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

Good morning, everyone, and welcome to Alsea's Second Quarter 2023 Earnings Video Conference. Today, our Chief Executive Officer, Armando Torrado; and our Chief Financial Officer; Rafael Contreras, will be presenting the quarter results. Now I would like to hand it over to Armando for his initial remarks. Please, Armando, go ahead.

Thank you, Nicolás. Good morning, everyone, and thank you for joining our second quarter 2023 earnings video conference. I'm very excited today to share our results, a regional and brand performance and some insights on our ESG achievements. In the second quarter, we experienced a constantly and strong sales across all the company brands. This is a result of our strategic long-term plan to continue to generate value for our shareholders. We are pleased to announce a 12% year-over-year increase in total sales, amounting to MXN 18.9 billion post IFRS 16 and a [ 99 ] increase excluding the impact of a stronger peso. Despite a sequential increase in the comparable base, same-store sales showed an impressive growth of 18.6% year-over-year. EBITDA pre-IFRS increased by 15% amounting to MXN 2.5 billion for the quarter, with a margin of 13.7%. Post-IFRS EBITDA increased by 6% to MXN 3.6 billion for the quarter with a margin of 20.3%. This quarter's results reflects a strong demand for our brands and the company's high profitability, driven by positive consumer behavior and supported by our strong business model. We serve over 12.3 million orders by home delivery this quarter, reaching MXN 3.2 billion, representing a 12.8% increase compared to the second quarter of 2022. Home delivery sales accounted now for 17.1% of our total sales. Regarding our brands, Starbucks. Starbucks reported an impressive year-over-year same-store sales growth in Mexico of 25.2%, while in Europe, 15.3% and South America, 42.8%. Excluding Argentina, the percent was 11.8%. Regarding Domino's Pizza, sales were up in Spain and Mexico, 7.8% and 5.2%, respectively. We are pleased to announce that we're recognized -- we were well recognized in our 2 biggest markets, Mexico and Spain, with The Gold Franny Award, the most prestigious honor bestowed on Domino's franchise owner. The award is based on several key factors, including operational outage scores, community involvement, store safety and security. Domino's International, as you know, entered into an agreement with Uber Eats [indiscernible] to enhance our delivery service, especially in Mexico and Spain, while gaining deeper insights into our customers. In Mexico, our successful commercial strategy to increase participation at the carryout segment resulted in a remarkable 19% sales increase compared to the year before in this prestigious channel. Regarding Burger King, we reported another positive quarter -- positive increase in Mexico and Spain of 9.5% and 3.1%, respectively. During this period in Mexico, it is important to say that our digital kiosk implementation has been very successful with a 17% increase in average ticket. We will be implementing this channel of digital kiosks in all our brands, in all our stores in the next quarters. Regarding Vips, Mexico continued with strong second quarter same-store sales up to 7.5% year-over-year. Orders were up 8.1%. Vips remain to be focused on improving in-store overall experience. Also in Spain, we reported a strong second quarter sales increase of 12.8% versus last year. In Mexico, we continue with our revitalization efforts to the brand with an additional of 10 remodel restaurants year-to-date with a target up to 40% by the year end which resulted in sale improvements around 15%. The brand recently launched its communication platform [indiscernible] [ and CASA ] with the aim to improve guests with a unique experience in a home environment, offering familial close, warm and personalized attention, taking care of every detail creating great moments in each visit. Likewise, the brand resumed its presence in television, which has brought an increase in sales in the week 29. Our global casual dining segment also had a solid quarter with a same-store sales up 10.2% and orders growing 5.6% versus the second quarter of 2022. Continue with our expansion strategy, I am delighted to announce a significant milestone, the opening of the first Starbucks store in Paraguay, making the brands debut in the country. As we move forward, we will carefully evaluate each new potential location to ensure the profitability of our establishments. In line with our digital transformation strategy, our digital sales, which include e-commerce, aggregators and loyalty, grew 21.4% versus last year, reaching MXN 4.7 billion at the end of the second quarter 2023. This represents a 28% share of the total sales. Domino's achieved a remarkable 40.2% penetration of digital sales and Starbucks, which sets a remarkable growth of 48.1% compared to the last year. Starbucks Rewards program Stars for Everyone, was -- we did a soft launching in Spain and Portugal in this quarter. More than 170,000 new members joined the program since we launched it. Spain, France and Portugal have a tender of 12%, 11% and 10%, respectively. In Mexico, the Starbucks tender was a 28%. We expect to grow the tender in the Europe in the coming quarters. Regarding ESG. Finally, I would like to give you a quick overview of what has been going on in the company. In Europe, we highlight Domino's Pizza effort in Spain to transition from regular delivery fleet to electric vehicles, having already modified 13% of our fleet with a goal of reaching 30% by 2026. Additionally, the installation of solar panels in 3 out of our 4 factories that we have in Spain and also in other 4 freestanding stores, resulting in a 20.27% reduction of CO2 emissions for the factories. In Mexico, Alsea and its brands through Va por Mi Cuenta movement led by Fundación Alsea, delivering 5 vehicles, 2 with a capacity of 5 tons and 3 with 1.5 tons benefit 5 Food Banks of BAMX Network, increasing the association capacity to combat hunger among vulnerable populations. In Mexico also, we have 1,188 units powered by a clean and renewable energy consuming 81 GWH, which represents 69% of our consummation in the country. Thereby, reducing the impact of Scope 2 emissions. Also, during this quarter, we certified 23 Starbucks greener stores, bringing the global total to 42, embracing the Starbucks greener store framework. The equipment in these greener stores increased efficiency, leading to a reduction in water consumption by 50%, energy consumption by 28%, carbon emission by 4% compared to normal regular stores. So I would like to -- thanks to our -- all our team for a strong number in the first quarter. I'm pleased to report that we are running ahead of our guidance so far. We will see how the rest of the year unfolds. But based on the current information, I am upbeat about the outlook going forward. The consumption in Mexico is strong; the summer season in Europe is looking promising; cost pressures have been eased in most of our regions; operating leverage has been benefiting us and our team has been executing exceptionally well our commercial strategies. Now I will pass the voice to Rafael, so he can give you a more detailed overview of our brands, regions, results and balance sheet items. Thank you very much.

