Arcos Dorados Holdings Inc (ARCO) 2021 Q2 法說會逐字稿

Good morning, everyone. Thank you for joining our second 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 upper left-hand side of the screen and click on the arrows to maximize the slides.

After our speakers conclude their opening remarks, we will answer your questions, which you can submit using the chat function on the left-hand side of the screen. You will need to minimize the slides to access the chat function. 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 will provide an overview of our second quarter 2021 consolidated results. Luis and Mariano will take you through sales and profitability at the divisional level as well as providing an update on the main elements of our Three D’s strategy of Drive-Thru delivery and digital, along with our growth investments and capital structure. Marcelo will wrap up by sharing some news about 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. Since the beginning of the pandemic, we have prioritized the safety of our people and guests while also focusing on ensuring the long-term health of the Arcos Dorados business. We have done this by leveraging the competitive advantages of the Three D's and unmatched free-standing restaurant portfolio, strong balance sheet and superior cash flow generation.

We began the year expecting to face a challenging first semester followed by a much stronger second semester as operating conditions normalized in the region. So far, we are trending in line with or even better than we initially expected, but there is still a long way to go. Given the impact of the pandemic on last year's results, for the remainder of this year, we will be comparing 2021 quarterly results, not just with the prior year or prior quarter, but also with the same period of 2019.

We are very pleased with the progress we have made in returning to 2019 local currency sales levels while also approaching pre-pandemic profitability. Although conditions are normalizing, government restrictions continue to hamper our ability to operate normally at night and on weekends or benefit from entertainment activities such as movie theaters that usually help generate guest traffic. Despite this, for the full quarter, 2-year systemwide comparable sales were essentially flat on a consolidated basis, including positive growth in May and June. In fact, 3 of the 4 divisions delivered positive comparable sales for the entire quarter versus the same period in 2019.

Looking ahead, we are excited and preparing for the return of the on-premise business in both free-standing and mall-based restaurants as the year progresses.

Let's take a closer look at our second quarter 2021 results. The strong systemwide comparable sales trend, I just mentioned, continues into July with momentum building in all divisions on a 2-year comparable basis. Adjusted EBITDA grew sequentially from $24.7 million last quarter to more than $48 million this quarter, including a tax credit of almost $12 million in Brazil, which largely offset the impact of government restrictions in that market. Importantly, all divisions were able to generate significant operating leverage with the strongest growth coming in the Caribbean and SLAD. As a result, we generated a 12.6% increase in constant currency-adjusted EBITDA on a 2-year basis. The Three D's are driving this recovery. Drive-Thru remained strong despite a modest recovery in on-premise sales, while delivery sales have not stopped growing sequentially, setting new records in each passing month.

According to App Annie, we have the industry's highest-rated mobile app, and we are expanding the digital capabilities that will allow our guests to move seamlessly across our on-premise, takeaway and delivery sales channels, enhancing convenience and improving personalization. Notably, these competitive advantages have supported strong market share gains in our main markets, including Brazil.

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

Thanks, Marcelo. The geographic diversity and single-brand focus of the Arcos Dorados operation served to smooth out the crisis management and recovery periods of the last 18 months without disruptions. As a result, comparable sales were within 1% of the second quarter of 2019 with positive 2-year comparable sales in 3 of the 4 divisions.

As we mentioned on our last call, Brazil began April down 40% compared with 2019, but sales performance improved with the relaxation of government restrictions over the course of the quarter. More importantly, we continued gaining market share. According to CREST, the McDonald's brand gained 2.3 percentage points of market share versus 2020 and 4.1 percentage points versus 2019, far more than any other competitor in that market. Brazil is capitalizing on the unique emotional bond, the McDonald's brand has with its guests. Marketing activities in the second quarter focused on our strengths, core menu favorites and the Three D's.

