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

Good afternoon, ladies and gentlemen, and welcome to IMC's conference call to discuss the second quarter of 2022 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. Alex Santoro, CEO of IMC; and Mr. Rafael Bossolani, CFO and IRO of IMC. I will now turn the conference over to Mr. Santoro. Please, Mr. Santoro, you may proceed.

Thank you. Good morning, everyone. I hope you and your families are doing well, and thank you for being connected with us for the earnings of the second quarter of 2022. A year ago, I presented for the first time the results of IMC. At that point, we were coming out of the first wave of the pandemic with the understanding of how the next month would be not only here at IMC, but also in Brazil and around the world. And clearly, there were challenges ahead, but that's when we found many opportunities in our business. Our team once again went over our goal and was able to really recover profitability and transformation of IMC bringing better results than the first quarter of this year and also in terms of the previous year. We should highlight also that this is the first quarter in the sequence that we have a record in revenues when compared with the performance of the previous year. So I'd like to thank our full team of IMC, our franchisees, partners, suppliers that were essential to allow us to get to where we are now. And now to start the presentation. Let's go to Slide #2 with the highlights of the second quarter and guided by our transformation agenda. We have clear objectives and very ambition ones to bring modernization to the company, improve experience of consumers and leverage profitability. The results of the second quarter show a positive trajectory with recovery in all segments in Brazil and a consistent progress in terms of the international operation. The sales of the same stores grew 21% versus pre-pandemic levels, and we went from BRL 121 million with a 39% increase compared to the same quarter last year. The net sales reached BRL 621 million, a 40% lead compared to the previous year. We closed the semester of EBITDA with a 14% where we are talking about a 74% distortion when we talk about the nonrecurring items and the profitability of our stores increased when compared with the previous years. But clearly, the scenario of inflation was and will still be a red flag to pay attention to for the next quarters. We closed the quarter with BRL 138 million and a net debt of BRL 297 million, which brought us a leverage of 2.7x under the 3 set by our covenants. And we know the size of our challenge and that there is a long path ahead, but we are confident that we'll get there with the strength of our brands, within our portfolio with a focused team acting accordingly. And now talking about store units. Slide #3, we'll show that in the last 12 months, we opened 57 stores in this last quarter, we completed like the previous 1 of 2021. So we will keep discipline with investment to get the best result with invested capital without losing focus on long-term sustainable growth. And Slide #4, talking about our revenues, it shows here same-store sales, where the basis we have here the pre-pandemic, which is 2019. And here, the third quarter, we have a consolidated 21% over the pre-pandemic moment and the consistent progress quarter-over-quarter. In the first quarter of this year, where there was the first wave in January, February of COVID. And in July, we can see that we're back to the same growth, and we closed a 27% growth over the numbers of 2019. So when we look at these numbers on Slide #5, with KFC, we can see an important recovery of sales for the second quarter in July, where we can see over 13% over 2019 and 27% compared to the previous year, recovering the problem supply that we had at the end of the fourth quarter of 2021. And here, we can see with Pizza Hut, the improvement of sales, and we see that it went from pre-pandemic levels over it now in April. So we see there is a great plan for the next few years, and we'll count on some changes in the menu to once again meet more consumer moments during the day and along the week. We should also say that these 2 businesses are the ones that are more dependent in terms of traffic in malls, which is still under the pre-pandemic levels. Frango Assado, we also see a recovery that is quite important, reaching record of revenues for the restaurant operation in July. Historically an excellent month for this business because of the mid-year vacation and the consequent increase of flow in the highways. And to close the slide in the U.S., here, we have a strong growth, as you can see, 11% over 2019. And going to the next slide, #6, I will talk a bit about our brands. Let's talk about Frango Assado first, which is the most traditional 1 on the highways, well known. And this year, we'll have its seventh year anniversary. We have a new app for Frango Assado with a loyalty program, the FRAN-GO and what makes so much sense when we think about the characteristic of this business. We also have a focus of testing some quick service concept where we will test some outside kiosks, drive-through, self-service, always to speed up and improved experience of our consumers, mainly in peak hours. Also, we focus on our core with the relaunch of some products as the parmesan sandwich in the semolina bread. And also, we will have more innovations soon in traditional products as the [indiscernible] And in the U.S., we are going through a process where we are at the peak of our operation because of the summer in the U.S., and we are much well-structured in the operation when compared to the previous year. Price management in the U.S. also was essential to be able to increase profitability of the stores because of the inflation pressure that they also did suffer in the U.S., something new to the American market. And also, we launched the operations of Margaritaville in Miami and Atlanta and we're planning to open in Boston by the end of the third quarter. And now Slide #7, a bit of Pizza Hut and KFC. Pizza Hut, which is the preferred pizza brand in the country. Pizza Hut has a growth during the week especially during lunchtime and solutions as combo, my box and in the future, bringing also pasta options to our menu. And when it comes to the digital, our focus here is to increase the relevance of our channels, our own channels. And for KFC, also an absolute leader in the segment, we focus innovation in our mix and increase of profitability. KFC recently launched the chicken crunch and chicken kernel with less cost with more accessible prices with a goal to increase the number of transactions. And this showed to be perfect target. And in the digital channels, we're focusing with totems at the stores and sales through WhatsApp. And as we're on digital, the next slide #8 will show the total amount of our digital sales have been strong. And at the same way the total satisfaction has dropped, which is not a bad news. So our digital transformation is just getting started. And we also see much room to take steps forward and increase participation in the digital with our sales. In that way, we show the results of all these initiatives with Slide #9, where we show the global revenue. So you can see that we got to the best sales results in the second quarter in our track record, driven by the improvement in all segments in Brazil and the consistent of evolution in our international operations. So we reached BRL 621 million, 40% over last year, in Brazil increased 62%. That's the highlight. In Brazil, we see that the operations in malls, airports have a recovery and also in onboard consumer use of our meals with less restriction now. And in the United States also, we see an increase in traffic and also the comeback of the catering recovery in Colombia. And in terms of what is the result in our bottom line. So the operational efficiency brought a 74% increase of EBITDA when compared to the previous year when we talk about nonrecurring items. So we have 3-point expansion in EBITDA margin, a better control of cost, prices and the operational leverage. On Slide 11, we here have a breakdown per region, Brazil, the Caribbean and the U.S. You can see all of them that have great performance over last year. And clearly, our big challenge is still the operations in Brazil, although there has been a great improvement in the profitability is not at the level we want. The inflation pressure brought impact, and we had to be swift in managing prices. And we still have an important challenge to improve the operation at the end and to have a better balance of cost and price so that we can carry on to recover the transaction of our stores, and at the same time, expanding the margins in a way that can be sustainable. G&A had a impact in the strengthening of strategic areas and that are vital for our business plan as technology, for instance. We also had an unfavorable situation with the phasing of some strategic projects that had a greater weight on the second quarter. When we talk about the recurring EBITDA, you can see that here in the U.S. with the result, an important share comes from the American PPP, which was a government aid for the impact of the pandemic that didn't repeat itself. So when we see there's an increase in the United States as well. And then I shall now pass the floor to Rafael Bossolani, so he can give more results of the financial performance of IMC. Please, Rafa.

