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Edited Transcript of ALSEA*.MX earnings conference call or presentation 26-Jul-19 4:00pm GMT

Q2 2019 Alsea SAB de CV Earnings Call

Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Alsea SAB de CV earnings conference call or presentation Friday, July 26, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Torrado Martínez

Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO

* Rafael Contreras Grosskelwing

Alsea, S.A.B. de C.V. - CFO and Director of Administration & Finance

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Conference Call Participants

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* Antonio Gonzalez Anaya

Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research

* Benjamin M. Theurer

Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director

* Luis Rodrigo Willard Alonso

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Ravi Jain

HSBC, Research Division - Analyst

* Rodrigo Alcantara

UBS Investment Bank, Research Division - Associate Analyst

* Sergio Takeshi Matsumoto

Citigroup Inc, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to Alsea's Earnings Conference Call. With us are Alberto Torrado, Executive President of Alsea; Rafael Contreras, Chief Financial Officer; and Salvador Villaseñor of Investor Relations.

Our speakers will present the results for the second quarter 2019. At the end of the presentation, we will have a Q&A session.

As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in Alsea's most recent annual report.

At this time, I will now turn the conference over to Mr. Alberto Torrado. Please go ahead.

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [2]

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Good morning and welcome to Alsea's conference call. We will be presenting the most significant events of the second quarter of 2019 as well as our strategic outlook.

As you know, I came back as Executive President last quarter with a clear mandate from the Board. The goals were to -- the goals were to bring the sales operation closer to the final customer, integrate and improve the new acquisitions in Europe, embrace and implement new technologies, optimize our portfolio brands for Alsea full scale and changing consumer trends, and finally, to have the right human capital structure and best talent to ensure accomplishing these goals.

As we achieved these, our sales profitability and return from capital will improve freeing up capital to deliver us our balance sheet and continue growing. I am pleased to report that we are making substantial progress in achieving these goals. Even if there is more to be done, we have reorganized management and even greater autonomy to the store heads to manage their businesses. Our new acquisitions in Europe are being integrated with the sales culture and are already generating positive results. Synergies are ahead of forecast and we have been finding even more opportunities and efficiencies that will surely give us better results in the near future. We have defined a good organizational structure, which we have completed with the recent appointment of Miguel Ibarrola, as the CEO of Alsea Europe. We can work in confidence we will accomplish our plans for the region.

Following the latest consumer trends and demands on food delivery, we are aware that we have to act accordingly and fast. That's why we are developing our own platform and at the same time, finalizing arrangements with the most relevant food aggregators in each geography [toward] our brands and participate in every market place without losing any opportunity to reach our clients. A disciplined approach to profitability, capital allocation and growth under my leadership, allow Alsea to become one of the world's leading operator of quick-service restaurants, coffee shops and casual-dining establishment over the past 2 decades. I am convinced that as we execute our business plan going forward, we will replicate again this success.

To achieve that, we need to be on top of technological change. That's why we have been making important investments on this topic. The first of the 2 is an investment in Brightloom, which used to be the (inaudible) arms of Starbucks and was recently spun off.

This company developed new technology that will not only serve Starbucks, but the whole food and beverage industry. The [funds raised] will be used to help expansion of Brightloom for the development of technology platforms that will bring our products closer to our clients and the innovative and service provided to our customers given the changing consumption avenues.

The second investment is in Valor Siren Ventures, a private equity fund based in San Francisco, focused on innovation in the food and beverage industry. Neither investment will be material financially, but will help us by giving us insights into technology trends in the restaurant sectors, and we're confident this will provide investors have some returns.

In line with the restructuring strategy of our brand portfolio, to focus on those with greater potential and profitability, in the second quarter of the year, we made important progress. Alsea reached an agreement with franchiser, California Pizza Kitchen to divest from California Pizza Kitchen brand under the [theme] of asset leasing and transferring operations and development rights.

Additionally, we finalized an agreement with Banco de Franquias for the formation of the joint venture regarding the P.F. Chang's business in Brazil. As part of this agreement, Banco de Franquias, an operator with proven experience in the Brazilian market, will manage the operation of existing P.F. Chang's unit in that country as well as the development of the new units.

Finally, during the quarter, we received notification for Burger King to execute the purchase option of 71 of the 181 existing units in Mexico that we operate, which will be held towards the end of this year. That transaction will result in positive inflow for Alsea of approximately MXN 150 million.

