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

Good morning, everyone, ladies and gentlemen, and thank you very much for being here with us today. Welcome to the teleconference with IMC to discuss the earnings concerning the third quarter of 2021. The presentation is available for download at www.internationalmeallcompany.com/ri. Let me also inform that everyone of your participants will be listening to this teleconference during the presentation. [Operator Instructions]. And forecasts about future events are subject to risks and uncertainties, which may actually lead such expectations not to materialize or to materialize in different terms than expected. These forecasts reflect only the opinions given at the time they are produced. In this conference, we have Mr. Alexandre...

I'm sorry, there's quite a bit of noise and it's -- and I can't hear what you're saying. Thank you, [ Sheila ]. Good morning, everyone. I hope that you and your families are well. And thank you again for connecting today with us and our call from IMC in which we're going to talk about the results for the third quarter of 2021. And this is actually my second as the CEO of this organization. Let me start by thanking everyone for being here, everyone from our operations for their hard work and their ability to overcome challenges, specifically during the hardest moments of the pandemic. We are now facing a very different scenario from the one we had earlier this year, with Brazil getting to the landmark of 60% of its population fully vaccinated and seeing, therefore, as a consequence, a new influx of customers in our businesses. We ended the third quarter with sales for the same store is now 12% above our pre-pandemic levels and with the greatest revenues in our history. And in spite of the very strong recovery that we have had in our sales, we will not take any less care with preventive measures so that we can keep providing our folks and our clients with the best conditions possible. So thank you very much, all of you, my dear friends at the IMC team, franchisees, suppliers and partners. I would now like to start my presentation by going through our transformation agenda, which you can see on Slide #2. Even though we set up this agenda only shortly ago, it helps us guide our teams in regards to things that we should be focusing on in everyday actions and also in our investment definitions and preparations for the future. I'd also like to remind you that our transformation agenda first is first based on a pillar, which we call people and culture. And in this area, I have to say that I'm very happy with our ability, not only to retain the existing talent that we have in IMC, but also with our ability to attract new talent into our team, which was actually the case with the recent arrival of Rafael, our CFO; and Ricardo Azevedo, the Executive Director for Pizza Hut. Our team and our culture is the basis for everything that we mean to build here at IMC. Another important pillar in our plan is our ESG commitment. And we have been working really hard in this area, and we will also describe our ESG goals for the next 5 years at the start of the first quarter of 2022. And as we look at the 4 ingredients of our transformation agenda, which are operating excellence expansion, digitalization and financial discipline, it is very clear to us that we have only taken the very first few steps in a long journey. And throughout this presentation, I will cover the main highlights in this -- in these areas. It is also important to say that the goal here is to further strengthen our brands and deliver sustainable, profitable growth focused always on our consumers. At the end, we mean to deliver the best experience possible to them with quality convenience, service and price. Okay. So after these introductory remarks, let's move on to our results. What we have here is a summary chart showing the main highlights of this quarter, and this is on Slide #3. And as you can see, this has been one of the best quarters that we have ever had. Our revenue went above BRL 540 million, an 81% increase when compared to the same period of last year. Our sales at the same stores increased by 12% in relation to pre-pandemic times and increased by 75% in relation to the third quarter of 2020. Our EBITDA reached BRL 77.9 million, an 83% increase in relation to the same time period of last year and we've got an EBITDA margin of 14.4%. We've also been successful with our cash management strategy, which has led us to a net debt of BRL 172 million, which is basically 1.9x the EBITDA that we have had in the past 12 months. It's also important to mention that our covenant for debt at that moment was 7.5x. And this was given at the same time as we went back to making investments in our focused brands, getting to 515 stores at the end of the quarter, increasing by 25 stores in our portfolio, which accounts for a growth of 5% of our system, as you can actually see in our next slide, which is Slide #4. So out of these 25 new stores, 20 of them are corporate stores, which increased our mix of corporate stores to 51% in our total system. And this growth happened because of the focus that we have given on Margaritaville and KFC, very much in line with our long-term strategies. So let's now switch to Slide #5, in which I am going to talk in more detail about revenues. We have had our best quarter in terms of revenue. We got an increase of 81% in relation to the same time period of last year, and this also meant a 20% increase when compared to the second quarter of 2021. Here in Brazil, we have seen every one of our operations go through strong recovery. And as we see our stores also opening up normally and a consequent increase in the number of people going to our stores and shopping malls, airports and highways. I would like to talk a little bit about the operations of KFC and Frango Assado and -- which performed pretty well this semester. At Frango Assado, we've actually surpassed our sales of 2019, but with a somewhat unfavorable mix since this recovery happened more quickly and our fuel business rather than in the restaurant business that knows however, is that the restaurants from Frango Assado, our sales are now at the same level as they were in 2019 in October. And taking advantage of this positive moment, we have just opened a new store of Frango Assado, in partnership with the Monte Carlo network in the [ Gora ] region. And the first, in state of Sao Paulo, the first store Frango Assado opened in 8 years. Now going on to the U.S. in which we had a recovery curve for the COVID that was essentially different than that of Brazil. They did it faster than we did here. We had strong performance in the first quarter because of seasonality, which was expected because of the summer in the U.S., but also because of a growth seen in internal tourism. And in the Caribbean, we've had actually 2 different situations. Our catering operations in Colombia are still hurting a little from the pandemic-related restrictions, but those are more than offset by the strong performance of our operations in the airport in Panama, which had a significant recovery in a number of passengers going through that airport. Now moving on to Slide #5, and in it, we have sales at our same stores during the past few quarters. We have here the consolidated numbers in the break -- in the broken down numbers per brand. And you should see that if you look at the consolidated numbers, we now got to a 12% level -- 12% above pre-pandemic levels. And it's also worthwhile mentioning that in October, this number has actually left to 15%, showing the resilience of our business and the strength of our