Arcos Dorados Holdings Inc (ARCO) 2020 Q4 法說會逐字稿

Good morning, everyone.

Thank you for joining our Fourth Quarter and Full Year 2020 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.

We will be using the same webcast platform we use for our investor update in January of this year.

(Operator Instructions)

Also on the left-hand side of the screen, you'll find some basic information about today's speakers as well as the chat function for this webcast tool.

At the end of today's presentation, you will be able to submit questions using that chat function.

Before turning the call over to Marcelo, I'd 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 audited financial statements filed today with the SEC on Form 6-K.

Our discussion today also 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.

If you please now turn to Slide 3. Marcelo, over to you.

Thank you, Dan, and thanks to all of you for joining us on today's webcast.

Almost 2 months ago, we reported system-wide comparable sales for the fourth quarter, commented on the main trends in the 3 Ds, Drive-thru, Delivery and Digital, and delivered a preliminary outlook for 2021.

Today, we will fill in the details of our strong fourth quarter performance and talk about more recent trends as well.

Additionally, we will provide more color on the ongoing digital transformation of Arco Dorados, which will increase our lead in the digital race across the regions' restaurant industry.

Finally, we will share some important news related to our ESG commitments.

In 2020, we managed through the most unexpected and unprecedented crisis of our lifetimes.

We were forced to find new ways to work in our restaurants and offices, managing a business with an enormous geographic and cultural footprint while coordinating efforts with the vast network of suppliers and sub franchisees.

Looking now at Slide 4. I believe our successful crisis management was the result of our proactive and aggressive response to the crisis itself, together with our historical long-term strategic approach to growth.

We built a superior restaurant footprint, with 60% street-facing locations that are resilient in difficult times and flexible in terms of changing consumer behavior.

We introduced new sales segments to capture emerging growth opportunities, such as McDelivery in recent years and Dessert Centers further back in our history.

We began investing in digital tools more than 5 years ago, likely as the earliest movers in Latin America's QSR industry.

And we never lost sight of the company's most important assets, our people and the relationship with the communities they serve.

The recipe for the future is rooted in generating opportunities for young people and ensuring that we have a positive impact on the environment for the benefit of future generations.

Before I turn it over to Luis and Mariano for specifics on the fourth quarter, let me take you through the highlights of the full year 2020 on Slide 5. Total revenue for the year was almost $2 billion, which was about 33% lower than the prior year due to the impact of the pandemic and the depreciation of several of the regions' key currencies.

However, by focusing on the competitive strength of the 3 Ds, we generated strong sequential top line growth beginning in May, which included 33% constant currency Drive-thru sales growth and 153% constant currency delivery sales growth versus the prior year.

All of these supported by the most popular and highest-rated digital mobile app in the industry.

Adjusted EBITDA was $72.5 million despite a very difficult result in the second quarter.

Both profitability and cash flow generation improved significantly in the second half of 2020.

The benefit of having both geographic and currency diversification became crystal clear in 2020, when we did not depend on any single market to navigate the crisis, nor did we feel the impact of the pandemic in all markets at the same time.

In fact, 30% of last year's EBITDA before corporate expenses came from the U.S. dollar or euro generating markets, and another 20% was generated in markets with relatively stable local currencies.

We began 2021 the way we ended 2020, with strong top line and profitability trends despite a difficult comparison with the 10.9% comparable sales growth we generated in the first 2 months of last year.

As we told you at the beginning of the year, we expected to face near-term volatility before entering the full revival phase of our plan.

In fact, several governments recently increased restrictions on mobility and gatherings that negatively impact consumption.

This includes Brazil, where São Paulo state is about to complete 2 weeks of strict quarantine measures.

However, in other markets such as Argentina and Chile and SLAD, Colombia and Puerto Rico and the Caribbean and all NOLAD markets, the strong recovery trends have continued so far in March.

We also do not expect renewed restrictions to last as long or have the same impact as when the pandemic began 1 year ago.

Today, we are a more agile and adaptable company with all the learnings from last year.

We know which safety protocols are needed, how to move inventory from closed to open restaurants, which sales channels to focus on and in what way.

Keep in mind that the fast-growing Drive-thru and Delivery segments generated 52% of total sales in 2020, and these segments are not materially impacted by the restrictions.

Consumers also know how to better deal with these restrictions the second time around, and they know which brands they can trust and which touchless service models are available.

