AmRest Holdings SE (EAT) Earnings Call Transcript & Summary

Hello, and welcome to today's AmRest Q3 2023 Results Call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] Lukasz Wachelko from Wood & Company, begin, Please go ahead.

Again, good afternoon, good morning ladies and gentlemen, as announced my name is Lukasz Wachelko. I am representing WOOD & Company, I have the pleasure of moderating this call. The company is being represented by CFO, Eduardo Zamarripa; and Strategy Director and Chief of IR, Santiago Camarero. Guys, not to take much of your time. The mic is yours.

Thank you, Lukasz, and good afternoon, and thank you for joining us in AmRest's Third Quarter 2023 Results Presentation. Another quarter with good news to share. In a still challenging environment, AmRest's business dynamics continued to show a remarkable growth in most of our markets, and this time, together with a recovery in profitability levels. But let me show you these things in our presentation. In Slide 2, you can see part of this essence of AmRest's business model, a group with a portfolio of more than 2,100 restaurants spread across 21 different geographies, through which more than 44,000 employees provide a distinguished service to over 30 million customers every month. This geographic diversification is complemented by a diversified portfolio of iconic first-class brands that meet the needs of our customers on different consumption occasions, which nonetheless has big bias in terms of capacity towards the quick service and coffee segments. In addition, this portfolio of brands maintains a good balance between franchise and property brands that combined provide a critical size for our logistics and central kitchen models to offer a clear advantage through the generation of economies of scale. Going to the Slide 3, let me summarize the most relevant defense for the third quarter of the year. Once again, we have a quarter where we have to talk about record revenue generation. AmRest's sales reached EUR 632.8 million with a growth of 11.6% versus the same period of last year. These commercial dynamics continue to be supported for an increase in the number of transactions that grew by 3%. In terms of profitability, the EBITDA generated in the quarter increased to almost EUR 111 million. That translated into an EBITDA margin of 17.5%, the highest quarterly figures in the last 2 years. Third, the profit attributable to the equity holders of the parent company amounted EUR 27.1 million. Fourth, the leverage ratio continues to decrease slightly downwards to 1.8x compared to 1.9x in the previous quarter. And finally, the number of restaurants reached 2,143 after a net increase of 20 new units in the quarter. In Slide 4, you can find the latest organic and nonorganic portfolio changes. There were no new nonorganic changes from the quarter after the disposal in May of the 213 restaurants that we have in Russia. And in terms of organic changes, we opened 24 new restaurants in the quarter, and we closed 4 in the context of our optimization portfolio exercise. In Slide 5, we are illustrating AmRest's revenues and made profitability measures trend for the third quarters of the last years. First, as I pointed before, sales reached almost EUR 633 million with a growth of 11.6% on a comparable basis to the same period of 2022. Second, the EBITDA generation also showed an excellent performance with a growth of 16% in the quarter, reaching EUR 111 million that represent an EBITDA margin of 17.5%. And finally, the EBITDA increased cascades strongly in the operating profit of the group, which after growing by 36%, reached EUR 52.9 million that represents an EBIT margin of 8.4%. These excellent results are the consequence of the value generated by all of our brands. And in this regard, I would like to share with you the commercial vision and position of them. Let me start with a quick service and coffee brand in Slide 6. On a Starbucks, iced coffee is showing the biggest growth dynamics, especially among young customers. This type of products is helping us to extend the Starbucks into joining their age groups. On KFC, we are focusing in reinforcing our iconic products image. They are known and loved products by our customers. We reinforce their excellent quality while we deliver great value for money. All of these are combined by simply the best offering in our KFC restaurants. In Burger King, we are meeting customers who expect something more from burgers, a unique taste and unconventional ingredients. This is how our Gourmet line Kings Collection was created. Premium burgers that tend with flame grill beef, crispy brioche bun and the highest quality ingredients. On Slide 7, let's review our fast and casual dining brands. In Sushi Shop, we have introduced new hot dishes that are providing a nice complementary fit to our existing menu offer. Japanese Curry, Jacki Soba or Ramin our dishes remain by our chefs in the spirit of Japanese gastronomy and with a little bit of Susi Shop magic. In Pizza Hut, strong promotion in Pizza was launched in September through all you can eat, mechanized with new range of players. In La Tagliatella, we have a very good example of our commitment to improve eating habits. We are creating the promoting highly nutritional menus. On this occasion, La Tagliatella has launched the Cuore Felice Project in collaboration with Cima Universidad de Navarra, where we offer a selection of dishes made for raw materials with a nutritional profile, typical and a heart healthy diet. And finally, in Blue Frog, the innovation of the core menu. We're adding more Asian and fusion flavored products, such as Korean, Chinese and new ingredients that provide great experiences, allowing the consumer to endure more testing at the same budget. Returning into the more financial part on Slide 8, all the distribution channels recorded again higher levels of activity. Dining sales that were 46% of our total sales continued to show the highest level of growth, followed by takeaway and drive-through with delivery being the only channel that did not achieve double-digit growth. On the other side, digital sales continued to make progress and set a new record in the third quarter of the year. In Slide 9, as in previous quarters, we are illustrating the evolution of the 12-month trailing average revenue per equity store, where once more, we continue to report that consistent advance that supports improvement in quality of our sales. As we have discussed in several occasions, we are becoming one more efficient, reducing the resources that we need to generate sales. In Slide 10, let me share a few thoughts on the cost pressure. First, we are seeing price moderations at aggregated level. Although we cannot forget that we are still in an environment of abnormally high inflation, at least from the perspective of recent decades. Regarding the price moderation, highlights this reduction is not linear. Some countries are showing volatility in their inflation level, especially affected by the increase in energy prices during the summer months and unevenly behavior across different products, some of them affected by adverse weather conditions. Nonetheless, starting the moderation in the cost of supplies and energy. Together with advances in efficiency and higher sales is enabling us to start the recovery of profitability levels. And with this, I will pass the mic to Santiago to cover the main financial highlights and trends on the quarter.

