Arcos Dorados Holdings Inc (ARCO) 2013 Q3 法說會逐字稿

Good morning everyone, and welcome to the Arcos Dorados third-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)

And 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 statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statement 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 today. I'm very pleased to report double-digit underlying growth in our business in the third quarter, which is a testament to the strength of Arcos Dorados' operations as well as the McDonald's brand throughout Latin America.

Despite continued soft consumption across some of the markets we achieved comparable sales growth of 12.6%, organic revenue growth of 18.5% and organic adjusted EBITDA expansion of 25.8% in the quarter. I'm particularly pleased with the margin expansion achieved in Brazil despite the weakened environment.

Since the start of the year we have consistently expanded comparable sales and organic adjusted EBITDA on a sequential basis. Part of this improvement reflects more favorable year-over-year comparisons which we noted earlier in the year would benefit second half results.

Moreover, the results underscore the continued strong brand preference that exists in our region. In an environment where economic and political uncertainty continued to impact several key markets our team has drawn on decades of operating experience in Latin America to implement strategies focused on those areas within our control.

We have a compelling marketing calendar and in the third quarter, the momentum created by the recent launch of the successful Chicken McBites products offering in many markets enhanced sales. This resulted in broad based comparable sales growth across our four divisions, reinforcing our dominant position within the region.

Based on internal and available public data, in the third quarter we once again outperformed our listed peers in terms of comparable sales and outpaced most consumption metrics in key markets.

In our largest market, Brazil, we maintained our dominant position with the best coverage of any QSR in the country. And across the region, we expanded our overall footprint to 1,993 restaurants, up 113 year over year contributing additional revenues.

Alongside top-line growth, we also achieved strong growth in organic adjusted EBITDA through a strict focus on those levers within our control. During the quarter we were able to lower most cost items as a percentage of sales thanks to our efforts to contain fixed costs and mitigate the impact of currency volatility, particularly in Brazil.

Additionally, in October, we concluded debt restructuring and successfully reduced our overall cost of funding, while extending the average maturity of our debt.

Given our strong results for the first 9 months of the year we are confident that we will reach our revenue guidance and even expect to exceed organic adjusted EBITDA full-year guidance.

As the market leaders we are operating from a position of strength, and I remain confident that we will continue to profitably expand our business going forward.

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

Thank you, Woods, and hello everyone. Turning to slide 3, a strong marketing calendar and solid execution has enabled us to overcome soft consumption growth across several key markets this year and the third quarter was no exception.

The successful Chicken McBites promotion was a key driver of sales in the quarter. And in addition, the family business also stimulated sales.

Because of these efforts and the overall strength of our product portfolio we were able to increase average check in line with inflation despite strong competition.

Turning to slide 4, Brazil's revenues were flat in the quarter mainly due to the depreciation of the Brazilian real. Excluding the currency impact, revenues gained 12.8% year over year.

System-wide comparable sales were up 5.6% primarily due to average check. As Woods mentioned, we benefited from easier year-over-year comps across the region. However, I would like to point out that we are comparing with the September of last year that was a particularly strong month for traffic in Brazil due to the highly successful Big Mac promotion at that time.

Despite this tough comparison together with continued mixed signals from other consumer industries, our third quarter results were strong. This reinforces our strategy of offering great value combined with a strong core portfolio and premium products.

Alongside Chicken McBites and the family business, desserts like the ice cream cone and McFlurry platform also performed very well. The net addition of 71 restaurants during the last 12-month period contributed $31.5 million to revenues in constant currency.

Turning to slide 5, revenues in the North Latin America division increased 7.9% or 6.6% on an organic basis year over year. System-wide comparable sales returned to positive growth from the second quarter, increasing 1.2% year over year despite the soft consumer environment.

This reflects the strong performance of the family business and the desserts category primarily in Mexico. And also in Mexico, comparable sales outgrew the broader retail sector according to data from the National Association of Supermarkets and Department Stores, which has been showing declines versus the prior year. The net addition of seven restaurants during the past year added $5.7 million to revenues in constant currency.

