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

Good morning, ladies and gentlemen, and welcome to IMC's conference call to discuss the results for the second quarter of 2024. This conference call is being recorded, and the presentation is available on the company's website.[Operator Instructions] Before proceeding, please bear in mind that the forward-looking statements are subject to risks and uncertainties, which may cause these expectations not to materialize or be different than those expected. These forward-looking statements speak only as of the date they are set forth and the company undertakes no obligation to update them. Present at this conference, we have Mr. Alexandre Santoro, CEO; and Mr. Rafael Bossolani, CFO and IRO of IMC. I will now turn the floor over to Mr. Santoro, who will begin the presentation.

Well, thank you, [ Grazielle ]. Good morning, and thank you all very much for attending IMC's Second Quarter 2020 Conference Call. I hope you and your families are well. Today, we will have the opportunity to speak in detail about the performance of the quarter, which was challenging, but also full of learnings and important advances. Before we get into the specifics of this quarter, it is worth starting with Slide #2 where we have a summary of IMC's strategy towards the big dream of being the best food service platform in Brazil. 3 years ago, we set forth our big dream to transform IMC into the best food service platform in Brazil. And this guides us every day and serves as a north for all of our actions. To achieve this dream, we have defined a clear strategy based on essential pillars that underpin this transformation. We approach balances and operational discipline with the innovation needed to ensure that we are not only maintaining relevance and growth in the short term, but that we're also building our future with solidity. Our mission is to provide an excellent customer service, which allows us to increase both the base and the frequency of consumers in stores. IMC's great stream lies in its brands, which are not only recognized but also admired and desired by its consumers. And most importantly, these brands still have that growth potential that we're only just beginning to exploit to turn this vision into reality. We have focused on a few pillars. In particular, people and culture. The team is the backbone of IMC. We invest heavily in developing a team that is aligned to deliver both short- and long-term objectives. The corporate team is much closer to the field and more sensitive to what happens on the front line. As I often say here, the head office is in practice a support center for the restaurants, a culture change that is neither simple nor obvious, but which is necessary and continues to grow significantly. Technology and operational efficiency. Technology, the key component for efficiency and for improving the customer experience and making life easier in our field team. We have progress, but we still have a big challenge. Examples are Pizza Hut proprietary app, which offers a personal experience and the changes that we're making in the restaurants migrating to a single platform for all brands. To conclude this slide, it's important to speak about financial discipline. The evolution of financial management is evident. Today, we have a controlled level of debt and a debt profile that is more appropriate to our current context. We have successfully completed the divestment of operations in Panama and Colombia, allowing us to focus on areas with greater growth potential. We continue to work in -- to be increasingly efficient in capital allocation, ensuring that we are investing where we can generate the greatest return. In addition to organizing the health and improving the operating results, we are focused on expanding the brand in a disciplined manner. This virtuous cycle of expansion further reinforces the relevance of the brand generating a new cycle of growth. Throughout the presentation, you will see that despite a challenging start to the year and below expectations in terms of sales, our strategies and priorities remain the same. We remain committed to discipline and execution and we believe we are on track to achieve our long-term objectives. Let's go on to Slide #3. IMC closes the quarter in a sound way maintaining a net debt-EBITDA leverage of 2.1x, although we faced significant challenges. Despite this, we have grown recurring EBITDA by 10%, reaching BRL 66 million in the quarter, even with revenues virtually stable compared to the previous year. This quarter was a quarter of important developments, especially with regard to innovation and the growth of digital sales. We saw a series of innovations impacting counter-sell at both Pizza Hut and KFC. Digital sales meanwhile grew 60% year-on-year. In addition, we kept cost and expenses under control and saw progress in the supply area and in the central kitchen, allowing us to optimize promotions and improve both traffic and margins throughout the quarter. However, it is important to note that despite these developments, the quarter was challenging in terms of sales. We underperformed with flat sales compared to the previous year. But this snapshot of the quarter doesn't capture the picture of what happened month after month. We had a number of external