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

Good morning, everyone, and welcome to Alsea's Third Quarter 2022 Earnings Videoconference. Today, we will have presentations from our Chief Executive Officer, Armando Torrado, our financial -- Chief Financial Officer, Rafael Contreras; Miguel Cavazza our Supply Chain Director of Alsea Mexico and myself, the company's IRO. Now I would like to hand over to Armando for his initial remarks. Please, Armando?

Good morning, everyone, and thank you for joining to our Third Quarter 2022 Earnings Videoconference. I'm excited to discuss this quarter's results, our regional and brand performance and other strategic developments. And looking at the results of the third quarter, we are pleased to report a year-over-year increase in net sales of 25.5% reaching MXN 17.5 billion, representing more than MXN 3.6 billion increase versus the third quarter of last year. Same-store sales posted an increase of 30.5% compared to the third quarter of 2021 and an impressive 31.4% compared to pandemic third quarter 2019 results. EBITDA post-IFRS 16 was MXN 3.5 billion for the quarter, up 10.6% year-over-year, leading to an EBITDA margin of 19.9%. Our operation -- cash generation was healthy at MXN 5.1 billion compared to MXN 3.6 billion in third quarter of 2021, allowing us to continue to deleverage our company. We continue observing a strong trend in consumption in all our geographies and the results quite reflects this with demand holding up -- still holding up the speed in the backdrop of challenging macroeconomic conditions, especially in our region of Europe. During our third quarter of the year, we were impacted by important increasing energy expenses in Europe, where in the previous quarter, this represents only 2.6% of sales. In the current quarter, this was 4.2% points that was in the report that you already saw. Given that at the end of June, a contract, we had a fixed price exploration there in our fixed prices that we already reported. In this regard, I want to point out a couple of points regarding electricity. During the quarter, the highest pointing in price, which was 584% higher versus historical cost and approximately EUR 45 per megawatt. This was observed in the month of August, but has now been showing a downtrend until today. Actually, I'm going to present later on. I mean, here you have the chart that you can see how is -- that's been coming down, especially in the month of October. Secondly, we have reviewed the various options offered by the market in terms of contracts for the supply of electricity at stable price. However, given the current market conditions and due to the lack of visibility of what will happen in Europe, we prefer to be cautious and not close a long-term deal at this moment. However, we will be monitoring the situation closely, trying to make the right decision in case we see a good opportunity to lock a fit cost over the next 3 to 5 years, if possible. Since my appointment as the CEO back then in July, I have visited more than 100 stores out across our regions. I was able to connect with our talent and hard-working team members, affording me with some valuable insights, including ways that we might be able to dip in ties with some of the clients and other -- and suppliers. Additionally, I was happy to verify that Alsea has a solid portfolio in our brands with a diversified offering products and consumption occasions and the right team to operate our brands and support a successful business model. Also, I came away with a deeper understanding of our strengths as a company and areas of opportunity across our regions and brands. One such area is very clear the potential that we have as an opportunity to become our old-day technology that we've gained to have a better operation so as the same in digital platforms in our brand countries, where we haven't developed them yet. We added 37 new corporate restaurants across all regions in the third quarter, totaling 92 for the first 9 months of the year. We are in line with complying with our guidance of opening more than 170 stores in 2022. We plan to build on the success that we've seen over the past years with our expansion strategy. We are currently working on our strategic plans towards 2026. Looking into the opportunities we have ahead in the current market holding capacity data that we have been sharing in our Investor Day in the first quarter in 2023. We find ourselves now in a good position to take advantage of the market opportunities to speed all the macro conditions that are outside of the control. We ended the quarter with more than 4,300 stores and more than 74,000 collaborators in our company. Finally, I would like to give a quick overview of our main achievements in sustainability matters. Regarding ESG strategic, within the work done with our Balance pillar, we have invested over MXN 186 million since the beginning of the year to acquire ENERGY STAR certified equipment for [ 72 ] new stores in Mexico. This gives us our store efficient electricity users. We are also processing with our many offerings toward healthy plant-based products. During this quarter, as part of our Growth pillar, we made an alliance with NotCo to respond to the demands of our consumers. And we are looking for delicious and balanced options in plant-based products or alternatives for our customers. This alliance also has a positive impact in our Balance pillar and contributes to our goal of reducing our carbon footprint. In line with the strategic Spain and Portugal, the offer of Espresso drinks made of plant-based milk reach over 20% of all the Espresso products sold, and we are already offering new vegan snacks at Starbucks. Also in Burger King Argentina, we have expanded our vision in vegan menu adding meat-free nuggets in addition to already existing Veggie Whopper and Veggie King. As well, I would like to share that as of today, Alsea remains in fifth position out of 95 companies that are well evaluated in the restaurant category for the S&P Global Corporate Sustainability Assessment of the Dow Jones Sustainability MILA Index. We now we have -- we know that much remains to be done regarding ESG to meet expectations and needs of all our stakeholders. We are working on a critical route and plans to achieve key milestones and ultimately our 2030 goals. Now I will have you again with Salvador for him to have a more detailed overview on our sales and report trends. Thank you very much.

