AmRest Holdings SE (EAT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Lukasz Wachelko. I'm representing Wood & Company. And again, I have a pleasure of moderating the call with AmRest after the quarter results. The company is being represented by CFO, Eduardo Zamarripa; and Chief of IR, Santiago Aguilera. Guys, not to steal too much of your airtime, we're already fairly late. The mic is yours.

Thank you, Lukasz, and good afternoon, and thank you for joining us today. I hope you and your families are doing well. In this first months of the year, the war in Ukraine has caused human suffering. From AmRest, we remain focused on supporting health initiatives and providing humanitarian relief while standing with the international community in the call for peace. Starting with first quarter results presentation. As you know, AmRest is Europe's leading restaurant operator with a portfolio of 2,434 restaurants in 25 countries across Europe, Middle East and China. In Slide 2, you can find updated information regarding our presence and brands split by typology of service offered. That remains virtually unchanged compared to year-end. In Slide 3, during the first quarter of the year, the COVID-19 pandemic continues. However, in the main economies where the group operates, with the exception of China, the restrictions imposed by the government are gradually relaxed as mortality rates decreased due to a higher proportion of the population being vaccinated and the lower [ lifting ] of the new variants. This is facilitating rating mobility and social interaction and is having a positive impact on the group's revenue generation. As you can see in Slide 3, during first quarter of 2022, we achieved the highest revenue for our first quarter in AmRest's history, reaching EUR 507 million. These excellent results are related to the return of our guests to on-site dine-in restaurants and coffee stores. The human touch, the possibility of sharing experiences, smiles around a nice meal constitute the heart of our business. In this sense, the biggest advances were registered in the dine-in channel that continues to be highly correlated with the easing of restrictions from the pandemic. This channel accounted for 37% of the sales in the current period, compared to 15% in the same period of 2021, showing a growing acceleration during the quarter. Nonetheless, these figures are still far from the levels recorded in the pre-pandemic period, when 55% of sales were obtained through this channel, a sign of the significant potential that the Group still has and which will foreseeable put in value as the normalization and opening up of the economies continue. At the same time, the EBITDA generated reached EUR 75 million, boosting cash flow generation and putting distance from the figures of the past 2 years severely impacted by the pandemic. Due to seasonality of our business, in a normal year, the first quarter have the weakest level of year sales, profitability or cash flow generation. On the opposite side, the fourth quarter tends to show the stronger positive seasonality. So the fact that we have recorded the best first quarter in our history, substantially increasing margins over last year, makes us positive about the future of the business dynamics despite of the important challenges ahead. In Slide 4, we can find the evolution of the 12 months trailing average revenues per store. That reached EUR 840,000, recovering the big levels reached back in 2019. We are sharing what we consider to be one of the most relevant indicators to monitor the evolution of quality sales. The positive evolution of revenue per restaurant provides sales leverage, a key factor in offsetting cost pressures from semis and labor costs. In this regard, the labor market remains very tight in many markets. Restaurant wages have increased. But sales leverage and the continuous enhancement in our digital capabilities that leads towards [ late ] labor-intensive processes, have allowed us to absorb them with a minor impact in our margins. In the next slide, let me focus on two very relevant events. Since the last part of the quarter, higher volatility has impacted the economic activity, affecting pricing dynamics and commodity prices, thus increasing the already-high inflationary pressures and stress on global supply chains. In the left part of the slide, we illustrate the cost evolution that we are seeing in relevant items for our business. We're expecting aggregated inflation levels for the full year in the high single digits. However, we have had to review our expectations towards the mid-teens. At the same time, we are facing an abrupt fall in terms of consumer confidence indicators. As are illustrating in the right side of the slide evidence of the impact of the war on sentiment and the rising uncertainty that is generating. If now we go to Slide 6. Despite these new challenges exposed, the gradual reopening of the economies, the reactivation of the tourism, the increasing people traffic and occasions for socializing and sharing create an environment in which our value proposition is very attractive because we offer quality and remarkable consumer experiences at very competitive prices. The situation invites us to believe that our trade dynamics should remain strong and will continue to increase in the coming months. As for most of the companies, the big challenge ahead of us is to maintain profitability and margins. As we explained, in our case, dynamic sales are necessary to offset the cost of semis and labor. Moreover, despite advances in digitalization, which generates less labor-intensive process, and other advances in terms of efficiency, we will need to continue to increase prices in a responsible manner to protect margins. The price increases made so far in the mid-single digits have been compatible with a very significant increase in number of transactions, which we believe illustrates the appropriateness of the actions taken and AmRest's current ability to continue to maintain margins. With this, Santi will cover the main financial highlights of the quarter. Santi, the mic is yours.

