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

Good morning, ladies and gentlemen. And at this time, we would like to welcome you to the IMC conference call to review results for the second quarter '25. This presentation is being recorded, and the presentation is available on the company's website. [Operator Instructions] Forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them. In the conference, we have Mr. Alexandre Santoro, the CEO of IMC; and Natalia Lacava, CFO of IMC. I would like to give the floor to Mr. Santoro, who will begin the presentation. You may proceed, sir.

Well, thank you, Samantha. Good morning, everyone, and thank you very much for participating in IMC Second Quarter 2025 Earnings Call. I would like to start today's call by thanking our 7,000 employees, franchisees and partners who are truly responsible for the progress we have made here at the company. Thank you to everyone. To begin the presentation, we can go on to Slide #2. And before we go into the details, I would like to speak about the journey of IMC and the cycle of the company. Clearly, we lived a first great cycle that could be divided into some chapters. This was the construction cycle, a period of acquisitions and mergers that gave us scale and presence in several countries, but also significantly increased the complexity of the operation. This cycle had a rupture with the pandemic, that happened after we had incorporated Pizza Hut and KFC, and it lengthened during the pandemic or at the end of the pandemic with a new cycle, which we have called the transformation cycle of the company. We still had doubts and uncertainties of how the economic resumption would be and the impact on business. But basically, at that time, we clearly defined the main pillars of this transformation, which we had set forth to do. And we wanted to move forward in operational efficiencies, the day-to-day of the business, reduce the company's complexity, be ever more financially disciplined in capital allocation and expenses and, of course, to have selective growth. We focused a great deal on KFC in the last few years, and on Pizza Hut, but more on KFC. During this period, we delivered strategic divestments. Important ones: We left Panama and Colombia. We saw a consistent improvement in margins -- in the company margins. There was a redesign of teams, a reinforcement of teams, a debt re-profiling not only in terms and cost. We substantially reduced the company leverage and made great strides in technology. Now this cycle is now coming to an end with the conclusion of the KFC Brazil partnership, a milestone that has strengthened our cash position, reduced leverage, and brought us a strong, well-capitalized partner and reduced our need for stock. We have a well-capitalized partner with whom we share the upside potential in this new phase for the brand in the country. We are now entering a new cycle, which is already underway, where we have everything we need to convert our potential into tangible results. We remain convinced that the sum of the parts is greater than the whole. In this new cycle, the KFC deal has pointed this out very clearly. When we assessed the importance of the value of KFC, it equaled to our market cap. When we think about the main pillars, they will not be changed. Basically this is a business that requires financial discipline, execution discipline, and we will continue in the pursuit of operational excellence, financial discipline. And of course, we have brands with a great deal of potential for growth. And we understand that this cycle will be ever more creative. We have been quite creative throughout the years to overcome the challenges we faced, but the challenge will be to be even more creative going forward to generate results consistent with our assets. In this cycle, of course, we want to fully explore the potential of our Frango Assado business, expand franchises, establish strategic partnership and accelerate build-to-suit projects where we grow with less CapEx, bringing in partners for the construction of the stores, always with a focus on return and generating value for shareholders, franchisees and employees. Now after having told you this story, the conclusion of the KFC deal is an important framework. Let's speak about how the quarter was in terms of operation and results. Now the deal with KFC has demanded a great deal from the team. It could have been a reason of distraction, but it was not. And I'm very proud of the team, our entire team here, for having maintained their focus on the day-to-day operation, focusing on what is more relevant and important. Here we see our revenue very close to BRL 600 million, a growth of 4% vis-a-vis last year. In Brazil, we have a revenue of 12.6% with margin expansion in all business units and a reduction in administrative and general costs. It is important to remember that this performance, well, is the merit of the entire team, but it was also favored by a weaker comparative base in the second quarter '24. Even so, we had healthy growth sustained by consistent execution and operational improvement. Now this leaves us well positioned to accelerate even further in the third quarter '25, especially with the initiatives underway to both sales and profitability. EBITDA grew 6.2%, the recurrent EBITDA. And I will explain the nonrecurring effects that happened last year. It grew 6% in the quarter and 15% throughout the last 6 months. We also ended the quarter with almost BRL 300 million in cash, 64% above the same period in 2024, with a healthy leverage of 1.7x EBITDA for the last 12 months. Very briefly as we always do, I'm going to have a page per business unit. We begin with the U.S.A., where we had another very difficult quarter in terms of sales with a negative same-store sales, some stores being more affected by reduced demand, and in some cases because of the macro scenario of consumption in the U.S.A., and in other cases due to competition. The example here is Nashville, where they inaugurated several other attractions very close to our restaurants and, of course, we have suffered that impact, and the team was not able to revert that trend. On the other hand, despite this challenge in sales, we improved profitability. Gross margin increased by 200 base points, reaching 46.3% in the quarter. And we continue to gain operational efficiency, but we have to reverse the drop in sales. We implemented several sales initiatives with a special lunch menu, some specific offers for Happy Hour. We now see this at the end of summer, and at the end of summer, improving our sales. And something that makes us very proud, an evolution, a significant evolution, in NPS that was a