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 Villasenor of Investor Relations. Our speakers will present the results for the fourth quarter of 2020. At the end of the presentation, we will have a Q&A session. . As a reminder, all forward-looking statements on this call are subject to risks and 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.

Thank you, and good morning to everybody. Thank you for joining us for this fourth quarter 2020 results. [Technical Difficulty] significant events from the fourth quarter as well as [Foreign Language] [Technical Difficulty]

We will now return to our speaker, Mr. Alberto Torrado please go ahead.

Thank you. I will repeat the last paragraph. As you all know, we faced major challenges during the year due to the COVID-19 pandemic and related lockdowns and social distances measures enforced throughout our geographies. In spite of the impact on sales, we were able to achieve MXN 38.2 billion in sales and a positive EBITDA of MXN 1.5 billion for the year, even while operating our stores at 100% capacity for only 10 weeks throughout the whole year, the first 2 months of the year, of course. As a result of negative free cash flow, our financial ratios deteriorated, but we were able to reach temporary waivers with our banks regarding our debt covenants until the end of June 2021. That said, we finished the year on a resilient note as our initiatives to grow take out and delivery channels and optimize costs paid off. For the fourth quarter, our sales were up 13% and EBITDA of 262% compared to the third quarter of 2020. Once again, we were able to post positive EBITDA in all our geographies. We achieved this positive EBITDA even though many of our key geographies faced new lockdowns in quarters from October in some European markets and from mid-December in Mexico and South America, and capacity constraints were in place throughout the period. Domino's and Starbucks led the way, with sales up 6% and 21% when compared to the third quarter of 2020. While casual dining, such as Italianni's or Vips, were still suffering. With respect to geographies, Mexico sales up 21% quarter-over-quarter, South America, 36%, and finally Europe saw a slight decline of 1%. So what did we do in face of this? Given that -- given that we are looking at the full year result, it's worth listening some of the many accomplishments in 2020 post pandemic. And I should stress that I'm immensely proud and grateful to all the Alsea employees and their related stakeholders for how they reacted. We first safeguarded our employees and customers with strict hygiene and protocols following all governmental rules to the letter. The well-being of the Alsea community remains our top priority. Second, we embraced delivery and takeout throughout our own apps and third-party food aggregators, including the soft launch of the Wow delivery platform, which we will be promoting much more in the following months. For the full year, delivery reached more than MXN 9.3 billion, with a share of 27% of our sales, and in absolute terms, grew from 2019 by 143%. At the brand level, some of the brands that led the increase reached important delivery share of sales were Domino's Pizza, growing from 55% prepandemic to 65% at the year-end, Burger [Technical Difficulty] from 10 to 20 [Technical Difficulty] in Mexico, Colombia, Chile and Spain, Alsea has a market share of about 12% of all the food delivery transactions throughout these countries. Third and we lately, we accelerate going digital. This year, Dario Okrent joined our team as Chief Digital Officer to strengthen our digital strategy and guide us through our customer-focused digital transformation. We plan to invest MXN 55 million to boost information analysis area, to carry out direct marketing and increase the number of online orders. We also created a marketing shared service department in 2020, which will be responsible for our digital marketing strategies going forward, enabling us to reach a greater and more targeted audience. We digitalized all our menus. Our loyalty programs continue to grow successfully with more than 650,000 active users of Wow Rewards and more than 472,000 active users for My Starbucks rewards at the end of 2020. Orders via the Domino's Pizza app increased 75%, reaching 13 million transactions in 2020. When compared to 2019 and Starbucks has completed more than 2.6 million delivery orders in 2020. In Mexico, we reached more than 20 million delivery orders from our entire brand portfolio. Fourth, we increased our premise sales always following the authorities guidelines. Increasing outdoor seating and drive through capacity as well as focusing on profitable SKUs and outlets. Fifth, we brought down operative expenses by MXN 7.5 billion in the year. By implementing strategies in order to make our operation more efficient in the future. We postponed new hiring following natural turnover in our staff and reduced working weeks with a 4x3 rotation and flexible payment scheme depending on the sales level of each store. And benefited from certain employment subsidies available in Europe and South America, thus bringing down labor costs while always respecting contractual obligations. We focused on operating with a leaner and more efficient structure, achieving an approximate 25% reduction in G&A expenses versus 2019. We were able to reach oral agreement with our brand owners. We substantially cut real estate costs with -- via renegotiating leases regarding contract terms. We reduced less profitable SKUs in major markets and replaced expensive important raw materials with local options. We cut down some of our marketing expenses outside digital areas. In addition, we closed 185 corporate units as part of our focus on profitability given the current economic crisis due to the pandemic. We were able to avoid expensive penalties from canceling the lease contracts. So we took advantage of this by cleaning up the portfolio and closing some negative performing stores, which will translate into improved margins going on forward. Sixth, we preserve our cash flow as much as possible with relentless focus on working capital. Rafael will address our balance sheet in more detail, but it is worth noting that our cash is now at MXN 3.9 billion, in line with our new agreements with our creditors. Seventh, we strengthened our commitment to ESG, understanding that sustainability is a core part of Alsea purpose, especially in a period as challenging as a global health pandemic. Alsea undertook a number of initiatives, which have had a positive impact on over 370,000 people, including through the delivery of close to 1 million meals with our program, Va Por Mi Cuenta and Va Por Nuestros Héroes. In 2020, Alsea was included for the third consecutive year in the Standard & Poor's, Dow Jones Indices and the Mexican Stock Exchange. I am very proud of this achievement, which highlights our commitment to ESG, placing it at the core of our corporate purpose. Alsea was also accredited by CEMEFI and Alliance for Social Responsibility in Mexico for its commitment to corporate social responsibility. So where do we go from next here? Clearly, it is difficult to make firm predictions, but with the COVID cases receding and vaccine rollout now underway in all our main geographies, we can be fairly confident that those works will soon be behind us. At the first 7 weeks of 2021, we have registered a consolidated level of sales of 73% versus last year and 76% compared to 2019 doing the same exercise per segment. In Mexico, we are at 75% versus 2020 and 78% compared to 2019. In Europe, we are at 63%, both versus 2020 and 2019. And in South America, we are at 94% versus 2020, reporting a 6% growth compared to 2019 sales. I will still expect a difficult first quarter of '21 due to the continued lockdowns but a much better second quarter and then second half of the year, slowly returning to normal. We will expect Europe to lead the way in recovery given that its vaccination program is ahead of Latin Americas. We also think that after a year of lockdown, a vaccinated population will be keen to return to on-premise dining. So while delivery and digitalizations are clearly here to stay and for sure growing versus pre-pandemic levels from premises sales, we will recover fairly fast in my view as lockdowns recede. Just as we experienced in the third quarter of the year when even with restriction in place, we'll reach approximately 70% consolidation -- consolidated level of sales. I'm also confident that when we come out of this pandemic, Alsea will be a stronger and more efficient competitor. Many of the digital initiatives will help our cause permanently and reach our customers in a more efficient and direct manner. And while the pandemic has hurt the whole natural -- I mean the whole restaurant industry without exception, the new normal postpandemic, I believe, is likely to play to Alsea's strengths. Well-known brands, digitalization, financial flexibility, scale and technology in a smaller sector, Alsea will be a stronger player. Many of the smaller informal restaurants have closed -- always closed giving us an immediate higher market share. Thank you very much. And now Rafael will give you a more detailed review of our financial results. Please go ahead, Rafael.

