Tortilla Mexican Grill plc (73D.F) Earnings Call Transcript & Summary

With a huge focus on deleveraging over the coming months and year.

I'm going to skip through the 2025 financials pretty quickly, just flash them up on there. These are really the full year items. We didn't do a full year presentation because of the delay to the financial reporting, but these are very much sort of old numbers now. And they're just there really in the pack for people to take away. I'm not proposing to go through them in detail. Instead, I want to move on to some of the exciting stuff, Brandon is going to talk us through.

One of the important things with the reset that we're doing with Tortilla is putting in place a value creation plan that's multiyear, multi-department, and that starts with a new Board, which includes Duncan Garrood, one of the few people in the country who have a combination of franchise experience, plc experience, CEO experience at this stage of business life cycle and Chair experience. Marta, a good friend who joins us from GAIL's, where she was Managing Director and then COO. Gregor Grant, who is the CFO at Loungers, a publicly traded firm. And then we've introduced ourselves, but we've also added Mac Plumpton as U.K. Chief Executive Officer. So Mac joins us from LEON, where he was Managing Director. And importantly, Edson Diaz-Fuentes. Edson was the innovation chef at Oaxaca and then owns his own Mexican restaurant chain. He's a Mexican native, and he's bringing the flavor profiles and the authenticity to the food that we're doing, which we believe at the moment is the best we've ever had and we'll continue to get better. This shows our ambitions, the next 2 slides. So we are currently trading or expecting to trade at GBP 1.15 million AUV per annum for 2026, and our ambition is to get to GBP 1.5 million. We have a whole bunch of levers at our disposal to do that. We'll talk about those in the value creation plan, but a big focus is obviously around the product, not just the quality of it, which is going to improve, we'll talk a little bit about that, but actually the breadth of the offering. We see some huge opportunities in dayparts and use cases. Importantly, we also want to develop our margin. And so you'll have seen the 16.4% EBITDA margin, that's across the estate. But for our mature stores, we're at about 17.5%. And we have a number of levers that are at our disposal. One is obviously around gross margin and further improvements with that, and that will come with scale, especially with an increased franchise base, but also around delivery ops metrics. The more that you improve your ops metrics, the lower the commission rate that you get. And also with things like refunds, we think there's huge ability to improve on that. If you go down the P&L, labor scheduling, one of the reasons that we want to put in place a new EPOS system was so that we could layer on some of the tech stack that allows us to do more creative things. In this case, the ability to use AI to correctly schedule your labor and optimize is there for us to take. And repairs and maintenance, something that we haven't invested well in, in the past. We have not looked after our estate as much as we should. We haven't been doing the renovations and the refreshes. And so it's a bit of a dated estate. We want to do more preventative maintenance, which will bring down our R&M. So between all of these, we believe that 20% EBITDA margin is in our grasp. We think it's really important because ultimately, we're creating a product for franchisees, and they want to see those kind of levels in order to be profitable on their terms. In terms of the top 10 key objectives, I will rattle through these, and then we'll pick up a couple of these as we move forward with the slides. But they're focused on product, first and foremost. We have a great product now. There's been a lot of investment in that over the next couple of years, but there's further improvements to be done to reach parity with best-in-class globally, and that is our ambition. We want to build more emotional connectivity with our consumers. That's going to be on social media and other channels. Importantly, and I come from a tech background in Silicon Valley, we are very focused on our tech stack. When a lot of people are saying they're embracing AI, we are really putting that at the heart of the technology stack and layering on additional platforms. Franchise is the growth for the future. We have a number