Good morning, everyone. My name is Leonor and I will be your conference operator. Welcome to Tiendas 3B Second 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 speakers' remarks, and instructions will be given at that time. Please note that this call is for investors and analysts only. Questions from the media will not be taken. The call will be recorded. Any forward-looking statements made during this conference call are based on information that is currently available to us. Today, we are 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. Thank you for joining us today for Tiendas 3B second quarter 2024 earnings call. I will review our operating results for the quarter, and Eduardo Pizzuto, our CFO, will provide an overview of our financial performance, and then we will open up for Q&A. I'm pleased to report that Tiendas 3B has delivered another strong quarter. We opened 121 net new stores and one new distribution center, bringing our total store count to 2,503 as of June 30th, compared to 2,288 stores at the end of 2023. Our same-store sales grew by 10.7%, and our total revenues increased by 27.5% year-on-year for the quarter to reach PS. 13.6 billion. EBITDA reached PS. 689 million, a growth of 43.2% year-on-year. Given quarterly volatility in working capital due to the timing of inventory purchases, we prefer to look at cash flows on a cumulative basis year-to-date. The quarterly numbers are available in our earnings report. Over the first half of the year, net cash flows provided by operating activities rose to PS. 1.256 billion, an increase of 25% year-on-year. We ended the quarter with a net cash position of approximately PS. 1.2 billion, and there is an additional PS. 2.8 billion in short-term bank deposits. Let's turn to operational performance. We continue to see increased momentum in store openings. Our store expansion remains on track. In the second quarter, we opened 121 net new stores, that's 215 net new stores since the beginning of the year. We believe that we will meet our goal of opening between 380 and 420 new stores in 2024. Our newly opened stores are performing well. The new stores continue to perform better than stores from the past. We keep on saying that there's plenty of runway in Mexico for Tiendas 3B. We remain very optimistic about store growth opportunities for the future. When we look at revenue growth and gross margins, our total revenue grew by 27.5% year-on-year for the quarter, driven by the expansion of our store network and a 10.7% growth in same-store sales. Underlying demand remains strong despite a slowdown in same-store sales growth compared to the second quarter of last year. The main reasons are Easter falling in Q1 of 2024 and not in Q2 like last year; lower inflation; the moving of some government payments to the first quarter from the second quarter due to the June elections; restriction on alcohol sales due to the elections in June 2024 in Mexico; and the weather effects. Gross profit margins improved by 60% to reach 16.7% for the second quarter, mainly due to improved supplier terms. This number moves quarter-to-quarter, so I tend to look at it on a cumulative basis. We continue to be a price leader and plan to remain so. I'm going to pass the microphone to Eduardo now.

Thank you, Anthony. Good morning everyone. As we have mentioned in our past calls, our EBITDA is a consequence of everything we do. For the second quarter, we reported an EBITDA of PS. 689 million, representing a 43.2% increase versus last year. This improvement reflects our strong sales growth, gross margin expansion, dilution of selling expenses over a higher revenue base, and more efficiencies. Our admin expenses rose by 45.8%. This increase is mainly explained by higher personnel expenses, driven by expansion into three new regions; a significant investment in talent in the areas of IT, purchasing, HR finance; public company-related expenses; and share-based payment expense recognitions. Our EBITDA margin improved to 5.1%, up 56 basis points from the same period last year. Moving on to our next slide and talking about working capital. As you know, our business model benefits from significant negative working capital. This is a key driver of cash flows despite the significant store expansion we are experiencing. Our KPIs continue to be in line with our expectations. Our adjusted negative working capital stands at 10.2% of total revenue, reflecting the efficiency of our operations and the strength of our business model. I will now turn it back to Anthony for some closing remarks.

Thanks Eduardo. Looking ahead, we're maintaining our guidance to open between 380 and 420 stores and to grow our sales by 28% to 32%. Our decentralized approach to store openings continues to be effective, evidenced by the number of stores we opened this quarter. While this quarter sales were slightly impacted by the Easter weekend occurring in Q1 2024, decreasing inflation, and other factors due to the June elections, our same-store sales growth remained solidly above the industry average. Our growth remains self-funded due to our positive EBITDA margins and efficient working capital management. The strength of our business model lies in its simplicity: open new stores, provide excellent value to our customers, continue to improve on this value offer, attract more customers, and increase sales per store. This cycle drives efficiency and cash generation, reinforcing our growth trajectory. We appreciate your support and interest. We will now begin the Q&A session. Operator, please go ahead.

