Alsea S.A.B. de C.V

Good morning, everyone, and welcome to Alcea's third quarter 2023 earnings video conference. My name is Nicolás Espinoza from Alcea's IR team, and today our chief executive officer, Armando Torral, and our chief financial 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.

Gracias. Thank you, Nicolás. Good morning. Good morning, everyone, and thank you for joining our third quarter 2023 earnings video conference. I'm pleased to present Salsea's latest financial results, provide insights into regional and brand performance, and discuss the main highlights for the quarter. Overall, we deliver strong sales performance across all the companies' brands this quarter, and it's clear that our commercial strategies, product innovations, and our digital strategy has, again, solid results. when excluding the impact of peso appreciation. Same-store sales also saw a substantial 17.3 year-over-year increase, reflecting continued customary loyalty across all regions and brands. EBITDA by IFRS grew by an impressive 24.6%. Totally 2.6 billion pesos for the quarter, with a 14% margin, way above our guidance. Post-IFRS, EBITDA grew by a still strong 30% to 3.5 billion pesos for the quarter, with a margin of 20.2%. We serve over 12.1 million orders by home delivery in the quarter, amounting at 3 billion pesos sales. Home delivery sales accounted now for 16.1 of our total sales. Regarding our brands, Starbucks reported an impressive year-over-year same-store sales growth of 24.9%. In Mexico, same-store sales increased 26.5% year-over-year. Europe, a 13.1%, and South America reached a 35.7%, and excluding Argentina, 6.8%. Domino's Pizza posted a solid sales in Mexico and Spain with an increase of 8.1% and 3%, respectively. We are pleased to see that our range of commercial strategies and effective contribute to boost our total sales in the pizza sector. Regarding Burger King, in Mexico, we had another overall successful quarter with sales increase of 9.6%. We are focused here on expanding the national rollout of our digital kiosks, which have proven to increase the average ticket by a double digit number. Our global restaurant business, excluding VIPS Mexico, also reported a solid quarter with same-store sales of 8.8%. Regarding VIPS Mexico, it continues with a strong same-store sales performance, reporting an 11.3 year-over-year increase with guests of 9.5%. Regarding BIPS, it's been improving in store experience and product diversifying. We remain very focused on the product and experience with our customers. We started the first overall celebration with a remarkable, that will be a remarkable year. Next year, we'll have 60 years in Mexico. We'll celebrate our 60 years in Mexico, and we will have several events to celebrate with guests and our Bipster members along this year. In Vips Mexico, we increased the brand probability based on remodeled stores. During this year, we are remodeling 30 units, reaching 177 stores remodeled of a total of 238. With this improvement, we have increased average weekly unit sales in 15% compared to the same store sales before remodeling. S.A.B. de C.V S.A.B. focuses on the most profitable ones and the high growth opportunities. Additionally, we have placed special emphasis on the drive-through format in Starbucks Mexico with a total of 185 drive-through units in the country, which has shown a 30% increase in sales comparing to the standard format. In line with our digital transformation strategy, Our loyalty sales grew 28.7% versus last year, reaching a 3.5 billion pesos at the end of 3Q of 23. This represents 19% of share of the total sales. Regarding Starbucks, your program starts for everyone. That was launched in Spain, France, and Portugal. In last quarter, we had more than 280,000 new members. that join our programs. That it's also happened with a 10% in tender in average. In the Starbucks Mexico rewards tender, the Starbucks Mexico rewards tender has 28% now, and we expected to grow the tender also in Europe in these levels. Regarding ESG during the third quarter of 2023, We continue to sponsor significant environment and social initiatives in the line with objectives of our ESG model. In our fight against food waste, we expanded our partnership by placing new brands on that Too Good To Go app in ASEA Europe. This app allow us to maximize product sales during the final hours of stores operations to prevent waste. Through this partnership, we have sold over 66,000 food packages this year while avoiding 174 tons of CO2 emissions. In a collaborative effort with the Planet Water Foundation, Alsea South America has provided clean and safe drinking water to the community of Caquesa in Bogota, Colombia. S.A.B. de C.V. In line with our commitment to inclusion and accessibility, we have begun the countrywide introduction of Braille menus for the blind and visually impaired for all the Mexican brands. We anticipate that the completion initiative will be ready in early 2024. I am very pleased with our year-to-date results. S.A.B. Our team with more than 76,000 team members across 12 countries providing their excellence day in and day out. Now, I will hand over to Rafael so we can give you more details, overview of our brands, regions, results, and a balance sheet item. Thank you very much.