Finally, with our broad geographic footprint, we are seeing solid contributions from hard currency markets and benefiting from operating the industry's best brand and restaurant portfolio.

Luis, over to you for a look at operating highlights in the fourth quarter on Slide 6.

Thanks, Marcelo.

In January, we reported fourth quarter system-wide comparable sales for the company and by division.

So today, I will just point out a couple of additional highlights.

Brazil faced the toughest comparison with the prior year after posting 9.5% comparable sales growth in the fourth quarter of 2019.

Despite this, fourth quarter 2020 comparable sales approached 90% of the prior year's level and the cumulative sales impact of the last 2 years was down just 1%, far outperforming the industry in the period.

And at the beginning of last year, we finished acquiring all sub franchisee restaurants in Puerto Rico.

As a result, we now recognize 100% of the revenue from those locations rather than just rental income.

Although this does not change the system-wide comparable sales result, it did contribute 14.4 percentage points to the 19.2% U.S. dollar revenue growth in the quarter.

One of the consistent themes of 2020 was the contribution of the 3 Ds on Slide 7. The fourth quarter was no exception.

As constant currency growth in Drive-thru sales exceeded 48% and Delivery sales rose 171% over the prior year quarter.

The contribution to total sales from these 2 segments declined sequentially over the last 2 quarters as sales at the front counter and other sales segments continue recovering with fewer operating restrictions in most markets.

Still, Drive-thru generated almost 37%, and Delivery contributed more than 14% of the quarter sales, slightly higher than and in line with our long-term expectations, respectively.

Drive-thru was particularly strong at the end of the year when we reached a record number of vehicles served per restaurant in December.

And Delivery started 2021 on a high note, reaching the highest ever number of daily orders per restaurant in February.

Both segments are performing above expectation so far this year.

We are also very proud that McDonald's Corporation recently named our delivery squad among the winners of its Circle of Excellence Award, which celebrates the success of cross-functional teams that have come together to drive significant results across the business.

I want to congratulate our team for leading the way in Latin America and across the McDonald's system as well.

On the digital front, at the end of 2020, we had 46 million mobile app downloads.

I am very pleased to announce that just a few days ago, we became the first Latin America restaurant operator to cross the important milestone of 50 million downloads.

According to App Annie in Brazil, the McDonald's mobile app is consistently and by far the most downloaded app in the restaurant industry.

Perhaps a reflection of the app's industry-leading customer rating.

Let's turn to another important and consistent trend from 2020 on Slide 8, market share gains in our key markets.

According to the latest report from CREST, which started tracking the industry in 2016, McDonald's brand reached its highest share in Brazil's QSR industry last year with the largest share gain across all QSR brands, maintaining its significant leadership position.

There were similar gains in markets such as Argentina, Chile, Colombia and Puerto Rico, just to name a few.

While we certainly benefited from a consolidating industry and consumers who trusted larger brands to provide a safe restaurant experience, we believe the outperformance against the industry came from factors we controlled, proactive management decisions that leveraged our freestanding restaurant portfolio, a focus on the strength of the 3D strategy and the rapid implementation of the McProtegidos program.

In other words, we have capitalized on the opportunity to strengthen the McDonald's brand across the region by taking care of our people and guests, focusing on operational excellence and enhancing brand trust through safety.

We expect this consistent leadership to boost future growth when markets normalize.

The McDonald's brand remains the most trusted restaurant brand in the region for being the safest place to eat out-of-home by a wide margin.

In 2021, we will double down on the McProtegidos program to ensure excellence and consistency of execution.

Looking at the main priorities for 2021 on Slide 9. We are capturing further benefits from menu simplification, focusing marketing efforts on core products and reviving the family business in support of top line growth.

We are also sharpening our focus on the competitive advantages of operating the largest number of drive-thru restaurants with segment-specific initiatives.

For example, a swing by any way you like campaign that encourages guests to visit our drive-thru lane no matter how they get there.

Another example is the loyalty program linked to the drive-thru segment, Club VIP AutoMac.

The program, which already has 900,000 registered users, was originally launched in Argentina and was rolled out to Colombia, Chile, Uruguay and all 3 NOLAD markets during the fourth quarter.

Finally, I cannot overstate the significance of the delivery business.

We are continuously reducing our delivery times while improving the accuracy of the orders, which has resulted in some of the highest customer satisfaction scores since we launched the service in 2018.