Thank you, Alberto. Good morning, and thank you for joining. To begin, I want to clarify that as in the previous quarter and in order to present a comparable analysis versus the financials of the previous year, all the explanation and notes reported in our earnings release exclude the effects from the statements 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 on our financial results for the quarter are as follows: MXN 1.6 billion EBITDA increase and a positive impact of MXN 362 million of net income. For the full year, the impact was positive MXN 5.5 billion on EBITDA and MXN 522 million, also positive on net income, which represent 13.6% of the year net loss. Regarding sales, we were able to reach MXN 9.3 billion from home delivery, mainly as a result of the previously settled agreements with third-party aggregators and our integrated system, such as our Alsea Corp in addition to the positive performance from our digital platforms, while rewards, the Starbucks Rewards, online ordering from Domino's Pizza and other innovations in which we invested more than MXN 200 million during 2020. We are also proud of the excellent cost control and expense management, and we implemented since the beginning of the pandemic, including the following: we were able to access government support program in almost every market where we operate. We also established a flexible payment and labor productivity scheme, which resulted in savings of approximately MXN 4 billion versus last year. We agreed on positiveness negotiation regarding rent payments, which translated into almost 1 full quarter of rent expense saved. To sum up, we made important efforts by aiming to reduce every P&L line as possible, which resulted in Alsea reaching a positive EBITDA in all geographies in the fourth quarter. In addition, during the year, we achieved the sale of several assets for an amount of approximately MXN 300 million, however, we also registered one-off expenses from store closures and brand value impairments of around MXN 600 million. Even with these negative impacts, we obtained a positive MXN 1.4 billion in EBITDA for the full year. Regarding the increase in the all-in cost of financing, this was mainly a consequence of the negative exchange rate loss of MXN 455 million related to the call and put option of the remaining 21% of Grupo Zena, compared to the exchange rate profit of MXN 200 million reported in the previous year. As we have mentioned before, we continue to be conservative with our planned CapEx as we favor cash flow and profitability over growth. In terms of liquidity, at the end of the fourth quarter, we had MXN 3.9 billion in cash, above the agreed MXN 2.5 billion minimum liquidity level required for the waiver. Since the waiver, we took out from the line of cash any restricted cash position and put it in the other asset line. Also, with the support of our suppliers, we increased the payment day from 60 to 90 days in average. As of today, we have complied with all of our covenants. We are in continuous communication with all of our creditors and closely monitor our debt indicators. Thank you, and I would like to open to Q&A.

