Sphera Franchise Group S.A. (SFG) Earnings Call Transcript

Good afternoon, and welcome to Sphera Franchise Group's Earnings Call for the Third Quarter of 2025. My name is Zuzanna Kurek, and I'm Investor Relations Officer at Sphera Franchise Group, and I will moderate today's call. Today morning, we have published our Q3 2025 results, which you can find on our website in Investor Relations section as well as on BVB's website, Sphera Franchise Group Investor profile. Before we begin, I would like to mention that this call is being recorded and that the recording of the call will be uploaded on our website tomorrow, the latest. As stated in the call invite by joining the video conference, you automatically and implicitly consented to being recorded. If you do not consent to being recorded, please leave the call. In terms of organizational aspects, we will follow our standard setup, which means the management will deliver a presentation outlining the Q3 2025 results, and later, we'll have a Q&A session. [Operator Instructions]. Last but not least, as always, I would like to mention that we might be making forward-looking statements today during this call regarding the future performance of Sphera Franchise Group and that the actual results may differ materially. We encourage you to review the disclaimer that we have included in the presentation, which you can see right now on the screen. This disclaimer applies equally to all the statements made in today's call. We can now kick off the call. I would like to introduce the management that is here with me today and will present our financial results. I am joined today by Calin Ionescu, Chief Executive Officer; and Valentin Budes, Chief Financial Officer. I will pass now the floor to our CEO, Mr. Calin Ionescu, who will share with you some insights about our performance in the first 9 months of 2025. Calin?

Good afternoon, and welcome. In 2025, Sphera Franchise Group operated in a macroeconomic environment characterized by economic stagnation, persistently high inflation and a series of tax changes that directly impacted household purchasing power. The removal of the energy price cap and the increase in the indirect taxes further intensified pressure on family budgets, reducing discretionary spending, the component of private consumption most critical to the restaurant industry. In the third quarter, inflationary pressure escalated sharply with annual inflation rising from 5.66% in June to 9.8% in October, driven by the termination of the electricity price cap on July 1 and the increase in VAT and excise duties on August 1. In this context, Sphera Group operation in Romania reflected the same trend of consumer caution, evident in a slower pace of visit and purchases, particularly for brands with a more mature customer base or those reliant on shopping center traffic. These dynamics are not unique to our brands, but aligned with the broader food service sector, which has impacted by declining real income and fiscal uncertainty. Although sales remained stable, the group continued to face pressure from rising operating costs, especially labor expenses, which eroded margins during the first quarters of the year. The renewed increase in food and materials prices, combined with sustained growth in wage cost further constrained the group's ability to manage expenses effectively in the context of flat consumption. Even so, the third quarter saw a significant improvement in profitability compared to the beginning of the year, driven by rigorous efficiency measures and strict cost control aimed at protecting margins in a challenging macroeconomic context. The group's diversified portfolio serve as key stabilizing factor. Overall, 2025 has so far been a year of resilience for KFC in a stable macroeconomic environment with the brand maintaining its leadership position through a diversified sales channel strategy and moderate network expansion. KFC remained the group's primary revenue contributor, although its performance was impacted by Romania's challenging economic condition, the market that generates the majority of sales. In Romania, KFC experienced the strongest signs of consumer portion as it is a high-volume brand with constant traffic heavily dependent on overall market dynamics. While brand visibility and awareness remain intact, demand stabilized and rising costs, particularly wages and raw materials continue to pressure profitability. In Italy, KFC delivered positive results, supported by a market less affected by fiscal constraints and by the gradual expansion of the network. This market added balance to the portfolio and highlighted the brand's potential in the regions with different consumption patterns. In the Republic of Moldova, the brand sustained solid growth, benefiting from an expanding market and the rapid adoption of the international QSR concept. Taco Bell positioned for reopen to urban consumers continued to outperform, supported by the stable preference of key segments that maintain discretionary spending. The brand remains the group primary growth driver. Pizza Hut by contrast, faced sharper pressure on discretionary spending compounded by intensifying market competition and the evolving consumer preference. The macroeconomic environment remains volatile and inflationary and fiscal pressure continue to influence consumer behavior. However, our diversified brand structure, along with the expansion of the portfolio with 2 new international concepts give us a strong foundation to steer through this challenging period. Sphera has added new brands to its portfolio, Cioccolatitaliani at the end of 2024 and more recently, Hard Rock Cafe, a globally renowned name has reinforced the group's growth and diversification strategy by adding a strong experiential and distinctly differentiated brand to its portfolio. The group plans to open 5 Hard Rock Cafe restaurants in Brasov, Timisoara, Iasi, Cluj and Chisinau over the next 5 years starting in 2026. This strategic move reinforces our position in the food service market by expanding our portfolio within the globally recognized entertainment brand segment. Looking ahead to 2026, we aim to build on the project initiated in this year and leverage the expansion of recently added brands, unlocking new opportunities in the premium experiential segment. Despite an equally challenging economic environment, we remain committed to investing in sustainable growth and diversification, strengthening our market position while continuously adapting to industry dynamics and evolving consumer behavior. I'll conclude on a positive note. Sphera Franchise Group is 1 of the 6 Romanian company featured in the Financial Times and Statista list of European's long-term growth champions. The prestigious ranking highlights European business that have achieved the most significant revenue growth over the past decade, and Sphera Group is the only player from Romania's food service industry to earn a spot. Thank you, and I will invite Valentin to continue the presentation.