Regarding our quarterly numbers, we saw positive sign in most of our main markets. Consolidated sales for the quarter increased 29% and same-store sales increased by 8%. And corporate units rose by 22.3% compared to the same period of previous year, or 6.2% without considering the recent acquisitions in Europe. EBITDA increased 16.7%. Overall, EBITDA margin was impacted by the rise in energy fees, in spite of employing clean energy in most of our restaurants; the increase of minimum wage in some countries; as well as the impact related to the tariffs for certain products imported from the U.S.

There were also some one-off restructuring cost in Europe, of course, and EBITDA margin was 12.7% in line with our expectations. Despite economic slowdown, we were especially pleased by the same-store sales growth of 6.6% in Mexico, as market strategies paid off held by greater autonomy for store management as well as the Easter week affect. Starbucks, Vips, Burger King and P.F. Chang's, all had strong sales during the quarter. On a consolidated level in Europe, same-store sales grew 5.3% and total sales 122%, driven by the acquisition of Vips in Spain and Starbucks in France and Benelux. Adjusted EBITDA margin was 16.5%, which presented a compression against 2018.

Total integration of these businesses, which have lower margins represented an opportunity for synergies.

As I mentioned earlier in the call, our recent acquisitions in Europe are performing in line with our expectation, and we remain very excited about this opportunity. For Starbucks France, we carry out certain initiatives including the new marketing strategy, optimization of innovative and available food products, focusing store managers on EBITDA rather than sales, and making our stores more visible to the passing consumer. The positive sales response we just set a strong customer loyalty for our brand that have been partly neglected.

Meanwhile, we have been able to improve profits, profit margins [via fairly] straightforward efficiencies and integration benefits with the rest of Alsea in Europe.

Our South American operation presented a decreasing sales of 10.7%. This was mainly due to the political economic instability in Argentina, registering a devaluation greater than [50%] in the last 12 months. Excluding this negative effect, sales growth of our sales South America will have reached 19.4%.

Additionally, it's important to mention that our operations in Chile has been overperforming reaching a 6% growth in same-store sales, particularly driven by Burger King, which has been presented, as you know, double-digit same-store sales growth for at least the last 3 years.

Alsea is now one of the leading quick service restaurants, coffee shops and casual-dining operations in Mainland Europe. As we integrate these businesses and identify deficiencies, we will be placed to deliver exceptional returns to our investors. Alsea's talent and team is fully focused on carrying out, out-of-the-box mandate to improve profitability, return some capital and deleverage the balance sheet. We will achieve these by providing our customers the best restaurant dining experience. These are top of the consumer preference and technological changes and with a relentless focus on execution.

As one of the world's leading restaurant operators, with businesses spanning 12 countries and with extraordinary strong relationships with our brand owners, we believe we are very well placed to achieve these goals.

My new responsibilities as executive president include communication with investors, and over time, my commitment is to provide investors with the necessary information to properly evaluate Alsea and the power of profitability of the franchise we have built. We welcome suggestions from investors on how to improve in (inaudible) going forward.

And now, I will leave Rafael for more detailed information about the financial information of Alsea. Thank you very much.

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Rafael Contreras Grosskelwing, Alsea, S.A.B. de C.V. - CFO and Director of Administration & Finance [3]

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Thank you, Alberto. Good morning, everyone, and thank you, once again, for your time. First, I want to mention that all the explanations and comments reported in our press release exclude the effect from the restatement related to the hyperinflation in Argentina as well as the IFRS 16 effect. In order to present a comparable analysis versus the prior year, these 2 factors were addressed in the financial statements included in the information reports for the stock exchange and Mexican Securities [Authorities].

The impact of IFRS 16 on our results for the quarter are as follows: A positive impact of MXN 1.2 billion in EBITDA compared to MXN 1.8 billion in total EBITDA pre-IFRS 16, increasing the EBITDA margin by 830 basis points, reaching 21%. A positive impact of MXN [26] million in net income compared to MXN 227 million in net income pre-IFRS 16; and additionally, we recognized MXN 23.3 billion in lease-related liabilities non-executable, compared to our net debt of MXN 25.4 billion in 1 -- in the first quarter of '19 pre-IFRS 16 after recent Europe acquisition. Also, I want to highlight that this is the second quarter, we are consolidating Grupo Vips in Spain and Portugal, and the first time we are consolidating a full quarter of Starbucks in France and Benelux.

