Arcos Dorados Holdings Inc (ARCO) 2014 Q4 法說會逐字稿

Good morning and welcome to the Arcos Dorados fourth-quarter and full-year 2014 earnings call.

A slide presentation accompanies today's webcast, which will also be available in the Investors 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 conference over to Daniel Schleiniger, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today. With me on today's call are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, our Chief Operating Officer; and Jose Carlos Alcantara, our Chief Financial Officer.

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?

Thank you, Dan. Hello, everyone, and thank you for joining us today. Before I comment on our fourth-quarter and full-year 2014 performance, I would like to introduce you to our new Chief Financial Officer, Jose Carlos Alcantara, who joined us in January of this year. Jose Carlos brings to Arcos Dorados substantial experience as a finance executive in both Latin America and the consumer products industry. I am confident that his leadership, broad skill set, and regional experience will be a tremendous asset to our Company.

I would also like to take a moment to thank his predecessor and my longtime colleague and friend, German Lemonnier. German's contributions to our Company over his 21-year tenure are too many to list. Suffice it to say that he was instrumental in helping us grow into the largest restaurant chain in Latin America and the largest McDonald's franchisee in the world. I wish him the best in all of his future endeavors.

Turning to our fourth-quarter results, we reached double-digit revenue and comparable sales growth as we stepped up our promotional campaigns and benefited from a seasonal pickup and consumer activity. Organic revenues grew 16.4% in the quarter, backed by a 15.4% increase in comparable sales. While we achieved further efficiencies in G&A and other cost items, our EBITDA margin reflected more active marketing activities to drive traffic.

Despite the year-end pickup, 2014 was a difficult year overall, and our performance fell short of our expectations. Organic revenues increased 12.7%, and comparable sales grew 10%.

Although we anticipated economic and other obstacles heading into the year, the deceleration of economic and consumption growth and the depreciation of some of the main currencies in our region were greater than anyone expected. As an example, two exchange rate changes during the year in Venezuela generated a negative impact of $40 million in adjusted EBITDA and almost $144 million in net income alone.

The softer than expected economic environment drove the shortfall in performance versus our plan for the year. In addition, we underestimated the effect of the FIFA World Cup on traffic across our businesses during the tournament, which had an important impact on our second- and third-quarter results last year.

In 2014, we opened 82 restaurants, with freestanding restaurants accounting for 60% of the total openings. The year-end 2014 overall restaurant count was 2,121 restaurants.

During our last call we mentioned that we will provide you with a long-term strategic outlook for our business during the early part of this year. Our focus has been on developing a three-year roadmap for a leaner and more efficient organization that is not only the best restaurant chain operator in Latin America, but also generates shareholder value through enhanced profitability and cash flow generation as well as a disciplined approach to capital allocation.

As you can imagine, this has been a complex task, particularly given the uncertainty of the shorter-term political, economic, and currency outlooks in our region. While we will continue to implement strategies to drive top-line growth with an optimal product mix, I would like to share with you additional measures that we will focus on to improve our Company's performance and financial position to significantly increase shareholder value over the medium term. Within the current context, these are the areas where we will have a high degree of control -- keeping in mind, of course, that the economic cycle in our region will have an important impact on the ultimate long-term results of our Company.

The key elements of our plan include, number one, utilizing technology to help us become more efficient and enhance our customers' experience. We are committed to increasing store margins by a minimum of 200 basis points over the next three years. The majority of this improvement will come from more efficient labor scheduling, improvements in inventory management, and reductions in non-product purchases, for example.

However, under no circumstances will these initiatives negatively impact our service levels, as measured by Customer Satisfaction Opportunity numbers, or CSO. Our CSO, as you know, is known as the highest in the McDonald's system and we will continue to be so.

Two, a commitment to reduce our G&A expenses by a minimum of 10% on an absolute US dollar basis over the next three years. While we are pleased with the progress that we have made in achieving G&A leverage, we believe that there is more that can be done.

Three, we will seek to monetize the real estate assets in our portfolio that are either non-core office buildings and other facilities or operating assets where the value far exceeds the operating potential of the assets. We have many long-standing assets across our region that are appreciated, with a significant development around those properties.

