Arcos Dorados Holdings Inc (ARCO) 2013 Q1 法說會逐字稿

Good morning and welcome to the Arcos Dorados first quarter 2013 earnings call. With us today are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, Chief Operating Officer; the Company's Chief Financial Officer, German Lemonnier; and Sofia Chellew, Investor Relations Director.

A slide presentation accompanies today's webcast, which is also available in 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 call is being recorded. At this time I would like to turn the 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 statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements or 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. Please note that, as previously announced, Colombia and Venezuela now form part of the Caribbean Division, and all comparable references have been adjusted accordingly.

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 for joining us today.

Our restaurants are a daily destination for more than 4.3 million customers across 20 territories in Latin America and the Caribbean, thanks to our everyday good value offerings of great tasting, high-quality food served in contemporary settings. Our first-quarter performance indicates a solid start to the year as we remain focused on executing the strategy behind the five vectors of our growth blueprint, la receta para ganar, or recipe to win. We achieved 15.7% organic revenue growth as our three largest divisions grew by double digits, and a near 10% increase in consolidated comparable sales.

In our key markets, we increased our market share. This demonstrates our operational excellence, the strength of the McDonald's brand and our ability to consistently grow sales even in challenging market conditions. We continue to dominate the market and grow our share within the market in the near-term while laying the foundation for sustainable and profitable long-term growth. Accordingly, our restaurant count is now 1159 stores. We also have 1997 Dessert Center's and 339 McCafe's and are on track to meet our gross openings guidance of approximately 140 new restaurants for the full year.

In the first quarter, we introduced a new communications campaign based on the Happy character. That character, just as in McDonald's Europe, has been extremely well received and has demonstrated strong engagement levels. To give you a sense of the character's popularity, the related games we put online have reached the top five downloaded apps from the Apple store in Latin America.

Another strong brand-building initiative which is along the same line as the very successful UK and Canada campaigns is our restaurant quality campaign called Mas alla de la Cocina, or Beyond our Kitchen. These initiatives form part of our long-term plans to reinforce our family business as well as strengthen brand presence throughout all our territories.

In our largest market, Brazil, we continue to increase our market share lead and outgrew our main list competitors in terms of comparable sales in the first quarter. This achievement again underscores our compelling positioning and effective marketing. Our plans for the rest of the year call for building on the gains we have made and ensuring that we provide long-term value for our shareholders while balancing the pressures of the current environment.

Our marketing calendar features new promotions, improvement to existing formats, compelling value and customized local activities. Our product line pulls from the world's largest pipeline of food and products that have been developed by McDonald's internationally, and it can be adapted locally. Also, our menu strategy provides exceptional value at every price point as we focus on continually driving growth.

While top-line growth has been quite resilient to low or declining consumption and geo-political tensions across some of our markets, margins in certain regions and our bottom line have come under pressure. We are experiencing added food and paper pressure in a market where the US dollar remains strong vis-a-vis local currencies, thus impacting the cost of our dollar-denominated inputs. We remain cautious about the outlook, particularly in Venezuela, where consumption is still adjusting to devaluation and changes in the political context. Overall consumption in Colombia is also experiencing a slower pickup than expected.

Nevertheless, as experienced operators in Latin America, we know how to handle challenging conditions and even use them to our advantage. As an example of this, in the first quarter we were able to gain market share in both those countries, Venezuela and Colombia.

First quarter consolidated adjusted EBITDA increased 1.7% excluding currency impact and special items. Bottom line results reflected the previously disclosed one-time loss related to Venezuela's official devaluation and declined 28.1%. However, operating results for the first three months of the year are within our expectations. In coming quarters, adjusted EBITDA should benefit from more favorable foreign exchange comparisons, a smaller minimum wage increase in Brazil as well as continued top-line growth.

As a result of all this, we continue to expect to achieve our 2013 guidance. We are concentrating on all factors that are within our control, namely driving increased customer visits by delivering exceptional service, value and new products in increasingly modern restaurants. We are operating from a position of strength. We are the market leaders. We have significant long-term competitive advantages due to our size and scale. Our business model is resilient and backed by proven financial discipline and our team has decades of experience in every type of operating environment.

