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

Good morning, everyone, and welcome to Alsea's First Quarter 2022 Earnings Video Conference. My name is Nicolás Espinoza from Alsea's IR team. Today, our Chief Executive Officer, Armando Torrado; and our Chief Financial Officer, Rafael Contreras, will be presenting the quarterly results. Now I would like to hand it over to Armando for his initial remarks. Please go ahead.

Good morning, everyone, and thank you for joining our first quarter 2023 earnings video conference. I'm excited to share with you our consolidated results, regional and brand performance. I will also distribute some strategic developments and guidance from our recent Alsea Day. In the first quarter, we posted strong sales across all companies brands. We are pleased to report a year-over-year increase in total sales pre-IFRS 16 of 16% to MXN 17.6 billion. Same-store sales for the quarter were up an impressive 23.5% year-over-year driven significantly by 12% same-store orders. EBITDA pre-IFRS 16 was MXN 2.3 billion for the quarter, up 23.6% compared to the same period of last year with a margin of 13.1%. This quarter results demonstrating a strong demand of our brands and a company high profitability, especially in the face of inflation, increase in minimum salary and elevated energy costs in Europe. An affordable exchange rate that effects represents 10% points less in sales growth. We serve over 11.5 million orders in the delivery channel this quarter. Delivery made up 17% of total sales, the same share as of the fourth quarter of 2022. The steady growth of delivery is in line with our overall sales and emphasis the performance on this trend. In the quarter, we opened 20 new corporate restaurants and 8 sub franchisees across all regions. Of those, 50% were Starbucks and 29% when Domino's Pizza. At the end of the quarter, Alsea has over 4,400 stores and over 1,000 sub franchisees stores, and more than 75,000 team members. In line with our expansion strategy, last April, we signed an agreement to operate and develop the Starbucks brand in Paraguay, introducing the country's first Starbucks location. This expansion is fully aligned with Alsea Starbucks role strategy. Currently, we operate over 1,600 Starbucks locations across Mexico, Europe and South America. The total CapEx for the first quarter was MXN 16 million, of which 48% was allocated to maintenance, 29% to store openings and remodels, and 23% for IT and other strategic projects. In line with the company's leverage strategy, I'm pleased to share that we are now below pre-pandemic leverage levels. I'd like to highlight a few of the important moments along this journey. As you can see in the graph, at the end of 2018, we acquired Grupo Vips in Spain and our PFRS leverage net debt EBITDA was 3.7x, which then went up slightly with the acquisition of Starbucks in France and Benelux to have the leverage at 3.9x. Then during the pandemic with the restaurant closures and increased cost of global level, our leverage ratio increased significantly. As we recover, we've been able to increase sales while maintaining an increased share of delivery and reducing costs and debt. Our pre-IFRS 16 leverage ratio is 2.4x net debt EBITDA, and we will continue to emphasize our deleverage strategy. In line with our digital transformation strategy, our customers with accounts in our loyalty programs have a higher average ticket, visit us more frequently and provide us with a valuable data to learn how to improve our service and the consumption habits. Our digital sales that include e-commerce, aggregators and loyalty, represents during the quarter at 30% of share of the total sales, standing out at Domino's Pizza with 40.6 penetration of digital sales. This MXN 5 billion on digital sales at the end of the first quarter of '23, represents a 23% growth over last year. Led by Global Starbucks Rewards growth of 44.5% versus same period of 2022. We reached 10.4 million of digital customers with activity with 365 days with a growth of 6% versus last year. In terms of activity, digital customers were actively with 180 days, we reached 6.6 million with an increase about 3% versus last year. Finally, I would like to give you a quick overview of our main ESG achievements for the quarter. In order to identify our global sustainability strategy priorities, we update our materiality assessment, an exercise that we perform every 2 years. For this update, we use a double materiality approach for this time. This identifies the most significant external and financial ESG factors that influenced our company performance, allowing us to address market demands. We engage in a consultation process with senior management and key stakeholder groups across 8 countries in all regions that we operate, including Mexico, South America and Europe. Our ESG-related actions and plans will focus on addressing the material issues identified in this study. Talent attraction and retention, number one; two, food quality and safety; three, health and safety of the customers and employees; four, equity, diversity and inclusion; and five, energy and emissions and achieving our 2030 targets. We will be delivering yearly progress for the priority indicators we track as part of our ESG strategy. The principal findings of the materiality assessment will be incorporated into our 2022 annual report, which will be available in early May on the company's website. Regarding our global sustainability strategy, which consists of 3 pillars: balance, growth, and development. During the first quarter of 2023 under the balance pillar, in Mexico, we recovered over 191,000 liters of used vegetable oil for biodiesel production. Additionally, we installed solar panels at 2 of our facilities in Spain. These panels are expected to generate enough clean energy to meet about 30% of the facility's energy needs. Under the growth pillar, our brand and distribution centers are regularly assessed for quality and safety standards. As of the development pillar, in Mexico, [indiscernible] movements provide over 235,000 meals to over 4,000 children through 6 society organizations. In collaboration with the Mexican Food Bank network, 7 tons of food were donated in the first quarter, benefiting over 32,000 individuals. In Spain, we reaffirmed with commitment to the United Nation Global Compact by signing the country level, charter and entering into an agreement with an NGO Down Espana to support the integration of people with disabilities into our workforce. Now I will pass it to Rafael, so we can give you a more detailed overview of our brands, regions, results, and balance sheet items. Please, Rafael.