Please turn to slide 6. In SLAD revenues grew by 13.1% and 31.2% on an organic basis year over year. Comparable sales have been improving throughout the year and during the quarter in the division. Successful marketing activities underpinned a 25% increase in comparable sales, as did an increase in discounts. Marketing initiatives including Chicken McBites along with the strengthening of our family business benefiting sales and overall results.

The net addition of 22 restaurants during the last year contributed $15.8 million to revenues in constant currency in the quarter.

Turning to slide 7, the Caribbean division achieved revenue growth of 11.5%. Excluding currency variations, organic revenues increased by 22.7% year over year.

System-wide comparable sales grew 22.5%, driven by increased average check primarily on the back of price increases in Venezuela as we continue to pass on higher costs in this country. Despite the negative traffic this has caused and the challenging condition in this market we have gained share according to internal data.

Successful regional and local marketing campaigns such as Chicken McBites in Colombia and the new Quarter Pounder Flavors in Puerto Rico helped mitigate traffic declines in the division.

The net addition of 13 restaurants during the last 12-month period contributed $5.2 million to revenues in constant currency during the quarter.

As you can see on slide 8, gross openings of 129 restaurants on a consolidated basis over the 12-month period ended September 30th resulted in a total of 1,993 restaurants, 2,157 Dessert Centers and 344 McCafe's.

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

Thanks, Sergio. Please turn to slide 9 to review our adjusted EBITDA performance. Adjusted EBITDA increased 8.1% year over year to $90.4 million in the third quarter. Excluding special item and currency impact organic adjusted EBITDA was up 25.8% backed by top line growth. Additionally, with the exception of payroll, we were able to lower most cost item as a percent of sales in the quarter.

This achievement reflected strong revenue growth combined with certain hedges, G&A leverage and other operating efficiencies.

The special item include an increase in corporate G&A when compared to a net gain of $2.9 million in the third quarter 2012 related to the CAD incentive plan versus a small net charge in the third quarter 2013.

The Company also recognized an additional year-over-year benefit in the third quarter 2013 of $0.8 million related to the temporary royalty waiver from McDonald's Corporation for Venezuela.

The adjusted EBITDA margin as a percentage of total revenues increased by 16 basis points to 8.8% with improved margins in Brazil and NOLAD.

Coming to Brazil, third quarter adjusted EBITDA grew 11.8% or 26% on an organic basis. Adjusted EBITDA margins increased strongly by 135 basis points to 12.7% in the third quarter 2013.

While revenue growth was flat year over year, margin improvement was driven by reduced food and paper cost helped by the use of hedges to mitigate currency pressures, lower occupancy and other expenses as percent of sales mainly due to the lower energy rates. But this factor was partially offset by increased G&A as well as higher payroll as a percent of sales due to the ongoing migration to fixed work schedules and higher employee benefit provision.

The cost increase were -- have experienced from the shift to fixed schedules are expected to stabilize going forward as we use turnover in headcount to modify work schedules.

In NOLAD adjusted EBITDA increased by 12.8% year over year to $8.1 million or by 11.2% on an organic basis. Margin mainly benefit from increased comparable sales along with G&A leverage and lower food and paper cost as a percentage of sales.

These factors more than offset increased payroll as a percent of sales. As a result, the adjusted EBITDA margin grew 34 basis points to 7.7%.

Adjusted EBITDA in SLAD increased by 11.9% or 31.3% in organic basis. Organic EBITDA benefit from increased sales, which were partially offset by higher occupancy and other expenses. As a result adjusted EBITDA margin from the division reached 12.5%.

Finally, in the Caribbean division adjusted EBITDA grew 2.9% to $19.2 million in the quarter. The Company recognized a royalty waiver from McDonald's Corporation for Venezuela of $2 million in the quarter versus $1.3 million in the prior period.

On an organic basis adjusted EBITDA increased by 13.9% year over year. The adjusted EBITDA margin decreased 75 basis point to 9% as the higher dollar-denominated food and paper cost in Venezuela more than offset revenue growth and improvement in all other cost item in the division as a percentage of sales.

Turning to slide 10, third quarter non-operating results reflected a 107.7% increase in overall funding costs. The increase is mainly explained by the one-time charge of $12.7 million related to the debt transactions.

