Arcos Dorados Holdings Inc (ARCO) 2012 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Arcos Dorados Second Quarter 2012 Earnings Conference Call. With us today are Woods Staton, Chairman and Chief Executive Officer, Sergio Alonso, Chief Operating Officer, the Company's CFO, German Lemonnier and Sofia Chellew, Investor Relations Director.

As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Today's conference is being recorded.

Hello, everybody. This is Sofia Chellew. Before we proceed, 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 measures to the comparable GAAP result, which can be found in the press release filed with the SEC on form 6K.

I would now like to turn the call over to Woods Staton, our CEO and Chairman.

Thank you, Sofia, and hello to everyone. I'd like to thank you all for joining us today for our second quarter 2012 review of results. After some brief comments, we will open the call to questions. During the quarter, we remain focused on what McDonald's does best, that is providing the highest quality customer experience, delivering the most relevant menu items and increasing accessibility to the McDonalds brand.

Our operations continue to be strong in the second quarter, driven by higher check growth, increased guest counts, successful marketing activities and continued operational efficiencies. The result is double digit comparable sales growth and solid operating profitability, despite macroeconomic headwinds in some of our key markets.

To mention a few highlights, comp sales rose 10.4% year-over-year. This is particularly significant as it comes on top of a double digit increase in the year ago period. Revenue growth excluding the impact of currencies was 15.5%.

Our reported adjusted EBITDA and net income were particularly impacted by the sharp depreciation of 23% in the Brazilian currency. Excluding the impact of currency translation and other special items, adjusted EBITDA rose 6.3% year-over-year.

You all will have noticed, we are now reporting organic results which strips out the impact of currency translation and special items, alongside reported results to better reflect the health and growth of our business on the ground. We identify special items in the analysis. We hope that this new format will make it easier for you to track our underlying performance.

Our leadership position and ability to adapt marketing activities to changing conditions led to increased sales in Brazil in the second quarter, even as economic activity was sluggish. Brazil reported 0.75% year-over-year growth in the first half. Venezuela and Argentina also continue to be important contributors to consolidating results and we're monitoring those two markets carefully.

We are pleased with the progress that we are making in our turnaround plan for Mexico and expect to continue to benefit from a better macroeconomic scenario in that country as we go forward.

Operations in the Caribbean also improved, the stronger performance from Puerto Rico, fueled by innovative marketing initiatives are driving revenue growth. The result is double digit organic revenue growth for the Company, which is on target with our stated expectations.

And, while various macroeconomic and geopolitical issues persist in the region, the underlying strength of our enterprise is indisputable and will serve as a driver of ongoing future revenue growth.

We continue to expect to achieve our full year revenue growth target. However, given the slower than expected pickup in economic activity in our largest market, Brazil, and the impact on dollar costs from currency weakness, we now anticipate achieving adjusted EBITDA growth rate for the year 2012 of between 8% and 10% on a constant currency basis.

Turning to slide three, you will all be familiar with McDonald's successful growth roadmap, the plan to win. As McDonald's largest franchisee, Arcos Dorados forms an important part of this plan. To complement this strategy and to take account of Arcos Dorados unique operating environment, we have created our own growth blueprints, Receta Para Ganar, or Recipe to Win.

For our team members there is little that will come as a surprise in this strategy. Every Arcos Dorados colleague is aware of the emphasis we place on customer satisfaction and sales growth. Our first vector as well as our focus on margin management, the third vector. As such, all this plan does is institutionalize something that's already inbred in our team.

While we are still refining specific targets for the plan, we have chosen to communicate this framework with our external stakeholders, because, much like the plan to win, it will govern our approach to growth over the next five years. Also, I want to be clear about our areas of focus and how we plan to improve our business.

The first vector, comparable sales growth is a key pillar of Receta Para Ganar and it's always been at the forefront of our effort to expand the business. We have a number of initiatives in place to grow sales including brand extensions like McCafe's and dessert centers. Most recently, we launched a combined beverage business in the Caribbean, which is proving to be highly successful.

Going forward, we should be able to expand guest counts, increase average check, and further refine Arcos Dorados dynamic pricing strategy while keeping at the forefront our commitment to customer satisfaction levels.

Our next vector, development, refers to increasing sales form new restaurants, improving the quality of existing stores through imaging and maximizing our return on investments. We are focused on conducting a thorough planning process and maintaining a balanced approach for openings planned.

