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

Good afternoon, ladies and gentlemen, and welcome to Sphera Franchise Group Results call for 9 months of 2021. My name is Zuzanna Kurek, I'm Investor Relations Officer of Sphera Franchise Group. Earlier today, at 8:00 a.m., we have shared our Q3 2021 financial report, which you can find on our website as well as on BVB's website under Sphera Franchise Group Investor profile. Before we begin with the call, I would like to mention that this call is being recorded and that the recording of the call will be updated on our website later this week. As stated on the call invite, by joining the video conference, you automatically and implicitly consented to being recorded. If you do not consent 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 9 months' results and key events that happened in Q3 2021. And later, we will have a Q&A session. [Operator Instructions] Last, but not least, I would like to mention that we might be making forward-looking statements today during this call regarding future performance of Sphera Franchise Group and that actual results may differ materially. We encourage you to review the disclaimer, which we have included in the presentation that is also available on our website in the Investor Relations section as well as on the BVB website. The disclaimer applies equally to all statements made in today's call. Let's kick off the call. I would like to introduce the management that is here with me today and will present to you the 9 months' results. I am joined today by Calin Ionescu, Co-Chief Executive Officer of Sphera Franchise Group; Valentin Budes, Chief Financial Officer; as well as Monica Eftimie, Chief Marketing Officer. I will now pass the floor to our CEO, Mr. Calin Ionescu, who'll share insights about our performance in the first 9 months of 2021. Calin, the floor is yours.

Thank you, Zuzanna. Good afternoon. First of all, thank you all joining this quarterly call. During the past call, 3 months ago, I started my speech telling you that in the first half of 2021, we have noticed the signs of stability and recovery. In third quarter, Sphera Group continued this strength, registering record consolidated sales of RON 284.2 million, 44 percentage higher than Q3 in 2020. The sales in Romania are amounting to RON 247.9 million when Italy contribute with an amount of RON 33.1 million. And the sales in Republic of Moldova reached the historical value of RON 3.2 million. And to have a better image, KFC generated revenues of RON 243.4 million; Pizza Hut, RON 26.7 million; and Taco Bell, RON 14 million. Except for Pizza Hut, all brands of the group registered record sales in third quarter of 2021. Our group reached in Q3 this year, an EBITDA of RON 62 million, higher by 21%, while the net profit increased by 30%, reaching RON 22.9 million. The operating profit of the restaurants increased in Q3 this year by 24% compared to Q3 last year, reaching RON 35 million. At the end of third quarter, this year, the group has 164 restaurants compared to 157 units in the same period of last year. Overall, the third quarter of this year was excellent quarter for Sphera Group. We continued the same dynamic of growth on the Romanian and Moldavian markets as in the previous quarter, but we have topped it up with an improved performance in Italy to restriction relaxation imposed by authorities. Historically, third quarter has always been our strongest quarter, which we are happy about, as more customers choose the dine-in Taco Bell service instead of delivery. The performance in the third quarter of 2021 provided us as well as all our shareholders with a good indicator of how fast we can recover if the economy is fully reopened and the restrictions are lifted. In addition, it gave us the confidence that our decision to continue the development of our restaurant network throughout the last 12 months has been the right one. Having this said, I'm kindly asking Vale to take the floor and start the financial presentation of the third quarter. Thank you.

