BBB Foods - Q1 2024

Transcript

Operator (participant)

Good morning, everyone. My name is Leonor, and I will be your conference operator. Welcome to Tiendas Tres B first quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. There will be a question and answer session after the speaker's remarks, and instructions will be given at that time. Please ensure that your full name is displayed correctly on Zoom. If not, please take a moment to edit your display name. Also, please note that this call is for investors and analysts only. Questions from the media will not be taken. Any forward-looking statements made during this conference call are based on information that is currently available. Today, we're joined by Tiendas Tres B Chief Executive Officer, Anthony Hatoum, and Chief Financial Officer, Eduardo Pizzuto. I will now turn the call over to Anthony. Please go ahead.

Anthony Hatoum (CEO)

Good morning, everybody. Welcome to our first quarter 2024 earnings call, where we will review our key results for the quarter. Special welcome to those of you joining us for the first time. Eduardo Pizzuto, our CFO, will follow, presenting our financial results. This will be a brief and to the point presentation so that we can have more time for the Q&A session. Some highlights. As expected, we delivered strong results for this first quarter of 2024. We opened 94 stores this quarter to bring the total number of stores to 2,382. Compared to the same quarter of last year, same-store sales grew by 14.8% and revenues by 13.9%. Operating cash flow grew by 36.4%, supported by EBITDA growth of 57.9%.

We ended the quarter with a net cash of MXN 4.3 billion due to the proceeds from our IPO and organic operating cash flow generation. Let's turn to operational performance. The momentum continues with our store openings. In terms of store expansion, we maintained a brisk rate of store openings in what is traditionally a soft quarter for new stores. We opened 94 stores, bringing the total number of stores to 2,382. This is a 27% increase in the number of stores opened this quarter compared to Q1 2023. We have been very consistent with our growth. From 2019 to 2023, we have maintained a compound annual growth rate of store openings of 15%+.

In our last earnings call, I mentioned that we have a significant runway to sustain these growth rates, and we maintain our view that Mexico offers a potential of no less than 12,000 3B stores. I would mention successful 3B stores. The strong performance of our stores opened in the last three years supports that view. If we look at revenues and gross margins, we see that our first quarter of 2024, revenues reached MXN 12.7 billion. That's a 30.9% growth over the first quarter of last year. Our gross margins increased by 80 basis points over last year's quarter, largely explained by our increase in scale and negotiating better terms with our suppliers, most of which we passed on to our customers. I'll pass on the mic to Eduardo now.

Eduardo Pizzuto (CFO)

Thank you, Anthony. Good morning, everyone. Our EBITDA and EBITDA margin is a consequence of everything we do. In Q1, we increased our sales, increased our gross margins, and reduced our expenses as a percentage of sales. As a result, a growing EBITDA and EBITDA margin. As illustrated in the graph, our EBITDA grew 57.9% from MXN 396 million to MXN 626 million, and our EBITDA margin from 4.1% to 4.9%. If we exclude the expenses from the IPO of MXN 70 million incurred in Q1, our adjusted EBITDA would have been MXN 695 million on a margin of 5.5%. As we had mentioned in our last call, hard discount is a unique business model. It generates a significant amount of cash through changes in negative working capital.

In Q1, this trend continued. If we adjust our working capital by excluding IPO proceeds, net of cash used to pay down a promissory and convertible notes, then our negative working capital stands at MXN 4.8 billion versus MXN 4.6 billion at the end of last year. That is an increase of MXN 287 million in Q1. As explained before, this trend will continue as long as we continue to increase our sales.

Anthony Hatoum (CEO)

At our last call, we set guidance for the year to open between 380-420 stores, and to increase sales in the range of 28%-32%. We maintain this guidance. Consumption remains solid in the segments we target. The minimum wage increases have benefited our target customers, in particular. Our decentralized approach to store openings is working well, and we opened a record number of stores for our first quarter. Notwithstanding the IPO, our operating costs as a percentage of sales continue their trend downwards. As we get larger, the opportunities for efficiency improvements grow, and we continue to dilute costs with a larger revenue base. Our growth is self-funded, thanks to positive EBITDA margins and attractive negative working capital generation. Our business model is simple, yet very powerful.

