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Edited Transcript of TPZ.MC earnings conference call or presentation 14-Nov-19 3:00pm GMT

Q3 2019 Telepizza Group SA Earnings Call

MADRID Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Telepizza Group SA earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Tapia Tardón

Telepizza Group, S.A. - IR Manager

* Javier Van Engelen

Telepizza Group, S.A. - Financial Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to today's Telepizza 9 Months 2019 Results Presentation. My name is Jake, and I'll be the operator on today's call. (Operator Instructions)

I would now like to hand over to Antonio to begin. Antonio, please go ahead.

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Antonio Tapia Tardón, Telepizza Group, S.A. - IR Manager [2]

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Thank you. Good afternoon, everyone, and thank you very much for joining us. Today, we will take you through the details of the performance of Telepizza during the first 9 months of 2019. You can follow the call using the presentation that we have posted on our Investor website. After the presentation, there will be a Q&A session where you will have the chance to submit your questions.

I would like to hand over to Javier Van Engelen, our CFO.

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Javier Van Engelen, Telepizza Group, S.A. - Financial Director [3]

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Thank you, Antonio, and welcome to all of you on the call. It's only about 6 weeks, I think, we talked in the last investor call. So without a fundamental change in the business dynamics, you can expect me to go a little bit faster than usual through today's presentation.

However, before going through the business, financial update, I do want to take a minute to single out and thank -- especially thank, our Ecuador and Chile employees for the amazing commitment and perseverance in the last couple of weeks. As you've probably heard, over the last couple of weeks, both in Ecuador and in Chile, they've been hit by social unrest and a subsequent wave of protest and unfortunate disruption. Yet, most importantly, none of the Telepizza people got hurt in the process. And more than that, we have countless reports of employees continuously taking action to protect not only themselves but also the Telepizza business and its assets. It is this level of adherence to our company values and strong commitment to the business that makes us both proud and confident about the future of the company. And again, a special thanks to the people in those troubled countries.

So with that, let's move to Slide 3. On Slide 3, the key data of the Telepizza Group remained largely unchanged. Yes, a subtle change versus last presentation is that we have the confidence to add Ecuador as yet another country where we enjoy market leadership. This is following the successful acquisition of the Pizza Hut business at the end of 2018 and the successful conversion of our Telepizza stores to Pizza Hut. For the rest, store count has increased to 2,370 units with 82% of our store network franchised.

On Slide 4, key highlights for the first 9 months of the year are roughly in line with the highlights for the first 6 months. Quarter 3 has been another busy period with all Telepizza employees rising to the significant challenge of integrating the new Pizza Hut perimeter in our day-to-day priorities. The key results are as follows. Over the first 9 months of the year, the group delivered a sound 4.8% increase in system sales, continued proof that our commercial activity is well on track to deliver incremental market share.

EMEA, with a growth of plus 5.3% continues to outpace Latin America, where we recorded a growth of plus 4.3%. Spain and Portugal continue to deliver excellent results, while Latam continued its slow recovery in Chile. Unfortunately, that recovery came to brutal and violent halt in Ecuador and Chile early October, and we'll talk a bit more about that later on in the presentation.

Comparable EBITDA stood at EUR 49.8 million, still slightly down versus the first 9 months of 2018, and again, fully explained by the upfront investments in infrastructure to support the Pizza Hut partnership and the impact of both the minimum salary in Spain and the macroeconomic rubble in Chile.

We generated an underlying free cash flow of EUR 34.5 million. And in terms of value-creation activities, we already opened 33 -- the net new opens are 33 stores. We converted 58 Telepizza stores to Pizza Hut, and sales uplift continued to exceed our expectations. Both openings and conversions will further accelerate in the last quarter of 2019.

In terms of value-creation plan compared to our half 1 presentation, we have added on Slide 5 that our industrial strategy is on track. With plant constructions in Latam largely completed and supply-chain synergies starting to kick in over the last quarter of the year. Please also note that in quarter 3, we have completed the divestment of our Peru Telepizza business and again, we'll talk about this a little bit later.