In addition to participating in the global famous orders platform with the launch of the BTS meal, we introduced our Drive-Thru based loyalty program in the quarter. In just 3 months, the Méqui VIP drive club has surpassed 1 million registered members and has already become an important frequency driver. NOLAD's growth sequentially year-over-year and on a 2-year basis was driven by Mexico, which more than offset tough conditions in both Costa Rica and Panama. Mexico is capitalizing on the brand's reputation for food safety and hygiene while leveraging one of the largest free-standing restaurant portfolios in the country. Drive-Thru sales have been particularly strong in Mexico, and we are making upgrades to the operations IT infrastructure as we prepare to introduce significant digital capabilities to get in that market.

Marketing activities in NOLAD continued to focus on our core products and brand-building activities. All 3 markets boosted the Chicken McNuggets platform with the introduction of the BTS meal on June 1, selling out within just a few days. Delivering accelerated sales supported by co-branding campaigns with the delivery aggregators and product bundles to celebrate various occasions and special dates. These mobility campaigns helped generate double-digit sales growth on a 2-year basis in Mexico, where we also opened the country's first EOTF restaurant.

SLAD's top line growth was driven by the strength of the Chilean and Argentine markets, despite persistent government restrictions across the division. The division's 2-year comparable sales were positive in both May and June. The Copa America is Latin America's most important international soccer tournament, which took place from June 10 to July 11. We were able to capitalize on the building excitement in Argentina through our digital sponsorship of the country's National Soccer Association. This sponsorship, which allowed us to use the image of some of the country's big soccer stars, including Lionel Messi, helped boost digital sales and improved guest experience through promotional activities in the restaurants.

Finally, the Caribbean delivered another quarter of solid results from its main markets, Puerto Rico, Colombia and the French West Indies. We supported the chicken platform with the launch of the BTS Meal in Puerto Rico and Colombia, building on the momentum of the successful introduction of the crispy chicken sandwiches in Puerto Rico in the first quarter. Drive-Thru sales have also grown significantly, thanks to improved service times, reduced menu complexity, focus on customer experience and growth in the Club VIP AutoMac program.

For several quarters now, the Caribbean has been proving the benefit of operating across the broad and diverse geographic footprint. Just a few years ago, this was Arcos Dorado's most challenging division. And today, it is among our best performance, contributing strong U.S. dollar and euro-denominated cash flows.

The division, which benefits from the highest free-standing restaurant penetration in the company generated almost double-digit comparable sales growth on a 2-year basis. As Marcelo already mentioned, this momentum continued across the business in July with another month of positive comparable sales on a 2-year basis, including flat comps in Brazil and sequentially higher results in the other 3 divisions.

That we discontinue driving growth and delivering results. Drive-Thru sales rose 29% in constant currency and contributed 39% of system-wide sales. Even with the gradual improvement in the on-premise business in our free-standing restaurants, we have been able to sustain growth in the Drive-Thru segment through operational improvements, advertising campaigns, promotional activity and the Club VIP AutoMac program.

Delivery was up 94% on top of 150% growth last year on a constant currency basis, contributing more than 19% of systemwide sales in the quarter. This included 91% growth in Brazil in local currency on top of 152% growth in the prior year period in that market. We set another quarterly sales record for delivery even with recovering on-premise sales in both free-standing and mall-based stores.

This is strong evidence that delivery has generated an additional consumption indication for our guests and should bring incremental growth even with normalized sales at the front cover. Our relationships with the delivery aggregators are evolving and remains strong across the region as we work to improve the business model for the segment. The digital platform generated 39% of total sales in the quarter. This includes delivery, mobile app and self-order kiosk sales. We have the highest-rated mobile app in just about all our main markets, with cumulative downloads nearing $54 million across the region, including $29 million in Brazil, where we have a 2:1 advantage in active users against our nearest competitor according to App Annie. We believe in running great restaurants and focusing on great guest experiences no matter how guests choose to enjoy the McDonald's menu, including giving them more reasons to visit us more often.

With that in mind, we introduced the Club VIP AutoMac program in several markets late last year, quickly exceeding 1 million registered members by the end of the first quarter of 2021. In April, we launched a similar program in Brazil, adding another 1 million registered members in that market in just 3 months. The program provides members with exclusive offers, early access to new product launches and other personalized experiences. Results so far have been compelling with registered members already helping to boost frequency. This program leverages the Drive-Thru segment, where we enjoy a significant competitive advantage and can test a number of loyalty program concepts. We are also monitoring other models across the McDonald's system to evaluate which can be good alternatives for our markets in the future.

