Arcos Dorados Holdings Inc (ARCO) 2015 Q4 法說會逐字稿

Good morning, and welcome to the Arcos Dorados Fourth Quarter 2015 Earnings Conference 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 call is being recorded.

At this time, I would like to turn the call over to Daniel Schleiniger, Senior Director of Corporate Communications and 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; Marcelo Rabach, 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 statement 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 acceptable 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 and audited financial statements filed with the SEC on Form 6-K today.

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. A year ago, we announced a three-year strategic plan to strengthen our financial structure to better position our Company to capture the long-term potential for the McDonald's brand in Latin America.

The key elements of this plan are improving our operating efficiency, reducing our cost structure, monetizing the value of certain assets, and reducing net debt levels. These steps reflect our commitment to managing the business for the long term. And I'm confident this strategic plan will position Arcos Dorados for sustained profitable growth. I am pleased with the progress we have made so far. We're on track to meet our three-year target, and I will now provide you with an update of our main initiatives.

We ended the year with positive momentum, achieving double-digit consolidated comparable sales growth and margin expansion across all divisions in the fourth quarter. The improvement in our consolidated EBITDA margin is, in part, a testament to the early success of our efforts to drive operational efficiencies under our three-year strategic plan.

Our management actions are driving improved operating performance in our local markets, despite the challenging economic environment, softer consumer spending, and continued currency depreciation in our largest markets.

On a full-year basis, comparable sales grew in the high single digits. And we also delivered double-digit organic revenue growth, as well as margin expansion in each of our divisions last year.

We begin 2016 with a lower cost base, having implemented a reorganization plan at the end of last year that will allow us to exceed the minimum target of a 10% reduction of G&A well ahead of schedule. These savings will be captured in 2016, thanks to three main corporate, divisional and country-level cost structures. And moving forward, we will continue working to realize additional efficiencies in other costs.

Another initiative that is improving a key component of our cost structure, and that's our consolidated EBITDA margin, was the rollout of our scheduling and forecasting system in Brazil. This was completed in the final quarter of 2015, and already we are seeing improvements in operational efficiency and restaurant level margins following its implementation.

Turning to our asset monetization strategy, we have now signed agreements that represent more than half of our total target. As you know, a key element of this plan consists of an initiative to monetize the value of certain operating and other non-core real estate assets. So far, we have advanced on this initiative in Mexico, where we have signed agreements to redevelop a small number of our high-value properties.

In addition to our properties in Mexico, we have hired Jones Lang LaSalle to advise us on the sale of certain non-core assets in Brazil. We continue to be on track to reach our redevelopment targets by the end of 2017.

The plan also contemplates refranchising. Our efforts are also advancing as planned, and I'm confident we are on the right path to achieve our goal. We have now reached agreements to refranchise more than 25 of our Company-operated restaurants.

The enthusiasm that exists in franchisees to invest in additional restaurants demonstrates their confidence in the long-term opportunity for the McDonald's brand in the region. Keep in mind that the primary objective of the monetization strategy is to reduce net debt levels.

With respect to our long-term debt structure, Jose Carlos will update you shortly on the progress we're making to address the July maturity of our 2016 Brazilian real denominated bond. But let me just say that we are in the documentation stage of our loan structure with our banking partners.

The ultimate goal of our three-year strategic plan is to strengthen our leadership position in Latin America. We're focused on improving our top-line performance, and remain committed to growing comparable sales approximately in line with inflation. We will also stimulate traffic in each of our markets over the medium to long term. As always, we will continue to reinforce the customer experience, combining our brand favorites with new and compelling menu offerings from the McDonald's global portfolio.

We are focused on delivering great-tasting, high-quality food, convenient and value in a family-friendly environment to our guests.

I will now hand the call over to Marcelo for a review of our fourth quarter top-line results in more detail.

Thank you, Sergio. Let's turn to slide 3. We saw a pickup in [seasonally average check] activity at the end of the year. Organic revenue growth reached 13.6% in the fourth quarter, supported by a 12% increase in comparable sales due to average check growth outpacing inflation.

Reported revenues were once again impacted by currency depreciation in key countries, especially Brazil and Argentina. Traffic levels on a consolidated basis were lower year over year, due to a difficult economic environment in the Brazil division, and a couple of key markets in the Caribbean.

However, NOLAD and SLAD achieved flat to higher traffic in the period, as consumers responded positively to our promotional strategies.

Please turn to slide 4 for a closer look at our divisional results. In Brazil, organic revenue growth was backed by a mid-single-digit increase in comparable sales and the contribution of new restaurant openings. Average check growth kept pace with inflation in the quarter, and more than offset a mid-single-digit decline in traffic. We continue to face significant headwinds in terms of the broader retail sales environment in the country. For the first time in more than a decade, Brazilian retail sales declined in 2015 in the face of economic uncertainty, high inflation and interest rates.

