Good morning, everyone. My name is Leonor, and I will be your conference operator. Welcome to Tiendas 3B's 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. Any forward-looking statements made during this conference call are based on information that is currently available. Today, we're joined by Tiendas 3B's Chief Executive Officer, Anthony Hatoum; and Chief Financial Officer, Eduardo Pizzuto. I will now turn the call over to Anthony. Please go ahead.

Good morning, everybody. Welcome to our first quarter 2024 earnings call. We will review our key results for the quarter. A 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 net cash of Ps. 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 maintain the brisk pace 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 over 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 Tiendas 3B stores. The strong performance of our stores opened in the last two years supports that view. If you look at revenues and gross margins, we see that in our first quarter of 2024, revenues reached Ps. 12.7 billion, which is a 30.9% growth over the first quarter of last year. Our gross margins increased by 80 basis points compared to 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 the mic to Eduardo now.

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, our EBITDA and EBITDA margin grew. Our EBITDA grew 57.9% from Ps. 396 million to Ps. 626 million and our EBITDA margin from 4.1% to 4.9%. If we exclude expenses from the IPO of Ps. 70 million incurred in Q1, our adjusted EBITDA would have been Ps. 695 million with a margin of 5.5%. Our discount model is unique and 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 the promissory and convertible notes, our negative working capital stands at Ps. 4.8 billion versus Ps. 4.6 billion at the end of last year. That is an increase of Ps. 287 million in Q1. As explained before, this trend will continue as long as we continue to increase our sales. At our last call, we set guidance for the year to open between 380 and 420 stores and to increase sales in the range of 28% to 32%. We maintained 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 quarters. Our operating costs as a percentage of sales continue their downward trend. As we grow, the opportunities for efficiency improvements increase, allowing us to pass more value onto our customers while generating cash. Thank you for your support, and now we can start our Q&A session.

Thank you. We will now conduct the Q&A session with Anthony Hatoum and Eduardo Pizzuto. Our first question comes from the line of Bob Ford. Please state your name and ask your question.

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 labor operators maybe that are knocking on your door or 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, given your ability to self-fund growth, how are you thinking about the use of that Ps. 4.3 billion?

There's definitely a positive halo effect, as you say, Bob, in the sense that the level of motivation and enthusiasm on the part of all our suppliers has gone up significantly. What I see is people who are more eager to do more and to do things faster. In terms of what we do with our cash, as we have mentioned to some of you previously, there are a number of initiatives with high returns on invested capital that we have started undertaking, namely in terms of human resources and IT efficiency projects. Everything is evaluated through the lens of return on invested capital and return on time invested. Our solid balance sheet today and the elimination of debt provide us with comfort to weather any turbulence down the road.

Very helpful. Just one follow-up, and that is, 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?

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

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

Hi. Thanks for taking my questions. Congrats on the execution, Anthony, Eduardo. My question would be a simple one, regarding gross margins. If I recall on the investor rep process, the base case was to have, to some extent, flat or even slight contraction on the gross margin as you're investing in prices. But you have surprised to the upside in the sales mix effect and the efficiency that you can generate on the gross margin. I mean, just curious here, if your outlook or your view on how to handle the gross margin has changed, Anthony. Perhaps instead of a flat scenario for gross margin, we may see gross margins structurally trending up? That would be my question. Thank you. Congratulations on the quarter.

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 scale up, we are getting better terms from suppliers, and our suppliers are getting more volume from us. In general, we aim to pass these savings to our customers, which then will generate more traffic, more sales, and ultimately more cash flows. But it's highly dynamic and it’s normal for it to go up a little bit and 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.

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

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. Looking on a unit economic basis, same-store sales have been in the mid-teens range for quite a while. But I think this hides an even stronger metric, which would be for mature locations, those stores with over five years. This is probably very powerful for the EBITDA margin levels that we have been seeing. My question is to explore this network effect that you're seeing on consumption based on those stores and try to quantify how you are seeing checkout growth or average basket size and ticket in those mature locations. How are those trending? That’s my question. Thank you.

Let me break down your question into various parts. If I heard you correctly, you're asking about the performance of older vintages as we move forward. If I go back to fundamentals, we haven't seen a slowdown in growth for 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 the attractiveness to customers. That is basically the fuel that keeps generating increased same-store sales across the board. As long as we maintain that, I don't see a slowdown. Eventually, theoretically, yes, you will reach a point where you've touched every customer and penetrated as much as you can, and then you may see a slowdown. But I think we're far away from that point yet. Yes, the network effect is present, with increasing recognition of the 3B brand as a value-driven brand. One of our objectives is to build trust with our customers.

Just to try to quantify this effect in terms of basket size and number of checkouts for mature clients, could you provide more details on how the volumes are evolving?

What we can say with confidence is that the number of tickets driven by customer visits and attracting new customers has been a solid upward trend. In terms of basket size, there's a counterintuitive effect: as more people buy private labels, which are priced 20% to 30% lower, the peso basket size is pulled down. What we need to focus on is increasing the number of items in their baskets, which is happening, although at a slower pace over time. What we’re seeing today is more frequency and more tickets as opposed to a rapid increase in the peso average ticket size.

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

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

Hi, Gulrez. At least this quarter, we haven't seen anything notable in the market in terms of pricing or strategy changes from any of our direct competitors. It wouldn't surprise me if something happens down the road, but remember, we're a hard discounter. We're sticking to our core strategy. We have a significant lead; it's hard to catch up to someone who's already scaled up. Competition is healthy for all, and I think we're a strong competitor in the market.

