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Edited Transcript of MEAL3.SA earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 International Meal Company Alimentacao SA Earnings Call

SAO PAULO Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of International Meal Company Alimentacao SA earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luis Felipe Silva Bresaola

International Meal Company Alimentação S.A. - IR Officer & Member of Board of Executive Officers

* Newton Maia Salomao Alves

International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to IMC's conference call to discuss the second quarter of 2019 results. The presentation is available for download at the company's website, www.internationalmealcompany.com/ir. We would like to inform that this conference is being recorded. (Operator Instructions)

Forward-looking statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them in light of future developments.

In this conference, we have Mr. Newton Maia, CEO of IMC; Ms. Maristela Aparecida Do Nascimento, Administrative and Financial Officer; and Mr. Luis Bresaola, Investor Relations Officer of IMC.

I will now turn the conference over to Mr. Newton Maia. Please, Mr. Maia, you may proceed.

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [2]

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Good morning, everyone, and welcome to IMC's conference call for the second quarter '19 results in which we will provide important information related to IMC performance in the quarter as well as the main initiatives related to our 4-pillar strategy that consists of Frango Assado brownfield expansion in Brazil; Margaritaville and Landshark expansion in the States; our Central Kitchen construction in Brazil; and fourth, the simplification of IMC business. Additionally, on last July 26, we announced an agreement with MultiQSR to incorporate KFC and Pizza Hut brands in Brazil.

Now on Page 2. Before I start to speak about our second quarter results, I'd just like to add that for a better performance comparison, my comments will be based on non-IFRS 16 figures. For the operating figures, I would like to highlight, first, our Road business in Brazil that posted 11% same-store sales and an operating income growth of 83%; second, in the U.S. business, our operating income growth in dollars of 12%; and third, our Caribbean business that continues to deliver healthy operating margins that reached 26% this quarter. For the financial highlights, we posted consolidated same-store sales of 5%; revenues increasing 1.3% year-over-year, reaching BRL 402 million; and an EBITDA of BRL 38 million with a 7% growth; and margin of 9.3%, a 50 bps increase. At the bottom line, we posted BRL 4 million net profit versus BRL 3 million from last year.

On Slide 3, we speak about MultiQSR. Before I jump into the details, I'd like to highlight that the agreement to spending approval by our shareholders at the August 28 extraordinary general assembly meeting and also by CADE, the antitrust agency in Brazil. MultiQSR is the master franchisee for Pizza Hut and KFC in Brazil. And at the end of March, they had 249 restaurants: 31 old, being 20 KFC and 11 Pizza Huts; and 218 franchisees with 42 KFCs and 176 Pizza Huts. Together with IMC, they will total 444 restaurants. At the gross revenue side, if we consider figures for 2019 and also the system sales, MultiQSR had approximately BRL 640 million in revenues that, combined with IMC, would bring total sales to BRL 2.3 billion in 2018.

On the deal structure on Page 4. The Martins family, owners of MultiQSR, together with Yum!, the owners of Pizza Hut and KFC brands, will have approximately 15% of IMC with the issuancy of around 29.4 million shares. Meanwhile, the Martins family will have almost 13%, and Yum! Brands will have approximately 2%.

On Page 5, we give an overview of the deal opportunities that range from market reasons from pizza and chicken markets, company reasons to do the geo that will bring iconic brands and high-return restaurants formats and also deal synergies that range from supply, business model and stronger corporate governance. With that said, I would like to comment that Pizza Hut and KFC will bring 2 important markets to IMC business: the pizza and the chicken market in Brazil.

On Page 6, I will comment on the pizza market in Brazil that has approximately 36,000 restaurants in 2018; and Pizza Hut, one of the leading companies at only 0.5% market share. Speaking about the chicken market, chicken is 50% of the protein consumed by the average Brazilian, and the largest restaurant chain is KFC with approximately 60 stores. Chicken is also affordable protein which makes the addressable market even higher. We understand that both markets have strong opportunity and believe the IMC is capable to be one of the leading players to start expanding its presence.

On Slide 7, we give more details on the conversion of Viena stores. In June, we had already closed 14 stores that had negative contribution margins, and we see opportunity for other conversions. Viena brand is supporting the initiative where we expect to convert approximately 20 stores out of 28 potential restaurants.

On Slide 8, we evaluate store-in-store operation in which we could have a Pizza Hut corner inside our Frango Assado restaurants that will give Pizza Hut access to over 1.5 million customers that goes to Frango Assado every month and should also have Frango Assado stores as we attract customers interested in Pizza Hut brand.