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

Thank you, Woods, and hello, everyone. I would now like to share with you how we manage and grow our business in the current environment as we plan for the long-term.

Turning to slide 3 to discuss the first-quarter performance, please remember that quarterly comparisons are affected by the negative impact of an extra day in the month of February in the previous year.

On the marketing side, we launched a number of initiatives which drove comparable sales, led by SLAD, Brazil and the Caribbean. To begin with, I would like to mention the restaurant quality campaign launched in the quarter called Mas alla de la Cocina, or Beyond our Kitchen, which brings our customers closer to the provenance of our food and focuses on farms and other local sources of our quality ingredients. This is an exceptional brand-building activity that strengthens consumer perceptions about the origin and the high quality of our ingredients.

And we also launched the Happy character, which is a new approach that provides a consistent and engaging presence alongside our property promotions. It's still early; however, we expect similar success in strengthening our family business as in Europe.

Now turning to slide 4, Brazil's revenues were impacted by the Brazilian real's 13% average devaluation versus the US dollar year-over-year, which resulted in revenue growth of 2.4% in the first quarter. Excluding the currency movement, organic revenues grew 15.9% despite continued slow consumer spending, and the net addition of almost 70 restaurants during the past 12 months contributed $31.3 million to revenues.

We increased comparable sales by 9.1%. This growth primarily reflects successful product mix checks. The marketing calendar started the year off strongly. The national rollout of wraps and the triple cheeseburger in the Affordability platform performed well, as did other promotions. Based on our internal estimates, we grew our market share in the first quarter, further consolidating our leadership position and reframing our strategy of providing everyday good value alongside product innovation.

Please turn to slide 5. In our North Latin American division, first quarter revenues grew 9.6% or 7% on an organic basis versus the prior year period. Results in these markets in particular benefited from an Easter holiday which fell in March as opposed to April of the prior year. NOLAD system-wide comparable sales growth was modest at 1.5%.

In Mexico, the turnaround of our operations is ongoing. As discussed during our fourth-quarter call, we have a more conservative pricing strategy in place as we continue to work toward building traffic in a highly competitive environment. Comparable sales for the first quarter were mainly driven by new products and the Happy Meal as the net addition of 13 restaurants over the past 12-month period contributed $5.7 million to revenues in constant currency.

I am pleased to report that during the first quarter, we achieved the best mystery shopper scores alongside the best labor productivity in the history of McDonald's Mexico. These metrics continue to strengthen as the results of efforts such as Made For You.

Please turn to slide 6. SLAD now comprises Argentina, Chile, Peru, Ecuador and Uruguay and is reflected in results comparison for both periods. The division continues to be a strong contributor to consolidate the results in the first three months of the year as our customer consumption behavior in Argentina was generally resilient to increased sensitivity to the political and economic climate. Revenues increased 10% and 20.5% on an organic basis compared to the first quarter of 2012. These included growth of system-wide comparable sales of 14.6% driven by the strong performance of Value Meals and the Triple Bacon sandwich in the Affordability platform in Argentina, for example. And in the same country, we also achieved strong average check expansion.

While we are cautious in our outlook for Argentina, overall consumption levels in the country have held up well to date. Our nearly three decades of operating history equips us with effective strategies to face inflationary and currency devaluations.

Please turn to slide 7, the Caribbean division. Under the new structure, Colombia and Venezuela shifted from SLAD and joined the territories of the Caribbean division. The division reported revenue growth of 8.7% and 13.9% on an organic basis. Revenue growth was mainly impacted by the official devaluation of the Venezuelan Bolivar Fuerte in February. Despite difficult conditions, we achieved system-wide comparable sales growth of 12.1%.

Even in markets such as Venezuela where conditions are challenging, brand preference remains strong. Our superior product offering and successful regional local marketing campaigns that include [McDuals] and a number of ideas such as Fish McBites in Puerto Rico and Arepas in Venezuela have helped contain traffic declines. In this inflationary environment, we have been adjusting prices' levels to reflect rising costs where possible while still maintaining overall good value.

