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

Good morning, ladies and gentlemen, and thank you for standing by. At this time, we would like to welcome you to the second quarter '21 IMC earnings result call. This presentation is available for download at the company's website, www.internationalmealcompany.com/ir. [Operator Instructions] As a reminder, 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 this conference, we have Mr. Alexandre Santoro, the CEO of IMC. I would now like to give the conference over to Mr. Santoro. You may proceed, sir.

Thank you, and a good day to all of you. I hope that you and your families are well. And thank you for connecting today to the IMC call for the results of the second quarter 2021. It is a pleasure to be here today speaking directly from our office in Sao Paulo and to share the highlights of the quarter. This is my first quarter as the company CEO. Since the first months, I can say that most of my time was focused on better getting to know the company, the team and our partners. I would like to take the time to thank everybody involved in the operations for their dedication during this period with so many challenges and restrictions. We did all this without losing focus of the safety of our teams and clients. Thank you very much, IMC team, franchisees suppliers and partners. We will begin the presentation on Slide #2. We have a summary here of the main highlights for the quarter. As you can see, we delivered positive results in all metrics. The revenues went beyond BRL 445 million, almost threefold those of the second quarter '20. Our EBITDA reached a total of BRL 77.9 million, a growth of BRL 100,000 more vis-a-vis the same period last year. Now this quarter, we reported a net revenue of BRL 121 million (sic)[ BRL 21.1 million ] because of a combination of factors. We delivered the best quarter in results in this second quarter of 2019. We will now go on to the next slide, Slide #3, where we will speak in greater details about the revenue. This quarter was atypical when we observe what happened in our different operations and geographies. In the United States, with the advance in vaccination since the first quarter of this year, we had a very strong performance in April and maintained this evolution throughout the month, ending the quarter with same-store sales 7% above 2019 in constant currency and much higher than those of 2020. We also had the positive effect of the exchange rate and thus attained a revenue higher than BRL 200 million in the U.S.A. In Brazil, we underwent a different situation. We started up the quarter with operating restrictions, especially during the months of April and May, but ended with a significant recovery in June with sales 32% above those recorded in April. The revenue more than doubled when compared to 2020 but was 3% below 2019. All the units operated well above those of last year. And total sales in Brazil were 133% higher compared to the same period in 2020. The highlight for Frango Assado that already surpasses the sales of 2019, but with a unfavorable mix in terms of profitability as the recovery happened faster in the fuel market than in the restaurant business. In the last bullet point here, you can observe that we had a drop of 62% in the Airport and Others business. This group also has the catering business that has operated under a variety of restrictions, especially because we had a lower number of international flights and the prohibition of serving food on domestic flights. We should recall that in 2019, we still did not have Pizza Hut and KFC as part of our revenues. Once again, we had to adapt and be creative, migrating a significant part of our sales to digital channels but also focusing on innovation and the management of our product mix. The reduction of restrictions in Brazil was very important to recover our sales throughout the quarter, but that was not the only reason for this new reaction. In the next slide, I would like to highlight some of the activities with Pizza Hut on KFC. Actions carried out by the team with positive results in sales as well as in results. We now go on to Slide #4, where I highlight some of these actions. In Pizza Hut, we had the positive effect in sales as well as in margins because of the implementation of our own platforms with a new app and website with an increase of 13% in the delivery channel vis-a-vis the first quarter of this year and with a reduction in operating costs because we now have our own marketplace. Another highlight goes to innovation. We launched 5 new regional flavors with an increase in profitability and more options in our portfolio. These new flavors represent 15% of the total sales mix. For KFC, we introduced offers that add more products and contribute to increasing the average ticket, profitability and differentiating ourselves from the market. We had an increase of 22% in average ticket vis-a-vis the first quarter of 2021 in the delivery channel, a positive impact, thanks to the growth of revenues and the brand in Brazil, and we continue opening stores. We have opened 5 new stores for KFC. Now that is the information I wanted to convey to you about [ CFC ]. In the next Slide, #5, we have a summary of the evolution of delivery in our business. And this represents the entire performance of the delivery channel, our own stores as well as franchise stores. We have surpassed the mark of BRL 100 million in invoicing, 23% above the first quarter '21. I would like to highlight that for Pizza Hut and KFC, delivery represents over 40% of the sales. We now go on to same-store sales with an interesting evolution. There is a summary of the evolution quarter-on-quarter, and we obtained 88% of the values of the second quarter of 2019 in same-store sales, represents 14% more than in 2019 as a whole. Now this figure in July goes beyond the 90% barrier, making us closer to the levels of 2019. As we look at this broken down by brand, you can see that KFC represents 81% in the quarter. And in June, with a different behavior month after month, in June, we reached 87% of the figures referring to 2019. In Pizza Hut, the figure is 78% for the second quarter, and it is a result of the different store formats we have in Brazil. To add clarity to this, the airport stores bring down this figure. We ended the quarter with only 30% of the volume we had in 2019. On the average, in the