Brazil Fast Food reports Q1 net earnings of 4.6M reais, down 31.3% from year-ago period; revenue up 14.2% to 66.5M reais

RIO DE JANIERO , May 14, 2014 (press release) – Brazil Fast Food Corp. (BOBS) ("Brazil Fast Food", or "the Company"), one of the largest food service groups in Brazil with 1,192 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 first quarter ended March 31, 2014.

Q1 2014 Highlights

System-wide sales totaled R$ 349.9 million, up 17.6% from Q1 2013

Revenue totaled R$ 66.5 million, up 14.2% from Q1 2013

Points of sale totaled 1,192 at March 31, 2014 (505 kiosks and 19 temporary points of sale), up from 1,049 at March 31, 2013

EBITDA was R$ 8.7 million, down 23.7% from R$ 11.4 million in Q1 2013

Operating income was R$ 6.6 million, down 35.2% from R $10.2 million in Q1 2013

Net income was R$ 4.6 million, or R$ 0.56 per basic and diluted share

Note that all numbers are in Brazilian currency.

"We continued to experience a very challenging operating environment in Brazil's fast food industry during the first quarter of 2014, characterized by escalating costs for food and labor, muted growth in incomes and consumer spending. The market environment has also turned increasingly competitive, due to significant branding efforts of one of our established competitors sponsoring the upcoming FIFA World Cup. Renewed efforts of established international brands to increase share in Brazil created fierce competition between incumbents and expanding international brands in fast food. This has required increased investment in branding, facilities and promotions, and made it challenging to pass through these higher costs to our customers. While our revenues continued to expand at over 14%, our profitability dropped significantly as compared to the first quarter of 2013, with operating income down 35,2%," said Mr. Ricardo Bomeny, CEO and CFO of Brazil Fast Food.

"Looking in more detail at our brands, we are very pleased with the performance of our Bob's franchised stores, where net franchise revenues grew 17% and operating income grew by 22.2% to R$ 10.1 million with an operating margin of 73%. The number of franchise outlets grew to 1,093, from 972 on March 31, 2013. Our owned-and-operated Bob's stores grew revenues by 2.8% over Q1 2013, but were barely profitable for the quarter. We have recently made some changes to our management structure and incentives for these stores that we believe will help to restore a reasonable level of profitability.

"We were pleased with the continued expansion of Pizza Hut stores, where we added 12 new stores and net revenues grew by 30.7% over Q1 2013, although contribution to operating income is similar to last year. Our KFC stores continued to struggle in the local market with a slight decline in revenues and a $1.8 million operating loss for the quarter. We are in active discussions with Yum! Brands as to how to better adapt the KFC concept, marketing, and menu offerings to the Brazilian market so as to create a more vibrant future for this brand," Mr. Bomeny said.

First Quarter 2014 Results

System-wide sales grew 17.6% in the first quarter to R$ 349.9 million, driven by an increase in the number of franchised points of sale.

Total revenue for the first quarter of 2014 was R$ 66.5 million, an increase of 14.2% as compared to R$ 58.3 million in the first quarter of 2013, due to higher revenues from franchisees and own-operated restaurants.

Net restaurant sales for company-owned restaurants increased 13.5% year-over-year to R$ 52.7 million in the first quarter of 2014, driven by higher sales at Bob's and Pizza Hut.

Net revenue from franchisees increased 16.9% year-over-year to R$ 13.9 million, driven primarily by an increase in number of franchised retail outlets to 1,093, as compared to 972 a year ago.

Operating expenses increased 24.7% to R$ 59.9 million in the first quarter of 2014 from R$ 48 million in the first quarter of 2013. As a percentage of revenue, operating costs increased to 90% of total revenue in the first quarter of 2014 from 82.4% of total revenue in the first quarter of 2013.

Operating income for the first quarter of 2014 was R$ 6.6 million, a decrease of 35.2% from R$ 10.2 million in the first quarter of 2013. Operating margin in the first quarter of 2014 declined to 10%, as compared to 17.6% in the first quarter of 2013.