factors with a strong impact on sales as well as important lessons and in-house issues along the way. I'll highlight some of these points. Regarding the external impacts in April, we faced a significant disruption in our supply chain, which forced us to close some stores temporarily and limited service capacity and others. We went from a positive same-store sales evolution of approximately 6% in March to a negative same-store sales of 10% in April. We managed to rectify the situation in April. And since then, we have been operating with stability, implementing contingency plans to prevent anything similar from happening again. Then in May, of course, we were impacted by the flood trap Rio Grande do Sul, which severely affected the catering business at the Porto Alegre Airport and some of the KFC-owned stores in the region, where we operate around 10% of our own units for that brand. Now despite these impacts, we saw a recovery in sales in May and June, with a growth of same-store sales, which was minus 10% in April, closing the quarter flat, a little above [indiscernible] which means a significant recovery to offset that minus 10%, which happened in April. Now internal learnings, this is what we control. We had some important learnings in areas under our control. One example was the delivery strategy and an important example, therefore, that we are revisiting and that did not work was our delivery strategy, especially at KFC in an attempt to improve profitability, and we had been doing that. Perhaps we overdid it by canceling free shipment promotions and individual compounds, which resulted in a significant loss of sales in this channel above what we had planned. The success we had in increasing over-the-counter sales, which was very positive, was negatively offset by a drop in delivery sales. This situation is being redressed and the expectation to return to profitability -- this is important, will happen over the coming months. Resilience and focus, combined with the commitment of our franchisees, partners, and employees give us confidence in the assertiveness of our strategy. Well, with this, let's now take a deeper dive into the performance of the main businesses starting perhaps with Pizza Hut. We are now going to Slide #4 and #5. Pizza Hut clearly is an iconic brand recognized and loved by consumers, but still with a great deal of room for improvement, both in terms of revenue, profitability and format expansion. As mentioned, Pizza Hut's operations were heavily impacted through April due to the supply disruption, which also affected KFC. This problem resulted in a significant loss of sales during the period. Notwithstanding these challenges, we managed to record a 3% growth in same-store sales and 6% in total system sales. Our system per pizza had reached BRL 153 million in the quarter. Digital sales continue to be an important pillar of the growth strategy, Pizza Hut's new app was very well received by consumers and already accounts for 16% of all delivery sales. This channel not only improves the customers' experience by offering greater convenience and personalization, but also contributes positively to profitability by the average cost of delivery, the take rate. Now in terms of product innovation, we have made great strides. In the case of Pizza Hut, we recently launched Melts besides the thin crust pizza and the dough rollout, which further expands the options for consumers. These innovations strengthen the brand's presence in various consumer occasions without losing focus on the core, the delicious pan pizza, which continue to be the brand's flagship product and will continue to be so. When we look at the expansion of this business, we have been working together with young brands to deliver new formats and optimize CapEx with the aim of expanding the brand primarily through franchising. This approach allows us to go faster and with less exposure to equity, which is fundamental to our strategy. We go on to KFC, Slide 6 and 7. We are excited about the evolution of the brand in Brazil. We have reached the important milestone of 200 stores. Sales in the KFC system grew 9% in the quarter on an already sound base, which has grown 18% in the second quarter last year. We spoke about the disruption in supply and the impacts of Rio Grande do Sul with a negative impact in our growth, but digital sales continue to grow significantly. What does this mean? We have a significant evolution in the use of self-checkout terminal. And because of this, a reduction in the deliveries with aggregators, despite this, our digital sales grow 100% of the stores have self-checkout terminal. And in those stores, the sales carried out through terminals already represent almost half of the total sales, contributing to an increase of 7% in the average ticket. Regarding the same-store sales, besides the -- well, we had the impacts I mentioned before. Despite the negative impact in April, we ended the quarter at minus 1%, with a recovery in May and June. Another way of speaking about same-store sales the size of factors mentioned is that there is a positive evolution in the counter that was negatively impacted by an almost double-digit reduction in delivery sales through aggregators. We saw this important evolution in the counter because of the evolutions I mentioned, but