Our strategy in this challenging environment is to implement appealing promotional activities that support restaurant traffic levels, and provide more value to customers. In keeping with this approach, fourth quarter marketing activities included the Big Cheddar campaign, which is an extension of one of the most popular menu items in Brazil. In addition, our marketing activities included the Angry Birds campaign, the Quarter Pounder in the affordability platform, and new flavors in the McFlurry.

Turning to slide 5, much like the third quarter, NOLAD's fourth quarter organic revenue and system-wide comparable sales growth was driven by an increase in average check and flat traffic versus the year-ago period. Last year we gained traffic in Costa Rica, and saw consistently strong performance in that market. Overall, our management team is executing on point. Marketing initiatives included the 30-year anniversary campaign for the Big Mac in Mexico. Our family business remains a key driver of results, backed by successful properties such as Angry Birds, Hotel Transylvania 2, Mario Kart and Barbie in the Happy Meal.

Please turn to slide 6. SLAD's double-digit organic revenue and system-wide comparable sales growth in the quarter reflected higher average check and a low-single-digit increase in traffic. In Argentina we were pleased with our efforts to retain traffic and improve average check in the final months of the year, given uncertainty surrounding the change in government and subsequent currency devaluation.

Our fourth quarter marketing activities included the Angry Birds campaign, and the Big Mac in the affordability platform in Argentina. We also featured the KitKat flavor in the McFlurry. And the Happy Meal performed well.

Turning to the Caribbean division results on slide 7, organic revenue growth, excluding Venezuela, reflected a slight increase in comparable sales in the quarter, supported by the ongoing strong performance in Colombia, where we continued offering the Almuerzo Colombiano, or Colombian Lunch Menu. The marketing activities in the period included the Combo Con To in Puerto Rico, strong properties in the Happy Meals, and the introduction of new flavors in the McFlurry.

Please turn to slide 8. We opened 36 new restaurants over the course of 2015, resulting in a total of 2,141 restaurants. We also added 165 dessert centers, and 2 McCafes.

During the year, half of our restaurant openings took place in Brazil, where we see the highest long-term return potential. Approximately 70% of these restaurants are free-standing units. And this footprint remains an important competitive advantage for Arcos Dorados.

We are also making strategic investments in our existing restaurant base. In addition to technology and systems upgrades, we completed 53 restaurant re-imagings in 2015, as we work to continue providing a modern and progressive restaurant experience to our guests.

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

Thank you, Marcelo. In 2015, we took some difficult, yet necessary, measures to strengthen our financial situation and position the business for sustainable growth and value creation in the coming years.

We begin 2016 with a streamlined cost structure, having realized operating efficiencies through a meaningful reduction in our G&A expenses. As Sergio mentioned, in the fourth quarter of last year we implemented a reorganization and optimization plan aimed at reducing our G&A by 10% on an absolute US-dollar basis.

Our fourth quarter results include an associated charge of $15.8 million in our G&A, which we exclude from our adjusted EBITDA calculation. Over the course of 2016, we expect to capture additional leverage from the lower G&A base with reduced corporate expenses, as well as to benefit from the impact of the devaluation of the Argentine peso on our reported G&A figures.

Turning to our adjusted EBITDA performance on slide 9, fourth quarter adjusted EBITDA increased 3.2% year over year, primarily due to a $32.6 million net PIS/COFINS recovery in the Brazil division, relating to prior years. This special item, combined with the Company's organic growth, more than offset currency translation impacts in Brazil, Venezuela, Argentina, and other markets.

On an organic basis, adjusted EBITDA grew 21.6%, backed by positive organic growth across all our operating divisions. Excluding Venezuela, adjusted EBITDA increased 6.7% and 15.3% in organic terms in the quarter.

The consolidated adjusted EBITDA margin expanded by more than 230 basis points to 12.6%, and benefitted from the net PIS/COFINS recovery in Brazil, which more than offset higher G&A, payroll costs, and occupancy and other operating expenses as a percentage of sales.

G&A increased by 18.1%, or 49.6% on a constant-currency basis versus last year. Excluding the $15.8 million reorganization charge, G&A would have increased by 21.3% on a constant-currency basis. This initiative will allow us to achieve annualized cost savings of $20 million during 2016.

On slide 10 you can see that we achieved adjusted EBITDA margin expansion across all operating divisions during the quarter. In Brazil, the net PIS/CONFINS recovery offset increases in key cost line items. This resulted in more than 600 basis points of margin expansion to 23.4% in the quarter.

