Arcos Dorados Holdings Inc (ARCO) 2017 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Arcos Dorados Third Quarter 2017 Earnings Call.

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

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

At this time, I'd like to turn the conference call over to Mr. 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 again 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 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.

This morning, we reported another strong quarterly result as the positive momentum we delivered in the first half of the year continued into the third quarter.

But before we take you through the results, I would like to say a few words about our operations in Mexico, Puerto Rico, and the U.S. Virgin Islands.

As you know, each of these markets was impacted by severe natural disasters during the month of September.

We do not expect a material impact on our financial performance given that we have sufficient insurance coverage for both the property loss and the interruption to our business that resulted from these disasters.

Fortunately, our business in Mexico was not materially impacted by the earthquakes.

The vast majority of our restaurants and those of our sub franchises was back up and running within a couple of days.

In the case of Puerto Rico and the U.S. Virgin Islands, the impact of hurricanes Irma and Maria was much more severe.

We are now working to assist our employees as they recover from the hurricanes.

From a business perspective, these markets represent around 1% of our consolidated EBITDA and we are working with our insurance providers to assess and cover the property damage in Puerto Rico, St.

Thomas and St.

Croix.

We currently have more than 70% of our restaurants back in operation and expect to have substantially all of our restaurants operating by the end of the year.

Employees and sub franchisees from other Arcos Dorados' markets have provided donations that both Arcos Dorados and McDonald's Corporation have matched in order to support our colleagues in Mexico, Puerto Rico, Saint Thomas and Saint Croix.

We appreciate these contributions, which show us once again why the McDonald's system is so strong worldwide.

Now please turn to Slide 2. Our strategic approach to top line growth drove higher restaurant volumes in our biggest markets.

Better volumes combined with average check growth supported stronger revenues and expanded consolidated adjusted EBITDA in the period.

Importantly, we also delivered positive net income in the quarter.

More specifically, growth in both traffic and average check resulted in a 10.4% increase in comparable sales and constant currency revenue growth of 9.7%, both excluding Venezuela.

This sales growth exceeded blended inflation for our business and reflect the broad-based strength in our fundamentals.

Our strong top line performance was the main reason we were able to generate our stronger operating result in the Brazil and SLAD divisions, as well as at the consolidated level.

As reported adjusted EBITDA rose 17.5% in the third quarter on the back of top line growth and leverage in Food and Paper costs and G&A.

During the period, we captured an additional 70 basis points of adjusted EBITDA margin versus the prior year.

Finally, the improved operating results and lower below the line expenses led to a net income of $23.4 million in the quarter.

Please turn to Slide 3. Our plan to expand our footprint and modernize our base to keep guests coming back to our restaurant remains on track.

Early results from the roll out of Experience of the Future are in line with our expectations and are within the range of results experienced on average in the McDonald's system globally.

By focusing on providing a better customer experience from service oriented employee training and technological upgrades, we are transforming our restaurants and delivering a more convenient, personalized and enjoyable experience to our guests.

Now looking ahead, we remain cautious with respect to our short term performance given that economic recoveries are rarely linear.

And we're facing a tough comparison to our strong fourth quarter 2016 operating results.

In the medium to long term, we will continue to focus on offering compelling value across our menu board while updating our restaurant base to deliver an unmatched guest experience.

Our operations are becoming more efficient every day and our capital structure is as strong as it has ever been.

I am confident that our strategy to drive top line and adjusted EBITDA growth by bringing more customers back more often will generate shareholder value and help us to continue capturing the potential of the McDonald's Brand in Latin America for many years to come.

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

Thank you, Sergio.

Please turn to Slide 4. We continued to generate positive business momentum by focusing on capturing traffic growth, with affordable menu offerings, old classics and the McDonald's signature line.

In the quarter, we recorded positive restaurant volume trends in most of our markets, which combines with average check growth to drive our strong top line results.

Reported revenues grew 8.6%, with constant currency revenue growth of 17.5%.

Systemwide comparable sales increased 20.3%, thanks to average check growth combined with positive traffic in every division, except the Caribbean.

Comparable sales exceeded blended inflation, supported by Brazil, NOLAD and SLAD.

