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

Good morning, ladies and gentlemen, and welcome to the IMC conference call to release results for the first quarter of 2024. This presentation is being recorded, and the presentation is available at the company's website. [Operator Instructions] Ensuing this, we will go on to the Q&A session when further instructions will be provided. Forward-looking statements are subject to known and unknown risks and these forward-looking statements may not materialize or differ from what is expected. Such statements speak only as of the date they are made, and the company is under no obligation to update them. At this conference, we have Mr. Alexandre de Jesus Santoro, the CEO of IMC; and Mr. Rafael Bossolani, the CFO of IMC. I would now like to turn the floor over to Mr. Santoro, who will begin the presentation.

Thank you, Samantha. Good morning to everybody, and thank you for connecting to the IMC call for the results of the first quarter '24. I hope that you and your families are well. Before we begin the presentation, I would like to express our deep sorrow and extend our solidarity and concern for all the people impacted by the rainfall in Rio Grande do Sul. We have concentrated efforts to offer support to our team, franchisees and the community as a whole. In the last few weeks, we have intensified emotional financial and other support to all those affected by the rainfall. Additionally, we have contributed with a donation of 20,000 liters of water and 1 ton of food for the shelters in the region. And of course, we're engaged in other initiatives that are underway at the moment. We make the commitment to offer continued support to our teams and partners during these stages of reconstruction. We're now going to begin the presentation per se for the first quarter of 2024. Let's go on to slide #2. Now 3 years ago, we set for, which would be our dream, the big dream to transform IMC in the past food-service platform in Brazil. Now to reach that goal, we define essential and strategic pillars to carry out this transformation and we're still paving the road with a clear strategy, the goals between balance of discipline, daily focus on the construction of our future. In slide #3, you can see the summary of some of the cycles of this journey for IMC. Now, we have 3 main phases. The first is the foundation in 2006 until the challenges faced in 2020 because of COVID-19, followed by a deep and important cycle of transformation that we began in 2021. We now arise as a different company, strengthened with a robust team, top line governance and strong and admired brands. We're ready to speed up growth, increasing sales traffic in our stores and of course, the profitability and expanding our operations. We are a platform made up of 4 main systems, Pizza Hut, KFC, Frango Assado, and the U.S. operations, each with invoicing higher than BRL 700 million per annum, all with an enormous potential for growth and value generation that will be captured in the coming years. Now, if we go on to slide #4 and speak more specifically about the first quarter, I would say that the first quarter was challenging and growth stood below our expectations, impacted by the vigorous winter in the U.S. with a direct correlation with our operation and profitability. Throughout the presentation, we will further explore the performance of each of our main operations. It's important to highlight that the first quarter has a lower weight in our business, representing less than 10% of the EBITDA we generate in the year. Same-store sales reached 2.1% above last year with a growth of 3.5% in Brazil, positive highlight with Pizza Hut with a growth of 7% and Frango Assado with a growth of 7% in same-store sales. Net revenue grew 2.5% in the quarter, reaching BRL 507 million. It's worthwhile underscoring here that we have exchange rate impacts and impacts of our gas stations. Now the revenues in restaurants in Brazil had a growth of almost 12%. EBITDA reached BRL 38 million, 7% below last year when we compare this setting aside the non-recurrent event we had in the U.S. last year, the EBITDA had a growth of 3%. EBITDA margin reaching 7.5%, and our net debt EBITDA ratio, closing at 2.1x vis-a-vis the 3x that we had forecast. A special thanks to our entire team, the franchisees and partners are the ones that truly make this business happen day after day. Let's go on to slide #5, where we have a summary of the total number of stores in the IMC system. We end the quarter with 569 stores, 47 more than the last quarter last year, impacted by the strong growth of KFC. When we compare this with the close of the year, there is an adjustment in the number of stores, reflecting the closure of units with low performance, [indiscernible] aligned because of our focus and profitability and that underlines the expansion for 2024. We no longer have 28 operations that have been discontinued. We continue to be very disciplined in our investments, always seeking the best capital allocation and, of course, having operational cash, which is of course for expansion. In slide #6, a summary of same-store sales. We can see the accrued performance in 2 years with a growth of 17%. This means we have a growth of 2.1% this quarter versus a strong base. We had the first quarter last year of 14%. I will speak a bit more about the brands where we can speak in greater detail about our performance. In slides #7 and #8, I begin with Pizza Hut. In Brazil, we already have more than BRL 700 million of invoicing in this system with 270 stores only in Brazil, an extremely strong brand with opportunities for improvement in revenue and profitability as well as store formats. Now the remodelation of the park has been a significant sort of an improvement in sales, followed by brand consideration, which is still quite low, considering the fragmentation of pizza stores in Brazil. Despite this, Pizza Hut stands out as a favorite among consumers, it has a positive impact on performance with a growth of 6% in this quarter with sales reaching BRL 156 million the growth of 6% is based on a strong growth of the first quarter last year of 12%. We continue to grow in digital sales, improving our profitability. We have a new app that has been very well accepted and has had strong growth. It represents 13% of all deliveries carried out by Pizza Hut. Besides offering consumers a better experience, it has a positive impact on profitability, reducing the