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

Good afternoon, and welcome to Sphera Franchise Group's Q1 2024 Results Call. My name is Zuzanna Kurek and I am Investor Relations Officer at Sphera Franchise Group, and I will moderate today's call. Today morning, we have published our Q1 2024 results, which you can find on our website, Investor Relations section as well as on BVB's website, Sphera Franchise Group Investor profile. Before we begin, I would like to mention that this call is being recorded and that the recording of this call will be updated on our website tomorrow, the latest. As stated in the call invite by joining the video conference, we 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'll follow the standard call setup, which means the management will deliver a presentation outlining the Q1 2024 results. And later, we'll have a Q&A session. Please note that all the participants should be on mute. If you would like to ask a question, please type it in the chat box. Feel free to do so during our call, and we will answer all the questions in chronological order as soon as the presentation of the management is over. Last but not least, as always, 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 the actual results may differ materially. We encourage you to review the disclaimer that we have included in the presentation, which is available also on our website, spheragroup.com and Investor Relations section as well as on BVB's website. This disclaimer applies equally to all statements made in today's call. Now let's kick off the call. I would like to introduce the management that is here with me today and will present our Q1 2024 results. I am joined today by Calin Ionescu, Chief Executive Officer; Valentin Budes, Chief Financial Officer; and Monica Eftimie, Chief Marketing Officer. I will pass now the floor to our CEO, Mr. Calin Ionescu, who will share with you some insights about our performance from the first 3 months of 2024. Calin?

Thank you, Zuzanna. Good afternoon, everybody, and welcome to the call presenting the first result of 2024 quarter. It's been a good start to the year. The more stable economic condition and the team's hard work to pursue our consistent strategy allow us now to reap the feet, and it's been great 3 months. We are registering the best first quarter of the year in history in terms of sales, EBITDA and net profit. And profitability reached previously quarter high of 10.9%. These figures are based on the strong fundamentals underlying our business. The steady growth of consolidated sales of 9%, a 4 percentage point decrease in the shares of restaurant expenses in total sales and the lowest net debt-to-EBITDA ratio in the past 3 years. We believe these are indicative of the robustness of our business, creating proper premises for further sustainable growth for Sphera Group. I want to dwell on the first 3 months of the year as we are all aware of the challenges we are facing. The price of the input scheme keeps rising albeit of a slower pace. Does not forget the inflation in Romania is double the EU average. Labor market is still tight, and we were putting in a considerable effort to recruit a retain. However, good news come from the consumer side. The economic sentiment indicator calculated by the European Commission is at its highest for the past years. Data published by the National Institute of Statistics show consumption is picking up. This is confirm the signals we have seen in the first months of the year, and our estimates on which we have based our 2024 budgeted forecast. They support our prediction for solid growth throughout this year for Sphera. We have estimated double-digit increases for both top line and bottom line, and we are confident we will achieve these targets. Nevertheless, we remain prudent as uncertainty is not yet a thing, but from the past. While locally, we do not expect major changes due to the upcoming round of elections, which could make things more predictable on the regulatory side. The geopolitical context remain turbulent, plus, we have a long-term approach to our business and our extensive previous experience has shown us that [indiscernible] periods are stable for preparing the surf of agitated war times. That's why we use this time to consolidate our financial help, secure our consumer base and invest in our teams. We are increasing our reach and diversifying our portfolio, having guided to it in March [indiscernible] by Pizza Hut. We are also sticking to the word the trust of our shareholders have placed in us. As you all probably know, we will be distributing the gross dividend amounting to RON 1.05 per share in June, and we intend to distribute an additional dividend in 2024, if certain conditions are met. We are happy that our ever improving results enable us to follow through with our dividend policy and start our ability to create value for our shareholders is recognized by the market as it affected in the evolution of the share price. We continue to surpass the market growth offer among the best yield of that index company than we had the highest since January 2018. On this high note, I invite any team Valentin Budes, Chief Financial Officer, to offer more details on the great performance of this year's first quarter.