Thank you, Santoro. Good morning, everyone, who are here with us for our teleconference of the second quarter's earnings of this year. I would like to carry on with our presentation, just quickly comment some important points of our financial performance that can be seen here on Slide #12. We can see, as it has already been mentioned by Santoro, we have taken steps forward quickly and consistently in our transformation agenda. So our financial discipline front, which is an important pillar is still evolving in a way that is significant in terms of our goals to improve our capital structure. In the second quarter, we nearly doubled our operating cash generation, where we went from BRL 40 million from the previous quarter last year to BRL 78 million for the second quarter this year. And this progress is not only because of the better operations of the company, but also the important progress when it comes to capital management and reducing the cycle of cash. And within our strategy of grow, the focus now is to have greater profitability in other operations. So we are still in the discipline with our investment in terms of expansion in our own stores. So in this quarter, our CapEx was quite aligned with the same period of the previous year. We ended up investing BRL 19 million, where BRL 12 million to expansion and BRL 7 million to maintenance and refurbishing and some technology projects. So at the end of the quarter, our net debt reached BRL 297 million with a leverage level of 2.7x the EBITDA that is within the set covenant for the period, which was 3x. So these results mirror a disciplined management, diligently managing capital and maintenance of profitability that is suitable to our business. So reaching now Slide 13, a before getting back to Santoro, we can see here that we closed the quarter with a cash consolidation of BRL 339 million. And we can see the cash generation of the operation was mainly applied in the reduction of our debt and also to be there according to the demand of our interest in our debt. And the final number also shows a foreign exchange variation we received from the U.S. and the Caribbean. We should also highlight here that we will keep focusing on to improve our capital structure to be able to increase profitability of the operations, to be able to have a very efficient management of our cost and expenses and to be able to bring this operational leverage in all the different regions so that we can drive results of the company as a whole. I should reiterate now our trust in the path that we've taken, the results that we have reached until now without losing the vision of the challenge ahead, but we keep evolving heading to the direction that we think is the right one. So I'll pass the floor back to Santoro now. Thank you.

