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Edited Transcript of MEAL3.SA earnings conference call or presentation 11-Nov-19 2:00pm GMT

Q3 2019 International Meal Company Alimentacao SA Earnings Call

SAO PAULO Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of International Meal Company Alimentacao SA earnings conference call or presentation Monday, November 11, 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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Conference Call Participants

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* João Mamede

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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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 third quarter of 2019 results. The presentation is available for download at the company's website, www.internationalmealcompany.com/ir. (Operator Instructions) Please also note, today's event is being recorded.

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 Alves, CEO of IMC; Ms. Maristela Nascimento, Administrative and Financial Officer; and Mr. Luis Bresaola, Investor Relations Officer of IMC.

I will now turn the conference over to Mr. Maia. 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 third quarter '19 results in which we will provide important information related to IMC's performance as well as the main initiatives related to our strategic pillars of: one, Frango Assado brownfield expansion in Brazil; two, Margaritaville and Shark expansion in the U.S.; three, the start of our Central Kitchen; and four, the simplification of IMC businesses. Additionally, we added a fifth pillar with the incorporation of Pizza Hut and KFC last October 31st that we will speak more about later.

Now on Page 2, I would like to start to speak about our third quarter results and add that for a better performance comparison, my comments will be based on non-IFRS 16 figures. In this quarter, we had the specific one-off events that impacted our EBITDA in Brazil and the U.S. In Brazil, we had Central Kitchen construction that impacted our food costs at the Road and Malls businesses and bankruptcy of Avianca impacting our business in Brazil. In the U.S., we had the impact of Hurricane Dorian that reduced the amount of tourists. That said, we had a challenging third quarter '19 in which consolidated revenues decreased by 4.8% to BRL 424.8 million, and our EBITDA was down by 7.1% to BRL 55.4 million with a 13% margin, 40 bps below last year. On the other hand, our net income grew almost 49% to BRL 19.7 million compared to third quarter '18. Consolidated same-store sales in Brazilian reals was negative in 4.9%, with Brazil decreasing by 2.8%, the U.S. is down by 4.9% and the Caribbean reducing by 10.3%.

Now on Slide 3, I would like to comment a little bit more about the events that are impacted by BRL 9.7 million of operating results in the quarter and that we understand that are one-offs. On the Road and Air (sic) [Malls] business, we had a BRL 2.3 million and BRL 1.6 million impact, respectively, driven by the construction of our Central Kitchen. With the closure of the Old Kitchen, we had to outsource part of the production impacting our costs. As we start to ramp up the Central Kitchen to the stores, this issue should be gone. On the Air business, we had Avianca leaving the market that impacted our business by BRL 1.9 million. We expect other airlines to fulfill the empty slots left by Avianca that stopped its operations in May '19. And finally, in the U.S., we had the impact of Hurricane Dorian that reduced the tourist flow within our stores.

Now on Slide 4, we have the EBITDA bridge. Consolidated EBITDA decreased by 7.1%, reaching 5 -- BRL 55 million and 13.0% margin. Brazilian operations including G&A and others totaled BRL 20 million compared to BRL 21 million in 2018. The Road segment was the key business for the quarter, and despite the impact of the food cost, we had a positive impact from a tax credit that benefited the business by BRL 9.7 million, helping on the year-over-year performance. On the Air side, besides the catering business, Avianca also impacted the passenger flow within the airports with a reduced amount of flights, meaning that not only the catering business was impacted, but also our airport retail business. On the Malls side, we continued to see a slowdown in performance that we expect to overturn with the Pizza Hut and KFC operations. In the U.S., operating income was flat in U.S. dollars and Brazilian reals despite the impact from Hurricane Dorian in our top line. In the Caribbean, we maintained a high margin level at 23% in the third quarter that was impacted by the soft opening of the new terminal at Panama airport.

Now I'd like to turn the floor to Investor Relations Officer, Luiz Felipe Bresaola, to explain further details of results, and I'll come back later to talk about our strategy.

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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. On Slide 5, we show the Brazilian business performance with revenues decreasing by 3.2% and EBITDA reducing by 5.6% compared to last year, reaching BRL 20 million. The lower performance in our Air business with Avianca leaving the market that impacted not only our catering business but also the retail business was a key point behind the top line deceleration. On the EBITDA side, we had further impact with the food costs in our Roads and Mall businesses, driven by the construction of the Central Kitchen and a necessity to outsource part of the production.

