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

Good morning, ladies and gentlemen, and thank you for waiting. You're welcome to IMC's conference call to discuss the fourth quarter of '22 results. The presentation is available for download at the company's website. [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; and Mr. Rafael Bossolani, CFO and IRO of IMC. I now turn over to Mr. Santoro. Please, you may proceed.

Thank you, Andre. Good morning, everyone. I hope you and your families are doing well. And thank you for being here with us today on this call for the fourth quarter of '22. Last year was marked by the best delivery of results in the history of company, both in terms of sales and EBITDA. Today, we have a much more financially structured company with the best indebtedness level, demonstrating how right the decisions were when we first started working here. The scenario is now very different from 2 years ago. When that question I heard the most was about the capacity of the company to resume after the pandemic and be able to pay its debts for example. Immediately after my arrival and the arrival of my team, we established a clear plan based on a strong transformation agenda. We brought in a new team that helped us prepare this plan and carry it out. Today, I can say we have a new company. We have a team that is aligned in the long term with a new management model with processes in control and [ for live ] systems was invoicing between BRL 650 million, BRL 680 million per year, all of them with a huge potential to grow. We have different systems, KFC, Pizza Hut, Frango Assado and the United States. In Slide #2, I will talk about the company when compared to the pre-pandemic period in 2019. Clearly, the company not only recovered from the pandemic, but we're doing much better than we did in 2019. Some important indicators such as the business profitability which is already back to the levels of 2019, the amazing expansion of KFC, which has tripled in Brazil. We also increased our digital sales reaching 30%, and we are substantially less indebted than we were at the end of 2019. And how did we get there? We're now going to move on to the next slide, Slide #3, where I show you a summary of our transformation road map, which I have been shown throughout the last 2 years. It was and will continue being our road map in terms of what we should prioritize. And now quickly going through the pillars of our transformation agenda, we can see that we had an important progression in all of the aspects. Our people and culture are the basis for everything we're developing. In addition to having the right people in the right position, it's essential to have a culture aiming at sustainable results where we think and act as owners of the business. We're happy that we were able to attract talents to our team along to the ones we already have, we make a strong and well aligned team. Operational efficiency, today, we will see more details during the presentation, but we reached record sales, thanks to a series of initiatives we had in different areas of the company. It goes from creativity and assertiveness of our marketing team with well done campaigns, update of our menus and offers and a strong operations team for the day to day. The Panama sale was a significant step for the simplification of our business, where it also gave more liquidity to the company, helped us reduce our debt, providing more balance to our capital structure. The third pillar, digital transformation, had a significant evolution, especially when we compare where we were 2 years ago. We were a company that was essentially analogic. Today, we can say that we have advanced. We have made a series of digital channels available. We also have the new Pizza Hut app and also for KFC, Frango Assado, those sales using WhatsApp and also what we did with Frango Assado as an example of what we implemented last year. It has been an evolution, but we are still behind our main competitors. We are working and focusing so that we can close this gap. The fourth aspect is expansion. We went from a situation where we had a litigation between the company and the global KFC into a new 10-year agreement. As a consequence, we opened 30 stores for KFC, a growth of 25% in the number of stores, clearly turning KFC one of the fast food networks that grows the fastest tier in Brazil. Regarding Frango Assado, because of the huge potential of the business and also because it did not expand in the last 10 years. In '21, we decided it was about time that we totally analyzed this business to define a new model and start growing again. We had a series of opportunities to improve the experience of consumers with more technology on the stores and also reinforcing certain aspects. We reinforced our visual identity and have a robust plan to become the leaders of this segment in Brazil along the next years. To wrap up regarding our financial discipline, we went from debt of 3x to 1.5x, thanks to our net debt reduction and also this Panama sale. Today, we have a lower net debt, and we just obtained BRL 200 million to work with our debt. These values will be used 100% to prepaid debentures that are due in '23 and '24. The new debt has a longer profile, 5 years at a lower cost than the previous debt. This clearly shows that the evolution of the company reflects not only our accounting results, but also the risk perception which is much lower than it was 3 years ago when we had the last debenture. So we move consistently. We are sure that our journey is just beginning. I think the whole team, our franchises, vendors were essential for the results we obtained, and we will show in our Slide #4. And Slide #4. We have a summary of the main indicators for the fourth quarter and also for the year of 2022. Starting with the sales in the same stores. We can see an evolution of all of our operations. Our net revenue grew 4% in the quarter and 27% in the year, reaching BRL 336 million, and a growth of 71% when compared to