BBB Foods Inc.

Good morning, everyone. My name is Leonor, and I will be your conference operator. Welcome to Tiendas 3B first quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. There will be a question and answer session after the speaker's remarks, and instructions will be given at that time. Please ensure that your full name is displayed correctly on Zoom. If not, please take a moment to edit your display name. Also, please note that this call is for investors and analysts only. Questions from the media will not be taken. Any forward-looking statements made during this conference call are based on information that is currently available. Today, we're joined by Tiendas 3B Chief Executive Officer Anthony Hatton and Chief Financial Officer Eduardo Pizut. I will now turn the call over to Anthony. Please go ahead.

Good morning, everybody. Welcome to our first quarter 2024 earnings call. We will review our key results for the quarter. Special welcome to those of you joining us for the first time. Eduardo Pizzuto, our CFO, will follow, presenting our financial results. This will be a brief and to-the-point presentation so that we can have more time for the Q&A session. Some highlights. As expected, we delivered strong results for this first quarter of 2024. We opened 94 stores this quarter to bring the total number of stores to 2,382. Compared to the same quarter of last year, same-store sales grew by 14.8% and revenues by 13.9%. Operating cash flow grew by 36.4%, supported by EBITDA growth of 57.9%. We ended the quarter with a net cash of 4.3 billion pesos due to the proceeds from our IPO and organic operating cash flow generation. Let's turn to operational performance. The momentum continues with our store openings. In terms of store expansion, we maintain the brisk rate of store openings in what is traditionally a soft quarter for new stores. We opened 94 stores, bringing the total number of stores to 2,382. This is a 27% increase in the number of stores opened this quarter compared to Q1 2023. We have been very consistent with our growth. From 2019 to 2023, we have maintained a compound annual growth rate of store openings of 15 plus percent. In our last earnings call, I mentioned that we have a significant runway to sustain these growth rates. And we maintain our view that Mexico offers a potential of no less than 12,000 3B stores. I would mention successful 3B stores. The strong performance of our stores opened in the last two years supports that view. If we look at revenues and gross margins, we see that our first quarter of 2024 revenues reached 12.7 billion pesos. That's a 30.9% growth over the first quarter of last year. Our gross margins increased by 80 basis points over last year's quarter, largely explained by our increase in scale and negotiating better terms with our suppliers, most of which we passed on to our customers. I'll pass on the mic to Eduardo now.

Thank you, Anthony. Good morning, everyone. Our EBITDA and EBITDA margin is a consequence of everything we do. In Q1, we increase our sales, increase our gross margins, and reduce our expenses as a percentage of sales. As a result, a growing EBITDA and EBITDA margin. As illustrated in the graph, our EBITDA grew 57.9% from 396 million pesos to 626 million pesos, and our EBITDA margin from 4.1% to 4.9%. If we exclude expenses from the IPO of 70 million pesos incurred in Q1, our adjusted EBITDA would have been 695 million pesos and a margin of 5.5%. As we've mentioned in our last call, our discount is a unique business model. It generates a significant amount of cash through changes in negative working capital. In Q1, this trend continued. If we adjust our working capital by excluding IPO proceeds, net of cash used to pay down the promissory and convertible notes, then our negative working capital stands at 4.8 billion pesos versus 4.6 billion at the end of last year. That is an increase of 287 million pesos in Q1. As explained before, this trend will continue as long as we continue to increase our sales.

At our last call, we set guidance for the year to open between 380 and 420 stores and to increase sales in a range of 28 to 32%. We maintain this guidance. Consumption remains solid in the segments we target. The minimum wage increases have benefited our target customers in particular. Our decentralized approach to store openings is working well and we opened the record number of stores for our first quarter. Notwithstanding the IPO, our operating costs as a percentage of sales continue their trend downwards. And as we get larger, the opportunities for efficiency improvements grow and we continue to dilute costs with a larger revenue base. Our growth is self-funded thanks to positive EBITDA margins and attractive negative working capital generation. Our business model is simple yet very powerful. a virtual circle of opening new stores, continuously increasing the value for money that we offer to our customers. And as a result, attracting new customers and growing sales per store, resulting in turn in more sales and with scaling becoming even more efficient and then allowing us to offer increasing value for money to our customers while all this time continuing to generate cash. Thank you for your support and for being on this call with us. And now we can start our Q&A session.

