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

Good afternoon, and welcome to Sphera Franchise Group Earnings Call. This morning, we published our Q3 2024 results, which are available on our website in the Investor Relations section as well as on the Bucharest Stock Exchange website under Sphera Franchise Group, SFG Investor profile. My name is Zuzanna Kurek, I'm Investor Relations Officer at Sphera Franchise Group, and I will be moderating today's call during which we'll discuss in detail another quarter of strong performance of our Group. Before we begin, please note that this call is being recorded and the recording will be uploaded Sphera Franchise Group website next week. By joining the video conference as stated on the call invite, you have automatically and implicitly consented to this recording. If you do not wish to be recorded, we kindly ask you to leave the call. In terms of logistics, we will follow our standard call setup. Management will begin by presenting the 9 months of 2024 results, followed by a Q&A session. [Operator Instructions] We will address the questions in the order they are received once the management presentation concludes. Lastly, as always, I'd like to remind you that we might be making forward-looking statements today regarding the future performance of Sphera Franchise Group, and that actual results may differ materially. We encourage you to review the disclaimer included in our presentation, which you can now see on the screen. This disclaimer applies equally to all the statements made during today's call. Thank you for your patience with all the organizational details covered, we can now get started. I'd like to introduce the management team joining me today to present our Q3 2024 results. I am pleased to be joined by Calin Ionescu, Chief Executive Officer; Valentin Budes, Chief Financial Officer; and Monica Eftimie, Chief Marketing Officer. I will now hand over to our CEO, Mr. Calin Ionescu, who will share insights on our performance over the first 9 months of 2024. Calin, the floor is yours.

Thank you. Hello, everyone, and welcome to this year's final earnings call. I'm pleased to share some good news as we wrap up 2024, aligning with the positive outlook we had at the beginning of the year. . Today's results reflect strong performance in both sales and profitability, along with positive developments across our brands and markets. We concluded the first 9 months of 2024 with record sales once again. Our normalized net profit reached RON 71.4 million, which is 66.3% higher compared to the same period in 2023 and accounts for nearly 90% of the normalized profit achieved in the entire year of 2023. We also experienced our best third quarter ever in terms of sales, EBITDA and net profit. Valentin and Monica will provide more detail -- detailed insights shortly. This year has been quite busy for us. We have opened several new restaurants so far, five KFC centers in Romania, one KFC in Chisinau and one Taco Bell in Bucharest. We are steadily expanding our network, and this development strategy has already proven effective as the new restaurants are contributing positively to the Group's overall performance, validating the added value of each location. A significant milestone in our strategy with the acquisition of the franchisee right for the Cioccolatitaliani brand. I would like to highlight the importance of this step for the Group's development, with Cioccolatitaliani, we are tapping into new growth opportunities, which we see as crucial for long-term success. Our operational experience and business results in Italy through our KFC franchisee network represent a strong base for diversification, allowing us to capitalize on existing synergies. The acquisition of Cioccolatitaliani franchisee rights alliance with Sphera Group growth strategy, allowing us to expand into a new consumer segment and develop in a healthy manner by adding a profitable brands to our portfolio. This strategic move strengthens our leading market position and better positions us responding to a new category of customer needs, while delivering to our promise to further development and profitability boost. In the following months, we will get back with news on this topic. Looking ahead, there are signs of concern. Romania needs to go on a diet, the governor of the National Bank when presenting the latest forecast for inflation. The rate is now expected to rise to 4.9% in 2024 compared to the previous estimate of 4% to 3.5% in 2025. Importantly, this forecast does not take into account the fiscal correction anticipated after the elections. However, National Bank of Romania has kept the interest rates unchanging, indicated cautioned approach to future development. These updates are not surprising to us, given the high deficits, the government at the beginning of its full year mandate, there's enough leeway to increase prices. However, the impact of the private sector can vary significantly depending on the specific of the tax increases and whether they are accompanied by much needed reforms of the inflated budgetary apparatus. At this point, we have no indications of such reforms, but we have received assurance that any fiscal changes will benefit for the 6 months legal implementation period. Recent positive consultation with the Ministry of Finance give us some confidence that this normal process may be followed in 2025. Nevertheless, we are experiencing a period of uncertainty which we are all aware of. However, we have been navigating uncertainty for over 4 years now. Since its inception in 1994, our business has driven through 6 electoral cycles, and we are confident that we will continue to succeed through the next 6, regardless of what next year may bring. I will now hand it over to Vale, who will guide you through the financials that highlight the strong fundamentals of our business and support our optimistic long-term outlook. Vale, please.

