Alsea S.A.B. de C.V

Good morning, everyone, and welcome to Alfea's fourth quarter and full year 2022 earnings video conference. Today, our chief executive officer, Armando Torrado, our chief financial officer, Rafael Contreras, and myself as the company's IRO will be presenting the results of fourth quarter and full year. Now, I would like to hand over to Armando for his initial remarks. Dito, Armando.

Thank you, Salvador. Good morning, everyone. And thanks for joining our fourth quarter of full year 2022 earnings video conference. I'm excited to talk about our results, our regional and brand performance and other strategic developments. For the full year, we are pleased to report an increase in total sales of 28.9% for a record high of 68.8 billion pesos. which was 15.5 billion pesos above 2021. Same store sales for the full year increased by 34.8% compared to 2021. EBITDA post IFRS 16 was 14 billion pesos for the year of 14.1 compared to 2021 leading to an EBITDA margin of 20.4%. An operation cash generation was healthy at 6.1 billion pesos, allowing us to continue to deliver and invest in new projects. Net sales excluding the hyperflation effect from Argentina for the fourth quarter of 2022 were up 12.2% year over year to a record high of 18.4 billion pesos. Same store sales for the same period were up 21.5% while pre-IFRS 16 EBITDA was up 3.4%, reaching 2.5 billion pesos. Now, before I get into post-IFRS numbers for the quarter, I would like to make a few comments about IFRS 16, which impacted our four-quarter EBITDA margin. First, as you well know, IFRS impacts how we account for our leasing contracts. It has poorly known cash effects that we don't consider internally for our metrics. We prepare this as an accounted market requirement. During the COVID pandemic, we obtained reductions on our rent payments. We have been working on many of our releases to be set to a variable rate, depending on our sales. Since our sales have increased, so have our variable list payments were up. In addition, measuring against a difficult comparative base from the fourth quarter of 21, where post-IFRS results were especially favorable. Rafael will get more in details regarding this topic later on. That said, post-IFRS 60 net sales for the fourth quarter were up 14.4% year over year, to a record high of 19.1 billion pesos, and due to that of 14 mentioned factors, EBITDA was down 18.4% to 3.5 billion pesos versus a 4.5 billion reported in 4-21. Our record sales in the quarter and full year show a strong demand for our brands. The underlying profitability is also solid, despite post IFRS effects, which are largely non-cash. and all of this despite the backdrop of challenging macroeconomics conditions, especially that we lived in Europe. In the second half of 2022, we were impacted by significant energy expenses increase in Europe. Since the end of June, our fixed price energy contract expired. In the second quarter of 2022, energy cost represents 2.3% of sales in Europe, rising to a 6.8% in the third quarter and falling to 4.3% in the fourth quarter of 2022. Regarding electricity, the highest price point we witnessed in the year was €308 per MWh in the third quarter. which was 580% higher than the historical cost of the month of August. Since then, electricity prices have been gradually falling, which was continued into 2023. This year, we are expecting to pay in the range of 90 to 100 euros per megawatt hour. We have been watching the market for long-term electricity hedging contracts. However, Given the current market conditions and the centrality of the situation in Europe, we prefer to be cautious and not close to a long-term deal now. In the short term, we are implementing a strategy of partial electricity hedges in Europe on a month-to-a-month basis. In the fourth quarter, we are in 74 new corporate restaurants and 12 sub-franchises across all regions. 147 Net Corporate Units and 38 Net Subfranchise for the full year. Since we restarted our openings process a bit later than initially expected, we are not able to open all the project units within the year. We are constantly revaluating every aspect of potential openings to reflect our focus in profitability. Among our openings this year, In France, we opened 17 Starbucks locations in the year. We see a potential for further growth in this market where we estimate to open between 400 to 500 stores in the future. In Uruguay, we have opened our first Domino's pizza store and currently we have three more under construction. The entry of Domino's in this market has been very successful and we have been observing twice the demand we initially forecasted. We ended the quarter passing 1,000 sub-franchise team mark. We also have more than 4,400 total stores and over 75,000 team members. We continue to be in a strong position to take advantage of the market opportunities with our core brands in the market that we currently operate in. We will share in our strategic plan and along with further guidance for the year at our upcoming Universal Day on March 30 in New York City at City Corporate Offices. Finally, I would like to give a quick overview of our main achievements in ISG Miners. In 2022, we launched our goals for 2030 and made the following progress during this year. We were able to help over 1.8 million people by delivering more than 38.6 million pesos and in kind donations for more than 70 tons of food. Also, during that year, Alsea Foundation in association with World Vision Mexico created a premio Alsea and awarded for food and nutrition related to research. 69 projects from Argentina, Colombia, Chile, Spain, and Mexico participated, and we gave $150,000 prize to the winning research project. In Mexico, we achieved 72% clean energy consumption. Additionally, in our four manufacturing centers, we were recertified as safe quality food and all our regions. We are being a baseline survey of the current state of our supplies regarding ISG issues. At the end of 2022, Alcibo remained in the fifth position out of 95 companies that were evaluated in the restaurant category of the Standard & Poor's Global Corporate System GDP Asset Assessment. of the Dow Jones Sustainability Millionaires. Regarding advancements in gender equity and social inclusion, we were pleased to announce in January 2023 our newest board members, Cristina Quena and Gabriela Garza. Now, ALCEA board has a total of three woman members, and women make up to 25% of the total board and 43% of the independent board members. Christine has over 22 years of experience as a technology investor, identifying innovation trends, managing complex fundraising and M&A transactions, and driving global corporate strategy. Christine is a part of the ITNIA Venture Capital and has previously held leadership positions at Google, IT Education First, and IWI Parfenthal. Gabriela is a director of a family office and a strategic executive advisor. She is the co-author of the first and second edition of Women Matters MX and is an expert in gender diversity and inclusion. Gabriela was a former consultant in McKinsey and Company. In addition, 872 members of our global workforce come from disadvantaged groups and 23% of our managing position are held by women. We know that much remains to be done regarding ISG to meet expectations and interval our stakeholders. We are working on our plans to achieve key milestones and ultimately our 2030 goals. Now, I will pass it back to Salvador for him to give you a more detailed overview of our sales.