Puerto Rico continues to be impacted by a difficult economic environment. However, the combined [beverage] business and Puerto Rico continues to perform very well and overall consumption in Colombia has been slower than expected to pick up, yet we have strengthened our leadership position within our segment.

In summary, consolidated revenues grew 6%, reaching $977 million, and reflected depreciation of local currencies versus US dollar, mainly in Brazil and Venezuela. Excluding this impact, organic revenue growth was almost 16%.

Now please turn to slide 8. The pace of our new unit expansion has increased year-over-year since Arcos Dorados took control of the region. In the past 12 months, we extended our footprint with 133 gross openings of full-service restaurants. At the end of March, our restaurant base reached 1959 restaurants. Dessert Center's totaled 1987 and McCafe's expanded in number to 339. The larger formats provide high average return on investment, adding to consumption opportunities as well as brand positioning.

As discussed before, we are prioritizing restaurant openings in high-potential markets such as Brazil. Our 2013 openings pipeline is strong with more than 75% of locations secured or under construction. It shows we're well on track to meeting our full-year guidance.

Now German will discuss our adjusted EBITDA generation and other financial metrics. German?

Thanks, Sergio. Please turn to the chart on slide 9 to review our adjusted EBITDA performance. Adjusted EBITDA for the first quarter was $68.7 million, a 12% decrease compared to the same period of 2012, mainly affected by significant currency depreciations in countries such as Brazil and Venezuela. Adjusting for special items and currency impact, organic adjusted EBITDA grew by 1.7%.

Special items consisted of a net gain of $0.3 million in the first quarter 2013 relating to the CAD incentive plan compared with a gain of $4.1 million in the first quarter 2012. The adjusted EBITDA as a percentage of total revenues decreased by 144 basis points to 7% year-over-year. The deterioration mainly reflects the impact of currency devaluation over dollar-denominated cost in various countries.

On an organic basis, SLAD, NOLAD and the Caribbean division all reported increased year-over-year adjusted EBITDA. In the case of Brazil, adjusted EBITDA decreased 11.6% in the first quarter while organic adjusted EBITDA remained stable. This is a result of increased revenue and G&A leverage, which were upset mainly by higher food and paper costs as a percentage of sales due to the negative impact over dollar-denominated costs of the higher exchange rate.

Adjusted EBITDA margin for the quarter reached 12%. NOLAD adjusted EBITDA increased 53.8% to $4.7 million from $3.1 million in the prior year. On an organic basis, adjusted EBITDA was up 51.7%. EBITDA benefited from the Easter holiday in March, devaluation and food and paper cost, which includes reduced product waste and efficiencies and other operating expenses. As a result, the margin improved 139 basis points to 4.8% in the quarter.

SLAD adjusted EBITDA remained stable versus the prior year, resulting in a margin of 9%. Adjusted EBITDA rose by 9.8% on an organic basis, driven by higher revenues which were partially offset by higher payroll and energy costs as a percentage of sales. Adjusted EBITDA declined 6.3% and amounted to $12.2 million in the first quarter in the Caribbean. Organic adjusted EBITDA increased 1.4% compared to one year ago, mainly due to the impact of dollar-denominated costs resulting from the currency devaluation in Venezuela. This factor more than offset revenue growth and improvements in payroll and G&A as a percentage of sales. As a result, adjusted EBITDA margin decreased 102 basis points to 6.4% of revenues.

On slide 10, non-operating results for the quarter reflect a 12% increase in overall funding costs as net debt has increased due to the restructuring process carried out during the last 12-month period. Regionally, foreign currency exchange results in the first quarter of 2013 have been included as previously disclosed one-time charge of $15.4 million resulting from the impact of the official devaluation of the Venezuelan Bolivar.

Income tax expense in the first quarter was $5.9 million compared to $12.1 million in the year-ago period. The resulting increase in the effective tax rate is mainly explained by the negative impact of the Venezuelan currency devaluation. Bottom line results were a loss of $6.6 million compared to net income of $25.4 million in the same period of 2012. The result mainly reflects lower operating results as well as the higher nonoperating charges recognized in the quarter, which were partially offset by lower income taxes.

The Company reported a loss per share of $0.03 in the first quarter of 2013 compared with earnings of $0.12 in the previous corresponding period.