Thank you, Armando. Good morning, everyone. As Armando mentioned, all the Alsea team members are pleased with Alsea's performance as quarterly sales increased 8.8% on a pre-FRS basis year over year, driven by a positive trend in all regions. Costs were down 20 basis points versus last year, and EBITDA pre-FRS was up 24.6% to 2.6 billion pesos. in Mexico sales were up 17.8% to 9.9 billion pesos and adjusted EBITDA was up 20.7% per IFRS to 2.2 billion pesos this improvement was driven by robust consumption trends and effective expenses management also S.A.B. de C.V In Europe, sales increased by 3.7% to 5.6 billion pesos, or by 14.1% in euro terms. At Jotset, EBITDA increased by 46.8% per IFRS to 884 million pesos, and in euros by 62.3%. S.A.B. de C.V S.A.B. S.A.B. Pre-IFRS for the third quarter increased 60.5% to 540 million pesos year-over-year, driven by the increase in sales and EBITDA. In the third quarter of the year, we posted a pre-IFRS earnings per share of 2.8 pesos, including IFRS earnings per share rose to 2.5 pesos with an increase of 31.4% year-over-year. In terms of our investments, the total capex year to date amounted to 3 billion pesos. We allocate 30% of this amount to maintenance and 50% to store openings and remodeling and the rest of the 20% for IT and other strategic projects. In the last 12 months, we made amortization payments of 1,026 million pesos. Our prior first gross debt decreased 1.3 billion pesos year over year, closing at 26.5 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 debt amortization during the period. During this quarter, we refinanced the Euro banking loans of 229 million euros ending in 2026 with a favorable condition of extending for two more years the amortizations of the credit after the Euro bond refinance. Our pre-IFRS 16 gross debt to EBITDA ratio at the end of the quarter was 2.6 times and EBITDA to interest paid at 3.6 times. The debt structure at the end of the quarter was 92% long-term, with 64% in Mexican pesos and 36% in euros. So we can go now to the Q&A session. Thank you.

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. Rodrigo Alcantara from UBS. Please go ahead.

Hi, good morning, good afternoon. Thanks for checking my question. Armando, Rafa, Nico, nice to see you there. So, well, I was on BIPs. Maybe, Armando, if you can explain us better, I mean, how impressive the reduction that you have achieved there on the COG side. S.A.B. de C.V on Starbucks, right? I mean, impressive to keep seeing in Mexico of such digits. So just curious if you can comment on this quarter, which commercial initiatives gave you this uplift in sales? to understand what drove this. And for next year, which commercial strategies could give you the next uplift for sales? I mean, in the context of, we know how the baking store program was an uplift for you guys, right? Then the drive-thrus, maybe you can give us an example of other uplifts that are helping you to maintain such impressive momentum at Starbucks. Those would be my two questions. Thank you very much.

Okay. Gracias, Rodrigo. There are actually three questions. Let me answer you a little bit. Three ones. First of all, the Bips, no? I mean, as I told you when I saw you, we are very focused in that brand. I think that brand, actually, yesterday, our head of Bips, Jaime Vasquez, just gave an update to the board, a 20-minute update about where we stand and how we've been doing these impressive numbers, no? And we've been working very highly with our distribution center, with our... S.A.B. de C.V S.A.B. for promotions. Just September was the best season ever. We sold 280,000 chiles en nogada for one week, making a 2.1, just making convenience for the consumer. So I think the brand is just having a great momentum now. The next weeks, 10 more weeks to come, things are look very well too, not only in La Cox, but only in the labor cost. So, I mean, we still momentum to go. In 2019, I have the numbers very fresh right now, but 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. S.A.B. driving by price, he's driving by an increase in second items. So we are great there. Cold drinks right now represent 48% of our mix. So that has a better ticket average. So I think we're working also in IT regarding with speed of service. We are measuring all the speed of service that we do in the drive-thrus, in all the stores. We are putting better POS systems, new POS systems. S.A.B. S.A.B. de C.V Top things to go next year. But I think we have the SDS. SDS will be installed next year, bundle two. That will give us a lot, a better loyalty performance for starts for everybody. We are working there in the loyalty. We are already having an implementation of our food program for next year. Looks, there look very good with Europaste and other vendors who are working with some improvements in food that I want to be great. And also in beverage, you know, with Starbucks Corporation, there's, Thank you very much for your question.