I strongly believe that this is a key differentiating element to the strength of the brand and to sustainable revenue generation. The highest selling restaurant in Brazil was only opened in 2009. The opportunity remains enormous in all of our markets.

Our third vector is margin management, which is crucial if you balance the growth of our footprint to take advantage of increased purchasing power with the need to contain costs and achieve operational leverage. When we think about margins, we are particularly focused on food and paper, payroll and operating expenses.

The use of currency hedges benefitted food and paper margins in the first half of the year, for example. Additional programs to better align the rate of cost growth to revenue growth focuses on productivity and fixed cost optimization at the restaurant levels. Made For You is an example of such an initiative.

In the second quarter we made headway on our fourth vector, G&A leverage when measured excluding the effect of currency and special items. As we continue to open restaurants and generate additional volumes with a relatively stable structure, we should see more evidence of this leverage.

And finally, our fifth vector, improving our EBITDA to net income yield requires us to refine our taxation structure, manage the impact of foreign exchange movements and reduce financing costs. All of which, we are currently working on and have demonstrated advancements.

All of our initiatives contribute to this Receta Para Ganar which also serves to keep our focus on the key factor to generate value for our business.

During the second half, as the economic environment begins to recover, we are focused on strategic initiatives to drive down costs, improve efficiencies and increase margins coupled with the marketing initiatives that will continue to support our leadership position.

Specifically, we are very pleased with the role of the Made For You platform, which has exceeded internal targets with respects to food quality, increased productivity and reduced waste. Made For You has been an important strategy to help mitigate increased labor related costs you would otherwise have to fully absorb while delivering a superior customer experience.

I will now hand the call over to Sergio Alonso, who will go through Arcos Dorados key marketing initiatives and top line performance by region in the second quarter in greater detail. Sergio?

Thank you, Woods, and hello everyone. And just a reminder, this presentation is available on our website and also in the webcast.

Now, I would like to take you through some of the key market initiatives that shaped out our second quarter results, which can be found on slide number four. As you will know, McDonald's has been a sponsor of the Olympics for more than 35 years and in 1996, became the official restaurant of the Olympic Games.

The games trended our brand on an international level as well as throughout our specific markets. Promotions included a giveaway of Coca-Cola glasses during this period. This is an important part of the run up to the 2016 summer Olympic games hosted by Rio de Janeiro where we will play an active role as host country sponsors.

Promoting a balanced lifestyle is a key positioning element of our brand and increasing our presence as sponsor of sporting events throughout the region as well as offering tasty and healthy options on our menu underscores this position.

Additionally, during the second quarter we will enforce [tribal] traffic in most of our markets through successful happy meal promotions with Madagascar. We have also entered new segments with the launch of wraps in many markets, with the new and interesting packaging solution to [sign in] consumption on the go.

All of this addition is drove system wide comparable sales growth which primarily reflected average check growth when compared to one year ago. In addition, traffic is also showing positive momentum.

Please turn to slide five. As Woods mentioned, we are now highlighting results on a divisional basis so that you can obtain a complete impression of each individual region's performance. Starting with Brazil, the macroeconomic environment was challenging in the second quarter as growth and consumer spending remained weak.

On top of that, on average, the Brazilian real fell 23% versus the US dollar, which resulted in a 9.1% decline in reported revenues. But excluding the sharp depreciation in the Brazilian currency, organic revenue growth was 11.5%. This increase was driven by system wide comparable sales growth of 5.6% in the quarter. And additionally, we had a net addition of 52 restaurants over the past 12 months, which contributed $26 million to revenues.

In Brazil, our guest counts benefit from the inclusion of the Quarter Pounder in the value platform at BRL5 and the successful Happy Meal promotion with Madagascar. And while the aspirational quality of our brand is consistent with an expanding middle class, our menus contain a mix of products and price points, enable us to address price sensitive customers and defend traffic levels.

Slide six shows the performance over our NOLAD division, which was a solid contributor to second quarter performance amid sound overall economic conditions and progress in the turnaround of our Mexican operations.

The division revenues grew 15.4% on an organic basis, year-over-year. The increase was driven by system wide comparable sales growth of 9.2% due primarily to increase sales actions. While the net addition of 19 restaurants during the past 12 months contributed with $4.2 million to revenues.

The combination of successful marketing activities and operational enhancements is translating into increased transaction and improved margins as we advance our turnaround effort in that market.

