International Meal Company Alimentação S.A. (MEAL3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to IMC's conference call to discuss the 2020 results. The presentation is available for download at the company's website, www.internationalmealcompany.com/ir. [Operator Instructions] Forward-looking statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them in light of future developments. In this conference, we have Mr. Newton Maia Alves, CEO of IMC; Mr. Alex Santoro, CEO of IMC from April 1; and Ms. Maristela Nascimento, Financial Officer and Investor Relations Officer. Please note, this event is being recorded. I will now turn the conference over to Mr. Maia. Please, Mr. Maia, you may proceed.

Good morning, everyone, and welcome to IMC Conference Call for 2020 results, in which we will present information related to the company's performance over the year and also comment on the challenging period we are going through with COVID-19. On Slide 2, I highlight that we ended the year with 495 restaurants, 247 of which we own. On Slide 3, we present the main pillars of this presentation that will reveal the impacts of COVID-19 on our business and the main measures taken during this challenging year. On the next slide, we present the same-store sales performance in the last months of our main operations. We noticed the positive trend in sales [ recovered ], Frango Assado and KFC. In the U.S., we are still under pressure by capacity issues and reduced working hours. And in Pizza Hut, with the reopening of new stores in the fourth quarter, at some stores, the delivery area was reduced, and thus, some volatility on the same-store sales recovery. On Slide 5, we highlight IMC's consolidated same-store sales in constant currency and in reals. Here, I would like to highlight the foreign exchange effect on IMC's operation that resulted in our consolidated same-store sales moving from negative 32.3% to negative 26.9% in the year 2020. On Slide 6, I would like to comment on 2020 results and the COVID-19 effects on IMC's operations. Our consolidated revenue dropped 28.1%, naturally impacted by the constraints coming from COVID-19 pandemic. Adjusted EBITDA totaled a positive BRL 35.2 million with a margin of 3.1%. The net loss in the year was BRL 473 million and mainly affected by noncash effect of the asset impairment, which we will explain later on. IMC consolidated pro forma same-store sales, including the Pizza Hut and KFC operations were down by 26.9%. Cash used in operations for the year was BRL 142.2 million, and our net debt reached approximately BRL 146 million, reflecting the follow-on held in July, which has added more than BRL 370 million to IMC's cash. On Slide 7, we highlight our delivery operation over the past few months. We have maintained high level of sales, even with the reopening of the branches. This is an important indicator and shows that delivery is a channel that adds to and not cannibalize sales. On the next slide, I'd like to reinforce that despite the resumption of operations, we remain prudent, given the -- we still observe a volatile environment. The team is still reduced, and we continue to analyze opportunities for efficiency gains with staff optimization, menu simplification and other initiatives. On Slide 9, we present a reduction in G&A that reflects the initiatives implemented over the year, aiming at gaining efficiency and reducing expenses. These initiatives included the conclusion of the ERP migration to the S/4HANA version of SAP and internalization of back-office activities performed by third parties as part of the integration process of the Pizza Hut and KFC businesses. On Slide 10, we demonstrate the initiatives for food donations to the popular health units in the City of São Paulo as well as to assistance institutions realized in 2020. In the next slide, we present the several measures realized in 2020 to protect the company's liquidity and strengthen its capital structure. We renegotiated the bond terms in Brazil with semiannual interest capitalizations up to the end of 2021. We also replaced the U.S. debt in order to obtain a grace period for principal payments until 2023. In addition, we renegotiated the Caribbeans debt, with grace period and extended terms. We also issued 90.4 million shares of IMC, raising approximately BRL 372 million to the company on a follow-on offering. In 2020, we also joined the U.S. Government Paycheck Protection Program with funding of approximately $11 million. Those funds were used for salary and rent payments throughout 2020, and earlier this year, the amounts were written off. In 2021, the U.S. Government started the second phase of the PPP with similar specifications to the first phase. In this phase, we received $4 million. On Slide 12, we present some of the initiatives undertaken in the last few months, aimed at preparing the company for accelerated growth in the coming years. One of the main ones at the end of 2020, the Central Kitchen of Louveira became operational and in 2020, we started the homologation process for Pizza Hut dough production. In the next slide, we highlight the combined ovens that in 2020 were gradually implemented in our restaurants for the regeneration of products prepared in the central kitchen. On Slide 14, we discuss our expansion strategy, focusing on the Frango Assado, Pizza Hut, KFC, as well as Margaritaville. At Frango Assado, we are building 4 restaurants as a result of the partnership signed with Rede Monte Carlo in November 2020. And we have established our partnership with Raízen to prospect new restaurants in gas stations in the South and Southeast highways of Brazil. At KFC, we opened 14 stores in 2020, in addition to the acquisition of 6 franchisee stores. In 2021, we move forward with the opening of 2 more restaurants and we have 31 stores under construction or with lease are negotiated. At Pizza Hut, we are focusing our expansion in street stores, especially gas stations, and have ongoing negotiations with several groups that operate inside the cities. In 2020, we opened 18 new stores and by 2021, we have launched 5 more restaurants. Currently, we have 29 stores with lease terms negotiated or under construction, among them, [ 4 stores Frango Assado ] restaurants. Finally, in the United States, we opened 2 restaurants in 2020, and here we have another 5 in the pipeline for the 2021-'22 [ biannual ]. On Slide 15, we have the adjusted EBITDA bridge, which was approximately BRL 35 million in the year versus BRL 236 million in 2019, reflecting the impact of COVID-19 pandemic in all regions. The Brazilian operations, including G&A and others, totaled an adjusted EBITDA of approximately negative BRL 6 million. In the U.S., EBITDA in the period was positive by BRL 33 million, benefiting from the U.S. PPP, while in the Caribbean, EBITDA was positive BRL 8 million. On Slide 16, we provide more detail on the special items that totaled BRL 407 million in the year. Of the total, we have BRL 327 million of goodwill impairment due to the operations of Vienna, Batata Inglesa and Airports operations in Brazil. It is important to highlight that the impairment has no cash effect and that the tax benefits of those goodwills due to the acquisition of the brands has already been realized. On Slide 17, we presented business performance in Brazil, with revenues down 23.6%, a decrease that was mainly offset by the addition of Pizza Hut and KFC business; and adjusted EBITDA of negative BRL 5.9 million, reflecting the impact of COVID-19 pandemic. Moving to Frango Assado on the next slide, operating revenues decreased 20.1%, with an adjusted operating result of BRL 33.1 million. The reduction in traffic still impacts our restaurant operations. On the other hand, we have modified our strategy in gas station and focus on trucks, reduced the drop in revenues from the operations. In the next slide, we discuss the Airports performance. The revenue decreased 63.3%, while the adjusted operating result was positive BRL 11.9 million. The approximately 49% decrease in flight traffic at the airports we operate was the main factor driving the segment performance, which was partially offset by our cost and expenses reduction initiatives. In the Pizza Hut, KFC and Other segment, revenue increased 2.4% due to the addition of Pizza Hut and KFC operations in November 2019. Adjusted operating income totaled BRL 11.7 million. Moving to Slide 21, we discuss the U.S. operations, which we present in local currency. The impact of COVID-19 pandemic resulted in our revenues decreasing by 42.6% and EBITDA positive by $4.9 million, mainly benefited by the U.S. Government PPP that were used to support payroll and rents into the second and third quarter 2020. In the next slide, we will review the Caribbean operations. For a better comparison, we present the figures in constant currency. Revenues in the period decreased 64.5%, while EBITDA was BRL 7.1 million. The suspension of labor contracts and the renegotiation of rents mitigated the decrease in revenues as the airports was closed -- were closed over 2020. On Slide 23, with company -- on the company's cash flow. In 2020, due to the challenging operating scenario, the cash consumption after maintenance CapEx and fixed rent payments was approximately BRL 147 million. In the net cash variation, the follow-on held in July was the main factor driving the cash generation. In conclusion, on Slide 24, we demonstrate the status of our store base on March 15, 2021, after the new restriction measures. At this date, we had 46.9% of our restaurants operating only with delivery and 38.8% opened, however, with restrictions. Now I have the pleasure to turn the floor over to Alexandre Santoro who, as of April 1, became the company's global CEO and the one that I'm passing the baton to.

