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

Good afternoon, and welcome to Sphera Franchise Group Preliminary 2021 Results Call. My name is Zuzanna Kurek. I'm Investor Relations Officer at Sphera Franchise Group. Earlier today at 08:00 AM, we have published our 2021 preliminary financial results report, which you can find on our website's Investor Relations section as well as on BVB website on the Investor profile. Before we begin, I would like to mention that this call is being recorded and the recording of the call will be uploaded on our website by tomorrow the latest. As stated in the call invite by joining this video conference you automatically and implicitly consented to being recorded. If you do not concern to being recorded, please leave the call. In terms of the organizational aspects, we will follow our standard call setup, which means the management will deliver a presentation outlining the preliminary 2021 results. And the key events that happened in the last quarter of last year. And later, we'll have a Q&A session. [Operator Instructions] Last but not least, as usual, I would like to mention that we might be making forward-looking statements today during this call regarding the future performance of Sphera Franchise Group and that actual results may differ materially. We encourage you to review the disclaimer that we have included in the presentation, which is available on our website, spheragroup.com, Investor Relations section as well as on BVB's website. The disclaimer applies equally to all the statements made on today's call. Let's kick off the call. I would like to introduce the management that is here with me today and present -- to present the preliminary 2021 financial results. I am joined today by Calin Ionescu, Chief Executive Officer, Valentin Budes, Chief Financial Officer; and Monica Eftimie, chief Marketing Officer. I will now pass the floor to our CEO, Mr. Calin Ionescu, who will share with you insights about our performance in Q4 and full year 2021. Calin, the floor is yours.

Thank you, Zuzanna. Likewise, big first thank you for all joining this quarterly call. Here we are at the beginning of 2022 after almost 2 years since COVID-19 pandemic started. When Sphera Group is presenting the financial preliminary results, I would like to point out that the process of recovery is in progress and will continue this year. I would like also -- I'd like to highlight some important points. And thereafter, together with my colleagues, who will go deeper in details. Therefore, Sphera reports for the last year, consolidated sales of over RON 1 billion a historical achievement for the group, with an increase of 41% compared to 2020. At the end of 2021, Sphera was operating 170 restaurants out of which 148 in Romania, with 12 restaurant more than at the end of 2020. We are talking about 5 new KFC restaurants in Romania, 2 Pizza Hut Fast Casual Delivery units and 1 Express unit, 2 new Taco Bell restaurant and another 2 new KFC in Italy. These new openings represent our strong commitment to continue the development of the restaurant chain in the markets where we are active. The expansion will continue this year, and our aim is to open even a larger number of restaurants compared to the last year. 2021 was the year when Sphera launched, new type of Pizza Hut restaurant on the local market, and I referred to the Fast Casual Delivery and Express. Unlike like the classic Pizza Hut restaurant, the Fast Casual concept offers customers the opportunity to order at the counter and eat either at the table or else where -- or if else where. It is a concept that address customers who don't have time for the former ceremony of restaurant who prefer the convenience sense being able to sit down and enjoy the meal. 2022, yet, we look forward to us with mark a series of important events that Sphera [indiscernible] that 25th anniversary of KFC presence in Romania and the inauguration of the KFC's 100th local restaurants. 5 years since Sphera was listed on the Bucharest Stock Exchange and 5 years since the launch of Taco Bell in Romania. Even the last 2 years as the market intensively by the global pandemic, our teams in all 3 markets have managed to achieve exceptional results despite the difficult context. We are ready to write a new chapter in the history of Sphera Franchise Group with very good results for all brands and in all markets of activities. Given the context, we are all more pleased with the recognition you see from the FTSE Russell agency and the inclusion of Sphera's shares in the FTSE Global Micro Cap index, which will put us on the later of institutional investors worldwide. Now given all of the above, I'm further asking my colleague Valentin Budes, to start presenting the financial results of Sphera for the last year. Vale, please?

