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

Good morning, everyone, and welcome to Alsea's Third Quarter 2023 Earnings Media Conference. My name is Nicolás Espinoza from Alsea's IR team; and 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.

[Foreign Language] Thank you, Nicolás. Good morning. Good morning, everyone, and thank you for joining our third quarter 2023 earnings video conference. I'm pleased to present Alsea's latest financial results, provide insights into regional and brand performance and discuss the main highlights for the quarter. Overall, we delivered strong sales performance across all the company's brands this quarter, and it's clear that our commercial strategies, product innovations and our digital strategy has again solid results. Especially, we reported an 8.8% year-over-year increase in total sales, reaching MXN 18.6 billion pre-IFRS or an 18.5% increase when excluding the impact of peso appreciation. Same-store sales also saw a substantial 17.3% year-over-year increase, reflecting continued customer loyal across all regions and brands. EBITDA per IFRS grew by an impressive 24.6% totaling MXN 2.6 billion for the quarter with a 14% margin, way above our guidance. Post-IFRS, EBITDA grew by a still strong 30% to MXN 3.5 billion for the current quarter with a margin of 20.2%. We serve over 12.1 million orders by home delivery in the quarter, amounting at MXN 3 billion of sales. Home delivery sales accounted now for 16.1% of our total sales. Regarding our brands, Starbucks reported an impressive year-over-year same-store sales growth of 24.9%. In Mexico, Same-store sales increased 26.5% year-over-year. Europe, at 13.1%; and South America reached 35.7% and excluding Argentina, 6.8%. Domino's Pizza posted a solid sales in Mexico and Spain with an increase of 8.1% and 3%, respectively. We are pleased to see that our range of commercial strategies and effective contribute to boost our total sales in the pizza sector. Regarding Burger King. In Mexico, we had another overall successful quarter with sales increase of 9.6%. We are focused here on expanding the national rollout of our digital kiosks, which have proven to increase the average ticket by a double-digit number. Our global restaurant business, excluding Vips Mexico, also reported a solid quarter with same-store sales of 8.8%. Regarding Vips Mexico, it continues with a strong same-store sales performance reporting an 11.3% year-over-year increase with guests of 9.5%. Regarding Vips, it's been improving in-store experience and program diversifying. We remain very focused on our product and experience with our customers. We started the first overall celebration with a remarkable -- that we have a remarkable year. Vips next year, we'll have 60 years in Mexico. We will celebrate 60 years in Mexico, and we will have several events to celebrate with guests and our Vips store members along this year. In Mexico, we increased the brand profitability based on remodel stores. During this year, we have remodeled 30 units, reaching 177 stores remodel of a total of 238. With this improvement, we have increased average weekly unit sales in 15% compared to the same-store sales before remodeling. Going further, with the strategy of this Mexico we are working on major improvements. For example, in cost as a percentage of sales, we decreased 100 basis points and items of menu efficiency, we are focused on best-selling products as part of the strategy. We took out 17 items regarding to perform this food cost in the brand. We will continue developing strategies in order to make our guests have the best experience possible. Continuing our global business, regarding our organic expansion strategy, we have opened 30 corporate restaurants and 25 franchisees. As always, focuses on the most profitable ones and the high growth opportunities. Additionally, we have placed a special emphasis on the Drive-Thru format in Starbucks Mexico with a total of 185 Drive-Thru units in the country, which has shown a 30% increase in sales comparing to the standard format. In line with our digital transformation strategy, our loyalty sales grew 28.7% versus last year, reaching MXN 3.5 billion at the end of 3Q of '23. This represents 19% of share of the total sales. Regarding Starbucks Reward program starts for everyone, that was launched in Spain, France and Portugal. In last quarter, we had more than 280,000 new members that join our programs. Thus, it's also happened with a 10% in tender in average. In the Starbucks Mexico Rewards tender -- the Starbucks Mexico Rewards tender has 28% now, and we expect it to grow the tender also in Europe in these levels. Regarding ESG, during the third quarter of 2023, we continued to sponsor significant environment and social initiatives in the line with the objectives of our ESG model. In our fight against food waste, we expanded our partnership by placing new brands on the Too Good To Go app in Alsea Europe. This app allows us to maximize product sales during the final hours of stores operations to prevent waste. Through this partnership, we have sold over 66,000 food packages this year while avoiding 174 tons of CO2 emissions. In a collaborate effort with a Planet Water Foundation, Alsea South America, has provided clean and safe drinking water to the community of Chaqueta in Bogota, Colombia through our new water towers. This completes the 2 existing towers provided by Alsea in [indiscernible] Mexico, and established the first of its kind in South America. The Exito Foundation has honored Alsea Foundation with a Child Nutrition award in the business category recognizing our dedication to the protection and promotion of food security and child nutrition in Colombia. In line with our commitment to inclusion and accessibility, we have begun a country-wide introduction of Braille menus for the blind and visually impaired for all the Mexican brands. We anticipate that [indiscernible] initiative will be ready in early 2024. I am very pleased with our year-to-date results. The effective execution of our commercial strategies and our commitment to innovation, supported by a solid consumption moment has paid off, with all the main regions and brands performing well. I remain optimistic about the company's outlook with our brand's strong position in the marketplace, our logistical operation and financial strengths and as a decisive competitive advantage. And of course, our team with more than 76,000 team members across 12 countries, providing their excellence day in and day out. Now I will hand over to Rafael, so we can give you more details overview of our brands, regions, results and our balance sheet items. Thank you very much.

