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

[Interpreted] Good morning, ladies and gentlemen, and thank you for waiting. Welcome to IMC's earnings call to discuss the results referring to the third quarter of 2023. The presentation is available for download at the company's website. [Operator Instructions] Forward-looking statements are based on beliefs and assumptions that can make these forward-looking statements not to be confirmed or be different than expected. They reflect the opinion of the company on that date, and there's no obligation of the company and updating them. Here we have with us Alexandre Santoro, CEO; and Rafael Bossolani, CFO and Investor Relations Officer of IMC. Mr. Santoro, you may proceed.

[Interpreted] Thank you, Priscilla. Good morning, everyone. I hope that you and your families are fine. Thank you for connecting to IMC's call today referring to results of the third quarter of 2023. Before moving into the details, relating specifically to the performance of the third quarter. I would like to talk about our big dream to be the largest food service platform in Brazil. And what have we been doing to fulfill this dream? So moving to Slide 2, where we talk about our big dream. Since we came to Brazil 2 years ago, our priority was to establish the main pillars of this transformation. The transformation IMC needed to go through. And since then, we're paving the way with a very clear strategy and involves balance between discipline and focus on the day-to-day operation as well as building our future. It is important to reinforce the key points of these strategies. So I would also like to go over how much we have advanced those points. Everything starts with a clear mission to serve our customers well, to deliver an excellent customer experience so that people want to return to our stores and more frequently. And then obviously, we will be able to attract a larger customer base to our business. One of the main strength of IMC are our brands. We have relevant brands. Some of them are global leaders. These are admired and brands that everybody wants to consume and with a lot of potential for expansion. How can we make this happen, make this big dream happen. So our people, our culture is the foundation of everything we do at IMC. We have a strong team that is aligned in the long term, supported by teams that can work much closer to our field team on a day-to-day basis. I usually say to our team that at IMC's office, the central office is only intended to support our field team. When we move to data and technology, another important pillar of our company, it reflects our wish to be more efficient and to be available to our customers at any time at every possible channel. We want to have the ability to know our customer base and better interact with them regardless of the brand that we are talking about. This is 1 of the most challenging pillars, given the gap we had between ourselves and our competitors 2 years ago. Although this gap still exists, we've been able to make a lot of progress and reduce this gap, such as the examples of Pizza Hut's own app that can be customized and also include more brands. This is just 1 example of that. Self-service terminals have also evolved significantly, helping digital sales at Pizza Hut and KFC reaching almost 40% of the total sales. Those self-service terminals also work as express checkout point. And they accelerate the payment process, especially during peak hours. Now in this diagram, we also have a pillar of operational efficiency. Given the fact that we have so many relevant brands, our challenge was and still is to increase the efficiency and the profitability of operations, capturing synergies through the creation of [ CSD ] and also using our Central Kitchen with a supplies area being supported by intelligence. And we also need to be more efficient in every store. We evolved in this pillar, but we are not pleased yet. We see a lot of room for improvement in terms of profitability in every store and in every site. Regarding financial discipline pillar, we've also had a very clear evolution in that aspect. I can say that our level of indebtedness is fully controlled that debt profile has lower cost and also longer term, and we were able to successfully divest operations in Panama and Olive Garden in Brazil and with that, our indebtedness net level is below 2x in this quarter when we completed with our debt level of 1.8x. So not only we improved our operational efficiency, reprofile our debt and we are also growing more through our main brands. We've expanded in them. Those are our priorities. This is a positive cycle that we are implementing right now. The expansion of brands make them even more relevant and that cycle starts once again. So after this introduction, let me share the figures with you. How have we advanced in those pillars. We've been advanced very consistently and with discipline. Now moving to Slide 3. I would like to bring some highlights. Although we are still experiencing a reverse macroeconomic scenario. It was the [ first ] consecutive quarter with positive results vis-a-vis the same quarter of last year. This is a historical record. This shows consistency in our strategy and also that we are reaping the fruit not only right now but also in the future. The net revenue has grown by 1%. And we have good news when we understand the origins of this figure. Exchange rain had -- exchange rate has brought an effect of 3%. So you would have been 4% if you consider that in terms of improvement of net revenue. As to operations of restaurants in Brazil, we grew by 9% in revenue and tripled EBITDA. We tripled EBITDA of the restaurant operations in Brazil in this quarter and also in the year-to-date figure. For those who have been following us for a longer period of time, our focus in improvement and priorities is still in Brazil. We have had significant improvements here as planned. The consolidated adjusted EBITDA reached BRL 93.6 million in the quarter, 16.5% increase vis-a-vis the same period of last year, and the EBITDA margins reached 14.5%. We keep evolving in terms of that indebtedness and the end of the quarter, this is pretty controlled at a level of 1.8x. Our company is well structured and has a lot of ability and appetite for growth. I would like to thank our franchisees and the IMC team for Colombia and the U.S. for these results because they are the ones who make the business happen on a day-to-day basis. Now moving to Slide 4, we see a summary of the number of stores of the IMC system. In total, there are 548 stores, 17 more than the third quarter of 2022 in the same comparison basis and excluding the divested operations. It's important to highlight the significant improvement in KFC. So right now, we have 160 restaurants and that makes KFC the fast food brand that grows the fastest in Brazil. And we are constantly balancing the mix between our own stores and franchise -- franchised stores. In the next slide, we see the evolution of same-store sales of IMC. We had a 2% growth in the third quarter of '23, vis-a-vis a stronger base, they had already grown 18% in the