Alsea S.A.B. de C.V

Good morning everyone and welcome to Alsea's second quarter 2023 earnings video conference. Today, our chief financial officer, Armando Torrado, and our chief executive officer, Rafael Contreras, will be presenting the quarter results. Now, I would like to hand it over to Armando for his initial remarks. Please, Armando, go ahead.

Thank you, Nico. Good morning everyone and thank you for joining our second quarter 2023 earnings video conference. S.A.B. de C.V We are pleased to announce a 12% year-over-year increase in total sales, amounting to 18.9 billion pesos post-IFRS 16, and a 19.9 increase excluding the impact of a stronger peso. Despite a sequential increase in the comparable base, same-store sales showed an impressive growth of 18.6 year-over-year. EBITDA pre-IFRS increased by 15%, amounting to 2.5 billion pesos for the quarter, with a margin of 13.7%. Post-IFRS EBITDA increased by 6% to 3.6 billion pesos for the quarter, with a margin of 20.3%. This quarter results and reflects a strong demand for our brands and accompanies high profitability, driven by positive consumer behavior and supported by our strong business model. We serve over 12.3 million orders by home delivery this quarter, reaching 3.2 billion pesos, representing a 12.8 increase compared to the second quarter of 2022. Home delivery sales accounted now for 17.1% of our total sales. Regarding our brands, Starbucks reported an impressive year-over-year same-store sales growth in Mexico of 25.2%, while in Europe, 15.3%, and in South America, 42.8%. Screwing Argentina, The percentage was 11.8%. Regarding Domino's Pizza, sales were up in Spain and Mexico, 7.8% and 5.2% respectively. We are pleased to announce that we were well recognized in our two biggest markets, Mexico and Spain, with a Gold Franny Award, the most prestigious honor bestowed on Domino's franchisee owner. The award is based on several key factors, including operational audit scores, community involvement, store safety, and security. Dominos International, as you know, entered into an agreement with Uber. It's incumbent to enhance our delivery service, especially in Mexico and Spain, while gaining deeper insights into our customers. In Mexico, our successful commercial strategy to increase participation of the carryout segment resulted in a remarkable 19% sales increase compared to the year before in this prestigious channel. Regarding Burger King, we reported another positive increase in Mexico and Spain of 9.5% and 3.1% respectively. During this period in Mexico, it is important to say that our digital kiosk implementation has been very successful, with a 17% increase in average ticket. We will be implementing this channel of digital kiosk in all our brands, in all our stores in the next quarters. Regarding VIPs, Mexico continues with strong second quarter same-store sales, up to 7.5% year-over-year. orders were up 8.1%. Bips remain to be focused on improving in store overall experience. Also in Spain, we reported a strong second quarter sales increase of 12.8% versus last year. In Mexico, we continue with our revalidation efforts to the brand with an additional of 10 remodel restaurants year to date with a target up to 40% by the year end which resulted in sale improvements around 15%. The brand recently launched its communication platform Igual Que En Casa with the aim to prove guests with a unique experience in a home environment, offering familiar clothes, warm and personalized attention, taking care of every detail, creating great moments in each visit. Likewise, the brand resumes presence on television and television, which has brought an increase in sales in the week 29. Our global casual dining segment also had a solid quarter with the same store sales of 10.2% and orders growing 5.6% versus the second quarter of 2022. Continuing with our expansion strategy, I am delighted to announce a significant milestone, the opening of the first Starbucks store in Paraguay, making the brand's debut in the country. As we move forward, we will carefully evaluate each new potential location to ensure the profitability of our establishment. In line with our digital transformation strategy, our digital sales, which include e-commerce, aggregators, and loyalty, grew 21.4% versus last year. reaching 4.7 billion pesos at the end of that second quarter 2023. This represents a 28% share of the total sales. Domino's achieved with a remarkable 40.2% penetration of digital sales, and Starbucks, which sets a remarkable growth of 48.1 compared to the last year. Starbucks Rewards Program starts for everyone, we did a soft launching in Spain and Portugal in this quarter. More than 170,000 new members joined the program since we launched it. Spain, France, and Portugal have a tender of 12%, 11%, and 10% respectively. In Mexico, the Starbucks Ruas tender was a 28%. We expect to grow the tender in Europe in the coming quarters. Regarding ESG, finally, I would like to give you a quick overview of what has been going on in the company. In Europe, we highlighted Domino's pitch effort in Spain to transition from regular delivery fleet to electric vehicles, having already modified 13% of our fleet, with a goal of reaching 30% by 2026. Additionally, the installation of solar panels in three out of our four factories that we have in Spain and also in other four freestanding stores resulting in a 20.27 reduction of CO2 emissions for the factories. In Mexico, Alsea and its brands, through the Vapor Mi Cuenta movement, led the Fundación Alsea, delivered five vehicles, two with a capacity of five tons and three with 1.5 tons, benefit five food banks of BAMX network, increasing the association capacity to combat hunger among vulnerable populations. In Mexico also, We have 1,188 units powered by a clean and renewable energy, consuming 81 GWH, which represents 69 of our consummation in the country, thereby reducing the impact of scope two emissions. Also during this quarter, we certified 23 Starbucks green stores, bringing the global total to 42, embracing the Starbucks greener store framework. The equipment in these greener stores increased efficiency, leading to a reduction in water consumption by 15%, energy consumption by 28%, and carbon emission by 4% compared to normal regular stores. So I would like to thank all our team for a strong number in the first quarter. I'm pleased to report that we are running ahead of our guidance so far. We will see how the rest of the years unfold. But based on the current information, I am upbeat about the outlook going forward. The consumption in Mexico is strong. The summer season in Europe is looking promising. Cost pressures have been eased in most of our regions. Operating leverage is being benefited on us and our team has been executing exceptionally well our commercial strategies. Now I will pass the voice to Rafael so he can give you a more detailed overview of our brands, regions, results, and balance sheet items. Thank you very much.

