Sphera Franchise Group (BVB: SFG), the biggest food service industry company listed on the Bucharest Stock Exchange, reported its highest sales ever in 2023 and an 80% increase in net profit despite challenging market conditions with tax increases, inflation, and reduced consumption in general. Valentin Budeș, CFO Sphera Franchise Group, explains the strategy behind the results.

“While inflation remained high throughout the year and put pressure on customers' budgets, we managed to carefully calibrate prices to balance their ability and willingness to spend to protect our profit margin,” says Valentin Budeș, CFO Sphera Franchise Group.

The group managed to bring more clients to its restaurants through a mix of value offers, menu innovations, and cleverly targeted promotion. It also invested in the digitization of services and optimized online sales channels and home delivery routes. The expansion of the restaurant network also helped boost its sales.

“4 out of 5 group companies generated positive net results. We demonstrated the effectiveness of our strategy to strengthen the KFC Romania and Moldova presence, while KFC Italy and Taco Bell turned a profit,” Valentin Budeș explains.

The group’s solid results were also reflected in the evolution of its share price on the Bucharest Stock Exchange, which significantly outperformed the BET Index with an 83.6% increase.

“The share performance reflects the company's profitability, and this good share price performance means more value in our shareholders' budgets and reinforces the confidence of our investors, customers, and partners in the company's ability to generate profits and achieve its goals,” says Sphera’s CFO.

Read the full interview below to learn more about:

• The factors that contributed to Sphera’s FY2023 results
• The contribution of each brand to the group’s performance
• The network expansion and Pizza Hut restructuring
• Share price performance and distribution of profits
• Expectations for 2024

Sphera Franchise Group reported record turnover in the fourth quarter and full year 2023. What factors contributed to the sales increase?

Valentin Budeș: Indeed, the company achieved record results in 2023, with activity in the last quarter making a major contribution. This is the result of an outstanding strategy that we have consistently pursued based on efficiency, effectiveness, rigorous cost control management and smart pricing. Adaptation has been the watchword in an ever-changing market with tax increases, inflation, and reduced consumption in general. And while inflation remained high throughout the year and put pressure on customers' budgets, we managed to carefully calibrate prices to balance their ability and willingness to spend to protect our profit margin.

The markets in which we operate are very dynamic and we are forced to reinvent ourselves every time and approach new marketing strategies to retain our customers and win new ones. Also, to keep a close eye on consumer habits and how we can adapt our products so that we remain competitive in the market. We have implemented a mix of value offers, brought innovations to the menu and through cleverly targeted promotion we have driven more visits to restaurants.

We have invested in the digitization of services and accelerated this process while optimizing online sales channels and home delivery routes. The Group decided to gradually outsource its delivery fleet to existing partners to optimize costs. In this way we maintained sales and stayed in close contact with customers Also, we were able to find solutions to continue our growth trend, become more efficient and improve our profitability.

Another contribution to last year's outstanding results that helped the Group's performance was the expansion of the restaurant network - we opened 8 new KFC restaurants in Romania. Also, the reorganization program of Pizza Hut network to optimize costs and improve profitability indicators. 4 out of 5 group companies generated positive net results. We demonstrated the effectiveness of our strategy to strengthen the KFC Romania and Moldova presence, while KFC Italy and Taco Bell turned a profit.

As a result, we managed to achieve record sales at the end of last year of over RON 1.47 billion and a normalized net profit up 80.3% versus the previous year, amounting to RON 79.8 million. Thus, we consolidated Sphera's leading position in the food service industry. We are proud of achieving these results and confident, at the same time, in our ability to generate value for our shareholders.

The group’s profitability also improved significantly in 2023 as revenue growth outpaced the increase in expenses. How did you manage to achieve this result?

Valentin Budeș: The result is the fruit of firm decisions and a consistent strategy, which we have meticulously followed through, revolving around efficiency, tight cost control management and smart pricing. Of course, rooted in our core strengths – sustained effort, discipline, and innovation - and the philosophy “sales overnight and brand over time” supported with a thoroughly tailored marketing strategy. Thus, we have managed to keep the expenses below the pace of sales despite rising costs for all raw materials, rents, and additional tax pressures.