Thank you, Armando. As Armando mentioned before, sales during the quarter increased 25.5% year-over-year, and we continue to see a better performance compared to prepandemic levels with a 20.9% growth versus the second quarter of 2019. Excluding the FX effect, sales increased close to 38% versus 3Q '21. Our solid business model and the strategic calls made over these past couple of years have proven to be effective. After the pandemic, our customers began returning to our restaurants. However, performance in food delivery continues to be solid. We're making a 15% year-over-year sales increase in the third quarter. We serve more than 11.1 million orders by home delivery, accounting for 16.7% of total sales in the quarter, a slight slowdown in share versus last quarter, mainly related to the upward trend in on-premise sales. Digital channels and technology-based solutions continue to be fundamental pillars in our long-term growth strategy. We are currently working on exciting digital solutions for our Starbucks and Domino's brands that will be rolled out over the next few quarters. In Starbucks, for example, the all-encompassing digital platform called Starbucks Digital Solutions will expand e-commerce delivery, loyalty programs and payment methods. While at Domino's Pizza, we're developing advanced in-store displays to help our customers better explore our menu options, improve ticket size and reduce labor costs. Regarding our core brands, the same-store sales growth year-over-year of Starbucks in Spain and France was in the mid- to high 30s range, while in Chile and Mexico were close to 30%. This quarter marked the 20th anniversary of Starbucks in Mexico. We are very proud of this achievement and what it means for the country. We were also glad to announce the MXN 4.5 billion investment in Mexico from now until 2026, that we will earmark for Starbucks new store openings, renovations and improvements. Domino's Pizza in Spain and Mexico represented a 15% and 12% comparable sales growth. Domino's Pizza in Colombia reported a mid-single-digit decrease in same-store sales compared to the third quarter of 2021, mainly due to a menu restructure, cutting out some aggressive promotions which impacted orders, however, improving margins. And finally, Burger King presented increases in Chile, Mexico and Spain of 15%, 14% and 13%, respectively. Vips continue as well with a strong recovery in Mexico, reporting a 30% same-store sales growth compared to the 3Q '21, while Vips in Spain reported a strong same-store sales increase of 28% versus the same quarter of last year. And we are introducing innovative products to our breakfast menu that have been very well received by our Spanish customers. In spite of the cost increase, mainly due to inflationary pressures in raw materials and nonrecurring benefits related to agreements negotiated with some of our strategic partners in 3Q '21. Pre-IFRS figures -- EBITDA figures in the third quarter 2022 increased 12.9%, reaching MXN 2.1 billion with an EBITDA margin of 12.3%. Excluding the exchange rate effect, EBITDA increased 22.7%. Costs as a percentage of sales rose 200 basis points year-over-year, reaching 32.9%. Given the ongoing inflationary pressures, we have demonstrated how the cost control strategies we have deployed to counter inflation are working. We have also been proactive as a company in mitigating the global inflation scenario. And later on, Miguel will be talking through some initiatives that we have implemented, particularly in Mexico that have helped us navigate through these cost headwinds. Looking at our regions, geographies, Mexico sales increased by 25.3% year-over-year, with an adjusted EBITDA increasing by MXN 558 million to MXN 2.5 billion. We are pleased with Mexico's continued excellent performance in the face of rising inflation and declining purchasing powers in real terms. Sales in Europe grew by 12.5%. However, due to increased costs and expenses, adjusted EBITDA was MXN 386 million lower at MXN 1.1 billion. In the face of major increases in inflation and energy expenses, the sales number in this region showed the resilient demand and consumer preferences for our brands. The contraction on adjusted EBITDA margins in the region were also impacted by nonrecurring benefits from the previous year related to some agreements with our strategic partners, both on the cost side and in royalties. At the same time, we are working on mitigation efforts such as carefully started price increases, negotiating long-term agreements with suppliers and using our dynamic display menus and apps to guide customers towards higher margin offerings. Finally, in South America, we posted a strong 51.9% sales increase, while adjusted EBITDA was MXN 865 million, representing a 56% increase year-over-year. South American solid figures are mainly the result of the strong demand, decreased SG&A, successful product innovation and digital strategies. Now I will leave you with Rafael for him to give you a more detailed overview of our results and balance sheet situation. Rafael, please go ahead.