We have conservatively estimated that we will raise at least $200 million through this initiative over the next few years without materially impacting EBITDA. These proceeds can be used to reduce debt or for any other purpose that enhances shareholder value.

Fourth, the ability to re-franchise existing restaurants in many of our markets. Today, 24% of our restaurants are operated by our sub-franchisees. The master franchise agreement establishes that this can be as high as 50%.

While we do not foresee reaching a 50-50 mix, we do believe that there is an opportunity to shift this next to enhance cash flow availability and the Company's consolidated margin. We are committed to raising at least $50 million over the next three years by re-franchising some of our existing Company-operated restaurants.

Similar to the cash that we expect to raise from redeveloping some of our locations, cash raised from re-franchising can be used for debt reduction. Importantly, our focus will be on increasing our return on invested capital.

We are being prudent during this difficult period. As you know, we have committed to continue growing our region. However, much like our partner, McDonald's, we are strategically slowing our pace of growth until the region's economies begin to turn around.

We will continue to rigorously screen new restaurant opportunities to determine where they will generate the most attractive returns, given each market's potential in the context of its competitive environment and the industry's dynamics. While we implement these strategies, we will also be doing all we can to improve our sales and continue to capture market share within the current macroeconomic environment. In addition, we are realigning incentives and compensation at all levels to help achieve our Companywide goals.

We are focused on building a healthy business for the long term; and thus today we are presenting a new way of measuring our ability to achieve this goal, by providing medium- and long-term milestones rather than just annual guidance. Jose Carlos will detail for you in a few minutes what we believe is a better way of measuring our success in achieving our longer-term goals.

We believe that the steps that we are taking to streamline our business, capture operating efficiencies, and extract value from certain of our assets will result in a sustainable improvements in our operating cash flow generation, financial position, and will help create shareholder value. With that, I'll now turn the call over to Sergio for a more detailed look at our fourth-quarter performance.

Thank you, Woods, and hello, everyone. We have been strengthening our value proposition and supporting our customers through this period of weak economic growth by offering more affordable dining options. As we mentioned on our last call, this strategy contributed to a stabilization of fourth-quarter volume trends versus the challenging second and third quarters of 2014.

If you turn to slide 3, this was particularly the case in our largest market, Brazil. While it's still negative as compared to the prior year, traffic trends picked up from the second and third quarters, which were impacted by FIFA World Cup. This improvement reflects an expected seasonal pickup as well as promotional activities which were focused on value offerings on core products.

Organic revenues increased 9.4% versus the prior-year period, backed by a 5.2% rise in comparable sales. Average check was underpinned by sales of the Happy Meal, Big Mac, and GPPP platform. As-reported revenue growth declined 2.2% due to the 12% year-over-year depreciation of the Brazilian real.

The net addition of 54 restaurants during the last 12-month period, of which over half were freestanding units, contributed $23.5 million to revenues on a constant currency basis during the quarter. The openings brought the restaurant count in Brazil to a total of 866.

Before I move to NOLAD, let me update you on the rollout of the new restaurant management technology in Brazil. We now expect to be fully implemented in our largest cities by the middle of the third quarter of this year, and the entire country by the end of the year. Later this year, we plan to commence that rollout in Argentina, which should take about six months to complete.

The system will also serve as a platform to roll out customer-facing strategies in line with McDonald's global digital initiatives in the future. We are encouraged by the results.

Last week, Woods, Jose Carlos, and I visited Brazil to follow the implementation firsthand. Given that Brazil and Argentina account for almost half of our Company-operated restaurants, the potential medium-term savings to margin are significant. Once the system has been widely implemented in our two largest countries, we will roll it out to other countries over the next three to four years, as appropriate.

Turning to slide 4, NOLAD's revenue decreased by 4.1% year-over-year, but grew 1.3% on an organic basis. Systemwide comparable sales declined 2.2% as a reduction in traffic more than offset average check growth. Traffic was impacted by a continued weak consumer environment, while average check primarily reflected price adjustments.

Conditions in Panama and Costa Rico remain challenging, and competition intensified. However, we are well positioned in these markets because of the scale of our operations and the associated advantages on marketing and food and paper costs.