Perfect. Thank you, Armando. Well, as Armando mentioned, sales increased 14.4% for the quarter and 28.9% for the full year. And we continue to see improved performance compared to pre-pandemic levels. Excluding foreign exchange effects, sales increased close to 22.6% for the quarter and 35.6% for the full year. Our solid business model and the strategic decisions made over these past couple of years have proven to be effective. Customers have returned to dining in as pandemic-related restrictions have been removed across all our regions. Despite this, and even As sales continue to increase, food delivery as a percentage of sales hasn't wavered. In the fourth quarter, it remained sequentially stable at 17% of total sales. We served over 12 million orders by home delivery in the quarter, which represents an increase of 13.2% compared to the fourth quarter of 21. Looking at the full year, delivery was up 13.8% compared to 2021. reaching 12.3 billion pesos, which is over 46.6 million orders, and represented 17.8% of Althea's consolidated sales. Our digital channels and technology-based solutions continue to be fundamental pillars of our long-term growth strategy. We are currently working on an innovative digital solutions for our Starbucks, Domino's, and Burger King brands that will be rolled out over the next few quarters. In Starbucks, for example, the all-encompassing digital platform called Starbucks Digital Solutions, which was already put in place in Europe, will expand e-commerce delivery, loyalty programs, and payment methods. While at Domino's Pizza and Burger King, we're developing advanced in-store digital displays to help our customers better explore our menu options, boost conversion, and improve ticket size. Especially as labor costs have risen, we have seen the increased utility of these digital solutions. Regarding our core brands, the fourth quarter, thanks to sales growth year over year of Starbucks in Spain and France, was in the low 20s range, while Chile and Mexico were in the mid to high 20s. For the full year, all of those regions had thanks to sales growth over 30%, with France reaching more than 50%. In 2022, out of the Starbucks units that we opened, 40% were drive-thru locations, which reported outstanding results. Even though these units are in average 30% more expensive than other formats, they have achieved more than 50% higher sales and 30% more orders than traditional stores. Therefore, we plan to keep on developing this strategy by opening around 60% of all Starbucks units with drive-thru capabilities. Domino's Pizza in Spain and Mexico had 11% and 7% comparable sales during the quarter, respectively. Domino's in Colombia reported a mid-single-digit decrease in its same-store sales compared to the fourth quarter of 2021, mainly due to a menu restructure and cutting out some aggressive promotions which impacted orders but improved margins. Burger King posted increases in Chile, and Mexico of 10%, 7%, and 6% respectively during this quarter. I'm also pleased to announce that Bips Mexico has now recovered to pre-pandemic 2019 levels. In the fourth quarter, same-store sales were up 15% year-over-year and 34% for the full year versus 2021. Bips in Spain in the fourth quarter also reported strong same-store sales, increase of 20.8% versus the same period, and 40% growth on a full year-over-year. Despite cost increases, mainly due to inflationary pressures in raw materials and non-recurring benefits related to agreements negotiated with some of our strategic partners in the fourth quarter of 21, our pre-IFRS 16 EBITDA in the fourth quarter of 22 grew 3.4%, reaching 2.5 billion pesos with a margin of 13.7%. Excluding the exchange rate effect, the EBITDA increased 11.4%. For the full year, 3 IFRS 16 EBITDA in 2023 grew by 33.3%, reaching 8.7 billion pesos, with a margin of 12.9%. In the fourth quarter, costs as a percentage of sales rose 260 basis points year-over-year, reaching 33.3%, and for the full year, costs represented 32.7% of sales, increasing 130 basis points. Given the ongoing inflationary pressures, we have demonstrated our cost-controlled strategies, such as inventory planning, negotiating long-term agreements with suppliers, and eliminating aggressive promotions are working. Also, as we mentioned earlier, we are constantly monitoring input prices and evaluating potential overstocking agreements. Also throughout the year, we worked on carefully studied price increases and using our dynamic display menus and apps to guide customers towards higher margin offerings. Looking to results by geography, Mexico's quarterly sales increased 19.1% year over year with adjusted EBITDA falling 153 million pesos to 2.5 billion pesos. Mexico's annual sales increased 28.6% year-over-year, with adjusted EBITDA growing 1.7 billion pesos to 9.8 billion pesos. We're pleased with Mexico's continued demand performance in the face of rising inflation and declining purchasing power in real terms. Sales in Europe grew 2.1%. However, due to increased costs and expenses, adjusted EBITDA was 596 million pesos lower for the quarter, at 1.4 billion pesos. For the full year, sales grew 19.3%, and for the same reasons, adjusted EBITDA was 487 million pesos lower at 5.4 billion pesos. In the continued phase of increased inflation and energy expenses, the sales numbers in this region showed resilient demand and consumer preference for our brands and products. The contraction in adjusted EBITDA margins in the European region was also explained by the end of non-recurring benefits from the previous year related to agreements with our strategic partners, both on the cost side and in royalties, in addition to the foreign exchange effects. In 2022, our tourism was lower than usual due to China's COVID-19 restrictions, especially in France. We expect a positive impact this summer from tourism now that Chinese citizens are traveling again. On a normal basis, tourism accounts for approximately 25% of Alsea sales in Europe. And finally, in South America, we posted a strong 25% sales increase for the quarter with adjusted EBITDA at 899 million pesos, representing a 70 million pesos increase year over year. For the full year, sales increased 49% and adjusted EBITDA was 3 billion pesos, representing 937 million pesos increase. South America's positive results were driven by strong demand, decreasing SG&A, successful product innovation, and digital strategies. Now, I will leave you with Rafael to give you a more detailed overview of our results and balance sheet. Rafael, please go ahead.

