Arcos Dorados Holdings Inc (ARCO) 2014 Q2 法說會逐字稿

Presentation

Good morning, and welcome to the Arcos Dorados second 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 Relations section of the Company's website, www.arcosdorados.com/ir. (Operator Instructions). Today's conference call is being recorded.

At this time I would like to turn the call over to Mr. Staton. Please go ahead.

Actually, this will be Daniel Schleiniger speaking first. Thank you, and 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 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 in 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. Every day, McDonald's is a destination for approximately 4.3 million customers in our Latin America and Caribbean markets, and our top priority is to serve them great-tasting, high-quality food in a contemporary setting. This focus on our customers is particularly important in today's economic environment, where weak economic growth and rising inflation continue to dampen consumer sentiment and buying power in some of our largest markets.

While we anticipated much of the decline in traffic as a result of the FIFA World Cup, and a tough year-over-year comparison in our largest market, Brazil, we have also faced a weaker-than-expected consumer environment in the second quarter. Given this backdrop, I am pleased to announce that we achieved another quarter of double-digit organic revenue growth, supported by a high single-digit increase in comparable sales. The result demonstrates our ability to continue to grow sales even in challenging market conditions, and underscores our operational and brand strengths.

On the topic of branding, the second quarter marked a once-in-a-lifetime marketing opportunity for the McDonald's brand in Latin America. The World Cup is the most widely watched sporting event in the world, exceeding even the Olympic Games. As an official sponsor, McDonald's was the only restaurant brand visible across the event venues during all 64 games.

And based on a GlobalWebIndex survey to track awareness levels among people watching in the UK, USA and Brazil, McDonald's was the second most-recognized official sponsor of the event. This visibility will no doubt increase the dominance of the McDonald's brand in the region over the long term.

We were successful in leveraging the brand sponsorship of the World Cup through exciting marketing activities, including new product introductions and event-related promotions which positively impacted sales in the lead-up to the event.

However, during game days we did experience a significant lunchtime decline in traffic, which was exacerbated by the advancement of many of our Latin American national teams to the final stages of the event.

This factor, combined with a tough year-over-year comparison due to the inclusion of the Monopoly promotion in the second quarter of 2013, impacted top line growth in our largest market, Brazil, and in turn our consolidated results.

Looking ahead, we expect economic challenges in several of our key markets to persist in the near term. Our annual guidance was based on projections that included third party forecasts for economic and consumption growth in our markets. Since the time that we provided guidance, actual economic data has underperformed these forecasts, and the outlook for the balance of the year has deteriorated substantially. As an example, GDP forecasts have been revised to 1.1% across our territories excluding Venezuela, versus the 2.1% used in our original projections. Similarly, expectations for growth in private consumption had declined sharply to 1.6% from 2.5% in our original projections.

As Brazil is our largest market, the slowdown in economic growth in that market has played a key part in this deceleration. At the beginning of the year, market economists forecast economic growth of around 1.8% for 2014.

Currently, they expect Brazilian GDP to grow below 0.9% this year. More specifically, the QSR sector in Brazil has been losing share to the informal sector as a result of broad economic weakness, and we expect this to continue in the near term.

While we have seen a return to pre-World Cup sales and traffic in Brazil following the conclusion of the tournament, and we expect to benefit from an easier year-over-year comparison of the third quarter, these soft economic and consumer trends will limit revenue growth in Brazil in the second half of the year.

Turning to our second-largest division, the South Latin American Division, or SLAD, mounting inflation in Argentina and the lack of a resolution of the debt situation in that country, are expected to continue to dampen consumer sentiment and spending.

In response to this turn of events, the significant deterioration in regional and macroeconomic conditions during the first half, and the impact of the World Cup on sales in June, we are revising our full-year guidance. On an organic basis and excluding Venezuelan operation, we now anticipate revenue growth for the year 2014 of between 9% and 11%, and adjusted EBITDA growth of between 5% and 8%.

We also now expect to open 84 new restaurants, which is in line with the 3-year average of our commitment with our partner, McDonald's Corporation. Our capital expenditures are therefore also expected to be lower, reaching $180 million for the full year 2014. Our full year effective tax rate projections remain unchanged, however. We expect to come out in the top end of that range.

In this environment, we are balancing our focus on maintaining traffic and market share, with our long-term plans to realize cost savings, become more efficient and agile as an organization, and improve profitability.

