Sphera Franchise Group S.A. (SFG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Lukasz Wachelko. I'm representing Wood & Company. And today, I have the pleasure of moderating the call with Sphera Franchise Group. And maybe now we'll just pass on the mic to Daniel Palita, the Head of Investor Relations.

Thank you so much, Lukasz. Good afternoon, everybody. Thank you so much for joining us for the Q3 financial results analyst and investor call. We are very happy to see that there are so many of you joining today. I am here together with Mr. Calin Ionescu, the CEO of Sphera Franchise Group; Mr. Valentin Budes, CFO of Sphera Franchise Group; as well as Monica Eftimie, the Chief Marketing Officer of Sphera Franchise Group. At the beginning of the call, I would like to make a short -- acknowledge the disclaimer that you can find on Page 2 of the investor presentation that was sent to you today morning by Wood. The comments and responses as well as information that we are going to share today reflect the management's views as of today, November 12, 2020, only. And this presentation will include some forward-looking statements. Actual results may differ materially. Additional information about the factors and risks that could potentially impact our financial results are included in the financial report that was published today. We invite you to read the whole Q3 report as well as the presentation if you haven't done so yet. The disclaimer that I just shared with you just a brief summary and I urge you to read the full disclaimer on Slide 2 of today's presentation. Now moving to the agenda for today. We will start with Calin sharing some highlights about our performance -- investment from the management actually about our performance in Q3. Then we will pass on to the Q3 2020 highlights, which will be shown by Valentin followed by the COVID-19 adaptation measures that we took in Q3. After that, we will share with you information about the performance of the brand throughout Q3 as well as we'll end the presentation with the detailed Q3 financials as well as the financial results of the 9 months of 2020. As well as we have a slide about forecasted 2020 revenue and expense that we have shared with the market through a current report last month. At the end, as Lukasz mentioned, we are going to have a Q&A session. Therefore, please keep your questions for the very last bit of the presentation. Thank you so much. I'm now passing the floor to Mr. Calin Ionescu, the CEO.

Thank you. Good afternoon, everyone, and thank you all for joining our today's call. So I will take the floor telling you a few words regarding this third quarter. And thereafter, I will invite my colleague, Valentin, to run you through the financial report of the Q3. After an extremely difficult second quarter, thanks to all team member involvement and dedication, the third quarter showed a good sign of recovery. During this period, we reopened all the restaurants and focused mainly on expanding delivery service, optimizing menus to safe market conditions, redesigning customer and production flows, analyzing an improving cost structure to maximize performance. Sphera Group was able to implement significant cost-cutting measures, both in the restaurants and in general and administration expenses. All these measures together with others that we want to implement will help us get through the difficult period due to the new restriction imposed by the authorities. As you all know, Romania is basically increasing in corona virus cases and a partial lockdowns, our field of activity being affected again. Despite this pandemic, we continue to implement the plan to open new restaurants as well as to identify new potential location for future development. All this result will be expanded in our today's presentation. Now I just want to highlight some of the achievements of the group that I consider extraordinary for this period. Consolidated sales of the group grew with RON 91.6 million, 86.2 percentage compared to second quarter of this year. The normalized EBITDA margin registered by the group in the third quarter of this year reached 30.6%, improved compared both with results from the second quarter of this year and also from the same period of last year's the third quarter of 2019. When the EBITDA normalized, it was 12.3%. Also, the group managed to lower the general and administrative expenses by almost 20% compared to the same period of 2019. During this last quarter, have been opened 4 new units, out of which, 3 in Romania and 1 in Italy. As I said in the past, we are all in this together, and we will do our best both for the company shareholders, investors and our valuable employees and the client. Valentin, please take the floor.