brands. And it's interesting to see that as you see the breakdown by brand, KFC has actually gotten to 6% greater levels of performance now on the third quarter when compared to pre-pandemic levels. And at Pizza Hut, we've seen a progress on a month-to-month basis, getting to 94% of our pre-pandemic levels in the month of October, stemming from a series of commercial actions, improvements in our mix and also a resumption of people going to shopping malls and airport stores. Now moving on to the next slide, and this is Slide #7. We can see the progress that we have had in performance in our delivery channel throughout the entire system. And I'm talking about corporate stores and franchisee stores alike, and they got a landmark of BRL 95.8 million of revenues in this quarter, 2.2x greater the levels that we had before the pandemic. And on the second chart, as you can see here, the share of the delivery in the businesses of Pizza Hut and KFC has now surpassed the 30% milestone in spite of the fact that we're now going back to selling our products over the counter. In spite of this very important evolution, we do recognize that we are still very far from where we need to be in terms of digitalization of our businesses. So in the next slide, I'm going to go over the specific priority initiatives, which we have been developing in this area, and they are currently in progress and supposed to be implemented by the first quarter of 2022. So over here, and this is Slide #8, we can see 3 main initiatives. The first of them is to meant to accelerate our digital sales and to do that, we will enable access to consumer -- access to our brands to consumers via social media platform such as WhatsApp and Facebook, in addition to rolling out our digital kiosks for the KFC stores. And the second initiative here, we're going to keep strengthening our delivery -- our own delivery platforms with the goal of improving profitability and also improving consumer experience. We will increase the amount of offerings, which are done exclusively via the Pizza Hut platform and also in the first quarter of 2022, we will also launch our new platform for KFC. And to wrap up here, the third point, in order to build loyalty of our customers in the Frango Assado network, we will launch a digital loyalty program with coupons, exclusive offerings and rewards. And there's a lot of stuff in the pipeline, a lot to be done under our digitalization initiatives. Now moving ahead, and let me now talk a little about how that has affected our bottom line and what our results have looked like. If you look at Slide #9, here, you can see the global EBITDA of IMC, we got to BRL 77.9 million in which coincidently by the way, it was actually the same number that we saw in the second quarter of 2021. However, with a difference, but in this quarter, we did not have any nonrecurring event, which would have otherwise affected our EBITDA. So with that, our recurring result was actually 6x greater than the one that we had in the same period of last year. We lapped from BRL 12.2 million to BRL 77.9 million and almost 2x greater than the numbers that we saw in the previous quarter. One of the main factors contributing to this result was very clearly the growth that we have seen in our revenues and the consequent operational leveraging of our operations by better managing our cost and expenses. We were also able to see our EBITDA improve. So now let me talk about this in more detail, and we're now moving on to Slide #10. We can see that the recovery of our operations in Brazil has helped us close the quarter with an EBITDA of BRL 11 million, driven by the improvements of the Margaritaville, Pizza Hut, KFC and any airport stores. Now in spite of the fact that we've had significant progress in our sales in Frango Assado restaurants, the weight of the fuel operation has increased, leading to an average margin, but it's still below what we saw before the pandemic. In the U.S., it is also important to remember that we have significant impacts from seasonality, that our results for the year were built pretty much throughout the second and third quarters, which also to us represents a significant opportunity. And for that same reason, we have also prioritized the expansion of our businesses in the cities in which we have a last seasonality when it comes to tourists and flows such as Miami and New York. And another important point is the operations in the Tocumen Airport in Panama, with strong recovery in revenues and very good operating leverages. So we were able to deliver very consistent results there once again. And even though we still have restrictions to the onboard food service in airplanes, we have seen a significant rebound in the catering business within the past few months and the perspectives for the next few months are actually quite positive, specifically as we are seeing now that international flights are coming back. Looking at the slide, and as I also said in the last quarter, it is very clear that one of our main challenges at IMC is to increase the profitability of our operations here in Brazil. Now let's move on to Slide #11. And while we have made significant progress in our financial discipline agenda. As mentioned earlier, we have given, assigned higher levels of priority to managing liquidity, allocating investments in operations of greater return and also by optimizing our costs. And all of that has got us to a debt level of 1.9x of our EBITDA for the past 12 months, which is actually a level that is much below the one required by our covenants. I should also mention that the company has generated BRL 51 million in terms of operating cash and has generated free cash of BRL 14 million, and that's a positive cash flow versus a use -- a consumption of BRL 9.5 million in the third quarter of 2020. We're moving on with the resumption of our investments and we predict that we should open between 30 and 40 stores in the fourth quarter, and they will be concentrated more specifically in our brands, Margaritaville, Frango Assado, KFC and Pizza Hut. And we are always keeping our discipline in capital allocation and proper liquidity levels. It is important to mention that every one of the brands in our portfolio do show potential for growth. But clearly, it is not possible to expand all such businesses at the same time given the natural restrictions tied to the allocation of resources. Therefore, I made a decision to prioritize investments in these 4 brands. And simultaneously to that, we are also going through a process in which we are assessing and defining the very best strategic alternatives to maximize the value of the other operations. And now we are making it to the very last slide, and this is Slide #12, in which I'm going to offer some conclusions, and I'm going to talk a little bit more about our transformation agenda, which, as I said, is our guideline, and this is actually defining our priorities. We are very much aware of the challenges that we have ahead of us and it's a fact that our transformation journey is only beginning. We still have a lot to do. But I can say to you that I am more excited than ever, excited with the results that we had in the third quarter, excited about our team and excited about the future perspectives and the strength of our brands. And on purpose, since lunch is just -- as lunch time is just upon us, I'm ending my presentation with this spectacular picture on Slide 13 with one of our irresistible pizzas from Pizza Hut. Maybe guys can order one for lunch as well because mine has just made it here. Thank you very much, everyone. Let me yield the floor back to the operator so that we can start our Q&A session.