[Operator Instructions] the first question is from Mr. Ben Theurer from Barclays.

Congrats on the results. Just, first of all Alberto, thank you very much for sharing all the details. As always, very, very detailed prepared remarks. So just following up on what you said around the 7-week sales performance on a year-over-year basis as well as on a 2-year basis, could you help us put that into perspective? And my particular focus is on Mexico and Latin America, how is this looking on a sequential basis? Just thinking about the fact that in Europe, obviously, lockdown measures during the fourth quarter started a little earlier, and we saw actually results in Europe, down slightly on a sequential basis. So just to understand what we should expect from Mexico and LATAM, where most of the restrictions just came in towards late December, but clearly impact January, February of what we can see here. So to get that sequential picture as well, that would be much appreciated.

First of all, obviously, believe it or not, these things start to keep changing almost every week. And I believe now that you're frustrated about that, but what I'm trying to do is really to understand week by week what is happening. And let me give you some numbers. The average sales for the 7 weeks of this year is around MXN 700 million, of all the systems.

MXN 695 million.

MXN 695 million, exactly. The worst weeks of 2020 were about MXN 200 million. And the best weeks, which was week 50, 51 -- 49, 50 and 51, were around MXN 900 million. So what I want to tell you, and the first -- I hope it's not confusing. And the best weeks that we have in the 10 weeks that we operated fully in 2020, were around MXN 1 million -- MXN 1 billion. So we are selling about 67%, 68% as an average up to week 7 or for the -- of what we were selling in normal conditions early 2020. That's the first thing I would like to say. So if you see this as an average, we're selling close to 70% as a company in all our regions. In Mexico, we're selling about -- let me see exactly -- about 78%. In Argentina, 97% and in Europe, in Europa, about 58%. So those will be the numbers. Mexico is doing almost 80%, and Europe is doing around 54% as an average of the first 7 weeks. But as I mentioned, and I'm flying to Spain next Tuesday, we expect that Spain and Europe will get vaccinated faster and therefore, have a better quarter than even Mexico. That's our expectation.

Also, I think we expect that in March, that the red light that we have in Mexico City and the state of Mexico has also changed. And when those stay restrictions are coming down, our sales going up around 5 points. So we can be around 85 points when the red light change here in Mexico City.

That's very helpful color. Very much appreciate it. Okay. And then just second, quickly, I mean, obviously, you've done last year a lot of portfolio reshape. You were able to shut down certain -- well, certain places which were not profitable. It's obviously all going to be accretive for this year. But in light of where we are in the different regions in terms of vaccine rollout, recovery and so on. How do you think about the level of CapEx, what can you spend? Where would you dedicate it to? And how should we think about store openings versus closings in 2021?

