International Meal Company Alimentacao SA

BOVESPA:MEAL3

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to IMC's conference call to discuss the first quarter of 2018 results. The presentation is available for download at the company's website www.internationalmealcompany.com/ir. [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; and Mr. José Agote, CFO and Investor Relations Director of IMC. I will now turn the conference over to Mr. Newton Maia. Please, Mr. Maia, you may proceed.

[Newton Alves, executive]

Good morning, everyone, and welcome to IMC's conference call for the first quarter of 2018. First, I'd like to thank everyone for joining IMC's call, in which we'll provide important information related to IMC.

Now on Slide #2, you can find the main highlights for the year. First, with regards to financial highlights, I would like to emphasize that adjusted EBITDA reached BRL 21 million and was up by 24% with a 90 bps increase in margins that reached 5.8%. Net revenues reached BRL 363 million, up 3.5% year-over-year with flat same-store sales in the quarter.

We had a net loss of BRL 6 million compared to a BRL 17 million loss in the first quarter 2017. The operating cash flow after maintenance CapEx was BRL 3.2 million, equivalent to 15% of adjusted EBITDA, an improvement compared to the cash consumption of BRL 6 million in the first quarter of 2017.

These are the improvements in results as a consequence of the continuous implementation of our strategy of focused efficiency, execution and growth. However, we are still in the middle of a turnaround. And even though we remain very confident that we are on the right path to achieve our mid- and long-term targets, we expect a bumpy road, given our high level of operational leverage.

On the following slide, we will see that the main source of improvement in results was Brazil. Now on Slide 3, we compare the EBITDA bridge of the first quarter 2018 and the first quarter 2017. And we can see the improvements, especially in Brazil. In Brazil, operating income was up by 91% year-over-year, reaching BRL 11 million, with a 200 bps expansion in margins as a result of improvements in all segments and overhead expenses, partially offset by higher other expenses.

In Roads, top line growth and high efficiency led to 80 bps improvements in margins. In the Air segment, higher revenues from the catering division led to a 95% improvement in results. In Malls, the 40% increase was due to higher revenues from Olive Garden and the new concepts for Viena, combined with the effort to improve efficiency and the cost structure, offsetting the pressure from negative same-store sales.

In the U.S., results were negatively impacted by higher store preopening expenses due to the launching of a new Landshark restaurant in Daytona Beach, Florida, on late January. In the Caribbean, operating income was nearly flat with a slight improvement in margin, offsetting slightly lower revenues.

On the following slide I will give you a brief recap of the main initiatives to improve results even further in 2018. Now on Slide 4, I would like to share with you the 4 main levers to help us to improve results in 2018 as we disclosed in the fourth quarter '17 earnings release. First, in terms of initiatives to improve margins, we highlight the continuous focus on the zero-based budget. And we are adding the Intelligent Kitchen project and the manual process automation.

Second, with regards to operational leverage and sales initiatives in Brazil, our main focus are: One, on Viena, we will replicate Frango Assado's initiatives from last year. We will promote team assessment and training, research and focus groups and we're adding the Intelligent Kitchens project. On Frango Assado, increase significantly the publicity efforts, with 50% growth in the number of billboards on the roads, increasing social media and digital marketing. And those investments include investment in the Waze app. In the U.S., the focal points are: improved stores' infrastructure, promote group sales and marketing initiatives.

With regards to organic expansion, the focus remains Olive Garden in Brazil and Margaritaville and Landshark in the U.S., where we just opened a new store in Daytona, Florida, in January. We are about to sign at least 2 new contracts in 2018. Finally, in terms of team and processes, we're introducing this year a goal-setting project, allowing variable compensation at all levels across the company, including all employees.

I will now pass the floor to José Agote, our CFO, who will provide further detailed information on our financial performance.

[José Agote, executive]

Thank you, Newton, and good morning, everyone. On Slide 5, we can see the evolution of the number of stores. We see that the company closed the year with 237 stores, a net decrease of 22 in comparison with the previous year. There was a net reduction of 21 stores in Brazil, of which 1 was in Roads, 10 in shopping malls and 10 in airports. It was a net reduction of 3 stores in the Caribbean and a net opening of 2 stores in the U.S.

On the next slide, we can see the same-store sales performance in the first quarter. On the top left, we can see the Brazilian same-store sales totaled negative 0.7%. The Road segment posted a 1.6% positive performance, led by a 5% positive performance in restaurants. We had a normal 6% increase in airports with a positive performance of catering offsetting the reduction in restaurants and a 14% reduction in same-store sales in the shopping mall segment.

