Alsea S.A.B. de C.V

Good morning, everyone, and welcome to Alsea's second quarter 2024 earnings video conference. My name is Gerardo Lozoya, head of investor relations and corporate affairs. And today, our chief executive officer, Armando Torrado, and our chief financial officer, Federico Rodriguez, will be presenting the results. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers contained in our earnings release and in our most recent Bolsa Mexicana de Valores report. The company does not have any obligations to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on the pre-IFRS 16 standards. I would now like to hand it over to Armando for his initial remarks. Please go ahead, Armando.

Good morning, everyone. and thank you for joining our second quarter 2024 earnings video conference. I am pleased to share with you our financial results, regional highlights, and other notable milestones from the quarter. I will also develop in progress what we have made and our digital ESG strategies. Before I begin, I would like to thank our team members for their hard work and our stakeholders for the continued support to Alsea. In the second quarter, sales increased by 2.3% year-over-year, reaching 19 billion pesos, or a 9.6% increase when excluding foreign exchange effects. same-store sales grew by a solid 9% year-over-year. Despite a challenge in macroeconomics environments and strength of the Mexican peso impacting currency transactions across regions, EBITDA grew a 7.6%, reaching 2.7 billion pesos for the quarter, with a 14.5 margin. This increase is due to the benefits of operating in leverage, lower cost of food, and other raw materials. In the quarter, we served over 32.9 million digital orders, totaling a 6.4 billion pesos, which contributed for 33.9% to our total sales. Regarding our brands, Starbucks Alsea same-store sales increased by a 7.2%. across our regions, Starbucks Mexico, same-store sales grew up 8.7%, driving by over-the-counter promotions, improving store service, innovative food options, and attractive merchandise. For Europe, same-store sales declined 9.9%, mainly affected by more challenging consumption environment, and a boycott of American brands in France and the Netherlands. Finally, in South America, same-store sales grew 27.4%, but declined by 5%, excluding Argentina. Regarding Domino's Pizza Alsea, we posted at 1.8% increase in same-store sales. In Mexico, Domino's same-store sales increased by 4.7%, largely driven by successful commercial strategies such as Domino's Mania. Additionally, popular over-the-counter promotions like My Domino's and Pan Pizza offerings at 119 and 149 pesos provided very highly effective results. In Spain, same-store sales decreased by 2%, affected by ongoing challenges in the delivery channel. And finally, in Colombia, same-store sales were up 2.6%. Regarding our Burger King business, Alsace same-store sales, excluding Argentina, increased by 2.5%. In Mexico, Burger King reported same-store sales grew by 1.7%. In our full-service restaurant segment, we trended positive same-store sales up 5.5%. Pips Mexico posted a very robust 8.4% year-over-year increase in same-store sales, driven by compelling value promotions, service improvements, and innovations regarding product offerings. Chilis and Italianis in Mexico reported a double-digit growth in same-store sales, helped by increased traffic after introducing new food and beverage offerings. In Spain, Ginos also reported a high single digital growth in same-store sales. Let me turn now with Alsea Global. As a brand operator, we focus on providing a top-notch experience for all of our customers. For example, Starbucks Alsea leveraged its geographic reach by sharing best practice between stores while also tailoring food offerings to local preference. We seek to provide a welcoming third place environment where customers feel at home among friendly staff. During the second quarter, we opened 48 corporate units and 17 franchises, or that is a total of 65 stores. which focuses on the most profitable opportunities across all the regions. During the first half of the year, the rate at which new stores were opened was similar to last year and expected to increase in the upcoming months. A core element of our expansion strategy is remaining unique to align with customer trends. For example, remodeling VIP stores in Mexico has lead a 15% sales increase and help attract new customers. Globally, we remodeled 25 units during the second quarter. Regarding loyalty programs, our digital transformation strategy continues to drive growth. By the end of the quarter, loyalty sales increased by 37.6%, reaching 4.4 billion pesos, which accounted for 23.9 million orders and contributed for 33.2 total of our sales. By the year end of the second quarter, Club Bi, launching in Spain during the fourth quarter, reached more than 2 million members, while Stalvos Rewards reached also more than 2 million active users at calls, all ALSEA regions. Now, I would like to take a moment to discuss our team and the progress we are making in our key initiatives. At the end of the second quarter, we had more than 76,000 team members, 49% of whom are women. We have seen our global turnover rate to improve to 60%, a 1% point decrease from the first quarter. During the quarter, we completed the engagement survey with participation from 96% of our total team members across all countries where we operate, achieving an engagement index of 4.2 points and a net promoter score of 56%. Our ESG strategy is progressing well. 25% of our leadership roles are now filled by a woman. 95 of our employees earn living wage or above, and we support more than 2,000 employees from the priority group, including the elderly, people with disabilities, refugees, migrants, and vulnerable youth. In June, as a part of our efforts to reduce CO2 emissions, We acquired international renewable energy certificates for 508 stores in Argentina and Chile, including Burger King, Starbucks, Chili's, and P.F. Chang's, equivalent to cutting over 19,000 tons of CO2. In Spain, we installed 354 solar panels in Q2, reducing CO2 emissions by 209 tons and cutting energy consumption by 20 to 25% in stores, factories, and the support center. In Mexico, Fundación Alsea donated 12 million pesos and two mobile kitchens to Red de Banco de Alimentos de Mexico to the Comer en Familia program. And finally, during the quarter, we certificate 10 Starbucks stores as greener stores, reaching 141 in Latin America. Now, I would like to hand it over to Federico Rodriguez. Thank you.