Thank you. Thank you very much, Calin. Good afternoon, everyone, and thank you all for joining us today. A very unfortunate day having in mind the official conflict in progress at our borders. I personally hope this will be established as soon as possible. But coming back to our topic, I'm very pleased to share our fourth quarter strong results despite the fact that during Q4, we have been still navigating through the pandemic. And we have faced extra restrictions, especially in Romania. Despite all this, our group continued to generate healthy operating results fell by a top line of RON 1 billion which is the equivalent of a year-over-year growth of 41% from a year-to-date point of view, and respectively, 30-plus percent from a quarter perspective. During the fourth quarter, we once again grew our same-store comparing it with the same quarter of last year. And I'm particularly pleased to be able to deliver and even slightly overachieve the level of our latest guideline for 2021. I'm also very proud of the tremendous effort of our teams that contributed to such a performance in a very difficult quarter in which, as I said, COVID-19 green certificate became mandatory in Romania for any indoor access, including shopping malls and restaurants. For the full year of 2021, Sphera Group generated a solid positive EBITDA of RON 75 million, leading to an operating profit of RON 35 million. Having in mind the context, our last quarter contributed to the top line of RON 272 million, 4% below the previous quarter, but significantly better than the similar period of last year even from a same-store perspective, as I just mentioned earlier. Our full year net profit is RON 27 million compared with a loss of RON 2 million for 2020. Turning to expenses, we have our restaurant expenses increasing 39% year-over-year to RON 917 million at a slower pace than the sales by 41%. Now I will take each main category to offer you some more color on the progress since our last call. We have, first of all, as usual, our cost of goods sold, which for the full year increased by 41%, in line with the growth we have recorded in our top line. However, if we are looking from a quarter stand-alone perspective, we can see an acceleration of our cost of goods sharing revenue from 32.6% in the previous quarter to 33.7% in the last month. This is the effect of the inflationary pressure we face nowadays which all in all for the last year, we have been able to offset throughout all initiatives we have implemented. As for the full year, the sharing revenue of our COGS is in line with 2020 and significantly better than the pre-pandemic level of 2019 level. Going forward, we have our payroll cost line. The labor market remains very tight and dynamic, especially in Romania. Labor costs for the fourth quarter were 23.4%, an increase of about 2.3 percentage points from last quarter. This increase is primarily the result of the reversed sales leverage we faced in the last quarter. And the weight of the fourth quarter payroll cost and revenue is in line with the second quarter of 2021. And from a full year perspective, it's bringing us to 22.6%, which is similar and in line with 2019 pre-pandemic level of the payroll cost in revenue. Next, we have the rent expense with RON 19 million we continue to renegotiate the lease agreement whenever possible. Consequently, in Q4, we have succeeded to obtain discounts amounting to RON 600,000 out of which RON 400,000 were granted in Italy and 200,000 in Romania for Pizza Hut. The next cost line is advertising expenses. Here, we have invested in marketing during Q4, around RON 18 million versus revenue generated in mid-weight of 6.5%, which brings us to a total investment of RON 53 million from a full year perspective, representing 5.8% in total revenue in line with our expectation. Finally, we have the other operating expenses line with an expenditure of RON 42 million and the weighting revenue of 15.6%, increasing with 14% versus previous quarter. The main 2 cost lines here are the aggregator commissions and utilities. The rising restriction of Q4 fuel the sales through the delivery channel, therefore from a relatively constant quarterly level of around RON 16 million for the first 3 quarters. During Q4, we have reached RON 82 million worth of delivery sales. This resulted into an increase of the cost related to aggregators commissions from around RON 11 million in the previous quarters to around RON 13 million in the last one. The other main component represent -- it's represented by the utilities cost, facing significant price pressure reaching RON 10 million, which is 23% higher compared with the previous quarter level. The extent of inflation and cost pressure this year remains volatile. That's why we will make additional price during the next period to help building back margins all while focused on delivering for our customers a