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

Good morning, ladies and gentlemen. Welcome to the IMC teleconference to disclose the results of the first quarter of 2025. This teleconference is being recorded, and the presentation is available at the company's website. [Operator Instructions] Before we proceed any further, we would like to let you know that any predictions for future events are subject to risks and uncertainties, which may cause such expectations to not come to fruition or to be different from the estimations. These predictions only have to do with the date that they are issued and the company is not obliged to update them. In this conference, we have Mr. Alexandre Santoro, CEO at IMC; and Mrs. Natalia Lacava, CFO at IMC. At this moment, I would like to hand it over to Mr. Santoro, who will begin the presentation. Mr. Santoro, you may proceed, sir.

Thank you, Grazieli, and good morning. Thank you so much, everyone, for being present here in this disclosures call for the first quarter of 2025 for IMC. So, I would like to begin this call by welcoming Natalia Lacava, my partner and CFO. She's here with me, and we will conduct this presentation in tandem. Of course, we have a very tight schedule at IMC from now on, and I'm sure that Natalia and IMG will add quite a bit to our team. We begin the year with a strategic movement of high impact for the future of IMC. We signed the JV agreement with KFC, which is an important step to reduce our leveraging and add value to our shareholders. And the conclusion is expected to come in the next few months in 2025. We are firm in our execution, making strides in Brazil that have offsetted a very challenging scenario in the United States in the beginning of the year. We continue to be focused on the development of our operations, capturing expansion opportunities, always with an eye to financial discipline, which is one of the main underpinnings of this movement we're making at IMC. Now to begin the presentation, moving on to Slide #2, where we have the main highlights here for the quarter. Well, we have begun the year with a revenue below the estimations. We know that the development in our results, even though the results are positive, they could have been even more significant. Now looking at it with a critical eye, the company has developed in terms of margin and profitability, but we have yet to make strides in sales in the speed that we would like to and that we know we have the potential to. In numbers, we concluded at BRL 504 million of consolidated revenue. It's flat compared to last year. Even though some stores have closed and the calendar was not favorable, we have sustained our revenue levels, and we have delivered margin expansions. Highlights to the operations in Brazil that have grown by 6% and the development of our gross margin all across the different operations, as you can see on this slide. Total growth, 250 bps. Now with the adjusted EBITDA, the consolidated EBITDA has reached BRL 62 million, which accounts for a growth of 64% compared to the same period last year. And the EBITDA adjusted margin has reached 2.3%, which is a substantial increase compared to last year. Now moving on to a little more detail. We'll give you some color on the results. In regards to the number of stores, we closed the quarter with 592 units, which is a development compared to last year. Now 22 stores less than December 2024. This reduction was very much concentrated on Pizza Hut, where we closed many stores that were not performing, which is a natural movement in this business to improve our portfolio overall. Now as a consequence of this process, and we'll get into the same-store sales in a moment, but as a consequence of what I just mentioned in the previous slide, when we go to Hall, just like I said, BRL 504 million, it's flat from '24 to '25, while this quarter is still marked by the impact of some of these store closures that were important, such as the Las Vegas store in the U.S. Now if we do not consider the impact of these closings, our revenue would have grown by 7%, approximately 7% compared to last year, 3% of which would have been in the U.S. and 8.2% in Brazil. Now just like I mentioned, the closure of a few stores explains in part -- it's part of the reason why the revenue was flat this year. And the other explanation is regarding the same-store sales performance, which I am going to get into in further detail when I get to the brand presentation part. Now looking at the numbers here, though, our main opportunity for the second quarter besides the natural seasonal development of our business because our business has a natural development on the second quarter. There's a natural bump. But the main opportunity is to resume the revenue growth with discipline on the execution and preserving the level of profitability that we have been enhancing throughout the last few years. And then when we look at the EBITDA, first quarter 2025, adjusted EBITDA has reached BRL 62 million, which accounts for a growth of 64% compared to last year. There is a combination here. There is a development of gross margin, and there is also a stability on the G&A operationally. And there is a lot of -- there's been a lot of initiatives on the company's management such as gain with some fiscal credits in the second quarter, which have brought a significant improvement when compared to the same period last year. Now at this point, to continue the presentation and to get into our financial results in further detail, I'll hand it over to Natalia.

