Arcos Dorados Holdings Inc (ARCO) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Arcos Dorados first quarter 2014 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 Daniel Schleiniger, 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.

(Operator Instructions)

Today's conference call is being recorded.

At this time, I would like to turn the call over to Daniel Schleiniger. Please go ahead.

Thank you. Hello, everyone.

Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward-looking statements, and I refer you to the "Forward-Looking Statements" section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

In addition to reporting financial results in accordance with the generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found on the press release filed with the SEC on Form 6-K.

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

Thank you, Dan. Hello, everyone, and thank you for joining us today.

Our first quarter consolidated results indicate a solid start to the year and underscore the continued strong preference that exists for the McDonald's brand in Latin America and the Caribbean.

We achieved double-digit organic revenue growth, supported by a high single-digit increase in comparable sales. This expansion was driven by our Brazil and SLAD divisions, where we further increased our leading market share.

Importantly, these results were achieved despite economic headwinds and a soft consumption environment in several of our key markets. This is a challenge for anyone operating in Latin America, but we benefit from having one of the most experienced management teams in the region to steer us through the cycle. In fact, today you will hear about some of the measures that we have taken to improve our business, both in the short and long term.

As discussed during last quarter's earnings call, given the increasingly complex operating environment in Venezuela, our 2014 organic guidance excludes that country's operations. On this basis, our key consolidated operating results experienced double-digit growth in the first quarter: organic revenues expanded 11.6%, and our cost-containment initiatives translated to organic adjusted EBITDA growth of 18.5%.

During the quarter, our compelling value platform, beverage, and dessert categories, as well as execution of strong marketing promotions in the lead-up to the FIFA World Cup, drove revenue growth. And despite a challenging consumer environment across much of the region, overall traffic was relatively stable, excluding Venezuela.

Turning to [unit] expansion, our footprint in Latin America is unmatched and serves as a key differentiator for the McDonald's brand in our region. As has historically been the case, the first quarter of the year is seasonally slow from a restaurant growth perspective, with expansion typically concentrated in the second half of the year.

Accordingly, we open nine new restaurants in the first three months of the year, of which six were freestanding, thereby expanding our portfolio to 2,069 restaurants as of March 31, and we maintain our commitment to open a minimum of 250 restaurants from 2014 to 2016.

By balancing the growth of our footprint with cost-containment initiatives, we were able to achieve further operational efficiencies in the first quarter. A strict focus on costs allowed us to decrease our G&A expense structure, which together with increased contributions from new restaurants led to G&A leverage of approximately 90 basis points.

We believe that streamlining our business will not only help us to respond to current challenges, but will also position us to take advantage of a future re-acceleration and growth across our markets.

Looking ahead through 2014, while economic challenges are predicted to persist, we expect organic revenue and adjusted EBITDA growth, excluding Venezuela, to be in line with guidance, as we focus on expanding our market share, maximizing traffic, and containing costs. This approach aligns us with the five [vectors] of our growth blueprint, "La Receta Para Ganar," or "Recipe to Win," which is our guiding strategy and keeps us focused on the factors that generate the most value for our business.

Of course, the biggest event in 2014 is the FIFA World Cup in Brazil. In the coming months, McDonald's will be the only restaurant brand visible across the event venues during all 64 games.

In addition, we've been running an exciting program of marketing activities, including new products introductions and event-related promotions, to leverage the brand's sponsorship of the event. Just yesterday, we launched a World Cup sandwiches campaign in Brazil, which has historically served to increase our average check.

I truly believe this is a once-in-a-lifetime marketing opportunity for the McDonald's brand in Latin America, and it is one of the many benefits we enjoy from being part of a global McDonald's system.

On that note, last week we participated in McDonald's' worldwide operator convention in the United States. My team and I have been attending these meetings for many years. This latest convention only fortified my conviction in the strength of the global brand and the best-in-class leadership backing it. Having heard the success stories from our counterparts elsewhere in the world, I am sure we will be able to apply many of those lessons to our Latin American operations.