Okay. We still have very few stores that we are evaluating. And mostly, the stores that we are evaluating are -- most of Starbucks stores that are incorporate in buildings or office areas, where we are analyzing the possibility of opening them if the traffic gets there. But it's not a big amount, I would say, maximum 40 stores. That's one thing. So I don't foresee any big closures. We try to do all the cleanup last year, and we, believe me, very aggressive doing that. Second, as you know, we have some restriction in our covenants from the banks. We have about MXN 3.5 billion maximum as of today to spend in CapEx. And we were privileged that CapEx, for maintenance Capex, we believe that 2020, we didn't spend enough money to maintain our restaurants the way they should. And we see a lot of opportunity now that the customers are going to come back. So we're going to put a lot of money -- most of the money to maintain our stores. I've been visiting some stores last week in Buenos Aires and in Spain and in Mexico, and we need to put some money there. Second, we will put money in technology, as I already mentioned. And the third will be openings. We want to capitalize on the real estate opportunities that are there in the market. We also want to capitalize in the market share opportunity because a lot of our competition is closing. But we want to prioritize the growth in orders in the stores that we have today. So the numbers of openings that we plan to do is around 50 stores for next year, all around our geographies. If things get better in the second quarter -- in the second semester, sorry, we might be able to change that number after we finish our negotiations with our creditors. But right now, that's the number, and that's how we prioritize the CapEx.

And also in terms of CapEx, the prioritize of the first quarter would be maintenance for all of our restaurants to have all the restaurant in better shape as we can.

Our next question is from Ms. Vanessa Quiroga from Crédit Suisse, go ahead.

Congrats on the results. One of the questions that I have is regarding Mexico. It called our attention that margins were better year-over-year despite sales being still lower. And this didn't happen in the other region. So can we get your views on what allows for Mexico to be more flexible in responding to the necessary changes in cost structure. And so what could we expect going forward? How should we expect that margins will continue to be higher year-over-year in Mexico sustainably during 2021? That's first question. And the other one is, if you can provide an update with your negotiation with banks. I'm not sure if you said it on the initial remarks, but I missed a few parts.

Thank you. Well, first of all, you know that Mexico has bigger margins than the other geographies. We have always generated margins in our business in Mexico. Second, the mix of business, the participation in Mexico of Domino's and especially Starbucks is a lot bigger than in other geographies. And not only Domino's performed very well, but surprisingly, even with the lockdowns, Starbucks performed very, very well even with the lock -- when you take in consideration how many stores were closed. So that is the main reason. Also in Mexico, as you know, we have a distribution company that supplies to the Domino's business and other brands. And this company also were able to achieve their full budget 2020 as well as Domino's. So those are the 3 main reasons. And the fourth main reason is that in Mexico, also is where we have a bigger G&A. And the biggest adjustments that we did in G&A was in Mexico. And this has -- was achieved even without any government support in labor in this geography. So yes. And also, yes, Rafael is remembering that -- what we were able to achieve with our landlords, not only for 2021 or -- I mean, for 2020, but also for 2021, you will see that. We're more aggressive in Mexico because the legal lockdowns helped us in that sense. That's the first question. I hope I answered your question. And Rafael about the banks?

And in terms of banks, as I mentioned on some previous calls, we hired a third-party that is Deloitte, and would give the banks an IDR with the projections for the next 4 years. So with that, we are supporting our projections. And also we have asked the banks, right now, an extension of the waiver and also an extension of the short-term credit amortization. Right now, we are talking with all of the banks. And right now, it's the position that we have right now, extension of the waiver for maybe 12 more months. And after that, we are going to start also to restructure all of our long-term amortization of our credits.

Excellent. And do you expect to announce something soon or just before the June maturities?

I think we're going to close maybe at the end of April or first 2 weeks of May. I think we're going to be able to have the waiver closed and start the other -- the long-term amortizations with banks after the waiver.

Okay. And just a follow-up on the landlords, Alberto. What's the situation right now with the landlords, given that the restrictions have been largely lifted at this point?

Well, they have not been lifted at all completely but to be honest -- what we are doing is -- not only in Mexico, in all our geographies, we are talking to our landlords and they are understanding, most of them, the level of sales that we are doing right now. And they also understand how fast the restaurants recuperated after opening, but how big they get affected if they close. So I will tell you that with some of our landlords, we've been able already to reach some agreements for 2021. That said, if by any reason, some of our restaurants are impacted because of COVID restrictions, some of them have accepted a formula of discounts on rents.

Okay. That's great. That gives more visibility. Thank you Alberto and Rafael.