As a reference, in September the Company launched a tender and exchange offer for its outstanding 2019 7.5% bonds and issued 2023 bonds at 6.625% coupon.

As a result of the transaction, we improved our overall debt profile by extending the maturity and reducing the blended rate at a time when interest rates are predicted to increase.

Income tax expense for the quarter totaled $15 million compared to $11.3 million in the year ago. The effective tax rate for the third quarter reflects the mentioned one-time charge related to the debt transaction as well a recent tax reform in Puerto Rico.

As a reference for the first 9 months of the year the effective tax rate would have been similar to the previous year if we exclude the debt transaction and the official devaluation in Venezuela.

Basic earnings per share was $0.09 in the third quarter of 2013 compared to $0.16 in the previous corresponding period.

Slide 11 contains our debt indicators. Cash and cash equivalents were $338 million at September 30. Total financial debt was $911.5 million while net debt was $573.5 million and the net debt adjusted EBITDA ratio was 1.7 times.

Capital expenditure amounted to $62.8 million in the third quarter.

In October we conclude the debt transaction that I had mentioned. The total principal amount of 2019 existing in our tender was $208.8 million. As a result, we issued a total of $473.8 million of 2023 notes and reduced the amount of the outstanding 2019 bonds from $308.6 million to $99.8 million.

Along with the uses connected to the offer, the majority of the proceeds were also used to repay short-term debt around $60 million, unwind a cross-currency swap around $10 million, and for general corporate purposes.

In addition, the Company has a call option for next year on its outstanding 2019 bonds and (inaudible) an early redemption.

Given strong year-to-date growth in our consolidated results, we would like to confirm our full-year 2013 revenue growth of 15% to 18%, and we believe we will exceed our guidance range for organic adjusted EBITDA growth of 8% to 10%.

Additionally, given recent reforms in Puerto Rico, we expect the effective tax rate to be in the range of 35% to 38% excluding any financial activities. As a reminder, guidance is in constant currency and excludes special items in both years.

The CapEx plan for the full year includes approximately 130 gross openings, down from 140 previously. In addition, total capital expenditures are now expected to reach approximately $270 million from $208 million previously, mainly due to the real devaluation.

I wanted to mention a recent development in Brazil. In October the Brazilian authorities issued a preliminary ruling in favor of the Company regarding the employee meal program, also know was the PAT. We are currently analyzing the legal implications to determine potential benefits.

I will now turn the call back to Woods. Woods?

Thank you, German. Our strong third-quarter results showcases strength of the McDonald's brand in Latin America and our ability to execute targeted strategies to overcome challenging environments across our market.

Strong population growth, untapped demand for our products and a burgeoning middleclass are driving the long-term expansion of the QSR segment. As the market leader, we have been at the forefront of this growth. Our current footprint encompasses iconic locations throughout the region, which our competitors will find extremely difficult to replicate.

While the long-term growth prospects in the region remain unchanged, given current economic, political and political uncertainties as well as currency volatility in some of our key markets, we are considering modulating the pace of our restaurant openings in the near-term, while we redouble our efforts to improve profitability and maintain sound debt levels and ratios.

Under such a plan we would remain committed to opening a balanced portfolio of restaurants, not just points of sale. And growth in our largest market, Brazil, where the McDonald's brand has almost three times the market share of its closest listed competitor, will continue to be a priority.

While the moderation in the pace of openings will impact top-line growth, we are working to improve margins, increase G&A leverage and provide more predictability to our food and paper products. As such, we have already hedged part of the imported portion of our dollar costs for 2014. This focus is in line with our guiding strategy, Receta Para Ganar or recipe to win.

And I'm confident that advances in our profitability initiatives combined with the continued expansion of our footprint in key markets will set the stage for improved results in the coming years.

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

(Operator Instructions) Jeronimo De Guzman, Morgan Stanley.

I had two questions. My first question was about your same-store sales growth in Brazil. I wanted to see what you are thinking about the expected pace going forward. Now that you have left the price increases in the value platform just wanted to see what you can do to maintain -- to get growth or potentially get more of your top line growth from traffic gains?

