Arcos Dorados Holdings Inc (ARCO) 2016 Q4 法說會逐字稿

Good morning and welcome to the Arcos Dorados fourth-quarter and full-year 2016 earnings conference call.

A slide presentation will accompany 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, Vice President of Corporate Communications and Investor Relations.

Sir, please go ahead.

Thank you and 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 Mariano Tannenbaum, 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 and audited financial statements filed today 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.

Before I discuss our fourth-quarter and full-year 2016 performance, I would like to take this opportunity to congratulate Mariano Tannenbaum on his new position as Chief Financial Officer of Arcos Dorados.

Mariano originally joined Arcos Dorados more than eight years ago, and during his tenure, he has been an instrumental member of our finance team.

He has deep financial expertise from an extensive international career, and I am confident he will continue to excel in his new role.

I would also like to thank his predecessor, Jose Carlos Alcantara, for his service to the Company and wish him the best in his future endeavors.

Moving now to our 2016 results, we had a solid end of the year.

Comparable sales gained 16.4% in the fourth quarter of 2016, while constant-currency revenues grew 14.2%.

And, so far, top-line growth during the first few months of 2017 is surpassing our initial expectations.

In terms of adjusted EBITDA, if we exclude the nonrecurring PIS/COFINS recovery from last year's results, the operating efficiencies that we have built into our business so far led to a 240-basis-point margin expansion during the quarter.

The result was largely supported by more promising volume trends driven by our highly competitive menu and continued G&A discipline.

Last year was a challenging year in terms of the Latin America consumer environment.

The Brazil division faced a historically deep economic recession, which severely impacted consumption and led to uneven quarterly results.

The flat division results were negatively impacted by the significant depreciation of the Argentine peso at the end of 2015, despite solid results in some of the divisions of the markets.

On the other hand, the NOLAD and Caribbean regions were able to overcome tough market conditions to once again deliver better results versus the prior year.

On a full-year basis, we achieved comparable sales growth of 14.4% and constant-currency revenue growth of 13.9%.

The consolidated EBITDA margin expanded 160 basis points, excluding the nonrecurring PIS/COFINS recovery in Brazil, and benefited from the same factors that drove fourth-quarter performance.

With a more efficient cost structure and the benefit of a weaker Argentine peso, we were able to reduce G&A spend by 18.3% year over year.

The improvement in our result is a testament to the strategic plan we began to implement two years ago to capture efficiencies in our restaurant operations, streamline our cost structure, and reduce our debt levels.

I would like to highlight a few key achievements in this respect.

When we first introduced our previous strategic plan back in March 2015, we expected to achieve a 10% decrease in G&A on an absolute US dollar basis.

We have already exceeded this target, having reduced G&A by 18.7% over the past 2 years, following a corporate reorganization in 2015.

We also reduced our financial leverage by repaying a portion of our long-term debt as well as generating more EBITDA.

As a reminder, this was the main purpose of initiating our successful asset monetization program.

And to update you on this program so far, we have collected approximately $105 million from the redevelopment of a small number of our properties.

And we have deals in place that will take the total to $150 million by the end of 2017.

We have decided not to pursue further deals, given that our debt reduction goal has already been met.

Our re-franchising program generated around $30 million through the end of 2016, which we used largely to reinvest in our business.

We will continue to review re-franchising opportunities as part of our efforts to maximize our operating model.

In terms of margin expansion, we have made solid headway, but we believe that the most difficult aspect of our three-year plan will be to achieve these targets.

The reality is that the operating environment over the past two years was more challenging than anyone originally anticipated.

Top-line trends have been insufficient to generate the operating leverage that we expected to capture.

In summary, we have successfully delivered on the targets that were most under our control while effectively navigating a historically deep recession in some of our main markets.

The efficiencies that we have built into our business and our investment plan for the next three-year cycle have and will position Arcos Dorados to capture the potential of the McDonald's brand in Latin America for many years to come.

Economics condition remain tough in the region, but we expect consumption trends in our major markets to improve.

Our strategic focus on increasing restaurant volumes should lead to stronger comparable sales performance.

With our progress and anticipated trends in mind, we also expect to continue increasing our operating cash flow generation.

We have meaningfully reduced our G&A base, and will focus on capturing incremental savings on an ongoing basis.

Moving forward, we expect to achieve additional G&A leverage largely through top-line growth.

Based on our strategic outlook for the next three years, we have come to an agreement with McDonald's Corporation on our restaurant opening and reinvestment plan for the 2017-to-2019 period.

