Arcos Dorados Holdings Inc (ARCO) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Arcos Dorados fourth-quarter and full-year 2012 earnings conference call. With us today are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, Chief Operating Officer; and the Company's Chief Financial officer, German Lemonnier; and Sofia Chellew, Investor Relations Director.

A slide presentation accompanies today's webcast and this is available at the investor section of the Company's website, www.ArcosDorados.com. 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.

And at this time I would like to turn the conference call over to Sofia Chellew. Please go ahead.

Hello, everybody. 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 statement 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 comparable GAAP results, which can be found in the press release filed with the SEC on Form 6-K.

I would like to now turn the call over to our Chairman, Woods Staton. Woods, please proceed.

Thank you, Sofia. Hello, everyone, and thank you very much for joining us today. I am pleased to report solid underlying growth in our business in 2012, which is a testament to our ability to achieve improved performance and cement our leading regional position in the QSR industry.

Double-digit organic growth was driven by our largest regions and demonstrates the continued strength of the McDonald's brand throughout Latin America.

During the year, we set the stage for future earnings growth in the opening of 130 new restaurants, which is exactly in line with our guidance. This is almost 30% more than 2011 and a record number of openings for the Company. And we extended the McDonald's brand to 16 new cities.

We know it is not just about quantity but also about the quality of our openings. We open full-fledged freestanding restaurants, not just points of sale. As an example, in Brazil we opened 32 freestanding restaurants in 2012, more than 5 times the number of our largest listed competitor. This strong pace of expansion enabled us to maintain our leading regional market share, which is more than 3 times the size of our closest competitor.

Despite increasing competition in the region, this share has grown since we acquired the operations from McDonald's in 2007. Last year our comp sales significantly outperformed all of our large competitors in each of our key markets. But more importantly there remains a vast opportunity for the continued expansion in the QSR segment and our role in leading and dominating growth.

As experienced operators in Latin America, we know that the long-term positive growth trajectory will not be without its cycles. It is precisely why we have assembled a team with decades of operating experience who can handle challenging environments like the one we live in in Latin America. Excluding the depreciation of local currencies, organic revenues grew 14.2% in 2012 year over year. Systemwide comparable sales rose 9.2% in 2012 which is in addition to a 13.7% gain in 2011.

Consolidated adjusted EBITDA was driven by growth in all divisions except Brazil, where the currency declined by 16.5% and as a result we experienced a reduction in EBITDA. Consolidated adjusted EBITDA was stable and excluding the currency impact and special items increased 1.2%. Net income was largely unchanged at $114.3 million as compared to one year ago.

We are encouraged by the pickup in the pace of revenue growth in the fourth quarter. In the final quarter, consolidated revenues increased 13.8% in organic terms. Adjusted EBITDA increased 6.7% in the quarter, which includes the impacts of special items. On organic basis, then, it grew 4.7% despite an ongoing sluggish consumption environment in Brazil. Systemwide comparable sales were up 8.6% in the fourth quarter year-over-year.

In our largest market, Brazil, we maintained our dominant position with the largest coverage of any QSR in the country. While competition is intensifying, today we succeeded in overcoming pricing pressure thanks to our GPPP value platform. Based on internal and public data, in 2012, we significantly outperformed our listed peers in terms of comparable sales and were able to grow either line width or in excess of most consumption metrics.

Arcos Dorados now has a stabilized G&A structure in place that is prepared to manage further expansion. This combined with increased contributions from new restaurants means we began to see G&A leverage in 2012. We expect this to continue as each area of the organization focuses on cost controls.

Some of the areas we made significant headway on include stabilizing headcount and systems of control. During the year, we completed the rollout of Made For You in Brazil and Argentina, and incorporated additional suppliers to strengthen our procurement efforts. In 2013, we expect cost-containment to improve further, with a smaller incremental minimum-wage increase in Brazil and the hedging of a majority of import food and paper costs in that country.