the past year. The EBITDA margin also reached 20% in the fourth quarter and 14% in the year. To conclude, the net debt, as mentioned before, was reduced to 1.5x and the net debt was reduced to BRL 253 million. Moving on with the presentation in Slide #5. We have a summary of the number of stores. We closed the quarter and the year with 559 units, 22 additional store than 4Q '21. And we also had the sales of Panama including 25 stores in total. We remain very disciplined with new businesses trying to obtain the best return on the capital invested, maintaining our sustainability in the long term. In Slide #6, we have some highlights of the 4 main operations, starting with Pizza Hut. It is a system that here in Brazil reached BRL 700 million in sales with over 250 stores. It remains in the favorite pizza brand in Brazil. We carried out a survey by MDI and 51% of the interviews consider it the best pizza. It's a very strong brand that has opportunities for improvements in terms of profitability and revenue and also in the format of the stores. We are trying to create a larger area of products, such as during launch time. And to do that, we have developed some options with us for example. Last year, we also focused on another opportunity for sales. In addition to the increased revenue, we have a new app and have implemented a new call center to provide a better experience to our consumers, increasing the profitability in the system. With that, it will be possible for us to decrease the main take ratio of Pizza Hut. When we analyze KFC, which is an absolute leader in this segment, with the sales above BRL 650 million, aiming value per store, which is very good and we have an opportunity to renew our global partnership with KFC, and we're also going to reinforce our digital channels, WhatsApp sales. We have a strong calendar for the upcoming months with interesting offers, an excellent price and cost with the promotion, I highlight in this slide of 3-in-1 for BRL 17. Now -- in the next slide, we have Frango Assado with sales of BRL 700 million. And here, in addition to the new visual identity, as you can see, we have also improved with our digital experience and then the installation of self-health terminals. The most important thing here is that we are totally redesigning the client experience aligned to a detail and ambitious expansion plan that will be implemented in '23. It's also important to highlight the important role of our centralized kitchen in Frango Assado, where Brad [indiscernible], among others, are produced by a central kitchen in the United States, which is our largest system currently with sales greater than BRL 800 million and 30 stores only. We had another excellent performance especially during the U.S. summer with a lot of traffic in our stores. We also have a ramp-up of the new stores in New York, Atlanta and Miami, as we had planned. We have a huge opportunity in the New York stores which is probably going to be the best operation, similar to the restaurant we have in Las Vegas. And then moving on to digital sales, and I quickly talked about this in the beginning. The total sales of Pizza Hut and KFC has reached BRL 66 million, representing 60% of our total sales. In the near future, we will relaunch the pizza app, it has a simple and effective interface archive. KFC is rolling out terminals, and we expect to reach 100% of our stores with self-help by the end of the year. Frango Assado also has a loyalty program and response for approximately 5% of the sales in our restaurants. Our digital transformation is just beginning. We still have a lot of opportunities to increase leveraging our business in this area. This is and will continue being 1 of our priorities. In Slide #9, we have a summary of the same-store sales when compared to the previous year, 2021. The fourth quarter of '21, which is usually the strongest one, we have maybe comparison that in general we had a strong performance throughout '22 except for the fourth quarter, which was impacted by the U.S. operations, where we closed different stores because of the strong winter in that country in the snow storms as well. In '23, we started the year very strongly, especially led by Frango Assado and KFC. We can see this in Slide #10, our next side where we can see the evolution of each 1 of the 4 brands. We can see the results for the beginning of '23 in Frango Assado with a growth of 30% and KFC 27%. Moving on to Slide 11. Here, we have a summary of our net revenue -- as a result of all of the actions I told you, we've reached the best results in our history, both in Brazil and in international operations, reaching global revenue of BRL 2,350 million. The operations in Brazil grew 35%. In Slide 12, we will see the adjusted EBITDA. And how this was transformed in the last line. So you can see that as a result of our operational efficiency, we reached the highest EBITDA in history, and an increase of 71%, reaching BRL 336 million, a better cost control, operational leverage led us to an EBITDA margin of 14% in the year. And even if we exclude extraordinary events in '22, we grew more than 60%. We went from BRL 158 million to BRL 253 million. And then in the next slide, we can see the adjusted EBITDA by region. We have been focusing our operations, especially here in Brazil to increase the productivity of each one of our stores with a better management, reduction of operational losses, implementation of cost and expense control, which helps us monitor and leverage the performance of our store. In Brazil, our results increased fivefold with a positive result of BRL 5 billion that we had to pay in the U.S. The program is called ERTC. At the same time, it's important to highlight that in '21, we also had a positive impact of the American government in the order of BRL 4 million. And if we look at the recurring EBITDA, it grew throughout '22. And now I turn over to Rafael Bossolani, my partner and CFO to give you some more details about our financial results. Rafael, please.