On the top line, we present a MXN 3.3 billion increase during the quarter, mainly explained by the addition of 622 corporate units, out of which 367 come from the acquisition of Grupo Vips and 83 corporate units of Starbucks in France Benelux as well as 6.2 organic growth. Our same-store sales expansion of 8% also contribute to our revenue growth for the quarter. This was partially offset by the negative effect of the devaluation of currencies versus the Mexican peso, particularly the Argentinian peso and the euro, which represent an impact of MXN 932 million in the quarter consolidated sales, coupled with the impact from the fiscal reform in Colombia. Excluding the devaluation impact, sales growth would have been 8.3% larger, reaching a 37.5 growth in consolidated sales. I would also like to highlight that we were able to report an EBITDA growth of 16.7% during the second quarter of the year even with a pressure on operational expenses mainly arising from the impact from our recent acquisition in Europe, high inflation in Argentina, which we are mitigating by trying to close the gap between our pricing and strategy and inflation; the increasing energy in Argentina and Mexico that we are also mitigating by having around 70% of our units on clean energy and natural gas with a benefit of MXN 21 million during the second quarter, and finally, to the minimum wage increase in some countries. During the quarter, our net income decreased 28%, amounting to MXN 227 million. This was mainly attributable to the 240 basis points increase in operating expenses due to incorporation of the recent acquisition in Europe, a MXN 112 million increase in interest expenses related to the leverage in group for the acquisition in Europe, tied to the loss of marginality in Argentina. This was partially offset by a lower tax rate moving to 37% from 38% in the second quarter of last year. Cost of financing for the quarter increased by MXN 160 million -- [MXN 165 million], mainly due to the rise in interest rates resulting for the increase in Mexican [interest] rate and a higher leverage related to the recent acquisitions as well as a negative impact in foreign exchange losses. We closed the quarter with the total debt of MXN 27.3 billion and a net debt of MXN 25.4 billion, which had an increase of up -- of MXN 11.5 billion in comparison with the same period of last year, mainly related to the recent acquisition of Grupo Vips and Starbucks in France and Benelux. The debt structure at the end of the period was 97% long-term with 60% denominated in Mexican pesos and 39% in euros and the remaining 1% in Chilean pesos. During the quarter, we settled the remaining Argentinian debt giving the current rates in the country. In our efforts to continue improving our debt profile, we carried out a substantial issuance of 2 bonds in the Mexican markets, one for MXN 1.3 billion due in 5 years and another one for MXN 2.6 billion due in 7 years. Resources were used to pay down the bonds due next year as well as short debt improving the average maturity of our total debt.

With a total debt to EBITDA pro forma including acquisitions at 3.7x, net debt to EBITDA pro forma including acquisitions at 3.5x at an interest coverage base at 3.9x at the end of the quarter. The company has complied with all the covenants established in our loan [conference] which are currently set at a maximum total debt to EBITDA of 4.5x for 2019, excluding IFRS 16.

Regarding our profitability metrics at quarter end, our rate considering operating income after taxes was 8.4%, and our return on equity also considering the results of acquisition in the last 12 months reached 8.4%. Concerning our hedging strategy for 2019 due to the expected market volatility, we continue following our antenna FX hedging policy. Where at quarter end, we were covering up to 68% of our U.S. dollar needs for the following 8 -- 12 months at the average exchange rate of MXN 19.82 per $1. During the second half of the year, we will continue focusing on achieving synergies that will lead us to higher profitability, as well as on implementing our deleverage strategy.

Finally, we would like to comment on our expectations for earnings up to 2022. We are projecting a compound annual growth rate of approximately 15 for sales -- 15% for sales, driving by 6% to 7% organic growth, coupled with a similar figure in consolidated same-store sales. These factors and the impact on sales that the divestiture on some units and brands in our portfolio will have.

With respect to EBITDA, we expect comparable growth of about 16.5% with a margin close to 15%. Driving by the improved performance of our European operations following expected synergies and efficiencies. In line with our commitment to providing best investors attractive returns for the period ending in 2022, we are forecasting a CAGR EPS growth above 25%, ending 2022 with a rate of 13.5% and a return on equity of 16%. With an accumulated dividend of [MXN 3.90] over these 4 years, factoring in the postponement of this year's dividend.

Now we would like to open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Ben Theurer from Barclays.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [2]

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First of all, congratulations on the results. I had a question, I wanted to follow a little bit on the European business and obviously it's clear that most of the margin compression we saw on a store basis and what you have in the press release was driven by the integration of the new businesses. Just to understand and you've mentioned some of the synergy potential, but obviously, you have -- you have still severance payments out there when it comes to contract termination, which isn't as easy in Europe. But realistically, what do you think is the potential, which -- what level of profitability can you bring these new assets you've just acquired in Europe to the similar level that you had in the past? Or what's the going forward level we should assume is going to be realistic on those European assets, that would be my first question and then I have a quick follow-up.

