Good afternoon and welcome to Sphera Franchise Group's results call for the first quarter of 2025. My name is Zuzanna Kurek, and I'm Investor Relations Officer at Sphera Franchise Group, and I will be moderating today's call. Today morning, we have published our Q1 2025 results, which you can find on our website in the Investor Relations section, as well as on the BVB website, Sphera Franchise Group Investor Profile. Before we begin, I would like to mention that this call is being recorded, and the recording of the call will be made available 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 call setup, which means the management will deliver a presentation outlining the Q1 2025 results, and later we'll have a Q&A session. Please note that all the participants should be on mute. If you would like to ask a question, please type it in the chat box. Feel free to do it during the call, and we'll answer all the questions in chronological order as soon as the presentation of the management is over. 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 actual results may differ materially. We encourage you to review the disclaimer that we have included in the presentation, which is available right now on your screen.
This disclaimer applies equally to all the statements made in today's call. Let's kick off this call. I would like to introduce the management team that is here with me today and will present our results. I am joined today by Călin Ionescu, Chief Executive Officer, and Valentin Budeș, Chief Financial Officer. I will now pass the floor to our CEO, Mr. Călin Ionescu, who will share with you insights about our performance in the first quarter of 2025. Călin.
Thank you. Good afternoon, everyone, and thank you for attending this call. As many of you remember, we closed 2024 with record high sales and strengthened balance sheet. Three months later, the picture looks less vibrant. Purchasing power in Romania has softened, and mandatory wage adjustment pressured our cost base, which led to an almost flat evolution of our sales on a contraction in profits. It will be easy to focus on the figures, yet the real story is more nuanced. Various factors affected our market and brands differently. I think geopolitical tension and the uncertainty surrounding the presidential election cycle have made consumers even more cautious with discretionary spending. This prudence is not new to us, and we have been talking for some time now, but the unprecedented outcome of the first round of elections in autumn last year added to the Romanian's worries.
Unseasonably harsh weather, which discouraged dining out, only compounded the slowdown, where staff shortage delivery platforms curtailed order volume further. This combination of negative events, which we experienced in the first quarter, affected mainly our star brand, KFC Romania. Other factors impacted their top and bottom line. The brand is facing increasing competition as more and more players enter the kitchen segment. Faced with demand that fell short of our initial estimate, we adjusted our pricing strategy to stay aligned with the customers' purchasing power. On the other hand, Taco Bell recorded another successful quarter, and remains proof that diversification is key. The brand's core target is young customers less sensitive to a VUCA environment. We have also noticed that it is the clients in small cities who react most to any signal towards a future contraction in their incomes and become more prudent.
Taco Bell, which is only present in the big cities, was not affected. However, there is a real risk that the discretionary behavior will spread if uncertainty persists. We must also recognize that Romania now stands at a crossroads between East and West, and this is only one of the several open questions. The economic outlook for the rest of the year is murky. The predictability we have so much hoped for is seriously jeopardized by the Prime Minister's resignation and subsequent government changes. It is clear that adjustments are needed to cover the deficit. However, there are more and more discussions about reforms that will aggressively cut public spending. This gives us some confidence, along with the fact that any changes will have a certain period before implementation. We are too operating under the assumption of business as usual.
However, we are well aware that the fiscal framework is uncertain. If any major changes occur, we will analyze and, if needed, revert with new guidance for this year. Whatever the scenario, we'll carry on with our plans, having a long-term view. An example is the new KFC drive-thru in Galați, which we opened in the first quarter. We are very proud that it's smart and an innovation for our network. It is our first restaurant equipped with solar panels. We estimate that about half of the restaurant electricity will be self-generated. We are too not only sustainable but also efficient. We continue to monitor costs closely and digitize operations to boost efficiency, negotiate, and find better solutions for our suppliers, engineer our menu, and adapt the pricing strategy to best fit consumers' needs.
We are looking for opportunities to diversify our portfolio and ensure new business streams that help consolidate our foundation. With this in mind, I give the floor to Valentin for a deep look into the figures.
