Alsea S.A.B. de C.V

Hello, 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 in our earnings release and our most recent Bolsa Mexicana de Valores report. The company is not obligated to update or revise any such forward-looking statements. Please note that unless specific, otherwise, the earnings numbers referred to are based on pre-IFRS 16 standards. I will now hand it over to Armando for his initial remarks. Please go ahead, Armando.

Thank you, Gerardo, and good morning, everyone, and welcome to Alsea Third Quarter 2024 Earnings Video Conference. S.A.B. de C.V. and key developments across our brands. I will also highlight our progress on digital transformation, ESG initiative, and expansion strategy. To begin, here are the key highlights from the quarter. In the third quarter, sales increased by 9.3% year over year, reaching at 20.3 billion pesos. That's an 11.7% increase when excluding foreign exchange effects. Same-store sales grew 7.7% year over year. EBITDA increased by 9.3% year over year, reaching 2.85 billion pesos with a margin of 14%. Through strategic pricing and cost measures, we were able to offset minimum wage increase thereby maintaining both our margin and financial strength. We serve over 32.2 million digital orders in the quarter, totaling a 6.6 billion peso sales, which contributed for 32.5% to our total sales. Regarding our brand performance in the quarter, Alsea Starbucks same-store sales increased by 2.6%, For Starbucks Mexico, same-store sales increased by 1.9%, the speed at tough comparisons and our normalization of customer habits. During this quarter, we had a slowdown in the travel and channel stores, reflecting lower traffic in airports, which accounts for roughly 10% of our sales. There were also disruptions in more than 30 stores driven by weather-related events, also impact on security measures implemented in certain parts of the country. Also during the quarter, and particularly in July, increasing rainfall affect our sales by 1%. Additionally, we had lower sales for merchandise, which pressure over our ticket during the quarter. For Starbucks Europe, same-store sales declined 12.3%, mainly affected by the ongoing pressures in France and Benelux, and reduced consumer traffic in popular tourists such as Barcelona and Valencia. Finally, in South America, same-store sales increased by 29.7% and decreased by 6.3%, excluding Argentina. We are implementing different commercial strategies in the market where we operate, and we are expecting to generate a recovery in transactions during the fourth quarter. During the first nine months of the year, we opened 100 new Starbucks stores globally, reflecting an increase of 27% compared to last year. Domino's Pizza Alsea posted a 4.6% increase in same-store sales. In Mexico, Domino's Pizza same-store sales increased by 8.1%, driven by successful promotions like Domino's Mania. This year, it marks the 35th anniversary of Domino's Pizza in Mexico. We are proud of the brand's accomplishment of this period and look forward for an exciting future. In Spain, same-store sales were relatively flat, reflecting store performance in the carry-out and dining channels, while we continue to experience delivery challenges. In Colombia, S.A.B. store sales were up 7.7%, supported by an increased traffic, formed successful operation and commercial campaigns. During the first nine months of the year, we opened 45 new Domino's Pizza stores globally, reflecting an increase of 36% compared to last year. In our Burger King sector, same-store sales, excluding Argentina, increased by 2.3%. In Mexico, we reported a sales growth of 0.9%. This was mainly driven by strong growth in delivery channel and digital initiatives, such as digital kiosk installations, which increased our average ticket. Regarding the full-service restaurant segment, we delivered a very solid 6.3% growth in same-store sales. VIPs achieved a solid 8.9% year-over-year growth in same-store sales, fueled by strong operation performance, expansion of the delivery channel, and successful seasonal promotions. Here we are marking our 60th anniversary and we are moving forward with the remodeling plans to improve the customer experience and continue building on the brand's success. Chilis and Italianis in Mexico report a strong same-store sales of 9.6% and 9.5% respectively, boosted by an increased traffic following effective marketing and commercial campaigns, such as Tres Para Mi and Paradiso Italiano. In Spain, Bibsanginos also reported a very solid 4.3% and 5% increase in same-store sales, respectively, supported by commercial strategy, such as our Breakfast Plataform, and a very successful Club Buy loyalty program. S.A.B. de C.V. We are also remodeling existing locations to enhance the customer experience and driver future growth. We are confident in our ability to meet the expansion targets outlined in the guidance provided early this year. Our digital transformation continues to fuel growth. By the end of the quarter, loyalty sales grew 38%. reaching a 4.7 billion pesos, accounting for 24.1 million orders, and contributing for 25% of our total sales. Additionally, by the end of the quarter, Club I has surpassed 2.4 million members, which represents almost 5% of all the Spanish or the Spain population. while Stavros Rewards reaches over 2.1 million active users across all ASEA regions. Regarding ESG and people, we made a solid progress in executing our ESG initiatives in the third quarter, reflecting our commitment to sustainability and social responsibility. We keep advancing in our people's strategy Our growth turnover rate remains very healthy at 60%. Additionally, 28% of leadership roles are filled by women, and we support more than 2,100 employees from priority groups. In Mexico, Fundación Alcea donated 10 million pesos to support 12 communities' kitchens operated by the Save the Children in Sinaloa. And additionally, through our Vapor Mi Cuenta initiatives, we provide over 200,000 nutritious meals during the quarter. Our second charity run, Al Secon Causa, led to the donation of over 4 tons of grain to support more than 17,000 people. In Europe, we install more than 600 solar panels in our support centers, stores, and factories. reducing our CO2 emissions by over 343 tons. In addition, we carry out Aperturas con Causa through brands like Domino's, Bips, Genos, and Starbucks, which supported over 18,000 people. We remain focused on delivering our ESG commitments, ensuring that our business positively impacts the communities in which we operate. I would like now to hand it over to Federico Rodriguez, our CFO.

