AmRest Holdings SE (EAT) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the AmRest Q2 H1 2023 Results. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Lukasz Wachelko from WOOD & Co. Lukasz, please go ahead.

Good morning, good afternoon, ladies and gentlemen. My name is Lukasz Wachelko. I'm presenting Wood & Company. And again, I have a pleasure of moderating the call with AmRest after the -- results. The company is being represented by CFO, Eduardo Zamarripa; and IR, Santiago Camarero. Let me start with congratulations on the results because I believe especially on the cost side, they were really great, but not to take much of your time. The mic is yours.

Thank you, Lukasz. Good afternoon, and thank you for joining us in AmRest's Second Quarter of 2023 Results Presentations. As usual, let's start with an update regarding our presence and brands in Slide #2. AmRest continues to be the Europe leader restaurant operator with a portfolio of 2,123 restaurants distributed across 21 different countries in Europe, Middle East and China. During the quarter, we disposed all of our remaining business in Russia, changing our footprint and a total number of restaurants. We keep a nice balance of franchise and proprietary brands, which nonetheless has a big bias in terms of capacity towards the QSR and coffee segment. Every month, we serve to 30 million guests that find our restaurants a distinct service provider by over 44,000 passionate AmRest [ piece ]. Now on Slide 3, I would like to share with you that in 2023 is a very special year for us, the 30th anniversary of the creation of AmRest, a group that constitutes a large family that has been growing throughout Europe and China. The dedication to service, the quest for excellence and the hard work of this great family of professionals has allowed AmRest to become a leading company [indiscernible]. More than ever, has the desire and ambition to continue to grow in a sustainable and inclusive way, generating greater value for our societies. Many thanks and congratulations to all of those who make up AmRest family and to the thousands of partners and suppliers who have been supporting us over the years. Going to Slide 4. Let me summarize the most relevant event for the second quarter of the year. I know this is not new. Our revenues was more, reach a new record breaking level for a second quarter with EUR 607 million. Our commercial dynamics continues to show a strong and balanced growth between transactions and average guest check. That resulted in almost 17% increase versus second quarter of 2022 in a like-for-like basis. In terms of profitability, the EBITDA generated in the quarter increased by more than 25% to EUR 101 million. Net income reached EUR 23.8 million of which the profit attributable to the equity of the holders of the parent company amounted almost EUR 22 million. Additionally, leverage ratio drifting slightly downwards to 1.9x at the low end of the group's target range. Finally, highlights around the 15th of May, AmRest disposed all its remaining business in Russia for a final price of EUR 100 million. In Slide 5, you can find the latest strategic portfolio changes that lead us to close the first half of the year with 2,123 restaurants after the disposal of the 213 restaurants that still we had in Russia and the organic portfolio changes, [ vary ] from the optimization exercise of our portfolio that led us to the closure of 23 restaurants during the quarter, of which 10 were closure from franchisees in France. In Slide 6, we are illustrating AmRest revenues and main profitability measure trends for the first semester of the last year. In this sense, first half year 2023, revenues reached EUR 1,170 million, excluding Russia registering a 19% growth. This figure also constitutes the best half year in record with an organic growth that overcompensated the effect of the exclusion of the Russian portfolio for the whole 2023. EBITDA generation also showed an excellent performance with a growth of 15% in the semester, reaching EUR 172 million, putting in value our progress and efficiency together with the first half in a very long time for a slight reduction in the huge cost pressure [ suffered ]. In terms of operating profit, we generated EUR 51 million, up 23.1% versus second quarter 2022, resulting in an EBIT margin of 4.4%. On Slide 7, the hospitality industry and the AmRest as part of it has paid enormous challenges over the past 3 years. We have been able to turn most of these challenges into opportunities and that finally are allowing us to strengthen and improve the growth business model, which is increasingly sustainable, inclusive and providing greater value to society. That's why it's also the time for sure for some time, you're sharing our commercial approach with our different brands, the KFC, the California summer campaign supported by TV, radio and digital media has increased transaction and even improve further consumer satisfaction. In Starbucks, we are increasing the volume sale in beverage and food with the biggest contribution categories being Espresso [ based ] drinks and Frappuccino. In BK, plant-based salads and burgers, chicken burgers and [ wraps ] offers are running the quality menus that we offer in our restaurants. In Sushi Shop, we have introduced new hot dishes that are providing nice complementary fit to our existing menu offers. In Pizza Hut, a new range of summer products offer are translating into retained transactions and food courts. In Blue Frog, the value proposition and quality of our offers are letting recover the growth trend that we have previously to the COVID period. And finally, Tagliatella, our teams are doing an amazing job on improvements on our digital platforms and creating new moments of consumption through the adoption of new sales channels. Now turning to Slide 9. All this work is resulting in incremental sales, where, as you can see, we are [ co-managing ] a recovery of the dining activity that currently represents 44% of our sales with a growing digital penetration. As you can see in the right chart of the slide, during this year, more than 50% of our transactions are generated through digital channels. On Slide 10, as previous quarter, we are illustrating the evolution of the 12-month trailing average revenue per store where we continue to report a consistent advance that support improvement in the quality of our sales. As we have discussed in several occasions, we are becoming more efficient, reducing the resources that we need to generate sales. And this is a link with Slide 11. The elevated cost pressure continues so does our work to become more efficient. The successful implementation of value-added initiatives is enabling to limit the impact of costs on customers and to continue to maintain an attractive price value proposition, showing that it is possible to grow in transactions and to recover margin. Of course, the fruit of these actions is visible once the huge cost pressure suffered in the last period gets stabilized, and it has started to happen on this quarter. Nonetheless, we are not -- and we will not slow down our commitment and work on long-term initiatives to improve the profitability and efficiency of our business from several engines. And with this, we will pass to cover the main financial highlights and trends that Santi will help us to go through. Santi, when you're ready, the microphone is yours.