Thank you very much, Eduardo, and good afternoon, everyone. It's always my pleasure to have the opportunity to share with you all our results and to discuss on any issues that may be of interest to you during the call. All in all, today, we are presenting new advances in the quality of our results and another quarter of a strengthening in the company's financial profile, a further step forward in our objective of growing in a sustainable, profitable and inclusive manner. If we now go to Slide 12, let me start reviewing the main financial highlights for the third quarter of the year. Group revenues increased by almost 12% to EUR 633 million in the quarter with a 10-store sales level of 9% versus last year. In this regard, the most up-to-date reading is 11% year-to-date. Second, in nominal terms, the EBITDA generated was almost EUR 111 million. This is a growth of 16.5% higher than the growth in sales, which lead to an increase in margins. Third, the operating profit conversion was higher than in previous quarters. AmRest generated an EBIT of almost EUR 53 million. This is 36% more than in the previous year. This figure represents a margin of 8.4%. And finally, CapEx is accelerating in line with the progress in the group's results. In this regard, almost EUR 44 million were dedicated to CapEx during the quarter compared to almost EUR 31 million during the same period of 2022. This increase in investment is translated into new restaurant openings, more refurbishment and accelerating and taking more digitalization projects. Diving into our sales evolution in Slide 14, you can appreciate that the strong commercial momentum continues for AmRest despite the economic growth has slowed down that we have been seeing in the main European countries where undoubtedly, the strength of the labor market continues to be a key factor for us. Nonetheless, this commercial trend illustrates well the resilience of our business model and our capture of market share and support the increase in the number of transactions that we are reporting. In the Slide 14, you can find the quarterly evolution of our EBITDA and operating profit. And I would like to share 2 many details on this slide. The first one, AmRest third quarter EBITDA is consolidated about the EUR 100 million watermarked quenched on the second Q of the year. And second, the path towards margin recovery is also consolidated. We are selling more and with higher margins. In this regard, the EBITDA margin almost reached 18% in the quarter. This is the highest level since the global supply problems and inflationary pressures around the world begin to rise a couple of years ago. Let me emphasize the important challenges that continue to be ahead of us and that still we are confronting a nonstandard situation. However, I would like to remark the normal progression that we are doing in terms of efficiency that imply a structural and long-lasting changes that are starting to pay off and equally important, provides key competitive advantages for our future. If we move now to Slide 15, you can find the cash flow generation of the group. In addition to the strong operating cash flow generation, let me focus on the financing cash flow that reached almost EUR 122 million outflow and has been abnormally high in this quarter for 2 main reasons. The first one is that we have repaid almost EUR 70 million of debt using part of the expenses that we have been accumulating during the last months. And second is a consequence of the higher interest rate that are impacting the financial cost of the group. With regards to the financing cash flow, as we mentioned before, we continue to increase investments in line with our guidance and also in line with the results improvement that we have reported. Nonetheless, let me also share that we expect to maintain the strong seasonality shown in previous years, where in the last quarters, we concentrate the highest level of investments, especially due to the opening of new restaurants. And in this regard, if we move to the Slide 16, we can find the number of new restaurant openings and closures undertaken on the last quarter. AmRest closed the quarter with a portfolio of 2,143 restaurants after opening 24 units and closing 4. In year-to-date figures, openings reached 53%. White closures amounted 38 units. As I mentioned before, we reaffirm our expectations of opening more restaurants in 2023, that relate in 2022 when we opened 109 units. The fourth, as in previous occasions, the last quarter of the year will concentrate a significant number of Neo Banks. All this work down is gravitating