Today, we are feverishly preparing for guests to return to our front counters, Dessert Centers and McCafés. We believe it is just a matter of time for the on-premise business to recover, and we know how important it is to provide the service, quality and cleanliness they have always associated with our restaurants. It is important to keep in mind that the on-premise business includes both free-standing and mall-based restaurants.

Pre-pandemic, free-standing restaurants generated about 70% of sales on-premise, meaning at the front counter, Dessert Centers and McCafé. Mall-based store sales were even more concentrated in the on-premise sales segments. So far, when government restrictions allowed, and guests feel comfortable, they still see old restaurants as a destination where they can order and enjoy their favorite menu items and desserts. This gives us great confidence and optimism for the second half of this year as well as for the medium- to long-term growth prospects of the McDonald's brand in Latin America and the Caribbean.

Mariano, over to you.

Thanks, Luis. As is the case with our sales figures, profitability in the second quarter is already near or above pre-pandemic levels in all divisions. The sales recovery and the streamlined operations are generating significant operating leverage in the business, such that our adjusted EBITDA improved sequentially and rebounded strongly from the peak of the pandemic last year. We were already very close to 2019 results at the consolidated level in constant currency, even excluding the tax credit in Brazil. As Marcelo mentioned, the second half of the year started out strongly. This is also the case in terms of profitability in July, which has historically been 1 of the 2 most important months of the year for us.

Barring any significant setbacks, we are on track to deliver a strong second half of 2021, in line with the outlook we provided at the beginning of the year. Remember that we report in U.S. GAAP, so our operating income includes lease expenses above the line, which is the basis for our adjusted EBITDA calculation. Furthermore, while currencies have not been kind to our U.S. dollar numbers, local currency performance has been very strong over the last several years and recent performance has been no exception.

Consolidated adjusted EBITDA performance in the quarter reflects on level line items, which drove the 12.6% increase in constant currency on a 2-year basis. Notably, both food and paper costs and payroll expenses were lower as a percentage of revenue versus the pre-pandemic second quarter of 2019. The strongest growth in the period came from SLAD and hard currency markets in the Caribbean, once again, demonstrating the benefit of operating across a broad geography.

Brazil's adjusted EBITDA margin reached 15% in the second quarter or 9.7%, excluding the $11.9 million PIS/COFINS tax credit. We saw significant operating leverage in most costs and expenses despite very difficult operating conditions at the beginning of the quarter. The exception was higher food and paper costs due to commodity price pressures. Through revenue management and strong supplier relationships, we were able to keep the increase in food and paper costs to less than 80 basis points as a percentage of sales.

NOLAD's EBITDA margin came within 50 basis points of the second quarter of 2019, driven by Mexico's continued strong performance. Again, we had significant operating leverage across all line items, thanks to the rebound in sales and the more streamlined operation. Similarly, SLAD came within 30 basis points of its second quarter 2019 margin with adjusted EBITDA growing 8.7% in constant currency on a 2-year basis. Chile and Argentina more than offset tough conditions in the division's smaller markets. Last but not least, the Caribbean division's adjusted EBITDA grew nearly 150% on a 2-year basis in constant currency, including a 560 basis points margin expansion.

This division, which generates largely hard currency cash flows has benefited from the rebound in Puerto Rico, continued strong results in the French West Indies and an improving business in Colombia.

Looking at our cost structure compared with the second quarter of 2019, our streamlined operation is generating leverage where we expected. Food and paper, despite commodity cost pressures, payroll with increased productivity, royalties with resumed growth support and franchise restaurant occupancy expenses were all lower as a percentage of revenues.