This year's marketing plan is focused on driving delivery sales growth with a number of initiatives around special dates, exclusive promotions and relevant consumer occasions.

While we develop expanded delivery options, including own delivery, we are also optimizing our aggregator relationships.

In fact, after launching the service and building the McDelivery brand by partnering with major aggregators in each market, we are now testing exclusivity agreements with aggregators in Brazil, Colombia and Peru.

Among the benefits are the alignment of incentives and growth investments, together with a greater focus on execution to improve the customer experience.

So far, the results have been very promising.

Mariano, over to you for a closer look at the company's profitability and capital structure.

Thanks, Luis.

Let's start with fourth quarter adjusted EBITDA on Slide 10.

We worked hard in 2020 to transform Arcos Dorados' cost structure, successfully converting a significant portion of previously fixed costs and expenses to variable.

This is why we saw a rapid improvement in profitability in the second half of 2020 despite softer sales.

Our decisive cash management actions, together with our strong supplier at McDonald's relationships, helped to quickly stabilize our cash flows, which grew throughout the second half of 2020.

In terms of margin impact, food and paper costs were basically flat, both sequentially and versus the prior year quarter despite all the cost pressures we faced with protein prices, changes in mix and volatile market conditions.

Payroll and employee benefits as well as occupancy and other operating expenses improved significantly versus the third quarter and were close to flat versus the prior year quarter.

Margin pressure in the quarter came mostly from other operating expenses.

Turning now to Slide 11.

All 4 divisions improved EBITDA results versus the third quarter of 2020.

However, both Brazil and NOLAD saw margins and total EBITDA contract versus the prior year.

Brazil's results reflects lower sales and net negative impact from one-offs in other operating income and the depreciation of the Brazilian real versus the prior year.

NOLAD's EBITDA contraction was mostly the product of the sales decline versus the prior year.

SLAD's EBITDA improvement was largely driven by the recovery in the Chilean business as well as margin expansion in the quarter.

Finally, excluding last year's noncash bad debt reserve reversal in Puerto Rico, the Caribbean division's EBITDA margin expanded 990 basis points in the quarter, benefiting from strong U.S. dollar results now that we are operating 100% of that market's restaurants.

The division's EBITDA improvement also reflects significant growth in Colombia's drive-thru sales and another strong quarter from the euro-denominated markets of the French West Indies.

Turning now to our balance sheet and cash flow metrics on Slide 12.

We began 2021 with a very favorable cash position of $166 million, thanks to strong operating cash flow generation in the second half of 2020.

Despite all the challenges and the significantly lower EBITDA versus the prior year, cash flow from operations reached $66 million during the fourth quarter of 2020 compared with about $86 million in the prior year quarter.

By focusing on cash flow generation and maintaining a balanced FX hedging strategy, we successfully limited the year's net debt increase to $33.4 million or just 7% higher versus the prior year-end despite all the challenges we faced last year.

The net debt-to-EBITDA ratio rose to 7.4x due to the decline in trailing 12-month EBITDA.

This was below our initial expectations of at least 9x for the year-end, and we continue to expect it to gradually return to our comfort range over the final 3 quarters of 2021.

Our balance sheet is strong.

Not only did we start 2021 with a strong cash position and only modestly higher net debt, but it is important to highlight 3 other aspects of our debt profile.

First, we have 0 short-term debt, making our short-term credit lines fully available.

Second, the FX hedges that appreciated by $59 million last year are still in place.

And third, we have a healthy maturity profile with the next very manageable long-term debt maturity only in September of 2023.

We take a prudent approach to managing our capital structure.

When possible, we prefer to fully fund investments with cash generated from operations, while including a healthy mix of freestanding restaurants in our footprint in order to build and maintain a long-term sustainable business model.

The business and the restaurant footprint we have summarized on Slide 13 have been adjusted and are in the process of being optimized for the road ahead.

We opened just 9 restaurants last year, but through the first 2 months of 2021, we have already almost matched this number with 7 new restaurant openings.

Despite the short-term impact of renewed government restrictions, we are pleased with the profitability and cash flow trends during the first 2 months of 2021.

So we are currently evaluating growth opportunities that would take us to the top end of 40 to 50 new restaurant opening guidance for the year.

Marcelo, back to you.

Thanks, Mariano.

In January, we gave you some insight into the ongoing digital transformation of Arcos Dorados.