We have already seen pressure on some of our competitors in the formal QSR segment that has contributed to our continued ability to gain share in these markets. The net addition of six restaurants during the last 12-month period contributed $4 million to revenues in constant currency for the division.

As we mentioned in the prior quarter, we have been testing a new menu in Mexico which enables consumers to personalize their dining experience. During the 90-day pilot phase, customers came into our restaurants to try these new concepts with our core classic, and this led to an increase in the average check.

By catering to regional preferences for customization, we will deliver a more relevant dining experience to our Mexican consumers. We are expanding the concept to other parts of Mexico and also will report on this later.

On slide 5, you can see that SLAD organic revenues increased 23% in the quarter. Systemwide comparable sales grew 23.6%, average check expanded, and traffic grew in the division despite a deteriorating macroenvironment.

As-reported revenues declined by 6% due to the 40% year-over-year average depreciation of the Argentine peso. The net addition of five restaurants during the last 12-month period contributed $2.3 million to revenues in constant currency in the quarter.

Now please turn to slide 6. Excluding Venezuela, revenues in the Caribbean division grew 1.6% on an organic basis, but declined 4.7% in as-reported terms. Comparable sales decreased by 4.8% due to negative traffic and lower average check in Puerto Rico.

In the division in 2014, we had a net reduction of six restaurants. The combined contribution to constant currency revenues of the restaurants that were closed and opened over the last 12-month period was $6.2 million in constant currency.

Now, for the consolidated the Company, organic revenues excluding Venezuela rose 11.1% in the fourth quarter. As-reported revenues declined by 3.6%, primarily due to the depreciation of the Argentine peso and Brazilian real.

Turning to slide 7, during the year we completed 82 new restaurant openings, ending the year with a total of 2,121 restaurants. Just under half of our current portfolio now comprises freestanding units.

Also during the year, we added 266 Dessert Centers and nine McCafes, bringing the totals to 2,494 and 343, respectively.

I will now hand you over to Jose Carlos for a discussion of our adjusted EBITDA and key balance sheet metrics.

Thank you, Sergio. First of all, let me say how excited I am to have joined the Arcos Dorados team. We represent the strongest brand in our industry and continue to have significant long-term potential in our region. I look forward to tackling the challenges and capitalizing on the opportunities ahead.

Please turn to slide 8. The Company's fourth quarter consolidated adjusted EBITDA decreased 20.9% but rose 29.5% on an organic basis versus the prior-year period. Excluding Venezuela, fourth quarter as-reported adjusted EBITDA was down 9.2% and was down 4.6% in organic terms.

As Woods mentioned in his opening remarks, the Company continues to scrutinize its spending as part of its cost-reduction program. In the fourth quarter, G&A as a percentage of revenue declined by 44 basis points, bringing the full-year reduction to 43 basis points.

These savings, combined with lower labor costs, were not sufficient to fully offset higher food and paper costs and occupancy and other operating expenses. As a result, the adjusted EBITDA margin decreased 106 basis points to 10.2%, or 10.1% on an ex-Venezuela basis.

Turning to Company divisional results on slide 9, Brazil's reported adjusted EBITDA contracted 0.8% and was flat on an organic basis. Brazil's adjusted EBITDA margin expanded 24 basis points, as efficiencies in payroll costs, occupancy, and other operating expenses and G&A more than offset higher food and paper expenses. Fourth-quarter labor costs benefited from efficiencies at the store level and from the recovery of payroll taxes related to previous years, partially offset by the reversal of the PAT provision in the same quarter of last year.

NOLAD's adjusted EBITDA slightly declined on an as-reported basis, but increased 6.7% in organic terms. The adjusted EBITDA margin increased, driven by lower food and paper and payroll costs, partially offset by higher G&A and other operating expenses as a percentage of sales.

In SLAD adjusted EBITDA decreased 15% on an as-reported basis, but increased 14.3% in organic terms. Adjusted EBITDA margin declined as food and paper costs increased as a percentage of sales due to higher beef and transportation costs. This factor more than offset efficiencies in labor costs, G&A, and occupancy and other operating expenses.

In the Caribbean division, excluding Venezuela, as-reported EBITDA decreased 82.5% and was down 67.9% in organic terms. The adjusted EBITDA margin declined as certain expenses more than offset leverage in G&A.

