Alsea S.A.B. de C.V

Good morning, everyone, and welcome to Alsea's third quarter 2022 earnings video conference. Today, we will have presentations from our chief executive officer, Armando Torrado, our chief financial officer, Rafael Contreras, Miguel Cavaza, our supply chain director of Alsea Mexico, and myself as the company's IRO. Now, I would like to hand over to Armando for his initial remarks. Please, Armando.

Good morning, everyone, and thank you for joining to our third quarter 2022 earnings video conference. I'm excited to discuss this quarter's results, our original and brand performance, and other strategic developments. Looking at the results of the third quarter, we are pleased to report a year-over-year increase in net sales of 25.5%, reaching 17.5 billion pesos, representing more than 3.6 billion pesos increased versus the third quarter of last year. Same-store sales posted an increase of 30.5% compared to the third quarter of 2021 and an impressive 31.4% compared to pre-pandemic third quarter 2019 results. EBITDA post IFRS 16 was 3.5 billion pesos for the quarter, up 10.6% year over year, leading to an EBITDA margin of 19.9%. Our operation cash generation was healthy at 5.1 billion pesos compared to 3.6 billion pesos in third quarter of 2021, allowing us to continue to deleverage our company. S.A.B. de C.V During our third quarter of the year, we were impacted by important increasing energy expenses in Europe, where in the previous quarter these represent only 2.6% of sales. In the current quarter, this was 4.2% points that was in the report that you already saw. Given that at the end of June, we had a fixed prices expiration there in our fixed prices that we already reported. In this regard, I want to point out a couple of points regarding electricity. During the quarter, the highest point in price, which was 584 percent higher versus the historical cost, and approximately 45 euros per megawatt. This was observed in the month of August, but has now been showing a down S.A.B. S.A.B. de C.V Since my appointment of a CEO back there in July, I have visited more than 100 stores out across our regions. I was able to connect with our talent and hardworking team members, affording me with some valuable insights, including ways that we might be able to deepen ties with some of the clients and supplies. I was happy to verify that Alsea has a solid portfolio in our brands, with a diversified offering products and consumption locations, and the right team to operate our brands and support a successful business model. Also, I came away with a deeper understanding of our strengths as a company and areas of opportunity across our regions and brands. One such area is very clear the potential that we have as an opportunity to become our old technology that we are game to have a better operation. So is the same in digital platforms in our brand countries where we haven't developed them yet. We added 37 new corporate restaurants across all regions in the third quarter, totaling 92 for the first nine months of the year. We are in line with complying with our guidance of opening more than 170 stores in 2022 S.A.B. de C.V. S.A.B. de C.V. S.A.B. de C.V. Regarding ESG strategic, within the work done with our imbalance pillar, we have invested over 186 million pesos since the beginning of the year to acquire Energy Star certified equipment for 72 new stores in Mexico. These give us our store efficiency electricity usage. We are also processing with our many offerings to our healthy plant-based products. During this quarter, as part of the Grow Pillar, we made an alliance with NotCo to respond to the demands of our consumers, and we are looking for delicious and balanced options in plant-based products alternatives for our customers. This alliance also has a positive impact in our balance pillar and contributes to our goal of reducing our carbon footprint. In line with a strategic Spain and Portugal, the offer of espresso drinks made a plant-based milk reach over 20% of all the espresso products sold, and we are already offering new vegan snacks at Starbucks. Also in Burger King Argentina, we have expanded our vegan menu, adding meat-free nuggets in addition to already existing veggie Whopper and the Veggie King. As well, I would like to share that as of today, Asel remains in fifth position out of 95 companies that were evaluated in the restaurant category for the S&P Global Corporate Sustainability Assessment of the Dow Jones Sustainability MLI Index. We now... We know that much remains to be done regarding ESG to meet the expectations and needs of all our stakeholders. We are working on a critical route and plans to achieve key milestones on ultimately our 2030 goals. Now, I will have you again with Salvador for him to have a more detailed overview on our sales and report trends. Thank you very much.