Occupancy and other operating expenses were higher, primarily due to the growth in delivery, the improvement in other operating income, largely reflects the benefit of the tax credit in Brazil. Total G&A expenses declined 7.2% in U.S. dollars versus the second quarter of 2019. The 27.2% increase in constant currency was below the 2-year G&A weighted inflation of 28.5%, thanks to our ongoing focus on expense control. Consolidated adjusted EBITDA reached $48.3 million compared with last year's negative $41.7 million result, a $90 million positive swing. We are very pleased with the momentum in the business and the results we will generate in U.S. dollars despite the significant depreciation of many of our currencies from 2 years ago.

We have now delivered 4 consecutive quarters of positive cash flow from operations. Even though this year included the payment of 5 months of deferred royalties related to sales from March through July of 2020. In May of this year, we monetized a portion of our derivatives by unwinding 2 swap structures in Brazil, a combination of cold spreads and interest coupon-only swaps. This balance sheet transaction converted the asset value from the derivative instruments to an equivalent $23.2 million of cash. During the quarter, we used a little over $6.5 million of this cash to repurchase some of our outstanding 23 and 27 notes. Since the beginning of July, we have deployed an additional $8 million to repurchase more of both the outstanding notes. As we anticipated, the company's leverage ratio dropped significantly from the prior year-end given the strong rebound in trailing 12 months EBITDA. For the second half of the year, we expect this ratio to continue dropping, primarily as a result of improving EBITDA.

Finally, I want to point out that we do not have any material debt maturities until September of '23, and we have more than sufficient cash to manage our business on an ongoing basis. Capital expenditures were $29.9 million in the second quarter, which included opening 19 new restaurants, of which 14 were free-standing units in Brazil. For the year-to-date through June, we opened 29 new restaurants and the pipeline for future new restaurant openings remains very attractive. We have also begun the planning process for next year and the long term to ensure we continue to make good capital allocation decisions to generate value for our shareholders. This will include an update of our assessment for long-term unit growth potential in the region, which we believe remains robust in many markets, especially in Brazil, Chile and Puerto Rico, among others. As the same goes, Rome wasn't built in a day and neither was our unmatched free-standing restaurant portfolio or industry-leading digital capabilities.

Looking ahead, as we continue to leverage our many competitive advantages, through our Three D's strategy, I expect cash generation to accelerate through the end of this year and operating profitability margins to return to pre-pandemic levels by the fourth quarter. Moving forward, with strong cash flow generation and prudent access to capital markets, we plan to support the fever expansion of the McDonald's brand in Latin America and the Caribbean, which is still highly underpenetrated in all our main markets.

Marcelo, back to you.

Thanks, Mariano. One of the most important learnings on the last 18 months has been the difference we can make in the lives of our people and the communities we serve. Service has long been among the most important values at Arcos Dorados and the concept has evolved well beyond the experience we provide guests when they visit our restaurants. Service is also about using our scale to have a positive impact on the planet, which is why we have established goals related to sustainable sourcing, packaging and recycling and climate change. In our latest social impact and sustainable development report, which for the first time, was audited by EY and can be downloaded from our website, you will learn more about the progress we are making towards these science-based goals.

As part of our commitment to families, we have consistently improved the additional content of our food by reducing sodium and added sugars as well as calories and fat content in the Happy Meal. Parents can choose from a number of options to provide their children with a well-rounded meal, aligned with the daily nutritional recommendations of the World Health Organization.

I am proud to tell you that during the second quarter, we took another important step on this path by removing all artificial flavors and colors from Happy Meal ingredients.

Finally, youth opportunity is one of the most natural elements of our recipe for the future ESG platform. We hire thousands of young people every year, providing most of them with their first formal job opportunities. We provide them with a wide range of personal and professional life skills that will last for the rest of their lives. We also offer a viable long-term career path that could even take them to the highest levels of Arcos Dorados management.

Today, we are announcing a new program offered through our award-winning Hamburger University that will make free online certificate courses available to all young people in Latin America and the Caribbean, informed by the study conducted by Trendsity, a leading Latin American Research Organization that surveyed young people in the region. We identified 5 areas of instruction they need to help them enter the workforce and build successful careers. The 5 disciplines are: personal finances, entrepreneurship, emotional intelligence, customer service and health and wellness. This afternoon, our team, along with the Hamburger University administrators and Trendsity will be presenting the results of this study and providing more details on how this free online program will work. You can join this live event on the Arco Dorados LinkedIn profile and learn more about our recipe for the future platform by visiting our website.

