Arcos Dorados Holdings Inc (ARCO) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Arcos Dorados third-quarter 2015 earnings call. A slide presentation will accompany today's webcast, which will also be available in the Investor section of the Company's website, www.arcosdorados.com/ir.

As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation.

As a reminder, today's conference call is being recorded. At this time, I would like to turn the call 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 Sergio Alonso, our Chief Executive Officer; and Jose Carlos Alcantara, our Chief Financial Officer, who will provide you with an overview of our third-quarter results as well as an update on our three-year plan.

Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward-looking statements and I refer you to the forward-looking statement section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statement 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 CEO, Sergio Alonso.

Thank you, Dan. Hello everyone and thank you for joining us today. In March of this year, we announced a three-year plan to improve our operating efficiency, reduce our cost structure, monetize the value of some of our real estate assets and reduce our total debt levels.

The ultimate goal of our plan is to strengthen Arcos Dorados leadership position and capture the long-term potential of the QSR industry in Latin America.

With the progress that we have made so far, I have no doubt that we will generate significant shareholder value as we continue to execute our plan. In fact, as of this week, we have already met our commitment of reducing the Company's G&A in absolute terms by 10%.

A key driver to improve operational efficiency in our restaurants is the implementation of our new scheduling and forecasting system in Brazil, which is intended to increase restaurant level margins over the medium term. Last month we completed the rollout of a new system in line with our plan. The results in the restaurants (technical difficulty) that have been running the system for a few months continued to improve and are in line with our expectations given the current operating environment in the country.

When we laid out our strategy to improve consolidated EBITDA margins, we expected to deliver a 10% reduction in our G&A in absolute US dollar terms by the end of 2017, and since that time, we have taken positive steps to accelerate the reduction of certain costs that are under our control.

As part of this effort, we review our cost structure at the country, division and corporate level, and made a number of difficult, but necessary decisions. Last week, we implemented our restructuring plan across the Company, which will lower our total G&A by more than $20 million on an annualized basis in today's dollars. And we continue evaluating all elements of our G&A for opportunities to further reduce our costs.

As part of our restructuring and succession planning, we have implemented some additional changes to the management team effective as of November 1st. Paulo Camargo has been promoted to President of the Brazil division after serving for the last 12 years as Vice President of Operations in the division. Paulo is taking over from Jose Valledor, who will join us now in Buenos Aires as VP of Supply Chain.

And Jose replaces Horacio Sbrolla, who decided to leave Arcos Dorados after 27 years of service to the McDonald's system in Latin America.

We have a highly committed team that is aligned with the goals of providing the best possible levels of service to our guests throughout the region and create value for our shareholders. I'm confident that we have the right people in place to lead our Company going forward.

Turning to our asset monetization plans, we have made significant progress in developing an organized and disciplined process through our broker, CB Richard Ellis, for the redevelopment or sale of a leading number of properties in Mexico.

Having laid much of the ground work for our plan earlier this year, the pipeline of properties represents an important portion of our target proceeds of $200 million by the end of 2017. Based on our current timetable, we expect to receive initial offers on these properties towards the end of this year. The current phase of this step should continue throughout 2015 and we will update you as appropriate.

Last month, we kicked off the asset monetization plan when we signed our first agreement to sell and relocate one of our restaurants in Mexico.

The other component of our asset monetization strategy is the refranchising of some of our company operated restaurants. On our last call, we mentioned that we have begun negotiations in Brazil, which is the market that we believe has the greatest potential for this initiative.

We have also reached agreements on the refranchising of more than 20 of our company operated restaurants in the country and we are working through the process required to take these agreements to contract.

Importantly, all agreements today were reached with existing franchisee operators. Given their in-depth knowledge of the business environment, their eagerness to invest is a testament to their confidence in the continued opportunity for the McDonald's brand in Latin America.

In addition to these agreements, we're making headway with other refranchising negotiations in Brazil and have also initiated refranchising plan in a few of our other markets. Based on our progress on the pipelines that we have developed so far, I'm confident that we are on track to achieve our goal of raising $50 million from the refranchising effort by the end of 2017.

Finally, we're also advancing in our plans to address the maturity of our Brazilian real denominated bond in July of next year. Jose Carlos will comment on this topic in a few minutes.

Now, please let's turn to our third-quarter results on slide 3. We achieved organic revenue growth of 11.4% in the quarter, which was backed by a 9.4% expansion in systemwide comparable sales. We delivered this growth against a weak economic backdrop and softer consumer spending in our largest markets.