Many thanks, Eduardo, and good afternoon to you all. Before I start, as Eduardo, wishing for a near solution of the war in Ukraine and an end to the suffering of many Russian people. Our prayers are with them. The first quarter of the year was another challenging quarter for the hospitality industry, globally. Despite that, AmRest continue its recovery trends across major regions. In Slide 8, we can find the main financial highlights for the first quarter of the year. Group revenues increased by 33% to EUR 507 million, with our same-store sales level of 128% compared to 2021. The number of [ operating ] stores declined below 99%, mainly due to the closure of restaurants from the lockdown of the Shanghai area in China. In terms of EBITDA, the generation reached EUR 75 million that allowed to finance a CapEx of EUR 16.5 million, while the cash position stood at very high levels of almost EUR 180 million. As usual, we would like also to share with you the most up-to-date information. At the end of April, the same-store sales index stood at 129% compared to 2021, reinforcing the positive momentum that we are seeing in our business. In Slide 9, we saw the revenues evolution. The easing of COVID restrictions, the strength and balance of our diversified portfolio and progress in better embracing new distribution channels have led AmRest to achieve during the first quarter of the year the highest revenues for our first quarter in AmRest's history, reaching EUR 507 million, up 33% year-on-year or 14% compared to the same quarter of 2019. The same-store sales index stood at 128% compared to 2021 and 109% compared to 2019. On Slide 10, we can see the EBITDA generation evolution that reached over EUR 75 million in this quarter. This is 52% higher than the previous year, represents an EBITDA margin of almost 15%. This is 2 percentage points higher than last year. As Eduardo has explained, the high cost pressure has been mitigated by increased service, advanced in terms of digitalization and efficiency, as well as responsible price increases. This has not prevented a significant increase in the number of transactions in line with our expectations. the actions taken so far has been [ occupied ] and that our ability to continue to add responsibly be a pricing remains in -- cost inflation is affecting all categories and regions. The success and timing of price increases really depends on the strength of the company's position and value proposition. And here, I really see that we have a clear competitive advantage. As a last point, let me emphasize again the seasonality of our business. This is why it's so important to contextualize this record first quarter results. In Slide 11, we show the cash flow generation. Let me remark that the cash flow generated from operating activity was over EUR 53 million, double the amount generated during the same period of 2021, which has allowed financing and net investment of [indiscernible] almost was once again almost doubling last year amount. In Slide 12, we are showing the changes in our restaurant portfolio that was modified with the opening of 11 new units and the closure of 13, once more in line with the seasonality of the first quarter. From our side, work continues on securing new openings and the necessary equipment, in order to achieve the new openings announced. In the next two slides, you can find information on our leverage and debt profile. On Slide 13, you can see the further improvements in profitability led to a further reduction in leverage. The ratio of net financial debt-to-EBITDA was 2.2x, compared to 2.3x in the previous quarter. Net debt stood at EUR 484 million and the cash level of almost EUR 180 million after having decreased by EUR 19 million during the quarter, following the normal seasonality of the first quarter, which implies adjustments in working capital and bonus payments. All these figures are in line with the targets we shared with you in the last quarter. In Slide 14, we have our debt profile following the agreement with our banks at the end of last year, in which we extended the maturities of outstanding debt by 3 years. There has been no relevant changes during this quarter. As you can see, we have a comfortable maturity profile over the next couple of years. We are in addition. We expect to see an acceleration of our cash flow generation. Next, we will focus on the results by different segments. On Slide 15, you can find the revenues, EBITDA and the number of restaurants that we have in each region. Starting with Central and Eastern Europe in Slide 16. Sales reached almost EUR 244 million during the first quarter of the year, registering a year-on-year increase of 49% or 31% compared to 2019. EBITDA generation reached EUR 45 million, an increase of almost 60% compared to the same period of 2021 and 18% higher than 2019. The EBITDA margin stood over 18% higher than in the same period of 2020 and 2021 despite increased pressure on cost. Minimal variations, in terms of the number of restaurants, stood at 1,084 after the net reduction of 1 unit. All of them were operational at the end of the quarter. In Slide 17. In Western Europe, revenues reached almost EUR 187 million during the quarter, an increase of 24% compared to the same period of 2021 and practically recovering the levels of revenues recorded in 2019. In this regard, the markets that suffered the greatest impact during the pandemic such as Germany, are the ones showing the best year-on-year performance. EBITDA reached EUR 23 million, representing an EBITDA margin of 12%. That is an increase of 5 percentage points versus first Q '21. All restaurants were operational at the end of the quarter. And the portfolio recorded a net decrease of 4 units, following the restructuring of certain businesses, mainly concentrated in Spain. In Slide 18, we have China. As we mentioned, strict lockdowns were imposed in some areas of China during the first quarter of 2022 and continue to be in place for now. The situation has affected mobility, commercial activity and has led to the temporary closure of 19 of our restaurants. As a result, revenues stood at EUR 21.5 million, virtually the same level that we have during 2021 but with a decline in EBITDA, which stood at EUR 4.3 million, representing an EBITDA margin of 20%. This is 6 percentage points lower than the same period of 2021. Last point, the total number of restaurants increased to 80 units, following the opening of 3 new restaurants. Unfortunately, only 76% of them were in operation at the end of the quarter. Finally, regarding Russia, in mid-March, the Group decided to initiate the process of temporarily suspending operations in Russia. Since then, AmRest has engaged in close and constant conversations with the brands owner, stopped investment in the country and is carrying negotiations with the franchisor to transfer its Pizza Hut operations in Russia to a local operator. This is all from my side.

