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

First of all, thank you all joining this quarterly after a period of instability caused by the COVID-19 pandemic, which severally (sic) [ severely ] affected HoReCa Industry this year, we see the first sign of stability and recovery. The excellent results recording in the second quarter give us confidence and optimism in the further investment and development of our network. In this context, it's a pleasure for me to highlight a few achievements of the last quarter and first half and which we will present to you in the next hour. Sphera Franchise Group ended the first half of 2021 with restaurant sales of RON 444.5 million, up with 46% compared to the first half of 2020. The group's consolidated sales in the second quarter increased by 119% compared to the second quarter of the last year, reaching to RON 233.1 million, being the best quarter in the company's history. Sphera Group ended the first 6 months with a normalized EBITDA of RON 30.7 million, increasing by 1,867%, and with a net profit of RON 5.2 million by 123% above the level of the first half of the last year. We are proud to announce you that on June 1, 2021 Sphera reached the highest sales ever registered in a single day. In the first half of this year, Sphera opened 4 new restaurants. At the end of this semester, we are opening 161 -- operating 161 restaurants, 8 more compared to the same period of the last year, out of which 114 in Romania, 19 in Italy and 2 in the Republic of Moldova. At the end of June, Sphera heads 4,392 employees, out of which more than 4,000 in Romania, 253 in Italy and 81 in Republic of Moldova. In this context, we are happy to announce the launch of new types of Pizza Hut restaurants on the local market, fast-casual delivery and express. Unlike classic Pizza Hut restaurant, the fast-casual concept offers customers the opportunity to order at the counter and eat either at the table or elsewhere. It is a concept that address customer who don't have time for the formal ceremony of a restaurant, who prefer the convenience and the speed of being able to sit down and enjoy their meal. However, our plan for Pizza Hut is to open 10 new restaurants in the next 3 years. Now even all the above, I further ask my colleague, Valentin to start presenting the financial results of Sphera for the first half of the year. Thank you so much.

Can you please tell us that everything is okay, and you can hear us, guys, please?

Yes.

Okay. Yes.

Yes.

Okay.

So apologies for this, we had some technical issues. We reversed a little bit the order of today's call. So Calin started. I would like to welcome you on behalf of Sphera Franchise Group team to first half of the year earnings call. As usually you already know, earlier today, at 8:00 a.m., we have shared our H1 2021 financial results on our website as well as on BVB website. Before we begin the call, I would like to mention that this call is recorded and the recording of today's discussion will be uploaded on our website by tomorrow, the latest. As stated in the call, invite by joining the video conference, you automatically and implicitly consented to being recorded. If you do not consult to being recorded, please leave the call. In terms of organizational aspects, we will follow our standard call setup, which means the management will deliver a presentation outlining the results and the key events that happened in the first 6 months. And later, we will have a Q&A session. [Operator Instructions] Last but not least, as always, I would like to mention that we will be making forward-looking statements during today's call regarding future performance of Sphera Franchise Group and that the actual results may differ materially. We encourage you to review the disclaimers that we have included in the presentation, which is available also on our -- the presentation is also available on our website as well as on BVB's website. The disclaimer applies equally to all the statements made in today's call. So let's speak of the call, I would like to introduce the management that is here with me today. You've already heard the welcome speech of Calin Ionescu, the Chief Executive Officer of Sphera Franchise Group. We will then -- we will now follow with Valentin Budes, the Chief Financial Officer; and later on, Monica Eftimie , Chief Marketing Officer, is going to take over the presentation to tell you a little bit more about performance of our brands. I now pass the floor to our CFO, Valentin. The floor is yours.