[Operator Instructions] First question that we have here comes from Carlos [ Tejera ] from [ Condor & Cider. ]

Can you please give us a perspective on the progress of your business in the fourth quarter and how you see 2022? What are the main risks and opportunities that you see?

Carlos, thank you very much for your question. Look, if you look at the fourth quarter, and we have actually shown some numbers here from October, we can see Brazil still picking up and as we have seen in the third quarter. So our operations should perform well. Obviously, we are getting into a more seasonal period in the U.S. now, which is a natural thing in this business of ours. As I said earlier, we see that as an opportunity as well for us to increase our sales during the fourth quarter outside of Brazil. But we see an ongoing improvement in general terms, in every one of our operations. And out of every business that we have here is the only one that's still say, lagging behind when you compare it to 2019, is catering for obvious reasons because, I mean, you have flight restrictions and the onboard meal services and you have fewer international flights. But I have seen in the past 2 months that things are beginning to pick up again. And we are optimistic now for like at November and December specifically now, since the U.S. is open again. So in general terms, I think that in Brazil, we are recovering. In the U.S., again, as a part of the seasonal nature of our business in this quarter and the idea is that we should have somewhat weaker performance because of our presence in more, say, touristic locations in the U.S. And if you look at 2022 -- and there's -- we have -- all it takes for us to finish things up at the pace that I have just alluded to here this year. And we see that next year should be an interesting year. Clearly, we have some uncertain scenarios as well, specifically when it comes to inflation, and we've been following up on that very closely. But if you look at every one of our brands and every one of our businesses, we have a lot of opportunities here in Brazil, a lot of growth opportunities, specifically, and I think I have been focusing a lot on that and looking inwards to really tie our operations up and make progress in our digitalization agenda so we can capture a larger chunk of this market, which is really so huge and of which we still have a small share. Thank you for your question, by the way.

Our next question comes from Larissa Pérez from XP Investimentos.

This is Larissa from XP Investimentos. So looking at the transformation decisions at IMC, I saw a lot of positive things here. And digitization is also a major step forward. So if you could please make some more comments about your ideas on using coupons and your marketing initiatives as well? And then potential changes in the mix? And a second question, you said that the active CRM portfolio at IMC increased by 20%, but it's not clear to us how much that means in terms of the whole brand. Those are my questions.