Turning to slide seven, the SLAD division was another strong contributor to our quarterly results. Revenue grew by 24.7% on an organic basis in the second quarter. The significant improvement reflects a 21.9% increase in system wide comparable sales and the net addition of 28 restaurants during the last 12 month period which contributed with $9.2 million to revenues.

The increase in comparable sales reflected strong average ticket growth in most countries in the division, particularly in Argentina and Venezuela, which have higher inflation levels than the other countries within the division. These two markets have held up well, despite geopolitical headwinds and slowing growth. We're closely monitoring conditions in these two countries.

Turning to slide eight, the Caribbean division experienced revenue growth of 5.6% on an organic basis, system wide comparable sales of 2.8% were mostly a result of [Arcos] growth despite weak economic output in the region.

The launching of combined beverage business or CBB, as mentioned early this year is providing positive results and has been well received by customers with an offering of cafes, frappes, smoothies and lemonades. This opens up a new category for us and captures new conception opportunities that complement our existing menu offerings. And additionally, chicken McBites have boost sales in the quarter.

Now, please turn to slide nine. As you know, the execution of our ambitious operating schedule is crucial to extending our footprint in Latin America in order to take advantage of the low penetration of the QSR formats and cement our leadership position. Over the last 12 months, the pace of recent openings accelerated with the net addition of 91 new restaurants up from 86 in the previous 12 months period. These restaurants contributed $40.4 million to revenues and will fuel sales growth in the years to come.

Just as important as the size of our restaurant base is the mix, we maintain a balanced portfolio of restaurants with free standing making up about half of our base. This is higher than the industry standard and insures long term brand development and growth potential in key locations as we are able to adopt our offerings to meet changing customer needs as well as provide what we call the full McDonald's experience.

Now, German will discuss our adjusted EBITDA generation, balance sheet and our outlook for the remainder of the year.

Thanks, Sergio. Please turn to the chart on slide 10 to review in more details component of adjusted EBITDA. Overall adjusted EBITDA was impacted by margin variation, currency and special items. Excluding currency in the impact and special items, we consider the cut, the [city] tax in Brazil and the Venezuela temporary royalty waiver, adjusted EBITDA rose 6.3% as compared to second quarter 2011. Comps related accruals amounted to a benefit of $6.3 million in 2012 compared with the charge of $.4 million in 2011.

The adjusted EBITDA margin as a percent of total revenue fell 20 basis points to 7.4% in the quarter, mainly due to the Brazilian cost growth.

NOLAD, however, experienced a margin improvement of 230 basis points and Mexico's turn around plan advanced. Additionally, SLAD's adjusted EBITDA contribution improved.

In Brazil, organic adjusted EBITDA contracted 3.5% excluding the city tax and royalty payment for $2.7 million. And that was not recognized until the fourth quarter, 2011. This tax will continue going forward and will no longer be considered, especially the item in 2013 for comparison purposes.

Adjusted EBITDA was also impacted by a modest increase in food and paper costs as a percent of sales and higher payroll costs as a result of increased minimum wages.

In NOLAD, adjusted EBITDA grew 54% on an organic basis, reflecting increased traffic, which in turn led to reduced payroll as a percent of sale and G&A leverage.

In this slide, adjusted EBITDA increased as a temporary royalty relief in Venezuela of $1.2 million combined with G&A leverage upset the negative impact of currency conversion and higher payroll as a percent of sales. On an organic basis, adjusted EBITDA rose 27.4%.

In the Caribbean adjusted EBITDA increased 15.4% on an organic basis and the EBITDA margin also improved mainly driven by efficiencies in payroll and higher comparable sales.

In summary, consolidated reported revenues of $904.2 million are impacted by depreciation of local currency. Once you exclude the impact from currencies translation, our top line results were better with revenue growth amounting to 15.5% on an organic basis. Consolidated adjusted EBITDA totaled $67.3 million.

Now turning to the non operating results. Non operating charges were partially offset by lower overall financial costs including existing realities in the second quarter 2011. Mainly due to the debt restructuring in July 2011.

Finally, net income reached $12.1 million in the second quarter, down from $14.2 million one year ago as improved operating income and funding costs were offset by foreign exchange losses and higher tax charge. The Company reported basic earnings per share of $0.06 in the second quarter of 2012, compared to $0.07 in the previous corresponded period.

Now, taking a quick look at our balance sheet on slide 11. The Company maintained a solid debt to equity ratio of 1 and ended the quarter with $245 million in cash and cash equivalents, which gives us the flexibility to expand our business and pursue future development.