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [3]

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Yes. For the European and the new acquisitions, we are projecting that we can achieve in a 3-year period the same percentage and EBITDA margin that we used to have in Europe and [well into] the third year because in this 2019 and 2020, even though we are going to have the -- or we're going to achieve the synergies, we're going to have the layoffs of all the G&A. That's why I point to third year, we're going to achieve that percentage in terms of EBITDA margin.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [4]

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Okay. Perfect. Very clear on that. And then just on Mexico, very quickly, so from the commentary and what you've been talking about Starbucks and -- has been doing somewhat in line with the market so that, that's obviously positive, but then you have Burger King being one of the very big outperformers in terms of same-store sales growth, you nicely highlighted that in the report. But at the same time, you're seeing a lot of competition in Domino's Pizza on the delivery segment. So what strategies are you thinking of in order to boost growth again at the Domino's Pizza side? And what do you think has been the driver for the strength of Burger King? So those -- that two-part question would be nice to understand a little bit the drivers.

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [5]

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First, in Burger King, as you know, we've been doing double-digit growth for the last 2 years in Mexico and, as I mentioned, in Chile for 3 years. And basically, what we have done in Burger King is really do the basics in terms of operation, teams, renovation in stores, being very effective in promotions, et cetera. But I have to tell you that we are having obviously a boost now in Burger King because all the aggregators and the delivery strategy that we have set. So that's basically Burger King. I do believe that this trend of Burger King will continue because the level of operations and the consistency of the promotions that we have done have been very well received by the consumer. So I see that to continue throughout the year even with a slow economy as we all have heard that it's going to happen in Mexico. In the case of Domino's, I think there's 2 reasons. As I mentioned in our first conference call in the first quarter, the promotions that we did in the first quarter were not effective. And we decided to change the marketing strategy to be able to compete in value with other players in the industry. Mexico had been quite successful. That's one part, and you have seen the result on the second quarter, Domino's -- even though Domino's was not growing in orders, what I would like that to be, it did grow same-store sales and it achieved the budget that we have for Domino's in this quarter.

What we are doing in the future, we're doing several things. First, we are maintaining a value strategy in marketing for our customers that are looking for value. We are also launching and, you will see them soon, 2 new promotions: one with innovation in product by September and one group giving to our consumer better options to see -- or to provide them with better mix in terms of toppings and specialties. Domino's, compared with the competition, have a lot better specialties than the competition, which really only fights with price, on pepperoni pizza. So I think that's also an opportunity. And the last part of that will be, of course, delivery. We are going to reinforce, and you will see that, that Domino's is, by far, the best delivery company in this country. And we give our consumers not only the best pizza, but we give the best pizza with a right value at their home within 30 minutes or free guarantee. And that's a service that nobody else can do. There is no one aggregator in this country that we have measured than can give our consumers that type of service in terms of time and guarantee. So we're going to reinforce that, but not only that because Domino's -- because the trend of aggregators is so strong, we are going to start using aggregators even in our Domino's business. And you will see that happening. So what we're going to do, we're going to let the customer choose which aggregator or which technology they want to use to get their products at home. Domino's [has its solo] and other aggregators have their own. We believe we have the best one, and we do the best service. But we are going to let the customer choose.

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Operator [6]

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Our next question is from Mr. Sergio Matsumoto from Citigroup.

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Sergio Takeshi Matsumoto, Citigroup Inc, Research Division - Research Analyst [7]

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My question is on the Mexican consumer. You mentioned in the press release yesterday that you were seeing better demand for sales products in the second quarter. And I'm wondering if you can point to specific initiatives that you've done that resonated with your consumers. And specifically, I'd like to hear those other than the Easter shift and the World Cup effect last year and the gas shortage at the first (inaudible), something more specific like in terms of menu innovation and promotions and perhaps some limited-time offer items that you did this quarter?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [8]

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Well, I just mentioned what we're doing in Burger King and Domino's. So I would jump to tell you about Starbucks and the other brands, particularly Starbucks, which I know, you're right, the market was interested to see how performance -- Starbucks was performing because it was not doing that good. Basically, as I said on my first conference 3 months ago, the most important thing we have done is make sure that we have enough people in our stores to fulfill the demand for our consumers and to -- not only to have that right amount of people, but also make sure that we are scheduling that people for the peak hours in the stores and have these people trained. I have to tell you today that we have 99% coverage in our Starbucks stores and in most of our brands. We are focusing a lot on making sure that we have the amount of people and the right people to take care of our consumer.

The second thing that we are doing, we are making sure that the promotions that we are making in our restaurants are appealing for the needs of the consumers today. We have a consumer today that is looking for price. We have a consumer today that is looking for value. And we have a consumer today that has many, many options in the market. So if we want to win, we have to really give them value. And that's why you will have seen a little bit of pressure in our food cost in some of our brands because if we want to give them value and we're getting some pressure from the raw materials, well, we have to be very smart how to play the game in terms of food cost.

