Guzman y Gomez Limited ($GYG)

Thank you for standing by, and welcome to the Guzman y Gomez Limited GYG Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Marks, Founder and Co-CEO. Please go ahead.

Thanks, everyone, for joining today. As you might have already seen, today, we announced that as a Board, we have made the difficult but necessary decision to exit the U.S. market. This means ceasing to trade our restaurants from today and proceeding with an orderly wind up of our operations in the U.S. Before talking through how we have arrived at this decision, I would like to first and foremost recognize our people. From the very beginning, our teams have worked tirelessly with passion, professionalism and conviction to bring GYG to the Chicago market. Their efforts have delivered genuine progress in brand building, guest experience and operational standards and the quality of food and culture they have established is something that I am extremely proud of. We are committed to supporting every team member through this transition with the respect and integrity they deserve. Now turning to the decision. It wasn't easy. We have always said that we would remain disciplined in pursuing growth in the U.S. and have been transparent about the thresholds we would be targeting to validate our proof of concept. Notwithstanding the progress made by the team, the financial performance of the U.S. has simply not been acceptable and is not meeting targeted hurdles. I have always been confident in the differentiation of our food and guest experience. However, this was not translating to an improvement in sales momentum. Having spent the last 3 months in the U.S., I realized this was going to take significantly more time and capital than we had expected. In assessing the trajectory of the current network, the Board and I have concluded that the business is unlikely to deliver the performance that would justify continued investment of shareholder capital. We have not always got things right, and we have learned a lot. As we reflect on this, there are some things we would do differently. Starting with suburban drive-thrus has made it difficult to build brands in the U.S. Chicago has also been difficult. What is important is that we make changes when we need to. Continuing to invest in a market where the data does not support the path forward would be inconsistent with the discipline we owe to our shareholders and the rigor that defines the rest of our business, which brings me to our Australian business. Our core business is very healthy. We continue to deliver strong growth in our existing network, produce world-class unit economics in our restaurants and have a long runway ahead of us as we progress towards our long-term target of 1,000 restaurants. The quantity and quality of sites in our real estate pipeline continues to grow, and we remain on track to open 32 restaurants this financial year. Today, we are also updating our full year guidance for the Australian segment underlying EBITDA of approximately $85 million, representing 29% growth on the prior year. We believe directing our capital, focus and infrastructure behind this opportunity is the most effective way to compound shareholder value over the long term. I want to make it clear that this decision to exit the U.S. is no way altering our conviction in the global appeal of the GYG brand or in the long-term opportunity to expand into new geographies in a disciplined and deliberate manner. The strong performance of GYG's massive franchise markets of Singapore and Japan reinforces our confidence. Beyond Singapore and Japan, we continue to believe there will be the right opportunities in the right markets with the right models. When those opportunities arrive, we will be ready. Today's decision is not a statement about GYG's global potential. I will now hand over to Erik to go through the financial impacts of today's announcements.

Thank you, Steven, and good morning, everyone. As a result of today's decision, we expect to recognize a one-off P&L impact of between USD 30 million and USD 40 million to be included in the 2026 full year results. This range is subject to the audit review process, but represents the full exit and closure costs, including our existing lease commitments. The majority of these costs will be noncash with the cash component not expected to exceed USD 15 million. The one-off items I just mentioned are not expected to impact GYG's final dividend for F '26. Further detail on the financial impact, accounting treatment and timing of the exit will be provided in our full year results materials. I will now hand back to Steven.

We want to thank our shareholders for the trust you place in us. Decisions like today are never easy, but they are the decisions that build generational companies. Our obsession with food, our commitment to our people and our focus on reinventing fast food and changing the way the masses eat remains. The Australian business is in a strong position. Our master franchise markets are performing well, and our focus is clear. To our U.S. team, we will support you through this transition with the care, respect and integrity you deserve. To our guests, franchisees, suppliers and shareholders, thank you for being on this journey with us. The best of GYG is still ahead. Open for questions, guys.

[Operator Instructions] Your first question today comes from Tom Kierath from Barrenjoey.

Congratulations. I know this must have been a really difficult decision for you to make. I suppose my question is just on the cost growth outlook from here. I know that you've built up whole central to support a global network and the U.S. Is there some opportunities to kind of further streamline the head office costs? And as you bring people back from the U.S., how should we kind of think about the broader cost growth in the business going forward, please?