Thank you for your questions. Look, during our presentation, and I think that I made a few comments about and we try to be realistic about it. We still have a lot to improve, a lot to evolve and every area here, CRM and digital activations and coupons as well. We've only started in the Frango Assado restaurants using those digital coupons. We have a number of other initiatives that have been mapped out, first do that for Pizza Hut and KFC as well, after we've launched the app. CRM and so far as KFC is concerned, we saw a significant increase coming obviously from a somewhat small basis. We are now focusing on that. But as I said, there's still a lot to do. So I'd say that our basis or the base that we're starting from here, if I look at the number of individuals, it's about some 300,000 individuals registered with us and -- which is still a very, very low number, the way we see it. And this only reinforces how much we still have to progress in this area, but thank you for that question.

The next question is from [ Luca Lesstingi ] from [ Sarivest ].

What about the progress of divestments and less profitable operations? Are you seeking potential buyers to these operations?

Luca, thank you very much for your question. You see, as I commented during the presentation, it is clear now that we are focusing on expanding our 4 largest brands, Margaritaville, Pizza Hut, KFC and Frango Assado. And in parallel to that, we are obviously assessing the status of our other brands to see what the best option should be for them. With that said, we see opportunities here in terms of efficiency improvements in every one of our businesses and every one of the items in our portfolio. And I can tell you that we have no operation operating on the red. See every one of our operations today, they are delivering results. What we are analyzing, as I said earlier, and I'll say it again, we are basically looking at what we should do from a strategic standpoint but in parallel, we've also been improving the efficiency of every one of the businesses in our portfolio. But thank you for that question.

[Operator Instructions] Well, apparently, there are no other questions. We have one question now from Mr. [ Francisco Villa from Legano ].

My question has to do with the expansion of Frango Assado. And after nearly 8 years, I mean you have opened now a new store. And what [indiscernible] in partnership with the Monte Carlo network, I'd like you to please make a few more comments about what this strategy looks like today and potential negotiations for the purchase of brownfield point and what we might see as additional activity into 2022, considering that now, I think that if you look at the operational issues, it's become stabler now. You have a central kitchen and the investor relation now started out in marketing and strategy, all of that. Could you please tell us a little bit more about that and more specifically, in what concerns the expansion of Frango Assado and negotiation of potential future points of sale.

Francisco, thank you for that question. Yes, I have to say that we are very excited with the new store that was opened, the Frango Assado store, which was opened a week ago. And yes, I have to say that we've been working really hard. And in a few cases, we've been working with other partners, which is the case of Monte Carlo. We've also been engaging in conversations with [ Air Asia ] as you know. And we are now in a process of really mapping out and setting up the point of sale in which we think we should basically accelerate this expansion. And we see a huge potential here. One of our competitors, for instance, they have twice as many stores as we do and going to go to some of those highways, you really have a lot of traffic, which is the case of the [ Odutra Highway ], here in Brazil. And they have 8 stores there, and we have 2 or 3 maybe. So there's really a lot of opportunities and evidently, what we are doing now is to basically narrow them down to see what we will do next year. But I should reinforce the fact that as a part of our plans, yes, we do plan on resuming the -- or actually accelerating the expansion of Frango Assado next year. And we are just now defining the sites to those new stores, and we are basically prioritizing the idea of having brownfield operations as you said yourself in which we operate the restaurant and not be a service station, okay? Thank you again for your question.

Our next question comes from Leonardo de Barros.

What is the status of the rights to KFC?

Leonardo, thank you for your question. You see, nothing changes about those rights. We are still the master franchisor -- franchisee of KFC in Brazil, and you have seen it in the presentation, we've opened our own stores. And we are -- as a master franchisee, we also have partnerships with other franchisees. So we've also seen other stores being opened with franchisees. And since we have a discussion or -- it's a legal discussion and it's under an arbitration right now, so I can't give you a lot of detail. But KFC, again, as far as the rights go, nothing changes. We're still a master franchisee in Brazil. It is a brand that we like a lot, it is a brand for which we see a lot of potential. And I have been working personally with the folks from KFC so that we can try and find an alternative to litigation. But again, this is a legal discussion right now. This is all I can say right now. But again, we're moving on very strongly expanding this year. And next year, we also plan to have a lot of expansion for KFC.

Okay. Since there are no more questions, I'd like to now leave the floor to Mr. Santoro for his closing remarks.

Thank you very much, Sheila, and thank you very much, everyone, who is here with us today. Thank you. And quite certainly, we will be in touch with some of you within the next few weeks. I wish you all a great day. because now I'm going to have some pizza here, guys. Thank you very much, and goodbye.

The teleconference by IMC is now adjourned. Thank you very much for being here. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]