The restaurant opening and reinvestment commitments align with our strategy to expand our footprint as growth prospects show signs of improvement.

In line with the global McDonald's system, we will also aggressively reinvest in our existing restaurant base as we strive to expand our leading share in the main markets in which we operate.

Under the agreement, we committed to open 180 new restaurants and to reinvest $292 million in existing restaurants.

In addition, McDonald's Corporation agreed to provide growth support for the same period.

We project that the impact of this support could result in an effective royalty rate of 5.3% in 2017, 5.7% in 2018, and 5.9% in 2019.

As the competitive environment intensifies in our key markets, we are accelerating the modernization of our restaurant base to attract more customers more often.

In November of last year, we launched our first experience of the future restaurant pilot in Argentina.

The initial customer reaction has been positive, and we are evaluating the elements of this updated and progressive restaurant experience in advance of a more extensive rollout.

Our investment plans include opening additional restaurants and operating existing restaurants with this concept in some of our main markets over the coming years.

Thanks to the disciplined execution of our strategy over the last few years, we are leaner, more efficient, and have a stronger balance sheet.

The next page of our plan takes us from turnaround mindset to an outlook of growth.

While we remain cautious in the short term, we are confident that Arcos Dorados is on the right path to generate significant value for our shareholders.

I will now hand the call over to Marcelo for a review of the key drivers of fourth-quarter top-line results.

Thank you, Sergio.

Please turn to slide 3. Within a challenging environment, we have been delivering solid sales performance.

Our redesigned affordability platform is performing well in our major markets, generating strong momentum.

Likewise, we had several successful product launches during the year, including premium sandwiches from the McDonald's signature line and the McShake Ovomaltine, which support the volume trends and margin expansion.

As competitive and promotional activity intensifies in the region, we are also making the necessary investments to the loyalty among existing customers while attracting new guests.

Turning to our fourth-quarter results, reported revenues increased 5.5%, supported by the appreciation of the Brazilian real.

Currency translation continued to pressure results due to the depreciation of other key currencies, including the Argentine peso and the Venezuelan bolivar.

However, in keeping with the third-quarter results, the impact of currency translation was more than offset by constant-currency growth of 14.2%.

Comparable sales increased 16.4% year over year and was mainly driven by average check growth.

Excluding Venezuela, reported revenues rose 5.1% year over year.

Please turn to slide 4 for more detail on our divisional results.

In Brazil, reported revenues grew 13.4%, driven by the 14% year-over-year appreciation of the Brazilian real.

Excluding this FX tailwind, constant-currency revenues declined 2.7%, primarily due to the re-franchising of certain Company-operated restaurants.

As a reminder, the shift to a greater percentage of franchise restaurants negatively impacts our consolidated revenues, as our Company-operated sales are replaced by the rental income that we receive from our sub-franchisees.

Brazil's comparable sales were flat, as growth in average check was offset by a modest decline in traffic within an environment of soft consumer spending.

Also keep in mind that we achieved mid-single-digit comparable sales growth in the year-ago quarter, making for a higher basis for comparison.

The marketing activities in the quarter included the launch of the new affordability platform classicos do dia, or daily classics, as the crispy onion barbecue premium partner as part of the signature line.

Moving to slide 5, NOLAD's revenues were stable year over year as constant currency growth of 8.3% was offset by the impact of currency translation, primarily related to the 19% year-over-year depreciation of the Mexican peso.

The combination of average check growth and an increasing profit in the division resulted in a 6.6% increase in comparable sales.

We were pleased to see higher guest counts relative to the first nine months of the year.

In Mexico, our redesigned affordability platform is driving improved results.

NOLAD's marketing initiatives in the quarter included the launch of the MegaMac and Grand Big Mac campaign and the continuation of the new affordability platform in Mexico.

Please turn to slide 6. The economic recession and weak consumption in Argentina continue to impact SLAD's results.

In this context, our strategy is to protect traffic and market share and deliver more value to our customers until the country's economy begins to recover.

As-reported revenues decreased 3.7% in the quarter, mainly due to the 52% depreciation of the Argentine peso versus last year.

The division's constant-currency revenues rose by 28% as a result of average check growth and an increase in traffic.

Successful marketing activities included the new affordability platform in Argentina and the launch of the crispy onion barbecue premium burger as part of the signature line.

Please turn to slide 7. Excluding Venezuela, the Caribbean division's as-reported revenues grew 3%.

Constant-currency revenue growth was supported by a 2.5% increase in comparable sales.

A strong performance in our Colombian operations supported the divisional result.