Over the past year, our marketing efforts were focused on maintaining and driving traffic, especially through our unique value platforms. We are the only ones that provide everyday good value to all of our customers with core products and accessible prices. This is our mantra and helps us stay ahead of the competition and gain share even when consumption slows.

Alongside our strengthened value platform, we moved sales with the launch in the Caribbean of the combined beverage business, which is also part of our expansion of dayparts. In addition, we began rolling out the CBB in Brazil during the fourth quarter. Initial sales and customer feedback is very encouraging and we expect to complete the rollout in Brazil this year.

We are also leveraging our premium products to encourage trade up, to drive average check and gross margins and reinforce the aspirational nature of our brands and products. Our strategies are focused on driving long-term profitability and we have a resilient business model with experience in operating in dynamic environments.

We continue to strengthen our dominant brand image in the communities in which we operate. In the fourth quarter, we held our annual McDonald's 5K women's run. With more than 60,000 participants, it is the biggest women's run in Latin America plus the thing we are most proud of is that in 2012, we ranked among the top four best multinational companies to work for in all of Latin America. This is how we are able to track the best and the brightest talent to our Company. Overall the expansion of our footprint and advances in our profitability initiatives in 2012 have set the stage for improved results in coming years.

I will now hand the call over to Sergio Alonso, who will go through Arcos Dorados's fourth-quarter performance by division in more detail. Sergio?

Thank you, Woods, and hello, everyone. I would like to take you through some of the key marketing strategies that we implemented in the fourth quarter, which can be found on slide 3.

During the quarter, we launched a number of marketing initiatives which resulted in driving comparable sales for the quarter led by Brazil and SLAD.

On slide 4, we can see that Brazil's revenues were impacted by the Brazilian real's 14.4% devaluation versus the US dollar year over year resulting in a decline in revenues of 1.6% in the fourth quarter. Excluding the currency movement and despite continued soft consumer spending, organic revenues grew 12.6%. And the net addition of almost 70 restaurants during the past 12 months contributed $34.8 million to revenues.

We increased comparable sales by 6.3% despite a weak environment and thanks to successful campaigns in our affordability platform. The inclusion of the Big Mac and new Gran Verano sandwich within the GPPP value platform were the main drivers of increased sales and outperformed those of the year ago period.

In addition, the introduction of new sandwiches like Angus Barbecue within the Angus platform also contributed to comparable sales growth. As a result and based on internal market share estimates during 2012, we maintained our leadership position versus our closest competitor.

Please turn to slide 5. In our North Latin America division, fourth-quarter revenues grew 13% or 9.2% on an organic basis versus the prior-year period. Our goal in NOLAD has been to drive traffic particularly in Mexico by investing in our value menu offerings and at the same time managing margins through productivity measures such as Made For You.

In the fourth quarter, we maintained the pace of our marketing efforts and in Mexico included more a la carte options and compelling affordability offers along with the favorable reception of premium products. Systemwide comparable sales growth was modest at 0.5%.

In Mexico, the turnaround of our operations continued. As discussed in our third-quarter results, we have a more conservative pricing strategy in place as we continue to work towards building traffic in a highly competitive environment.

The net addition of our approximately 20 restaurants over the past 12-month period contributed $8.7 million to revenues in constant currency. Openings for NOLAD were concentrated in Costa Rica and Panama, two countries that have strong presence and potential.

Please turn to slide 6. SLAD continued to be a strong contributor to consolidated results in the fourth quarter as consumption in Argentina and Venezuela remained stable despite geopolitical and macroeconomic headwinds. Revenues increased 14.6% and 19.2% on an organic basis compared to the fourth quarter of 2011. The increase in included global systemwide comparable sales of 16.4% driven by the strong performance of the Triple Bacon in Argentina's GPPP value platform as an example.

