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

Hello, everybody. Welcome to Sphera Franchise Group's First Quarter 2021 Results Call. Before we begin, I would like to underline that this is a recorded line and the recording of -- we are recording both the presentation as well as the Q&A session. And by joining this call, you have agreed to being recorded. If you do not wish to be recorded, please let us know via chat or feel free to leave the call and we can discuss separately. I am here today with Calin Ionescu, the CEO of Sphera Franchise Group; Valentin Budes, the CFO of Sphera Franchise Group; as well as Monica Eftimie, the Marketing Director. My name is Zuzanna Kurek, I'm in charge of the Investor Relations. We are going -- before we start the presentation, as always, I would like to mention to you a short disclaimer which you can see as well as on your screen. Statements or comments made during this conference call may be forward-looking statements. These may include, but not necessarily, could be limited to financial projections or other segments of our plans, objectives, expectations and intentions. These matters involve certain risks and uncertainties. Our actual results may differ significantly from the projected or suggested in any forward-looking statements due to a variety of factors. I would like to invite you all to read the disclaimer before we begin. Now as I mentioned, we are here with the Sphera Franchise team. I would like to invite at the beginning Calin Ionescu to share a few words about the performance of our group in the first quarter of 2021.

Thank you, Zuzanna. Good afternoon to everyone. We are all here for the results related to the first quarter of 2021. I'll start with a summary of the main key factors which have influenced in a way or rather the first quarter results. However, before the summary, the following should be noted. After 2020, probably the worst year in history, the first quarter of this year, Sphera was on an upward trend when it was possible to operate in doses, even at low capacity, and this on top of the takeaway and delivery activities. As we will see later in our presentation, in terms of restaurant sales, the first quarter of 2021 was the best quarter of Sphera Group on the Romanian market since the beginning of the pandemic. The result is even more remarkable as it shows an increase in sales of over 6% compared to the same period of last year when only 2 weeks were affected by taxation. During these first 3 months of 2021, we have focused on increased sell-through partnership with online ordering platforms. We have implemented dedicated offers for delivery and drive-thru channels. And furthermore, we have continued the investment by expanding the restaurant in our network, both in Romania and Italy. Together with my colleagues, we are all convinced that as the restriction have lifted due to the expansion of national vaccination campaign, which have also supported at the group level, we will be able to open the restaurant at full capacity, which will also lead to increased sales and profitability. Coming back to the summary of the presentation, which you will follow. Sphera Group ended Q1 2021 with restaurant sales of RON 211.4 million, up 6.6% compared to the Q1 2020. Orders recorded through the delivery channel remained at the level of Q4 2020. The group recorded a normalized EBITDA, excluding the impact of the IFRS 16, of RON 13.1 million, 271% higher than the same period of the previous year. In Romania, the group's revenues increased by 6.9% compared to the same period last year and by 1.7% compared to Q4 2020. The group opened a KFC restaurant in Sfantu Gheorghe, the first drive-thru restaurant in Italia, Italy in Pomezia Mari last [ year ]. We look forward to a better remaining 2021, and I will take the opportunity to thank the whole Sphera Group team for the hard work and dedication to this difficult period. Vale, please proceeded with the presentation of Sphera results.

Thank you. Thank you very much, Calin. First of all, I would like Zuzanna to go through a little bit [ of an outline to sum it first ].

So as many of you probably joined that in the past calls, we -- well, we changed the method of the call, we are going to do from now on the Microsoft Team meeting so that you can also follow the presentation. The idea has remained the same. We are first going to go through our results presentation. [Operator Instructions] We will open the floor for questions after we've finished the first 3 points on the agenda. So the Q1 highlights, the COVID update as well as the brand performance. We -- I'm now giving back the floor to Vale to continue with the Q1 results.

