Sphera Franchise Group (BVB: SFG), the biggest food service industry company listed on the Bucharest Stock Exchange, posted significantly higher financial results in the first half of this year compared with the same period of 2022. Valentin Budeș, CFO Sphera Franchise Group, explains the factors that led to these results and talks about the group’s perspectives in the second half of this year.

In the first half of 2023, Sphera reported a 14.8% increase in sales, to RON 695.6 million (EUR 141 mln), and a 146.5% increase in EBITDA, to RON 52.4 mln (EUR 10.6 mln). The group also posted a net profit of RON 19.4 mln (EUR 3.94 mln) versus net loss of RON 8.7 mln in H1 2022.

The group recorded growth with all of its brands – KFC, Pizza Hut and Taco Bell – and in all of the markets where it operates – Romania, Italy and Moldova.

“Our capacity to navigate challenging conditions and seize growth opportunities played a pivotal role in this remarkable evolution. We had meticulous cost control and strategies tailored for each unique market and brand within our portfolio. These included innovative marketing approaches, product enhancements, and pricing strategies correctly designed to resonate with consumers,” says Valentin Budeș, CFO Sphera Franchise Group.

While the sales growth was supported by the group’s continued expansion of its restaurant network, the increased profitability was due to constant focus on cost management against a background of rising prices.

For the second half of this year, the group’s estimates remain in line with the budget adopted by the shareholders, although the level of uncertainty has increased compared with the beginning of the year.

“We have factored in the high inflation, fluctuations in supplier prices, labour shortage, fiscal uncertainties, and geopolitical risks. It's good to know that we planned for this kind of challenges right from the start. This means we're resilient and can handle tough situations, which should help us keep growing,” explains the Sphera CFO.

Read the full interview below to learn more about:

• The factors that contributed to the H1 2023 results
• The measures taken by Sphera to manage costs
• The group’s new restaurant openings
• Expectations for the second half of this year
• Dividend distributions and share performance

Sphera Franchise Group reported sales growth in all markets and for all the brands in its portfolio in H1 2023. What factors contributed to this positive evolution?

Valentin Budeș: The outstanding sales growth we posted across markets and brands in H1 2023 are a combination of strategic decisions and adaptability. Our capacity to navigate challenging conditions and seize growth opportunities played a pivotal role in this remarkable evolution. We had meticulous cost control and strategies tailored for each unique market and brand within our portfolio. These included innovative marketing approaches, product enhancements, and pricing strategies correctly designed to resonate with consumers.

Also, our sales increased as we continued to expand. This year, we opened our 100th KFC restaurant in Romania, an absolute milestone for the local market. KFC is the largest local food chain and Sphera has thus consolidated its leading position in the food service industry. We will continue to develop, and we aim at opening especially Drive Thru restaurants, the format that covers all sales channels – dine-in, delivery, drive.

I would also like to draw attention to some great achievements. In Italy, we demonstrated our ability to generate positive EBITDA on a sustained basis for each of the past 12 months and even reached the breakeven point in H1 2023 in terms of net profit. In Moldova, since Q2 2020, in every single quarter, we achieved double digits EBITDA margin.

Our ability to consistently grow our sales, even in the face of increasing competition, demonstrates the validity of our robust business model, the strength of our brands and the great products and service we deliver to customers.

What are your expectations for the second half of this year? Could this be a record year for Sphera in terms of sales?

Valentin Budeș: Our estimations are in line with the budget we have presented in the first part of the year. We have factored in the high inflation, fluctuations in supplier prices, labour shortage, fiscal uncertainties, and geopolitical risks. It's good to know that we planned for this kind of challenges right from the start. This means we're resilient and can handle tough situations, which should help us keep growing.

However, the level of uncertainty has increased compared to the beginning of the year. One such example is the fiscal changes currently under discussion, some of which directly impact our sector. The overall state of the economy is another one. Locally, this is linked with the policies the Government is considering in order to address the budget deficit. For the external markets, it comes down to how the global economy will be able to navigate this complicated context and manage to have a soft landing.

