Arcos Dorados Holdings Inc (ARCO) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Arcos Dorados' Second Quarter 2017 Earnings Call.

A slide presentation will accompany today's webcast, which will also be available on the Investor section of the company's website, www.arcosdorados.com/ir.

(Operator Instructions) Today's conference call is being recorded.

At this time, I'd like to turn the conference call over to Daniel Schleiniger, Vice President of Corporate Communications and Investor Relations.

Sir, please go ahead.

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 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 circumstance.

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 unaudited 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.

Please turn to Slide 2. Our strategic progress on bringing more customers to our restaurants drove positive restaurant volume across our Belgian markets in the second quarter of 2017.

This, along with strong average check growth resulted in improved top line performance as well as consolidated margin expansion in the period.

Excluding Venezuela, comparable sales increased 13.6%, while constant currency revenues grew 13% in the quarter.

Top line performance in the quarter reflects broad-based strength in our business across all divisions, despite the continued economic uncertainty in the region.

And in fact, NOLAD experienced the highest level of comparable sales growth since our IPO in 2011, while Brazil's comparable sales during the quarter were the strongest since the second quarter of 2013.

We are still in the early stages of our investment and expansion plan for 2017 to 2019.

In the 2 years prior to 2017, we delivered on the key components of our turnaround plan by capturing efficiencies in our restaurant operations, meaningfully reducing our G&A expenses as well as our levers.

Our growth strategy over the coming years will be to increase our cash generation by focusing on improving our top line performance.

In the second quarter, our sales growth drove the 38.7% increase in unsupported EBITDA and a 58.2% increase on a constant on currency basis.

We also achieved a 120 basis point improvement in our consolidated EBITDA margin.

Please turn to Slide 3. We're moving forward with plans to modernize our restaurant base, adding digital capabilities and enhancing the use of technology.

We're also expanding our regional footprint.

Efforts focused on operational excellence, which we collectively call, cultura de servicio or service culture, will also drive continued improvement in customer satisfaction.

Nine months ago, we opened our first Experience of the Future, or as we call it, EOTF, restaurant pilot in Argentina, which features self-order kiosks, digital menu boards and dual point service.

Using the learnings from this successful pilot, we expanded to other locations in Argentina and only 2 weeks ago, opened our first free-standing EOTF restaurant in Brazil.

Our plan is to open or re-image additional restaurants with this format over the next several years, reaching approximately 70% of our restaurants in Brazil and Argentina by 2019.

In the second quarter, our marketing and promotional activities more than offset the impact of continued challenging consumption dynamics in key markets.

While we're seeing improving consumption trends in our major markets, the rate of improvement remains gradual, and the path to recovery will likely be uneven.

Looking ahead to the second half of the year, we will face tougher comparisons from the year-ago period.

I believe our sound foundation, marketing and purposeful investment plans will fuel growth as we prioritize those sections that matter most to our customers.

We're making headway on the long-term strategic vision we communicated early this year.

With our streamlined operations and optimized debt structure, our strategy is to drive top line performance in order to generate total EBITDA growth, as we extend our leadership in the region over the coming years.

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

Thank you, Sergio.

Please turn to Slide 4. As Sergio mentioned, the increases in the outcomes in most of our markets, along with higher average check, drove strong second quarter top line growth.

Our value platforms are successfully driving more guests to our restaurants by leveraging McDonald's core assets.

During the second quarter, we also saw good performance in our Dessert and Family businesses in several of our markets.

Reported revenues increased 16.2%, with constant currency revenue growth of 18.3%.

Systemwide comparable sales reached 20.1%, thanks to average check growth along with positive traffic in most markets.

Including Venezuela, comparable sales kept pace with blended inflation, and we maintained the trend of positive total volume growth.

Importantly, each of our 4 divisions reported comparable sales growth well above blended inflation, when excluding Venezuela.

Please turn to Slide 5 for a more detailed look at our divisional results.

In Brazil, reported revenues grew 14.7% supported by the 8% year-over-year appreciation of the Brazilian real.

Excluding this currency tailwind, constant currency revenues grew 5.2%.

As in recent quarters, the result was impacted by the refranchising of certain company-operated restaurants.

As company operated sales are replaced by the rental income received from our top franchisees.

Constant currency total systemwide sales in Brazil grew 10.5% versus the prior year quarter.

Comparable sales rose 8.3% supported by increases in both average check and restaurant traffic during the quarter.

While consumption trends are showing signs of improvement in Brazil, the consumer environment remains challenging with even continued high unemployment and economic uncertainty.

