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

Good afternoon, ladies and gentlemen. We welcome you to the IMC Conference Call to discuss the results for the Third Quarter 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 made herein are subject to risks and uncertainties that may cause these expectations not to materialize or be different than 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 the conference, we have Mr. Alexandre Santoro, CEO; and Mr. Rafael Bossolani, CFO and IRO. I give the floor to Mr. Santoro, who will begin the presentation.

Good morning, Carol and thank you very much for your attendance at IMC's Third Quarter 2024 Results Call. Before I begin to talk about the third quarter, I would like to start by reviewing our strategy on Slide #2, where we have a summary of what we've seen successfully implemented over here in the last 3 years. Three years ago, we set our big dream to turn IMC into the best food platform in Brazil and this guides us and serves as a pillar for our actions. To achieve this dream, we work with operational discipline and the innovation needed to ensure that we are not only maintaining relevance and growth in the short term, but also solidly building the future. Our mission is to deliver an exceptional customer experience, which allows us to increase both the base and the frequency of consumers in stores. IMC's great strength lies in its brands, which are not only recognized, but also admired and desired by its consumers. More importantly, these brands still have enormous growth potential which we are only just beginning to explore. Additionally, to improving the operating results, we are focused on expanding the brands in a disciplined way. Now this reinforces the relevance of the brand, creating a positive growth cycle. Throughout the presentation, you will see that although the year is below our expectations in terms of sales and the strategies and priorities remain the same. We are committed with disciplined execution and we believe we are on the right path to obtain our short-term results. Let's go to Slide #3, where we have the main highlights of the third quarter. IMC is determined ending a new quarter. We ended with a growth of 7% in EBITDA, even though the scenario was practically flat. The growth of EBITDA was driven by the good performance of our Frango Assado and Airport businesses as well as by the reduction of corporate G&A by 6.5%. Although the revenue was flat year-on-year, this is due to 2 main reasons. First, the number of stores. We closed 13 stores when compared to the same quarter last year. On the other hand, we had strong expansion of KFC, which grew 21% in turnover, but this was not sufficient to offset the loss of revenue from the closed stores. On the other hand, same-store sales was another growth driver was also flat and far below the potential of our brands. We will discuss this further ahead, but mainly, it was brought down due to the low performance of KFC and the United States. We will talk about this in greater detail through the presentation. Now to better understand the makeup of our revenue between the Slides 4 to 7, I will speak about the main drivers that move both our revenue and how it behaved at the end of the quarter. We begin on Slide #4 with number of stores. We closed with 571 stores, 48 stores more than in the third quarter '23. Growth comes basically from the evolution of KFC with an addition of 45 stores. However, this growth was negatively offset by the closure of units with higher individual sales such as the 3 stores of Frango Assado that were closed and 2 stores in the U.S., the Las Vegas and San Antonio stores. Although we have 5 stores, 3 from Frango Assado and some from the United States, the revenues are higher than KFC. We also closed 8 stores from Batata Inglesa due to performance and the catering operation in Porto Alegre ended up being closed for 6 months this year. When we compare this with the performance last year, obviously, this had an impact. We have resumed that operation at the Airport of Porto Alegre, but it did have its impact. This partly explains why the revenues were flat year-on-year. The other part of the composition of the revenue comes from same-store sales, as you can see on Slide #5. In Brazil, the growth is 3%, but in the U.S.A., a shrinking of 12%. Here in Brazil, the positive highlight were airport operations with 18% growth. The negative highlight came from KFC, which is not able to grow same-store sales over the 3 months. We will explore in greater detail this operation. Slide #6 has an important component of our revenue, the digital sales. They grew almost 60% year-on-year and account for 57% of the sales of KFC, Frango Assado and others. This demonstrates the success of the investments made over the last 3 years. Digital transformation is and continues to be a priority and we understand that this is an important level for the increase in sales and efficiency in our restaurants. Now in Slide #7, we show you the global net revenue. As I mentioned, it was basically flat year-on-year with an evolution in Brazil of 5%. Net revenue grew 5%, but there was a downturn of 6% in the U.S.A. operations. And once again, we will explain this further ahead. Now to speak about the business units. We're beginning to speak about each of our units, beginning with Pizza Hut here on Slides 8 and 9. Pizza Hut, well, it's an iconic brand, recognized and loved by the consumers, but still has opportunities for improvement, both in terms of revenue, store formats and also in terms of profitability. An important point are the digital sales. Digital sales are an important part of that business. The new Pizza Hut app has been very well received by consumers. It accounts for 14% of all delivery sales with a growth of 26% vis-a-vis the same quarter last year. Now this channel is not only improving the customer experience, offering convenience and customization, but it also contributes positively to profitability. Sales with aggregators dropped 2% when compared to the same period last year in that search for a better balance of sales and profitability. There is another important front that we have been remarking on the new occasions, new opportunities at Pizza Hut. We continue to work on expanding the product portfolio through innovation. Recently, last quarter, we launched Melts, a product that was extremely well received, and we are relaunching our thin-crust pizza and carrying out the rollout of dough with a higher number of options for consumers even for occasions such as lunch or snacks. Now all of this strengthens our product portfolio, but without losing focus on our core, which are the delicious pan pizzas that continue to be the flagship of our brand, and this will continue on. On the other hand, we have been working along with a brand to develop new formats by optimizing CapEx and OpEx with the aim of expanding the brand primarily through franchises. This approach allows us to grow more quickly and with less allocation of our own capital. We're also working with the [ AM/PM ] chain to bring Pizza Hut to the group's convenience stores. Let's speak a bit about KFC highlights on Slides 10 and 11. KFC has been making significant progress in Brazil. We already have passed the 200 store mark that will be celebrated with the first street store in the country that will happen in the next