In Colombia, marketing initiatives in the quarter included the launch of the mushroom dijon burger as part of the signature line and the McFlurry Cocosette in the dessert category, among others.

As you can see on slide 8, for the 2016 full year, we opened 33 new restaurants, resulting in a total of 2,156 restaurants.

Most openings took place in Brazil, which will remain the focus of additions to our footprint over the next three-year period.

We also added 140 dessert centers, bringing the total to 2,745.

McCafes total 316 as of December 31, 2016.

Across the region, we are prioritizing initiatives that have the most direct impact on our customers.

Our redesigned affordability platform provides a wide selection of core products at accessible prices.

And customers are seeing for themselves our high ingredient quality and food preparation standards, with more than 1.8 million guests participating in our open doors program just last year.

When we bring guests into our kitchens and pantries, we show them the high-quality beef, chicken, bread, produce, and condiments that go into their sandwiches.

They also learn about our disciplined food safety standards and see the attention to detail that goes into the preparation of every meal we sell.

We plan to further elevate the customer experience by accelerating digital capabilities and enhancing the use of technology in our restaurants.

As Sergio mentioned, we have already opened the first experience of the future restaurant pilot in Argentina, which includes self-order kiosks, digital menu boards, dual point service, and other features.

Mariano will now take you through a discussion of our adjusted EBITDA and key balance sheet metrics.

Thanks, Marcelo.

First, let me just say that I'm very pleased to have the opportunity to lead the finance team in my new role as CFO of Arcos Dorados.

And I look forward to meeting many of you in the near future.

Please turn to slide 9. As noted, we had a strong finish to an uneven year in the final quarter of 2016 and made excellent progress on key elements of our three-year plan in terms of boosting restaurant productivity, overhauling our cost structure, and reducing debt levels.

Importantly, improved sales in the quarter are creating leverage in our business and driving higher margins.

Our G&A expenses also continued to improve and were 200 basis points lower as a percentage of revenue on an as-reported basis.

Last year we had a nonrecurring $32.6 million recovery of PIS/COFINS in Brazil.

Excluding this impact, adjusted EBITDA grew 35.4% in the quarter.

As reported, adjusted EBITDA fell 10.4% or 5.4% on a constant-currency basis.

Please turn to slide 10.

The adjusted EBITDA margin rose 240 basis points, excluding one-offs, supported by lower food and paper, payroll, and G&A expenses.

On an as-reported basis, adjusted EBITDA margin contracted by 190 basis points to 10.7%, with margin contraction in Brazil and SLAD only partially offset by margin growth in the Caribbean and NOLAD.

In Brazil, the adjusted EBITDA margin contracted 530 basis points to 16.7% versus the prior-year quarter, which benefited from the PIS/COFINS recovery.

This more than offset other efficiencies in food and paper, payroll, and G&A expenses as a percentage of revenues.

Excluding this nonrecurring benefit from the 2015 results, the adjusted EBITDA margin grew 440 basis points.

For NOLAD, the adjusted EBITDA margin increased 40 basis points to 10.8%, mainly supported by efficiencies in G&A expenses.

In SLAD, Argentina's difficult consumer environment negatively impacted results.

The adjusted EBITDA margin contracted 150 basis points to 9.7% due to higher food and paper costs and occupancy and other operating expenses.

These factors offset efficiencies in payroll costs as a percentage of revenues.

The Caribbean division, excluding Venezuela, saw the adjusted EBITDA margin expand 300 basis points to 5.8%, driven by efficiencies in food and paper costs and occupancy from franchised restaurants.

For the full-year 2016, the adjusted EBITDA margin expanded 60 basis points as positive contributions from NOLAD and the Caribbean division more than offset contractions in Brazil and SLAD.

Excluding one-offs, the adjusted EBITDA margin was 160 basis points higher.

On slide 11, nonoperating results for the quarter reflected a $3.5 million foreign currency exchange gain versus a loss of $6.1 million previously.

This was supported by the appreciation of the Brazilian real and the impact of the depreciation of the Mexican peso on the dollar-denominated proceeds from the asset sales in Mexico.

Lower interest expenses on the 2023 US dollar notes was more than offset by higher interest expenses on the BRL-denominated debt.

However, the Company reversed our provision, which caused net interest expense to decrease $3.1 million year over year to $13.6 million in the quarter.

Net income for the fourth quarter was $21.2 million versus $5.6 million a year earlier.

This reflects a positive variation in foreign exchange results along with lower net interest and income tax expenses.

On slide 12, you can see our debt metrics.

As of December 31, 2016, our net debt to adjusted EBITDA ratio was a healthy 1.7 times.