with a negative impact besides the external factors due to the decrease in sales through aggregators. Now to conclude the issue of sales through aggregators, although our focus is to improve profitability this interruption of individual promotions and withdrawing free shipments led to a greater loss in sales than anticipated. We are focused on readjusting this strategy and to have a better balance between sales and profitability. We will now speak about our Frango Assado, our beloved Frango Assado on Slide 8, 9 and 10. In the month of April, we had a situation that differs from Pizza and KFC. The performance was strongly impacted by the calendar compared to the same period last year. The month of April was atypical. In 2023, we had 3 public holidays, while in 2024, we have none. This difference led to a significant reduction in April's comparable sales. In May and June, we had significant recovery in both sales and profitability, partially offsetting the loss in April. We're also quite focused on allocating capital, not only on the expansion plan, but on the renovation of the main stores and development of new formats as Frango Assado expressed. Besides increasing visibility of the units on highways, it is part of a broader strategy to offer a better experience to our customers. We are fully redesigning the customer experience aligned with this expansion plan. When it comes to digital sales, we have significant strides. Frango Assado at present has 350,000 registered customers with high loyalty measured by recurrent 2 visits a month. And through the self-checkout, this represents 60% of our sales, helping us in expediting the exit of the customers and allowing them to pay their bills faster, which enables us to better manage the lines. We also had advances in the core products, innovations with different types of bread, coxinha and the chicken skewers. Now let's speak about the U.S.A. We now go on to Slide 11 and 12. It was a quarter below the potential of the team and the strength of the brand. In the U.S.A., we had a challenging second quarter with flat same-store sales and an 18% drop in the total restaurant revenue. Now part of this drop of 18% is due to 2 effects. We made the decision of selling Pigeon Forge at Tennessee for $13 million in February. This represents 15% of the present-day market value of IMC, and we had the close of operations in -- of the store in Las Vegas. We did not renew the lease of the Las Vegas store, replacing the present-day concept with Margaritaville, with an option of fine dining, the combination of this generated a reduction of 18% in the total restaurant sales in the quarter. On the other hand, we have new stores in New York, Atlanta, Miami, and Boston that are still maturing. Given the strategic location of these units, we expect them to help reduce the seasonality of the business and offset the departure of Pigeon Forge in Tennessee and the non-renewal of the Las Vegas store. With this, I close this balance of performance by business unit, and we now go to the end of the first part of the presentation where we will speak about the total figures on Slide 13. We have 565 stores, 41 more than in the second quarter of '23, driven mainly by KFC's strong growth. Compared to last year's close, the adjustment in the number of stores reflects the closure of underperforming units, a strategic decision focused on profitability and which does not alter the expansion strategy for 2024. We have not included the stores from discontinuing operations, which totaled 30 units. We will continue to be disciplined when making investments only always aiming for the best return in capital allocated with stringent discipline regarding operating cash generation through finance expansion. On Slide 14, a few figures on sales. BRL 212 million for digital sales, a growth of 58% vis-a-vis the second quarter of '23. The digital transformation is a priority, and we understand that we still have a great deal to evolve and to continue to increase the share of digital media and our total sales. Now the conclusion of all of these movements is on Slide 15. Well skip that, go to Slide 16. At the end of the quarter, we reached total revenue of BRL 571 million, an increase of 2% in Brazil and a decrease of 2.5% in U.S.A. operations. The reduction of the U.S.A. in dollars was 8%. Well, 2.5% due to the exchange rate. And as all of this has an impact on our bottom line, we reached an adjusted EBITDA of BRL 113 million this quarter. Of this total, BRL 66 million was a recurring result, an increase of 10% compared to the same period last year. When we look at total EBITDA, we had a growth of 38% due to the prescription of non-materialized contingencies, which are not recurring. On Slide 18, visually, you see the impact of the United States on the quarterly results with a reduction in total EBITDA. And in recurring EBITDA in Brazil, operating EBITDA grew from BRL 9 million to BRL 23 million, an important development in a challenging quarter. Finally, the company remained solid and ready to accelerate growth. This result confirms the resilience, not only of the business but also of our team. With this, I'd like to hand the floor over to Rafael Bossolani, the CFO and my partner, to give you more details about IMC's financial performance. Rafael, please.

