Arcos Dorados Holdings Inc (ARCO) 2013 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Arcos Dorados second-quarter 2013 earnings conference 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 conference call over to Ms. Sofia Chellew. Please go ahead.

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

Thank you, Sofia. Hello, everyone, and thank you very much for joining us. I am pleased to report continued strong underlying growth in our business in the second quarter. Our key consolidated operating results experienced double-digit growth with comparable sales increasing 11.6%, organic revenues increasing 16.9% and organic EBITDA gaining 18.2 percentage points.

This expansion was driven by our largest regions, SLAD and Brazil, where we achieved top-line growth alongside margin improvement. And it once again demonstrates our ability to profitably expand our business despite challenging market conditions.

During the quarter we continued to lead the market despite more aggressive competition. This achievement reflects the continued dominance of the McDonald's brand throughout Latin America. We also have a strong marketing calendar in place for 2013 and the momentum created by introduction of Chicken McBites in various countries in June is continuing into the third quarter.

Arcos Dorados has a superior position in iconic locations and in the second quarter we extended our footprint to 1,971 restaurants. Our expansion strategy taps into countries with strong growth and performance prospects such as Brazil while maintaining our overall competitiveness in all the countries of the region.

While we remain focused on short-term performance, long-term prospects of our business are compelling. We are already a daily destination for more than 4.3 million customers across 20 territories in Latin America and the Caribbean. But this is just a small part of our overall long-term potential. A swelling middle class, changing habits and demographics as well as untapped demand for our products are fueling the long-term expansion of the QSR segment. As the market leader we are at the forefront of this growth.

In Brazil the McDonald's brand has almost three times the market share of its closest competitor according to Euromonitor. During the quarter we maintained our market dominance having outperformed our listed peers in terms of comparable sales and expanded either in line with or faster than most consumption metrics.

While margins in Brazil and SLAD improved along with comparable sales growth in the quarter, these gains were offset by challenging conditions particularly in the Caribbean and the North Latin America division. Operating results for the first half of the year are consistent with our expectations and we entered the second half and a stronger position than last year.

In more uncertain markets such as Venezuela we've achieved consistent growth and have been largely resilient to political and economic instability. We have a strong foothold and a long history in these countries and, despite recent challenges, maintain a leading brand position.

The hedges we put in place have mitigated currency volatility and its impact on the important portion of our food and paper costs. Strong gains in G&A leverage, consistent with stabilized structure, are counterbalancing labor cost pressures. And importantly, we have consistently protected volume as defined by guest counts, demonstrating the success of our marketing strategies and our status as a top consumer brand.

It is no consequence -- it is no coincidence then that these achievements correspond with the five vectors of our growth blueprint. La Receta para ganar or recipe to win, which remains our guiding strategy. We remain focused on those areas within our control and will continue to leverage our deep experience in Latin America to gain market share and deliver strong results in a variety of operating environments.

I will now hand the call over to Sergio Alonso who will go through Arcos Dorados' second-quarter performance in more detail. Sergio.

Thank you, Woods, and hello, everyone. Turning to slide 3, our marketing calendar was a key driver of sales growth in the second quarter. Our strong product portfolio, along with popular properties in Happy Meal and dessert category, enabled us to grow and to once again drive average check increase in line with inflation despite increased competition. Overall, it was a strong quarter considering the environment and the tough comps facing June in particular.

Turning to slide 4, Brazil's revenue grew by 9.4% in the quarter. If you exclude the 5.6% average devaluation of the Brazilian real, organic revenues were up 15.6%. Season wide comparable sales increased 10% due to several factors. A strong product mix and price adjustment over the last 12 months drove higher average check while promotional activities resulted in increased discounts.

In addition, we continued to strengthen the brand through initiatives during the Confederation Cup Soccer championship. And the addition of 69 restaurants during the last 12 months also contributed $23.6 million to revenues. Brazil's sales growth during the quarter is particularly impressive when you consider the still challenging consumer environment and impact of the demonstrations in the second half of June.

Now please turn to slide 5. The North Latin America division was negatively impacted by the shift of a traditional holiday period along was slower Happy Meal trends. Revenues increased 6.9% or 2.1% on an organic basis while system wide comparable sales decreased by 4.2% in the quarter.