Thank you, Santoro. Good morning, everyone. Thank you once again. Thanks for participating on this disclosure call for the first quarter of this year. Now first of all, I would like to say that it's -- that it's a joy to have all the IMC team together here. My objective is to continue an effort that has been successfully undertaken in the last few years. There's a lot of financial discipline in this company, and there's a lot of focus on ROI and profitability. So, the objective is just to continue the well-executed efforts from the last few years. I think we've seen the company unlock some significant value with a number of initiatives. And on this slide right here, we actually see that this is reflected on the cash flow -- on the operating cash flow numbers in the first quarter. We can see the results of some of these initiatives clearly in this number, BRL 62 million in our cash flow. Now some of the fronts on this quarter included working on improving the working capital and the operating result for the period, which explains the strong cash flow generation. It's noteworthy to mention that in '22 and '23, we had some incentives related to the pandemic in the U.S., while in 2025, the performance came notably from the Brazilian operation, especially chicken, which was a main contributor and has been a very strong pillar of our cash flow. Now on the right-hand side, we have a reduction of 30% on our CapEx, in line with what the company has disclosed to the market in the last few months, which is a more restrictive year extension-wise, especially considering the capital situation and the capital structure we are dealing with at the company. So, this number that we see on the slide is basically the carryover of some of the late '24 initiatives. And going into 2025, the strategy is for us to be a little more restrictive. Now moving on to the next slide. We are able to maintain -- I mean, given the numbers, we can -- we see that we maintain our financial health. Indicators are still well within the expectations and within our limits. It's noteworthy to remember that the debt of '25 comes due only in the fourth quarter, and this is going to put us at ease, financially speaking, so we can continue to work on our growth agenda. So, with that being said, we can pretty much summarize the financial slides over here. Thank you once again, all of you for being here, and I will hand it over back to Santoro, and I'm here if you'll have any questions at the end. Thank you.