fortnight. Sales in the KFC system grew by 21% in the quarter on a solid base, which grew 16% last year. KFC has been expanding at a strong pace, having almost doubled its revenue and the number of stores in the system in the last 3 years. Probably it is one of the fastest-growing brands in Brazil. This pace of growth brings along with it a major operational challenge, which is being addressed by our teams. We have several opportunities to progress in performance and especially in the maturing of the new stores and in changing the footprint in the future with greater presence on the street and less dependence in malls. Self-service terminals have grown fivefold since the third quarter '23. Today, 100% of our stores are equipped with this device. On the other hand, as you can see in the graph, the delivery sales through aggregators fell sharply, representing BRL 8 million less equivalent to a reduction of 10%, which pulled down the brand same-store sales performance in the quarter. It was a quarter where our sales had evolution. Self-service terminals had a growth, but sales through delivery had a negative impact of 10%, meaning that our same-store sales performance was practically flat. The focus on delivery very clearly is to improve profitability, but the interruption of individual sandwich promotions along with free shipping that we had last year resulted in a significant loss of sales, much higher than what we had planned, directly impacting same-store sales. We are focused on readjusting this strategy, focusing on a greater balance between sales and profitability in order to resume growth in all of our sales channels. Another important point with regard to KFC is that we still have opportunities to redesign some of our promotions, which at the same time should increase traffic and add margin to the business. When we carry out benchmarks in comparable countries that have a mix more similar to ours, for example, the sandwiches, we see that the biggest difference in performance is precisely in the number of transactions per store. And this comes from a more aggressive offer of value achieved through a lower cost product, but maintaining the brand's unique quality standards. And that is one of our great priorities for the end of the year and especially for 2025. We are carrying out a review of our value products, which are the traffic drivers, along with the reassessment of suppliers so that we can increasingly have a better value proposition that attracts more transactions with profitability and without losing a focus on the spectacular quality that KFC has. With this, I have summarized KFC, and we'll now speak about Frango Assado on Slides 12 and 13. The third quarter of '24 was marked by important strides in the profitability of Frango Assado chains, driven by the control of costs and expenses in operations despite the negative impact of [ type days ] due to a lower incidence of holidays in 2024 when compared to 2023. During the year, we closed 3 operations due to changes in the profile of the sites that were not in line with our strategy and were not profitable. Our focus -- and this is the most important part is to enhance further the experience of our customers at Frango Assado. We have adopted some actions with important results. We began the refurbishment of some stores and we are developing new formats like Frango Assado Express besides increasing the visibility of the units and enhancing communication on highways. These are part of a broader strategy to streamline and make the stores more attractive and efficient. We are redesigning the customer experience in line with a detailed expansion plan. Another important point is digitization in Frango Assado. We have 400,000 registered customers, and it is interesting to see their behavior. They are very loyal. They come twice a month to the restaurant and they consume 40% more than our regular customers. As I mentioned, we also have self-checkout transactions that already account for 75% of total transactions of our checkout in Frango Assado. Now to conclude, another very important point is the issue of innovation. We are also advancing in core products with a focus on innovation. And as an example, we have developed semolina bread with pepperoni. We have a muffin made with semolina bread, cheese bread and a chicken fritter that are frozen to offer options to the customers so that they can consume at home. So we're more enthusiastic day after day, more confident with the potential of growth of this business, Frango Assado. Going to Slides 14 and 15, let's speak about the other domestic brands that have had a good performance with a growth of 10% in same-store sales, emphasizing the airport operations and the reopening of the Salgado Filho Airport in Porto Alegre after having been closed for 6 months. We have made progress in the service and operation of these brands, which has been translated into better margins. Although these businesses are not a focus for expansion at the moment, they are important and continue to contribute positively to the results as a whole. Now to conclude the business units, we'll speak about the U.S.A. in Slides 16 and 17. Now the U.S.A. fell short in terms of the performance we're used to delivering there because of some factors. I will mention 4 of the main ones. First, the closure of 2 operations with a relevant weight in terms of reduction of revenue, the operation of Las Vegas that we remarked upon in the last call. We also decided to close the operation in San Antonio, Texas, a store with low performance and a very high cost of occupation. We have a plan. We have been opening stores in the last 1.5 years that should be offsetting the exit of the other stores, but this is not happening. New York, Miami and Boston stores have a longer maturation curve than we had imagined, but they do have the potential of more than offsetting the closure of these operations. We had a typical third quarter. The comparison base was very strong. In '23, we had a nonrecurring movement in our stores and Margaritaville LS brands, well, the owner, Jimmy Buffett a singer passed away, it created disproportional traffic in the stores. People are going to the stores to render homage. So the comparison base was atypical. And finally, we could have performed better and I will speak about our actions. But the scenario in the United States is a tough one. For many quarters, I had not seen a quarter like this one where all of the large brands in the Food segment had negative performances in the United States. And of course, our case was not different. We have several actions underway with a focus on increasing flow in our stores, adapting our product price and entertainment offers, evidently depending on the reality of each store. Now I have conveyed to you a view of each of our business units, the behavior of each unit. On Slide 18, we have the conclusion of the first part of the presentation. We end the quarter with an EBITDA of BRL 87 million. And we had some nonrecurring items last year and this year, but we grew 7%. Now if you exclude this recurring EBITDA was an increase of 10%. And we had very positive performances in Frango Assado, very positive in airports and a reduction in our corporate G&A of 6.5%. With this, I will give the floor to my partner and CFO, Rafael Bossolani, to give you more details on IMC's financial performance.