and keeping a balance around 3 main concepts that I want to share with you. The first one is sustainable value generation. The second is growth. And the third is balance sheet strength. If we can now move please to Slide 17, we can see the evolution of our net financial debt and leverage ratio that closed the quarter at 1.8x EBITDA. As you know, the improvement in operating results is making possible to combine increased investments with further progress in strengthening the balance sheet. In this regard, on the last quarter, almost EUR 70 million of excess cash has been dedicated to the repayment of debt. This together with higher EBITDA generation, once again led to a reduction in the leverage ratio, which stood at 1.8x at the end of the quarter compared to 1.9% in the previous quarter. In addition, the strengthening of the balance sheet is also evident in terms of the equity accumulation that exceeded EUR 70 million at the close of the third quarter, thanks to the accumulation of profit from continued operations as well to the positive effect generated by the disposal of the Russian business on the second quarter of the year. As a last remark, let me point that this situation allows us to comfortably comply with our financial covenants, but as you know, established a leverage ratio lower than 3.5x and an interest coverage ratio of more than 3.5x. Moving to Slide 18, you can find our financial debt structure and the maturity profile with no material changes during the quarter besides the debt repayment that I mentioned earlier. Now as usual, let's review the results by different segments that you can find in Slide 19 with the breakdown of revenues, EBITDA and the number of restaurants that we have in each region, starting by our biggest market, you can find information of Central and Eastern Europe in Slide 20. Revenues in the region reached EUR 354 million in the quarter, an increase of more than 70% versus the same period of 2022. All of our main markets in the region grew at double digits. If we have to highlight the market and once again, I will remark the excellent performance in Hungary, with revenue growing by over 30%. EBITDA generated in the quarter amounted almost EUR 79 million after increasing by 27% and resulting in an EBITDA margin of more than 22%. Once again, the improvement in margins is generalized in all the markets, which now have EBITDA margins about 20% response. Finally, in terms of footprint, we closed the quarter with a portfolio of 1,138 restaurants in the region after the opening of the learning units and the closure of one. This brings to 22 the new restaurants opened and to living the closes for the year. Moving to Slide 21, we can find Western Europe results. Revenues in the region grew by almost 8% to EUR 231 million in the quarter. The strongest gain was achieved in Germany, where revenues increased by 21%. On the opposite side, France continue to be laden the rest of the markets. In terms of profitability, EBITDA stood at EUR 34 million, with a growth of 23%. This figure represents an EBITDA margin of almost 15%. This is around 2 percentage points higher than a year ago. Once again, the evolution in the German and French markets show the 2 sides of the coin. In terms of the portfolio, the number of restaurants in the region reached 915 units at the end of the quarter with the opening of 9 units and the close of 2. This implies 20 new openings for this year and the closure of 25, of which 17 of them were concentrated in France. And finally, in Slide 22, we have China, where the depreciation of the renminbi against the euro is affecting the information that we are displaying in these gaps. Revenues in the region stood at almost EUR 26 million. This is a decline of 4% versus last year. However, in constant euros, sales recorded almost double-digit growth, supported by an increase of transactions in our restaurants. The commercial positioning of AmRest's business in China, both due to its geographic presence concentrated in the fastest-growing UVA centers and the attractive value harmony proposition offer continues to provide an interesting opportunity for growth. EBITDA generated in the region amounted to EUR 5.6 million, representing an EBITDA margin of 22%, which is almost 7 percentage points lower than in the same period of 2022. As a last point, the number of restaurants in the region reached 90 restaurants after opening of 4 and the closure of 1. The cumulative annual numbers of openings stand at 11 with only 1 closure. This is it from my side Eduardo, if you want to conclude with some remarks.