Reported revenues reflected significant currency headwinds across the region and customers are responding well to our promotional strategies, but traffic trends remain challenging in many of our markets.

Please turn to slide 4 to take a closer look at our divisional results. Organic revenue growth in Brazil was supported by a modest increase in systemwide comparable sales versus last year.

Traffic levels were impacted by further deterioration in the challenging consumption environment reflected in all-time lows in consumer confidence. As consumers trade down to local offers, we were able to partially offset these effects by continuing to use marketing and promotional activities to support restaurant traffic levels and provide more value to our customers. This impacted average check growth.

The marketing activities in the quarter included the successful Grand Big Mac and Minions campaigns, which started in the previous quarter and ended in mid-August. Third quarter marketing initiatives also included the Triple Cheeseburger in the affordability platform and the launch of the McFlurry Lajotinha in the dessert category.

Turning to slide 5, NOLAD's organic revenue and systemwide comparable sales growth was driven by an increase in average check and flat traffic versus last year. Average check growth was supported by inflation and the more favorable mix, especially in Mexico where a new McMio platform is now fully implemented in our Company-operated restaurants and is giving customers even more reason to visit us.

Most of our franchisees in Mexico have also begun implementing McMio at their restaurants. And we continue to see traction in our family business, demonstrated by the strong performance of our Happy Meal properties such as Minions, Transformers and My Little Pony in the quarter.

Please turn to slide 6. Flat organic revenue and systemwide comparable sales growth was driven by an increase in the average check, which rose due to inflation. Traffic declined modestly in the quarter. The popular Minions campaign and the Triple Bacon in the affordability platform in Argentina were among the promotions that contributed to double-digit comparable sales growth.

Coming to the Caribbean divisions result on slide 7, organic revenue growth, excluding Venezuela, was supported by a modest rise in comparable sales due to a higher average check and traffic gains.

Sales in Colombia benefited from strong performance in our family business, dessert channels and the targeted new launch menu called Almuerzo Columbiano or Colombian Lunch, which includes local flavors.

As you can see on slide 8, we opened 65 new restaurants in the past 12 months, of which about half were in Brazil, resulting in a total of 2,122 restaurants. We also added 196 Dessert Centers and four McCafes and we continue to prioritize the construction of free standing restaurants, where we provide the full McDonald's experience to our guests.

The composition of our restaurant portfolio is an important competitive advantage in helping us to weather the current environment and will serve as the backbone for the future growth of our business.

As we mentioned last quarter, we have reassigned some of our capital expenditures to reimaging and system upgrades at the restaurant level. This shift should further improve operating efficiencies as we work to provide a modern and progressive restaurant experience to our guests.

And I will now hand the call over to Jose Carlos for discussion of adjusted EBITDA and key balance sheet metrics.

Thank you, Sergio. Let me start by updating you on the progress we have made in streamlining our business through targeted cost reductions this year.

As Sergio mentioned, we have taken action to further lower our G&A by more than $20 million on an annualized basis following the recently implemented restructuring plan. With this, we are achieving our goal to reduce G&A expenses by a minimum of 10% on an absolute US dollar basis.

We will record a one-time restructuring charge of up to $15 million during the fourth quarter. This restructuring further decentralizes our operations and brings decision-making closer to our customers. We will continue to focus on increasing efficiency throughout the organization.

Over the last few months, we have begun developing -- we have been developing our plans for next year and beyond. During this process, the management team provided a few guiding principles to each of the divisions and country managers.

From a finance perspective, we continue to prioritize cash flow generation, cost control and disciplined capital allocation. We are in the process of reviewing our variable and long-term compensation structures which are crucial to achieving our long-term goals for the business.

Turning to adjusted EBITDA performance on slide 9, you can see that adjusted EBITDA for the third quarter decreased 22.9% year over year on an as-reported basis due to currency translation impacts from Brazil and Venezuela. On an organic basis, adjusted EBITDA was up 6%, backed by positive contributions across all the operating divisions except Brazil.

Excluding Venezuela, as reported, adjusted EBITDA contracted 23.6% and 1.8% in organic terms in the quarter. The consolidated adjusted EBITDA margin decreased by 50 basis points, reflecting higher food and paper costs along with the loss of leverage of G&A, which more than offset gains in payroll and occupancy and other expenses as a percentage of sales.