For the full year, the expected capital expenditure plans remained the same with more than 130 gross open. Due to the devaluation in local currency the results in a lower full year CapEx in US dollar terms and should amount to $300 million to $320 million.

Financial ratios continue healthy levels and well below any covenant requirement.

Please turn to slide 12. Base on the current environment and market plan for the remaining of the year, the Company's maintaining its full year and effective revenue and effective tax rate outlook provide at the beginning of the year.

However, given its lower unexpected pickup in consumption Brazil, along with potential pressure on imported costs from providing currency rates, we now expect to achieve adjusted EBITDA growth based on constant currency and excluding the caps related impact of between 8% to 10%. As a reminder, revenue growth remain as original anticipated in the range of 15% to 17% and the effective tax rate for the year is expected to be in the range of 31% to 33%.

I will now hand the call back to Woods for some closing remarks.

Thank you, German. The strength of our operations is indisputable and is reflected in our ability to drive sales growth and increase operating income despite macroeconomic headwinds in some of the key markets we operate in.

But we are focused on staying the course and achieving our goals, I would also like to emphasize our long term focus. The current environment does not detract from Latin America's long term positive outlook, healthy population growth, untapped demand for our products and a swelling middle class will continue to lift our profitability and cement our leadership over the years to come.

Thank you for your attention, we will now open the call up to questions. John? John Glass?.

And, at this time, we will begin the question and answer session. (Operator Instructions). In the interest of time, we do ask that you please limit yourselves to a single question. (Operator Instructions). Our first question comes from John Glass from Morgan Stanley. Please go ahead with your question.

Hi, thanks very much and appreciate the increased disclosure and slides, that's helpful. I guess my question is a larger one then just on your revised full year guidance. You didn't change your revenue guidance, you changed your EBITDA guidance and yet you've talked about increased or slower than expected macro recovery. So specifically, did you change your same store sales guidance in Brazil and what is the new expectation there?

And in also in answering that, can you talk about what your unit development goals are for this year? You've opened up 18 stores year to date and we'd at least initially thought the full year you might get to somewhere north of 100, even 120 stores. So is that still a viable goal, given where you are on year to date on unit development? Thanks.

Yes, so let me start -- hi John, how are you?

I'm well.

John, we are continuing on track with our openings of -- store openings, as you probably know, we're always back ended, we get most of our store openings in the third and fourth quarters of every year, so that's going to happen again this year. We are ahead, however, of last year's opening plan to date. So we're doing fine and we're comfortable.

We are still bullish with Brazil and we are still keeping to the guidance of revenue for the whole company, but we feel that even though Brazil is going to be okay, we feel that the uptick in economic activity is going to happen maybe toward the latter part of the third quarter versus earlier, so that's the only thing I have to say about that.

Thank you, and next question please.

Our next question comes from Jeronimo De Guzman from Morgan Stanley. Please go ahead with your question.

Hi, good morning. A couple questions, the first one was if you have any more color on how the sales performance has been trending in Brazil so far in the quarter and also in terms of the second quarter, if it was mostly driven by tickets or if there was -- yes, just kind of how the same store sales behaved.

And then, if you have any color on the combined beverage business in the Caribbean, what kind of a -- any insights on what's sold so far in terms of how much its helping sales for restaurants that have it and any views on a timeline regarding implementation in other regions?

You want me to take it, Woods?

Yes, go ahead.

Yes, first part of the question, Jeronimo related to Brazil sales performance in Q2 will -- the main driver for sales were average check for this quarter in Brazil.

And the second question was about the CBD performance. Well, Woods mentioned in his presentation, we have already implemented in Puerto Rico which is doing very well, is actually creating a new category. Our restaurants are performing very well actually, slightly higher than the average in the sales. So we do have plans but we're still during the process of discussing how fast are we going to develop this segment in other markets in the Company.

But, do you have any metric in terms of how much it helped sales for specific units where you put in the CBB? Anything that (inaudible - multiple speakers)

As a main driver -- in the case of Puerto Rico, we're pretty much in line with what happened in Brazil, the main driver for sales were average check and we believe that as a very significant portion of this average check increase came from the addition of CBB. Some -- a relevant portion of our customers, they're trading up the beverage of the EVMs or the menus for CBB beverage and that for sure helps average checks up.

Okay, thank you.

Thank you. Next question, please.

Our next question comes from John Ivankoe from JPMorgan. Please go ahead with your question.