Yes. Good morning, Guzman. Look first of all, don't forget we are comparing ourselves to last year where we had a very strong Big Mac promotion that ended around the middle of the month. And for further color I'll pass it to Sergio so he can provide more information.

That is true, Woods. I think it's appropriate to mention that the Big Mac was a relevant factor (inaudible) platform and it impacted all September and a large part of August last year. So we were competing with a really tough base. And on top of that, of course, I mean the overall economic situation in the country is not as dynamic as we were expected, as it was projected actually at the end of last year.

So under these circumstances we stick to our strategy that led us to increase sales and mainly protect margins. And also as German said during his part, our revenue guidance remains exactly at the same level. So that indicates our confidence on the remaining part of the year.

Okay, thanks. And then just a separate question on the expansion, you mentioned a more moderate pace of unit growth, wanted to see what this means for -- or what you are thinking about for 2014, and if there is any specific regions or any specific countries where you are focused on slowing down the expansion.

Yes. And we will provide more detailed guidance when we start going to our fourth quarter results in January. But this is a dynamic market. Given the current environment, we expect to moderate unit openings in the near-term. We are in a planning process right now. We really don't know where. But as you know, we will always focus on Brazil and we will focus on higher profitability.

Okay, thank you.

(Operator Instructions) John Ivankoe, JPMorgan.

Several, if I may. First, did the Brazil labor law suit affect the third quarter margins in any way or is that a potentially, going forward, margin benefit?

Hi, John, this is Woods. Yes, let me pass it to German so he can --

You want me to explain what --

Is it the PAT, John, you are asking about?

Yes, exactly.

Okay. Yes, let me pass it to Sergio.

Sure, John, how are you? PAT, to begin with, let me give you some color on what it is exactly. PAT stands for Programa de Alimentacao do Trabalhador, which is indicates that in Brazil the law -- the labor law requires companies to provide meals to its employees, okay? So what it is, this subject is whether the meals that are provided to our employees are considered part of the salary or not leading to applied payroll taxes. So, German, do you want to?

Yes, thank you. John, how are you? That really is relatively new, it's in October, but it's positive for us. So we are analyzing this with our lawyers, because you know the Brazilian laws are very complicated. But we are sure that there are benefits for the past for the provision and going forward. But I don't feel comfortable right now to give you a number. But year-end probably we will have a number that we'll disclose to the market.

And could we -- slightly separately on Brazil -- talk about initiatives such as the CBB program and breakfast, how far long those programs are in the system and what your future plans are to roll those out?

Yes, John, let me pass it to Sergio, who will give you an update on CBB.

Yes, on CBB what we are doing, if you recall, John, we already have the platform implemented in Puerto Rico and Mexico, where we are doing -- is doing pretty well. In Brazil the plan is to have by year-end this year, 2013, the biggest markets, so with the equipment. So we will have the chance to market the new products early next year. So we're working at a very high pace to have all the restaurants with equipment installed. And, as I said before, we will -- you will have being part of the overall marketing calendar early 2014 all the CBB platform.

And that will be the first time for national advertising for that?

Yes, for the market, yes.

And could you remind me what percentage of your stores have breakfast and whether that's increasing or it's -- is it relatively static at this point?

Yes.

Well, breakfast in Brazil -- remember that around 40% of our restaurant base in Brazil are placed in shopping malls, where due to opening hours we cannot offer breakfast, okay? So I would say that the remaining portion, around 60%, we offer breakfast. Though it has to be said as well that we do not have the wide product range that McDonald's has, for instance, in the States or that ourselves we have in Puerto Rico and Mexico. It's a more limited approach.

In terms of product portfolio it's a relatively new category for us. So it's growing and we're happy, and of course it will be a medium-term business opportunity.

Filippe Goossens, Mitsubishi Securities.

My question I think is largely -- or my two questions are largely for German. First question, with the -- and this relates to your Mexican operations, German. With the Congress in Mexico passing a new tax on both fast food and sugared drinks, can you kind of share with us what you think the impact will be on your business and what you can do to remediate perhaps a decline in volumes there?