Competition remains strong throughout countries in the division. In Mexico we introduced customized flavors such as the Chamoyada drink made with the local chamoy fruit, mango and pineapple. And in addition to strategies aimed at top-line growth, management continues to make progress on longer-term projects to strengthen operations achieving improved customer satisfaction and productivity metrics in Mexico. The net addition of 10 restaurants during the past year contributed $5.3 million to revenues.

Let's turn to slide 6. SLAD, which comprises Argentina, Chile, Peru, Ecuador and Uruguay, increased revenues by 14.3% and 27.9% on an organic basis driven by effective marketing strategies and continued high levels of consumption in Argentina. We increased average check in line with overall inflation with volume growth in almost all of our product categories. As a result (inaudible) comparable sales for the division rose 21.4% in the quarter. And the net addition of 23 restaurants during the last year contributed $14 million to revenues.

Turning to slide 7, the Caribbean division experienced revenue growth of 5.3%. Excluding currency devaluation, principally related to the Venezuelan bolivar, organic revenues were up by 15.2% year over year. System wide comparable sales upheld the prior quarter's growth rate, increasing 14.6% and we were backed by effective marketing initiatives including the McMenu in Venezuela which lets customers choose between a quarter pounder with cheese or McChicken combos and McWraps in Puerto Rico. The latter helped mitigate traffic declines including soft performance in Columbia as well as record rainfall in several Caribbean markets in June.

Despite macroeconomic issues in Venezuela we continue to deliver consistent organic growth in this market. While inflation is cutting into the disposable income of families, our top brand recognitions means we are in a stronger position than most. The net addition of 11 restaurants during the last 12 months period contributed $6.5 million to revenues in the division. In summary, consolidated revenues increased by 9.4% to $989.2 million as organic revenue growth of 16.9% was partly offset by the valuation of local currencies.

As you can see on slide 8, gross openings of 130 restaurants over the 12-month period ended June 30 resulting in a total of 1,971 restaurants, 2,057 (inaudible) centers and 340 McCafe's throughout the region. New restaurants continue to deliver attractive returns on investment and have the added benefit of boosting sales within trade areas.

Our full-year operating plan is on track and more than 90% of opening sites were secure as of period end. German will now discuss our adjusted EBITDA generation and other financial metrics. German.

Thanks, Sergio. Please turn to slide 9 to review our adjusted EBITDA performance. Second-quarter adjusted EBITDA was stable at $67.4 million as strong comparable state and contribution from new stores were offset by higher (inaudible) costs as a percent of revenues. Adjusting for special items and currency impact, organic adjusted EBITDA rose 18.2%.

Special items in both periods Included the charge in corporate G&A of $1.5 million in the second quarter 2013 versus a gain of $6.3 million in the second quarter of last year related to the cost incentive plan. And by a benefit of $1.5 million related to an increase in the temporary royalty waiver from McDonald's Corporation for Venezuela recognized in the second quarter 2013.

Margin in our largest division, Brazil and SLAD, grew due to strong comparable sales in the quarter. However, these gains were offset by challenging conditions in the Caribbean and other Latin America divisions. As a result the EBITDA margin decreased by 62 basis points to 6.8% year over year.

In Brazil adjusted EBITDA increased by 14.1% in the second quarter and organic adjusted EBITDA grew 20.5%. The increase in the margin of 48 basis points was driven by revenue growth, lower food and paper costs as a percent of sales, improved G&A leverage and a bump in lowering energy cost. These factors were partially offset by higher payroll as a percent of sales, mainly due to the high (inaudible) initial cost as part of a learning curve from the shift of employees to fixed work schedules along with higher employee benefit provisions.

(inaudible) in NOLAD declined by -- to $4.9 million from $7.4 million. Food and paper costs as a percent of sales decreased in the quarter. However, margins were negatively impacted by lower traffic in decreased to 4.8%. In SLAD as EBITDA increased 26.1% or 44.8% on an organic basis. Leveraged (inaudible) operating costs and expenses due to strong revenue growth resulted in an adjusted EBITDA margin of 10.7% which is an improvement of 100 basis points over last year.