third quarter of last year. So in the year-to-date, our growth totaled 5% vis-a-vis a 29% improvement of last year. In this quarter, we were able to prioritize the evolution of profitability and we were more selective in terms of some promotions. We're also facing a challenging consumption scenario that has impacted our business and retail as a whole. But given the strength of our brands and the quality of our products, we are pleased with this performance levels of same-store sales in this quarter. And with all the initiatives we have ongoing, we believe that our fourth quarter will also evolve in this aspect. Now let me talk about the 4 largest systems we operate. As I've been saying, we are a platform that is mainly composed of 4 systems Pizza Hut, KFC, Frango Assado and Margaritaville with over BRL 700 million in sales every year and with a great potential of growth and value generation captured in the upcoming work. So let's start with Pizza Hut. It was recently chosen by the public as an undisputable leader in pizza makers, and this was [indiscernible] with consumers with 14 cities in the state of Sao Paulo. It's a very strong pizza brand but there is a lot of opportunities for improvement in revenue, profitability and store formats. We are trying to expand the offer of products and work strongly on innovation. Since April this year, Pizza Hut has had to its [ portfolio ] the New York's style pizza as an alternative to their traditional pan brand. This is a thin dough, large slice pizza that aims to attract new consumers and increasing the frequency of our already loyal consumers. So here, you see the improvements in mix and in growth. So the airport business also faced some difficulties and the street stores, on the other hand, have advanced significantly. So we keep evolving in our partnership with the 18 network, and we are operating in 15 places. There is also a significant improvement in our own digital channels with our own app and has brought an improved experience to consumers and improved profitability to all Pizza Hut systems reducing the average cost of takeaway. Now let's move to Slide 7 and talk about KFC, an absolute leader in this segment. In average, makes BRL 4 million per restaurant per year. We focused a lot on profitability of the business this quarter. That has had an impact on the sales performance. You saw a flat level of sales, which was offset by improvements in profitability. We made some promotions, especially in the delivery channel, optimizing some initiatives such as free freight. With that, we had a positive impact on margin. But the same-store sales growth was flat in the quarter, but with a 6% increase year-to-date. We are constantly reviewing our menu with new products, new promotions, trying to find a good balance between transactions and profitability. We keep improving and expanding with our digital channels, and now we have self-service terminals that not only improved the experience of our customers, but also improve the average ticket of transactions. One of the main challenges in KFC is resuming growth in sales, especially at the counter. The innovations we launched is Cheese Lovers and 3 into 1 for the price of BRL 17.90 are intended for that. We are going to have some news in terms of improvements in sales. With the natural evolution, we will open the first street stores of KFC which is going to be crucial for the evolution of the brand in the country. Now Frango Assado, our next slide. We are growing strongly 6% growth in the quarter, 13% in the year. It's a very good evolution, especially because of the increase in traffic in our restaurants. We have new visual identity, we also evolved in digital initiatives, and we launched a loyalty program for Frango Assado with over 180,000 customers registered. We are redesigning the customer experience in those stores. This is aligned with a detailed and ambitious plan of expansion we plan to start in 2024. There is a strategic role in the central kitchen. So different products are produced at a central kitchen. This is a business that shows a positive evolution. And as of 2024, we want to focus not just in the current complex of stores, but also improving the existing stores, but also to start an expansion to be able to capture all the potential of Frango Assado business. And to conclude the key brands, in the U.S., we did not have a quarter as we were used to since the end of pandemic, the same-store levels was not a positive store in this quarter, not a positive result. But in terms of preoperational costs, they were above, we had planned. It took longer to open our store in Boston. We expected it to open in April. We'll put together a team to start its operation in April, but the store was only inaugurated in November because of several restrictions such as operating licenses. There was also an important pressure in cost especially because of labor costs in the U.S. in terms of salaries, health care costs. So we were not able to transfer part of these costs to prices and along this summer. We have a significant challenge trying to perform strongly out of the peak season that will involve the mobilized part of the staff because of demand seasonality. And to complete this part of the presentation, our new restaurants have had a positive evolution, especially the restaurants in New York. Now let me move to Slide #10. We talk about total digital sales of the company. We totaled BRL 114 million and that accounts for 36% of our sales. The app of Frango Assado has over 180,000 customers registered that accounts for 5% of our sales. There is no doubt that digital transformation is just beginning. So we see a lot of room for improvement to keep increasing the share of digital channels in the total amount of our sales. This is and will continue to be 1 of our priorities here. And to summarize the results, I'm going to briefly talk about the consolidated net revenue that totaled BRL 645 million, a 1% increase. If we isolate the exchange rate effect, we had a 4.5% growth in revenue. We had a positive result in Brazil, particularly where we had a 9% increase in the restaurant business. In terms of EBITDA, Slide #12, BRL 94 million in the quarter, a 16% increase and BRL 230 million year to date with a 31% increase. The recurring EBITDA had a 14% growth. And if we exclude nonrecurring events is 12.9% year-to-date. Now moving to the next slide. we see adjusted EBITDA per region. As I mentioned before in the beginning of the presentation, our greatest challenge is an increase of operating efficiency. We've been focusing a lot on operations, focusing on increased productivity of its store and improving the management ability of the field team, improving in terms of operating losses to monitor and leverage the performance of stores. And these efforts are bringing important fruits in the EBITDA in Brazil that was tripled in the half of the year and which is reflected in the year-to-date results. This is a significant performance that confirms that we made accurate decisions. Now I will turn over to Rafael Bossolani, our CFO, to give us more details about the financial performance of IMC.