Many thanks, Santi and many thanks to everyone. We are very pleased with the results presented today. At the same time, we are aware that we still have significant challenges ahead of us, but our commitment is to continue to work for making AmRest a better company and a clear leader in the reference in our sector. And in this regard, the results presented here today demonstrate further step forward and our progression towards this goal. And with this, we are open to any questions that you may have.

[Operator Instructions]

Yes, can I take -- make use of my moderator privilege, I wanted to ask about one of the markets of yours, mainly in Germany because it was one of the weakest points for a longer while. But in fact, this quarter was standing out both in terms of the dynamics of sales and profitability. So if you could elaborate more what was behind this major turnaround of troublesome market not that long ago?

There are 2 main dynamics on this and the profitability. I would say, first, the level of sales continue strong. same-store sales, same-store transactions continue at a very positive level. Of course, as you saw in our comments at different levels within the regions that we have within AmRest position. And number two is given this level of sales and some reductions, as we say, or moderation in terms mainly on the cost of food that also helped in an important way. And particularly that you mentioned Germany, the recovery that Germany is having is, let's say, it's outstanding from comparing to the rest of the region. And the 2 main brands that we have over there for KFC, the same-store sales and transactions are very positive. But mainly, I would say that Starbucks is the one that is outstanding in terms of results. And things that we are doing within the brand, as we were mentioning, it's, of course, always understanding our consumer launching new products that comply with this as having a lot of dynamics in terms of our offerings, coffee, drinks, food. So extending the offering that we are having in the sites. Also, we are particularly investing in Starbucks and particularly in Germany in the new POS system, which help us to understand more the consumer and give a better value.

Okay. Just to follow up after this remarkable recovery of German market, what are you planning for France because I must say that among all the strong markets of your friends lags behind. So what kind of medicine you're planning to apply there?

Sorry, Lukasz, can you repeat? We missed a little bit line.

Okay. So well, you've turned around German market, which was one of the weakest of yours for a longer while, currently, I'd say, France is lagging the other geographies. So what are the plans to turn around the business in France?