Having taken advantage of an opportunity to increase prices in the lead-up to the World Cup, we will increase our focus on growing traffic in our restaurants by leveraging McDonald's' classic brand attributes of value, clean restaurants and great service, together with our worldwide favorite menu products.

We have already taken steps that will yield an annualized reduction in G&A of at least $20 million, and in the quarter we were able to achieve G&A leverage of approximately 46 basis points, excluding a one-time $4.5 million expense related to the head count reduction that we implemented in May.

Additionally, we have already identified opportunities to improve our purchasing of non-product supplies and inputs, and are reviewing additional options in this and other areas.

By balancing cost-containment initiatives with the growth of our footprint, we are able to respond to current challenges while positioning ourselves for future reacceleration in growth. Accordingly, during the first half of the year we opened 21 new restaurants, of which 11 were freestanding, thereby expanding our portfolio to 2,075 restaurants as of June 30 this year.

While we maintain our commitment to open a minimum of 250 restaurants from 2014 to 2016, we believe that current economic conditions warrant a review of our capital allocation policy, including the [optimal] mix among capital expenditures, debt and dividends. We will update the market once progress has been made on this issue.

I would like to stress that the immediate challenges do not take away from the region's strong long-term prospects. The size of the consumer base in our territories, at approximately 520 million people, is equivalent to the combined population of the US, Germany, the UK and Italy.

Not only is this base growing, but the proportion of young people, our target market, is higher than that of developed countries. This young and growing consumer base favors convenience and away-from-home eating options, and will continue to drive sales in years to come.

And despite current challenges, the market remains substantially underpenetrated. In Latin America we still have only one-third of the penetration that McDonald's has in the US on a purchasing power parity basis. So, as you can see, although we are facing some short-term challenges, we continue to have a lengthy runway for future growth.

Finally, with an unmatched footprint in Latin America and the dominant brand in the region, we stand to benefit the most from these favorable long-term demographic trends.

Sergio Alonso will now provide a more detailed discussion of our second-quarter performance.

Thank you, Woods, and hello, everyone. Please turn to slide 3.

As Woods mentioned, the World Cup represented a one-of-a-kind marketing opportunity for the McDonald's brand in the region. On the final weekend of the tournament, McDonald's was the second most-recognized sponsor of the event, achieving recognition levels of 49% according to a market research firm, GlobalWebIndex. I am confident that this improvement in recognition levels will have a positive, long-lasting impact on the brand and our business in the region. Please turn to slide 4.

Taking into account an 8% year-over-year depreciation in the Brazilian real, reported revenues were unchanged versus the prior-year period. Comparable sales were relatively stable year over year, whereas organic revenues increased 7.7% in the second quarter.

Quarterly revenue growth in Brazil was primarily impacted by a calendar shift in the Monopoly promotion, which ran in the first quarter of this year versus the second quarter of 2013. The promotion's inclusion in the year-ago period drove comparable sales growth of 10% in that quarter, resulting in a strong year-over-year comparison.

In addition, continued soft consumer spending, strikes that disrupted transportation prior to the World Cup, and sharp declines in traffic during World Cup matches -- which, by the way, took place during the -- our lunchtime -- [weighted] on top line growth.

Key quarterly marketing activities included the World Cup Sandwiches, the launch of the McFlurry Kit Kat in the dessert category, and the addition of the Crispy Tasty sandwich into the GPPP value platform. The net addition of 78 restaurants during the last 12-month period, of which half were freestanding units, contributed $34.2 million to revenues in constant currency during the quarter.

As you can see on slide 5, NOLAD's reported revenues declined 4.8% year over year but were stable on an organic basis. Systemwide comparable sales were down 2.7%, due to declines in average check and traffic. The decline in average check mainly reflected a shift in mix, while traffic was impacted by the World Cup and the weak consumer environment, especially in Costa Rica.

Mixed economic growth signals in Mexico continue to impact consumption, and have prompted consumer to seek out more affordable dining options in the informal segment.

On a positive note, however, guest count per store per month increased as we continue to implement strategies that are attracting more guests as part of our turnaround in that country. We have also made significant strides in our overall consumer satisfaction score over the last year.

Key quarterly marketing activities included the launch of FIFA World Cup campaigns such as Campeones Mundialistas and Desayuno de la Copa, and the introduction of the McFlurry Milky Way to the dessert category.