Thank you, Calin. Good afternoon, and thank you for being with us today. As Calin said, we navigated a difficult year that made us think about the pandemic period. However, having the experience and learning to be resilient, we managed to recover in this quarter in which we saw an improvement in both sales and profitability if we are comparing it to the quarters 1 and 2. I will review the main results, cost dynamics, performance across brand and markets, third quarter performance and the outlook for the remaining part of the year. In the first 9 months, the group recorded sales of RON 1.2 billion, up 0.7% versus the 9 months of the previous year, which essentially reflects the overall stability of our activity. This moderate growth reflects the continuing external pressure in the group main markets, Romania, where the fiscal measures introduced to reduce the budget deficit have pressured the discretionary spendings. The trend first visible at the end of the last year and which persisted in Q1 and Q2, it's expected to continue in the last quarter of the year. It's important to highlight that from quarter-to-quarter this year, sales increased, reaching RON 406 million in quarter 3, thus marking the best third quarter in the history of our company if we are looking to the sales performance. In the first 9 months, Romania remains the group main market with sales of RON 985 million, slightly down in volume compared to the previous year, i.e., 0.2% with minus. And as a share in total sales, i.e., almost 86%. This is followed by Italy with RON 145 million, plus 3.7% compared to the same period of last year and with a share of 12.6% in total sales. And of course, Republic of Moldova with sales of RON 21 million, plus 25% almost versus previous year and 1.8% in the share of our portfolio. Analyzing the performance at the brand level, KFC sales amounted to RON 995 million, which is 86.4% of the total sales, 0.2% slightly below 0 compared to the previous year. Then Pizza Hut with RON 78.7 million, 6.8% of total sales and minus 1.7% compared to the previous year; and Taco Bell with RON 77.3 million, i.e., 6.7% of total sales, plus 16.4% compared with the previous year. In quarter 3, the first Cioccolatitaliani restaurant was opened in Italy. This unit was generating sales of RON 495,000, representing a very small share yet in our portfolio. The restaurant expenses amounted to RON 1.1 billion if we are looking to the first 9 months of this year with 4.9% exceeding the growth rate of the restaurant sales. The operating cost outpaced the sales, mainly due to the inflationary pressure. Both restaurant operating profit and normalized EBITDA are below the levels in the first 9 months of the last year. But it's very important to note the fact that in the first 9 months of the previous year, we were having a record performance for our business. We have delivered a substantial normalized EBITDA of RON 96.2 million in this first 9 months of this year. The Q3 per se showed a significant improvement with EBITDA rising 65.5% compared to the previous quarter and the net profit improving to a level 5x higher than in the previous quarter of this year. In Q3 2025, Sphera Franchise Group achieved a total sales of RON 406 million, up 0.6% year-on-year. This magnitude was tempered by the fiscal pressure in our main market in Romania, which reduced the discretionary spending visibly. Restaurant expenses increased by 3%, this outpacing sales. Compared with the similar period of last year, food and material costs increased by 1.9% year-on-year to RON 127.9 million, driven mainly by higher poultry prices. The largest contributor to expenses growth remains the payroll and the employee benefits, which increased by 8.8%, mirroring the adjustments observed across the industry. Persistent inflation across payroll and other operating categories, coupled with reinstated upward pressure on food and material costs continue to limit our group capacity to contain operating expenses against sales, reflected in lower EBITDA by 12.9% if we are comparing the performance year-over-year. However, compared to the previous quarter of this year, the EBITDA shows a strong recovery, the 65.5% I mentioned, and the net profit at RON 25.4 million, down 17.3% year-on-year, but 5x higher than the Q2 of this year. As mentioned in the beginning, in the first 9 months of 2025, our group sales increased by 0.7%, reaching the RON 1.2 billion, slight evolution influenced by consumer prudence in the context of the political and economical uncertainties, but also due to the exceptionally strong comparative base from the first 9 months of the previous year. The period was marked by broad-based inflationary pressures. Most cost categories grew faster than sales with the exception of the advertising, which is in our control and royalties. The 10.2% year-on-year increase in payroll and employee benefits mirrors the strong labor market competition that we are facing here in Romania. The food and material costs grew at a moderate 1.9%, as I mentioned, driven mainly by the higher poultry prices. The rising operating expenses, the stagnant sales in Romania and the drop in EBITDA by 25% on the back of very strong last year base effect led to restaurant operating profit in the first 9 months of 2025 to RON 102.1 million registering a decrease of 28% if we compare this amount with the same period of 2024 and to a reduction of 2.5 percentage points in normalized net profit margin again versus last year. KFC continues to be the engine of our portfolio and the brand with the largest operational footprint in Romania, which is our main market, the first 2 quarters were characterized by strong macroeconomic pressure with high inflation, with tax increases and the reduction in the discretionary spending. This context tempered KFC growth pace, high