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

Good morning, ladies and gentlemen, and welcome to the IMC's conference call to discuss the results for the third quarter '25. This conference call is being recorded and the presentation is available at the company website. [Operator Instructions] We will then go on to the Q&A session when further instructions will be provided. As a reminder, forward-looking statements are subject to known and unknown risks that could cause the actual results to differ from those expressed 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. At this conference, we have Alexandre Santoro, the CEO of IMC; and Natalia Lacava, the CFO. I would now like to turn the floor over to Mr. Santoro, who will begin the presentation. You may proceed, Mr. Santoro.

Thank you, Samantha. Good day to all of you. Thank you for joining the IMC's earnings call for the third quarter of '25. I would like to begin by thanking our 7,000 employees, franchisees and partners. To begin the presentation, let's move on to Slide 2, which summarizes IMC's business cycles. We went through an initial cycle between 2020, a building cycle marked by acquisitions, mergers, scale expansion, but also with increased complexity with little synergy between the businesses. The pandemic created a major disruption after the incorporation of Pizza Hut and KFC at the end of 2019 to '20. In 2021, we began the transformation cycle focus on operational efficiency, reducing complexity, financial discipline and expansion mainly concentrated in KFC. During this period, we completed divestments in Panama and Colombia, strengthened our team, improved our margins, reduced leverage and advanced in technology. Now this cycle now comes to an end with the materialization of the KFC Brazil joint venture, which strengthened our cash position, reduced leverage and lowered our future [ caper ] needs brought us a strong operating partner with whom we share the brand's future upside. The KFC valuation clearly validated the thesis that the sum of the parts nowadays is more than the whole. We are entering a new cycle, maintaining the same pillars that we created way back in 2021, but with greater creativity to deliver consistent results. And to do that, we're going to fully explore the potential of Frango Assado, expand franchises, build partnerships and continue with discipline and a strong focus on return on capital. Let's speak about the debt of the KFC slides -- update on Slide #3. Now the KFC JV is now a reality with its own headquarters and dedicated teams. Here, we see the initiatives launched earlier this year, especially the value-focused promotion. We continue to deliver strong results even in a more competitive and hard scenario. We are very pleased with the KFC performance with the team and with our new partner. On Slide #4, I'll speak about IMC and specifically about the quarter highlights. Despite the tough comparison based on a weaker calendar vis-a-vis last year, revenue in Brazil grew 1% in the quarter, already excluding KFC and 9% year-to-date. On a consolidated basis, revenue fell 4% in the quarter and remained flat year-to-date, pressured by the U.S. operation. Even with the revenue below expectations, we were disciplined on cost G&A decrease significantly, reflecting the reorganization and the service provided to the JV. Recurring adjusted EBITDA grew 2.4%, reaching BRL 66 million and increased more than 10% year to debt. Operating cash flow was possible and we had a reduction of net debt to BRL 207 million, a decline of BRL 144 million versus the third quarter '24 following the extraordinary amortizations after the JV. In summary, this was a challenging quarter, but with important structural progress. As we always do, I will go through our business units with a brief summary of the performance of each of these. Regarding Frango Assado, the best roadside stop in Brazil, we had a mixed quarter. It wasn't a strong revenue quarter, but it was a quarter with important operational advances. Same-store sales grew 2.5%. We faced a tough comparison base, a weaker July, largely due to weather and increased competitive activity and an unfavorable calendar, especially September, where we had no holidays vis-a-vis the holidays in '24. As this is a business with high operating leverage when revenue doesn't materialize, margin is naturally pressured even so year-to-date performance remains stable and resilient, supported by strong previous quarters and the strength of the brand. Structurally, we made solid progress. Digital sales grew 10% and now represents 75% of road revenue. We advanced in CRM, kiosk and the new Guararema unit continues its ramp-up phase marking the beginning of a new expansion cycle. The brand also gained traction with consumers and became a finalist in the Reclame AQUI Award, reflecting the continuous improvement in customer experience. Our priorities remain clear that customer at the center market expansion through efficiency and the Central Kitchen playing a key strategic growth for cost control and with a focus on the quality of the products we sell at our stores. I would like to underscore an important point going forward. In addition to the opportunities for expansion, we will place a strong emphasis on improving our existing stores. And as a result, enhancing our customers' experience with a discipline that has always defined us, we will be ever more creative to attract third-party capital to finance the investment we deem essential for the brand's evolution. Frango Assado continues to accelerate in the right direction. We are building an operation that is increasingly stronger, more profitable and better prepared to grow. On Slide #6, we speak about USA with negative results this quarter. We saw same-store sales down 8.8%, impacted by reduced demand in some markets and in places like Nashville specifically we are facing intensified competitive activity. We also had some important improvements in profitability and gross margin and increased operational efficiency in some of our stores. Now a positive point is traffic that grew in our stores and the NPS reached record levels 87 points in September, the highest in our historical series. This reflects the impact of the actions taken in the menus, communication and customer journey in our stores. Now revenue in local currency declined 16.6% due to the closures implemented over the past year. Excluding this effect, we would have had a more online or more stable revenue. The focus now is to recover sales and margin with store-by-store execution, distinct consumer profiles and different competitive dynamics are our focus now. Now the operations with the highest short-term turnaround potential remain New York, Boston and Nashville. In New York, we are seeing concrete progress with same-store sales growing 4.1% in the period, reversing the negative trend of previous quarters. We will also focus to elevate the experience in some iconic results such as Panama City Beach in Florida and Myrtle Beach in South Carolina. To accelerate this agenda, we have announced the arrival of Emilio Busoli as the new President of U.S. Operations. Emilio has sound experience in our sector and will lead the next phase of the business there. We now go on to Slide #7 to speak about other domestic brands. We had a challenging quarter, especially in airports, in the specific case of catering, we have a difficult base of comparison. Last year, we had one-off higher-margin contracts, but once again, they were short-term contracts for only the second half of the year. In our shopping mall and hospital brands, we saw improvement in service and efficiency. And in our Vienna business, we have a high-quality product with a high potential for recurrence in a segment that has been growing most in terms of sales. Now these brands continue to contribute to the consolidated results and in the future, we will reposition what we are doing, but our focus for the coming year will be to focus again on efficiency, customer experience and profitability. We now move on to Pizza Hut on Slide #8. The quarter was quite positive for Pizza, showing us the strength of the same-store sales grew 2.5% driven by higher traffic and very effective delivery campaigns with delivery sales up 14% in the period. Company-owned stores also contributed with 4% in same-store growth even after the portfolio adjustments and the reduction in total number of units, brand revenue grew 1.3%. In digital, we continue to advance consistently with better platform integration, targeted promotions and greater efficiency in online channel. In profitability we had another quarter of margin expansion, reflecting the process in COGS, cost of personnel and a healthier store system. Strategic partners remain a highlight in delivery in the collaboration with AMPM that is gaining traction. We have now reached 82 stores in the AMPM network. Now the combination of same-store growth, digital momentum, margin improvement and expansion via partners reinforces that Pizza Hut remains on a consistent trajectory of recovery, productivity gains and margin expansion. To conclude this part of the presentation on business units on Slide #9. Here, you see the number of stores simply for comparison, we highlight KFC. Presently, we have 588 stores, 17 more than the same period last year, but we exclude this increase of stores of KFC, we take it away from our base, and we have fewer stores in the rest of our portfolio. On Slide #10, as a consequence of the performance trends described, our ROL net revenue fell 4% in the quarter and remained stable during the year. We have the impact of store closures. If we exclude that, we have grown approximately 5% in terms of revenue. Brazil growing above 8% and the U.S. with a negative performance. Now all of this takes us to Slide #11. Our final results EBITDA. We closed the quarter with BRL 69 million below last year. We remind you once again that last year, we had the impact of nonrecurring results. If we withdraw this result last year, basically, the EBITDA has grown 2.4% in the quarter and 10% in the 9 months of the year. Although the revenues were below plan, we continue on with our discipline in terms of cost management, leading to a 30-year reduction of SG&A year-on-year. Of course, this clarifies the strong discipline we have in cost management. On the operational side, the positive highlight was Pizza Hut and the negative highlight was the performance of the U.S. operations. In summary, total results reflect a more challenging quarter, but recurring EBITDA has improved and the sharp reduction in G&A shows that we are executing with discipline and strengthening the foundation for coming cycles. I will now turn the call over to Natalia, my partner and CFO, to speak about the company's financial results.