Thank you. Thank you very much, Zuzanna. Good evening, everyone. Two days ago, it was exactly 1 year since we had our first earnings call of the COVID-19 pandemic. It has been a tremendous year in which we have experienced frequent closing and openings of our operations and constantly changing group regulations. As mentioned in the previous call, I see it as a test. The test in which we have witnessed the power of our brands and the commitment of our staff. Regarding Sphera business performance, as Calin mentioned, we are excited to share with you today our strong first quarter results. Despite continued governmental restriction in all our countries of operations, I'm pleased to share that in the first quarter, we have already surpassed Q1 2020 sales level, along with a significant better bottom line performance. All store sales grew 6.6% in Q1 as compared to Q1 2020. And furthermore, our sales performance was higher even compared with Q4 2021 level, despite the fact that historically, Q4 has the best seasonality in our industry. Overall, Sphera Group generated solid operating results, leading to a positive EBITDA of RON 13.1 million for the first quarter. When looking to the first quarter operating expenses, because of a very tight control, we have recorded a slower growth than revenues of 42.5%. Now I will be sharing some color on this category of expenses. So I will start with the food and material cost lines, where there is an increase of 4.6% as well as slower than the revenue ramp-up. This resulted in a better weight of our food and material cost in revenue of 32.9% compared with 38.5% in the same period of last year. Next cost line that I want to tackle, part of the restaurant expense category is the payroll cost line. During Q1, our payroll cost stated approximately RON 48 million, having a weight of 22.6% versus 25.6% last year. Even though we have a dedicated section later in our presentation related to COVID aspects, since we are on this cost line, I want to touch base on the fact that during Q1, the technical unemployment reimbursed by the state was still applicable for our operations. The number of people under this status was relatively small compared with the previous periods. Yet, we have recognized RON 919,000 worth of reimbursement from the authorities. Going forward with the restaurant expenses, we have our rent cost line, with RON 16.5 million in Q1. As I indicated last time, we have continued to approach case by case our landlords, and we have succeeded to obtain during Q1 an amount of approximately RON 1.3 million, part of discounts related to fixed rent. The next cost line is the advertising expenses. We have invested in marketing during Q1 almost RON 9 million. Versus revenue generated, it means a weight of 4.3%, lower both compared with the similar period of last year and versus Q4 as well. Similar to the past years, we expect marketing expenses to be around 5% of sales for the full year of 2021. Lastly, other operating cost line with an expenditure of RON 31.4 million, and the weight in revenue of 14.8%, higher with 260 basis points versus similar period of last year, however, lower with 220 basis points compared with Q4. The main factor when we are analyzing this cost line versus the similar period of last year is the effect of higher delivery fees, which in the current context, it is an essential leverage of our top line. Delivery expenses remain elevated year-over-year given the significant growth in delivery but constant in absolute value for the last 2 quarters. As you may have seen, we further increased our delivery menu prices during Q2 to help cover the higher cost of accessing these services in this [indiscernible] during the current dynamic market. Now some color on our general and administrative expenses, where we have recorded a reduction of 9.3% in Q1 2021. Main drivers were the lower employee benefits, the transportation expenses and the third-party fees and commissions. The share of the G&A expense in the consolidated sales decreased 100 basis points year-on-year. If we are looking to the balance sheet, we had closed the quarter with a very solid cash position of almost RON 170 million. It is already the third quarter in a row when we can secure a cash balance above RON 110 million. The performance achieved along with no influence on our ambitious development activity, which was executed according to the plan. From a leverage point of view, we stay on a very safe side, recording a linear extrapolated net debt-to-EBITDA ratio of below 1. All in all, having in mind the context, we are pleased with this progress. And we remain confident that we have taken and will take all the necessary actions to ensure the margin stays on the budgeted level. Now on this slide, we have prepared some visuals from 3 perspective concerning our income statement: revenue, expenses and EBITDA. We are delighted to see the magnitude of our sales recovery ramp up. Although it will be visible on the brand performance section later in our presentation, it is worth mentioning that we have recorded a solid same-store performance as well. By excluding Italy, where there were more severe restrictions, the level of the same-store sales in Q1 2021 have been higher with RON 1.7 million year-on-year. Next, we want to provide a quick update on the share of our markets and brands. Romania, obviously, our main market, with a share of almost 90%, increasing against Italy, which, despite being severely impacted by the lockdown measures introduced in March 2021, grew, but only with 2.5% year-on-year, and thus declining 1.5% in market share compared with 2020 average. Regarding brands, except in Pizza Hut, which decreased mainly because of the restriction on the indoor dining, the other 2 brands like KFC and Taco had a positive evolution. Furthermore, both KFC Romania and Moldova closed the quarter profitable. Now we are going to the second chapter of our presentation. It's about COVID-related updates. Regarding vaccination, there is a good progress in our both 2 main markets of around 14%. Probably you saw in the mass media that we encourage the vaccination, and we are the first company in our industry that have organized a dedicated vaccination center in one of our restaurants in order to facilitate the access of our employees and their families as well. As a reminder of the restriction impact in Q1, we had 30% capacity of indoor activity for the period between 21st of January and 7th of March. The remaining period of the quarter was under restriction for our main market. These restriction continue until 3rd of May when we came back to 30% capacity and reached the next milestone this weekend when the indoor capacity increased to 50%. On this slide, we present the evolution and plan for our development. We have closed the quarter operating 159 restaurants; 138 in Romania; 19 in Italy; and 2 in the Republic of Moldova. So far, we had 3 new openings: 2 KFC in Q1 and 1 in Taco in Q2. The 2 restaurants KFC opened were located, one in Romania and one in Italy, as Calin mentioned as well. The one in Italy in the Lazio region being the first drive-thru location outside Romania. Beginning of January, we have closed as well 1 Pizza Hut delivery location that was not viable and had no recovery potential. As a remainder of 2021 commitment on development, we have an extra number of 13 more restaurants to open until the end of the year: 8 KFC, 3 Pizza Hut and 2 Tacos. During June, we estimate to be able to inaugurate another 2 more restaurants of a drive-thru format. Related to the remaining ones, I can mention that we have good progress so far. And I think it's worth mentioning as well the remodeling plan for this year, where we are targeting works for 38 locations, and activity already initiated being phased and work in progress. Related to the state aids, we had technical unemployment that I was referring to on our first slide. We had 17% in Italy and only 4% of our staff in Romania under this status. The compensated value was in the amount of RON 919,000. Another topic is related to the restaurant's specific tax extensions, which now is valid in Romania for the entire first semester. These initiatives give us a benefit of RON 2.3 million for the first 6 months. And potentially, there is also the initiative relating to the compensation by the government for an equivalent of 20% of the lost turnover during 2020, which is kept to EUR 800,000. For this one, the draft is published, being close to its final form. We are evaluating it. However, based on our current understanding, we are quite reserved related to its benefits for our group. Now I will pass the floor to my colleague, Monica, for the marketing and brand performance sections. Monica?