volume and high-traffic brand, as Calin mentioned, which is sensitive to all the changes that we can see in the consumption. However, in Q3, we observed an improvement driven in part by seasonal factors and as well because of the commercial measures implemented throughout the beginning of this year. Italy had a more stable business environment if we are comparing with Romania and it maintains its steady pace of around 2.3 percentage points increase. However, the sales evolution were affected by the closure of the KFC Bari unit that happened in Q3, and I will mention later as well. In the Republic of Moldova, the KFC maintained a strong growth trajectory. Although the market is relatively small, it demonstrates rapid adoption of the main international concepts there, which has supported a steadily and positive evolution for our brand as well. Overall, KFC remains a highly resilient brand. The regional performance in 2025 reflects both the unique characteristics that we are seeing in each market and the importance of our diversified geographic presence. In Q3, together with the improvement seen in the Romania and the growth in Moldova show the brand is on a good trend in the remaining -- for the remaining part of the year. Pizza Hut had a performance that most closely reflects the market changes and the consumer pressure in 2025. Following 2024, a year in which recovery measures began to take effect, Pizza Hut entered a more cautious consumer environment in 2025, which was strongly affected by inflation, by tax increases and by all these changing consumer habits. In the dine-in segment, the traffic was influenced by the decrease in discretionary spending. And in the delivery area, competition remained intense, which adds pressure on the overall brand performance. Taco Bell continues to be one of the most dynamic and resilient brand in our portfolio. It has shown consistent growth from quarter-to-quarter. The brand maintained its growth rates, thanks to a young urban audience, less sensitive to price changes and its differentiating positioning in the market. The expansion of the network, the presence in high-traffic locations and the intelligent adoption of the offer to the preference of the young generation supported the brand performance in all of these quarters of 2025. While other segments felt the macro pressure more strongly, Taco demonstrate consistency and provided balance to the entire portfolio. This evolution demonstrates the brand potential while reaffirming diversification as a key pillar for our group strategy. Taco remain a stable growth engine and an important support point for the future performance of our group. Now analyzing the evolution of the deliveries. We observed that the first part of the year, all brands registered a slight increase, initially fueled by optimist following the government announcement regarding the fiscal packages and the expectation of the potential economic stabilization. However, then this positive trend proved short-lived. Once the fiscal measure come into effect, such as increasing the VAT, the excise duties and all the other taxes that impacted the household real income became significant. Instead of supporting consumption, these measures contracted it for a short period of time at least, causing much greater prudence in spending, especially in delivery orders, which are perceived in general as more expensive. Thus, all brands entered a downturn trend in the second part of the year as the real effect of the fiscal and the inflationary pressure were felt by more strongly by the consumers and reflecting their behavior. In Q1, Sphera opened a new restaurant, the KFC drive-thru in Galati. As we remember, in Q2, we opened 3 new restaurants, 2 KFC in Romania, both of them food court location, one in Mall Moldova in Iasi and one in Pitesti. Also in Q2, we opened the first Cioccolatitaliani, as I mentioned, in Riccione, which is a tourist area. And in Q3, we had a new opening in Italy for KFC, i.e., a drive-thru in -- no, sorry, it's the closing -- I was mentioning the closing of KFC Italy in Bari that I mentioned earlier. In Q4, we had an opening in Udine, but we are not discussing Q4 now. As of September, Sphera franchise was operating 176 restaurants, out of which 110 were KFC in Romania, 3 in Moldova and 17 in Italy as well as 28 Pizza Hut restaurants in Romania and 16 Taco Bell restaurants as well in Romania plus the choco that we have opened in Italy. So far in Q4, we have opened a new Taco Bell location in Promenada Mall. And the one I was mentioning the drive-thru KFC in Italy in Udine. On October 15, we have announced the expansion of our portfolio by the addition of the Hard Rock Cafe, as Calin mentioned, which will be operated by one newly created entity fully owned by us. We are planning the 5 openings that were mentioned by Calin as well in Brasov, Timisoara, Iasi, Cluj and Chisinau, all this in a period of 5 years from now. The performance of Sphera shares over the first 9 months of this year, of course, mirrors the operational context we're navigating during this period. And naturally, these developments influence the sentiment and were reflected accordingly in the share price. But despite all this context, we remain -- the interest -- the investor interest in Sphera shares remain strong. We have increased liquidity and we have a stable shareholding. We have a consistent dividend policy with the payment of gross dividend of RON 1.09 per share in June and another extra one of RON 1.04 per share, which is scheduled to be paid in 15th of December. So in conclusion, although 2025 has been challenging so far, our group has responded with adaptability, with discipline and well-calibrated investments, which is laying a solid foundation for the improved performance in the period ahead. Thank you very much.