Finally, the net addition of seven restaurants during the last 12-month period contributed $4.1 million to revenues in constant currency. Please turn to slide 6.

While SLAD revenues were impacted by the depreciation of the Argentine peso, geopolitical tensions and high inflation, top line growth remained strong on an organic basis, increasing 21.1% year over year.

Taking into consideration the 54% year-over-year depreciation of the Argentine peso, reported revenues decreased 13.5%. Systemwide comparable sales increased by 19.1% in the quarter, driven by average check growth.

Traffic in SLAD was down, due to declining macro environment in Argentina, and again the impact of the World Cup.

Quarterly marketing activities included the reedition of the Monopoly promotion in Argentina as well as the continuation of the World Cup promotion, McCombo de la Copa.

The net addition of nine restaurants during the last 12 months contributed $7.7 million to revenues in constant currency.

Moving to slide 7, excluding Venezuela, the Caribbean division second quarter reported revenues increased by 2%, or 1.7% on an organic basis. While traffic remained flat to slightly positive in Colombia and Puerto Rico, comparable sales decreased 5.4% due to a shift in mix.

And the net addition of ten restaurants during the last 12-month period contributed $6.8 million to revenues in constant currency.

Despite continuing challenging conditions in Venezuela, the Company maintained its leading market share through the execution of a strong marketing calendar, including the introduction of the campaign, Combo de la Copa, and the addition of the McFlurry Samba to the dessert category. Other notable marketing activities in the division [including] the launch of the Bacon Clubhouse sandwich in Puerto Rico, and the Bone in Chicken in Colombia.

In summary, consolidated reported revenues, excluding Venezuela, declined 3.8% but were up 9.6% on an organic basis versus the year-ago period.

During periods of weak economic activity and consumer spending, our core strategy has been to protect traffic and market share. As a result, in the coming quarters we plan to expand value platforms and leverage McDonald's' unique attributes, such as the family experience along with the iconic McDonald's properties. We will also explore efforts to better leverage the scale of our business. Please turn to slide 8.

Our footprint in Latin America is unrivaled, and during the last 12 months we extended our portfolio with the opening of 120 restaurants. As we have discussed in the past, what sets our expansion strategy apart is the concentration of freestanding restaurants, which provide multiple revenue-generating opportunities and significantly more branding than the simple point of sale. And accordingly, just under half our current portfolio comprises freestanding restaurants, which is in keeping with the composition of the 2014 opening plan.

At the end of June our restaurant base reached 2,075 restaurants, and during the past 12 months we added 339 Dessert Centers and 15 McCafes, bringing the total to 2,380 and 341 respectively.

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

Thanks, Sergio. Please turn to slide 9.

During the second quarter, our reported adjusted EBITDA declined 37.8%, primarily due to the impact of our transition to the SICAD II exchange rate for remeasurement of the Company's operations in Venezuela, effective as of June 1.

Excluding Venezuela, adjusted EBITDA was stable in organic terms and down 1.7% as reported. Operating profitability improved in the second quarter in Brazil, as average check growth offset payroll and other cost pressures.

We also saw operating improvements for the second consecutive quarter in NOLAD; and on a consolidated basis, adjusted EBITDA margin expanded 15 basis points year over year, excluding Venezuela. This follow the 50 basis-point margin increase that we delivered in the first quarter of this year, and reflects the Company's cost-containment initiatives as we streamline the business in response to challenging market conditions.

As Woods mentioned in his opening remarks, efficiency improvements remain a key area of focus throughout the Company. During the first quarter, we achieved a 90 basis-point year-over-year reduction in G&A as a percentage of revenue, and in the second quarter we extended these savings with the addition of 46 basis point year-over-year reduction, excluding the impact of one-time severance payment.

The main drivers for this G&A leverage included a lower G&A base from the head count reduction that we implemented towards the end of 2013, adding up to the hedge that comes from maintaining our corporate headquarters in Argentina.

Turning to our divisional results, I am pleased to report that Brazil's adjusted EBITDA increased by 5.1% in the second quarter, while the adjusted EBITDA margin grew 59 basis point to 12%.

Payroll costs in the second quarter of 2014 benefit from adjustment in payroll compensation and from easier comparison versus the second quarter of 2013, which included the PAT provisions. This factor was partially offset by higher food and paper, and occupancy and other operating expense.