Thank you very much, Eduardo, and good afternoon to everyone. It's always a pleasure to have the opportunity to share with you all our results, achievements and expectations. On this important date for us, I would like to start by joining Eduardo in congratulating the entire AmRest family for their excellent work [indiscernible] and the passion and commitment behind it. All of this is what has led us to be able to present today a new advance in the quality of our results. The consequence of a business model that is constantly developing and which is resulting in another quarter in the strengthening of the company's financial profile. All this with a clear objective of continuing to grow in a sustainable, profitable and inclusive manner. In short, generating greater value for our shareholders and for the societies. Going into the Slide 13, you can find the main financial highlights for the first half of the year. Group revenue increased by almost 19% and reached EUR 1.170 billion with a same-store sales level of 14% compared to last year. EBITDA generation reached EUR 172 million with an increase of more than 15% versus last year. Operating income stood at EUR 51 million, up by 23% and representing a margin of 4.4%. And finally, CapEx accelerated to more than EUR 64 million to more than EUR 60 million. Dedicated to the opening of new restaurants, we opened 23 new equity restaurants during this period. But also let me remind that we are dedicating average or allocation of resources to modernize a significant number of restaurants and to invest in our technological transformation. All these figures reinforce our expectations of delivering the guidance for this year that we shared with the market. In Slide 14, you can find the main financial highlights for the second quarter of the year. Under second quarter revenues reached almost EUR 607 million, setting a new all-time high for this period of the year. The revenue growth, it was almost 17% overcompensating for the set of the consolidation of the Russian results. And our sales growth reflects a mix balance between a [ positive improvement ] in the number of transactions, which increased by 4% and an after prevent management, including price increases. In terms of the same store sales index, we were at 112 for the quarter, while the latest reading for the year-to-date is 113. In terms of profitability, the EBITDA climbed to EUR 101 million with a growth of 25%. On the other side, the operative income reached almost EUR 37 million, up 27%. Once again, organic growth overcompensated both in absolute and in product [indiscernible] the effect of the change in the perimeter of the consolidation of the Russian business. And finally, the CapEx stood at EUR 34 million versus EUR 25 million last year. Diving into our sales evolution in Slide 15, you can appreciate that the strong commercial momentum continues. Our attractive value proposition and service quality has also been reinforced by the resilience shown by the European economies where the strong labor market is sustaining [indiscernible]. In addition, during this year, we are gradually recovering the contribution from our business from China. In Slide 16, you can find the quarterly evolution of our EBITDA and operating profit. Second quarter EBITDA surpassed the EUR 100 million mark, growing by more than 25% year-on-year are recovering the margin level of almost 17%. As noted, profitability increase, thanks to cost control, efficiency gains and the generation of more value-added operations. In addition to the less headwind from macroeconomic factors at lower energy prices and the normalization in the [indiscernible] supply chains are moderating the still high levels of inflation. This is providing some relief from the extraordinary cost pressure experienced in recent quarters. In terms of the operating income, as we mentioned, we reached almost EUR 37 million, with a growth of 27%, which translates into a net margin of 6.1%. In Slide 17, we demonstrate the cash flow generation. An almost 10% increase in the generation of operative cash flow that amounted EUR 169 million during the first half of the year, that together with EUR 61.6 million income from the sale of the remaining part of our Russian business [indiscernible] to meet comfortably with our investment commitments service, the financial payments reduced the gross financial debt and also to increase the cash buffer as we are