Thank you. We will now conduct a Q&A session with Anthony Hatoum and Eduardo Pizzuto. Our first question comes from Andrew Ruben. Please state your company name and ask your question.

Hi, this is Andrew Ruben from Morgan Stanley. Congratulations on surpassing the 2,500-store milestone. I would like to dive deeper into the factors influencing gross margin. You mentioned that it fluctuates from quarter to quarter, but it showed strong performance this quarter, improving year-over-year and compared to Q1. I'm interested in understanding what you observed in this quarter and the first half of the year. Should we expect this level to become the new normal, or is there a delay between when you receive benefits from suppliers and when it impacts prices? I'm looking to grasp what has driven this strength and how we should view its implications for future trends. Thank you.

Hi Andrew, thank you. Fundamentally, by scaling we are reaping cost benefits on purchasing across the board and that's not going to stop. As we get bigger and work closer with our suppliers, whether they're private label suppliers or branded goods suppliers, we are getting better terms, and I think it's a win-win for everyone on this front. Then the question is, do you pass it on to your customer in the form of lower prices or do you keep it and see it reflected in a gross margin, which is your question about, is this the new normal? I don't have an answer apart from this one. We price our products on a product-by-product basis. It's optimizing margin in dollar terms and optimizing sales, not necessarily optimizing percentage gross margin. Our continuous elasticity testing of what prices should be is determining that, and that's very dynamic and changes with time because it's done on a product-by-product basis. I would say, in general, there is a tendency to pass on the benefit to the customer. So, if this continues, we will keep increasing value in our proposition. If we do see a decrease in gross margins, we're most likely going to reap the benefit in increased sales and gaining more customers. So, this is a trade-off that we're doing constantly and something very dynamic. Bottom line, it's a little bit volatile, and I wouldn't say that this is the new normal; it's likely to fluctuate over time.

Great. No, it makes sense, and helpful to hear the explanation around the continuous elasticity testing. Thank you again.

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

Hello everyone. This is Froylan Mendez from JPMorgan. Thank you for taking my question. Hi Anthony, hi Eduardo. I wanted to ask you about how has the fresh and meat been performing in the stores that you have tried these fracs, SKUs? And thinking more in the long run, how should we think about the impact of these categories on the gross margin, which has been better than expected? But considering the higher rotation that these products may need, the higher usage of logistics that they may imply. How do you think this will affect your long-term gross margins?

Hi. I'm going to answer this question in two parts. Meat and fruits and vegetables are not part of any projection that we've shared with anybody. Whether it's meat, fruits, and vegetables, or any other project, we will not launch it officially unless the return on investment is highly attractive. So, it might not even show up on our radar in the future. But let's say to date, the tests, because that's exactly what they are, are encouraging and would indicate that the numbers would be positive. Hello. Froylan, are you there?

Sorry, I was on mute. Thank you for that. If I can follow up, can you give us some sense of how the same-stores for your mature stores are trending so far in the year? I know you usually provide that spaghetti chart, but so far, do you think we're following the same trend, seeing it improving for the first half of this year, your same-store for mature stores?

Yes, I think the trend has been as expected in general, positive. With that same weakness we've seen in second quarter same-store sales, but there's no indication that it's going to do anything different than what we've seen and what we expect. So, yes, solid growth on same-store sales across the board.

Perfect. Thank you so much.

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

Hi guys. Thanks for taking my question. Gustavo Frattini here from Bank of America. I would just like to ask you about if you could give a little bit more detail about the dilution in selling expenses and the increase in talent and IT that you made in G&A? Also, I would like to ask you about the increased pace of openings; you already reiterated the guidance, but it feels like you could even be at least at the top of the guidance, but maybe even more? Just would like to hear your thoughts about it. Thank you.

Hi Gustavo, I'm going to break down your question into three parts. So, the first part is investment in people and IT. I think it's normal for a company that is growing at the pace we're growing and at our stage of life to make investments in people, which I think are very good investments with high return on investment. And in IT, especially when you have the focus we have, which is we don't make an investment unless we are convinced that it has a great return on invested capital. So, that's what you're seeing here now regarding IT and people expenses. The second part of your question had to do with the dilution of expansions on the base. The timing sometimes makes the numbers seem a little variable. But there's no doubt that as you're growing the number of stores and your sales at the pace we're growing, you're going to see continued dilution of expenses across the base because the trend is that our expenses are not even close to growing at the pace of our revenue and store growth. This will happen over time mechanically and we have no worries on that front. There was a third part to your question and I would ask you to repeat it, please.

