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. [Operator Instructions]. 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. Special welcome to those of you joining us for the first time. Eduardo Pizzuto, our CFO, will follow presenting our financial results. This will be a brief and to the point presentation, so that we can have more time for the Q&A session. Some highlights. As expected, we delivered strong results for this first quarter of 2024. We opened 94 stores this quarter to bring the total number of stores to 2,382. Compared to the same quarter of last year, same-store sales grew by 14.8% and revenues by 13.9%. Operating cash flow grew by 36.4%, supported by EBITDA growth of 57.9%. We ended the quarter with a net cash of 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 term of store expansion, we maintain the brisk grade of store openings in what is traditionally a soft quarter for new stores. We opened 94 stores, bringing the total number of stores to 2,382. This is a 27% increase in the number of stores opened this quarter compared to Q1 2023. We have been very consistent with our growth. From 2019 to 2023, we have maintained a compound annual growth rate of store openings of 15% plus. In our last earnings call, I mentioned that, we have a significant runway to sustain these growth rates, and we maintain our view that Mexico offers a potential of no less than 12,000 3B stores. I would mention, successful 3B stores. The strong performance of our stores opened in the last two years supports that view. If you look at revenues and gross margins, we see that our first quarter of 2024, revenues reached Ps. 12.7 billion, that's a 30.9% growth over the first quarter of last year. Our gross margins increased by 80 basis points over last year's quarter, largely explained by our increase in scale and negotiating better terms with our suppliers, most of which we passed on to our customers. I'll pass on the mic to Eduardo now.

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 growing EBITDA and EBITDA margin. As illustrated in the graph, 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 and a margin of 5.5%. As we've mentioned in our last call, our discount is a unique business model. It generates a significant amount of cash through changes in negative working capital. In Q1, this trend continued. If we adjust our working capital by excluding IPO proceeds, net of cash used to pay down the promissory and convertible notes, then 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 the sales in the range of 28% to 32%. We maintained this guidance. Consumptions remain solid in the segments we target. The minimum wage increases have benefited our targets at customers, in particular. Our decentralized approach to store opening is working well and we opened the record number of stores for our first quarters. Notwithstanding the IPO, our operating costs as a percentage of sales continue their trend downwards. As we get larger, the opportunities for efficiency improvements grow, and we continue to dilute cost with a larger revenue base. Our growth is self-funded, thanks to positive EBITDA margins and attractive negative working capital generation. Our business model is simple, yet very powerful. A virtual circle of opening new stores, continuously increasing the value for money that we offer to our customers, and as a result, attracting new customers and growing sales per store, resulting in turn in more sales and with scaling becoming even more efficient and then allowing us to offer increasing value for money to our customers, while all this time continuing to generate cash. Thank you for your support and for being on this call with us. And now, we can start our Q&A session.

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

Bob, you're on mute.

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 that Ps. 4.3 billion?

There's definitely a positive halo effect as you say Bob in a sense that, the level of motivation and enthusiasm on the part of all our suppliers has gone up significantly. What I see is people that are more fired to do more and to do things faster. In terms of what do we do with, our cash, as we have mentioned to some of you previously, there's a number of initiatives with high returns on invested capital that we have started undertaking, namely in terms of human resources and some others in IT, efficiency projects that we have started putting to work. But anything that we look at is always looked at through the lens of what's the return on invested capital? What's the return on time invested? The rest basically gives us more strength in a sense that, we have a very solid balance sheet today and we've cleaned it up. There is no debt on it. That is comfortable in terms of weathering any turbulence down the road that might happen

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've seen that every vintage seems to be doing better than previous vintages. As we have maintained our discipline in store openings and our methodology and our approach and our models have not changed. There is no reason to believe that going forward, we don'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. Rodrigo Alcántara: Hi. Thanks for taking my questions. Congrats on the execution, Anthony, Eduardo. My question would be a simple one, regarding on gross margins. If I recall on the investor rep process, the base case was here, to some respect flattish 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 the outlook or if your view regarding how to handle the gross margin has changed, Anthony. Perhaps instead of a flattish scenario for gross margin, we may see 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 are scaling up, we are getting better terms from suppliers and our suppliers are getting more volumes 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, 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 is in the mid-teens range for quite a while. But I think, this hides an even stronger metric, which would be real mature locations for those stores with over of five years. This is probably very, very powerful for the EBITDA margin levels that we have been seeing. My question to you here is, to explore a little bit of, this network effect that you're seeing on the consumption based on those stores and try to quantify a little bit, how are you seeing checkout growth or average basket size and ticket in those mature locations. How those are trending? That's my question. Thank you.

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

Exactly.