Which brands and regions had the most substantial contribution to the group’s results in 2023 and which underperformed?

Valentin Budeș: As usual, KFC Romania was the biggest contributor to Sphera Group's outstanding financial results last year. It exceeded the RON 1 billion sales in 2023, an increase of 12.5% over 2022, on the course of an excellent fourth quarter of 2023. With an EBITDA profitability margin of 15.7%, our flagship brand ended the year with a net profit of RON 86.8 million (+26.5%).

Taco Bell also had an outstanding performance and finally reached break-even ending 2023 with a profit, because of 22% higher sales and triple-digit increases in restaurant operating profit (+148.6%) and EBITDA (+139.3%). Taco Bell, as well, had a final notable quarter of 2023, with an EBITDA margin of 11.7%.

KFC Italy also became profitable in 2023, with a net profit of RON 3 million, in a year with EBITDA growth of 436%, and a margin at a comfortable 9.4%.

KFC Moldova, with its two restaurants in Chisinau, again performed excellently, with a net profit of RON 2.8 million (+42.6% compared to last year). The units operated by Sphera in Moldova had double-digit growth in 2023, on all important indicators: sales (+18.4%, to RON 20.59 million), operating profit at restaurant level (+42.5%, to RON 3.78 million), EBITDA (+35.2%, to RON 3.66 million).

We continued our steady network expansion, and in Q4 we opened 3 new KFC restaurants: 2 drive-thru, one in Buzau and another in Slobozia, and a food court unit in Craiova. We are focusing on developing drive-through units, as they are the most comprehensive format in terms of sales channels, covering dine-in, takeaway, delivery, and drive lines.

Pizza Hut accelerated its efficiency process in the last quarter of 2023, when we closed 6 units, and in the beginning of this year with the closure of 5 more units, a process that is expected to have positive effects in the medium term.

The group’s financial performance in 2023 was also reflected in the stock price, as the SFG shares were among the top-performers on the Bucharest Stock Exchange in the last year. What does this evolution mean for the group?

Valentin Budeș: Sphera shares (stock symbol SFG) performed very well last year, outperforming the BET index. We are very proud of the 83.6% increase in share price, and I dare say investors are also pleased with these results given the awards we received based on votes from institutional investors: Best CEO, Best CFO, Best IRO Program and Best Investor Relations Program. The total return on SFG shares in 2023, including the dividends paid on March 31st, 2023, and October 10th, 2023, was 95.5%.

The share performance reflects the company's profitability, and this good share price performance means more value in our shareholders' budgets and reinforces the confidence of our investors, customers, and partners in the company's ability to generate profits and achieve its goals. A strong company with a good share price performance attracts new business partners, and new investors, and when it needs new capital, it can get it much more easily.

How do you plan to use the net profit obtained in 2023?

Valentin Budeș: In 2023, we distributed the largest amount since listing in dividends – RON 65 million. We remained constant in our policy, with divided distributions each year, even through the rough times of the pandemic.

We will remain consistent in our growth philosophy with a focus on profit margins and we’ll respect our commitment to maximizing the shareholders’ return through the most appropriate tools at hand. We carefully evaluate each opportunity and, depending on the return on capital, we always choose to recommend the most suitable options for approval.

Do you expect any significant change in market conditions this year (positive or negative)? What are the group’s financial goals for 2024?

Valentin Budeș: I am optimistic - a year to return to ‘normal’, and circumspect at the same time, for the end of the year, when I hope for stability and predictability in the economic and fiscal environment.

We started the year under the impact of tax increases and the economy will continue to be influenced by tax policies and the level of revenue collected to the state budget. The NBR recently announced a 4.7% inflation forecast target for the end of this year, down from 7.4% in January, which may be encouraging. We take into account that the market will continue to be influenced by the current geopolitical context, and also by the electoral elections which could put pressure on the state budget, which could translate into further tax adjustments. We will continue to monitor consumer behavior so that we can make wise decisions and adapt our sales policies.

We have been present in the Romanian market for 30 years and are confident that our strong business and experience are important factors to rely on to increase the profitability of the business. We will continue to invest in technology and digitalization to improve the customer experience, as well as streamline our internal operations.