Well, thank you, Santoro. Good day to all of you. I would like to thank all of you for your attendance at our earnings call for the third quarter 2024. Well, initially, I highlight the role of our financial discipline to build a resilient and sound IMC. Since the beginning of our trajectory in 2001, we have been committed to a very stringent financial management. And nowadays, we see the results of this very careful and responsible management. The results of this quarter represent significant steps in our trajectory for evolution and this will allow us to attain our financial and strategic goals, as you can see on Slide 19. We continue to enhance our activity to overcome the natural challenges of this journey that we have seen since 2021 to have a good pace. Operating cash flow was BRL 99.2 million, representing a growth of 27.7% vis-a-vis the same period last year. This result was driven by the increase in EBITDA with a management of costs and expenses, as mentioned previously, and efficient management of working capital and a payment of some fiscal taxes from previous periods. Cash generation continues to grow in a consistent way, as you can see in the slide, and this reinforces our commitment of guaranteeing the necessary resources to fund the growth of the company in a sustainable way. We have a very selective vision on investments. Investments in the store grew 15.8% and was reduced in 10% when compared to the 9 months of the year, reflecting our focus on making the existing operations profitable and aligning our performance to the financial results of the company. We invested BRL 36.2 million, of these, BRL 21.5 million in store expansion and BRL 14.7 million in maintenance, refurbishment and some strategic projects geared especially to technology. I mentioned an example, a change in our cash system. After the investments in CapEx, we had a free cash flow of BRL 62.9 million with an increase of 32.5% when compared to the third quarter '23. Now when we go to the next Slide #20, I would like to underscore the importance of our capital structure to ensure the feasibility of IMC's business plans. Gross debt has remained stable vis-a-vis the previous quarter, BRL 527 million. Of these, 87% are classified as long-term debt. Net debt increased 2% to BRL 351 million. The leverage of the company continues to be stable. This quarter, it stands at 2.3x net debt/EBITDA, aligned with the levels that we understand to be coherent at this moment and below the covenants for the period that were 3x. Regarding our liquidity, the quarter ended with BRL 176 million in cash and a comfortable term for the debt to make feasible our business plan. These results are a reflection of the discipline we have in capital allocation and the focus on the right levels that are adequate for our business. Now to conclude, I would like to underscore that we will continue to focus on maximizing our cash generation, a priority in the company and that we will be more selective in our investments so as to prioritize to the utmost the resources that we deliver, guaranteeing that each investment will be carefully geared to obtain the return expected. Thank you for your attention. I return the floor to Santoro.