We have 2 topics in France. Economy is one, and the sector is suffering in France. It's not only our brands. No, of course, we always compare to what is happening in the economy and the sector. And France is a region which is suffering at this moment in terms of the restaurant industry. And particularly for us, what we are doing in KFC and in Sushi Shop is incentivating the transactions. And that's crucial for us. Transaction is something that we cannot lose. So we are focusing on the top line in order to maintain our growth at the biggest pace that is possible for revenues and the rest will follow. One of the topics that we've seen here is drive if sales are there, the rest of the P&L follows. So that's our focus, how to keep the traffic, have to keep the same-store sales and now all our initiatives in terms of operations, in terms of marketing right now are relating to incentivate the consumption on that market. And of course, as you can in these timings also initiatives in terms of supply change efficiencies in terms of the restaurants and all those things that follow. But the priority right now is in terms of the revenue.

Okay. Great. Operator, do we have any questions from the room?

Yes. Our first question comes from the line of Jean-Pascal Rolandez from The L.T. Funds.

I have 3 questions. The first one is relating to La Tagliatella. Are you thinking of expanding the format to other countries than Spain and Portugal? Second question is regarding the bakery segment, where in some countries, it's quite popular. Are you thinking of developing that segment, maybe not now, but in a couple of years from now, if and when you can afford it in terms of leverage? The last question is you have less and less Polish investors according to Bloomberg. So is it not time to move your main listing to somewhere else to NASDAQ, for example, where people are more familiar with the restaurant business and reward good management with better valuations? In Poland, you feel a bit isolated and the value I can see from other restaurant business and invested in?

Good. Thank you, JP, for the questions and results, and we're very happy, as you stated with the results. But going direct to your questions. In terms of La Tagliatella to other countries, right now, as you stated, Spain is our core market, and it will continue being. And we still think that there is room for growth in terms of this market. In fact, another going to major cities that we still have room for growth and also going to some other cities in which not necessarily we are present right now. And one thing that we need to take into consideration, which is like the best format that suits each of the regions in which we can be opening stores. So still greenfield need to have opportunities in France, and we see exactly the same in Portugal. Up to now, this is our focus in these 2 countries. We may think in the future to have other latitudes but not in the short term. In terms of the bakery, as you were saying, this is a very interesting concept. And this is something that we continuously follow now being, as you mentioned, bakery one of the most important and interesting ones. As just said, it was not a proper moment, let's say, to look into that. But every day, as you see our results, as you see, our leverage as we see the opportunities is something that is discussed within the company as opportunities that may arise and that could, at some moment make sense for the company. But definitely, it's a very attractive segment. And in terms of your third question, in terms of the markets that we are present right now, we have our dual listing in Poland and in Spain. And that's where we are at this moment. And right now, we are not considering any market. But it's something that always is worth to analyze, as you point out.

Yes, you're raising a quite important point regarding a little bit consolation that we have in terms of our segment, so as we mentioned before in the States, it's I mean in detail, there are quite a few companies of this sector trading there, and investors are seeing from perspective and understanding the business more from the discussion. So the work that we are doing right now is to try to be educational, to try to be proactive, to try to deliver what we are promising into the market and to show the beauties that we have in terms of our business model. This type of business model, we don't have credit risk to you receive all the money that you have upfront in order to enjoy the benefits and above or a negative working capital. So there are like quite very unique advantages of this very diversified business model in terms of brands, with the complementary that we have to do in franchise portal brands in terms of geographies that we really hope not obligate little we are showing to the market the value that we have through the results that we are delivering. Thank you very much.

We have a written question here that comes from Janusz Pieta from mBank, and they ask, how would you assess the state of the European consumer? Do you see any signs of an improvement in the consumer environment?

Thank you, Janusz, for that. This is very challenging times as I was stating in terms of the dynamics, what we can see up to now in most of our brands and regions is that the level of transactions continue to be strong. And that's how we sense our consumer. If we, of course, go to the economics on whatever we have like within the different countries, different expectations from the official statistics now. But up to now, what we can see and what it shows in our brands is that the transactions continue at a very healthy level.