The group’s profit growth was more significant than the sales increase in the first half. Does this mean that the costs stabilized after the fast rise recorded in 2022?

Valentin Budeș: I would not say they stabilized, more that the growth trend has tempered. We saw moderate increases in various cost categories, with food and material costs rising by 7.2% year on year, a rate lower than the inflation rate for food products.

But the increase in profits is due to our constant focus on cost management at all organizational levels. We actively seek opportunities to engage with our suppliers and secure favorable deals. As a result, we managed a notable reduction in restaurant expenses as a percentage of sales. This figure dropped by nearly 5 percentage points, reaching 91.3% in H1 2023, compared to 96% in H1 2022.

We have also taken additional measures to optimize costs while maintaining sales, such as gradually outsourcing our in-house delivery fleet to existing partners.

How were the first half results compared with the group’s estimates when drafting the budget for 2023? Considering the H1 results, do you expect to end the year above budget?

Valentin Budeș: In our 2023 budget plan, we had initially projected restaurant sales exceeding EUR 320 million, signifying a substantial 21% increase compared to the previous year. Additionally, we anticipated a significant 58% increase in normalized EBITDA, reaching EUR 32.5 million.

Looking at our historical performance, we typically experience a consistent upward trajectory in sales throughout the year, with the final quarter usually delivering the strongest results. Based on our positive first-half results, we are confident Sphera will meet its initial 2023 budget estimates.

When it comes to investments and new restaurant opening, how much of the investment program for this year was completed in the first half?

Valentin Budeș: We set out to open 10 new restaurants in 2023 - 8 KFC and 2 Taco Bell, in Romania – with an estimated investment of approximately EUR 6.8 million. We allocated EUR 3.8 million extra for renovating our existing restaurants and technology improvements like digital kiosks.

In the first semester, we opened 4 KFC restaurants, out of which 2 new integrated HoReCa – Retail stores developed in partnership with Rompetrol, one Drive Thru location in Giurgiu Shopping Park and another Drive Thru in Slatina. We continued with a new restaurant at the end of August, in Alba Iulia. So, we have 5 more openings, however, we depend on various factors outside our control, such as the pace of construction works for retail centers, permits and authorizations etc.

What are the main risks you see for the second half of this year? Do you expect any negative impact from the fiscal measures prepared by the Government?

Valentin Budeș: One of the major risks for our Group is indeed related to unforeseeable changes in tax legislation or enforcement practices in the markets in which we operate, as these could adversely affect operating costs and profitability. Such changes may increase the Group's tax burden, disrupt business planning, and reduce the predictability of future earnings.

This year, for the first time since the company’s listing, Sphera has proposed a second dividend payment. What determined you to come up with this proposal?

Valentin Budeș: When we propose dividend payments, we take into account several aspects such as sufficient cash flow, the need for investment and we analyse the economic situation with scenarios to make sure we have the necessary resources.

This year, we propose to pay RON 45 mln on October 10, 2023. This dividend proposal of RON 1.16 per share has just been approved by the General Shareholders Meeting. Overall, at 2023 full year level, we’ll record a historical payment of dividends of RON 65 mln. 

This year, the SFG shares have significantly outperformed the BET and BET-TR indices. What has contributed to this performance?

Valentin Budeș: Indeed, share price developments outperformed the BVB's BET benchmark index. Our share increased by 29% versus Dec 2022 while the BET index grew by 7%. SFG's shares have outperformed the indices due to a combination of strong financial performance, strategic initiatives, efficient cost management, and favorable market conditions. We have also been very active in our investor relations efforts, and we have aimed to increase the daily liquidity of our shares.

The fact that we reported solid financial results, demonstrated resilience and adaptability in the face of difficult economic and market conditions, but also our strategic expansion plans or that we proposed a second dividend payment this year could have attracted income-oriented investors and contributed to the company's share performance.

We are very proud that, as of August 31, SFG shares are included in the MSCI Frontier Markets Small Cap and MSCI Romania Small Cap indices, while FTSE has just announced that SFG our shares will continue to be included in FTSE Global Micro Cap.