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

Good morning, everyone, and welcome to Alsea's Second Quarter 2024 Earnings Video Conference. My name is Gerardo Lozoya, Head of Investor Relations and Corporate Affairs. And today, our Chief Executive Officer, Armando Torrado and our Chief Financial Officer, Federico Rodriguez, will be presenting the results. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers contained in our earnings release and in our most recent Bolsa Mexicana de Valores report. The company does not have any obligations to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on the pre-IFRS 16 standards. I would now like to hand it over to Armando for his initial remarks. Please go ahead, Armando.

Thank you, Gerardo. Good morning, everyone, and thank you for joining our second quarter 2024 earnings video conference. I am pleased to share with you our financial results, regional highlights and other notable milestones from the quarter. I will also [indiscernible] in progress what we have made and our digital ESG strategies. Before I begin, I would like to thank our team members for their hard work and our stakeholders for their continued support to Alsea. In the second quarter, sales increased by 2.3% year-over-year, reaching MXN 19 billion or a 9.6% increase. When excluding including foreign exchange effects, same-store sales grew by a solid 9% year-over-year. Despite a challenging macroeconomic environment and strength of the Mexican peso impacting currency translations across regions, EBITDA grew at 7.6%, reaching MXN 2.7 billion for the quarter with a 14.5% margin. This increase is due to the benefits of operating leverage, lower cost of food and other raw materials. In the quarter, we served over 32.9 million digital orders totaling MXN 6.4 billion, which contributed for 33.9% to our total sales. Regarding our brands, Starbucks Alsea same-store sales increased by 7.2%. Across our regions, Starbucks Mexico same-store sales grew up 8.7%, driven by over-the-counter promotions, improving store service, innovative food options and attractive merchandise. For Europe, same-store sales declined 9.9%, mainly affected by more challenging consumption environment and the boycott of American brands in France and the Netherlands. Finally, in South America, same-store sales grew 27.4% but declined by 5%, excluding Argentina. Regarding Domino's Pizza Alsea, we posted a 1.8% increase in same-store sales. In Mexico, Domino's same-store sales increased by 4.7%, largely driven by successful commercial strategies such as Domino's Mania. Additionally, popular over-the-counter promotions like My Domino's and Pan Pizza offerings at MXN 119 and MXN 149 provided very highly effective brand results. In Spain, same-store sales decreased by 2%, affected by ongoing challenges in the delivery channel. And finally, in Colombia, same-store sales were up 2.63%. Regarding our Burger King business, Alsea same-store sales, excluding Argentina, increased by 2.5%. In Mexico, Burger King reported same-store sales growth by 1.7%. In our Full-Service Restaurant segment, we trended positively same-store sales up 5.5%. Vips Mexico posted a very robust 8.4% year-over-year increase in same-store sales, driven by a compelling value promotions, service improvements and innovations regarding product offerings. Chili's And Italianni's in Mexico reported a double-digit growth in same-store sales, helped by increased traffic after introducing new food and beverage offerings. In Spain, Ginos also reported a high single-digit growth in same-store sales. Let me turn out with the Alsea Global. As a brand operator, we focus on providing a top-notch experience for all of our customers. For example, Starbucks Alsea leverage its geographic reach by sharing best practice between stores while also tailoring food offerings to local preference. We seek to provide a welcoming third place environment where customers feel at home among friendly staff. During the second quarter, we opened 48 corporate units and 17 franchisees or that it's a total of 65 stores. We focuses on the most profitable opportunities across all the regions. During the first half of the year, the rate at which new stores were opened were similar to last year and is expected to increase in the upcoming months. A core element of our expansion strategy is remaining unit to align with customer trends. For example, remodeling Vips stores in Mexico has led a 15% sales increase and help attract new customers. Globally, we remodeled 25 units during the second quarter. Regarding loyalty programs, our digital transformation strategy continues to drive growth. By the end of the quarter, loyalty sales increased by 37.6%, reaching MXN 4.4 billion, which accounted for 23.9 million orders and contributed for 33.2% total of our sales. By the year-end of the second quarter, Club By, launching in Spain during the fourth quarter reached more than 2 million members while Starbucks Rewards reached also more than 2 million active users across all Alsea regions. Now I would like to take a moment to discuss our team and the progress we are making in our key initiatives. At the end of the second quarter, we had more than 76,000 team members, 49% of whom are women. We have seen our global turnover rate to improve to 60%, a 1% point decrease for the first quarter. During the quarter, we completed the engagement survey with participation from 96% of our total team members across all countries where we operate, achieving an engagement index of 4.2 points and a Net Promoter Score of 56%. Our ESG strategy is progressing well. 25% of our leadership roles are now filled by a woman. 95 of our employees earn a living wage or above, and we support more than 2,000 employees from the [ priority ] group, including the elderly people with disabilities, refugees, migrants and vulnerable youth. In June, as a part of our efforts to reduce CO2 emissions, we acquired International Renewable Energy Certificates for 508 stores in Argentina and Chile, including Burger King, Starbucks, Chilis, and P.F. Chang's, equivalent to cutting over 19,000 tons of CO2. In Spain, we installed 354 solar panels in Q2, reducing CO2 emissions by 209 tons and current energy consumption in 20% to 25% in stores, factories and a support center. Mexico Fundacion Alsea donated MXN 12 million and two mobile kitchens to Red de Bancos de Alimentos de Mexico to the Comer en Familia program. And finally, during the quarter, we certificate 10 Starbucks stores as greener stores reaching 141 in Latin America. Now I would like to hand it over to Federico Rodriguez. Thank you.