Well, thank you, Santoro. Good morning on those who are participating in their result conference for the fourth Q of '22. I would like to continue our presentation and quickly comment some important aspects of our financial performance, which can be seen in Slide #14. So as mentioned by Santoro, we have moved very quickly and consistently in our transformation agenda. And this has been translated into concrete results obtained in the last almost 2 years and somehow, it reflects the continued evolution of the company when compared to all of our financial and strategic objectives. Our financial discipline is another example that we progressed significantly. And I am [indiscernible] today in a very different situation when compared to the prepandemic period as demonstrated year-to-date. You can see the numbers. And in the quarter, we grew 68% with our operational cash flow, we went from BRL 28 million to BRL 47 million in the quarter. In the year, the same operational cash flow totaled BRL 172 million, which is a growth of 33% when compared to the previous year. It is a result of the operational improvement, but also an important improvement in our working capital and cash flow. Within our growth strategy, we continue focused on profitable operations. We remain disciplined with the expansion of our own stores and in the fourth quarter, it was accelerated when compared to the previous quarters in '22. The company's CapEx was basically half of what has been seen in the same period of the previous year. We invested BRL 62 million and BRL 37 million were dedicated to expansion of stores and the other BRL 25 million were used for maintenance and renovations and strategic projects and also technology processing. And so in the year, we also reduced investments in about 40%. As we can see in the graphic to a total of BRL 113 million of investments, of which 65% was used for the growth of new stores. We're closing the year with a very controlled net debt. It was BRL 253 million, EBITDA is close to 20% when compared to the last quarter of the year. And this represents a leverage level of 1.5x the EBITDA of the last 11 months, which is below the [indiscernible] we had in the beginning of the year and the 1 that was determined by the covenants of the period, which was 3x the EBITDA. This represented a reduction of one time the EBITDA. These results reflect a very disciplined management of capital allocation, focusing on maintaining adequate liquidity on our businesses. I also want to reinforce the focus we've been giving optimizing the capital structure of the company. Once again in the last few days, we concluded a new issuance of debentures in the amount of BRL 200 million for the prepayment of part of our current debentures. This enables a reduction in the spread, but also a longer meantime of 25 to [indiscernible] months. Our financial position is solid. For us to make the company plan feasible as we commented here a few times. In Slide 15 before I turn over to Santoro, we can see that we closed the quarter with a cash consolidated position of BRL 411 million. Cash generation of the operation and the resources obtained from the Panama sales were used to reduce our debt and also the payment of interest rates and also capital investment as I commented in the previous slide. It's important to mention that the variation of our liabilities was impacted by investment in the natural working capital resulting from the growth of the business and the credit we're going to receive from the U.S. with RTC taxes and some amount remaining from the investment in Panama, which will be made throughout this year. We will continue focusing on maximizing our cash and [ ratio ]. This is 1 of our priorities, along with increased profitability of the operation which guarantees very efficient resource management, generating operational leverage in all of our businesses, so that we can leverage IMC results. I also want to reinforce our confidence in what we've been doing and the results we've achieved keeping in mind the challenge we have ahead of us, but we continue evolving in the direction we will need to be correct. Thank you for your attention. And now I turn back to Santoro.