Turning to slide 10, fourth quarter nonoperating results reflected a $7.5 million non-cash increase in foreign currency exchange losses. FX losses for the quarter were mainly driven by the impact of the depreciation of the Brazilian real, which generated a loss on intercompany balances. This was partially offset by a gain related to the BRL-denominated long-term debt and movements in other currencies which impacted intercompany balances.

Net interest expense declined $11.6 million versus the prior-year quarter, which included a one-time charge of $10.8 million related to the full redemption of the 2019 note. In the fourth quarter, net income decline reflects lower operating results and higher foreign exchange losses, which were partially offset by lower net interest and income tax expenses.

Slide 11 contains our debt indicators. As of December 31 our net debt to adjusted EBITDA ratio was 2.6 times versus 2.9 times at the end of the third quarter. Seasonally stronger cash flow from operations combined with positive working capital changes contributed to the reduction of our short-term debt and increase in our cash position. While we expect this ratio to move in the short term, based partially on the intra-year seasonality of our cash flows, our plan is to bring the year-end ratio back within our target of 2 to 2.5 times within the next 12 to 24 months.

As you can see in slide 12, on an organic basis, excluding Venezuela, revenues were 9.6% higher year-over-year, which is in line with guidance of 9% to 11% growth. Adjusted EBITDA increased 0.6% on an organic basis, excluding Venezuela, below our guidance range of 5% to 8% growth.

Finally, also excluding Venezuela, the adjusted EBITDA margin contracted based on higher food and paper and occupancy and other operating expenses, which offset leverage in labor costs and G&A. Total capital expenditures were $169.8 million versus guidance of $180 million.

Please turn to slide 13. As discussed by Woods, this is a long-term business, and short-term visibility has proved challenging. With this dynamic in mind, beginning in 2015, we will no longer provide annual guidance for total revenue growth, adjusted EBITDA growth, and the consolidated effective tax rate.

Instead, we will provide you with a baseline expectation for medium- to long-term revenue growth and adjusted EBITDA margin improvement. In addition, we will now provide a range of guidance for both capital expenditures and new restaurant openings for the current year rather than a single-point estimate.

We expect the short-term operating environment in our region to remain challenging. However, our medium- to long-term outlook includes comparable sales growth that, on average, excluding Venezuela, will be in line with the weighted inflation rate of our other markets. We also expect to expand our full-year adjusted EBITDA margin by at least 200 to 250 basis points over the next three years.

Our main areas of focus for margin expansion moving forward will be those that Woods discussed today, namely, leverage and labor costs, non-product purchases, and G&A. The implementation of the new restaurant management technology will help us capture labor efficiencies and better manage inventory at the store level, among other benefits.

This is the first step in our plans to invest in technological advancements. It will serve as the platform for future investments in both back-end and customer-facing technologies that will help us manage our business better and maintain relevance with our customers.

We will continue implementing our hedging strategies to introduce a greater degree of predictability in our food and paper costs. For 2015, we are fully hedged for our projected exposure to US dollars in Brazil; and we have also hedged a portion of our projected US dollar exposure in some of our smaller markets.

Over the next three years we plan to extend our efforts to reduce G&A, with a goal of delivering a 10% reduction in absolute US dollar terms. As we are doing at the restaurant level, we will be realigning incentives and compensation at the divisional and corporate levels to be more in line with the creation of long-term shareholder value.

For full-year 2015, we expect capital expenditures to be between $90 million and $120 million, and we expect to open between 40 to 45 new restaurants. As was the case in 2014, we expect freestanding restaurants to represent about 60% of our 2015 openings.

We also plan for about 80% of our new stores -- new restaurants to be opened in Brazil this year. Finally, about 55% of our 2015 openings will be composed of sub-franchisee operated restaurants.

With improved operating cash flows, reduced capital expenditures versus prior years, no dividend declared for 2015, and the monetization of some of our real estate assets, we are taking measures that we expect will generate significant shareholder value over the next several years. I will now turn the call back to Woods.

Thank you, Jose Carlos. As you've heard from Sergio and Jose Carlos, as well as in my opening remarks, we have developed a roadmap with concrete steps and initiatives aimed at generating shareholder value by improving our operational efficiency, extracting value from the assets without a long-term impact on our business, and making prudent capital allocation decisions.