Well, with this, we get to the last side of the presentation, increasing in-store transactions in a cost-effective manner and consistently delivering an excellent customer service remain key parts of our strategy. We have many opportunities for growth, but we will execute this plan with a great deal of discipline in terms of returns and financial availability. For the year 2025, our priority will be cash generation with a focus on the maturity of investments made so far and the constant operational evolution of our businesses. We are aware of the challenges and opportunities that still lie ahead, but we are confident about the progress we have made so far and the path we're on. The consistency of the strategy, the strength of the brands and the quality of the team and franchises will take us ever closer to our big dream, which is to be the best food service platform in Brazil. With this, I would like to end the presentation and return the floor to Carol, so we can go on to the question-and-answer session.

[Operator Instructions] Well, we have received a question through the chat from Christian. I would like to get more color on the investments that are underway.

Christian, thank you for the question. IMC is a multi-brand platform, which means that part of our strategy is to periodically assess our portfolio. As you know and as you follow up on our investment cycle, this has already happened in the last 3 years. But this does not mean that we're going to put aside good opportunities that have synergy with our vision. We're quite diligent in terms of this and we're always assessing alternatives that could add value to the company. Nowadays, we have a portfolio that is much closer to what is ideal compared to when we got to the company. We have invested in Central America, Panama, Colombia, some in Brazil, some in the U.S.A. But we understand that there are still opportunities for our business when we assess our portfolio.

[Operator Instructions] We have another question here from [indiscernible] an individual person.

Based on the performance evolution of the company, is there a forecast of when IMC will pay out dividends for its shareholders?

Thank you for the question. This is Santoro. We received the question during the last call, and it is important. As we mentioned during this presentation, the company is under growth. We have iconic brands, brands with enormous growth potential. When we look at our business plan for the coming 2 years, we imagine the opportunity of investing in the expansion of the brand as being the best way of allocating capital. This is what will give shareholders a greater return. When we look at the short run, therefore, this is our strategy to deleverage the company, ensure that it will grow even further through businesses that will bring us a greater return.

The next question comes from [ Roberto Dumke ] from ABC Bank. [Operator Instructions] We have received another question through the chat from [ Jose Carlos ]. To speak more about leverage, I understand that the company covenant is up 3x, but which is the company target in the mid and long term?