On slide 10, you can see that we achieved adjusted EBITDA margin expansion in all divisions except Brazil in the quarter. In Brazil, the sale decline outpaced the reduction in all cost and expense line items on an as-reported basis. This combined with our efforts to add value to our customers and increase promotional activity in a declining consumer environment, underpinned the 240 basis points contraction in Brazil's adjusted EBITDA margin to 9.7% in the quarter.

We are continuing to streamline our cost structure in Brazil and are pursuing additional marketing initiatives to drive our traffic and sales levels in the division.

The NOLAD division has achieved adjusted EBITDA margin improvement during the last two years and the third quarter was no exception, with more than 350 basis points of margin expansion to 10.3%.

SLAD's adjusted EBITDA margin expanded over 240 basis points to 12.8%, driven by improvements in all cost line items as a percentage of sales. Excluding Venezuela, the Caribbean's division adjusted EBITDA margin increased by more than 90 basis points to 4.2%.

Turning to slide 11, third quarter non-operating results reflected a $27.9 million foreign exchange currency loss, mainly caused by the depreciation of the Brazilian real, which impacted the intercompany balances and was partially offset by the BRL bond. Net interest expense declined by $4.5 million to $14.5 million in the quarter, also partially due to the impact of a weaker Brazilian real on our BRL-denominated bond.

The third quarter net loss was $35.9 million compared to net income of $240,000 in the same period of 2014. The net loss was mainly explained by lower operating results coupled with increased foreign exchange losses as well as a higher income tax expense. These effects were partially offset by lower net interest expenses.

Slide 12 contains our debt metrics. As of September 30, our net debt to adjusted EBITDA ratio was 2.6 times, down from 2.8 times at the end of the second quarter. By improving operating cash flows, temporarily reducing capital expenditures and monetizing some of our real estate assets, we expect to bring this ratio back within our target range of 2 to 2.5 times by the end of 2016.

With respect to the July 2016 maturity of our BRL-denominated bond, we are advancing on an alternative that we expect will provide us with sufficient flexibility around next year's maturity. We are working to finalize the structure, but since this is a subject of ongoing negotiations, the only details that I can share are that we expect to replace the current BRL-denominated bond with another BRL-denominated or BRL exposed source of lending with a competitive pricing and repayment structure. We will update you on our plans in the coming months as appropriate.

In summary, we are taking the necessary steps to meet the short-term challenges that we are facing and we have made important progress towards delivering the longer term targets that we established in March of this year.

As we continue to execute our plans, meaning that improving operational efficiencies and strengthening our balance sheet, we're positioning Arcos Dorados for a resumption of growth and value creation in the years to come.

I will now hand the call back to Sergio.

Thank you, Jose Carlos. This was a difficult quarter to operate in. However, we made progress in our strategic plan. While there is still much to do, I'm convinced that we are on track to achieve our targets. We completed the implementation of our new forecasting and scheduling system in Brazil within the planned time line.

We've also taken the necessary steps to deliver the promised absolute reduction of our G&A expenses to further enhance our consolidated operating results. Importantly, we are continuing our evaluation of all aspects of our G&A to realize additional savings.

We are following an organized and disciplined process to maximize the value of our strong asset monetization pipeline, which we believe will represent a significant proportion of our $200 million redevelopment and $50 million re-franchising target for 2017. And as Jose Carlos mentioned, we expect to be able to tell you more about our plans to refinance our 2016 bond within the next few months.

We are not expecting a material improvement in the economic condition next year, so we will continue to focus on streamlining our business, capturing operating efficiencies, extracting value from certain assets, generating cash flow and reducing our debt level.

We are reinforcing the customer experience as the long-term market fundamentals are still in place, and I firmly believe Arcos Dorados will be well positioned to capture the opportunity when the next cycle of economic expansion comes in Latin America.

So thank you for your attention. I will now open the call for questions.

(Operator Instructions) Robert Ford, Bank of America Merrill Lynch.

I had a couple of questions on the restructuring and a couple on Brazil. In terms of the restructuring, can you discuss the economics of some of those refranchising agreements and I was curious if any of the units were loss-making and I wanted to know how many units you currently operate which are loss-making? And then the press release mentions eight closures I believe in the Caribbean division and I was curious how many closures you may be contemplating for next year?

And then with respect to the Brazilian business, what was the proportion of Brazil's sales last year that were made from the value menu and how is that mix evolving this year? And when you consider the hedge position, what kind of pricing do you feel you need for next year to offset the FX? And then with respect to the improvements in the scheduling, I was curious what you anticipate for wage increases for 2016 and if you will be able to offset that with some of the advancements you've made in scheduling? Thank you.