Thank you very much, Călin. Good afternoon, everyone, and thank you for joining us today. As Călin mentioned, the first quarter of this year has been less performant than the one of 2024. My goal today is to put the quarter in context, show where the business continues to move forward, and explain how the 2025 budget keeps us on course for sustainable growth in the future. We have started 2025 restaurant sales of RON 362.6 million, which is 0.9% lower than the first quarter of the previous year. The impact fell differently across our three markets, highlighting the diverse context from one country to the other. Romania slipped 1.9% to RON 311 million due to the combination of external pressures that Călin mentioned earlier and the strong base effect as the first quarter of 2024 marked a particularly strong start of the year, which also impacted this quarter's performance.
On the other hand, Italy continued to grow. The single-digit rate is in line with the previous performance, typically for a mature market like Italy. In Moldova, we are reaping the fruits of the new restaurant opening in Chișinău last year, which allowed us to further unlock the potential of this market. The next slide here shows why the margin tightened. The expense continued to rise in the first quarter to RON 352.1 million, up by 4%. With the top line essentially flat and on the back of a very good performance in Q1 2024, restaurant operating profit and EBITDA contracted roughly a third. Let's dive deeper into what stands behind the bottom line. As mentioned, restaurant sales are essentially flat after two years of very solid growth. However, restaurant expenses increased by 4.3 percentage points year-on-year, driven by payroll, which is the pressure point for us.
Payroll and employee benefits jumped 12.4% to RON 92.7 million, reflecting the industry-wide wage adjustment and higher number of employees as a result of the new store openings. Payroll alone accounted for more than 2/3 of the total year-on-year increase in the restaurant expenses. Aware of the fact that in a low-growth quarter, every basis point of cost discipline matters, we have managed to reduce expenses in several categories. As such, food and material costs decreased by 0.7% to RON 115.4 million, so they held steadily at 31.8% of sales. We accomplished this through strong partnership with suppliers, smart hedging, and menu engineering. We have adjusted our advertising budget by 8.7%, down to RON 16.1 million. We also maintained G&A discipline, with costs rising just 1.8% and only 10 basis points higher as a percentage of sales compared with Q1 of 2024.
We also managed to keep G&A almost flat at 4.4% in sales, despite inflation and pressure on wages due to the tight labor market. However, the category Other Operating Expenses grew 11%, leading us to RON 52.8 million, driven by increases in third-party expenses such as food aggregator and on-delivery commissions, service fees, followed by the increase in utilities driven mainly by higher energy costs. Also, versus last year's similar period, new stores opened during the last 12 months, generating an increase in this line as well. As a result, the share of the operating expenses in sales has increased by 1.6 percentage points to 14.6%. On the back of flat sales evolution, the rise in the two categories, payroll and other expenses, led to a restaurant profit 36% lower year-on-year. EBITDA margin decreased by 4 percentage points.
The higher restaurant operating costs and the inelasticity of the G&A expenses resulted in a net profit of RON 7.81 million in Q1 2025, compared with RON 21.45 million in the first three months of 2024. Now, please allow me to go into details for each brand's financials. KFC Romania generated RON 259.8 million in Q1 sales, which is down 3.4 percentage points compared with Q1 2024, and is due to several factors, many of which Călin already touched on. The uncertainty caused by the upcoming presidential elections, along with the growing geopolitical tensions, made consumers more cautious with their spendings. On top of that, unexpected bad weather kept people at home, while delivery sales were impacted by staff shortages at food delivery platforms. Moreover, the lower-than-estimated demand determined us to adapt our pricing policy as well.
All the while, competition has intensified, with new brands entering the chicken category especially. However, we expect demand to pick up as local uncertainty lowers and the shift in our marketing strategy delivers to its most. This, coupled with new restaurant openings, should bring KFC Romania back on course. On foreign markets, we see the continuation of the growth stories. KFC Moldova maintains its robust double-digit sales growth rate. The restaurant we opened last year in Chișinău, number three, allowed us to capitalize on the potential in Moldova and grow here by 23%. At the same time, KFC Italy's sales increased by 3.3%, a moderate phase, typically for such a mature market like Italy. If we are moving to Pizza Hut, we can see here a continuation of the turnaround.
Sales dipped a modest 1% to RON 27.2 million as the network streamlined that started late in 2023, and it's bearing fruit. Restaurant operating profits shifted to a positive RON 0.5 million from a loss that we have recorded last year. Taco Bell also managed to offset the effects of an unfavorable start of the year, including thanks to the opening of a new restaurant in the second half of 2024. Thus, sales increased by 15.6% while profits doubled. The brand proves we can win incremental speed, even in cautious times, by diversifying our portfolio. Taco Bell appeals especially towards the young generation, which is less prudent in their spendings. Finally, our own channels, delivery revenue grew 5.5% YoY, i.e., RON 73.5 million, and now represents 20% of our group sales, 1 percentage point higher than last year's weight.