Our next question is from Ulises Argote from J.P. Morgan. Please go ahead.

Hi guys, thanks so much for the space for questions. Just a quick one and a follow up maybe to trends that we heard from you guys at the start of the year. So you mentioned in the investor day that you were kind of looking to consolidate the portfolio a little bit, maybe sell some of the brands that were underperforming or that were not at the core of the strategy. So just wanted to get an update from you guys as to where we stand there, if there's anything on deck that we could be expecting. Thank you.

I mean, you saw this year, we do the Mexican concept that we already put out of our company. We don't operate more. CPK also is out. We did also the Mexican. We did also Ole Molle is out. And we are in advanced conversations with the TJ Friday, 11, 12 stores that we're in in Spain. We also are looking for... for some casual dining in Latin America where we only have seven restaurants in Chile to disincorporate for the group. But that's what we are focusing. We're going to still focus on that and just focus on the brands that really are core and making us a better return of investment in the portfolio.

Okay, no, that's super clear. And then the other question that I had was regarding the European operations. You have that option upcoming with Bain Capital for, I think it's October of 24. So just wanted to get like an update on where do we stand there and what can we expect and how that fits in the overall capital allocation strategy. Maybe if discussions on dividends are still there present for 24, given this potential cash that you will be spending on this.

Well, yes, in terms of the call option that we have with Bain, it's in October 2024. We would like to go for it and buy back that 10.5% of Alsea Europe. As I mentioned previously, the amount, it's around 110 million euros. And we will need some bank credit funds. to pay that amount. And in terms of dividends, yes, we would like also to go back and pay dividends next year. The amount we will see in the annual meeting that we will have, but yes, we would like to go back to the same amount that we used to pay in terms of dividends next year.

Okay, perfect. Thank you very much. Super clear. Thank you.

Thank you very much for your question. Our next question is from Mr. Álvaro García from BTG Pactual. Please go ahead.

Hi, gentlemen.

Thanks for the space for questions. A couple on my end, Rafa. The first one is a housekeeping item on the 85 million peso impact from Argentina.

S.A.B.

de C.V

and 7.5 of all the product. And it's when you buy the U.S. dollars to pay that product or that service. We made a provision because in Argentina we couldn't pay some royalties and some products because we can't pay U.S. dollars as easy as some years ago. So we provisioned that amount for all the 10 months in average of royalties that we that we own to Starbucks and Burger King. For this year? It's for this year. It's a one-timer because all the royalties that we have that debt. But we will have to pay this 25% every time that we have to pay some U.S. dollars in Argentina. Awesome.

We are here waiting, you know, as you know, in two weeks we will have the second round of elections and then the 10th of December, 11th of December, the new president coming. We will see what will be the economical package for the country regarding taxes, regarding everything that goes away. So we will have more clear our path for next year in order to see what is going to be the effects of all these impacts in taxes.

Awesome. That makes a lot of sense. And then just one on Mexico, on dominoes. I'm just wondering if you can maybe provide an update on competition versus Little Caesars and the outlook into next year for dominoes in Mexico. Thank you.