And, well, you've got plenty -- a number of questions. We will do one by one. Number one is about refranchising. We've reached already agreements to refranchise more than 20 of our Company's restaurants in Brazil. Obviously, we are in the process of formalizing the agreements to contracts. We have some work to follow. It may take a few weeks to finish on the purchase and pass the rest to the franchisees.

The reality is that we would not [love] to provide a specific number of negotiations and conditions overall, because we have some other negotiations going on so far. But the reality, Bob, is we are on target for our $50 million expectation out of the refranchising by the end of 2017. We are also starting to negotiate conditions in other markets like Argentina and Chile, where we believe that we have opportunities.

And finally on this particular point, we're not talking about only loss-making restaurants, but we'd rather focus and concentrate on markets where it makes more sense to pass some of the restaurants that we have into the hands of our franchisee. To give a couple of examples, we're talking about typically tier two and three cities in Brazil where we have like two restaurants and then we have a franchisee there that has three different restaurants.

Well, obviously if you look at the market in total, it makes a lot of sense to consolidate our operations and that is the type of transactions that we are pursuing, okay. That is on the side of refranchising.

On the closing question, the reality is, well, closing, as we've said so far, are part of the normal way of doing business in a Company our size. We have over 2,100 restaurants, so close some restaurants is part of what we have to do for a number of reasons because I mean some lease contracts are new or because some market trading or market generative change or because a factor in some cases the restaurants are not performing the way we expect them to perform and we do not see changes to reverse that situation. So in those cases, we decided to close the restaurant. But we're not entering any material acceleration process in closing versus the previous years.

FX equation for Brazil next year, well, we have hedged our position for this year and obviously we're moving ahead with some hedge opportunities in Brazil and some other markets at least for the first part of next year. And we -- (spoken in Portuguese).

As you know, Bob, the (inaudible) and the real specifically has been very strong and specifically in Q3 was very strong. At this point moment, we're looking at opportunities for hedging. We've started hedging some portions of our food & paper exposure for 2016. We've hedged at this point 30% of our exposure for Q1 at approximately BRL4 per dollar. But again, we're still looking at the market and the forwards and we will continue to hedge as we deem appropriate.

No, our objective is not to speculate on hedge, but again to give some predictability on our cost to the market so they can operate and they can price accordingly.

And the other question was regarding the schedule of (inaudible) in Brazil. Well, we finished right on time according to the schedule that we had at the end of October with implementation in 100% of the Company operated restaurants. We have 60 restaurants that had more history with the system already been used. Those are the restaurants that we started the implementation in the market and in those restaurants we are getting exactly the benefits that we projected when we decided to rollout this initiative.

So we are confident and we know that we are going to get the full benefit out of these new tools that we have in the restaurants full-year 2016.

Martha Shelton, Itau BBA.

Just regarding some of this decentralization of operations and the restructuring, it sounds like some of the Company's infrastructure, if you could just elaborate on that a bit more? What should we expect to see going forward? Are you going to have management based out of Argentina, are you going to have more of the management in the regions, in the regional offices? I just like a bit more color on that front please. Thanks.

Look, the decision that we have made in terms of our structure and G&A reduction is in line with our efforts to continue the decentralization process of the decision-making process that we have in the Company. So while we repeat the -- so the strategical frame at the center of country level, the reality is what we were doing is we're pushing down to the divisions and from the divisions to the markets of the countries all the decision-making processes. That obviously is giving us space to streamline our structure and obviously moving down levels of management, as I said before, to divisions and countries.

We did it according to the process. It's not something that we did one time. And we will continue next year to focus and looking for additional ways to increase our efficiency in the organization at the G&A level and obviously with the focus to have a linear kind of a organization, okay.

We do not focus the parts of the rationalization process in any particular geography. I will say that it was a consequence of the continuity of this process of decentralization that we've started last year.

Jeronimo De Guzman, Morgan Stanley.

I had a couple of question also, maybe starting in Brazil. I wanted to see if you could tell us what the average ticket growth was and then kind of more looking ahead how you are thinking about profitability for next year kind of given the challenging top line and FX pressures, but some offsets from the scheduling system savings? I just wanted to see if you still think you can protect profitability next year or how you are thinking about it?

And then the separate question besides Brazil was on capital allocation. Wanted to ask I mean with CapEx more skewed towards reimaging and systems rather than development, just wanted to get more sense on what kind of results you expect from this and how do you think about the kind of prioritizing the benefits from these investments rather than kind of the benefits from a more accelerated cash flow generation?