Thank you, Newton. Good morning, everyone. I hope you are all doing well and staying healthy during these challenging times that we're living. I am thrilled to join the IMC team and I'm honored by the challenge of leading the company in this new cycle. I want to thank our team, and especially Newton, for the receptivity I have had since I arrived and the commitment and determination that have been fundamental to our operations. I also want to say thanks to our field team. They have been doing a right job to serve our customers, even with other restrictions that the moment imposes. And now is indeed, a challenging moment. Certainly the most difficult in our sector's history. But I do not doubt that we will overcome it. Our demand is not over. It is constrained, with our consumers having restrictions to access our restaurants. Our focus at this time is to take care of the health and safety of our team, customers and partners. At the same time, we have to prepare ourselves for future growth. And there's a natural tendency for people to perpetuate the moment they live in, be it good or bad. But everything passes, and with this crisis, it will be no different. We are experiencing an intense change in consumption behavior, which had been happening even before the pandemic and have accelerated considerably over the last year. It is essential to gain the agility to adapt to them and technology is at the heart of this change. We will work every day to integrate more and more experiences in physical space and the digital environment, and prioritize our advances in technology to deliver the best experience for our customers. If I could summarize, 3 principles that I have learned over the course of my professional experience and that I bring to IMC, they would be: people, focus and discipline. People because having good people, committed and aligned in the long run, is the basis for everything. Focus because we need to have clear plans and prioritization is key. And the last one is discipline, because it's key to have the discipline on execution in search of operational excellence. The goal is to have an even more modern, agile and dynamic organization. IMC is a spectacular platform with iconic brands and leaders in the national market and also globally. Brands that I have always admired and that have enormous growth potential. This combination is exciting. I don't doubt that we have a bright future ahead of us, and this is the reason I decided to join IMC and make it my life project. I thank you for participating in this call, and we will certainly have the opportunity to speak further ahead. Thanks, and good morning to all of you.

