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

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the IMC conference call to discuss Q2 2023 earnings release. The slide deck is available for download on the company's website. [Operator Instructions] We would like to inform you that forward-looking statements are subject to risks and uncertainties that may cause such statements to not materialize or be different from what was anticipated. Such forward-looking statements represent opinions only as of the date they are made, and the company is under no obligation to update them in light of future events. Joining us this morning are Mr. Alex Santoro, CEO; and Mr. Rafael Bossolani, CFO and IRO. Now I'd like to turn it over to Mr. Santoro. Mr. Santoro, please go ahead, sir.

Thank you very much. Good morning, everyone. I hope you and your families are doing well. Thank you so much for joining us this afternoon to discuss Q2 2023 earnings release. Before we discussed the performance for this quarter, I'd like to talk to you about our big dream to be the best food service platform in Brazil, and to discuss what we have been doing in order to make that dream come true. To start on Slide #2. Since we established here 2 years ago, we identified the major pillars in order to allow us to make this come true. And we have paved the way with clear strategies, balancing discipline and focus on the day-to-day operations and also discussing our future. I find it important to go back to the major pillars of this strategy. Everything starts with a clear mission to provide excellent services to our customers so that we can increase our customer database and also increase their visits to our units. And our strongest assets that our brands, which are global admired and desired aspirational brands. All of them with a great potential for growth. How can we make that happen? First, team, our people and our culture, which are really the foundation of everything we do. We have a very strong and aligned team, also our HR working closely with those who are at the front line. Technology also allows us to be more efficient and also to be available to our customers any time in different channels. And this is the pillar that represents 1 of the major pillars considering the gap that we faced 2 years ago vis-a-vis our competitors. Today, although there is still a gap, we succeeded in decreasing that. Some example: The Pizza Hut proprietary app that can be customized to other brands in the future. That's a very good example. And operational efficiency is also a very important pillar for all brands, and our goal is to improve our efficiency and profitability of our operations. And we can increase synergy by implementing the Central Kitchen, also centralized supply chain and increasing our efficiency at the stores. We have no doubt about our progress regarding that, but we are not fully happy yet. There is still room for improvement. As for financial discipline, this is another point in which our evolution is evident. Today, we have a longer debt profile and also our operations in Panama. There is still work to be done such as improving our capital structure by also lengthening and decreasing the cost of debt and becoming more efficient in allocating resources, cost management and expenses. We still need to improve our operational costs, reduce debt, which will allow us to grow and expand our brands. These are our priorities. This is a positive cycle that we have implemented and the brand expansion makes them further relevant and then the cycle starts again. That said, I would say that we have been very consistent and with discipline, we are achieving that. So now let's move to Slide #3. Although the macro scenario is adverse considering the conditions of customers, we have succeeded in improving our results once again compared to the same period year-over-year, both in revenue and EBITDA. The diversification of our brands and geographies being [ present ] and providing services in more than 1 segment. Fast food, we have casual dining. We have also stores along highways. We have businesses in Brazil and in the U.S. And that certainly helped our growth path. We are not exposed to a single segment in food services, and that has impact on our continuous growth and consistency of our strategy, which will keep on bearing fruits today and in the future. Let's talk about numbers, moving to Slide #4. Sales of same-store has increased 1.6% consolidated global data, and we had the impact of a negative performance in the U.S. by 3%. If we focus on operations in Brazil, our growth was 3.5%. And year-to-date consolidated growth 10%. I'd like to highlight once again Frango Assado, strong growth, 12% in the second quarter and 18% in this first half of 2023. We are very happy to see this result of one of the most relevant brands of our group. As for net revenue, BRL 605 million, growth of 3% compared to 2022. And net revenue had a negative impact by gas station businesses that account for 13% of our revenue, so globally. So 13% of our global revenue comes from gas stations. And although we increased quantity of [ leaders ], so there was a decrease in the price of fuel, and that's why we see a decrease in gas station revenue of 20% compared year-over-year. Now if we exclude that, our net revenue increased 8%. And in Brazil, it was above 14%. Our quarter EBITDA, almost BRL 89 million, with a margin very close to 15%. I'd like to also highlight the fact that we comply with IFRS-16. And we keep controlling our debt as we see in our EBITDA for the last 12 months. Today, our company has a very good financial position and the decrease indebtedness, proving that the decisions made were right from the very beginning. I'd like to express my heartfelt thanks to the franchisees and also to the entire IMC team in Brazil, Colombia and in the U.S. who are the ones who make our business happen on a day-to-day basis. Now moving to Slide #5. We see a summary of total number of stores. We closed this quarter with 557 units, 18 more than the same period in 2022. Here, we are not considering the stores from Panama that