Thank you, Armando. Good morning, everyone. Moving on to Alsea's second quarter 24 performance, despite the challenging microeconomic environment, quarterly sales increased by 2.3%, driven by effective commercial strategies. Excluding FXFX, sales would have increased by 9.6% for the quarter. In Mexico, sales were up 8.8% to 10.7 billion pesos. Sales in Europe decreased by 2.7% to 5.5 billion pesos, but in European terms, sales increased by 0.8%. Finally, South America's sales declined by 9% for the quarter to 2.8 billion pesos, mainly due to the devaluation of the Argentinian peso and reduced consumer demand in the region. In Mexico, adjusted EBITDA grew by 12.1% to 2.6 billion pesos for the quarter. This improvement was driven by increased sales, successful commercial strategy, a better portfolio mix, and the benefits of our cost reduction strategy. Also, the 7.3% growth in same-store sales continued to enhance operating leverage. For Europe, the adjusted EBITDA decreased by 14.9% to 737 million pesos for the quarter and by 12.2% in euros due to a decline in same-store sales arising from macroeconomic pressures and the boycott of American brands. In South America, adjusted EBITDA decreased by 21.3% to 414 million pesos driven by the devaluation of the Argentinian peso and a reduction in operating leverage. The net income for the second quarter decreased year-over-year by 66.9% to 157 million pesos. This was mainly due to a non-cash negative effect from currency exchange translation leading to an increase in our U.S. dollar's debt in Mexican pesos terms by the end of the quarter. For the second quarter, the earnings per share were 3.06 pesos. Post IFRS 16's EPS rose to 3.63 pesos, an increase of 53% year over year. The capex for the second quarter amounted to 2.4 billion pesos. Can we go to the next slide, please? The capex for the second quarter amounted to 2.4 billion pesos. We allocated 25% to maintenance, 56% to store openings and remodelings, and the remaining 19% to other strategic projects. Throughout the quarter, we prioritized prudent and responsible investments focusing on profitability. Our pre-IFRS 16 gross debt increased by 4.6 billion pesos year over year, reaching 29.7 billion pesos by the end of the quarter. This rise was primarily due to the impact of a weaker Mexican pesos on our foreign currency debt at quarter end. And finally, moving on to financial ratios, total debt to EBITDA ratio closed the quarter at 2.6 times, while our net debt to EBITDA ratio stood at 2.3 times. At the end of the quarter, 88% of the debt was long term, with 65% denominated in Mexican pesos and 35% in euros. We are committed to maintain a healthy balance sheet going forward and are confident in meeting all our debt obligations thanks to the healthy cash generation. At the end of the quarter, we posted a cash position of 4 billion pesos. Now, finally, I will pass you over to the operator for the Q&A session. Thank you very much.

We will now start the Q&A session. 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 Diego Harduin from Citi. Please go ahead.

Yep. Hello. Good morning, Armando, Federico, Gerardo. Thank you for taking my question. There are two points that I wanted to discuss with you guys. The first one is a little bit more on Europe. Right. So recent dynamics. And we have the Olympics coming up now. Right. So just hear a bit more from you guys what you're seeing. What are what are like the outlooks for this region? And the second is regarding the costs. So very, very good news, right? Regarding the lower food costs and raw materials. So just trying to understand what's behind this and the outlook. Again, going forward here. Thank you.

Tiago, how are you? Thanks for connecting. It was exactly the last eight days I was in France for two days just touring the market, and it was amazing to see very less people in the streets of Paris two weeks ago. Hopefully, this Olympics is going to start in two days, but it was a ghost town just two weeks ago regarding all the traffic that we are implementing now. We are losing traffic. Streets are closed. They are protection all of the center of Paris when we have around 80 stores. So people are getting stealing his houses. Parisians are not getting to the downtown of the city because everything is blocked. Everything is problem to get there. S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V and the traffic will get down and we get back again to our business. But this was not only us. I went to another companies or another talking to the people, hotels, restaurants, and we are really affected, not only us. I mean, it's the whole environment in downtown. Robert, why don't we talk a little?