Thank you, Armando. Good morning, everyone. Moving on to Alsea second quarter '24 performance. Despite the challenging macroeconomic environment, quarterly sales increased by 2.3%, driven by effective commercial strategies. Excluding FX effects, sales would have increased by 9.6% for the quarter. In Mexico, sales were up 8.8% to MXN 10.7 billion. Sales in Europe decreased by 2.7% to MXN 5.5 billion but in euro terms, sales increased by 0.8%. Finally, South America sales declined by 9% for the quarter to MXN 2.8 billion, mainly due to the devaluation of the Argentinian peso and reduced consumer demand in the region. In Mexico, adjusted EBITDA grew by 12.1% to MXN 2.6 billion for the quarter. This improvement was driven by increased sales, successful commercial strategy, a better portfolio mix and the benefits of our cost reduction strategy. Also, the 7.3% growth in same-store sales continued to enhance operating leverage. For Europe, the adjusted EBITDA decreased by 14.9% to MXN 737 million for the quarter and by 12.2% in euros due to a decline in same-store sales arising from macroeconomic pressures and the boycott of American brands. In South America, adjusted EBITDA decreased by 21.3% to MXN 414 million, driven by the devaluation of the Argentinian peso and a reduction in operating leverage. The net income for the second quarter decreased year-over-year by 66.9% to MXN 157 million. This was mainly due to a noncash negative effect from currency exchange translation, leading to an increase in our U.S. dollar debt in Mexican pesos terms by the end of the quarter. For the second quarter, the earnings per share were MXN 3.06. Post IFRS 16, EPS rose to MXN 3.63, an increase of 53% year-over-year. The CapEx for the second quarter amounted to MXN 2.4 billion. Can we go to the next slide, please. The CapEx for the second quarter amounted to MXN 2.4 billion. We allocated 25% to maintenance, 56% to store openings and remodelings and the remaining 19% to other strategic projects. Throughout the quarter, we prioritized prudent and responsible investments focusing on profitability. Our pre-IFRS 16 gross debt increased by MXN 4.6 billion year-over-year, reaching MXN 29.7 billion by the end of the quarter. This rise was primarily due to the impact of a weaker Mexican peso on our foreign currency debt at quarter end. And finally, moving on to financial ratios. Total debt-to-EBITDA ratio closed the quarter at 2.6x, while our net debt-to-EBITDA ratio stood at 2.3x. At the end of the quarter, 88% of the debt was long term with 65% denominated in Mexican pesos and 35% in euros. We are committed to maintain a healthy balance sheet going forward and are confident in meeting all our debt obligations. Thanks to the healthy cash generation. At the end of the quarter, we posted a cash position of MXN 4 billion. Now finally, I will pass you over to the operator for the Q&A session. Thank you very much.