Thank you very much, Calin, and good afternoon, everyone. Today, we are sharing the strong third quarter results that highlight ongoing progress in this unprecedented times. I'm very proud of our solid quarter performance that once again demonstrated our focus on value, on services, quality and safety in order to meet our customer needs. The journey definitely is not finished, but I can assure you that we'll remain focused. We react fast, and we will closely monitor every single day in such a way to be able to take the necessary measures. Our Q3 sales almost reached RON 200 million threshold, being 86% higher compared with the previous quarter. The recovery was from month-to-month, obviously, in September, the highest performance. We have recorded sales lower with just 9.4% compared with the same period of last year from an all-store perspective. The EBITDA followed the solid evolution of the top line just mentioned and reached RON 27 million, just 12% lower than the similar period of last year. We -- like Calin said, we have continued our cost optimization-focused approach. The restaurant expenses decreased in absolute figure with 20 -- 23% for the first 9 months versus the similar period of '19. However, in Q3, we managed to record a similar restaurant gross margin as in Q3 2019, basically absorbing the inelasticity of the semi-variable expenses of the other restaurant OpEx line savings. The G&A as well, very well managed, again described by Calin earlier, tremendous optimization, 33% lower in Q3 versus '19. Going back to the bottom line, the recovery of our EBITDA margin is visible from 1.8% in Q1 to minus 2% in Q2 and 13.6% in Q3. The level of 13.6% is even bigger than the same period of last year as mentioned by Calin as well when it was 12.6%. Actually, in terms of margin, this 13.6% of our last quarter is our best quarter since we have been listed from a margin perspective. So I want to mention also the fact that in the slide for Q1, this is a typo. We are mentioning there 8.7% margin. But as I said, it was 1.8%. So I apologize for this. In terms of risk, on one hand, we have the pleasure to see our recovery to date. But on the other hand, we also understand inevitably the risk of more starts and stops for the remaining period. So as you know, our industry is very sensitive to the evolution of this current pandemic effect. To make it clear for everybody, during Q3, the rules were the following: City or area reaching 3 cases per 1,000 inhabitants were having the possibility of the respective municipality to impose restrictions. Given -- starting September, we had such cases in Romania. And as you probably are aware, more reach in the red zone level during October, including the capital Bucharest. Nowadays, even more, we had national-wide unit restriction applied in Romania. Let's go to Slide 7, where we can see the 9 months performance third quarter. From 3 pillars point of view, sales, expenses and EBITDA, most notably the Q3 performance. Next slide, Slide 8 is showing the localization of our top line performance per geography versus previous years for both year-to-date and quarter. So Q3 was 22% lower for Romania, 12% for Italy and 15% for Moldova. Next chapter presenting some big categories. Our efforts in elections, we took in the COVID environment during Q3. So I have the pleasure to pass the word to my colleague Monica who will touch the first 2 section of the slide by revenue and development plan. Please, Monica.

Thanks, Valentin. Hello, everybody. Our mantra in Q3 was to bring back the lost transactions that we've seen in Q2 due to the pandemic. So all of our marketing efforts are leaning towards maximizing revenues focusing on top line. We had to adapt to the new market situation, and we have to look at the consumer behavior. And we are focused on new consumption occasions, which were delivery and takeaway. And we addressed them with both marketing campaign, but also new technology. For KFC, we launched in Q3 our own e-commerce channel, which, obviously, helped our delivery sales effort. And also, we launched a touchless kiosk as a pilot. It's a novelty in the KFC world and in the QSR world, so it's the first kiosk, self-ordering kiosk where you can order without touching the screen. More on this in our next -- in our Q4 results presentation. We also looked at our menu in order to optimize margin and also cater to consumers' needs. All of the research says that familiarity is paramount in times like this. So we offer them familiar products through our improved menus. And also, differentiation in terms of communication, being different can be an asset. So we try to develop marketing and communication campaigns that stood out from the quarter. So that's in terms of revenues top line effort. In terms of development, we know that to being available is available to our customers in terms of proximity is very important. So we continued our development plan despite of the conditions in the marketplace. So until today -- so this includes Q3 plus with the first month of Q4, we opened 4 KFC restaurants. We relocated 1 -- 4 KFC restaurants in Romania. We opened 3 in Italy, 3 KFC restaurants in Italy and 1 Taco Bell. More details on Q3 development plan will be shared in the next slide. So I'm not going to go into detail right now. Something that it's worthwhile mentioning is that we are in continuous negotiations with YUM!, our master franchisor, in order to adapt the development plan to the new market conditions in Romania for both KFC and Pizza Hut. And I will go back to Valentin for the remaining presentation.