Thank you, Salvador. First of all, I would like to explain the main impacts regarding IFRS 16 and our results. We had rents negotiation related to the pandemic, where we paid less rent than what we had on the contracts. According to IFRS 16, you have to register the paid amount on rents. Why? On the post-IFRS 16, you discount the full amount of the rent under the contract. For example, In Europe, during the quarter 2021, we paid rents for 423 million pesos. However, with the IFRS 16 methodology, we discounted 608 million pesos, less benefit in 2022. Another effect is the change in our leases contract from fixed to viable rents and the corresponding increase in sales reported. For example, in Mexico, during the quarter, We paid rent for 718 million pesos. However, with the IFRS 16 methodology, we discounted 398 million pesos, which correspond to the fixed part of the rent. Higher effect than last year. Also, as a result of the USD bond issuance, we were required by banks to terminate a sale and lease back agreement related to equipment on our operation center. of approximately 350 million pesos. This transaction positively impacted the pay interest of financial leases in Alsea, Mexico in the post-IFRS 16 figures for 2022. Yet another impact, mostly in LATAM, are the changes in lease contract conditions before their maturity, impacting other income expenses lying in post-IFRS 16 figures. Our net income per year for S.A.B. for the fourth quarter increased 12.2% to 771 million pesos. This increase was mainly due to a 152 million pesos increase in operating income, resulting from the continuous positive trend in sales, commercial strategies, product innovation, developments in digital applications, as well as improved cost and expense control efficiencies. For the full year, pre-IFRS 16 net income increased 222% and post-IFRS 16, 100%, achieving at 1.7 billion pesos. We have been able to keep up the strong recovery trend since the first quarter of the year, achieving a pre-IFRS 16 earnings per share of 2 pesos and 17 cents, including IFRS 16, our EPS rose to 1.96 pesos per share versus the 94 cents in 2021. In January 2023, the General Shareholders' Meeting approved the cancellation of 18.5 million ordinary shares that had been reported in market transactions during the year, representing 2.2% of the outstanding total shares. As of December 31st, 2022, we paid 2.3 billion pesos of amortizations during the year. Our gross debt per IFRS decreased 3.9 billion pesos year over year, closing at 27.8 billion pesos. This reduction in debt corresponds mainly to the devaluation of the euro against the Mexican peso and debt amortizations that I already mentioned. Regarding our covenants, in 4.22, our minimum liquidity and capex covenants were removed, with banks seeding our positive financial results. Looking to our pre-IFRS 16 gross debt to EBITDA ratio, we ended the quarter at 3.2 times, and EBITDA to interest rate at 3 times. Regarding liquidity, we posted a solid 6.1 billion pesos in cash at the end of the year. The debt structure at the end of the year was 95% long-term, with 64% in Mexican pesos and 36% in euros. We expect to deliver going forward and meet all of our debt governance thanks to our healthy and ongoing cash generation. Our full year capex for 2022 was 4.2 billion pesos, of which 35.8% was allocated to maintenance, S.A.B. We will now start the Q&A session.