Thank you, Armando. As Armando mentioned before, sales during the quarter increased 25.5% year-over-year, and we continue to see a better performance compared to pre-pandemic levels, with 20.9% growth versus the second quarter of 2019. Excluding FX effects, sales increased close to 38% versus 3Q21. Our solid business model and the strategic calls made over these past couple of years have proven to be effective. After the pandemic, our customers began returning to our restaurants. However, performance in food delivery continues to be solid, making a 15% year-over-year sales increase in the third quarter. We served more than 11.1 million orders by home delivery, accounting for 16.7 of total sales in the quarter, a slight slowdown in share versus last quarter, mainly related to the upward trend in on-premise sales. Digital channels and technology-based solutions continue to be fundamental pillars in our long-term growth strategy. We are currently working on exciting digital solutions for our Starbucks and Domino's brands that will be rolled out over the next few quarters. In Starbucks, for example, the all-encompassing digital platform called Starbucks Digital Solutions will expand e-commerce delivery, loyalty programs, and payment methods. While at Domino's Pizza, we're developing advanced in-store displays to help our customers better explore our menu options, improve ticket size, and reduce labor costs. Regarding our core brands, the same-store sales growth year-over-year of Starbucks in Spain and France was in the mid- to high-30s range, while in Chile and Mexico, we're close to 30%. This quarter marked the 20th anniversary of Starbucks in Mexico. We are very proud of this achievement and what it means for the country. We were also glad to announce the 4.5 billion pesos investment in Mexico from now until 2026 that we will earmark for Starbucks new store openings, renovations, and improvements. Domino's Pizza in Spain and Mexico represented a 15% and 12% comparable sales Domino's Pizza in Colombia reported a mid-single-digit decrease in same-star sales compared to the third quarter of 2021, mainly due to a menu restructure, cutting out some aggressive promotions which impacted orders, however, improving margins. And finally, Burger King presented increases in Chile, Mexico, and Spain of 15%, 14%, and 13% respectively. Bips continue as well with a strong recovery in Mexico, reporting a 30% same-store sales growth compared to the 3Q21, while Bips in Spain reported a strong same-store sales increase of 28% versus the same quarter of last year. And we are introducing innovative products to our breakfast menu that have been very well received by our Spanish customers. In spite of the cost increase, mainly due to inflationary pressures in raw materials and non-recurring benefits related to agreements negotiated with some of our strategic partners in 3Q21, pre-IFRS EBITDA figures in the third quarter of 2022 increased 12.9%, reaching 2.1 billion pesos, with an EBITDA margin of 12.3%. Excluding the exchange rate effect, EBITDA increased 22.7%. Costs, as a percentage of sales, rose 200 basis points year over year, reaching 32.9%. Given the ongoing inflationary pressures, we have demonstrated how the cost control strategies we have deployed to counter inflation are working. We have also been proactive as a company in mitigating the global inflation scenario. And later on, Miguel will be talking through some initiatives that we have implemented, particularly in Mexico, that have helped us navigate through these cost headwinds. Looking at our regions and geographies, Mexico sales increased by 25.3% year over year, with an adjusted EBITDA increasing by 558 million pesos to 2.5 billion pesos. S.A.B. de C.V. In the face of major increases in inflation and energy expenses, the sales number in this region showed the resilient demand and consumer preferences for our brands. The contraction on adjusted EBITDA margins in the region were also impacted by non-recurring benefits from the previous year related to some agreements with our strategic partners, both on the cost side and in royalties. At the same time, we're working on mitigation efforts such as carefully studied price increases, negotiating long-term agreements with suppliers, and using our dynamic display menus and apps to guide customers towards higher margin offerings. Finally, in South America, we posted a strong 51.9% sales increase, while our just-edited was 865 million pesos, representing a 56% increase year-over-year. South American solid figures are mainly the result of a strong demand, decreased SG&A, successful product innovation, and digital strategies. Now, I will leave you with Rafael for him to give you a more detailed overview of our results and balance sheet situation. Rafael, please go ahead.