Finally in the Caribbean, EBITDA declined 13.2% to $11.2 million year over year. A royalty waiver from McDonald's Corporation for Venezuela of $2.9 million was recognized in the second quarter 2013 including $0.8 million of (inaudible) adjustments versus $1.3 million in the previous year. Excluding currency transition and special items adjusted EBITDA decreased 15.6% on an organic basis. This decline mainly reflects higher cost especially for dollar-denominated inputs in Venezuela also reflect by declines and Colombia.

These negative factor were partially offset by increased average check, an improvement in payroll and general it as a percent of sales. As a result the adjusted EBITDA margins decreased 124 basis points to 5.8%.

Turning to slide 10, non-operating results for the quarter reflected an 11.8% increase in the overall funding cost to higher debt levels which were partially offset by the favorable impact of the depreciation of the Brazilian currency over the real-denominated debt and a foreign exchange loss mainly from the impact of currency devaluation on intercompany loans. Income tax expenses for the quarter totaled $0.6 million compared to $7.0 million in the year ago period.

The effective tax rate for the second quarter 2013 is the consequence of income tax valuation based on the first six months and which includes a negative impact on the first quarter 2013 result of the official devaluation of the Venezuelan currency. I would like to remind you that taxes are calculated based on the full-year estimate and not on an interim result. Therefore, the effective tax rate will vary each quarter.

Basic earnings per share were $0.04 in the second quarter compared to $0.06 in the year ago period. Slide 11 contain our debt indicators. In actual debt including derivative instruments was $691.1 million at the end of the quarter. Net debt was $562.3 million. And the net debt adjusted EBITDA do ratio was 1.7 times. Cash and cash and equivalents totaled $128.8 million at the end of June while capital expenditure amounted to $49.4 million for the quarter.

Slide 12. As a reminder, our outlook for the full-year 2013 versus 2012 is based on year-over-year organic growth, which is in constant currency and excludes special items in both years. In the first half of the year consolidated revenues in constant currency grew 16.3% and organic EBITDA increased 9.2% both indicators are within their company's original guidance range for the full-year.

Our guidance remains unchanged with top-line results benefitting from easy comparisons together with our ongoing strong marketing activities and the second half of the year, we have already started with robust comparable sales growth in July and effective tax rate is also anticipated to remain within range for the full-year. In the current environment cost containment remain a key focus for us. And we have initiatives in place to reduce expenses not just for 2014 but also over the coming years.

We are currently working on negotiation certain input price beyond 2013 in order to provide our operation with more visibility along with initiatives such as energy cost savings among others. I will now hand the call back to the Woods. Woods.

Thank you, German. Our second-quarter results demonstrate the continued strength of McDonald's brand as well as Arcos Dorados' operations in Latin America. During the first half of the year we skillfully maneuvered challenging conditions in various markets, drove G&A leverage, managed currency volatility with appropriate hedging, and outperformed branded and non-branded operators in the main markets through high-performing marketing initiatives.

As a result we are in a sound position going to the second half of the year. Our dominant brand image provides us with substantial long-term growth opportunities in an underpenetrated market. Particularly as the increasing influence of the middle class, as well as lifestyle changes, lead to increased demand for our products and services.

The current environment is posing many challenges including foreign exchange volatility as well as changing legislation. These have impacted our business and reported numbers. We have been successful at maintaining the top line and in the meantime we are focused on those factors within our control. As experienced operators in Latin America I am confident we will continue to outperform our competitors. Thank you for your attention. I would now like to open the call up to questions.

(Operator Instructions). Bob Ford, Bank of America.

I had a question on FX, it just has two parts. And the first one is if you could please explain the reference to the Venezuelan FX in the context of the $600,000 tax bill for the quarter and what your expectations are for the full year in terms of the tax rate?

And then also with respect to FX, could you more broadly discuss kind of the size and tenor of your operating hedges in Brazil? It is obvious that you guys meet some very prescient decisions early in the year with respect to those and I was curious as to how big they are and how long they are out there for?

