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

Good afternoon, and welcome to Sphera Franchise Group H1 2024 Results Call. My name is Zuzanna Kurek, and I'm Investor Relations Officer at Sphera Franchise Group, and I will moderate today's call. Today morning, we have published our H1 2024 results, which you can find on our website in the Investor Relations section as well as on BVB 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 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 consent to being recorded, please leave this call. In terms of organizational aspects, we will -- one second, apologies. let me reconnect the presentation. My apologies we had some technical issues. [Technical Difficulty] Let me start again, in terms of organizational aspects, we will follow our standard call setup, which means the management will deliver a presentation outlining the H1 2024 results, and later, we'll have a Q&A session. [Operator Instructions] 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 on our website, Sphera Franchise Group (sic) [ spheragroup.com ], Investor Relations section as well as on BVB's website. This disclaimer applies equally to all the statements made in today's call. Now that we're done with the organizational part, I would like to kick off this call, and I would like to introduce the management that is here with me today and will present the results for the first half of 2024, 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 some insights about our performance in the first 6 months of 2024. Calin, the floor is yours.

Thank you. Good afternoon, and thank you for attending this call. The first semester confirms the perspectives we had envisioned at the beginning of 2024. It has been a good year so far, but not without its challenge, we have ended with the best first half of the year in history in terms of sales, EBITDA and net profit. We remain attentive on the core side. And as a result, the share of restaurant expenses and total sales continued to decrease in the first half of the year by 3 percentage points. Our net debt-to-EBITDA ratio remains at a reduced level of 0.4. After, we continue expanding our restaurant network either by entering cities capitalizing opportunities brought by new shopping center or expanding with drive-thrus, the most valuable format. More details about the financial results will be presented by Valentin and Monica. Therefore, I will cover several other important topics in the following means: we intend the new dividend distribution similar to the one we had in June and the [indiscernible] shareholders' meeting has been convened in this respect for October. The Board of Directors proposed the distribution of the gross dividend per share of around RON 1.05 from 2023 and distributed profits. We are delivering on our promise to reward the confidence of our investors, and I take this opportunity to reaffirm our commitment to continue creating value for those who have put their trust in us. Another topic I want to touch up on today is, sustainability and please allow me to present some of our achievements in 2023, as highlighted by our sustainability report published in June. Our strategy is build on 4 pillars, and we have made significant progress on each of them. In the business field, we are proud that 80% of our purchasing budget in Romania went to domestic suppliers. This has contributed to the local economy, while ensuring efficiency on the cost side. On the environment front, we have made strides in becoming greener by reducing our electricity consumption at group level by 3.63% compared to 2022, which was also visible in our base. Additionally, due to the other efficiency, we have managed to decrease our greenhouse gas emissions. Regarding products, food quality and safety remain our top priority. All chicken meat suppliers have been audited for animal welfare standards, ensuring quality and ethics in the supply chain. Finally, the people and community pillars underscores our dedication to our employees and participation in such causes. 80% of the restaurant managers are promoted from within the company, and we have over 30 different nationalities among our employees. Our commitment to the committee is evident to our support for food and education initiatives, with over our 1 million lei and 5 tons of donated food. We believe that operational excellence and corporate responsibility are mutually reinforcing and we will continue to take measures that are ESG-friendly, but also economically sound. As we discussed in the future, we anticipate both opportunities and challenges, where inflation is more moderate now, there was a slight increase in July. We hope this is an isolated issue and not a sign of reversing trend. The upcoming election are expected to lead to less regulatory volatility and continued poor public investments for the rest of the year despite the growing deficit. On the challenging side, geopolitical risks persist, and I will not insist on this as it has been a recurring issue for several years now, unfortunately. In addition, there are an increasing concern about potential economic slowdown, both domestically and internationally. While this could affect household spendings, our balance will benefit as they offer an affordable meal option for consumers looking to scale down their expenses. To summarize, we had a strong first half of the year and the outlook for the remaining months is positive. However, we are staying cautious as we cannot overlook potential risk. Being prepared is crucial for managing changes, and we are confident in our ability to navigate this for foreseeable uncertainties and maintain our stable position. I will now allow Valentin to present the financial argument that support our optimistic vision for Sphera's future.