great value in terms of experience, food quality and taste. This was all regarding the structure of the restaurant expenses. Now before the bottom line, we have the G&A expense, which for the Q4 was registering the lowest level for the year, leading to a weighting revenue of 4.7% without depreciation. We are satisfied that we were able to maintain our G&A expense at a level of below 5% versus revenue for below 4% for 2021. Shifting to balance sheet. I will highlight our strong financial model that have continued to generate significant cash flows. We ended the year with a historical record high total available liquidity of RON 146 million after having throughout the year cash outflow from dividends of RON 35 million and from investing activities of RON 60 million, all this while maintaining a net debt-to-EBITDA ratio of only 1.1. Our strong free cash flow generation will allow us to continue our long-term commitment to returning cash to our shareholders and maintaining the ambitious committed development plan. Now turning to the next slide. As usually, we have a visualization from 3 perspectives concerning our income statement, revenue, expenses and EBITDA. Obviously, we are delighted to see a constant solid growth on our top line for all 4 quarters. For the full year, the growth of the expenses was lower than the recovery of revenue, which led us to an EBITDA level of RON 73 million, as mentioned before, representing 67% variance versus 2020. Next, we provide a quick update on the share of our markets and brands. As usual, Romania, our main market with a share of 88%, 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. Regarding brands in Q4, KFC brought revenue in total amount of RON 234 million with a share of 86%, Pizza Hut, RON 25 million with 9% share and Taco Bell, RON 13 million, i.e., 5%. During Q4, we had unitary evolution as the share per brand of Q4 portfolio remain constant and in line with the other quarter split as indicated by the second part from our slide. Now going forward, we are entering into the second part of our presentation. Let's further discuss about facilities granted and lease discount. Because of the new restrictions, there were some limited technical unemployment grants during Q4, worth of RON 300,000. Putting this together with the indemnities received for Q1 worth of RON 1.3 million and the ones for -- from Q2 in the amount of RON 1.2 million and the small ones from Q3 worth of RON 15,000 is bringing us to a full year indemnity received of RON 2.8 million. Then we have the specific tax exemptions provided by the Romanian state for HoReCa industry. These initiatives give us a benefit of RON 2.5 million, specific tax that was avoided from both the P&L and cash flow point of view. And lastly, the initiative related to the compensation of 20% of the loss of turnover in 2020 compared with 2019, capped at RON 800,000 at group level. Here, we have received a total amount of RON 2.6 million from the Romanian stake in 2 tranches, 1 paid in December '21 and another in January '22 for KFC and Pizza Hut Romania. The entire amount is recognized as other income in 2021 financial statement under discussion today. From a rent perspective, I mentioned earlier as well during 2021, we have managed to obtain in total RON 3.9 million worth of discounts, out of which the RON 600,000 are book into Q4. Moving on the next slide. We have some updates related to the capital markets. As you already know, we had on 4th of February, a shareholders' meeting, where it was elected the new Board of Directors. The new structure consists of Mr. Silviu Cârmaciu Sir, Mr. Mihai Ene, Mr. Lucian Hoanca; Mr. Razvan Lefter and Mr. Georgios Repidonis with a mandate value until May 2023. During the meeting, it was as well approved the dividend distribution amounting to RON 35 million from the undistributed net profit of 2020 with a dividend yield based on the current market price close to 6%. The 6th of May 2020 and the payment date of May 30, 2020 -- 2022, sorry. And as you already saw in our current report as of 21st of March. As Calin mentioned as well in the beginning, Sphera be included in the Russell Microcap Index. And for this, we are extremely proud this was a component of our IR internal strategy linked to a better liquidity in the market and a better visibility among the local and global community of investors. Speaking about our strategy in 2022, we are planning to introduce the Investor Day event, a new annual recurring event for all stakeholders. And here, we are targeting to address publicly in a very transparent 1 year all possible inquiries from analysts, institutional or retail investors. And furthermore, during 2022, we'll introduce at least 4 semester and earnings call in Romania dedicated to retail as well. Now I'll pass the floor to Monica to navigate you through development, sales and marketing topics. Monica?