I would like to remind you that we are 100% hedged in our currency exposure to imported goods, and we have lowered our blended exchange rate for the second half of the year. NOLAD experienced a second consecutive quarter of margin improvement despite a tough operating environment.

The reported adjusted EBITDA margin increased by 156 basis points to 6.2%. At lower food and paper as percentage of sales more than offset higher payroll, occupancy and other operating expenses. Adjusted EBITDA also rose, gaining 22.1% year over year, or 28.1% on an organic basis.

Looking ahead, we do not expect margin expansion in Brazil to be maintaining as we expand our value platform in order to protect market share and stimulate traffic in this current environment.

Adjusted EBITDA in SLAD decreased by 25.5% year over year but was up 8.5% on an organic basis. The adjusted EBITDA margin contracted 148 basis points to 9.2%, primarily due to the higher food and paper cost as a percentage of sale. Food and paper costs outpaced average check growth during the quarter, mainly as a consequence of the position of the Argentine peso and its impact on local inflation.

Before I turn to the Caribbean division results, I would like to update you on our Venezuela operations. As of June 1, we transitioned to the SICAD II floating exchange rate for remeasurement of our assets and liabilities and operating results in Venezuela. The change was primarily a result of the Company's lack of access to the SICAD rate this year and our (inaudible) ability to [settle] transactions at the SICAD II rate of approximately VEF50 per $1.

Second quarter results include one-time charges for the change to SICAD during April and May, and the SICAD II in June. Our operating results in the quarter include an $11.7 million writedown of certain inventories, and $11.1 million loss related to lower margin, and a $45.2 million impairment of Venezuelan fixed asset.

Furthermore, our non-operating results include the recognition of foreign exchange loss of approximately $39 million in Venezuela due to the remeasurement of the operations local currency denominated net monetary asset position during the second quarter of 2014. For more details in this non-cash impact on our second quarter results, please refer to our earnings release and the 6-K filing with the SEC today.

Despite current challenges, we remain the leading QSR brand in Venezuela and are committed to our operation there. During nearly 30 years of operation in the country, we have built an unmatched foothold which has helped us maintain strong revenue growth on an organic basis. We continue to expect that the business will not require operating cash support in 2014.

The Caribbean division, excluding Venezuela, reported 5.3% reduction in adjusted EBITDA and 8.9% decline on an organic basis. Adjusted EBITDA margin declined by 28 basis points to 3.6%. Including the Venezuela operations, adjusted EBITDA in the division declined back to negative $10.2 million, resulting in a negative adjusted EBITDA margin of 6.4%, mainly due to the losses in the Venezuela operation.

We received a $3.1 million royalty award for the Venezuela operation from McDonald's Corporation in the second quarter of this year, versus $2.8 million in the second quarter last year, underscoring their continued support for our efforts in the region. For the remainder of the year we expect to pay royalties using the SICAD II exchange rate.

Turning to slide 10, our second quarter foreign currency exchange losses were allegedly driven by the losses in our Venezuela operations. Our non-operating results also experienced a similar increase in net interest expenses and a $5.7 million increase in income taxes.

The Company registered a net loss of $99 million compared to net income of $8.8 million in the same period of 2013, mainly due to the transition to SICAD II. Basic net loss per share was $0.47 in the second quarter of 2014, compared to the gain of $0.04 a year ago.

Slide 11 contain our debt indicators. Cash and cash and equivalents were $101 million at June 30. Total financial debt was $891.3 million, while net debt was $790.3 million, and the net debt to adjusted EBITDA ratio was 2.6 times, including the one-off impact in the Venezuelan (inaudible). Without this one-off impact, the leverage ratio should decline significantly next year.

As Woods discussed earlier in the call, [deterioration] in the economic environment in the several of key markets since the beginning of the year, have prompted us to revise our full-year guidance, as you can see on slide 12.

In summary, on an organic basis, excluding the Venezuela operations, we now anticipate revenue growth for the full-year 2014 of between 9% and 11%, and adjusted EBITDA growth of between 5% and 8%. We also now expect to open 84 restaurants, which is in line with the 3-year average of our commitment with our partner, McDonald's.

Our capital expenditure are therefore also expected to be lower, reaching $180 million for the full-year 2014. Our full-year effective tax rate projection remain unchanged, although we now expect to come in at the top of the range.

I will now hand the call back to Woods.

Thanks, German. Our team is made up of seasoned professionals, each with decades of experience operating in Latin America, so we understand first-hand that our business's long-term growth path will not be without its cycles.