In Argentina, our growth exceeded overall consumption growth in the country, while in Venezuela our market where the QSR category shrunk, we gained market share. The net addition of almost 30 restaurants during the last 12-month period contributed $13.5 million to revenues.

In February, the Venezuelan government devalued the bolivar. German will go into further details on this. The announcement had been rumored for some time. So in this environment, our focus will be to continue supporting our strong brand with the quality products and service our customers expect from us. We are also focusing our resources on other high potential countries in this region such as Colombia, which is a fast-growing country in Latin America with low QSR penetration.

Five years ago we were the number four restaurant chain in the country and today we are number one. As a fast-growing country Latin America with low QSR penetration, we see a lot of potential in this market.

Turning to slide 7, the Caribbean division reported revenue growth of 3.3% and 4.4% on an organic basis. Systemwide comparable sales gained 3.1% and were positively impacted by the combined beverage business, which was launched in early 2012. The increased participation of everyday value meals also penetrated comparable sales and was fueled by successful marketing campaigns on premium products including the CBO and McRib.

In summary, consolidated revenues grew 5.3%, reaching more than $1 billion and were impacted by the depreciation of local currencies versus the US dollar mainly in Brazil and SLAD. Excluding this impact, organic revenue growth was 13.8%.

Now please turn to slide 8. Our dominant position in iconic locations within Latin America is extremely hard to replicate. In 2012, we extended our footprint with 130 gross openings. As is normal for our industry, the openings were back-ended. However, the distribution of openings improved as compared to the previous year and is the result of a strong pipeline of attractive opportunities.

At the end of December, our restaurant base reached 1,948. More than half of the new restaurants opened in 2012 were in Brazil, which remains one of our highest potential markets.

Our restaurant count far exceeds our closest competitor and the competitive environment has not made it more difficult to obtain strategic locations. We are not only the preferred brand by consumers but by landowners, landlords, and major shopping centers as well.

During the year, we also added 245 dessert centers, bringing the year-end total to around 1,950 and 33 [McCafe] (inaudible) reaching [2,340]. These formats provide high average returns on investment, adding to consumption opportunities as well as brand positioning. To ensure our customers enjoy a contemporary setting, almost half of our restaurant base have the current image.

In addition, I would like to comment on operating advances made to support our market strategies. We have Made for You in our principal markets, we have been able to better manage labor cost pressure and more importantly, continue to improve upon our already high product quality. This translates into happy customers.

In 2012, customer satisfaction levels across our system improved for the sixth consecutive year and in Brazil, these satisfaction levels were amongst the highest within the McDonald's system worldwide. We also advanced in maximizing peak hour traffic.

Finally, we continue to focus our resources around high potential countries. Today we announced the reorganization of our SLAD and Caribbean division to maximize the contribution of Colombia, which has enjoyed over a decade of strong economic growth and is set to become the third largest economy in the region after Brazil and Mexico. Under the new structure, Colombia and Venezuela will shift from SLAD and join the territories of the Caribbean division. The division's headquarters have been located in Bogota, Colombia to further promote the country's significant potential.

McDonald's is a preferred brand in the market, which positions us to benefit from increasing disposable income in this underpenetrated region.

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

Thanks, Sergio. Please turn for the chart on slide 9 to review our adjusted EBITDA performance. Adjusted EBITDA increased 6.7% to at $111.6 million compared to the fourth quarter of 2011. The increase was primarily due to a special item from the recovery of a Brazilian tax credit related to certain input costs. Adjusting for special items and aided by the currency translation, organic growth was 4.7%.

In addition to the Brazilian tax credit, special items in the quarter included a net charge of $1.7 million related to the cut incentive program, a gain of $1.2 million related to the royalty wallet for Venezuela and a gain of $5.3 million in the fourth quarter of the previous year related to rebate from Venezuelan [note] suppliers as well as a charge related to (inaudible) tax recognized in the fourth quarter of 2011.