Thank you, Salvador. Our net gig income for the third quarter increased 13.2% to P336 million. This increase was mainly due to a P328 million increase in operating income, resulting from the continuous positive trend in sales, commercial strategies, product innovation, development in digital applications, as well as improved cost and expense control efficiencies. We have been able to keep the strong recovery trends since the first quarter of 2021, achieving an earnings per share of $1.90, including IFRS 16. Our EPS rises to $2.26 per share. Regarding our debt profile... As of September 30, 2022, our gross debt decreased 4.1 billion pesos year over year, closing at 27.8 billion pesos. This reduction in debt corresponds mainly to the devaluation of the euro exchange rate against the Mexican peso and debt amortizations during the period. Year to date we have paid down 1.3 billion pesos with 275 million to be paid in the fourth quarter. We feel comfortable with the current maturity curve and debt ratios that we are achieving. Our debt ratings were upgraded by Fitch and Moody's in the quarter on September 18th. Fitch ratings upgraded our foreign and local currency long term to double B, along with our unsecured and senior unsecured notes. Fitch also upgraded our local currency long and short-term ratings. Likewise, Moody's upgraded our CFR and senior unsecured rating with a stable outlook. These upgrades recognize our operating performance, are quicker than projected deleveraging, Revenue growth across all regions, improved margins, our portfolio of brands that continues to gain market share, superior product offerings that meet consumers' preferences, and our investment strategy focused on expansion, modernizations, and innovation. Regarding our covenant, we complied comfortably during the quarter. On the gross debt to EBITDA ratio, we ended the quarter with 3.2 times, EBITDA to interest paid in 3.6 times, and net debt EBITDA 2.6 times. The minimum liquidity covenant is set at 2.2 billion pesos, with us posting 5.1 billion pesos in cash for the quarter. The debt structure at the end of the quarter was 96% long term with 66% in Mexican pesos and 34% in euros. We expect to deliver going forward and meet all of our debt covenants thanks to our healthy and ongoing cash generation. S.A.B. de C.V Out of the 98 stores openings that we achieved in the first nine months of the year, 60% are Starbucks and 22 Domino's Pizza units. I will now like to hand the call over our supply chain director of Alsea Mexico, Miguel Cabasa, who will give us a deeper insight on our supply and sourcing strategies. Thank you.

Thank you, Rafael. Good morning, everybody. Today, I want to share with you S.A.B. de C.V S.A.B. de C.V From procurement, we have some key initiatives. We do hedging in commodities and also in FX rates. We follow key market indicators such as the Chicago Mercantile Exchange, USDA, Univari, Indice Nacional de Precios de Mexico, and others. We are negotiating mid-long-term fixed prices agreements. Also, we integrate the planning process with strategic in advance. We plan our demands, we adjust our lead times, volumes, and the suppliers can secure raw materials so they can have an anticipated manufacturing plan. And with that visibility, for most parts, we have win-win agreements and have the best logistics indicators and costs for the companies. Also, we anticipate seasonal purchases, and we're looking for new items around the world to support the innovation program. Also, we execute some physical pre-buys. For example, our cheese vendor is the most important supplier for La Sea Mexico. We have a consolidated strategy partnership since 1990. Through 30 years, he has been the main pizza cheese supplier for ASEA Mexico. Under Domino's Pizza embracement, the supplier has developed for ASEA a unique best-in-class pizza cheese formula, key on Domino's Pizza's success. Year over year, we have increased our volume supply partnership. We have integrated the planning process so we adjust the volumes and delivers one year in advance. We execute a pre-physical buying during some key months of the year where the cheese price is lower than the average price of the whole year. Supported annual volume forecast, the supplier is one of the step ahead securing milk supplies in advance to cover Alsea volumes demand. With this process, we secure both price and availability. The last year results of the ASEA Mexico price list versus the national index consumer price, the team has been delivering better costs than the market. We continue working hard to mitigate prices increases, as we mentioned, having long-term relationship with our strategic vendors. Also, we spent a lot of effort improving our key logistic indicators to be contributed advantage for ASEA Mexico. In in-stock, we achieved a 99.3% of availability of products for our brands. We have increased 42% in all in productivity since 2019. And finally, our transportation costs since 2019 have a reduction of 19%. Also, we can mention that after doing benchmark, our total logistics cost is 25% lower than other logistic food service competitors. From the quality perspective, we have a strong quality program in the company. There is a supplier approval and development program implemented for food and packaged materials. We will include food safety, quality, and social responsibility criteria. Regarding food safety, our suppliers are required to be certified based on international criteria established by global food safety initiatives. Additionally, there is a surveillance program implemented in-house with our own laboratory where we test products from our suppliers randomly. All our distribution centers have been food safety certified on SQF, Safety Quality Food Standards, in the last two years. Our cold chain management is being monitored and controlled daily with a detailed traceability program from the vendor to our stores. Our internal quality insurance system, named SIGICA, Alsea Food Safety and Quality Integrated Management System, has demonstrated compliance with international requirements. Due to the last two years ago, our manufacturer operators are SQS certified. Before closing the presentation, We want to share with you that we're very proud because Logistics in Mexico has won the Premio Nacional de Logística 2022. The Logistics National Award is the highest decoration that is given to the logistics sector to professional companies that due to their contribution to the supply chain have managed to become synonymous with efficiency, competitiveness at the national level. Thank you all. We can go to Q&A.