The short-term outlook for our region and our Company is challenging. However, we are not standing still. We are confident that the strategic direction that we've described today will prepare us not only for the current economic challenges but it will also -- and more importantly -- put us in a position to accelerate business momentum when the macroeconomic environment recovers in the future.

We have long-term competitive advantages that have helped us over time, and those advantages are even more prevalent today. The McDonald's brand remains the preferred brand in the minds of casual diners in Brazil and all of our major markets. And even as the branded QSR market goes through a cyclical downturn, we are maintaining or gaining share in most of our main markets.

As operators of the region's dominates QSR brand, with an unmatched footprint and unparalleled experience operating in volatile markets, I remain confident that we will be at the forefront of an eventual recovery and growth. Thank you for your attention.

As I mentioned earlier, Jose Carlos joined our Company two months ago and is in the process of familiarizing himself with the business. For today's call, Dan Schleiniger will also join the Q&A session to help answer questions related to our financial indicators and outlook. I would now like to open the call up to questions.

(Operator Instructions) John Ivankoe, JPMorgan.

Hi, thank you. A couple of quick ones if I can; I guess I will ask them one at a time.

In terms of raising $200 million of proceeds from what I guess sounds like land sales, without affecting EBITDA, it would seem like that would be land that would be valuable that would actually be very well-performing type of McDonald's units. But just do clarify that: that these stores are actually EBITDA breakeven at the store level; or is it offset by other cost cuts that you've talked about elsewhere in your presentation?

Yes. Hi, John; this is Woods. Look, this is a subject of ongoing negotiations so I can share just a few details with you. As you said, we expect to generate about $200 million from this initiative. We have some office and other non-core real estate assets that we can sell and consolidate.

We also have some restaurant locations with a real estate value that far exceeds the operating potential of the locations. In those cases we can partner with a local developer to monetize the asset and, after a period of construction, continue operating our restaurant at that location.

Okay. That's interesting. So you can monetize the asset; you continue to operate the restaurant. But that doesn't all of a sudden become rent then, in other words?

Like you don't -- what you previously owned, it's not a sale/leaseback transaction? I just want to be clear about that.

That is correct. But that doesn't mean we might not look at also some sale and leasebacks. But you're right.

Okay. Okay, I think I understand. Then secondly, as part of the MFA with McDonald's, I think by my math it still suggests that you would have to open over 100 units, maybe even a little bit more than that in 2016 to hit your MFA. Was there any discussion of -- is that still the case? Or are there any discussions with McDonald's of reducing your unit opening requirements?

Yes, in 2014 we opened up 80 new restaurants of which 60 were freestanding. We have several variables that we can look at to reach our commitment with McDonald's Corporation having to do with timing of the openings, the restaurant formats, the ownership structure of them.

We are monitoring market conditions along with McDonald's, and we will agree on an opening plan for 2016 based on the prevailing outlook later this year. The agreement with McDonald's is responsive to changes in market conditions; and both parties are committed to a level of openings that reflect market dynamics. We are being in line with McDonald's global strategy, and we are reducing our pace of openings for the short term to reflect political and economic dynamics going on today.

Martha Shelton, Itau BBA.

Thanks for taking the question. I was hoping you could walk through the re-franchising of the existing restaurants initiative. I know that 24% of the portfolio is currently franchise operated.

So I'm just trying to get a sense for the economics of the higher shifts towards more franchise units. I would like to better understand perhaps the return metrics associated with a more -- a larger percentage of your portfolio being more franchise operated.

Yes, hi, Martha; this is Woods. We are looking at selling some franchises, right? Some franchise stores in areas where, quite frankly, they are far away from the main cities and where we spent considerable G&A. So there is a pickup there.

Our current ownership is 74/26; we can go up to 50%. And we plan to continue shifting a higher percentage of our unit growth to our existing or even perhaps new sub-franchisees so that we can get these savings in G&A.

I think quite frankly in some areas of our countries where we operate, Mr. or Mrs. McDonald's in that particular community has a better handle on what's going on than perhaps we can. So it's a question of getting the geographies that we have and making them as operationally efficient as possible from a margin perspective as well as a G&A perspective.