A virtuous circle of opening new stores, continuously increasing the value for money that we offer to our customers, and as a result, attracting new customers and growing sales per store, resulting in turn in more sales, and with scaling, becoming even more efficient, and then allowing us to offer increasing value for money to our customers, while all this time continuing to generate cash. Thank you for your support and for being on this call with us, and now we can start our Q&A session.

Operator (participant)

Thank you. We will now conduct a Q&A session with Anthony Hatoum and Eduardo Pizzuto. If you would like to ask a question, please press the Raise Your Hand button located at the bottom of the screen. If you are connected via telephone, please dial star nine. We remind you that all lines have been placed on mute. When it is your turn to ask a question, you will be given permission to speak. You will then be able to unmute yourself and ask your question. We will now pause for questions. Our first question comes from the line of Bob Ford. Please state your name and ask your question.

Anthony Hatoum (CEO)

Bob, you're on mute.

Bob Ford (Managing Director and Senior Equity Research Analyst)

Thank you so much. Apologies for that, but congratulations on the quarter. Anthony, post-IPO, are there any tangible benefits you're seeing to the business? Are suppliers perhaps taking you a bit more seriously? Are there new multinational private label operators, maybe that are knocking on your door? Or, you know, are you seeing better offers in real estate? Is there a halo benefit for your existing vendor base, or is it just a big headache? And, you know, given your ability to self-fund growth, how are you thinking about the use of that MXN 4.3 billion?

Anthony Hatoum (CEO)

There's definitely a positive halo effect, as you say, Bob, in a sense that the level of motivation and enthusiasm on the part of all our suppliers has gone up significantly. And what I see is people that are more fired to do more and to do things faster. In terms of, you know, what do we do with our cash? As we have mentioned to some of you previously, there's a number of initiatives with high returns on invested capital that we have started undertaking, namely, in terms of human resources and some others in IT efficiency projects that we have started putting to work.

But anything that we look at is always looked at through the lens of: What's the return on invested capital? What's the return on time invested? The rest basically is gives us more strength in a sense that, you know, we have a very solid balance sheet today, and we've cleaned it up. There is no debt on it, and that is comfortable in terms of weathering any turbulence down the road that might happen.

Bob Ford (Managing Director and Senior Equity Research Analyst)

Very helpful. And just one follow-up, and that is, you know, are you seeing any deterioration in terms of the quality of your new store openings, in terms of locations, occupancy costs, or the initial performance of your sales as you ramp in new markets?

Anthony Hatoum (CEO)

If you've looked at our spaghetti chart previously, you've seen that every vintage seems to be doing better than previous vintages. As we have maintained our discipline in store openings, and our methodology, and our approach, and our models are, have not changed, there is no reason to believe that going forward, we don't maintain the same kind of positive results from new store openings. We haven't seen anything like that.

Bob Ford (Managing Director and Senior Equity Research Analyst)

That makes perfect sense. Thank you so much, and again, congratulations on the quarter.

Anthony Hatoum (CEO)

Thanks, Bob.

Operator (participant)

Our next question comes from Rodrigo Alcantara. Please state your company name and ask your question.

Rodrigo Alcantara (Equity Research Director)

Hi, thanks for taking my questions. Congrats on the execution, Anthony, Eduardo. I guess my question would be a simpler one, regarding gross margins. If I recall on the investor roadshow process, you know, the base case was to some respect flattish or slight, even slight contraction the gross margin as you're investing in prices, right? But you have surprised to the upside in the sales mix effect and the efficiency that you can generate on the gross margin. So, I mean, just curious here, if the outlook or if your view regarding how to handle the gross margin has changed, Anthony, perhaps instead of a flattish scenario for gross margin, we may see, you know, gross margins structurally trending up. That would be my question. Thank you, and you know, enjoy today.

Anthony Hatoum (CEO)

Thanks.

Rodrigo Alcantara (Equity Research Director)

Congratulations on the quarter. Yeah.