Sure. Well, let's go piece by piece. First, on the average check thing, the question in Brazil -- well, average check grew, obviously not at the pace of inflation. It grew at over 3%. And that we believe is a consequence of people facing a challenging environment in terms of consumption, so they normally would look for lower priced alternatives in our menu. So that obviously leads to an increase in our check that is below inflation.

In terms of the margins outlook for 2016, (inaudible) we do not expect any major change in the overall situation of the economy. But having said that, we know that we have in place several initiatives to sustain the margins level that we have today. We do not foresee any further deterioration in margins for 2016. We may -- of course we will get some impact out of the FX, but we're still in the process of working on our plan and we don't know what the market consensus will be at the end of the year for 2016.

Surely, as you've said, the new schedule system, Kronos, will help us big time because we're going to get the full benefit since day one for the entire Company-operated restaurant base.

And finally, on the capital allocation piece, well, this will be a continuation. We will focus on being better, notwithstanding being bigger, about being -- we will focus the most part of our resources to reinvent and to improve the overall profile of our restaurant base, okay.

Yes, just to complement the capital allocation question, obviously we're going to focus on complying with our three-year plan agreement with McDonald's. We committed to opening 150 restaurants over the three-year period that ends in 2016 and reinvesting $180 million also for the same three-year period.

Thanks.

Roy Yackulic, Bank of America.

Can you tell me the dollar composition -- or the debt composition in terms of currencies and what would be the year-over-year change in debt? I think if we look on the balance sheet, it went down about $187 million. And what would it have been in constant currencies?

Well, Roy, the composition of our debt as of September 30, right now, 2015, we have a total debt of approximately $676 million, of which $171 is the BRL-denominated bond that comes due July of next year, $470 million is the dollar 2023 bond, and we have a couple of other smaller lines, other obligations about $23 million. We have a short-term debt of about $35 million with Bank of America.

10% of our 2023 bond is swapped to BRL. Our approach is to have a 50/50 split between dollars and reais. Right now we're about 60/40 not because we've reduced the debt, but because of the devaluation of the real. As I mentioned in our opening remarks, we're working to refinance the BRL bond, which is again as to today's dollars is about $171 million or BRL675 million. We are looking for an option in either denominated in real or swapped to reais.

So if I just look at the impact on the BRL bond in the FX and when you report in US dollars, I see -- you say you hedged 10%. And if I exclude that, it looks like it went -- that that changes in value about $105 million year over year because of the depreciation of BRL. So there was about $70 million year over year that was actual debt reduction. Is that correct?

I don't have these numbers in front of me right now, Roy. Probably we can do this offline. Either Dan or Dan and I can talk to you and review these numbers in more detail if that's okay.

Okay, thank you.

Ben Hough, BCP Securities.

Just wanted to see if you could share any color on the various avenues you are considering for refinancing the BRL. Would this new instrument perhaps be a secured instrument? I was wondering if you could share any color on that.

Yes, Ben, again as I mentioned in opening remarks, no, we're looking at an option that will be BRL-exposed or BRL-denominated. I can't -- we're advanced in the process and are going to finalize the structure within the next couple of months. I can't provide many details because this is still being finalized and negotiating. We expect -- again, we expect it to be either BRL-denominated or BRL swapped. And again, we don't expect it to be substantially higher cost on after-tax basis. I mean, that's a lot -- the only thing that I can share at this point.

Okay. And you mentioned you are underway on addressing this. Do you think we will have news of this in the coming few months or what's the timing in your mind?

Yes, in the next couple of months we should have news on this for sure.

Okay. And an unrelated question, can you help us think about your exposure to the Argentine official exchange rate versus any potential weakening post the election, which has been anticipated by some market participants, when you think about Q3 results for --

Yes.

Yes, thanks.

Yes. As we mentioned before, we have a natural hedge in Argentina. The EBITDA that generates from of our operations is mainly -- almost totally consumed by this corporate call centers that we have here in Argentina and our shared service center.

Again, when we look at the actual business in Argentina, only 10% to 12% of the food and paper is dollar denominated. So most of our suppliers in Argentina are local. So again, this is not a linear relationship. But again, we don't think that the devaluation that is sure to come will substantially impact us. It will obviously impact our EBITDA that we generate in the country, but it will also reduce our dollar and our peso denominated corporate cost.

And so far we had access to the official FX for the 10% food and paper costs that are dollar linked.

Yes.

Robert Schweich, Burnham.