Thank you, Natalia. Now let's get into a little more detail about the separate business units performance, starting with the United States, Slide #8, that is. Clearly, we had a performance that is well below the potential of this BU. Now revenue has dropped 27% compared to last year. And that has happened due to a few factors. The most substantial one, of course, is the closure of some of the stores. We closed San Antonio and Las Vegas last year. That has had a significant impact on the numbers. And clearly, we can see that in the comparison regarding last year. Now I have said this one year ago, the closure of Las Vegas was due to the nonrenewal of the lease of the store that happened on the second quarter last year. And speaking about the Lake Shark in San Antonio, we decided to close that store due to the low performance and the high cost. So that explains part of this scenario where we saw some drop in revenue. And as far as same-store, the comparable stores, there's been a drop of 11% and there's a combination of factors here. So, the calendar was not favorable, clearly. When you compare that to Easter, I mean, Easter is a very relevant holiday in the United States because you're going out -- just coming out of winter going into spring. So, the calendar does have an impact, but we had a climate matter to be considered. I mean, several stores had to be closed due to blizzards. There's been a lot of snowing, including blizzards that have, I mean, reached as far as Florida, which is extremely rare. Besides that, we had stores like Nashville and New York, which underperformed. They were well below last year, and that definitely pulled the numbers down. There's been a number of challenges operationally that have been corrected as far as competition, as far as just regular -- just overall operating challenges. So, we have put in place a lot of initiatives focused mainly on these 2 stores, including some initiatives such as promotions, specifically for lunchtime and happy hour. These are 2 points where we saw a sharp decrease in traffic, so lunchtime and late afternoon and also for drinks. So, we tackled precisely those 2 aspects. We have been focusing on that so we can develop the operation in that regard. And we expect in the second quarter to have a strong season at this point. Usually, we have a strong second quarter in the United States, and that we imagine and estimate will happen this year as well. And I briefly talked about New York, but New York, Atlanta, Boston, these are relatively new stores, and they are still maturing, as we say, but the maturing curve is definitely being a little longer than we calculated. But they have the potential to more than compensate the impact of the closures we've had. So, we are seeing a development but slower than we would like to, but it's still heading towards the right direction. To be pretty straightforward, the United States was a negative highlight on the second quarter -- on the first quarter, and the results were worse than last year. First quarter is always a challenge, right, due to the seasonality aspect. And the focus right now is on the execution. We are seeing signs of recovery, and we are now going into a more favorable cycle, which is going to take place in the next few months. So now next, Slide #9. These are the national brands where we have the airport business and also some shopping malls. So, catering in the airport, we also have -- yes, so catering for airports, we also have some operations of airport retail, and we have also Brunella, Vienna and English Potato. Now the main highlight for the airport operations is growth to the tune of 15% on same-store sales. The EBITDA on this market is also growing and is contributing to our quarter, the growth to the tune of 17%. Clearly, there's been a development in the service in these operations, which have made for better margins. Now, even though these businesses are not really our focus for expansion at the moment, they are still important businesses, and they have a positive contribution for the outcome of the company as a whole. We still see a lot of improvement opportunities and potential for growth in these brands, and that is going to be redesigned and repositioned as far as these brands for the coming future. Now moving on to Slide #10. Pizza Hut, which is an iconic brand, it's a renowned brand, beloved by the consumer, and still a lot of opportunity for improvement from a revenue perspective as well as new formats for expansion and also profitability. Sales in the system have dropped in almost 5% due to the closures. We did close some stores for renovations, besides the overall closures that we had in the group, 13 stores throughout the quarter. Additionally, there's been a strategy to do a mix and promotions, which have failed to deliver on the expected results. We had a strong inflation pressure in the beginning of the year. We have adjusted our strategy and corrected our course perhaps more aggressively, and the outcome was not as expected. We did correct the course, but we felt that in terms of that loss in sales, especially in January, February. Now speaking on digital sales, those are still a strong pillar in our growth strategy. We did have some challenges in the transition to the new app, which have affected digital sales in this first quarter, but we already course-corrected. And the new app gives us more stability, more control, and an improvement in the overall customer experience. Now, when we look at strategic partnerships and franchisees, we have worked together with young brands to develop new formats and to optimize our CapEx and OpEx with the objective of expanding our brand mainly through franchises. Now this approach enables us to grow faster and rather without injecting capital or without injecting our own capital. Now, Slide #11, Frango Assado. We are performing strongly as far as EBITDA, a growth to the tune of 15% in Frango Assado, which is a reflection impact of our improvement on the stores. Now, clearly, this is a business that has a very strong impact when it comes to our calendar, so holidays and things like that. So, we don't see such a strong growth in terms of same-store and revenue, but we do see a substantial improvement when it comes to the profitability. Now, within the initiatives that we have, we have a very important pillar, which is digitalization and loyalty. We are advancing quite a bit on this sector. Today, we have more than 400,000 customers that are registered in our base, and we see how loyal these customers are with the brand. When we look especially in terms of the recurrence of their business, on average, these customers pay us a visit twice a month, and they consume substantially more than the remaining customers of the company. So, in transactions, we can observe as well in this table, the transactions on self-checkout that already accounts for roughly 2/3 of the total transactions. And there is an important part as well. There is a relevant innovation aspect. We continue to make strides. We continue to improve and advance with regards of our core products, and these are the main focuses in innovation. For example, we have different flavors. We have savory snacks, our famous [ Pound cake ]. All these products are done by the Central Kitchen. Now we still see a lot of opportunity with this amazing brand, just like I've said, through time. And we're going to be laser sharp -- we're going to have a laser-sharp focus on the conversion of stores, for example. Now, store conversion is an intelligent way to grow the business with a relatively lower CapEx, just like we did with Guararema in the first quarter. This is a moment where we have a lot of opportunity in our pipeline. We are ever more excited with the performance and the potential for this business. And to conclude the business units on the next slide, Slide #12. This is about KFC, which has grown substantially in Brazil. We have surpassed the mark of 300 stores in the country. By the way, 5 years ago, this brand had 60 stores only. Now, the sales in the KFC system, they are growing strongly to the tune of 20% in the quarter, and the digital sales are growing to the tune of 70%. Now, this growth phase also brings about some important challenges from the operations side, which have been addressed by our team. We are making improvements every day. Clearly, there's still a lot of opportunity to advance, especially when it comes to maturing new stores and when it comes to looking at the future with more presence on streets. Now, one important point that we just mentioned on the second quarter was the redesign of a few promotions, just like 2 for 19.9%, which have brought a significant impact on our traffic as well as our margin. So growing traffic in our stores with profitability is and will continue to be our main priority here. And the JV, of course, I think there's been a significant watershed. We are focusing a lot on KFC in Brazil. We are reducing our leverage, and we are improving our free cash flow generation for the future. And in conclusion, now moving on to the last slide to tie all the dots, if you will, connecting the JV with the different priorities in the company. Clearly, our focus is on the execution, on improving customer experience, and advancing on our margins. It's simple as that. It's those 3 things: execution, customers, and margins. Now, with regards to the KFC deal, we have been striving, focused so that we can close this transaction still on the second quarter this year, and we're going to obviously maintain, keep the market posted about that. In conclusion, last bit, we are aware of the severe challenges that we have in the short-term, but we are also very confident with the advancements that we've had so far and on the path that we are tracking right here. We're going to be lighter, more efficient, leaner and better prepared to accelerate where we have the actual competitive edge. Now the consistency of our strategy, the power of our brands and the quality of our team and our franchisees are going to propel us ever higher and get us closer to our dream to be the best food and beverage platform in Brazil. With that, I conclude my presentation and I'll give it back to Grazieli so that we can start our Q&A session. Thank you so much, ladies and gentlemen.