record for the period. And we have had evolution quarter-on-quarter. Revenue in local currency was reduced by 16.6%, but there is the impact of the closure of stores. You can see that we had 31 stores, 28 stores after this, and we closed an additional store. Now the challenge is a significant challenge. It is for operation and sales. We recently announced the arrival of [ Sully ], our new CEO for operations in the U.S.A. And the focus in the final count is to make everything more profitable. We made important investments in the U.S.A. We have new stores that are still not performing according to their potential. And this is one of our main priorities. Given the geographical dispersion and the different customer profile in the U.S.A., our sales and operation plan ends up having to be very detailed store by store. And the focus basically is on Nashville. Three restaurants would have a huge potential for reversion and results in the short term, stores in New York, Boston and Nashville. At the same time, we have to evolve in delivering a better experience for our customers in some of our iconic restaurants, such as Margaritaville in Panama, Florida and 1 Myrtle Beach in South Carolina. Now let's go to Slide #5, we're going to speak about our domestic brands: Catering, Brunella, Viena and Baked Potato (sic) [ Batata Inglesa ]. We had a good performance generally, especially in the airports and with Baked Potato. Catering grew 19% in same-store sales due to some of our temporary business that we built during the quarter. We have made progress in the service of these brands, bringing us better margins. Now although these businesses are not a focus for expansion at this moment, they are important and continue to contribute positively to our overall results. To continue on with the presentation, we will now speak about Pizza Hut. We achieved significant progress, especially in the second quarter. The system recorded an 8% increase in revenue compared to the same period last year. And combined with productivity improvements, we had a margin expansion, that drove a significant increase in EBITDA. The same-store sales reversed the negative result in the first quarter and posted growth, driven by the performance of company-owned stores which grew more than 8% in same-store sales and by delivery, which saw significant margin improvement with a reduction in COGS and delivery costs. I would also like to highlight the quality of our delivery service with faster delivery times and higher customer satisfaction translated directly into increased sales. We continue to develop new sales channels. We have reached 65 stores in partnership with the AMPM chain. We are very excited with the potential of this collaboration to bring Pizza Hut to more and more consumers across Brazil. In terms of KFC, we had another strong quarter, driven by the success of "2 for BRL 19.90," a traffic driver that we were testing during the last 2 years. It had a perfect and it has enormous attraction for customers when it comes to competitiveness because of the price. And at the same time, it is profitable. Now this balance is always the greatest challenge, and this offering and the way we have prepared this sandwich allows us to bring in more traffic and be profitable. Now the same-store sales grew a strong 15.5% and the total system revenue grew 34% in the system as a whole for KFC. Now differently from the same-store sales of 34%, we have the impact of the new stores we opened at the end of 2024. The highlight was digital sales doubling year-on-year. We're very excited with the brand and confident that through the partnership we have built here, KFC will continue to bring us a great deal of joy and reasons to celebrate in the coming years. Now to conclude this part of the business unit, we have Frango Assado, "The best stop on Brazilian highways." We had a quarter with very strong results. We start with 8% growth in same-store sales driven by a pricing strategy, a smart pricing strategy, and strengthening of customer recurrence. This performance is supported by continued improvement in the experience of consumers, recognized by the market through our nomination for Reclame AQUI Award and reflected in the revitalization that we're carrying out in our restaurants. The top line growth along with an efficient expense control resulted in an increase of 25% in adjusted EBITDA ex IFRS 16 and efficiency gains in restaurants and service stations. We had robust growth in digital sales, which rose 52% and represents 70% of our revenue -- the revenue for Frango Assado, payment is done through digital means in this case. We're still very firm in our priorities of placing the customer at the center of our decisions. We want to expand our margins, price intelligence and resume expansion, mapping out activities for opportunity and contracts that are already ready to be signed to address that expansion. Frango Assado continues to accelerate in the right direction. And each result reinforces that we are on the right track to deliver more value both for our customers and for the business. To go on to the next slide, a very quick summary. We ended the quarter with 590 stores, 25 more stores year-on-year, but 2 fewer than in March 2025. Of these, 53% of the stores are company-owned and 47% are franchises. Now all of this -- well, we spoke about business units and number of stores and we have a revenue growth of 3.6%, there is a relevant impact of the closures. We closed 30 stores, 1 in the U.S.A., the stores in Brazil. Some Pizza Hut stores were closed in the first quarter. If we disregard store closures, our revenue was almost 9% year-on-year. And of those 9%, 16% growth in Brazil and a 2% decrease in the U.S.A. Same-store sales in Brazil were positive at 9%, while in the U.S.A., they were negative by 8.8%. Our greatest opportunity for the third quarter remains in resuming revenue growth with disciplined execution and maintaining the profitability level. We have improved in recent years. Now all of this, you will see on Slide 11 with EBITDA. Adjusted EBITDA reached BRL 71 million, a decrease of 37% compared to the same period last year. In the second quarter of 2024, adjusted EBITDA reached BRL 113 million, driven by a nonrecurring event of BRL 47 million, the prescription of non-materialized contingencies for previous acquisitions. If we remove this nonrecurrent event, EBITDA grew 6.5%. Another important point, in the quarter, we had a reduction of G&A of 14%, adding 25% to our net revenue. Now I would like to stop this first part of the presentation on business units and I will hand over the floor to Natalia, my partner and our CFO, to speak about our financial results.