of different relationships that we're building right now. We are resetting our relationships with SSP and Compass in order to make them even more successful, and that's -- we'll talk about that in a little bit as well. The brand conversions in France are effectively done. We have 7 converted. We have 1 remaining. We've shut down 5. So France is, aside from the 1 site converted over to the Tortilla brand. And importantly, and probably the most important thing, aside from building the stability of the business, is creating a franchisable model for Western Europe because our clear ambitions are to roll this business out across Europe and be, dare I say, the Chipotle of Europe. We have addressed the short tail of underperforming U.K. sites. We'll talk a little bit about that. We're very keen to modernize the estate. You'll see some pictures of the new Tortilla Leeds. And of course, we're discussing now the 3-year value creation plan and all the initiatives we're putting in place. And importantly, I think we have to maybe speak to the elephant in the room, which is that we've missed all of the profit targets that we've set since we IPO-ed. We need to be much more realistic about those targets. They need to be achievable, and the Board is all very focused on ensuring that, that happens moving forward. I'll skip through a couple of these slides at pace, but this one is an important one. We see a huge opportunity to increase AOV through enhanced desserts, better drinks. And we also see the ability to drive trade in the evenings through larger portion platters that can be shared by multiple people, also the desserts and the drinks and other initiatives. We also think that there's some improvement that we can do in breakfast, probably secondary to the desserts, but driving evening trade is a big one. We're also just going to be improving the product itself. There's a whole bunch of initiatives, which we may or may not be able to talk about, our food director might get grumpy with us, but we will be improving our wraps, we'll be improving our salsas, and those are all works that are underway with some equipment that we're putting in across the estate. Also in the channels, corporate offering is a huge opportunity for us. We get orders for burritos, and we have to make 300 burritos that by the time they get to the offices, they're cold. And so packaging them up in a way that people can make self-created tacos and things like that, that are heated up on site is going to be a huge opportunity. And then stuff specifically for delivery. So family offerings, kids offerings, which would bring up AOV. And bringing up AOV actually has an additional improvement in reducing down the commissions that we pay to the delivery aggregators. On the tech side, as I mentioned, we have greenlit Oracle. We have rolled that out across some of our estate, and we're continuing to do that. That sets the foundation for being able to add to our tech stack. We will be introducing cameras in order to monitor our footfall and be better about our labor scheduling. And also around missing orders and items that might be missing from our delivery. So there's a 3-year plan for all of this that's being put in place. We've already done a huge amount of Agentic AI where we're tracking prices of our competitors, putting in place competitive dashboards and things like that. So we're looking forward to rolling that out, and we have a very busy tech director that is working on that now. Franchise is our big focus on expansion. We will continue to take some equity on stores, but we see a huge opportunity to leverage what is a central production kitchen that's serving food throughout the U.K., an existing franchise base with SSP and Compass that Richard was mentioning before. We've got a robust platform, and we now have 3 interested potential franchisees that we're talking to about specific regions in the U.K. In Europe, we are starting to have some early conversations with folks, but really you need the unit economic model to be in good shape. But again, our belief is that the -- whenever we look around Europe and we see fast casual Mexican executed well, it works. And so the ability to use our Central Production Kitchen in Lille, which is 14,000 square feet, 2.5x the size of the one that we have in Tottenham Hale, to service the Netherlands, France, Western Germany is enormous. And we're very excited that -- to exploit that opportunity, and that is the big long-term goal there.