Hilton here. I'll take that question. Thank you. So firstly, from a U.S. perspective, all G&A relating to the U.S. business has always been allocated to the U.S. business. So from a cost-out perspective, what you'll see is the costs relating to the U.S. business will come out. From an Australian perspective, we've obviously built out a leadership team that will support our strategy and our growth to 1,000 restaurants, and that remains intact. That will support naturally our Australian business as well as our international partners. So the way we think about it is that effectively the cost out you'll see is coming out of the U.S. As far as the Australian team is concerned that are based in the U.S. and were in the G&A, those are predominantly operational team members and opportunities for them will be in Australia. As you know, we're opening up to growing to 40 restaurants per annum. And as we open new restaurants, there will be those roles for them when they return.

Yes. Wonderful. Second, just I'd be interested in your comments on what you're seeing in Australia at the moment. So you've given some earnings guidance for this year. Can you maybe just provide some comments on what you're seeing maybe in the last couple of months? Obviously, the world has kind of changed a bit with what's going on in the Middle East, but just some comments there around trading and input costs would be helpful.

Tom, it's Erik here. So I guess the first thing is we've obviously confirmed our guidance for the year, which gives us -- which demonstrates our confidence in where we're going to land the year. There's obviously a lot happening in markets, but it's all taken into account in that forecast. We're not going to be providing additional commentary and cost guidance on this quarter's trading, and we look forward to sharing that at our results in August.

Your next question comes from Caleb Wheatley from Macquarie.

Just one question for me. Just keen to explore how you're sort of thinking about the balance sheet settings in a similar vein to Tom's question that arguably you now have a bit more reinvestment capability. How are you sort of thinking about leverage in the balance sheet? How does the buyback sort of play into this and how you sort of thinking about, I guess, maybe some of the incremental capital that you now have off the back of the losses in the U.S. being in the P&L, please?

Yes. Thank you, Caleb. Look, I think as you know, we're already in a position where we have surplus capital in excess of what we need to continue to invest in our restaurants in Australia. And as you know, we're generating an extremely attractive return on that investment. So our priority will always be investing in our restaurants first and foremost. What has changed as a result of our decision today is that we will have going forward, significantly less operating losses in the U.S. Obviously, those will fall away. And so the group's earnings profile will improve materially as a result of that decision. That will allow us, first and foremost, to -- that will flow through in the form of higher dividends through the payout ratio that we have set as a Board. That -- and the Board's decision has always been to distribute the majority of franking credits to shareholders. And so the first and foremost is we expect the dividend to increase as a result, reflecting the higher earnings. From a cash perspective, we obviously have a small cash outflow as a result of this decision, but that's against a background of a very strong balance sheet. And so we're in a position where we will be able to continue the buyback program that the Board has approved. We are delighted -- we have been delighted that our ability to buy shares at the prices that we have because we believe it's -- we are able to buy those shares at prices that -- where we're trading materially below our 0 growth peers. And so we believe that in time, that will be an extremely attractive investment on behalf of our shareholders. So that will be something that will continue in the weeks ahead.

Great. And I guess as a bit of a follow-up, the USD 30 million to USD 40 million in terms of the P&L impact versus the USD 15 million in cash. How do we sort of think about the stack and reconciling those numbers?

Yes. So the USD 30 million to USD 40 million will be included in this year's earnings numbers in 2026. It is likely that, that will be captured in -- obviously, we need to work through with our auditors, but it is likely that, that will be included in discontinued operations, and you'll have that detail in the accounts come year-end. In terms of the cash, some of the cash will flow this year, but the majority we expect to flow next year as we work through our wind down of the U.S. operations. So you'll see the P&L impact in F '26, and then you see the majority of the cash impact happening in F '27 and beyond.

Okay. And what does the noncash component relate to?

It's primarily the impairment of our property, plant and equipment that we've got over in the U.S. as well as the impairment of our lease assets that we have recognized in the U.S. as well.

Your next question comes from Craig Woolford from MST Marquee.

I just want to ask a question on how you think about offshore operations going forward. Your Singapore and Japan are franchising operations. The U.S. was largely corporate owned. Like if you think about future opportunities, would you be considering franchising or corporate-owned opportunities?

Importantly, the decision to exit the U.S. in no way alters our conviction in the global appeal of our brand or in the long-term opportunity to expand into new markets in a disciplined and deliberate manner. The performance of our master franchise markets of Singapore and Japan reinforces our confidence. Both markets continue to deliver strong sales growth and healthy unit economics, and we continue to open new restaurants. We're proud of both those partners and see lots of runway ahead in each market. Beyond Singapore and Japan, we continue to believe there will be the right opportunities in the right markets with the right models. When those opportunities arrive, we'll be ready. We haven't made any decisions at this point as to any next markets beyond Singapore and Japan.

Okay. So you're not suggesting that the operating model of the U.S. was part of the issue?

I mean, obviously, Craig, there's been a lot of learnings in relation to the operating model in the U.S. We've had a lot of success having master franchise markets, both in Singapore and Japan, and it is naturally something we'll take -- we'll consider all the learnings we've had from the U.S. as we go into new markets, given the strength of our success with our master franchisees in those markets.