[Interpreted] Thank you, Santoro. Good morning, everyone, who is participating in our earnings call for the third quarter of '23. Let me continue our presentation and share with you some important results in terms of financial performance. They can be seen on Slide 14. As mentioned by Santoro and as I like to reiterate, the advantages of the company is aligned with a rapid and consistent advance in our transformation agenda, which is translated in concrete results that have been obtained in the last 3 quarters which also reflects the continuous advance of the company to our strategic and financial goals. So in terms of -- financial discipline plays a crucial role in the success and sustainability of our company. And this front has progressed significantly the beginning of our journey in 2021, putting IMC at a very advantageous and solid financial situation. The operational cash flow in the third quarter totaled BRL 77 million, 3x higher than the same period of the last year. This is a result that is due not only to the improvement in our operating results, but also because of an important improvement in our management of working capital, which is 1 of our focus here. In the year, the cash operating flow totaled a BRL 179 million, a 43% increase vis-a-vis the first 9 months of last year. We focus on increasing our operating cash is a priority at IMC, and we are going to follow this up very [ diligently ]. As part of our growth strategy, we have capped an expansion rate that was disciplined and responsible and that focused on making current operations more profitable. But we're also trying to find new growth opportunities and improve our relevance in the business. I'd like to say that the pace of growth in building new stores is directly related to the financial and operating performance of our company. Along these lines, we keep the discipline in our investment and expansion of our own stores that was accelerated this year in a planned fashion vis-a-vis 2022, which also reflects a different schedule of store opening. During the year, the company made investments that totaled BRL 99 million, BRL 64 million dedicated to the expansion of stores and BRL 35 million dedicated to retrofit and also other strategic products. Now moving to Slide 15, I would like to reinforce the intent focus we've been giving and optimizing the capital structure of the company. In the past 12 months, we reduced our gross debt in almost 20%, and we completed the third quarter with a net debt of BRL 335 million, which is a significant reduction and this is aligned with what we had 12 months ago. The leveraging index is in a very positive trend. At the end of the quarter, the net EBITDA debt was 1.8x, which is much lower than 2022 and also much lower than the targets that we had of 3x. In October, we completed the last date of debentures issue, we have raised BRL 300 million in October totaling BRL 400 million along the year where we reduced the average cost of debt by 125 basis points, and we increased our average term by more than 24 months. So we keep a very solid and consistent position in our indebtedness position. With that, we achieved a very comfortable debt status, very appropriate for us to implement our business plan sustainably. These results reflect a disciplined management and capital allocation and the focus on maintaining the liquidity level we have that is appropriate for our business. So to wrap up, before I turn over back to Santoro, I would like to reiterate that we trust the path we've been taking and the results we have achieved so far. So I reaffirm that we focus on maximizing cash generation. This is 1 of our priorities, together with increase in profitability of our operations which ensure an efficient management of cost with good operating leverage in all the regions we operate, so that we can keep leveraging IMC's results. Thank you very much for your attention. And now I'll turn over back to Santoro.