The adjusted EBITDA margin grew 14 basis points to 11.1% in the quarter. The increase primarily reflects improvements in all divisions with the exception of SLAD. In addition, organic G&A as a percentage of sales decreased compared to the year ago period for the third consecutive quarter.

The entire organization has made progress in stabilizing our structure, continued professional service, and improving system of control among other initiatives. In the fourth quarter, Brazil's adjusted EBITDA grew [2.6]%. The increase was mainly due to special items in both periods of $21.2 million which related to nine months of a true up of serial tax in the fourth quarter 2011 plus a tax recovery from prior periods registered in the fourth quarter of 2012. These effects together with the impact of a 14.4% real devaluation of the dollar-denominated costs and higher operating costs resulted in an 11.2% decline in organic adjusted EBITDA in the quarter.

All of our other regions experienced higher adjusted EBITDA on a year-over-year basis.

In NOLAD, adjusted EBITDA almost doubled to $9.1 million from $4.7 million in the fourth quarter of 2011. On an organic basis, growth was 87.1%. We had better efficiencies combined with G&A leverage among other efficiencies resulted in an adjusted EBITDA margin of 9% in the quarter. In the fourth quarter, revenue from openings in Costa Rica and Panama leveraged G&A and were an important contribution to adjusted EBITDA.

[In that], adjusted EBITDA was 7.9% higher in the fourth quarter. The increase reflects a temporary royalty relief in Venezuela as well as it relates on certain suppliers in the final quarter of 2011.

On an organic basis, adjusted EBITDA rose by 22.2%, reflecting G&A leverage which was partially offset by higher payroll costs as a percentage of sales. Adjusted EBITDA margin reached 12.8% in the quarter.

In the Caribbean division, adjusted EBITDA grew by $2.2 million and reached $3.7 million for the quarter. The adjusted EBITDA margin increased 3.1 percentage points to 5.2% of revenues, mainly driven by efficiencies in payroll as well as fixed cost leverage.

On slide 10, non-operating results for the fourth quarter reflects stable overall funding costs despite higher debt levels thanks to the debt restructuring we implemented over the past year. In addition to providing financing (inaudible) also reduced the impact of derivative valuation and currency valuation on intercompany loans that previously impacted the income statement.

Income tax expenses reached $15.7 million resulting in an effective tax rate of 26.2% for the quarter compared to 30.5% in the year-ago period. This lower effective tax rate was primarily the result of reducing certain valuation allowances or deferred tax assets.

Net income was largely stable amounting $44.2 million versus $46.2 million in the year-ago period. The results reflect stable operating results and a decline in income taxes, which was offset by lower nonoperating results. The Company reported basic earnings per share of $0.21 in the fourth quarter compared to $0.22 in the year-ago period.

Turning to slide 11, you can see our full-year results. Revenues increased 3.8% or by 14.2% on an organic basis. Systemwide comparable sales gained 9.2% and included a 19.9% increase in SLAD and 5.2% rise in Brazil alongside growth in the remaining divisions. The result is in addition to a 13.7% increase in comparable sales in 2011.

We achieved our full-year restaurant opening target with gross openings reaching 130 ending the year with an overall restaurant count of 1,948. Adjusted EBITDA guidance for the year was between 3% to 5% go growth in constant currency and excluding 2012 share price variation. Based on this criteria, adjusted EBITDA grew 6.8%. If the tax grades recorded for the full quarter are excluded, adjusted EBITDA grew 2.8% versus 2011.

Net income was largely unchanged at $114.3 million versus $115.5 million one year ago. The effective tax rate for the year reached 28.8% and was below the guidance range of 31% to 33%.

Capital expenditures for the quarter reached $123.3 million and primarily reflected distribution of our restaurant opening plan. For the year, capital expenditures were $294.5 million, broadly in line with guidance.

On slide 12, we will review our debt indicators. Our end of quarter net debt to adjusted EBITDA ratio was 1.4 times. If needed, the ratio can accommodate future development plans. We ended the year with cash and cash equivalents of $184.9 million.