Yes, it was about the pace of openings, right? If you think you will probably be a little bit closer to the top of the guidance or even surpassing it?

I'm not going to budge from the guidance numbers that we've given because again, I wish I could tell you that store openings would be a straight line every quarter; everything is nice and smooth. It's a lumpy process. While you might have seen the second semester outpacing, you might see a slowdown in the third semester. I'm not saying that there is one. But again, my only message here is that real estate is lumpy, and although we have a very robust pipeline, you're at the mercy of a number of variables and therefore, you have to look at it over the course of the year.

Super clear. Thank you so much.

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

Hi, this is Management. Thanks for taking my question. Regarding the gross profit margin, you noted that the improvement was driven by effective pricing decisions. Could you clarify whether this improvement was also influenced by the product sales mix between private and branded products? Or are you observing consistent levels in the product sales mix and margin improvements in both segments? Thank you.

Santiago, I'll go back to my previous response by starting and saying to you that there is continuous improvement on the purchasing side, and that is simply driven by scale and better working with our suppliers. In terms of product mix, yes, it does impact, and over time, you will see an impact due to maybe an increasing number of private label sales versus branded sales. However, this is not a quarterly-to-quarterly event that you're going to be able to notice. It's more like a multiyear kind of tendency that you should look out for. So, again, at the core, you'll always see improvements on the purchasing side and costs. Whether you retain these as a gross margin that appears in your income statement or this translates into increased sales and maybe a lower gross margin, this remains to be seen. Net-net, it's an improvement, whether it appears in one line or the other, and the tendency is positive.

Very clear. Thank you.

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

Hi, good morning. This is Jorge Izquierdo from BTG Pactual. Good morning Anthony, Eduardo, hope you're well. My question is on the two distribution centers that you opened year-to-date. I was wondering if you could share how many stores they are currently serving. Thank you, and congrats on the results.

Hi Jorge, Eduardo, do you want to take this one?

Yes, sure. Hi Jorge. Yes, we opened two distribution centers. We have about 100 stores in one of them and then about 150 in the second one. So, if you remember our presentations, the way we do this is that we go by stretching. Every time we open a new distribution center, it starts off with a number of stores already; it doesn't start from zero. That is what we have currently.

Very clear. Thank you very much.

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

Good morning. This is Sergio Guerrero from RSH Family Office. We're based in Guadalajara and we still have no stores basically in the State of Jalisco. So, I would just want to have a little bit of an idea of what's your geographical expansion plans? And if you think you could face increased competition as you grow towards the north part of the country? The second question is regarding the peso depreciation. Should we expect any impact on your cost of goods sold because of the moving in the peso that we've seen recently?

Eduardo, do you want to take this one?

Sure. Sergio, this is Eduardo. We have stores in the State of Jalisco, although not in Guadalajara. You can likely find them online, and I encourage you to visit. Regarding your second question about the peso and its effect on our cost of goods sold, were you asking if the depreciation of the peso has influenced that?

Yes.

Okay. Not immediately. This is something that we lived before. Typically, what happens, Sergio, is that when we get a peso depreciation, this is mostly a pass-through, and it takes a few months for that to happen. So, not in the immediate terms has been impacted.

Okay. Thanks.

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

Hi Anthony and Eduardo. Just a quick follow-up. From your 121 openings during the quarter, how many of them were in the last part of the quarter? Trying to understand the higher expenses that we saw diluting a little bit of the gross margin gain if it was mostly on preopening expenses, given the timing of when these stores were actually opened. So, if you could tell us how many of the 121 were backloaded to the last part of the quarter?

Hi Froylan. Roughly 40% of the openings were in the last month of the quarter.

Perfect. Thank you so much.

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

Thank you. Madhu Kodali here with Yaksha Capital. Thanks for taking my question. I want to ask a follow-up question on the cost of goods, related to the peso question earlier. I was wondering out of the merchandise you sell through the store, how many of them are as a percentage of total cost of goods in terms of imports versus made in Mexico? And, on the longer term, how should we think about the changes in the cost of goods that you might be buying using USD if this peso devaluation goes the opposite direction of the current direction it is in?