Thank you, Armando. Good morning, everyone. As Armando mentioned, all the Alsea team members are pleased with our sales performance as quarterly sales increased 8.8% on a pre-IFRS basis year-over-year, driven by a positive trend in all regions. Costs were down 20 basis points versus last year, and EBITDA pre-IFRS was up 24.6% to MXN 2.6 billion. In Mexico, sales were up 17.8% to MXN 9.9 billion, and adjusted EBITDA was up 20.7% pre-IFRS to MXN 2.2 billion. This improvement was driven by robust consumption trends and effective expense management. Also, the growth in sales help us improve our operating leverage and the appreciation of the Mexican peso helped us cut cost by 40 basis points for sales. In Europe, sales increased by 3.7% to MXN 5.6 billion or by 14.1% in euro terms. Adjusted EBITDA increased by 46.8% pre-IFRS to MXN 884 million and in euros by 62.3%. This sales boost was mainly attributed to the successful execution of promotional and effective television advertising and product innovation. The stabilization of energy costs and the decrease in some raw material costs has also contributed positively to our results, while the summer season also helped bring double-digit growth in the cafeteria and casual dining segments. South America sales decreased 6.1% to MXN 3 billion mainly impacted by a strong devaluation in the Argentine peso, with a same-store sales increase of 41.4% and adjusted EBITDA pre-IFRS increasing 0.5% to MXN 613 million. Our net income pre-IFRS for the third quarter increased 60.5% to MXN 540 million year-over-year, driven by the increase in sales and EBITDA. In the third quarter of the year, we posted a pre-IFRS earnings per share of MXN 2.8, including IFRS earnings per share rose to MXN 2.5 with an increase of 31.4% year-over-year. In terms of our investments, the total CapEx year-to-date amounted to MXN 3 billion. We allocated 30% of this amount to maintenance and 50% to store openings and remodeling and the rest of the 20% for IT and other strategic projects. In the last 12 months, we made amortization payments of MXN 1,026 million. Our pre-IFRS gross debt decreased MXN 1.3 billion year-over-year, closing at MXN 26.5 billion at the end of the quarter. This reduction in debt corresponds mainly to the devaluation of the euro again the Mexican peso and debt amortization during the period. During this quarter, we refinanced the euro banking loans of EUR 229 million ending in 2026, with a favorable condition of extending for 2 more years amortizations of the credit after the Euro bond refinance. Our pre-IFRS 16 gross debt-to-EBITDA ratio at the end of the quarter was 2.6x and EBITDA to interest paid at 3.6x. The debt structure at the end of the quarter was 92% long term with 64% in Mexican pesos and 36% in euros. So we can go now to the Q&A session. Thank you.