Thank you, Calin. Welcome to this call from my part as well. It's not the best context to me today. In the final come down until the end of the summer and for most of us, the holiday season is over. So we faced tough days. But I'm very happy that I can come with very good results to brighten these days. The first half of the year has been the best first semester in history for Sphera in terms of sales, EBITDA and net profit. We continue our strike of record, even though, as Calin mentioned, we faced not so favorable market conditions. Inflation was still high and customer behavior proved to be cautious. However, we have streamlined activity, continuing the wise cost control management, implementing network optimization and capitalizing on efficiencies. These efforts have ended us to strengthen our market position and increase profitability while maintaining a healthy balance between investment and operating costs. The result is the doubling of the net profit compared with the first semester of 2023 and a very good EBITDA margin of 10.7%. Please allow me to present in extenso, the results for the first half of this year. We had the restaurant sales reaching RON 740 million which is 6.4% up compared to the first half of 2023, a rate in line with our expectation as the combined effect of more transactions and higher average ticket. All 3 geographies contributed to this increase with Moldova delivering the best level of 11.6%, an indication of the potential that still exists in this market. However, Romania remains the main contributor to the group performance in H1 2024, generating sales of RON 639.5 million, which accounted for more than 86% from the total share. KFC Romania is by far the most valuable asset in the Sphera's portfolio with the restaurant sales reaching RON 544 million up by 8.6% year-on-year. Pizza Hut had lower sales in the first half of the year compared with the first semester of 2023, which is a normal effect given the streamlining process that saw the closing of several restaurants throughout the last 2 semesters. However, the benefit of these courageous actions are already visible. Pizza Hut performance having improved with a restaurant operating loss of only RON 1.3 million 24.6% lower than the one registered in the first half of 2023. We continue to remain confident in the decision we have taken and coupled with some uplift in our menu, optimization in restaurant and the fine-tuning of our marketing strategy, we expect an uptick in the improvement trend in the near future. Taco Bell continues to grow at a lower rate, but brings a positive contribution to the group's profitability, ending its first semester in history with a net profit. I would like to highlight the great performance of Sphera's youngest brand, which managed to break even in terms of EBITDA at the end of 2019 in its third year of functioning despite facing the challenging of pandemic during its critical development years. I will now move to the next slide to discuss the evolution of the key indicators. The healthy trend of expenses growing at a slower pace than the sales continued also in the first half of this year with an increase of only 3%. As a result, the restaurant operating profit had a 45% surge year-on-year to RON 87.8 million with high double-digit increase for Taco Bell, KFC Romania and KFC Moldova. Taco Bell performance is mostly notable as it has doubled its restaurant operating profit. This brand is also the front runner in terms of EBITDA growth having more than doubled this indicator. All brands, except Pizza Hut, witnessed improvements in profitability with EBITDA showing a strong upward trend. It has risen to RON 78.9 million in the first half of 2024, which is up 50.7% year-on-year. This was mainly driven by the performance of KFC Romania, which show -- which saw 50.7% year-on-year increase, reaching RON 70.3 million in EBITDA. Additionally, KFC Moldova also experienced a double-digit increase of 57.3%. These improvements are mainly due to the effective cost control measures implemented throughout the group, a leitmotif of the past year forced upon us by the pandemic but internalizes hygiene behavior since. And if we look to the next slide, we have undisputed proof of this. Q2 continues Sphera Group strike of record being the best second quarter of the year in the history in terms of sales, EBITDA and net profit. Total sales stood at RON 374.1 million, supported by growth across all 3 markets. This expansion continues to shape our promising year with the company having a successful track record of increasing sales quarter-by-quarter with the last 3 months of the year often delivering the strongest results. For 2024, this trend is expected to persist. Restaurant expenses are only 1.2% increase year-on-year to RON 331.2 million in the second quarter compared with the same period of 2023. Food and material cost decreased 2.6% year-on-year in the second quarter due to the cost control