Thank you, Vale. Good afternoon, everybody. I will start with the recap of sales and the evolution of the delivery channel in our ecosystem. In Q1 2021, 31% of wholesales percentages, which translates to almost RON 66 million, were delivered by either aggregators or our own fleet. Delivery maintained the same shares last quarter since, as my colleagues mentioned, restrictions on in-store dining were reinforced in almost all major cities where our stores are present in the first 3 months of the year. In terms of expectations for quarter 2, the share of delivery sales should decrease from 31% to 24%, a level similar to that of quarter 3 of last year. And in-store dining should increase due to fewer restrictions, and hopefully, a vaccination campaign that progresses. Moving on from the snapshot of sales to marketing. In terms of marketing activities, we have as main objective to build the brand over time and the sales overnight, focusing on core areas that I mentioned in previous calls: brands, value-based and access. Going through each brand with a short recap. For KFC, our mantra for this year is to build sales through transactions. And the brand concentrated its communication on value for quarter 1, successfully relaunching 2 value campaigns, Smart Menu and Ceva, both campaigns with an attractive price tag attached and with a promo layer on top, offering prices for purchase to customers. The main objective was regaining lost transactions from 2020, which the campaign managed to deliver, both campaigns managed to deliver. Moving on to Pizza Hut. Pizza Hut is the brand affected the most by in-store dining restrictions, and regaining lost visits is our main objective for the year. Pizza Hut has started the year by communicating aggressive value through its small pizza, only RON 1 campaign, which attracted frugal consumers and increased trial. Moving on to our youngest brand, Taco Bell. Here, we -- here, our focus was on trial. Taco Bell launched a value campaign in Q1 by offering tacos for RON 6 each, with the objective of making core crave-able and offering accessibility to our products. And in terms of technology because I mentioned access at the beginning of the slide. In terms of technology, our internal slogan is digitalize or die. So in 2021, we are continuing the digital journey by focusing on things like digital menu boards, self-ordering kiosks, e-commerce platforms, Click & Collect mobile app. All of those initiatives having as an objective easy access of our brands anywhere and anytime. So this was the recap of the marketing activities. Moving to Slide 15. We'll go, as Vale mentioned, we'll go through brand performance. We will touch upon all store and same-store results and openings. So starting with KFC Romania. As you can see in the tables on the right-hand side of the slide, Q1 2021 was a strong quarter of growth for the brand as all stores performance improved 14.3% year-on-year. We opened 6 new locations from March 2020 to March 2021. Those locations contributing to the solid results. Also, and Vale mentioned, the same-store performance was also good. It improved 6.9% year-on-year, registering partial recovery after the restrictions of 2020. Moving on to KFC Italy. Restrictions here and lockdown was more severe compared to Romania. So this is why the like-for-like performance in Q1 2021 dipped 21.2%. However, we did open 3 new locations, again, between March 2020 until March 2021, and the 3 location helped offset the negative effect of the restrictions. So all store performance, you can see, had an improvement of 2.5% year-on-year. KFC Moldova, a good performance for the Republic of -- for the brand in the Republic of Moldova, which managed to increase sales by 19% compared to Q1 2020. This being the second highest turnover generated since the onset of the pandemic. This increase was also driven by an increase in sales for delivery, which went up 8 percentage points quarter-on-quarter. Pizza Hut. As you can see, Pizza Hut sales dropped 32.6% year-on-year. However, the brand managed to record the highest turnover since Q2 2020. It also lowered the loss by 20.5% quarter-on-quarter and posted an improved performance year-on-year. And this was also driven by the decision of the group to close selected nonperforming Pizza Hut restaurants, starting with Q3 2020. Last but not least, Taco Bell. Taco Bell same-store performance in Q1 2020 registered a 6% increase year-on-year. And the new Taco Bell restaurant that opened in 2020 was a main contributor to increasing all store sales year-on-year performance by 13.1%. So this slide concludes our presentation. And now going back to Zuzanna.