Thank you, Rafa. We're coming to the end here of the presentation. Now let's go to Slide #14. You can see that we decided to change our digital identity and the identity of the company, a change of slogan that has a focus to encourage teams to feel that they own the business and to take care of the operation as owners. Good restaurants have owners and the owners focus on customers, take care of the team, is hands-on, takes care of the ingredients and pay attention to the details. The new logos is orange, here where it brings warmth and energy and also the flavor that the brands bring in terms of food, fire and aroma. And at the end here, a whole position that is much more closer to the field to the operation, giving support to our team that makes the company exist and makes it all carry on at the end. And you can see we're already a new IMC from the 150 leading positions, at least half. We already have people that started in the company less than 15 months ago, a great combination of talent that we already had here at IMC with new talent that came to join us in this project in the last few months. And this brings us clearly to an additional challenge, which is how to make this group of people to be a strong team, united and heading to the same goal. And the best thing is to have a dream in common to be able to have this teamwork, this sense of belonging that goes beyond our brand and products. So I'd like to share with you what is our dream, the big dream of IMC. So right here on Slide #15, we want to be the best food service platform in Brazil. And we don't say the greatest, but the best. And at the end, how are we able to measure that? What does that mean? What is to be the best food service platform? And for us, it's clear that it needs to be better or the best for our customers, for our employees, for our franchisees, who are important partners and for our shareholders who support us and have been supporting us. So that's how we encourage everyone in-house. And how we get there? In the last quarters, we have been talking about our main pillars in our company and I should highlight here the 4 main pillars to conclude my presentation. So as you saw the first slide about operational efficiency, throughout the presentation, we talked about that many that has been improved in terms of profitability. So we have many challenges ahead specifically with the high inflation scenario. And we are constantly revisiting our supply chain, our product offer and strategy of products. And we carry on capturing opportunities to be able to have the process evolve through ESG and also to our central line. So always with synergy among the operations. And also there is much room to evolve in same-store sales and as a consequence to improve margins because of the operational leverage. Clearly, the evolution of profitability of the operations in Brazil is our main focus. And the second point that we should highlight is our plan to simplify the business. There are many operational models currently and a very diversified action when it comes to geographies. So we will keep analyzing the strategies into the future, always seeking to simplify, optimize and to find synergies among the operations. As I said in the last call, so the company will be bigger in the next years, but less complex and with less diversification of business models. And that's where the third pillar comes into play, which is our financial discipline. As you know, we have a controlled net debt of 2.7x, the EBITDA but there's a high cost to it, especially with a new reality of interest in Brazil. And these are all intertwined. We need to improve profitability. We need to simplify our business. So that way, we can improve our capital structure, and that will give us greater flexibility in our expansion plan, which is the fourth pillar. Today, it's clear which brands to be prioritize and how to grow by region, store format, franchise owned and so forth. With Frango Assado for instance, there will be a greater relevance in this expansion plan with return on investment and potential growth of the brand here in Brazil. We have many opportunities of growth, and we will take this plan on diligently focusing on returns and our availability financially. And to make all of this come through, we know people and culture is the pillar to all. So to close, I should say that once again, we are very excited about the results of the last quarter, and we are aware of the challenge ahead. And we have a big dream. We need to celebrate our victory, but we are down to earth. So I should close out our presentation and I pass the floor back to start our Q&A session. Thank you, everyone.

[Operator Instructions] This is the question -- is Gabriel Santini from BWAG. The financial result has been having a negative impact in the results. The intention to sell assets to reduce the debt.

Gabriel, this is Santoro. Thank you for your question. Well, first of all, I mean, this point about the financial cost has increased greatly in Brazil. Less than a year ago, we had a 2% CDI now. This is definitely a red flag where we pay attention to, and we have been taking action to mitigate that. So the improvement in operational results and better management of our working capital. But as I showed in our presentation here, is that we are always finding alternatives and strategic possibilities to make sense to our business. So there are many businesses. All of our businesses are profitable. But obviously, we are open and always thinking about different alternatives of strategies within our business. So that is pretty much the information I can share with you at this point. And I think Rafael wants to share something.