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

Sure, Marcelo. In order to get started, please minimize the presentation slides so that you can access the chat function on the left-hand side of the webcast platform. (Operator Instructions) So the first couple of questions we have here from Marcella Recchia of Crédit Suisse. The first one, I'll give to you, Marcelo. Marcelo asks for an update on same-store sales trends in July and early days of August in Brazil?

Okay. Marcella, thank you for your question. Let me recap the second quarter first because looking in detail what happened sequentially within the second quarter, I think that will help you to understand what's going on in recent weeks. Systemwide comparable sales in the second quarter rebounded strongly rising more than 98% compared with last year. And more importantly, systemwide comparable sales for the full quarter were nearly flat on a 2-year basis, on a consolidated basis, despite a tough start to the quarter. Over the course of the quarter, we saw a steady sequential improvement in comparable sales performance on a 2-year basis, in all the 4 divisions. In fact, 3 of the 4 divisions generated positive comparable sales on a per year basis for the entire quarter.

Brazil was the most challenging division, given the fact that we saw it tightened in the restrictions during April. But since then, the sequential improvement was very good. On a consolidated level, systemwide comparable sales moved into positive territory in May and we have even better results in June. So what happened in July and the first week of August is that the strong momentum we built during the second quarter continued into the beginning of the third quarter, also talking on a 2-year basis. July, which is historically 1 of the 2 strongest months of the year ended with Brazil essentially flat in comparable sales versus 2019.

On the other hand, the other 3 divisions, which were already positive in the second quarter, built on those strong numbers. And as a result, we are extremely pleased with July's sales performance. On a 2-year basis, July, and in fact, it's the same for the first week of August, systemwide comparable sales rose in the mid-teens on a consolidated basis. Remarkably, even though the on-premise business is still down due to government-imposed operating restrictions mainly on hours and capacity, this comparable sales results are already in line with the benchmark blended inflation for the period. And this is why we firmly believe that the second half of the year will be much stronger than the first half for us assuming operating conditions will continue to normalize.

So Marcella, if I can, let me add a few comments. I think it's worth mentioning that this is the fourth consecutive quarter that we delivered a sequential improvement in comp sales. And it is the first positive quarterly comp sales results since the fourth quarter of 2019. So the reality is that as government restrictions are relaxed, gift traffic increases in our restaurants, and this is because there is clearly built-up demand for McDonald's. And I already mentioned some of the marketing activities we have implemented in each division as part of my opening remarks. But from an operating perspective, we are focused on people, product and technology, not only to enhance the guest experience, but to prepare our teams to this full revival phase for our on-premise business.

That again, on-premises, Dessert Centers and McCafé and, of course, from corner. And if you let me double click on that, we have assembled multidisciplinary squads to focus on the operational excellence, not only in Drive-Thru but in delivery. In each free-standing restaurant, we also have an expert team dedicated to the Drive-Thru segment. And as you know, we have simplified our menu. This has benefited not only supply chain, but it has also reduced complexity in our restaurants.

Of course, we will launch new products that are relevant and exciting to our guests, but we want to be smart about it. We're focusing on smart innovation. So the focus is to introduce products that not only bring sales, but are accretive to margins and easily incorporated into the operation. And I would say that my last point here is that we know that accuracy and speed are very important for guest satisfaction. And that's why we are continue improving and investing in technology that allows us to measure and track this KPI. So I hope that provides a little bit more insight about how we are generating the operating leverage, not only this quarter, but moving ahead.