Before I turn the call over to Sergio, I would like to reiterate that the current environment does not detract from Latin America's long-term, positive growth outlook. A young and rapidly growing consumer base in the region which favors convenience and away-from-home eating options will continue to drive sales. And despite current economic challenges, the market remains substantially underpenetrated, affording us a lengthy runway for future growth.

Sergio will now provide a more detailed discussion of our first quarter performance.

Thank you, Woods, and hello, everyone.

Please turn to slide 3. During challenging periods for the consumer, we'll focus on the variables that we can control, which include delivering the best value through our unique value platform, maintaining customer traffic in our restaurants, and providing our customers with an unparalleled experience.

If you'll turn to slide 4, you can see how this strategy played out in our largest market, Brazil. There, the addition of the triple cheeseburger sandwich to the GPPP value platform and the McFlurry Lingua de Gato to the dessert category, combined with the implementation of the Monopoly promotion and Champion glasses campaign, helped to overcome a weak consumption environment.

As a result, Brazil's revenues grew 9.9% on an organic basis. Taking into account an 18% year-over-year depreciation of the Brazilian real, revenues were down 7% in the first quarter.

Our promotional strategies designed to stimulate traffic resulted in a shift in mix which lowered the average check in the quarter. As a result, comparable sales growth was 3.4%, with relatively stable traffic.

The net addition of 81 restaurants during the last 12-months period contributed $32.2 million to revenues in constant currency.

And following up on Woods' earlier comment on brand preference in the region, one of Brazil's most respected business publications, Epoca Negocios, published a survey within the last couple of weeks where McDonald's was voted the most admired retail brand in Brazil.

As you can see on slide 5, revenues in the NOLAD division decreased by 5.4%, or 1.8% on an organic basis, year over year.

Systemwide comparable sales were down 5.1%.

Sales growth was impacted by a weak consumer environment in the division and a shift in the important Easter holiday from the first quarter last year to the second quarter this year, resulting in lower traffic in the first quarter. We continue to focus on our turnaround strategy in Mexico, which has been hampered by soft consumption in the country. And we are, however, pleased with the performance of our Panama operations.

The net addition of six restaurants during the last 12-month period contributed $4 million to revenues in constant currency.

Please turn to slide 6. SLAD continued to be a strong contributor to consolidated results in the quarter. The region's organic revenue increased by 26% year over year. Taking into consideration currency movements, revenues were down 8.8%.

Systemwide comparable sales increased 23.5% in the quarter, supported by average check growth and stable traffic.

Successful marketing initiatives included the bone-in chicken in Peru, while in Argentina we added the FIFA World Cup promotional "McCombo in a Copa," which is the Angus Criollo and McWrap Criollo, as well as the McFlurry Toblerone to the dessert category.

The net addition of 13 restaurants during the last 12-month period contributed $9.4 million to revenues in constant currency.

Now, moving to slide 7, excluding Venezuela, the Caribbean division's first quarter revenues declined by 2.5%, primarily related to the depreciation of the Colombian peso, but were flat year over year on an organic basis.

Comparable sales in the Caribbean division, again, excluding Venezuela, decreased by 5.2%. Although traffic was stable in the quarter, this was primarily offset by a shift in mix which lowered the average check in the division.

And the net addition of 10 restaurants during the last 12-month period contributed $4.7 million to revenues in constant currency.

Despite ongoing challenging conditions in Venezuela, including social unrest, changes to an exchange rate regime, and price controls, we maintained our [leaded] market share in that country. This was achieved by strong marketing promotions, including the introduction of the QPC Melt and McChicken in the country to incorporate as many local ingredients as possible, together with the addition of the McFlurry Pralines and Cream to the dessert category in Puerto Rico.

In summary, consolidated revenues excluding Venezuela declined 6.8%, but were up 11.6% on an organic basis versus the year-ago quarter.

Please turn to slide 8. As the biggest QSR company in Latin America, our footprint is unrivaled. During the last 12 months, we extended our portfolio, with the opening of 125 restaurants.