And the last one that I will tell you is we are investing in the stores. There were a lot of stores and restaurants that needed maintenance, CapEx and some remodeling, some of them. And as we have stated before, this is not going to be the record year for, say, in opening of stores. We are going to focus more the resources in making sure that the stores that we have are perfectly maintained to serve the customers that we have today. And also in Starbucks, as you know, we have a very big initiative, which is [bake-in-store]. And bake-in-store will reach 300 stores by this quarter, almost half of our restaurants in this. And this has boost the experience of the consumer, the orders and the tickets also for the consumer where we -- now we have products that are bake-in-store , and we also have some products that are made in the store like the croissant -- the ham-and-cheese croissant, for example. And you will see a lot of innovation in the food [cocina] in Starbucks and in other brands like Chili's and Domino's with the new products that are coming this quarter.

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Sergio Takeshi Matsumoto, Citigroup Inc, Research Division - Research Analyst [9]

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When you're talking about the baking stores at Starbucks, do you have a figure that you could share with the market about the food attach rate of your transactions and what is it now under the baking stores and what it was before you launched this initiative?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [10]

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I have some information, but I would like to share that later because I want to make sure that I give you the right information because that is changing a lot based upon the stores that have [bake-in-stores] and the stores that don't have bake-in-stores . And I will get back to you with this information through Salvador, if you don't mind -- so I can give you accurate information, and you can see the effects from the [bake-in-store] investment because obviously we're investing in ovens, and we are investing in other equipment that we need in the stores and will also -- this takes labor of our stores. So I'll share that with you for sure.

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Sergio Takeshi Matsumoto, Citigroup Inc, Research Division - Research Analyst [11]

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That's terrific. And just one last thing, if I may, last quarter you discussed improving compensation for store managers, and you mentioned launching an initiative in the second half to make the manager/owner and some profit sharing and bonus based on KPI. Can you provide us an update on that?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [12]

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Yes. Unfortunately, I have not much to tell you because it's just launched. I just finalized this morning my [QVR] in Domino's, and we have not had the resource because we started in July. So it's too early for me to give you information because we really don't have information about that to see if this has been a success. But by next quarter, I will write this down and make sure that we guys give you more clarity on the effects of this initiative.

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Operator [13]

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Our next question is from Mr. Antonio Gonzalez from Crédit Suisse.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [14]

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I just got 2 quick questions, if I may. The first one, you already gave us the brand specifics, right, Alberto, what you are doing in Starbucks and Burger King and so forth. But I guess I wanted to ask you more from an organizational standpoint, right? Same-store sales, when you look across brands, there was a very nice acceleration both in Mexico and in Spain, taking out South America given the macro situation in Argentina. But in any case, it seems like there is sort of an acceleration across-the-board, right?

And this is happening at the same time when you -- you made reference in your prepared remarks to some tech-oriented ventures, right, which make a lot of sense for the future and so forth. So I wanted to ask you, have you made any significant changes more from an organizational point of view so that you can continue to make sure that these commercial initiatives, brand by brand, continue to take place while you also take care of the more strategic initiatives? So that's question number one.

And then question number two, very quickly, if I may. The margin in Mexico specifically was flattish basically year-on-year. You're coming from a period of margin compression. Can you update us on when do you expect the COA to be net positive for the margin in Mexico? And perhaps can it offset all of the pressure that we're seeing from wages and so forth? Is it reasonable to assume that margins can actually go up in Mexico in the next, I don't know, semester or perhaps 12 months?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [15]

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Let me get one by one, and I probably will need more clarification in the last one. But the first one -- and I'm glad you mentioned technology. What I found out -- well, not found out -- what I've seen now is that I have to tell you that the strategy that Alsea has today -- and we will give you guys, in a couple of week or so, information about our new technology strategy, but let me tell you what's happening. First, we had in Alsea 3 basic technologies in front of the consumer: the Wow, which is our loyalty program; the OLO, which is our online for Domino's; and My Starbucks Rewards, which is a program of loyalty for Starbucks.

The reality is, believe it or not, all this technology were not really talking to each other, and it was not hand managed by the experts in technology in the company. It was a little confusing who was the leader in the project then it was confusing what was the responsibility of the marketing brand manager in all these. So what I'm doing, we're going to create kind of a hub in Alsea, but out of Alsea, with a new leader that will be focused on putting all this technology together, learning from the best Starbucks, learning from the best Domino's Pizza and now with the opportunity to be in San Francisco with our friends from eatsa and Valor. So we will put all this technology together because we have it and start using it the right way. In the next 2 to 3 weeks, we are going to give you guys more information about this.