[Operator Instructions]

Good morning, everyone. This is Newton. I'm going to read here some of the questions that arrived through the webcast. I have a couple of questions here from Joaquín Ley from Itaú BBA. First question you ask is from the nearly 60 stores you have in the works or being negotiated for KFC and Pizza Hut, how many will be company-operated and how many will be franchised? Approximately 2/3 or roughly 40 stores out of those 60 are equity stores, owned and operated, and 20 stores are from subfranchisees. You also asked about updated terms and length of the agreements with Pizza Hut and KFC, we -- unfortunately, we do not disclose those details Joaquín, I apologize. The other question from Joaquín Lay is also, what are the differences, if any, between the agreements with Raízen and Monte Carlo for Frango Assado? There are many differences and I'll try to clarify them. In Brazil, few distributors like Raízen that operates the Shell brand cannot operate directly the gas station. So in that sense, Raízen is only the fuel distributor of the brand Shell, and they have all the operators for about 1,000 gas stations in the highways of Brazil. Monte Carlo is one of those operators. They operate BR, Shell, Ipiranga and other brands. So the agreement with Monte Carlo is the following: they operate their own gas stations in the highways and the deal with them is almost a [ build to suit ]. So they build the Shell or the Frango Assado restaurant for us, we put pretty much the equipment and the marketing piece of it. And we pay rent to them, a percentage rent. So that is the deal and they keep operating the gas station. So that deal is very interesting because they are growing significantly in the highway. And we can team up with them and with other operators to grow with them. It's a good return on invested capital format for IMC, since most of the CapEx is made by the operator. The deal with Raízen is different. The deal with Raízen is actually a deal to help find other players such as Monte Carlo, in which we could either partner in the same format or eventually buy the location and the existing restaurant or even the gas station from all the operators. With the partnership with Shell and their existing network of organization and their growth, it can help us to speed up significantly the growth of Frango Assado. Those are a big difference in the format with them. I hope it has clarified, Joaquín. If you need, please contact us later, we can talk more about that. There's another question here from [ Carlos David ] from [ Compañía Cloud Investments ]. It say, are you planning to sell any assets which are not performing well and are not strategic anymore, such as Vienna, [ IKC ] and others? We don't comment M&A possibilities, but simplifying the business is one of our pillars that we mentioned before. So eventually, we are evaluating opportunities and if something more concrete -- whenever there's something more concrete, we're going to disclose when the time arrives. But let me see if there's other questions.

I can take the other one, Newton. There's this question from [ Francisco Dilo ]. My question is for the new CEO of IMC, Mr. Santoro. Based on your experience as former global CEO of Popeyes, how big is the opportunity for KFC in Brazil? As of today, there are only 100 stores versus 4,000 in the U.S. and 12,000 in China. Francisco, I can tell you that the potential in Brazil is huge. I would say that here in Brazil, the chicken consumption, it's super high but we don't have many options in the QSR space for chicken. So if you look -- we don't give any guidance, but I can tell you the opportunity is really big here, and we are super excited with the potential of this brand. So the second part of your question is about what management can do in order to bring attention to the company with foreign investors, given that we're trading only at 4x EBITDA. Look, I think here, as we've said over this presentation, right at this moment, our focus is in the operations, in our team. And definitely, in the near future, we will revisit our Investor Relations strategy, probably more close to foreign investors. So it's a great point, and we'll definitely do it, Francisco, in the right moment. Thanks for your question, Francisco.

Since there seems to be no further questions, I would like to turn the floor back over to Mr. Maia for his final remarks.

Now thank you, everyone, for joining us in this call. I'd like to extend an additional thank you for our employees, who are in the front lines, making sure that both the company stays operating and also we can help our customers with delivery and so on. So a big thank you to them. And I just want to add here that it's an honor to pass the baton to someone with such a huge experience in the sector such as Alex Santoro. And I wish him and the company all well. And I'm going to pass to him to say a few words before we end up this call. Go ahead, welcome, Santoro.

Thank you. Thank you very much, Newton. Look, as happened in every crisis, this one should pass too. So now it's also time to prepare for the future. IMC has a great platform, great brands, huge potential for growth and I couldn't be more excited about joining the team. I thank you all for participating in this call today. Stay safe, okay? Thanks.

This concludes IMC's conference call. You may disconnect at this time, and have a nice day.