Turning to Slide 9. We speak about the synergies with supplies. On the chicken side, if the deal is approved, we will buy 3.3 more chicken than we buy today. In terms of wheat flour, we will double the purchase currently on IMC. And on the credit card transactions volume, we increased the volume by 70%. We also see synergies over equipment acquisition, also G&A and (inaudible) optimization.

On Slide 10, we detail our proposed Board of Directors. We note the additional 3 members: Charles and Lincoln from Martins family and their strong backgrounds on franchise business and also food business. And Joseph Call, our Global Development VP for Pizza Hut at Yum!. Mr. Call has been with Yum! for over 20 years with experience at both KFC and Pizza Hut brands in 4 different countries.

Lastly, on Slide 11, we detail the deal time line. We expect to close the deal by October. But of course, this is subject to antitrust approval that -- so this time line might varies with time.

Now on Slide 12, we update IMC's strategic pillars, including the merger with MultiQSR. Two of our pillars has to do with expanding business with high return on invested capital. First one is Frango Assado in Brazil, second one is Margaritaville and Landshark in the U.S. And now we add the growth of Yum! Brands, Pizza Hut and KFC as a third pillar of growth with high return on investment capital. At Frango Assado, we continue with the brownfield acquisition strategy, mostly in the Southeast region. We have active conversations with several groups, a few of them with more than 1 gas stations and we have some NDAs signed. On Margaritaville and Landshark, we maintain the expansion process within terrific cities and iconic locations. Since our last call, we added 4 new locations: a Landshark at North Myrtle Beach; a Margaritaville and a Landshark in Oahu, Hawaii; and a Margaritaville at Bayside, Miami, reaching 11 locations planned for the next 24 months. At Pizza Hut and KFC, we have a strong pipeline to open own and franchise stores in the coming months.

On the margin side, our pillar is the Central Kitchen that we broke ground in May this year, and the development has been in line with our time line to end it by the fourth quarter 2019, and also the restaurants are already being adapted. I would like to reemphasize that once this New Central Kitchen is ready, the automation kitchen project kicks in. All restaurants will be equipped with combined steam ovens, whether we finalize the food prepared in the New Central Kitchen. This should improve customer experience with increased food quality and consistency and also improve profitability with reduced direct labor costs and food waste.

And lastly, the fifth pillar of IMC simplification we have re-engaged to reduce IMC business complexity. Over the last years, we sold our operations in Mexico, Puerto Rico and Dominican Republic. We also discontinued several brands, such as Wraps, Go-Fresh, Carl’s Jr, Red Lobsters and Eat&Co brands in Brazil. More recently, we closed 14 stores with negative contribution margin. In Brazil, we outsourced our logistics to a logistics operator. We also unified our products division, and we will convert the last Red Lobster into Olive Garden.

Now turning back to second quarter '19 results on Slide 13. We have the EBITDA bridge of '19 and '18. Consolidated EBITDA grew 6.7%, reaching BRL 38 million and 9.3% margins. Brazilian operations, including G&A and others, totaled BRL 4 million compared to BRL 6 million in 2018. Despite the continuous improvement on our Road business, which grew operating income by 83%, the decrease in operating income from the Air business offsets this gain. In the second quarter 2019, we had a loss of Avianca's revenues with their bankruptcy. They accounted for BRL 3.7 million in 2018. Also, last year, we had a positive impact of BRL 6 million in tax benefit in the Air and Mall business. In the U.S., operating income grew 12% in U.S. dollars in the quarter that was amplified in Brazilian reais, reaching BRL 21 million, posting a 19% growth and 15% margins. In the Caribbean, we maintained the high-margin level at 26% in the second quarter '19 despite the softer performance in Panama due to airport refurbishments.

Now I would like to turn the floor over to our Investor Relations Officer, Luis Felipe Bresaola, to explore in further details the results, and I'll come back later for our final remarks.