Thank you. Thank you very much, Zuzanna, and good afternoon, everyone. Thank you for joining us today for our second quarter earnings call. As you probably managed to see on our financials published on the stock exchange website this morning, we have succeeded to have a very strong second quarter. As Calin already mentioned, I'm also very excited to announce that in Q2, we have achieved record high sales. We have surpassed 2019 sales level, and we had our best second quarter for all stores sales level in the history of our company. This performance was achieved despite continuing restrictions in all our countries of operations, which were present throughout the entire Q2, and it reflects the strength of our brands and our people. Since we talk about records, I need to share with you that on 1st of June, we had the highest sales ever registered on a single day. Now let's see the figures. All store sales grew 119% in Q2 as compared with Q2 2020. And overall, Sphera Group generated a solid operating profit of RON 20 million, which lead to a positive EBITDA of RON 17 million for the second quarter. This, combined with the strong first quarter, helped our group to close the first semester with consolidated sales of RON 444.5 million, representing 46% increase compared with the first semester of 2020, and the normalized EBITDA of RON 30.7 million, significantly above the similar period of last year when it was only RON 1.6 million. The net profit is RON 5.2 million compared with the loss for 2020. When looking at the second quarter restaurant expenses, because of a very tight control, we have recorded a slower growth than the revenues. I will take them one by one to have some more color on each category. I will start with the food and material cost line, where it's an increase in absolute figure of 6.5% as well slower than the revenue ramp-up. And when comparing with the previous quarter, it's a valuation that it's in our benefit, resulting in a better weight of our food and material cost in revenue of 31.9% compared with 32.5% in the previous quarter and 32.3% in the similar quarter of the previous year. Looking to this cost line from a semester point of view, the analysis is showing again a very good trend line, with a weight of 32.3% this year compared to 33.1% in the first semester of 2020. As you already know from the current economical context, there is a big inflationary pressure on the cost of oil materials in the market. As a counteraction, during Q2 in Romania, we had performed some price increases for all our brands. And I'm pleased to see that our moves were well accepted, resulting in a comfortable balance of transactions in average ticket, confirming that our brands and our value proposition are really strong on the market. Now let's speak a little bit about payroll cost. During Q2, our payroll reached a level of RON 54 million, having a weight of 23.4% in our top line. As expected, we are going to pre-pandemic levels in respect of this cost line. Our people are a strong asset for us, and they made the difference in this very difficult time. In Romania, there is still a very tight labor market, but we have invested in our employees, and we'll continue to invest because our team should remain focused on safety, reliability and excellent product experiences. Going forward, restaurant expenses, we have our rent cost line with RON 17.5 million in Q2. As indicated last time, we have continued to approach case-by-case our landlords, and we have succeeded to obtain during Q2, an amount of approximately RON 1.5 million discounts related to fixed rent. The next cost line is the advertising expenses. Here, we have invested in marketing during Q2 around RON 11 million versus revenue generated, it means the weight of 4.8%, which brings us to a total investment of RON 20 million for the first semester of this year, having a weight of 4.5% in total revenues. Similar to the past years, we expect marketing expenses to be around 5% of sales for the full year of '21. Lastly, another operating cost line, with an expenditure of RON 33 million and the weighting revenue of 14.2%, lower versus previous quarter when it was 14.8%. Versus last year, there is a significant increase in both absolute figure and weight, but we already know that the main factor when we are analyzing this cost line is related to the effect of the delivery. We had higher delivery volumes, which in the current context, it's an essential leverage on our top line, especially in the period with the restriction on circulation and indoor servings -- serving, like it was the case for the second quarter. Almost all our restaurants across all the markets offered for the entire semester and today in delivery capacity, either through on fleet or aggregators. Delivery expenses remain elevated year-over-year given the significant growth of this channel, but relatively constant in both volumes and absolute values for the last 2 quarters. As restrictions are being lifted, there is a slight decrease of the delivery size. Anyhow, this channel is hanging quite well in the channel sales mix, but definitely having an erosion, mainly due to the accelerated increase in the traditional serving method. As I have already mentioned in our previous call, we further increased our delivery menu prices during Q2 to help cover the higher cost of accessing this service needed in the current dynamic market. Lastly, the G&A expenses where we can see a stable evolution compared with Q1. The share of G&A in the consolidated sales decreased 500 basis points in Q2 compared with Q1 and 440 basis points year-over-year. A few words about the balance sheet as well. We have closed the quarter with a very solid cash position of almost RON 123 million. It is already the fourth quarter in a row when we can secure a cash balance above RON 110 million. As always emphasized by me in our calls, the safe cash position that we have secured lately had no influence on our ambitious development activity, which was executing according to the plans. 