Our next question is from Mr. Héctor Maya from Santander.

Could you give us more details on the type of support that you're receiving from Starbucks, Burger King and Domino's, and how should this evolve in the future? And the second question would be, I mean, has the recent spike in U.S. interest rates modify your thinking about not only issuing long term bonds? I mean, for instance, now that it would be more expensive to refinance that just a few weeks ago, does this increase the probability of listing the European assets or listing the stock exchange via an equity offering of those assets?

Well, regarding the franchise, so let me tell you, obviously, I cannot get in detail of that because it's confidential information because, obviously, they -- I'm sure they have agreements with their different franchisees around the world. But I'll give you -- I mean, Starbucks, I think Starbucks openly said to the market that it will help in the second quarter of 2020 to all our licensees, and that's what they did, with the royalties in the second quarter. They also help us with financing. So we can use the resources to keep the business not only opening, but trying to keep investing and maintaining the stores. That's exactly what we do with Starbucks. We're still talking to them to see if we can get more support to accelerate growth with Starbucks because the brand, even with the situation is performing quite good. And those discussions are happening right now. With Domino's is a different situation because Domino's performed very well even in Spain where we have to close several weeks. But obviously, the brand was performing great because of the delivery strength that it has. So the support that we got from Domino's was more -- not in discount of royalties, but more in financial so we can invest and grow the brand and invest in technology. Because with Domino's, we used to have our own platform in Spain and in Mexico. And with Domino's, we agreed last year to have their own platform, online platform in all our deals, and they are helping us financing that investment. So that's good news. And with Burger King, the support that they gave us was different depending on the geography. In some, they gave a discounted in royalties and in some they gave us other support. All of our franchise source can sell in that way, our growth plans and commitments. And we are talking to them to reschedule the commitments of openings for '21 and '22. And the small franchise holders like Cheesecake Factory and Brinker Chili's, they give us almost 3 months -- I mean, 3 quarters, some of them in royalties. So that's a little less from what we get. But we're still talking to some of them, and we have felt a lot of support from our franchise source in all areas. Regarding the other questions, we've been very open about the situation of how we will strengthen our balance sheet. And we are analyzing all the options that they are. Right now, what we are doing, as Rafael said, we are trying to have a longer holiday waiver, so we can issue probably and go to market for high yield bond. And we have other options. We just have a Board meeting this week and analyzing and will take the best option for our shareholders. But right now, that's the one. Yes, we have analyzed other options, follow-on, the listing subsidies. We talk about listing in Europe, if you remember a couple of years ago. So everything is on the table, but we have not decided anything yet.

Our next question is from Mr. Rodrigo Alcantara from UBS. Please go ahead.

I have one for Albert and one for Rafa. For Alberto, thinking about labor, it was one of your main OpEx compliance. How do you see this evolving, particularly in Mexico, where salaries are rising? I mean I think you're implementing some practices that you have in Europe, with other countries to Mexico as a way to increase store productivity. So I was wondering if you can comment about this, about labor, labor costs. That would be my question for you, Alberto.

Of course. I think we have mentioned this previously in our last call. As I told you, fortunately, we have the same brands in the different geographies. And in all these different geographies, labor cost is very different. As you can imagine, France, the Netherlands and Spain are high cost labor per hour, as well as Argentina. So what we did since the beginning of the pandemic, and probably we should have done it before, but sometimes you learn from these things, is that we did a benchmark help with our franchise source productivity in all our brands. Even in the brands that we own like Vips, Foster's comparing with Chili's and other casual brands. And we were able to reduce substantially the number of people that we need in the stores for the number of [Audio Gap] we have. We did it in the crisis, and we pretend to do that. And the biggest gains are going to be in Mexico, where obviously, because labor is cheaper, we were less efficient in how we structure our labor at store levels. So you will see, for sure, in the first quarter -- in the report of the first quarter of 2021, a less labor, even with the increase of minimum salary in Mexico as well as in the other geographies. The same was done in G&A. We make some synergies in marketing and other areas of the company. And the idea is that all the adjustments that we did in G&A in 2020, we don't -- we keep them for the future of Alsea.

I see. Interesting. So I mean, in simple words, you think that perhaps even after the -- in a much more normalized sales level of post pandemic, you perhaps could have less workers per store in Mexico or in across your geographies? Would that be correct?