Importantly, we are seeking to optimize the terms and composition of our long-term debt without materially increasing our total debt levels, subject to market conditions.

We will communicate further details as appropriate.

As Sergio mentioned, we reached an agreement with McDonald's Corporation for a new opening and investment plan for the period from 2017 to 2019.

In order to achieve that plan, we expect total capital expenditures for the 3 years to be approximately $500 million.

Specifically for 2017, we expect to open between 45 and 50 new restaurants and will continue to evaluate our existing restaurant base for optimization opportunities.

We expect our total capital expenditure to be between $150 million and $180 million this year.

From a finance perspective, I expect to continue building on the progress that we have made to reduce our fixed costs, hedge our operational exposure to currencies, generate more operating cash flow, maintain a healthy balance sheet, and rebalance the FX exposure on our long-term debt.

I will now hand the call back to Sergio.

Thank you, Mariano.

In the space of the last two years, we have made solid progress on our strategic plan.

We have significantly reduced our debt levels, streamlined our cost structure, and captured efficiencies in our restaurant operations.

At the same time, we have achieved positive top-line performance and expanded our margins.

While our economies continue to stabilize, we are focused on the aspects of our business that we can control.

This includes implementing technology upgrades to improve operating efficiency and adjusting our main strategies to drive traffic.

We remain the clear market share leader in most of our major markets.

We have reinforced our foundations so that, like the McDonald's system globally, we are transitioning from a turnaround to a growth strategy.

Our updated three-year outlook builds on the achievements of the past two years while expanding our footprint throughout the region and mobilizing our restaurant base.

As the year progresses, we expect to tell you more about some of the actions we are taking to create a better restaurant experience and make a real difference to our customers.

This year marks Arcos Dorados's 10th anniversary.

Over the last 10 years, we have retained McDonald's brand leadership in Latin America's QSR industry.

We have built and leveraged an unmatched footprint and we have established a reputation for operational excellence within the McDonald's system.

We have also taken a leadership role in the industry when it comes to being socially and environmentally responsible.

Through a number of programs and partnerships, Arcos Dorados has and will continue to be part of the solution of the serious issue of youth unemployment in Latin America.

We remain committed to our employees, our customers, and our shareholders.

And over the next several years, we will continue to work hard to profitably grow our business for the benefit of all.

So thank you for your attention.

And I would now like to open the call for questions.

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

Sergio, can you touch on operating trends year to date?

Brazil traffic in the quarter looked a little bit weak, and there have been some aggressive calls to boycott the brand in Mexico.

And I was wondering how that is filtering into the performance so far this year, please.

Let me start with some broader comment on Brazil last year and then we can extend the comment to what is going on in the first couple months of 2017.

The reality is in Brazil, we are very well positioned, obviously, to sustain and retain and expand our leadership in the market.

That's very clear for us.

And we are happy with the results that we get in 2016, of course, in spite of everything that happened in the market.

Just a couple of points to remind that, well, the GDP of Brazil last year was very, very weak and below actual our initial expectations.

We were led to adapt our marketing strategies to be more aggressive in terms of pricing, in terms of promotional activities to retain traffic.

And we believe that we were, again, considering the environment conditions, we were successful, particularly towards the second half of the year.

And, in special, Q4, where we got good results, really good results, again considering the overall condition.

What we see, talking about 2017, well, GDP growth expectations have been already revised downwards from 1% positive that we had as market consensus towards the end of last year to roughly flat for this year.

So that makes us think that results could still be uneven.

But we are seeing early signs of improving consumer activity, at least in our business.

And the reality is that the long-term fundamentals for the market, we know they will remain strong.

There's no doubt about it.

So we -- as I said, just wrapping up on Brazil, Q4 was a good quarter for us in Brazil, considering the overall market conditions.

But even in spite of that, we got a very good result.

And then a word on Mexico before I pass to Marcelo or Mariano, if they have any comment.

No, we don't feel any impact about the boycott worries, the situation between Mexico and the actual conditions in the US, no.

Nothing for the business.

Now, Marcelo, you want to expand anything on Brazil?

Yes.

In terms of traffic, as a Sergio mentioned, it was mostly negative year over year in fourth quarter, but we saw better trends toward the end of the quarter.

And that trend that they have continued into the first couple of months of 2017.

And in fact, we have a strong marketing calendar for this year.

I think that we are providing customers with a very compelling value proposition.

We are running promotions that we already did in the past and with a very strong track record.

And especially, we are focusing on family and the family experience, and we have a pretty strong Happy Meal properties for this year, too.

