Arcos Dorados Holdings Inc (ARCO) 2021 Q3 法說會逐字稿

Good morning, everyone. Thank you for joining our third quarter 2021 earnings webcast. With us today are Marcelo Rabach, our Chief Executive Officer; Luis Raganato, our Chief Operating Officer; and Mariano Tannenbaum, our Chief Financial Officer.

Today's webcast, which is being recorded, will consist of prepared remarks from our leadership team, which will be accompanied by a slide presentation, also available in the Investors section of our website, www.arcosdorados.com/ir. As a reminder, to better view the presentation on the webcast platform, we suggest you scroll over the left -- the upper left-hand part of the screen and click on the arrows to maximize the slides.

(Operator Instructions)

Before turning the call over to Marcelo, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found in the press release and unaudited financial statements filed today with the SEC on Form 6-K.

Our discussion today excludes the results of the Venezuelan operation, both at the consolidated level as well as for the Caribbean division due to the country's ongoing macroeconomic volatility. For your reference, we include a full income statement, excluding Venezuela, with our earnings release.

As part of today's presentation, Marcelo, Luis and Mariano will take you through the main highlights of our consolidated and divisional results as well as our investments and capital structure for the third quarter of 2021. They will also update you on the achievements and recent commitments we have made related to our Recipe for the Future ESG platform.

Marcelo, over to you.

Thank you, Dan, and thanks to all of you for joining us on today's webcast. The results we are reporting today are among the best ever for the third quarter and demonstrate what is possible with the full revival of Arcos Dorados. We are very pleased with the trends in the business and believe we are the best positioned restaurant company to capture the opportunity ahead of us no matter what short-term challenges we may face in the region.

But before we get into the specifics of the quarter's results, I want to talk to you about the structural competitive advantages that are now bearing fruit. This starts with the McDonald's brand. Thanks to our long-term strategic approach, brand metrics across Latin America and the Caribbean indicate we are the region's favorite restaurant.

We have worked hard to revive and reposition the brand, implementing a variety of strategies to establish this important competitive pillar. One of the most important is the operational excellence that makes Arcos Dorados the strongest restaurant operator in the region. Quality, service and cleanness are the mantra of our restaurant teams and indeed the entire organization.

This was put to the test in March of last year, and our teams stepped up to the challenge. We quickly developed and deployed the McProtegidos or McSafe hygiene and food safety protocols to all restaurants, reinforcing our industry benchmark procedures and strengthening trust with our people and guests. We also reinforced the loyalty that our teams already felt to the company by doing everything we got to protect them and their families throughout the period.

ESG is part of the DNA of Arcos Dorados, which is why we pushed ahead with the Recipe for the Future ESG platform, continuing to establish and meet tangible commitments to benefit the planet, our people and guests. I will tell you more about this later in today's presentation.

Brand, operational excellence and the Recipe for the Future platform have translated into trust. But we cannot talk about competitive advantages without mentioning Arcos Dorados' restaurant portfolio, nearly 1/2 of which are freestanding units. In fact, we have the most freestanding locations by a wide margin over the nearest competitors in most markets. This is another structural competitive advantage that cannot be easily replicated and was one of the keys to our ability to adapt to changing guest preferences over the last 6 quarters.

By leveraging these foundational aspects of the business, we have accelerated both top line performance and profitability by remaining focused on the 3 D's strategy of Drive-thru, Delivery and Digital.

We also operated our supply chain with no material interactions, keeping costs under control with highly localized sourcing and a simplified menu of guests' favorites. We are now harvesting the benefits of these competitive advantages as well as the efficiencies we built into the business over the last 18 months.

Let's turn now to the third quarter results. Total revenue surpassed $723 million, just 3.2% below the total from the third quarter of 2019, despite the significant currency depreciations of the last 2 years and a very different sales channel mix. This was backed up by a 16.5% increase in 2-year systemwide comparable sales, including positive results in all divisions and above the period blended inflation in 3 divisions. Importantly, this momentum has continued into the fourth quarter, with consolidated 2-year comparable sales growth in the high 20s in October.

