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

Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to IMC's conference call in order to discuss the third quarter results of 2022. This presentation will be available for download at the company's website, www.internationalmealcompany.com/ir. [Operator Instructions] We would like to inform you that forward-looking statements are subject to known and unknown risks and uncertainties that could cause 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 whatsoever to update them in the light of future development. In this conference, we have Mr. Alex Santoro, CEO of IMC; and Mr. Rafael Bossolani, CFO and IRO of IMC. And I will now give the floor to Mr. Santoro. Mr. Santoro, please proceed.

Thank you. Good afternoon or good morning, everyone. I hope you and your families are doing well. Thank you so very much for connecting today to IMC's earnings results for Q3 2022. A little over a year ago when I joined the project at IMC. We defined some clear pillars that would guide this very important and relevant transformation agenda for the company. And today, I would like to share with you the important treatments that we've made throughout this journey. We continue to evolve very consistently quarter after quarter, and this agenda continues to guide us and to strengthen our culture as an organization and obviously having our future. We are aware that there is a lot to be done, but without a doubt, this was a very important quarter for IMC. So, let's start this presentation on Slide #2. And we can see a brief summary of the most important achievements for each one of our strategic pillars. And to begin with, we delivered the highest revenue and the highest bit in our history. This year, accumulated from January to September, we have already reached a result that is 10% higher if compared to the whole year 2021. So, the simplification and reduction of IMC's complexity continues to be a very important driver for us to prioritize our brands with the greatest growth potential and at the same time to unlock value. We are moving forward with divesting our Panama operations, and we recently entered a 10-year master franchise partnership with KFC for the South and Southeast regions of Brazil, putting an end to the arbitration proceedings that had been on for 2 years. We continue to move forward in our digital journey transformation. With growing share on sales, with self-service channels, and we will tackle them in more detail further in this presentation. And with regards to our financial health, we keep on doing significant progress intending to improve our capital structure. We reduced our gross debt and the financial leverage was 5.2% lower than the previous quarter and below the markers, that was 3.0. Now on some highlights of the results of this quarter, I would like to start by thanking all the IMC team, our franchisees, partners and suppliers who were absolutely essential for us to reach the results that will be presented here this afternoon. So the 3Q result reflects a very positive trajectory with progress in all segments. The sales of the stores have grown 17% compared to last year. And the overall sales have exceeded BRL 883 million, a 3% increase compared to last year. Company's net revenue reached 677 million, a jump of 25% over last year. And the EBITDA reached almost 96 million, a 23% expansion over the same period of last year. As I mentioned, our net debt is now 2.5x, an overall amount of BRL 305 million. It is important to highlight that the Panama operation sales is still to be complete. And as a consequence of that, our cash does not reflect the values of the sale. Soon as this transaction is complete, which we estimate won't take no longer than the next weeks. The net debt will be significantly lower. And consequently, the leverage will be beneath twofold. We know the magnitude of our challenge. We gave a few very important steps ahead, but we know that there is a lot still to be done. Now on Slide #4, we have a summary on the overall number of stores at the IMC system. So, we closed the quarter with 562 stores, one more than in the previous quarter. And this year, we have to acknowledge that we were rather disciplined with regards to the investments with them. And for Q4, we are going to focus on the KFC brand. And we'll keep on being very disciplined in our investments, aiming for the best return over the invested capital without losing sight of our sustainable long-term growth vision. Now Slide #5, that slide basically shows the evolution of IMC's sales compared to 2019. So, we closed the quarter to 22% above the pre-pandemic period. And all our operations were exceeding the 2019 levels and 17% above the same period of last year. It is worth noting that we have this quarter-by-quarter consistent progress, except for Q1 '21 because of the COVID pandemic. And now it's important for us to track what is it that we've been doing, the actions to deliver the results starting by Pizza Hut. It continues to be the favorite pizza brand in Brazil, very strong brand with many improvement opportunities. We know both in revenue as in profitability. We want to broaden our options. And for that, we have developed some very interesting brand options. And with the launch of the MyBox sales, we have inaugurated a very interesting market for individual mills, both over the country as in the delivery. And aside to those actions that have an impact on the revenue, we have developed our own channels, such as the new app that is going to improve consumers' experience and generate a profitability increase for the Pizza system in inducing the average take rate. And KFC, which is the absolute leader in the segment. We took a