Arcos Dorados Holdings Inc (ARCO) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Arcos Dorados Second Quarter 2018 Earnings 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 call over to Daniel Schleiniger, Vice President of Corporate Communications and Investor Relations.

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.

Please turn to Slide 2. 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 obligations 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.

The differences in exchange rate and inflation in Venezuela generate material accounting distortions impacting both the reported results of our Venezuelan operation as well as our consolidated results.

And for that reason, and unless otherwise indicated, all results referenced in our comments today and shown on the accompanying presentation exclude the results of our Venezuelan operation, both at the consolidated level as well as for the Caribbean division.

For your reference, we include a full income statement, excluding Venezuela to our earnings release.

We trust this additional detail will provide you with greater visibility into our operating results.

I would now like to turn the call over to our CEO, Sergio Alonso.

Thank you, Dan.

And hello, everyone, and thank you for joining us today.

Please turn to Slide 3. As you all know, our strategy starts with building top line by offering a compelling value to bring more guests, more often to our restaurants.

In order to achieve this, we are managing the business drivers that are most under our control.

We generated our seventh consecutive quarter of consolidated comparable volume growth and continued to gain share in our main markets.

I believe that this is a testament to the strength of our strategic approach, given that we achieved these results even within a very challenging operating environment in our largest market.

During the second quarter, traffic growth, value-driven pricing and an improving product mix generated comparable sales above blended inflation in NOLAD, SLAD and in the Caribbean.

And without the impact of the truckers' strike, our comp sales trend in Brazil was also above inflation for the quarter, even though we had a tough comparison with the year-ago quarter.

Looking forward, we expect continued short-term challenges, but remain committed to our long-term plan to modernize our restaurants, provide an experience that is second to none and offer the best value for money in the QSR segment.

Strategically, with respect to the second quarter, we faced some external headwinds, which were reflected in our as-reported results.

The truckers' strike in Brazil, which significantly impacted most of the consumer sector, led to a decline in our top line for the quarter.

Our Brazilian operation was on track to deliver one of its best months in recent years.

However, top line trends turned negative for the last 10 days of May during the strike, and then for the first 10 days of June, while we rebuilt our supply chain and restaurant inventories.

Importantly, our gross margin expanded in Brazil as Food and Paper costs declined as a percentage of revenue, benefiting from a combination of strong product mix and our currency hedging strategy.

In the medium term, we believe that Brazil's consumer environment will improve.

And we have clear competitive advantages to capture the opportunity ahead.

In Argentina, local currency top line performed in line with trending inflation, supported by a positive comparable volume.

Having said that, reported revenue declined due to the significant depreciation of the Argentinian peso year-over-year.

In the near term, consumer activity remains difficult to predict, given the currency depreciation and other challenging macroeconomic conditions.

Our focus remains on offering competitive value through our affordability platform and across the rest of our menu to drive additional guest traffic to our restaurants to leverage our cost structure.

In addition, we're gaining traction in other important markets that will contribute to our future growth.

I will highlight Mexico, which continue delivering solid top line results in the quarter, with very strong volume growth driving higher average check.

As we have done in other markets, including Chile and Columbia, we expect this higher volume to start generating greater profitability by the second half of 2019.

We remain confident that we will leverage our fixed costs at the restaurant and corporate levels to generate 100 to 200 basis points of margin expansion over the next 2to3 years.

We have built a strong cash balance and are ahead of schedule on our 3-year capital allocation program.

Our priorities remain to open up at least 200 new restaurants, the majority of which will be freestanding units and to bring back $390 million, primarily to accelerate the deployment of Experience of the Future.

As we noted before, our business model generates margin leverage when we deliver sustained top line growth.

In that respect, we've aligned with McDonald's Global Velocity Growth plan, which is focused on driving top line and increasing operating efficiencies.

In summary, I am confident that our strategy combined with the medium to long-term economic outlook in the region will deliver sustainable growth and significant shareholder value over the next several years.

Now I will hand the call over to Marcelo for a review of our operating performance.

Thank you, Sergio.

Now please turn to Slide 4. As Sergio mentioned earlier, our long-term fundamentals across the region remained strong.

And we generated the seventh consecutive quarter of positive year-over-year traffic, evidence that our strategy can be sustained even in the face of difficult market conditions.