Moving now to the Road business. Operating income grew 56%, with almost 6 percentage points increasing the operating margin to 18.7%. Despite the lack of all this compared to the same period of last year, our same-store sales performance was pretty in line within the Road system traffic growth. A BRL 9.7 million tax credit was the key point behind the strong performance of the top line. On the operating income side, we had a small pressure from the outsourced production driven by the Central Kitchen construction.

On the next slide, we can see that the Brazilian Air operations operating income was down by 44% to BRL 7.6 million and margins reached 15.1% (sic) [15.4%]. As mentioned in the beginning, Avianca leaving the market not only impacted the numbers of flights, but also the passenger flow. Within the airports and terminals that we operate, flights reduced by 5.3% and passenger flow by 3% in the third quarter compared to last year.

On the next slide, we review the Mall operations. The operating income decreased from BRL 5 million to BRL 2 million and margin was down by 5.4 percentage points to 3.8%, mostly on the back of the outsourced production driven by the Central Kitchen construction. We also had a BRL 1.1 million positive impact with tax credits last year. With the incorporation of Pizza Hut and KFC, we expect to change the Mall segment performance.

Moving on to the next slide. We talk about the U.S. operations, which we present in local currency. The operating income was flat at $6.3 million with a 17% margin that expanded 100 bps on the back of higher efficiency with employees and food cost management. Hurricane Dorian had a lot to do with our top line and performance.

Moving to Slide 10. We review the Caribbean operations in Panama and Colombia. For a better comparison, we have presented the figures in reals and in constant currency. Operating income was down by 21.2% with margin decreasing by 4.7% percentage points to 22.1%, mostly on the performance of the Panama business. Same-store sales in the Caribbean was down by 5.4%, led by Panama Tocumen Airport passenger flow. With the soft opening of the new terminal in June, passenger flow within the existing terminal, where we allocated, reduced by 5.6%. Meanwhile the airport's total traffic grew 0.9% in the period.

Now on Slide 11, commenting on the company's cash flow. Our operating cash flow after maintenance CapEx totaled BRL 39.8 million versus BRL 41.6 million compared to last year. With the Central Kitchen construction, our expansion CapEx reached BRL 39 million this year. Our cash position increasing year-over-year driven by the 6-year debenture that we issued in September in the amount of BRL 150 million.

Now I'll turn it back for -- to Newton that will speak more about our strategy.

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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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Thank you. And moving to Slide 12, we updated our IMC strategy pillars, including the incorporation of Pizza Hut and KFC. First Pillar, the growth of Frango Assado in Brazil through brownfield acquisitions; second, the expansion of Margaritaville and Landshark in the U.S.; third, expansion in Brazil of Pizza Hut and KFC; fourth, improved margins in Brazil mainly with the new Central Kitchen project; and fifth, the IMC business simplification in order to reduce business complexity.

We continue to seek to expand the business with high ROIC, namely from Assado in Brazil, Margaritaville and Landshark in the U.S. and now Pizza Hut and KFC also in Brazil. At Frango Assado, we continue with the brownfield strategy, mostly in the southeast region. We have active conversations with groups, a few with more than one location, and expect to add 3 units per year in the next 5 years. In the U.S., we have already signed 11 new locations in a large market to explore, and that's why we give a guidance of 3 per year for the next 5 years. For Pizza Hut and KFC, we believe there's plenty of room to expand those iconic brands in Brazil, and we expect to open 40 stores per brand over the next 5 years, being 50% of those stores own stores. The fourth pillar is the Central Kitchen, which is finally done and ready to start. Lastly, on IMC simplification, we have been engaged in reducing IMC's business complexity, the most recent example is the conversion of the last Red Lobster into Olive Garden.

On Slide 13, we show a few pictures of the Central Kitchen to show the stage of the project and see that the soft start will happen in late November and the rollout into the stores during the first half of 2020.

Moving to Slide 14. We show the returns for stores that we opened recently. Daytona had a 15 months payback and Branson is at 11% of invested capital in only 7 months of operations.

On Slide 15, we speak about the MultiQSR agreement. I'd like to give you just a recap on the deal structure and what this represents for the company. IMC now accounts with approximately 196 million shares outstanding with the Martins Family holding approximately 13% and Yum! Brands approximately 2%. We also have a new Board in place. We note the addition of 3 members: Charles and Lincoln from the Martins Family, and their strong background in franchise business; and Joseph Call, our Global Development VP for Pizza Hut at Yum!. Mr. Call has been with Yum! for 20 years with experience at both KFC and Pizza Hut brands at 4 different continents. We also have a detailed post-merger integration plan in place that is being executed to ensure a smooth integration and also the capture of synergies.