Turning now to slide 13, I will give you an update on Venezuela and guidance for 2013. In a long-anticipated move, the Venezuela government last month devaluated its currency from VEF4.3 to VEF6.3 per dollar. At the same time, the (inaudible) exchange rate of bolivar 5.3 per dollar which the company used to translate its Venezuela results to US dollars for reporting purposes was in fact eliminated Based on the announced rate of VEF6.3 per dollar, the Company estimated that it will have to recognize a one-time pretax charge of approximately $14 million in the first quarter of 2013 related to the balance of monetary assets and liabilities in Venezuela.

With a leading QSR brand into the Venezuela market and an operating history of [three] years, we are well prepared to manage through the current challenges and we are focused on continuing to serve our clients and reduce our cost of currency exposure by initiatives such as increasing sourcing from local suppliers.

The Company's outlook for the full-year 2013 growth with respect to 2012 is based on year-over-year organic growth, which is in constant currency and excludes special items in both years. We have detailed the special items included in 2012 in our earnings release.

Revenue growth for 2013 would be between 15% to 18% (sic -- see accompanying slides, "17%"); adjusted EBITDA growth between 8% to 10%; effective tax rate between 33% to 35%; capital expenditure, approximately $280 million; and gross restaurant openings approximately 140.

Consolidated adjusted EBITDA growth is expected to be mainly affected by the Venezuelan operations given the recent devaluation along with the elimination of the (inaudible) exchange rate and its consequent impact on foreign paper costs.

We do not provide guidance by region I would like to highlight that we expect a stable to improved EBITDA margin in our large market, Brazil.

With regards to our CapEx budget, I would like to point out that the last year (inaudible) non-development funds for initiatives such as Made For You, which we have now completed.

I will now hand the call back to Woods.

That he very much, German. 2012 was a year shaped by a changing economic landscape and shifting geopolitical realities. Nevertheless, the underlying drivers of our business, namely a growing population, growing middle class, great brands, and a preference for high convenience, have not changed.

Revisiting our five vectors performance throughout the year we have fortified our leadership position through number one, the launch of over 100 products and flavors; two, the expansion into 16 cities with a McDonald's brand that didn't exist previously; three, successes in tightening our cost structure while at the same time improving the quality of our products through the completion of initiatives such as Made For You and expanding our supplier base. And four, the achievement of G&A leverage across the organization, as I mentioned before. Finally, reduced foreign exchange volatility through hedging and accessing local Brazilian currency debt.

As we head into 2013, we have an exciting marketing calendar which combines compelling value, strong local activities, new product introductions, along with a refreshing of our Happy Meal marketing that includes the launch of the happy character.

One initiative I'm particularly proud of is the launch last month of our quality campaign which demonstrates McDonald's and our commitment to bring our customers closer to the true origin of our food, focusing on farms and the source of our high-quality ingredients and highlighting the investment in local communities to support our supply chain.

In addition, we are well on our way to another year of record store openings while we also have many initiatives in place to manage our costs.

I know many of you have been following the events in Venezuela. Let me assure you the priority of our local management and local franchisees is to continue to work hard to deliver the high-quality food and superior experience that our clients expect from us. I would like to reiterate my confidence in the McDonald's brand, our absolutely fantastic management team, and the enormous potential of Latin America. With unparalleled footprints in the sizable and growing industry, a dominant brand that is continuously strengthened by our product mix and access to the largest portfolio of products, I am confident that we will continue to deliver value for our customers, partners, and especially shareholders over the long term.

Thank you for your attention. I would now like to open the call up to questions.

(Operator Instructions). John Glass, Morgan Stanley.

Thanks, good morning. My question has to do with your 2013 guidance, just understanding it a little bit better, maybe just asking them as a group. So first of all, I assume you used the $340 million this year as the base to grow the EBITDA off of in 2013. And then you cited Venezuela as being the primary pressure point there. Can you just maybe elaborate in dollars what you think the pressure is from Venezuela in 2013?