Anthony Hatoum (CEO)

Thanks, Rodrigo. The increase in gross margin in this first quarter should be seen as a normal fluctuation in our business. Don't read too much into it. It's a very dynamic metric that will move around. As we're scaling up, we are getting better terms from suppliers, and our suppliers are getting more volumes from us, and in general, we aim to pass these savings to our customers, which then will generate, you know, more traffic, more sales, and ultimately more cash flows. But it's highly dynamic and, just, you know, it's normal for it to go up a little bit, come down a little bit over time. Just look at the long-term trend, and I think we'll be in line with what we've expected.

Rodrigo Alcantara (Equity Research Director)

Awesome. Thank you very much.

Operator (participant)

Our next question comes from Joseph Giordano. Please state your company name and ask your question.

Joseph Giordano (Associate)

Hi there. Good morning, everyone. Good morning, Anthony, Eduardo. Thanks for taking my question. I want to explore a little bit more the very high operating leverage that we continue to see. So, like, looking on a unit economic base, the same-store sales is in the mid-teens range for quite a while. But I think this hides an even stronger metric, which would be like the real mature location. So those stores with over five years this is probably very, very powerful for the EBITDA margin levels that we have been seeing.

So my question to you here is to explore a little bit like the network effect that you're seeing, like, on the consumption base on those stores, and try to quantify a little bit like how are you seeing like, checkout growth or like, average basket size and ticket in those mature locations, how those are trending? So that's my question. Thank you.

Anthony Hatoum (CEO)

Yeah, Joe, let me break down your question in various parts. If I heard you correctly, you were asking about, you know, what's going to be the performance of older vintages as we move forward.

Joseph Giordano (Associate)

Exactly.

Anthony Hatoum (CEO)

So again, if I go back to fundamentals, we haven't seen a slowdown in growth of our older vintages. When we ask ourselves why, the fundamental driver is a continued improvement in the value offered to customers. I think I mentioned in our last earnings call that if you compare what we offer today in our basket versus what we offered five years ago, you'll see a notable improvement in what would be attractive to customers, and that is basically the fuel that keeps on generating increased same-store sales across the board, across vintages. As long as we do that, I don't see a slowdown. Now, eventually, theoretically, yes, you will reach a point where you've touched every customer and penetrated as much as you can, every wallet, and then you'll see a slowdown.

I think we're far away from that point yet. In terms of network effect, yes, it is definitely present in a sense that we benefit from an increased recognition of the 3B brand as a value-driven brand. So and one of our objectives is to build trust with our customers. I mean, in an ideal world, you walk into our store, and you trust that you're gonna get the best value for money. You don't even have to compare with other chains, that anything you buy in 3B is going to be giving you high value for money. And as long as we don't violate this trust, I think we can continue to see an improvement in this halo effect, as you call it.

And we can end up selling anything in a Tiendas Tres B store. As you know, you know, in our, in our in-and-out basket, our irrepetibles, where the prices are so low that they don't get repeated, we've sold a wide variety of goods, including bicycles, and televisions, and clothes, and shoes. So we're not limited, at least in that section of our store, to selling groceries, and that's very powerful. You had one more question, Joe, but it escaped me, so please go ahead.

Joseph Giordano (Associate)

Just to try to quantify, like, this effect, in terms of, like, basket size and number of checkouts per, let's say, mature client. Just to try to see, like, how the volumes are evolving here, and try to extrapolate that a little bit further.

Anthony Hatoum (CEO)

Look, I mean, what, what we can say with firmness is the number of tickets driven by the number of visits of customers and attracting new customers has been a very solid trend upwards. And basket size, you know, there's a perverse effect. As more people buy private labels, which are priced 20%-30% lower, the MXN basket size is pulled downwards. And then, what we need to do is basically increase the number of items they have in their basket, which is happening, but as we've talked about before, happens at a much slower pace over time, but happens. So what you'll see more is more frequency and more tickets, as opposed to, you know, a very high bump or a very rapid bump in the MXN average ticket size. And that's what we're seeing today.