Thank you, Rafael. In the last slide, I would like to show you, as I did during the presentation, the advances we've had relating to all of our business pillars. Alignment of transactions in our stores in a profitable way and the consistent delivery of an excellent experience to our customers are key points of our strategy. We have a lot of growth opportunity and we will execute this plan very disciplined -- in a very disciplined way regarding the results and our financial availability. We can claim today that we are a new company, are profitable with a better capital structure that moves on with a lot of growth opportunities, both organically and inorganically. I believe that our greatest challenge is to keep our discipline and balance short-term goals and long-term goals without giving up on the decisions we have for the future. We keep focusing on technology, expanding our key brands and as we also managed cash in a very disciplined way. We are aware of the challenges that lie ahead of us. But we are pleased with the company's evolution, and we are confident in the way that we are taking. This strategy is consistency, the strength of our brands, and the quality of our team and our franchisees will definitely take us closer to our big dream to become the largest food service platform in Brazil. I conclude my presentation, and now we are going to start the Q&A session.

[Interpreted] [Operator Instructions] I'm going to start with the first question from [indiscernible] is asking whether we can give you more details related to the factors behind the strong growth in margins of KFC and other business we have in shopping malls. So considering that quarter against the quarter.

[Interpreted] This is a combination of factors. There is a very relevant factor, which is the revenue per store. We have evolving in this sector, especially in our own stores. During the presentation, I mentioned that in some cases, the revenue as a whole may not make such a leap, but the quality of that revenue is improved. There is a greater margin. And this is because of a better combination of the offerings we are making in terms of products and prices. And we've also ...

[Interpreted] Excuse me, ladies and gentlemen, I'm sorry. We have some audio issues. Mr. Speakers, you may continue.

[Interpreted] I apologize. I don't know what happened, but we had a problem with the main link and we now move to the back up link. I'm sorry, I didn't realize that the connection was dropped. So I'll take over the question again. So let me go back to the beginning of the answer. So there's a combination of factors. First, a better management of our offerings, of our menu, that means the proper price points, conducting, making promotions that we have an incremental volume and margin and not just making sales just for the sake of them. if they're not profitable. So I believe that the quality of sales have improved because the mix of the products become more profitable. And this was also possible because of a lot of advances we've had in supplies -- in procurement, we were able to control our cost evolution because of that. And there is a third factor that relates to operations itself. We've evolved a lot in the past few years in terms of operating losses, and that's true for stores in general. So these results and evolution of margins were related to a combination of factors. Thank you for your question, and I apologize for this connection glitch.

[Interpreted] Okay, [ Keith ] had a question. So let me understand what the question was about. It's been read to me. Well, the first part of that question is very similar to the 1 I've just answered. And then the second part is what about negotiations to sell assets in the near future. There's nothing new about that. We just completed 2 important transactions of divestment. So in Panama, -- and so that's what we had to share about that right now.

There is also a question from Pablo I would like to understand how you define maintenance CapEx versus growth CapEx? So how is that growing even without new stores and not [ being opened? ]

[Interpreted] Pablo, we have opened new stores, but it's only natural in this business since the post pandemic, of course, some stores were closed during the pandemic. When you look at the figures, this difference, this [ 17 ] restaurants, it is the difference between stores we closed and stores we open. So we are opening stores, but there's also part of that, which is called the maintenance CapEx. And in the case of Frango Assado, we have a lot of opportunity in improving sales on the same time just investing in retrofitting and also upgrading the stores.

