Alsea, S.A.B. de C.V. (ALSEA) Earnings Call Transcript & Summary

Welcome to Alsea's earnings conference call. With us are Alberto Torrado, Executive President of Alsea; Rafael Contreras, Chief Financial Officer; and Salvador Villaseñor of Investor Relations. Our speakers will present the results for the second quarter of 2020. [Operator Instructions] As a reminder, all forward-looking statements on this call are subject to risks, uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in Alsea's most recent annual report. At this time, I will now turn the conference over to Mr. Alberto Torrado. Please go ahead.

Good evening, and welcome to Alsea's earnings conference call. We will be discussing the most significant events from the second quarter as well as our outlook for the rest of the year. The second quarter was even more challenging than the first. Given that the first quarter benefited from the strong January and February and only suffered from a couple of weeks of the pandemic that affected sales in March. Nevertheless, we are confident that the worst is behind us and economies gradually reopen and losing restrictions on social distancing. Our restaurants and coffee stores have been reopening across all our regions where we operate, carefully following all the government's policies and social distances while adapting to restrictions on movement. In the meantime, we are positioning ourselves for the post-COVID-19 world. We believe that the consumer will be even more focused on delivery, digital communication, strong brands as well as in health and hygiene. This will bring changes to the restaurant industry, and with it new opportunities will arise. In this new reality, many small players will struggle, leaving increased market share for larger companies such as Alsea and our brands. For the full second quarter, sales declined by 64%, same-store sales by 42% and EBITDA by 195%. This contributed to a net loss for the quarter of MXN 2.6 billion. Even though figures declined across the board, they were above the estimates we forecasted internally at the beginning of the quarter. Our balance sheet remains strong. Cash and cash equivalents are now MXN 4.3 billion, in line with our recent agreement with our creditors and our net debt-to-EBITDA ratio stands at 7.2x. As for the regions where we operate in Mexico for the second quarter of 2020, total units reached 2,236. 86% of our 1,876 corporate units are open for delivery and 671 are open for service on-site with limited capacity. The rest are temporary close. We will continue to reopen units in line with our strategy to focus on profitability and governmental precautions and guidelines. Our sales in Mexico declined by 60%, and same-store sales by 44% in the second quarter. Year-on-year, Mexico's adjusted EBITDA margins was negative 11% in the second quarter versus 24% a year ago. In Europe, total units reached 1,390, 82% of the 877 corporate units are open for delivery while 77 are opening for service on-site with limited capacity. Sales for the region declined by 69% and same-store sales by 36% in the second quarter year-on-year, while adjusted EBITDA margin declined to negative 34% versus a positive 17% a year ago. In South America, total sales for the quarter declined by 68% in peso terms, and adjusted EBITDA by 143% with a negative margin of 18%. Same-store sales were down 44% and units totaled 630. The company carried out different initiatives to cut costs and reduce expenses, always respecting legal and social constraints and protecting the long-term franchisee value of Alsea. Total savings for the quarter amounted MXN 3.2 million -- MXN 3.2 billion, which includes government support and union agreement related to the employee salaries, the negotiation of more reasonable rents from landlords, reduction on our advertising and marketing campaigns, a decrease in gas, electricity and maintenance costs and optimize inventory management for expected sales. As we mentioned in our press release issued on July 2, Alsea successfully received waivers until June 30 of 2021, on certain aspects of its debt covenants, due to the impact of the pandemic on our EBITDA and balance sheet. In addition, Alsea will be able to access additional debt which will allow us to respond to any liquidity mix that may arise during this contingency. Again, I would like to thank our creditors for their support, which reflect the strong relationship that we have built over time, and we affirm the confidence they have in Alsea. Clearly, the pandemic has accelerated the use of delivery and it is our intention to take advantage of this trend and continue to increase its share in total sales beyond the end of the pandemic. Through our portfolio of brands, Alsea has carried out different initiatives to increase sales and traffic, while at the same time, experimenting with different formats to adapt to the new market dynamics and customer behavior. This strategy has 2 pillars: aggregators and our own delivery channel. Currently, in Mexico, our own delivery channel represents already approximately 8% of our sales, and we aim to increase it to 15% by 2022. We have already seen operational efficiencies by bringing together all the distributors of the different brands. Making multi-brand and multi-unit delivery and lowering our operating costs and increasing sales by implementing strategies such as our Alsea core platform, which serve as a link between the aggregators technological platform and our points of sales, POS at the store level. As for aggregators, we adjusted the menus for all our brands, optimizing the items we offer, adding more than 80 promotions, and we added more than 600 units for delivery on Uber Eats, more than 100 Starbucks units were added to Sin Delantal. Also we integrated DiDi Foods as the new aggregators for 7 brands and added 200 Domino's Pizza units to Rappi in Mexico. We also created a division for delivery with an Alsea's strength, so can Alsea strengthen this channel. Additionally, Wow Rewards had more than 3.2 million registered users of which more than 570,000 have used the program in the last 12 months and now represents 5.3% of Alsea Mexico total sales. Our goal for Wow Rewards to provide a client with a direct digital communication channel and to offer independent loyalty programs from our different brands that initialize frequent use to the platform. We believe that it is a crucial strategy to take advantage of the digital store front that we are creating where we are able to access -- we are able to cross-advertise and cross-sell among our portfolio brands and better target our promotions according to our customer preferences. In our COVID-19 update press release issued on June 26, we mentioned the use of dark kitchen in some of our units, allowing us to bring our brands to a wider consumer base and cover the increasing demand of delivery and our very efficient costs. During the quarter, Alsea implemented the dark kitchen concept in more than 30 units of some of our restaurants that remain open. To offer products of the following brands: Chili's, Italianni's, The Cheesecake Factory and El Portón. These dark kitchens are using all of the delivery channels. And since the launch of this project back in April, more than 23,000 orders have been placed through this sales channel, and we will keep growing this channel as we continue in this crisis. We also mentioned some of the measures we are taking to ensure the safety of our collaborators and customers by implementing new technologies and additional food safety and hygiene practices that meet the highest national and international sanitary standards in the industry. Measures to ensure compliance with hygiene and health protocols include implementing digital contactless menus through QR codes on our restaurants as well as daily practices of all our collaborators like taking their temperature, disinfecting their shoes with sanitizing mats, washing their hands more frequently, wearing a mask and maintaining a safe distance. We understand the negative impact that the COVID-19 crisis has had on many families. In vulnerable situation, in the geographies where we -- where Alsea operates. For this reason, as of June 5, Alsea has undertaken a number of initiatives, which have had a positive impact on over 135,000 people. These initiatives include donating [ 288 ] tons of food through the markets where Alsea operates, equivalent to MXN 14 million, providing 163-foot regions for health workers of various hospitals through the country. And created an emergency fund for collaborators severally affected by COVID-19 in Mexico, Chile, Colombia, Uruguay and Argentina. This amounts to MXN 5 million, of which 17% has already been deployed to help all our collaborators. To finalize, we are proud to announce that during the quarter, Alsea became part of the Standard & Poor's/Bolsa Mexicana de Valores, Total Mexico ESG Index from Standard & Poor's Dow Jones and Mexican Stock Exchange. This index evaluates environmental, social and corporate government practices. Additionally, for the ninth consecutive year, Alsea has accredited its commitment to corporate social responsibility to CEMEFI and alliance for social responsibility in Mexico, where achievements will contribute to the appreciation of our sustainable management by all our groups of interest. We will continue to work so that our actions become positive income for our people, communities and the planet. And now I believe Rafael will give you a more detailed overview of our financial results for the quarter. Thank you very much.