very important step ahead, which was renewing our partnership with Yum! and also launched new channels such as WhatsApp sales and self-service terminals in our stores. We have a very strong calendar for the coming months with some absolutely incredible offers, great reference price and cost, like 3 to one promotion of chicken crunch that is a great perspective for the coming months of the KFC. Now on the FAs, besides the new visual IT, we've also advanced a lot in digital initiatives with the launch of the loyalty program. And most importantly, we are now completely redesigning reengineering our customers' experience aligned with the expansion plan that we intend to complete in 2023. And it's important for us to highlight the strategic role of the centralized production on our FA business, where all the semolina bread, cheese bread and the chicken drums, among others, chicken drumsticks and others are going to be produced in a central location. And in the U.S., we and others had an incredible summer, taking advantage of the strong increase in the traffic in our stores and with a very strong growth, 11% growth in dollars. We continue with the positive ramp-up of our stores in New York, Miami and Atlanta as planned. And on Slide #7, where we can conclude by -- as we look at the results of those actions when we look at all the brands, we have a very clear summary that the operations keep on delivering a very positive performance and an important evolution at a quarter-to-quarter basis. Now talking a little bit about the digital transformation. On this slide, we have a summary of our so-called ecosystem, which is IMC's phygital ecosystem. And in order to build our Meal platform, we need to do a more assertive connection between consumers and brands. And we have been resorting to technology to do that. And we know that we are a consumer-centric strategy. And we have many different digital channels such as the delivery channels, the call center, the self-service totems, the loyalty programs and so on. And in order to interconnect those systems to our stores and our operations, we are developing systems and solutions that will allow stores to be even more efficient and to allow even more profitability to our franchises. We can see -- now moving to Slide #9, we can see an evolution in our digital sales and the amount is growing almost BRL 90 million and only for KFC and Pizza Hut brands only. So, we are still making progress, and we are at 28.5% of the revenue is coming through digital channels. And it's important to highlight that KFC has started its rollout process for the self-service terminals and our hope is to have all the stores, 100% of the stores until the end of the year equipped with the self-service units. And in the stores that we have implemented, we noticed a very positive impact on the average ticket, consistent growth if compared to the OTC sales and leading the total digital sales to exceed 40%. Our FA app of the Frango counts on 50,000 registered clients and responding to 5% of the sales in our restaurants. And we are also making reference in the installation of our self-service terminals and reengineering the consumer experience. And so clearly, our digital transformation is still crawling. We have a long way ahead, but we intend to enhance the participation of the digital media. And this is and we'll keep on being one of our main priorities. And all that, now moving to Slide #10. And as a result of all those actions, we can see the best sales results of our history and posted by the consistent evolution of international operations, the BRL 677 million and a 25% increase over 3Q '21. And we are growing very relevant, say, 34%. In Brazil, we saw the airport, highways and all operations experiencing an important recovery as well as the catering itself that has just admitted more flexible and flight food options. In the U.S., in the Caribbean, we had a consistent performance with the resumption of flows in our stores and a resumption of the catering services in Colombia and the very positive impact of the American summer. Now moving to Slide 11, we can see the company's results. And I would say that as a result of the evolution of our operational efficiency, we have reached the highest EBITDA ever recorded by IMC BRL 95.9 million, 23% increase when compared to last year's same quarter. Better cost control, better price control and the consequent operational leverage has led us to this 14% EBITDA margin. And it's worth highlighting that the G&A basically reflects the strengthening of some strategic areas to support our plan. Additionally, to that, in this quarter, we've had this tax gains of BRL 9 million that was offset by the provision of bonuses and control expenses that were connected to the restructuring of our business. And just to complete that part of the results, we are now moving to next slide, which is number 12, and we will see the region-by-region results. And we have been giving a lot of focus on our Brazilian operations. And the goal is to increase the productivity, a better management of our field team, reduction of operational losses, implementation of the operational control center that will help us to monitor and to boost stores performance. For the international operations, they've also experienced double-digit growth, driven by the growth in the sales, cost control and the consequent operational leveraging. We still have a lot of opportunities to improve our efficiency in order to keep on doing transaction recovery while still expanding margins in a healthy and sustainable way. With that, I would like to give the floor now to Rafael Bossolani, our CFO and partner in order to give us some more details on the financial performance of IMC.