I'll take this one. So yes, back in 2022, '23, we, as part of a rapid rollout program, we opened up 15 sites. They were mostly in tertiary or secondary towns and launched at a time when our food, let's be honest, wasn't the greatest and perhaps marketing around it was not that good. So they have continually underperformed the rest of the estate. So the gray line is these stores. The red ones are the rest of the estate. What's happened over time actually is that those 2 lines have converged or are converging. And the underperforming sites, we've managed to exit 2 of them earlier this year. That was Gunwharf in Portsmouth and Canterbury was the other one. But the initiatives that we put in place to focus on these underperforming stores and the growth of delivery has helped lift them up from loss-making sites, which they were 2, 3 -- couple of years back to actually mostly all profitable. 11 of those 13 that remain are now profitable with just 2 that aren't, one of which there's a break in the lease at the end of this year, so we can exit that. But now they're tracking at above AUV of GBP 18,000 a week. They are now profitable. So it's been a real testament to the food and the effort that was put in to turn those stores around and bring them closer to the rest of the estate.

When we launched these stores, I would say that our food was at a bit of a low. And nothing has changed in those stores operationally that much and certainly not with ambience, they look the same as when we launched them. It was the first time that we saw sales decrease once we launched them. Usually, we see a maturity curve and a growth that happens because people are being educated about the product and the brand. So this is the first time that happened. The real driver here was the product quality. And obviously, that has worked really well for us. So we're delighted that the long tail has gone to an incredibly short tail, and we've largely knocked this one on the head. And there's the brand refresh. And we have a video that we will, at some point, probably put on social media, just showing all the different things that we're doing with a highlight around Leeds. But this is our Leeds site. You'll see the new branding up top right of the signage along with a great treatment of the kiosk. We have a second assembly line here. We have video screens. We've got a fourth video screen, which we're going to be rolling out across the estate. It looks great. It's very effective. We have dedicated customer journeys for digital and in-person ordering. And this is going to be the way forward and something that we're very keen to roll out across the estate in due course as capital allows. So in summary, it's been a challenging couple of years, but we've got the product in good place. We are shoring up the challenges of France. We are the largest Mexican chain in Europe, and there's still huge, huge white space across Europe that we can expand into. I've come back in. We brought in a great team, a great Board. We've got Richard co-piloting, and we're excited to how that's all going to move forward. And we've got a great capital-light growth model. For franchisees, they love the idea that they have food that comes in that's absolutely beyond tasty that they can regenerate and serve to their customers without a huge amount of hassle and without a huge amount of cooking, which actually brings down the CapEx and improves the returns. So a robust franchise model that allows us to roll out not just in the U.K. but across Europe. And we've got financial momentum. The like-for-likes are great. We are exceeding the CGA tracker, and we are looking to really focus on the conversion to the bottom line with this new reality of a higher sales level. And I think importantly, we're putting in place a clear strategic plan. There wasn't really a direct plan for all the different initiatives we would be doing across the different departments. We now have that in place. The team has bought into it. We have 250 initiatives that we're going to be rolling out over the next couple of years and just strong momentum at the moment. So we're delighted with how everything is going.

That's great. If I may just jump back in there. [Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and published Q&A can be accessed via investor dashboard. Brandon and Richard, if I may now hand back to you to take us through the Q&A session. Kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you both at the end. Thank you.

I'll take the first one, which is about France. Could you please speak more about the group's progress in France and what the group is learning about the French market from its operations over there? I think the biggest learning is, when I started Tortilla in 2007, Mexican food wasn't very well regarded. If you remember back to the days of Chiquitos and places like that, it was kind of a bit of sloppy food and a real focus on tequila. That is where the market is in France as well. And so going back to the education and just kind of starting a fresh and building back up and building that product knowledge and awareness and brand awareness has been the real challenge. And -- but we are on top of it now and using the right playbook. I think also there's obviously rigidity in the labor market as I think everybody knows about. And so getting our costs under control while educating the market is really the challenge. But the ability to expand across France is unquestionable. We have -- there's a competitor over there name called Nachos, who's actually founded by a former Tortilla employee. He's grown to 30 sites. We think we have an advantage over them on product and brand, and we will continue to expand in France, though probably with more of a franchise type approach.

I'll take the next question. So it's how do you determine whether to invest further in underperforming stores versus close it and what return thresholds are you applying? So actually, when I joined a year ago, we had quite a long -- you saw that graph, we had quite a list of sites that we thought we might close and thinking actually, we need to exit those, and we did a couple of those, Gunwharf and Canterbury. But actually, the shift with delivery growing and with in-store growing has meant a number of those sites we talked about before, have actually turned into positive territory. When you think about -- so actually, there's a balance to be had to say, do I want to -- do I get more value from those underperforming sites, making them profitable versus investing more in the profitable sites. If we look at something like Leeds, so that's a brand-new store. Our CapEx on that was just under GBP 0.5 million. We look typically for a return on capital employed of about 35% on new sites. Leeds is performing exceptionally well. It's at that early point of its maturity curve. But I'd say at the moment, we take a balanced approach between turning around those underperforming stores and delivery certainly helped sweat the assets a bit harder actually versus investing in new stores. But I guess our new -- as Brandon alluded to, our model really is looking more at sort of franchising rollout rather than a significant amount of cash going into equity stores.

Given the success of the franchise model, how should we think about -- do you mind if we just scroll back a bit? How should we think about the impact of the shift towards delivery on margins given the higher aggregator commissions? That is something that we have been debating on the Board for as long as I can remember. The -- I think the way to think about it is we have probably seen about a 1% impact on margin from the increased commission levels on -- by going multi-aggregator as opposed to exclusivity. At the same time, we've seen a 50% increase in our sales on delivery, which makes up just over 1/3 of sales. So it's a pretty easy trade-off when it comes to actual EBITDA. The sales increase way outweighs the increased cost on margin. And also, we're passing along a lot of that increased cost to the consumer who's willing to pay a little bit more -- actually quite a bit more on delivery versus in-store. So it was a bit of an easy decision. And I think one of the challenges that we had in the past because we were multi-aggregator and then went off of Deliveroo is that we saw a lessening of awareness in-store. Our in-store softened when we've moved away from multi-aggregator and actually going back on to multi-aggregator has increased our in-store. So not only does it not cannibalize, it's actually beneficial. So for all these reasons, we think that the multi-aggregator approach is the right one.