Key marketing activities in the quarter included: the continuation of the Clássicos do Dia or Daily Classics value platform, which supported volume growth.

Also in the quarter, we included Smurfs and Transformers in the Happy Meal and launched the McFlurry and McShake Sonho de Valsa, which contributed to growth in the Dessert category.

Moving to Slide 6. NOLAD's revenues increased 9% year-over-year, as constant currency growth of 12.2% more than offset negative currency translation.

Comparable sales grew 11.1% during the quarter, driven by average check growth and increased traffic in the division.

NOLAD's marketing initiatives in the quarter included: the McTrío 3x3 and Combo of the Day value platforms in Mexico and Panama, respectively.

The Dessert category also performed well with the launch of the McFlurry Hershey’s Cookies and Crème Bites.

In Mexico, we also had the positive calendar effect with the shift of the Easter holiday to the second quarter of this year.

Please turn to Slide 7. SLAD's reported revenues grew 21.6% in the quarter as constant currency growth of 28.6% more than offset negative currency translation impact, resulting from the 11% year-over-year average depreciation of the Argentine peso.

Systemwide comparable sales increased 29%, well above the blended inflation rate, driven by a combination of average check growth and the solid increase in traffic.

Successful marketing activities included: the Combo del Día value platform and the Antojos campaign, based on core menu items.

Also in the quarter, we introduced Smurfs and Transformers in the Happy Meal and the McFlurry Toblerone in the Dessert category.

Please turn to Slide 8. Excluding Venezuela, the Caribbean divisions of reported revenues rose 7.5%, which was in line with constant currency revenue growth.

As divisions currencies were stable year-over-year.

Our Colombian operation remained the driver of the divisional performance, while Puerto Rico delivered a solid result, given the continued difficult environment.

Marketing initiatives in the quarter included: the continuation of the Crispy Onion BBQ in the Signature Line; and the launch of the McFlurry Pirulin in the Dessert category.

Also in the quarter, we launched the MyCombo campaign in Puerto Rico and include Smurfs and Super Mario in the Happy Meal.

As you can see on Slide 9, for the 12-month period ended June 30, we opened 42 new restaurants, resulting in a total of 2,150 restaurants.

We also added 166 Dessert Centers, bringing the total to 2,748.

McCafés totaled 316 at the end of the quarter.

We are not only introducing physical changes to our restaurants, but also cultural changes across the organization.

And everyone is embracing this new way of working together and serving our clients.

A part of the cultura de servicio, we have redesigned the training program for employees to focus on customizing experiences to enhance client satisfaction.

We are encouraging everyone to think of ways to create the special moments for our clients by being themselves.

Customers and employees are enjoying a more fun, more inspiring environment at our restaurants.

I am confident these initiatives will provide a first-rate customer experience and attract more guests to our restaurant, more often.

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

Thanks, Marcelo.

Please turn to Slide 10.

Our strong results continued this quarter.

Healthy revenue gains demonstrate the effectiveness of our strategy to increase guest traffic in our restaurants.

Strong top line performance combined with the operating leverage we built into our business generated a better operating result versus last year.

Consolidated G&A declined by 10 basis points as a percentage of revenues in the quarter.

As reported, adjusted EBITDA increased 38.7% compared with the prior year quarter.

The result also reflects strong adjusted EBITDA growth in absolute terms across all 4 divisions, in line with our stated strategy.

Please turn to Slide 11.

Consolidated adjusted EBITDA expanded 38.7% in the quarter, with margin expansion of 120 basis points.

Consolidated margin expansion was helped by efficiencies in Food and Paper and occupancy and other operating expenses, the percentage of revenues.

Please keep in mind that our third quarter results will include the impact of the scheduled increase of the royalty rate that we pay to McDonald's Corporation, which began last week.

Brazil's adjusted EBITDA grew 50.5% in the quarter, including significant margin expansion of 300 basis points to 12.9%.

Lower Food and Paper costs drove the margin expansion, as we benefited from reduced beef cost as well as the consolidation of a number of our suppliers earlier in the year.

Productivity gains offset label-related cost increases.

For NOLAD, the adjusted EBITDA grew 7% in the quarter, despite the small margin contraction of 20 basis points.

The margin decline reflects higher Food and Paper costs as well as an increasing occupancy and other operating expenses due to a significant increase in gas prices in Mexico that impacted both utilities and logistic costs.

In SLAD, the adjusted EBITDA grew 14.7%, driven by top line growth, which was partially offset by a 50 basis point margin contraction.