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. So in conclusion, a very good second quarter, double-digit growth on our top line despite restriction in place; 2 records, highest quarter sales and highest daily sales; and of course, EBITDA where we have a margin piling up. Now the second slide of our presentation. As usual, it contains visualization of 3 perspectives concerning our income statement, revenue expense and EBITDA. We are delighted to see the magnitude of our recovery ramp-up at all levels, although we know that Q2 2020 was the most affected period by the pandemic effects. Anyhow, if we're going more deeper in the history and still having in mind the current context, the comparison with 2019, it is very enlighting (sic) [ enlightening ] as well with our surpassing the level of 2019. Next, we'll provide a quick update on the share of our markets and brands. Romania, obviously, our main market, with a share of 89%, and Italy, which despite being severely impacted by the lockdown measures, which were introduced in March 2020, secured market share of 10% with a double-digit top line performance when we are comparing even with 2019 levels. Regarding brands, during Q2, we had registered solid double-digit positive evolution for all our brands. And furthermore, both KFC Romania and Moldova closed the quarter profitable. Now we are going to the second section of our presentation, where we have the coverage of the business updates. The first on the technical unemployment. The compensation from the government for the technical unemployment was still in place during Q2. This facility has been utilized by us, especially in the first month of the quarter. So for the second quarter, the compensated value for the technical unemployment was in amount of RON 1.2 million, pretty much in line with the one received for the first quarter. This brings us to a total compensation for the first semester of RON 2.5 million. [ HoReCa's ] specific tax exemption, which is valid in Romania for 180 days, so half of the year. From this initiative, we will have for the entire year a total P&L benefit of RON 2.3 million. Accounting-wise, this is recognized half in the first semester and the remaining half in the second one. So this is the reason why you can see some accrued amounts for the income tax in our financials. And lastly, the initiative related to the compensation of 20% of the loss turnover in 2020 compared with 2019, which is capped to EUR 800,000 at group level. We have applied for this and our application is currently under analysis with the relevant authorities. Going forward, we have the evolution and the plan for our development. As of the end of Q2, we were operating 161 restaurants. The structure was already mentioned by Calin in the beginning. We had 4 new openings, 2 -- 2 KFC in Q1 -- in Q1 and Q2, and 1 Taco Bell and 1 KFC in Q2. The KFC opened were located 2 in Romania and 1 in Italy, the 1 in Italy in Lazio region, and it represents our first Drive Thru location outside Romania. Regarding the development plan for Pizza Hut, we have some great news, as mentioned in our current report in August. So we have closed the negotiation with Yum!, and we have signed an update of the development plan for this brand. In summary, there are 2 important achievements from our point of view. On one hand, we have converted 17 restaurants that we were supposed to open in 2 years' time, i.e., in 2020 and 2021. And 2, 10 restaurants to be opened in 3 years, i.e., '21, '22 and '23. All this is backed by a progressive financial incentive from Yum! and stipulate also the inclusion of the new Pizza Hut Express, which is a smaller type of restaurant with less capital-intensive requirements. On the other hand, we have the cancellation of the accrued penalties for 2020 and 2021, which are referring of not fulfilling the 2019 development commitment. Here, we have agreed a plan, YUM! to invest the equivalent amount in different streams in order to help the brand profitability. Before passing the floor to Monica for marketing and brand performance sections, I just want to have some words regarding what we are doing from a capital market perspective. So I have mentioned so many times in the past that we are focused on improving the level of communication with our investors. All these steps we have done so far are supposed to improve the quality of the relations we have with our shareholders, reinforcing always our credibility and trust. We have updated our corporate website with the main purpose to be compliant with the highest investor relations and corporate governance standards, and we have requested a reassessment of our VEKTOR index, which is carried out by ARIR, and it measures the quality of communication of the stock exchange issuer with investors. As the results were scored after the reassessment, the maximum marks 10/10. We have inserted also a link with the new website in the presentation to be easy for you to access it, if you want to see how it looks. We have dividends soon on 19th of August, the Ordinary General Shareholders Meeting approved the distribution of dividends, in total amount of RON 30 million. The ex-date is September 16, with payment date being set up for September 30. And another important point is the launching of the market-making activity from 24th of August with BRK Financial Group, having as objective the enhancement of the liquidity of our shares. And now Monica, the floor is yours.