Thank you, Armando. Good morning, everyone. We were pleased with the performance per IFRS 16 numbers also. Quarterly sales increased 10.9% on a per IFRS 16 basis year over year. Costs were up 45 basis points versus last year, and adjusted EBITDA was up 15% to 2.5 billion pesos. Looking to regions in Mexico, sales were up 17.6% to 9.8 billion pesos and adjusted EBITDA was up 23.1% to 2.3 billion pesos. This improvement was driven by digital innovations, new menu offering, and the continuous improvement in the retention of key talent, decreasing 2.9 percentage points in the turnover rate of the country compared to the same period of the last year. Also, sales growth helped us to improve our operating leverage, and the cost was benefited from the appreciation from the Mexican peso, resulting in a cost reduction of 100 basis points. In Europe, sales were up 4.4% to 6.6 billion pesos, and adjusted EBITDA was down 5.1% prior to 2016 to 866 million pesos. However, when excluding the effect of foreign exchange fluctuations, sales grew up by 15.7%. The increase in sales was driven by the normalization of consumption in the region, Digital Strategies Implemented and the Product Innovation. The contraction in the EBITDA was mainly due to the impact of the raw material and energy costs year over year, as well as the rise in minimum wage, partially offset by responsibility, price increases, cost control, and value strategies. South America posted a strong 49% increase in same-store sales for the quarter. with adjusted Pre-IFRS 16 EBITDA increasing 13.2% to 526 million pesos. The results in this region are mainly relating to the inflationary impact in Argentina as well as responsible pricing strategies and product innovation. Our net income Pre-IFRS 16 for the second quarter increased 89.7% to 475 million pesos year over year. This result comes from a very strong EBITDA generation and a benefit of the exchange rate variation. In the second quarter of the year, we achieved a pre-IFRS 16 earnings per share of 2.74 pesos and including IFRS 16 earnings per share rose to 2 pesos and 37 cents. In terms of our investments, the total capex for the second quarter amounted at 1.7 billion pesos. We allocated 39% of this amount to maintenance, 45% to store openings and remodeling, and 16% for the strategic projects. In the quarter, we paid 44 million pesos of net amortizations. Our pre-FRS gross debt increased 3.1 billion pesos year over year, closing at 25.5 billion pesos at the end of the quarter. This reduction in debt corresponds mainly to the devaluation of the euro against the Mexican peso and the debt amortizations during the period. Our pre-IFRS 16 gross debt to EBITDA ratio at the end of the quarter was 2.7 times versus a covenant of 4.9 times and EBITDA to interest rate at 3.2 times. net debt to EBITDA 2.2 times with a cash position of 4.3 billion pesos. The debt structure at the end of the quarter was 63% on fixed rate and 37 variable. Also, 87% long-term with 64% in Mexican pesos and 36% in euros. And we reached a return on equity of 25%. We can go to a Q&A, please.

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. Sergio Matsumoto from Citigroup. Please go ahead.

question. Armando and Rafa, could you comment more on the employee retention plan that you implemented, announced, and I'll say this year? It looks like you're gaining quite a bit of traction with it with frontline employees. You mentioned recruiting and training are better if you could give us more color on that and is there more that we can expect from this program perhaps on technology and automation if that's part of that and also if you can comment on the store manager's compensation that may help improve productivity

Oye, Sergio, thank you. How are you, Sergio?