Thank you, Vale. Good afternoon. So I'm going to share with you the brand highlights of quarter 4, and we'll start with the recap of store count and sales. Sphera operated 170 stores at the end of 2021 out of which 148 in Romania, 20 in Italy and 2 in the Republic of Moldova. In 2021, the group fulfilled the restaurant development plan as agreed with the master franchisor, Yum! and opened a total of 13 new stores. Out of which 6 KFC restaurants in Romania and 2 in Italy as well as 3 Pizza Hut restaurants and 2 Taco Bell in Romania. 30% of all orders in Q4 2021 were delivered by -- both by aggregators and our own delivery fleet, registering a 7 percentage point increase quarter-on-quarter to the detriment of in-store sales. The quarter-on-quarter increase in all 3 markets was mainly due to another wave of COVID-19 infections. And specifically for Romania, the introduction of the green vaccination pass. Going forward and talking about pricing, in Q3 2021, the group decided to offset part of the aggregators caused by increasing the prices of the product sold for delivery, that's mitigating a major part of the negative effect that increased the sales for delivery had on the bottom line. And of course, this carried over in Q4. So in terms of consolidated sales in Q4 2021, Sphera generated RON 271.6 million, which represents a 30% increase compared to Q4 2020. However, as mentioned, both by Calin and Vale, due to restriction caused by the introduction of the green vaccination pass in Romania, sales recorded a slight decline of 4% quarter-on-quarter. As you might already know, the green vaccination pass is mandatory in Romania as of 25 October. And restaurants and the food courts and malls are included among the restrictions. Moving on to marketing. As I've said in the previous calls, we are building brand over time and less overnight, keeping in focus the same pillars, brand value, taste and access. And I will shortly go through each brand and activities for quarter 4. Starting with KFC, building on the traditional Christmas campaign, the brand launch of specific buckets with the aim of strengthening sales and targeted specific moments and the placements in order to tap into the holiday spirit. As a secondary campaign, KFC has successfully launched Star Wrap (sic) [ Wrapstar ] with the objective of increasing frequency among regular users. The product is in vision in terms of performance. And it supports our efforts, which I mentioned in previous calls of strengthening the burger and [ Wrap territory ]. In order to interact with specific targets, while building brand awareness, KFC partner with X Factor, one of the most popular talent TV shows in Romania and launched a dedicated market as well during the Christmas period. And in October, we restarted our amount to go to high school campaign by which we collect donations from consumers to provide financial assistance to use from underprivileged backgrounds who wish to continue their education. Moving on to Pizza Hut. With the -- we continued the back-to-school campaign of 5-star deals with the objective of improving transaction levels. And for the winter campaign, the brand brought into focus one of its iconic products, Stuffed Crust. And the campaign successfully delivered sales and increased the consideration by building on distinctiveness and strengthening our best pizza attribute. And as Calin already mentioned, in December 2021, we launched the Pizza Hut Express of that concept in Buzau, providing a more convenient and affordable formats catering to grab-and-go consumers. Moving on to Taco Bell, the brand continued its back to school campaign which we launched the Quesadilla, focusing its efforts to build relevance and for its winter campaign, Taco Bell concentrated its communication on a range of boxes with the promo layer on top offering prices for purchases, which resulted in trial by light users. Moving on to digitalization, and we covered this in previous quarters. We continued our digital journey, focusing on ease of access for our consumers and launch our click and collect service for both KFC and Pizza Hut dine-in. We communicated the launch through digital media or with the objective of expanding our user base. The Click & Collect was, in terms of Taco Bell Click & Collect. So the service was launched in the previous quarter. With the new restrictions, one of the trends that we've seen, which is called raise of the home value was focused on people obviously staying at home and working from home, which pushed home delivery. And that's why bringing the Sphera portfolio established partnership with aggregators with the aim of increasing the delivery sales and transactions. As my colleagues have mentioned, restaurant is diminished due to the pandemic in quarter 4. And now moving on to brand performance. Only a few highlights on each brand. For KFC Romania in Q4 2021, the all-store performance results improved 20% year-on-year, a strong result given the new restriction in bolt-on restaurants. Same-store performance registered a 14% increase year-on-year. And USFN Romania generated to restaurant operating profit in 2021 of RON 87.4 million. In KFC Italy like-for-like performance in Q4, almost doubled due to the opening of the local economy as well as the fact that we are comparing it with Q4 '21 which was one of the weakest quarters of that year due to the spread of COVID-19. KFC Italy was the only company that did not reach restaurant operating profit. Moving on to Moldova. Sales in the Republic of Moldova increased 22% in quarter 4 year-on-year. And the company closed 2021 with the restaurant operating profit of RON 2 million. Pizza Hut, after a difficult period as you know, Pizza Hut continued the positive trend in Q4 2021, growing sales 55% year-on-year in terms of all stores performance and 47% in terms of same-store performance. And the company registered restaurant operating profit of RON 1.1 million. Taco Bell, Taco Bell same store performance in Q4 registered a 25% increase year-on-year, while also performance of 44% increase, so strong results as KFC given the restriction and the company ended 2021 with a restaurant operating profit of RON 0.8 million.