So that's a good segue, Luis. Marcella's second part of your question relates to operating performance, right? So in terms of margins. So she asked about operating leverage in the payroll line, mentioning that it's near the lowest historical levels of around 18.5%. She's asking what drove that performance. And I also ask for a little bit of insight into Brazil's gross margin, both year-over-year and also versus 2019 levels. And I'm going to take advantage of this because we have a question from Galdino from Goldman Sachs, who also asks about gross margin. And he is asking about the gross margin improvement at the consolidated level in the context of Brazil being -- Brazil's performance being down a bit. So how did gross margin perform in the other divisions, he asks, right? So it's kind of a 2-person question related to payroll and gross margin, and maybe Mariano, you can get us started.

Yes. Thanks, Marcella and Galdino for the questions. Well, the first part regarding payroll, I would mention that the reason why the payroll line is performing so well is that we are seeing, of course, a recovery in sales, in many markets above 2019, and that will help to gain leverage on that line. And that happens in many of our markets. And in the markets where we are not having sales recovery or where we experienced during the quarter, closures of restaurants, we are receiving government support in that line as well, and that helps compensate the costs -- the extra costs that we are having because those restaurants are closed. On top of that, we are experiencing productivity gains. Since 2019, productivity has been going up in our restaurants. And I would say that the importance of alternative segments like Drive-Thru and delivery, gaining share of our total sales are also reflected in these gains that we are seeing in the payroll line.

And lastly, I would mention as well that weaker economies as we are experiencing in many of our markets are related or correlated with lower salary increases as well. So overall, I think that's the explanation why the payroll line is performing as we are seeing so well and near the historic low levels.

Now I will move to the gross margin question regarding Brazil and as well as the consolidated level. Let me start that we mentioned this many times, but the beauty of Arcos Dorados is that we operate in 20 different markets across the vast geography. For that reason, consolidated food and paper costs in the second quarter of 2021 were just -- not just lower versus the second quarter of 2020, but more importantly, we delivered lower food and paper costs versus the pre-pandemic second quarter 2019.

So now focusing on -- in Brazil, the protein cost pressures are a reality. We mentioned this already in previous calls and we see and the fact is that these are a reality, not only for QSRs or restaurants, but also to the entire food industry. So everybody in Brazil is experiencing these cost pressures. But we have been able to secure the best prices through long-standing supplier protocols and because we are the largest buyer of beef in the market by a factor of 3. In addition, we also apply best practices in terms of revenue management, where we include intelligent pricing and product mix through more segmented and targeted marketing, the inventory management and that reflects in moving -- and we did that during the pandemic or when many restaurants were closed, moving inventories from closed mall-based restaurants to free-standing units during the pandemic. That, of course, helped us to reduce the cost in the food and paper line. And also last year, we reduced the number of menu items by at least 30%. This menu simplification strategy streamline the supply chain and the operation itself.

So although Brazil's second quarter 2021 food and paper costs were higher versus the second quarter of 2020 as a percentage of revenue, keep in mind that our best-in-class supply chain kept increasing food and paper costs to just 100 basis points versus last year. Now at the -- going back to the consolidated level, and I think it's important to mention this because we have good news to tell here. One of the main benefits of operating in this as I already mentioned, this vast geography is that we have another 2 to smooth out the impacts of difficult operating conditions in 1 market or the other.

So adding to all the measures that we took in Brazil and that I already explained, all the 3 divisions are experiencing gains in the food and paper cost line. So we are having efficiencies in the 3 other divisions and our food and paper cost that we developed over the years are more localized, reducing our consolidated exposure to imported goods or localized market disruptions. So using many of the same tools we use to minimize food and paper cost increases in Brazil, our other 3 divisions, as I already mentioned, have been able to reduce food and paper costs fully offsetting the higher costs in Brazil. And that's why we are seeing a gain in the line at the consolidated level.

Now with -- I will end up with an outlook of 2021, food and paper costs as a percentage of revenue on the consolidated level should once again remain relatively flat versus the prior year. That's what we are expecting. Strong performance in NOLAD, SLAD and the Caribbean divisions and they will be -- we are expecting that they will be offsetting modestly higher food and paper costs in Brazil.

Perfect. Thanks, Mariano. Galdino actually had a -- from Goldman had a second or follow-up question. And he asked in the same sort of context around what's happening in various geographies. It will be very helpful to hear more about our CRM strategy. And I think it's within the digital sort of pillar of our Three D's strategy. So I'll turn it over to you, Luis. Maybe you can get a start on.