Thank you, Armando. Good morning, everyone. We were pleased with the performance for IFRS 16 numbers also. Quarterly sales increased 10.9% on a pre-IFRS 16 basis year-over-year. Costs were up 45 basis points versus last year, and adjusted EBITDA was up 15% to MXN 2.5 billion. Looking to regions. In Mexico, sales were up 17.6% to MXN 9.8 billion, and adjusted EBITDA was up 23.1% to MXN 2.3 billion. This improvement was driven by digital innovations, new menu offering and the continuous improvement in the retention of key talent, decreasing 2.9 percentage points in the turnover rate of the country compared to the same period of the last year. Also, sales growth helped us to improve our operating leverage and the cost was benefited from the appreciation of the Mexican peso, resulting in a cost reduction of 100 basis points. In Europe, sales were up 4.4% to MXN 6.6 billion and adjusted EBITDA was down 5.1% by IFRS 16 to MXN 866 million. However, when excluding the effect of foreign exchange fluctuations, sales grew by 15.7%. The increase in sales was driven by the normalization of consumption in the region, digital strategies implemented and product innovation. The contraction in the EBITDA was mainly due to the impact of the raw material and energy costs year-over-year as well as the rise in minimum wage, partially offset by responsible price increases, cost control and value strategies. South America posted a strong 49% increase in same-store sales for the quarter with adjusted pre-IFRS 16 EBITDA increasing 13.2% to MXN 526 million. The results in this region are mainly related to the inflationary impact in Argentina as well as responsible pricing strategies and product innovation. Our net income per IFRS 16 for the second quarter increased 89.7% to MXN 475 million year-over-year. This result comes from a very strong EBITDA generation and a benefit of the exchange rate variation. In the second quarter of the year, we achieved a pre-IFRS 16 earnings per share of MXN 2.74, and including IFRS 16, earnings per share rose to MXN 2.37. In terms of our investments, the total CapEx for the second quarter amounted at MXN 1.7 billion. We allocated 39% of this amount to maintenance, 45% to store openings and remodeling and 16% for the strategic projects. In the quarter, we paid MXN 44 million of net amortizations. Our pre-IFRS gross debt increased MXN 3.1 billion year-over-year, closing at MXN 25.5 billion at the end of the quarter. This reduction in debt corresponds mainly to the devaluation of the euro against the Mexican peso and the debt amortization during the period. Our pre-IFRS 16 gross debt-to-EBITDA ratio at the end of the quarter was 2.7x versus a covenant of 4.9x and EBITDA to interest paid at 3.2x. Net debt-to-EBITDA 2.2x with a cash position of MXN 4.3 billion. The debt structure at the end of the quarter was 63% on fixed rate and 37% variable. Also, 87% long term with 64% in Mexican pesos and 36% in euros, and we reached a return on equity of 25%. We can go to Q&A, please .

[Operator Instructions] The first question is from Mr. Sergio Matsumoto from Citigroup.

Could you comment more on the employee retention plan that you implemented announced in Alsea this year? It looks like you're gaining quite a bit of traction with front-line employees. You mentioned [ maturing ] training are better. If you could give us more color on that. And is there more that we can expect from this program, perhaps on technology and automation that's part of that. And also, if you can comment on the store managers' compensation that may help improve productivity.