And outside of that, I know you talked about generally stable to improving Brazil, but what is your resumption for example in same-store sales in Brazil that would get you that flat to improving results when you didn't have it at least in this quarter with pretty strong same-store sales?

Yes, thank you, John. Let me pass it to German so he can answer you.

John, let me explain that the guidance is based on organic growth was so you need to extract from 2012 EBITDA the special items that are detailed in the earnings release and the last earnings release. In terms of impact for Venezuela, it's very difficult to quantify. Let's begin that we convert or translated the financial statements now at VEF6.30 instead of VEF5.30 but the big impact in the Venezuela is basically the elimination in fact of the shipment exchange rates where a lot of local suppliers (inaudible) the company used bought dollars to pay imports. The cost of this impact today unclear so it's very difficult to try to project the impact but we are projecting a big impact in food and paper costs because of the elimination of the exchange rate, official exchange rate.

In this basically you need to have in mind that we have obviously the translation impact. In 2012, the revenues were -- Venezuelan revenues in the consolidated were about 14% that -- 10% and in EBITDA 14%. The dollar component in food and paper is around 40% and the last 18 months we tried to localize as much as possible and in this environment basically we need to see the reaction of the suppliers and consumers because of the evolution is not just exchange rate, it is the real economy and we take the focus in finding the right balance between average check and traffic as well as containing costs.

Just thinking about your guidance for -- excluding Venezuela for 2013, you mentioned -- I know you have got relief on the minimum wage but in Brazil for example you mentioned that you have got more food locked in, so do have better visibility on your food cost? What is your same-store sales assumption in that country for 2013?

Yes, the main -- the dropping margin is basically because of Venezuela. We do not provide guidance for individual markets but let me tell you that in Brazil, margins will be stable or improved so that could help a lot in terms of guidance. We obviously -- the minimum wage increase in 2013 is significant lower than in 2012. The food and paper is stable and we expect to leverage G&A.

Mitch Speiser, Buckingham Research.

Great, thanks. Just to make clear on the 2013 guidance, German is it -- you reported $340.6 million in EBITDA in 2012. Should we subtract the $28.6 million in benefits included in that number? So call it $312 million is the base to grow from the EBITDA?

Yes, that's right.

Okay. I just wanted to clarify that, thank you. And my follow-up question is just on the combined beverage business, I believe you mentioned it is rolling out in Brazil. Can you give us a sense of how many stores it is in Brazil? You said you want to be throughout all Brazil at sometime in 2012. Can you give us maybe a more detailed timetable and perhaps maybe why it's not rolling out quicker? I know you started rolling it out I believe in November and just trying to get a sense of why it would not be systemwide at this point. Thank you.

Hi, Mitch, this is Woods. We are now in 250 restaurants in Brazil. We will roll it out to the full system in Brazil by the end of the year and no, it's right on schedule. Don't forget we have to do a lot of -- we have a lot of in stores. There is some space constraints, so it's not as easy as doing it in a free stander. So we are not at all frustrated with the rollout and we are quite happy with the results.

Amod Gautam, JPMorgan.

Thanks, can you discuss the hedging and the commodity costs in a little more detail? I think typically it's 20% to 25% of your COGS that are exposed to US dollars, so how much of that has kind of been mitigated for 2013?

I will pass this question to German.

Basically we are trying to keep productivity to our costs. We are not trying to beat FX, so in this line we are doing general -- several hedging to cover the food and paper costs on a dollar base. And on a consolidated basis, this food and paper costs, it's 30% imported; in Brazil its 20%. For Argentina, its 10% and in Mexico, it's approximately 50%.

So what we are doing, we are trying to get productivity. We are close in some hedge in Brazil for the food and paper costs in (inaudible) and we are doing some hedges in Uruguay, Chile, Colombia, and Mexico.