Thank you very much, Calin. Good day, everyone, and thank you for joining us today. I'm very pleased to share our third quarter results, where overall Sphera Group continued to generate healthy operating performance, fueled by the top line of RON 729 million, as Calin mentioned, as well, which is the equivalent of a year-over-year growth of 45% from a year-to-date point of view, and respectively, 44% from a quarter perspective. During the third quarter, we once again grew our top line versus previous quarters of this year. I am personally extremely proud of the team's effort so far, teams that were able to deliver such a performance in a quarter in which the dine-in capacity was limited to 50% in Romania, and the access was restricted without green pass in Italy. We are fortunate to operate these 3 iconic brands because even in such abnormal times, they managed to prove how strong they really are, and we can find the proof in the all store sales performance, which grew 44% in Q3 as compared to the similar period of last year. Overall, Sphera Group generated a solid operating profit of RON 22 million, leading to a positive EBITDA of RON 32 million around for the third quarter. This, combined with the strong first half of the year, helped our group to close the first 9 months of 2021 with a consolidated sales of RON 729 million, as I just mentioned, and then normalized EBITDA of RON 61 million, significantly above the similar period of last year when it was only RON 29 million. Our net profit is RON 28 million compared with a loss of RON 5 million in 2020. Turning to expenses. We have all restaurant expensing increased 41% year-over-year to RON 615 million. However, we have managed to be more efficient during Q3 as the weighting revenue is better both than Q2 stand-alone and half year as well. Anyhow, as you already got used from the previous calls, I will deep dive per category to offer you some more color on what is happening in each one of them. I will start with the cost of goods sold. This cost line increased by 44%, lower than the growth we have recorded in our top line. We all know the current inflationary pressure we face nowadays. But despite the current context, even if we are comparing the performance of our cost of goods sold related to the pre-pandemic levels, and we are looking to 2019 weighting sales. We have a very good Q3 performance with a ratio of 32.6% versus 33.4% in 2019. Going forward, we find the payroll cost. The labor market remains very tight and dynamic in Romania. Labor costs for the third quarter was 21.1%, a reduction of about 2.2 percentage points from last quarter. This decrease is primarily reflecting the sales leverage. And I consider worth mentioning that for the third quarter, there were no indemnities booked for technical unemployment, so we speak about the clean expense here. Regarding people, as mentioned in the previous call, we are investing and we'll continue to invest in our employees, grounding on our strategy to increase our staff wages, because we believe these efforts are helping to attract and retain great employees, which is more important than ever given the challenging labor environment we are all experiencing today. Next, we have rent, reaching RON 20 million as we had limited opportunities to renegotiate the rent agreements as opposed to a year ago as well as operating a larger number of restaurants. However, still, we have booked during Q3 discounts of RON 0.5 million, out of which RON 335,000 were granted to Italy and RON 158,000 to Pizza Hut. The next cost line is the advertising expense. We have invested in marketing during Q3 around RON 15 million versus revenue generated in means a weight of 5.4%, which brings us to a total investment of RON 35 million, for the first 9 months, representing 4.9% in total revenue. Similar with the past year, we expect marketing expense to be around 5% of sales for the full year of 2021. Finally, we have the other operating expenses line with an expenditure of RON 35 million and the weighting revenue of 12%, which normalized means 13.1%, continuing its dilution from 15% in Q1 and 14% in Q2. This gliding path primarily reflects the sales leverage on both components of the other operating costs, i.e., the semi-variable expenses and the aggregators' commissions. Delivery expense remain elevated year-over-year given the significant growth of this channel, but relatively constant in absolute value for the last 2 quarters. As restrictions were lifted, the delivery channel was hanging quite well in the channel sales mix, but having an erosion mainly due to the accelerated increase in the traditional serving method. This was all regarding the structure of the restaurant expenses. Now in between the restaurant operating profit and EBITDA, we have the G&A expense, which for the Q3 was pretty stable in absolute terms, if we are comparing with the previous quarter, however, declining 900 basis points in relative terms. We ended the third quarter with a total available liquidity of RON 110 million, and this was after paying the dividend of RON 30 million in the last day of September. Going forward, we are confident that our operating performance will continue to fuel growth in our already strong free cash flow profile. Before moving to the next slide, I just want to remind you that in our previous call, I was mentioning how fortunate we are having strong pricing power, a huge advantage in the current market context that is enhancing our resilience to potential shocks. In Romania, during 2021, we have exercised our pricing power a couple of times during Q2 and again during Q3, and we have not seen any material reductions from consumers, proving how valuable it is this competitive advantage that we have. Now turning to the next slide. As usually, we have a visualization for 3 perspectives concerning our income statement: revenue, expense and EBITDA. Obviously, we are delighted to see a constant solid growth on our top line for all 3 quarters, combined with an elastic year-to-date evolution of our expenses. A very big achievement for our group would be that since the onset of the pandemic, this quarter represent the first quarter when we have managed to surpass 2019 same-store sales level. I will go now next, where we provide a quick update on the share of our market and our brands. Romania, obviously, our main market, with a share of 88%. And Italy, which despite being severely impacted by the lockdown measures from the beginning of the year, secured a market share of 11% with a double-digit top line performance even if comparing it to 2019 level. Regarding brands in Q3, KFC brand revenues in total amount of RON 243 million, as mentioned by Calin in the beginning, with a share of 86%; Pizza Hut, RON 27 million with 9% share; and Taco bell RON 14 million with 5%. The share per brand of our Q3 portfolio, is in line with the year-to-date split, as you can see in the second part from the -- from this slide. Now we reach the second part of our presentation, where I'm proposing to touch base on some business updates and our guidance for this year. I will start with the facilities. In terms of facilities, we have technical unemployment, which was almost not utilized during Q3. As for the last 2 months of the quarter, it was canceled by the authorities as well. However, as you already know from the first 2 quarters, we have benefited from RON 2.5 million out of technical unemployment state reimbursements. Restaurant-specific tax, the same like last time, valid for Romania, 180 days. For this initiative, we will have for 2021, a P&L benefit of RON 2.3 million, which is progressively recognized throughout the year. And last, initiatives related to the compensation of 20% of loss of turnover in 2020 compared with 2019, kept to RON 800,000 at group level. There is some progress here as we have received notifications from authorities, mentioning that our group could be eligible for RON 2.6 million. KFC Romania and Pizza Hut, Ron 1.3 million each. However, the process is not yet finalized being still ongoing for the time being. And now moving to the next slide. We have our update guidance. As you already saw in our current report published on BVB, we have decided to update our guidance for this year. The new set of rules implemented by the Romanian authorities during Q4, linked to the low number of vaccinated people, made a big difference compared with our assumptions embedded in the approved budget. The budget assume a progressive recovery of sales throughout 2021 on all 3 markets of our activities. And that as of second semester, the normal cost of business will be resumed fully. When preparing the budget, we took into consideration based on the forecast provided by the Romanian government, the success of the vaccination campaign, which unfortunately was not achieved. In response to the low number of vaccination, as of October 25, the COVID Green Certificate became mandatory in Romania for any indoor access to public institutions, banks, restaurants, cinemas, gyms and shopping malls. The pass shows someone has been vaccinated, tested negatively or recently recovered from the virus. Since the introduction of the rules that only allowed the entrance of persons with Green Certificate in public indoor spaces, we have witnessed a decrease in sales due to the lower foot traffic. Compared with the approved budget, we estimate a decrease in sales of almost 13% for this year, bringing the consolidated top line slightly above RON 1 billion. This is translated in an EBITDA of RON 72 million versus RON 95 million is expected based on the budget with 100 basis points lower than -- lower in relative terms. Now I'll pass the floor to my colleague, Monica, to go through development and sales and marketing insights. Monica, the floor is yours.