Thank you, Santoro. Good afternoon, ladies and gentlemen, who are connected to our 3Q earnings results of 2022. Just moving on with the presentation and a quick comment on very important points of our financial performance that can be observed on Slide #13. So as I had mentioned -- as Santoro himself mentioned, we have been making a very quick and consistent progress on the transformation agenda in many different fronts. And the financial discipline front for instance, we keep progressing very significantly towards that goal of enhancing our capital structure. So, this quarter, we grew 25.5%. That was our cash generation ability. So, from BRL 51 million to BRL 64 million in this quarter. And this progress is a result of not only the operational improvement of the company as a whole, but it's an important evolution of our working capital and the consequent reduction on the cash conversion cycle. So within our growth strategy, I mean the focus is obviously to improve the profitability of new operations. And for that, we keep withstanding with the discipline in the expansion of our own stores. And that, again, has pushed for the free cash to 125%. So, we can see a clear generation of free cash of BRL 46.7 million throughout this period. And during this quarter, the CapEx remained at basically half of -- if compared to previous years. So, we've invested 17.3 million, out of which 10 million were devoted to expansion and the other 7 million to maintenance activities, remodeling an important technology projects. So at the end of the quarter, our net debt remained in BRL 305 million with a leverage level of 2.5x the EBITDA of the last 12 months, which is pretty much within framed within the rates that we intended for this period. And we've reduced a 0.2x the leverage level of the company if compared to the previous quarter to 2Q. So those results are nothing but the reflag of a rather disciplined and strict management on capital allocation with a strong focus on the maintenance of the liquidity levels keeping this pretty adjusted to our business. So now moving to Slide #14. And just before giving the floor back to Santoro, we can observe that we have closed the quarter with the cash status of BRL 305 million. As I've explained in the net-net and the cash generation capacity of this operation was basically deployed and correcting the debt and the payment of those obligations. And the final balance reflects the exchange rate variations in the U.S. and the Caribbean. So, it is very important for us to emphasize that we'll keep on focused on our capital structure. This is a very important priority. We will focus on improving the profitability of our operations. And that obviously guarantees a very efficient cost management, generating, operating, leveraging many different regions so that we can keep on pushing IMC’s results. And allow me to just reinforce that we are very confident on our strategies adopted so far and the results without never losing sight of the magnitude of the challenges that lay ahead. But we keep on making progress towards the right direction. That's what I had for now. If you allow me, I would like to give the floor back to Santoro.

Thank you, Rafael. Now we -- this is Slide #15, our last slide. And I'd like to finish by just describing some of our priorities and forward-looking objective. So, we want to keep on increasing the profitability of our operations. And as I said, we had many major increases with regards to profitability, but we still have many challenges, significant challenges ahead. And that is something that should happen day by day, store by store with an even more efficient management of our team with an even greater loss control, increasing the service and satisfaction levels. and essentially increasing the number of transactions in our stores and as a consequence of that, our margins. And we'll keep on trying to capture new opportunities to centralize both processes and production through the shared services central and decentralized production in search for better synergy and efficiency. And the consistent evolution of the profitability of our operations is our main and the greatest challenge, no doubt. Second thing to highlight is our intent to keep on simplifying -- further simplifying our business, reducing its complexity. We have some operational models in a very diversified activity. The leaving Panama was an important step in consolidating the simplification set. We keep on analyzing our strategic trades for the future, always aiming at simplification and optimize optimization and synergy creation. And I can see that the company is substantially larger in the next years, but less complex and with less diversification of business models. Now the third point, which is the capital structure, -- our debt is rather controlled corresponding to 2.5x the EBITDA even before the cash inflow from Panama sales. But with a high cost, especially taking into account the reality of interest rates not only in Brazil, but in the world as a whole. And the issues here are interconnected. We need to improve profitability and to simplify our business. And so, we can improve our capital structure, which will aggregate even more flexibility to our expansion plan. And we have many opportunities to grow, and we hope to execute this in a very disciplined manner with regards to the returns and to our financial availability. In order to make this happen, our team and our culture are the very basis for everything that we have been doing here in IMC. I'm very happy and pleased with our team. We are aware of our challenges and that the road ahead is long. However, rather confident in the soundness of our strategy and the execution ability of our team and our franchises and the strength of our brands. We are just getting started. With this, I'd like to close this presentation and give the floor back to the operator so that we can start with the Q&A session. Thank you very much, everybody.

[Operator Instructions]

So my dear friends in the absence of questions, I would like to just thank you once again for your attendance. We -- in case you need any clarifications, do not hesitate to contact [ myself, Rafael ] -- next Tuesday is a holiday and some of you are probably going for holidays. Don't forget to just hit the road and stop at Frango Assado unit and just enjoy our chicken drumsticks festival.

Thank you. I am is -- conference call is now closed. Thank you for your participation, and we wish you a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]