On Slide 7, you see the continued evidence that the base business is strong. After the year 2018, with a line distraction, the first 9 months of this year, sales show maintained momentum with a total chain sales growth of plus 4.8% or an increase of EUR 41 million. EMEA continued to deliver an increase of 5.3%, in line with the first half. Latam still reduced with increase of plus 4.3%, helped by favorable exchange rates excluding FX, quarter 3 sales growth in Latam is in line with half 1. And please note that the 2018 numbers on these slides have been rebased to include Pizza Hut.

On Slide 8, we drilled down into the regional and brand performance. Again, please note that the numbers for 2018 have been rebased for including Pizza Hut. Through September 2019, EMEA grew very solid plus 5.3% in total chain sales, the same at constant currency, yet more importantly, with a like-for-like of plus 3.1%. Also important growth was broad-based throughout our new perimeter. Telepizza, Spain recorded a like-for-like of plus 3.4%, with number of tickets increasing by 1.5%. Pizza Hut, Spain remains a small operation in need of a turnaround and then an aggressive growth plan that will allow us to maximize market share with 2 differentiated brands. Total growth in Spain for Pizza Hut was plus 7.6%, yet the like-for-like was negative at minus 6.7%.

Portugal recorded healthy growth on both brands, plus 5.2% for Telepizza and 5.9% up for Pizza Hut. Especially Telepizza is showing an acceleration in Q3 with a like-for-like growth of plus 5.5%. Our Swiss and Irish businesses continued also to perform very well, registering growth numbers of, respectively, plus 20% and plus 11%, both at constant currency.

Latam, over the first 9 months of 2019 grew by plus 4.3%, with positive top line growth across the region, that's further helped by currency headwinds. The regional numbers are dragged down by Chile's slow recovery from the macroeconomic slowdown in July 2018 with Telepizza recording a minus 5.5% sales decline in the first 9 months of 2019 at constant currency. However, the good news, though, is that the repositioning of the commercial offer has resulted in stabilizing like-for-like growth in quarter 3 compared to a negative 5% like-for-like decline in half 1. The regional 4.1% decline in Telepizza, which you can see on the slide, continues to reflect our efforts to accelerate conversion of Telepizza stores into Pizza Hut in the markets where we have clear evidence that the Pizza Hut brand enjoys a stronger consumer appeal compared to Telepizza. Year-to-date, plus 1.3% growth in Pizza Hut on this slide, shows slight acceleration in Q3 at 1.4% compared to 1.2% over the first half, with further opportunities to restore and accelerate growth in underperforming markets such as Puerto Rico, Panama and Mexico.

In Ecuador, where we have acquired the Pizza Hut franchisee in the second half of 2018, we have already completed the conversion of all Telepizza stores into Pizza Hut, and average conversion uplift, over 70%, remains well ahead of our original expectations. In Colombia, we are recording sales uplift, also close to 70% from converting our Telepizza stores to Pizza Hut.

On Slide 9, and before moving to the financial update, I want to take a short moment to take you on recent events in both Ecuador and Chile, even if they took place after the Q3 close. As you have heard, social unrest broadcasting both Ecuador and Chile after the government announced unpopular measures to curb the public deficit. Especially in Chile, people dissatisfaction with the announced government measures soon turned into violent protests and then into destruction and looting of retail businesses. Fortunately, none of our people were hurt in the process. But unfortunately, our business in both countries suffered significant disruption and assets were destroyed.

In Ecuador, the disruption has been less significant as stores were closed, but stores were not damaged and this is in Ecuador. It's by now back to normal, thanks to all the efforts of the local teams.

In Chile, so far, the riots have caused significant business disruption as all stores in Chile were close for at least some days and 30 stores have been significantly damaged. The picture on this slide, it tells a thousand words on the extent of the damage caused on properties.

While we expect asset damage to be covered through insurance, there's still ongoing disruption to the business, both short-term closures as longer-term consumer distrust and consumer confidence will hit our sales and profits in the last quarter. We are still inventorizing the extent of the damage, and will provide you with an update when announcing full year results.