Yes. Galdino will give you a little bit of color of the digital evolution that we're having. To be fair, our digital journey started many years ago. And since then, we have made huge progress in the digital transformation of our company. If you let me give you some numbers, in the first half of 2021, digital sales represented 39% of total sales. We have nearly 54 million downloads of our app, and it has the highest customer ratings in the region's QSR industry. So this is an average of 4.6 points out of 5. And we have 9 million active users per month who have accessed our app. To put that into context, according to App Annie, we have twice as many active users as our nearest competitor in Brazil.

Today, we keep doubling down, I would say, on creating a personalized experience. And thanks to our growing CRM capabilities, we are gaining new data, new insights into guest preferences. And just as an example, we have just learned from the digital space that campaigns based on users' favorite products have a 15% to 25% greater conversion than mass communications. So with this in mind, and just as an example, in Brazil, we applied this data to capitalize on the popularity of the Big Tasty sandwich. So how it worked was that our mobile app users who we identified as fans of the Big Tasty sandwich, received premier access to bottle tasty sauce. And this generated outstanding sales and very positive customer feedback.

So -- and another point that I would like to tell you about is that another feature that we are developing is MOP, Mobile Order & Pay. Sales increased by 50% sequentially in the second quarter compared with the first quarter of this year. We're in the first stages, and this is a new feature that we're helping guests to adopt. So to recap, we have the most robust digital platform with the most downloaded and highest rated mobile app -- and today, we are expanding CRM capabilities, and our goal is to provide the most, I would say, seamless guest experience in the industry.

Great. Thanks, Luis. The next question we have is from Bob Ford of Bank of America. Bob says, "how should we be thinking about food inflation and pass-through across markets?" So I'll turn it over to you, Marcelo.

Okay. Great. I think that Mariano already covered about our expectations in terms of food inflation and particularly for us, food and paper cost pressure, we foresee for the rest of the year, the same kind of pressure we are dealing with as of today. And that's the reality all across the region and for everybody, consumers have seen a significant increase in food inflation in most countries.

So we saw that there has been room to increase prices in our markets for us in order to mitigate the food and paper cost pressures. But dealing with cost pressures is not just about increasing prices. Fortunately, we have, on one hand, the agreements with our suppliers that allow us to plan for the timing and magnitude of pricing increases as well as for which product category in order to make the impact the less possible for our customers. And we saw at the same time that in terms of the competition or the competitive activity, it has been more rational during the last couple of quarters, particularly since the pandemic began because obviously, everyone is facing the same kind of pressures.

On top of the agreements we have with the suppliers, we were very focused in the simplification of our menu, concentrating our efforts in the most popular products that at the same time are typically the ones with the highest margins. And on top of that, and as Luis already mentioned, we have leveraged all our digital capabilities in order to make a good segmentation of our customer base and drive revenue towards more profitable product mixes with higher average check and more items per order.

I think that we know that the customers use to look for the best value equation, which is not only about price but about service, quality, speed and accuracy, and that's why our operation is pretty focused on improving those kind of attributes. And I think that we are doing very well. In fact, a good indicator of that, in my opinion, is the market share growth we saw in many of our markets. And for example, in the case of Brazil, where we have the advantage of having CREST, we captured 230 basis points of market share in Brazil in this quarter compared with last year and enjoy more than 2 percentage points of advantage for our next closest competitor. So I think that we are dealing well. We are having space to pass through prices, some of the pressure. And activate all the other levers in order to sustain or even increase our gross margin as we did in the second quarter.

Great. Thanks, Marcelo. We have a question from Ulises Argote from JPMorgan. He says that if we can, please, provide an update related to store opening pace beyond the guidance we provided for this year, if you can comment on market share evolution across new markets. So I guess back to you, Marcelo.