Many thanks, Santiago. We are very proud of our results and of making consistently deliver every quarter despite of the difficult macroeconomic situation. This quarter impacted us directly with a temporary closure of restaurants in China and indirectly increasing even more the elevated cost pressures. Today, once more, we presented that we are on the right track and we have confidence in the future despite the significant challenges ahead. Many thanks to everyone. And with this, we are open to any questions that you may have.

[Operator Instructions] We have a written question from Hubert, which reads, what is the non-IFRS 16 Q1 EBITDA and the amount of lease liabilities payments?

To be honest, this is something that we need to check because, of course, I mean, the information that we provide is -- the one compliance with the current regulation that is including the IFRS 16. So usually, we have a difference of around 7 percentage points, in terms of the cost of the rents and amortization.

We have a follow-up question, which reads, what is the current status of Russian operations and their accounting treatment in Q2?

Well, as we mentioned, we have negotiated with the franchisor to suspend the Pizza Hut operations in Russia at this moment, and the accounting registers -- registered the operations that we are having up to date.

[Operator Instructions]

Okay. So maybe I will take the privilege of the moderator, and I will jump in with a couple of questions from my end. Well, in effect, your presentation was fairly full of data. So some of the questions of mine were already answered. But can you elaborate a bit about the split between dine-in and takeaway deliveries? Because it has rebounded pretty much to the middle point between COVID and normal situation. Going forward, should we expect dine-in to go back above 50% of restaurant revenues? Or is it just the past world and it's not coming back? How do you see that?

I think you made a very interesting question, Lukasz. And we consider that still there's a percentage that the dine-in should be recovering. So I think -- and that, of course, will help the numbers of AmRest. The toughest part of your question is at which level it's going to get. As you mentioned, the reality has changed. Now, one of the things that we took the opportunity to do because of this, is enhance our digital capabilities. And that's why, right now, it's easier, and we have made easier for our consumers to use the digital channels and always to use the delivery channel. But one thing that we are sure of, people like to see face to face. People like to enjoy and have very nice times together. And this is what we are offering through our restaurants. So the percentage should go up. But of course, the percentage is uncertain. But what we are really happy, as mentioned, is that we are able to get together. And one of the things that we saw now that restrictions are easing, of course, is that change in terms of the mix. And now, spring is coming, spring is here. So that's another enhancement that we may have to see the percentage going up.

Yes. I mean, if you want to illustrate what happened during the quarter. So we are starting the quarter really in the very rich in the 30s level. We finished the quarter with levels above 40%. So this is an indication really of how things are evolving in this specific channel, very correlated, as we appointed with the easing of restrictions coming from the pandemic.

