BBB Foods Inc. (TBBB) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the BBB Foods' Fourth Quarter '23 Results. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Anthony Hatoum, CEO. Please go ahead.

Good morning, everybody. Welcome to our first earnings conference call. We will begin by reviewing our key accomplishments from our fourth quarter of last year and we will review 2023. We will next look at the important operational milestones. Eduardo Pizzuto, our CFO, will follow, presenting our financial results and outlining our guidance for 2024. We will conclude with a Q&A session to answer as many questions as we can. As expected, we delivered strong results in the fourth quarter and for the full year 2023. Sales grew by 30.8% for the fourth quarter and by 35.3% for the full year. We opened a record 396 stores in the year, and 153 alone in the last quarter. In terms of cash flow from operations, in 2023, they reached MXN 3.1 billion, a growth of 48% for the year. This driven by improvements in our EBITDA and our favorable working capital dynamics. Post-IPO, we have a very robust balance sheet, having fully repaid our outstanding dollar debt. Let's turn to operational performance. In terms of store expansion, 2023 was a landmark for our company. We opened a record-breaking 396 new stores, bringing our total to 2,288 stores. That is a growth of 21%. Of these 396 stores, we opened 153 in the fourth quarter alone. That's 39% of the total. We have been very consistent with our growth. From 2019 to 2023, we have maintained a compound annual growth rate of new stores opened of 20-plus percent. For those of you with whom I spoke during our road show, you know that we have significant runway to sustain these growth rates for the next 10 years. And we maintain our view that Mexico offers a potential market of no less than 12,000 3B stores. Moving on to revenues and margins. For 2023, revenues reached MXN 44 billion. That's a 35% growth over 2022. To break it down, of this 35%, 29% is from stores opened before 2022 and 7% from the new stores of 2023. Our gross margins increased by 86 basis points over the last year, largely explained by our increase in scale and negotiating better terms with our suppliers. Some of you are familiar with the positive sales trend of our 2005 to 2022 store vintages. What you see on this chart are the sales curves of each of our vintage of stores since inception, and this is adjusted for inflation. I note 3 things: All our vintages continue to grow their sales. No vintage has yet flattened down. Each vintage -- each newer vintage has a steeper sales curve than the one preceding it. And the starting sales points of each new vintage are getting higher. In other words, our stores are breaking even faster. And what drives that is the continuous improvement in our value proposition to our customers, which, for example, is far superior today to what we offered customers 5 years ago. We have more private labels, we have better-quality private labels, and we're giving our customers more value for money. That, in turn, builds trust, existing customers will buy more, and we continue to gain more customers. And it also helps that the 3B brand is getting stronger. It's also true that, as we have more stores, word of mouth on our value proposition spreads further and faster. And although we are not showing it here on this chart as we don't have yet full year numbers, our 2023 vintage appears to be following the same trend. So if I had to summarize, I would say we continue to increase penetration of private labels, which went from 43% to 47% of our sales. In turn, these private labels are offering tremendous value to our customers. That, in turn, will drive, and is driving, increasing traffic to our stores and the positive trends in our average ticket size. So we're generating this virtuous circle: Outstanding value proposition, generates higher traffic, generates higher sales, generates increasing cash flow, then, in turn, finances our growth. I'll pass the mic now to Eduardo, who will go over the financial results for the fourth quarter and for the full year.

Thank you, Anthony. Good morning, everyone. Our EBITDA continues to grow exponentially. As seen in the chart, our EBITDA grew 32.9% in the fourth quarter and 44.3% during 2023. Let me give you a few highlights to better appreciate the context of the quarter. 40% of our total store openings happened in the fourth quarter. Therefore, we show full expenses, but we had yet to show full revenues. Admin expenses were affected by the hire of talent to support our growth and to fulfill our obligations as a public company. And finally, we reported a number of nonrecurring expenses. Specifically, MXN 80 million related to Hurricane Otis in Acapulco and MXN 14 million in pre-IPO expenses in the fourth quarter. As illustrated in the graph, if we exclude the expenses from the IPO and the impact of Hurricane Otis, EBITDA would have been approximately 17% and 5% higher for fourth quarter and 2023, respectively. Therefore, adjusted EBITDA margins would stand at 5.3% and 4.5%, respectively. It's important to note that, over time, we expect expenses to decrease as a percentage of sales as our revenue base grows, fixed costs are spread out, and the one-offs costs do not recur. Hard discount is a unique business model. It generates a significant amount of cash through changes in negative working capital. We are not the exception. We turn our inventories 3x before we pay suppliers. As you can see in this chart, negative working capital represents 10% of revenues. We generated MXN 1.4 billion during 2023 given this dynamic. This trend will continue as long as we continue to increase our sales. And finally, let me give you some guidance for 2024. We plan to open anywhere from 380 stores to 420 new stores. We expect our revenue to grow anywhere from 28% to 32%. And same-store sales, we are expecting it to grow mid-teens. I will now turn back the call back to Anthony for some final remarks.