Yes. I am now going to -- we are going to open the floor for questions, one second. [Operator Instructions]

This is [indiscernible] from [ Betty] Capital Partners. I have a question regarding the financing cost. What was the reason behind the increase?

The finance cost, basically compared with Q1 2020, there is the extra amount of leverage that we took meanwhile. However, during Q1, there is no new money from the banks. So the difference is from the interest applied. As well, I need to remind you that we are still under the capital postponement facility. So in this moment, the capital reimbursement for the debt we have towards the banks for the investing activity, it's postponed. So it's all in the interest that it's applicable for the principal and the postponed amount as well. So the variance, it's generated from this perspective.

Okay. And should we expect the same level in the next 2, 3 quarters?

Yes. On top of this one, it will be added to any extra line that we'll decide to activate in the foreseeable future. And also, another factor of interest, it's related to the fact that we are under tax postponement as well. If you remember, there was a facility to defer the tax, the amount of taxes to be paid, without penalty but with regular interest. So this is -- this will be vested as we progress during time. However, if we decide to go for extra leverage, then it will be compensated by the interest generated by the extra leverage. However, for the time being, everything should be more or less constant.

Okay. And 1 more question. And taking into account the RON 27 million EBITDA this quarter, how do you see the RON 95 million EBITDA you budgeted? Is it still available?