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

In Brazil, reported revenues grew 6%, supported by the 2.7% year-over-year appreciation of the Brazilian real.

Excluding this currency tailwind, constant currency revenues rose 3.3%.

Consistent with recent quarters, the company's reported revenues were impacted by the refranchising of certain company-operated restaurants, as company-operated sales are replaced by the rental income received from our sub franchisees.

On a systemwide basis and in constant currency, total sales in Brazil grew 8%, while comparable sales gained 6.3% versus the prior year.

The comparable sales result, which was more than double the prevailing inflation rate, was supported by average check growth on another quarter of positive traffic.

Notably, we achieved this result in the context of an improving but still soft consumer environment.

Key marketing activities in the quarter included the introduction of core extensions such as the Duplo Quarterao, the Grand Cheddar McMelt, and the McFritas Cheddar Bacon.

We've also launched the McFlurry and McShake Prestigio in the dessert category, and included Despicable Me 3 and Emoji in the Happy Meal.

Turning to Slide 6. NOLAD's revenues rose 8% year-over-year, reflecting constant currency growth of 7% and there is more benefit from currency translation.

Comparable sales increased 5.9% during the quarter, driven by average check growth and increased traffic in all of the division's markets.

While our performance in Mexico was strong compared with our peers, the consumer environment remains challenging amid concerns about the pace of the economic recovery.

As Sergio already mentioned, the earthquakes in Mexico had a relatively minor impact on our people, property, operations and results in the quarter.

NOLAD's marketing initiatives in the period included the launch of the premium Guacamole and Barbecue Crispy Onion burgers in the Signature Line, and the continuation of the affordability platform McTrio 3x3 in Mexico.

The dessert category performed well with the launch of the McFlurry Hershey's Mini Kisses and the continuation of the McFlurry Hershey's Cookies and Creme Bites.

In addition, we included Despicable Me 3 in the Happy Meal.

Moving to Slide 7. SLAD's reported revenues increased 13.6% in the quarter, as constant currency growth of 24.5% more than offset negative currency translation impacts, resulting from the 16% year-over-year average depreciation of the Argentine peso.

Systemwide comparable sales grew 24.9%, well above the division's blended inflation rate, driven by a combination of average check growth and solid increase in traffic.

SLAD's successful marketing activities in the quarter included the launch of the Guacamole burger in the Signature Line and the McFlurry Abuela Goye in the dessert category.

We continued with our new affordability platform, Combo del Dia, while the Happy Meal performed well with Despicable Me 3.

Please to turn Slide 8. Excluding Venezuela, the Caribbean division's as reported revenues rose 2.5%, driven by constant currency growth of 1.6% and a positive currency translation impact.

Comparable sales remained flat, as average check growth was offset by a decline in traffic, primarily in Puerto Rico and the U.S. Virgin Islands.

As Sergio has described, the division's results were impacted by the effects of hurricanes Irma and Maria on our businesses in Puerto Rico and the U.S. Virgin Islands.

We are working to restore full operations in these markets as soon as possible and do not expect our medium to long term consolidated results to suffer materially as a result of [these weather events.

Results in the rest of the division were strong, particularly in Colombia and the French West Indies.

Marketing initiatives in the quarter included the launch of the affordability platform, McCombo del Dia, in Colombia and the continuation of the Barbecue Crispy Onion premium burger in the Signature Line.

In addition, we introduced the McFlurry Jet Cookies and Cream in the dessert category and included Despicable Me 3 and Emoji in the Happy Meal.

Please turn to Slide 9. For the 12-month period ended September 30, we opened 39 new restaurants, resulting in a total of 2,160 restaurants.

We also added 189 Dessert Centers, bringing the total to 2,791.

McCafes totaled 317 at the end of the quarter.

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

Thanks, Marcelo.

Please turn to Slide 10.

As you can see, our adjusted EBITDA grew by 17.5%, or $11 million versus the prior-year quarter.

Our strong comparable sales growth, along with operating leverage, drove both the operating performance as well as the positive net income result in the quarter.

Notably, our cash generation was also healthy with net cash provided by operating activities reaching $67 million for the 3 months ended September 30.