Adjusted EBITDA reached almost $90 million with a margin of 12.4%. This was more than 3x the year ago EBITDA in U.S. dollars and up 17.7% versus the third quarter of 2019. The result included a tax credit of $6.5 million in Brazil. Excluding the tax credit, the consolidated margin was 11.5%, up 130 basis points versus the third quarter of 2019.

Almost 40% of the quarter's EBITDA before corporate expenses was generated in countries that operate in hard or relatively stable currencies. Another 48% came from Brazil, while less than 8% of the quarter's EBITDA was generated in Argentina.

Off-premise sales through the Drive-thru and Delivery sales segments remained sticky. Guests also loved choosing their favorite McDonald's menu items through the mobile app and are now coming back to the modernized experience of the future restaurants that will support future digital innovation.

I will now turn it over to Luis for a closer look at our divisional sales performance.

Thanks, Marcelo. All Arcos Dorados' divisions generated positive 2-year comparable sales growth in the third quarter and the 3 exceeded the blended inflation for the period. This is a testament to the structural competitive advantages that Marcelo just described.

We surpassed pre-pandemic sales levels in local currency by leveraging the flexibility of the restaurant portfolio to offset the temporary decline in mall stores and the on-premise sales channels. Importantly, we delivered another quarter of increased market share across all divisions, building on the gains from 2020.

Brazil's 2-year comparable sales growth turned positive at the end of the quarter, growing mid-single digits in September. Digital sales channels of delivery, mobile app and self-order kiosks are very strong in Brazil, where they generated 45% of systemwide sales. On-premise channels are recovering gradually as mobility improves in the country, leading both mall-based locations and restaurant front counters to see improved traffic. In fact, October 2-year comparable sales growth was already very close to double digits in Brazil.

Marketing activities in Brazil included a new line of McChicken sandwiches, take-home bottles of the popular Tasty sauce, the elimination of all artificial colors and flavors from the kids' menu and the first ever 100% plastic-free Happy Meal toy collection.

As has been the case in each of the last 5 quarters, NOLAD delivered a sequential improvement in top line growth. Total revenue in U.S. dollars grew by 3.7% versus the third quarter of 2019, backed by 5.1% growth in comparable sales on a 2-year basis and a relatively stable currency environment.

Mexico is the main story here, benefiting from the strength of the brand and the restaurant portfolio in a receding consumption environment. Panama and Costa Rica are also returning to normal after experiencing a more prolonged period of government post operating restrictions despite high vaccination rates. In Mexico, we executed a Quarter Pounder Lovers campaign, driving 70% unit growth. Drive-thru continued to perform well, while both Delivery and the family business achieved sales records in the quarter.

Top line growth has been very strong in SLAD and was higher than the division's blended inflation rate over the last 2 years. Total revenue in U.S. dollars was 3.8% higher than the third quarter of 2019 despite the 48% devaluation of the Argentine peso over the last 2 years.

In Chile, guests have adapted quickly to Digital sales channels. Delivery value per restaurant has tripled since the beginning of the pandemic. We also operate Chile's largest street-facing restaurant footprint, supporting strong drive to sales growth even as the on-premise sales segments began to recover. Argentina has also performed well this year compared with the softer results we saw in the country in recent years.

Marketing activity in SLAD included the launch of the Premium Grand Tasty sandwiches in Argentina and Chile, which already took double-digit share of total meals sold in both countries.

Dessert category sales grew double digits, boosted by a new flavor in Chile. Results in the 3 D's were also promising. The Drive-thru VIP loyalty program, which is executed exclusively through the mobile app, drove increased frequency among the 1.3 million registered users in SLAD and more than 3.2 million registered users across all markets.

As we have mentioned in the past, the Caribbean today operates at a different level of revenue and profitability. 2-year systemwide sales growth was almost 28% versus the third quarter of 2019, significantly higher than the blended inflation for the period. Colombia, Puerto Rico and the French West Indies were the standouts.