average cost of delivery. We're focusing on enhancing the range of products for new occasions. We have just launched a new product, Melts. We also have the [indiscernible] pizza, it comes in New York, and we're rolling out all of the stores for pasta. With this, we strengthened our footprint and our supply in a greater number of occasions, allowing for an incremental source. Now regarding expansion, we continue our partnership with the largest store in Brazil, and we're planning to rollout for more stores in the coming months. We now go on to slide #9 and 10 to speak about KFC. This is one of the fastest growing networks of fast food throughout the world. There is a new store being opened somewhere in the planet every 3.5 hours, an impressive feat, and we're very happy with the evolution in Brazil. We're about to reach 200 stores. The total sales of KFC had a strong growth of 21% based on a growth of 40% in the first quarter last year. This is one of the fast food brands has most growth in Brazil in the segment of growth because Brazilian like this store. Now, we went beyond the potential of this business in the first quarter. We had a growth of 1% in same-store sales vis-a-vis a strong growth of last year of 19%, totaling a growth of 20% in a period of 2 years. Now, we continue to focus on profitability, especially in the delivery channel. We have stopped working with promotions that did not prove to be profitable, but we have also launched some promotions that were not effective, and we have retrace them. We had positive results on a single month, but this didn't offset the weak performance of January and February. We continue to expand digital channels, especially in self-service channel that represents 30% of our stores, improving the average ticket and the efficiency of the operation. We have reorganized the architecture of the menu. We have more effective promotions geared towards traffic generation and an improvement of margins. Now, we had a typical opening of stores at the end of last year, offering challenges in terms of operation. We have a maturity curve that is slower than what had been planned. Regarding Frango Assado on slide 11 and 12, we had a very good position, a growth of sales of 3% for same-store sales. We continue to focus on the renovation of the main stores and the development of new formats such as Frango Assado Express. Besides this new visual identity, we have made strides in the digital work with the new identity we have. We have more than 300,000 clients registered in our app. And as I mentioned before, we're redesigning the customer experience besides the detailed expansion we plan to begin in 2024. You will see the growth of same-store sales that we renovated showing the acceptance of this new experience. The central production plays a very important role in Frango Assado. The main products like cheese bread and others are produced in the central kitchen. The business is still under evolution and beginning this year, we will see a greater enhancement of the total store park and the resumption of expansion. We're going to be creative discipline, look for alternatives to have a better return in the use of capital. We're quite optimistic with this brand and with a huge growth potential we have before us. To conclude this part of the presentation on the brand, we will now go on to slide 13 to speak about the operation in the U.S. We have the license of an iconic brand and as I said in the introduction, we had a weak first quarter, a drop of 2% in same-store sales vis-a-vis a drop of 2% in sales vis-a-vis a growth of 16% the previous year. And same-store also represented the same -2%. This was not the performance that we expected that we had planned, but it was impacted by January where there was a typical cold in January and snowstorms in some cities where we operate, leading to the closure of the stores for several days impacting the results for January. The first quarter on the other hand shows a significant disinvestment. We disinvested one of the stores we had there in Pigeon Forge in Tennessee, representing $13 million, almost 15% of the present in market cap for IMC. This reinforces our vision that the sum of our present day business are worth more than IMC as a whole. The new [indiscernible] are growing in terms of performance, especially in New York, Miami and Boston. Because of the locations, they will help us to boost the seasonality of the business. These stores that so far are not mature and 2024 will be a key to make strides in the performance and profitability of these stores. Let's go on to digital sales on slide 14, the value continues to increase, reaching almost BRL 200 million, a growth of 86% vis-a-vis the first quarter 23. There's an important evolution in all brands, representing 51% of KFC between delivery, self-service, 33% of Pizza Hut and 15% in Frango Assado through the Express checkout. Now the digital transformation is one of our priorities. We still have a great deal to evolve and enhance our share in digital meals. Now to conclude this part here, we will speak about revenue and EBITDA on slide 15. We reached total revenues of BRL 507 million, a growth of 2.5%, 5% growth in restaurants. And specifically in Brazil, the restaurant business had a significant growth of 12%. And in the U.S., a reduction of revenue of 2% as mentioned. Let's speak about the impact of this on EBITDA. We reached BRL 38 million in the quarter, a reduction of 7% vis-a-vis the first quarter '23. If we exclude a nonrecurrent effect, we had a growth of 3% because of the impacts already mentioned. EBITDA margin reaching 7.5% and as has been mentioned, this quarter with less representiveness and has a share of 10% of our total EBITDA. In slide #17, we see the difference of performance between Brazil and the U.S.A. In Brazil, EBITDA is growing 21% and in the U.S.A., we have a reduction of 32%, which means the performance much below what was planned, but it doesn't change the pillars of our strategy and are confident focus and discipline on execution. The company entered into 2024, soundly and ready to speed up our growth. As has been mentioned on other calls, our focus continues to be to grow profitability, margins in same stores and to continue with the expansion with intelligence and discipline to capture the growth potential of our brands. I would like to pause and give the floor to Rafael Bossolani, my partner and CFO, to speak on the financial performance of IMC.