Lower Food and Paper cost, as a percentage of revenues in the quarter, were offset by higher payroll expenses, as salary adjustments are based on the prior period inflation rate.

The Caribbean division, excluding Venezuela, saw the adjusted EBITDA grow 8.5% in the second quarter, and the margin expanded 10 basis points, driven by efficiencies in G&A and payroll expenses as a percentage of revenues.

On Slide 12, nonoperating results reflected a $15.6 million foreign currency exchange loss versus a gain of $15.5 million last year.

The depreciation of the Brazilian real and appreciation of the Mexican peso from the prior quarter end caused a loss related to the company balances.

Net interest expense rose $2.3 million, year-over-year, to $23 million in the quarter, mainly explained by certain transactions costs linked to the recently completed debt transaction.

Net loss for the second quarter was $4.1 million against net income of $43.4 million in the same period last year.

This reflect lower operating results, which in the second quarter of last year, included $50.1 million from the company's asset monetization initiatives.

In addition, negative variance in foreign exchange results and higher net interest expenses impacted the results.

These were partly offset by a positive variance in income tax expenses.

On Slide 13, you can see our debt metrics.

As of June 30, 2017, the net debt to adjusted EBITDA ratio was 1.4x.

As I indicated on our last call, we have continued our effort to balance the FX exposure of our long-term debt.

As of the end of June, the FX exposure of our long-term debt stood at approximately 55% U.S. dollar and 45% Brazilian reals.

Through June 30, 2017, we have received cumulative cash proceeds of approximately $140 million from the redevelopment of certain of our properties, primarily in Mexico.

Based on existing deals, we expect these proceeds to total at least $150 million by the end of 2017.

Please note that the proceeds from this initiative are excluded from the adjusted EBITDA calculation.

In summary, we are continuing to execute on our strategy to boost restaurant volumes, grow the top line, expand cash generation and optimize our balance sheet.

I will now hand the call back to Sergio.

Thank you, Mariano.

Our strong second quarter results show our potential for top line growth and cash generation.

Successful marketing initiatives, a focus on operating excellence and an improved customer environment continue to attract more customers to our restaurants.

On start of our 2017 to 2019 plan, we're building on the achievements of our long-term strategic outlook, while expanding our footprint on modernizing our base to keep guests coming back to our restaurants.

Looking forward, we believe that our marketing and investment plans for the next several years will deliver growth in our business and value to our shareholders.

Last quarter, I mentioned that we were about to issue a comprehensive report, outlining our social impact initiatives as part of our commitment to our community, the environment and all our stakeholders.

As operators of the largest quick service restaurant chain in Latin America, we are also the largest generator of first employment in the region.

Among our recent initiatives to benefit the region's youth, our partnerships with the JP Morgan foundation in Brazil and the Ford Foundation in Mexico.

Through these partnerships, we provide young people with training and growth opportunities that will serve them for the rest of their professional lives.

We continue moving forward with our sustainability commitment.

Our paper packaging across the company as well as the coffee and fish served in Brazil, is certified as sustainable and by the year 2020, our commitment is to have sustainable sourcing for all of our packaging, coffee and fish.

We continue to be very active in the communities in which we operate.

As we have done for many years, over the next few months, many of our markets will again hold their annual [Grandia] or McNífica.

Arcos Dorados donate 100% of the proceeds from Big Mac sales on this day to charge other costs in each markets.

This year, these will include organizations dedicated to youth employment as well as our continued support of Ronald McDonald franchises.

You can find the full results of our 2016 environmental and social impact report on our corporate website.

To summarize, we are committed to delivering value to all stakeholders and look to the future, confident, that we are on a sustainable growth trajectory, as Latin America's consumption environment recovers.

So thank you for your attention.

And I will now like to open the call to questions.

(Operator Instructions) Our first question today comes from Robert Ford from Bank of America Merrill Lynch.

I had a question on a couple of numbers on the press release.

Mariano, you show a net tax asset of $6 million for the quarter.

How big was the gross amount?

What's the origin of that tax asset?

And what's the time horizon to monetize it?

And then, of the $12.8 million you received from asset monetization efforts in the quarter, how much and on which lines did it flow through in income statement, if at all?

Mariano, why don't you go first start and then you may clarify the question.

Can you clarify the first part of the question?

Bob, please?

The tax asset was shown net, right.

So we're looking at maybe a deferred tax benefit against national tax charge, and I was just wondering what the gross amount was?

What the origin was?