Joseph Giordano (Associate)

Perfect. Thank you very much.

Operator (participant)

Our next question comes from the line of Gulrez Arshad. Please state your company name and ask your question.

Gulrez Arshad (Private Investor)

My name is Gulrez Arshad, and I'm a private investor. Congratulations to Anthony and Eduardo and the team, an outstanding quarter. I have really one question, which is on the competitive landscape and whether any of your competitors are adopting your hard discount model?

Anthony Hatoum (CEO)

Hi, Gulrez. At least this quarter, we haven't seen anything notable in the market, neither on pricing or in terms of change of strategy of any of our direct competitors. It wouldn't surprise me if something happens down the road, but keep in mind that, you know, we're a hard discounter, we're sticking to our knitting. As we say, we're doing more of the same faster. We have, I would say, a significant lead. You know, we've, it's hard to catch up to somebody who's already scaled up. It's not impossible, but it's difficult, and we're not staying still. So competition is healthy for everybody, and I think we're a very strong competitor to the rest of the market.

Gulrez Arshad (Private Investor)

Yeah, one last question, Anthony. Are you committed to continued organic growth for the company, or would potential, M&A, activity be in the future, especially when you go into the more remote parts of Mexico?

Anthony Hatoum (CEO)

You know, if you ask me right now, today, I would say it's organic growth. We, we never discard an M&A, but the challenge with M&A is exactly what are you buying?

Gulrez Arshad (Private Investor)

Okay.

Anthony Hatoum (CEO)

What I've found over time is the scarce element is talent. So unless you're buying talent in your M&A, it's a low probability event.

Gulrez Arshad (Private Investor)

Thank you very much.

Operator (participant)

Our next question comes from the line of Álvaro García. Please state your company name and ask your question.

Álvaro García (Associate Partner)

Hi, it's Álvaro García from BTG. Hi, Anthony, Eduardo. Congrats on the quarter, and thanks for the call. One specific question on the Easter calendar shift in the first quarter, would it be fair to assume that relative to hypermarkets, which obviously saw a nice bump given the Easter calendar shift into 1Q, you maybe saw less of a boost given the Easter impact?

Anthony Hatoum (CEO)

I think you're absolutely right, Álvaro. I mean, these shifts do see an impact, but, you know, in terms of a full quarter, it's not gonna be significant.

Álvaro García (Associate Partner)

That's fair, that's fair. And then just one on, on gross margin. You also... the scale is understandable, but you also mentioned the better sales mix, and I was wondering if you could maybe give a bit more color on what that is exactly that's driving the higher profitability.

Anthony Hatoum (CEO)

Again, highly dynamic, so let's break it down in its pieces. On one side, you're buying from suppliers, and on that pricing and costing side of the equation, your scale naturally drives better terms and conditions. And then on the market side, as you know, we, we dynamically price. We are continuously elasticity testing to optimize volumes and, peso margin, and we do that on an SKU by SKU basis.

And then, at the end of the quarter, we get a result, which is gross margin that we look at, and in this case, it happened to be higher than the previous one. So really, we don't drive for gross margin. It's always a consequence of, this very dynamic process that's going on, both on the purchasing side and then on, setting prices side. Again, as I mentioned earlier, I wouldn't read too much into it. It's going to be very dynamic and will continue to be dynamic. But in general, if there is a trend, it would be to pass on value to our customers.

Álvaro García (Associate Partner)

Very clear. And then just one last one, on new categories and on fresh specifically, if you could maybe give some color on the pilots you're putting in place, and what sort of results you're seeing and what your strategy is there. Thank you.

Anthony Hatoum (CEO)

We won't comment on pilots and tests, and in general, we will not introduce anything that has not been fully tested and that has come out successful in our tests, whether it's fresh or any other category that we would be testing in. But you know, it's fair to know for everybody that at any point of time, there is about 50-60 SKUs that are being tested in 3B, and some of these tests are successful, and then you see basically a new product emerging and probably another product dropping off. And those that are not successful, you will never see on the shelf.

Álvaro García (Associate Partner)

Very clear. Thank you very much.