Thank you, Salvador. Our net income for the third quarter increased 13.2% to MXN 336 million. This increase was mainly due to a MXN 328 million increase in operating income, resulting from the continuous positive trend in sales, commercial strategies, product innovation, development in digital applications as well as improved cost and expense control efficiencies. We have been able to keep the strong recovery trend since the first quarter of 2021, achieving an earnings per share of MXN 1.90, including IFRS 16 our EPS rises to MXN 2.26 per share. Regarding our debt profile as of September 30, 2022, our gross debt decreased MXN 4.1 billion year-over-year, closing at [ MXN 27.8 billion ]. This reduction in debt corresponds mainly to the devaluation of the euro exchange rate against the Mexican peso and debt amortizations during the period. Year-to-date, we have paid down MXN 1.3 billion with MXN 275 million to be paid in the fourth quarter. We feel comfortable with the current maturity curve and debt ratios that we are achieving. Our debt ratings were upgraded by Fitch and Moody's in the quarter on September 18 (sic) [ September 8 ]. Fitch ratings upgraded our Foreign and local currency long term to BB, along with our unsecured and senior unsecured notes. Fitch also upgraded our local currency long- and short-term ratings. Likewise, Moody's upgraded our CFR and senior unsecured rating with a stable outlook. These upgrades recognize our operating performance, a quicker than projected deleveraging, revenue growth across all regions, improved margins, our portfolio of brands that continues to gain market share, superior product offerings that meet consumers' preferences and our investment strategy focused on expansion, modernization and innovation. Regarding our covenants, we complied comfortably during the quarter. On the gross debt-to-EBITDA ratio, we ended the quarter with 3.2x. EBITDA to interest paid is 3.6x and net debt to EBITDA 2.6x. The minimum liquidity covenant is set at MXN 2.2 billion, with us posting MXN 5.1 billion in cash for the quarter. The debt structure at the end of the quarter was 96% long term with 66% in Mexican pesos and 34% in euros. We expect to deleverage going forward and meet our -- all of our debt covenants. Thank to our healthy and ongoing cash generation. In line with our CapEx plan, without sacrificing needed investments, we have spent MXN 2.5 billion during the first 9 months of 2022, of which 40% was allocated to maintenance as we keep catching up following the pandemic, 49% went to store openings and remodelings and 11% for IT and some other strategic projects. Out of the 98 stores opening that we achieved in the first 9 months of the year, 60% are Starbucks and [ 22 ] Domino's Pizza units. I will now like to hand the call over our Supply Chain Director of Alsea Mexico; Miguel Cavazza, who will give us a deeper insight on our supply and sourcing strategies. Thank you.