Your next question comes from Ben Gilbert from Jarden.

Just first one for me. Did you consider trying to sell the franchise offer in the U.S. or they just weren't necessarily buyers for it there?

Ben, no, we didn't consider selling the restaurants to franchisees just because the economics obviously weren't strong enough and obviously, that's part of the reason why we've exited the U.S.

And just second one for me, I appreciate your comments, Erik, around not providing us with further details on costs. But can you just remind me how you think about pricing and cost pass-through to the business? Because it's surprised me, obviously, you're still leaning in and it's working well given the result. But just how you think about pricing and managing COGS because obviously, some pretty material COGS inflation out there, and it doesn't really look like you guys have taken price.

Yes. Sure, Ben. I'll take that one. Look, I think the first thing I'll say is our pricing philosophy has been very consistent for a long time now and has been delivering very strong results in our business. So the way that we think about price, and I've always thought about price is that we need to do everything in our power to keep menu prices as low as possible for our guests. And when we do that, we get rewarded with significant transaction growth, and you saw that in the third quarter, and you've seen that coming through at the beginning of this financial year. Now we are entering into a higher inflationary environment. And so we continue to apply that framework. And we will do everything we can, working with our suppliers without compromising on quality to mitigate those cost increases. But if that is not possible, the last lever we will pull is menu price increases. And as you know, what we try and work towards on behalf of our franchisees and the health of our network is a COGS outcome of about 30%. And so what you should expect in a higher inflationary environment, the reality is that menu price growth will be higher than it otherwise would have been. But we -- due to the benefits of operating leverage in our business and the significant scale that we're starting to build as a business, we believe we can keep those menu prices inflation well below inflation and below the rest of the market, and that's our objective.

That's really helpful. And just -- I'm thinking one follow-up. Do you think your relative pricing has improved? Because it feels like your relative price progressively improved through this fiscal year?

Absolutely. Absolutely. The industry inflation has been well ahead of ours, and we are not only keeping inflation below industry, but actually below general CPI. And so we're getting rewarded with that through transaction growth and the growth in frequency.

Your next question comes from Bryan Raymond from JPMorgan.

Just on -- just to clarify on the Australian corporate cost line, G&A cost, is there any costs in there at all that are related to the U.S. or could be rationalized at all? There's quite a big cost base. I think Tom might have mentioned this earlier, but is there any implication at all for the Aussie EBITDA out of this project?

Bryan, no, there's not. All costs relating to the U.S. have been allocated to the U.S. G&A line that is included in the U.S. EBITDA line that we've been reporting.

Okay. Great. And is the -- your $85 million EBITDA guidance, is that consistent with the 6% to 6.2% range you got previously in terms of margins?

It is. It's probably at the upper end of that range.

And then just does the lack of sort of, let's call it, cash flow drain in the U.S. change your pace up to 40 stores per annum from 32 currently? Or was that not the issue previously and sort of opportunities there?

So Bryan, as far as the Australian business is concerned, our strategy remains the same. We will open 32 restaurants here in Australia this year. We're building our pipeline as we grow towards 40 restaurants over the medium term. So nothing changes from a strategic perspective as far as the Australian business is concerned. It's important that we don't compromise on the quality of our real estate sites.

Yes. And just to build on that, Bryan, it's another way of saying that is cash has never been the constraint to that pipeline. It's the quality of the sites that we continue to insist upon.

Right. So we should expect the buyback to resume now before...

Yes, you should.

[Operator Instructions] Your next question comes from Sam Teeger from Citi.

Just wondering, given consumer sentiment in Australia has been a bit weaker, have you seen any slowdown in delivery sales given it's cheaper for consumers to choose carryout?

Sam, I'm going to deliberately confine my comments to the third quarter results, and we'll be able to share our Q4 results in August and talk more about it. But we're very pleased with actually all channels of growth in the business and delivery has played a big part in the momentum that we saw in Q3. But importantly, it was not the only area of momentum. As I said, we saw momentum across all channels. And so we're happy with the way that delivery is going at the moment.

All right. And then just hypothetically going forward, if delivery sales do slow due to weakening consumer sentiment, can you just talk us through the impact on the P&L?

Yes. Sam, one of the great things about our business is that we have many different channels, and we are very -- we're there for the customer in whatever channel they need, whether it's the app, whether it's drive-thru, whether it's in our restaurants. And so we provide a great convenience and cost for all our guests when they come in. If delivery is softer in the future, then we have so many other channels to serve. So all else being equal, the nondelivery channels are more profitable than our delivery channel. And so that would be a benefit in hypothetical terms.