Today, I want to provide a few more details, starting with Slide 14.

We began this journey more than 6 years ago when few observers believed digital would meaningfully change the quick service restaurant business.

Our Chief Technology Officer, Marco Cordón, joined the company about 18 months ago to lead 3 interconnected groups.

Throughout 2020, we talked mostly about the customer-facing group, which we call ADVANCE.

However, the other 2 groups are crucial to the long-term success of everything we are doing in ADVANCE.

First is the information technology group that is working on modernizing our IT infrastructure to ensure we have the hardware, software, services and people necessary to extend Arco Dorados' lead in the Latin American QSR industry's digital race.

Then there is the data group that is working to improve the way we capture and analyze data to make better, faster and more targeted strategic decisions moving forward.

The ADVANCE team has 3 of its own interconnected agile squads made up of around 80 employees and best-in-class partners, working on delivery, which is now working to optimize our aggregator relationships, as Luis already mentioned, as well as the logistics and operations of all delivery channels, including our own delivery capabilities.

Digital marketing has made significant progress from a couple of years ago when we used the mobile app for one-size-fits-all digital company to today, when 100% of the digital offers we send customers are segmented to drive frequency and profitability.

And we are starting to implement personalized communications and offers to take advantage of our ability to identify at least 45% of digital sales down to individual guests.

Digital experience is the newest squad formed to develop our own channels to improve the guest experience with our mobile app.

This includes payment technologies, mobile order and pickup options, on delivery and several other initiatives that are in the early stages of development.

In order to stay on the leading edge, we need to ensure that we have the technological infrastructure to support these efforts.

The information technology team is upgrading systems to ensure uniformity and efficiency across the enterprise.

This includes moving core applications such as Oracle E-Business Suite to the cloud.

We have chosen Oracle Exadata Cloud Service and Oracle Cloud Infrastructure to support this process.

By modernizing our IT infrastructure, we can focus on other improvements, such as the standardization of systems and processes, enhanced cybersecurity and supporting better data collection and analysis.

Data is the key ingredient for success in this digital race.

So we hired the company's first Chief Data Officer, who started on March 1 to lead the data team.

With the modernization of our IT infrastructure and partnerships with leading CRM, cloud computing and e-commerce providers, we will truly begin to leverage the data we are capturing.

Finally, let me turn to ESG on Slide 15.

The recipe for the future is important to the way we run the company as well as how guests and communities view the brand.

This month, we welcome Gabriel Serber, our Senior Director of Social Impact and Sustainable Development, to the Management Board, the most senior members of the company's management team.

This year, for the first time, we are aligning ESG reporting with a financial reporting process for the 20-F filing with the SEC.

This will ensure the next social impact and sustainable development report is published around the same time and with as much visibility as our annual financial report.

To reinforce our commitment to the recipe for the future ESG program, today, I am proud to announce that starting with 2021, the variable compensation policy for the company's executives will include ESG indicators.

Arcos Dorados is the first major restaurant company in Latin America and the Caribbean to adopt this practice.

We have a long track record of contributing to the communities we serve, and we are committed to making a positive impact through youth opportunity, sustainable sourcing, packaging and recycling, climate change and family well-being.

This step further aligns the company with the long-term social and environmental commitments we made in recent years and ensures Arcos Dorados is recognized as one of the most socially responsible companies in Latin America.

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

Sure, Marcelo.

(Operator Instructions) We will now pause briefly to compile your questions.

Great.

So let's start with a couple of questions we have here from Ian Luketic of JPMorgan.

Both of these questions, I think, are for you, Marcelo.

How are sales performing after the fourth quarter?

And when do we expect them to normalize?

And if we can quantify how much sales are down in Brazil in March with the second wave of pandemic and the associated lockdowns.

Okay.

Thank you, Dan.

Ian, thank you for joining us for today's webcast.

And based on the conversations we have had with many of you in recent weeks, I think that this was one of the most frequent asked question to ask.

So I try to give you a very comprehensive answer about this.

First, how we see this year, how we see 2021.

We started 2021 with relatively modest expectations for the first half of the year.

And our base assumption and our most likely scenario is that operating conditions will be closer to normal in the second half of the year.

The year started with sales trends in line with our expectations but with better-than-expected profitability trends in both January and February.