Thanks, Alberto. Good evening, everyone, and thank you for joining the call. To begin, I want to clarify that as in the previous quarters, and in order to present a comparable analysis versus the financials of the previous year, all the explanations and notes reported in our earnings release exclude the effect from the statement related to the hyperinflation in Argentina as well as IFRS 16. These 2 factors were included in the financial statements issued to the corresponding authorities. The impact of IFRS 16 in our financial results for the quarter are as follows: MXN 849 million EBITDA increase and a negative impact of MXN 331 million on net income, which represents 11% of the total income. As of last week, at the consolidated level, we are operating with 86% of our total corporate units open, with a strict sanitary and hygiene measures. Many of our open units are operating below capacity, given social distancing, government guidelines. Based on potential capacity, and not stores, in July, we are operating at 60% sales levels versus the regular sales of July in 2019. Since we are still operating with 46% of our corporate units only opened to the public with a strict sanitary measures and selling exclusively through delivery and takeout, with an approximate 65% increase in sales from delivery, excluding Domino's Pizza compared to the second quarter of 2019. In Europe, at first quarter end, our operations were 100% shutdown. And since then, have been reopening to 87% of our total corporate units in the region on July 19. In Mexico, 92% of our units are now open; in Chile, 48%; Argentina, 68%, since confinement measures have been reinstated in the country. And finally, Colombia 97%, also as of July 19. As Alberto mentioned, given the negative impact on our EBITDA of temporary unit closures, we have seen our net debt EBITDA rise to 7.2x at the end of the second quarter. Agreements with our leading banks regarding waivers to our current covenants have permitted appropriate financial stability through 2020 and 2021. The debt structure at the end of the quarter was 88% long-term, with 57% in Mexican pesos, 43% in euros and less than 1% in Chilean pesos. Turning to our liquidity. At the end of the second quarter, we had MXN 4.3 billion in cash, well above the agreed MXN 2 billion minimum liquidity level according to the waiver. To help liquidity and as I previously communicated, our planned CapEx for 2020 has incurred to MXN 1.7 billion, and about 80% of our planned new openings for the year will be postponed. Now we would like to open the call to Q&A.