Thank you. Thank you, Monica. We'll continue with the lease agreement perspective. So from a lease point of view, we managed to finalize and recognize the effect of the rent discount for the entire 9 months period of 2020. So for fixed rent, we have an extra RON 4.3 million worth of discounting embedded in our financials for Q3. If we are linking this with what we were discussing in the H1, this led us to a total of RON 8.7 million of fixed rent discounts to date. Obviously, following the evolution of the restrictions, during Q4, we will continue to apply case-by-case any kind of further possible negotiation. Moving forward, next slide, Slide 11 shows an overview of the cost of labor. We have in the beginning of the slide, the first bullet, a recap of aid grant status. Then we move to Q3 where we have benefited from 2 measures granted by the government, depending on the country, either technical unemployment for state aid, 41.5%, covering the cost related to the salaries for the employees who received technical unemployment indemnity. In Q3, the amount we benefit also and we have reflected in our financials is RON 7.7 million for all 3 markets. You can see in the slide the breakdown of this per country and per type of measures. However, I think it's worth mentioning as well the fact that there are RON 26.8 million worth of compensative labor cost for the entire period of the 9 months, to have the entire magnitude corroborate the last quarter 1. So the next slide, Slide 12, we have an overview of our financial positions. On top of all measures implemented and presenting during our previous call, we have secured on top, during Q3, a new short-term working capital line of RON 9.6 million, which has not been activated to date. Our financial spending remains strong. We generated positive cash from operations during the third quarter. And as of the end of it, we have RON 113 million available cash. Good. Next slide is Slide 14, where we have the evolution of our active stores as of the end of H1, Q3 and October. It is worth knowing the fact that during November, as we mentioned, we have opened another 2 stores of Taco in Romania and 1 KFC in Italy. Moving to Slide 15. I indicated in our last call that this time, we will go back to our usual thing, store -- all-store type of analysis. So here it is. We have the evolution of the top line of KFC Romania in this slide. From an all-store perspective, KFC Romania face a decline of 26% for the first 9 months and 17% for the Q3 standalone. However, from a same-store perspective, we have reported a 35% decline for the first 9 months. While for Q3, we had 24%. As you can see in the last bullet, under the same-store category, we would like to share with you a guidance related to the evolution of the sales during October. We have a solid evolution staying at minus 12% versus similar period of last year, same-store while all-store is only 4% lower in October. In the next slide, Slide 16, we have Italy and Moldova for KFC. In Italy, we had 18% decline of all-store for the first 9 months and 12% in Q3, while same-store is minus 40% for the first 9 months and 27% in Q3. So since Moldova doesn't have new store category, so we have all in all 30% decline for 9 months and 16% for Q3. Next slide, Slide 17, we have Pizza Hut and Taco Bell. The same Pizza Hut, like KFC Moldova doesn't has new store, so same-store is equal to the same-store and has a decline of 45% for the first 9 months and 52% for Q3. Taco Bell, also 9 months, declined 14%. Q3, declined only 3%. However, same store is 33% 9 months and 24% last quarter with minus. Now let me provide a bit more detail regarding our financial result for Q3. So we are going to Slide 19 where we have presented our 9-month consolidated P&L without IFRS impact. Basically, a wrap-up of the info mentioned until now versus '19. The top line declined, 28%. The restaurant expenses is lower with 23% coming from almost all component lines. G&A, 70% down, resulting in an EBITDA of RON 27 million, lower 50% than 2019 level. Next slide, Slide 20, we have the P&L same structure for the quarter, the last quarter, quarter 3, without IFRS 16. So while continuing our recovery journey, we are RON 92 million worth of sales versus the previous quarter, reaching RON 198 million, as I said, almost RON 200 million threshold sales for Q3, representing a level low with 19% versus the same quarter of '19. In the same time, we had