Ours is a very powerful and resilient business model, and we are executing it with discipline and consistency. We continue to be the leaders in this segment. Every year we get stronger and we increase the value offer to our customers. That's what it is at the core of our growth that you have seen both in terms of total and same-store sales. So for us, it boils down to this: It's more of the same, better and faster. We continue to open stores. We continue to increase the value that we offer our customers by developing new products and strengthening the relationships with our suppliers. And scaling up helps a lot. We continue to improve the efficiency of our operations, as we have done over the last years. And we continue to generate cash that we will use to grow, invest in price and in projects that have high ROICs. In conclusion, I'm very excited for 2024. And thank you for listening. We'll now start the Q&A session. So please go ahead, operator.

[Operator Instructions] We'll take our first question from Andrew Ruben with Morgan Stanley.

Congratulations, Anthony, Eduardo and to all of the 3B team. I have 2 questions, if I may. The first is on gross margin. It looks like a strong quarter in 4Q. So I'd be curious, versus the [indiscernible] of the year, if there is anything incremental on the supplier negotiations to call out. And then as it pertains to 2024, how you think about the balance of letting the scale benefits, the negotiations flow through the margin versus being reinvested in price? And then second, quickly on the store guidance for the year, curious how you think about the timing. I know you mentioned 40% of the 2023 opening were in the fourth quarter. Just curious if we should consider any similar cadence for the year ahead.

Andrew, good to hear from you. Let me start with the margin question. This is quite a dynamic process negotiating with suppliers as we scale up. And you have to think about it that this is something that happens on a product-by-product basis. And typically, what happens as we scale up, we're negotiating better terms and conditions across the board. And then the decision is what goes into price and what gets retained that gets reflected in gross margin as you see. And the end result is what you've seen, which is a 16% gross margin in the fourth quarter. That's a very dynamic number and I wouldn't be surprised if it fluctuates as it's trending or stabilizing at some point. Your second part of the question, if I'm not mistaken, had to do with store openings and the concentration of store openings in the last quarter. Again, a very dynamic process. And my expectations for 2024 is that it's better spread out throughout the year.

Our next question comes from Robert Ford with Bank of America.

Congratulations on the quarter. Anthony, can you talk a little bit about your price gaps? I know there's some concern when people look at this gross margin that some of this is pricing and you have some difficulty accepting that these are actually vendor term improvements. And then, Eduardo, you touched on the increase in SG&A, but can you give a bit more detail on how you expect to leverage that administrative cost line as you move forward? And then on the Hurricane Otis charges, are you done? And is that net of insurance? And then how are you thinking about Acapulco over the intermediate to longer term? And then lastly, how should we think -- or how do you think about long-term equity-based compensation in terms of annual dilution from this point forward?

Okay. Bob, I'll start with the first part of the question, which was: do our gross margins come from price increases or increase in unit sales? And I would say the latter. When we look at our internal inflation numbers, we have seen a significant drop in inflation, and I would say even deflation in the fourth quarter. So all driven by better negotiations on costs from our supplier, and a portion of that gets actually put in the prices of our products. You had a question about price gaps.

Price gaps. Yes.

All of our data, extensive data, shows that we are the price leader in the market today. Some of you have gone out and done their own price checks, and I would encourage everybody to do the same and reach your own conclusions. But when you come visit us, we'll be happy to share oodles of data about pricing in a vast geographic area.

Bob, this is Eduardo. Your first question on SG&A and how to leverage moving forward. Yes, we had a particular Q4. As I explained, we had a number of stores, about 40% of our openings, during Q4. Then we had additional hires in different areas, in strategic areas for 3B moving forward. We also had preparation for new regions. But as we move forward, yes, you should expect leverage from an SG&A, mainly coming from store expenses, also from efficiencies in logistics. As we have mentioned before, we continue to do a lot of work in terms of efficiencies. We look at hours worked, and we're always constantly looking for ways to continue to drive our costs down. So yes, you should expect that SG&A will continue to go down as a percentage of sales.