Consumers continue responding positively to the safety of our operation and to the convenience that we are offering through the 3 Ds, Drive-thru, Delivery and Digital, all of which maintain a very strong growth rates at the start of the year.

In March, in particular, we have seen the return of government-mandated restrictions in some markets, most notably in Brazil.

So let's talk in detail about what's going on in Brazil in these days.

As of today, about 15%, and to be more specific, 155 restaurants are closed in Brazil, mostly in shopping malls and mostly in the state of São Paulo.

Remember that at the peak of the crisis last year, we had closed around 40% of the restaurants in Brazil and at that time, no restaurant was able to operate all sales segment.

As of today, 23% of our restaurants in Brazil are fully open, are operating all business segments, and we have the other almost 60% operating at least 1 sales segment.

So we are facing less restrictions at this moment than last year at the peak of the crisis.

And on top of that, our operation has been adjusted to be more agile and adaptable, applying all the learnings from last year.

Consumers have also adjusted their habits given the experience of the last 12 months.

And based on what we have seen, we believe that sales numbers will bounce back quickly once the restrictions are lifted.

So that's the situation in Brazil, which, as you know, is a part of our footprint, the largest one, but just a part.

Keep in mind that -- what we mentioned in the opening remarks.

We are generating strong top line and EBITDA results in other markets, particularly those with U.S. dollar, euro and other stable local currencies in our other 3 divisions.

Last year, for example, fully 50% of the year's EBITDA result before corporate expenses came from these markets.

And generally speaking, government restrictions have loosened in these markets, which means that we are much closer to normal when we look at the consolidated operation.

Just to give you an idea, we -- I mentioned, we have 155 restaurants closed in Brazil.

In all the other markets, excluding Venezuela, we only have 7 restaurants completely closed.

So we are mostly operating in all the restaurants in the rest of the company.

And in those restaurants that are closed in the rest of the company, more than 60% of them are operating all business segments.

So the situation outside Brazil is much better in terms of restrictions.

Needless to say, the situation is very dynamic, and we are closely monitoring developments in each market.

And we are making the adjustments to the operation as needed and leveraging all the learnings of last year.

So wrapping up, I'm sorry for the long answer to the question.

I firmly believe -- we firmly believe that we have the right strategic approach for this year.

We remain very confident in our ability to capitalize on our market share gains and unmatched restaurant footprint once these short-term disruptions are behind us.

Perfect.

Next couple of questions are from Marcella Recchia of Crédit Suisse.

And the first one, I think, is for you, Luis.

And she asked about the Club VIP AutoMac, the loyalty program around our drive-thru programs.

And if you can comment on sort of the nature of the program, provide a little bit of visibility in terms of what we expect to do with it moving forward, if we're going to roll it out into Brazil or -- and also if it's the only loyalty program or if there are any other loyalty programs, excuse me, that are underway as well.

Thank you, Dan.

Marcella, thank you for the question.

First, for us, having a loyalty program is a strategic initiative since it stimulates the frequency of consumption of our customers, increasing their loyalty to the business and to the brand.

And there are a different way the loyalty program.

We have already started through the use of digital offers in our app, where we can identify their frequency of visit and their favorite stores and products.

Additionally, as I -- we mentioned, we have already this Club VIP AutoMac that is the first step of building a compelling loyalty program platform.

This club is already in Argentina, Colombia, Chile, Uruguay, Costa Rica, Panama and Mexico.

And our plan is to roll it out to the rest of the region, of course, Brazil included.

Today, the members receive exclusive offers and information related to their favorite products, stores and use-ication.

And it already has like 900,000 registered users.

And even though it's in the early stages, we're focusing on developing efficiently because it's going to be very important in the near future.

Great.

And the second question from Marcella is for you, Mariano, and she asked about sort of the nature of the tax-related provisions in Brazil in the quarter -- in the fourth quarter of this year and last year.

So if you can just provide a little bit of color there, that would be great.

Yes.

Thanks, Dan.

And thank you, Marcella, for the question.

Yes, half of the decline in Brazil's fourth quarter 2020 margin is explained actually by the other operating income line, which was mostly the result of tax-related and other provisions that generated relevant positive one-offs already reported in 2019 and some negative one-offs in the fourth quarter of 2020.

And we are not expecting that these specific items that I just mentioned will continue going forward.

Perfect.

We also have a number of questions here from a number of folks.