No. is that's another topic that we expect to start to be more relevant in the quarters to come is different dynamics across different countries. And what we see is, but at the end of the day, the high levels of inclusions, the different pace in terms option monetary policy is making a certain level of this conversation amongst the different economies. So in this regard, what we really state now is that Central and Eastern European markets are going to have a detail, but perhaps the work is already behind those economies in terms of construction and perhaps with the European economies are going to be lagging a little bit the trend. But once more, what is really important, we are trying always to highlight coming to my previous point before, is the resilience of the business model that we have and the complementary of the offer that we have through our restaurants well. So still goes well. We sell it still doesn't go well, will continue to be sell. So for us, what is really important and one of the KPIs that I always very focused on is in terms of employment. We offer something that is very attractive to a very modest price. So as long as the people has employment, has the possibility to be working on some income. Basically, the way of providing is a service that is essential. This perception of essentiality is increasing through generation. So more and more chunk people is using the services of the restaurant in the normal daily lives. So in some markets, what we have seen some years ago is that in the business of the restaurants, we represent much higher figures in the business that we have or the expense. But on those countries, you can find the number in a normal shops for buying food. So this is something that is a trend that is there and that we are going to fit in a bit.

[Operator Instructions] We currently have no questions registered. Sorry, I'd like to pass it back to the management team.

Okay. So maybe I will jump in, if I can, because I have a couple of questions. So first of all, it's certainly likely that after the elections with new government for making Poland, Sunday trading ban will be removed or loosen? What's your view on that on expanding your firepower in the shopping malls in Poland over Sunday slightly coming next year?

On that, Lukasz, one of the cycle of opening a store is quite long. In fact, the restaurants that we want to open in 2024, the vast majority of them, we already have been committed. So this is always that we always look at the development team has always the work in order to find the best locations available. whatever that means. And we have a mix that we want to follow in terms of in-line street to the ones that we have strived through the ones that we have in shopping malls. And we always look for the first location that makes sense for the company. But one thing to consider, as I was mentioning, is taking into account that opening a restaurant is something that takes the cycle around a year to open one. But what is relevant here is to find the best locations because that's part of the secret of the business, location, location and location.

Okay. But I want to understand that given that your closings were only 4 this quarter, the lowest number in the last couple of years. And in fact, the net rollout was the strongest among the last couple of quarters. Is it right action from our end that you are pretty close to ending the restructuring and going forward, we should be seeing more of a net opening than we've seen before?

So one of the points that we always remark is that the closure of the stores has to be understood as an intrinsic part of our business model. So it's true that if you are looking for a short-term catalyst in terms of valuation, you can focus on the absolute number of restaurants that you have. But what we want is really to create value and it's normal to have certain level of closures because concepts may be updated because dynamic changes and regions because we make mistakes. So there are many different reasons that really support the fact that the closures of restaurants is an increasing part of our business model. So what we were saying is that from previous years when we started really with this model, we were purchasing an abnormally high level of closures. This is something a little, very little. We should be letting behind. And the number of closures going forward, it should be lower than in previous years. But one more, let me remind that this , it has to be understood as in a part of our business model.

Okay. And if I can go back to my question on the trading band which we have currently in Poland. Restaurants are allowed to be opened, but most of the shopping mall is closed. So the food courts are suffering. It's likely that the standard trading and will be removed to lose next year with new government coming to power. What would be your view on the potential impact on AmRest's operations?

So it's something that we bring in to finite make numbers. What we are doing right now, for example, is to be working on the budget line for 2024. As always, on next quarter, we will try to provide you the guidance of how we see 2024, and this is part of the things that we need to process. So we are working on it. Operator, are there any more questions in the room?

There are no questions registered.

Let's say, as a final comment, I would like to thank you for your participation in the third quarter AmRest's conference call. And looking forward to see you in some of our restaurants in the near future. Thank you very much, and have a nice day.

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