Once again, we are benefiting from structural competitive advantages in Colombia with a market-leading number of street-facing restaurants and the growing popularity of both the Drive-thru and Delivery channels. Puerto Rico maintained the momentum we have been building since the beginning of last year.

Marketing activities in the Caribbean included the launch of the Signature Chicken Sandwich Spicyracha in Colombia. 2 months after the launch, sales remain above expectations as we continue on the journey to grow the chicken category.

All divisions benefited from our exclusive access to Disney licenses for the family business, helping to drive traffic while strengthening the brand's bond with families. Finally, the Caribbean already enjoys the company's highest penetration of street restaurants, and we accelerated delivery sales with special promotions to support own delivery channel in Colombia.

The off-premise channels continued growing in the quarter despite the gradual recovery in mall stores and on-premise sales. In fact, the split between on and off-premise was still nearly 50-50 in the third quarter. Drive-thru sales rose about 12% in constant currency versus the third quarter of 2020 on top of 54% last year. Drive-thru volumes per restaurant proved to be resilient even as front counter and Dessert Center volumes continued recovering month after month during the quarter.

Delivery was up 43% on top of 180% growth last year on a constant currency basis, boosted by very strong growth in value per restaurant. This included 52% growth in Brazil in local currency on top of 147% growth in the prior year period in that market.

We believe the structural competitive advantage of our restaurant portfolio together with the 3 D strategy will continue to support total sales growth in both Drive-thru and Delivery moving forward. We also expect a contribution to total sales from these 2 channels to be diluted rather than cannibalized by growth in on-premise sales.

Digital sales have been boosted by the strength of the McDonald's mobile app, which offers the most comprehensive functionality in the QSR industry. In fact, total Digital sales grew 54% in U.S. dollars during the third quarter 2021 versus the prior year period. The Digital platform generated 36% of total sales in the quarter and the industry's highest-rated app reached cumulative downloads of 56 million, with strong customer engagement evident in the active user numbers. This momentum continued into the fourth quarter with October capturing the highest number of active users for the year, and there is still much more to come.

The evolution of the performance of the 3 D's gives us great confidence and optimism for the medium to long-term prospects of the McDonald's brand in our region.

Mariano, over to you.

Thanks, Luis. We are very pleased with adjusted EBITDA generation in the third quarter. This result was underscored by improved profitability, with all divisions generating restaurant-level EBITDA margins equal to or higher than the pre-pandemic period. Although we thought we would have a better second semester, this recovery in profitability came sooner and stronger than we expected.

Three divisions generated higher adjusted EBITDA results in U.S. dollars compared with the third quarter of 2019, boosted by the fact that almost 40% of the quarter's EBITDA came from markets that operate in hard or more stable currencies. Keep in mind that in addition to Argentina's relatively small contribution to consolidated EBITDA, having our corporate back office based in Buenos Aires provides a natural hedge against currency risk. In other words, when the Argentine peso is devalued, corporate expenses decline more or less in line with the decline in Argentina's EBITDA in U.S. dollars.

Once again, both food and paper costs and payroll expenses were lower as a percentage of revenue versus 2 years ago. Food and paper improved by 30 basis points versus the prior year and was 50 basis points better versus the third quarter of 2019. Payroll expenses were also lower versus the third quarter of 2019, improving by 180 basis points as a percentage of revenue, partly due to the higher contribution from the more efficient off-premise sales segments. These margin improvements more than offset the margin impact of higher aggregator payments associated with the growth in Delivery sales.

Brazil's adjusted EBITDA margin reached 19% in the second quarter or 16.6% excluding the tax credit, which matched its third quarter 2019 margin. Food and paper costs remain in line with 2020 levels despite commodity price and input cost increases.