restaurants at the airport, the delivery format stores with a focus on delivery have closed with levels very close to those of 2019. And as I like to speak about brands and growth, we go on to the next Slide #7. And we show you the evolution in terms of number of stores. We increased the total number of stores by 12, representing an increase of 2.5% vis-a-vis the same period in 2020. The mix of owned stores and franchise stores went up to 46% and 48%, with a greater focus on opening KFC, Pizza Hut and [ MV ] stores. We now go on to Slide #8, where we will present our global EBITDA. We attained the mark of BRL 77.9 million with BRL 66 million coming from the United States and BRL 11 million from the operations in the Caribbean. It is important to recall that the business in the U.S.A. has the results of the year that is built during the second and third quarter. In Brazil, we ended with an EBITDA of BRL 1 million, an important evolution, but still way below where we would like to get to. It is clear that one of our main focuses here is to make our operations in Brazil more profitable. As you can see on this slide, and I would like to highlight we had BRL 31.5 million of nonrecurring expenses. Now if we exclude this effect, we get to an EBITDA margin a little above 10%, the direct consequence of the strong operating leverage of the company in this quarter. This concludes the first part of the results. On Slide #9, we have a summary and we have some financial indicators. We see that net debt ended at BRL 163 million, much better than last year, mainly due to the follow-on process that was held in the third quarter of '20. This quarter, we also had another nonrecurring factor positively impacting net revenue. An agreement totaling BRL 15,000 that was mentioned in a material fact, we ended up with a positive cash flow in operations of BRL 53.3 million. To conclude this part of the results, I can say that we're quite enthusiastic with the results of the second quarter, however, we're aware of the challenges ahead of us and our transformation and recovery journey is just beginning. To speak about transformation, I would like to end the presentation today with Slide #10 that refers to our transformation agenda. In this slide, my intention is to share with you how we're becoming structured for the long term here at IMC. It is fundamental to have clarity of where we are heading and how we want to proceed. This journey begins with our people and our culture, which is the basis of everything that we do. As you can see in the figure here in the lower left corner, we want to attract and retain talents that believe in the culture of an owner that is diverse and inclusive. All of this nurtured by a management system that will guarantee discipline and focus on results. As you can see on this figure, our team will work on the ESG principles, focusing especially on governance, on the quality of our products and ingredients, enabling us to have a positive impact on society as a whole as well as on the environment. It is on the ESG platform that we put our main business pillars. The first component is operational excellence, which contains the initiatives to raise our quality standards, identify synergies among our operations, a centralization of production with a Central Kitchen, for example, and a centralization of processes to have greater efficiency gains and optimize our resources. The second component is expansion, and focus here is fundamental. It's impossible to be good in everything and expand all of the brands that we have. We're going to focus on brands with the greatest potential for profitability and expansion. It is also important to set forth the format of the stores, the priority regions and the strategy between owned stores and franchised stores. And we have been working on this throughout the coming months. The third element here is what we have called our digital journey, one of the priorities in our business. We're seeking to create our own ecosystem, leveraging the competitive edge of being in different segments. And we want to use technology as a tool to deliver products and experiences that are ever better for our consumers. We have already begun the development of our own platforms. We have created initiatives to speed up our CRM management and take the first steps towards an omnichannel. There is a great deal left to do here. We're just beginning this journey. The fourth ingredient of course, which is fundamental in this process is financial discipline. Fundamental to have discipline in capital allocation, to rethink the structure of our debt and to seek the best possible fiscal and company efficiency in our business. And the final recipe will include these 4 ingredients. We will end up with a stronger brands with a more profitable business with constant and sustainable growth. The goal here, to give you more color, is to have at least 3 of our brands becoming part of the 5 most admired brands in the sector. Besides strengthening our brands and having sustainable and profitable growth, we will have a focus on the consumer. We want to deliver the best possible experience, quality, convenience, services and prices. In sum, we have a great deal of work ahead of us. And to conclude, before I give the floor for questions and answers, I would like to underscore that we're very enthusiastic with the results of this quarter, but we're fully aware of the challenges that we have ahead of us and that the journey is just beginning. The short-term scenario requires caution and attention. We continue to be optimistic when we look towards the future and confident in our transformation agenda, which is based on the well-being of our people, the quality of our products and focus on our consumers. Thank you very much. I would now like to return the floor to the operator so we can begin the question and answer session.

[Operator Instructions] We have a question that has come from the site. What is happening with the brand disinvestments if the American operation is on sale?

As I mentioned, I spoke about the expansion in our main pillars. At this point in time, we're defining which are our priority brands, and I think you are aware of this, and we are rethinking and analyzing strategic alternatives for the other brands. This is a moment of analysis so that we can make our decisions going forward. The American business is not on sale.