Thank you, Santoro. Good morning to all of you and thank you for attending our second quarter earnings results call. Now we'll speak about our investments and reinforce what Santoro said at the beginning of the presentation, the trajectory that we have been building in the last few years transforming IMC. And here you will see the movement becoming more tangible and the impact on the company cash. Operating cash flow went from a negative level to BRL 45 million in the first half of '25, thanks to operational improvement in all businesses, the drop of G&A, the austerity in our G&A cost and the work of our treasury converting EBITDA in cash. And all of this has generated these benefits. We have an additional disclosure to speak about the effects of KFC. Now the company reached BRL 55 million in operating cash flow, showing you this construction that Santoro is referring to, transforming the business units in the company. When we look at CapEx, the investment line, we maintained that selective approach that we have had for many years. CapEx dropped 18% to BRL 56 million. If we carry out that carryover adjustment, that is to say payments that refer for the previous year, the drop was even more expressive. We reached BRL 25 million, which shows that we want to protect our cash from the higher interest rate with a focus on investment in the maintenance of the business. Now a comment regarding KFC. This is an operation that has undergone expressive operational improvement as has been shown. And of course, this shows the improvement in the cash flow of this business. Even though it is still negative and needs investments to expand the business, we have had a significant evolution year-on-year. We continue to believe in this business on the ability that we have to continue to grow with the partnership and to bring a new scale to the business. And we will, of course, enhance all the flows. Finally, after CapEx and disregarding the figures of the KFC deal, we had a cash generation of BRL 20 million. If we adjust this by the carryover figure, we would reach BRL 42 million positive. It's important to highlight that for the second half of 2025, we won't have the carryover effects. The CapEx will continue on that more austere line where we focus on essential elements. And of course, you will see an improvement in our cash flow. Now we can now go on to the next slide where we speak about our capital structure. You can see what is left after all of the recent movements. Net debt drops to BRL 545 million, quite balanced in the coming months. Net debt improved significantly, dropping to BRL 190 million because of the higher operational flow and the effects of the KFC deal. Cash increase reaches BRL 300 million, and this will be used to accelerate the amortization of our debt. And in the coming quarters, we will cooperate even more towards a greater debt reduction. The leverage closing at 1.7x, quite comfortable and below the covenant of 3x. Simply a comment as information. The company has option for sale of what remains of KFC, and this will have an impact on our debt structure. All of this is reflected in our balance. So we continue to be focused as we have in previous years in maturing our cash generation. We have been very selective when making investments to optimize our resources and ensuring we have the greatest return on invested capital in all of our assets. I conclude the summary of the financial part. Thank you all for your support. And I return the floor to Mr. Santoro.