we sold at the end of last year. I'd like also to highlight the impressive growth of KFC. There were 70 stores before the pandemic. And today, we have more than 170 and it is still growing. So more than 25% growth, which certainly proved it to be the fast-growing brand of fast food in Brazil and the proper mix of company-owned store and franchising stores. Now I'd like to talk to you about our 4 main systems. So today, the company is comprised of Margaritaville [indiscernible] Pizza Hut, KFC and Frango Assado, and they all have a revenue of more than BRL 700 million in a year, and they also represent a very good potential growth. Now let me talk to you about each brand. Let's start with Pizza Hut. It's a very strong brand with many opportunities should improve on revenue, profitability and also business formats. We have been increasing the portfolio of products, and we are working on innovation. From the very beginning, we have added a New York style pizza as an option to consumers vis-a-vis the traditional crust. So the thin crust with larger sizes and that also increases sales, attracting new customers and also increasing the frequency of our [indiscernible] offer our Christmas spirit. We have also launched a new flavor and with [indiscernible] so that customers can have that to the launch of the Ninja Turtle. And with New York type preferred like the Ninja Turtle. And we are also working with the AMPM Steak where we operate in 9 units, and we expect to increase at [ # 215 ]. We are also developing our own digital channels. Just as I mentioned before, and that will also improve customers' experience and also potential for improving profitability, considering that, that also increases our average [ ticket ]. Now let me move to KFC, leader in respect each new unit as a revenue of BRL 4 million. And this year, we are focusing on increasing profitability, which affected negatively in the past. Just to give you an example, we went over promotions, particularly for delivery channel. And some of them were not as profitable as we wanted despite selling. So that had a positive impact on our margins, but had impact on sales. And that's why we had a flat sales. We are always reviewing our menu, our products and promotions in order to achieve balance between transactions and profitability. Innovation was very important to attract customers to our stores and to really enchant them with novelties. Such as ones we had to attract gamers, Diablo. And we are also keeping regularly the spicy sauce soft that was a success for the Kentucky Diablo spicy. We are also focusing on digital sales and also focusing on self-service terminals that will also increase the average ticket increasing access. Now let's move to Slide #7. I'd like to talk about Frango Assado. Strong growth, as I mentioned at the very beginning 12% growth, 18% in the first half. New visual identity, you can see a picture also on the first page of our same-store on [indiscernible] to highway. So the visual identity, and we are also reviewing going over customers' experience and also considering the expansion that was parked in 2024. I'd like to also mention the strategic growth of centralized production for different types of breads and snacks that are now produced at Central Kitchen. This quarter where we had some stores that had negative result is in Las Vegas, and that's why we saw it decreased by 3% in the U.S. and flat this first half. But we know we can improve our performance outside those [indiscernible] per month. We know that in the U.S., we have, as you know, approach by customers and it's a great challenge to get the same performance outside peak months. And we know that the peak months are July and August. On the same page, you can see our restaurants in Myrtle Beach, South Carolina. I had the opportunity to visit now in July. And just to give you an idea that the day I visit the operation -- we -- our sales were USD 80,000 and we served 2,000 customers that day. And what we know is that we see very good results in our restaurants in New York and a same sales stores went 18%. Now let me talk about the digital sales. Slide #8, we can see total number for digital sales, BRL 114 million just of KFC and Pizza Hut, that accounts for 36% of our total revenue with a positive impact of our app. As for Frango Assado, we also launch Frango, which is our loyalty program. we have more than 150,000 customers also registered. Going to Slide #9, we can see same-store sales and our consolidated number shows a 2% increase year-over-year and for the first 6 months of this year, 7% growth. So I have already talked about operations. But I'd like to mention on Slide #10, the recovery of Pizza Hut, Frango Assado had an impressive performance. And for Pizza Hut, we saw 4% growth for -- year-over-year comparison. [ 4% to 8% ] comparing the first 6 months. As for KFC, also a 6% -- 9% increase in the first 6 months and a flat increase comparing just the second quarter. And we have also -- we focused on operations for KFC, but we have a strong plan through the third quarter are the increase in our organic revenue. And then Slide #11, We see our net revenue growth of 3%. And in Brazil 14%. As for EBITDA, Slide #12. BRL 89 million this quarter, 21% increase year-over-year and BRL 130 million to date, 40% increase. And we see an 11% increase and in year-over- -- to date 38%. If we go over EBITDA by region on Slide 13. And I to then turn it over to Rafael. As usual, Brazil represents a challenge regarding improving our operational efficiency. We are focusing on our operations. We wanted to increase the productivity of stores to decrease operational losses and implementation of an operational loss control in order to leverage the performance of stores. We start to see now the fruits of such actions when we go over EBITDA per region, and we can see that Brazil presented a substantial growth in its EBITDA and increase by 3% in the USD 15 million and also Colombia with BRL 6 million. With that, I close my first part of this presentation. I'd like to turn you over to our CFO, Mr. Rafael Bossolani. Please, Rafael, the floor is yours.