Hi, great. I think it's all one question. Firstly, just in terms of setting expectations, if I can, the third quarter of '11, very difficult comp quarter, even more difficult than the second, just to keep everyone on the same page, should we expect a similar, greater, or lesser number than the second quarter? So, that's the first broad question.

And then, secondly, it was I think in your prepared remarks, at least I interpreted something about some hedges that you had in commodities that may have kind of offset some of the volatility in the first half, could you make a comment in terms of what they may be in the second half, especially with the US dollar being stronger year-over-year especially in the third quarter?

Okay, let me pass to German. Hi John.

Hi, John, how are you?

hi, fine thank you.

Well, seasonally speaking the third quarter normally is a little bit better than the second one and we expect that. So the issue I would mention, basically the pickup in Brazil is delayed a little bit, that's why we adjust the guidance.

In terms of hedge, we mentioned that we cover the foreign paper import part of the Brazilian ramp up of costs with hedge for the first part of the year. We will probably receive an impact in the ramp up of costs for this 20% of the total ramp of cost in Brazil because we don't have any longer hedge in place in the second part and that part of the transaction, if you like, in the 2012 guidance.

German, can I ask you to clarify that comment that you just made on comps, do you --the third quarter normally being seasonally stronger than the second quarter, but of course, it's kind of seasonally stronger every year on a year-on-year basis. Are you suggesting that the third quarter, in terms of year-on-year comp growth with be higher than the second quarter? I just wanted to make sure I heard you correctly.

It's similar, a little bit better than the second one.

Okay, great. Thank you very much.

Thank you. Next question, please.

Our next question comes from Bob Ford form Bank of America/Merrill Lynch. Please go ahead with your question.

Hey, good day everybody. I had a question with respect to Venezuela, if I'm looking at this correctly it looks as if your net income that you're reporting is twice your EBIT in Venezuela and you look like you're up 64% versus the first quarter. Could you explain what's happening there, please?

Yes, hi Bob. This is Woods. Let me start -- let me take a stab at it and I'll pass it over to German. But basically what we've done is we've raised prices to cover the cost of importing things in Venezuela. So, when we originally started with our price increases in Venezuela and we thought there would be a higher drop off of transactions and that did not come. So we've got much higher prices to cover the -- reflect the value of the money on the parallel market, which our imports have brought into the country and without any ensuing loss of transactions.

Then, just on the net side, your EBIT actually compared to the first quarter is down 35%, almost 36%. So, I can really see the pressure in what you're going through, but the net -- the net is more than twice the EBIT so there's something below the operating line that seems to be having a very favorable impact as well, and I was curious as to what that might be.

Okay, remember that we adjust the -- because we renegotiate prices in the fourth quarter, we adjust the full ramp up of costs in the fourth quarter last year and that is basically we keep these prices in line with the last negotiation that that helped a lot in terms of food and paper costs when you compare second quarter versus second quarter last year.

Okay, that (inaudible)

Thank you -- I'm sorry, next question, please.

(Operator Instructions). And our next question comes from Mitchell Speiser from Buckingham Research. Please go ahead with your question.

Great, thanks very much. Yes, I just want to understand better how you do think that the brazil economy is a little slower than what you thought, but you are keeping the top line revenue growth guidance of 15% to 17%. You did lower your EBITDA growth guidance, which means that there is some less than expected profitability I guess in the back half.

So are you -- do you plan to maintain lower prices or more aggressive pricing on the value menu, particularly in Brazil? I just want to get a sense of why you think revenues will hold in but EBITDA a little bit slower in light of the fact that you think that the Brazil economy is a little bit slower than what you originally thought. Thank you.

Yes, hi Mitch. A couple of things, one, we have -- don't forget we have a 20% component of imported goods in Brazil, especially Happy Meal toys. So, obviously the weaker currency affects our margins right there. And then also, our basic job with a more competitive environment of a slowdown in the economy is to be more competitive and we -- we have -- we will be protecting and defending our market share through probably more aggressive pricing if need be. So, that's -- those are the main two opponents of that reduction in EBITDA.

Okay, that makes sense, thank you. And just one quick follow up. I don't think you took much pricing in Brazil in the second quarter, will there be a little bit more pricing in the back half or is it simply -- or from what -- how you answered the last question that's probably a no?

It depends. As the economy evolved, we evolved with it and as we see the competition moving we try to have a balanced approach to this and have dynamic pricing and so we'll see Mitch.