Next, to the right, we can see the U.S. operation had a 0.5% increase in reais and a negative 3% performance in constant currency. In the Caribbean, we had a 3% positive performance in reais and a 1% reduction in constant currency. Finally, on the bottom right, we have the consolidated figures that show the flat performance in reais and a 1.3% reduction year-on-year in constant currency.

On Slide 7, we have the company's consolidated results, which were positively impacted by improved margins in Brazil. EBITDA totaled BRL 21 million in the quarter, improving 24% versus last year with a 90 basis point improvement in margins. In terms of cash generation, operating cash flow after maintenance CapEx was BRL 3 million compared to a cash consumption of BRL 6 million last year.

Moving on to the next slide. We have the consolidated results for the Brazilian operations. Operating income came in at BRL 11 million for the quarter, up nearly 91% versus last year, due to the improvement in all segments despite the pressure on the same-store sales in the shopping mall segment. In terms of cash generation, our operating income to operating cash conversion reached 86% in the quarter, up from 26% last year.

Moving now to the Roads segment on Slide 9. We can see the positive performance in restaurants, up 5%, that led to a consolidated 1.6% increase in same-store sales in the quarter, offsetting the negative performance in gas stations. Net revenue totaled BRL 124 million, up 3% year-over-year. Operating income came in at BRL 15 million, 11% up year-on-year as a consequence of lower labor, selling and operating expenses, which offset the increase in rent expenses and food costs, resulting in an 80 basis point improvement in margins. In terms of cash generation, our operating income to cash conversion reached 99% in the quarter.

On Slide 10, we can see the Brazilian Air operations posted an increase of almost 6% in same-store sales in the quarter. That, combined with lower sales tax, led to a 7% increase in net sales. Operating income came in at BRL 8 million, which represented a 95% improvement year-on-year with a 500 basis point increase in margin. In terms of cash generation, our operating income to operating cash conversion reached 99% in the quarter, up from 86% last year.

On the next slide, we review the Mall operations, which were impacted by the negative 14% same-store sales, which were partially offset by the positive performance of the new Olive Garden restaurants and lower sales tax. Operating income totaled BRL 5 million, up 40% year-on-year with a 260 basis point improvement in margins. In terms of cash generation, our operating income to operating cash conversion reached 72% in the quarter.

Now on Slide 12, we talk about the U.S. operations, which we present in local currency. In the first quarter, revenue from the U.S. operations totaled $23 million, up 6% versus last year due to the good performance of the new stores offsetting the reduction in same-store sales of 3%. Operating results were also impacted by the new stores. Preopening expenses related to Landshark Daytona led to a negative $300,000 results in the quarter. Excluding preopening expenses, the results would have been in line with last year.

On Slide 13, we review the Caribbean operations. For a better comparison, we presented the figures in reais in constant currency. Same-store sales in the Caribbean were down 1%, mainly led by Colombia, and combined with a net reduction of 3 stores, resulted in a net revenue decrease of 5% year-on-year. Higher efficiency, especially in food cost, offset the lower revenue pressure, leading to a 40 basis point improvement in margins that reached 26.2% in the quarter. In terms of cash generation, our operating income to operating cash conversion reached 97% in the quarter.

On Slide 14, we review the company's cash flow. Our operating cash flow after maintenance CapEx totaled BRL 3 million in the quarter, up from a BRL 6 million consumption last year. The EBITDA to operating cash conversion reached 15%, benefiting this year from lower maintenance CapEx and lower taxes paid.

Continuing with the cash flow, on Slide 15, we can see that we consumed BRL 18 million in the quarter. The cash flow highlights include CapEx of BRL 19 million, debt payment of BRL 7 million and BRL 2 million in payments related to previous acquisitions.

This concludes my comments on the financial results. I will now turn it over back to Newton for his final remarks before we open up for the Q&A session.

[Newton Alves, executive]

Now on Slide 16, I'd like to share with you my last comments. Brazilian EBITDA margin in 2016, including holding expenses, was 2.3%. We nearly doubled that in 2017, reaching 4.2%. Now at the outset of 2018, we have reached 4.4% from 2.4% last year. But there's still a lot of room for improvement for us to reach our 10% target margin in Brazil.

This concludes my comments. And from now on, we open for Q&A session.

[Operator]

[Operator Instructions] Since there seem to be no further questions, I would like to turn the floor over to Mr. Newton Maia for his final remarks.

[Newton Alves, executive]

I would like to thank everyone for joining us today in this call, reinforce that we're very excited about the outlook for the company and also that our Investor Relations department is available for any follow-up questions. Thank you.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes IMC's conference call. You may now disconnect, and have a nice day.