Yeah, I mean, what we're doing, I briefly hear you, but you talk about the retention plans that we are doing, right? What are we doing regarding the retention plans? I've been very, very focused on that. Actually, we have very pleasing and record numbers in Mexico regarding turnovers. We're working hard in Spain to do so. S.A.B. de C.V and retain all those people in a program. Of course, we do some adjustments, salary adjustments. That is also with the ESG program in two of our brands regarding salaries. Other, we are focusing in critical zones, critical regions, especially in Mexico. We have four states where labor is starting to get... It's been... S.A.B. de C.V We've been having that platform of hiring with AI since last year. It's working very good for us because we, in Mexico, just in Mexico, we hire more than 2,000 people a month. So that is working fine. And also, why not, I mean, develop a process of promotions with an internal upside in our people. And then the other one, as you know, Alcea has a Gerente Dueño program. S.A.B. de C.V they're up north in Mexico yeah it's Nuevo León for sure it's Querétaro we have a we have a Quintana Roo those three states and we're still we're seeing some problems also in Bajio in the Bajio zone and all is the north shorting of course we are looking there's shortage of people in especially in Nuevo León that is a little bit the biggest one that we are suffering thanks for that call Armando thank you

Thank you very much for your question. Our next question is from Ms. Camila Acevedo from UBS.

Please go ahead. Hi, gentlemen. Thank you for the space for questions and congratulations on the results. I have two from my side, the first for Armando. So could you comment about the commercial initiatives implemented at VIPS Mexico and which were the impacts on traffic? And the second for Rafa. So considering the strength of the Mexican peso and your debt denominated in Europe. Is there any chance you can take advantage of this swapping or hedging the debt? Perhaps. Thank you.

I mean, I will let Rafa start in terms of the the the credit that we have in in euros. We don't have a hedge because we have a natural hedge with the euros that we that we have in in in Europe and in Mexico. We did the hedge not when we when we issued the U.S. bond. So really with a with the effects that we have right now, we can't do say anything to have a better rate in terms of the cost of debt.

And regarding the strategy in VIP, since we started last December, we were losing traffic in that specific brand versus 2019. Mobility was a big concern, and that family restaurant segment is really moved by mobility. So what we did in January, February, March, is actually doing a very aggressive strategy in, I would say, in price, but also involved innovation process. We look at what was working, what was the product that was originally for us. We look at the receipts. We focus in the quality of what we were selling, giving attractive menu during weekdays. So we did that from January to March. S.A.B. de C.V S.A.B. de C.V remodeled 40 stores. This is 40 restaurants. That's a big milestone for us. We're already up to 12 more or less year to date. And we've seen an increase of sales when we do our remodelations of 15%. So that's a little bit I would comment in why the results are strong in this brand.

Thank you both. Very clear.

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

Hi, good morning, Rafa, Armando, Nicolas. Thanks for taking my question. Regarding Europe, I don't know if you could provide more light on your expectations there. And also, I mean, you mentioned a strong summer season, but S.A.B. de C.V S.A.B. de C.V

Antonio, as I mentioned, yes, it's been strong. The first four weeks of July, we are up 12%. So above, a wave above the second quarter that this Europe... S.A.B. de C.V S.A.B. S.A.B. de C.V S.A.B. de C.V So that is a little bit what is happening. There's a good momentum in all the geography and with all the brands. So I'm happy to announce that things look better than we thought and expected and especially than the second quarter or the first quarter in Europe.

Perfect. Thanks for the call, Dora. Have a nice day.

Thank you very much for your question. Our next question is from Mr. Joaquin Ley from Itao. Please go ahead.

Hi, Armando. Rafa, good morning. How are you? Two questions, if I may. The first one, now that you've sold El Portón, are you comfortable with the portfolio of brands that you have, or should we expect further rationalization? And along that question, what have you learned from the acquisition of El Portón regarding potential future M&A? And the second question goes to Europe and energy. So could you elaborate a bit more on the sequential behavior of energy prices that you're seeing for your operation in Europe? And are you thinking again about potentially hedging at the prices that you'll see for the second half for 2024.

You want to comment a little bit, Rafa, on energy? In terms of energy, the cost of energy in the first quarter was in average 97 euros per megawatt. And in this second quarter, it was 95 euros per megawatt. What we are expecting is that the cost goes down for the second semester. The special guys told us that it can be better next year, and we can expect around 60 euros per megawatt. And I think, we think that can be a good cause to have a hedge or a long-term contract with somebody.