We will now start the Q&A session. If you have a question, please press the question button in the browser. Please make sure you are not in full screen mode to see the button. The first question is from Mr. Sergio Matsumoto from Citi. Please go ahead.

Thank you for taking my question. I want to ask a question about European business. We heard from your presentation that energy is higher. How about the customer? Are you seeing anything in limited service? You know, less... This question is, if you can give us some sense of the customer base, and also, does the current situation affect the store development plans in the next couple of years? Thanks.

First of all, I would say, Sergio, we have seen a strong trend in terms of consumption still in Europe up to this quarter as well. So like we mentioned in the presentation, Vips in Spain having close to 30% growth, same-store sales, same-store sales figures. So we haven't seen actually a slowdown. Third quarter, for sure, we still saw positive tourism effect and people going out quite a lot. But so far, we haven't seen any major slowdown, and that's what has been helping pretty much overall the business in Europe. Like we mentioned before, and you also mentioned recently, the main concern right now is energy prices going up. And on the competitive base, if we take a look at what happened on 3Q21, we did have some benefits from some arrangements that we reached out with some of the main suppliers that we had on the cost side and as well as some royalties that helped out in 3Q21. And it's not helping right now because of the competitive base. For your second question, I guess, on the... on the expansion plan, we do not see any setback on what we are right now planning going ahead. So the target to open between 170 to 200 stores for this year, it's still on for the whole company, exactly. And even with the concerns that we see in Europe, we're not moving away from the current guidance in terms of openings.

Thank you very much for your question. Our next question is from Mr. Alvaro Garcia from BTG Paxual. Please go ahead.

Good morning, gentlemen. Thank you very much for the space for questions. I have a One question for Armando on the general defensiveness of dominoes and beeps. I was just curious if you could sort of speak to affordability strategies and how you're thinking about transaction growth or defending transactions into next year. I was just wondering how you think of those brands and how defensive they may be into next year. Thank you very much.

S.A.B. de C.V in Colombia, 1,000 orders per week here in Mexico and also in Spain. I just was with the people of Domino's, and we are looking to a strategy of servicing. Just to make an idea, we are delivering right now our average of delivery in pizzas are less than 21 minutes. So regarding with service, we are putting a new technology around all our geography next year starting in February or March that is called DSS. And that DSS technology also with a GPS in our system will get us to our around S.A.B. de C.V of the name of the game for Indominus that will be the strategic of get the best service and the best product and that will keep us up to getting better orders in order to the competition. Regarding VIPS, VIPS in Spain, as Salvador said and Rafael said, is very strong. We've been seeing just tremendous growth in all the company. S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V S.A.B. Wonderful. Thank you very much, Armando. Thank you very much for your question.

Our next question is from Mr. Antonio Hernandez from Barclays. Please go ahead.

Hi, good morning. Thanks for the specific question. Congrats on your results. My question is regarding, given the different consumer trends, in one end you have higher mobility, and of course that's helping casual dining and the different formats, as you mentioned, for example. And on the other hand, you have, of course, inflationary pressure. Is that... driving a kind of a trade down in any of your different geographies or have you seen any shift or any impact from a trade down perspective within the different regions? Thanks.