Now we give an overview of the deal opportunity that range from pizza and chicken markets, company specifics that will bring iconic brands and high-return restaurants formats and the deal synergies that range from supply to business model and stronger corporate governance. With that said, I'd like to comment that Pizza Hut and KFC will bring 2 important markets to IMC business: the pizza and chicken market in Brazil. Brazil had approximately 36,000 pizza restaurants in 2018, and Pizza Hut, one of the leading companies, had only 0.5% market share. Brazil has second largest pizza market in the world, only behind United States. Speaking about the chicken market, chicken comprise 50% of the protein consumed by the average Brazilian, and the largest restaurant chain is KFC with more than 60 stores. Chicken is also an affordable protein, which makes the addressable market even higher.

On Slide 17, we show that those 2 brands are iconic and valuable brands globally. KFC is the third most valuable brand in the world, and Pizza Hut is the seventh most valuable restaurant brand in the world. We also have a variety of store types increasing our addressable market, we have food court formats, we have delivery and carryout models, and we also have freestanding and drive-through models. In addition to that, we have the ability to sub-franchise those business to help us expand our store base without CapEx.

Turning now to Slide #18. We speak about synergies with suppliers. On the chicken side, we can now buy 3.3x more chicken than we had bought before without counting the expansion plan. In terms of flour, we've doubled the purchase. And then on the credit card transactions, we increased the volume by 70%. We also see synergies of our equipment acquisitions and G&A, with the back office optimization. We're also counting with a store-in-store operation, which we will have a Pizza Hut corner inside our Frango Assado restaurants. That will give Pizza Hut access to over 1.5 million consumers monthly, and should also help Frango Assado stores that it would -- as it will attract customers interested in Pizza Hut. We currently have 10 stores being adapted to receive the Pizza Hut corner. We are already looking at converting Viena stores into Pizza Hut and KFC.

On Slide 19, we speak a little bit more about Pizza Hut and KFC stores base that ended the third quarter '19 with 259 stores, being 193 Pizza Hut and 66 KFC that represents a 10-store addition compared to March, being 6 Pizza Hut and 4 KFC.

On Slide 20, we detail our expansion guidance that we released together with the results. For the next 5 years, beginning 2020, we estimate: first, to open at least 40 Pizza Huts and 40 KFCs, being at least 50% of those own stores; two, to acquire at least 3 Frango Assado stores per year; and three, to open 3 Margaritavilles or Landsharks per year. In addition to the 40 stores per year per brand for KFC and Pizza Hut, we currently have 31 Pizza Huts and 32 KFCs under construction. This concludes my comments.

And now I will open the floor for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from [Francisco Villa] of [Lugano].

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Unidentified Analyst, [2]

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My first question is regarding the sell-side coverage by the company. We see that there's still very few coverage on the stock. And there are still -- even some basic mistakes in the sell-side report, such as the number of outstanding shares and the market cap calculation. So my question is what can the company do in order to bring more attention to the stock and to bring some Tier 1 sell-sides to cover the company.

My second question is regarding the number of stores that will be opened this year. It's not very clear the exact number of stores that are expected to open in 2019. So if you could give some more color on this, it will be helpful as well. In this sense, I also would like to ask -- you're disclosing the number of 40 stores per brand per year as the bottom. So this number could be even higher. And this potential upside will be proprietary stores, franchises or a mix of deals? If you could also give a little more color on this. And my last question is regarding the new model that the company is entering, adding the franchise model and also the delivery and carryout that is something pretty new for IMC. Are you guys looking for some exclusivity agreement with the delivery aggregators such as iFood, Uber Eats, [Hapi]. What could we expect on this side?

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [3]

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Thank you, [Francisco]. Let me take one at a time. Number one, sell-side coverage. We do have several meetings with several banks, several sell-side analysts. We have not only road shows, we have -- we participate in several conferences, even though of banks that do not cover our paper. But in the end, it's not our decision. There's nothing more than talking to them that we can do to (inaudible) from the banks to cover our paper. Usually, if the clients ask, the banks tend to respond.