Thank you, Santoro. Good day to all of you. I would like to thank you for your attendance in our earnings call for the third quarter '25. I'm going to speak about cash flow and CapEx investment. As Mr. Santoro mentioned, the quarter was more challenging. We had good management of our cash, and we ended up with a good amount. This reflects structural changes we made, as mentioned by Santoro and a reduction of SG&A that is considerable. We end the quarter with an operational cash flow of BRL 68 million for the 9 months of '25, almost double of last year. We have a stronger cash operation. It's one of our focuses and of course, supported by austerity and expense control. Now this, along with working capital, when we look at the line item of investments, we do have a very selective approach. As Mr. Santoro mentioned, we have creative ideas to use third-party financing for expansion so we had a drop of 46% of CapEx in the semester also influenced by reforms in the U.S.A. For the 9 months of the year, the drop is 27%. If we think of the carryover of 24% that we have commented on in previous calls, the drop was even more expressive of BRL 76 million would in truth be BRL 36 million. And this is what we're doing to protect our cash generation and continue on with our maintenance investments. As a summary, therefore, you can see that the company has focused on cash generation and with a higher interest rates, this has improved our liquidity. If we look at our capital structure on this next slide, with a JV with KFC, we have had structural changes in the company. The net debt has dropped to BRL 468 million. This reflects BRL 100 million of amortizations carried out in an extraordinary fashion. We end up with BRL 200 million the operational cash, of course, and the payment for KFC. Now we have worked to lengthen our structure in debt and we continue to work so that we can better structure changes for the coming years. The leverage, as you can see on this slide is 1.1 below the rate that we have stipulated in our covenant of 3x. And I would like to remind you, and I had mentioned this in the previous quarter, once again, the company does have a structure of options for sale, what remains for KFC and this has a positive impact on our debt structure. Those rights, we are entitled to are reflected in our balance. This is simply to remind you what we explained in the last quarter. To conclude, I would like to underscore that despite the challenges we faced this quarter and mentioned by Mr. Santoro, we were able to balance the company cash, we had a focus of changing EBITDA into cash, and we continue to be selective in our cash allocation, making the most of the resources that we use and working with more creative ideas and third parties to expand our capital. This shows you the pillars that were remarked upon by Mr. Santoro for the company. With this, I would like to end this slide, I thank all of you for your attention, and I am at your disposal should you have any doubts. I return the floor to Santoro.