Thank you very much. Thank you Santoro, good afternoon, everyone. Thank you for joining us to discuss Q2 2023 results. So let's continue -- and I'd like to share some important results regarding our financial results. And let's start to Slide 14. As mentioned by Santoro, we have our alignment with the company also keep our transformation, and we can see that reflected in the results achieved over the last 2 years, reflecting the evolution of the company vis-a-vis our strategies and also financial strategies. As for financial discipline, this is key for the success and sustainability of our company. And it keeps on improving substantially. And today, IMC has improved a great deal compared to 2021. So let's talk about the operational cash flow in the second quarter, BRL 40.4 million compared to [ BRL 68 million ] in '22 for the same quarter. So this negative result compared to some other assets and liabilities that have an impact regarding noncash elements by recognizing also some [indiscernible] that will be offset in the future. That means that they will be converted cash in the future. So for [indiscernible], we can see a 23% increase compared to the first 6 months of 2022. This was possible, thanks to the improvement in our efficiency in every single business unit, but also because of our cash management and also working capital. On the right-hand side, considering our growth strategy, while you'll keeping the same extent of pay can also managing our EBITDA, we keep on identifying opportunities in new markets, new regions. And I'd like to remind you that with regard to investments in new stores, directly related to our operational and financial performance. We keep on being disciplined in expanding our equity. And that's been now being performed as planned. And also, we have the timeline for opening new stores this year. For the first half, we invested BRL 57 million. And what we drive on that work for store expansion and then the rest for others strategic actions, particularly related to technology. As for Slide 15, I'd like also to stress focus in optimizing the use of our working capital, to reduce our debt by BRL 121 million. And now our net debt is BRL 330 million. So our financial leverage measured by net debt to EBITDA is 2x, 0.7x less than the same period in 2022 and the way to roll what is required by the covenants which was 3. These results reflecting not only very strong discipline on how we use our capital, but also the proper maintenance of liquidity for our business. We already mentioned this in the previous call. But it's important to say that in April, we issued debentures BRL 200 million in order to pay part of the debt in advance. And the [indiscernible] was [ 150 ] [indiscernible] we then medium, medium time in 25 months. So it's important to say that our financial position is very robust, and to support our business plan, just as mentioned a couple of times. So we will keep working in lengthening the debt payment and -- and we also -- we are to work in order to decrease the cost of debt. And we have not seen that reflected in our results yet. And just to close before I turn it over to Santoro again. I'd like to say that we will be focusing on our cash generation, which is 1 of our priorities, together with the increase of our operational profitability, ensuring an efficient cost management and also leveraging our growth and our results. I find also important to reinforce that we firmly believe in the measures we have taken, always also bearing in mind the scope of the challenges that we face. So I am sure we are on the right path. I'd like to turn it over to Santoro again.

Thank you, Rafael. And just to close, so it's very clear that we evolved. We assume the better results regarding profitability, and there are many opportunities and challenges lying ahead, and the transaction being profitable and consistent delivery of improved experience to our customers are key within our strategy. There are many opportunities for growth, and we will always examine and welcome these program according to our financial availability and working being efficient. So we wanted to balance what we have ahead of us in the short term as are necessary to keep in feeding our future, we will keep on investing in technology on our brands and also working on cash and managing cash with discipline. We are very happy with the results achieved and we firmly believe in the path we have chosen. Consistent strategies, the strong brand that we have, the quality of our franchisees will certainly allow us to achieve our big drink so to be the best food service platform in Brazil. With that, I close this presentation and I'd like to turn it over to the operator so that we can open for questions and answers. Thank you very much.

[Operator Instructions] We received a question from Marco.

We talk about EBITDA revenue. And so this question is about financial leverage. And the second part is related to profitability.

So last year, we made a decision of concentrating our CapEx in the last quarter. This was a decision we made. But this year, we have already started investing in the second quarter. We have also renovated many KFC stores, and we are doing the same with our Frango Assado stores. That's why if you compare for the first half compared to last year, you will see that that's different. So -- but we are really manage it that we will keep on expanding on renovating the stores, but there will not be some huge variations. With regards to the profitability of the same stores, I would say that in general, it's aligned to our problem. We know that depending on the store, depending on the type and brand of store, we have a maturation curve, but we are happy with the new brands that were opened in 2022. We see a very positive result and aligned to our business plan, and they keep on growing. Thank you very much for your question, Marco.

[Operator Instructions] If there are no further questions, I'd like to turn it over to Mr. Santoro again for his final remarks. I'm sorry, we received one more question about new stores. So if that will increase debt.

No, we are not going to increase the debt of our company. What we want to do is what we similar to what we did at the beginning of this year. So we will consider debt only if it's as expensive in order to replace some debt. And that comes from operation -- for generating operational cash. And this is what actually will allow us to keep on growing. So -- it will not be from new debt. I think that with that, I don't see no other questions. So once again, I like to thank you for joining us this afternoon. And you will see that in the last slide of our presentation, we have the QR code of our Pizza Hut app. I invite you all to download this app and to order a pizza so that you can have a very good beginning of your weekend. So I wish you all a very good day and a great weekend. Thank you.

With that, we close the IMC Q2 Earnings Release Call. We wish you all a great day. Thank you very much for joining us.