going to see on the next slides. But first, let's focus on the organic evolution of the portfolio. We are 12 new restaurants were opened and 3 were closed during the second quarter of the year. In total, 29 units were opened out of 34 were closed during the first half of the year. In summary, we continue with the portfolio optimization strategy that is helping us to further progress towards a more efficient allocation of capital. Remark that this quarter, most of the closures come from [indiscernible] from a specific market. In summary, we continue with our plans of opening more restaurants than we did in 2022, which totaled 109 units, so this is expected that the second half of the year, we will concentrate most of the planned openings and the necessary investment as it has happened in previous years. From Slide 19, let me remind that the level of net financial debt stands at EUR 381 million, having been reduced by almost EUR 45 million during the year. Likewise, the cash and cash equivalent position increased by EUR 25 million during the first half of the year to reach almost EUR 255 million. This situation allowed us to comfortably comply with our financial covenants but at the end of the first half, the group show a leverage of 1.9x financial leverage and the interest coverage was 6.5x. In Slide 20, you can find our financial debt structure and the maturity profile. There has not been any material changes during the last quarter beside the 2 new bilateral unsecured loans of amounted EUR 56.5 million that we already covered on the previous quarter. Now as usual, we will review the results for different segments that you can find in Slide 21, with a breakdown of revenues, EBITDA and number of restaurants that we have in each [indiscernible]. Starting by Central and Eastern Europe in Slide 22. Revenues generated during the second quarter reached EUR 335 million with an increase of 20% year-on-year. All countries in the region saw excellent commercial dynamics although Hungary evolution stand out with a sales increase of more than 40%. The relative importance of the Czech Republic continued to grow. Consolidating its position as the group's second largest revenue generator country at the [ polar ] during this quarter. EBITDA generation during the quarter was almost EUR 69 million. This is EUR 14 million higher than in the same period of 2022. And the EBITDA margin was 20.5%. Highlights that most of the countries achieved margins above 20%. In the specific case of Poland, the EBITDA margin stood at 19%, which nevertheless recorded a notable growth of 1.7 percentage points in comparison with 2022. At the end of the quarter, the restaurant portfolio in the region amounted 1,128 units after the opening of 3 units during the quarter and the closure of 6. The number of openings in the first half among 11 units and the number of closures 10. Overall, Western Europe in Slide 23. Revenues in the region amounted was EUR 225 million on the quarter with a 10% increase year-on-year. By country it was highlighting the excellent performance of Germany where the gradual [ return ] to on-prem consumptions continues to boost activity levels. The EBITDA generated in the region reached EUR 32 million with a year-on-year growth of 15%. Finally, the total number of restaurants at the end of the half year stood at 910 after the opening of 6 and the closure of 16 during the second quarter of the year. This drove the number of openings in the region during the first half year to 11 and the closure to [ 21 ], of which 15 were concentrated in France. And finally, China on Slide 24. After the end of the restrictions resulting from the COVID crisis, a strong economic recovery was expected in China. But so far, the level of intensity has not been as expected. However, the reopening of the economy and increased mobility has allowed AmRest to regain the good old path of this operation in the country. Revenues generated during the second quarter almost doubled versus a year ago, reaching EUR 27 million. In terms of EBITDA EUR 5.5 million were generated during the second quarter that represents a margin of almost 21%. The number of restaurants in the region reached 87 after the opening of 3 units in the second quarter and [ 7 ] for the first half of the year. There were no closures during this period in the country. And this is all from my side. So Eduardo, I don't know if you want to conclude with some remarks.