Your next question comes from Michael Toner from RBC Capital Markets.

Well done on making, obviously, a very tough but commercially logical decision. Just back to the Australian pipeline, I think in February, you reported 108 stores. I'm sort of curious what that number is today. And when you say commercial terms are agreed, does that mean you've identified the site terms and it's Board approved and you've agreed sort of terms with the lessor? And then can you remind me kind of what the rule of thumb is for the lead time from something kind of entering that pipeline to then being built and opened?

So from an Australian pipeline perspective, you're correct, we did confirm 108 stores restaurants at the half year. We continue to build that pipeline as we said we do at approximately 4 to 5 sites per month, and we're confident in continuing to do that. From a time line perspective, it takes between 18 months and 2 years on average from when we agree commercial terms with the landlord to when we open the restaurants. So we have a very strong healthy pipeline. As we've confirmed, we will open 32 restaurants this financial year and then growing to 40 restaurants.

And Michael, just to confirm, as you said, when a restaurant is in the pipeline, that means we have agreed commercial terms with the landlord and our Board has approved those sites.

Okay. And just on Uber Eats as well. Anecdotally, there's been quite significant promo activity on Uber Eats currently for GYG. Is that sort of mainly or entirely funded by Uber? And how powerful do you think that's been for your sales and earnings growth since you've signed that agreement?

Yes. So promotional activity in the delivery channel is highly effective, and it's all funded by Uber under the arrangement that we have with them. It's a key part of the exclusivity agreement that we signed.

Your next question comes from Shaun Cousins from UBS.

Just a question regarding underlying losses in the U.S. in the second half. I think in February, you guided that losses would be lower in the second half versus the first half, conscious you're closing stores today. Just curious if that still holds or if you could sort of provide some sort of underlying loss guidance for the second half just so that we can be accurate, given I assume you've got that information somewhat close to hand.

Yes. Thank you, Shaun. Look, I think it's fair to say that the U.S. business has been underperforming our expectations. And that is a key part as we discussed today of the decision that we've made, not just -- it's not just because of the performance this quarter. It's more about the projections and the capital that we would need to invest, but it has been underperforming our expectations. And so we would be expecting those losses to be slightly higher than we had expected them at the time of the half year results.

And that will be even though you're not trading for June and the remainder of May?

We're going to have to work that out. It's all going to come out of the wash of all the accounting, and we'll be able to share that in [indiscernible].

Great. And maybe Chipotle is a competitor that I think is soon to be opening in Singapore or have spoken a bit about that. You've had some experience now competing with them. Chipotle could be more adventurous in markets they look to go to. How do you think your business lines up against them, I guess, from a food customer experience perspective, just given the pending degree of competition that may exist?

Yes. Well, maybe I'll answer that. Having spent, obviously, the last 3 months in Chicago with Chipotle locations near GYG, and we can go into all the lessons learned, Shaun, from the U.S. and the mistakes that we've made. But in seeing where the GYG locations were in the Chipotle locations were, I mean, GYG was outperforming. I think on a food experience, I think GYG has its beat. I mean, as I said earlier, I mean, I think our food and our guest experience is second to none. I can tell you all the lessons learned on real estate that we pick the right city, that we start with the right real estate strategy. And I'm very confident for Chipotle to come into other markets where GYG is and for us to outperform it.

Great. And maybe just to clarify, just the buyback. Your first quarter sales announcement indicated the buyback would run to the 31st of May. Conscious now you said your blackout extends to the end of June. Does that mean your buyback could continue into June and so it would follow your blackout period. Could you just sort of be quite crisp in that -- just clarify that, please?

Yes, exactly, Shaun. So ordinarily, we would obviously stop our buyback program at the time that the blackout comes into effect. Given that we've shared today the additional guidance for the Australian business, we feel comfortable that the market will be trading on an informed basis. And so we've been able to push the blackout back to the 30th of June, which would allow the buyback to continue until that date.

Your next question comes from Peter Meichelboeck from Select Equities.

Sort of maybe just a bit of a moot point, but I just wanted to check, I think you had 8 sites in the U.S. Were there any other sites that you had committed to that obviously won't go ahead now? I think there was a couple were mentioned. I think Lincoln Square and Lakeview, I think, from memory.

Yes, that's correct. There's 2 additional sites, the South Naperville and Lakeview. Both those sites will obviously not open, and we're working like we are with all our suppliers and landlords. We're working with the parties involved in those sites to wrap up amicably.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Marks for closing remarks.

Yes. I just wanted to thank everybody for taking the time to join us on obviously, the decision we made for the U.S. and look forward to speaking to you all soon. Have a great day.

That does conclude our conference for today. Thank you for participating. You may now disconnect.