Okay, thank you.

Thank you. Next question, please.

Our next question comes from Nitin Saigal from Bridger Capital. Please go ahead with your question.

Hi, guys. Congrats and thanks for the more helpful disclosure. This was great. Just getting a little more detail on the comps traffic versus average check in Brazil and NOLAD. So Brazil, 5.6% comp, how much was traffic up or down year-over-year and the same for NOLAD? Thanks.

Yes, let me pass you to Sergio for that answer.

What I would say overall, anything is if 80% average check, 20% traffic in the particular case of Brazil is slightly higher, 85% -- around 85% average check and 15% traffic that is very much the split for the quarter.

Okay, so Brazil traffic was up year-over-year in the quarter?

Slightly, yes.

And was there any -- I think last time you guys mentioned that you were hoping biggest difference with the shopping centers versus non shopping center traffic, are you seeing any pick up in the shopping centers or any trends there to talk about different from last quarter?

No, I would say the remains pretty much the same, the difference in performance needing nominal changes.

Okay, thanks. All the best.

Thank you. Next question please.

Our next question comes from [Robert Schwike] from [Firm Securities]. Please go ahead with your question.

Good morning. I have two questions. Could you be more specific on the number of openings that you expect to do this year? You were a little bit vague in answering the first question, and secondly, could you give us the preliminary thought as to numbers of store openings next year?

And on an entirely different subject, wonder if you would -- you've been around and dealing with the Brazilian currency up and down for a long time and I'd be interested in your comments on your expectations over the next couple of years of what's likely to happen on this score. And in that context, could you discuss in a little more detail, your viewpoint on the way you've handled your debt financing whether you feel you should be -- should have done something differently or are you satisfied with the balance that exists at this point in time?

Yes, hi Bob, how are you? Bob, we're going to open up 130 stores gross openings this year and that's basically what we've -- the guidance we've given. And going next year we will do at least that. I mean We look to be on track for that. We have not finished our plans for next year, but we feel comfortable with that number. So that takes care of your first question.

Going to the question of the real and where we see it going, that's anybody's guess. If you look at brazil over the last years, there's been a lot of volatility, but I think over the last perhaps, I don't know, eight, 10 years since Lula was in power or even before in the prior government, I think there's been a lot of more fiscal responsibility in all of -- in the Brazil as a -- particularly in all of Latin America.

So, I think fiscal and monetary policy are being managed -- are being managed. Although, you've seen greater erosion in the real than we would have expected in the last year, it's not crazy, as it used to be. So, we feel that within that range, we can operate. And there's no hyper inflation as you had before which is really the big problem.

As far as our debt is concerned, we are comfortable with the debt levels we have now, we have space to increase our debt, but at the time being, we have no plans to. I think in anything we -- or I or all of us are a bit more on the conservative and cautious side of the balance sheet -- of the balance on that specific area, question.

Thank you.

Thank you, next question, please.

(Operator Instructions). And we have one additional question from Mitchell Speiser from Buckingham Research. Please go ahead with your question.

Great, thanks very much. In the combined beverage business initiative seems to be going well in the Caribbean, can you talk about if -- what the time table could be to roll that out to other markets, particularly brazil, Argentina or Mexico? Are there operational issues and maybe just in general how you're thinking about the time table to roll this out to your key markets.

Hi, Mitch, this is Woods. Listen, Mitch, we're looking at that, it's a very good product, it's something that we're -- it's done the Company very well all over the world and as Sergio said in the Caribbean as well, for us.

We're doing our plans for the next year and one of the barriers that we have or opportunities that we have is supply chain, so that's what we're looking at right now to make sure that that's properly lined up and that we have good margins. We're -- we started off with it in Mexico and it's doing very well. It's too early to really give any good coloring about it, but it's similar in Mexico as well and as you can well imagine, both the Caribbean and Mexico are supplied out of the US. That cannot necessarily be the case in other countries.

Got it, great. And if I may just slip one other question in. If I could just ask just in terms of housekeeping the 10% to 12% EBITDA growth guidance for this year, what is the first half comparison, is it the organic number, is it just the adjusted number? Or if you can just give that first half EBITDA growth result that's included in the 10% to 12% for the year?

No, remember the guidance is excluding cut in constant currency the first half of the year grew almost 1%. So the rest of the EBITDA growth is coming in the second half of the year.