Thank you, Calin, and welcome, everyone. I'm excited to discuss the details of our performance over the first 9 months. This breakdown will highlight the strong fundamentals behind our impressive results. Key highlights include double-digit increase in profitability at KFC Romania, a continued profitability trend for KFC Italy and Taco Bell, a reduction in losses for Pizza Hut and an excellent EBITDA margin for KFC Italy. The results for the first 9 months of this year have set new historical records. Our consolidated sales reached RON 1.14 billion, reflecting a 6.4 percentage increase if we are comparing the figures with a similar period of last year. This growth is a testament of our strong business model and the commitment of our team to ongoing success. Most of the revenue were generated in Romania, where sales of RON 986.7 million were recorded with 86.3% weight in the total, while the market in the Republic of Moldova, have the highest growth of 10.9% compared to the same year 2023. These results reflect consistent performance and stable expansion in key markets. KFC brand continued to lead in performance, achieving a sales growth of 7.7% across the three markets during the first 9 months of the year. Pizza Hut experienced a 7.7% decline in sales due to the restaurant closure over the past 12 months aimed and streamlining the activity. However, as we will outline later, Pizza Hut is making significant progress in its business turnaround, particularly evident in the third quarter with improved profitability. Taco Bell continues its steady growth, reporting a 7.1% increase in sales and an impressive 83.8% rise in EBITDA. The brand reached breakeven in the second half of last year, capitalizing on the continuous investments since its entry into the Romanian market. The profit of RON 2.1 million and the spectacular increase in the EBITDA in the first 9 months compared to the similar period of 2023, confirmed the brand's ability to continue long term to the group performance. We are very confident in Taco Bell prospects, which is why we opened a new unit in November and plan to continue expanding the restaurant network. Going into the details of the 9 months performance, our restaurant operating profit experienced a significant increase of 41%, reaching nearly RON 142 million. This growth occurred as the restaurant expenses rose at a slower rate compared to sales. Additionally, normalized EBITDA saw a double-digit increase of RON 36.2 million totaling RON 129 million. This improvement can be attributed to effective cost control measures that boost our operating profit. EBITDA remained strong at 11.3 percentage points during our first 9 months of this year. The margin is different by brand with U.S. food network Moldova, leading at an impressive 19.3% followed by HORECA Romania, KFC at 13.3%. Taco Bell with the entity California Fresh flavor has seen improvement, reaching a margin of 9.6%. Thanks to an exceptional third quarter in which it achieved 12.8 percentage points of EBITDA margin. Additionally, RSA, which is the entity for Pizza Hut, increased its EBITDA margin by 2.5 percentage points, reaching only minus 2.9% on a year-to-date basis. Moving on the performance of the third quarter. I'm delighted to present once again our record-breaking results. We achieved total sales of RON 403.4 million, surpassing the RON 400 million milestone for the first time in a single quarter. This marks a 6.4% year-on-year growth and aligns with our exceptional -- with our expectations of progressive sales increase throughout the year with peak performance usually occurring in the final quarter. In Q3 2024, there was a significant rise in restaurant operating profit of 35.4%. This growth was driven by restaurant expenses increasing with a slower rate than sales with expenses up by 3.1% year-on-year compared to 6.4% rise in sales. As a result, the expense to sales ratio fell by nearly 3 percentage points bringing it down to 86.7% in Q3 of this year. We experienced double-digit increase in both operational profit, plus 61.3% to around RON 38.5 million and normalized net profit, a 30.8% uptick to around RON 30.8 million. One small non-normalization was applied only in 2023. However, for consistent reporting analysis refers to normalized net profit and EBITDA as well. Furthermore, the normalized EBITDA margin improved by 1.2 percentage points to 12.4%. If we are looking to the quarter 3 of 2024 compared to the previous year quarter. Examining the 9 months performance more closely, all the relevant indicators showed a double-digit increase. Very important operating profit for restaurant rose by an impressive 41%, while restaurant expenses only increased by modestly 2.9%, reaching RON 1 billion. This reduction in these spaces resulted in their share of total sales decreasing by nearly 3 percentage points, now accounting for 87.7%. All expense categories experienced single-digit growth. Food and material costs increased by only 0.9% compared with the first 9 months of the previous year, totaling RON 358.3 million. This was achieved through negotiation efforts and cost control, which reduced this category share of total sales by nearly 2 percentage points, bringing it down to only 31.3%. Additionally, efforts to support and retain employees led to a 4.3% increase in payroll, in line with the general labor market trends. In terms of profitability, the figures are quite impressive. The net profit doubled year-over-year to RON 71.4 million. The normalized profit also increased by 66.3% reaching RON 71.4 million, which accounts for 90% of the total profit generated in the entire year of 2023. We continue to maintain a very healthy approach from a financial point of view with a net debt-to-EBITDA ratio at its lowest level in the history of our company standing at only 0.2x as a ratio. Moving on the -- moving on to the business update. We have been actively expanding our network by opening new KFC restaurants in Romania, focusing particularly on drive-thrus, as mentioned also in the past, Additionally, we have added another unit in Republic of Moldova. As of September, Sphera operated a total number of 472 restaurants across our markets, but we continue to expand, and we have opened one new Taco Bell unit in Bucharest in November. I'm very excited to share details about the newest addition to Sphera brand portfolio, the Cioccolatitaliani franchise, which Calin briefly mentioned. The brand is well known for its Chocolate-based product, including ice cream, pastries and coffee. We plan to develop the franchise in the Italian market with the first Cioccolati unit set to be open in the beginning of 2025, requiring an estimate, approximate investment of EUR 500,000. Our goal is to open about four new units per year over the next 5 years. Initially focusing on the northern region of Italy. Additionally, we are considering expanding it to Romania market as well, depending on the evolution of the local economy. Other significant achievements over the first 9 months of 2024 are reflected in the performance of stellar shares on the Bucharest Stock Exchange, which continue to outperform the stock market significantly. During this period, Sphera shares appreciated by approximately 53% compared to only 15% increase in the Bucharest index. Additionally, the total return of the stock, including the dividends paid on June was 57.8%, while the total return index show a 22% evolution. Furthermore, liquidity has improved visibly with the trading volumes of Sphera shares being doubled the ones for the same period of 2023. The total value of the transactions has nearly reached a 4x level. I would like to note that during the General Shareholders' Meeting on 7 of October, the shareholders approved a gross dividend of RON 1.05 per share to be paid from the undistributed net profit of the financial year of 2023. The dividend was distributed -- actually paid on November 7. This marked the second dividend payment in 2024 for our company, bringing the total annual dividend yield, which includes the dividend attributed in both period June and November to almost 6%. In conclusion, Sphera Franchise Group has maintained a solid performance. We have achieved positive results across all our brands and in every market where we operate. By streamlining costs, we have significantly improved our profit margins, enhancing our ability to create added value for our shareholders. We continue to grow our restaurant network steadily, while also expanding our portfolio to ensure a broad and diverse foundation for our future growth. We are confident that our integrated approach focused on optimizing operations and capitalizing on strategic investments will support the group long-term performance. Thank you. And now I will let the floor to Monica for the brand and marketing informations.