[Operator Instructions] The first question is from Tiago Harduim from Citi.

There are 2 points that I wanted to discuss with you guys. The first one is a little bit more on Europe, right? So recent dynamics, and we have the Olympics coming up now, right? So just hear a bit more from you guys what you're seeing, what are like the outlooks for this region? And the second is regarding the costs. So very, very good news, right, regarding the lower food costs and raw materials. So just trying to understand what's behind this and the outlook again going forward here.

Thanks for connecting. I was exactly -- last 8 days, I was in France for 2 days just touring the market. And it was a main thing to see very less people in the street of Paris two weeks ago. Hopefully, this Olympics is going to start in two days but it was a ghost town just 2 weeks ago regarding all the traffic that we are implementing now. We are losing traffic, streets are closed. They are protection all of the center of Paris where we have around 80 stores. So people are getting -- stealing these houses, Parisian are not getting to the downtown of the city because everything is blocked, everything is a problem to get there. I mean you go there as a tourist, you cannot surpass. Everything is very complicated. Hopefully -- so the Parisians wasn't there and the tourists didn't arrive yet. So that's a dual problem. Hopefully, tomorrow, we start -- we've been seeing how the traffic and some index of the pedestrian traffic getting better. But anyway, we are not with our arms crossed. We are doing some other things in to anchor and to get better traffic to our stores. Hopefully, in the next quarter in October, we can tell you that this -- that we really got good things about the Olympics and the Parisian or the French people already are completely out of this emotion of the three weeks that we will have and the traffic will get down -- will get back again to our business. But this was not only us, I went to another companies, one other -- talking to the people, hotels, restaurants, and we are really affected not only us, I mean, it's the whole environment in downtown. Raw materials, why don't we talk a little?

Yes. Thank you, Tiago. On a consolidated basis, raw materials and food costs are showing price stability or even a decrease in some of the prices of protein, vegetables, oils, et cetera. The cost of the coffee is stable that we have a contract with Starbucks that give us a stability when the prices are more volatile and we are keeping up with the stockpile strategy with the Mozzarella cheese as we have mentioned in the past, to reach better prices with our suppliers. As you know, we did a stockpile in Mexico back in October '23 till March '24. Now we have new stockpile until at the end of September. So we are not worried. Obviously, we are always trying to improve the food mix that we use for the different promotions for the different menus but we're still having good news in terms of the food cost.

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

Just wanted to squeeze in two questions. So number one, as you look into the performance in Mexico, which clearly was amongst the better ones with same-store sales are coming in at 7%. But can you help us maybe understand a little bit the quarterly dynamics as to the performance, just given the shift in the Holy Week from April into March, like kind of like a monthly cadence maybe between April, May and June? And what you've been seeing so far in July? That would be my first question. And my second question really comes down to South America. I know it's not too large of a contributor anymore. But clearly, are you looking into any initiatives to potentially turn the business around? Is it waiting for the consumer to come back. What are like the options that you're seeing from the South American business be it investing or maybe divesting?

Okay. Ben, for the second quarter, the beginning of the second quarter was tough in April with calendar effects affecting April as the Holy Week happened during March, we had an extra day and an additional weekend in the first quarter. We saw a rebound during May above [indiscernible] same-store sales number reported, which was 8%. And then June was a bit more volatile, but we closed the quarter at high single-digit growth. Throughout the year, we could expect more normalized trends in a range of mid- to high single-digit growth on a consolidated basis. This is in line with the 2024 guidance of 7% to 9% for the full year. In Mexico -- going by region in Mexico, we had a continuation of the strong momentum for consumption in the country. The increase in minimum wage and the level of remittances at this point are helping to drive sales in the region. [ Vips ] is still recovering traffic with such good results and other brands like Chili's, like Starbucks with similar performance compared to the first quarter with a normalization, obviously, of the effects of the Holy Week that I just mentioned. In Europe, as Armando just mentioned, we are facing some pressures in the quick service concepts in Spain and particularly with Starbucks in France and the Netherlands due to the boycotts against American brands, and a consumption is slowdown in all the regions. The Full-Service restaurant, not just in Europe but in Mexico, too, still with a high solid performance of mid-single digit to high single digit on average. And in South America, we have a tough economic scenario during the whole year, and we expect the same for the second half of the '24 in most of the geographies due to political uncertainty and volatility while economic slowdown remain across regions. Chile is still improving compared to the first quarter, Argentina with a double-digit decline in traffic and Colombia remains pressure but we are still seeing some changes, mainly in Domino's Pizza in Colombia. I don't know, Armando, if you want to complement?

