Brazil Fast Food Corp, one of the largest food service groups in Brazil with 1,235 points of sale, operating under (i) the Bob's brand, (ii) the Yoggi brand, (iii) KFC and Pizza Hut São Paulo as franchisee of Yum! Brands, and (iv) Doggis as master franchisee of Gastronomia & Negocios S.A. (former Grupo de Empresas Doggis S.A.), today announced financial results for the second quarter ended June 30, 2014.
Q2 2014 Highlights
System-wide sales totaled R$ 338.6 million, up 18.4% from Q2 2013
Revenue totaled R$ 71.9 million, up 26% from Q2 2013
Points of sale totaled 1,235 at June 30, 2014 (including 523 kiosks and 21 temporary points of sale), up from 1,057 at June 30, 2013
EBITDA was R$ 11.5 million, up 49% from R$ 7.7 million in Q2 2013
Operating income was R$ 9.5 million, up 51% from R $6.3 million in Q2 2013
Net income was R$ 7.0 million, or R$ 0.86 per basic and diluted share
Note that all numbers are in Brazilian currency. (R$2.2156/US$ as of 06/28/2013 and R$2.2025/US$ as of 06/30/2014)
"We are pleased with our performance in the second quarter of 2014, in which we grew revenues by 26% and our operating income by 51% despite what continues to be a challenging economic environment in Brazil. These results reflect the continued expansion of the Bob's restaurant concept, primarily through franchised operations, which produce excellent profitability. The anticipation of school vacations to June due to the FIFA World Cup, accelerated an increase in sales that would normally occur in July, thus producing a temporary positive effect in our results in Q2 2014.
"Nevertheless, sales at our restaurants were negatively impacted by demonstrations and strikes that affected the transportation system in May and by the World Cup, which reduced traffic in restaurants and increased traffic in bars during the second half of the month of June and in July. The number of transactions in comparable stores in the BFFC system decreased 4.67% in May and 2.05% in June, counterbalanced by sales of higher value added sandwiches," said Mr. Ricardo Bomeny, CEO of Brazil Fast Food.
"Looking in more detail at our brands, we are delighted with the performance of our franchised stores, where net franchise revenues grew 31.7% in the quarter. The number of franchise outlets grew very rapidly to 1,134, from 982 on June 30, 2013, reflecting the popularity of our products and strong franchisee interest. That said, we are making additional efforts to ensure that the food, service, and ambiance are at a high level of excellence and consistency across the network.
"Our owned-and-operated Bob's stores grew revenues by 30% over Q2 2013, and a better user experience improved profitability. This reflects an increase in points of sale to 49 at June 30, 2014, from 39 a year prior, and a 5.4% increase in same store sales in the second quarter. We anticipate that over the next two years we will significant increase our capital expenditures, due to the need to make a very sizable investment in our owned-and-operated stores to revamp their image and to convince our franchisees to do the same. Bob's recently presented its new visual identity, with a different store design and ambiance, communications, equipment and ingredients, to its franchisees at the annual national convention. We believe that these investments in our store network and franchisee incentives are critical to maintain the long term growth and popularity of the Bob's brand.
"We continued the expansion of our Pizza Hut stores, where net revenues grew by 40% over Q2 2013, with operating income similar to last year. We added 12 new stores, but we have experienced delays with the opening in several high-profile locations and a longer than expected maturation of new stores that negatively impacted results. Our KFC stores continued to struggle in the local market with an 18.6% decline in revenues, as we shifted the menu towards higher priced items, but produced a very small operating profit. We continue in active discussions with Yum! Brands as to how to reverse the continued negative results for these stores, including the possibility to close and/or sell some stores. Our Yoggi's brand made a small but growing contribution to profitability, with recently opened stores performing well and the potential for future expansion," Mr. Bomeny said.
Second quarter 2014 Results
System-wide sales grew 18.4% in the second quarter to R$ 338.6 million, driven by an increase in the number of franchised points of sale.
Total revenue for the second quarter of 2014 was R$ 71.9 million, an increase of 26% as compared to R$ 57 million in the second quarter of 2013, due to higher revenues from franchisees and own-operated restaurants.
Net restaurant sales for company-owned restaurants increased 24.8% year-over-year to R$ 57.5 million in the second quarter of 2014, driven by the expansion and higher sales of Bob's and Pizza Hut.
Net revenue from franchisees increased 31.7% year-over-year to R$ 14.3 million, driven primarily by an increase in number of franchised retail outlets to 1,134, as compared to 982 a year ago.