NOLAD's EBITDA margin improved by 50 basis points versus 2019, with strong performances in both Mexico and Panama, where Drive-thru and Delivery sales continued to grow. Keep in mind that NOLAD's 2019 EBITDA margin included a 150 basis point boost from the refranchising of some restaurants in Mexico. Excluding refranchising from the 2019 result, the division's EBITDA margin expanded by about 200 basis points in the last 2 years.

SLAD exceeded third quarter 2019 adjusted EBITDA margin by 80 basis points. As Luis mentioned, momentum in the Chilean business remains robust and Argentina has been relatively strong after challenging results in recent years.

Finally, the Caribbean division built on the sequential improvements it has been delivering since last year. Adjusted EBITDA grew almost 38% versus the prior year and excluding one-offs, the 12.4% margin was the highest for the division since at least 2010. Puerto Rico and Colombia were the main drivers of the result.

Compared with 2 years ago, restaurant margins improved by 130 basis points. Increased occupancy and other operating expenses as a percentage of sales were more than offset by efficiencies in food and paper and payroll as well as slightly lower royalties, reflecting higher growth support this year.

Total cash G&A expenses declined by 60 basis points as a percentage of revenue, with a recovery in top line and still lower travel and other expenses. The third quarter's total G&A includes expenses related to the reorganization of Arcos Dorados into 3 divisions. This reorganization, which became effective as of October 1, will make for a more agile company, able to adapt even more quickly to local consumer trends and guest preferences. Excluding these nonrecurring expenses, total G&A declined by almost 10% in U.S. dollars versus the third quarter of 2019.

Putting it all together, consolidated adjusted EBITDA margin expanded by 220 basis points compared with the third quarter of 2019, and our bottom line also rebounded to $25.2 million or $0.12 per share.

Cash flow from operations has been strong this year. As a result, net debt was at its lowest level since the end of 2018 despite the modest increase in total debt last year. This, combined with the strong EBITDA performance of the last few quarters, brought the net debt to adjusted EBITDA leverage ratio to the low end of our 2.0 to 2.5x comfort range. This is well ahead of the guidance we provided for this year. If you remember, we originally expected to be closer to the high end of the comfort range and only by year-end.

Capital expenditures were $25.6 million in the third quarter. We opened 12 new restaurants, of which 11 are freestanding units, including all 10 openings in Brazil. For the year-to-date, through September, we opened 41 new restaurants, including 34 in Brazil. We should remain within the guidance range of 40 to 50 openings. More than 90% of these will be in Brazil with 90% freestanding units. In other words, this year, we already returned to 2019 levels of freestanding restaurant openings and we will increase total new restaurant openings in 2022 and beyond.

Total capital expenditures for the year should be within the guidance range of $110 million to $130 million.

Finally, look for a safety date in the next several weeks for an investor update event early next year, if possible, in person in Brazil, no later than the end of February 2022. We expect to be able to provide you with openings and CapEx guidance for 2022 and beyond. Marcelo, back to you.

Thanks, Mariano. As I mentioned earlier, ESG is part of Arcos Dorados' DNA. The Recipe for the Future ESG platform focuses on the areas of youth opportunity, packaging and recycling, sustainable sourcing, climate change, commitment to families and diversity and inclusion.

Starting with youth opportunity. On our last call, we announced a new program offered through our award-winning Hamburger University that made free online certificate courses available to all young people in Latin America and the Caribbean. These introductory level courses cover 5 areas of instruction designed to help young people enter the workforce and build successful careers. We are very pleased to report that more than 20,000 young people enrolled in the courses in the last 3 months.

We also launched a very interesting pilot program in Colombia within the packaging and recycling pillar of our ESG platform. We have partnered with Amazoniko, an NGO dedicated to promoting recycling in the country, and with iFood, our exclusive delivery aggregator in Colombia. The program provides customers with a kit to collect and return recyclable waste from their delivery orders by returning it to iFood drivers, supporting a more circular economy.

In Argentina, we took another step to support our climate change commitments by signing an agreement with Pampa Energia to start using sustainable energy sources to power our restaurants in the country.