Marcel Moraes from Santander, Jeronimo de Guzman from INCA and Marcella also from Crédit Suisse have all asked different questions related to our delivery aggregator relationships, how many relationships we have in the various markets and also a little bit more color or if we can provide a little bit more background on what we mentioned in our opening remarks related to the exclusivity agreement with iFOOD in Brazil and possibly other tests that we're doing along those lines.

So I think, Marcelo, that's for you.

Okay.

Thank you, and thanks for the questions.

As you may know, we are operating delivery in 17 of our 20 markets in the region.

And we have a very strategic approach to this segment, which grew dramatically and in a spectacular way last year.

So we are negotiating with all the aggregators that have operations in our markets, in the different markets.

And we are looking market by market in order to optimize our results, our sales growth, our margins and our market share in this business segment, which is very important for us.

So typically, we have markets -- most of the markets where we work with 3 or 4 aggregators, the main ones in those markets.

And at the same time, from the last part of last year and at the beginning of this year, we are running some experiences, new experiences in terms of exclusivity in some markets, particularly, at this moment, we have some exclusivity agreements in 3 of our markets, Brazil, Colombia and Peru.

And in these cases, we base the negotiations with the aggregators with which we signed these agreements based in 3 pillars: sales growth, which is maybe the most important for us, okay, which is the player that can give us the fastest pace in terms of sales growth in the short term.

That obviously translates in gains in market share, particularly for the future.

And third, profitability, which is a main part of the decision.

So we are very pleased with the results, the early results we are getting.

We mentioned during our opening remarks that we hit our record sales per day per restaurant in delivery in February.

And let me add to that, that March is looking even better.

So we have a very strategic approach and we are looking, market by market, how we can optimize this channel, how we can optimize the results of this business segment for the company.

And we leverage, obviously, our size.

We are the only player in the region that can sit with any aggregator and talk about 17 markets at the same time, just 1 brand, just 1 operator.

That's a huge advantage in order to negotiate different conditions across the region.

So that's more or less what I have to say about this, Dan.

Yes.

And Marcelo, let me add, regarding margins, delivery margins.

Given the incrementality of sales in this segment, the fact that delivery does not require almost any additional investment, the strategic negotiations that you just mentioned with our 3 [POs] in every market where we operate, the higher prices that we have in the menu board for delivery, plus the higher average check of this segment, we have been able to manage this segment very efficiently, allowing us to leverage on the fixed costs at the restaurant level and bringing additional dollars to the business.

So that's more or less the pictures, the picture regarding margin related to this segment, which is very accretive for the company.

And so Mariano, why don't we keep it with you?

[Barbara] from JPMorgan asks the question with respect to what your expectations are for working capital dynamics in 2020.

And we have a somewhat related question related from Hugo of Luminus Capital, who is asking about sort of our margin outlook.

He notes that margins seem pretty high considering the current sales level and was wondering if there's a structurally higher margin expected than pre COVID or if it's too soon to say.

So maybe you can sort of take the cash flow and margin perspective there.

Perfect.

Thanks, [Barbara] and Hugo.

Well, first of all, it's worth noting that we started the year with a very strong balance sheet, including a very comfortable cash balance of $166 million, no short-term debt and a manageable maturity profile for our long-term debt.

So for this year, we are starting with a very strong cash position.

In part, the reason for that are all the successful negotiations that we performed during 2020.

Within those, it's worth mentioning that from March to July of 2020, we did not pay royalty fees to McDonald's that we are starting to pay this year starting in January.

So from January to March, regarding working capital, we're going to have some pressure on our cash because we are paying each month double royalties.

But having said that, we are starting the year with a very strong cash position.

And on top of that, we continue negotiating with all our suppliers to -- in order to increase and have better payment terms.

When I say suppliers, I'm mentioning all the food and paper suppliers, I'm mentioning all landlords, all corporate suppliers.

So regarding working capital, 2020 was a cash flow -- working capital generated additional cash to the company.

In 2021, we will go back more to normal levels, mainly because we are paying fees -- royalty fees to McDonald's from last year.

But it's important also to note that this year, we are receiving the growth support, as we explained already during our investor call in January.

So the royalty fees for this year are going to be lower in percentage terms over sales.

So that's regarding working capital.

We are not expecting any pressure, and we are very comfortable with our cash position and the cash that we are expecting to generate throughout the year.

Regarding margin expectations for 2021 and the questions regarding how we can see margins for 2021.