Yes. I mean what we are doing -- I briefly hear you when you talked about the retention plans that we are doing, right? What are we doing regarding the retention plans. I've been very, very focused on that. Actually, we have very pleasing and record numbers in Mexico regarding turnovers. We are working hard in Spain to do so. But we did repeat some major things where focus is in focusing the people from 0 to 90 days. The people that are here most and passed -- surpassed the 90 days target. They stay longer, so we are already working very hard in retaining all those people in our program. Of course, we do some adjustments, salary adjustments. That is also with the ESG program in 2 of our brands regarding salaries. Other, we are focusing in critical source, critical regions, especially in Mexico, we have 4 states where labor is starting to get -- it's been complicated, regions that the labor is growing fastly. It's complicated to get those hands. We are focusing there. We are also having a really good robust selection plan also working with AI, I will tell you. We've been having that platform of hiring with AI since last year, it is working very good for us because we -- in Mexico, just in Mexico, we hired more than 2,000 people a month, so that is working fine. And also, why not, I mean, develop a process of promotions with internal upside in our people. And then the other one, as you know, Alsea has ahead until new program. [ strategical goal ] program that has been working since 2 or 3 years. That's also giving us a good response of having the best managers and the best staff in our stores.

Thanks, Armando. Just if I may clarify, those are 4 states with more shortage. Is that [indiscernible] assume they're up north in Mexico?

Yes, it's north. For sure, it's Queretaro. We have in Quintana Roo. Those 3 states, and we still -- we've seen some problems also in [indiscernible] shorting, of course, we are looking -- there is a shortage of people in especially in Nuevo Leon that is a little bit the biggest one that we are suffering.

Our next question is from Ms. Camila Azevedo from UBS. Please go ahead.

Gentlemen, thank you for the place for questions and congratulations on the results. I have 2 from my side, the first for Armando. So could you comment about the commercial initiatives implemented at Vips Mexico, and which were the impacts on traffic. And the second for Rafa. So considering the strength of the Mexican peso and your debt denominated in Europe, is there any chance you can take advantage of this, swapping or hedging the debt perhaps?

I will let Rafa to start to .

Well, in terms of the credit that we have in euros, we don't have a hedge because we have a natural hedge with the euros that we have in Europe. And in Mexico, we did hedge when we issued the U.S. bond. So really with the FX that we have right now, we can do anything to have a better rate in terms of the cost of debt.

And regarding the strategy in Vips since we started in last December, we run -- we were losing traffic in that specific brand versus 2019. Mobility was a big concern. And that family restaurant segment is really moved by mobility. So what we did in January, February, March is actually do a very aggressive strategy in, I would say, in price, but also involve innovation process. We look at what was working, what was the product that has originally for us. We look at the receipts. We focus in the quality of what we were selling, given attractive menu during the weekdays. So we did that from January to March with a long well-executed strategy that give us traffic and momentum. And right now, we went again with [ Los Clasicos ] and another promotion that is just working well. As I told you, the brand was back in national TV. We've been having 2 or 3 record weeks; the last week, the best week we ever had in Vips, so we are very pleased with that. Margins are strong going back to 2019 and we -- there's a lot of things well and good momentum to come in that brand regarding -- especially in innovation. That's why we want to make a transformation there. We are pleased that we're going to remodel 40 stores. These 40 restaurants. That's a big milestone for us. We are already up to 12 more or less year-to-date. And we've seen an increase of sales when we do our remodelations of 15%. So that's why -- that's a little bit our comment in why the results are strong in this brand.

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

Regarding Europe, I don't know if you could provide more light on your expectations there. And also I mean you mentioned a strong summer season. But now, I mean, for the last part of the year, your expectations there, both in terms of sales and profitability? And how much is a warm weather in that zone in that region, also impacting both sales and margins because of energy .

Antonio, as I mentioned, yes, it's been strong. The first 4 weeks of July, we are up 12%. So above -- way above the second quarter that this Europe unit reports -- so it's been a great steady especially in the tourism places. We also, in the tourism places, Starbucks, and we have restaurants, we've seen a good momentum and increase. I mean we have still way more to go because you know [ Agos ] there is stronger. So we are looking. There is -- regarding the heat waves that are becoming for our business that cold beverage moved, and that is a strong profitability product. Now we moved just in Mexico for 42% to 46% in those 2 weeks, so that gives us a good momentum. We have the same impact in Europe. As you know now, I mentioned, with some third parties, we did an analysis on a strategic price and strategic analytics. So we are right now in place, especially in Europe in some of the summer places of vacation, having a differentiation in price that is giving us a better result in margins. And then regarding energy, as you know, with the worst quarter that we report energy [ effects ] what is the third quarter of last year in Europe. Things are way down in the price of electricity that we are paying. So the results from Europe, first 3 quarters of this year regarding that one, it will be a lot stronger. And we are seeing a good momentum, raising prices in the products that really are affecting us like coffee, like cheese, like wheat and [ ladina ]. So that is a little bit what is happening. There is a good momentum in all the geography and with all the brands north, so I am happy to announce that things look better than we thought and expected, and especially in the second quarter or the first quarter in Europe.