[Operator Instructions] First question from Joao Silva. What has contributed to the increase of 250 bps on your margins?

Well, João, if we look back, there's been a constant development on this front. I mean there are numerous initiatives. It's not just one thing. But we have been obviously prioritizing the quality of our sales, meaning not only to increase revenue per se, not only to increase the experience of our -- the experience, but we want quality revenue with margins. So, one example that I can give you, which I think is the clearest one, we have ceased to do some promotions that were way too aggressive. They would bring about sales, but the cost was just too high for the company, whether it's for example, free freight or a discount for a certain product. So, I think considering this package, that's a good example that I can give you as far as the initiatives that we have. We are prioritizing the margin that things generate not just percentage but really dollars and cents. We want to get the volume at a healthy margin. And just like I said, we went very well with margins, but we still need to develop in terms of volume. So, to be able to do those 2 things is really the challenge of our company.

[Operator Instructions] Great question from Ricardo from Tagus Investment. He's asking if there is no contradiction on reducing the CapEx at the same time where we are resuming growth with Frango Assado.

That is a great question, Ricardo. Well, it's not really a contradiction. First of all, we've always said -- we've always been very clear that financial discipline is one of the key pillars of our company. So, at this point, we are focusing on executing this deal with KFC. This is a deal that is going to deleverage us quite a bit. It's going to put us at a much more comfortable position, much better prepared to be able to accelerate the Frango Assado growth. We knew that and we already planned our year based on that. This would not have happened on the first 6 months. So, what we are doing right now, obviously, is to undertake this plan and do all the negotiations and contracts to start executing that on the second semester. So, we have a number of negotiations ongoing to expand Frango Assado but the execution is not going to take place right now due to our moment that we are going through, due to the discipline we have, our level of leveraging and also the cost of capital, but it's a great question and thank you for the opportunity of clearing that up.

[Operator Instructions] Next question from Mr. Eduardo from Teton Capital.

On my side, basically I have 3 questions. One is with regards to what you said, Santoro, the closures in the U.S., Las Vegas and San Antonio. But I think you touched on that last year. And when you look at the '25 numbers, you closed one additional store. Can you please give us a little more color of what that closure was? And also, you talked a little bit about the Pizza Hut closures, which happens seasonally, usually in the first quarter, just like you said, this is part of the business but this number was way higher this quarter compared to the last 2 to 3 years. So, is there any attention point that we should focus on in that regard? And lastly, with regards to Frango Assado, I think you mentioned as well that there is a specific strategy. There is a conversion process. You mentioned one particular store. Can you please explain a little more what that is?

Thanks to you. Now let's take it one question at a time. It's an excellent point you brought up. I didn't mention that, but we did close a low-performing store, which we plan to close for a few years. It's a place called Syracuse in New York. So that's a store that we were waiting for the lease to come due. We had negotiated that and we wanted to get out of this operation. This is an operation where the location, the store, just the overall proposal. We made a mistake opening that store to be quite honest, in the past and we wanted to close that. We just waited for the lease to close, so there wouldn't be any fines with that. So, it's a very low impact because that store really didn't generate any earnings for us. But I mean, the EBITDA impact is practically none. Now with regards to Pizza Hut, you are right. We made an important decision to close a higher number of stores than in the past given our own stores or stores that were underperforming. We actually did a very detailed study about the portfolio and there were some combinations with regards -- I mean, there were some problems, whether it's problems from the site itself or otherwise, but we also detected some cannibalization cases where stores actually opened up and ended up outshining or worsening the performance of neighboring stores, whether it's equity or franchise. So, we sort of reassembled. We reorganized, and we made that decision. So still, this is something that is going to continue, but we don't -- I mean, we've been discussing with our franchisees, and we've been reorganizing our portfolio. I think Pizza Hut is still a large complex systems. We are talking over 200 stores. And for sure, there's going to be some adjustments to be made. And now from a Frango Assado perspective, again, thank you for your question and for the opportunity of clearing some points up. The thing about the stores conversion, well, this example that happened now in Guararema, that was a store that was well, it was a Madero store that we had on the highway. And conversion means a store that already exists. And in practice, we have a relatively low CapEx because the store is there. You have the parking lot, you have the lighting structure, you have the restrooms, you have the whole patio, you have the whole customers' area. So, CapEx is relatively lower because you already have a store to operate. All you have to do is adapt the facade, change some of the adaptations. We had to adapt the kitchen in that case because the product mix is quite different from the previous store. So, I think this is a good example as far as what we did and what other opportunities we see. So again, it doesn't mean that Frango Assado is not going to have greenfield in the future or stores that we start from scratch, but we see a lot of opportunity to convert additional stores on our roadways.