Thank you. We will now conduct the Q&A session with Anthony Hatun and Eduardo Pizzuto. If you would like to ask a question, please press the raise your hand button located at the bottom of the screen. If you are connected via telephone, please dial star nine. We remind you that all lines have been placed on mute. When it is your turn to ask a question, you will be given permission to speak. You will then be able to unmute yourself and ask your question. We will now pause for questions. Our first question comes from the line of Bob Ford. Please state your name and ask your question.

Bob, you're on mute.

Thank you so much. Apologies for that, but congratulations on the quarter. Anthony, post-IPO, are there any tangible benefits you're seeing to the business? Are suppliers perhaps taking you a bit more seriously? Are there new multinational private labor operators maybe that are knocking on your door? Or are you seeing better offers in real estate? is there a halo benefit for your existing vendor base or is it just a big headache? And given your ability to self-fund growth, how are you thinking about the use of that 4.3 billion?

There's definitely a positive halo effect, as you say, Bob, in a sense that the level of motivation and enthusiasm on the part of all our suppliers has gone up significantly. And what I see is people that are more fired to do more and to do things faster. In terms of what do we do with our cash? As we have mentioned to some of you previously, there's a number of initiatives with high returns on invested capital that we have started undertaking. namely in terms of human resources and some others in IT efficiency projects that we have started putting to work. But anything that we look at is always looked at through the lens of what's the return on invested capital, what's the return on time invested. And the rest basically gives us more strength in a sense that we have a very solid balance sheet today and we've cleaned it up. There's no debt on it. And that is comfortable in terms of weathering any turbulence down the road that might happen.

Very helpful. And just one follow-up, and that is, are you seeing any deterioration in terms of the quality of your new store openings, in terms of locations, occupancy costs, or the initial performance of your sales as you ramp in new markets?

If you've looked at our spaghetti chart... Previously, you've seen that every vintage seems to be doing better than previous vintages. As we have maintained our discipline in store openings and our methodology and our approach and our models have not changed, there is no reason to believe that going forward we don't maintain the same kind of positive results from new store openings. We haven't seen anything like that. That makes perfect sense.

Thank you so much. And again, congratulations on the quarter. Thanks, Bob.

Our next question comes from Rodrigo Alcantar. Please state your company name and ask your question.

Hi, thanks for checking my questions. Congrats on the execution, Anthony. Eduardo, I guess my question would be a simpler one regarding on gross margins. If I recall on the investor rate process, the base case was here. to some respect, flattish or even slight contraction in the gross margin as you're investing in prices, right? But you have sort of price to the upside in the sales mix effect and the efficiency that you can generate in the gross margin. So, I mean, just curious here if the outlook or if your view regarding how to The gross margin has changed, Anthony. Perhaps instead of a flattish scenario for gross margin, we may see gross margins structurally trending up. That would be my question. Thank you and join today. Thanks. Congratulations on the quarter.

Thanks, Rodrigo. The increase in gross margin in this first quarter should be seen as a normal fluctuation in our business. Don't read too much into it. It's a very dynamic metric that we'll move around. As we're scaling up, we are getting better terms from suppliers and our suppliers are getting more volumes from us. And in general, we aim to pass these savings to our customers, which then will generate more traffic, more sales, and ultimately more cash flows. But it's highly dynamic and... Just, you know, it's normal for it to go up a little bit, come down a little bit over time. Just look at the long-term trend. And I think we'll be in line with what we've expected.

Awesome. Thank you very much.

Our next question comes from Joseph Jordan. Please state your company name and ask your question.

Hi there. Good morning, everyone. Good morning, Anthony, Eduardo. Thanks for taking my question. I want to explore a little bit more. The very high operating leverage that we continue to see. So like looking on a unit economic basis, same store sales since the meetings range for quite a while. But I think this hides an even stronger metric, which would be like the real mature locations of those stores. We've over five years. This is probably very, very powerful for the EBITDA margin levels that we have been seeing. So my question to you here is to explore a little bit of the network effect that you're seeing on the consumption base on those stores and try to quantify a little bit how are you seeing checkout growth or average basket size and ticket in those mature locations, how those are trending. So that's my question. Thank you.