Within commitment to families, together with McDonald's, last month, we announced that Happy Meal toys will be made from 100% sustainable materials by 2025. As you heard today from Luis, we introduced the first 100% sustainable toy collection this year, working toward the 2025 commitment.

Finally, in Brazil, we were ranked in the top 10 among the country's largest companies by Great Place to Work. We are the only restaurant company ranked by this respected organization in Brazil. And just last week, we were recognized by the city of Sao Paulo, receiving the municipal Seal of Human Rights and Diversity for the work we do to generate job opportunities for differently abled people. We are very proud of the work we do at Arcos Dorados to promote diversity and inclusion in the workplace.

You can now learn more about the main elements of our Recipe for the Future in English and download the audited social impact and sustainable development report for 2020 by following the link at the bottom of the slide.

The long-term strategic investments we made over the last several years as well as the efficiencies we built into the business in the last 18 months made it possible for us to generate one of the best third quarter's results in the company's history.

Guests are coming back to McDonald's because they trust us to deliver the region's best and safest restaurant experience. Heading into 2022, we are closely monitoring and adjusting the headwinds in our region. Nonetheless, we are pleased with the current trends of the business, and we believe we have built significant structural competitive advantages that cannot be easily replicated.

We operate the region's largest freestanding restaurant portfolio, which we built over the course of decades to ensure our ability to adapt to changes in guests' needs and preferences. We also feel confident that the 3 D's strategy of Drive-thru, Delivery and Digital will continue to accelerate sales and profitability performance for many years to come.

Dan, I will now turn the call back to you to start the Q&A session.

Sure, Marcelo. (Operator Instructions) Our first question comes from Marcella Recchia of Credit Suisse, who says thanks and congrats on the results and asks that with our net debt-to-EBITDA ratio already below the target of 2.5x, what can we expect in terms of expansion plans for 2022.

I think that's over for you, Marcelo.

Yes. Okay. Good morning, everyone, and especially, Marcella, thank you for the question. Yes, as you mentioned, we are already within our comfort range in terms of net debt-to-EBITDA ratio, which is 2.0 to 2.5x. We're in the low end of that ratio given the excellent results we had during the year.

As you know, under the MFA, every 3 years, we agree in a restaurant opening plan and reinvestment plan with McDonald's. Particularly for 2020 and 2021, we suspended the 3-year agreement mechanism due to the uncertainty in the region related with the important impact of the COVID issue.

So as of today, we feel comfortable enough with the trends of the business and the visibility we have of the markets where we operate in order to resume the 3-year planning. And in this case, the cycle will be for 2022 and 2024. And we are in the final stages of the discussions of the process with McDonald's and I think that we are going to have a very strong plan for this 3-year cycle.

We expect to announce the new plan early next year, as we always did in the past. And the idea this time is to do that during our investor update, hopefully, we will have in-person in Brazil during the first couple of months of 2022.

What I can tell you is that what we are seeing is that we will be able to accelerate both openings and reinvestments and the deployment of EOTF restaurants, given the fact that we are seeing a high potential for both investments.

If you recall, our pre-pandemic plan for the period of 2020 to 2022 included something around 100 restaurant openings per year. It's important to mention that the mall-based restaurant pipeline in that plan has been drastically reduced based on our current view of the market opportunity in malls. On the other hand, the pipeline of freestanding units remains strong, and we are working to capture additional growth opportunities over the next several years.

We also expect to reaccelerate the modernization of our restaurant base given the excellent results we are seeing in our Experience of the Future restaurants, particularly the ones we did this year. And of course, we will continue to invest in our industry-leading Digital platform in -- regarding that in order to expand capabilities and enhance the customer experience both on and off premise.

And we still see and we still think that the long-term unit growth potential remains very robust in all of our main markets given the under penetration of the McDonald's brand. So total CapEx spend will be correlated to our cash generation. Remember that we typically self-fund our gross investments. And we are in an excellent position given the fact that we have the best development team in the industry and in the region. And we know the power of the McDonald's brand, that was clearer than ever during the pandemic.