So yes, there's going to be a big change in how we approach technology, in the investment we do in technology, and how we're going to restructure technology across the different geographies and the different brands that we have. That will require some investment but not in the -- we cannot put in our -- the normal business plan of CapEx that we have in the year because rather than investment, it needs people. I don't think that we are using technology to the consumer at its full potential. And I think this is a competitive advantage that Alsea has because of our size and our synergies and the access to technologies through our franchisors.

Also, if you talk about OLO, which is the delivery program, as you know we have 3 different ones today. We use one is Spain, one in Mexico and the Domino's Pizza International in Colombia. We cannot do that. So we have been talking with Domino's Pizza International to join forces and have the best technology to compete to aggregators. And as I speak -- as I'm telling you, we are in the process of doing that. So that's what it's about, technology.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [16]

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No, no, no. Yes, yes, yes. Margins in Mexico, I think that there's been a sequential improvement. You were declining in margins in Mexico, specifically in the last couple of quarters, if I'm not mistaken. This quarter, you're basically flattish. With the new distribution center, can we expect margins to structurally go up in the next, I don't know, semester or next year?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [17]

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I'll take that issue with (inaudible) center out. Now the brands had a very tough first quarter and are getting better in the second quarter. And as I told you, a lot of that was because of the marketing strategies that we were doing particularly in Domino's were not -- how would I say it, were not effective, and we were not able to cost right, and we made a mistake. That's the reality. And that's why you saw a better food cost in the second quarter. All the brands, and this is important, we are being very conservative on promotions because I personally believe that we have to be very cautious on our dependence of the exchange rate because, as you know, some of our products come from [this] and also because a lot of pressure was done because of the tariffs that we have in the first semester of the year. That affected a lot -- most of our products like cheese, pepperoni, fries and some products from Starbucks.

So as you know, the tariffs are not there anymore, but we still have some products in inventory that were imported with those tariffs. So you will see our costs are going to go down. We are taking this provision for that problem of increasing price for the pork and the things that we're having in China, and we have enough products today and that protein to close the year. So you will see the brands getting better margins than the average of the first semester for sure in the second semester. The COA is operating full. The effects of the COA, you will see better margins in the last quarter for sure, and we still have a lot of efficiencies to catch or to make them happen in our COA operations. But it's not affecting at all our brands today, it's just opportunities that we see in our new facility.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [18]

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Is it helping or not yet?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [19]

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It is helping, of course. But I think there are still things to do. And I'll give you an example, for example, if I may. For example, I'm importing right now the croissant for the [bake-in-store] in -- from Europe. We are already testing croissants frozen made by us in some of the stores in the markets where we can store it. My expectation is that we are able to achieve that quality, which we have, and that's why we are doing tests. And now we are working in the performance on the product. And if that happens, we will stop bringing croissants from Europe. And that will give you obviously a benefit in profits and also a less cost in the stores.

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Operator [20]

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Our next question is from Mr. Ravi Jain from HSBC.

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Ravi Jain, HSBC, Research Division - Analyst [21]

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So on the Mexican consumer, I just wanted to get your sense of how you are seeing maybe July and your expectations for the second half. A couple of your peers have been talking of a material softness to the consumer getting into the third quarter. And my second question on Europe is you have a good idea of what your plans for synergy on Grupo Vips is. Could you give us some color on the profitability of the Starbucks Benelux operation or your plan of what exactly needs to improve to get the profitability of Starbucks Benelux up?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [22]

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First of all, I mean you guys have seen the reports of different expectations of economy growth, which recently, as of yesterday, was Citi saying that we will grow 0.2%, which is not good news. But I personally -- and I've been working with my team to make sure that we're doing everything right at the restaurant level because the consumer is there. I don't think -- and that's my opinion, I think we have a very resonant business model in Mexico because of the kind of brands that we do and the price points that we do. And I do believe that even with an environment like the one that especially is there for forecasting for our country, we can keep growing. And we have done that in the last quarter, and we are doing that in most of the brands in July. And as I mentioned in the promotions and the strategies that we are taking, that's our expectation for the third quarter.

Saying that -- after saying that, I do believe that the economy in Mexico is going to be very slow, and therefore we are taking some provisions to have always value propositions to the consumer in most of the brands or in all the brands for -- if the consumer is only looking for value. On the other hand, we are also making sure that we have other promotions that we increase our ticket, so we don't lose marginality. So we are trying to work on those sites to make sure that we achieve the EBITDA margins that we want to do. We have already blocked all -- most of our purchases for the end of the year, so we don't expect any pressure in the raw materials. And that's basically what we are doing in Mexico. I'm more positive than most of the people, because our consumers are there and the numbers you've seen them, and July is going in line with our expectations.