Well, thank you, Gabriel, for your question. I think this is a very important point for us. And we have been prioritizing our point on settling and bringing greater investments where we have greater results. And we have been able to keep our debt ratio aligned with the business and what we believe is good for our business. There are a few leverages that we can work on to improve our capital structure and they go through the same organic process of the company as well. So there are many leverages here to improve our operational results, to improve profitability, especially in terms of our stores in Brazil with control of cost and a good management of working capital to be able to increase due dates with our suppliers, which have been successful. And also, there is a whole process of redesigning our debt, which allows us to have a control level here of our debt.

Thank you, Rafael. We have another question with non-opening of any store in this quarter. What is the updated plan of expansion? Will it be similar to last year from 50 to 60 stores? This question comes from [ Guilherme ] from [indiscernible].

Well, first of all, yes, I mean, we, as any other retailer business this quarter wasn't different. Some stores closed where others opened. And these are normal shifts in the market. We're not updating specifically, [ Guilherme ], the opening of stores this year, but we are obviously always study to have an updated number. And obviously, if there's any change, we will reposition and we will communicate that to the market. At this point, there isn't much of a change in our plan.

There's another question from [indiscernible]. Is there any update about arbitration with KFC? Can you bring a bit more color to understand where we're at?

Well, thank you for your question. Well, I don't know if you've seen in our relevant fact where we specifically have been talking to KFC to be able to have a solution that's good for both. So what I can tell you at this point is something that is ongoing. We are -- there an arbitration has been suspended. Thank you very much for your question. A question from Wagner Sylvia also, also about KFC and I think I just answered that.

A question from Antonio from Mais Investimentos. And he asked her how should be the liquidity in covenant for the next semester or quarter.

Well, we have kept our levels of the financial covenants have been very controlled and they have been for some time now, at least 12 months where we have been really keeping it to the expectation. As I mentioned, I mean, with all the improvement operational performance, working capital, cash management, we will keep the covenants set at levels under 3x, which is the one demanded from now on, always seeking into optimizing the structure of capital.

We have one more question here from Wagner Sylvia. In terms of the partnership with Raizen, if we can say anything about that.

Well, we have a very close relationship with Raizen. And recently, we redid all our strategic expansion in terms of which are the priority for highways and stretch us to expand our Frango Assado business. So there's a great potential of increase in the main highways existent around the city of São Paulo and other ones as well. So what we see in terms of the partnership is that there has been many discussions about prospecting spots together with Raizen to find these sites and strategic first to understand where to grow and what are the priority highways and then doing what we have done and now to understand the location specific and within our strategy. We do not plan to have a new sites with the stations. So we will be working with partnership and with Raizen. It is exactly the strategy we're talking about. Thank you for your question.

Wagner sent one more. Thank you for your questions, Wagner. In terms of strategy, what is the possibility of Frango to expand into malls?

As I just mentioned, Wagner, we see such a big potential of Frango Assado of growth on highways, I mentioned with the mapping we just went through that because of a diligent and focused approach, we will keep growing on highways, but we will not set aside into looking at that into the future. But for the next few years, I'd say that the focus is to have Frango Assado expanding on highways.

One more question from [ Rodigro Boteli from 3L Investment ]. About the simplification, if there's anything more mature ongoing?

As I said, we are always paying attention to the opportunities available on alternatives that can bring value to our business. So there is nothing on the radar now that we can share with you. Nothing that is set. But if there is any progress when it comes to simplification of the company, we will have the market informed. At this point, is to really think about alternatives and to be open to different ideas and always think about bringing greater value to shareholders in the long run.

And there's one last question from Marco Bandera. He is a private investor. So the role of simplification in the airport.

Well, we -- at the airport, we have catering. We also have stores, retail stores, which is a segment that has grown greatly in the last quarters because of the traffic flow in airport. And catering is one with a comeback of having food served onboard. So as I have mentioned during my presentation, we have been very diligent in terms of our expansion. So we cannot, I mean, lose focus. In this business, losing focus would not be helping us at all. So we have been focusing what are the priority brands to expand, and we are following it in a diligent manner. But thank you for your question, Marcos.

As there are no more questions, I'd like to turn the floor over to Mr. Santoro for his final remarks.

Thank you, Natalia. Thank you everyone for being here. It was a busy day. I know there were many calls of different companies. So thank you for being here with us. Thank you for the questions. And I hope you have a great end of the day and great weekend, everyone. Thank you.

This concludes IMC's conference call. Thank you, everyone, for participating, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]