[Interpreted] [Operator Instructions] There is another question here. Marco Bandera is asking a question here. It's a long question. I'll try to summarize it. Of -- the first part of it relates to the number of airports and the sales life cycle of those stores. What will be temporary changes you plan to implement at airport.

[Interpreted] Well, there are 2 factors that contribute to that. You probably notice that the airports have shown an increase in offerings in many stores are being opened in many airports. Therefore, competition has grown, but the number of passengers has not. So it's a challenge to be able to grow in that segment. But there was a more specific data that has an impact here is because we've stopped or did not make a catering operations that would have an important way. This is a catering service that we had and we no longer have.

[Interpreted] Let me add to that answer. We also are changing the services that we provide in our catering service between food services and handling services. So there was a change in the mix of services and products, and that has also put some pressure on the results for this particular type of business.

There is another question from the same person saying regarding shareholders and specialty investors. Food services business suffered the post during the pandemic especially in touristic side. So what is -- are the prospects for the future or small investments.

I think your question directly relates to degeneration of value in shares. During the presentation, you realize that we are very confident about our strategy. We are moving towards 2024 very well organized in terms of operations, finance, results. So I feel confident about our strategy and the direction that we are taking here. And I've mentioned this more than 1. I truly believe that fair value is something we should discuss in the medium and long term, because the net time line that's naturally moved over and as the company grows, this will naturally reflect on the price of the share. And we make decisions focusing on the medium and long term, but we do not focus so much on the variation of share value and share prices. We are confident about the strategy we're implementing.

[Interpreted] There is another question here as well Yes, it's a question by Johnny. What can the company make in terms of improving efficiency in administrative expenses.

[Interpreted] IMC in the beginning of its new cycle, has prepared the company or what you want to pick up, and we are strengthening some strategic areas. Areas where we have competencies the company did not have before. We really strengthened our structure in the past 3 years. We understand that today, we have a [indiscernible] efficiently prepared to support the growth of the company in the next year. What we should expect in an operating leverage of those expenses as the business grows. We believe that we have human assets required to support this growth.

[Interpreted] There is another question here from Danielle [ Negley ]. It's about the operations of -- in Colombia that was transferred.

[Interpreted] Yes. In Colombia, we have 3 businesses. We have a main business, which is an airport catering service. We operate fixed catering services in the main capital, main cities of Colombia. We also have a network of restaurants in some airports, we also have a network of restaurants of Colombian food, typical food with 11 units at the city of Medellín that is called JIC. And what was transferred to -- was the investment of the chain of restaurants and 11 stores, which was a relatively small business for the company.

Ricardo [indiscernible] ask the question about Frango Assado. Could you please give us more details about the expansion plan of Frango Assado stores? Will you focus on the Sao Paulo and state or in other states as well?

[Interpreted] What we have been doing here, Ricardo, is a very thorough analysis of the potential of different segments of highways, especially in the state of Sao Paulo, we are looking for places that could potentially have Frango Assado store. So we analyzed that in the state of Sao Paulo and main roads that are away from Sao Paulo to other states like Rio de Janeiro, [indiscernible] Fernao, a road that goes to Minas Gerais state. So that's our initial footprint. So when we conducted this study, we realized the potential of growth in Frango Assado in this region is huge. So in our mind, we believe that it's important to grow in a more concentrated fashion trying not to have a wide spread position, of stores, also considering cost of logistics, not to move too far away from the central kitchen, which is a crucial point for us. So we tend to have a more denser distribution, and that plays a lot of cost -- management costs are much better in -- and so this is why we are prioritizing Sao Paulo state in this expansion plan. Having said that, we see also a lot of opportunities outside the Sao Paulo state. And right now, it's just a matter of prioritizing the focus we have given huge potential we can still take from highways in the state of Sao Paulo.

[Interpreted] With no further questions, I would like now to turn over to Mr. Santoro for his final remarks. Please proceed, sir.

[Interpreted] Thank you. Once again, I would like to thank everyone for attending this call and for sending your questions. I would like to invite you to download a coupon that you are going to see in the last slide with a QR code of KFC. So make the best of these products, and my mouth is already full of water just for thinking of that. So have a great weekend and wish you a nice day.

[Interpreted] IMCs earnings call is [indiscernible] we would like to thank everyone's participation, and wish you a nice day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]