Regarding our brands, the Starbucks reported an impressive year-over-year same-store sales growth of 36% in the first quarter, with a growth in orders of 20%. In Mexico, the Starbucks same-store sales were up over 30% year-over-year, while in Europe, they increased by 27%, and in South America, up over 26%, excluding Argentina. Domino's Pizza same-store sales were up in Spain, Mexico and Colombia by 6.4%, 2.7% and 1.3%, respectively. This growth came despite a difficult comparison basis versus the first quarter of 2022. Burger King reported another positive quarter, posting increase in Chile, Mexico and Spain of 12.3%, 8.6% and 8.3%, respectively. After officially recovering to pre-pandemic levels late last year, Vips Mexico continued with a strong first quarter same-store sales, up 13.5% year-over-year with orders up 10%. The brand continues to be focused on improving its in-store experience and products. In Spain, Vips also reported a strong first quarter same-store sales increase of 21% versus the same period last year. The casual dining segment also had an impressive quarter with same-store sales up 16% and orders growing by 12% versus the first quarter of 2022. Looking by region. We were pleased with Mexico performance as quarterly sales increased 22% year-over-year. Costs were in line with last year, and adjusted EBITDA pre-IFRS 16 was up 19.7% to MXN 2 billion. In the quarter, we closed our JV agreement with El P, who will be providing bread and pastry products to our sale stores in Mexico. This transaction added MXN 60 million in EBITDA to Mexico P&L. In Europe, sales were up 7.6 to MXN 5.6 billion, and adjusted EBITDA was down 9.2% per IFRS 16 to MXN 726 million. However, when excluding the effects of foreign exchange fluctuations, sales grew by 24% and adjusted EBITDA was up 4%, underlying its significant impact on overall results. Despite the ongoing challenges of rising inflation and energy cost, demand was resilient. We remain hopeful about sales hedge hitting into the summer months. South America posted a strong 58% increase in same-store sales for the quarter, with adjusted pre-IFRS 16 EBITDA increasing 32.8% to MXN 504 million. South America's positive results were driven by strong demand, reduced cost and successful product innovation and digital strategies. Moving on to detailed overview of our results and balance sheet. Despite the sales Europe cost rise resulting from not being able to mitigate inflation in important products, the increasing cost of energy in Europe and wage increase across different regions, we were able to offset part of the impact with some strategic initiatives, which helped us to mitigate the impact in the consolidated cost as a percentage of sales, only increasing 1.3 percentage points year-over-year, reaching 33.1%. During the quarter, we reached different agreements with our suppliers. One, a benefit in the price of cheese through a decrease in cost of 9% versus the same period of last year. Overstocking our needs until December 2023 in Colombia and September 2023 in Mexico benefit in the cost of some core products that we fixed price for the year, like wheat flour, pork ribs, oil, among others. In our distribution center in Mexico, we have been innovating in order to improve some processes within our supply chain. As an example, we review the sugar used in the manufacturing process of different products, and we're centralizing our industrial kitchen to produce some dishes to guarantee the quality and consistency in our stores. Despite cost increases, our prior IFRS 16 EBITDA was MXN 2.3 billion for the quarter, up 23.6% compared to the same period of last year with a margin of 13.1%. Post-IFRS 16 EBITDA was MXN 3.7 billion for the quarter, up 6.6% with a margin of 20.9%. Operating cash generation was healthy at MXN 4.5 billion for the quarter, which allow us to continue to both deleverage and invest in our organic growth. In Europe, energy costs in the first quarter of 2023 will be elevated, but still elevated up 110 year-over-year, which impacted the region EBITDA compared to a year ago. However, energy prices continued to decline on a sequential basis from the third quarter 2022 peak. As you can see on the graph, in the third quarter of 2022, energy costs as a percentage of sales were at a historic high of 6.8%, with electricity at EUR 308 per megawatt hour. Since then, energy share of sales fell to 4.3% in the fourth quarter of 2022 and to 3.2% in the first quarter of 2023. This quarter, we paid an average of EUR 97 per megawatt hour. After a warm winter and with increasing renewable energy projections in Spain and France, Alsea will be able to find new reasonably priced options in the second half of 2023. We continue to work with our team of energy experts in Europe to analyze the possibility of securing long-term contracts. Our net income for IFRS 16 for the first quarter increased 41.1% to MXN 564 million. This result comes despite an increase in cost of products, energy costs, financing costs and higher tax rates. In the first quarter of the year, we achieved a pre-IFRS 16 earnings per share of 2.48 including IFRS 16. Earnings per share rose to 2.13. In January 2023, the General Shareholders' Meeting approved the cancellation of 18.5 million ordinary shares that had been reported in market transaction during the last year, representing 2.2% of the outstanding total shares. And last week, the General Shareholders Meeting approved another cancellation of 4.9 million ordinary shares, representing 0.6% of the outstanding total shares. In the quarter, we paid MXN 86 million of amortization. Our pre-IFRS gross debt decreased MXN 3.3 billion year-over-year, closing at MXN 26.3 billion at the end of the quarter. This reduction in debt corresponds mainly to the devaluation of the euro against the Mexican peso and debt amortizations during the period. Our pre-IFRS 16 gross debt-to-EBITDA ratio at the end of the quarter was 2.9x and post-IFRS 16 3.3x, 0.6x less than last year. Regarding our bank covenants, looking to our pre-IFRS 16 gross debt-to-EBITDA ratio, we ended the quarter at 2.9x and EBITDA to interest paid at 3.4x. The debt structure at the end of the year was 96% long term with 65% in Mexican pesos and 35% in euros. Our target is to still deleverage the company in the coming years. I would like to quickly go over the guidance that we gave in March at Alsea Day. We expect to open between 250 and 280 stores of which most are corporate stores with about 70 to 90 store franchises. Regarding CapEx, we are expecting MXN 5.5 billion in the year. Same-store sales should come in around 14% to 17% and revenue above 13%. We are guiding EBITDA for IFRS 16 to grow over 15% with a margin of over 13%. Our gross debt-to-EBITDA ratio of about 2.8x and return on equity of 18% to 19%. Post-IFRS 16 EBITDA should grow over 10% with a margin of over 20%, a gross debt-to-EBITDA ratio of about 3.3x and return on equity of 21% to 23%. This quarter results put us on track to achieve our full year guidance. I will now pass it back to the operator for the Q&A session. Thank you.