both restaurant -- both the restaurant expense, SG&A lower versus the period -- versus same Q of last year with '19 respectively 33%. All this ended up in an EBITDA level of RON 27 million being 12% lower than '19. Next slide, Slide 21, we provide a focus on the components of the restaurant expenses. I will take them one by one in order to give you some insight. Food and material, lower with 30% versus '19, driven by both volume and efficiency. As you can see in terms of weight, in revenue, decreased from 33.9% to -- in '19 to 32.7% in 2020. Payroll is lower with 33% fueled by both state aids and efficiency measures like reducing working hours and lower number of employees in the specific period of Q3. Here is to be noted as well, the lowering of the weight of this cost line in revenue from 22.8% in '19 to 22 -- to 21.1% in 2020. Next line, rent expenses decreased to 12% versus last year to RON 43 million level, having a weight in revenue of 8.6%. Here, despite the received discounts I already mentioned, there is still present leverage effect of the fixed rent over the not-fully-recovered level of sales. The royalties and advertising expenses are following the sales evolution. So going to the other operating expenses line, it shows an increase versus '19. This increase was driven by the higher share of aggregate and commissions with weight in this category growing from 2.1% out of RON 67.6 million as of September '19 to 21.7% out of RON 74.5 million as of September '20. Next slide, Slide 22 shows the same level of detail, but from a quarter perspective this time. All the remarks mentioned before for the first 9 months slide are valid for this slide as well from a quarter perspective. So I will move to Slide 23 where we have the 9-month performance split per entity. We can clearly observe significantly improvement in EBITDA margin in Q3 '20 compared to Q2 '20 and even with Q3 '19. KFC Romania margin, 19.2%, a very high level, improved from 9.9% in the second quarter of this year and also higher than Q3 '19 when it was 15.9%. Moldova margin, 21.2%, again, a very high level as well, improved from minus 4.1% in the previous quarter and higher than Q3 '19 where it was 15.8%. Taco Romania, 11.3%, improved from minus 6.7% in previous third quarter and also higher than Q3 '19 where it was 9.7%. Italy, negative 5.8% this time, but improved from minus 54.4% in Q2. And also, Pizza Hut, negative 2.4%, but improved from minus 22% in the previous quarter. Next slide, Slide 24, we present the details of our G&A expenses for the first 9 months. For this period, we managed to reduce the G&A with 17.4%. We are looking -- if we are looking to the Q3 loan, the performance was even more solid, mentioned as well in the previous slides, minus 33% versus the same quarter of '19. Here, as you can see, almost all the cost line component of the G&A has recorded a reduction. All in all, Q3 G&A expenses line reaches a very good weighting revenue of only 5.5%. Next slide, Slide 25, as you get already used in this reconciliation of the P&L from -- with and without IFRS 16 perspective. And before going to forecast slide guidance section, I would like to mention something in respect of the impact of the COVID expenses in our first 9 months results. First of all, very important to emphasize that all the decision that we are taking are grounded in an intense focus on safety of our customers and [indiscernible] employees. As we have mentioned from the very beginning, we are fully committed to do the right thing for our team members, for our customers and, of course, for our communities. In the first 9 months, the total impact resulted in a direct effect of the pandemic, we estimate to be around RON 3.5 million worth of expense in our P&L. So I'm already on the Slide 27. As you are aware, on 22 of October, we have published a revised forecast for 2020. As it is very obvious for all of us, everything is volatile and unpredictable. However, we are optimistic in respect of our capabilities to achieve this guidance. As of September, the top line is achieving proportion of 75%. This is translated in a monthly run rate remaining for Q4 of RON 57 million. And in respect of EBITDA, we are already above guidance level of full year that we have provided. So in the end, I want to thank you all for the presence and patience. So I will be very happy, me and my colleagues, now to go to Q&A and to address all of your questions.