If I may take this opportunity to ask an additional question about the airport segment in the previous 2 calls, we already discussed this, and there had been an increase on the revenue. But my impression with regards to what we discussed is that it would go back to the average. And it seems like it's going the opposite way. It seems like you experienced some growth. So, what is your take on that front now? And could this be a potential for revenue in the next few quarters?

Well, from an airport's perspective, there's been a combination of factors. There is one specific thing that you mentioned, especially in the fourth quarter, we saw a very strong increase, especially on the catering business on the first quarter as well, and that was a more specific service. That was a more punctual service. So, we don't see that continuing on this trend as we saw in the same-store sales in the first quarter.

Was that a partnership you made with LATAM?

Exactly. That was a partnership with -- in the airport of Congonhas, more specifically.

[Operator Instructions] There's a question here about the reduction of the debt cost and the impact on the financial side as you have resources coming in from KFC.

Well, it's $35 million from KFC that we intend to use to reduce our leverage. And of course, it depends a little bit on the interest rate, but we're talking about BRL 30 million to BRL 35 million that we should save in the interest after this deleveraging.

[Operator Instructions] What is the mix between your own stores and your franchise that you estimate for Pizza Hut?

Well, Roberto, thanks for your question. First of all, now we are going to work very hard on franchises. We don't expect to open up no equity stores this year, for example, for Pizza Hut, but we do want to focus completely on franchises. Thank you so much for your question once again.

We also have a question from Luis Felipe from Pan Capital. Congratulations on the management of the company, he says. And there are a few questions. Let's break it down. First, if we can give more details if there is a pipeline of closing more underperforming Pizza Hut stores. Will you close more stores?

Well, I think I already touched on that topic, but it is possible that we will have some closures this year. Yes, maybe not in the same magnitude as we've seen, but we are working very closely with the Pizza Hut teams. We are working with our franchisees and our internal staff. So yes, it is possible that we should see some closures. Second question I'll hand it over to Natalia to help me out.

Well, the second question from Luis is with regards to receivables this quarter.

Yes, indeed, there's a seasonal aspect in these receivables coming in. We work on our working capital in the first quarter, and we adjust the receivables that has to do with the performance in the U.S., and that has caused the company to be more disciplined with regards to anticipating the receivables.

Yes. And third question, can you take this one, Natalia?

With regards to the second receivable of $22 million from the JV to come in, in 2027, yes, precisely. I mean, just like I said in the previous question, the answer is yes. We see a possibility to anticipate that receivable because with the debt cost today, we feel it makes sense to reduce the leverage of the company.

Right. And the last question from Luis, with that release of our mandatory CapEx with KFC, if this CapEx should be relocated to Frango Assado and what is the company's take on growing Frango Assado? And can we expect a CapEx in '25 on the same level as we had in 2024?

Well, we have been working very strongly on the expansion of Frango Assado in terms of negotiations, in terms of looking for sites. And I think this is an important moment for this business in particular. And I'm sure you're paying attention to it. There's been some concessions being renewed. There's new concessions happening. And obviously, that creates a very beneficial momentum for a solution like ours, a full stop of quality in roadways. So, we have a great mapping. We have a very detailed mapping that we have been developing on our negotiations and conversations. And in the second semester, we hope to make strides with that, and we hope to be able to comment further on that on the next disclosure calls and give you some practical examples that are still under negotiation. When you talk about the CapEx in 2025, no, actually, we're going to have a lower CapEx, okay? I think we were discussing that in the previous call actually. Our plan for 2025 is for a lower CapEx than last year, okay? And for a number of reasons, one of which is the JV itself because we're going to allocate the KFC CapEx. We're going to be very selective with our CapEx. Of course, we're going to pay a close -- had a close eye on Frango Assado. But overall, we're going to be very disciplined. The current interest scenario -- the current interest rate prompts us to make that decision.

[Operator Instructions] We hereby conclude the Q&A session. We pass the floor to Mr. Alexandre Santoro, CEO of the company, for his final remarks.

Thank you so much, Grazieli. Thanks to everyone that participated. Thank you for your questions. In the last slide here, I'll extend an invitation for all of you. If you haven't downloaded the new Pizza Hut app yet, please download it. And if you download the app, you're going to get a pepperoni pizza. You're going to get some free points for that. And yes, have a great day and enjoy your pepperoni pizza.

The teleconference of IMC is hereby concluded. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]