Also, just to mention that, Joaquin, and just going to your second – to first and your second question, you know, there is a big impact there. Renewable energies in Europe are really coming back, no? There is going to – there are some big projects of renewable energy. We are seeing to have the whole amount to go to – to close a deal with some other guys. We're already talking to that. So I think we're going to stand by now to see what is the future and not sign anything. Thank you for your question. That was a very good one. I mean, regarding, first of all, the portfolio, right? S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V If we don't have critical mass, we have to decide where and where to play the game, no? And the Porton, it's a great brand. It was a great product for us since the beginning. And when we bought 10 years ago from Walmart, that was a second brand in the portfolio. The Bips was the first one always. And if you go, we have a lot of combos where sales of those combos, Bips did... 100,000 and the other one did 40,000. So it was always back to the store and back to the door of Vips. So that was never a brand. We never opened since we started. We never opened a new Porton. We opened another kind of a of segment, Corazon de Barro and La Finca, but we never saw that that brand had a growing path to focusing. So I think that now not having in the portfolio is a good news for us, so we can focus in the brands and in the strategy or long-term strategy that I've been talking in this table. That's great.

Thank you.

Thank you very much for your question. Our next question is from Mr. Fernando Herrera from Compass Group. Please go ahead.

Hi, guys. First of all, congrats on the results. Just two questions. The first one is related to margins in Mexico. In EBITDA pre-IFRS, we have seen expansion in margins, maybe due to raw materials like coffee and cheese. But I just want to understand what's going on with EBITDA post-IFRS because we're seeing a contraction there.

But in EBITDA post IFRS, we have the increase in sales in many of our brands, but mainly in Starbucks. we have these variable rents higher than last year. So that's the main impact. If you see, we open the rents on our report, and you can see the impact of one point because of the variable rents that we are paying, and the variable rent we doesn't take out of the IFRS 16 expense.

Okay, perfect. And second question, it's related to Starbucks. What are you seeing in terms of drive-thru model?

Well, in drive-thrus, actually, like I said, most of our portfolio, there's a big amount of percentage of drive-thrus open this year. Last year, too. 50%. So that also is giving us the amount of average weekly unit sales that we have because the average, also an investment, is bigger. S.A.B. de C.V And that has been very proven. We are also opening our first drive-thru in France this year and in Spain this year. And we will continue with our strategy that has been very good profitably for the brand and for Alsea. So that is going to be still a moment to focus and a challenge that we are all very interested to still develop, no?

Thanks, guys.

Thank you very much for your question. Our next question is from Mr. Felipe Casimiro from Bradesco BBI. Please go ahead.

Thank you. Buenos dias, Armando, Rafa. I wanted to dig deeper into the competitive landscape in the fast food segment that is one of the underperforming segments in Mexico, right, alongside casual dining. But mostly on pizza segment, how is the competitive landscape with Little Caesars and how are you dealing with the pressure from this more aggressive player? and if we could dig deeper also in Burger King performance in Mexico as well that could be very helpful thank you

What are we doing here to gain more share of wallet, not only Little Caesars, against all our competitors? And how are the results now? I mean, same-store sales had, of course, a comparable tougher base for other brands, especially in the Rivoli that 2022 were stronger. S.A.B. de C.V S.A.B. de C.V promotion in the carryout segment. One that has been in the market probably 10 weeks now, that is a pizza sartén for 149 pesos. And we have some other stores, like 175 stores, with 129 large pizzas. So now we are seeing our segment growing, like I said, 19%. So very focusing, first of all, that we are the owners, the leaders in the category, the number one in the category of delivery. But we are going, we are going S.A.B. They do pizzas for carryout, but with a different kind, quality, and sizes, no? And we do it to order, and they order, they do it ready to go. Those pizzas are already done versus the ones that we have. You order it, and we're doing customer with your way, no? So I think that, as you know, we are also switching to Domino's cloud application app that will be ready, hopefully, in this quarter. And that will give us a high conversion rate also in service in the counter and also in delivery. So that is a little bit of momentum that is going. We have 100 stores more than our second competitor. We are growing a base of 50 to 80 stores this year in Mexico. The first time the franchisees opened more stores than us. So that's a little bit of credibility that the brand and the S.A.B. de C.V So that is a great momentum that the brand is doing. Also, like I told you, the digital kiosks that we are starting to implement, I would say we are looking to an 18% increase in ticket average and around 22% conversion, people that go directly to the digital kiosks. We are doing our program of remodel the whole portfolio. In Argentina, it's already at 70%. In Chile, it's already 89%. We are starting to do it in Mexico with 10 stores that we're going to remodel. So I think we're living the best times for that brand, and I'm excited to report again in these quite a better numbers for that unit.