Thank you, Santoro. Good morning to everybody, and thank you for attending our conference call for the second quarter of 2024. Financial discipline has been a fundamental pillar for the success and sustainability of IMC. And this front has evolved significantly since the beginning of our journey in 2021, allowing IMC to be an advantage of financial situation. I would like to point out some of the main financial results that show our progress towards our strategic objectives, our financial objectives, and you can see them on Slide #19. As you see, operating cash generation for the company in the second quarter was BRL 70.6 million, a growth of 97.5% vis-a-vis the same period last year. Now this result was driven by the increase in EBITDA with a reversion of the contingencies that were mentioned previously without a cash effect and offset by efficient management of working capital and the monetization of some tax credits for previous periods. It's important to highlight the focus that we have to increase the operating cash flow, which is a priority at IMC and something we will continue to pursue very diligently in the company to fund the investments we would like to make. As part of our growth strategy, while we maintain a responsible pace of growth focused on the existing operations, we still try to identify growth opportunities and enhance our relevance in this market sector. The pace of investment in the construction of new stores is intrinsically connected to the financial and operating results of the company. So we continue to maintain our discipline in expansion investments for our own stores. We have reduced 46% vis-a-vis the second quarter of '23. But this is due to a different schedule per store openings. During the semester, we had BRL 21.5 million in CapEx and BRL 18.5 million devoted to reforms maintenance and strategic projects, which mainly relate to technological initiatives. Now after these investments in CapEx, we had EUR 42.1 million cash generation, fourfold above what we saw in 2023. Now to continue on with the next Slide #20, I would like to underscore the importance of our capital structure to make our business plan feasible and sustainable. Gross debt of the company maintained its position vis-a-vis the previous quarter, BRL 26 million. Net debt increased about 2% to BRL 344 million. The leverage, as you can see, is on a positive trend, standing at 2.1x. Net debt-EBITDA aligned with the levels that we believe to be consistent and below the rates set forth by the covenant that was 3x. Regarding our liquidity, we have a cash position of BRL 189 million and a structure and term of the debt that is very comfortable and will make feasible, I'm sorry, our business plan. Now these results reflect a highly disciplined structure in our capital allocation and a focus on maintaining the liquidity that is appropriate for our business. To conclude, I would like to say that we're still focused on maximizing cash generation, enhancing the profitability of our operations, and of course, ensuring efficiency of our costs and expenses. Thank you for your attention, and I will return the floor to Alexandre.