Again, in this situation, I think it's important to thank our local employees for their continued commitment in these difficult times and to wish them all the very best as they go to task to rebuild these closed stores.

On Slide 10, we summarize the status of openings across our perimeter. We have accelerated openings and conversions in quarter 3. Until end September, we have opened 51 and closed 18 stores within our new perimeter. Additional, we have converted 58 Telepizza stores into Pizza Hut.

Despite picking up speed in quarter 3, our openings continued to be at a slower pace than historical, as we are still adjusting to a more complex business-opening approval process. Still with that, both openings and conversions will further accelerate in the last quarter of the year, keeping us well ahead of the minimum target that we have agreed with our partners, Yum!. Our business openings are showing promising sales with average monthly sales over EUR 500,000 per year in Latam, significantly ahead of the average sales of a Telepizza store. Again, this gives us confidence that we look at conversions. After conversions themselves, as we said, we are delivering sales uplifts well ahead of our original expectations. Ecuador is still ahead of the pack with sales uplift above 70%.

On Slide 11, a quick recap on our M&A activities. Next to the Pizza Hut acquisition in Chile that we reported with the half 1 results, in quarter 3, we also completed the divestiture of our Telepizza business in Peru. The sale of our business -- in Peru, the Telepizza business to the Peruvian Pizza Hut franchisee is highly accretive, with significant cash proceeds against only a loss of marginal EBITDA. Moreover, as part of the sale, we have agreed on an important store-development plan, guaranteeing us a continuous flow of royalty income, and we have secured a supply agreement for frozen dough to a large part of the Peruvian Pizza Hut stores. We are still in the process of divesting operations outside our Pizza Hut MFA perimeter, namely Poland and Czech Republic. And we'll hopefully have more results and information at the end of the year.

This brings us to the financial information, starts on Slide 13, with a real impact versus 2018 of the Pizza Hut alliance in our chain sales revenue. Following the alliance, our total chain sales about doubled from EUR 448 million in the first 9 months of 2018 to over EUR 900 million in the first 9 months of 2019. The growth in chain sales continues to be almost completely derived from franchisee stores as we absorbed mainly fully franchised Pizza Hut business.

The evolution in the group revenues, on the right-hand side of this slide, continues to be very different than the evolution in chain sales. While our own stores, system sales directly translate into revenue. For our franchise business, the chain sales translate into revenue through royalty income, supply-chain sales and other income.

In the first 9 months of the Pizza Hut alliance, the 24% increase in franchisee revenue mainly reflects those new royalties coming in from the Pizza Hut stores that we have taken into the alliance.

Slide 14, that captures the key movements in our adjusted EBITDA for the first 9 months of 2019 compared to the first 9 months of 2018. Our total adjusted EBITDA for the Jan/September 2019 period is down by about EUR 2 million versus the same period in 2018 from close to EUR 52 million to close to EUR 50 million. As already mentioned in the half 1 presentation, this is the balance of a healthy development in like-for-likes, openings, conversions and M&A, yet offset by temporary headwinds in Spain and Chile and our early investment in the Pizza Hut alliance.

In more detail, like-for-like growth, together with store openings and conversions contributed to a EUR 2.9 billion increase in EBITDA. The EUR 3.1 million contribution of M&A reflects the purchase and successful integration of the Ecuador and the Chile Pizza Hut businesses. Even if 0, just like last presentation, we have signaled still the supply-chain synergies as we have more visibility on the positive contribution that we expect to materialize in Q4, both in Iberia and Latam.

We already talked last time about temporary headwinds, the minimum salary increase in Spain combined with the aftermath of the Chilean macroeconomic slowdown impacted our first half results by negative minus EUR 3.5 million. Chile is or was showing clear signs of recovery in the third quarter. But as we said before, we will see some negative impact of the disruption we've seen in October. In Spain, we continue making structural adjustments to at least partially offset the current and potentially further minimum wage increases in the country.

As a final reconciling element, we have invested an upfront EUR 4.3 million today into the Pizza Hut infrastructure as we target to maximize future synergies and value-creation potential. First, we have recruited incremental resources in those areas, we believe will have significant value creation.