The second question. What is happening in terms of the opening of franchises by third parties? And has the search decreased during the pandemic? Has it resumed? The first question is from Andre. The second question from Guillermo.

Yes, obviously, during the pandemic, there was a reduction in the search for franchises, but the team has been consulted in the last few months with a large number of consultations. So we do see a growing interest for the brands and in opening franchises.

Carlos poses another question, and he says, what is happening with the negotiation with the owners? Is there a forecast?

Well, Carlos has posed 4 or 5 questions, which I will try to summarize. Our partner is doing very well. We're focusing. We want to grow along with them. And the whole process is underway. When it comes to arbitrage with KFC, there will be a [ definition ] still during the year 2021. Now the issue about the CFO, that is a very interesting question. We have been working a great deal on this. I'm not only looking for a CFO, I'm looking for a partner for the project. So we hope that in the coming weeks, we will be able to make a decision and announce who will be the new partner to lead the financial area in the company. Another question referring to KFC. In the last call, I already remarked on this. Well, this is something that is undergoing under confidentiality. We have already begun the arbitrage. I'm personally caring for this to end up with the best results possible. This continues to be a franchisee brand in Brazil with an expansion plan and a profitability plan. And we're going to continue on with the work they're doing in the country, especially when it comes to street stores as there are several opportunities for KFC, we also have several opportunities in shopping malls. A question on guidance for CapEx. Once again, we're revising the company's expansion plan for the second semester. But not only for that, this includes the year 2022, 2023, and there is no novelty in terms of this guidance for the time being. A question of how we view our margins going forward. As I mentioned, we had a significant recovery. June was a very important month for us, and we're closely following up on the evolution. And as I mentioned at the end, we do have that agenda with the 4 fundamental pillars to enhance our profitability and to be able to grow. This is our priority, and it lies within that agenda. I would like to know if the operator has received any questions that came in over the phone.

Our question comes from [ Francisco Villalugan ]. Congratulations for your results. I would like to see if you can remark on your strategies for the company reorganization? And if you have a plan to allocate a value to your American assets? I think that the value that the consolidated company has might end up being much higher. And if you have a strategy to work with a fund to sell a part of your stake or if you're interested in any assets outside of Brazil? And if you could speak about the expansion of KFC and the partnership with the Monte Carlo. I believe there was an inauguration that would take place still during this year. There's also 2 information -- pieces of information that I have heard, number of employees referring to vis-a-vis December 2019, how this stands? And the idleness of your Central Kitchen, which is a very important topic in the present day scenario. And of course, it would be important to be able to produce the dough for Pizza Hut and also the food for KFC?

Thank you for the questions, and thank you for your participation today. Now the issue of the United States, we're revising our plan for the coming years. We're thinking of a new order of growth with a profitability for the capital invested. There is no new design besides what you have just mentioned. There are some elements that we will have to analyze and see what makes sense. But at this point in time, there is nothing novel. When it comes to Frango Assado, an excellent question. We have a partnership with the Monte Carlo network. We will be opening a new store in the coming months. And we're looking at what would be a spectacular potential for Frango Assado. We have surveyed some formats with our partners. And all along the lines of a brownfield of perhaps partnering with somebody who is already operating the gas stations and perhaps build a new restaurant, enlarge the restaurants that are there. Exploring the brownfield and having a possible partnership with investors that could share the CapEx and enhance the speed of implementation of this. This would enable Frango Assado to grow more expeditiously through partnerships. Now we do have that growth mindset as does Monte Carlo and we're speaking with Raizen and others. Let me update you in terms of the following the number of active employments. We do have a natural recovery because of the sales. You will recall that last year at this time in April, we had a great deal of restrictions, closed doors, but this is not the case now. We seem to have a natural resumption and we need discipline in this resumption. We want to grow with profitability, and this is what is happening. The last point about the Central Kitchen. This is proportional to the recovery. We're working towards better occupying and having more synergy and bringing in additional products to the Central Kitchen. But we don't limit ourselves to that. We're thinking of alternatives, a centralization of production, not necessarily in our Central Kitchen. I hope to have responded to your questions. Thank you. Thank you very much.

[Operator Instructions] At this point, we would like to end the question-and-answer session. I will return the floor to Mr. Santoro for his closing remarks.

Thank you very much to all of you. We will have the opportunity obviously to speak to many of you during the coming days. I would once again like to thank you for your participation. Our journey is just beginning. There is a great deal to do. The intention today was to share with you not only the specific results for the quarter, but also to share our agenda going forward, the pillars, the projects, the initiatives that we're carrying out here at IMC. Once again, thank you very much, and please keep in touch. Have a good day.

The IMC conference call ends here. We would like to thank all of you for your participation. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]