AmRest Holdings SE (EAT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. As said, my name is Lukasz Wachelko. I'm representing Wood & Company. And today, I have a pleasure of moderating the conference call with AmRest, the company being represented by Eduardo Zamarripa, CFO; and Santiago Camarero Aguilera, Chief of IR. Not to take too much of your time, gentlemen, the mic is yours.

Excellent. Thank you very much, Lukasz. And good afternoon to everybody, and thank you for joining us. I hope you and your families are doing well. Today, we will present you the half year and second quarter results 2021. I will start with an overview of where we stand, the COVID impact, some changes in consumer habits of our guests and how AmRest is facing these current challenges. Following, our recently joined IR and Strategic Planning Director, Santiago Camarero, will lead you through the financial evolution of the group during this period. If we jump into the results presentation, let me convey a few ideas from the Slide #2. We keep conducting our operations across 25 countries and currently count with 2,367 restaurants that feed more than 1 million guests every single day, 7 days per week. We are very proud of our portfolio of 8 leading brands, the franchise and the proprietary as well as the virtual brands developed. The diversified portfolio by geography, brands and products puts us in a unique position. In addition, this critical mass enables to obtain synergies through our centralized procurement model. Regarding the impact of COVID, the pandemic has hit the results hard. We clearly were not expecting for such a synchronized sudden shutdown of dine-in activity and mobility restrictions across most of the countries. Those restrictions have been progressively eased. However, the pandemic had also other effects. It is challenging consumption habits with -- which accelerates the digital transformation. We have been and are at the top of this technological transformation process. And as a direct consequence, our service sales are rapidly approaching to level registered in 2019, together with an expansion of margins. However, the way we serve our guests is very different from previous years. While in 2019, more than half of our sales were through dine-in, they now represent just 1/4 of them despite some promising improvement seen in June. The big takeoff has been the takeaway channel. Other channels as delivery and drive-through also registered strong growth during the last quarters. Santiago will give you more details in a moment, but let me highlight that during the first half of the year, the EBITDA margin exceeded 18%. This implies a significant margin increase that is driven by the sales growth and also for a more profitable business model. We continue to increase the number of restaurants together with a profitable growth approach. We opened 57 stores in the first half, and we expect to have a strong pipeline to surpass the 130 units of new gross opening by year-end. We keep on growing. As I mentioned, the pandemic is having a profound change in our society and making habits evolute. In Slide 4, we have illustrated some of the most material changes from our guests. Consumption patterns and where definitely the COVID has acted as a catalyst. Some of them will be temporal, but some others will become structural. During this time, customers did not churn away. Instead, they challenged and changed to different channels of consumption and in the way they interact with the restaurants. We have evolved towards a cashless society, where even the reluctant people to download an app on their mobile phone are doing it right now. This is having a direct impact in terms of the online commerce growth and its future evolution. Additionally, customers trust and select leading brands even more than before. This is one of the reasons why it is so important to rely on top brands. The high-quality and sanitary protocols are a priority. Finally, customers are migrating between the channels more than before, adapting to the evolution of restrictions. It is crucial to offer an easy transition and a good experience across different sales channels. And in this, AmRest has done, respond, adapt and anticipate to this new concept these new needs and enhanced our capabilities during the last quarters. In Slide 5, we provide an overview of some of the projects and tools that we are using. As we have indicated in previous calls, we keep promoting initiatives to drive through the pandemic, strengthening our positions and keeping the base for sustainable long-term growth. We rolled out to our entire network to full digitalization, and we are already benefit from tangible actions, being able to obtain very detailed information in real time from each restaurant. Regarding delivery, we have different models from own delivery to aggregators. Particularly for the first model, automated delivery dispatch places a relevant role, allowing to automatically assign the drivers with the restaurants that are closer to them, improving our speed of service under the less-than-30-minutes category. Other interesting initiatives are, for example, that we have been benefit in launching Click & Eat, a digital table ordering solution, which allows our guests to place an order through their mobile at a Pizza Hut restaurant dine-in in Poland. We have also taken advantage of the widespread use of the QR code in our industry to go one step forward and offer augmented reality of some of our dishes, increasing the gastronomic experience of our consumers and customers additionally to enhance our loyalty programs with new features. Finally, supported by the strong uplift in demand for delivery, our virtual brands have printed new record to order numbers since we operate them using a multi-aggregator approach. And this is the link to the question of our relationship with the aggregators. This space and innovation around is evolving at a dramatic speed. Currently, we cooperate with them to develop features that optimize our operations. In addition, we are focusing in a multi-aggregator strategy that enables us to renegotiate to migrate the customers in a landscape shift. And now I will go -- I will give the floor to Santiago.