Thank you, Rafael. Good morning, everybody. Today, I want to share with you what improvements we have been doing for last year's to mitigate supply chain constraints that we are all aware of them, such as lack of availability of products, lead times, transportation cost, inflation and quality. Since 2020, when the pandemic started, we took some specific actions to mitigate the lack of availability and prices increase. We worked with vendors to reduce costs and also to improve our logistics key indicators, expenses and results. From procurement, we have some key initiatives. We do hedging in commodities and also in FX rates. We follow key market indicators such as the Chicago Mercantile Exchange, USDA, [indiscernible] and others. We are negotiating mid long-term fixed prices agreements. Also, we integrate the planning process with strategic suppliers. So 1 year in advance, we plan our demands, we adjust our lead times, volumes and the suppliers can secure raw materials so they can have an anticipated manufacturing plan. And with that visibility for most parts, we have win-win agreements and have the best logistics indicators and costs for the companies. Also, we anticipate seasonal purchases, and we're looking for new items around the world to support the innovation program. Also, we execute some physical prebuys. And for example, our cheese vendor is the most important supplier for Russia and Mexico. We have a consolidated strategy partnership in 1990. Through 30 years, he has been the main Pizza cheese supplier for us in Mexico. Under Domino's Pizza embracement, the supplier has developed for us a unique best-in-class Pizza cheese formula, key on Domino's Pizza success. Year-over-year, we have increased our volume supply partnership. We have integrated [ the planet ] process, so we adjust volumes and deliveries 1 year in advance. We executed a prephysical buying during some key months of the year, where the cheese price is lower than the average price of the whole year. Supported annual volume forecast, the supplier is one of the step ahead, securing milk supplies in advance to cover Alsea volumes demand. With this process, we secured both price and availability. The last year results of the Alsea Mexico price list versus the National Index Consumer Price, the team has been delivering better cost than the market. We continue working hard to mitigate prices increases, as we mentioned having a long-term relationship with our strategic vendors. Also, we spend a lot of effort improving our key logistics indicators to be contemplated advantage for Alsea Mexico. In [ new ] stock, we achieved 99.3% of availability of products for our brands. We have increased 42% in -- all in productivity since 2019. And finally, our transportation costs since 2019 have a reduction of 19%. Also, we can mention that after doing benchmark, our total logistics cost is 25% lower than other logistic food service competitors. From the quality perspective, we have a strong quality program in the company. There is a supplier approval and development program implemented for food and packaged materials where we will include food safety, quality and social responsibility criteria. Recurring food safety, our suppliers are required to be certified based on international criteria established by Global Food Safety Initiatives. Additionally, there is a surveillance program implemented in-house with our own laboratory, where we test products from our suppliers randomly. All our distribution centers have been food safety certified on SQF, Safety, Quality Food standards, in the last 2 years. Our [ cold ] management is being monitored and controlled daily with a detailed traceability program from the vendor to our stores. Our Internal Quality Assurance System named SIGICA, Alsea Food Safety and Quality Integrated Management System, has demonstrated compliance with international requirements due to the last 2 years ago our manufacture operations are SQF certified. Before closing the presentation, we want to share with you that we're very proud because logistics in Mexico has won the premier National Logistics at 2022. The Logistics National Award is the higher decoration that is given to the logistics sector to professional companies that due to their contribution to the supply chain have managed to become senior most with efficiency, competitiveness at the national level. Thank you all. We can go to Q&A.

We will now start the Q&A session. [Operator Instructions] The first question is from Mr. Sergio Matsumoto from Citi. Please go ahead.