[Operator Instructions] The first question is from Mr. Rodrigo Alcantara from UBS.

So well, I was -- on Vips, maybe Armando, if you can explain us better. I mean, how impressive the reduction that you have achieved there on the COGS side -- if you can comment on how you have achieved that? And is it fair to think about that as a function of the remodelings. Therefore, the high remodeling, the high profitability of Vips. Would that be the correct [ risk ]? And the second one would be on Starbucks, right? I mean, impressed to keep seeing Mexico same-store sales of such digits. So just curious if you can comment on this quarter, which commercial initiatives gave you this uplift in sales, right, to understand what drove this. And for next year, which commercial strategies could give you the next uplift for sales, right? I mean in the context of -- we know how the bake in store program was an uplift for you guys, right? Then the drive-throughs. Maybe you can give us an example of other uplifts that are helping you to maintain such impressive momentum on Starbucks. Those would be my 2 questions.

[Foreign Language]. There are actually 3 questions. Let me answer you a little bit on 3 once. First of all, uplifts. I mean, as I told you when I saw you, we are very focused in that brand. I think that brand, actually, yesterday, where head of [indiscernible] just gave an update to the Board, 20 minutes update about where we stand and how we've been doing these impressive numbers. And we've been working very highly with our distribution center, with all our vendors in order to keep the very food cost. As you said, we put 17 items back. We're just focused in the items that are really represent 80% of the sales. We -- since the beginning of the year, we tried to not offer that -- not increase the price of menu [indiscernible]. That is really the focus in that business, 20% of our sales side menu of the day, that is really the anchor of the brand. That's what makes the traffic and then we up uplift with suggesting sales for every customer. We've been in TV, that brand wasn't in TV the last 3 years. We've been in national TV for promotions. Just September was the best season ever. We sold 280,000 Chili’s en nogada for 1 week, making in 2 for 1, just making convenience for the consumer. So I think the brand is just having a great momentum now. The next weeks, 10 more weeks to come, things look very well too, not only in the cost but on the labor cost. So I mean, we still have momentum to go. In 2019, the number is very fresh right now, but we had a 20% EBITDA store -- EBITDA unit level for that unit. We are in 17% now. So we have 300 basis points more to go. And I think we can achieve that. That remodelization of the stores has been a great achievement. It's given us a return on investment of 15% to 20% I also have good news for next quarter, but whether there's going to be some stores that are going to be franchised already for third parties, stores that are not performing well or stores that are really very far from us from the way we operate. So that also would uplift the margin in that Vips in Mexico. As you know, Vips Spain has also performed very well. So I'm excited about that. Regarding Starbucks, I mean we are capitalizing all the Drive-Thru that we told you. All the openings that we've been having in Mexico are above expectation, above [indiscernible] package, that drive through this 30% higher volumes. So that and with better margins, paying rents of 4% to 5%, the brand has about 8% or 9% average. So all the Drive-Thrus will reopen and we see the brand and economics are fantastic. We do have innovation still with the highest price tone. As you know, the pumpkin latte that also was 20 years in the states. It goes for 10 years here in Mexico. We had increase of the pumpkin latte, 22% higher than the third quarter of 2022. Also, we've been having a good momentum with [indiscernible] summer, there is a full increase of 31%, higher ticket, and that higher ticket is not driving by price, it's driving an increase in second items. So we are great there. Cold drinks right now represent 48% of our mix. So that has a better ticket average. So I think we are working also in IT regarding speed of service. We are measuring all the speed of service that we do in the Drive-Thrus in all stores. We are putting better POS system -- new POS systems, better communication systems, changing the credit card tools to gain a better momentum. And that also comes again with a job with a rotation on turnover with our partners. We have a record 39.5 turnover in that unit. So that makes a very solid experience with the partners. Regarding the next year, I mean, I'm agree with you. We have a very big top things to go next year. But I think we have the SDS. SDS will be installed next year, bundle 2. That will give us a lot -- a better loyalty performance for everybody. We are working there in the loyalty. We are already having an implementation of our food program for next year. There it looks very good with our pastry and other vendors who are working with some improvements in food that are going to be great. And also endeavor, as you know, with Starbucks Corporation, there's some new products that are coming next year. So I see a future with clear skies, and hopefully, we can still gaining this momentum of increasing of orders that is important.

