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

Good afternoon, and welcome to Sphera Franchise Group's Results Call for the First Quarter of 2025. My name is Zuzanna Kurek, and I'm Investor Relations Officer at Sphera Franchise Group, and I will be moderating today's call. Today morning, we have published our Q1 2025 results, which you can find on our website and 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 the recording of the call will be made available on our website 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 the call. In terms of organizational aspects, we will follow our standard call setup, which means the management will deliver a presentation outlining the Q1 2025 results. And later, we'll have a Q&A session. [Operator Instructions] As soon as the presentation of the management is over. 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 actual results may differ materially. We encourage you to review the disclaimer that we have included in the presentation, which is available right now on your screen. This disclaimer applies equally to all the statements made in today's call. Let's kick off this call. I would like to introduce the management team that is here with me today and will present our results. I am joined today by Calin Ionescu, Chief Executive Officer; and Valentin Budes, Chief Financial Officer. I will now pass the floor to our CEO, Mr. Calin Ionescu, who will share with you insights about our performance in the first quarter of 2025. Calin?

Thank you. Good afternoon, everyone, and thank you for attending this call. As many of you remember, we closed 2024 with record high sales and strengthened balance sheet. 3 months later, the picture looks less vibrant. Purchasing power in Romania soften and mandatory wage adjustment pressure our cost base, which leads to an almost flat evolution of our sales on a contraction in profits. It will be easy to focus on the figures. Yet the real story is more nuanced. Various factors affected our market and brands differently. Heightened geopolitical tension and the uncertainty surrounding the presidential election cycle have made consumers even more caution with discretionary spending. This prudence is not new to us, and we have been talking for some time now, but the unprecedented outcome of the first round of election in autumn last year added to the Romanian warriors. Unseasonably harsh weather, which discouraged dining out only compounded the slowdown, where staff shortage delivery platforms curtailed order volume further. This combination of negative events, which we experienced in first quarter affected mainly our star brand, KFC Romania. Other factors impacted the top and bottom line. The trend is facing increasing competition as more and more players enter the Kitchen segment. Faced with demand that fell short of our initial estimate, we adjusted our pricing strategy to stay aligned with the customers' purchasing power. On the other hand, Taco Bell recorded another successful quarter and remains proof that diversification is key. The brand's core target is young customers less sensitive to [indiscernible] a environment. We have also noticed that it is the clients in small cities who react to any sign towards future contraction in their incomes and become more prudent. Taco Bell, which is only present in the big cities was not affected. However, there is a real risk that this caution behavior will spread if uncertainty persist. We must also recognize that Romania now stands at the crossroads between East and West, and this is only one of the several open questions. The economic outlook for the rest of the year is murky. The predictability we have so much hoped for is seriously jeopardized by the Prime Minister resignation and subsequent government changes. It is clear that adjustments are needed to cover the deficit. However, there are more and more discussion about reforms that will aggressively cut public spending. This give us some confidence along with the fact that any changes will have a certain period before implementation. We are just operating under the assumption of business as usual. However, we are well aware that the fiscal framework is uncertain. So if any major changes occur, we will analyze and if needed, revert with new guidance for this year. But whatever the scenario, we will carry on with our plans, having a long-term view. An example is a new KFC drive-thru in Galati, which we opened in the first quarter. We are very proud that this marks an innovation for our network. It is our first restaurant equipped with solar panels. We estimate that about half of the restaurant electricity will be self-generated. We are [indiscernible] not only sustainable, but also efficient. We continue to monitor cost closely and digitize operation to boost efficiency, negotiate and find better solution for our suppliers, engineer our menu and adapt the pricing strategy to best fit consumers' needs. We are looking for opportunities to diversify our portfolio and ensure new business streams that help consolidate our foundation. With this in mind, I give the floor to Valentin for an in-depth look into the figures.