Operating expenses increased 23% to R$ 62.3 million in the second quarter of 2014, compared to R$ 50.7 million in the second quarter of 2013. As a percentage of revenue, operating costs were 86.8% of total revenue in the second quarter of 2014 as compared to 89% of total revenue in the second quarter of 2013.
Operating income for the second quarter of 2014 was R$ 9.5 million, an increase of 51.3% from R$ 6.3 million in the second quarter of 2013. Operating margin in the second quarter of 2014 increased to 13.2%, as compared to 11% in the second quarter of 2013.
EBITDA in the second quarter of 2014 was R$ 11.5 million, up by 49% as compared to R$ 7.7 million in the second quarter of 2013. This growth rate is a result of a favorable comparison between 2013 and 2014, as our 2Q 2013 EBITDA was negatively impacted by certain non-recurring items that took place in the second quarter of 2013. EBITDA margin was 16%, as compared to 13.5% in the second quarter of 2013. Please refer to Table No. 4 in this press release for a reconciliation of EBITDA to its nearest GAAP equivalent.
Interest expense was R$ 0.9 million in the second quarter of 2014, as compared to interest expense of R$ 0.2 million in the second quarter of 2013, reflecting both increased debt obligations for expansion and higher interest rates.
Net income in the second quarter of 2014 was R$ 7.0 million, or R$ 0.86 per basic and diluted share, as compared to R$ 4.4 million, or R$ 0.54 per basic and diluted share in the second quarter of 2013.
Six Months Results
During the first six months of 2014, total revenues grew by 20.1% to R$138.4 million, from R$115.3 million in the prior year period. EBITDA for the first six months was R$20.1, up by 5.6% from EBITDA of R$19.1 million in the first half of 2013. Operating income for the first six months was R$16.1 million, down 2.4% from $16.5 million in the first half of 2013. Net income for the first six months of 2014 was $11.6 million, or $1.42 per share, up from $11.2 million, or $1.37 per share in the first half of 2013.
Financial Condition
As of June 30, 2014 the Company had R$ 50.3 million in cash and equivalents, compared to from R$ 50.1 million as of December 31, 2013. Working capital was R$ 41.6 million at June 30, 2014, compared with R$ 41.9 million as of December 31, 2013. Debt obligations with financial institutions were R$31.6 million as of June 30, 2014, compared with R$23.6 million as of December 31, 2013, which reflected recent investments in opening and remodeling our owned-and-operated stores. Total shareholders' equity was R$ 95.6 million at June 30, 2014, compared to R$ 85.5 million at December 31, 2013.
Recent Events and Legal Issues
In the first half of 2014, the company's subsidiary received a notice from the Brazilian tax authorities that it was to be fined an additional R$33 million for the years 2009 to 2011 as a result of tax credits resulting from the 2006 restructuring of Venbo Comercio de Alimentos Ltda ("Venbo.") The tax authorities assert that the restructuring constituted abusive tax planning, and had in 2013 assessed a fine of R$17 million for the years 2007 and 2008.
The company has filed an administrative appeal against each penalty, which believes will take two to three years to resolve. However, there can be no assurance that the company will prevail and that these tax assessments will not have a material impact on its business. Should the fines be upheld, the company plans to take the matter to court, with possibility of being required to post collateral and bear onerous legal costs.
Business Outlook
In 2014, the company expects to continue to incur in a higher level of capital expenditures due to the ongoing level of investment in facilities, advertising and promotion required in order to support the growth of its brands in Brazil and respond to growing competitive pressures in the marketplace by international competitors.
"Brazil's economy continues to be sluggish, with inflation running at about 6.5% and GDP now forecast to grow less than 0.5 % in 2014. Brazil economy is in a pre-recessionary stage, with very low growth and high inflation, leading to a continued drive by the central bank to increase interest rates during the second half of the year. This scenario is worsened by what is anticipated to be a tight presidential race in the October general elections. Rising prices above inflation for food, labor, and leases, high turnover and fierce competition will likely continue to pressure our margins, while the company plans to continue to invest in a high level of marketing and remodeling to support the expansion of our brands in a highly competitive fast food market." Mr. Bomeny said.
"In the near term, we remain very cautious about our outlook and expect significant capital investments. Longer term, we expect that the expansion of our franchised store base will generate strong profitability and operating leverage as additional points of sale come onto the network," Mr. Bomeny concluded