Hi Madhu, let me answer this question by looking at history. Over the course of our life, we have seen already two, if not three, devaluations of the peso. What we have observed is the following: If it's a permanent devaluation in a sense that it's a little bit longer term as opposed to volatility that we might be seeing right now. The input costs, which I would say all raw materials in Mexico are pretty much dollarized for the vast majority of the goods that are sold, you would see that fast in the form of inflation and prices over time. If I had to put a stake in the ground, I've always seen it happen in the course of 12 to 18 months. So, if it's short-term, you're not going to see much change, but if it's long-term, you're going to see an inflation in costs and therefore, back to whether it gets passed on to the customer and with what speed it gets passed on.

Right. Would you be able to share in terms of percentages of items or costs in terms of imports versus manufactured within Mexico?

I think it's fairly common sense and applicable to any country in the world, but let's say all manufactured goods in Mexico in terms of variable costs are very dollarized; the non-variable cost is labor-related. But let's say, I don't know, if you take diapers, for example, we sell diapers. The super absorbent powder is dollarized, the cellulose is dollarized, the elastic band on that diaper is dollarized. The machine was bought in hard currency at some point. The non-dollarized part is basically labor and to some degree with a delay, energy. So, if you ask me to give you an exact percentage, I'd be hard-pressed to come up with a number, but I'll leave you with this thought as to the underlying forces here are similar for every single product you look at.

Thank you for that. I have a follow-up question regarding the pace of store openings and your forecasts, as well as the operating metrics associated with your investments. From what you've indicated in your filings, it seems that the return on investment per location is approximately $2 million, and you anticipate realizing a cash return on that investment within around 12 months. That certainly represents a strong return. I'm curious if you believe this is attainable over the next two to three years, or if it depends heavily on the market dynamics and your growth areas, including the quality of those opportunities and any regional competition present. Could you provide us with some insight into whether you can sustain that cash return on investment?

Madhu, I'm going to answer this question by giving you the principles and then I'll let you come up with your own conclusion. Unless you see a significant change in CapEx costs due to whatever reason, the tendency is for an improvement on returns because what we're seeing is every new vintage of stores performing better than previous vintages. And underlying that improved performance are two things: One, the Tiendas 3B brand is better known. Therefore, you have stores that basically start much stronger because people know who you are and what you are. Even more important behind that is a continued improvement in the value proposition to our customer. So, basically, what you see and what we offer the customer today is significantly better than what you saw five years ago and what we offered to the customer. This improvement, and it's continuous, drives continuous improvements in same-store sales and faster ramp-ups of new vintages. As long as we believe that's the case, then coming back to your first question, the return on invested capital on a store should continue to improve.

That’s clear. Thank you so much.

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

Morning everyone. Congratulations on a strong quarter and thanks for taking my question. Quick question on the exchange rate variation, which resulted in a non-cash gain of PS. 304 million in Q2? You disclosed that the company holds $2.7 million denominated investments in the form of short-term bank deposits at the end of June. So, what is the strategy in terms of our forecast? Should we assume that the same amount remains for the rest of this year? So that it better helps us to forecast the non-FX non-cash gains or losses?

Eduardo, do you want to take this one?

Yes, absolutely. Hi Daniela, good to hear your voice. I think for the remainder of the year, yes, let's assume that we will continue to have this investment overseas. As we explained, we have roughly about $150 million in U.S. deposits and we also have $50 million in cash and cash equivalents overseas as well. So, at least for the remainder of the year, yes, you should assume that we will continue to keep that money overseas.

Okay. So, a total of $200 million?

Close to $170 million.

170 million, okay. Thank you Eduardo. And just in terms of your working capital, you have this favorable ratio between inventory days and payables. Any room to improve there? Or anything that you can comment on about that? You already do a phenomenal job.

Yes, that's a great question. Thank you. I would encourage you to look at this on a half-year basis rather than quarter-by-quarter, as the latter can be misleading due to fluctuations. Regarding your question about improvements, while we can certainly improve, we are not assuming any enhancements for the remainder of the year. However, we do recognize that a greater rotation of inventories would lead to fewer days of inventory. For now, though, we're not anticipating any improvements, so you can model that for the rest of the year accordingly.

That's very clear. Thank you so much and congrats again on the strong results.

Thank you, Daniela.

We have not received any further questions. I would like to hand the call back over to Anthony for his closing remarks.

Thank you very much for participating and for your questions. I want to say thank you and extend my gratitude to our investors and analysts for your continued support and your confidence in our business plan and strategy. I also would like to thank all our employees for their hard work and commitment. They have been instrumental in achieving all of the results that you're seeing. Eduardo and I remain available if you have any questions, just feel free to contact us. Thank you again and have a great day.

That concludes today's call. You may now disconnect.