I just want to say the problem that we have in South America, most of this is coming from Argentina, where we have a 16.3% orders down from last year, and that's exactly because we are maintaining our margins. We are really protecting the business regarding margins, where we are still profitable there. So I'm sure this 16.3% is lower than the first quarter. So I'm sure that probably in the next quarter, we will see less -- a better number in same-store sales. But I mean, we've been 15 years there, we know how to address a problem like that. And this is going to be, hopefully, momentaneous in order to get better results by the end of the year. But I will see that's more affecting Argentina because we are looking with good momentum in Colombia as Federico says and Chile is rebounding in a very good way, so this is -- the effect because it's quite big enough Argentina in the total basket. That's what is affecting us.

Yes. And regarding the divest -- your question of divesting in South America, not just for South America, we're still analyzing the divestment of some brands to unlock value for the investors on Alsea. None of these brands could be considered core for Alsea in some specific markets but we have not taken any kind of [indiscernible].

Our next question is from Mr. Rodrigo Alcantara from UBS.

I guess, I mean, most of the questions we have received from clients after just results were related to the weakness in Europe, right? We know in France, the situation, right? But just still not clear to me in Spain. I mean you mentioned, right, that the delivery segment is struggling but casual dining is performing better, right but we Europe, it looks like it's not strong enough to offset the weakness in the delivery, right? But -- when we look at the consolidated number for Europe, it looks like it's not strong enough to offset the weakness in the delivery, right? So my question would be regarding on your outlook for the second half in Spain for getting a bit about the situation in France, and what are you thinking that would be possibly done in order to stabilize same-store sales there?

Thank you, Rodrigo. Regarding the question of the delivery in Spain, this is not something new. This has been related since 2023 as long as the aggregators entered into the market and were game changers. However, since the end of the COVID constraints, customers have changed their behavior, favoring the cash aligning brands. We expect the same trend for the second quarter of '24 in terms of delivery but obviously, for the first quarter of '25, we expect to have a more relevant channel in terms of the weight and in terms of the same-store sales increase. And for France, as Armando mentioned, obviously, we would like to have better news but the boycott to American brands, to Starbucks and some other brands has been more deep than we expected in October of last year. We are not expecting to have a big change due to the Olympics. We are obviously going to improve the trends of same-store sales in around 15 points but I don't have a better outlook for the rest of the year. Maybe we will take a delay in the business plan of one year. That means around 20 to 25 stores but we still are ambitious around the market holding capacity in France. That is not changing the market holding capacity we delivered in the Alsea couple of months ago. So that's...

So here, a follow-up. So we may see a revision, right, in store openings in Europe, therefore, CapEx. Any idea of the magnitude of those revisions perhaps?

Well, regarding the guidance, this is not only for the openings. Obviously, if FX continues to pressure and the macroeconomic environment evolves in a more challenging scenario, we might need to make some adjustments, particularly to the revenue growth. We still think to accomplish with the EBITDA guidance we delivered in the Alsea de. We have cut some of the openings, around 10 to 15 openings not just in France but in Netherlands and Belgium too. But we are offsetting that reduction of openings with Mexico and Starbucks and some other brands of the casual dining portfolio like Vips, Chili's, et cetera. So we are still expecting to accomplish with the MXN 6 billion of CapEx for '24.

Our next question is from Ms. Sara Maldonado from Santander.