Consolidated G&A expenses fell 10 basis points as a percentage of revenues.

As reported adjusted EBITDA growth was supported by strong constant currency results, particularly Brazil and SLAD, partly offset by NOLAD and the Caribbean division.

Please turn to Slide 11.

Our adjusted EBITDA margin rose 70 basis points versus last year, mostly due to cost leverage in Brazil.

We achieved margin expansion primarily by capturing efficiencies in Food and Paper, which benefited largely from negotiations earlier in the year to consolidate suppliers, as well as from the declining beef prices in Brazil.

Brazil's adjusted EBITDA margin gained 200 basis points to 13%, driven by lower Food and Paper costs, occupancy and other operating expenses, and royalty fees as a percentage of revenues.

Royalty fees benefited from growth support which McDonald's Corporation began providing during the quarter.

This growth support is expected to be primarily directed toward the Brazil and SLAD divisions, where the majority of our investments are planned to occur over the next few years.

For NOLAD, adjusted EBITDA margin contracted 140 basis points to 9.7%, reflecting higher occupancy and other operating expenses, largely due to increases in utility costs, as well as royalty fees and payroll costs as a percentage of revenues.

This was partially offset by refranchising inflows.

As Marcelo mentioned, concern around the speed of Mexico's economic recovery is impacting the consumer backdrop in that market.

In SLAD, adjusted EBITDA margin rose 10 basis points to 10.4%, driven by efficiencies in Food and Paper costs, partially offset by higher payroll expenses and royalty fees.

The royalty fee increase was partly mitigated by the growth support received from McDonald's Corporation.

The Caribbean division, excluding Venezuela, saw its adjusted EBITDA margin contract 70 basis points to 5.4%, due to higher occupancy and other operating expenses, Food and Paper costs and royalty fees, which were partly offset by efficiencies in payroll and G&A expenses as a percentage of revenues.

As noted by both, Sergio and Marcelo, we do not expect our medium to long term consolidated results to be materially impacted by the hurricanes.

In the short term, we're working with our insurance providers to assess and fully cover the impact of both the property damage as well as the interruption of our business in Puerto Rico and the U.S. Virgin Islands.

On Slide 12, nonoperating results reflected a noncash $5.6 million foreign currency exchange gain versus a noncash loss of $3.3 million last year.

The net gain related to intercompany balances was mainly due to the appreciation of the Brazilian real from the previous quarter end compared to depreciation last year.

Net interest expense fell $3.2 million year-over-year to $15 million in the quarter, given the lower financing cost of our restructured long term debt.

We generated $23.4 million of net income compared to a net loss of $1.8 million in the same period last year.

This reflects higher year-over-year operating results, combined with the positive variance in noncash foreign exchange results, lower net interest expenses, and lower income tax expenses.

On Slide 13, you can see that our debt metrics remained strong at the end of the quarter.

As of September 30, 2017, our net debt to adjusted EBITDA ratio was 1.3x.

We continued balancing the FX exposure of our long term debt.

As of the end of September, the FX exposure of our long term debt stood at approximately 50% U.S. dollar and 50% Brazilian reals.

We are winding down our redevelopment initiative.

Through September 30, 2017, we have received cumulative cash proceeds of approximately $150 million, from the re-development of certain of our properties mainly in Mexico.

As a reminder, we used $80 million of these funds for debt reduction.

We expect the total redevelopment proceeds to reach approximately $170 million with the final amounts to be received by the end of 2017.

We are pleased with the progress we have made so far by focusing on sustainable top line growth drivers to support operating leverage, and more importantly, increased cash flow generation.

Looking ahead, we remain committed to fully funding our expansion and reinvestment plans with cash flows from operations, while maintaining a healthy balance sheet, FX exposure and debt metrics.

I will now hand the call back to Sergio.

Thank you, Mariano.

Please turn to the final slide.

Over the past several years, we have executed the key components of our turnaround plan by achieving efficiencies in our restaurant operations as well as meaningfully reducing our G&A expenses and long term debt levels.

These initiatives, combined with our successful marketing efforts and an improving consumer environment, are driving better top line and EBITDA performance.