You know that in 2019, we have a 10% EBITDA margin, which was the highest in the company's history.

So although we do not expect to reach those levels yet in 2021, as sales continue to recover, we do expect much better EBITDA performance versus 2020, especially if we see the more normalized operating environment we are expecting for the second half of this year.

The good news is we started 2021 with solid top line performance and better-than-expected profitability in January and February.

Remember that the same period in 2020 did not experience the effects of the pandemic, which only started having a material impact on results during the second half of March.

In this line, what we can say is that although the first 2 months of 2021 trended in the right direction, they have not yet returned to pre-pandemic performance.

So comparing 2021 with 2019, we expect some cost pressures mainly from protein costs in the food and paper line, some higher delivery take rates within the occupancy and other expense line and some deleveraging in terms of G&A expenses as a percentage of sales, not in absolute terms.

But as a percentage of sales, we do.

On the other hand, the good news is that increasingly effective digital marketing, menu simplification, higher restaurant productivity, continued improvement in front counter and dessert center sales and the resumption of the already mentioned growth support we are receiving from McDonald's should help recapture some of the pre-pandemic profitability.

So that's the general outlook for margins in 2021.

It's also relevant to point out that we operate across a large geography.

And when we look at the performance on a division-by-division basis, there are different stories to tell.

Caribbean division, for example, as we have already mentioned during last year, which generates a large portion of its EBITDA in U.S. dollars or euros, has maintained the very strong performance you saw in the second half of 2020.

So January and February, we're seeing a similar performance.

Brazil and SLAD, with a solid rebound in Chile and Argentina mainly, also performed well in the first 2 months of the year but remained below last year's level, talking about January and February.

And NOLAD has been the slowest to recover, although we see some promising underlying trends that we hold will improve performance as the year continues.

So I think that's the overall picture for 2021 regarding each of the cost lines and of our geography as well.

Thanks, Mariano.

I come back to a question from Ian Luketic of JPMorgan.

And this one relates to market share gains.

Yes, if we can quantify market share gains in Brazil, and if we believe these gains were on top of smaller players or even some of the larger QSR players in the market.

And I think that's for you, Marcelo.

Okay.

Let me first start talking about how we measure market share.

We mentioned we track market share using a variety of sources of information.

And what we do is we try to triangulate to identify trends and areas of opportunities.

Particularly talking about Brazil, we have the opportunity to work with CREST.

CREST is -- it has a very large sample size, more than 70,000 cases per year.

So it's a very robust tool, and the sampling error is very small.

And according to this tool, to this CREST tool, we have, in 2020, our highest market share ever in Brazil.

They began measuring Brazil in 2016.

And our expansion compared with 2019 was a multiple of all other players in the marketplace.

So most of the gain came from smaller players.

That's what the information tells us.

And at the time, we have more than 2x the market share that our closest competitor has in Brazil in both measures because we have information both from visits and sales.

And in both measures, we have more than 2x the market share of our closest competitor.

And in both categories, because they measure market share related to QSR, quick service restaurant industry, and to the EO, for when eating out industry, so the whole industry.

And in both cases, we have the 2x -- more than 2x the market share of our closest competitor.

And it's important to notice that this kind of trend, showing us that we gained market share big time last year, is similar in other markets where we operate, not only Brazil, markets like Argentina, Chile, Colombia and Puerto Rico.

We have a pretty strong market share gain in 2020, and we are building on that in order to come out of this crisis in a even stronger position than we have before it.

That's more or less what I can disclose about market share.

Great.

We'll keep it with you, Marcelo.

Joaquín Ley from Itaú has asked us to elaborate on how digital and targeted marketing will impact our pricing and costs.

And if we have an ongoing program to improve data management.

Yes.

Joaquín, and thank you for joining us today.

Yes, definitely, we see this as a big opportunity for us.

That's why we were talking about digital transformation in Arcos Dorados for the last few years.

The name of the game for us in this is moving from mass marketing to mass personalization.

And given the fact that we have better tools and we have a better understanding, we analyze better data and with better tools, including artificial intelligence, we have the opportunity to go, first, segment our offers, our promotions, our incentives for the customers.

And we are reaching the point where, for example, at this time, we have approximately 45% of our digital sales identified up to the customer, the individual customers.