On slide 11, we detail our debt indicators. Our end of quarter net debt to adjusted EBITDA ratio was 1.6 times. Cash and cash equivalents were $145 million in the first quarter. As a reminder, our outlook for the full year 2013 with respect to 2012 is based on year-over-year organic growth, which is in constant currency and excludes the special items in both years.

First-quarter organic revenue expansion of 15.7% is on track with our stated expectation of growth in the range of 15% to 17%. While first-quarter adjusted EBITDA growth was below our full-year target of 8% to 10%, it is within our year-to-date expectations, given the Brazilian currency comparison for the first quarter of 2012 and 2013. In coming quarters, results should benefit from cost containment initiatives including continued focus on the G&A and more stable currency comparisons.

Assuming the current consumption momentum in our main market with respect (inaudible) to bring adjusted EBITDA growth in line with our full-year guidance. We are in a very different situation as compared to last year. We have very stable foreign exchange rates. Our experience is stronger consumption in our larger markets, and as the year progresses we will be facing easier comps.

I will now hand the call back to Woods.

Thank you, German. Our first quarter results are a solid foundation on which we continue to grow. Our business, our brand and our financials are sound and backed by strong underlying drivers, namely rapid population growth and the emerging middle-class's preference for convenience in our target markets.

I would like now to make a brief comment on Venezuela. During the weeks after the election, our sales were impacted as many of our customers chose to stay home. This appears to have been only a temporary response, however, with people since they returned to their day-to-day activities after. In this environment, we are focused on areas within our control, which include growing market share and maintaining the same quality, service, cleanliness and good value we have always delivered.

Additionally, in the spirit of the strong partnership that we have, McDonald's has continued to support their brand in Venezuela and our efforts to maintain our strong positioning through an increase to $8 million in royalty relief in 2013, from $5 million in 2012.

We start the second quarter in a strong position following the very successful launch of the Monopoly promotion in Brazil. The campaign is a global success story and has been run in the McDonald's system for many, many years. Already it has exceeded expectation amongst its target audience, young people and adults, and we expect increased traction over coming months.

In closing, I would like to stress my conviction in the underlying strength of our business. Revenues for the first three months of the year were solid, particularly among our three largest divisions, which achieved double-digit growth. Our investment in the brand and our focus on operating excellence is paying off with market share gains in Brazil and other important markets. This strong positioning should result in improved performance as the year advances and should counterbalance any potential deterioration in some of the markets.

Our marketing calendar, new project introductions and restaurant openings in 2013 are driving sales. At the same time, we are focused on improving the results through cost containment initiatives. We expect these will continue to gain further traction.

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

(Operator instructions) John Ivankoe, JPMorgan.

A question on Brazil -- I think in the first quarter, at least over the past couple of months, there are a couple of news stories that hit regarding your use of part-time workers relative to the monthly minimum wage. I just wanted you to comment just in terms of how that might affect your business, if it would at all, both from a staffing and a cost perspective.

Secondly, if I may, in Brazil I think it was just a couple of days ago there was some news about a settlement that you made with a consumer protection bureau of some sort regarding your advertising of Happy Meal's. So I just wanted to get a sense of -- that's a looking-back issue or potentially a looking-forward issue for the brand's positioning in Brazil?

I'll answer the first part and I will have Sergio answer for you the first part. The first part, the part on the advertising -- that's an old case from 2010. We are appealing it in the courts. It has been rolling around and we are very confident that we are going to win it. So that's the situation there.

And with respect to Pernambuco and the labor issue?

The real thing is that, actually, the labor authorities in Brazil have been requiring us to shift from the flexible schedule that we used to have since the beginning of the market to a fixed-hour schedule. We started shifting the system at the end of 2011, so in reality this is not new. More importantly, we are going to be done before the end of this year with all the markets, and we do not expect, once we've stabilized the scheduled system in our restaurants, the reality is we do not expect any significant impact in our labor cost line of the P&L.

And if I may also, just one unrelated question on your US dollar exposure in Venezuela. Have you been able to substantially reduce your US dollar costs, 2013 versus 2012? And are those initiatives possible and are they continuing in 2013 into, perhaps, 2014?