Very well. We get to our last slide where I would like to underscore some important points before going on to questions and answers. Our strategy has not changed. The increase of transactions in the stores in a profitable way to continue to deliver a wonderful experience. So the customer continues to be the core of our strategy. We have several opportunities for growth, and we're going to execute based on this. We are aware of the challenges and opportunities that lie for us. But we're confident with the evolution and soundness of the company and confident in terms of the path we are following. The strong strategies, the strength of our brands, and the team that we have will bring us ever closer to our big dream that is to be the best food service platform in Brazil. With this, I would like to end the presentation, and I return the floor to the operator so we can go on to the question-and-answer session.

Thank you. We will now go on to the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from [ Victor Hook ] from [indiscernible] Capital. [Operator Instructions]

Alexandre, you remarked that you ended up having some store closures and that you had a disruption in logistics. If you could explain to us what happened. A second question, you spoke about the closure of your restaurants in Las Vegas and that recently, you had openings of other restaurants in New York, Miami, Boston, and so forth. If you could remark on the date of opening of these other stores and your expectations for their maturity, and if you have other types of restaurants with that type of contract where you have a partnership with another player and that perhaps a contract could be ended.

Well, Victor, thank you for your questions. I will begin with the question of the logistics disruption and explain what happened. The problem is focused on a logistics operator that has a distribution center that faced a serious problem when migrating from one center to the other. There was a problem with people, with systems, versus is unacceptable, but this is the true situation. Because of this, the products did not reach the stores, they came incomplete and with a delay. Some stores had to close down. Others offered a limited mix. This was a significant crisis in-house and we went to the distribution center to speed up the correction of the problem. This evolved in April, we began May without the problem. But of course, there was an impact in our results because of April, especially because April was a month where we had made important bets. We launched meats in KFC, melts in March. We had several campaigns to enhance ourselves in April. And the sales ended up being somewhat curtailed or reduced. And this is basically what happened, and by working very closely, we continue debating this with the personnel. We do have a contingency plan for a backup distribution center, which gives us confidence this problem will not happen again. Regarding the U.S.A., we do not have anything in the short term. That is to say an outlook to have another store, nothing similar to what happened in Las Vegas. Quite the contrary, we begin with enormous anticipation before we obtain a contract. There's nothing maturing in the next 2 years. And the contracts that will mature will do so in the next 3 or 4 years. And we have practically agreed upon a renewal. But Las Vegas gave us a bit more work. I can give you more color about Las Vegas to clarify what happened there. That network and Caesars was sold to a group that has a strategy where they will sell the hotel with our restaurant is allocated. They were not able to proceed with the sale. They decided to begin a renovation to enhance the positioning of the hotel and the -- well, they took the decision to change the profile of the store to have a more high-end restaurant, fine dining store and not what we offer. We attempted to reach an agreement with this group. We're unable to do so. And in the short and mid term, there is no contract maturity similar to this. And we have anticipated conversations with other partners to carry out these renovations with quite a bit of anticipation. Our stores in New York have been there for somewhat more than 2 years. Newer stores are in Miami and Boston. In Miami, we opened a store 3 months ago in April, May of this year. Just a few months ago. The Atlanta stores are -- have 1 year. So New York with more than 2 years and the other stores with 1 year, Miami, Tampa, and for some months, a restaurant in Boston. What happened with all these stores? In the U.S.A., in generally, our stores, and I'm sure you follow up on that market, it was a typical quarter for all sectors, for all restaurants, casual dining with a decrease in store traffic. This is what we saw happening. Competition, and of course, the financial availability of Americans in general. Obviously, this poses an additional challenge for us, especially in those stores that are newer stores. But we're quite confident. We have a surprising appeal. There is a great deal of work that we have to carry out. Instead of an adverse scenario, we see traffic increasing, and we have been able to enhance our share and results in those stores. I hope to have fully answered your question.

[Operator Instructions] Yes, we do have a question from [ Matteo ] [indiscernible]

I would like to know if the company intends to bring down other brands to Brazil to increase their profitability and margins.

Thank you for the question. We don't have a plan like that. We do have a business portfolio with very interesting brands and with high potential that we can explore. Now Matteo, if you look at our history in the last 2 years, we left some of the operations outside of the country because of a reason of focus. We can use our time, capital and resources better by further developing the businesses we have as part of our portfolio.

[Operator Instructions] Our next question comes from [ Alex Junior ]. You can unmute your microphone and proceed with your question. Alex Junior?

Good afternoon. Well, good day, actually. Can you hear me?

Yes, yes. You can continue with your question.

When we hear you speaking about your company's strategy, expansion and costs, we see this reflected in the figures. Now when we look at the breakdown of expenses in the first half of the year, there was an increase of 10% in expenses with advertising and marketing. And we see that the revenue grew a little more than 1%. As you mentioned at the beginning, the results were somewhat below expectations with the increase in terms of marketing and advertising expenses. I would like to hear from you if you have a strategy relating to the company marketing for the group as a whole to face the other competitors in the market.

Well, thank you for your question, Junior. A very important point. What happened and I glimpsed over that very quickly in the presentation. Marketing expenses are not necessarily linear. Sometimes we make decisions to close contracts and there may be a mismatch in some months between the expenses and the activity we're making. We have a corporate area that has that intelligence in allocation and the purchase of media. More specifically, Junior, the best way to explain this is that this mismatch happened in April. We had 2 important launches. We had Melts and the KFC cubes. We already had the marketing campaign for those 2 products at Pizza Hut and KFC. Upon facing that disruption, we had a drop in sales. We were able to work with contingencies for some of those expenses in other cases. This was not possible. So it was a very specific problem that mismatch growth of revenues and allocation of marketing expenses.

[Operator Instructions] Our next question comes from [ Leandro Lima ] Very well, you can proceed. Leandro Lima, you can unmute your microphone and proceed with your question. Once again, Mr. Lima, you can unmute your microphone and continue with your question. Our next question comes from [ Jonathan Oliveira ].

Good morning. Can you hear me?

Yes, we can. You can continue.

I was taking a look at the figures. I'm looking at the EBITDA, the return on investment. I would like to know if you have an outlook for the payout of dividends.

Hello, Jonathan. This is Rafael. Thank you for your question. At this point in time, the company has focused on enhancing operating cash generation to finance the company expansion and the strategic projects that we have mapped out to generate value in the mid and long term. So along those lines, we don't have a forecast for paying out dividends or any other type of equity at this point in time.

[Operator Instructions] We have a question from [ Joao ] who would like to know about the outlooks and objectives you are pursuing for the main efficiency indicators.