Our next question is from Ulises Argote from JPMorgan.

Just a quick one and a follow-up maybe to [indiscernible] from you guys at the start of the year. So you mentioned in the Investor Day that you were kind of looking to consolidate the portfolio a little bit, maybe sell some of the brands that were underperforming or that we're not in the core of the strategy. So just wanted to get an update from you guys as to where we stand there, if there's anything on deck that we could be expecting.

I mean -- and you saw this year, we do the Mexican concept that we already pulled out of our company. We don't operate more the CPK in South. We did also the Mexican. We did also OleMole South . And we are in advanced conversations with TGI Fridays, 11, 12 stores that we did in Spain. We also are doing -- looking for some casual dining in Latin America where we only have several restaurants in Chile to [ disincorporate ] for the group. But that's what we are focusing. We're going to still focusing that and just focus is on the brand that really are core and making us a better return on investment in the portfolio.

Okay. No, that's super clear. And then the other question I had was regarding the European operations. You have that option of coming with Bain Capital for, I think it's October of '24. So just wanted to get like an update on where do we stand there and what can we expect and how that fits in the overall capital allocation strategy? Maybe if discussions on dividends are still there present for '24 given this potential cash that you will need to be spending on this.

Yes, in terms of the call option that we have with Bain, it's in October 2024. We would like to go for it and buy back that 10.5% of Alsea Europe. As I mentioned previously, the amount, it's around EUR 110 million. We will need some bank credit to pay that amount. And in terms of dividends, yes, we would like also to go back and pay for dividends next year. The amount we will see in the annual meeting that we will have, but yes, we would like to go back to the same amount that we used to pay in terms of dividends next year.

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

A couple on my end, Rafael. The first one is a housekeeping item on the MXN 85 million impact from Argentina? How many quarters does that provision sort of reflect?

Yes. In terms of Argentina, this is a new tax that is mentioned, Argentinian tax. It's 25% of all the services and 7.5% of all the product and is going to buy the U.S. dollars to pay that product or that service. We made a provision because -- in Argentina, we couldn't pay some royalties and some products because we can't pay U.S. dollars as easy as some years ago. So we provisioned that amount for all the 10 months in average of royalties that we owe to Starbucks and Burger King.

For this year?

It's for this year. It's a onetime because all the years, the royalties that we have that debt. But we will have to pay this 25% every time that we have to pay some U.S. dollars in Argentina.

Alvaro, we are still waiting. As you know, in 2 weeks, we will have the second round of elections and then 10th of December or 11th of December, a new President incoming. We will see what will be the economical package for the country regarding taxes, regarding everything that goes away. So we will have more clear our path for next year in order to see what is going to be the effects of all these impacts in taxes.

Awesome. That makes a lot of sense. And then just one on Mexico, on Domino's. It's -- I was just wondering if you can maybe provide an update on competition versus Little Caesars and the outlook into next year for Domino's in next year.