The number two, on number of stores of '19. I want to clarify, I'll answer the second question and third one together. The guidance that we gave, the official guidance is number of stores starting 2020 onwards. That is the minimal number of stores, it could be high, but the target could be higher for both franchisees and owned stores. But the guidance, as we gave, its 40 stores, 20 each per brand. For 2019, we do not give official guidance, but the information that we gave is we have 31 stores for Pizza Hut and 32 for KFC already being built today. We expect them to be open in 2019, but some of those could end up being open in January or beginning of the next year. But those stores that we disclosed, they are in addition to the guidance we gave for 2020, just to be clear.

Regarding delivery process and aggregators, we do work with all of them. We work with Uber Eats, we work with iFood, and we work with [Hapi] in Brazil. And we also have our own app for Pizza Hut, and we're probably going to keep working with several aggregators and several -- and with our own delivery system as well. For now, there's no exclusivity that I'm -- that I can disclose. I hope that was clear.

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Unidentified Analyst, [4]

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Okay. Could we expect some IMC Day or some event in the near future? Or this is something that could happen -- we should expect only for 2020?

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [5]

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We are not going to have an IMC Day for 2019. We are working on a date for the beginning of 2020. As soon as we have a date organized, we're going to let everybody know. And we will probably try to do it at our Central Kitchen site. So this is to let everybody know what is there and the potential and everything else. So -- but it's not going to happen in 2019, it's going to be beginning of 2020. We'll let you know when we have a date.

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Operator [6]

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Our next question comes from João Mamede of Itaú.

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João Mamede, Itaú Corretora de Valores S.A., Research Division - Research Analyst [7]

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So first question regarding the Central Kitchen and potential savings. How much do you expect to save with the entire project and how fast can we expect that to materialize? So in 2020, how much of the savings is going to show up? So this is my first question. And the second, regarding -- I'm going come back to the -- go back to the expansion plan. So how much -- can you provide us some color on the economics of the stores? It's pretty clear for us the number of stores that you're opening in the next 5 years. But if you can go through later on, on the revenues per store and margin per store, profitability of the store, so we can make our calculations here. That would be very helpful.

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [8]

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Thank you, João. We do not give guidance on the Central Kitchen savings. But the way it's going to work, we're going to -- as we announced, it's going to start producing by the end of November. It should be fully operational by the end of the year. And we're going to roll out the new system -- new operating system, the intelligent kitchen with the combusting ovens in the stores during the entire first semester of 2020. We have 2 kinds of -- 3 kinds of savings here. First is to stop spending higher food costs by outsourcing to third-party suppliers. This should end by the end of this year. Already in December, we should be producing everything at our Central Kitchen. So the first additional spend we had to factor in food cost, we should not have that in the first quarter of 2020. The second portion of savings is that we're going to shut down the Central Kitchen we have today, 2 Central Kitchens, one in [Jundu Ubatuba] that used to be Viena; and one in [Lovera] that used to be from [Wasabi] that's going to be the new one. We're going to shut down in January the old Central Kitchen from Viena. So from February onwards, we're already going to have the savings for not having the employees, the rent, energy and everything from the second kitchen. So this is going to be ready from February onwards. The remaining the savings that we're going to have on the store level, both on food costs and also on reduction of direct labor costs, this is the one that's going to take the entire first semester as we're going to be rolling out stores one by one to make sure we don't have any disruption. So this is on Central Kitchen savings. Unfortunately, we do not give dollar amounts for that.

On the economics of the stores, I cannot give you guidance, but I can give the historic numbers. A typical Pizza Hut stores on economics -- a typical Pizza Hut store sells between BRL 200,000 and BRL 300,000 per month; and a typical KFC store sells between BRL 400,000 and BRL 500,000 per month. And we should expect EBITDA margins of those stores of at least 10%. I hope that was clear.

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Operator [9]

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Since there seems to be no further questions, I would like to turn the floor over to Mr. Newton Maia for his final remarks.

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Newton Maia Salomao Alves, International Meal Company Alimentação S.A. - CEO and Member of Board of Executive Officers [10]

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Thank you, everyone, for joining us on the call. As I was saying, I mean, despite the soft numbers this quarter, the challenged numbers, we're very excited about this new merger. And the new growth avenues that opened with several KFC and Pizza Hut stores, many of them already this year. And the guidance that we gave from at least 80 stores per year going forward. Please feel free to reach out to us or our Investor Relations department if you have any further questions. Thank you, and have a good day.

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Operator [11]

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Thank you. This concludes IMC's conference call. You may now disconnect, and have a nice day.