Thank you, Armando. Good morning, everyone. Moving on to Alsea's third quarter performance, despite a challenging macroeconomic environment, quarterly sales increased by 9.3%, driven by effective commercial and promotional strategies. Excluding DFX, sales would have increased by 11.7% for the quarter. In Mexico, sales were up 7.9% to 10.6 billion pesos. In Europe, sales increased by 13% to 6.4 billion pesos, while in Europe sales increased by 0.9%. Finally, S.A.B. sales increased by 7% to 3.2 billion pesos. In Mexico, the adjusted EBITDA increased by a strong 14.8% to 2.6 billion pesos for the quarter. This growth was driven by lower material cost, increased sales, successful commercial and promotional campaigns and effective expense management. Additionally, the 4.9% growth in same-store sales continues to enhance operating leverage. In Europe, S.A.B. de C.V In S.A.B., adjustatividad declined by 28.8% to 445 million pesos, driven by the devaluation of the Argentinian peso and a reduction in the operating leverage. The net income for the third quarter decreased by 60.56% year-over-year to 186 million pesos. This was mainly due to a negative non-cash effect from the currency exchange translation, which increased the cost of the U.S. and Euro-denominated debt in Mexican pesos terms by the end of the quarter. For the third quarter, the EPS were 1.98 pesos. Post-IFRS 16 EPS rose to 3.65 pesos, an increase of 54% year-over-year. Regarding the CAPEX, in the third quarter, this was amounted to 4.2 billion pesos. We anticipate CAPEX to slightly exceed the initial guidance due to the start of the construction of the new distribution center factory in Guadalajara. This strategic investment will strengthen our logistical capability and support future regional growth. We allocated 58% of the capex to store openings and remodelings, 28% to maintenance capex, and 14% to other strategic projects like digitalization projects. Throughout the quarter, we prioritize prudent and responsible investment with a clear focus on profitability and payback. Our pre-IFRS 16 gross debt increased by 5.5 billion pesos year over year, reaching 32 billion pesos by the end of the quarter. This rise is due to the debt taken for the minority shareholder acquisition in Europe, as well as to the impact of a weaker Mexican pesos on our foreign currency debt at the quarter end. Turning to financial ratios, the total debt to pre-IFRS 16 EBITDA ratio closed the quarter at 2.8 times, while the net debt to EBITDA ratio stood at 2.4 times. At the end of the quarter, 92% of the debt was long-term, with 63% denominated in Mexican pesos and 37% in euros. We remain committed to a strong balance sheet and are confident in comfortably meeting all the governance and obligations, thanks to our healthy capital structure. At the end of the quarter, we posted a cash position of 4.6 billion pesos. Before we go to the Q&A session, I want to add detail to our other current liabilities line and cash flow. This is with the intention of being more transparent with the market and keeping you informed of what's happening with those two lines. Hopefully this will help you to get a better understanding of the business and the operations of Alsea. The increase in the other accounts payable line is due to a pending 90 million euros payment to minority shareholders of the European entity that we acquired earlier this year. Additionally, more than 80% of this account is explained by the following items, the derivative instruments for hedging risk, the recurring and variable compensation, which includes the long-term bonus, store manager bonus, et cetera, operating and supply provisions such as water, electricity, internet, et cetera, legal and labor reserves, among others. During the first nine months of the year, Alsea has increased the pace of openings in comparison with the first nine months of 2023, reflecting a consumption in working capital during the year. Besides, this working capital consumption is related with a one-time supplier payment in Argentina and lower operating leverage in Spain, a tribute to regulatory changes affecting perishable products. I will now pass you over to the operator for 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. Alejandro Fiuch from Itao BBA. Please go ahead.