Are you committed to continued organic growth for the company, or might M&A activity be in the future, especially in more remote parts of Mexico?

If you ask me right now, I would say it's organic growth. We never discard M&A, but the challenge with M&A is exactly what you're buying. Over time, I've found the scarce element is talent. Unless you're acquiring talent in your M&A, it's a low-probability event.

Our next question comes from Alvaro Garcia. Please state your company name and ask your question.

Hi. It's Alvaro Garcia from BTG. Hi, Anthony, Eduardo. Congrats on the quarter, and thanks for the call. I have a specific question about the Easter calendar shift in the first quarter. Would it be fair to assume that, relative to hypermarkets, which obviously saw a nice bump from the Easter calendar shift into Q1, you maybe saw less of a boost due to this impact?

I think you're absolutely right, Alvaro. These shifts do impact sales, but in terms of a full quarter, it won't be significant.

And about gross margin, you mentioned better sales mix. Can you provide a bit more color on what specifically is driving the higher profitability?

Again, it's highly dynamic. On one side, you're buying from suppliers which impacts pricing and costing. Our scale drives better terms and conditions. On the market side, we dynamically price and continuously test elasticity to optimize volume and margin. At the end of the quarter, we review the gross margin, which this time was higher than the previous one. We don't actively drive for gross margin; it results from this dynamic purchasing and pricing process. If there is a trend, it would be to pass on value to our customers.

One last question on new categories and fresh specifically; can you provide some insights on the pilots you're implementing and what results you're seeing?

We won’t comment on pilots and tests, but generally, we will not introduce anything that hasn’t been successfully tested. It's fair to note that at any point in time, there are about 50 to 60 SKUs being tested. Successful tests lead to new products being introduced, while unsuccessful ones are removed. We maintain a disciplined inventory approach.

Our next question comes from Aleksandar Nikolic. Please state your company name and ask your question.

This is Alex with Morgan Stanley. Thanks for taking the question, and congrats as well on this great execution. Most of my questions have been answered, but I wanted clarification on efficiency improvements. Are there any new projects you are undertaking to offset the higher labor cost or is this just the regular operating leverage you are seeing in the stores? Secondly, regarding the share-based compensation, I recall you mentioned expecting around 1% of sales; does this remain the case or should we expect higher volatility in the next quarters?

On share-based payments, you are correct; what you're seeing are the expenses tied to our legacy plan. You can expect that these will trail off while our new option plan kicks in later this year. Regarding efficiencies, it's business as usual. We have never halted any projects and continuously prioritize initiatives to improve efficiencies. At any point, there are two to three initiatives ongoing focused on enhancing efficiencies, whether it's in logistics or technology. We've previously shared examples of operational efficiencies leading to considerable savings.

Our next question comes from Hector Maya. Please state your company name and ask your question.

Thank you very much. Hector Maya from Scotiabank. Hi, Anthony, Eduardo. Congrats on the very positive results. I know this may be too soon since you just completed your IPO, but what would be the next milestone you envision for Tiendas 3B? Is there a project that excites you to deploy as more customers become familiar with your brand?

Hector, it might sound boring, but for us, it's straightforward. We're just going to keep doing what we've been doing, just better and faster. That's my key takeaway for the near future. Nothing changes in our business model or operation. We just aim to execute more efficiently and swiftly.

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

Congratulations on the great first quarter. Can you provide more detail on the product sales mix? Last year, it was around 45% for private label product and branded product was at 50%. What trends are you seeing in Q1 2024 and going forward regarding the common size of private label in the product sales mix?

Hi, Santiago. That's a very good question. You can expect the trend of private label penetration to continue increasing. For reference, their private label penetration is about 90% plus. This trend is common among hard discounters globally, and we are no exception. We have not reported this number yet and don’t expect to on a quarterly basis as it’s dynamic. However, overall the trend is upwards in favor of private label.

Our next question comes from Ignacio Arnaldo. Please state your company name and ask your question.

Hi, this is Ignacio from Western Europe. Thank you for the call, and congrats on the execution. I wanted to ask about the 50 to 60 potential SKUs in pilot mode. Is there a chance that this number increases as the model evolves?

The current model is designed to handle more SKUs, but we are disciplined in what we consider as 'more'. If a new category meets our criteria of high rotation and value for money, we can incorporate it. We're strict in evaluating performance based on value-for-money criteria and maintaining efficiency in our inventory management.

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

The peso is at a historic high against the dollar. Is there any susceptibility in your business concerning a depreciating peso in the next few quarters? Thank you, and congratulations.

Hi, Sebastian. The whole market is susceptible to peso fluctuations. I'm not talking just about Tiendas 3B but the broader economy. We have lived through at least two devaluations in our history. We've observed that the market readjusts after about 12 to 18 months, mainly through inflation post-devaluation. We've been through this before, and it's business as usual for us; our stores keep opening and our sales trends continue upward.

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.

Thank you, everybody, for being on this call. Thank you to our investors and analysts for your continued support and confidence in our strategy. I also want to thank our team members whose hard work and commitment continue to drive the results you are seeing. Eduardo and I, along with the rest of the team, are available for any further questions post-call. Thank you again, and have a great day.

You can now disconnect.