Thank you, Valentin. Good afternoon, everyone. I am happy to share with you the brand highlights of a strong quarter. I will start with the recap of sales and evolution of the in-store and delivery channels. In-store sales gained share compared to the last 2 quarters, more exactly in Q2, 29% of all orders, which translate to RON 67.6 million were delivered both by aggregators and our own delivery fleet, registering a 2 percentage point decrease quarter-on-quarter in favor of in-store sales. In terms of our expectation, we anticipate indoor dining to grow in Q3 of 2021. And we are seeing this looking at last year's performance, when the share of delivery -- since the share of delivery should decrease further in Q3 and later increase in Q4 as weather has an important impact on the sales channel. Moving on to marketing. We are building brand over time and sales overnight, keeping in focus the same pillars as last quarter, brand value, taste and access. For KFC, our main objective remains building sales through transactions. The brand concentrated its communication on product innovation for Q2, successfully launching a lower price format for the Real Burger, which drove both sales and the share of burger occasion. Value remained also in focus with CEVA bundles at 5 lei and the Wednesday special offer, both being communicated as a secondary campaign layer in order to gain transactions. Moving on to Pizza Hut. We said that -- we said this in our last call. Pizza Hut is the brand most affected -- most affected by restrictions and regaining loss visits remains in focus. So the brand continued its value journey in Q2 by launching Special 5, 5 pizza recipes at a special price, with the aim of increasing transactions through attracting new users and bringing back lapsed users. Taco Bell focused its communication in both existing and new stores, on product innovation by launching a value format of the Crunchwrap, with the aim of creating differentiation while making the core products affordable to its targets. No changes in terms of technology since our last call. We continue our digitalization journey for our brands. The focus remaining on self-ordering kiosks, digital menu boards, e-commerce, click & collect, e-coupons, CRM and proximity e-targeted communication. Moving on to the brand performance. We'll start with KFC in Romania. In Q2, the results of KFC Romania substantially increased as all store performance improved 115% year-on-year. The improved financial performance is partially due to less COVID-related restrictions. Same-store performance of KFC Romania improved 99.4% year-on-year, registering a solid recovery after a difficult 2020. KFC in Italy. For KFC in Italy, the like-for-like performance in Q2 registered 85% increase year-on-year. The new locations opened after mid-2020 helped improve performance even further. Consequently, all store performance improved 114% year-on-year. Going further to KFC in Moldova. Sales in the Republic of Moldova increased 179% in the second quarter compared to Q2 2020. Sales for delivery continued to grow 2 percentage points quarter-on-quarter. So this is it for KFC. Going -- now going to Pizza Hut. After a difficult period in Q2 2021, Pizza Hut registered a 108% year-on-year increase in all store performance despite a lower number of stores compared to the same period of last year. The brand managed to control the expenses in the period, primarily thanks to the decision of the group to close related nonperforming Pizza Hut locations starting with the third quarter of last year. Last but not least, Taco Bell. Taco Bell same-store performance in Q2 registered 188 percentage increase year-on-year. The largest increase of sales during the period out of all the brands in the group's portfolio. The all store performance reached end of -- with an all-store performance result of 245% -- 245% increase. So this is the snapshot of the brand performance. Zuzanna, you have the floor now. Thank you.