What country?

What caused it to come into existence?

Sometimes after devaluation, for example, in Venezuela, you have these large net tax assets, you may have something that I'm unfamiliar with in Brazil.

But I was just curious as to the origin of that tax asset.

And then, thereto, there may be immediately amortized or monetized?

In other situations, you may have a longer-term outlook in terms of how you can actually convert that into cash.

And I was just curious as to what the outlook is to monetize that asset.

Okay.

Perfect.

Actually we will follow up on that part of the asset -- on the tax asset later if you want.

We're not providing this time the gross amount, so we will follow-up with you later.

Regarding the redevelopment, actually, as we mentioned in the release, when we started initiatives we received around -- I think we started the initiative, we received around $140 million in cash.

And which has so far most of it been applied, as we mentioned before, to debt reduction.

Approximately $80 million that we bought back from the 23 notes.

For the remaining of the year we are expecting to receive proceeds of at least $10 million more and that will add, of course, to our total cash balance that as we mentioned as well in the script, is around $240 million at this time.

So -- and also, we also mentioned, these proceeds are coming from existing deals.

We are not going to proceed with more deals.

Regarding your question about where we are accounting these, the redevelopment proceeds are not having any impact on our EBITDA.

They are below the line and in other operating results.

So with no impact on the EBITDA.

And so there was $12.8 million in other income in the quarter, is that correct?

Exactly.

Our next question comes from Eduardo Ordóñez from BankInvest.

Could you provide any more color on the trends you're seeing for traffic and tickets in Brazil?

Yes, sure.

Eduardo.

As we mentioned during the first part of the call, traffic in Brazil was positive year-over-year, for the second consecutive quarter.

We are relieved that --we're very pleased with the results that we're getting from that part of the business.

As you remember, that is essential part of our strategy, which is growing volumes, particularly in a economic environment that is now so dynamic that it's a proper way to sustain with the value creation for the businesses, if you will.

The -- actually, the business trend towards the end of last quarter, last year, we have seen this momentum to continue in the first half of the year and we actually are maintaining that same dynamic as we enter Q3.

Marcelo, why don't you provide us...

I think that as we mentioned before, we are pretty focused in those variables of the business that we have most control of.

And in the case of Brazil, we are providing customers with a very competitive value proposition, which includes, mainly core McDonald's menu items as Big Mac (inaudible) and others.

We are, at the same time, running promotions that have a strong track record.

And we are focusing on the family experience in the restaurants.

As we mentioned in the script, we are working in our service culture in other markets of the company and obviously it's not the exception, and we are trying to enhance the experience of the customers in our restaurants.

And I think that the combination of those -- all those factors gave us the advantage when compared with our retailers in the country.

I think that we are doing pretty well in the field.

As Sergio mentioned, we are very pleased with the results we have saw in the second quarter, and which are in line with what we saw in the previous one.

Our next question comes from Bruce Geller from DGHM.

What is the current all-in interest rate that you're paying?

And how come you're running with such a high cash balance, as opposed to paying down some of that highest cost debt?

It seems like you could bring down your interest expense dramatically, considering what appears to be a high cost?

Mariano?

Yes.

Actually, we currently have 2 bonds outstanding, the 23 notes, which we are paying 6.625% coupon on a semi-annual basis and the 27 notes from which we're paying 5.875% coupon.

The latest is for $265 million.

The first one is for $345 million.

So for this quarter, what we are recording in our -- as our interest expense, is $23 million.

We are running a large cash balance, that's true.

And we already reduced our debt.

But keep in mind that our net debt to EBITDA ratio at this time is 1.4x.

So we feel pretty comfortable with that debt level.

And on top of that, keep in mind that we just announced on -- at the beginning of the year, a very ambitious CapEx program with McDonald's for more than $500 million.

And our intention is to find that CapEx with our own generated cash flows.

So given that we are in the second quarter of a 12-quarter CapEx program, we are -- we think that the balance the cash balances that we have for the moment are the right ones.

And we will follow up, and we will continue to evaluate different alternatives in the future.

But for now, we think that we still need to -- the cash balances that we have are the correct ones.

So, Mariano if I may.

Keep in mind that even in the very short term, most of the bulk of the investments we're going to make both in operating's and reimages are really going to be deployed toward the 2017 end of the year.

Because in the second half, because we're traditionally back ended, if you will.

I'm sorry, I'm still confused on the interest expense, because it was $23 million in the quarter, which implies about $90 million a year in interest expense, which implies a dramatically higher interest rate than what you just quoted on your debt.