measures I have previously mentioned, but also to negotiating -- negotiation efforts to secure the best prices, while continuing to uphold the highest quality standards, which support our client retention. As the restaurant spaces increased at a lower pace than the sales, their weight in total sales decreased by over 2 percentage points to 88.5% in Q2. Increases in other cost categories were contained as well and as a result, EBITDA followed a positive evolution, reaching RON 39.1 million, a 35.7% increase year-on-year while the net profit of the group recorded a remarkable increase of 59.1% year-on-year to RON 19.2 million. I also want to underline that all 3 brands except Pizza Hut ended Q2 with a net profit. Due to the positive results in the second quarter that built on a very good first quarter, the half year performance is notable. As I mentioned, it's the best first semester in the history in terms of sales, EBITDA and net profit. Restaurant expenses saw a moderate 2.9% increase year-on-year, reducing the rate in the total sales down to 88.3%. Food and material costs decreased their weight in sales with 2 percentage points. Now please allow me to cover another category of expense, which is not present in this slide, but it's very important, namely the payroll and employee benefits. There is no news that we are facing a very, very tight labor market and recent statistics are a clear indicator of this. According to the overall start, the increase in the cost of hourly labor rate in the first quarter of this year compared to the similar period of 2023 was the highest in Romania among member states of 16.4%. In this context, we managed to grow our payroll and employee benefit cost line by only 3.6% in H1 2024 versus the similar period of 2023, while increasing our retention rate. This speaks of our continuous effort to motivate and secure our employee base through a complex mix of benefits, actions and measures and the clear career path. This generates, on the other hand, a competitive working environment, while on the other hand, creates an organizational culture, nurturing people well-being and growth ambitions. Now returning to the more pragmatic slide of the -- side of the business. We are very pleased with the achievement in terms of EBITDA margin. For the first half of the year, this stands at a very good level of 10.7% for Sphera Group, a boost of 3.2 percentage points compared with H1 2023. This indicator varies by brand. Here, KFC Moldova has the highest figure at an excellent 22.4% followed by Romania with KFC at 12.9%, then Taco Bell, which has continued to improve its margin and reached a healthy 7.8% in the first half of the year. The group's net profit in H1 soared to 109.4% compared with the same period of 2023, reaching RON 40.7 million. This doubling in profitability was fueled by operational expansions and continued efficiency measures. KFC Romania was the main driver of this result, earning a profit of RON 45.9 million, up 74.4% compared with the same period of last year. KFC Moldova also saw a great improvement in net profit, 68.3% to RON 1.9 million while Taco registered its first profitable half of the year. Pizza Hut made progress in reorganization process, reducing its net loss to RON 5.7 million, 6.7% improvement versus H1 2023. The net debt-to-EBITDA ratio, as Calin mentioned, remains to a very reduced level of 0.4x. The performance in the first semester is due to both network expansion and same-store sales growth. The group opened 7 new KFC restaurants between June 2023 and June 2024, all in Romania, while 2 additional openings took place in Q3 2024. This year alone, we have added a new drive-thru KFC in Sibiu and opened 1 in Craiova. We entered Arges Mall food court in Pitesti, and we cover 2 new cities, Hunedoara and the perfect treat for the mountaineers in Sinaia. Moving on the next slide from the presentation. I'm happy to close on a very high note regarding Sphera share's evolutions. We have once again surpassed by far the BET index increased by 47.1% versus 18.7% in the first half of the year. The total return on Sphera shares for the same period, including the dividend paid in June, stands at 51.2% compared to 25.2% increase for BET-TR. To create the best trading conditions for the company's shareholders and to sustain the liquidity of our shares we have signed during this period, a partnership for a second market maker. And as Calin mentioned, we intend to distribute new dividends in the second half of the year. having, as usual, the same shareholder confidence through these actions. And we look forward to continue to deliver on our promises towards stakeholders. I believe that the results we have presented today reflect our determination to create value for our shareholders. consumers and, as Calin showed, to employees and communities as well. We remain committed to following this successful path. Thank you. And now I give the floor to my colleague Monica.