I can mention that based on our seasonality that we have embedded in the budget we have published, the one you are referring to, the one generating RON 95 million for the full year, for the first quarter, we are on track. Actually, we are even a little bit higher based on the assumption that we have used. This correlated with the facility, with the relaxation that are implemented in this period creates us the comfort that can go towards the direction of meeting the assumptions in the budget, and implicitly, also the EBITDA and the margin.

Yes. I know. What I -- my question was, if there is any possibility to cross the RON 95 million, because I know that the first quarter is not so good historically, so I thought that this was a very -- I mean, very -- was a good quarter compared to the previous quarter. And I thought that it was -- it may be possible to cross the RON 95 million EBITDA.

Yes. For the time being, I think it's early to anticipate any kind of positive variance. We are very concentrated and we follow everything that's happening. And we are optimistic that we will meet it. Hopefully, based on the evolution, we'll evaluate later during the year if it will be...

The half year [ most probable ] will be much easier to answer for your first question.

[ Cais ], you have the floor.

Congratulations for the quarter that is -- shows a lot of positive surprises. My questions were regarding to cost items. First of all, regarding food and material, I see that compared to sales, you have here some improvement compared to the previous quarter. And my question was, should we expect the same type of percentage of sales dedicated to food and materials to remain going forward? And the second question was regarding the employee benefits. Once, hopefully, this COVID nightmare is over, will we see going back to the level that we saw before? Or you have implemented some lasting savings in that area. And also about the -- if you can detail a little bit more about the other operating expenses.

Okay, [ Cais ]. So I will take them one by one. Related to food and material, on this cost line, we have a big pressure in terms of cost of materials. Here, there is also an efficiency related to the menu proposition that easily is going back to normal. So all in all, we foresee this cost line coming in the next period back to the normal levels. We'll try to mitigate as much as possible all the pressure on the cost of the materials. And here, I'm referring to the main ones, chicken and the others. Related to payroll expenses, again, here the pressure on the labor cost is still applicable in Romania, as you probably know in the market. So once we have reintroduced the bonuses and the performance bonuses in the restaurants and the sales are going back towards normal level, we expect as well this cost line to come back to the levels that we have been used in the past, as well from both perspective, average cost and the number of FTE as well. And the last category we have mentioned, other operating expenses. Here, the main contributor, as mentioned in the presentation, is the delivery cost. Still, delivery, we estimate to be one of the main fuel for sales generation this year. So we see it remaining at high percentage. However, we estimate to improve the margin, having the advantage of natural dilution, mainly because of the price adjustment that I was mentioning earlier that was further increased beginning of Q2. On the other hand, we need to face all the pressure of the labor cost for all the other OpEx line. And here, I'm referring to maintenance, cleaning and all the other categories that are part of this category.

Thank you, [ Cais ]. [Operator Instructions]

This is Reino Pent. Just 1 question I'm wondering about is how big of a problem are these capacity restrictions for you? So if you have like this 30% or 50% restriction, so how full are your restaurants usually? So just wondering whether this 30% or 50% is a problem or it's not.

I will answer to your question. Depends. The business was calibrated for the -- all the scenario. Now with the -- once the restriction is lifted, we are prepared to increase the number of transaction that will be processed day by day. But in the same time, the number of customer is calibrated based on the restriction. Yes? Once the restaurant, it's closed for up to 3 cases per 1,000, the habitat is only takeaway and delivery allow in the restaurant. Now with 30% or 50%, the sales increase depends on the capacity. There's nothing -- in the same time, the delivery number of transaction decrease. Yes? It's not a clear answer for your question, but it's business as usual somehow, because it depends on the restriction, we calibrate the restaurants for the number of people.

Do we have any other questions from the audience? If there are no more questions, we're going to wait 2 more minutes, and then at 5:45, we're going to wrap up this call. So if you have any other remaining items that you'd like to raise or put forward, please let us know right now. If there are no more questions, we're going to wrap up this call. Thank you all so much. As always, you can reach us on Investor Relations. For -- some of you, if you would like to re-listen to this call, we're going to put it on the website. Thank you so much. We're going to hear each other again in August for the half year -- for the first half of the year results. Thank you, and have a great day.