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Luis Felipe Silva Bresaola, International Meal Company Alimentação S.A. - IR Officer & Member of Board of Executive Officers [3]

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Thank you, Newton, and good morning, everyone. Moving on to the next slide. We show the same-store sales performance in each country we operate. In the top left, we can see the Brazilian same-store sales totaled 3.9%. The Roads segment posted a 10.7% positive same-store sales, reinforcing Frango Assado's good performance. Airports reached 8.8% decrease, led by the issues with Avianca. In Malls, those are stable after 3 consecutive quarters of decline after nonperforming stores' closure. Next to the right, we can see that the U.S. operation had an 8.1% increase in reais and slightly increase in local currency. We note that food and beverage grew 1.2%., meanwhile the merchandise sales decreased by 9% as a sector trend after reduction of restaurants merchandise. In the Caribbean, we had a slight increase of 0.2% in reais and a decrease of 1.5% in constant currency as Colombia's positive performance was offset by lower sales in the Panama airport, which has been under refurbishment. Finally, on the bottom right, we have the consolidated figures that show a 5% increase in reais and a 1.8% growth in constant currency.

On the next slide, we have the company's consolidated results with the growth of 6.7% on its operating income. As Newton previously mentioned, the results were impacted mostly by the U.S. business operating income growth.

Moving now to the Brazilian business. I will start with the Roads segment. Operating income grew 83% with a 400 bps increase in operating margin that reached 10%. An improved product mix, combined with the truckers' strike and the World Cup last year, were a factor behind this performance.

On the next slide, we show the Brazilian Air operations with operating income down by 50% to BRL 5 million and margins that reached 11%. Besides Avianca bankruptcy, revenues were down given 14 store closures and the tax benefit in 2018.

On the next slide, we review the Mall operations. Same-store sales was flat after consecutive quarters of decline due to the closure of 12 underperforming stores at the beginning of June that helped to improve these figures. The operating income decreases by BRL 3 million to reach BRL 2 million, and margin was down by 430 bps to 4.1%, mostly on the tax benefit of the second quarter 2018 that was BRL 4 million.

Thus we move on to the next slide to show the Brazilian operation on a consolidated deal. To sum up, all the business resulted on a 3.9% same-store sales driven by the Roads performance. Revenues decreased by 2%, mostly on the tax benefit in the second quarter 2018. Operating income was down by 30% to BRL 4 million with 1.9% margin, representing a 70 bps decrease. Same-store sales was slightly positive. And as mentioned previously, we note that the food and beverage grew 1.2%., meanwhile the merchandise sales decreased by 9% as the sector trend of reductions of restaurants, merchandise sales. The operating income increased by 12% with a 15% margin on the back of higher efficiency with the food waste management and a disciplined process for ordering, use of paper and other restaurant supplies.

On the next slide, we review the Caribbean operations in Panama and Colombia. For a better comparison, we have presented figures in reais and in constant currency. Same-store sales in Caribbean was down by 1.5%, mainly led by Panama due to the airport refurbishment, which offsets Colombia's positive performance, resulting in a net revenue decrease of 1% year-over-year. Despite the lower sales, the Caribbean operation managed to sustain high level of margins at 25.7% from 24.8% in the second quarter '18.

Now on the next slide, commenting on the company's cash flow. Our operating cash flow after maintenance CapEx totaled BRL 20 million versus BRL 13 million in the second quarter '18. Lower working capital needs with the conversion of tax credits in cash and lower contingency and disbursements was partially offset by higher CapEx due to the Central Kitchen construction, improvements and refurbishment at our Road business in Brazil and in the U.S.

Jumping into the next slide, continuing with the cash flow. You can see that we consumed BRL 6 million in cash in the second quarter '19. In this theme, I would like to highlight the reduced amount of financing activities given the down payment of BRL 17 million that happened last year and also the lower FX impact with cash and equivalents.

Now I would like to turn the floor back to Newton for his closing remarks.

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [4]

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Thanks for joining our call. And so our final remarks, we'd like to reemphasize the main highlights of IMC's 5-pillar strategy for the next few months. Number one is growth of Frango Assado in Brazil through brownfield acquisitions; number two, expansion of Margaritaville and Landshark in the U.S., number three, assuming the deal goes through, is the addition of Pizza Hut and KFC expansion; number four is improving margin in Brazil, mainly through our Central Kitchen project; and number five, a continuous simplification of IMC business to reduce its complexity.

This concludes my comments. And I open the floor for questions. Thank you.

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Operator [5]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Newton Maia for any closing remarks.

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [6]

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Thank you, everyone, for joining us on this call. I'd like to reinforce that we're very excited about the developments on our 5-pillar strategy on Frango, Margaritaville, the Central Kitchen and IMC simplification, and now with the deal, the expansion of KFC and Pizza Hut, and also, put ourselves available through our Investor Relations department to answer any questions or any doubts that you might have. Thanks a lot, and have a good morning.

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Operator [7]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect, and have a nice day.