Good afternoon, and welcome. Thank you, Valentin. I will take over from here and cover the marketing news and updates. But before starting, I am excited to share some great news with you. One of the few lines for advertising won by KFC globally was brought home this year by none other than KFC Romania. This prestigious award recognizes outstanding campaigns worldwide. I'm very proud of this achievement which is a continued testimony of the consistent performance and high standards achieved by KFC Romania. And now going back to the slides. The second quarter is always very busy. But you see that this year, we have increased our activities even more than usual. We are aiming to achieve 2 objectives for all the brands. First, increase the frequency among loyal customers through offers; and second, attracting light users through innovation. So we will first cover KFC and several initiatives that are particularly notable and effective for the second quarter. We focused on growing the burger category strategic for us given its potential identified through research. We focused on this category since last year and continue to export potential in 2024. We ran 2 campaigns with a focus on burgers, the Cheesy Zinger Burger and the Star Burger, both of which also included product innovation. The objective is to drive sales by increasing frequency among loyal KFC-ers as well as attracting burger-loving consumers. In the second quarter, we promoted our new e-commerce platform. This is one of the most innovative platforms in the local market as it aligns the entire menu across the entire e-commerce ecosystem, pick-and-collect, delivery and e-com. All products can be found and ordered in the platform for the same price, no matter the point of entry or interaction type. The communication campaign was complex and aimed to increase the number of app downloads and transactions through this channel. We continued the aggressive offers in the second quarter with the traditional Tuesday Bucket, a campaign that consistently proved successful. We added coupons both for special offers and for Click & Collect in the KFC app to increase traffic in the restaurants and the consumer base registered in the app. We continue to focus on optimizing sales including through localized tactics where we had 2 such actions in the second quarter. The first one was implemented in 15 selective restaurants. And the second, in partnership with [ NOI ] in 7 restaurants. The latter was dedicated to the gaming community, a niche, where we already have strong penetration, thanks to the multiple projects carried out in recent years. We carried out 2 gaming-related initiatives in June, KFC Gaming Marathon and KFC Spicy Discount, strengthening KFC's association with the gaming community. This niche is important in our strategy, which is to increase the younger consumer base, especially Gen Z. For Pizza Hut, we implemented campaigns with the main aim of increasing transactions through very competitive offers. We capitalized on external plant [indiscernible] such as Euro '24 and channeled our efforts to communicate a very important moment for us, specifically the 30 years anniversary of Pizza Hut in Romania. Some of the campaigns focused on offers focused on offers, including medium pizza for RON 20 only and good deals that come at unbeatable prices, and the kids meals, eat for free, where the name says it all. This were aimed at increasing orders as well as restaurant traffic especially for the latter during the period mark by event specific to these age groups, such as June 1 and the end of this school year. Well, for football fans, we prepared an offer valid during the European Championship, 2 beers on the house and ordering certain products aimed at increasing transactions. The 30th anniversary of Pizza Hut in Romania is a very complex campaign through which we gave away 30,000 pizzas as well as substantial price of EUR 30,000. The campaign runs in the third quarter as well, but I can already tell you that the results are very good. For Taco Bell, we aimed to both strengthening our customer base through higher frequency as well as increased trial. We achieved both objectives by developing from competitive offers and by adding innovation to the menu. This is the case of Lil Cheesy Bacon Quesadilla, a product that performs very well and which we innovated with a new recipe and communicated the junior version at an affordable and competitive price. In the offers category, Más Menu or complete menu at a very attractive price, created exclusively for restaurants outside of Bucharest aiming to generate transactions and build the image of an accessible world brand in the QSR category. In May, we reintroduced the milkshake range in the menu highlighting the diversity of Taco Bell products from tacos to drinks and deserts. We communicated Play Más an interactive and engaging gaming platform created to accustom young audiences with the Taco Bell brand. and products with the main goal of increasing awareness. We also continue communicating for our Click & Collect platform to increase consumer loyalty. And now turning to the financial performance of the brands. We continue to grow in terms of both same-store and total sales. KFC Romania as a consolidated brand, with the comparable rate of 4.8 growth -- 4.8% growth, with Italy continuing to advance while Moldova has a strong performance with a 10.8% growth. Pizza Hut entered the recovery phase as Valentin mentioned, and we expect to see the positive effects of the streamlining process initiated last year. Taco Bell also begins its brand consolidation phase with the single-digit growth rate but substantially improved profitability, as you already saw. The evolution of delivery sales which represented 18% of sales at group level in the second quarter is not worthy. The total value registered an increase of 11.1% in the second quarter of '24 compared to the similar period of '23. And now we will open for questions during the Q&A session. Thank you.