Thank you, Vale, and good afternoon. We had a busy year already, but with positive results, including for marketing. We faced two main challenges: increased competition and pressure from customers. Our primary objective remains to increase transactions. So we aligned our campaign calendar closely with procuring mix while increasing competitiveness through value offers and innovation across all three brands. I will first cover KFC's main initiatives, paying at driving transactions and consolidating the brand. And I will start with non-spicy strips, a campaign usefully launched this quarter restating the brand's core attributes, freshly prepared chicken with a unique base. A spin-off product innovation, but aimed at growing sales through transactions was [ quick ] burger, a value offer communicated for the back-to-school period. Value for money perception is an attribute we constantly build up both through disruptive offers such as Tuesday bucket or Monday burgers. The latter being a new initiatives for this year that grows our burger category and also intrinsic value through our well-known Ceva platform. All three initiatives drove traffic in the stores and had positive store sale transaction numbers. In the third quarter, we continued to promote our new e-commerce platform. The communication campaign managed to increase the number of app downloads and transactions through the strategic channel. With the aim of optimizing sales and increasing footfall, we started the new wave of localized tactics in selected KFC stores and added new coupons in the KFC app. [indiscernible] is a strategic pillar for KFC. So we launched a campaign that looked like game show as a sequel last year's [indiscernible] to reinforce that fresh chicken sourced from local producers is cooked by hand daily in our stores. Last but not least, in Q3, we opened two new drive-thrus, one in Sinaia and the other one in Craiova. And we had opening events and freebies for the first 100 clients. Now moving on to Pizza Hut. Relevance and value are keywords for Pizza Hut for this quarter. The 30th anniversary of Pizza Hut in Romania, was a very complex campaign, in which we gave away 30,000 prizes as well as the substantial cash prize of EUR 30,000. The campaign started in Q2 and was finalized in Q3 with positive transaction results and strong brand health KPIs. For the back-to-school period, we focused on improving transaction levels by launching MyBox, a value bundle that offers three products at a special price, which generated increased trial. Disruptive value through buy 1 get 1 free Monday offer and the bundle value through the relaunch of Duo Mix, are two initiatives, which attracted price without cannibalizing sales. And now moving down to Taco Bell. At Taco Bell, we continue to focus on driving trial and building brands. To increase consideration, we concentrated on value for core products. As such, we launched a range of brewers based on a popular permanent menu item. As this proved to be a winning card as the campaign resulting in same-store sales transaction growth. Another successful example on value for core is that campaign launch in September, branch below value products, where we innovate with a new ingredient. We continue communicating our pick and collect platform to increase consumer loyalty and our gaming platform [indiscernible] to increase awareness among gen Zs. Next, I will present the financial evolution of each brand. KFC has demonstrated a strong performance throughout the year. It maintains the leading status in Sphera's portfolio, registering double-digit increase in normalized net profit, up 45.9% to RON 74.9 million and normalized EBITDA up 37.1% to RON 112 million. In Italy, the brand's evolution reflects the maturity of the market with a 1.7% increase, while our stores in kushina continued to grow at a comfortable pace. The latest addition to our network in the Republic of Moldova, footwork restaurant opened in September already contributes to the brand's growth. Pizza Hut's path to recovery is visible. The streamlining of the restaurant network has impacted sales, but the decline has been smaller than in the previous quarters. At the end of the 9 months, the operating loss in the restaurants was only RON 0.3 million, an improvement of 96.3% compared to the previous year. Moreover, in the third quarter, the brand reported an operating profit at the restaurant level, approximately RON 1 million and reduced the net loss to only RON 0.9 million. We are optimistic about the brand's future performance as we continue to implement our turnaround strategy. Taco Bell has been a standout performer, reporting robust 13.1% growth in sales for Q3. This growth is indicative of the brand's increasing popularity and the success of our marketing initiatives. We remain confident about Taco Bell's potential for further growth in the coming quarters, especially following the latest opening in November. As you know, delivery has been a key focus area for us to optimize costs, while maintaining our sales levels, we have decided to gradually outsource our delivery feed to establish partners. In the third quarter of 2024, the delivery sales decreased by 1 percentage point compared to the second quarter of 2024, representing 17% of total group sales. Despite this slight decline, the overall value of delivery sales grew by 11.5% year-on-year. The group on the delivery sales channel contributed 9% of total delivery sales. And now we will open for questions during the Q&A session.