Food and paper costs were negatively impacted by a shift in product mix and cost increases above price adjustments, partially due to a shortfall in our currency hedges. While we began the year fully hedged from our projected potato and toy imports, these hedges were consumed faster than expected, as we sold more fries and Happy Meals than initially projected.

The increase in payroll expenses was mostly explained by the recovery of payroll taxes in the prior-year quarter.

The NOLAD division continued to expand its adjusted EBITDA margin in the quarter, reflecting continued operational improvements and better productivity levels. The division's margin expanded by more than 130 basis points to 11.1%, reflecting efficiencies in payroll, in occupancy, and other operating expenses.

SLAD's adjusted EBITDA margin increased by nearly 100 basis points to 11.7%, driven by improvements in food and paper, which more than offset increases in other line items.

Excluding Venezuela, the Caribbean division's adjusted EBITDA margin grew by more than 270 points to 3.3%.

Turning to slide 11, fourth quarter non-operating results reflected a $6.1 million foreign exchange currency loss, compared to an $11 million loss last year. The foreign exchange loss was mainly due to the continued depreciation of the Brazilian real, which impacted the intercompany balances, and was partially offset by the decline in the US dollar equivalent principal of the BRL bond. Net interest expense declined by $1.2 million year over year, to $16.7 million in the quarter.

Fourth quarter net income was $5.6 million, down from $10 million in the same period of 2014. The decline reflects a higher loss from derivative instruments and income tax expenses, partially offset by lower net interest expenses and foreign currency exchange results.

Slide 12 contains our debt metrics. As of December 31, 2015, our net debt to adjusted EBITDA ratio was 2.4 times, down from 2.6 times at the end of the third quarter. Our strategic focus on cash flow improvement, the temporary reduction in capital expenditures, and proceeds from our asset monetization strategy brought the ratio back within our target range of 2 to 2.5 times.

While we expect some seasonal fluctuation in the quarter and ratio over the course of 2016, we also expect to end the year within our targeted range.

With respect to the July 2016 maturity of our BRL-denominated bond, we are finalizing the documentation of a loan structure with a number of our banking partners. The loan will be denominated in Brazilian reais, with a principal of approximately $170 million over a four-year terms. We will provide you with more details of this loan agreement once it is finalized. We expect the transaction to close within the next two to three weeks.

We have signed agreements to redevelop some of our properties and refranchise some of our restaurant locations, representing more than half of our asset monetization target. So far, we have received proceeds of over $25 million from these agreements, and are working through regulatory approval for some of the redevelopment agreements in Mexico, and the transfer of operations for the refranchised restaurants.

We are progressing within the timeframe that we expected for both initiatives. And we are confident that we will achieve the total targeted amount by the end of 2017.

During the fourth quarter, we also amended the cross-currency interest rate swap agreement that we have in place to hedge about 10% of the 2023 US dollar bond. As a result of this amendment, we monetized the mark-to-market value of the swap, collecting $19.8 million, and recording a loss of $2.6 million in derivative instrument losses. With a portion of those proceeds, we then repurchased $11.7 million, or BRL47 million, of the outstanding BRL675 million principal of our BRL bond.

Before outlining our plans for 2016, let me first summarize our key full-year financial results. Excluding Venezuela, system-wide comparable sales grew 6.1%, and on an organic basis revenues were 8.9% higher year over year.

Adjusted EBITDA increased 4.9% on an organic basis, and the adjusted EBITDA margin contracted slightly to 7.9% from 8% in 2014.

Moving to slide 13, for the full year 2016 we expect capital expenditures to be between $90 million and $120 million. As part of our restaurant opening plan agreed to with McDonald's for the current three-year period 2014 to 2016, we have committed to open a cumulative minimum of 150 new restaurants. We will meet this commitment by the end of 2016. Approximately 65% of our new restaurant openings will be in Brazil this year.

In summary, our fourth quarter performance was positive, despite the macroeconomic challenges in Latin America. We made clear progress on the goals included in our three-year plan. Our asset monetization plan and debt refinancing strategy are focused on improving our balance sheet. While the achievement of operational efficiencies is positioning Arcos Dorados for profitable long-term growth.

I will now hand the call back to Sergio.

Thank you, Jose Carlos. And please turn to slide 14. We begin 2016 in a stronger financial position versus 12 months ago. We have made important progress toward delivering of the targets set in our three-year plan, and executing against this strategy remains our main focus.

We're fully committed to delivering sustainable profitability. And our marketing efforts our aimed at stimulating traffic, a key component of sales, and delivering value to our customers. This, combined with our recently streamlined cost structure, will enhance our financial results going forward.