Thank you, Monica. This concludes the presentation of our results for the first half of 2024. [Operator Instructions]. The first question is what is the reason behind the profit increase? Is this sustainable? I will ask Valentin Budes to address this question.

Yes. So basically, the remarkable evolution of the net profit in our H1 results, it's a result of both our effective cost control measures implemented throughout the group and also the negotiation done from a procurement standpoint. Specifically, we managed to keep flat and absolutely figure our food and material cost. The weight of this cost in the restaurant sales improving with 2 percentage points. Romania poultry price has followed the constant European increases across the first 2 quarters, but on a slightly more moderate pattern. This allowing us to keep the prices negotiated at the beginning of the year. As a result, we have capitalized significantly a number of savings in Q2 on top of the very good results of the Q1. This is not replicable in the second half of the year, but we already reacted to different measures to counterbalance the pressure on the poultry prices.

Thank you, Valentin. The next question, your revenue increased by 6%, while your profit aroused by [ 147 ] What's the explanation for that? Is this logic reproductible? Why didn't the operational cash flow increase correspondingly?

Yes, I'll split this question, for the second half of the year, since, as I mentioned, I will mention also here that 2024 quarter hot summer would also be visible in prices of agricultural products. First impact is visible in vegetables than the second half of the year will bring some effects on shortening and consequently on sources, which are expected to show increases caused by the affected crops. But our target is to improve furthermore our EBITDA margin to offset all these favorable conditions as we managed to do it also in the past. Regarding the first semester operational cash flow, there was a different timing in supplier scheduling versus the last year. If we split the semester per quarter, you will see that Q2 captured the effect of the profit and everything is attributable to the Q1 where we have this shift of payments from December.

And the last question from the set we received on e-mail. [Operator Instructions]. You mentioned 21 possible risks for the second half of 2024, which of them are the most probable or even possible to happen? How can you avoid their negative impact?

So concerning risk, we believe the most significant are associated with the macroeconomic environment, including political and electoral risk, inflation, economic slowdown and, of course, fiscal changes. As these are the external factors, our preparation focus is on mitigating their impact depending on the outcomes we'll see in the next months.

Thank you, Valentin. Now we move to the questions from the chat. Congratulations for the record results, and thank you very much for the presentation. Could you please update us on the expansion plans and the CapEx associated with these plans. I will invite now Calin to address this question.

Our budget was [indiscernible] on the beginning of the year. It was in plant 8 location. We're already open 5 as Valentin mentioned, and it's working on progressing another 3, one Taco Bell, 1 KFC directory in Romania and 1 in line in Italy. The budget, the CapEx for the all year, it was RON 69 million. But together with the remodeling the for remodeling for these 3 locations that remain for this year, it's around EUR 2.5 million.

Thank you, Calin. The next question, could you please also discuss the quarter-on-quarter performance during Q2 2024 versus Q1 2024. If I'm not mistaken, the profitability has suffered slightly, despite historically the second quarter being more profitable than the first. What is the dynamic of employee costs in Q2 2024 versus Q1 2024?

So yes, there are different elements that contributed to this shift between Q1 and Q2. One of the main important one is the timing of our campaigns -- our marketing compass from an advertising expenses point of view. Basically, we face more campaigns and more investment in Q2 versus Q1 from here also the weight in revenue from 5.4% in Q2 versus only 4.8% in Q1. Also in the payroll, there is a 5% increase between the 2 quarters, which is mainly triggered by the increase in the salaries. But even though from a quarter-to-quarter, there are variances, we are focusing to be able to absorb all of them and go towards the target we have engaged to our budget for this year.

Congratulations on the great results. Could you please complement again on the dividends you intend to distribute in the second half of 2024. How much? And when can shareholders expect to receive the supplementary dividend?

I think it's a little bit already clarified through the current report we sent today because we are already planning to go in the shareholder meeting for the approval, the magnitude of the dividend, it's already visible the ex date. It's also there.

So as a reminder, you can see on our profile as well as on our website, there is a convening for a general meeting of shareholders on October 7, where there is a proposal of the Board of Directors to distribute a gross dividend of RON 1.05 per share. And as you will mention, this is a supplementary dividend. So this is already a second dividend we are paying this year from the profits undistributed in 2024. So you can find all of the information -- 2023, excuse me, 2024 is still ongoing. You can find all the details on our website. Going to the next question, can you comment about the full budget numbers for full year 2024? Do you stand by those?

For the time being, our guidance for this year remains in line with the budget we already approved. It will be definitely a tough second part of the year. There are some signs of headwinds, as I mentioned. But we are counting a lot on our teams with their ability to find solution as they proved in the past. And they try, we are quite confident that the levels of the budget are still achievable in this moment.

And the next question, can you comment about the share buyback program approved by shareholders?

So indeed, we have, according to the last shareholder meeting buyback program, a buyback program that is supposed to have a green line decided together with our Board and based on the market evolution and based on our cash flow capabilities now linked also with this just fresh information of proposing an extra dividend will be assessed and decided whenever it's appropriate to be implemented.

Thank you very much, Vale. We have one more question. [Operator Instructions] And the last question is, can you please detail your plans with Italy and acquisitions or development of new brands, other growth initiatives? And I will invite Calin to address this question.

Regarding of Italy, our plan is to starting next year is around 3 locations each year. Regarding of the new brands, we are looking constantly to see if we can bring another brand in our portfolio, but we cannot talk in this moment about this subject.

Thank you, Calin. If there are no further questions, as I mentioned a little bit earlier, we are going to be -- we are going to have a general meeting of shareholders on October 7 to approve the dividend, other than that, we're going to hear each other next time on November 15, after we publish the Q3 2024 results in the morning on the same day. Thank you all very much for joining us, and we wish you a great afternoon.