Thank you, Calin, and thank the audience behind the screen for joining our call today. I must confess it was difficult for me to write the introduction to my speech today. I tried to be original with each earnings call, but this proved to be increasingly difficult as we continue to register record after record. [indiscernible] plus it gives me great satisfaction to say it. We have a new record high in our history for the first quarter, both in terms of top line and bottom line. Yes, we have outdone ourselves once again, and this proves we have a strong team with a visionary plan, committed and able to deliver top performance. We have continued to be alert on cost side, expand in a sustainable manner, digitalize for both internal efficiency and improved customer experience, innovate on the product side and be careful of our clients' training budgets. It has paid off, and please allow me to dive into what lies behind the outstanding figures of this first quarter. Higher sales across all geographies led to a 9% year-on-year increase in total sales. The figure is fully in line with our previous estimates of high single-digit growth rates following the termination of the post-pandemic catch-up phase and the start of the consolidation period for Sphera's businesses. The sustained growth of the group persists within a backdrop where the first quarter typically witnessed a deceleration in the food service industry post holiday season. This sets a solid foundation for a robust performance in 2024. Moreover, Romania, which is the biggest contributor to the sales with 86.7%, managed to attain a double-digit growth rate of 10% due to the excellent performance of the KFC brand. And Moldova keeps on giving with a 12% increase in sales and as you will see on the following slides with impressive profitability rates. Looking at the brand contribution, KFC is the undisputable star, achieving a double-digit increase of 12%, out of which more than half is associated with same-store sales. Taco Bell had a reasonable growth of 5% year-on-year and remain profitable. Pizza Hut continued its reorganization process with 5 restaurants closing in January, which set lower sales compared to the first quarter of 2023. However, its performance improved as the restaurant operating loss decreased to RON 0.1 million in quarter 1, 22% lower than the similar period of 2023. We are continuing with our turnaround plan, and this improvement is a good indicator that we are on the right path. While paying attention to cost hit, we are also seeking to strengthen the base of the business and one action that has already yielded good results is the addition of the WingStreet sub-brand under the Pizza Hut umbrella. It's a new concept for the local market, baked chicken wings. If you haven't tried them yet, I highly recommend it. The garlic is one is my favorites, but I don't want to want to influence you. Moving on the next slide. It's a means of what drove the great performance of this quarter. Expenses grew below inflation. Restaurant operating profit surged by 63% and normalized EBITDA by an impressive 69%. But what are the reasons behind these numbers? I will take them one by one. Restaurant expenses increased at a significantly smaller pace than sales by only 4.7% year-on-year, resulting in an approximately 4 percentage points drop of their weight in the total sales from 91.8% in Q1 2023 to 88% in Q1 2024. As usual, the largest contributor to the expenses were food and material costs due to our diligent approach in this area, they only increased by 2.8% lower than the inflation for food products at national level. As a result, we were able to reduce its share in sales by 2 percentage points, bringing it down to 31.8%. On a less bright note, the local labor market continues to experience a high level of competition and scarcity in both skilled and non-skilled workers, which compares us to up our efforts to motivate and secure our employee base. Combined with the new increase in the minimum wage in 2023, this results in a 5.9% increase in payroll and employee benefits if we are looking to Q1 2024 versus Q1 2023. Other operating expenses amounted to RON 47.6 million, recording a moderate 3.1% increase, primarily fueled by the volume activity boost. However, the weighting sales decreased with 0.8 percentage points versus last year's similar period, reaching 13% in Q1 2024. What is worth mentioning