I want to ask a question about the European business. We for the proposition that energy is higher [indiscernible]. How about the cost, are you seeing anything [indiscernible] less discretionary statistics. You can give us some sense of the customer base? And also, does the current situation affect the store development plans in the next couple of years.

First of all, I can say, Sergio, we have seen a strong trend in terms of consumption still in Europe up to this quarter as well. So like we mentioned in the presentation, Vips in Spain having close to 30% growth in same-store sales, Foster's Hollywood as well has a mid-20s same-store sales figure. So we haven't seen actually a slowdown. Third quarter for sure, we still saw positive tourism effect and people are going out quite a lot. But so far, we haven't seen any major slowdown, and that's what has been helping pretty much overall the business in Europe. Like we mentioned before and you also mentioned recently, the main concern right now is energy prices going up. And on the comparative basis, if we take a look at what happened in 3Q '21, we did have some benefits from some arrangements that we reached out with some of the main suppliers that we had on the cost side and as well as some royalties that held out in 3Q '21, and it's not helping right now because of the comparative base. For your second question, I guess, on the expansion plan, we do not see any setback on what we are right now planning going ahead. So the target to open between 170 to 200 stores for this year, it's still on for the whole company, exactly. And it's even with the concerns that we see in Europe, we're not moving away from the current guidance in terms of openings.

Our next question is from Mr. Alvaro Garcia from BTG Pactual.

Good morning, gentlemen. Thank you very much for the space for questions. I have one question for Armando on the general defensiveness of Domino's and Vips. I was just curious if you could sort of speak to affordability strategies and how you're thinking about transaction growth or defending transactions into next year. I was just wondering how you think of those brands and how defensive they may be into next year?

Thank you very much, Alvaro. And regarding Domino's, I mean we have still, I mean, very strong in the consummation of our customers, especially, we are raising around 1,100 orders in Colombia, 1,000 orders per week here in Mexico and also in Spain. I just was with the people of Domino's, and we are looking to a strategy of service in a way we are -- just to make an idea, we are delivering right now our average of delivery in pizza is less than 21 minutes. So regarding with service, we are putting a new technology around all our geography next year, starting in February or March, that is called DSS. And that DSS technology also with the GPS in our system will get us to around 21 to 19 minutes for stores delivering. So that is a big, big advantage with all the consumers. And whenever we will see lower times of delivery, we will see increase of orders, an increase of NPS and increase of satisfaction of the consumers. So the game of the -- name of the game for Domino's that will be the strategic of give the best service and the best product, and that will keep us up to getting better orders in order to the competition. Regarding Vips, Vips in Spain as Salvador said and Rafael said, is very strong. We've been seeing just tremendous growth in all the company, since August 15, more or less, the trend of sales has been going up, and it's been every week better than ever. In Mexico, yes, I mean just the mobility of persons still around, still going up. We have a lot of stores here in Mexico City area that are tracking better numbers every week regarding over 2019, but it's been not recovered at the levels or at the pace that we wanted to see. So that's going to be a challenge for next year. But I think we are in a better and a good situation regarding our portfolio of brands that we see. I mean, in all geographies, as Salvador said, we are having just a good demand of our consumers and in all brands, too. So I think we feel very secure or with -- affordable of what is going on, especially we have next 8 weeks in our growth. We're going to open quite a lot of stores in the next 8 weeks.

94 in the next -- for this fourth quarter.

94 stores we're going to open in this quarter to win probably the record that we've ever done. So -- and Christmas season -- November 4, we're going to launch our Christmas strategy in Starbucks that is going to be very strong as it's been in the past years. And also with the [ Navidenas ] also in Vips. There's going to be the World Cup coming on also in 28 days, that for us it's just going to be an amazing opportunity for Chile's and for Domino's, of course, and other brands. So we are ready to close a great year regarding demand.

Our next question is from Mr. Antonio Hernandez from Barclays.