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. [Operator Instructions] Also, 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, this 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, this is 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. And 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. And we keep on saying that there's plenty of runway in Mexico for Tiendas 3B. We remain very optimistic on store growth opportunities for the future. Revenue growth. 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. This despite a slowdown in same-store sales growth compared to the second quarter of last year. The main reasons being 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 and this is due to scaling. 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 43.2% increase versus last year. This improvement is a reflection of our strong sales growth, gross margin expansion, and dilution of selling expenses over a higher revenue base, and more efficiencies. Our admin expenses rose by 45.8%. This increase is also 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 and it reflects the efficiency of our operations and the strength of our business model. I will now turn it back the call 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 and that's evidenced in 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 reasons due to the June elections, our same-store sales growth remained solidly above 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 gas 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.[Operator Instructions] Our first question comes from Andrew Ruben. Please state your company name and ask your question.

Hi, great. Thanks. Andrew Ruben with Morgan Stanley here. Thanks for the question and congratulations on crossing over the 2,500-store mark. I'd hope to dig in a bit more on to the dynamic for gross margin, understanding -- you said it moves quarter-to-quarter, Anthony, but it was another strong figure this quarter, stepping up year-on-year and even from 1Q. So, trying to better understand what you saw in the quarter, what you saw in the first half, is this some sort of new normal level to expect from here? Or is there a gap between when you get the benefits from suppliers and when you reflect it in prices? Just trying to better understand what's driven the strength and how we should think about, what it means for the trajectory going forward? Thanks again.

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 we 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 everybody 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? And 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 and not necessarily optimizing a percentage gross margin. And our continuous elasticity testing of what prices should be is determining that and that's very dynamic and that 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 that is going to continue to happen the way we're doing it, then we continue to increase value in our proposition. If we do see a decrease in gross margins, then 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 on a constant basis and something that's very dynamic. Bottom-line, it's a little bit volatile and bottom-line, 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 in the gross margin, which has been obviously 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. And 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 that 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 on 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, see 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 details about the dilution in selling expenses and also this increase in talent and IT that you made in G&A? And I would also 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 the three parts. So, the first part is investment in people and in 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 with regards to IT and people expenses. The second part of your question had to do with dilution of expansions on the base. I think the timing sometimes makes the numbers seem a little bit variable. But there's no doubt that as you're growing the number of stores and your sales at the pace we're growing that you're going to see continued dilution of expenses across the base because there is -- if you look at the trend, our expenses are not even close to growing at the pace at which we're seeing growth in revenues and growth in store numbers. So, that is going to 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 with a straight line every quarter, everything is nice and smooth. It's a little bit of a lumpy process. So, 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 to you 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 [indiscernible]. Please state your company name and ask your question.

Hi, this is [indiscernible] Management. Thanks for taking my question. Just following on the gross profit margin, you mentioned that the improvement was due to effective pricing decisions. Can you give us some color if the improvement was also impacted by the product sales mix between private and branded products? Or are you seeing the same levels in product sales mix and improvements in margins 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 by better working with our suppliers. In terms of then 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. But this is not going to be 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, I would say that at the core, you're going to always see improvements on the purchasing side and the costs. But then 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. But in terms of dollar margin, possibly an improvement, this remains to be seen. Net-net, it's an improvement, whether it appears in one line or the other, 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. And every time we open a new distribution center, it starts off with a number of stores already, so it doesn't start from zero. So, 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? And the second question is regarding the peso depreciation. Should we expect any impact on the -- 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 hi, Eduardo here. We do have stores in the State of Jalisco, not in Guadalajara, but in the State of Jalisco. You can probably also Google them and I encourage you to visit them. The second -- your second question on the peso -- on the cost of goods sold, are you talking about if the depreciation of the peso affected our cost of goods sold? Is that what you asked?

Yes.

Okay. Not immediately. This is something that we lived before. Typically, what happens Sergio is that when we get a peso depreciation, what happens is that this is mostly a pass-through, 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 like 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 on when these stores were actually open. So, if you could tell us how many of the 121 were like backloaded to the last part of the quarter?

Hi Froylan. It would be 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, so 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 do you -- how should we think about the changes in the cost of goods that you might be buying using USD and 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. And 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. And 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 percentage 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 -- the non-dollarized 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.

Sure. We really appreciate that. Thank you. I have one follow-up question on the pace of number of stores and forecast and the operating metrics around your investment -- return on investment, rather, what you have outlined in your filings, I believe, was it's quite attractive in terms of, if I remember right, it's roughly PS. 2 million or so per location and your cash on return -- cash return on investment is probably somewhere around 12 months or so. That's an excellent return, obviously. I was wondering, is that something you think you can achieve over the next two to three years or is it -- I'm sure it is dependent on markets and where you are heading in terms of the growth areas and how good they are and so on? And of course, the competition if there is any regional competition in that area, just wondering what can you give us in terms of a directional view if you can maintain that return on cash and 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 brand Tiendas 3B is better known. So, you have stores that basically start much stronger because people know who you are and what you are. And 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 the customer. And this improvement, and it's continuous, is what's driving continued improvements in same-store sales and faster ramp-ups of new vintages. And 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? And 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 -- sorry, 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. 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 in 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 that? You already do a phenomenal job.

This is -- I mean, yes, that's a great question. Thank you. This is something that -- well, first of all, I would encourage to look this and that's why we did it on half year versus half year because looking at quarter-by-quarter, it could be misleading and it's lumpy. Now, in terms of your question about improvements, for the time being, of course, we can improve. However, for the time being, we're not assuming any improvements for the balance of the year. However, we know that the greater rotation of inventories we have, the lesser than the days of inventory would be. But for now, we're not assuming any improvement. So, you can -- if you want to model that for the balance of the year, that's how we are thinking about it.

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 want 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. And 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.