We believe that a balanced restaurant portfolio is the best long-term strategy to take advantage of the growth opportunity in Latin America and in the Caribbean. This is why just under half of our current portfolio is made up of freestanding restaurants, which provides multiple revenue-generating opportunities and significantly more branding than a simple point of sale.

At the end of March, our restaurant base reached 2,069 restaurants, and during the past 12 months we added 329 dessert centers and 15 McCafe's, bringing the total to 2,310 and 343, respectively.

Our 2014 opening pipeline is sound. More than 80% of the real estate sites have been secured or are under construction, of which 60% are also expected to be freestanding restaurants.

I would like to recollect that the performance of our new unit remains strong. The restaurants we opened during 2010 to 2012 achieved our internal target for return on investment in excess of 20% on average for the trailing 12 months.

I will now hand you over to German, who will discuss our adjusted EBITDA generation and other financial metrics. German?

Thanks, Sergio.

Please turn to slide 9. In the first quarter, the devaluation of the Venezuelan bolivar more than offset adjusted EBITDA generated elsewhere in the region, resulting in 26.7% year-over-year decline.

Excluding Venezuela, adjusted EBITDA performed well, increasing 18.5% in organic terms and remained stable as reported.

We also delivered a 50-basis point increase in adjusted EBITDA margin, excluding Venezuela, over the prior year, driven by our NOLAD and SLAD divisions.

As we discussed in our fourth quarter earnings call, we have formed an internal task force to identify further cost-reduction opportunities.

During the first quarter, we achieved a reduction in G&A as a percent of revenue of approximately 90 basis points year over year. There were three main drivers for the G&A leverage. One, we began the year with a lower G&A base from the headcount reductions that we implemented towards the end of 2013. We also paid lower variable compensation across all divisions and at the corporate level. And third, we benefit from the natural hedge in maintaining our corporate headquarters in Argentina.

Finally, we take further steps to achieve important, ongoing reductions to our G&A and other cost structures.

Moving to our divisional results, the Brazil division's adjusted EBITDA decreased by 17.3% on a reported basis and decreased 5.9% on organic basis year over year. The decline resulted primarily from food and paper as well as payroll cost pressures.

Food and paper was impacted primarily by higher beef costs, which rose earlier in the year than we had projected. We will continue to execute our annual plan which we expect will offset some of this pressure over the course of 2014.

Payroll pressures were derived mostly from the fixed schedule requirement in Brazilian market. We are improving our management of the fixed schedule and expect these pressures to reduce over time.

At the end of the quarter, we took advantage of the position of the real and complete our 2014 hedging on food and paper. We are now 100% hedged on imported goods, and we have lowered our blended exchange rate for the full year.

In NOLAD, adjusted EBITDA increased by 18.9%, or 22.2% on an organic basis. Margin expanded by 124 basis points, to 6.1%, as food and paper efficiencies more than offset pressure in payroll, occupancy, other operating expense, and G&A.

Adjusted EBITDA in SLAD increased by 9.1% year over year, or 55.3% in organic basis. The margin expanded 176 basis points, to 10.8%, primarily due to leverage in payroll costs and G&A.

Before I discuss the Caribbean division results, I would like to update you on our Venezuela operations. As a result of the recent developments in Venezuela's exchange control system, we have reassessed the exchange rate used for the measurements of the Venezuela operation financial statements.

We have concluded that Sicad exchange rate is the applicable rate for our Venezuela business, effective as of March 1, 2014. As of March 31, 2014, the Sicad exchange rate was VEF10.7 [worth] per dollar, and the resulting average rate for the quarter was VEF7.88 [for the] per dollar.

During the three-month period ended March 31, 2014, we recognized a foreign currency exchange loss of $19.7 million as a result of the exchange rate change. The Company's operating results included $7.6 million write-down related to certain inventories due to the impact of the currency exchange rate change on the net recoverable value, and $6 million loss related to lower margin due to the impact on inventories measured at the historical exchange rate.

At March 31, 2014, the Venezuela's net monetary asset position was $25.8 million, including $22 million of cash and cash equivalents. Please refer to the Company's Form 6-K filed with the SEC today for more information on the Venezuela operations.