Thank you very much, Monica. This concludes this concludes our presentation of the results for the first 9 months of 2024 and we will now open the floor for questions. For the sake of those, who'll be rewatching the replay -- who'll be watching the replay of this recording. We will read each question aloud and address it accordingly. [Operator Instructions] I see we already received several questions, so we can get started on the Q&A. How many Taco Bell restaurants do you plan to open in 2025? And I will invite Calin to address this question.

Because the location is very important in the development of this brand, depending on that vulnerability of the space is in the shopping center and those on the streets we are targeting, we estimate that we will open between 190 units next year.

The next question, what is the rationale behind the acquisition of Cioccolatitaliani franchise? And how much revenues do you expect to generate from this new segment in the next years after the planned openings? And I will invite Valentin to address this question.

Yes. So to Cioccolatitaliani for us, it's a logical addition to our portfolio. As we have mentioned in the past, we are actively looking to diversify our portfolio of brands to leverage more our excellent ability to operate restaurants. And based on the screening that we are performing, this was considered by the management as an opportunity, especially for the Italian market based on the performance of the brand there. And based on the condition we have managed to achieve by entering in this collaboration there. As I tried to touch base on this, we are targeting an average investment of EUR 500,000 per restaurant. This is an average plus format that we are now planning to open. Obviously, the formats of the restaurants will be adapted to the location based on the opportunities that we'll find in Italy. But in order to be able to model and to have an estimation of the money to do the turnover impact in our Group consolidated figures, we see EUR 700,000 sales per unit, which, depending on the timing of the units where we'll be able to open, it's a simple math with a path of around four restaurants, hopefully, per year. Of course, it will be a learning curve. I mean, the development, it will have gliding path based on the experience to gain with the locations there in Italy.