The current challenges we face are considerable -- weak economic growth, soft consumer trends, foreign exchange volatility, as well as geopolitical instability in several key markets, are all impacting our business and reported numbers.

In response, we are focused on those factors within our control, such as continuing to streamline our business to targeted cost savings, ensuring that in this way we can provide a compelling value proposition to our customers. We're also refocusing our marketing efforts on the family and our iconic McDonald's menu.

We have already taken the steps required to achieve $20 million in annualized G&A cost reductions, and year-to-date we have identified an additional $7 million in annualized cost savings through our non-products purchasing processes. These include such strategies as implementing reverse options as well as utilizing our scale to lower costs across the various countries.

We are beginning our planning cycle, and as part of this process we will continue to review all areas across the organization for opportunities to extract further savings. I expect to be able to provide you with further information on this ongoing process by the end of the year.

I would like to conclude by reminding you that economic growth in this region is inherently cyclical, and the QSR industry in particular is backed by strong long-term demographic trends including population growth, a burgeoning middle class, a preference for convenience, and untapped demand for our products.

In the future, just as it has done in the past, I am sure that economic growth will rebound. And to ensure that we are at the forefront of this recovery, in addition to the cost saving opportunities mentioned already, we are taking steps to improve the efficiency of our operations through systemwide advances in technology.

These initiatives will capitalize on the scale and competitive advantages that we derive from being a single brand with a single cooking system which no other regional QSR player can leverage.

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

(Operator Instructions). John Glass, Morgan Stanley.

A couple on Brazil. First, if I missed it I'm sorry -- did you quantify the traffic decline in Brazil?

And in more broad terms, can you talk about how you're now modifying your marketing calendar in Brazil in the second half? If it's a more value-sensitive consumer and the macro's not where you thought it would be, what are you going to do differently, specifically in the back half, to drive that traffic back?

Yes. Hi, John. Look, for the -- I'll -- we'll answer this in two parts. The first part is, for the second semester we will do total focus on value propositions and our value platform. Affordability is the standard of McDonald's, and we're going to focus much more on that than we have. And with that, let me pass you to Sergio so he can answer the first part of your question.

Sure. Thank you, Woods. Hi, John. What happened, particularly -- as you may be aware, in particular in June, we have in the weeks immediately before the World Cup start, we had some riots and transport --

Disturbances.

Strikes, sorry -- thank you, German -- that actually affected big-time the volume in our restaurants mainly in Sao Paolo city.

And then on June 13 the World Cup started, and the reality is that, even though we were not expecting to have additional traffic, as we discussed previously, the reality is that we were sort of surprised by additional loss or decline in volumes, particularly on the days where the national teams played.

And on top of that, be aware that most of the Latin American teams made out to be qualifying on. So, the reality of that effect extended mostly all -- length of the tournament.

So, all those effects, compounded, really led us to have a -- I won't -- we're not talking about a big decline in traffic; it was low single-digit, I would say. And -- but -- and the other part of the question, for the second half, Woods already covered, I guess.

Roy Yackulic, Bank of America.

Can you talk about your expectations on increasing prices this year to make up for the -- I guess, the change to the SICAD II in Venezuela? And what kind of leverage guidance can you give us for year-end?

I'll answer the first part. Roy, welcome. And I'll let German answer the second part.

We can make up some of the pricing in Venezuela. We are not controlled in prices there. But take in mind -- keep in mind also, we are -- already are at high prices, so we can't make it all up.

What we're doing also in Venezuela, which is important, is we're substituting as many imports as we can. We're substituting and we're bringing in substitutions for French fries. We have a yuca, which is a very good product, which is local.

So, we're trying to reduce our food costs as well, and our dependence on buying dollars, which is difficult to find today in this environment. And with that, let me pass you to German.

Hi, Roy. Based on the -- our projections, we -- remember that we have a healthy balance sheet. Our business is great, long-term perspective. In the past, several times we target our net debt levels, around 2 times, and the end of this quarter we reached the number of 2.6 time.

But that was mainly as a result of the Company's decision to move the SICAD II FX rate for remeasurement purpose in Venezuela, and that obviously reduced the EBITDA and create a series of one-off impacts in the EBITDA number.

If we, next year, eliminate these impacts, basically we [were] around 2.3 times net-debt-to-EBITDA. We feel comfortable with this level of leverage and we don't see any reason to change that number.