Thank you, Valentin. This concludes the presentation of our results for the first 9 months of 2025. We will now start the Q&A session.

[Operator Instructions] The first question is, how do you expect wage and raw material cost pressures to evolve in Q4 and throughout 2026? Is there room for price adjustments or further operational efficiency measures to help stabilize EBITDA margins? I will invite Valentin to address this question.

So in the end of this year and in the beginning of next one, we can see a constant pressure in both the labor market and the cost of goods. It's something that will continue to be present, even though the pressure is not as intense as it was until now. We are prepared to offset this. We remain laser focused on cost control measures and all this efficiency will be able to offset the pressure that we still see in the cost of goods. We also work smartly in the menu engineering. So all our offers remain with a clear focus on protecting margin in the new context. But also, we are looking to a very strong value for money proposition. So yes, it will be a tough end of the year and probably beginning of the next one. But we remain optimistic and we remain committed to the latest guidance that we have made public. In respect of price adjustments, we had a recent price adjustment in August, so in the mid of Q3. Based on the current context and on the pressure of the -- on our consumers, we do not plan any price adjustments until the end of this year at least. So we believe that it's a very sensitive -- not to believe we are sure that it's a very sensitive aspect to the price adjustment, even though probably there is still some pricing power, but should be exercised very strategically when it is the most appropriate moment.

Thank you, Valentin. The next question, could you provide more color on the planned investments, rollout time line and the expected financial impact of the Hard Rock Cafe franchise on the group's cost structure and profitability over 2026 and 2027. I will pass this question to Calin.

It's a very easy answer. We plan to open each year one Hard Rock Cafe starting with next year when it's plan to open end of Q3, beginning of Q4, first one probably will not affect our performance -- financial performance next year. The first one will start to contribute to our performance starting with 2027.

Thank you, Calin. The next question, we're seeing diverging trends between KFC and Taco Bell with KFC showing stagnation and Taco Bell continuing to grow strongly. How would you explain the difference in consumer behavior between these brands? And do you expect this performance gap to persist going forward? And we'll link it with the next question that is also about KFC. Can you detail plans of reviving KFC brand appeal in Romania?

So I will start. First of all, I will start mentioning that the KFC appeal is not penalized at all. Neither -- in none of the countries that we are operating. So it's still a very strong brand and very appealing for the customers. The difference it's coming rather from the magnitude of the footprint of these 2 brands. So on one hand, as I mentioned in the previous call, we have a very small footprint for Taco Bell and very spread footprint for KFC. We speak a number of below 20 restaurants strong and more than 100 for the other. This is very important because if we are looking micro in the statistic of the performance of both brands, we can see that the pressure is coming from the rural from the smaller cities. So this is one aspect. Then the other aspect is the competition. Chicken has a very strong competition everywhere. Taco Bell, it's a niche. So it plays in a market with a different offer proposition for this type of food. And then, of course, the segment, which is more pregnant, the young segment in the Taco Bell versus in KFC, which is more popular for more categories of customers, which again creates a difference -- a temporary difference because if we are looking to a broader picture and we have a cutoff period in the future, then they will eventually normalize. But we -- in this moment, we take benefit of this power that we have, and we are happy to counterbalance the effect between the brands that we have in our portfolio.

I want to only to explain better regarding of Taco Bell, it's about penetration ratio. It's how many restaurants per 100,000 inhabitants. If you compare with KFC 110 locations in Romania comparing with 17 Taco Bell location, it's a totally different results. And it's normal for brands that start to develop a network to perform better. For a brand that is a mature brand, it's normal to be more affected by -- when it's a crisis.