Regarding Domino's, I think, as I told you, we did a good evolution in sales regarding the carry-out business, the counter business. That's what we are gaining some share. Just to tell you, we did about four points regarding sales from last quarter. S.A.B. de C.V in same stores that we had also an effect of same store sales regarding some other promotion that we did last year. Well, we are implementing some other good promotions. In September, we did a Domino's Pizza, Domino's Mania, all types of pizza, 189. And we did an increase of sales of 29% versus the last one that we did in June. We increased orders in 6.5 times compared to June. And actually the 9th of this month, we're going to do again this kind of promotion. So I think that the business is performing very strong. Also helping, of course, by a solid consumption moment that is in this region in Mexico. You know, the minimum wage increase also is helping. And there's, you know, these new profit sharing scenarios that is also in the pockets of the consumer. So I think all these things are helping us to reach better sales and not only in Starbucks, also in Domino's, and I will say in the casual business and also in Vips.

Great. Thank you, Armando. Thank you, Rafa. Gracias.

Thank you very much for your question. Our next question is from... Mr. Alan Alanis from Banco Santander. Please go ahead.

I think you're on mute. Okay, yep. Nope.

No, we can't hear you yet.

Nope.

No.

No, we can't hear you.

sorry Alan we can't hear you but if you are okay we are going to take another question right now and we can try again if you want to set your audio settings or email or you can send us by email and we will be glad to answer it right now our next question is from Mr. Ben Theroux from Barclays please go ahead

Hey, good morning. Does that work?

Yes.

Yeah. Fantastic. I was already scared because Alan couldn't get through. Anyway, it's a twofold question. So obviously, one thing I wanted to understand is how you see Alsea going forward from a capital allocation perspective. Where do you think investment needs to be done? Is it more towards still opening stores to get the penetration higher in certain areas? S.A.B. de C.V. S.A.B. de C.V.

Going forward, what we are seeing is that we are still growing organically. And as we mentioned, we can open 200, 220 new units, mainly Starbucks and Domino's Pizza. 75% of that number will be S.A.B. de C.V Then we're going to still put a lot of view in terms of maintenance and remodeling. So another, I would say another 35 to 40% will be that part. And the other 20% will be in terms of IT and strategic projects. Next year, as Armando mentioned, we're going to implement SDS, Starbucks Digital Solution in Mexico and South America. The total amount of that investment will be around 300 million pesos. And we're still investing. In Olo, we're going to end the Olo. In Mexico, we're going to implement the U.S. cloud app for Domino's Pizza. And we are still with some investment in all the digital part.

Yeah, and I think the digital concept doesn't need really a big, big amount of because it's only a cap is regarding the hardware, no? All those venues and all the product, the software, everything is just made in the U.S. And actually yesterday that we had a call with the Starbucks USA, they are the ones that are investing completely in the platform, no? S.A.B. de C.V S.A.B. de C.V and less to the administrative part of the business.

Okay, perfect. And then just one quick follow-up on Europe. I just wanted to understand how you feel about the consumer in Europe in particular. Do you see any downtrading trends, anything to just be aware of? Because obviously the geopolitical situation and some of the inflation in Europe is still very elevated, and maybe the consumers aren't that used to high inflation for longer in contrast to Latin America. So just wanted to get your view from off the ground.

Actually, we had a very solid number in the quarter because the summer for us was a lot better than the past two or three. I mean, we remained, August was a very solid number. Still the first two weeks of September was solid. S.A.B. de C.V S.A.B. So I think that is not going to be an issue. And energy just is a cause that reflects in all the houses, hassles of our consumers. So I think we don't we don't see any any standbys or things that are going to we see a strong, solid number to close a year to close the next two weeks of sales that we will have.

Also to compliment Armando, when we see by format the participation and the same store sales, we're noticing that the casual dining brands are even performing better than the QSR. So that gives us the outlook that down trading is not happening yet in Europe. Okay, perfect. Thank you very much.

Thank you very much.

Thank you very much for your question. Our next question is from Mr. Alan Alanis from Banco Santander. Please go ahead.

Let's try it now. Can you hear me?

Yes.