Well, thank you, Natalia. We're now going on to Slide 14, our conclusion. Our focus continues to be day-to-day execution, sales with quality, with margins. We have that challenge of bringing traffic to our stores. Our business has high leverage and we have to work with sufficient intelligence to always have margins that will add to our results. I'm speaking from the viewpoint of customer experience, that's one of our great challenges. We still have several opportunities to continue to make strides. And let's speak about the expansion of Frango Assado. To conclude, we're quite aware of the challenges that exist for the short term, but we're quite confident with the strides we have already made and with the path that we are following. Going forward, we will be lighter, more efficient and ever more prepared to accelerate our competitive edge. The consistency of our strategy, the strength of our brands and the quality of our team and our franchisees will doubtlessly take us closer to our big dream, which is to be the best food service platform in Brazil. With that, I would like to close the presentation. I hand the floor over to Samantha so that we can begin the question-and-answer session.

[Operator Instructions]

We have already received a question. I'm going to read it out here. A question from Roberto, investor. In the case of IMC, how are you initiating your evolution because the campaign "2 per BRL 19.90" tends to accelerate your sales? I would like to understand if there is a specific strategy for hedging to soften out your debt. Roberto, thank you for the question. I will try to summarize my answer. That campaign "2 for BRL 19.90" has a margin that is higher than the average. But of course, we have other effects which are very positive. First of all, we have a positive margin; it's not negative. We make money with each of these promotions. Now by bringing in more traffic, you can dilute most of your fixed costs. And the fixed costs is very reasonable. Every time we open a store, we know exactly which are the bills we have to pay, but we don't know which is our revenues. To have a promotion that attracts customers that make this line item grow with a positive margin is positive. A campaign like this one, "2 per BRL 19.90," pure campaign. And as part of that campaign, a percentage of the sales will refer to the famous additionals as generating 35% to 40%, and that percentage can grow. Not only the sandwich, not only the promotion. We have the soft drinks, the fries and other things. So all of this helps us to drive the issue of margin. If you look at our disclosure, that business unit grew less, but it is also growing in terms of their results. It wasn't only a sales campaign. Now the transfer, and here we have to have a management of mix. In some products, yes, we have the issue of proteins. In other products, we have redesigned or have had to pass on a price increase. But we have balanced everything in such a way that our mix, as it stands at present, can sustain that "2 per BRL 19.90" campaign positively. I hope to have answered your question, Roberto.

He says, considering the evolution of operations, should we consider that you will make other investments? Now the company has reduced leverage and we have a good cash. Given the scenario of the interest rate and because of the expansion of Frango Assado that has enormous potential, these are measures that we will continue to follow going forward. We have Luis Santos. Congratulations for your strides. And he has 3 questions. If we're going to disclose the summarized P&L of KFC separately. The answer is yes. Because KFC has to be consolidated in the balance. And yes, you will see it separately. The second question, this is a new cycle to [ unharness ] value, now what will happen to your business portfolio?

Now regarding the question about the portfolio, it is our understanding that we have a portfolio that has more synergy than it had 4 years ago with significant potential for growth. I have repeated this constantly, we have intellectual capital, financial capital, but we can develop several brands at the same time. We're clearly going to focus on Frango Assado, but we don't have a specific action to change our portfolio. What we want to do is enhance the results of the assets under our management, specifically Frango Assado where we see a greater capacity to grow. And we will do this with great discipline, of course, depending on our cash and the conditions of CDI and the macro scenario.

I'm going to consolidate the next 3 questions that speak about what you have already explored, investment in other businesses.

I think I touched upon this very quickly. What I can say is that we will always analyze and assess opportunities that would make sense for us. But our background has shown this. And a good example was sale of the operation of a restaurant in the U.S.A. This was not part of broader strategy, but we saw that opportunity with a super attractive offer. So we carried on with the sale. So we will always consider opportunities in our portfolio. At the moment, we have nothing to share with you.

Another question from Bradesco. Well, the macroeconomic situation in the U.S.A. and a drop in demand. A question from Luis.

Thank you, Luis. The scenario is somewhat more restrictive and crude. But what we believe, Luis, is that, in the U.S.A., we have a great deal of opportunities in-house. We have already seen some enhancements impacting the results and sales. The example that I gave you, having a more competitive environment at lunchtime, having specific Happy Hour promotion. I see that despite having a nonfavorable macro scenario, there is a great deal of work in-house that will enable us to deliver better sales if we do our homework properly.

Very well. Do we have any additional questions?

With this, we would like to go on to our last slide. Once again, I would like to thank all of you for your attendance. Thank you for the questions. And as is traditional, we always end up with a promotion, the large pepperoni pizza from Pizza Hut. Marvelous, only at BRL 69.90. Such a good product at such a good price. So don't miss this opportunity. Have an excellent day and enjoy the pizza.

The IMC conference call ends here. We would like to thank all of you for your participation. Have a very good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]