And how much of that would you say is fixed versus variable, Eduardo?

Well, the fixed -- if you look at a store basis, our fixed cost is pretty much the rents, electricity. Most of it is fixed cost in terms of stores. We had a variable cost, which is personnel, but it doesn't grow linear with sales. It grows marginally with sales. So again, we have a pretty good runway in terms of efficiencies moving forward.

And on the admin side, I would assume that's largely fixed. Is that fair?

Correct. Again, we -- as I mentioned, we had some hires at corporate level, in some areas like in purchasing, IT and, of course, finance to meet our IPO company obligations. But as we move forward, that is an obvious one in terms of leverage moving forward. Then your second question on Acapulco, Bob. Yes, we have -- we pretty much have expensed everything in 2023. We don't expect anything in -- any additionals in 2024. This is not net of insurance. We're still pending to get claims from insurance, and that will happen within the next weeks or even a few months still. And I believe that was your question on Acapulco, Bob.

Right. So this is gross of insurance, so you could see some reversal of these charges. And then it was more about -- I'm just reading some horror stories coming out of Acapulco in terms of how depressed the environment is. And I was just wondering how the market is behaving for you and what your expectations are over the intermediate to longer term.

We've reopened almost all our stores, and they're doing extremely well. I mean the rebound was fantastic.

Great to hear. And then the last thing was the equity-based compensation, in terms of annual dilution and how you're thinking about that.

Yes. So we've inherited our existing ESOP. And if you look at the F-1, this represents about 43 million options outstanding, not fully vested yet. But you can come to your own dilution number if you net the strike prices, the average strike price, which is published in the F-1, and you can get a number. And that's one fixed number for share dilution. Now going forward, we have an authorized new plan of about 8.4 million options that have yet to be distributed and that will be distributed over the course of several years. It has an evergreen function attached to it. But again, going forward, you issue options, you issue them at market price, and you get diluted only if we've created value that's superior to the strike prices we've set. So I don't see a significant impact to that dilution going forward. It will only come because we've created significant value for all shareholders.

Agreed. And that's what we're thinking of. Just from this point forward, the benchmark we're using is about 1 point, based on our expectations, which seems in line with this incremental...

Yes. And I think that's a reasonable assumption.

Congratulations on the quarter.

Thanks, Bob. Good hearing from you.

Our next question comes from Hector Maya with Scotiabank.

Anthony, Eduardo, congratulations on your first quarterly report and the positive results. I just have one strategic question for Anthony. Could you please tell us your view on competition? I mean we have seen that the other players have responded to the growth of Tiendas 3B with plans to increase private label penetration and accelerate opening. So just wondering if you are considering to become even more aggressive in new stores outside of Mexico's central region, to potentially avoid, for example, BARA and FEMSA getting stronger before you in the north region, or Bodega or [ Redansa ] particularly becoming stronger in the southern region and Veracruz.

Sure. Hector, Mexico has always been a very competitive market in grocery retail. And today, it's no exception. And we've been competing in this market as a significantly smaller company over time. And while it's true that our entry as a public company has created noise, we haven't seen to date any significant changes at the competitive level. It's still as competitive as ever and we're still all competing healthily against each other. So no material changes in the competitive environment that we've noticed. We remain the price leaders today, and we don't see anybody consistently undercutting us. In terms of expansion, do we see anything different as we move out forward? No. It's been fairly consistent in terms of competitive environment. And will, let's say, competitors turbocharging their growth or doing something different really affect our business model? I think it's healthy. I think there is plenty of runway for 2 or 3 or even 4 very strong competitors in this market. When we look at Mexico as a whole, we just see so much opportunity, and as such, as long as we do our job well, we focus on offering significant value to our customers, which is always improving, I think we will carve out our niche and be very successful.

Excellent. Thank you very much. Very clear. And congratulations again on the results.

Our next question comes from Froylan Mendez with JPMorgan.

Hello, James. Could you give us some color on the same-store sales trends of mature stores during the quarter? And if you could give us a little light on what's embedded in your same-store sales guidance, but for the mature stores?