Just in the release, it says the first half organic constant EBITDA growth was up 13.3%, is that the -- is that not the number to compare it to the 10% to 12% for the full year?

No, again, when you compare the first part of the year with the second part of ht year, obviously, as we mentioned form the beginning, the first part of the year was weaker versus the second on e and the difference between the 10% to 12% with that 8% to 10% is basically because of the delay in the --.

Yes, I do understand that I guess. Just one last way to ask the question, just the first half of the year, constant dollar EBITDA growth, what was the result in the first half of the year? Or the actual --?

I don't understand really your question.

The first half of 2012, which is now complete, the constant dollar EBITDA growth for the first half that is a part of your full year target of 10% to 12%, is it the up 13.3% that's organic constantly dollar, yet the 10% to 12% target, I don't know if that's organic or if it's just constant dollar.

Remember that first part -- the 6.3% in the first part includes the seated tax in Brazil and the Venezuela royalty waiver from McDonald's. And that is different than the target that we gave to you for the full year.

Okay, I will -- I'll follow up later. Thank you.

Okay, thanks.

Thank you, next question please?

Our next question comes from John Ivankoe from JPMorgan. Sir, your line is open, is it possible your phone is on mute?

Yes, it was. Thank you so much. Just -- I'll do Mitch a favor and all of us just to make sure that we understand his question then I have one. His question was in the first half of 2012, the -- kind of the adjusted constant currency operating income growth, 13.3%, which is what's in your press release.

Yes.

Okay, that's fine. I just wanted to get that out of the way.

And then secondly, just on your website in Brazil and I thought that this was the case, but I wanted to again just to clarify. How many stores are touched by McCafe? Because it does -- I know it's not all of the CBB, but things like frappucchinos and smoothies, you already have in a lot of the stores, so like how new would CBB -- if it was brought to Brazil, how new would it be in the stores and in other words, how many new products, how much with the new offering really effective Brazilian stores relative to what's already there?

You know, Sergio, why don't you answer that?

John, the McCafe that we have in Brazil is a different customer experience, it has a dedicated space. The products are mostly based out of espresso and they're done in a -- in equipment that is manually operated. It's a different product profile.

CBB, which it lends some confusion because actually in United States as well as in Puerto Rico, it is called McCafe as well. But is a different product line. That sometimes leads to confusion.

In Brazil we've got actually a bit less than 80 -- 76 McCafe's out of almost 700 restaurants, so it's a relatively small base.

And those 76 McCafes, I mean how many restaurants does it touch? I know in some -- I think in some -- at least from what I've seen.

(Inaudible), we do not have -- we don't have stand alone McCafes. They're always part of our restaurant.

Okay, and that's only in 10% of the units currently.

Yes.

And how many do you think it could have -- if there was like a just -- like the US like you wanted to have the stores in the store or what have you. How many of those 700 restaurants could support McCafe in your opinion?

Well, that's part of the work that we're doing these days, John. We still are -- that's work in progress for us.

Okay thank you.

Thank you. Next question?

(Operator Instructions). And we do have an additional question, this comes from John Glass from Morgan Stanley.

Thanks. Can you -- if you think about your cash generation longer term, say this year and next year, you've been borrowing to some degree to make up for that short fall, in other words, you haven't generated enough internal cash to pay for the CapEx of the development, when does that end and when do you feel that you can be self funding?

I know there's a lot of working, moving pieces here with currency changing CapEx budgets in dollars. So I want to make sure I'm getting this straight as you see it in your local currencies. Are you able to fund -- fully fund your development this year? Do you think you'll be able to fully fund it internally next year or when is that point where you break even?

Yes -- hi John. The construction costs go down the devaluation sets in. So, we have an import component obviously of equipment and all that. So, CapEx will also go down as a result of currency depreciation. But not track it precisely because of that imported component.

We -- as we said, we put in 50% of our stores more or less this year in free standers. Going forward, we can change the mix. But we -- we would like to be able to grow our store base based on the cash that we generate. And that is our -- that is our objective and we may have to tweak the mix of stores by store types between free standers and shopping malls, etc to get there, but that's our objective.

Just a follow up, will you self fund your capital development this year, 2012 and/or will you self fund it in 2013, or do you think you'll require additional borrowings this year and/or next year to achieve that --?

We will not have - we will not need additional funding this year and we don't think it'll be required for next year. That's the objective for next year.

Okay, thank you.

Thank you. I'm going to turn the call back over to Woods Staton, please.

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