Second, in Spain, we are paying learning money, as we decided to acquire the 30 loss-making Pizza Hut stores for early learning and optimization of our future rollout plans. We are still suffering this impact and expect to -- the operation of Pizza Hut to breakeven in 2020.

Also in Spain, in order to allow for a smooth and coexistence of Telepizza and Pizza Hut, we invest in better aligning supply chain terms between both brands.

And finally, across the entire perimeter, we have temporarily slowed down the sale of old stores to franchisees, impacting our year-on-year profits from transfer fees as we're in the process of redesigning trade zones and optimal on-store franchisee mix per country.

On Slide 15, you can then see the income statement summary. As already discussed before, the 15.5% increase in revenues reflects the combination of 6% increase in on-store sales and royalties received from the new Pizza Hut business that are offset by the royalty paid lowering income statement. Cost of products increased by 10.7%, largely driven by price alignment between the Telepizza and Pizza Hut businesses in Spain, and some price inflation, mainly on cheese and meat versus 2018. As just mentioned, the minus EUR 22.5 million royalty and fee payment to Yum! are fully offset by the received royalties, which are part of the revenue line. As you remember, royalty in and out in this alliance should offset each other.

Operating expenses, excluding royalty payments, increased by 8.6%, this is mainly due to the integration of Ecuador, the increase of minimum salary in Spain and some items that scale with sales such as part of the rent, transport and utilities.

The adjustments between reported and adjusted EBITDA relate to, one, nonrecurring expenses related to the Pizza Hut alliance, the bond issuance and some restructuring costs; two, items that are of a nonoperating nature and distort the real profitability of the business such as impact of onerous lease contracts coming from the past; and three, P&L items that are seasonal of nature and, therefore, distort comparability with 2018 and projections for full year 2019. Example of that are the transfer fees, which get booked throughout the year on different periods.

Slide 16 is a CapEx overview. For the first 9 months of the year, CapEx spending increased by EUR 8.9 million versus comparable period in 2018, in line with our new strategic priorities and in line with our budget. Higher CapEx spending is mainly in digital capabilities, and we have invested a number -- in a number of digital projects to accommodate increased store counts, including the new acquisitions and renovations of our digital platforms. We have also increased our investments in conversions, openings and relocations and in-plant capacity in order to cope with the future increase in volume. M&A CapEx reflects what we already talked about, the acquisition of the Chilean Pizza Hut business, which was closed in quarter 3 and some smaller acquisitions in Colombia and Spain, the latter which with the objective of gaining early learnings into the Pizza Hut system.

Slide 17 shows with our underlying free cash flow remained healthy at EUR 34.5 million, impacted by tax payments, advanced royalty that will only be collected early 2020 and, therefore, has a negative impact from our adjusted EBITDA to cash and our maintenance CapEx.

Slide 18 shows you more granularity on the cash flow with a positive contribution of working capital, mainly explained by pending payments of royalties to Yum!. We've put in place a liquidity and working capital action plan to secure a healthy cash balance through the remainder of the year and up to our first bond interest payment on Jan 15, 2020.

This brings us to Slide 19, with an overview of net debt and leverage. As of September 30, 2019, our net debt stands at EUR 291.1 million, translating to a leverage of 4x over last 12 months pro forma EBITDA of EUR 72.5 million.

That basically takes me to the end of the presentation and some closing remarks. As mentioned by Pablo in the last call, 2019 is and will continue being hectic. Not only on the business side but also on the corporate side. Moreover, the start of Q4 has been marked by a significant disruption in Ecuador and Chile. On the business side, we continue to inject onetime investments to regain momentum on the Pizza Hut business. We unfortunately suffered the impact of both the minimum salary increase in Spain and the slow recovery from the macroeconomic slowdown in Chile. On the corporate side, on top of the tender of KKR, we delisted company from the stock market, we refinanced the company's debt and we now also have completed the acquisition of the Chilean Pizza Hut business and the divestiture of the Peruvian Telepizza business.