here is that starting with this year, in Romania, in other operating expenses, it was added to the excise duty, representing the tax on beverages containing added sugar above 5 grams per 100 milliliters. In Q1 2024, this amounting to RON 0.4 million. However, the moderate increase across all cost categories, coupled with the good top line growth led to a significant boost in the restaurant operating profit of 63.1% to RON 44.6 million. We are also witnessing a very favorable development regarding EBITDA, with a 69% increase year-on-year, following our effective cost control measures across the group. The G&A expenses had a positive impact with a reduction in proportion to sales of 0.2 percentage points year-on-year to 4.3%. The bottom line is a net normalized profit of RON 21.4 million for the period, almost triple than Q1 2023. Moving to the balance sheet. Even with our attention directed towards opening new stores, remodeling existing ones and investing in kiosk and other digital projects, our cash flow remains very robust, reaching a liquidity level of RON 89.5 million by the end of March 2024. Before we move to the next slide, I want to highlight 2 indicators, reflective of Sphera's robust results. EBITDA margin stands at a healthy comfortable 10.9%. It is a record high for the first quarter, which we have reached only once since listing in Q1 2018. The EBITDA margin vary per brand, and I must mention KFC Moldova with a stellar 23.8%, but also the excellent level of 13.2% for KFC Romania. The second indicator, as Calin mentioned, is the net debt-to-EBITDA ratio, which reached a minimum level of 0.3%, signaling the soundness of a cash reach business. Now going forward, in this session, there are some business updates. In the first quarter, we have opened 1 KFC drive-thru restaurant in Sibiu and in April, an additional food-court restaurant in Pitesti. The pace is consistent with previous experience with most openings taking place in the second part of the year. As already mentioned, we went through with our plan to organize the Pizza Hut business, which includes restaurant closings. As a result, we now operate a leaner, more efficient network of 29 units. In this first quarter, we published the budget for 2024, which was later approved by the GSM. We have considered a normal course of business with yearly average inflation of around 6% and an increase in the minimum wage announced by the authorities. Based on this assumption, we target to continue our steady growth in terms of top line and the improvement in the bottom line. The restaurant sales are estimated to go up by a comfortable 12% compared to 2023 on the back of contributions from both same-store and new stores. We are confident our effective cost control management will trigger an increase in the food and material cost in 2024, below the increase in sales. The evolution of the cost of labor will be in line with that of the sales throughout the year, similar to how the group managed it in 2023. We expect the weight of the normalized G&A expenses in total sales to be lower this year than in 2023 due to the inelasticity of this cost in relation to activity volume increase. As a result, we are targeting a more than satisfying increase in the normalized net profit of 20% year-on-year. In terms of development, the total estimated capital expenditure for 2024 is around RON 69 million late, allocated towards 6 KFC opening in Romania, store remodeling and implementation of digital solutions as part of our digital strategy. Last but not least, good news in terms of the share price evolution. We continue to outperform the bet index with 14% increase in the first 3 months of 2024 versus 10.8% increase in the bet index for the similar period. Liquidity tripled with almost 0.6 million Sphera shares traded in Q1 2024. Our shareholders approve RON 1.05 gross dividend per share to be paid in June, and we intend to distribute a supplementary dividend in the second part of the year, in line with our dividend policy. To conclude, we have wrapped up another outstanding quarter. Our meticulously crafted strategy, unwavering cost control, carefully designed marketing tactics and the tireless effort of our team have yielded good results once again, making us feel confident of the prospects for this year. We look forward to continuing to deliver exceptional results in the future. And now, Monica, the floor is yours.