Yeah. Thank you, Tiago. On a consolidated basis, raw materials and food costs are showing price stability or even a decrease in some of the prices of protein, vegetable oils, etc. The cost of the coffee is stable. We have a contract with Starbucks that give us stability when the prices are more volatile. And we're keeping up with the stockpile strategy with the mozzarella cheese, as we have mentioned in the past, to reach better prices with our suppliers. As you know, we did a stockpile in Mexico back in October 23 till March 24. Now we have a new stockpile till the end of September. So we are not worried. Obviously, we are always trying to improve the food mix that we use for the different promotions, for the different menus. But we're still having good news in terms of the food cost.

Fantastic. Thank you very much. You're welcome.

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

Good morning and thank you very much for taking my question. I just wanted to squeeze in two questions. So, number one, as you look into the performance in Mexico, which clearly was amongst the better ones with same-store sales still coming in at 7%, but can you help us maybe understand a little bit the quarterly dynamics as to the performance, just given the shift in the holiday week from April into March? like kind of like a monthly cadence, maybe between April, May and June and what you've been seeing so far in July. That would be my first question. And my second question really comes down to South America. I know it's not too large of a contributor anymore, but clearly, are you looking into any initiatives to potentially turn the business around? Is it waiting for the consumer to come back? What are likely options that you're seeing for the South American business, be it investing or maybe divesting? Thank you very much.

Okay, Ben. For the second quarter, the beginning of the second quarter was tough in April with calendar effects affecting April. As the Holy Week happened during March, we had an extra day and an additional weekend in the first quarter. We saw a rebound during May above what Antat's imps or sales number reported, which was 8%. And then June was a bit more volatile, but we closed the quarter at high single-digit growth. Throughout the year, we could expect more normalized trends in a range of mid to high single-digit growth on a consolidated basis. This is in line with the 2024 guidance of 7% to 9% for the full year. In Mexico, going by region, we had a continuation of the strong momentum for consumption in the country. The increase in minimum wage and the level of remittances at this point are helping to drive sales in the region. Vips is still recovering traffic with such good results. And other brands like Chili's, like Starbucks with similar performance compared to the first quarter with a normalization, obviously, of the effects of the Holy Week that I just mentioned. In Europe, as Armando just mentioned, we are facing some pressures in the pressures in the quick service concepts in Spain and particularly with Starbucks in France and the Netherlands due to the boycotts against American brands and a consumption slowdown in all the region. The full service restaurant, not just in Europe, but in Mexico, too, are still with a high solid performance of mid single digit to a high single digit on average. and in South America we have a tough economic scenario during the whole year and we expect the same for the second half of the of the 24 in most of the geographies due to political uncertainty and volatility while economic slowdown remain across regions S.A.B. de C.V I don't know, Armando, if you want to complement.

I just want to say that the problem that we have in South America, most of it is coming from Argentina, where we have a 16.3% orders down from last year. And that's exactly because we are maintaining our margins. We are really protecting the business regarding margins. We are profitable there. S.A.B. de C.V a better number in same-store sales. But, I mean, we've been 15 years there. We know how to address a problem like that. And this is going to be, hopefully, momentaneous in order to get better results by the end of the year. But I will say that's more affecting Argentina because we are looking with good momentum in Colombia, as Federico said, and Chile is rebounding in a very good way. So the effect, because it's quite big enough, Argentina, in the total basket, that's what is affecting us.

Yep. And regarding your question of divesting in South America, not just for South America, we're still analyzing the divestment of some brands to unlock value for the investors on Auxea. None of these brands could be considered core for Auxea in some specific markets, but we have not taken any kind of call.

Perfect. Thank you very much.

Thank you.

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

Good morning. Thanks for checking my question. Hello. I guess most of the questions we have received from clients of trajectory results were related to the weakness in Europe, right? We know in France the situation, right? But just still not clear to me in Spain I mean, you mentioned that the delivery segment is struggling, but the casual dining is performing better. But when we look at the consolidated number for Europe, it looks like it's not strong enough to upset the weakness in the delivery. So my question would be regarding on your outlook for the second half in Spain, forgetting a bit about the situation in France, and what are you thinking that could be possibly done in order to stabilize some store shelves there? Thank you.

Okay. Thank you, Rodrigo. Regarding the question of the delivery in Spain, this is not something new. This has been related since 2023, as long as the aggregators entered into the market and were game changers. However, since the end of the COVID constraints, customers have changed their behavior favoring the casual dining brands. We expect the same trend for the second quarter of 24 in terms of delivery, but obviously for the first quarter of 25, we expect to have a more relevant channel in terms of the weight and in terms of the sensor sales increase. 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 around 15 points, but I don't have a better outlook for the rest of the year. Maybe we will take a delay in the business plan of one year. That means around 20 to 25 stores, but we still are ambitious around the market holding capacity in France. That is not changing the market holding capacity we delivered in the Al Sade a couple months ago. So that's

Okay, so here, follow up. So we may see a revision, right, in store openings in Europe. Therefore, CapEx, any idea of the magnitude of those revisions, perhaps?