And then if you could also address some of the currency challenges, the hard currency challenges, you are facing in Venezuela as well as your mitigation efforts because those also appear very impressive. Thank you.

Let me pass you over to German, but let me preface everything by saying that the hedges that we have in Brazil are for the full year and they are for all of our imported products. And then with that I will turn it on to the other portion of your question to German.

Yes, I would mention we decided at the beginning -- at the end of the last year to head 100% of the imported (technical difficulty) in Brazil, the average (inaudible) is around [$2.10], obviously different in each quarter. And we are working right now trying to see opportunities for next year in term of commodity hedging. So we are okay in Brazil.

We already hedge a part of our imported goods in other countries like Colombia, Mexico and Chile, and Uruguay. So we decided at the beginning of the year to be very proactive and tried to reduce the volatility in our food and paper costs.

In terms of tax, it is basically -- I like to remember you that based on accounting rules we are required to recognize the full impact -- or any devaluation at the moment that it's generated, (inaudible) 18. In the first quarter of this year we recognized the Venezuela devaluation and therefore the effective tax rate was so high.

And basically in the second half the accumulated tax rate is 74.8, but as the year advanced additional profits are generated and (inaudible) [decelerate]. So basically we continue thinking that we can reach the range in the effective tax rate of 33% to 35%, but the effective tax rate will vary from quarter to quarter.

But for the full year we should work with something that is something closer to 33% to 35% for the consolidated Arcos Dorados, correct?

Yes, correct.

Okay. Great, thank you very much. And then just the difficulty with the hard currency in Venezuela please. It sounds as if you've got some great strategies out there to do more local sourcing and whatnot.

Yes, basically -- Woods (multiple speakers).

No, I think you have hit right on it, Bob. It's we are working with local suppliers and we are -- we now are basically at 100% of our supply needs being bought in Venezuela. And that's -- it is taken some time because obviously we have to maintain quality standards for McDonald's, so that is what we are doing. And we have procurement assured into the foreseeable future.

John Glass, Morgan Stanley.

I first wanted to ask just about your pick up in traffic in Brazil. If you could, one, quantify it. It seems like it is a change in tone there versus at least last quarter when maybe it was all check driven. So do you attribute that solely to the promotions that you ran? Do you think there is a shift in the macro there? So if you could help us understand, one, the magnitude and also sort of the reasons behind you think the traffic has improved there?

Yes, hi, John, this is Woods. Yes, basically it is been driven by average check, product mix shifts. We've had the Monopoly promotion there which helped as well. But I think basically I would attribute it to the strong marketing and also to our strong operations. We have very good operations, some the best operations in the world in that country.

And by the way, we've also had new launches of products, we had McBites, which was rolled out in Brazil and it was very successful. So we -- I think we've got the right formula now of good service, good value proposition and we had a great promotion also helping us.

Just to follow up, how positive was traffic though this quarter? Was it a meaningful contributor to the 10%?

Well, average check was about 70% of the number.

Okay. And then can you just explain why the food and paper was down -- was favorable in Brazil? I understand you had hedges, but I wouldn't think that would actually have helped you unless I have got that wrong. And so, was that commodities decline or was it simply that you're pricing now ahead of your food inflation and that is more than offsetting any negative currency impact? And how does that play out, I guess, for the balance of the year if you think that through and how your hedges are going to come in?

No, it's only product mix shifts, it has nothing to do with lowering. And the hedges that we have through the rest of the are also helping keep the price down in dollar terms. But it is all product mix.

John Ivankoe, JPMorgan.

Actually first a clarification on something that's on your presentation which is helpful. On the Brazil slide, I think it is page 4, you show the pequenos precos menu at $5.50, which I think is higher than what I at least remember it being. So was that pricing taken or will that pricing be taken and that is how you are representing that to us, as just a clarification?

German, do you want to answer that?

Well, we have a Spanish -- well, we call the small pleasures, the single items typically for add-ons, those are up 4 reals. And what we call the flavor or the core product or the sandwich of the month, that is 6 reals, that's the pricing, John.