Thank you, Santoro. Good morning to all of you for those who are attending our conference call for the first quarter 24. I will continue on with the presentation, and I would like to highlight some important results that can be observed on slide #18. As Santoro has just mentioned and as I would like to underscore the operational progress of the company is aligned with a rapid advance in our transformation plan and translates into concrete results we have obtained in the last 3 years, reflecting the continuous stride of the company towards a strategic goal. Financial discipline has been a fundamental pillar and success for our sustainability of the company. We have had considerable progress since the beginning of our journey in 2021. It allows IMC to be in a very sound financial position. Operational cash flow recorded in the first quarter of '24 was slightly negative of BRL 2 million below the BRL 56 million, we recorded in the same period last year. This is due to a combination of factors. Some have already been mentioned here, the role relevance, the seasonality of the first quarter of our business and the beginning of the year somewhat challenging and some of our operations. Additionally, in the first quarter of last year of 23, we received approximately BRL 25 million as reimbursement for IRTC, a subsidy program of the U.S. government for the recovery of some companies in the post-pandemic period. And we also had a program for the lengthening of our debt last year, a period with a greater concentration of expenses with our suppliers. It's important to highlight that we have a focus on increasing our operational cash flow. It's a priority at IMC, and we will pursue this very diligently to finance the investment in the company as part of our growth strategy. And while we maintain a very responsible pace of expansion, we continue to seek out opportunities for growth and identify our relevance in the sector. I underscore that the pace of investment of the company in the creation of new stores will be directly linked to the company's operational and financial performance. So we continue to maintain discipline in terms of the expansion of equity stores, we had a growth of 7% in CapEx vis-a-vis the same period last year. We had investments of BRL 40 million during half of the year, BRL 25 million for expansion and BRL 14 million for maintenance, renovation and some strategic projects. Let's go on to slide #19 to show you the intense work that we delivered to improve the capital structure of the company. We ended the first quarter with a net debt of BRL 326 million, a drop vis-a-vis December of 2023. We have cash that comes from the sale of Pigeon Forge that we mentioned here and it's still important to mention the seasonality of our business where the beginning of the year is characterized by greater cash consumption. We recomposed the cash during the following quarters. the net debt EBITDA leverage on a positive trend, standing at 2.1x. Once again, net debt-EBITDA ratio aligned with the levels that we deem to be coherent at this point and below what we set forth in terms of covenants that was 3x. Regarding our liquidity, we ended the quarter with a cash position of BRL 199 million and a structure and the term, which is quite comfortable to make feasible our business plan. Now these results reflect a highly disciplined management and capital allocation and a focus on maintaining an appropriate liquidity level in the business. Simply to conclude, I would like to give the floor back to Santoro. We're quite confident that our priorities and our focus will enable us to have a more robust and sustainable growth. We will increase the profitability of operations and guarantee management that is in accordance with our cost and expenses. I will now return the floor to Alexandre Santoro. Thank you, Rafael, and to conclude the presentation, let's speak about our focus for the second quarter. Of course, we want to increase transactions in the stores in a profitable way and offering customers an excellent journey. These are keys in our strategy. We have great opportunities for growth, and we execute this with great discipline. We are aware of the opportunities and challenges that lie ahead, but we're very proud of the solidity and soundness of the company, the quality of our team and the soundness of our brands will doubtlessly take us ever closer to our dream, which is to be the best food platform in Brazil. With this, I would like to end the presentation and return the floor to Samanta, so that we can go on to the question-and-answer session. Thank you very much for your attention.

Well, thank you. We will now go on to the question-and-answer session for investors and analysts. [Operator Instructions]. We have a question here from Roberto Rosa question that came through the chat. I will read it here. The question is the following the sale of the unit of the U.S. carried out in the U.S. was this paid cash or is the money still coming in?