John Ivankoe, JPMorgan.

The question is on your credit profile and CapEx. Firstly, could you kind of talk about how much comfort that you have with your current debt, in terms of where your EBITDA is? In other words, how much flexibility there is for changes in EBITDA relative to the forecast.

And secondly, in 2014, of the $180 million in CapEx, how much of that is discretionary versus non-discretionary -- non-discretionary in terms of what McDonald's requires you to build, or, I guess, McDonald's Corporation requires you to build, versus what is maintenance CapEx?

And of course, where I'm going with this question in terms of, like, what the minimal amount of CapEx would be in 2015, based on contractual obligations and what you perceive as required maintenance. Thank you.

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

John, could you repeat the first part of the question?

Of course. So, the question was regarding your current debt -- I mean, I think you're rated investment grade -- just in terms of how much flexibility you have, in terms of continuing to achieve your covenants relative to where your current EBITDA, or cash flow, or however those covenants are written.

Okay. Basically, in the long-term debt we don't have any covenants. We already have -- and there was an update of Fitch maintaining our investor rating, so we have flexibility to increase our debt in the long term if we like. But, as I mentioned before, today we feel comfortable, 2.3 -- around 2 times net-debt-to EBITDA leverage ratio. So, we not expecting to increase the debt right now.

Obviously, we are entering the -- in the planning process. We will decide what we want to do next year and following years. But today, we are not planning to increase that. But in any case, we have flexibility to do that. And -- but we believe that today we are totally committed to achieve the number of obligations that we have this year. So -- yes.

No, and John, we have several variables that we can control in order to meet our expansion plans, including the timing of openings. We're committed to 250 in the -- in this 3-year cycle of 2014 to 2016. The restaurants' formats also -- we've been focusing on drive-thru stores, which are considerably more expensive than others.

And ownership structure -- I mean, we're looking at ways of maybe gaining -- putting in more franchisees as a percentage of our restaurants. And we're now in the process of looking at all of this, and all the ramifications of it.

And John, another question that you asked is about the -- how much is the amount that McDonald's Corporation require to maintain our store base. We basically have $60 million per year -- in the McDonald's commitment, it's in fact $180 million for a 3-year period.

Jeronimo De Guzman, Morgan Stanley.

Just had a followup, and then a question. The followup was just, in Brazil you mentioned that there's a -- one-off effects from the World Cup. I just wanted to see how the trends are looking -- or looked, in July. Did you see any pickup there without the traffic impact?

And then the other question was, in Argentina, just wanted to hear your views on the outlook there, given that you did see weaker traffic trends in the second quarter. And kind of given the current macro situation, just kind of wanted to see how you're thinking about the operation for the second half.

Yes. Hi, Jeronimo. You know, today -- I'll start with the Argentina part and I'll pass you to Brazil with Sergio. But in Argentina, today comparable sales have remained pretty solid. The brand is very strong, and we have been able to effectively drive average check this year.

As you said, traffic in the second quarter declined. A lot of that is due to the World Cup but also to the macro environment. We're right now monitoring the currency depreciation; the mounting inflation; the lack of the resolution of this debt situation in -- with Judge Griesa and the Argentines.

But we feel that the situation is going to continue to dampen consumer sentiment and spending. Analysts recently came out predicting that there's going to be a climb in the GDP of Argentina of minus 1.5% from a flat prediction earlier.

On the good side, we have a -- commodity exports remain strong. And the government is taking measures to create economic activity. They're pumping money into the system, so we don't think that that's going to -- there are going to be many effects this year. And to sort of round that out, we have a very strong brand in Argentina and we saw good rebound in traffic after the World Cup.

And with that, let me pass you to Sergio so he can talk about (inaudible).

On the Venezuelan side. Hi, Jeronimo. How are you? Well, on top of what we said about the impact of the World Cup the strikes before the World Cup, the reality is that the traffic in Brazil continues to be impacted by a -- I would say, a soft consumer environment, and a shift, as a consequence of that -- a shift to the informal sector.

So, with all that in mind -- and there is, I would say, in response to our -- this sort of challenging environment, obviously we'll focus on protect traffic and market share in the remaining part of the year, with an enhancement of our value proposition and platforms, and refocusing our marketing efforts towards the family business and what we consider the iconic properties.

Nevertheless, I mean, the -- [I believe] the actual situation on [volumes on sale] is already considered in the margin and EBITDA projections that we just informed you.