Perfect. Thank you very much.

Thank you very much for your question. Our next question is from Mr. Bernardo Gonzalez from SURA-IM. Please go ahead.

Good morning. Thank you for the space and congratulations on the results. My first question is regarding the certificados bursátiles that are coming due in the short term. Is there any refinancing plans for them?

Yes. The next certificado bursátil that we are going to have is of 1.3 billion pesos in March next year. What we are going to work first is with the rate, the rate agencies. We think that with these numbers, we can have a better rate. And yes, I think we have a tool to two opportunities to refinance this certificate or something, go to the market next year or with a bank credit also. In Mexico, as you know, we only have Bancomex. We don't have any other bank credit. So we have a pretty good opportunity also to have a bank credit to refinance the Cebur for next year.

Perfect. Thank you. Thank you very much. And my second question is regarding the debt covenants, especially the interest coverage. I saw that for this quarter, it was very close to the limit of three times. So if you can comment on that. I don't know if – I mean – What could happen if you reach this level in the coming quarters?

In our projections, we don't see that we can... that we can break the covenant because the increase in EBITDA and also that 66% of our credits are fixed. So even though the increasing in cost of the other 30% that is viable, we don't see that we can break the covenant. Perfect.

Thank you so much.

Thank you very much for your question. As a reminder, if you have a question, please press the question button in the browser. Our next question is from Mr. Jorge Izquierdo from BTG Petrol. Please go ahead.

Good morning, Armando, Rafa, Nico. Thank you for taking my questions. The first one has to do with the impressive results we saw on your global employee turnover rate, almost two percentage points of rate reduction. If you could share any color on the performance by region would be very helpful. And the second one is regarding home delivery. Why is it growing so fast? What is behind these dynamics? Thank you very much and congrats on the results.

I think in that turnover, Rafa, we only are reporting Mexico in the report. But I think we can give you – I don't have exactly right now. In Mexico, we did exactly second quarter 67.7 percent, more or less. And then in the second quarter, we did 64. So we are reducing, yes, that turnover by 2.5 percent on points. 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 we have as you know a special area department here in Alsea that just do home delivery besides the delivery that we do for Domino's so we have people and a team just every day taking care of the platforms around the globe how can we do better and attractive promotions and products and innovation products for delivery taking care of the packaging taking care of 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 for... There's one left, okay. Eugenia is there, no?

Do I have a question? Okay, let's finish with Eugenia. Yes, sorry.

Hello, Eugenia, can you hear us?

Hi, can you hear me?

Yes. Perfect.

Thank you very much for taking the question. Actually, what I wanted to understand a bit more is if you have any changes for the cash flow walk that you gave us during the investor day or anything regarding the share buyback plan that you have. So just trying to understand how the free cash flow should shape through year end. Thank you.

No, really, in terms of the free cash flow for the whole year, we maintain our budget to have a positive free cash flow of around 200 million pesos. So I mentioned with a capex of 5.5 billion and EBITDA of higher than 13%, we mentioned that the EBITDA can be around 10 billion pesos. It can be a little bit better because of the performance that we have this first semester. But free cash flow will be positive for the full year.

Thank you, Rafa. And do you still expect to go with the share buyback plan that you had? If I'm not mistaken, it was 500 million pesos.

In terms of the buyback shares, we already did that. S.A.B. de C.V. S.A.B. de C.V. S.A.B. de C.V. S.A.B. de C.V.

Our next question is from Mr. Armando Ciordia from Banco Mixed. Please go ahead.

Thank you, Armando and Rafa. Thank you very much. My question is, based on the good results reported up to the second quarter 2023, do you expect any upgrade in the ratings assigned from the FH and HH ratings?

Yes, as I mentioned, we're gonna start with the result of the second quarter. Yes, we expect a better rate with both of them, because one of the main concerns, it was the leverage ratio that we have. As you saw, net debt evident prior to 2016 was 2.2 times right now. So it's a pretty good number, better than the projection that we had two years ago.

That's good news. Thank you. Thank you very much. Thank you.

thank you very much for your question that was the last question this concludes the Q&A session for today I will now hand over to Mr. Armando Torrado for final comments please go ahead

Thank you very much for attending our quarterly video conference. Thanks for the questions and the Q&A. And if you have any further questions like anywhere else, please be in touch with our investor relations team. And thanks for today. And we hope to see you in October. And have a great day. Thank you.

Alsea would like to thank you for participating in today's video conference. You may now disconnect.