Thank you, Roberto, for the question. It's important to speak about this. Well, we saw an opportunity of monetizing that store in the U.S.A. It's a store located in Pigeon Forge in Tennessee at an amount that the company understood would make a great deal of sense. So, this was a sale of 7.5x the EBITDA of the follow-on of that store with [indiscernible] here that some of the parts of the company has a value that is much higher than what we observed at present. Now to answer your question, yes, the amount of that investment was paid cash mostly. Of course, as always a part that remains in [indiscernible] for eventual contingencies, but 90% of that amount has already been incorporated into the cash in the first quarter for the company. [Operator Instructions] Please hold while we pull for more questions. Our next question comes from [indiscernible] from Bank ABC. You may proceed, sir. Your microphone has been un-muted.

Good morning, Santoro and Bossolani. I would like to know if you could give us more color regarding the maturity of the stores that you opened last year. Well, if those stores have good revenue and profitability in accordance with what you expected for more mature stores. Another question refers to your franchise model, which is your vision going forward for KFC and Pizza Hut. If franchises could be a strategy to lighten up your results or if you're going to continue with the same mix of owned stores and franchises for the expansion of these brands.

Thank you for your two questions. Well, first of all, regarding the maturity of the stores, normally we have a ramp-up between 3 and 6 months, which is natural. What happened differently in the first quarter is that we had a very high concentration in the last week of December where we had some problems in the stores, and we had to carry out some interventions to conclude the works, for example, with an impact on our revenue from the stores. Once this was concluded, yes, they are within our plan for each of the stores. We have more different plans, and we follow up on that very closely, store by store, and they very adherent to what we had planned initially despite that impact in January that delayed the maturity curve. Regarding the franchise model, clearly, that is part of our strategy to have a mix between owned stores and franchise stores. We have a specific area of working on that focuses on capturing new franchisees and on the relationship with franchisees on follow-up and support that are part of that relationship. Roberto, we see a mix of approximately 50-50% of owned stores and franchise stores at IMC. Of course, this could have variations, but this is what happens in the ballpark, what we see for Pizza Hut, a lower number of owned stores going forward perhaps 1/3 of own stores, 2/3 of stores for franchisees. We have a very important front where we're studying new format that will enable us to have stores with a lower CapEx perhaps nationalizing the equipment that is underway. This would reduce the use of CapEx, new formats, new designs of stores, where we will have a lower CapEx and a better return. Consequently, we will be able to attract more franchisees. This is a strategy that day after day, we are following. Well, this relationship could change between quarters, but we imagine that this will be the mix KFC 50-50%, Pizza Hut 1/3, 2/3, and of course, respecting with what makes sense for the company. What do I mean by this for franchisees, we're seeking new franchisees where we can develop some areas further away from where we are. People who already have infrastructure base where we can close local or regional partners for them to develop that specific sector. So, we have that combination of the mix, the issue of new formats and the footprint where the priority are our own stores where we already have a base in regions. Where we don't have this base, of course, we will bring in new brands through franchisees. Thank you once again for the question, Roberto. I have a question from Marcelo Guillen who asked about the restructuring of Frango Assado stores on the Castelo Branco Highway, for example. Thank you for the question and the answer is, yes. I mentioned this very briefly in the presentation. We saw a very positive return. Remember that Frango Assado is a brand with more than 70 years in the market. Some stores truly needed to undergo this restructuring and the return of all of this and the ones where we already carried out the renovation. So part of our plan for 2024 depends on an enhancement of the stores we have presently. This plan is already underway from the expansion of new stores, as I mentioned. This is an important activity to restructure the existing stores. Once again, thank you for your question.

We have one more question through the chat from Rodrigo Mota, who asked about the working capital dynamic for the first quarter.

Rodrigo, thank you for the question. Now simply to begin, we're very diligent when it comes to our cash management, our management of suppliers and terms, and we have set up several programs in the company to be able to optimize our working capital and our cash cycles. We have minimum policies with minimum term for supply and much more. Now there is a natural evolution in terms of working capital at the end of the fourth quarter. We have a significant concentration of suppliers, and we have seasonality of sales because of the end of the year. We concentrate many of the work services in the last quarter, and this has already been mentioned in the company. What happened is that this disbursement usually takes place in the first quarter of the year, where we have a greater cash burn and this cash is recomposed throughout the coming quarters where we normalized our terms and our cash burn with the suppliers.

[Operator Instructions] Please hold while we poll for questions. It seems we have no further questions. So we will now end the Q&A session. I would like to return the floor to Mr. Alexandre Santoro for his closing remarks.

Well, thank you, Samantha. I would like to once again thank all of you for your attendance at the call. The last slide, as usual, shows you what you can have for lunch to try this innovation from Pizza Hut that is gold Melts. I have already guaranteed my lunch. Enjoy, have a very good day, and thank you very much. The IMC conference call ends here. We would like to thank all of you for your attendance, and have a good day.