The first question is from Mr. Alan Alanis from Santander.

Congratulations on the results, first of all. I have 2 questions. We're seeing some -- a short-term question and a long-term question. The short-term question, we've seen some weakness in consumption during the month of March. Could you tell us if you're seeing also some weakness in March and April in Mexico specifically? That's the short-term question. And long term, could you help us reconcile the growth of EBITDA pre- and post-IFRS? And I'll explain where I'm going with the question. We know that you did a lot of renegotiations on the leases during the pandemic. And some of the leases became more variable than fixed and so much. Where are we going to start seeing a growth in pre and post? I assume -- maybe that should be the first question. I assume that the difference in the growth in pre- and post-IFRS has to do with those negotiations of the leases. And if that's the case, when do you think we're going to start normalizing and seeing both growth in terms of post- and pre-IFRS EBITDA growing at the same pace?

Okay. In terms of pre- and post-IFRS 16, this quarter, we opened the line of rent. So you can see the benefit that we had last year in terms of rents, because of the benefits that we had, first. And then this fourth quarter and this first quarter that we have more variable rents than fixed rents. So you can see the impact in each quarter in terms of the line in rents. What we are projecting is after the third quarter, you're going to see the same -- it will normalize the pre- post-IFRS 16.

Perfect. That's very useful. I'll look into that, and that's a very clear answer, just as clear as your…

And Alan, regarding the sales in March, we really see a very small slowdown because we were in January and February versus last year, the increase was, as I told you, New York was big. But in April, we are also -- we use close a month yesterday, and we are in line with our budget and will guide us.