Okay, great. And then on the unit volume side in Brazil, it's very helpful. Thanks for providing that information in the release. It seems like unit volumes are pretty stable. Can you talk about what kind of the 2013 mix of openings in Brazil is going to be like both in terms of regions where you might be opening maybe outside of Rio or Sao Paulo and in terms of whether or not they are going to be more freestanding versus mall units or vice versa?

We don't give information by region but we continue to be very interested in Brazil. It's a great market and we will have a balanced portfolio of new restaurants for that country.

Lore Serra, Morgan Stanley.

Good morning and thanks for the call. I wanted to talk a little bit about Brazil and we saw same-store sales growth of 6% in the fourth quarter. I wonder if you could give us a sense for how that broke down between transaction counts and average ticket. I guess what I would like to understand maybe from Sergio is last year you felt a need to invest in the value portion to gain back traffic. As you are looking at 2013, how do you feel about the affordability of your mix? Do you see maybe a bit more renewed pricing power looking into 2013 that you didn't have in 2012 please?

Okay, thank you. In general what I would say is that mostly the comp came from average check throughout -- it's not only for Brazil but also throughout all the regions for the year. Now having said that, we also increased traffic in all divisions except Caribbean, where we had a mild decline. So even though we gave the majority of the comp increase in terms of average check, that is a consequence of basically product mix shift, because we have got a really strong credibility platform in the country in the last quarter of 2012.

Okay, so I mean -- how do you feel about your ability to price with inflation into 2013 in Brazil?

This is what we have been doing so far that we get -- if you look at the results we had last year also compared with most of our competitors, as Woods mentioned in his speech, we did actually very, very well in that and we believe that having the leadership position that we have we are very well-positioned to price properly and achieve our target, which is sustained volumes. So we don't see a major issue on that topic for this year.

Julio Zamora, Citi.

Hello, thank you for the call. Could you discuss a little bit more your scenarios for both Colombia, where you are going to be placing more emphasis, and for Argentina? What are you looking at in terms of openings? How are you -- what's your outlook specifically in terms of same-store sales and inflations?

I think that Colombia obviously is going very quickly. I think Sergio mentioned that we were the number 4 chain some years ago. We're the number one chain today. We have for a long time now more than five or six years been increasing our investment and bets in that country and I think they are paying off now because it's the third largest economy in Latin America, so that's wonderful.

Columbia has certain challenges because it has a lot of different cities which are big and distribution costs are expensive but being the first mover gives us the ability to get better real estate and so it's an ongoing challenge, Colombia, but it's a good challenge and it's paying off and it's the highest growth rate country of our portfolio of countries.

Argentina, as Sergio mentioned, has a slowdown in the consumption. I think if you look at what you read in the press about Argentina and some of its financial things with bonds and so forth, you have to take that away -- I mean that's a financial thing but we are focused on building our volumes. We have a very strong marketing schedule for Argentina. You are going to have elections in October of this year. Probably they will be -- that means there will be a lot of money in the streets, so we feel comfortable about Argentina.

Thank you very much. A quick follow-up. Could you tell us a little bit about how you are seeing same-store sales year-to-date across the system in the particular regions?

Yes, we don't give data by countries but we are doing very well against the plan. And we are -- that's it -- we are doing very well against the plan, so we are optimistic.

(Operator Instructions). Robert Schweich, Burnham Securities.

I know you are reluctant to say much more about Brazil, but it's such an important critical variable in your outlook. You must have somewhat more you could share with us on the exchange rate prospects in that country which are still likely to be unfavorable in the first quarter but -- and even the second quarter. But theoretically could begin to be a real plus for you in the second half of the year. Would you comment further on what you think is going on in Brazil in terms of the exchange rate?

Glad you are on our call. Exchange rates in Brazil and GNP growth in Brazil are things that even the most sophisticated economists keep making --

Changing.