Thank you, Vale. Good afternoon, everybody. I'm happy to share with you the brand highlights of another strong quarter. I will start with a recap of store content sales. Sphera operated 164 restaurants at the end of September, out of which 143 based in Romania, 19 in Italy and 2 in the Republic of Moldova. In terms of store openings, as Calin mentioned, in Q3 2021, Sphera opened 3 new restaurants, a KFC drive-thru in Bucharest, a Taco Bell in Barco, and the Pizza Hut in Bucharest as the first fast-casual delivery restaurant of the chain. In October, the group celebrated the opening of its 90th KFC restaurant in Romania, a drive-thru in Corbeanca. In-store sales increased share in Q3. 24% of all orders, which translate to RON 68.7 million were delivered both by aggregators and our own delivery fleet, resulting in a 5 percentage point decrease quarter-on-quarter in favor of in-store sales. In terms of absolute value, the RON 68.7 million are slightly more than the results of Q2 2021. The share of in-store sales increased due to the effective communication campaigns as well as the lifting of indoor dining restrictions. In terms of price increase, and Vale mentioned this in his presentation, in Q3 2021, the group decided to offset part of the aggregator cost by increasing the menu prices for delivery, resulting in an improved bottom line. Due to the implementation of the government-imposed rules that only allowed the access of customers with Green Certificate to public indoor spaces, Sphera expects the share of delivery revenue to increase in Q4, as again, Vale mentioned in his presentation. Moving on to marketing. We are keeping in focus the same pillars as last quarter: brand value, taste and access. And I'll go through each brand, starting with KFC. The brand focused on building innovation for the summer and creating new occasion to visit for our customers, launching Boxmaster big eat wrap. And it also communicated core products in order to strengthen transactions, launching affordable boxes with a 10.9 lei price points, the aim being building sales through transactions. For KFC, value together with product innovation was communicated for the back-to-school period by launching a non-spicy strip recipe with an entry price point of 9 lei, maintaining the strong sales recovery trend the brand enjoyed in Q2. New growth layers were sustained by launching a new source for retail sale in a 325 gram bottle, with the aim of improving the revenue stream started in 2018 by the retail version of our famous garlic sauce. Moving on to Pizza Hut. To stay relevant to our clients, over the summer, Pizza Hut introduced a new pizza innovation called Crown Pizza with the aim of attracting both new and lapsed users, the special crust with spreadable cheese inside, being available in both dining and delivery stores. With the objective of improving transaction levels, the brand communicated 5-star deals for the back-to-school period, offering disrupting value in dine-in with a 10.9 lei price point for any small pizza and abundant value in delivery with a well-known dual mix or 2 medium pizza bundle for 45 lei. Taco Bell continued to focus on brand trial, being the newest brand in the portfolio. And it concentrated its communication on innovation by launching new products at affordable prices, such as the Cheesy Gordita Crunch, and bringing in focus a fan favorite quesadilla with the aim of creating favorability and differentiation from local competition. And now moving on to brand performance. I'll go through each brand and each market. So KFC in Romania, in Q3 2021, the KC Romania all store performance, results improved 43% year-on-year. The return of the indoor dining contributed to improved results. Same-store performance of KFC Romania registered a 36% increase year-on-year. For KFC Italy, like-for-like performance in Q3 2021 grew 18% due to the partial reopening of the local economy and new locations opened and the new locations opened after September of last year helped improve performance even further. Consequently, all store performance growing by 26%. KFC in the Republic of Moldova -- for KFC in the Republic of Moldova, sales increased 35% in Q3 compared to -- in Q3 2021 compared to Q3 2022. In terms of Pizza Hut, after a difficult period, Pizza Hut continued the positive trend in Q3 2021, growing sales resulted in a 71% increase year-on-year in all store performance despite the lower number of stores compared to the same period of last year. American Restaurant System contributed continued to improve its bottom line performance, registering another period of quarter-over-quarter increases and ending the 9 months period with the results improved by 50%. In terms in Taco Bell, Taco Bell same-store performance in Q3 2021 registered a 63 increase year-on-year, while all store performance saw a 39 percentage increase. So these are the highlights of all the brands. And now I'm giving the floor to Zuzanna for the Q&A session. Thank you.