Okay. So going forward with increasing share of dine-in, should we expect the margins to be also supported? Or in fact, you sorted out the logistics delivery cost that well that should not have an impact? Or maybe...

Everything is a mix, Lukasz, and part of the -- of course, we have made, as you can imagine, analysis of the impact that having a different mix between the different channels' capital, but what I can share is that we are really happy that consumers are coming back. Seeing the restaurants, seeing the restaurant food is something that is quite positive for us.

If I may, also, I mean, what we are showing really is that this is -- this is accretive. All the channels are accretive. So the fact that you have -- that you may have different profitability across different channels is not compromising to our margins. The challenge that we have ahead, really, are coming in terms of the cost pressure. So it's not really because what we are seeing in our new distribution channels. So to have another quick adaptation of this channel is what is important. And what we are showing is that we are working on that and, I think, quite successfully until the point.

Okay. And can you elaborate a bit about the cost pressure because I understand the inflation is one of the key global trends you are seeing? And what are your plans on passing on the inflation to customers? Is it possible to transfer double-digit inflation to customers with sticky price points of your products? Or will everybody around the inflation and, in fact, the market should be able to accept price hikes? What's your point on that?

Well, we provide some guidance regarding to the inflation that we are seeing and the price increases that we have done until now. The [ priority ] is that every market is different and every brand is different. So what we are showing is that you have to be very vigilant to study well the market, to understand well the elasticity of your clients and the value proposition that you do, in order to have adequate price increases. So if this is going to lead a double-digit increase in terms of prices? On an overall basis, I wouldn't expect really that, but we don't know. So every market has different dynamics. Every brand, it has different dynamics. Some markets are more used to higher level of inflation. Other markets, you have to look for different value propositions. So the focus for us is the value that we get from ourselves, not so much the focus on the final price.

The other consideration, Lukasz, is, this is something that is affecting the entire industry. And at the end, it's something that we are very focused on, of course, in our numbers and the value proposition that we have. And that's where revenue management initiatives take a lot of sense. As you know, this is a matter of pricing to the products but also price to the packages that we -- to the packages that we sell, to the combos that we sell. I have the proper price point for the different products across our restaurants. And one of the things that is, let's say, positive for us, we are in the market, our products are affordable. And that's quite positive for us, and it's a value added. We have proven to be resilient to these pressures.

Okay. Operator, are there any questions from the room? I don't want to monopolize it too much.

We had another -- we have another written question here from Adrian Gorniak from IPOPEMA. It reads, do you maintain previous statements concerning sales growth of greater than 10% and keeping EBITDA margin on a comparable year-over-year level?

At this moment, we are keeping the expectations that we have shared. I think revenues have been in line with those ranges, so we feel comfortable with that. As we say, we are addressing updates frequently, but I think it's still early to talk about changing the expectation. But that's also why we were highlighting across the call the -- also the pressures that we are facing and the initiatives that we are making, in order to absorb, partially, those pressures. But I think there's still a lot of chapters to be written in this 2022.

We have one more question from Michael Sikorsky, which reads, please elaborate a bit about traffic evolution across your market, breakdown of same-store sales between traffic and ticket.

To be honest, despite the price increases that we have, the average guest check that we have, it has not increased. So the increase in transactions is really aligned with the increases that we are seeing in terms of sales. So in other words, the big driver behind the increase in sales that we are having, is the increase in terms of transactions.

We have no further questions on the public side.

In fact, I will ask my usual question on the rollout. In the first quarter, you've closed more restaurants than you actually opened in the season, building in that was rather skewed towards the second half of the year, but what should we expect on that end? Is it realistic that at the end of 2022 AmRest will have less restaurants in operations than while starting? Or I'm exaggerating? Because part of that is dispute of yours with Burger King and the other is something over Pizza Hut in Russia to Yum!.

In terms of openings, at this moment, we are complying with the plan that we have internally. As you correctly mentioned, usually in the first -- mainly the first quarter and first half of the year, we have a lower number of openings, and we are more, let's say, have a higher number in the second half. One of the things that we are facing -- but again, it's still early to talk about changing the expectation is, as you know, the supply chain is suffering in these latest months. And that is not exception for equipment that we need, in order to have the restaurants in place. But still, we feel that it's a number that we should be achieving but highlighting that risk that everybody in the industry is facing.