Thank you, Santi. We just set strong quarterly results. This is the result of commitment to service of all the AmRest teams and all initiatives implemented that we have previously discussed. This week, we are having celebration in the context of the 30th anniversary of AmRest. Congratulations to all the AmRest teams and I also want to take the opportunity to thank all our clients and consumers that every day chooses to visit our restaurants. Now we are ready to take some of the questions.

[Operator Instructions] We have a question on the chat box from [indiscernible]. Given the high input cost base and the seasonal nature of the business, is it reasonable to assume that the company should be able to improve the EBITDA margin in Q3 by at least a similar level as in Q2 ex-Russia, i.e., by 1 PP?

Thank you very much for the question. I mean it is difficult not to make an assessment on what is going to be the quantity. But what we can tell you is that what we are seeing is that improvement continues, that the cost pressure is diminishing and this has a lag effect in our portfolio to see the fit of this cost pressure. It may lack several months. One of the things that we were doing in terms of our purchase agreement was to reduce the extension of them, the majority of them. In the past, we used to have more long-term contracts. Right now, we have shorter term contracts, but even so to filter all these reduction in terms of cost pressure, it takes a time. So still, we are living in a very uncertain environment with this regard. But what is true is that the momentum and the trend is positive and this is what we are seeing on right now.

[Operator Instructions] We have a question from JP Rolandez of [ IT ] Funds.

Yes. Hello. Congratulations for these excellent results once again. I have 2 questions. One is regarding the refinancing of your 2024 maturities. It's a good time to refinance them. It's in the summer that you repair your roof. So you are enjoying a summer time, and probably your bankers would be very keen to make you attractive offers. However, it's a tricky time on interest rate markets. So I would like to know whether you are starting to think about it or what are the plans there? And two, you said that you are ready for -- after -- for an expansion. And so what would be the next expansion phase for AmRest? And again, congratulations for excellent results, which deserve a much higher valuation on your share price.

Thank you, JP, and thank you for all the support of our shareholders. I'm going to address the first question that you were making in terms of the refinancing. And you made an important point. The big part of the debt is due to at the end of 2024. So right now, we are working precisely in the refinancing on that amount. It's quite important as I'm connecting this to the second part of the question that you are making. We're committing -- we are committed to growth. We have expansion plans in of course in our considerations. And this is the allocation that we could be having for the refinancing and additional funding that we may be asking for the banks, you say, it's an interesting timing. Santi was mentioning some minutes ago, there are still some uncertainty. But the first biggest step that we are shooting at this moment is the strong results that we are delivering. Given those results, we want to give the confidence, of course, to the bank that the company is having and passing to very good tax. So this is right now the focus that we have for the second half of 2023 to work hard on those discussions with the banks in order to get the refinancing on time. The other topic that you were bringing JP, in terms of the expansion pace, we continue committed to our brands. We still see opportunity to grow in all of them. There's still quite space in the different -- in the different countries. But one of the things that we have been saying for quite some time, we want to be very efficient on the openings. Right now, we have more strict processes in terms of where to open, where to open the stores because we want to be sure that the ones that we are open are the ones that can give the best return in terms of our numbers. And we talk about the geography, which makes more sense. The brand that makes more sense. So we are working towards that. But we still see, and I think is the most important part, growth opportunities for the entire portfolio of.

If I may add 1 point, Eduardo, I always try to stress. So to measure the growth in terms of number of restaurants, of course, is a very important KPI, but we are seeing that we are delivering constant quarter growth quarter-on-quarter and this is also coming because what we are doing is to embrace new technology, new distribution channels, to look for new momentum with the system portfolio of restaurants that we have. So to have this efficient use of the capabilities that we have, we will continue to be also a very important focus of search for growth for us.

[Operator Instructions] We have another question via the chat. Could you give us some color on the results in Spain, especially regarding the profitability of the business?