Again, 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 what would be attractive to customers, and that is basically the fuel that keeps on generating increased same-store sales across the board, across vintages. As long as we do that, I don't see a slowdown. Now eventually, theoretically, yes, you will reach a point, where you've touched every customer and penetrated as much as you can every wallet, and then you'll see a slowdown. I think we're a far away from that point yet. In terms of network effect, yes, it is definitely present in a sense that we benefit from an increased recognition of the 3B brand as a value driven brand. One of our objectives is to build trust with our customers. I mean, in an ideal world, you walk into our store and you trust that you are going to get the best value for money. You don't even have to compare with other chains that anything you buy in 3B is going to be giving you high value for money. As long as we don't violate this trust, I think we can continue to see an improvement in this halo effect, as you call it. We can end up selling, anything in the Tiendas 3B store, as you know, in and out basket, our irrepetibles where the prices are so low that they don't get repeated. We've sold a wide variety of goods, including bicycles and televisions and clothes and shoes. We are not limited, at least in that section of our store to selling groceries. That's very powerful. You had one more question, Joe, but it escaped me. Please go ahead.

Just to try to quantify this effect in terms of basket size and number of checkouts for mature client? Just to try to see how the volumes are evolving here and just try to extrapolate that a little bit further.

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

Our next question 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 outstanding quarter. I have one question, which is on the competitive landscape and whether any of your competitors are adopting your hardwood's discount model.

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

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

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

Our next question comes from the line of 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. One specific question on the Easter calendar shift in the first quarter. Would it be fair to assume that, relative to hypermarkets, which obviously saw a nice bump, given the Easter calendar shift into 1Q, you maybe saw less of a boost given the Easter impact?

I think you're absolutely right, Alvaro. I mean, these shifts do see an impact. But, in terms of a full quarter, it's not going to be significant.

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

Again, highly dynamic. Let's break it down in its pieces. On one side, you're buying from suppliers and on that pricing and costing side of the equation, your scale naturally drives a better terms and conditions. And then, on the market side, as you know, we dynamically price. We are continuously elasticity testing to optimize volumes and peso margin. We do that on a Again, highly dynamic. Let's break it down in its pieces. On one side, you're buying from suppliers and on that pricing and costing side of the equation, your scale naturally drives a better terms and conditions. And then, on the market side, as you know, we dynamically price, we are continuously elasticity testing to optimize volumes and peso margin. We do that on a SKU-by-SKU basis. And then, at the end of the quarter, we get a result, which is gross margin that we look at. In this case, it happened to be higher than the previous one. Really, we don't drive for gross margin. It's always a consequence of this very dynamic process that's going on both on the purchasing side and then on setting price aside. Again, as I mentioned earlier, I wouldn't read too much into it. It's going to be very dynamic and will continue to be dynamic. But in general, if there is a trend, it would be to pass on value to our customers.

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

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

Our next question comes from the line of 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. I mean, the majority of my questions have been answered, but just wanted to clarify on a couple of points here. First, regarding the efficiency improvements that you mentioned in the release. Just wanted to confirm if there's any new project that you are doing to offset, if you will the higher labor cost or this is just the regular operating leverage that you guys are seeing the at the stores? Second question regarding the SBC. I think, Anthony, you mentioned in previous call, around like an expectation for us to have SBC at around 1% of sales in the new term. Just wanted to confirm that remains the case or that should be higher volatility on a quarter-to-quarter basis for the next quarters? Thank you.

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

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

Let's start with the last question. But, yes, you are right. But then, this is what you're seeing here are the expenses for our legacy option plan. You can expect that, overtime, this would trail off whereas our new option plan, which in the F1 we call our 2024 option plan, will only kick in December of this year. We haven't yet decided on what the distributions are. But as you know, the strike prices on this plan are going to be set to market, and then any cost due to this plan are going to be 100% tied to the increase in value creation. Then I'll let you decide whether how much of a cost impact it is. On your first question, which was on efficiencies. For us, it's business as usual. We have never stopped any project or not started post IPO, any new project related to becoming more efficient at something ongoing. At any point in time, there's at least two to three initiatives going on, which have to do with improving efficiencies, whether it's something as simple as truck maintenance program on how to make it more efficient to better routing of such trucks to the stores, to better, more efficient ordering systems, faster response times from our systems, improving, making our reporting more user-friendly and therefore more focused on being able to pull out conclusions. We've given many times the example of operating efficiencies in the stores, where our last generation of boxes is lidless, so saving us countless seconds per box opened that sum up to 100s and 100s of hours of labor cost saved. Then, our initiatives to use tech to again drive more efficiency in our operation and reduce hours worked has never stopped and will continue going on. It's part of our DNA, and don't expect that, there's a sudden increase. Now that we're public, we do have a little bit more spending power, which is nice, which can accelerate things a little bit. But I would say, this is ongoing. And don't be surprised, if you see continuous improvements.

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

Hi. Thank you very much. Hector Maya from Scotiabank. Hi, Anthony, Eduardo. Congrats. Very positive results. I know this is maybe too soon because you just came up with the IPO. Was it such a great milestone? Very strong numbers and openings, but also wanted to know, Anthony, what would be the next milestone that you have in mind for Tiendas 3B? If there is any project that excites you to think about, to deploy on top of what you and your team have built so far, you don't have right now at your stores? This taking advantage of more and more customers getting to know your brand as you expand.

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

Perfect. Thank you very much. I mean, the results have been very, very good. Excellent. No problem there. Thank you.

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

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

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

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

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

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

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

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

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

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

You can now disconnect.