If you have a question, please press the question button in the browser. The first question is from Rodrigo Alcantara from UBS. Please go ahead. We will now start the Q&A session. If you have a question, please press the question button in the browser. The first question is from Mr. Rodrigo Alcantara from UBS. Please go ahead.

Hi. Hi. Good morning. Armando Chava. Thanks for checking my question. I mean, I guess on the top line and brands, not much to say that, putting in place the results. Just curious here on the leases, on the leases contracts. I mean, if you can clarify right now where do we stand in, I mean, talking about averages, right, what proportion of, is already, I mean, changed from variable, from fixed to variable, and how this compares versus, let's say, a year ago or before these changes. Here, the accounting impact on IO4S16. And the second question would be on labor expenses. I mean, it appears to be that Mexico is getting more like a structural thing. We have regulation in holidays, also increasing labor, minimum wage, et cetera, et cetera. So just to hear your thoughts, Armando, Rafa, on compare labor in 2023 versus it was how it was like five years ago. How much more expensive it costs for you guys? Maybe you can share that as a percentage of sales or something like that would be useful. Thank you very much.

I will take the first question about the leasing agreement that we have. We have, before the pandemic, lower than 50% of our contests as a fixed contract. or viable rents. Right now we try to have more viable leasing contracts. Right now it's higher than 60%. As you know, we have more than 4,400 contracts and we have many different issues in each one of the contracts. For example, some things that impact us is when we remodel a unit and we will try to have five more years in our contract. So that hit us also in the IFRS 16 numbers. And also if we end a contract or we close a unit, also that impact us in the IFRS 16. I try to explain the most significant impacts that we have last year and when we compare with the 2021 numbers.