Thank you, Rafa. This is our last slide. In the year, I share with you our big dream, which is to be the best service platform in Brazil. And also, this is an effective journey. To do that, we must have our priorities very clear with a lot of discipline. I would like to highlight some aspects of this slide and also wanted to share the main priorities, not only for '23 but looking ahead. We need to increase our operational efficiency of the business. As we've seen on this presentation, we evolved a lot regarding profitability, and we have opportunities in the future to improve the profitability of our business, [indiscernible] better control losses, increasing the level of service, consumer satisfaction, guaranteeing the quality of our end product. We will continue evolving to capture opportunities to advance processing and production using our simplified production, also looking for more synergism and efficiency. The delivery of an excellent experience of our clients and at the same time, increasing profitability is our main objective and challenge. We have different operational models and a diversified performance in terms of geography. The sales in Panama are an important step to consolidate our simplification strategy. We will continue evaluating strategies for the future, always aiming at simplification, optimization and synergies. As I've said in the last call, the company will be substantially larger, but less complex with less diversification. Another important aspect to highlight is our discipline -- financial discipline. We still have high cost, especially with the current reality of the interest rate and facility in the world and everything was interconnected, needs to improve efficiency and profitability, improve our debt profile so that we have even more flexibility to carry our expansion plan. We have a lot of opportunities to grow and we are going to carry out this plan with a lot of discipline regarding the returns and financial availability. We are aware of the challenges in the [indiscernible] we have ahead of us. We are confident in our strategy, in the capacity of our teams and franchises and on the strength of our brands. With this, I want to conclude. We are very enthusiastic about the results of last year, but we are aware of the challenge we have ahead of us, and we understand that the game has just begun. I'm very happy about the results, our team -- about the goals we are implementing and also very enthusiastic about the power of our brand. With this, I conclude my presentation and turn back to Andre for us to start the Q&A session. Thank you all very much.

[Operator Instructions] We have received some questions, and I'm going to start with a question on [indiscernible]. What factors contributed for the trend of decrease in the same stores and what are the inherent risks?

Well, it's always important that we understand the trend not only 3 years, but at least 2 years. And of course, we had COVID and it's difficult to compare with the years before, [indiscernible]. We have the best quarter we had a long time in our [indiscernible]. Our revenue in Brazil grew more than 10% of many [indiscernible] and same store sales percentage, it was lower. So I would say there are 3 factors that I [indiscernible] for you. One is clearly the [indiscernible] has a negative impact for us [indiscernible] shopping mall operations because we still depend a lot of shopping malls. So you can imagine [indiscernible] and this has a significant impact on us. There is also an important aspect that I mentioned of the U.S. It was a pretty harsh [indiscernible] in Mexico, where it doesn't usually snow and our operation has closed for almost 15 weeks because some pipes broke and so on and so forth because of these storms. So number one, the U.S. very specific and near in Brazil, our performance wasn't bad especially when we compare it to the fourth quarter of '21, but it did have a negative impact of the World Cup, which didn't help as much, especially at Frango Assado.

We have a question in this call. Our question is from Francisco [indiscernible] I have participated in this call for a long time. So I have a few questions here. First of all, I wanted to understand the difference of the M&A in Panama be announced amounting USD 40 million. And what we see in the cash flow says BRL 179 million. So I wanted to know if there are amounts received and why we see this difference? Another aspect I wanted to check with you has to do with the new issuance of debentures. In the previous debentures, there was a restriction for the company to share dividends. I want to know what this is like now in your mind that vendors and debentures were somehow not analyzed in this very dramatic period of the pandemic. And so I wanted to know whether you foresee anything to try to obtain any returns for shareholders by means of dividends or buybacks. Also the gas stations [indiscernible], we had a decrease of over 10%. If you are corrected according to the inflation, it will be close to 10%. I wanted to understand what the company's strategy is for gas stations. And then anything to that, could you please talk a little bit about M&A because the M&A was very transformational. And so I wanted to know there is any that we can expect those [indiscernible] or the gas stations. And I also wanted to hear from you about ESG, Santoro explained the results, the same term results. And can we expect any advances in the street stores because the strategy is today are 100% focused in shopping malls and we see McDonald's and Burger King, focusing 100% in street stores. Could you answer these questions? And almost, I don't know whether you have disseminated it or not, but the EBITDA margin that we are working internally and we saw figures close to 20% for the fourth quarter, the best result in your history. Can we expect this as an annualized result? And I apologize for the high number of questions.