OK, Jorge, let me break down your question in various parts. If I heard you correctly, you were asking about what's going to be the performance of older vintages as we move forward. Exactly. So again, if I go back to fundamentals, we haven't seen a slowdown in growth for older vintages. And when we ask ourselves why, the fundamental driver is a continued improvement in the value offered to customers. And I think I mentioned in our last earnings call that If you compare what we offer today in our basket versus what we offered five years ago, you'll see a notable improvement in what would be attractive to customers. And that is basically the fuel that keeps on generating increased same-store sales across the board, across vintages. And as long as we do that, I don't see a slowdown. Now, eventually, theoretically, yes, you will reach a point where you've touched every customer and penetrated as much as you can every wallet, and then you'll see a slowdown. I think we're far away from that point yet. In terms of network effect, yes, it is definitely present in a sense that we benefit from an increased recognition of the 3B brand as a value-driven brand. And one of our objectives is to build trust with our customers. I mean, in an ideal world, you walk into our store, and you trust that you're going to get the best value for money. You don't even have to compare with other chains that anything you buy in 3B is going to be giving you high value for money. And as long as we don't violate this trust, I think we can continue to see an improvement in this halo effect, as you call it. And we can end up selling anything in a Tiendas 3B store, as you know, in an outbasket. are irrepetibles, where the prices are so low that they don't get repeated. We've sold a wide variety of goods, including bicycles and televisions and clothes and shoes. So we're not limited, at least in that section of our store, to selling groceries. And that's very powerful. You had one more question, Joe, but it escaped me. So please go ahead.

just to try to quantify like this effect in terms of like basket size and number of checkouts for let's say mature client just to try to see like how the volumes are evolving here and try to extrapolate that a little bit further look i mean what what we can say with firmness is the number of tickets driven by the number of visits of customers

And attracting new customers has been a very solid trend upwards. And basket size, you know, there's a perverse effect. As more people buy private labels, which are priced 20% to 30% lower, the peso basket size is pulled downwards. And then what we need to do is basically... increase the number of items they have in their basket, which is happening, but as we've talked about before, happens at a much slower pace over time, but happens. So what you'll see more is more frequency and more tickets as opposed to a very high bump or a very rapid bump in the peso average ticket size. And that's what we're seeing today.

Perfect. Thank you very much.

Our next question comes from the line of Gulrez Arshad. Please state your company name and ask your question.

My name is Gulrez Arshad, and I'm a private investor. Congratulations to Anthony and Eduardo and the team. An outstanding quarter. I have really one question, which is on the competitive landscape and whether any of your competitors are adopting your hard goods discount model.

Hi, Guli. At least this quarter, we haven't seen anything notable in the market, neither on pricing or in terms of change of strategy of... any of our direct competitors. It wouldn't surprise me if something happens down the road, but keep in mind that we're a hard discounter. We're sticking to our knitting. As we say, we're doing more of the same faster. We have, I would say, a significant lead. It's hard to catch up to somebody who's already scaled up. It's not impossible, but it's difficult. And we're not staying still. So competition is healthy for everybody. And I think we're a very strong competitor to the rest of the market.

One last question, Anthony. Are you committed to continued organic growth for the company? Or would potential M&A activity be in the future, especially when you go into the more remote parts of Mexico?

If you ask me right now, today, I would say it's organic growth. We never discard an M&A, but the challenge with M&A is exactly what are you buying? And what I've found over time is the scarce element is talent. So unless you're buying talent in your M&A, it's a low probability event.

Thank you very much.

Our next question comes from the line of Alvaro Garcia. Please state your company name and ask your question.

Hi, it's Alvaro Garcia from BTG. Hi, Antonio Eduardo. Congrats on the quarter and thanks for the call. One specific question on the Easter calendar shift in the first quarter. Would it be fair to assume that relative to hypermarkets, which obviously saw a nice bump given the Easter calendar shift into 1Q and you maybe saw less of a boost given the Easter impact?

I think you're absolutely right, Alvaro. I mean, these shifts do see an impact, but, you know, in terms of a full quarter, it's not going to be significant.

That's fair. That's fair. And then just one on gross margin, you also... The scale is understandable, but you also mentioned the better sales mix. And I was wondering if you can maybe give a bit more color on what that is exactly that's driving the higher profitability.

Again, highly dynamic. So let's break it down in its pieces. On one side, you're buying from suppliers. And on that pricing and costing side of the equation, your scale naturally drives better terms and conditions. And then on the market side, as you know, we dynamically price. We are continuously elasticity testing to optimize volumes and peso margin. And we do that on an SKU by SKU basis. And then at the end of the quarter, we get a result, which is gross margin that we look at. And in this case, it happened to be higher than the previous one. So really we don't drive for gross margin. It's always a consequence of this very dynamic process that's going on both on the purchasing side and then on setting prices side. Again, as I mentioned earlier, I wouldn't read too much into it. It's going to be very dynamic and will continue to be dynamic. But in general, if there is a trend, it would be to pass on value to our customers.

Very clear. And then just one last one on new categories and on fresh specifically, if you can maybe give some color on the pilots you're putting in place and what sort of results you're seeing and what your strategy is there.