Let me pass that to German so he can answer it.

Basically, the decision in Venezuela is the same that we mentioned in the last call, in the fourth quarter. In fact, the FX, you have to remind that the FX is (inaudible) and for transition purposes we are using this FX. But for food and paper import costs, we are using a higher exchange rate more related to the unofficial exchange rate because this rate -- the supplies can access to pay imports. So basically we continue with the same outlook. We are continuing with the input through suppliers' products and the operations continue the same way.

Bob Ford, Bank of America Merrill Lynch.

With respect to the income taxes, there was a mention of a Venezuelan valuation allowance for the tax asset. And I was curious as to how big that was and what the actual tax payment was from a cash perspective or from a cash flow perspective, please.

Let me pass it to German.

Basically, you know the devaluation in Venezuela created a loss carry-forward that we cannot use in the future based on the actual projection in the market. So we need to adjust this provision, and that affected the income tax in this quarter in Venezuela. But within the year, we expect to normalize our exchange rate in the range that we originally gave in the guidance from 33% to 35%. We don't take any big movement going forward.

German, my interpretation of management's comments -- and correct me if I'm wrong -- was that there was a Venezuelan valuation allowance on some of the tax assets that you recognized because of the losses created by the devaluation. So you have a tax loss carry-forward which you used to reduce the tax expense that you recognize on the income statement of $5.9 million. I don't know if that's correct or if you recognized that asset somewhere else on income statement.

That was a gain in the previous year, but not in 2013. With the devaluation in 2013, we adjust again the loss carry-forward, and that's why we have a loss this year that we cannot offset and recognize as a credit for deferred taxes.

Okay. With respect to the losses you recognize, how much of those are non-cash?

Almost everything is non-cash, because, basically, I said the loss carry-forward we cannot use in the future. So today, it's not cash.

Jeronimo De Guzman, Morgan Stanley.

Just a follow-up on Venezuela, on the top-line growth -- you mentioned you had some pressure on the traffic that was unique to the quarter. I just wanted to see what kind of traffic decline were we looking at for the quarter, and how do you see this going into the second quarter? Because it seems like you did raise pricing significantly to offset the food and paper pressure, but it does look like the traffic decline was maybe bigger than expected.

Look, we don't discuss individual countries, but what I can tell you is that we have been passing all of the currency-generated food and paper inflation to the customers. Obviously, it has had an impact on traffic, but the fact of the matter is that we've gained share in Venezuela. So we are happy that things are going in our direction.

Okay, and then is there -- do you have any more clarity -- I know also, too, you just mentioned that the food and paper costs, you are still not able to get them at the official rate. But is there any more clarity on -- around what is going to be the cost for these raw materials, like the FX that you are going to have to use for these raw materials; and any concerns about the availability of raw materials in Venezuela?

Well, I don't know. As you know, they have changed a lot of the officials just last week. We have a new President of the Bank, Merentes, and so the whole issue of Cadivi and the purchase of dollars is still up in the air. But we don't have any problems with procurement. We are getting all of our supplies. The question of at what price is still up in the air.

So what we are doing, as I think Sergio mentioned now, we are rolling out things like Arepas and we are looking for as much local procurement as we can get, not only to offset that with, but also to be more localized and more a part of what's going on in Venezuela today. So all those things that we are doing have allowed us, as I said, to gain market share. And that's why we are, with the situation as it is today, confident that we are doing a good job.

(Operator instructions) George (inaudible) Asset Management.

Just a quick question -- why did you decide to start reporting Venezuela with the Caribbean?

It's all about work and about geography. Columbia and Venezuela are closer to the Caribbean than Buenos Aires, and it was just alignment to make things more easy from a management point of view. That's the only reason. And I think in the future, you are going to see more and more flights leaving Bogota for the Caribbean. It's going to become a hub, so that's good.

Okay.

(Operator instructions). Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you very much. I would like to thank all of you for your interest in Arcos Dorados. We are maintaining our focus on building new restaurants, driving sales through strong marketing initiatives and seeking out opportunities to improve our profitability, while always providing superior experience at our restaurants. Thanks very much for joining us today and we'll see you next quarter. Bye-bye, thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.