Through all of this, the organization continues to rise to the challenge. Sales growth maintains growth momentum, new openings have accelerated in Q3 and will further accelerate in Q4. Sales uplift from conversions continue exceeding expectations. M&A activities are highly accretive. Underlying cash flow remains strong. And supply-chain synergies will start to come in before the end of the year.

There's surely still lots of work to do in Q4, including the rebuilding of our Ecuadorian and Chilean businesses. But all of the group of Telepizza's employees remain highly committed to ensuring 2019 will be a strong base for continuing to build a successful future.

And with that, I would thank you for your attention, and we'll now open up for questions.

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Questions and Answers

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Antonio Tapia Tardón, Telepizza Group, S.A. - IR Manager [1]

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A couple of questions coming from the webcast from (inaudible) from Citi. The first one is, can you please explain the drastic decrease in EBITDA margin between the 2019 and 2018 results? And the other one is, how much has the minimum wage increased? And will it continue to grow going forward? And we have been able to offset this increase. So, Javier?

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Javier Van Engelen, Telepizza Group, S.A. - Financial Director [2]

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Okay. As with the first question, the EBITDA margin between 2018 and '19 is not exactly comparable as you change the universe in terms of revenue coming from royalties versus own stores. So the P&L composition is very different due to the loan close we have. And then also, separately we have the Pizza Hut investments that were made and the build-up costs we have. But the problem here is that it's clearly a different composition of asset-light or asset more heavy businesses, and therefore, it's very difficult to look at the 17.1% as an apples-to-apples to 20.8%. We'll have to separate that in much more detail.

As to the second question, which was how much was the minimum wage increase? The wage increase was 22% this year. We have, basically, at the start of the year, tried to pass on part of that to the consumers. That has led basically to a significant decrease in volume as competition did not follow that increase in minimum wages. We, therefore, kind of rolled that back, where we only partially implemented what we wanted to do throughout the year. And therefore, this year, we had an impact on the bottom line. Question going forward is a big question mark. As you know, there's just been elections in Spain. They are trying to make a government, and this is what they have finally closed. Depending on which government puts into place, we believe there will be, yes, to a lesser or a bigger extent, a further increase in minimum salaries. We do believe that if there is a further increase in minimum wages that the whole QSR industry will basically be forced to pass on to consumer pricing because we think it's impossible for the whole industry to absorb 2 years of minimum salary increase.

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Antonio Tapia Tardón, Telepizza Group, S.A. - IR Manager [3]

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Okay. And then we have a very, very long question from [Elizabeth Stapleton] from [Prudential]. Elizabeth, if we miss some answer, please contact our Investor Relation team and we will give you the additional details. But the question is, basically, we can repeat the like-for-like returns in Spain for Telepizza and Pizza Hut. And then if we can provide a split between Pizza Hut and -- sorry, number of orders and price. If we are able to isolate the LWN Chilean that's within the EUR 3.5 million that was in the briefs. If we can confirm that the phasing will be fully reversed in Q4, when will be the up from an investment for the Pizza Hut alliance will be returned -- to return in Chile, if we can compare and work with the current LTM revenue recognition, if we can provide any early view on the impact on Q4 related to the unrest in the country? And if we are able to provide any guidance for the year in terms of EBITDA and CapEx?

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Javier Van Engelen, Telepizza Group, S.A. - Financial Director [4]

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That's a long list of questions. Yes, we'll probably not cover all of them, let me just see which ones are the ones that we can easily talk about. So for Spain, our like-for-like in Telepizza was plus 3.4%. The like-for-like on Pizza Hut on a very small base of businesses, as you understand, is minus 6.7%. Our average ticket increase in Telepizza, so average ticket is plus 3%., okay? The isolation of basically Chile impact within the EUR 3.5 million, we can get back to you later on. We have the amounts, but we will have to look at the complete set of numbers there.