And when it comes to winning new restaurant site contracts, we have a very good power to negotiate. So that's our view around CapEx going forward. Again, during our investor update, you will have much more detail and more color around this for the next 3 years.

Great. The next question comes from Matias Galarce of Black Creek investment. He says that as our balance sheet and cash flow continues to improve, would we or the Board consider buying back shares if the price doesn't reflect the value of Arcos? And does management or the Board regularly compare the IRR of buying back shares versus opening new restaurants?

I think I'll turn it over to you, Mariano.

Thank you, Dan. And thank you, Matias, for the question. We continuously evaluate the rate of returns to make our capital allocation decisions. And as you know, Matias, in recent years, we have implemented a buyback shares program. And for going forward and looking forward, we will continue to do exactly the same. We will continue to evaluate all different options that we have available, including, of course, restaurant openings, modernization of existing stores, digital investment and all the investments we have been doing so far, on top of other alternatives like buying back shares. And we will define that, of course, looking at best rate of returns of each of them.

Great. Thanks, Mariano. The next question comes from [Leonardo Bovanchini] from Morgan. He asks if coupons or discounts are included in the mobile app sales or is it only the takeaway functionality. In other words, mobile order and pay or Mequi Sem Fila in Brazil?

I think that's for you, Luis.

Yes. All right. Thank you for the question, [Leonardo]. I mean, the answer is, yes, the digital offers are included in the mobile app sales. And a wider concept would be that everything is considered the digital sales. This is MOP, digital offers, delivery POS, home delivery and self-order kiosk. And one thing that I wanted to highlight is that digital offers are very important for us because we deliver them by segmenting our customer base and personalization.

And just a quick heads up. I think the operator may have heard that as well. We had some background noise. If you guys can clean that up, that would be great.

The next question -- thank you, Luis. The next question is from Thiago Bertolucci of Goldman Sachs. He says, hi, Marcelo, Dan and team. Good morning, everyone, and congrats on the results and thanks for taking our questions. Gross margin has positively contributed to overall profitability, printing higher than 2019 despite the persistently high cost inflation. Given the macro backdrop in the region shouldn't get improved anytime soon, how are you framing that equation between growth, pass-through, mix and profitability going forward?

And on a relative basis, what are the markets in which you believe pricing and profitability could be more challenging over the next 12 months? That's the first part of Thiago question.

And I guess we'll start with Mariano and then we'll take the second part.

Perfect. Thank you, Thiago, for the question. And -- in fact, all of the work that we did during the pandemic with cost management initiatives are paying off during this full recovery phase as sales are returning to pre-pandemic levels and we are gaining market share. So we think that the best way to contribute to our margins is by increasing sales and by increasing traffic, having more customers visiting our stores. And from there, we have built in all the cost management reduction initiatives that are showing in this third quarter. And we are doing everything possible to maintain and to have all these profitability gains going forward.

What I can tell you is -- Marcelo already mentioned a bit about this sales recovery, and this is what is allowing us to leverage on all our cost lines. All segments from counter, Dessert Centers, Drive-thru and Delivery are showing very good results. And from there is that -- where we are building up, for example, in food and paper in the gross margin, which, as you know, is the most important cost line in our P&L, I mean, the food and paper costs.

And we are effectively improving our gross margin despite the food cost pressures that we are facing in many of our markets by managing pricing through revenue management, dynamic pricing and -- as well by working on the product mix with segmentation, with all the efforts we are doing in Digital -- in the Digital area, where we are investing and we are doing a lot of things like with the digital app and all this marketing segmentation, which are giving us the results that we are seeing in our P&L.

And on top of that, of course, all the cost negotiations with our main suppliers that we can do given our size and the long-term relationship that we have with our main suppliers.

So I think that what you're asking about, that mix between focusing on growth, market share, sales, I think we are doing a bit of all of them. We are improving sales. We are improving traffic. We are working on our costs. We are working on the product mix. We are working on dynamic pricing. And all of them are the ones that are showing in our final results for the quarter. And maybe we can go to the second part, Dan.