You mentioned dual I'm going to speak about the main indicators. I think you can see the main indicators in the presentation. They are the more relevant. We don't offer guidance going forward, but we are working on same-store sales, a very relevant indicator in this business. We have a high operating leverage. So there is a cost to open a restaurant, the people, the rent. It's almost a fixed cost. And when you're able to grow your revenue, you dilute these costs. Most of them once again, are reverted to same-store sales. We do have a plan to continue growing above and beyond inflation throughout the year. This will be a straight-line growth. Some quarters, the growth will be higher. Others lower, but through these indicators, we can build the temperature of the business, which is very relevant. There are several other indicators as part of the store profitability. The cost of merchandise sold an important indicator, the cost of personnel. And of course, the EBITDA, which are the results within the store itself. Now if we take on a more macro view for IMC, operating cash generation at present is the most important indicator that we're focused on. And it is through this that we can fund our expansion and build this business going forward. We have a long-term vision. We're all here for the long term. And the best use of our capital is to invest in these brands that do have enormous potential. But for the investment, we need to generate cash. Once again, to simplify my answer, operating cash generation, along with sales, I would say, are our main 2 indicators.

[Operator Instructions] We have a question from [ Mario Brock Junior], who wants to know if as part of the company's strategy, we have restaurants that will undergo closure or if they will be modified.

Well, this is a constant exercise especially when we speak about reform modifications. We have an enormous potential in the KFC, Pizza Hut stores, and mainly Frango Assado, after we carry out a renovation. So there are investments to be made in enhancing our present-day park. There's another action that we follow up on monthly, the dispersion between the stores, the stores with a better performance. And in a large system, of course, you have stores that are underperforming. For those who have the worst performance, we separate them in groups. There's a group that may not be performing for a timely problem, maintenance personnel, or a onetime issue. And we have stores where we have had a change in flow. And after the pandemic, some shopping malls used to have significant traffic in the past that this traffic has been reduced and compromises the performance of some stores. And we have an idea of what we can renegotiate the lease or the limit. And we finally come to the conclusion that it's not worthwhile keeping a store. It's work that we do with the retail, not only with restaurants, it's a constant exercise to revise our portfolio.

Mario Brock Junior has asked a second question. Do you understand the need for a follow-on this year or the coming year to maintain your expansion?

Mario, we have mentioned here and that financial discipline is one of the company's strategic pillars. We have maintained the leverage of the company aligned with the levels that we deem to be sound and that will allow us sufficient liquidity to comply with our financial and strategic objectives. We don't intend to carry out any follow-on along these lines. And the expansion of the company is directly connected to the performance in operating and financial enhancement of the company. Thank you.

Our next question comes from [indiscernible] from [ BC Bank ].

Santoro, Bossolani, perhaps you could give us more color regarding the reversion that you had this quarter in terms of the MFA fines for Pizza Hut. And if you could refer to the logic of your tax credits. We see that they have appeared positively in several quarters. Thank you. Those are my questions.

Roberto, thank you for the questions. The company, as you will know, we have a master franchise for the both brands, KFC and Pizza Hut. This gives us rights and obligations. We just carried out an important renegotiation with Pizza Hut for the coming 3 years. And with this, we were able to eliminate those penalties that they foresaw in the contract. So this was clearly reverted and we had no expenses on that front. Now the second question regarding tax credit. The company is quite active in tax optimization. We're always seeking opportunities to optimize that front. And this is how we have been able to work with legal and accounting security with the right auditing and to carry out these compensations of tax credits that we took in previous years. And with this, we have been able to monetize that type of initiative.

[Operator Instructions] The question-and-answer session ends here. We will return the floor to the company's CEO, Mr. Alexandre Santoro for his closing remarks.

Well, thank you, Grazielle. Once again, I would like to thank all of you for your attendance, especially thank you for the questions. It's always good to be able to interact, go into more details and clarifications where we're in a call. Thank you, all, for that. And on the last slide, as usual, it's almost lunchtime. So I will tell you this incredible promotion that we're doing only for August, carried out in partnership with Sadia, it's called You Have a Match. You can choose 2 of these 6 options for only BRL 19.90. This is only for August. Make the most of it and have a good day.

The IMC conference call ends here. We would like to thank all of you for your participation. Have a good day.