We have a strong, [fruitful], and long history in Venezuela, and despite recent challenges we maintain our commitment to the country where we have a leading brand position. We are actively working to reduce our costs and currency exposure through local sourcing.

As we mentioned, [we will provide guidance]. We expect that the Venezuela business will not require operating cash support in 2014.

The Caribbean division, excluding Venezuela, reported 12.6% reduction in adjusted EBITDA, or 16% decline in organic basis. Although restaurant traffic was relatively stable, the division's profitability declined primarily as a result of a shift in mix which led to a lower average check.

Turning to slide 10, first quarter non-operating results reflect an increase in net interest expense, [and] a decrease in foreign currency exchange losses.

Income tax for the quarter totaled $3.7 million, compared to $5.9 million in the year-ago period. On the full-year basis, we maintain our guidance. [An] effective tax rate will be 35% to 37%, excluding Venezuela.

The Company [received] a net loss of $20.6 million, compared to a loss of $6.6 million in the same period 2013, mainly due to the lower operating income. Basic net loss per share was $0.10 in the first quarter 2014, compared to a loss of $0.03 in the year-ago period.

Slide 11 contains our debt indicators. Cash and cash equivalents were $126.4 million at March 31. Total financial debt was $848.4 million, while net debt was $722 million and the net debt-adjusted EBITDA ratio was 2.2 times.

Tough consumer trends in some of our largest markets present a challenge in terms of generating significant revenue growth in 2014. However, we are confident that the strength of our brand, the quality of our products, and the compelling marketing [campaigns] will drive our top line.

As I mentioned, we also take a significant step to maintain or improve our profitability this year and beyond.

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

Thanks, German.

Although political and economic challenges will continue to impact our operations in the near term, the underlying drivers of our business are strong, and I am confident that our team is the best positioned in the region to successfully manage through this economic cycle.

During the past few years, we have taken numerous steps to reduce earnings volatility and enhance our long-term profitability: the proactive use of currency hedges has successfully buffered operating results; the restructuring of debt has strengthened our balance sheet and the structural operations; while the corporate headquarters located in Argentina continues to provide a natural hedge for currency and inflationary pressures.

The cost savings that we have achieved thus far are the initial results of a strategic, comprehensive review of our organizational structure. In fact, beginning with the reductions implemented at the end of 2013, we are targeting an annualized reduction in G&A of over $20 million.

I want to close by reiterating my confidence in Arcos Dorados' bright future. More than 4.3 million customers every day across 20 countries and territories in Latin America and the Caribbean is a strong foundation, which we will grow. A swelling middle class, changing [habits] to demographics, and untapped demand for our products are driving the long-term expansion of our addressable market. As a leader in the QSR segment, we will benefit greatly from these trends over the years to come.

We have a strong relationship with our partner, McDonald's, and they remain very supportive of our operations.

Reaffirming my continued belief in Arcos Dorados's long-term prospects, in March I took the opportunity to purchase an additional 250,000 shares in the Company.

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

(Operator Instructions) John Glass, Morgan Stanley.

Just, first, can you just reiterate, what is the guidance that you are articulating today versus prior? What has changed? What is staying the same? I know you made reference to it a couple of times in the remarks, but I didn't see anything printed. So, I just want to understand what you're saying you can still do this year and what is no longer obtainable, given the issues we've discussed.

Let me pass your question over to German.

Basically, we don't have any change in the guidance [in terms of the Group]. Revenue growth guidance for 2014 is between 13% to 16%. Adjusted EBITDA growth is 15% to 18%. Always in organic and excluding Venezuela. And the effective tax rate that I mentioned in my part is 35% to 37%. And we -- basically, we don't have any change.

Basically, our organic growth excluding Venezuela is 11.6%. We did that, also when you consider the seasonality in our income statement, and we have an organic adjusted EBITDA growth in the quarter of 18.5%. This is above our full-year guidance of 15% to 18%.

So, we are not changing our guidance at all.