Thank you very much, Monica. [Operator Instructions]. We will start with the first question that we have received, why we did not see any impairment for ARS this year?

Yes, I will take this, Zuzanna. Indeed, there is no goodwill impairment for this year. And even the investment impairment booked was significantly lower than the one booked in the previous years. But strictly speaking about the goodwill, the main reason is that because of the result of the impairment test we have conducted this year together with our auditors, it resulted higher enterprise value compared with the balance of the goodwill in the balance sheet. And the main reason of this are the better perspectives that we foresee for Pizza Hut brand, especially based on the new format of the restaurants that we opened in Italy with their performance. And as well based on the recalibration of the development plan that have been agreed and made public regarding the perspectives of the development in the next year. So all in all, this brings us in the situation to have a zero impairment for goodwill.

Perfect. Next question, how many restaurants do you want to open this year? And next, and please specify by brand.

I will answer for this. And our plan is to open 9 KFC restaurant in Romania, 4 Pizza Hut, KFC and Express units, 3 Taco Bell new restaurants and 2 new restaurants in Italy. In total, I think there are 18.

Perfect. Thank you. Next question, will you make price increases in the next period?

I can take this question. Yes, we will take price in the next periods.

Great. How do you see the evolution of Pizza Hut in the medium term? And does the new restaurant concepts start to bring its contribution in a positive way?

Definitely, our expectation is to see a positive evolution of Pizza Hut based on the new restaurant concept and based on our measure that was taken in the last few years. And as I mentioned, our expectation is to be a positive contribution.

Great. The inflationary pressures are still in the market. Does the company expects further increase in food and materials costs as a percentage of sales? Should we expect additional price increase in the first half of 2022? I guess, so to the second question, Monica already answered, and I will let Vale answer about the increase in food and material costs.

Yes. I touch based on my presentation on this as well. Unfortunately, the inflation is still volatile. So it's totally unpredictable. We foresee pressure in the next month. We already saw some negative evolution in the first part of the year until to date. But we are prepared, and we have different initiatives to minimize the effect and secured our margins even through the price that we are planning to do in the next period.

Now the next question is related to the salaries. I will let Calin answer. Were the salaries of employees fully aligned with the market in Q4 '21? Or should we expect further increases in the payroll cost line in 2022?

What's happened -- we take care of our employees, even in this difficult economical context. Even last year, we increased the salary of our employees. And of course, this year, we will apply also an increase, and we will try to be in the range of the market. And of course, will be an impact, but at the same time, will be offset with our action to manage the cost.

The next question is how Sphera estimates the impact of Omicron wave? I guess here meant Q1 of 2022.

We already see -- we can feel the activity is much better. So the evolution is positive, We consider that finally this year will be the end of the pandemic. So in the performance of the first period of this year, we already see a positive evolution compared with the last quarter. And we are very optimistic that it will be the last wave of impact from a COVID perspective in 2022, this Q1.

Great. Moving on to the next question. The IFRS 16 is here to stay. Why to present financials with and without IFRS 16, is it just for historical comparison purposes?

Yes. IFRS 16, it's definitely permanent. There is no doubt. We have a note in the beginning of the financial statement as well. We are still looking to the figures also from -- without IFRS 16, mainly because of the history of the ability to gel in the -- more easily the figures without it. But IFRS 16 is permanent and it will remain. Once it will be very embedded in the habit of analyzing the figures, probably without and it will naturally disappear.

This concludes the questions that we have received, so far. If you have any other questions, please type them now or you can also raise your hand if you would like to ask us a question directly. We're going to wait until -- for 3 more minutes in case there are any other questions, unless we do, we will conclude this call. There is a question regarding how many restaurants, there's a plan to open this year?

I'll repeat, 9 KFC in Romania, 4 Pizza Hut, KFC and Express in Romania, another 3 Taco Bell in Romania and 2 KFC in Italy.

18 In total. Around 18.

Is it clear?

Yes.

Okay.

Great. If there are no further questions, we would like to conclude this call. And just as an update on our financial calendar as of March 21, the Sphera Franchise Group shares are going to be included in the FTSE Russell Microcap Index. On April 28, we have the Annual General Meeting of the shareholders. And the next time on May 6, we have the ex dividend date with a payment on 30th of May. And the next call that we will hold will be on May 13 after we published the results for the first quarter of 2022. Thank you all very much for joining us today, and please if you have any other follow-up questions, you can always reach out to us at [email protected]. Thank you, and have a great day.