Got it. So when you're talking about that $50 million, you're talking about or you're referring to the proceeds from the sale of these restaurants?

That is correct.

Okay, thank you.

(Operator Instructions) Jeronimo De Guzman, Morgan Stanley.

Hi, good morning. Maybe I could start with the re-franchising question, a follow-up there. Wanted to know: the $50 million, more or less how many units are we talking about? Just to get a better sense of what are the economics, how do those $50 million gains work?

And then longer-term where do you see yourself as having -- like what's the optimal mix of franchise versus Company-operated units?

Yes, I don't want to get into where we're going to do it yet, but all of our countries are up for this kind of remixing of operations. I don't want to get into how much we can get per store, per restaurant, or where we will do our focus, but I think that if you look at all of our countries, there are possibilities everywhere.

I don't think we want to get down to the 50-50, as I said before. But certainly over the next -- as we said, for the next two or three years we will do -- we will up the pace, as we have last year as well, of new franchise stores -- sub-franchise stores.

Okay, thanks. Then on your release, you also mentioned this new project that you are working on to redesign the way you manage and operate the business. I just wanted to know if you could give us a little bit more detail on what exactly is in this project and what kind of benefits you expect to have from it.

Yes, let me pass you to Sergio so he can answer that question.

Yes, sure, Jeronimo. This is a system that we are implementing at the restaurant level that will really help us enhance the efficiency of the way we operate our stores. The systems has actually the capacity to forecast sales in a much more accurate manner than obviously the method that we use today, therefore will allow us to manage labor, crew scheduling, more efficiently.

For instance, the system calculates how many crew people the restaurant needs throughout different dayparts, and also tell us the actual position for each one of the employees, considering the number of stations that we have in the kitchen, in the front counter, in the lobby, in the drive-through, etc. We're also going to get additional gains because out of the more accurate sales projection we will have all the -- that we call the supply chain part, which is all the process that we do at the restaurants to by products from the distribution center, leading us to have a more optimized inventory levels, not only at the restaurant but also at the distribution center. So we may expect to get additional gains in working capital as well.

Let me just add a few things, Jeronimo, to -- what Sergio said is perfect. I think an important thing for all of you to know is that we been looking at a pilot almost for a year now, with almost 20 stores. And we've been able to reduce labor hours considerably.

Our CSO scores, the Customer Satisfaction Opportunity that you all are familiar with, those numbers have remained constant. The challenge has always been to become more efficient but that it's invisible to the customer. The customer still keeps getting the best and high levels of service that we have.

And by the way, I'll just remind you all that we have some of the highest CSO scores in the McDonald's system worldwide, and we are very proud of them, and we will continue to maintain them.

Thanks. I guess that can be very positive for the margin on the same-store sales front. Just one last question. You gave your guidance as expecting same-store sales in line with inflation. When I look at -- try to estimate it for the current snapshot of your business, that would imply same-store sales of around 9% to 10%. So it is above what you are trending right now.

So I guess the question is: what are the main levers you see to accelerate that same-store sales momentum to reach that medium- to longer-term guidance of same-store sales?

Let me pass this to Sergio.

Well, Jeronimo, the reality is that, as we always said, during these economic difficulties that we are facing in some of our -- large parts of our geography, our marketing efforts and initiatives are targeting retained traffic. Because that is the way we believe the business will be protected in the long run.

If you look at what we have planned for this year in terms of marketing, we have a really, really strong calendar towards the end of the year, particularly in the second half. So the reality is that, as I said before, we will continue with promotional games. We will, obviously, sustain the launch of new products to create new food news.

The Happy Meal is performing better. This is a process that already started in 2014, so we remain quite confident on the contribution that will make to our business looking forward to 2015.

And we're also enhancing the marketing activities in other dayparts like breakfast. Remarkably, in the biggest markets that is also helping us to create additional sales volumes on those dayparts, apart from lunch and dinner.

Great. Thank you very much.

(Operator Instructions) John Ivankoe, JPMorgan.

Hi, thank you. Just two quick ones. Firstly, does the increase in the EBITDA guidance over the next three years include the increase in the royalty rate to McDonald's that I think occurs in early 2017?