Yeah, we can hear you. Sorry about that. My bad. Well, first of all, Armando Rafa Nico, congratulations for the results and thanks for taking my questions. Very impressive. A couple of questions. The first one regarding labor costs in Mexico and Europe. Are you seeing any additional pressures on labor cuts on the back of the very tight labor market that we're seeing in Mexico and any change in the turnover of labor? And that's the first question. The second question is more strategic as new CEO and the relationship with your key partners, with Starbucks and with Domino's. I mean, you must be like the best operator of Starbucks and Domino's or one of the best operators. in the world. How do you see that evolution going forward? What are the opportunities and the challenges that it poses? And when do you have to renegotiate terms with your partner?

regarding labor of course this year is gone I think Alan this year the numbers are there things are not going to change there's no loss that against us but yes again January 1st of next year we expect at least a 20% increase on the labor in minimum wage we are budgeting 22% 30 million pesos for Mexico every point so we have it very clear but we've been S.A.B. de C.V S.A.B. de C.V How much was it? S.A.B. Everybody, that creates more disposable income for the people and that has to traduce something in sales. But yeah, we are aware of that situation. Regarding Europe, no, we had an increase of labor, 8% last year. That was a big increase. But how we see the inflation next year, especially in Spain, we don't see an impact as the one that is in Mexico. Regarding the best operator, I mean, we cannot say we are the best operator, but there is S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V

in 2025 2025 we have the Domino's Pizza contract that we have to renew every time that we renew the only new commitment that we have is the number of openings that we have to do for the next years that's the only change in terms of a new renewal of the contract and the next ones in Starbucks are Mexico in February 2027 and then also Argentina and Chile 2027

Perfect. So they're far away. Congratulations. Amazing execution, guys. Really great results.

Thank you.

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

Hi, guys. Well, first of all, congrats on the results. I have a couple of questions related to EBITDA margin. First one in Mexico. In the EBITDA margin post AFRS, we saw a contraction of 80 basis points. I think that's related to leases or something like that. So just want to be sure and want to know how to measure that impact if there's some for the coming quarters. And the second question is regarding to Europe. I mean, amazing result with a bit of margin expansion related to the energy cost. But just want to know if there are some space left for the coming quarter and how much you are targeting on that front.

Okay, the first one in terms of post-IFRS 16, one of the main things is the variable part of the rents. Because of the increase in sales that we have, the variable rent increased also in terms of participation of sales. Last quarter, it was around 0.7 points, all the... the participation of viable rents. And this quarter was 1.8. So because of around 50% of our contracts are viable, it depends of the increase in each store and the contract that we have in each store. But I will say that going forward, I will say that it's going to be around 1.8% of sales. The part of the rents that stays as an expense and we don't take out to increase the EBITDA with this part of the rent In terms of Europe, we have two things. Yes, we increased EBITDA for around 400 basis points. One part is the cost because if you see last quarter, we had an impact of 250 basis points in terms of cost versus prior quarter. And this quarter is almost the same cost as the cost that we had last year. So one part is cost and the other part is energy. for the whole year. It's around 100 euros per megawatt. And what we are seeing is that we think that it's going to be in the same average of 100. In terms of EBITDA, we think that for the end of the year, in the last quarter, because we increased sales in December, it's going to be a little bit higher than 10%.

Okay, perfect. Thanks for the call, guys. Congratulations. Thank you.

Thank you very much for your question. Our next question is from Thiago Bertolucci from Goldman Sachs. Please, go ahead.

Yes, hi, good morning, gentlemen. Thanks for taking my question and congrats on the results. I have a follow-up on your cost deflation, right? Obviously, the dynamics really depends on each market we're looking at, but arguably in Mexico, you are going for a year of a material improvement on COGS. In Europe, Armando already mentioned COGS. in terms of energy, right? When we think about how this will flow into your PNL, would you say the strategy is to capture this environment through margins or do you think there is a space eventually to reinvest part of discussion to accelerate growth? That's the question. Thank you very much.

Thank you, Tiago. I mean, as Rafael mentioned, the company is ready to, I mean, what we feel comfortable and we want to make sure is an opening plan of regarding 250 to 275 stores a year.

With some franchises, yeah.