Many thanks, Eduardo, and good afternoon to everyone. It's a pleasure to introduce myself. As Eduardo mentioned, my name is Santiago Camarero, and I am the new Investor Relations and Strategy Director at AmRest. In the next few minutes, my intention is for us to review together the main business and operational dynamics that affected group during the first half of 2021 and the impact from a financial metric perspective. If we go to the Slide 7, we can find the financial highlights of the first half of this year that I will summarize in 3 main areas that are going to be also shared with the dynamics of the second quarter. The first idea is the sales growth; the second, margin expansion; and the third one, the balance sheet deleveraging. First, we have recorded significant sales growth compared to the previous years. Sales for the half year reached EUR 844 million. This is an increase of more than 23% compared to the first half of 2020. This has been due mainly to thanks to the slight easing of the restrictions derived from COVID, fast reaction and adjustment to the new needs of our guests, where clearly the takeaway channel leads the distribution and accounts for more than 40% of the total sales recorded in the period. The lifting of the COVID restrictions has increased the numbers of store operating to levels of 97% at the end of June versus 92% that we have in the same period of 2020. Additionally, we also continue to drive the organic growth of our portfolio. During the first half of the year, we opened 57 new restaurants, which have resulted in a net growth of 30 stores. Secondly, I would highlight the growth that we registered at margin level. EBITDA margin improved by more than 7 percentage points and is at levels of 18%, thanks to sales leverage and the successful execution of our cost-control initiatives, such as the portfolio optimization that we will cover later. Finally, we note our commitment to deleveraging the balance sheet in the current environment. During the last 12 months, the net debt has been reduced by 11.5%. However, we have maintained CapEx levels similar to those recorded during 2020. This is around EUR 30 million. If we go to the Slide 8, we can find also the main highlights of the second quarter. The growth of sales, it has been accentuated, reaching EUR 464 million, growing by more than 70% compared to the same periods of the previous year, obviously benefiting from the base effect caused by the collapse of the sales in the second quarter of 2020 after the unprecedented restrictions that have to be adopted by the governments of the main countries where we operate. However, growth is still 22% higher than in the first quarter of 2021 without any base effect. Measured by the perspective of the same-store sales, we are at levels of 135% with respect to 2020 and 91% with respect to 2019, which probably makes more sense as a comparative basis. For a moment, we jump to the bottom of the slide. We can see the latest metrics updated more or less 1 week ago, where we see levels of around 95% compared to 2019 and clearly higher than those levels recorded in 2020. EBITDA margin expansion was most pronounced also in the second quarter of the year, where we reached levels of about 22%. Finally, regarding the cash position is that not suffered great valuation. We maintained extraordinarily prudent levels with EUR 183 million in cash. If we go to the Slide 9. Here, we can see the time series of our sales. The time series is showing a big decline during the outbreak of the pandemic and the shape that we have of the subsequent recovery. As I mentioned on earlier, we are returning to sales levels similar to those recorded in 2019 but with a very different distribution. More than 50% of the sales in 2019 came from dine-in. However, currently, dine-in is accounting for just over 20% of the total sales. Despite during the last week of June with the easing of the restrictions, we have seen a strong recovery in this channel. In short, better figures shown contain a moderate contribution from the dine-in, where we maintain a huge growth potential that we hope to be able to put in value in the coming quarters. If now we go to the Slide 10. With this slide, basically, our idea is to deep dive into the factors responsible for the margin expansion that we reduced. Sales leverage, strict and proactive cost management as well as government aid programs enable to generate a solid margin improvement register. We had a nonrecurrent grant from a government aid program that is responsible of between 1.5 and 2 percentage points of the margin improvement in the semester. Let me remark that the presence of the pandemic make protective margins, increased efficiency and eliminating unnecessary cost more important than ever before. At AmRest, we continue executing initiatives to reduce nonessential operational and corporate expenses, along with the renegotiation of rentals and portfolio optimization that I will cover on the next slide. In Slide 11, basically, we have covered most of the items that we are displaying. However, let me focus on 2 ideas. The first one is the liquidity that we have generated in the semester. We have a generation of positive liquidity ex repayment of debt, which allow us to continue investing in optimizing our restaurant portfolio. At the same time, we have been -- at the same time, what I would like to highlight is the portfolio optimizations. Basically, what we are explaining there is and the number of the stores that we have opened and that we have closed during the latest quarters, what is the net openings that we have reduced. We have to be very strict with respect to the profitability that we demand from our stores and from the allocated capital. So in this sense, as we mentioned during the last quarter, we have closed a significant number of stores. As Eduardo said, we are a company that is committed to the growth, but to a sustainable and profitable growth. The store count, we consider that is a very important KPI. But measured in isolation, it is incomplete and could even be misleading. Nevertheless, we can see that the numbers of restaurants opened is higher than the closures. We had a net growth of 60 restaurants opened over the last 12 months, half of them during the first semester. I'm jumping into the Slide 12. Basically, you can find the distribution of restaurant sales and EBITDA generated by different segments that I will proceed to expand briefly in the next slide. If we go to the Slide 13, we cover Central and Eastern Europe. We have seen a very strong sales recovery in the quarter with sales that reached EUR 206 million. The main driver has been the performance of the takeaway channel and the comeback of the -- some dine-in activity after the easing of the restrictions over the months of May and June. This activity was non-assistance basically during the first quarter. Still during the second quarter, dine-in represented only around 10% of the total sales compared to more than 50% in 2019. In terms of EBITDA, we reached almost EUR 48 million, representing a margin of 23%. The number of restaurants in the region stood at 1,042, [ a targeting ] in 15 units during the first half of the year, keeping a steady growth trend over quarter. Finally, as of June, 100% of the restaurants were operating compared to 96% at the end of March of this year. In Slide 14, we cover Western Europe. Most of the countries in the region for last restrictions on hospitality during the month of June. In this context, the comeback of the dine-in was the main reason for the growth of sale during the quarter. That reached almost EUR 176 million. As of the end of June, 97% of restaurants were operating compared to 93% at the end of the first quarter. In addition, the total number of restaurants in the region grew by 10 units during the semester. Let me point out the importance of the dine-in in Western Europe. In this region, we have a very high sensitivity to the dine-in activity and to the reactivation of the curios. Dine-in, as you know, is a way of life in South European countries. In this sense and despite the recovery in the dine-in figures, these numbers registered in the second quarter are less than half of those achieved in 2019, which once again led us to appoint the huge latent potential that we hold in this channel. Jumping into profitability. EBITDA stood at EUR 34 million in the quarter with a margin of 19%. Sales leverage, the successful execution once more of cost-control initiatives besides some extraordinary contributions from the government support programs explain this margin improvement. If we pass now to the Slide 15, we cover Russia. In Russia, revenues amounted EUR 46.5 million in the second quarter, the highest figure since the beginning of the pandemic are more than doubling the figures achieved 1 year ago. Growth of both dine-in and takeaway channels explain the improvement. At the end of the period, opening hours for restaurants have been limitated due to the increase of positive cases for COVID, resulting in a decrease of open restaurants in the country from 100% as of the end of March to 87% as of the end of June. The EBITDA for the region reached EUR 13.5 million during the quarter. That represents some margin of nearly 29%. This is 8 and 9 percentage points higher than in previous year and quarterly, respectively. Business activity recovery, along with rental relief and cost optimization initiatives once more helped with the significant improvement in the margins. The total number of restaurants in the region stood at 268 units with a growth of 1 unit during the last 6 months. In the Slide 16, we cover China. China posted the biggest improvement of regions with sales that reached EUR 26.6 million in the second quarter, 38% higher than in 2020 and marking the highest ever in the series. Proven business model and the strength of the brand underpinned the continuous expansion registered, where 3 additional franchise restaurants were opened during the first half of the year, resulting in 9 franchise restaurants in total. The EBITDA stood at EUR 8.6 million with a margin of 32% in the quarter, consolidating the level reached during the last quarter. Finally, as we go to the Slide 17, let me briefly here point out once again the commitment to the leverage control and liquidity management that has led to the reduction of the financial debt ex-IFRS 16 of almost EUR 70 million over the last 12 months, which implies a deleveraging of 11.5% and all this maintaining constant levels of liquidity close to EUR 200 million, EUR 183 million, as you can see in the presentation. And with this, I pass the floor to Eduardo to sum up the main conclusions of the quarter that you can find in Slide 18.