Thank you very much, Calin. Good afternoon, everyone, and thank you for joining us today. As Calin mentioned, the first quarter of this year has been less performance than the one of 2024. My goal today is to put the quarter in context, show where the business continues to move forward and explain how the 2025 budget keep us on course for sustainable growth in the future. We have started 2025 with restaurant sales of RON 362.6 million, which is 0.9% lower than the first quarter of the previous year. The impact was felt differently across our 3 markets, highlighting the diverse context from one country to the other. Romania slipped 1.9% to RON 311 million, due to the combination of external pressure that Calin mentioned earlier and the strong base effect as the first quarter of 2024 marked a particularly strong start of the year, which also impacted this quarter performance. On the other hand, Italy continued to grow. The single-digit rate, it's in line with the previous performance, typically for a mature market like Italy. In Moldova, we are reaping the fruits of the new restaurant opening in Kischno last year, which allowed us to further unlock the potential of this market. The next slide. Here, it shows why the margin tightened. The expense continued to rise in the first quarter to RON 352.1 million, up by 4%, with the top line essentially flat and on the back of a very good performance in Q1 2024, restaurant operating profit and EBITDA contracted roughly 1/3. Let's dive deeper into what stands behind the bottom line. As mentioned, restaurant sales are essentially flat after 2 years of very solid growth. However, restaurant expenses increased by 4.3 percentage points year-on-year, driven by payroll, which is the pressure point for us. Payroll and employee benefits jumped 12.4% to RON 92.7 million, reflecting the industry-wide wage adjustment and higher number of employees as a result of the new store openings. Payroll alone accounted for more than 2/3 of the total year-on-year increase in the restaurant expenses. Aware of the fact that in a low growth quarter, every basis points of cost discipline matters, we have managed to reduce expenses in several categories. As such, food and material costs decreased by 0.7 percentage to RON 115.4 million, so they held steadily at 31.8% of sales. We accomplished this through strong partnership with suppliers, smart hedging and menu engineering. We have adjusted our advertising budget by 8.7%, down to RON 16.1 million. We also maintained G&A discipline with cost rising just 1.8%, and only 10 basis points higher as a percentage of sales compared with the Q1 of 2024. We also managed to keep G&A almost flat at 4.4% in sales, despite inflation and pressure on wages due to the tight labor market. However, the category other operating expenses grew 11%, leading us to RON 52.8 million, driven by increases in third-party expenses such as food aggregator and on delivery commissions, service fees, followed by the increase in utilities driven mainly by higher energy costs. Also versus last year's similar period, new stores opened with the last -- during the last 12 months, generating an increase in this line as well. As a result, the share of the operating expenses in sales has increased by 1.6 percentage points to 14.6%. On the back of flat sales evolution, the rise in the 2 categories, payroll and other expenses led to a restaurant profit 36% lower year-on-year. EBITDA margin decreased by 4 percentage points. The higher restaurant operating cost and the inelasticity of the G&A expenses resulted in a net profit of RON 7.81 million in Q1 2025 compared with RON 21.45 million in the first 3 months of 2024. Now please allow me to go into details for each brand's financials. KFC Romania generated RON 259.8 million in Q1 sales, which is down 3.4 percentage compared with the Q1 2024 and is due to several factors, many of which Calin already touched based on. The uncertainty caused by the upcoming presidential elections, along with the growing geopolitical tensions made consumers more cautious with their spending. On top of that, unexpected bad weather kept people at home, while delivery sales were impacted by staff shortages at food delivery platforms. Moreover, the lower-than-estimated demand determined us to adapt our pricing policy as well. All the while, competition has intensified with new brands entering the chicken category especially. However, we expect demand to pick up as local uncertainty lowers and the shift in our marketing strategy delivers to its most. This, coupled with new restaurant openings should brings KFC Romania back on course. On foreign markets, we see the continuation of the growth stories. KFC Moldova maintains its robust double-digit sales growth rate. The restaurant we opened last year in Kischno, #3, allow us to capitalize on the potential in Moldova and grow here by 23%. At the same time, KFC Italy sales increased by 3.3%, moderate pace typically for such a mature market like Italy. And now if we are moving to Pizza Hut, we can see here a continuation of the turnaround. Sales dipped a modest 1% to RON 27.2 million as the network streamlined that started late in 2023 and it's bearing fruit. Restaurant operating profit shifted to a positive RON 0.5 million from a loss that we have recorded last year. Taco Bell also managed to offset the effect of an unfavorable start of the year, including thanks to the opening of a new restaurant in the second half of 2024. Thus, sales increased by 15.6%, while profits doubled. The brand proves we can win incremental speed even in cautious times by diversifying our portfolio. Taco Bell appeals especially towards the young generation, which is less prudent in their spending. Finally, a word on channels. Delivery revenue grew 5.5% year-on-year, i.e., EUR 73.5 million and now represents 20% of our group sales, 1 percentage points higher than last year weight. Our own channel, which are more effective, handled 9.5% of all delivery orders, which is up from 7.9% previous period comparable. Despite a slow quarter, we keep investing. Calin already mentioned in Q1, we opened our first restaurant equipped with solar panels, KFC drive-thru in Galati, and we continue with our development plans. In April, we added a food court unit in Mall Moldova, Iasi, taking the network to 175 restaurants in total. Now I will walk you a bit through 2025 budget, which the Board approved at the end of March and our shareholders voted in favor in April. The budget reflects a positive outlook with total sales up to RON 1.74 billion, i.e., 12.1% higher than previous year. EBITDA RON 195 million, i.e., 9.8% higher and net profit RON 105 million, i.e., 8.2% higher. Growth will come from both same-store gains and up to 13 new restaurants, 4 KFC, 1 Taco Bell in Romania, 1 KFC in Moldova, 3 KFC and 4 Cioccolatitaliani in Italy. Our planned CapEx for 2025 is about RON 100 million. Cost management remains a key focus area. That's why the food and material expenses are budgeted to grow by 9.6% at a visible slower pace than the sales, leading to optimization of the restaurant gross margin for this year. The cost of labor reflect the increase in minimum wage level, and they will be further calibrated against higher volumes across the year. Our budget assumes a normal macro environment and considers a yearly average inflation of around 5%. It also takes into consideration the increase of the minimum wage, which is already effect, and it happened in January 2025. Moving on the next slide. Our shareholder return remains central to our capital allocation framework. We'll distribute a gross dividend of RON 1.09 per share with today ex date and with the payment date of 6th of June, and we remain faithful to our commitment to create value to all our shareholders. To sum up, Q1 was a soft opening of the year. The sales were almost flat, costs temporarily higher, but the fundamentals of our business are sound. We are protecting cash. We are investing selectively and have a clear road map to restore margins as 2025 unfolds. Thank you very much. And Zu, now we can go to the Q&A question.