So can you please explain this disconnect?

Okay.

Actually, this quarter, remember that we did the liability management transaction, where we recorded expenses for repaying that debt.

So the interest expense that we currently have in U.S. dollars is below the $40 million on a year-to-year basis.

That is our -- as I already explained in the script, we convert part of our U.S. dollar debt to Brazil reals.

We currently have 45% of our total debt in Brazilian reals, where we -- with that transaction, we increased the cost of our debt by more or less $20 million.

So all in all, our interest expense on an annual basis is below $60 million.

And you can do the math, just by calculating the U.S. dollar expense of the 2 bonds, that's the only debt that we have and convert that with half of it to Brazilian reals.

Each quarter, we have the expense on the liability management transaction for the repayment of the club deal as well.

Why wouldn't you try to eliminate a big portion of the real denominated debt since that is dramatically higher cost than the U.S. coupon debt?

Yes.

Actually, please keep in mind that the majority of the cash flows that we generate are in Brazilian real.

So even though the cost in U.S. dollars is lower, the exposure that the company have from a risk management perspective is not the correct one.

That's why, and we already explained several times, our target is to have at least 50% of our debt expressed in Brazilian reals.

The cost is a bit higher but from a risk management perspective, it's the right thing to do.

Our next question comes from Paola Mello from Citigroup.

I was wondering if you guys had an opportunity to evaluate the impact that the Labor Reform in Brazil could have in your financial statements.

Marcelo, why don't you take this?

Yes, as you mentioned, late recently labor reforms was passed by the Congress and has become law in Brazil.

But once the law has been approved, regulations will need to be developed before the law can be implemented.

This process may take some time, as both the Federal and the local big government will be involved.

I think that at this moment, it is premature to comment on how any of these reforms might impact our business in Brazil, particularly because we have many agreements in place with local authorities and unions, which we will have to revisit, once the new regulations are finalized.

And maybe, we will need some negotiations in order to apply the new rules.

So, maybe we will have to wait a couple of months in order to understand the details of this regulations and then calculate how these could impact our business in Brazil.

(Operator Instructions) Our next question comes from Robert Schweich of RMB Capital.

I wonder if you would discuss your assessment of the economic outlook.

You mentioned a soft consumer environment in the second quarter.

But I'd like to hear your assessment as you look out in the second half and into next year in Brazil?

And also, a discussion of the overall effect of the political turmoil that's been going on in Brazil.

Do you feel that it's more or less finished at this point, and is the -- has there been a lessening impact on your business.

There probably hasn't been that much impact, but could you discuss that whole picture?

Sure, Bob.

No.

For this year, the real GDP growth expectations as you know, continue to be weak.

It will probably be flat than the latest of the releases that we had active still for this year, 2017.

So, I mean, in the very, very short time towards the end of the year, we do not expect the situation of the market dynamic will change dramatically.

But on top of all that, we know that we have a strong business.

As our results in the first half of the year are showing.

And we are very confident that we will continue this trend towards the end of the year, and we're actually developing our strategy that is based on bringing in more customer-care restaurant, because that is the right thing to do in this kind of environment, and we're getting good results, as I stated before.

If you look at our opinion in terms of what's going to happen in next year, well, next year will be an elections year for Brazil.

And we know that, that creates a particular different dynamic in the market.

But we're already working on our plans for 2018.

We do not expect any major disruption in this term, at this point.

Finally, in the political side, well we're not experts in politics' dynamics.

All we can say is that number one, again, in spite of the bumpy or uneven consumer environment, we were able to get good results; and two, we're starting to see some positive signals in some particular regions within the country.

So we remain cautiously optimistic as we said before that the business will continue to perform well.

As I told before, the trends that we got in the first 2 quarters of this year, we're seeing some continuity towards July and we got so far in August.

But at some time we've had to keep in mind that we will face data comes.

Those time comes.

Does not -- nothing to do with the real dynamic of the business that continues to be very positive, we believe.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session.

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

Sure, thank you.

Last week, we celebrated the 10-year anniversary of the formation of Arcos Dorados.

We're proud of the achievements of the last 10 years, and I'm very confident that we are on the right strategic path to capture the full, long-term potential of the McDonald's brand in Latin America.

So thank you again for your questions and for your attention today.

We certainly look forward to speaking with you again in the next quarter.

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

So thank you very much and enjoy the rest of the day.

Ladies and gentlemen, that will conclude today's presentation.

We do thank you for joining.

You may now disconnect your lines.