Thank you for that question because I was going to raise it myself. I think if you refer to that spaghetti chart in the presentation that we shared with you, you can see that every single vintage is posting very strong same-store sales growth, and that's on an inflation-adjusted basis. And what we see is continued very strong same-store sales growth across the board. And every time, we ask ourselves, why? And it just boils down to what we've said before, the value proposition to our customers is continuously increasing. What we offer you today has nothing to do with what we offered you several years ago, in terms of better quality, better pricing, better assortment, across the board, that generates basically more customers coming in and very solid support for increasing ticket sizes. There might be, and I'm suspecting because I glanced through some of the analyst reports that came out late last night and early this morning, I'm suspecting that our definition of same-store sales might not be the same as the Street's definition of same-store sales. Just to be clear, we look at stores that have 2 years of sales and older to calculate our same-store sales ratios. And that might be conservative. But we like it this way because our newer vintages are growing so fast that we think that distorts the same-store sales number. But that's the way we do it.

I think that's exactly where my question was coming from. Because when you see the same-store sales number that you posted, the gap maybe versus what other retailers posted is not that large in some sort of way. That probably has to do with -- of course, it has to do with the growth pace. But I see your [ point though ]. Thank you so much.

Yes. I mean just look at the slope of the curve in the spaghetti chart, and you see that, in the early years, you're at 40-plus percent. So we prefer not to include that and just to talk about stores that have come off this fast ramp-up.

Our next question comes from Rodrigo Alcantara with UBS.

Anthony, Eduardo, nice to hear from you. Just a very simple question on your plans on fresh, right? I mean we discussed in the past about you guys starting the fresh category. Just curious if this is in the pipeline for 2024, how advanced you are on those plans? And maybe leveraging this question, if perhaps you can comment on CapEx expectations, just for us to model accurately cash flow generation for 2024?

Okay. Rodrigo, you were breaking up a little bit, but if I heard you correctly, your first question was: what are our plans for fresh?

Yes, yes.

Okay. A hard discounter, we'll offer fresh, but we'll offer it with the same kind of principle and approach that we offer everything else. It has to be high rotation, it has to offer high value for money. And we're currently running tests to be able to achieve that. I mean if you look at other countries like Turkey Bim, they offer fresh, A101 offers fresh, and there is no reason why 3B can't offer fresh. So as long as -- as soon as we are satisfied that the fresh we can offer meets these criteria we put, we will have fresh. Now when does that happen? It could happen in '24, but it could also be in '25. None of our looking-forward projections include anything from this category. So when it happens, it's icing on the cake. Your second question was CapEx. I'm going to let Eduardo answer that one.

Yes. CapEx.

Rodrigo, in terms of CapEx, it's pretty much what we had explained in our prospectus. No changes really there. Again, as we explained, our target is to invest MXN 3.9 million per store. Particularly this year, in addition to stores, we're going to be adding 2 additional regions, distribution centers. By the way, they both have already opened. And again, additional CapEx in terms of trucks and cars that the majority, of course, will come from CapEx from stores. So no major changes there, and that's how we plan to execute in 2024.

Thanks for the clarification, Eduardo. Congrats on your first earnings results.

[Operator Instructions] We will move next with Jorge Izquierdo with BTG Pactual.

Congrats on the results. My question is on average ticket. We saw it went from MXN 50 in 2019 to slightly above MXN 82 in 2023. So I was wondering if you could provide more color on the main factors which are driving this increase. And what should we expect for the future?

Good to meet you. Fundamentally, what drives increase in tickets is our customer picking up 1 additional item in their visit. And that happens as we increase the penetration of wallet because we're offering more, a bigger selection of better things, more value for money to our customers. And it's happening naturally and it's a natural upward trend that we've been observing now for several years. Now inflation that we've seen in the past has sort of created a little bit of noise in our number. We've seen high inflation. So in '22, the ticket size got a little bit inflated. We've seen it in the first quarters of '23. But we've seen internally a significant deflation in the fourth quarter of '23. Now going forward, I expect inflation to stabilize, and then I expect our ticket size to continue its upward trend as we've been experiencing it now for several years.

Great. Very clear.

And we show no further questions at this time. I would like to turn the call back to the presenters for closing remarks.

Again, thank you very much for attending our first meeting. This is very exciting for us. We were extremely nervous at the beginning of the call, but I think hearing familiar voices that have supported us all this time has made it very smooth and easy. And of course, we're happy to talk to you during our quiet periods about what's going on. So thank you again, and we look forward to talking again and seeing you in person.

And this does conclude today's program. Thank you for your participation. You may disconnect at anytime.