With sub-franchises. I mean, of course, that sub-franchises will be unlimited. If we can open more franchises, more franchises, we always will do it. We will have an aggressive plan of VIPs next year for that. We will make a record high in Domino's Pizza franchises open stores this year. So that is a good reflection of the momentum of the business P&L and return of investment, right? S.A.B. de C.V It only represents 5% to 6% of the sales, Tiago. So at the end, if I open another 50, the number doesn't change much. So I am very focused more in the operation that we had. Same store sales is a key of the company. Same store sales is what creates the margin. And, of course, because of the pressure of labor that we will have in Mexico, that I need to gain better sales. S.A.B. de C.V S.A.B. de C.V

I will say that, and this is not a thing of money in terms of the new openings. The bottleneck that we have is to find the right sites to open more than 200 new units and to have the right managers also to run these 200 new units.

It's important. I will tell you probably the next quarter how we're doing regarding average weekly unit sales for the new units. You will say probably when we opened store number 820 in Mexico, that average store is doing less than the first one that we opened 20 years ago. And it's not the case. In the case of a Starbucks, it's amazing that the stores that we are... opening now, they're above the average of our portfolio. So that creates a very good news for us to still create it. And also, as I've mentioned, drive-thrus takes longer. Drive-thrus for us takes around 12 months to complete. Instead of six months, that is just a quarter abbreviated unit. So that is also making us a little bit more, I would say, more slowly in opening, you know.

Also, you were mentioning the cost at the beginning, and what we are seeing here in Mexico, for give you an example, we have mozzarella cheese. We did an overstock until March, 2024, and we did it cheaper 12% compared to the last year. So we see other raw materials like the boxes of the pizza and other products going down. So we see a good outlook in terms of cost for Mexico.

That's clear. Thank you very much, guys. And once again, congrats on the numbers.

Thanks, Tiago.

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

I didn't have a question, actually, but If you can comment, I guess I stayed in the room by mistake. Sorry about that. But if you can comment maybe on same store sales quarter to date, what you've seen through October, that would be very helpful. Thanks again. Congrats again.

Yes, sir.

Yeah, Eduardo, we have some numbers here to share. In the first weeks of October, we see that the same store sales are growing on a more moderate pace. Just give me one second to give you more detail on the last week of October. In Mexico, looking at the numbers, I have a same store sales growth of 13%. Then if I go to South America, I have a growth of 64%, which inflation makes this number a little bit bigger. And then in Europe, I have a growth of 7% of same-store sales. That's the last week of October. And then if I look at the first week of October, it's pretty similar. Just give me one second. In Mexico, I have a same-store sales growth of 14%. No, sorry, 13%, sorry. And then in South America, I have 62%. And then in Europe, I have 12% of same-store sales growth. That's the trends that we see until the first two weeks of October.

Great. Thank you very much and congrats again. Thank you.

Thank you. Thank you.

nos vamos a trabajar una más thank you very much for your question our next question is from Mr. Federico Galassi please go ahead where is he?

Hi guys, congrats for the results. Quick question according to for Mexico, how is the capacity of the COA? How much with this old CAPEX plan that you are having in Mexico is enough? Do you need to increase the capacity, open new distribution centers, etc.? ?

Good question. Nobody asked that question, but I do ask every quarter when these results are going in and the momentum that we have in the orders that we have in and the plan of. And we're going to open just from here to December 64 new stores in Mexico. So imagine a capacity of a distribution center and logistic strategy is important. Mexico, as you know, we have five distribution centers. The only ones that and the bigger one is Mexico City and the capacity there is we have is from it's complete to 80 percent. So we have another 20 percent capacity. S.A.B. de C.V S.A.B. de C.V Why and how and what will be really the cost implementing this new distribution? Not only distribution, we always will do. And we can tell you a little bit more details of how is the capacity distribution center by distribution center. And when we open Guadalajara, how these things look. And we're going to do some manufacture in that facility. So that is a little bit of where we are. But from now on, we are covering the next 18 months. Okay, great, thanks.

Thank you very much for your question. That was the last question. I will now hand over to Mr. Armando Torrado for final comments.

Thank you. Thank you, everybody. Thank you, everyone, that was connected today. Thanks for attending our quarterly video conference. And like always, if you have any further questions, please be in touch with our investor relations team. And thanks again. Have a great day. And we see you in February. That's right. Thank you very much. Bye-bye.

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