Thank you, Monica. This concludes the presentation of our results. We will now open the floor for questions. [Operator Instructions] I see we already have the first question. We have actually 7 questions from -- in the chat. I'm going to read them out. So if you have further questions, please let's answer all the questions that we got from the chat first. So Pizza Hut restaurants not opened in 2019 is not part of the new agreement with YUM!. Is this correct? In this case, the adjustments for EBITDA in 2021 is approximately RON 700,000 or will be other adjustments?

So I will take this one. The -- whatever it was not opened during 2019 is not transferred in the new deal. So basically, what happened, whatever it was supposed to be built in '19, '20 and '21 from the old development agreement was canceled. And instead of this, we have the new agreement with the details I have just presented during the presentation. Regarding the EBITDA, which, in our case, if you remember, we were always presenting EBITDA normalized as well. The effect of the penalties will disappear. You are still seeing them in the P&L because it was an after financial statement event. And according to the audit procedure, we couldn't reverse them for the moment. But indeed, it will be reversed and will disappear from the P&L.

Yes. Then with the second question. From my understanding, you're in discussions for new rent concessions, what is the total economy estimated for 2021?

I will say this. This moment is not -- we don't have a clear number in mind or on the table. So we are in the process to negotiate this reduction of the rent. We will communicate most probably next time how much it will be. But in this moment, it's too early to discuss about this.

Thank you, Calin. We're going now to the next question. What amount we expect to see as subsidies from the government? And here especially...

[indiscernible]

Romania, Italy and Moldova.

It is in Moldova and Italy. There are not some programs to help the industry because these support also the technical unemployment. There are some facility regarding of the fees that we pay to the state. But in Romania is the difference, the 20% of the turnover 2020 versus 2019 or 2019 versus 2020. And most probably we'll receive this maximum that you can get from the 800,000 in Romania. But of course, with the assumption that they will pay the money.

Thank you, Calin. We are now going to the next question. What is the target payout ratio for the next period? By payout ratio, we understand as dividends, correct? If you mean something else, please let us know. And I will pass this to Valentin.

Yes. Yes. So regarding the dividends, we have the RON 35 million that are approved, as mentioned in the presentation. For everything else for the future, it will be evaluated based on the evolution of the situation with both the effect of funding mix and the cash flow capabilities that we have. What is important is we still have undistributed amount. So in terms of possibility we are capable for further distribution in the next period. But this, as I mentioned, to be case-by-case analyzed and decided. And obviously, the payout ratio result out of this analysis that we will take -- we'll do.

Then the next question is, what is your development plan for the next years for brand. Here, I would like to let you know that we have issued current reports. About individual brands development plans, you can find on the BVB website. We have the KFC -- the details of the KFC Romania development plan update issued on 22nd of December 2020, it's the current report. For Taco Bell, we have on 28th of December 2020, another report. And for Pizza Hut, we issued our 13th of August, and Valentin has briefly provided you the details earlier in this call. So I'm not going to repeat this information because you have all the necessary information in the current report details as well as in our financial reports. There were no updates.

Yes. Well if you are interested to see some numbers according to the current agreements that we have. For KFC, next year, there are 9 restaurants that we need to open. And for 2023, 6 restaurants. For Pizza Hut, it's exactly like Zuzanna said and I mentioned in the presentation is 3, 3, 4, so 3 in '21, 3 in '22 and 4 in '23. For Taco, we are -- we don't have a commitment. We are seeing a potential of 3 per year in the next 3 years. In KFC Italy, as you remember, again, we don't have a commitment. There is no signed development agreement in place. We are targeting in this moment something around 2 restaurants per year. So this year, 2 in '22, maybe 3 in '23. So this is related to the number of restaurants.

Thank you, Valentin. Regarding KFC, there is the next question. Regarding KFC...

Zuzanna, I will answer to this, the question #6. Do you hear me?

Once we share it also the recording on our website so it's clear what the question was. Regarding KFC, from my calculation, the average employee number per restaurant is lowered in Italy than in Romania and Moldova, approximately 20 versus 45. What is the reason? Will Romania decrease the number in Romania as well?

Zuzanna, do you hear me?

Yes, we can hear you Calin.