Well, regarding the guidance, this is not only for the openings. Obviously, if FX continues to pressure and the macroeconomic environment evolves in a more challenging scenario, we might need to make some adjustments, particularly to the revenue growth. We still think to accomplish with the EBITDA guidance we deliver in the LCA. We have cut some of the openings around 10 to 15 openings, not just in France, but in Netherlands and Belgium too. But we are offsetting that reduction of openings with Mexico and Starbucks and some other brands of the casual dining portfolio like Vips, Chili's, etc. So we are still expecting to accomplish with the 6 billion of capex for the 24.

I see. Okay. Thank you very much. You're welcome.

Thank you very much for your question. Our next question is from Ms. Sara Maldonado from Santander. Please go ahead.

Hi, thank you for taking my question. Maybe just a follow up. It's not very clear for me, as Rodrigo asked about Europe, maybe understand how is Spain and a quick delivery the environment, maybe the macro, and understand how it's affecting all the growth, maybe versus first quarter.

I mean, I will say we do have information in Europe from the aggregators. There's one that really dominates the market with 85% of the category there. So information that we have since last year, since Federico said, is delivery to houses is dropping down. It's dropping down, and that's affected strictly to our Domino's Pizza business. Either way, that is a little bit a trend that we're seeing. Of course, we're seeing in the other way in casual dining division, we are seeing a leverage and an upside in delivery. So that's a little bit what we're seeing, no? 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

Mr. Alvaro Garcia from BTG Paxual. Please go ahead.

Hi guys, thanks for the space. Just one, just to clarify if that equal on the guidance seemed, you said that you, maybe some potential downside to the revenue growth guidance because of the FX situation, but that the EBITDA guidance is sort of fine for the year. Is that sort of the message?

Yeah, we had a strong Mexican pesos, which is good, during the first five months of the year. So, obviously, that was not included into the guidance. But, as said before, we're still believing that we will accomplish with the EBITDA and CAPEX guidance for the 24th. So, if we see some kind of impact for the third quarter, we will announce this.

Great. I would say, Alvaro, just to complement what Federico was mentioning, if you exclude foreign exchange effects on the revenue side, we're basically in line with the guidance of 2024. Yeah, agreed.

And then just one more on same-store sales in Mexico. The full service number was sort of low to mid-single digits, but you mentioned VIPS did really well, which is obviously the biggest chunk of that. What about the others? Was that an Easter calendar shift impact maybe? Or what's going on with some of the other brands, casual dining brands in Mexico?

I mean, I will say that we have a terrific, we have a very, one of the best quarters for the whole casual and dining category. And not only casual, I will say also the family business that is Vips, that completely segment of the five brands that we are, that we operate. They just had an amazing same store sales, meet single digits, all of the brands. So, I mean, this traduces to, S.A.B. de C.V S.A.B. S.A.B. de C.V 20% to 30% of our cap business here in Mexico. It also grew an impressive 4.7%. So that is what it helped to anchor not only Starbucks. I will say Starbucks really performed very well, but the rest of the category before really surprised us with a better number than the rest.

Great. That's very helpful. Thank you very much.

I would say, Alvaro, also to complement what Armando mentioned and what he mentioned in the opening remarks, Chilis and Italianis, for example, had a double-digit growth. So I would say average was kind of mid to high single-digit, but there were a couple of brands that were performing even better than the rest.

Great.

Thank you.

Thank you very much for your question. Our next question is from Mr. Ulises Argote from Santander. Please go ahead.

Hey guys, how are you? Nice to see you and thanks for the space for questions here. I think most have been already answered and it was more on like the guidance and I wanted to double click on that part. But maybe now the other question that I had was more around capital allocation. You kind of mentioned that the CapEx guidance was kind of unchanged. Given the recent moves and probably where the stock price is right now, would it make sense for you guys to reignite the buyback program with the current scenario? Just maybe if you could share some thoughts on that. Thanks.

Thank you, Ulises. Manos Diaz. Definitely. We'll follow closely the market. And if the stock price makes sense, we could be looking for some repurchases to be canceled at the end of the year.

In fact, can you remind us what the amount that you have approved for Vivex is? It's quite significant, right?

It's around 500 million pesos, but obviously we're not thinking to spend this. That will depend, okay?

All right, perfect. Thanks so much.

You're welcome.

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. Armando Torrado for final comments.

Thank you. Thank you very much for joining us at our quarterly video conference. If you don't have any further questions, please, any ones that you have, you can contact Gerardo, our investor relations teams. So thank you very much for connecting today, and have a great day. Thank you.

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