Many thanks, Santiago. You touched 3 AmRest pillars: sustainable profitability and continued search of growth opportunities. I will link [ this positioning ]. Regarding the first pillar, profitability, this quarter, we have seen a strong recovery of sales that backed a significant margin expansion. The positive evolution in sales respond to a context with a general easing of restrictions across regions and countries. We have seen the beginning of the coming back in dine-in activity, where our potential is huge. However, know that's important are the enhancements accomplished in our digital and takeaway capabilities. Precisely, up-to-date takeaway is by far our most important distribution channel. With respect to sustainability, we are demonstrating that we are capable of combining prudent control of debt levels with an active and in-depth portfolio optimization exercise where nonetheless, we deliver a continuous and balanced growth in the total number of restaurants. Net store openings reached 60 during the last year and 30 in the semester. And this is closely linked to my last point, growth opportunities. We have important drivers for sales growth and margin expansion in the near future. So in response to different factors as the coming back of the dine-in that will support and will put in value many of the developments that we have achieved in our brands. We are aiming to leverage off the strength of our brand portfolio to become more asset-light by increasing the share of franchise opening in the future. We have already covered how important the technology is for us, a way to improve our efficiency, but also a way to upgrade and provide new customer experiences to our guests. Finally, a sustainable growth implies a wise and prudent use of capital and resources. Therefore, capital optimization is now more important than ever. We are realistic. We certainly hope and expect a full recovery. However, restrictions may live with us for a while, not to the extent seen in some months ago, but they may be there. We are prepared in all our fronts to face coming challenges. So what we are presenting and delivering is a more solid company from a financial and business perspective that continues to grow wisely and with a huge growth potential. Many thanks to everyone. And with this, we are open to any questions that you may have.