Thank you, Vali. In case you're wondering, when it comes to [indiscernible]. Good afternoon, everyone. As you may know, consumer spending behavior is more conservative in the first quarter of the year, typical for the post-holiday season. For marketing, this usually means more work to contract this trend. And we did have some busy 3 months for all the brands. At KFC, our approach was to drive sales growth through transactions, reinforcing the value for money perception for which we have run 3 campaigns, a large promotional campaign with daily and weekly prices consisting of KFC products and a big price of EUR 100,000. While the mechanic set us apart in the category, it also resulted in a significant transaction boost. We reintroduced for a limited period [indiscernible] Buckets, driving traffic in stores, and we offered coupons through our mobile app. We also successfully relaunched Smart Menu, a full meal for only RON 19.9, which resulted in same-store sales increases. We have also kept our consumers close through social media engagement on a variety of platforms, Facebook, Instagram and TikTok. Our marketing campaigns were supported through dedicated content, but we have also run real-time marketing tactics with influencers and content creators to ensure constant conversation with the fans. Pizza Hut, moving on. Pizza Hut continued its path to business turnaround, not only in terms of reorganization, a process, which continued in the first quarter, but also by unlocking new growth layers by addressing these occasions to support sales building. Thus, in March, we launched WingStreet, a sub-brand internationally renowned, proposing to consumers a new concept basically wings with 6 different flavors and other American-inspired products. The launch was strongly supported through communication, a digital campaign, premium exposure in aggregator platforms, an offline event with 30 influencers and the media gathering with 10 journalists. At the same time, we continue to pursue our objective of improving transactions. Therefore, 2 of the campaigns this year revolved around strengthening the value for money perception. We offer clients a small pizza for only one level with any medium pizza board, which attracted price conscious consumers and increased trial. We also brought in the focus our Wednesday offer, any pasta for RON 12.9 to remind consumers about our varied menu -- to remind consumers about our varied main items with affordable price points. Now, Taco Bell. Reinforcing the value for money perception is an objective for Taco Bell as well. However, marketing actions aim at the same time at increasing trial to expand consumer base. 3 combine sought this outcomes, 2 of them focused on affordability, must make [indiscernible] attractive price and Taco Tuesday Buy 1 Get 1 free, fan favorite.. The third one represented a value innovation. [indiscernible] is a new product at an affordable price that differentiated us in the category. All 3 campaigns result being boosted sales. We also continue to communicate with the mobile app with the reverse program on top so that consumers can only come to us for certain exclusive offers. Before moving on to the next section, which I know you are particularly looking forward to the individual performance of the brands, please allow me a few words on pricing. In the current economic climate, we increased the prices in February for the 3 brands in order to protect the bottom line and observe the increased cost of inputs. However, as I have previously mentioned, we focused on value offerings to customers to ensure continued traffic visits and transactions. Regarding the figures, all brands have experienced an increase in sales, except for Pizza Hut, which has already been discussed by Vali and will be addressed again. We see more moderate growth for some of the brands, in line with the post-pandemic reality, but we also have some nice surprises. One of them is KFC Romania, our star brand, which continues to shine quite bright with a double-digit growth rate of all stores sales. Given the magnitude of the business and the fact that we entered a business as usual, of course, the 12.8% increase is a notable achievement. Main indicators registered good performance. Restaurant operating profit increased by 58.3%, EBITDA surged by 64.8%, while the net profit doubled. Moreover, KFC Romania ended the first quarter with an excellent EBITDA margin of 13.2%. Contributor to the brand's performance was also the new KFC restaurant, a new drive-thru point in February in Sibiu. KFC Moldova also had a good first quarter. Sales were higher by 12.4% and the restaurant operating profit doubled. The [indiscernible] continue to record extraordinary profitability with an EBITDA margin of 23.8%. During the first quarter, KFC Italy saw an increase in sales as well by 5.7% and ended the period profitable in terms of EBITDA. Sales also increased for Taco Bell by 5.4%. And after breaking-even last year, the brand continues to remain profitable in the first quarter of 2024. Pizza Hut contributed RON 27.4 million to total sales in Q1 2024, down compared to the first quarter of 2023 amid the reorganization of the restaurant network, which continued in the first months of the year. However, the results of these actions are already visible with the operating loss at the restaurant level decreasing by 22% in Q1 2024 compared to Q1 2023. And now a few words on delivery. As delivery place an important part in our cost structure, we continue to bring in front of you the evolution of orders for this channel. In the first quarter of 2024, there was a 1 percentage point rise in delivery sales compared to the fourth quarter of last year with the 19% level across all group entities is identical to the one of Q1 of 2023. Given the larger whole sales, the total value of delivery sales in the first quarter of 2024 reached RON 70.4 million, marking 9.4% year-on-year. I would also like to mention that we decided to gradually outsource our own delivery feet to existing partners to optimize costs, of course, while securing sales and remaining in close contact with customers. In Q1 2024, on-delivery sales channel represented 7.8% versus 11.4% in Q1 2022. I will now wrap-up our presentation, and we will take your questions.