If you don't mind, one thing that I consider important to clarify, you mentioned Burger King. So we make a public statement regarding to the situation that we have with Burger King. Basically, we have concluded -- developed an agreement that we have in certain markets. But this is not to increase the operations that we have in Burger King. And what it means is that the sales to have the compulsory obligation of the compromise to open a numbers of restaurants in the regions right now. What we need to go through is an [ individual ] process for opening new restaurants in those regions. So in fact, during the first quarter of the year, we have opened, if I remember, currently 4 Burger Kings. And our expectations is that we will continue to open more restaurants during the rest of the year. So this is subject to the approval of the franchisor.

Okay. But the other than that given the current situation of the markets and issues with availability of equipment, we shouldn't expect major acceleration of you adding more Burger King. So is it fair for me to assume that the dispute with Burger King could be not that easy to be solved?

No, no. The thing is that Burger King continues. Let's say, we announced what happened with Burger King. So -- and that remains the development agreement is finished. But right now, we are in negotiations, as Santiago was saying, with the restaurants that were on track to be open, that we have that approval to finish to build those openings in this 2022.

Okay. I misunderstood. And the final question of mine would be on China. Are you seeing any relaxation of the lockdown up there and any improvement going to be in the end of the first quarter? How does it look like there? Because in fact, it was a market which outperformed for many quarters during the COVID. And now, they are pretty much the other way around.

Yes. No, impacting that as -- as we mentioned, we have -- we had, at the end of the quarter, 19 restaurants closed. And this is something that we are very [ spending ]. We are very close to the regulations and complying with all of the regulations. And we are expecting news from the government, in order to come back. Unfortunately, we don't have more than that.

Okay. Operator, are there any questions from the room?

We have no further questions. We have from Intera Capital.

I apologize. I dropped out at a certain point, somehow. I rejoined. So apologies if this question has been asked. But would it be possible to give a little bit more color on Russia? Are these operations -- I mean the restaurants are still open and functional? Why you're taking the necessary steps to sort of close the operation? Or have the operations been suspended and no sales are incurring? If you can give a little color on that and the timeline you see, that would be great.

Okay. Thank you. No, as we mentioned, we are on that process for making that temporary suspension. Right now, the restaurants are open. And since we made the analysis, as we mentioned, we continue the conversations with the brand owner and stop investments in the country and currently negotiating to suspend the Pizza Hut operations in the market. That's where we stand today.

And do you have at this stage -- have you made some calculations as to what the costs are going to be associated with stopping your operations?

In fact, as you can imagine, we are making our analysis towards that. But that's something that is -- that is information that we are working on, at this moment.

Okay. And by when do you think you will have clarity?

It's a working process. The -- what we -- what is important to highlight at this moment, the net asset value that we have in the -- in our numbers is -- it was in December, EUR 79 million and is EUR 57.6 million in the month of March.

I have one more question. For example, if we look at your Central Eastern operation, in terms of sales, it's been very high, close to the third and fourth quarters of last year. But on an EBITDA basis, the margin has been coming down. So your sales were the same, but the margins were low. I mean, is it fair to say, this is obviously due to sort of increasing raw material prices? And I'm assuming you haven't increased your prices maybe -- maybe you increased your prices towards the end of the first quarter. Is that a fair assumption?

What we are facing today, and you're right in your assumptions, what we faced during the first quarter is mainly increases in terms of costs of energy. That was an important item within our numbers. And we started, of course, to face some pressures, in the terms of the cost. And what we are doing, as you can imagine, is analyzing at the moment that the cost increases are affecting us, which are the adjustments that we need to make in terms of prices, in order to manage the margins to the proper level. And also, this is a continuous exercise that we are doing in the market.

And do you expect that -- I mean, I guess, this is probably starting to show itself now, although you said April sales have been quite good. Because people's, also, disposable incomes are getting hurt. Do you see as, I guess, we are in May now, sort of declining trend in terms of sales or that's the fact that you have to give more promotions? How has it been in the second quarter?

For us, the sales continue in the right track as expected. And the thing is that what we see is the effects that economy may be having in the numbers. But it's something that we have not still reflected in our sales.

This is all the questions we have on the public side.

Thank you very much, Operator. And thanks, everybody, for joining the AmRest conference call. Today, once more, we presented that we are on the right track and we have confidence in the future despite the significant challenges that we have ahead. So stay safe, and thank you very much.

Have a great weekend. Thank you.

Thank you.