Thank you very much, Monica. For the presentation. We are now done with the presentation of the management.

[Operator Instructions] We have the first question. Congratulations for the results. First question is, will we also see price increases in Q4 2021? And the second question, will you be able to open all the restaurants that you have proposed for this year? If not, what will you not open and what amount we have to pay as penalty?

I'll answer to the development question. Is very pleased that we'll finish our development plan for this year. We have been in our -- in the next few weeks, we'll work on another 2 stores in Romania, KFC. Another in beginning of December, mid of December would be a Pizza Hut Express. And in Italy, we'll open a new location. This is from the development perspective. For the price increase, I'll ask Monica to answer.

Yes. So for the price increase question, as we mentioned, we just increased prices for delivery. And since we expect delivery sales to have one important weight in our overall sales for Q4, we are not planning to further increase prices in delivery, in terms of -- and this is for Romania.

I want just to add something for Q4. In Italy, it was already another price increase that was operated. And I think it's very important to mention the fact that on top of the delivery prices increases that Monica was mentioned, also the in-store prices for our products have been through 2 session of increases this year. Probably, as Monica indicated, until the end of the year, there will be no modifications of the price structures, except the one in Italy that I just mentioned in October.

And depends the evolution of the energy price, depends on the evolution of the raw material price. If will come a crisis, we will evaluate, but we don't have any plan at this moment.

Yes. Definitely, since we have such a good output from the past exercises performed this year, we will not hesitate to pull the trigger. And obviously, this will be subject to analysis, if necessary, in the next months for the beginning of the next year.

We hope this answers your question. Please go ahead if you'd like to -- we got another question. Congrats on the strong results. A tricky question. How do you justify the discounts that are traits comparable to other Yum!-backed, quick service restaurants, such as Amarylis in Poland or Collins Foods in Australia. Do you have any plans to improve communication with investors? Or is it focused on performance and share price will come? I will take this one. In terms of improving the communication, we've -- this has been our focus so far in 2021. We did increase the presence that we have in the media, the frequency at which we publish current report. We also introduced the market making. That was important for us. It was start of our strategy as well. Of course, now the focus continues to be on the performance, and we note that the investors will recognize the value and the price will increase. Of course, out of all the [ Bev Index ] companies, we were the most influenced because, obviously, because of the sector in which we are active in HoReCa. But we are doing -- we are focusing very much on the Investor Relations, and we hope that the price will react accordingly.