[Operator Instructions] I'll just hand over to Lukasz for any questions that you have.

Okay. So maybe taking the privilege of a moderator, I would start for . First, let me congratulate on the results, really decent set of figures on the profitability. And I would like to dive a bit deeper into that. How sustainable do you find the current margins? Speaking of rent relief, what was the size of rent reliefs? And for how long should we expect it to last? And also the state aid, from my calculations, roughly EUR 20 million for the quarter. So how long do you think you may keep with these margins or even as a way for margin improvement? That would be my first question.

Excellent. Thank you, Lukasz. Related to that, we can divide, as you were saying, the margin increase in 2 parts. First, all the initiatives that we have done internally in order to drive the profitability. Of course, in terms of how we are managing the labor, how we are managing the processes, how we manage the restaurants and as I was mentioning, all the support and all the work that we have done in terms of technology in order to support our operations. Right now, drive-through is a very important channel, which is quite profitable. And we have invested heavily in that to keep the same-store sales and increasing the level of sales that we have. But one of the best that we are making is in terms of the recovery of the dine-in. So those are like the internal initiatives that we have been working on in order to enhance the profitability. But there's also another part that we have there. The government supports and aid that we have received, particularly in this month -- in this quarter were quite relevant. For the support that we have in this quarter, particularly in one of the countries, is EUR 12 million. If we add all the support, it's around EUR 13 million. So this is nonrecurrent. And as Santiago was saying, if we take this out from our margins, it will mean that we take a couple of points in terms of the margin expansion. So we are delivering a better margin. So if we take the one-offs, we consider that we should be able to continue with that trend. Right now, what we are seeing is that in the second half of the month, there are not any -- almost any support. And that's the trend that we have been seeing through the year. At the beginning, there were more closures, so -- and that corresponded to less restaurants operating. So we have more support right now that the restrictions are easing. Those helps are going down, and the sales are coming back. But the key issue here is that same-store sales growth, restaurants continue open, restrictions easing and we have that equation online. Even if we don't have the support, we should be able to have a strong margin. In terms of the rental relief, there are some that we have in the short term, so that we have more for the long term. And those are the negotiations that we have. But again, the key issue here is the sales. If we are able to continue increasing the level of sales, we have the leverage enough in order to have strong margins. But of course, it's challenging because it's going to be a shift. And we will -- but we are very well -- we consider very well positioned with all the work that we have been done through this last year.

Okay. And speaking of restrictions, I can see that in France and now in Germany, the regulators are a bit changing towards vaccination and documents proving that you've been vaccinated, either you have passed the test. What's the impact on your business or -- if there is any?