Our own channels, which are more effective, handle 9.5% of all delivery orders, which is up from 7.9% previous period comparable. Despite the slow quarter, we keep investing. Călin already mentioned in Q1, we opened our first restaurant equipped with solar panels, KFC drive-thru in Galați, and we continue with our development plans. In April, we added a food court unit in Mall Moldova Iași, taking the network to 175 restaurants in total. Now, I will walk you a bit through the 2025 budget, which the board approved at the end of March, and our shareholders voted in favor in April. The budget reflects a positive outlook, with total sales up to RON 1.74 billion, i.e., 12.1% higher than previous year, EBITDA RON 195 million, i.e., 9.8% higher, and net profit RON 105 million, i.e., 8.2% higher.
Growth will come from both same-store gains and up to 13 new restaurants for KFC, one Taco Bell in Romania, one KFC in Moldova, three KFC, and four Cioccolatitaliani in Italy. Our planned CapEX for 2025 is about RON 100 million. Cost management remains a key focus area. That's why the food and material expenses are budgeted to grow by 9.6% at a visibly slower pace than the sales, leading to an optimization of the restaurant gross margin for this year. The cost of labor reflects the increase in minimum wage level, and they will be further calibrated against higher volumes across the year. Our budget assumes a normal macro environment and considers a yearly average inflation of around 5%. It also takes into consideration the increase of the minimum wage, which it's already affected, and it happened in January 2025.
Moving on to the next slide, our shareholder return remains central to our capital allocation framework. We will distribute a gross dividend of RON 1.09 per share with today's ex-date and with the payment date of June 6, and we remain faithful to our commitment to create value to all our shareholders. To sum up, Q1 was a soft opening of the year. The sales were almost flat, costs temporarily higher, but the fundamentals of our business are sound. We are protecting cash, we are investing selectively, and have a clear roadmap to restore margins as 2025 unfolds. Thank you very much, and Zuzanna, we can go to the Q&A question.
Thank you very much, Valentin. This concludes the presentation of our results for Q1 2025. We will now start the Q&A. If you would like to ask a question, please type it in the chat box.
We will read it out loud and address it. To give you a little bit more time to type your questions, we will first address several questions we received on email from our investors and analysts before this conference. For your information, I have also typed these questions in the chat box, so you can also see the questions we will be addressing. The first question is, how does weather affect your sales? Can you please comment on this? If it is colder, do you sell more?
I have an answer to this. If it is colder, we typically sell more. If it is a snowstorm, as we face this year, people do not get out of the houses, and the aggregators cannot deliver because they rely on bicycles and motor scooters.
Thank you very much, Călin. The second question, discretionary spending decreased.
Is it a one-off or more sticky in nature? It's sticky, but the measure we have taken in terms of menu engineering, value propositions are already paying dividends, and in May, we hope for stabilization. The rest of the second quarter might look better as uncertainty should decrease after elections.
Thank you. Please detail main operating cost dynamics that influence margin decrease. Food, labor, other categories you want to mention, and how do you manage it in the next quarters?
The main impact was that of the increase in the minimum wage in January. We lost three percentage points in profit. As demand decreased, we decided not to pass on the higher cost to consumers and postponed the price adjustment we had planned for the first quarter. We monitored carefully the situation, and we have already increased the price in April.
Thank you.
Please tell us about G&A dynamics and how can you optimize it in the next quarters.
Me again. We continue to maintain G&A discipline, and this is why they are relatively flat as percentage of sales. We know there is a certain degree of elasticity which goes in both directions.
Thank you. Any comments on delayed increase in minimum wage?
We operate on several scenarios internally, but as long as nothing is certain, all we can say is that if any major changes occur, we make an assessment, and if necessary, we will revert with a new guidance.
Any comments on your corporate tax levels and trends?
It's almost the same answer like a previous question.
The last question from the set: how do the results compare to the 2025 budget?
The 2025 budget published in March already reflected the prudent stance, anticipating a soft Q1.
Current performance remains broadly aligned with internal expectations.