I noticed in the release that Woods had purchased shares during August. I wonder if you would discuss any significance to this and has he purchased additional shares subsequent to August?

No, actually I could not comment on that. It's on the release. So we wouldn't have anything to add to that.

Just what's in the release that's all you can say?

Yes -- yes actually.

Okay. The other question, the financial officer made mention of the agreement with McDonald's, the commitments. My understanding is that because of the economic circumstances in Latin America from a practical standpoint there is an understanding that some of the investment in stores and other capital expenditures may not hit the original plans or the commitments. I wonder if you would comment further on that.

Yes, Bob, we commit on investments with McDonald's on a three-year term. So we are right in the middle of the 2014-2016 period. And we have not made any change on this plan, so our commitment to this cycle is exactly what it were now, as Carlos mentioned a couple of minutes ago.

In 2016 -- early 2016, we will have to start talking about the 2017-2019 budget cycle and of course the overall economic outlook of the region will be considered for that.

(Operator Instructions) [Ed Santavichi, Nomura].

Just two questions; if I can just follow-up on the debt reduction. It looks like from last quarter the $79 million or so reduction in gross debt, there is a $12 million gain in derivatives and I'm assuming the rest of the change was just due to FX. But was there any active repayments during the quarter?

Ed, there were no active repayments during the quarter.

Okay. And the second question, what do you think the run rate annual rent expense will be following the completion of the asset sale program?

No, there won't be a change in that because the reality is that -- well, it's a redevelopment. So what we do is we will keep the property on that same site where we have the restaurant located. So it won't be an increase in value.

It's not a sale leaseback.

Yes. It's not a sale leaseback. So we do not foresee any -- get additional rent because of the redevelopment process.

Andrew De Luca, Credit Suisse.

I was wondering if you could first of all just discuss what you are seeing in terms of traffic levels in Brazil and specifically if you can break it out into what you are seeing in Rio, Sao Paulo and other markets, if you are seeing any sort of discrepancy internally?

And then secondly, I was wondering if you could just briefly touch upon the margin you are seeing at NOLAD and SLAD. You saw some very strong quarter-over-quarter and year-over-year improvements and I wanted to see how sustainable you think that is going forward.

And lastly, I was wondering if you could just confirm. I think you mentioned that you expect net leverage to remain between 2 times and 2.5 times by the end of full-year 2016, so I was wondering if you could just confirm that. Thank you.

I mean the level of activity in Brazil or traffic in Brazil, I rather -- I believe it's more -- probably more will give you some more color if you're talking about what difference are between [restaurant employment] more than on a geographic point of view. Even though we do have some markets that are performing better than normal, we tend to do better in the interior. Sao Paula is an example. But those are -- I would say, you would get less color or less information on that.

What I can say, though, is that we did better -- we are still doing better -- in the (technical difficulty) restaurants where we mostly depend on ourselves and we will provide the full McDonald's experience, rather than in shopping malls or to some extent where -- depending on how much traffic go into those malls and food courts. That is I believe a better way of providing what is going on so far in the markets.

Among other things, that is why in this particular time we're focusing or redirecting our investment towards free standing units because those have the capacity to, number one, depend on ourselves; number two, grow over time as the market conditions recover.

Number two, margins on the other division, well, we -- I believe we got some question similar to yours, Andrew, in the Q2 release. The reality is that the results that we're gaining that we are seeing today are not necessarily a consequence of what we have done in the previous three months, but rather as a consequence of a long-term process that we have been going through, looking for productivity at all different lines of investments.

If you see, we have leveraged our labor line. We have leveraged out what we call food control levels, [advertisers] line, also amount of services, cash collection, IT help desk, all kind -- security, all kind. And all those efforts are in line with our three-year target of improving or recouping the 200 basis points at the restaurant level.

So, yes, we expect to continue and to sustain this margin gains indeed through the business.

The second one?

And, Andrew, to your question on the net debt-to-EBITDA ratio, yes, our target is to have that -- the ratio between 2 times and 2.5 times by end of 2016. Again, we expect to do that by one of proceeds from the monetization of our real estate assets and the refranchising will be used to reduce debt and obviously by improving our operating cash flows.

Great. Thank you very much.

You're welcome.

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sergio Alonso for any closing remarks.

Well, thank you. Thank you very much for all your questions and your attention today. We certainly look forward to speaking with you again for next quarter. And in the meantime, our team remains available to meet you and answer any questions that you may have. Signing off, thank you and enjoy the rest of your day.

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