Our next question is from Mr. Joaquin Ley from Itaú.

Two questions, if I may. The first one, now that you've sold El Porton and -- so are you comfortable with the portfolio of brands that you have? Or should we expect further rationalization, right? And along that question, what have you learned from the acquisition of El Porton regarding potential future M&A, okay? And the second question goes to Europe energy. So could you elaborate a bit more on the sequential behavior of energy prices that you're seeing for your operation in Europe? And are you thinking again about potentially hedging at the prices that you'll see for the second half for 2024?

Do you want a comment by Rafael on energy a little bit?

Well, in terms of energy, the cost of energy in the first quarter was in average, EUR 97 per megawatt. And in this second quarter, it was EUR 95 per megawatt. What we are expecting is that the cost goes down for the second semester. The special guys told us that it can be better next year. And we can expect around EUR 60 per megawatt. And I think -- we think that, that can be a good cost to have a hedge on a long-term contract with somebody.

Also, just to mention that, Joaquin, and just going to your second -- to first and your second question. There is a big impact there, renewable energies in Europe are really coming back. There is going to -- there are some big projects of renewable energy. We are seeing to have the whole amount to go to close a deal with some other guys. We're already talking to that. So I think we're going to stay -- stand by now to see what is the future and not signing anything. Thank you for your question. That was a very good one. I mean, regarding, first of all, the portfolio. I think we still have some other units that you can see that we have been not growing those units. And those brands and some regions, we're going to try to exit that. And we've been trying already since the last probably 1 year that I saw you -- that I took position. I was very clear that we're going to focus in the brand that makes us really remarkable, different, but still, our casual business division of the whole is been very profitable. It's growing in traffic, it's growing in sales. And they are 4-wall EBITDA above 20%, so they are doing well. Even though there's 2, 3 brands there in our portfolio that are already in the process, and they are already in the market with some special people that to seek for a sale, so that is a fact. And regarding what are we learning? That's a lot of learnings. If we don't have critical mass, we have to decide where to -- where and where to play the game. And El Portón, it's a great brand, was a great product for us. Once it's the beginning, and we -- when we bought 10 years ago from Walmart, that was a second brand in the portfolio. The Vips was the first one always. And if you go to -- we have a lot of combos where sales of those combos Vips did 100,000 and the other one did 40,000 also, was always back to the store and back to the door of Vips. So that was never a brand actually. We never opened since we started. We never opened a new Portón. We opened another kind of segment, Corazón de Barro and La Finca but we never saw that, that brand had a growing path so forth to focusing. So I think that now not having in the portfolio, it's a good news for us. So we can focus in the brands and in the strategy or long-term strategy that I've been talking in this table.

Our next question is from Mr. Fernando Herrera from Compass Group.

First of all, congrats on the results. Just 2 questions. The first one is related to margins in Mexico. In EBITDA pre-IFRS, we have seen an expansion in margins maybe due to raw materials like coffee and cheese, but I just want to understand what's going on with EBITDA post-IFRS because we're seeing a contraction there.

In EBITDA post-IFRS, we have some -- the increase in sales in many of our brands, but mainly in Starbucks. We have this variable rents higher than last year, so that's the main impact. If you see we open the rents on our report, and you can see the impact of 1 point because of the variable brands that we are paying and the variable brand, we doesn't take out of the IFRS 16 expenses.

Perfect. And second question is related to Starbucks. What are you seeing in terms of drive-through model?

Well, in drive-throughs, actually, as I said, the most of our portfolio, there is a big amount of percentage of drive-throughs open this year. Last year or 2 or so 50%. So that also is giving us the amount to average weekly unit sales that we have because the average also an investment is bigger, but the average of that channel is around 2x the regular stores with better margins also because we've been able to have a better proposals in rents, site selection. Those stores are mainly in highways, [ Carreteras ] and that is being very proven. We are also opening our first drive-through in France this year. And in Spain this year, and we will continue with our strategy that has been very -- way good profitably for the brand and for Alsea. So that is going to be still a momentum to focus and a channel that we are all very interesting to still develop.

Our next question is from Mr. Felipe Cassimiro from Bradesco BBI.

Just I wanted to dig deeper into the competitive landscape in the fast food segment, that is one of the underperforming segments in Mexico, right, alongside casual dining, but mostly on pizza segment, how is the competitive landscape with Little Caesars and how are you dealing with the pressure from this more aggressive player? And if we could dig deeper also in Burger King performance in Mexico as well, that could be very helpful.