Thank you very much, Monica. This concludes the presentation of the management. We will now open the floor for questions. If you would like to ask a question, please type it in the chat box. We will then read them out-loud in chronological order and address them. I saw we already have 3 of the first questions. The first one is, hi and congratulations for the results. Can you provide us how much from the 9% year-on-year increase is due to higher average ticket prices and how much is aided by higher volumes? I will invite Valentin Budes to answer this question.

So the 9.2% increase of the Q1, it's fueled for both volume impact and price impact. We can see more than 40% triggered by volume in this 9% increase. So both elements with significant influence coming from volume as well.

The second question. Based on the good Q1, is it that the 2024 budget is conservative? For this answer, I will invite Calin to address the question.

My point of view provided for all the -- is the point of view of management. It's too early to say whether the budget for this year is conservatively constructed. But if we record the quite good results in the second quarter, we will communicate a new guideline to the market.

The third question. Congratulations for the results and for the presentation. Please indicate the impact of salaries in the OpEx and the comparative to Q1 2023. Here, I will bring it back again to Valentin to address the question.

So yeah, if we are looking to the payroll expense line, there are a different way to judge it. In absolute value, definitely the payroll increase with 5.9%, which is normal because it's a different scale of the business with a higher number of restaurants added and different volume increase. If we are looking to the weight of the payroll and employee benefits in the sales, we can see a decrease. They have a weight of 22.5% in Q1 '24 versus 23.2% in Q1 '23. And obviously, if we are looking at the weight in the total expenses in total OpEx, there is a different logic there as well. But if we are commenting on why the weight of the payroll and employee benefits decreased as related to revenue, then definitely, there are 2 factors. On the one hand, is the dilution of this expense line because of the effect of the price increases. On the other hand, it's a temporary difference because we run Q1 2024 with a lower average FTE per restaurant compared with the one recorded in Q1 2023. So I hope we addressed from multiple angles, the question.

The next question. Can we expect new Taco Bell restaurants in Romania or new openings in Moldova or Italy this year? For this question, I would like to ask Calin to address it.

Yes. Well, I am not sure regarding of Taco Bell, I am not sure if it will be this year or next year, but we work on this. In Moldova, there will be another one and we also had a few projects on the way.

And now we have a set of 3 questions. We are going to address them one by one. The first one is what was the comparable year-on-year sales performance of Pizza Hut, meaning if you only look at the stores that remain open and exclude the closed [setting] stores? This is a question for Valentin.

If we are isolating the effect, then it's a positive variance with one high single-digit percentage increase.

The next question is, could you elaborate on EBIT, on the weak NYC performance, that dragged down operating cash flows in Q1 2024?

So in Q1 2024, there is a timing difference, which is related to the last quarter of the previous year. So in the last period, there was a shift of the payments due to the holiday season from December to January. So we can classify it in one order like a short period payment delay that affected the Q1 2024.

We hope this answers your question. And before I read the next question, I would like to kindly invite you if you have any remaining questions for the management, please type them now. If there will be no further questions, we will conclude this call and this presentation after the answer to the next one. So we have the following question. Are the 250 employees from Sri Lanka actually as per our payroll or are they employed by a third party? And here, I bring it back to Calin now.

Yeah. We employed a third party because there are huge fluctuation on the turnover, high turnover on this part. And in this way, we can secure the cost.

If we are looking to the entire experience with this solution of workforce, in the beginning, we started with the internal hiring. So still a proportion of this category of employees are on our direct payroll. But then it was shifted to the solution that Calin mentioned, and this is a solution which we are working as of now.

We have addressed all of the questions that we've received so far. If there are no further questions, we are going to conclude this call. Thank you all very much for joining us. Just a few announcements at the end. As usual, tomorrow, we have an ex-date for the dividend payment that Calin mentioned, the record date is 17 of late and the payment of the dividend in the gross amount of RON 1.05 for 2022-2023 profit is going to be on June 6. In terms of the next call, next time we're going to hear each other is going to be on August 30 after we publish the results for the first half of this year. We thank you all for your participation today, and we wish you a great day.