The second one about Europe, we have mentioned that we expect synergies of about [EUR 13.7 million] in the next 2 years. I've said that we already have achieved about 1.2 million this quarter, and we do believe that by the end of the year, we will achieve at least half of those synergies. So what I tell you is by the December of 2020, we should have achieved the 13.7 million. I am not bullish of -- on this number because I think it's going to be -- it can be bigger. But I feel comfortable the 13 -- between 13.5 and 14 will be exactly the number. So that's around that.

And in terms of profitability of the business in France, well, we have a very good business in -- business model in terms of unit economics in the Netherlands. And in France, most of the problems that we have, have to do with rent and labor. And that's where we are working. The number -- the sales in terms of orders, the food cost we've been able to control, but definitely we need to make sure that we clean our portfolio of stores that are losing money because of the cost of rent, and we have to be better on how we schedule our corporate stores.

And the last part, of course, is through franchising. As you know, we have, for the first time, with Starbucks the opportunity of franchising. More than 60% of the stores, almost 70% of the stores in France are through franchise, and we are getting very good revenue streams from them. And we are generating with them some synergies to have better supply chain and better cost in other products that we buy from the stores.

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Ravi Jain, HSBC, Research Division - Analyst [23]

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That's very helpful. One small follow-up for Rafael, if I can. In your 3-year guidance that you gave, should we expect the number of store openings to accelerate and consequently the CapEx also to go up from the MXN 4 billion that we have for this year?

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Rafael Contreras Grosskelwing, Alsea, S.A.B. de C.V. - CFO and Director of Administration & Finance [24]

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For this year, it's going to be, in terms of CapEx, the same, MXN 4 billion. And for the next year, it's going to be around almost the same, no, of MXN 4.5 billion. But it's a -- the other year, that we are going to improve more CapEx. But the amount of stores is going to be around 220 stores per year. And that give us that 6% inorganic growth in terms of number of restaurants.

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Ravi Jain, HSBC, Research Division - Analyst [25]

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220 is for the total, right, not corporate store?

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Rafael Contreras Grosskelwing, Alsea, S.A.B. de C.V. - CFO and Director of Administration & Finance [26]

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220 for corporate stores. And then for franchise, that can be around 100 between Mexico and Europe.

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Operator [27]

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Our next question is from Mr. [Emilio Boutin] from [Grupo Bursátil Mexicano].

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Unidentified Analyst, [28]

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My question is, how is growth in same-store sales for your casual dining units? And if that's okay, I'll have a follow-up question after.

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Rafael Contreras Grosskelwing, Alsea, S.A.B. de C.V. - CFO and Director of Administration & Finance [29]

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For the quarter, for the second quarter, same-store sales in casual dining were 6.3%. Mainly driving that, P.F. Chang's was -- has a pretty good quarter, and the other one was we're in -- almost mid-single-digit or close to mid-single-digits, all the other products.

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Unidentified Analyst, [30]

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My second question is, due to your success in same-store sales for Burger King units, I was wondering, are you planning on opening more Burger King units in the next few quarters?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [31]

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No, not in Mexico. As you know, and as I mentioned, Burger King Corporation is going to get back the stores that were owned by them. So we're going to focus on operating our stores, and we don't have any plans right now that -- even though Burger King has been doing very well in the last 2 years in Mexico, it still has not reached the level of profitability of other brands. So we have good news, but not enough.

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Operator [32]

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(Operator Instructions) Our next question is from Mr. Rodrigo Alcantara from UBS.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [33]

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Just a follow-up on the COA and integration of Grupo Vips. So my first question is you're currently working on reducing G&A and this is what generating at this point synergies, but can you comment on how do you integrate in the supply chain and the logistic network in Spain mainly? And my second question would be regarding the COA benefit. So at some point, should we continue to expect that these distribution centers generate a 20 or 30 bps savings that were initially guided? Or should we expect a different number? That would be my 2 questions.

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [34]

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Well, I'll answer you the model in Spain. I have to tell you that we are -- and I'm glad you asked us that question. We are analyzing what is the right strategy for Alsea's supply chain. As you may know, we have different supply chain models in the different geographies based upon the acquisitions we have made or the availability of suppliers in terms of production or in terms of the distribution capabilities. In Mexico, as you know, we are fully integrated. But in Spain, which I think is our most efficient model, we do everything through third parties, but the dough production. So dough production for Domino's is very profitable, so we do that. And the third parties do [cross-docking], and they do all the distribution. We don't own the inventory, and they are responsible of everything else.