Yes. I mean last year until the third or fourth quarter, they were talking about 4.5% to 5% growth in GDP and we ended up the year with 0.9% GDP growth. We are going through the consensus. That's what we are doing. We, as German mentioned, did a hedge at BRL2.10 a few weeks ago and now the exchange is I think BRL1.97 more or less, no?

So I don't know, Bob. I think the country is going well. I think there are a lot of things being done by the government to contain inflation. I think that containment will really start taking effect in the second half and I think the greatest thing for us anyway as a Company is that minimum wage increases this year are going to be substantially below year before.

Well, not until the second half.

Minimum wage?

I'm sorry, minimum wage increase (multiple speakers) Now that hedge at BRL2.10, if the rate stays at BRL1.97, that hurts you, doesn't it?

No, and I will have German explain that.

Again -- hi, Bob. German speaking. Again, we try to [give] productivity to our cost structure. A lot of volatility in other markets and if you remember, last year we hedged the first part of the year in Brazil in -- at BRL1.75. In the first quarter last year, the exchange rate was BRL1.70 and in December, it was BRL2 plus. So we are not trying to play against currency only we try to give productivity our full cost up to get productivity our marketing strategy. That is our goal.

(Operator Instructions). Amod Gautam, JPMorgan.

I don't want to beat the topic to death but I just want to be very clear about what the EBITDA base we should be using in terms of the guidance of 8% to 10%. So I think there was something like $28 million of special charges in the EBITDA that was reported for 2012. But 3.12 should not be the base we're using, right because that also includes the effects of currency.

No, no, 3.12 is the number I would use. That is a constant currency adjusted by the special items in 2012. The special items are detailed in the earnings release and we call that organic growth. We try to use the same language in all the releases and in our guidance to be more clear and more transparent in all our communications.

So growth ex currency and special items is 8% to 10% off of the 3.12?

Yes.

Correct.

Okay, thank you.

(Operator Instructions). An additional follow-up from Robert Schweich. Burnham Securities.

Woods, that 3.12 figure -- I've been thinking about that throughout the call. That -- with your forecast, that doesn't imply a great deal of organic growth considering that the base is depressed. Are you just being conservative or -- I am kind of curious to why you are so cautious on that score?

Bob, yes, we are being conservative and one of the reasons we are being conservative is Venezuela. Venezuela still has not played itself out and we are early into the year so there is a bit of conservatism there. Having said that, we are very much on track with all the other countries, especially Brazil, which is a huge component of our Company.

But if I understand correctly, I think you said you are taking what was it a $14 million charge in the first quarter? Did I get -- I don't remember exactly -- on Venezuela. Now looking forward, what happens with rate of exchange isn't going to affect this adjusted EBITDA, is it?

Let me pass this to German so he can elaborate.

You are correct. We will impact our results in the first quarter for $[10] million which is basically because of monetary assets and liabilities at the end of the year but its balance sheet impact and then you need to consider the devaluation as mentioned before in the translation of the financial statement that is easy to calculate because you need to use 6.30 instead of the 5.30. But the most problematic part to calculate is the food and paper impact. Why?

Because in the past the supermarkets gave access to local suppliers and us to dollars to pay imports and now the (inaudible) was eliminated in fact so we don't have a reference -- a clear reference to know how much could be because of these imports. That's why the impact is higher because of the food and paper cost line other than the translation.

Ladies and gentlemen, at this time I would like to turn the conference call back over to management for any closing remarks.

Okay, thank you very much. I would like to thank all of you for your interest in Arcos Dorados. Over the last few years we have built a very strong foundation for continued growth. We have employed well honed strategies to best navigate the current environment. Our dominant brand provides us substantial long-term growth opportunities in an underpenetrated market and we are maintaining our focus on strengthening our brand, driving sales through new, existing and restaurants -- in new and existing restaurants and improving our cost structure.

Thank you very much and we will see you next quarter. Thank you.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.