EBITDA in the first quarter of 2014 was R$ 8.7 million, down by 23.7% as compared to R$ 11.4 million in the first quarter of 2013. EBITDA margin was 13%, as compared to 19.5% in the first 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$ 1.1 million in the first quarter of 2014, as compared to interest income of R$ 0.1 million in the first quarter of 2013.

Net income in the first quarter of 2014 was R$ 4.6 million, or R$ 0.56 per basic and diluted share, as compared to R$ 6.7 million, or R$ 0.83 per basic and diluted share in the first quarter of 2013.

Financial Condition

As of March 31, 2014 the Company had R$ 53.1 million in cash and equivalents, up from R$ 50.1 million as of March 31, 2013. Working capital was R$ 41.6 million at March 31, 2014, compared with R$ 41.9 million as of March 31, 2013. Debt obligations with financial institutions were R$23.5 million as of March 31, 2014, compared with R$23.6 million as of March 31, 2013. Total shareholders' equity was R$ 85.5 million at March 31, 2014, compared to R$ 80.8 million at March 31, 2013.

Recent Events

There were no developments during the first quarter of 2014 regarding the Company's administrative appeal against the penalty charged by the Brazilian Internal Revenue Service related to the its restructuring in 2006.

Business Outlook

In 2014, the company expects to continue a higher level of investment in facilities, advertising and promotion in order to support the growth of its brands in Brazil and respond to international competitors. This will continue to put pressure in profitability and operating results in the near future.

"Despite the near-term challenges due to the macro-economy and escalating competition, we strongly believe that we have the right brand assets and management team in place to drive continued growth. In the first quarter of 2014 we invested $7.8 million in new stores that includes a new multi-brand format combining Bob's, Doggis and Yoggi in one location, a new standalone Yoggi store concept called Yoggi Desigual, and expansion of Pizza Huts in high-traffic locations," Mr. Bomeny said.

"For 2014, to support our expansion and competitive position, we will also be making a significant investment in branding and promotion activities. Bob's recently presented its new visual identity, with a different store design and ambiance, communications, equipment and ingredients, to its franchisees at its National Convention. We will make a significant investment to refresh our owned-and-operated stores and will continuously incentivize our franchisees to do the same. While we expect to see continued margin pressure due to these activities, our goal is to achieve some improvement in our overall profit margins from Q1 2014 levels. Our strong balance sheet provides us with the ability to pursue this expansion strategy without recourse to outside financing.

"Brazil's economy has slowed significantly, with real GDP growth for 2014 expected to be in the range of 2% and inflation north of 6%, primarily due to rising food and labor prices. This will create difficulties across the restaurant industry and create near-term financial headwinds for Brazil Fast Food. But we continue to believe that the opportunity to build a significant player in the fast food industry is compelling and that we are on the right path to build long-term value with our unique business," concluded Mr. Bomeny.

About Brazil Fast Food Corp.

Brazil Fast Food Corp., through its holding company in Brazil, BFFC do Brasil Participações Ltda. ("BFFC do Brasil", formerly 22N Participações Ltda.), and its subsidiaries, manage one of the largest food service groups in Brazil and franchise units in Angola and Chile. Our subsidiaries are Venbo Comércio de Alimentos Ltda. ("Venbo"), LM Comércio de Alimentos Ltda. ("LM"), PCN Comércio de Alimentos Ltda. ("PCN"), CFK Comércio de Alimentos Ltda. ("CFK", former Clematis Indústria e Comércio de Alimentos e Participações Ltda.), CFK São Paulo Comércio de Alimentos Ltda. ("CFK SP"), MPSC Comércio de Alimentos Ltda. ("MPSC"),DGS Comércio de Alimentos Ltda. ("DGS"), CLFL Comércio de Alimentos Ltda. ("CLFL"), Little Boss Comércio de Alimentos Ltda. ("Little Boss"), Separk Comércio de Alimentos Ltda. ("Separk"), Schott Comércio de Alimentos Ltda. ("Schott"), FCK Franquias e Participações Ltda. ("FCK", former Suprilog Logística Ltda.), Yoggi do Brasil Ltda. ("Yoggi"), and Internacional Restaurantes do Brasil S.A. ("IRB"). IRB has 40% of its capital held by individuals, including the CEO of IRB.

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