Hello, Francisco, it's a pleasure to have you in our call again, and we haven't talked in a long time. I have different questions, Santoro and myself will try to answer all of your questions. Starting with Panama's M&A. Of course, we disseminated operations of USD 40 million and we have to exclude the taxes, fees, advisers and also we have about USD 2 million or USD 3 million for the 2 operations, which are resources that are in [indiscernible] with some conditions and it will probably be released in the short term. The second aspect regarding dividends and -- we are at a moment of expansion of the company. So today, when we look at our potential in the market to expand stores, advanced scenarios where we don't work yet. We novate our stores in the midterm -- this is going to be our priority and theoretically, the return for shareholders, which will be due to a higher generated amount for our operations. Also in terms of your last question before turning it over to Santoro with an EBITDA margin, you know about this indicator, but what I can tell you here is that we have observed expressive improvements in our results, but we are below where we can reach both in terms of strategic objectives and financial objectives. When we compare the benchmarks, we still see a lot of opportunities to advance not only in terms of the business profitability but also the strategic and operational issues.

This is Santoro now. We didn't have any problems. It has to do with price volatility. And if we get what we had last year for '21 and '23, we had increased [indiscernible] costs. And it has to do with prices that we monitor. It's not something that we define directly. So you can follow the variation in the market price, there was no decrease in sales. It has to do with the reference price. Also in terms of margin, we maintained the margin we've been working with. You also commented and I have quickly talked about KFC. And yes, we are already developing it so that we are going to this [indiscernible] with KFC, but construction takes time. We are working strongly with that so that we can have a higher presence. We understand that the brand is right now very important for us to strengthen the brand because it has to do with a flow decrease in the malls, and we can see that the flow we had before the pandemic has not been recovered. And it's still low, especially at launch time. So going to the Street is already part of our plan, and we are carrying it out now. We hope that at the end of the year or the beginning of next year, we'll start opening our KFC stores in the streets. Also, regarding the decision to leave Panama was very important in both in strategic terms, and in practical terms for the company to simplify our business. And of course, we will always be open to alternatives and options that make sense later on. But right now, there's nothing to share with you. There's nothing concrete right now. Once again, thank you for your questions.

Thank you, Santoro and congratulations to the whole team. The company is moving in the right track. And it will nice to follow your case in the next 2 months.

Thank you, [indiscernible], for your kind words.

We have another question from [ Marco Bandera ]. He asked a question about the performance of catering and the increase of passengers flow in the period. So he also wants to know if we have an expansion strategy because of the demand.

Thank you, [ Marco ], for your question. I think I can summarize it like this. Catering had a significant change in the format of the business. We have more food being delivered on board than we have now. And this demand just to be more creative internally. One of the things that has a very relevant impact that helps us with catering on the international routes where we have -- depending on the flight, we have 2 meals per passenger in long flights with a lot of patience, you can imagine that that's where we can obtain higher revenue and grow. One of the things we've been doing is that we've had a new route here in Brazil with the basis that we operate with. We have negotiated and discussed it with the airlines. We also have another important part. We are working in some airports. We're growing with the new businesses. So you can imagine the VIP rooms with other competitors. So we can try to explore the supply of certain meals, and we have worked in this direction to summarize passenger flow today has a higher impact on airport stores. And of course, it helps catering, but it helps even more in other areas, especially international flights, which have higher volumes and more opportunities. Once again, thank you for your question.

Since we do not have any more questions, we now close our Q&A session. I now turn over to Mr. Santoro for his final considerations.

Well, thank you all very much for participating in our call, with your questions. I also thank Greg and once again, I thank you all for your presence here today. We will close with a photo of KFC with excellent products. I've already ordered my delivery and invite you to try our KFC delicious meals. Thank you very much.

The teleconference is now over, and we wish you a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]