Thank you Natalia. Now we're moving to the conclusion of our presentation on Slide #14. Here, you see some of our priorities. We begin with customer experience, which is what will guarantee the results in the future. We have to continue to involve when it comes to customer experience at our stores with a daily focus on store by store, we can never lose sight of that, and that is why we are here. Additionally to that, we highlight 3 points. We're going to continue to unharness the value of Frango Assado with creativity. We're making strides in that evolution that recovery of the operations in the U.S.A. by reversing the results in New York and Boston more specifically, and strengthening commercial and operational management on all fronts. Now given the macro scenario, 2026 will be a year of absolute discipline on our part. We've always done this and things will not be different in 2026. You have seen a substantial decrease in CapEx and increase in our operational cash. No store will be inaugurated with our own capital in 2026. And if I look at the company, the consistency of our strategy, the strength of our brands and the quality of our team and our franchise fees gives me greater strength and certainty that we are in the right pathway. With this, I would like to end the presentation and return the floor to Samanta so that we can go on to our question-and-answer session.

[Operator Instructions] We received a first question from [ Marco Bandiera ] regarding catering because of the -- well, is this margin due to a cost increase or competition.

Well, we have 2 effects here Marco, as I mentioned in the presentation, there's the impact of the comparison base. In the second half of last year, we had extraordinary services. It's only extended through the second semester with a very good margin. So this had a positive impact last year. But as this was not recurrent, it was specific to the second half of the year. In the comparison, there is a reduction. For the second part of your question, yes, there is a problem of competition and cost pressure as well. We have a plan that is underway, along with our partners and client. We have a plan underway to recover those margins to the levels that we had in the last year.

We have a question from Roberto Santoro and team. Congratulations for your results. How are you going to comply with the contractual target of IMC without using your own capital?

Here, we have 2 things: the expansion through franchises. Yes. Secondly, we're under discussion with Pizza Hut to adjust our commitments in coming years to reflect that potential when it comes to the franchises. Thank you for the question.

Our next question comes from [ Edison Roberto ] from E2M investment. You may proceed with your question.

Well, my question basically refers to the activities in the U.S.A. Perhaps, this was a mistake of meal. And I would like to know if you have a term of certain period so that you can define a turnaround in your activities in the U.S.A., as the market there has enormous competition and we see the closure of several companies there.

Edison, thank you for your question. Now I'm under the obligation of clarifying a point. This operation historically was always very positive for us. I don't consider it a mistake, an error. It's positive. The currency is strong. And historically, this has always been the case even this year when the performance is not very good. The cash is positive simply to clarify that it's something that has aided and embedded us and continues to help us in cash generation. But to your point, we do have a plan. We have made significant changes in the structure in the U.S., bringing in a new President, one with a good profile in terms of operations. We have a strong brand and the locations are very good. We're in excellent locations. And the challenge there is pricing perhaps supply of products and it is our understanding that our plan will change this and allow the results to once again grow in the U.S.A., the coming year. We faced 2 challenging quarters in terms of seasonality, the American government and the coming summer, we're going to bring ever more positive results from the United States. Once again, thank you for your question. Thank you. And congratulations for the work that you have carried out at meals for the last few months. Thank you, Edison.

We have a question from Roberto a follow-up. He asks us to comment on the short-term debt strategy to roll the debt.

And Roberto, we have already changed the debt that is about to mature in October, as you can see in our statement and we are going to restructure the short-term debts. The intention is to lengthen the maturities. Regarding the receivables, we use them in a very timely fashion, BRL 10 million to BRL 15 million approximately. We use this in a timely fashion to balance out entries and exits in Frango Assado. For example, our payment is different from the receivables, and this is where we tend to use this more at the gas stations. Thank you for the question.

[Operator Instructions] The question-and-answer session ends here. We would like to return the call to the company's CEO, Alexandre Santoro, for the closing remarks.

I wanted to close by thanking all of you for your attention, thanking you for the questions. Of course. it's always a provocation to make the most of this space. Next week, we have a holiday. So everybody will be on the highways, do download our app. Of course, you can perhaps receive a cheese bread or a chicken fritter. Once again, thank you for your attention and have an excellent day.

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