Okay. That's very helpful. And then, can you just talk in Brazil, you talked about beef inflation being one of the biggest contributors and also some of the mandatory scheduling and some adjustments, though. Can you talk --? I think you said this, but I'm afraid I didn't catch all of it. Have you now hedged some beef so that there's no longer an exposure? You've quantified it? And can you also talk about what you're doing on those mandatory fixed schedules to alleviate some labor pressure?

Let me pass you to German for the thing on the beef, or the increase in pricing and how it can affect the full year. And then, on the scheduling requirements of the new law in Brazil, I'll pass you to Sergio.

German?

Basically, we mentioned that the Brazil margins were impacted primarily by food and paper and payroll. I will take the food and paper part. The food and paper increase was driven by an increase in beef costs, which basically [if looking] in our full year is in line with our trend and full-year projection, but happened more abruptly that we expected originally.

In terms of hedging, it's totally different. We hedged the imported food and paper part of Brazilian inputs. The beef is local. So, the 100% hedge is basically of the imported part of our inputs. But we don't take any significant movement in this in the rest of the year.

Sergio?

Regarding the fixed schedule situation, we let you know in the last call that we finished the roll-out all across the country at the end of last year. And the major change is that we now only have the chance to adjust the number of hours on a monthly basis, when compared to a weekly basis that we had before.

Obviously, that creates a different situation when the volumes in the sales are not as dynamic as they were in the past. That creates an additional situation that we need to consider.

Now, having said that, we still have obviously a chance to adjust the schedules, mostly letting the natural health in turnover to modify the number of -- to working hours that we schedule at different restaurants.

Even though this creates some additional pressure on our payroll in the P&L, we believe that we will be able to compensate in the months to come this situation with the number of hours that we have under the new schedule system.

And, John, just to round out your question, for the full year we expect margins will be approximately flat, with some food and paper and labor cost pressures, as these two guys said. But they're going to be offset in other non-productive costs as well as G&A as a percentage of sales.

Okay.

Amod Gautam, J.P. Morgan.

I'm filling in for John. You mentioned traffic in Brazil is stable year over year, but could you just help us, in the quarter maybe how much guest counts were as a percentage of comp growth?

And then, maybe more broadly, if you could just talk about the overall consumption environment in Brazil? I know you have the McDonald's-sponsored campaign with the World Cup gearing up here. So, is --? I think in the past you mentioned maybe it's possible that there could be some acceleration in the couple of months leading up to the World Cup. Is that still kind of the impression or hope that you have for the next few months?

The fourth quarter comps continue to be affected by unfavorable macroeconomic environment, especially in the whole QSR arena. We've been focusing on variables that we can control, which include delivering the best in value through our value platform and trying to maintain customer traffic as much as we can.

With that said, keep in mind that during the first half of 2014, we're facing much tougher comps because of last year's performance. So, this year, we have 3.4% increase, but that comes on top of last year's 9.1% increase for the quarter. So, that's a tough -- that's been tough for us.

And we're running promotional campaigns that have a short-term impact on product mix. But traffic is maintaining itself stable, and we're comfortable with that.

Sergio, would you like to add some (multiple speakers)?

Maybe give some color, Woods, on what we did in terms of the marketing calendar for Q1. We had, of course, as you mentioned before, the very active affordability platform that is obviously targeting retaining traffic, as well we do. In more complicated and less dynamic economies, we always will focus in retaining traffic, because we believe that is the best way to sustain value for the future.

But apart from the triple cheeseburger campaign, we have a lot of -- Monopoly campaign that we have to anticipate this year compared to the next year, just to open enough space to launch the FIFA campaign that you also mentioned. And obviously, we had a very, very comprehensive dessert launching and new product with our new McFlurry line.

So, we have a number of initiatives, all of them targeting retaining traffic as we did.

Of course, most of these initiatives -- remarkably, the triple cheeseburger and the affordability category, they led up to a changing product mix, which also led up to a change in average check, obviously, because people, they have less spending money. So, they [opt] -- they pick the most affordable options in our menu.