Now, Jose Carlos, thank you for the question. Now in terms of our level of leverage, I would like to underscore that the 3x covenant represents a limit in terms of our debt, but not a limitation in terms of operations. We have been able to reduce the leverage consistently in the last 3 years, always remaining below that level, which means we would still have room to operate at higher leverage levels. But one of our strategic priorities is financial discipline. The in-house goal that has to be balanced to allow the company to grow in a sustainable way without great exposure to risk is to maintain the leverage at 2x or 2.5x with minor variations due to seasonality of investments and market conditions. It could oscillate but within that range. As mentioned, we have a highly selective stand when it comes to investments, prioritizing the preservation of our cash and the financial situation is essential to sustain our company, our growth and to protect our financial health in the mid and long run.

We have a question in [ queue ]. We have 2 questions that will be answered, one by Roberto Dumke from ABC Bank, who asks about brands that have less synergy in the portfolio and ask about the mix of owned stores and franchises and what we can expect in terms of CapEx for coming years. We have a question from [ Anna Clara ] a private investor, who asks the following. As you have said here that your priority is profitable operation for existing operation, are you going to slow down in terms of expansion? I would like an explanation on this as this was the last comment in the presentation.

To address the questions from Roberto and Anna, thank you for the question. Our focus now is to make the existing operations profitable. We come from a rapid and aggressive expansion of KFC. We made significant investments in the U.S.A., and we see the potential for these stores to have a better performance. The priority is to optimize the performance of the assets that we already have and focus on cash generation for the coming year. This doesn't mean we won't have any expansion or investment, this is a strategy to maintain our commitment with growth, but with great discipline as we have always worked. Two examples of investments that are happening presently and that we will see next year, the drive-through of KFC that you will see in the next fortnight and a new unit of Frango Assado in the first quarter of 2025. The conversion in Guararema on [indiscernible] highway that will become a Frango Assado. The works are taking place presently. Now clearly, the expansion through franchises is one of our pillars in the coming year, the we will be disproportional. What do I mean by this? We had been opening more franchises in the Pizza Hut business compared to our own stores. We would like to speed up this process for KFC the coming year. The strategy for franchises is to take advantage of the strength that we have with our partners, and we can continue to expand the business through the partnerships that we have, principally with franchisees. This allows us to preserve our capital and ensures a balanced growth with profitability. Therefore, the objective answer is that presently, we're planning 2025 with this tribe of a focus on cash generation, revisiting our investments and prioritizing franchises for Pizza Hut and KFC without, of course, halting the expansion process for the company.

Very well. We have another question from [ Gabriel Oliveira ]

In other operational revenues, there is an amount of reversal of contingencies. If you could explain this further.

Thank you, Gabriel. In the second quarter of this year, we had a relevant reversal because of some contingencies that had been mapped in 2019 when we acquired the license to operate Pizza Hut and KFC. Well, they had all kinds of different natures, labor contingencies and others that did not materialize. Therefore, this provision was written off our balance in the second quarter. Now this quarter, we don't have any reversal or something similar that could impact our results.

[Operator Instructions] We have a last question here from [indiscernible]. He asked if it's not necessary to change the direction in terms of our priorities.

I'm trying to understand the question as indebtedness stands at 2.3x perhaps it would be good to go back and obtain profit. Perhaps you should bring down new brands to Brazil. Now in essence, it's the type of question that the company should generate profit in all of its segments. Now to reinforce everything I said during the presentation, our goal here is to move forward in the performance and the results of all of the businesses that we have here to bring down another brand to our portfolio is something that we are not planning. We have very strong brands with significant potential and that still have a result that is below their true performance. So the focus is to ensure the business will evolve with the brands it already has. In Pizza Hut, we have been working on that. One of the great fronts is to revisit the design and the format of the store through CapEx and OpEx to have a more competitive format where we will have a more rapid return on investment and attract potential franchisees. This is a way that we could grow the Pizza Hut business in Brazil, a growth through franchisees.

The question-and-answer session has been concluded. We will return the floor to Alexandre Santoro, the CEO, for the closing remarks.

Thank you all very much for your questions. It's always wonderful to have this participation in calls to go into greater details [ are at your disposal you can change points for product at this point ] for a cup of coffee of whatever. Have a good holiday and have an excellent weekend.

The IMC conference call ends here. We thank you very much for your attendance. Have a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]