Regarding Domino's, I think, as I told you, we did a good evolution in sales regarding the carryout business, the counter business. That's where we are gaining some share. Just to tell you, we did about 4 points regarding sales from last quarter. In last quarter -- last year, 3Q 2022, we did 35.5% in carryout sales. In this quarter, we do almost 39%. So we are just fighting there with the carryout business doing an incredible number there. In same-store sales, we had also an effect of same-store sales regarding some other promotion that we did last year. But we are implementing some other good -- I mean, good promotions in September. We did a Domino's Pizza -- Domino's Mania. All types of pizza [ 189 ] and we did increase our sales of 29% versus the last one that we did in June. We increased orders in 6.5x compared to June. Actually, 9th of this month, we're going to do again this kind of promotion. So I think that the business is performing very strong. Also helping, of course, by a solid consumption moment that is in this region in Mexico. You know the minimum wage increase also is helping. There's this new profit sharing scenario that is also in the pockets of the consumer. So I think all these things are helping us to reach better sales and not only in Starbucks, but also in Domino's, and I will say, in the casual business and also in Vips.

Our next question is from Mr. Alan Alanis from Banco Santander.

I think, Alan, you're on mute.

No, we can't hear you, yet.

No, we can't hear you.

Sorry, we can't hear you. But if you're okay, we're going to take another question right now, and we can try again. If you want to set your audio settings or you can send us by e-mail, and we'll be glad to answer it right now.

Our next question is from Mr. Ben Theurer from Barclays.

Does that work?

Yes.

Yes.

It's a twofold question. So obviously, one thing I wanted to understand is how you see Alsea going forward from a capital allocation perspective? Where do you think investment needs to be done? Is it more towards still opening stores to get the penetration higher in certain areas? Is it on the other hand, investments into loyalty programs on some of the other banners aside from what is very strong already, with obviously, Domino's and Starbucks? Where do you think the balance is going to be from a capital allocation perspective, tech versus store or online versus offline, if you want to call it that way? That would be my first question.

Going forward, what we are seeing is that we are doing still growing organically. And as we mentioned, we can open 200, 220 new units, mainly Starbucks and Domino's Pizza. 75% of that number would be in Starbucks and Domino's because the market holding capacity that we have and the opportunity that we have in different geographies, that will be around 40% of the total CapEx of the year. In terms of the total CapEx, it's going to be around 6% to 7% of the -- in terms of percentage of sales. So 40% will be openings. Then we're going to still put a lot of view in terms of maintenance and remodeling. So another -- I would say another 35% to 40% will be that part. And the other 20% will be in terms of IT and strategic projects. Next year, as Armando mentioned, we're going to implement SDS, Starbucks Digital Solution in Mexico and South America. The total amount of that investment will be around MXN 300 million. And we are still investing. In OLO, we're going to end the -- OLO -- in Mexico, we're going to implement the U.S. cloud app for Domino's Pizza. And we are still with some investment in all the digital parts.

Yes. And I think that digital -- all the digital concept doesn't need really a big, big amount because it's only a CapEx regarding the hardware. All those venues and all the product, the software, everything is just made in the U.S. and actually yesterday that we had a call with the Starbucks U.S.A. They are the ones that are investing completely in the platform. We are just implementing the platform, same in the U.S. We are paying -- actually, you will see that number in the OpEx. You won't see in the CapEx. We pay a monthly fee for brand per store, and that will give us the whole updates and the new versions of the whole platform, digital inbound and outbound. I will say digital platforms are created for better efficient -- administrative efficiency in the manager side. Inventories, what is scheduling for people, what is opening and closing the store, be ready to put a better order to our commissary. So all that comes together so we can dedicate more time to the customer, to the -- and less to the administrative part of the business.

Okay. Perfect. And then just one quick follow-up on Europe. Just wanted to understand how you feel about the consumer in Europe in particular. Do you see any down-trading trends? Anything to just be aware of because obviously, the geopolitical situation and some of the inflation in Europe. So very elevated and maybe the consumers aren't that used to high inflation for longer in contrast to Latin America. So I just wanted to get your view from off the ground.