Thank you very much for the question. The profitability in the different markets is something that is bias also to the type of offer that we have in the countries. So 80% of the business of [ under ] right now is QSR and is the coffee segment. So in the case of Spain, we have very important contribution coming, for example, from casual dining. So the performance of this type of segments is not as good as it's happening in other segments. And this is -- what is -- it is affecting the growth trends that we are showing among the different countries. Thank you very much.

[Operator Instructions]

Okay. So using my privilege of a moderator, maybe I will chip in and have a couple of questions from my end, if that's okay? Well, first of all, can you dive a bit deeper into the cost end of your business because I must say that profitability, which was the major surprise. So which cost has is this debt margin where are you seeing more [ room ] to cut? So we could understand it better.

We have -- Lukasz, and you raised a very interesting point. One of the first topics that we see is that sales were strong. And of course, when we have the proper level of sales as we are having right now, the flow-through that we have to profitability increases. So that's why -- that's the first topic to have the proper level of sales that can translate into profit. The second is we see mainly 2 topics. In terms of the cost of [ goods ], we are seeing some easing in terms of inflation and pricing which is supporting the margins. And the other topic that we have at least for some time is that the energy prices also are helping us in order to increase the margins.

Okay. And going market by market, I must say that I cannot complain about the results of the Polish business, but yet it stood behind the other markets. So why Poland is underperforming the other parts of your business?

Poland. Remember that Poland presented very strong results in the second quarter of last year. And anyway, the trends that we are seeing in Poland is quite positive. Poland market having a 19% margin is one of the most relevant market. I would see more than is one of our top developed countries, not really considering it and underperforming. I see the other way around.

Okay. But can we expect that the dynamics of EBITDA in Poland to catch up with other markets or given the big size and high [indiscernible]?

We are working towards all the markets in order to increase the profitability. And of course, Poland is not exemption. As you say, is our most important market, and we focus a lot into that. And also, it depends a lot on the mix that we have on. Unfortunately, all the brands that we are having right now are presenting in Poland, representing very good result, KFC, Pizza Hut, BK and Starbucks are having very good results on the market. But initiatives, in order to increase the profitability are in place. And why it is very important is that the momentum on sales remains that's something that we focus on. One of the priorities is, of course, the transactions -- keep the transactions up in the proper pricing is also a driver of profitability of the markets. But of course, all of them has this particular characteristics.

Okay. And the final one of mine at this stage, which I want to ask [ roll out ] because here, you're guiding that the gross roll out would be higher than 109 restaurants added last year. However, on the net level, you are still shrinking, even excluding the disposal of Russian business. So when can we expect the quarter when the new openings will be higher than the closing down?

I mean, as we said, no. We maintain our guidance and expectations to be opening more stores than we did on last year. About the closures here, we have some specific situation as we were highlighting most of the closures that we have during this period, it has been concentrated in 1 brand and in 1 country and they were coming from franchisees. So -- this -- well, this is something that is specific. But what is important is to understand several things over here. So to have [ natural presentation ] of the portfolio is something healthy and we think that we are making the delivery of how the profitability, how our sales continue to be growing despite the fact that we have been closing down portfolio. So once more. So what we want to have is profitable growth to be focused on performing stores. And this is a natural process that we will continue. So -- our commitment with the guidance continues to be [ unstable ], and we should expect further acceleration in the new openings during the second half of the year.

Q3 and mainly Q4 is going to be strong -- are going to be strong in openings. And that's like the cycle that we have had the latest years. We are working a lot in order to have a more stable growth across the quarter, but it's something that takes quite some time to adjust. There are still some delays that we are having in terms of receiving equipment. There are still some logistics issues in the chain to open the restaurants but we're on a good pace to get into the numbers that we shared at the beginning of the year as guided. So let's expect third quarter increase and even a higher number in the fourth quarter.

Great. Great. That's it from my end at this stage. I leave the floor to others.

Thank you. We have no further questions. I'll now hand back to the management team for any closing comments.

Thank you. Thank you very much for everybody for joining this conference call. We are very happy with the results, and we are committed to continue delivering on the numbers. And hope to see you soon in our restaurants in the near future. Thank you very much.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.