Then secondly, in the CapEx guidance in 2015, it seems like almost all that CapEx would be associated with the new restaurants that are being built, especially with the number of freestanding restaurants. So if you could talk about what's happened to existing unit CapEx, or remodel CapEx, or corporate CapEx -- in other words, CapEx outside of new stores, thanks.

Yes, hi, John. As far as our 2017 step-up in royalty payments, we haven't discussed those yet. There is a brand-building credit that is given to us, and it will be reduced in 2017. It's too early to say whether or not this aspect of our agreement will change.

But with that said, we do believe that we have many opportunities to improve our business in the long term, and we are focusing our efforts. The margin improvement that we are giving through 2017 includes a step-up, okay, just to answer you specifically.

Then could you repeat the second question? I didn't quite get it.

Yes, I'm sorry. Of -- the $90 million to $120 million of CapEx in fiscal 2015 is on 40 to 45 new restaurants, of which 60% are freestanding. So it seems like the vast majority of that CapEx is being associated with those newbuilds. So I wanted to clarify that and also understand what kind of CapEx is associated, whether on the corporate side or in remodels or re-images or other types of technology initiatives that might be necessary in the capital budget.

Hi, John; this is Dan. I think you need to keep in mind that from a CapEx perspective you can't draw a parallel with last year's unit growth numbers and last year's CapEx level with this year's. Because remember that about 55% of our openings this year will also be with sub-franchisees, and that's higher than our installed base of 24%; that's higher than our opening mix last year, which included about 30% of sub-franchisees. Okay?

So what that should do is give actually an additional, let's say, percentage of the total CapEx that we have, and that's where we will then be reinvesting in the business and technologies that not only enhance the base but also go into -- excuse me, investments that not only enhance the base but also go into the technological investments that Woods, Jose Carlos, and Sergio mentioned in their remarks.

Dan, if I'm still on, is it a capital-light franchisee? Or is it the traditional franchisee, where you are responsible -- where Arcos is responsible for the CapEx and the land and the building?

The traditional model today is where Arcos is responsible for the land and the building. But we are looking at alternatives; I think Woods alluded to it, that among the things that we are looking at in our expansion plans are modified ownership models.

Thank you.

Martha Shelton, Itau BBA.

Thanks again for the question. Just thinking about the master franchise agreement, it's just -- I want to make sure that I'm understanding this properly and in characterizing it. It sounds to me like the MSA with McDonald's, it really sounds like a very cooperative agreement between you and McDonald's Corporation.

What I mean by that is it sounds to me -- and tell me if I'm interpreting this correctly -- gross openings are flexible. I understand that per the MSA 250 unit openings were expected from 2014 to 2016; and it sounds, if I'm reading this right, it sounds like maybe that's subject to negotiation, as well as the royalty step-up. So I want to make sure that I'm reading that right.

Then secondly I wanted to get a sense for franchisees, their appetite and their capacity for new store openings. Thanks.

Yes, hi, Martha. Look, the relationship that we have with McDonald's could not be better. We are great partners. We are very happy, and I'm very, very, very thankful that we are franchisees with this great brand.

As you said, the 2014 to 2016 opening plan was made in 2013 and the economies were totally different then. Argentina today is in technical default; Brazil is in recession; and Venezuela is in an economic crisis. And that's a big percentage of our EBITDA in our Company, those territories.

So just like it's going on with the Corporation all over the world, there is a temporary reduction, and we're always conversing with the Company about this. So that's that.

And I think the second part of your question was the appetite of franchisees. Franchisees are, in most cases and in most countries very, very -- where we have them, they are very interested in growing their business. So as long as they have strong balance sheets where they are going to come into the business without added debt, where they have a proven track record, we will grow and we will want to grow with them as long as it's a strategic fit with what we are doing.

So -- and there has been a lot of indication of interest.

Great. Thank you so much.

Thank you and at this time I would like to turn the conference back over to management for any closing comments.

Well, thank you all for being with us. I believe it's St. Patrick's Day in the US, so happy St. Patrick's Day. Thank you for your questions and your attention.

We look forward to speaking with you again next quarter. And in the interim, the team remains available to meet with you and answer any questions that you may have. So hopefully you have a good day and happy St. Patty's Day. Thank you.

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