That's a very efficient business model. And when we bought Grupo Vips, they have a different model, and we are moving towards the original Zena and our Alsea business model in Europe. So you will see some part of the synergies that we have talked about in Europe are coming obviously not only because of the volume in purchasing, but also because the strategy that we are going to do in terms of how we do the supply chain in Europe, and obviously also with expect to get a lot of benefits from the volume that we have in Starbucks in Spain and the volume that we have in Starbucks in France.

When we bought Vips, also there was a good manufacturer of sandwiches, that has -- so the business was a business with third parties. We are evaluating what we're going to do with that factory. But so far, that factory is supplying us with the sandwiches for the Starbucks business only in Spain and some products in France already. So we are working on that. Now in Mexico, we are fully integrated. The COA has been very complicated, as I have mentioned to you guys since last year. This year, I will say that we are running probably 90% of the efficiencies in terms of service to the stores. At the COA center, I think we are running about 80% or 75% efficiencies. So I think there's still a lot of things to fix. And we are working on that. So I do believe that we will be able to get to those 20 basis points benefits before the end of the year.

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Rafael Contreras Grosskelwing, Alsea, S.A.B. de C.V. - CFO and Director of Administration & Finance [35]

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And tell them (inaudible) Tell them a figure because we're going to start to have benefits of the COA in December -- or not December, in the fourth quarter. And then at 12-month period, we're going to achieve those, say, 15 to 20 basis benefit from the COA.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [36]

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It change 20 in 2020 and [fourth] part of that in -- for this year, right?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [37]

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Exactly.

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Operator [38]

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Our next question is from Mr. Luis Willard from GBM.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [39]

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I hope I don't get very repetitive with this question, Alberto, but -- I mean now that you talked about commercial strategies over the different businesses. But I want to ask you, now that you're back at the helm, could you talk a little bit about what your priorities have been to this time? How have you divided your day-to-day activities? And maybe share with us some new efficiencies or areas of opportunity that you have discovered over these months?

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [40]

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I'm here all day, if that's what you're asking, if you have any doubts. I tell you -- I'm joking, I'm joking. Yes, I have put some priorities. And the priorities are very clear. The ones I mentioned in my statement about what the Board asked me to do and the clear mandate that they gave me. But if I want to be more specific, I will tell you, I think that the most important thing that we are doing today is focusing on the big brands. I mean we have a lot of brands. We have a lot of geographies. Not all the brands, not all geographies move the needle. And we need to be devote, me and most of the team, a lot more time in the big brands and understand that those are the brands that are the future of the company and the brands that move the needle. We have to understand also that the company today is different. We have a huge business in Europe. So half of the business is almost in Europe, therefore we have to give to our country managers and we have to give to our brand managers all the freedom of decision and support for them to achieve their goals. We cannot take decisions centralized in Mexico for Holland, for Belgium, for France, for Spain, it's crazy. So those are probably giving ownership to our team and focusing on what's important in what we're doing.

And the other one is heading a company this size, we have to be smart, creating synergies around the company and best practices without having bureaucracy. We had a lot of bureaucracy in the company. We need to turn it down and make sure that every decision is taken closer to the restaurant or closer to the consumer. Those are my areas where I'm spending more time. And obviously, with Rafael, we're spending a lot of time in how we are going to use the resources that we have. And you guys have not mentioned this, but I will, I said in my statement that one of the goals that we have is we want to deleverage our balance sheet. And we have done, as you saw this quarter, I mentioned that we are selling some real estate and some other assets that we have. We evaluate that we have like MXN 1,000 million -- MXN 1 billion of that. And I believe that we would be able to achieve at least MXN 400 million this year and hopefully more.

But we are focused on making sure because it is something that has the market a little concerned, we will lower our level of debt, only spending where we should spend it. And also, we are focusing a lot on G&A. We want to spend the G&A closer to the operations, and you will see some changes also in the amount of people that we are -- we have in the corporate office.

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Operator [41]

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That was the final question. I will now hand over to Mr. Torrado and Mr. Contreras for final comments.

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Alberto Torrado Martínez, Alsea, S.A.B. de C.V. - Executive Chairman, Executive President & CEO [42]

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Well, I just want to finalize saying, as always, thank you very much for trusting in us. We are happy with our results of the second quarter. Rafael just gave you our guidance for the next 4 years. And please, if you have any comments on the guidance or any concerns, just -- as always, you can call Rafael or me. And hopefully, we keep in contact and talk to you guys in the next quarter.

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Operator [43]

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All conference hosts have hung up. This conference is over. Thank you.