Yes. In terms of our guidance for openings for this year, we are still on track to meet our guidance of opening between 40 and 50 new restaurants this year. The focus will continue to be as it has been in the first 2 quarters in the Drive-Thru, in free-standing restaurants where we can operate Drive-Thru. In fact, I would say that we are close to the 90% range of free-standing restaurants of all the restaurants we are opening, and most of them are in Brazil. So we are not changing that guidance. We will continue to work in the 2 remaining quarters to open additional restaurants, but we will be within that range. The second part of the question was about...

The increase in the market share gains in the...

The market share, I already mentioned Brazil, but -- and we have the advantage there to have CREST, which is a syndicated tool. But given the size of Brazil, that's available there, not in every other market, but based on all the information, internal and external that we have in terms of market share, the gains we saw in Brazil are pretty similar in most of our main markets. That's why we are very pleased with the performance.

Next question is from Jean Paul Andrade from Bradesco. How do you expect the other operating expenses line to evolve with the increased penetration in delivery moving forward? So over to you, Mariano.

Perfect. Thanks, Jean, for the question. Yes. This line occupancy and other operating expenses includes 3 main costs that I would like to mention: First of all, the rent where our outlook is that what we have done so far is that we have been successfully renegotiating rental contracts and we do not believe that we will have a material margin impact versus 2019 in that line; then we have the advertising and promotion that it's fixed in the MFA where we are spending 5% of total sales. Remember that last year, we received during the pandemic in 2020, a waiver from McDonald's and that line was 4%. So this year, 2021, we are back to the 5% as we had back in 2019 as well. And then as you mentioned, we have the delivery take rates. That's where we include the fees that we pay to the third-party operators where we that we work with for the delivery segment.

And this line, as long as delivery continues to increase will have an impact, but remember that the fees of the operators are reflected in these lines, but there are a lot of gains that are shown in other lines. That's why we always mention that delivery is accretive to the business. But if you look only to the occupancy and other operating expenses line, you will probably see an increase there. On the other hand, for example, because of higher prices, food and paper receives some benefits, payroll and other fixed costs are also leveraged by delivery because you don't pay extra utilities and you don't use in many cases, more employees for -- to perform those sales. So delivery costs are included and the fees for the 3PLs are included in that line, but the benefits are widely spread along our P&L.

One more question here from Roberto Browne from Morgan Stanley. So you guys out of the several initiatives for cost and expense savings at the store and corporate levels, which ones could we expect to continue to have positive effects on margins after the pandemic?

I'll take this one, and thanks, Roberto, for the question. What we already explained, food and paper. We are seeing some pressures, but we are doing a lot of things in that aspect in order not to have significant impact going forward. But maybe let me go one step back and remember that in 2019, which was the last normal year, we experienced the highest EBITDA margin ever for the company at 10%. Of course, our goal is to go back to that margin level. And as I was mentioning, Food and paper, we are experiencing pressures, but we are doing everything we can so far successfully to avoid having an impact on that line. Payroll, I already mentioned that at the beginning of the call, and the payroll line is also performing well through productivity gains, efficiencies and as long as sales continue to increase, then we will see benefits on that line or not high pressures.

Occupancy and other, I just explained as well the rents, we are not seeing significant pressures and delivery, as long as it increased, will have some cost pressures in that line and then gains in other. Regarding royalty fees, we are seeing this year growth support from McDonald's that we think will lead to a 5.3% effective royalty rate. And this number, we expect to be slightly lower than the 5.5% that we paid in 2019. And in terms of -- finally, in terms of G&A, G&A expenses were historically low in 2019 as a percentage of revenue. But what I can say here is that as our strategic priorities evolve, we may relocate resources to new disciplines such as we have done with the digital team, we started building 7 years ago, but we expect to continue generating leverage on that line as well as revenue growth. So I think the outlook for our cost-saving initiatives, we are confident that we will try to expand it to the future and try to increase and go back to 2019 levels as soon as we can.

Perfect. Thanks, Mariano. We actually have no more questions in the queue, and we're almost at time. So this brings us to the end of the Q&A session.

We want to thank everyone for joining us today for your interest in the company, and we look forward to speaking with you again on our November earnings webcast. Until then, please stay safe, and have a great day.