Okay. And then, just one more. As we think about the increasing complexity of the operating environment in Venezuela, is there any possibility you would at least begin considering downsizing the store base to reduce exposure? And what kind of flexibility might you have under the MFA with McDonald's to do something like that (i.e., close stores or even a market)?

We've been to Venezuela, just a few weeks ago. I was there just a few weeks ago. And we are trying to get that operation as lean as possible. And as we mentioned before, we're also sourcing locally all of our ingredients, as much as we can. So, we're making a lot of progress there.

There are laws in Venezuela that do not allow you to fire people. So, you can't just close a store, and you can't just close the company down and walk away. So, that's one problem.

Then, there's also the problem that if you don't have that real estate under use, it might be expropriated, and it has been the case with a lot of other people in other companies.

So, we have no plans on shutting down restaurants unless obviously, as in any other country, they are bad real estate sites. But luckily, that's not the case in Venezuela.

And quite honestly, I think we're mildly more optimistic sitting here today about Venezuela than we were maybe some months ago, because of this new Sicad tool and some of the measures that they're taking which are more economically common-sensible.

And our partners, we get support still from McDonald's Corporation. We've got a better position than our peers in the market. And the most important thing is that we do not -- we're not going to inject any cash in that country, and it's internally sustainable, as German mentioned in his portion.

(Operator Instructions) [Benecus Seriva], Bank of America Merrill Lynch.

It's actually Bob Ford, and I had a question with respect to the foreign exchange loss that you incurred in the quarter on inventory. It was a little bit ambiguous to me, because typically when you're holding onto dollar-denominated inventory, there's often a gain, or you preserve value, during periods of FX weakness. But here, it seems as if it may be tied to maybe some of the price controls. But if you could elaborate on the nature of the FX losses, because you break it in two buckets, that would be very helpful, please.

Let me pass you to German.

To put everybody in the same page, basically we have three [trading] systems: CENCOEX, Sicad, and Sicad II. We choose Sicad I to translate, and because of this we have three kinds of impact. The normal impact; that is basically the impact of the devaluation on the monetary position. That was $19.7 million.

The inventory write-down that probably that you referred to, $7.6 million, is related basically because we have inventory that belongs to franchisees, and we cannot increase the price of these inventories because of price control. And that's why we need to write down the total value of these inventories.

So, you are right. It's because of the price control and not because of the accounting.

Josephine Shea, Hartford Investment Management.

Could you possibly talk about capital expenditure, which was $20 million this quarter? And could you remind what the guidance was for the year? And will you bring this down if operating cash continues to be negative? Obviously, your debt is going up and your cash is going down. So, your leverage is increasing. Could you comment both on capital expenditure and how that works through the cash flow statement going forward in relation to debt levels?

Let me pass you to German, so he can answer your question.

In our 2014 guidance, basically we keep $200 million for CapEx purposes. Sergio, in his part, mentioned that we are on track on this guidance and number of openings, around [9]. So, we don't expect to change anything in the CapEx deployment in the Company, and we are on track.

Based on the debt, we always say that we are comfortable with net debt levels around 2-times EBITDA, adjusted EBITDA, and we don't expect any material increase in this ratio. Today, we are [intuning as much]. So, we are in 2.2 times, around 2. And we believe that we can maintain this ratio [without any big] modifications, continuing our original CapEx program.

Jeronimo De Guzman, Morgan Stanley.

My question is also on Venezuela. We noticed that the local currency growth there decelerated quite a bit, to close to a little above 30%, versus 50% before. So, I just wanted to understand what drove the deceleration in that top line growth and what that means for your growth and your margin going forward?

And then, I guess related to that, I just wanted to know -- you mentioned the Sicad II system. Just wanted to know if you have been able to access this system at all? And if that's the case, whether there is a chance that you might move to that system for translation purposes?

I'll start with the last part first, with Sicad II, and we have been able to secure some money through Sicad II, but it's very complicated. There are not really many funds available, and we've been able to get some funds that way, but not really anything that's sustainable. Nothing substantial. It's $300,000. But, yes, it's open for business.