And then my second question is related to your leverage metric. If I make the adjustments for leases in the way that Moody's does it, your getting a little bit close to the higher end of the range that I feel comfortable with based on the current trading. What is it that you could do in terms of bringing that leverage down if there were to be deterioration in operating performance or even in the currency translation that would push you above the 4.5 times? Thank you very much.

Yes, let me answer the first part. This is Woods. The new legislation in Mexico regarding soft drinks and snack food does not affect us at all. It just came out last week. We're still trying to figure out if there is some indirect impact. But it's too soon to tell. But it doesn't -- at least it didn't hit us.

And I'll pass you over to German for the -- for your second part of your question.

Okay. Well, okay. We didn't follow closely the net debt-EBITDA ratio because we did smaller percentages in our geography. We don't have any problem with the leverage ratio including the leases from covenants point of view with McDonald's or with any bond holder. The difference between Moody's and Fitch, for example, is Moody's -- Fitch knows that in Latin America the majority of the leases can be finished or terminated without any big penalty, normally between 2 to 3 months of payment. So this ratio, we'll follow the ratio. But it's not forcing us to any drastic decision, we can manage that.

(Operator Instructions) John Ivankoe, JPMorgan.

I wondered if it was an appropriate time to begin the talk about how Arcos Dorados may sponsor the World Cup in 2014?

Yes, John, good question. We're lucky as a brand to be related to the World Cup as well as the Olympics all over the world. The World Cup will be held next year in Brazil, which is the world champion. It's going to be a huge party. It's going to be very good for our brand. And it's going to help build an exciting market calendar. We have a player escort program. We have a bunch of promotions.

As you probably remember, McDonald's was involved with training the Olympics hosts in London. We're doing the same thing with the FIFA volunteers. So that's a great thing for us to show ourselves off.

And so we're working diligently on capitalizing this great event for Brazil. And as we get more news we will let you know.

Okay. Can you tell us what the hedge rate was for FY2014? I assume that you were referring to Brazil, and if I remember correctly, I think it was 210 in FY2013.

Yes, let me pass you to German.

Hi, John. Again, as last year we are trying to be very proactive in terms of hedges. You know we hedged in the case of Brazil all the 2013. We are advancing 2014. We almost have a three-thirds of a -- three-fourth of the year closed, all the 6 first months, big part of third quarter and a small part in the fourth quarter. We are continuing to see windows to try to lockout all the food and paper imported parts in Brazil. But at the same time we are doing hedges in other countries with opportunities like Colombia, Chile and Uruguay. We continue to try to be predictable, not to beat the market.

Okay. And last one from me, I promise. You showed a foreign currency, I guess, gain in the quarter, I mean and that had been a loss recently I presume because of Venezuela. Could you shed some light on that?

Thank you. I'll pass to German.

Yes, because in the quarter there was significant real appreciation in September that offset the impact in the first 2 months of the quarter, was a special quarter only because of the appreciation of real in September.

(Operator Instructions) Robert Schweich, [Berman].

I know that you prefer to give us more definitive information at the end of the year. But I don't think it's correct for you to make a big point, Woods, at the end of your presentation that you plan to moderate expansion for the year 2014 and not give us some idea of what this implies. Does this imply that the 130 units of this year will go down below 100 or does this imply maybe 120? Can you give us some order of magnitude even though you haven't finalized your plans?

Hi, Bob. It's very tough for me to talk about the future. We are in a dynamic situation in Latin America. As you have seen, the predictions of growth, domestic product growth in all of the countries that we're in missed their mark this year, and I don't want to get ahead of ourselves. I mean I think we have to maintain our debt ratios. We are working on profitability. And we will grow as fast as we can and as fast as we think it is sound.

But, Brazil, just so you know, we will keep being as aggressive and as competitive as we can. But we need to be careful. It's a dynamic market. And more to come in the next few months; we're still in our planning phase.

(Operator Instructions) And at this time in showing no additional questions I would like to turn the conference call back over to Woods Staton for any closing remarks.

Well, thank you all for joining us today. It was a strong quarter and we are pleased with the results today. Our IR team is available to answer any questions and I look forward to speaking with you again soon. Thank you very much and goodbye.

And ladies and gentlemen, that does conclude today's conference call with you. Thank you for attending. You may now disconnect your telephone lines.