Great. Thanks, Mariano. So the second part of Thiago's question relates to market share. And he asks, is it -- also is it possible to share more details around market share evolution, specifically in Brazil.

So I'll turn it over to you, Luis.

All right, Dan. Hello, Thiago. Thank you for the question. In Brazil, according to CREST -- CREST, I remind you is a syndicated customer study that is conducted by the research agency The NPD Group and is used in major countries around the world. According to them, the QSR segment grew about 1.5 percentage points of market share. We captured 2/3 of that share. This is comparing 2021 versus 2019 numbers. And no other player gained more than 20 basis points of share in that period.

And what I wanted to highlight is that we experienced market share gains in all divisions and in every quarter. These gains are seen in both traffic share and value share. It's also important to note that not only we're gaining share, but we are going faster than any of our closest competitors. And we take this as a vote of confidence from our customers. And this is not a result of a silver bullet. These market gains are a product of our unique restaurant footprint, a strong focus on operational excellence. This allows us to operate through Drive-thru, Delivery, Dessert Centers, McCafes, front counters. And we have the industry-leading digital strategy and we have, too, a set of market initiatives that have consolidated the brand in the region.

Thanks, Luis. The next question is from Joaquín Ley of Itau. He congratulates us on the results. Apologies for having been disconnected for a period, but asks what was the rationale of the operations reorganization and what kind of G&A savings can it generate.

And by the way, both -- Joaquín asked this. And then, we're going to have another question from Ulises Argote from JPMorgan, who asks a similar question. So rather than repeat it, I'll turn it over to you, Marcelo, to answer the question that both Joaquín and Ulises have asked.

Okay. Thank you. Thank you both of them for the question. We have been always leaders in the QSR industry in our region, in Latin America and the Caribbean, thanks to the way the strategic and long-term vision that we have in order to take important decisions for the company. So we have been giving careful strategic thoughts to how the organization should be managed going forward. And we believe -- we firmly believe that our teams are ready for this new organization and this next step.

It's important for me to -- for you to know that this is not a cost cutting decision. Instead, this reorganization is intended to give us a more agile company, giving our local teams more ownership, and at the same time, more resources to support the daily decision-making in other markets.

At the same time, we are allocating additional resources to maximize the initiatives that are providing the greatest contribution and have the greatest potential to generate future growth and increase profitability. We firmly believe that this is the right organizational structural to take advantage of the full revival phase in our markets in the years to come.

Over time and in recent years, we started to decentralize decision-making, giving individual markets more freedom to operate within our strategic framework. During the pandemic, for example, local management teams were crucial to our successful response to the rapidly changing conditions in each market. Each market was very different to the other. So our people in the markets did a tremendous job. And the kind of results we are reporting today, I can assure you that those are a consequence of all the great people that Arcos Dorados has across the region taking the right decision every day.

So we think that this new structure will allow us to apply the learnings from the pandemic, and we will build on the excellent results we delivered in the third quarter of 2021. Divisional teams will continue to provide guidance and share best practices, and this will ensure that each market works within the established framework. And corporate teams will develop and deploy new capabilities and will manage the company's strategic direction established by our Board. So that's the rationale behind the changes we made. And for sure, we will talk a little bit more around this on our investor update in the first quarter of next year.

Great. Thanks, Marcelo. The next question is from Ulises Argote, who had -- you've already answered the second part of his question. Ulises is from JPMorgan. First says, hello, everyone. Hope all is well and congrats on the results. And his first question is related to EBITDA margin outlook. As we mentioned on the call, margins across the regions are trending in line with or above 2019 levels. So he wanted to get our thoughts on the sustainability of these trends and the main drivers for further margin expansion.

I think that question is for you, Mariano.

Perfect. Thanks, Ulises, for the question. And I will answer the question keeping in mind that part of that I already answered when Thiago asked about sales and gross margin.