Okay, well then maybe it's just these prices just aren't right on the slides, which is totally fine, I just wanted a clarification on that. Okay, and secondly, it is not an exact calculation at all, but it did look like there was some fairly substantial new unit volume slippage in the second quarter in Brazil based on the volumes of the stores that have been open in the past 12 months at least relative to our expectations. The second quarter looked a little bit light. Could you comment on the new unit volume experience in Brazil specifically in the second quarter?

Sure, John. What happen is the number that I'm going to give you is the reality is we have (inaudible) our completing the 12 month period along the quarter, okay. So for those restaurants you have actually less time to be considered as sales. There are two effects, one is this, I don't know if I am making myself clear, so we didn't open every single restaurant April 1. We were opening all along the quarter last year so that's -- new restaurants are contributing with a relatively smaller amount of sales in the quarter, that is one effect.

The second effect is don't forget that when we call -- when we say the number of restaurants that we open, we include in that number both our (inaudible) and franchise restaurants. And when we talk about revenues we consider our [corporate] sales plus revenues from franchisees that is only limited to rent, okay. So if you want to calculate the other volume by simply doing that division you won't get the right number.

[Lora Sarif], Morgan Stanley.

Congratulations on the improved results. I wanted just to ask about the improved top-line in both Brazil and in SLAD, which I assume is mostly coming from Argentina. It seems like it's partly traffic, which is good, it's partly mix and then I guess it's partly some of the promotional strategies that you have in place.

So I mean you are clearly outperforming particularly in Brazil with these kinds of numbers. So can you help us think about how you see the sustainability of that into the second half of the year? Is this more about your innovation calendar is just really strong right now or is it really about the Monopoly promotion and we should see good but more subdued numbers as we progress throughout the year? Please. And I guess you mentioned a bit about July, any color you can give us would be appreciated.

I don't want to get ahead of ourselves, but we did start this quarter robustly and we're very happy with where we started off. We have new product introductions, we have a strong -- very strong marketing calendar. I would like to hope that we can continue this momentum, but I can't obviously promise it. But I think we are doing all right. And I think it's not just -- it's not just the promotions or pricing, it is also the overall concept of McDonald's. We are providing very, very good experience to our customers. And it's starting to show.

Right. But something changed, because last year you were struggling more and the environments worse, not better, so you're bucking the trend. And that is impressive, but what is causing you to buck that trend? Because those things of good service, etc., I think they were probably in place last year.

I think -- I guess the only thing I could answer you, Lori, is that we have a better value proposition this year all in all than we maybe had last year. But I can't think of anything else that's bucking -- that's causing us to buck the trend of a lot of -- we have value, we've got great marketing -- yes, I don't --.

New product, Chicken McBites.

Yes, we've had good product launches, yes.

(Operator Instructions). Mitch Speiser, Buckingham.

Can you just discuss the cash flow position? You are still operating at a cash flow negative rate here in the first half of the year. As we think about that over the next couple quarters and couple years can you give us a sense of when you might expect to start turning cash flow positive?

Yes, hi, Mitch, I will pass it over to German so that he can elaborate.

Yes, hi, Mitch, how are you? Basically we are taking opportunity of the market right now because the market like Argentina with negative (inaudible) in real terms in local currency. We are thinking to improve -- always we are thinking to improve our debt profile in terms of maturity and total funding costs.

We are analyzing this year how we can improve that. But at this take a couple of years to be (inaudible) company thinking the actual investment trend. So basically we are very active looking for opportunities and we know that in a couple of years we need to found some way to finance the (inaudible) program.

Thanks. And one additional question, please. Just on the SLAD division, in the same we gave us the components of comps for Brazil can you give us the SLAD components? I think you said traffic was positive in SLAD, can you give us what that number was as a percentage of the comp?

Yes, traffic was 25% of that comp and the rest was price. Product mix -- yes, product mix shift.

Thank you.

And at this time I'm showing no additional questions. I would like to turn the conference call back over to Mr. Staton for any closing remarks.

Yes, thank you, Jamie. Well, I would like to thank all of you for your interest in Arcos Dorados and for joining us today. We look forward to speaking to you again in next quarter. So thank you and good afternoon -- or good morning to everybody.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.