[Operator Instructions] The first question is from Mr. Antonio Hernández from Barclays.

I just wanted to see if you have any update. I remember on your last call, you mentioned that by the end of the year, you were expecting like 80% to 85% of normal sales to be achieved. Have you -- have these expectations shifted so far? And also regarding profitability?

Thank you for your question. Yes, I will believe that's still current. That's what we expect to happen. But I would say the question also to tell you that we have seen different situation in different geographies. July has been an interesting month to analyze what's happening in the different geographies. I've been -- and this is Alberto. I was able to travel to Europe and visit our operations in Spain for a week and another week in France. And I came back very positive seeing that those markets are actually returning faster to normality, which is not the case of Mexico, especially the Mexico City and the surrounding areas. But also very positive in some other states in Mexico like Jalisco. So overall, I will assume that's the number. We have every week reviews of sales, and we do our forecast every week. And I will say that we do expect to close the year with 85%, 90% of the sales in some of the brands. As you know, some brands like Domino's are already ahead of that. And some brands like Starbucks, in Mexico, for last week, was 76% of sales. So things are looking better, but again, very different for brand and very different from geography.

Perfect. And a follow-up would be on SG&A. You were mentioning also last call, expecting to incur approximately 20% of less SG&A expenses. Is that also sustained?

Yes. Exactly, that's more or less a number that we are trying to get -- around 20% in savings in G&A in all our geographies the whole year.

Our next question is from Mr. Luis Willard from GBM.

I was -- I would like to ask about the dynamics between your own platform and the aggregators. Now that both have increased their relevance substantially, could you, Alberto talk -- walk us through the main difference of unit economics between each of the channels? And especially, how do you see both channels working together or function in the future?

Well, first, we really have 3 channels, not 2. Because obviously, our first channel of delivery is Domino's. As you know, Domino's, in our 3 geographies, Spain; Colombia; and Mexico, operates through their own platform, technological platform, of course and also, with their own delivery team. Now let's call it that way. Second, we've been signing agreements with most of the aggregators and we have different conditions of commission with each of one, depending in the geography where they operate. And the third is having our own delivery. Alsea system, we have 2 things, we have our own technological platform, so the customer can access an order directly to our restaurants through the core Alsea, which is the same technology that takes aggregators directly to our POS, but with the face of Alsea. And we are using our own delivery team to delivery all the brands bought Domino's Pizza. So we have 3 different ways of serving the customer. That -- we have different price structure also for the 3 different platforms. And we also obviously team with the aggregators with promotions that they want to do because, as you know, some of these aggregators are being very promotional and putting a lot of money in front of the consumer, which we obviously are taking. In our platform, in our delivery platform, which is the platform that doesn't do for Alsea, we are -- we expect to have a breakeven point before the end of the year. Because we charge the brand as if we were an aggregator.

Our next question is from Mr. Rodrigo Alcantara from UBS.

Two quick questions, if I may. So first, on the way you envisage the reopening process, right? As the situation evolves, particularly Mexico, restaurants may be able to operate at 40%, 30% maximum capacity, right? So my question would be, how can we relate this to your OpEx space? I mean is this 40% enough to cover the fixed cost of a restaurant or what levels of EBITDA margin you may achieve under this reduced capacity? That would be my first question.