How we are seeing the business and the EBITDA margin outlook? Well, the result is that -- in this third quarter, EBITDA margin improved by 220 basis points compared with 2019, 130 basis points if we exclude the tax credit. As I mentioned in the previous question, the main driver is that sales are recovering and that we are in this full recovery phase now and customers are returning to our stores.

I already mentioned how we are improving the gross margin: working on pricing, working on product mix and working on costs. And we believe that with the new -- or how the business is evolving with the new segments, with the growth in -- we are seeing in Drive-thru and Delivery and how the front counter and Dessert Centers are recovering, we still have -- we have the possibility to maintain and to improve our gross margin in that respect.

Regarding payroll, which is our second cost line, we are seeing improvements compared to 2019. Those improvements are coming mainly from productivity gains. Remember that while we sell off premises, our productivity increases. And also, we have received some government support in the last 6 months, but that probably will not replicate going forward.

Regarding rents, we are keeping rents under control. And this has been the result of all the work regarding rent and all the other fixed costs that we have in the occupancy and other cost line, all the work that we have been doing since the pandemic started. But we are very confident that these gains in margins and negotiations we will keep them and maintain them going forward.

So regarding food and paper, regarding payroll and regarding the occupancy and other cost line, we see that the new gains and the margins that we are seeing in this third quarter could be replicated going forward.

Then, of course, we have delivery fees. Delivery is a segment that is growing month after month. And as you know, we pay a fee to the 3 POS, and also you can see on the occupancy and other cost line. But all the benefits -- and of course, we always mention this, but it's worth mentioning this again: delivery is a highly accretive segment to our business and all the gains that we see in delivery, you see, of course, in the top line, but in other cost lines where we see other gains.

So -- and also, to end with the EBITDA margin outlook, we are also leveraging in the G&A when we have faster -- when we are seeing faster sales growth. And this new normal that also allows us to get some leverage on the G&A.

So as a result of all these trends, we believe that our historically high EBITDA margins of 2019 -- you remember, it was 10% -- at the base off of which we can continue expanding margins in the years to come.

Great. Thanks, Mariano. Our next question is from Joao Paulo Andrade at Bradesco. He congratulates on our results and thanks us for taking his question. And he asks, what was the penetration of Delivery in the quarter, if we could share.

I guess that question is for you, Luis.

Hello, Joao. Thank you for the question. Yes, I mean -- the -- so far this year, we have generated around 17% of sales year-to-date and around 15.5% in Q3 despite the gradual recovery in the on-premise segment. Sales were up 83% year-to-date and 43% in 3Q -- in the third Q of 2021. This is versus 2020. And like we said before, this growth of 43% is on top of 180% growth of last year.

In our -- the operational focus today -- we still have opportunities -- is to improve accuracy, service time and the customer satisfaction. And we are benefiting from a sustained customer demand. Because even though we are seeing a strong recuperation of the on-premise channels -- I remind you that on-premise channels are Dessert Centers, front counters or mall stores. Even though these channels are recuperating, Delivery at a slower pace keeps on growing and we are being able to sustain the big base gain during the pandemic. We strongly believe that on-premise sales will dilute rather than cannibalize the sales of this segment.

Perfect. Thanks, Luis. And actually, I should have mentioned Joao Paulo had a second part to his question, which I think we've already addressed. But just -- his question has to do with our remarkable ability to having maintained food and paper costs flat despite inflationary pressure in Brazil. And he also asks how should we expect that line to perform moving forward given protein export embargo to China and so on. I think Mariano you've already addressed that.

So that being the case, it's actually the last question that we received. I wanted to thank everyone for joining us today and for your interest in the company. [Matias] and I are more than happy to get on the phone with any of you following up today's call in the next few days to go through our results in more detail.

Until then, we look forward to speaking with you again on our next earnings call, which will be sometime in March of 2022. Actually, before that, we'll have our investor event no later than February of next year. And until then, have a safe day and we'll talk to you soon. Thanks so much.