Anthony Hatoum (CEO)

Sure.

Operator (participant)

Our next question comes from the line of Alexandre Namioka. Please state your company name and ask your question.

Alexander Namioka (Equity Research)

Hey, this is Alex with Morgan Stanley. Thanks for taking the question, and congrats as well on this great execution. I mean, the majority of my questions have been answered, but just wanted to clarify on a couple of points here. First, regarding the efficiency improvements that you mentioned in the release, just wanted to confirm if there's any new project that you are doing to offset, if you will, the higher labor costs, or this is just the regular operating leverage that you guys are seeing at the stores?

And the second question regarding the SBC, I think, Anthony, you mentioned in a previous call, around, like an expectations for us to have SBC at around 1% of sales, sort of in the new term. Just wanted to confirm that remains the case or there should be higher volatility for the on a quarter-to-quarter basis for the next quarters. Thank you.

Anthony Hatoum (CEO)

Alex, just a clarification. On your second question, you cut off a little bit. Did you say share-based payments?

Alexander Namioka (Equity Research)

Yeah, the share-based payments. It was 1% of sales in both the first quarter this year and last year. Just wanted to make sure that's sort of the level we should expect for the next quarters.

Anthony Hatoum (CEO)

Well, let's start with the last question. But yes, you're right, but then, you know, this is... What you're seeing here are the expenses for our legacy option plan, and you can expect that over time this would trail off. Whereas our new option plan, which in the F-1 we call our 2024 option plan, will only kick in in December of this year. And, we haven't yet decided on what the distributions are, but as you know, the strike prices on this plan are gonna be set to market, and then any costs due to this plan are gonna be 100% tied to the increase in value creation. So, you know, then I'll let you decide whether how much of a cost impact it is.

On your first question which was on efficiencies: for us, it's business as usual. We have never stopped any project or not started post-IPO, any new project, related to becoming more efficient. It's something ongoing, and at any point in time, there is at least two to three initiatives going on, which have to do with, you know, improving efficiencies, whether it's something as simple as, our truck maintenance program and how to make it more efficient, to better routing of such trucks to the stores, to better, you know, more efficient, ordering systems, faster response times from our systems, improving, making our, our reporting more user-friendly and therefore more focused on being able to pull out conclusions.

We've given many times the example of operating efficiencies in the stores where, you know, our last generation of boxes is lidless, so saving us countless seconds per box opened, that sum up to hundreds and hundreds of hours of labor costs saved. Then, you know, our initiatives to use tech to, again, drive more efficiency in our operation and reduce hours worked has never stopped, and will continue going on. So it's part of our DNA, and don't expect that, you know, there's a sudden increase now that we're public. We, we do have a little bit more spending power, which is nice, which can accelerate things a little bit, but I would say this is, this is ongoing. And, you know, don't be surprised if you see continuous improvements.

Alexander Namioka (Equity Research)

Very clear. Thank you very much.

Operator (participant)

Our next question comes from the line of Héctor Maya. Please state your company name and ask your question.

Héctor Maya (Director of Equity Research)

Hi, thank you very much. Héctor Maya from Scotiabank. Hi, Anthony, Eduardo. Congrats, very positive results. I know this is maybe too soon, because you just came out with the IPO. Was such, such a great milestone, very strong numbers and openings. But also wanted to know, Anthony, what would be the next milestone that you have in mind for Tiendas Tres B? If there is any project that excites you to think about to deploy on top of what you and your team have built so far, you don't have right now at your stores? And this, you know, taking advantage of more and more customers getting to know your brand as you expand.

Anthony Hatoum (CEO)

Well, Héctor, it might sound boring, but for us, it's, it's good. We're just gonna do exactly what we've been doing, just better and faster, and I think that's my main takeaway of what's gonna happen in the near future. So nothing changes in our business model, nothing changes in the way we operate. We just are better at executing in terms of, you know, being more efficient and being faster, and that's pretty much it.

Héctor Maya (Director of Equity Research)

Perfect. Thank you very much. And I mean, the results have been very, very good, so excellent. No, no problem there. Thank you.