So with that information and all the tools we are building and we are working with, not only internal tools, but with the partners, world-class partners that we are working with, we have the opportunity to target individuals with specific promotions, specific incentives and proposals in order to increase frequency and profitability.

So we are very excited with this in the company.

We talk a lot about winning the digital race in our region.

I think that we are the front-runner right now but we still have higher aspirations for this in order to improve our results going forward.

Great.

Thanks, Marcelo.

A question, I think, Mariano, maybe you can talk about this, with respect to concerns around supply chain, how our supply chain has been performing and maybe the impact on gross margins.

Yes.

Well, regarding concerns about supply chain.

We don't have any concern regarding availability of products to arrive to our restaurants.

In that respect, we don't have any concern.

The only concern, and I already mentioned something during the question about margin outlook for 2021, is about the protein prices.

So far, we have been pretty successful defending our gross margin.

If you look at gross margin during 2020, we have been very successful absorbing those costs, either via successful negotiations with suppliers and also having the revenue management skills to identify and to be able to transfer those increases to our average check and being able to sell the products that have higher margins.

Marcelo already explained how the digital transformation that the company is having has allowed us to improve our revenue management skills and our pricing skills and that's the way we are doing, and that's the way that we are expecting to continue to do it in 2021.

So I think the answer to the question is there -- to summarize it, is we see some pressures in the protein prices.

That pressure comes to the entire industry, not -- of course, not only to us.

We really think that we are much well prepared to face that challenge as we already demonstrated that during 2020, and you can see that in the -- specifically in the fourth quarter.

And all the things that we are doing to improve our pricing skills and improve also the product mix, we also -- we are also very confident that will allow us to maintain a very healthy gross margin for 2021.

Thanks, Mariano.

A follow-up question from Marcella Recchia of Crédit Suisse.

She asked if we could comment on how much pricing we passed through in Brazil in order to reach the current margin levels.

I think that's for you, Marcelo.

Okay.

Thanks, Marcella.

I would say that if you look at our menu ball prices or price increases, what we did in 2020 was pretty in line with inflation in the market.

But as I was mentioning before, since more and more of our sales are digital and come from different sources and different tools, like delivery and like our McDonald's app in the region, in those sales, we have the opportunity to make a different price strategy even for each customer.

So we have more flexibility, and we are trying to offer very compelling value propositions for customers, particularly, for example, last year, at the beginning of this year, we are pretty focused in family bundles and group of products for groups of persons.

And in those, we can offer very compelling value propositions for the customers and at the same time, at very good prices and margins for us.

I think that part of the explanation for our results in terms of gross margin last year was not only the excellent job that our supply chain team did during the year in order to keep the costs in our backdoor as low as possible, but at the same time, the ability that we have in order to deal with pricing.

So that's more or less what's going on in this area.

Perfect.

And we have time, I think, for one last question.

It comes from Jeronimo de Guzman, and he asked for a little bit of clarity or if we can comment, Mariano, on the FX hedges we have in place for 2021, food and paper purchases and maybe contrast that with how we were positioned last year.

Okay.

Thanks, Jeronimo, for the question.

Well, last year, in 2020, we were -- our hedging program.

And as I always mentioned, this is not speculative.

This is to give us -- this program is to give us visibility on our cost structure.

Having said that, during 2020, the average spot in almost all the hedges, given the depreciation of the currencies, was very accretive for the company.

And just to explain how it works, each time currencies depreciate and when we hedge in advance, that will bring a gain in our food and paper line.

This -- and we always hedge 6 to 9 months in advance.

That means that during 2020, given the sharp depreciation of all LATAM currencies, we had a lower food and paper cost than we would have had without hedges.

Same is happening for 2021.

We are already hedging for the third quarter of 2021 and the hedging on the FX values for those hedges are well below the current spot for the currencies.

Of course, the figures that we hedge for 2021 are -- or the rates at which we hedge for 2021 are higher than the ones that we hedge for 2020.

It's also worth mentioning that we hedge our imports, only 50% of our imports in the main countries where we hedge or the main countries that we have hedging in place, which are Brazil, Colombia, Uruguay, Chile and Mexico.

Great.

Thanks, Mariano.

I think we're a little bit over time.

And so I wanted to thank everyone again for joining you -- joining us today and for your interest in the company.

We look forward to speaking with you again on our May earnings call.

Obviously, the IR team is always available to you for any follow-up questions today and as we move forward.

Until we speak again, please stay safe, and have a great day.