Thank you, operator.

Hola, Armando, Federico, Gerardo.

Congratulations on the results, and thank you for the space for questions. I wanted to ask you two quick ones on my side. First is on Starbucks in Europe. We saw semester sales down 12% during the quarter, which actually was better than what China reported yesterday, right, with Starbucks Corporation. So I wanted to see how you're feeling about the overall France operation of Starbucks for the medium term, and if your perspective for growth, maybe your prospects have changed in the country. And then the second one would be in South America. I wanted to hear your thoughts of what you expect for consumption environment in Argentina, Chile, and Colombia for next year. Thank you.

I think, gracias. Buenos dias. Related to Europe, I mean, we continue to see S.A.B. de C.V S.A.B. de C.V S.A.B. de C.V from week 42, with gaining of transactions over the same period of last year.

Perfect. Regarding your question around South America for 2025, Alejandro, for Argentina, we're expecting to recover half of the lost traffic in 2025. As you know, we have had a loss of more than 10% in terms of traffic during 2024, obviously because of the macro- in Argentina. And regarding Colombia and Chile for 2025, we're expecting to have a low to mid single digit growth in terms of transactions. That would be the guidance for South America. But remember that South America is less than 7% of the total EBITDA of the company. It's relevant as a country. We're still thinking to develop the pipeline of all the brands like Starbucks or Domino's Pizza, but it is not relevant in terms of the whole pie of false air.

Thank you very much for your question. Our next question is from Mr. Ben Thoreau from Barclays.

Please go ahead.

Good morning and thank you very much for taking my question. Also two ones. So the first one really just quickly following up on Starbucks and obviously the changes and there's likely going to be a little bit of a change in the global mandate. I wanted to see how this is going to affect you in terms of like your growth strategy. S.A.B. de C.V How is that going to impact your leverage and is that anything that you work on as you look into potential financial solutions, be it debt financing or anything that you might need for those two billion extra as you start having to pay them in 4Q and then 1Q? Thank you.

Ben, good morning. Thank you for your question. First one, I mean, as you've been seeing in the news and what Starbucks USA has been reporting, our new CEO right now is very focused right now on the American business. We've been seeing him in a video yesterday. He's completely focused on the U.S. business and also on the China situation. S.A.B. de C.V S.A.B. S.A.B. de C.V S.A.B. de C.V. S.A.B. de C.V. S.A.B. de C.V

To complement Armando's answer, Ben, the wide space that we have targeted and we presented to you on OCEA Day in the last March is pretty much the same. As Armando said, we have a slowdown in France because of the macroeconomic pressures we have suffered during this year and other external factors. But in the long term, we believe the market space is there to have more than 700 stores in France. And regarding the 90 million leverage we have with the minority shareholders, we'll be paying 50 million euros out of the 90 million euros in December, as we said in the last February, and 40 million euros in February 2025. So this implies that the net leverage ratio for the end of year is 2.3 times prior for S.A.B. That was included into the initial guidance that we delivered in the S.A.B.

And just the source of payment for that, will that be cash on hand, or are you going to look into some sort of... Cash on debt.

Cash on debt, yeah.

Perfect. Thank you very much. Sure.

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

Hi, Armando. Thanks for the space for questions here. I think also a couple on my side. So first, maybe you can make some comments there, at least directionally, on how you're seeing trends in early fourth quarter. I think on the release and on your remarks you're citing, kind of that loss of operating leverage obviously impacting your margins there. So any comments on how that could look and maybe what other initiatives you guys are doing in terms of things that could help with that turnaround in margins? And maybe the second question, just if there's any kind of update to the guidance that you guys have provided. I think in the last quarter you said maybe there could be some updates in this one. So just to double-click on that.

Thank you. It is too soon to give you a clear trend regarding the four-quarter consumption. Obviously, we had a terrible July, a bad August, and a really improved September. We are quite confident, and maybe I can mix both answers, that we will be accomplishing with the guidance that we delivered yesterday. S.A.B. de C.V will work a lot to accomplish with this. Regarding the trend, as Armando said, we are starting to see an improvement in the different same-store sales, especially in traffic in France, but it is too soon to say this will last for the next months. But regarding the forecast and the guidance, we will be accomplishing the EBITDA margin.

And if I may add, Ulises, a little bit more color on what we're seeing on the fourth quarter. I would say last weeks, we've seen very similar trends than the ones we saw in the third quarter, Ulises, overall. So I would say on a consolidated basis, we should be, I don't know, mid-single, high-single type of growth. So we're still seeing, I would say, a resilient consumer environment in most of our markets.

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. Thank you very much.