First of all, yes, reduced capacity is not what we are using to decide which restaurants should be open or not. We are using really sales rather than the capacity because in all our restaurants, we are doing delivery, we're doing curbside, we're doing pickup, et cetera. And the reduced capacity and through the date. So really, if I have to say what is the right number in terms of how much we have to sell to maintain a unit open, it changes a lot from the different brands and the geographies because of what labor represents in Europe and in Europe, we are having help from the government in Norway, and we are having a help from the government in France. So it's very variable. But if I have to put a number, we have to be selling around 60% to start making money. Will you agree with me, Rafael with that number?

We are using some things now.

Yes. Obviously, we're not playing, but we're using our -- the time of our...

Staff.

Staff with this. We're really calling them just to operate when we need them, no? So our cost structure has changed a lot on the way we are facing that. But I would say that 60% -- above 60% we'll start making money. It's a hard number. Sorry.

Okay. Very clear. And another very quick one. So about the waiver that you announced a couple of weeks ago, or months, right? About the capitalization cap of MXN 8 billion. So I was wondering if you could explain what could be like the potential outcomes, right? Should Alsea surpass this limit? I mean just to be aware of this in the event that you are below this cap of MXN 8 billion? That would be the question.

Yes, really, we think that MXN 8.5 billion, that is the number that we have in the waiver. We think it gives us the flexibility to have a difficult time in the future. Because right now, we end the year because it's pre-IFRS 16, and we end the quarter with MXN 10 billion in network. So we -- and also in the waiver because we know that maybe we can have some impairments on some of our brands. We can take out the impairment that we can have at the end of the year in some of our brands because of this -- of the reduction in profitability in some of our brands. But we feel comfortable that 8.5%, it's pretty hard to achieve now to enter into that number.

No. Yes. I mean I agree, it's difficult, right, to reach levels below those. So just wondering about the outcomes for you in case you are below, right? Just what would be like...

I think -- well, I think the first one can be renegotiations with banks now. Because, obviously, the price that we have right now in our share is pretty low, and we don't want to have a follow-on with -- at this price. So for sure, the first thing that we must put in place first is to have a renegotiation with banks.

Our next question is from Mr. Rodrigo Echagaray from Scotiabank.

I was wondering if you could help us understand how do you think about cash flows for the next few quarters, given your cash position, but also you have MXN 1 billion in debt amortizations for this year and MXN 4 billion more for next year. How should we think about cash flows for the next few quarters?

Well, really, for the free cash flow that we have in our forecast for the third and fourth quarter. For third quarter, it's negative around MXN 300 million. But for the fourth quarter it's positive. So really, the hardest time in terms of free cash flow was the second quarter that we burned around MXN 2.5 billion. And we end -- and at the end of this second quarter, we have MXN 4.3 billion in cash. But also, we have some credits in Europe that government guarantees those credits. And we have around 7 million deals and we don't take those credits right now. And we think that we are not going to need to take them, but we have been and are committed.

And are those part of the EUR 75 million committed lines of credit that you mentioned in the press release? Or is that in addition...

Yes. No, no. In our press release, we didn't mention that EUR 75 million lines, it's in addition that we have in euros, those lines.

Got it. And those EUR 75 million, Rafa, it says in the press release as necessary and according to the solvency of the operation in Europe. How easy is it for you guys to draw those lines...

It's easy. It's pretty easy. It's committed. So I can take it from 1 day to another. It's a nickel. So it's guaranteed by the banks. So it's -- they are already ready. So I can take in when I need it.

Got it. And just one last question, if I may. So based on the sales that you currently have and on the free cash flow expectations that you have for Q3, it seems that it's reasonable to be close to breakeven of the EBITDA in July or in the Q3?

Exactly. Exactly.

Our next question is from Mr. Andrés Ortiz from Crédit Suisse.

I also want to clarify something from your initial remarks. You say that by 2022, around 50% of sales would come from digital channels. Is this including aggregators and your own channels? Or how should we think about this?

Yes, both. But not including, and obviously, that's a goal. We're not including Domino's in it. But yes, both.

Okay. And a quick follow-on on a previous question. Regarding the sales level that you will need to have to achieve breakeven at the store levels, you said that around -- the hard number will be around 60% of sales. That will require to be 60% of sales directly at the store, so dining? Or are you taking in account of...

No, no, no. Total sales.

Okay.

That is -- please. It's a very hard number to address because each brand in each geography is very different. No. But -- so I gave that number. I'm questioning if it's the right number or not, but we'll try to clarify that because I understand your concern. Your concern that you guys have is that I mean, are we making money or not with this level of sense, of course. No?

Yes, correct. Yes. I just wanted to clarify that.

Our next question is from [ Mr. Gustavo Mendoza from IDEC ].