As we have mentioned on previous calls, our growth strategy in the years to come will include expanding and modernizing our restaurant base by adding digital capabilities and enhancing the use of technology.

In addition to these [physical] changes to our restaurants, we're also driving cultural shifts across the organization.

For example, we are improving operational excellence and customer satisfaction as part of our Service Coolture program, which helps employees personalize guest experiences.

During the quarter, we also maintained a strong commitment to the communities that we serve.

Notably, in August, we held the McDia Feliz in Brazil, which raised a record amount of funds to support the Ronald McDonald Institute in the country.

We also made further progress in our efforts to support youth employment initiatives across the region by signing agreements with Ecuador's labor ministry.

Looking forward, our compelling menu, unmatched customer service and investment plan that is modernizing our restaurants uniquely position us to benefit from an expected improvement in consumer trends in the region.

We will continue to leverage the strong potential of the McDonald's brand in our markets to drive growth and generate shareholder value.

And finally, I want to thank all the employees, suppliers and franchisees who provided aid to the search and rescue operations in Mexico, Puerto Rico and the U.S. Virgin Islands.

We will continue to support these communities as they recover from the natural disasters.

So thank you for your attention today, and I will now like to open the call to questions.

(Operator Instructions) Our first question today comes from Robert Schweich from RMB Capital.

This was certainly an excellent report.

I would like you to elaborate, please, on your plans for restaurant expansion.

As I look at the figures in your report, you ended up with 2,160 restaurants, up 4 from the end of the year, with Brazil having an increase [of 8] and the other areas having a decline.

Could you elaborate on your plans for fourth quarter of this year and 2018 and 2019?

Yes, sure.

Bob, this is Sergio.

Well, if you recall, we gave -- reintroduced our 2-year (inaudible) with McDonald's, we mentioned a plan of 180 gross new restaurants, and we said at the time that the number of openings that we projected for this year, 2017, will be in the range of 45 to 50 units.

On top of openings, keep in mind that we also commenced a reinvestment of, I believe, $292 million for the period, I mean, 2017 to 2019, which adding [up both eventually it will go] around $500 million in total.

If you look at the store count evolution in the divisions so far this year, keep in mind that opening and closing some units is part of day-to-day running of a company our size.

And also keep in mind that most of the opening are typically back-ended.

So you should expect a relevant increase of number of openings in Q4 before the end of the year to meet with our original guidance in terms of restaurant openings.

Now what about -- you mentioned 180 over 3 years, if I understood correctly.

So what does that mean for 2018 and 2019 specific numbers?

Well, the remaining 130 openings for both 2018 and 2019 should be close to even, I would say, between 55 and 60 units for next year, and [there from] 65 and 70 units in 2019, Bob.

Are you satisfied with that rate of expansion?

Look, we have to be cautious in terms of what do we expect from the economies.

Looking forward, we believe we have a relevant investment plan.

Again, we plan to deploy over $500 million in this 3-year cycle.

We also mentioned that considering the environment from the economic situation in most of our markets, particularly in Brazil and Argentina, we would shift resources towards investing in the actual restaurant base rather than dedicating the big -- [the bigger piece] to restaurant openings.

Of course, this is a dynamic situation that we monitor day-to-day.

And should the overall conditions change, we may make some adjustments to our plans keeping in mind that, as we said several times, the opportunity to expand our footprint remains attractive.

But it's a matter of setting the right pace in terms of what we expect from the economies again, mostly in Brazil and Argentina to happen or to evolve particular in 2018, 2019.

(Operator Instructions) And at this time, we have reached the end of today's question-and-answer session.

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

Well, thank you very much for your attention today.

We certainly look forward to speaking with you for next quarter, and of course we're very enthusiastic about where we expect [towards] the end of the year.

You know that December is a very important month for us and we're very optimistic and certainly very well prepared to maximize the potential of our business in all the markets.

So, as always, in the interim, our team remains available to meet with you and answer any questions that you might have.

So thank you again, and enjoy the rest of your day.

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

We do thank you for attending today's presentation.

You may now disconnect your telephone lines.