As we mentioned, we don't see a trade down yet. What we are forecasting is if something S.A.B. de C.V this trade down, from fine dining to casual dining, from casual dining to QSR to QSR to family dining. So we think that we have the diversified portfolio to catch that trade down if it's going to be in the next year. But we don't know exactly the the amount of trade-down that we can have for the next year, but we don't see it yet. We see a pretty strong demand in the top line in the company.

Okay, perfect. Thanks a lot.

Thank you very much for your question. Our next question is from Mr. Rodrigo Alcantara from UPS. Please go ahead.

Hi, guys. Can you hear me? Hello. We can hear you. Thank you. My first question would be for Armando. Just curious on the comments that you said at the beginning of the call of the areas of improvements that you see mainly on the digital front. You partially already answered this with the case of Domino's in in Mexico. Just curious, first, is it fair to say that Domino's Pizza in Mexico is already like the standard for what you want to achieve for digital for the rest of the countries at the case of Domino's? And what about the differences that you perceive on the digital space, let's say on a Starbucks perhaps? That would be my first question to you. And the other one for Rafa would be, I don't know if as a way to take advantage of the strength of the Mexican peso, I don't know if it's on your plans to perhaps accelerate some amortizations there that you have in your depths. So I was curious about the net loss that S.A. Europe appeared to have reported in the quarter. If you can comment also about that That would be helpful. Thank you very much.

Thank you for your call. Regarding the digital aspect, I mean, we've been working in Domino's in the last nine months with a company in Canada called Bounties, and we're going to launch in the next quarter of, I mean, we're already in pilot test. We're going to launch S.A.B. de C.V especially in convertibility of orders we will see a better performance in our application I mean we are we want to achieve 75% digital orders in Domino's and also in Starbucks I think we have a good strength there to digitalize all the orders that we can as soon as we digitalize a customer we can see that there is a more loyalty, better ticket average, and better frequency. So we are aligned to do that. In an order of Starbucks, it's the same. We are going to show you probably in the next quarter conference, we will show you a little bit of what is going to be our strategic plan plan for the next year. And there is, like Salvador says, there is a new technology called SDS, Starbucks Digital Solution, that we already are taking in place in all Latin America. We're going to do the implementation next year. And that's going to be also a native app run by us that it will give us mobility of mobile order and pay. It will give a different kind of S.A.B. de C.V

S.A.B. de C.V then in terms of the cash position that we have or the capital allocation We're going to decide next year first in terms of the capital that we're going to invest next year because we have in terms of IT some pretty good investments for Starbucks. We're going to change all the POS and some of the IT product that we have in Mexico and Latin. We already did that in Europe. S.A.B. de C.V S.A.B. decided to prepay part of those credits that are with a variable rate. Then, because of the pretty good cash position that we have right now to buy back some of the shares, we see that the share is with a pretty good price to make a buyback of the shares, and we already buy back 700 million pesos in shares. Also, we're going to decide next year next year if we cancel some of those shares. But we're going to start it in the board meeting next year.

Okay, that's great. So the idea there is that you can potentially cancel the shares, right?

Of these shares, we can potentially cancel them.

Great. And about the net loss and the minorities that we saw in the quarter?

Well, in the debt loss that we saw in the quarter was mainly due to the European participation and the effects also that we have in Europe, that we have Euro lower than the 20 pesos right here. And that helped us in the debt position because in Europe we have 460 million euros in debt. So when we put it in pesos, that helped us around 3 billion, more than 3 billion pesos.

Okay. That's great. Thank you very much, Rafa and Armando.

Thank you very much for your question. As a reminder, if you have a question, please press the question button in the browser. Please make sure you are not in full screen mode to see the button. As a reminder, if you have a question, please press the question button in the browser. Please make sure you are not in full screen mode to see the button. That was the last question. I will now hand over to Mr. Armando Torrado for final comments. Please go ahead.

Okay, thank you very much for your time. Thank you very much for the conference. I mean, as I said, we are pretty busy right now in the best quarter. I'm sure we will report then in February when we see you again. Things are coming along well. External situations as energy came to do a... a negative effect on the quarter, but I'm sure that with the strong sales that we have and the good momentum that Alsea is having and all the openings that we have, I'm sure we're going to see you here with better results and another record quarter as we've been presenting and we've been really reporting. Thank you very much and have a wonderful day and just thanks again.

Thank you.

Thank you, everybody.