Phasing impact in the reported adjusted EBITDA bridge confirmed will be reversed in the full year, will largely be reversed on the full year because of phasing impact. Upfront investments of Pizza Hut, as we said, it's a learning curve. Here we have to separate Spain from the rest of the world. I think Pizza Hut on the rest of the world, I think, outside of Spain is showing immediate payout in terms of the acquisitions we've made, and also in the conversion we're making. So they have a very fast payout. In Spain, as we talked about, we have acquired the loss-making business, which is not in good shape. We're turning that around. We are targeting that business to be breakeven next year and then grow to profitability in the second half of next year and then in the year after. So that's our expectations on Pizza Hut. We will not detail specifics by country on EBITDA because we keep those numbers not disclosed.

And then, basically, impact on quarter 4 performance. As I said, we are looking at the impact of both countries. As we said, it's going to be slightly less important in Ecuador. I think we've talked about a couple of hundred thousand euros. I think, though, that when we talk about Chile, we're talking about a couple of million, which will impact us. And therefore, that will also be an adjustment to our full year. So we don't expect we can recover off the hurt in Chile, but again, let us do the numbers first. There's a questions about insurance, there's a question about disruption. The situation is not over yet. As you know, the rioting has stopped but now there was a general strike. So it's still a developing situation. But yes, the impact mainly of Chile will affect our total quarter 4 and therefore, full year. That will be the case.

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Antonio Tapia Tardón, Telepizza Group, S.A. - IR Manager [5]

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So we have an additional question from [Brian Edison] from Neuberger Berman, which is, the original EBITDA guidance for '19 was between EUR 75 million and EUR 80 million, revised to EUR 82 million from EUR 75 million in the second quarter and year-on-year growth of EUR 10 million to EUR 15 million was expected. And the EBITDA growth is in fact lower in Q2 and Q3. Can you maybe explain what is driving this decline versus your expectations? Is the uplift from opening is less than expected or are the costs higher?

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Javier Van Engelen, Telepizza Group, S.A. - Financial Director [6]

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So as you've seen, the bridge that we have versus 2018, the same elements that we have as a bridge towards 2018 are also the ones that have a bridge versus our expectation. So the same elements. The -- we expect this, especially the minimum salary increase in Spain to be offset through pricing, which we've not been able to do. We expected that Chile would recover faster from the economic downturn, which is taking a long time. And then basically, the Pizza Hut business in Spain is we had more investments than what we had already expected. So it's the same element versus expectations as versus prior year. The decline versus prior year is basically that, it's as shown on Slide 14. And again, expectations were roughly in line with those changes.

Uplift from openings, less than expected or costs higher, as I said before, the situation here, we have to split openings and conversions. On conversions, our results are higher than expected. So there we have clearly a positive, and that's also driving us to accelerate conversions in those countries where we see that the Pizza Hut equity is clearly stronger than Telepizza. And that's what, for instance, we have been in Ecuador. And I mentioned in the presentation that we have already converted all Telepizza stores into Pizza Hut.

In terms of Pizza Hut in Europe, there's -- and I would say, partially also in Latam is, especially in Latam, our openings are going well with sales clearly exceeding what we do on Telepizza. In Spain, as I said, the stores that we acquired are more troublesome on seeing how we can turn those sales around and we need total activation and marketing to be able to do that. It's true on the costs side, the costs of opening a Pizza Hut store are slightly higher than what we expected. And this has to do with the standards imposed by basically Yum!, and these are things that we'll be looking into on how we can further optimize the cost of those stores.

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Antonio Tapia Tardón, Telepizza Group, S.A. - IR Manager [7]

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Okay. We have no additional questions from the webcast. And the operator will give you now the instructions if you want to make any additional question from the phone.

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Operator [8]

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(Operator Instructions) We have no questions registered, so I'll hand it back over to you.

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Antonio Tapia Tardón, Telepizza Group, S.A. - IR Manager [9]

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Okay. So we don't have any additional question. With this, we finish this 9 months of 2019 presentation. Thank you very much for attending the call. If you have any additional questions, please feel free to contact us. Thank you very much.

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Javier Van Engelen, Telepizza Group, S.A. - Financial Director [10]

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Thank you. Bye.

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Operator [11]

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Ladies and gentlemen, thank you for joining today's call. You can now hang up your lines.