That helps. Thanks. And about the labor...

I mean, regarding the labor, yes, we are... 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. de C.V S.A.B. de C.V S.A.B. de C.V

Thank you very much, Armando, for your clarification there. See you next few days. Thanks.

Thank you very much for your question. Our next question is from Antonio Hernandez from Barclays. Please go ahead.

Hi, good morning, Armando Rafael Salvador. Thanks for taking my question. This is regarding Europe. Have you seen, well, you talked about the cost pressure that you've been facing, energy and so on, and how that is gradually improving, but what about consumption? How about consumption trends? Are you seeing any type of further slowdown of people going to Europe? restaurants or maybe some improvement expected second half of the year? What are the consumption trends?

We maintain, of course, we are comparing to the last year in the first eight weeks, we were affected by Omicron as much in Europe, not even in Mexico. In Europe, it was a little bit harder. But since we are almost closing this February, we are not seeing a reduction in consumptions. It's just punctual details, no? In the domino sector, we are seeing some slow trends, but we've been achieving some other commercial strategies and promotions that has been doing well in the consumption. But we are not seeing any downsides. And I will not say in Europe. We are not seeing it in Europe. We're not seeing it in Mexico. S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V

Just to add, I can give you a little bit more color in some of the formats just to clarify the sales figure year-to-date. What we see in Europe, especially in casual dining, it's been quite solid. So Foster's Hollywood with around 20% sales growth. We have Bips in Spain with mid-20s, like Rafael mentioned. Genius is the same, mid-20s. And Starbucks is still quite strong as well, talking about probably low 30s in Spain and in France it's even close to 30%. So far we haven't seen any major slowdown in consumption.

Perfect. Thanks. Thanks for the call around. I'll see you in some weeks. Thanks.

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. Our next question is from Alvaro Garcia from BTG Pactual. Please go ahead.

Good morning, guys. Thanks for the space. A couple questions on my end. Firstly, on rents for Rafa. Given the increased proportion of variable rents, would it make sense to see higher cash rents into next year in 2024 on a pre-IFRS 16 basis? So if I were just to look at your P&L on a pre-IFRS 16 basis, would it make sense to see that rent as a percentage of sales climb higher given what's going on, or is it solely a post-IFRS 16 accounting?

I think in terms of percentage of viable rents, I think we are already done the agreements with the landlords. But for example, in Mexico, that sales increased 19% and around 60% is viable rent. That increase of sales in the 60% of our rents will hit us in IFRS 16 figures. because we took out only the fixed frame, the variable rental space as expense in IE 360.

Yeah, but into 23 and 24, it should be a similar level probably as a percentage of sales. Would that make sense? Yeah. Okay, okay. And then you mentioned on the energy front in Europe, 90 to 100 megawatt, roughly 90 to 100 price per megawatt hour. You mentioned obviously it was way lower than what you paid at some point in 22. How might that number compare to 2019? It was around 40. Okay. Okay.

We had a contract for five years signed and it was 40. In between 35 and 40 megawatt hour. So we still, I mean, in the range of 90 and 100 still. S.A.B. de C.V

Your Domino's portfolio is maybe more resilient to what we're seeing.

Our Domino's portfolio is pretty healthy. I mean, we, in the same store sales, we are positive to week eight of this year still. We, of course, that was, I would say, the segment that was hit most because of three things, of cheese, of course, flour. Those two goods were... S.A.B. S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V a pulse strategy that we are doing of, like I said, last quarter of GPS and DCS. And there's a piece of the pie, it's a loyalty program that we are also launching our app, a native app, a native web, I think, and some other new products that we are launching. We are keeping up with a good pace regarding the increase of sales.

Thank you very much for your question. Our next question is from . Please go ahead.