Although we expect many of our markets to continue facing headwinds in 2016, we remain confident in the long-term potential of the McDonald's brand in Latin America. Through achieving operating efficiencies, monetizing certain assets and reducing our debt levels, we will overcome the short-term challenges we are facing, and position Arcos Dorados for continued growth and value creation in the years to come.

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

(Operator Instructions) Jeronimo De Guzman, Morgan Stanley.

Hi. Good morning. I had a question, first operationally. I wanted to see if you could give us an update on whether you have hedged any of the FX exposure in Brazil for your raw material purchases.

Okay good morning, Jeronimo. I'll pass the question to Jose Carlos.

Yes. Good morning, Jeronimo. Yes, we have. Similarly to 2015, we have hedged 100% of our exposure in Brazil, food and paper items, which are the potatoes and the toys.

And is there a-- do you have any details on the average rate you were able to hedge at for the year?

The average rate for the year is approximately 4.1.

Okay. Thanks. And then just on the guidance you gave on the CapEx, $90 million to $120 million, what we saw last year was kind of-- you gave the same guidance, and it was on the lower end. This year you'll finally have similar to lower number of openings. So is there anything that we should think of that would cause you to be on the higher end of that guidance? Because it seems like-- I mean I guess my expectation would be that you would continue to be on the lower end.

Yes, Jeronimo. (Inaudible), no. The most relevant target that is part of the CapEx guidance is the number of restaurants that we're going to open. So you well said, we expect to have at least 32 openings for this year. The reality is that the range is a bit wide, because we could either potentially increase our investment during the year if conditions and cash flow are appropriate. And also keep in mind that the target is set in US dollars. So we may have an impact in terms of total dollar from CapEx as a consequence of currency fluctuation.

Roy Yackulic, Bank of America

Yes, I'm sorry. Just had a question. I was confused about the number of new openings in 2016. From the press release you say there's a three-year plan that (inaudible) to open 150 in between 2014 and 2016. And I calculate that's 79 were opened. So that would leave like about 71 left to be opened in 2016 to meet the MFA requirements. And you just stated that you were going to open 32. Can you clarify that?

Sure. Good morning, Roy. As I said before, we have the commitment to open 150 restaurants between 2014 and 2016. That's our commitment with McDonald's. In 2014 we opened 82 restaurants. Last year that is in 2015, we opened 36 restaurants. So the number of openings for this year 2016, would be at least 32 restaurants.

So it's not net openings? It's just openings?

It's gross openings, yes.

Yes, okay. Thank you, thank you.

(Operator Instructions). Jeronimo De Guzman, Morgan Stanley

Hi. Good morning, again. Thanks for the follow-up. I wanted to see if you could give us a little bit more details on the asset monetization. I mean it's helpful and I think it's great that you're able to already achieve more than half of it. But wanted to see any details on kind of the further asset monetization, if it's going to be more of the same, or if there's a change in kind of where you have to go for the incremental proceeds.

Oh, Jeronimo, the reality is we were exactly within the same target, the $200 million. We have established a pipeline of properties that we believe are the best candidates. And keep in mind that the few number of properties, in particular in the Mexican market that are really high value real estate, and those properties are typically much more resilient to ups and downs in the market and even in currency fluctuations.

So with all that said, we are happy with the progress we have made so far and that we are on track with our [$2 million] target by the end of 2017.

So I guess no change in the nature of the kind of assets you're looking at versus what you've already been able to monetize?

No. Not at all, Jeronimo, no.

[Ed Santavichi], Nomura

Hi, guys. Just a quick follow-up. On the loan structure that you mentioned, is that BRL170 million, or that in dollar?

No. It's approximately. Oh, sorry (inaudible). It's approximately $170 million. If you take our BR-- yes, dollars. If you take our BRL bond, BRL675 million. We already reduced BRL47 million of that. So if you took exchange rate, I don't know where you want to take it, 3.70-3.80, that some to about $170 million.

Okay, perfect. I just wanted to clarify. Thanks.

(Operator Instructions). Andrew De Luca, Credit Suisse

Hi, guys. Thanks for taking my question. I'm not sure if you answered this already. But on the asset monetization, you mentioned that reached agreements from more than half of the $250 million target amount. And I think you said you also received $25 million in proceeds. So can you give us a timeline in terms of when we should expect the remaining, say at least $100 million, to come in?

Yes. Jose Carlos?

Yes. Andrew, yes. Our timeline right now takes us towards the second half of this year, 2016, so between Q3 and Q4. Again, a lot of these deals require approval or regulatory approval. But again, we expect to have the proceeds Q3 or Q4 of 2016.

Great. Okay, thank you.

(Operator Instructions). And showing no further questions, I would like to turn it back to management for any closing remarks.

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

And ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.