[Operator Instructions] We currently do not have any questions on the line.

Okay. So maybe taking the privilege of moderator, I will start. First of all, congratulations on the really good results, especially in the cost line. And let me ask you on the comparison of restrictions between the third quarter which is behind us and the fourth quarter we are going through, how do you compare them? And how much worse or better should we expect the fourth quarter to be versus the third one?

First of all, to -- and as recoupled with the situation in the quarter 3, until 1st of September 2 months, all the restaurant was closed from inside on the seating area. Only September, it was open with some restriction, usually 50% of the capacity. The first 2 months, it was takeaway and delivery for driveline. Now it's something in the middle. It was October, that part of the month, it was low to operating site with restriction of the capacity. And now we are only delivery and takeaway. Starting with Monday, with the new restriction in place that forecast to close the restaurant at 9:00 p.m. And after this hour, until 23 or more, it's allowed only the delivery business.

This is something that was not present in Q3, and somehow, it's limiting our capability from a drive-through perspective where we can operate only delivery.

This is the situation in this moment. We do all our best to offset this decrease of operating hours. And we try to increase our capacity of delivery.

Everything that Calin mentioned is applicable for Romania where is our main market.

In Italy, there are different situations. There are different rules. The restaurant is closed from interior. It's only the takeaway and the delivery also. They are closed from 6 p.m. in some regions, and after that, only delivery. There are some regions that apply in the weekends for the commercial center to be closed and so on and so forth. Different situation, different from region to region.

Okay. So if the situation of restrictions and potentially in the development of the top line is merely in the third quarter, should we also expect earing situation on the cost savings and discounts on rental costs and state aids to the labor cost?

Of course, we do the same -- we have the same approach like in March to maximize the -- or to reduce the cost and also go back to the landlord and to renegotiate again the rent. This would be the, let's say, common practice.

Yes. However, from everything that is dependent to government, we do not have any control, i.e., one of the benefits that was present during Q3, the 41.5% indemnity for Romania is not yet -- is not applicable anymore in Q4. However, we'll monitor any kind of other incentives in the limited, it's applicable for us, we'll take it. The technical unemployment, as far as we are aware, it's -- because of the restriction, it's applicable. And it will be part of the calibration that Calin mentioned earlier.

Okay. So last question on my end and maybe someone else would be willing to add more. After the first 3 quarters, you already delivered more than 100% of full year EBITDA guidance. Are you looking so cautious on the fourth quarter? Or we are just, well, there's an update what you are looking from the safe way and not including the guidance for now?

I think we just want to be cautious because you saw that -- you never know. And it's better to be able and we'll do everything possible to have it maximized. But we cannot anticipate any extra other help that is not in our control that can influence visibly the bottom line.

Okay. But I understand that for now, as for mid of November, there's clearly an update to those numbers, which we shall see how the second half of the quarter develops, or shall it decrease part time.

Exactly, which is very important. So we have always in our mind, April, which, for sure, we hope will never happen for anybody in any kind of businesses. But this is making us very cautious and balanced in everything that we do.

Okay. That's, I think, pretty much all on my end.

[Operator Instructions] We do not have any questions on line.

Let's wait another minute.

So maybe one more on my end. On negotiations with YUM! basically.

Please, Lukasz.

How are you proceeding with YUM!? Because I understand that this year, every single franchisee is going to YUM! or Moldova and all the others and asking for a reduction of the rollout plan. You are one of the few who actually maybe were falling behind the plan, but still adding new restaurants. Shall we expect you to be penalized for not delivering on the original plan? Or there should be no penalties? Well, how should we look at this? Because I understand that -- I don't think anybody will deliver on the initially promised numbers.

No, we are negotiating the good faith with YUM! And they are a -- it's a partnership between us, yes? And we don't face any issue in this moment. We negotiate. We don't have an answer to you in this moment. But we discussed about the number of stores that we opened this year and next year. And once we have a final answer, we'll go public.

Yes. We'll do a current report, for sure. We are quite advanced in this moment. Just to add on what Calin said, we were in this discussion also before for Pizza Hut, if you remember. So it will be a package for both Pizza Hut and KFC Romania in terms of development. Once finalized, as Calin said, the current report will be made publicly available to the market.

Okay. And when speaking of Pizza Hut, it has been always the trouble child within the portfolio of YUM! And in this world where KFC is better than the Pizza Hut, is YUM! coming with any idea as how to turn around the business? Or they are accepting any new ways of doing business because the dine-in definitely was more important for Pizza Hut, and that's the part of the business which is troubled much more. So are there any idea maybe of YUM! or yours, how to make is running by [indiscernible]

YUM! have ideas. We have our ideas. And we are working for a new format of the dine-in. Once we'll be ready, as Valentin mentioned, we'll come with the report and will inform everybody. We don't say we'll work on this.

Okay. Great. I believe that's all on my end.

We also do not have any questions on the line.

This is a good thing.

I believe so. So maybe I'll wrap it up basically and...

Great. In this case, we thank you all for joining us today. If you have any other questions after this call, please do not hesitate to contact us at [email protected]. We're going to come back to you as soon as possible. And of course, if you haven't yet run -- gone through the whole report, we invite you to read it in detail. Thank you so much for your time, and we will get in touch. We will be back at the call next year for the preliminary 2020 results. And hopefully, we'll be back with more good news. Thank you so much.

Thank you.