Yes. Basically, it's one of the top priorities for us, and we are working very close with Zuzanna and with our other executive colleagues. I hope somehow for the ones that are following us from a longer period to be visible some updates here. But I'm telling you that we are very, very focused on being as detailed as possible as close to nice as possible and do everything in our hands to have a better communication, better communication that finally will be translated, as you mentioned in your part of -- in the first part of your question in how the share is priced on the stock exchange.

We have a new question. For Q4, should we expect total expenses at the same percentage level of sales as in Q3?

So basically, the Q4 structures, we anticipate to be in line with the latest current report, in respect of our best estimate for the guideline of this year. However, here, it's a big disclaimer because, as you know, the situation can be very volatile, and we have seen a lot of turnarounds here from one day to the other. So we hope that it will be more predictable in the next future, and actually will go on a reverse trend in terms of magnitude of restriction and evolution of the vaccination, especially in the main market in Romania. And we estimate to follow the figures as presented in our guideline.

We have the next question. How do you see COVID situation and the restrictions development in Q4 of 2021 and Q1 2022 in Romania?

I'll take this. In Q4, our expectation is to see an improvement of -- even the good sense of the work. And I'll give you an example. Today, the rate in Romania, in Bucharest is less than 6 people at 1,000 applicants, which means a lot -- part of the restriction has been lifted in 48 hour, maximum 72 hours, which mainly is said to close at 9 o'clock, the restaurant. Most probably the closing hour will be 11. It's only one example. As Vale mentioned, the situation is very volatile. But based on this evolution and compared with what's happened in the previous week, most probably we passed the worst period of COVID restriction in this quarter. What will be next year is not easy to answer, but most probably will be the 5th wave, but it's linked with the rate of proximation. This is -- the market magnitude of the next wave, nobody can estimate in this moment.

We have the next question, do we expect payroll and employees benefit to further increase in value in Q4 of this year, around what percentage of sales?

Yes. A very good question. Here, the situation is the following. We see it as a transitory period, this wave of last quarter. So we want to secure as much as possible employees. So we'll basically adopt less initiatives that can harm their stability in our restaurants. As mentioned in my presentation, we have invested a lot this year in trying to bring the wage level to the market level in such a way to be able to retain and embrace as more employees as possible. So having this in mind, we expect the payroll cost as a percentage of revenue to -- in Q4 to be around 24%. And again, we see it as a temporary situation because we believe the evolution of things will pass, and it will be only a transition period. It's very hard to adapt and to calibrate such a cost line in such a very short period. And it's what we're trying to react as we know that in January, the minimum wage level in Romania will be further increased by the government. So we want to see it as an investment, an investment that will definitely pay off next year. However, the level of this weight of payroll, as we anticipate in Q4 in total revenue is not out of radar. However, it's -- as I said, is penalized by the reduction of the top line.

[Operator Instructions] We have a new question. Given the current strong M&A market, have you been approached by any circles?

Here -- you remember that in our calls we touch based on this subject. We are very -- I mean we are very agile, and we are trying to evaluate any opportunities. So it's rather an initiative coming from our side. We have been in some contracts, but it's too early to have some outlooks from this activity. So we are open, and we are ready to evaluate and to analyze any kind of opportunities. But in this moment, it's far from being something concrete on our table.

But anyway, once we will have something very clear and like of business case, yes, we'll go with the current report and again from the stock exchange.

Yes. So basically, we need to have clarity from an executive point of view and then to go through all the governance bodies that we have in place in our structure, then obviously to make it public.

If there are any other questions, we still have 5 to 8 minutes that we're going to stay. So please, please let us know if you have any follow-up questions. If there are no more questions, we would like to conclude the call today. Thank you all for joining us. And next time, we'll see each other in February 2022 to present the preliminary 2021 full year results. If you have any follow-up questions, you can always e-mail us at [email protected], so we can also continue the discussion there if you have any more pertinent question. Thank you all so much for joining our call, and have a great day.