Thank you very much, Valentin. This concludes the presentation of our results for Q1 2025. We will now start the Q&A. [Operator Instructions] To give you a little bit more time to type your questions we will first address several questions we received on e-mail from our investors and analysts before this conference. For your information, I have typed these questions in the chat box so you can also see the questions will be addressing. The first question is, how does weather affect your sales? Can you please comment on this? If it is colder, do you sell more?

I will answer this. If it is colder, we typically sell more. But if it is a snowstorm as we face this year, people don't get out of the houses and the aggregators cannot deliver because they rely on bicycle and motor scooters.

Thank you very much, Calin. The second question, discretionary spending decrease. Is it a one-off or more sticky in nature?

It's sticky, but the measure we have taken in terms of menu engineering, value proposition are already paying dividends. And in May, we hope for stabilization. The rest of second quarter might look better as uncertainty should decrease after elections.

Thank you. Please detail main operating cost dynamics that influence margin decrease, food, labor, other categories you want to mention? And how do you manage it in the next quarters?

The main impact was that of the increase in the minimum wage in January. We lost 3 points in profit. As demand decreased, we decided not to pass on the higher cost to consumers and postponed the price adjustment we had planned for the first quarter. We'll monitor carefully the situation, and we have already increased the price in [indiscernible].

Thank you. Please tell us about G&A dynamics and how can you optimize it in the next quarters?

Me again. We continue to maintain G&A discipline, and this is why they are relatively flat as a percentage of sales. We know there is a certain degree of elasticity, which goes in both directions.

Thank you. Any comments on VAT increase minimum wage?

We operate on several scenarios internally, but as long as nothing is effect, all we can say is that if any major changes occur, we make an assessment and if necessary, we will revert with a new guidance.

Any comments on your corporate tax levels and trends?

It's almost the same answer like the previous question.

And the last question from the set, how the results compare to 2025 budget?

The 2025 budget published in March already reflected a prudent stance, anticipating a soft Q1. Current performance remains broadly aligned with the internal expectation.

Thank you. And now we move to the chat. As I mentioned before, please type the questions once we run out of questions, we'll be concluding the call. Can you please indicate what would be the impact of the currency devaluation on your financials? I will let Valentin answer the question.