I'll answer to this. There are few reasons for this difference, to explain this difference. One is the chicken, the raw materials come premarinated from the [ slaughtery ], from -- and which is meaning we need less people. In Romania, we marinate the chicken in the store and we need more people. Also, the number of transactions is lower, but average per transaction is higher in Italy, which is meaning you need less people and so and so. Plus the types of the labor contract is different than Romania. It is more like -- we have more alternatives and people can work from 2 to 8 hours or 0 hours. There are different kind of contracts. And in this way, we can manage the number of people during the day, which cannot be done in Romania on the same.

Thank you, Calin. And now we have the last question from the series of questions. This is for Valentin. Regarding the debt, this year, the group will not pay any principle. You will only pay interest. It is correct, and what is the target debt-to-EBITDA?

It is correct, indeed, according to the agreement that we have signed with the bank for the entire year of 2021. We don't have many principal repayment. So we are going with -- only with the interest part. From 1st of January next year, we will come back to the normal repayments of the facility, so both the principal and interest. In terms of debt-to-EBITDA, according to the current agreements, we can go up to 2.5 multiple. In this moment, we are below 1. So there is enough room for extra leverage. However, this will be judged again in correlation with the needs for the development or any other projects that require extra financing in the future.

Thank you, Valentin. We have the next question. By the way, please go ahead and best would be if you type the question in the chart. It's the fastest for us to answer like this. We have a question from Cristian Popesco. How do you see the bottom line for this year, taking into account fourth COVID wave?

Indeed, we are very cautious, and we are following the evolution of the situation very carefully. We are prepared to adapt ourselves. We gained a lot from the experience of the previous periods. For the time being, we do not alter the targets for this year. However, if the situation will change, we'll come with a new view for the year. But for the time being, we just wait to see how the evolution will take place.

Vale, with your permission, I would add that I mentioned also in the last call or the call before, I don't know. In this moment, the -- all the business is set to work under this condition. With restriction, without restriction, with the fourth wave or not, it's business as usual. All the flow of the restaurant or all the procedure, everything, it was adapted for this new reality, which is mean -- even the older channels, the aggregators channel, delivery channels, takeaway channels, all it was optimized, which is mean the impact will not be higher because the wave is not expected to be higher like the third one. Yes. In other words, we are prepared for this.

Thank you, Calin. [Operator Instructions] We have a new question on chat. So any policy in place regarding vaccination of staff in stores?

I can answer this. We recommend to all the people, to all our staff to go to vaccinate and also organizing somewhere in May or June, I don't remember exactly, a center in one of our restaurants. But the decision is not our, we cannot force people to vaccinate.

Thank you. And then we have a second question. Have you been involved in any M&A discussions?

We cannot discuss about this.

Yes. But what we can share that M&A, it's a subject that we are trying to analyze and to evaluate any kind of opportunities if it is on. So it's not something strange for us, but we cannot disclose anything for the time being.

We have the next question. Do you see the July and August performance indicated you can reach your budget in 2021? I will let Vale.

Yes. We see, obviously, the evolution of the situation for July and August. What I can tell you that July and August overall continued the ramp-up, that it was visible also for the first month. So it's quite a good evolution from our top line point of view. And we are still optimistic in terms of the provision for 2021 in terms of budget. But obviously, we are cautious with the evolution towards the end of the year. Even though, as Calin mentioned, we are prepared for fighting with everything that will pop up in the end of the year.

Thank you. Please let us know if there are any other questions that we can answer [Operator Instructions]. We're going to wait 4 more minutes until 4:00 p.m. So we still have time if you are typing. Okay. I think we don't have any more questions. So we're going to wrap this call up. Thank you so much for joining us today. As always, if you have any follow-up questions, you can reach out to us at investor.relations at Sphera Franchise Group. We are also going to be at the Wood Conference later this week, together with Valentin. So with some of you, we might be also discussing later today. Thank you all so much, and we look forward to having you with us at the Q3 2021 call in November -- later November this year. Thank you so much. Have a great day.

Thank you.