I think an important thing that's happened also in that same vein is that they've taken away this law that makes it illegal for you to buy dollars, and that's taken pressure off a lot of the black market -- whatever blue market or parallel market that was there.

So, the traffic. The traffic has decreased because of increasing prices. We've had to maintain our margins. Don't forget that we've been buying things like French fries and other products that are imported, which is -- that's the only thing that's imported. But also the local products are very expensive.

So, to maintain margins, we've had to increase prices. That's brought some of our volume down.

And then, also, recently we've had some unrest in the country, and what's happened is that that doesn't allow customers to get to your store and/or allow your crew to get to the store. So, you can't open. And by the way, one of the focuses of the student activity is close to several of our restaurants.

So, it's a challenging situation, but we're very active in the market. We've launched the Cheddar Bacon Onion, the McFlurry Tres Leches. We've had also McFlurry Flaquito Chocolate. So, it's a dynamic situation, but the brand is very strong.

And I was just there, as I said, two weeks ago, and it's very nice to see that the stores, the restaurants are doing extremely well. It's just an absolute thrill to see how well the stores are being run and how good the crew is and what a great McDonald's experience they're giving, given all these negatives going on now.

(Operator Instructions)

Okay.

Our next question --.

So, thank you for your --.

We do have a few more questions. Would you like to take them?

Yes, absolutely.

Lore Serra, Morgan Stanley.

I just wanted a follow-up quickly to Jeronimo's question. German, can you just explain to us, if you're starting to tap Sicad II, at some point do you think about using Sicad II as an exchange rate for financial reporting purposes?

And as you advance discussions with McDonald's, we saw you had royalty relief that was important for the profitability of the operations this quarter. Is there any kind of -- now that you're seeing a little bit rules of the road in Venezuela, is there any more of a permanent solution that you're working on with McDonald's to see through the next, I don't know, year or two?

[Turning to] the royalty, the thing that I can tell you is basically that we received a waiver in the first quarter from McDonald's, $4.7 million, basically in line what we mentioned last call; $1.5 million approximately per month.

Currently, we are renegotiating on a monthly basis because the situation is very volatile, and we are working in April to pay the royalty, [which came very close to 50]. So, that would help a lot in the business in April.

And we will continue the negotiation with McDonald's, because our partners are supporting us in the business. So, we are not expecting any big change in terms of support from McDonald's.

In terms of Sicad II, Sicad I, or the new CADIVI, we check all the companies, and obviously there are a lot of companies choosing between exchange rates. We are monitoring the situation carefully every month, because obviously there are two markets there: Sicad I and Sicad II. As Woods mentioned, we can access the Sicad II for only $300,000. We have more access to Sicad I, more than $2 million in the last [40] months.

So, we are evaluating this every month. [We've already talked our lawyers]. And I cannot guarantee to you stay in Sicad I, but today Sicad I is the exchange rate that we need to use. And we are open to change, [because] the market change of the other companies [will be a] big change in this policy. But, today, it's Sicad I.

[Greg Pafia, Palla Assets].

Just a question about the EBITDA margin. You said margins would be flat. Is that what I understood correctly?

And just regarding dividends, what would be the payout ratio as to the 2013 and 2014 years? Do you have any indication for that?

Go ahead, German.

First part is margins. We said that the margin will be flat or slightly negative of the Company, excluding Venezuela. So, that's correct.

And the second part, [the dividend].

As far as dividends, we are paying dividends that -- we've already declared our dividends for this year. We don't see any reason to change that. And obviously, when we get into our planning cycle for next year, we'll look at that. But there's no change necessary right now.

So, anyway, thank you, all, for your attention, and thank you for joining us today. We approach our business with a very strong focus on the long-term opportunities for the McDonald's brand in Latin America. And as long as we continue to deliver an unsurpassed dining experience backed by innovative marketing programs, I'm confident we'll enhance long-term shareholder value.

And I look forward to updating you on our second quarter performance in due course.

Thank you, all, very much, and have a good day.

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