Sure. So thank you for the question. We all know the hectic evolution of the FX in Romania. I will start by stressing the fact that we are very focused since the pandemic continuing to maintain and to secure a very healthy balance sheet. So we are privileged to be in this situation. We are extremely underlevered. And this will create opportunities in the future if there will be market opportunities based on the situation that we are facing now. One of the major aspects of the exchange rate, it's coming from the credit lines. In this moment, where we have a very low level, as I mentioned, there are [ EUR ] 25 million as principal in our lines. However, here, we have a tool that, if necessary, we can exercise, but we need to be very careful because we have a multicurrency line. So we can convert and switch to RON if necessary. But definitely, it's too early for such a decision. So this will be one of the main categories that will have an effect because the lines are in euro, we need to pay them back in euro. Our revenue streamline, it is in RON. On the other hand, it's a normal market impact that I think it's for the main business player in the Romanian market because a lot of suppliers are having the price denominated in euro, starting with landlords and ending up with equipment suppliers. So this will be the effect of the FX for our business. And I think we touched base on another question related to this aspect is.

Thank you. We move to the next question. How do you avoid the continuation of decline of same-store sales in KFC?

So here, it's a complex set of actions. It started with the menu engineering. It's top up by the value proposition. It's related to the change in our strategy. As Calin mentioned, we have taken decisions to postpone the pricing that we were applying for the Q1. And this correlated with strong targeted marketing campaigns. We expect to have effects on same-store transactions basically.

Thank you, Valentin. Given the macroeconomic uncertainty in Romania and the risk that consumer purchasing power preference to eat out will decline, how do you see results in Q2 and Q3? Can we expect further pressure on bottom line?

So in this moment, we are very cautious. We are monitoring very tight the evolution of our sales. We can feel a stabilization and -- but we are still in the middle of the Q2. It's definitely too early for a conclusion. No matter what at the middle of the year, we will have more clarity on this subject and together with the management team, we will be able to have a conclusion on the remaining part of the year.

Thank you. The next question, when can we expect the first Cioccolatitaliani units to be opened?

We expect to open the first unit not later than end of June. It's already under construction, and we will come back with more information when we tell to everybody when we will open.

Thank you. The next question, we will -- we believe we already answered it. It was the FX question. So we will not be addressing. If you need further clarifications, feel free please to type it. So we will move to the next question. Where is the chicken food market going in terms of prices? Are there expected increases -- are expected increases in energy prices a factor? What about the various trade barriers that are threatened on the global market?

So chicken, as we all know, it's a major cost category in our cost of goods sold. Unfortunately, here, we see a very strong pressure. So in this moment, we are not on a very favorable position. There was a Q1 where we have implemented a lot of measures related to this cost category. We'll continue to be very agile and to work close with our suppliers in order to minimize the effect. But as anticipated in the question, there is a big pressure on this cost category. And generally speaking, the effect of the energy in the Romania in the second part of the year, it's an important one, and we need to see how we'll end up with the subsidies for the business players in Romania.

Thank you. I see we have answered all of the questions. We will wait on the line, but I see we got already another question. Can you go through once more on how many openings do you plan for full year 2025?

So I will start, Calin, if you...

Yes, please.

Yes. So in this moment, we'll totally stick with the budget also in terms of development. We already have some progress, as I mentioned, the openings in Galati and in Moldova Mall. The pipeline is in line with our expectations. There is a small delay for Cioccolatitaliani, where it was an ambitious plan of 4, and Calin mentioned the first one, it's about to come. We'll see for the remaining 3. But coming back to the figures we have for this year, the 1 extra restaurant in Moldova. We have 1 Taco Bell in Romania. We have 3 KFC in Italy and the 4 Cioccolatitaliani in Italy and from the 4 KFC in Romania to remain to be open until the end of the year. Of course, this is a dynamic target. If there will be opportunities and the market will help us to identify in the current context, even more appealing opportunities, we will not hesitate to evaluate and to add on this plan.

Thank you very much, Valentin. I believe this concludes all the questions we have received. Thank you very much for joining us today. We will hear each other again after we publish the results for the first half of 2025 on 29th of August 2025. And the conference call, as always, is going to be held on the same day, August 29. We look forward to speaking with you again. Thank you very much, and wish you an excellent day.