Hello there. Thanks, guys, for taking my question. I have a few questions. The first one is if you could just explain the reason why you're seeing very strong sales growth in Europe and in the rest of the regions. That's the first question. The second one is on price increases. Have you been able to increase prices in Q4 or in Q1 so far? And if so, by what magnitude? Also, if you could talk about your input costs as well. I think last year you were saying that you were buying cheese and chicken wings in advance. So just trying to understand how much worth of inventory S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V S.A.B.

Well, first, related to the guidance, I guess we're going to be going full mode into more detail during our investor day. That is going to be 30th March. So probably we're going to be waiting until then to fully put out a 2023 year guidance of role. Regarding sales performance, I guess it's just been pretty much part of the resilience and the good operating company that we are, that we're seeing. customers preferring our products versus the competition. And we are still taking advantage of some of the market opportunities that we see since a lot of players are not there anymore post-pandemic. But overall, I would say that we have the back office processes. We have the operating know-how of each of the markets, and we know exactly how to do and where to do it in each of our brands. And that's pretty much talking about the resilience that we've been seeing so far. And even though we've been hearing from, you know, investors, economists, that there's going to be a slowdown coming for sure, at least probably since the second quarter of 2022. So far, we haven't seen it. And it's been quite a positive surprise that our brands are performing amazingly well. Regarding price increase, I don't know.

Yeah, just I want to see, I mean, all I mean, look at the numbers right now to week number nine. Last weekend, all of our geographies and all of our brands are positive sales. More, like Salvador said, some are in the low 20s, in the high 20s. We have only the 10s. So everything is just for us is positive daily sales. Regarding the imports from the raw materials that you said, We are not seeing, and we already have a good agreement with suppliers regarding dough. We have a big consumption of dough for the Domino's Pizza brand. So we are steady there. We have overstock on cheese for Mexico all the way to May 23. It's also quoting dollars. We are seeing an 18 right now. The dollar is quoting 18.3. So that's also a headwind for us. We are also, regarding coffee, as you know, we rely on Starbucks editing and sourcing policies, but even though that coffee is right now running at $187 a pound in Chicago Stock Exchange, so we are seeing a decrease in coffee that fortunately will come to us in the second half of the year regarding our alignment with Starbucks Corporation, right? S.A.B. de C.V S.A.B. de C.V

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taking prices on the high marginality products are more on the innovation side rather than the enterprise core products where you're going to be feeling it more. If you put additional pressure to, for example, the everyday coffee of Starbucks, you're probably not going to match with that. But you can go for the higher marginality products or the new products that you're going to be launching, and there you don't have any price reference as a customer. and therefore we get a higher profitability.

Thank you for that. I guess what I just wanted to understand is when we're going to stop seeing the margin pressure that we've seen as a result of the input costs and also as a result of the change in the rent structure.

In terms of the rent structure, as I mentioned, we've already finished all the agreements with landlords changing the fixed cost to viable cost. So, as I mentioned, the only impact that we will have for the next quarters will be the increase in sales and the increase in payment of the viable rent. As I mentioned, if we have an average 60% of our contracts with variable rent, the 60% of that increase in terms of sales will hit us in terms of the IFRS 16 figures.

And we are talking about how we think pressure. I think the worst part of the pressure of cost and inflation, I think, is done, no? The only uncertainty that we don't have is the energy cost, right? The energy cost in Europe. That's the only thing that we do not have that control over. But I think the rest, we've already seen what happened in Spain with the minimum wage. It was a 7% increase. We already have the Mexican. We already have Chile. What is that? So regarding labor, we already know all the details how we're going to come. regarding all our suppliers. We do have a close relation with them, sitting down in the table to see what's going to happen for the full year. And I think we already are very clear with that. The only uncertainty is the energy in Europe. S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V

Thank you very much.

Thank you.

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. That was the last question. I will now hand over to Mr. Hernando Torrado for a final comment.

Thank you very much for attending our quarterly review conference. I hope to see you all in the investor day that we held on March 30 at the Citi's corporate office in New York. We will have more details about these questions that you got tables and another interesting points of our company. S.A.B. would like to thank you for participating in today's video conference. You may now disconnect.