Thank you. Now we move to the chat. As I mentioned before, please type the questions. Once we run out of questions, we'll be concluding the call. Can you please indicate what would be the impact of the currency devaluation on your financials? I will let Valentin answer the question.
Sure. Thank you for the question. We all know the hectic evolution of the FX in Romania. I will start by stressing the fact that we were very focused since the pandemic, continuing to maintain and to secure a very healthy balance sheet. We are privileged to be in this situation. We are extremely under-levered, and this will create opportunities in the future if there will be market opportunities based on the situation that we are facing now.
One of the major aspects of the exchange rate is coming from the credit lines. In this moment, we have a very low level, as I mentioned. There are EUR 25 million as principal in our lines. However, here we have a tool that, if necessary, we can exercise, but we need to be very careful because we have a multi-currency line, so we can convert and switch to RON if necessary. It is too early for such a decision. This will be one of the main categories that will have an effect because the lines are in euro. We need to pay them back in euro. Our revenue streamline, it is in RON.
On the other hand, it's a normal market impact that I think it's for the main business player in the Romanian market because a lot of suppliers are having the price denominated in euro, starting with landlords and ending up with equipment suppliers. This will be the effect of the FX for our business. I think we touched base on another question related to this aspect as well.
Thank you. We move to the next question. How do you avoid the continuation of decline of same-store sales and KFC?
Here, it's a complex set of actions. It started with the menu engineering. It's topped up by the value proposition. It's related to the change in our strategy. As Călin mentioned, we have taken decisions to postpone the pricing that we were applying for the Q1. This correlated with strong targeted marketing campaigns.
We expect to have effects on same-store transactions, basically.
Thank you, Valentin. Given the macroeconomic uncertainty in Romania and the risk that consumer purchasing power preference to eat out will decline, how do you see results in Q2 and Q3? Can we expect further pressure on bottom line?
In this moment, we are very cautious. We are monitoring very tight the evolution of our sales. We can feel a stabilization, but we are still in the middle of the to-do. It is definitely too early for a conclusion. No matter what, at the middle of the year, we will have more clarity on this subject, and together with the management team, we will be able to have a conclusion on the remaining part of the year.
Thank you. The next question: when can we expect the first Cioccolatitaliani units to be opened?
We expect to open the first units not later than the end of June. It's already under construction, and we will come back with more information, and we'll tell everybody when we open.
Thank you. The next question, we believe we already answered it. It was the FX questions. We will not be addressing. If you need further clarifications, feel free, please, to type it. We will move to the next question. Where is the chicken food market going in terms of prices? Are expected increases in energy prices a factor? What about the various trade barriers that are threatened on the global market?
Chicken, as we all know, it's a major cost category in our cost of goods sold. Unfortunately, here we see a very strong pressure. In this moment, we are not on a very favorable position.
There was a Q1 where we have implemented a lot of measures related to this cost category. We will continue to be very agile and to work close with our suppliers in order to minimize the effect. As anticipated in the question, there is a big pressure on this cost category. Generally speaking, the effect of the energy in Romania in the second part of the year, it is an important one, and we need to see how we will end up with the subsidies for the business players in Romania.
Thank you. I see we have answered all of the questions. We will wait on the line, but I see we got already another question. Can you go through once more on how many openings do you plan for full year 2025?
I will start, Călin, if you—yeah.
In this moment, we'll totally stick with the budget, also in terms of development. We already have some progress, as I mentioned, the openings in Galați and in Moldova Mall. The pipeline is in line with our expectations. There is a small delay for Cioccolatitaliani, where it was an ambitious plan of four. And Călin mentioned the first one is about to come. We'll see for the remaining three. Coming back to the figures, we have for this year one extra restaurant in Moldova. We have one Taco Bell in Romania. We have three KFC in Italy and the four Cioccolatitaliani in Italy. From the four KFC in Romania, two remain to be open until the end of the year. Of course, this is a dynamic target.
If there will be opportunities and the market will help us to identify in the current context even more appealing opportunities, we will not hesitate to evaluate and to add on this plan.
Thank you very much, Valentin. I believe this concludes all the questions we have received. Thank you very much for joining us today. We will hear each other again after we publish the results for the first half of 2025 on 29th of August, 2025. The conference call, as always, is going to be held on the same day, August 29th. We look forward to speaking with you again. Thank you very much, and we wish you an excellent day.