Anthony Hatoum (CEO)

You're welcome.

Operator (participant)

We will pause for further questions. Our next question comes from the line of Santiago Alvarez. Please state your company name and ask your question.

Santiago Alvarez (Summer Analyst)

Hi, congratulations on the great first quarter. I just want to know if you can give us much more color on the product sales mix. On 2023, it was around 45% on the private label product, while branded products was at 50%. What trends are you seeing on the first quarter in 2024? And going in, into further quarters, what are you seeing on the common size of private label between the product sales mix? Thank you.

Anthony Hatoum (CEO)

Hi, Santiago. Very good question. You can expect the trend of private label penetration to continue to increase upwards. Just take Aldi as a reference, where, you know, their private label penetration is about 90%+. You've seen that happen with all hard discounters across the world, where it tends to move upwards, and we're no exception. We haven't reported this number, and we don't expect to report it on a quarterly basis, because by nature, it's dynamic. It goes up a little bit, it goes down a little bit quarter to quarter, but overall, the trend is upwards. So, you know, maybe next quarter we'll give, we'll give an indication of where we stand versus end of year 2023. But in general, I'd say it's, it will continue to move upwards.

Santiago Alvarez (Summer Analyst)

Thank you.

Operator (participant)

Our next question comes from the line of Ignacio Arnau. Please state your company name and ask your question.

Ignacio Arnau (BI LatAm Fund and Portfolio Manager)

Hi, Ignacio here from Bestinver. Thank you very much for the call. Congrats on the execution. I just wanted to ask, you said that you have at any point in time a big number, like 50, 60 SKUs, potential SKUs in pilot mode, and that every time you bring one new, you take another out to maintain those 800 number, if I recall correctly. Any chance that number increases, as the model evolves?

Anthony Hatoum (CEO)

The model, the current model as it stands, our stores and our business model is designed to handle more, but we're extremely disciplined in deciding what the more is. If it's a completely new category, and it meets our criteria, which are high rotation, high value for money, then we can make use of that extra space that we have to grow the number of SKUs. But unless it's that, we're extremely disciplined. We put in one, and we look at the weakest SKU, and we take it out. Again, it might sound counterintuitive. It's so easy to increase sales by just adding more SKUs, but you have to look at the whole picture. We want to maintain efficiency across the board. We want to maintain high rotation of inventories, and of course, we want to make sure that every product on our shelf is high value for money.

Ignacio Arnau (BI LatAm Fund and Portfolio Manager)

Okay, thank you very much.

Operator (participant)

We will pause once, once more for any further questions. Our next question comes from the line of Sebastian Villarreal. Please state your company name and ask your question.

Speaker 11

Sebastian Villarreal, private investor. The Mexican peso is at a historic high against the U.S. dollar. Is there any susceptibility to your business of a depreciating Mexican peso in the next few quarters? Thank you. Congratulations.

Anthony Hatoum (CEO)

Hi, Sebastian. I think the whole market is susceptible to peso fluctuations. In the background, we're a very dollarized economy. I'm not talking about 3B in particular, but I'm talking about everything. We have lived over the course of our history through at least two devaluations, and what we've observed is that, you know, the market readjusts after a period of roughly 12-18 months, and things come back into sync, mostly through inflation, if it's a devaluation. But I can't say more to that, that, you know, we've been through two of these already, and it's business as usual for us. Our stores keep on opening, and our sales trends will keep on increasing.

Speaker 11

Thank you.

Operator (participant)

We will pause once more for further questions. We have received no further questions at the moment. I would like to hand the call back over to Anthony Hatoum for closing remarks.

Anthony Hatoum (CEO)

Well, thank you, everybody, for being on this call. Thank you to our investors present and to the analysts covering us, for your continued support and confidence in our strategy. I also want to say thank you to our team members whose hard work and commitment keep on driving the results that you're seeing. Of course, Eduardo and I, and the rest of the team are available to you if you have any further questions post this call. Feel free to contact us directly, and happy to have a quick chat. Thank you again, and have a great day.

Operator (participant)

You can now disconnect.