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

Two questions. One, on Vips in Mexico. Vips Mexico, you mentioned same-store sales growing 13.5% and traffic growing 10%, which seems like there's sort of some investment in price there to get traffic back in store. And I guess my question is sort of, do you think that strategy is playing out? And how long should we expect that strategy? And what sort of specific initiatives? Is it a breakfast thing? Is it a coffee thing? Is it a lunch thing that's really driving that traffic at Vips? Is it a consumer thing? Sort of more of a top-down thing? I'd love to hear your thoughts on how Vips traffic because rebounded. And my second question is on Domino's. You mentioned the tough comps, but I'm not sure if there's anything else in Mexico and Spain that is driving sort of -- let's say results that are below average. We would love to hear about that. Thank you.

I mean I think in Vips, we are really very happy with our results. I mean having traffic 10%, that's what we are looking for, especially that family business is driven by traffic. The penetration is high. So at the end, we went back to basics and regarding price, and actually, we briefly touched prices. We did some bundles, we did some 2 promotions. Went first for 9 weeks and then again another 8 weeks. We have very nice results going in TV, going in advertised. So I think we are back there. We have also very good results in the costs -- the controlling of costs, controlling of labor. So EBITDA store level, we are happy with our results, and they have been strong. We have a lot of opportunities still to go. So I mean where that as breakfast is coming back, breakfast in that, especially in Vips in Mexico represents a high percentage of our sales. We are growing breakfast in a good manner and also lunch. So we also turn around with Coke. Coca-Cola is our new vendor and our new supplier. We are doing some good things with them and driving promotions. So results are good in [indiscernible]. Regarding Domino's, I mean it's been a little bit tougher than in other brands I can tell, because we were open last year full hand. Last year, probably some restaurants were opened, so shopping centers, 70% of capacity of 80% of capacity, in Domino's we've been open since the pandemic. We never closed. So there was a little bit less growth, but I would be able that we just -- like I told you in New York we did a good promotion starting 15th of March for carry-out pizza 10,145. pesos, and you will see the results in the next quarter. We are very, very glad about how we are behaving in carry-out. The carry-out in Mexico, it's a bigger pie than delivery that we own already the category there. So things are moving in a very well as the North position with good headwinds for us in the pizza category.

Great. And just one last follow-up. If you could remind us what sort of -- what number of Vips in Mexico you've -- we'd be able to classify as new, let's say? What part of the process are we in terms of maintenance CapEx and sort of revamping old Vips in Mexico? Do you have that number of [ engines ]?

You want to say regarding portfolio how many stores we have remodeled? How many we have remodeled?

Yes, remodeled.

We are about 90 stores more to go for remodel out of the 240 or far more or less.

And we are trying to win more than 100% in 3 years. So we're going to remodel more than 20 this year. And another thing that helps Vips in Mexico is that offices are crowded. So that helps because that kind of people is the one that attend Vips.

Our next question is from Ms. [indiscernible] from [ Sura Investments ].

My question is for first one, it's only how comfortable do you feel about your debt -- in terms of your debt?

As you can see, we have a deleverage during the past quarters and the past years. We feel comfortable going lower than 2.5x. But with this trend, we think we're going to be at 2x in a couple of years, and we feel pretty comfortable at that number, 2x net debt to EBITDA.

Okay. We can expect that at the end of this year, or?

No, at the end of this year, as I put in our guidance, if you see the number that I give in our guidance is to be at gross debt EBITDA at 2.8x gross debt.

Our next question is from Mr. Thiago Bortoluci from Goldman Sachs.

I would just like to reconcile and hear a little bit more from you on the guidance, right? I think in the first quarter, you delivered impressive same-store sales of 23%, and we're sticking to our top line growth guidance of 13%, right? Obviously, we do recognize that there is FX. There is a challenging base going forward, but just like to hear from you if there is anything on the consumption background that makes you a little bit more cautious on the forward. That's my question.

No, I think that the guidance went from 14% to 17%. And that's the guidance for the whole year.

That's the guideline for the full year, but something that helped us in the first quarter was Europe. Because last year in Europe it was Omicron. So Europe has this quarter a pretty high same-store sales growth. But it can maintain the same pace for the second, third and fourth quarter. So that's why you see a full year of around 14% to 17%. It's a tougher number last year for Europe in the coming quarters.