The thing is -- particularly you are mentioning Germany. So as you say, you need that -- well, on France, you need a vaccine certificate. You also have restrictions for having dine-in indoors. So in these particular ones, we depend on the regulation. And as you know, we, of course, follow all the regulations that are in place. So we are very strict on that. And also we closely monitor what's happening in all the countries and adapt to that and is consistent with what we have experienced. The more restrictions that we have, the more challenging that it is to deliver the results. So we are aware of those limitations, those regulations. We are going to comply with that. But it's an important topic, the one that you raised. And this is for dine-in restaurants, but this is also related to how you can travel between one country and another and the passport. So there's a lot of things that are going to be getting on this. And as I was mentioning during my participation in the calls, the -- we'll need to learn to live with this new way of doing and adapting. It will have an effect, yes. It will have an impact, yes. But as I said, we are taking like all the necessarily steps in order to reduce the impact that these restrictions may have.

If I may, in this point, taking also the previous, Lukasz, that I over here, most of the countries, how they have some type of restrictions right now. So there are restrictions in terms of the capacity for dine-in. They have restrictions in terms of the space that they may have, of hours in some of the countries that are even more complicated as could we explain. We have restrictions different across the internal regions. But the point over here is that we have so, I guess, a little bit in the presentation that we have a huge opportunity in terms of the dine-in capacity that it has been very incipient what we have seen during the second quarter. So the opportunity that -- is over there. This is pretty much linked to the question that you mentioned before. If we are able to recover this channel of distribution, I mean, the margin expansion, I mean, could even increase, and we are there.

And the other topic, Lukasz, and let's see how this evolves. The basis is reducing. But in most of the countries in which we operate, vaccination is around 50% of the population. Some of them getting up to 60% or plus. Some of them are lagging. But these keep on changing every day. But hopefully, this continues and we can have a more open environment.

Okay. So maybe the last topic of mine and I'll let the floor to others. During the presentation, you used the word capital optimization. Leverage at the end of the first half of this year was 4.4 and trending down closer to 3.5 level of covenant potentially to be crossed at the end of this year. For this year, you are guiding for 130 restaurants rollout. What should we expect going forward once the balance sheet is likely no longer an issue? How you should grow next year?

Perfect. Thank you, Lukasz. And this is a very important topic, the one that you are bringing up. We have been working very hard in order to reduce the leverage. We have, of course, the number of 3.5x that we have to commit for the fourth quarter. So we are on the right track. But also, as you say, we need to be efficient, and we are also committed to grow. These 130 stores that we have for this year is an important milestone. And it's important to talk about the gross openings that we have because also have taken the steps in order to close some doc stores that we have, and that's why then the net openings have not increased in an important way. But it's important to split those numbers. This 130, I think, it's an important milestone. We have not, let's say, forget about our commitment of growth. If we talk about 130 for this year, we should have a similar or even a higher number for 2022. But also we have, as you know, certain topics to figure out. But the commitment to continue growing, it's something that we have very clear. But a similar or higher number to the one that we have in this year, it's something that we could be expecting.

But speaking 130 gross, which means like 70, 80 net and that's the thing for the next year?

No. But next year, the net should be higher given that the number of closures that we are having because of those stores should be reduced in an important way. The biggest part of the closures are already behind us.

Okay. And how many closures should we expect for this year roughly?

No. We still should have -- let me -- I'll come back with this number with you, Lukasz. But we still have some closures to be done, but should be lower than the figures that we have for the first half.

Okay. And can you remind me how many restaurants were closed in the first half?

Yes. In the first half, what we did was to open 57 and we closed down 27. So basically, we have a net growth of 30 units.

Okay. Great. That's all from my end at this stage. So I believe that's now there's also questions. So floor is yours.

We do have 2 questions on the line. Our first one today comes from João Pinto of JB Capital Markets.

The first one on sales dynamics. Can you elaborate on same-store sales dynamics during the summer? My second question on expansion. After the strong second quarter, are you already comfortable to analyze M&A opportunities again? And are there any attractive targets? Or you prefer to wait to have more visibility on the new dynamics post pandemic? My third question on dark kitchens rollout. Can you update us how many dark kitchens you have? And how's expansion going on this front? My fourth question, you said in the presentation that EBITDA margin grew due to sales, but also due to a more profitable business model. My question is, can you confirm that the higher weight of delivery versus [ 18 ] and does not reduce your overall margin? And finally, following the appointment of the new CEO, do you plan to organize any sort of presentation to update us on the strategic plan anytime soon?

Okay. Thank you, João, for your questions. Now first, in terms of the same-store sales dynamic. What is positive in here is that they keep on growing. We -- if we compare versus 2019, we began the first quarter of this year in the 80s. We're -- at this level, we are at 95% versus 2019. So the trend continues going up, and what we expect is the same-store sales continue growing. And that's -- that, of course, is what we have in terms of our expectations internally. The second one that you were mentioning...

M&A activity.