So I think that we are leveraging on all the strength of our brand and of our set of properties.

And that's good news in terms of the traffic that we are expecting for Brazil in 2017.

That's very helpful.

Thank you very much.

Richard Butcher, Argonne Capital.

Thanks for taking my call.

I looked at the -- your capital expenditures for next year, the $500 million in aggregate, that looks like it's about what you guys could produce in cash flow, if all things go well.

And we are just wondering, if you just brought leverage to a good spot, are you willing to revise down that CapEx, say if things were to get rocky over the next few years?

How firm is this CapEx commitment to McDonald's?

I'll give some initial thoughts on that and will pass to Mariano to go in details through the numbers.

Look, we have -- as you may know, we have to agree with McDonald's about openings and CapEx overall every three-year cycle, three-years time cycle.

Towards the end of last year, we agreed with the conditions that I mentioned for the 2017-2019 period, which basically calls for 180 new restaurants and $292 million, which, combined, led to around $5 million of total investment.

The reality is that is what we believe: under the current market consensus for 2017 and what we see for 2018, 2019, it is doable.

It is realistic, and it will be funded with our own cash generation.

We do not plan to increase debt or take any debt to fund these investments.

What could happen in 2018, 2019 are still to be seen.

Obviously, we'll drive our divisions, considering the market consensus.

Should the economics in the most important markets for us in our region improve, obviously we are going to do better.

If the recovery in the economies, particularly in Brazil and Argentina, take more time, well, obviously we will revisit and we will work with McDonald's, as we did in the past.

This is not new.

And I am sure that we will come out with a new action plan that is according at the level of the economies' reality.

Right?

Mariano, what am I losing?

Maybe just to add to Sergio's point, the $500 million is an estimate.

What we agreed with McDonald's is to open 180 new restaurants and to reinvest in the business $292 million.

With respect to the cash flow that we will generate, we expect our free cash flow to be more than sufficient to fund our capital expenditure plans for the three years.

We do not expect to materially increase our total debt during the period, and operational cash flows should be enough to fund the CapEx commitment that we have for the period.

Excellent.

Well, thank you.

That answers my question.

You all are doing an excellent job.

Appreciate your time.

(Operator Instructions) Robert Schweich, RMB Capital.

I have a couple of questions on the effective royalty rate.

What was it for 2016?

Good morning, Bob.

For 2016 all year was 5%.

As you are aware, the reality is that the master franchise agreement that we have with McDonald's calls for a step-up in royalties starting August 2017 from 5% to 6%.

And then -- so, having said that, so the effective royalty rate for this year -- or last year, sorry, 2016 -- was 5%.

Now, how do you adjust down that 6% when you go out to 2018?

When you say effective, is that reflecting the contribution of McDonald's towards your capital spending?

Exactly, yes.

You are absolutely right.

It is a complex formula, but to make the point clear, that is the best way to look at the McDonald's contribution.

And if I understand correctly, the $500 million of capital expenditures includes almost $300 million in existing restaurants.

Can you give us a dollar figure of how much McDonald's is going to contribute to the modernization of your existing restaurants during that three-year period?

Bob, it is right.

The amount is around $292 million that we are going to invest, obviously, in the existing restaurant base, by the way, as part of our strategy for volume.

No, we cannot share the actual dollar amount that is including the growth support from McDonald's.

(Operator Instructions) Ladies and gentlemen, at this time I'm showing no additional questions.

We will end the question-and-answer session.

I'd like to turn the conference call back over to Mr. Sergio Alonso for any closing remarks.

Sure.

But before you go, I want to leave you with a few parting thoughts.

As you heard today, we have a strategic plan in place that is focused on generating restaurant traffic growth across our region.

We will make investments that will update our existing restaurant base and that will deliver a more modern and progressive restaurant experience to each one of our customers.

Our pace of growth will also pick up compared with the last three years, adding to our top-line growth moving forward.

We have a strong balance sheet and have built significant efficiencies into our business.

So we can now shift from a turnaround mindset to one of growth.

And as I said before, I believe Arcos Dorados is uniquely positioned to capture the long-term opportunity of Latin America's quick-service restaurant segment as we move into our second decade as the region premier's QSR brand.

So thank you for your questions and your attention today.

We certainly look forward to speaking with you next quarter.

And in the interim, our team remains available to meet with you and answer any questions that you may have.

Thank you again and enjoy the rest of the day.

Ladies and gentlemen, that does conclude today's conference call.

We do thank you for attending.

You may now disconnect your lines.