Thank you, Valentin. The next question, you mentioned the positive effect from the implemented cost control measures. Can you detail a bit about what these cost control measures involved? And where do you see the level of restaurant expenses in the next quarters? Again, this is for Valentin.

Yes. As you already used our approach, our philosophy it was, it is and will continue to be with a very high focus on the cost. Basically, our programs are cascaded down per entity, and we have multiple streamlines. The -- one of the most important one is the procurement efficiency where we are renegotiating contracts with our suppliers, and we have managed to achieve a very good performance in terms of stabilizing the chicken cost despite the increasing trend that we've all seen in Europe and in Romania as well. Indeed, it's a very big pressure and we'll try to fight with this pressure as much as possible, but it will be a difficult period in Q4, for sure, but continuing with the overview on the cost efficiency, we are also very careful with energy and with utility where we have managed to record savings. We have investments in the more energy-efficient equipment and operational protocols that help us to reduce the utility cost across our restaurant network. Also, we are looking to streamlining operations, and we have achievements in simplifying the workflows and the processes by reducing the necessary steps. We have leveraged technology for more accurate demand forecasting on our inventory management and multiple other initiatives that, all in all are gathering the performance that we can see in our P&L.

Thank you, Valentin. I see we have one more question. In the meantime, if you can type any other questions you have for the management team, and we will address them. Otherwise, we will wrap up the call. So the question that we have is, do you see room for further EBITDA margin expansion in 2025? What will be the main drivers? Again, I will invite Valentin. It's a similar question, sort of impact.

But it's -- there is still room to increase the EBITDA margin [indiscernible] opened in the recent years, there is maturity plus the transition of the Pizza Hut that will have a contribution to the EBITDA margin.

So yes, basically, in order to go a little bit back in the history, we tried to reach the very important 10% EBITDA margin at a consolidated level, which was a critical milestone for us. And what we are planning now on starting with this year and continuing to 2025 to add on this foundation and to have an accretive contribution year-over-year. From where it can come this and why we think it's realistic, as Calin mentioned, everything coming from the success of the turnaround in Pizza Hut will definitely be accretive to the EBITDA margin that we have now because we speak about a negative contribution until now. So everything turning positive will be a net addition to the margin. And of course, the maturization again, as Calin mentioned, for the existing brands with headroom for both Taco Bell and Italy to generate extra margin because they are not, especially Taco Bell, are not to the maximum point level. Obviously, with the stabilization of the KFC, which is a very mature brand, and the additions from Republic of Moldova, which are not significant, but it accounts for our overall performance.

Thank you, Valentin. Next question, can you elaborate on the success of restructuring of Pizza Hut? Do you envisage more cuts to improve profitability? Valentin will answer the question.

Yes. So Pizza Hut, it's a long process as we've always mentioned here. Everything happened until now creates confidence that we are on the right path. It's not only perception because as you easily can spot it from our financial performance evolution, Q3 especially it's validating the right direction. However, we need to admit that it is not a straightforward path. We have adopted a lot of measures on the way. We still have -- the majority are already implemented. So we are expecting to produce even more positive effects. But still, we have some things to be done. We are also working on the layouts of some restaurants. There are some operational things to be adopted in the next period. So all in all, based on what we have achieved until now based on the optimism of the managerial team in this brand, we cannot foresee, but only good things in 2025.

And the last question that we have on the chat, could you please elaborate on the low same-store growth in KFC Romania? How does this growth split between traffic and transactions and pricing? Again, I will let Valentin to answer the question.

Yes. So basically, for KFC is something that we are expecting. The same store cannot go definitely with a big evolution. As you remember, initially, we had in the comparison base effect with the years of the pandemic the recovery period after. But this is normal to slow down because we speak about the weight of the mature restaurants in the overall network of KFC sizable. However, we still had a good evolution from the transactions for which we are proud. This also is not fueled as much as it used to be in the years of the inflation by price adjustments because we are very careful and there are not so many price adjustment events. So all these put together, it results in a performance that is not a threat and we consider it normal.

Thank you very much, Valentin. I see that we do not have any more questions. Thank you very much for your insightful questions for our management team. We look forward to reconnecting with you all at the end of February or early March of next year after we will publish our preliminary financial results for full year 2024. The specific dates for our 2025 financial reporting and earnings call will be announced by a current report of the Bucharest Stock Exchange in January 2025. In the meantime, if you have any questions, please feel free to contact us at [email protected]. We thank you all for joining us today, and we wish you an excellent rest of the day. Thank you.