(Operator Instructions). Rachel Chong, Hartford Investment Management.

Since you have not yet provided your cash flow statements, I would like to ask you for more color in the cash items. Your net debt rose by about $72 million, but if you take EBITDA, subtract CapEx, interest, income taxes, dividend, and book net working capital, your net debt should really only go up by about $33 million.

So, again, what were your large additional cash flow items, actual loss in derivatives, was there cash loss on working capital; and finally, are these recurring?

Hi, Rachel. This is Woods. Let me pass you to German.

Look, Rachel, I -- obviously, we are in the planning process, or we're entering the planning process, so it's too early to say -- we -- $72 million, $100 million. But you are right, the cash flow available is less than this year, and we have -- about how we expect to finish this year.

But we have different ways to [adequate] our capital structure to our plans. We -- remember, we have different options, like debt, that we don't want to touch significantly; dividends, that we can reduce or cut if we need it; we can balance the type of (inaudible) CapEx; and basically, we have another alternative, like credit lines in Brazil, to build restaurant in local currency.

So, it's too early to say, and we have a lot of options available to define how much cash flow we have to deploy, in CapEx, in dividends, or whatever other purpose that we decide.

Robert Schweich, Burnham Securities.

It appears in general that you are dealing with what I would call a perfect storm in terms of the South American political circumstances. That isn't to say it can't get still worse. I think it would be helpful if you could go through the three key countries and discuss this, and talk in terms also of elections and possibilities of change, particularly in Brazil, Argentina and Venezuela.

Hi, Bob. Thanks for joining us. I guess you want a macro -- sort of a macro political view of this, right? These three countries?

Absolutely.

Yes. Well, they happen to be close to 90% of our EBITDA base, so that's -- it's -- your question's a good one.

Let me start with Venezuela. Venezuela is a country that is going through a lot of issues. They don't have enough money. They're basically not very -- there's no cash. Very difficult to import.

So, what we're doing there is what any sane person would so, is we're trying to substitute imports with local products, and we're trying to maintain as much of a market share as we can, and keep the group of people together. And if you go there, Bob, you will go and you will see McDonald's which are absolutely fantastic. They're in great shape and they're doing very well. So, it's a very good McDonald's experience.

But we have to stay the course. We've had some decreases in traffic as a result of social, political and economic turmoil there. And it's difficult to project things in Venezuela, because it's a dynamic situation. But we don't plan on injecting any capital into Venezuela. It's -- we can sustain ourselves there, and we're getting enough dollars for our royalties and some imports that we're making still.

And so, it's a strong brand. I mean, of all the countries, McDonald's brand, as measured by third parties and brand awareness and brand attributes -- it's the best in all of Latin America.

Brazil. You know, Brazil is by far the largest country. It's going through a down cycle in its economy. At the beginning of the year, growth was expected to be 1.8%. It was just restated today at 0.87%, I believe. So, in half a year it goes down to half, and that's difficult.

Consumer sentiment is -- depends, I mean, on who you talk to. I think it's pretty difficult. Most of the -- there's some shopping centers which are not being filled with retailers, and so they're not getting the mix that they want.

But the fundamentals of Brazil are there. I mean, it's a huge market. It's -- burgeoning middle class. We are very strong in that market as a brand. I think Sergio mentioned it -- the brand was the second-most watched in the FIFA Cup.

So, I think it's a short cycle. All right? We'll -- short is maybe one year. And we'll see what happens with the elections. I don't want to talk about politics, and it's not my place. But we have elections in October and that could change things radically.

And Argentina -- Argentina is going through a difficult situation. I mean, as I said today, its comparable sales remain solid. The brand is very strong. There's a -- however, there's a decline of 1.5% in GDP. I think that the political situation is getting more and more complicated for the government. And how that reflects upon day-to-day life is -- we'll see.

But it's not a basket case economy. So, commodity exports are strong. And as I said before, they're taking some macro measures with fiscal stimulus to keep people employed and going. But they also have another issue, which is how they get rid of all the subsidies. So, it's difficult. It's a difficult read.

This concludes our question-and-answer session. I would like to turn the conference back over to Woods Staton for any closing remarks.

Thank you. And thank you for your questions and attention today. We look forward to speaking to you next -- to speaking with you next quarter. And in the interim, the team remains available to meet with you and answer any questions you may have. Thank you for being with us.

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