I'll take the next one. So how constrained are you by your debt facility? So yes, I said earlier that our net debt at the half year was GBP 12.4 million against the total facility of GBP 14.4 million U.K. and in France as well. We would always love a lot more cash to accelerate our value creation plan a bit faster. Santander have been extremely supportive. We do have some headroom on our debt facility, that's -- and our forecasts show that we stay within that facility and that everything is good on a look-forward covenant basis. But yes, we're well aware that the last couple of years has been -- we've consumed a great deal of cash in the business. I think the fast actions that we've taken in -- particularly in France, will stem those cash losses very quickly. And what we're seeing on the top line growth and the plans we are for delivering greater margin at a restaurant level will see us actually create a bit more breathing space, let's say, on that debt facility.

How many new opportunities are there still in the U.K.? That's a great question. So one of the things that we initiated in about March was a white space report on the U.K. through a company called HDI. And I'm not trying to be evasive on it. They have come back with an initial report and are doing some fine-tuning on that, and we will report on that opportunity in subsequent presentations. But what I would say is that there's a slight challenge in that there's certain stores that there's a stratification here. So if there's a store doing GBP 25,000 a week, we will probably end up doing 35% return on capital. But at GBP 20,000 a week, we're still doing 25% return on capital. And that return on capital is sufficient for franchisees to be interested. And so what we may be showing is kind of like a Tier 1 versus a Tier 2. But what I would say is I think there are a couple hundred that -- Tortillas that could be possible in the U.K. depending on your return on capital profile or threshold. What are the key learnings so far from the implementation of the new value creation plan? I'll take a step back on that. One of the challenges over the last couple of years is when you're missing your profit targets, one of the things that obviously happens is you need to trim costs. And so you trim personnel, you trim OpEx, you trim CapEx in order to hit the numbers and hit your targets and things like that. That's been a real challenge. We really need to have bitten the bullet and just said, "We're going to reset. We can't be beholden to profit targets, and we need to think about the long-term viability of the business and building sustainable growth." Sustainable growth is almost a cliche, but we have played out that, that is really necessary. You can build 100 sites, but you got to shore up the foundations. So as we're putting in place the value creation plan and being unrelenting about it and making sure that we have initiatives across all the different departments, what we've seen is success. The limited time offers that we put in place, the food improvements that we put in place are all bearing fruit. I hope everybody will go and try some of the latest products we have. We just did ghost chili chicken. We previously had Hibiscus Lemonade, which became the third most popular drink on the menu after Coke and water. We've done the Caesar wrap, which was a huge success during the summer, especially in the hot weather. So it's working. A lot of the stuff though, that we're doing now is very foundational, putting in place the benchmarks. I mentioned the HDI report. We never -- we didn't have a white space report on opportunities. So getting all that stuff in place, getting the Oracle project in place will allow us to really see the fruition in the future as we layer on stuff that actually has an impact on sales and margin.

That's great. Well, look, guys, that's all the questions we have for today. So thank you, Brandon and Richard, for addressing them on the call. But Brandon, before I redirect investors to provide you with their feedback, which I know is particularly important to yourself and the company, could I please just ask you for a few closing comments?

Yes. Thank you very much. I think the key thing that we'd like everybody to come away with is there have been some challenges in the past, and we are running to those fires, addressing them, tackling them head on and resolving them. There are loose ends out there that need to be addressed, and we're tidying all that stuff up. We have taken decisive action on France and actually decisive action on the U.K. as well. So there's a lot of shoring up that's taken place for stuff that's kind of been building up over the years. At the same time, we're looking at the current and the present, and we're making sure that we're continuing to reap the rewards of this move to multi-aggregator and the product improvements and everything like that. So keeping things moving along, while at the same time, putting in place a robust plan for the future that is modelable and that we can present to everybody. We haven't gone into a lot of the stuff around where we think this can get to over time with our -- and kind of the bridge chart that actually shows how we're going to get to 20% and how we're going to get to GBP 1.5 million. But we have that in our own mind. And as we see that start to materialize, we'll start to share that along with the opportunity for white space in the U.K. and the white space opportunity in Europe, which we're also putting together. So we're working on the past, working on the present, working on the future. We've been very busy, but we're delighted with the trajectory now.

Fantastic. Thank you guys once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback, which helps the company better understand your views and expectations. On behalf of the management team, we would like to thank you for attending today's presentation, and good afternoon to you all.