We remain focused on growing volumes, margins and market share to stimulate top line growth and attract more guests to our restaurants more often.

As we have seen in several markets, sustained volume growth generates additional profitability and cash flow to maintain and grow our business over the medium term.

Our current marketing initiatives are designed to provide guests with a compelling value proposition and stimulate volume in a soft consumer environment.

We are modernizing our restaurant base to maintain and drive share.

On top of that, we have a strong marketing calendar, which is focused on family experience and the value and quality of our iconic menu items.

And we are providing guests with additional choice in how they order and pay.

We are making progress on our plans to have approximately 650 EOTF restaurants by the end of 2019, primarily in Brazil and Argentina.

And we are also preparing the rest of our markets for future EOTF deployment.

At the end of June, we have 158 EOTF restaurants.

And we have developed local suppliers that are providing the vast majority of our needs for this EOTF [futures].

We will be accelerating the deployment of this transformation in the coming quarters.

We are receiving strong positive feedback from our guests, as the self-order kiosks allow them to seamlessly customize their orders.

The multi-point service improves their experience.

And the refurbished interiors offer them and their families a modern and inviting environment.

Importantly, we continue to perform in line with other regions of the McDonald's system in terms of other checklists at our self-order kiosks.

Successful implementation of EOTF not only boosts our competitive advantage in the short term, but like all of our investments, it will help us capture the long-term opportunity of our business.

We continue to make progress with McDelivery, both through a global agreement with UberEATS as well as local agreements with other leading delivery partners.

We are now operating in 9 markets across our region versus just 3 markets at this time last year.

While [stealing] the [pile] of choice in some markets, we are consistently capturing incremental guest counts in the restaurants that offer this service.

On the digital front, our mobile app is also growing in relevance.

As of the end of the last quarter, it has been downloaded nearly 15 million times in our geography.

And we continue to work on evolving functionality.

Our Cooltura de Servicio program, which encourages our employees to be themselves and focus on providing the best possible service to our guests, is making a significant and lasting impact on our operational culture.

The result, we are seeing continued improvement in customer satisfaction scores across our systems, not just in our EOTF locations.

This program is a major differentiator that I believe is partly responsible for the market share gains that we have seen in our main markets, including Brazil, where we remained the favorite QSR brand for the studies we conduct with a well-known international market research company.

Please turn to Slide 5. We continue to maintain and grow the best restaurant footprint in our industry by far.

With over 1,300 freestanding and in-store locations, we have the highest sales volume of any major QSR chain in the region.

Our unit growth strategy, which includes more than 200 restaurant openings for the 2017 to 2019 period, is based on leveraging our decades of expansion experience.

We will generate cash flow growth not just by adding units, but also by leveraging our streamline cost structure through sustainable top line growth.

Working together, our restaurants, our food and our people are delivering the competitive advantages that will ensure our continued growth.

We look forward to keeping you up-to-date on our progress.

Mariano will now take you through a discussion of our key financial results.

Thanks, Marcello.

Please turn to Slide 6. The underlying business trends in our region remained favorable and in line with our expectations for the long term.

In the second quarter of this year, we increased total revenue in constant currency by 7%.

This was supported by solid comparable volume growth on a consolidated basis, which was partially offset by the truckers' strike in Brazil.

Our reported revenues were impacted by the depreciations of the Brazilian real and Argentine peso.

Please turn to Slide 7. Looking at our operation, we generated efficiencies in our most important cost and expense lines.

Food and paper costs declined as a percentage of revenue in almost all divisions.

We also improved productivity in our restaurants, which led to lower payroll costs as a percentage of revenue.

These efficiencies were offset by leveraging of occupancy and other operating expenses and our re-franchising proceeds and a step up in royalty fees.

I should note that this was the last quarter facing a comparison with a full increase in the royalty fee, which became effective in August of 2017.

Our G&A expenses decreased by 1.7% year-over-year, in part due to the depreciation of the Argentine peso.

Please turn to Slide 8. Adjusted EBITDA decreased 17.1% to $49 million with margin expansions in SLAD and the Caribbean divisions and margin contractions in Brazil and NOLAD.

Adjusted EBITDA margin contracted by 100 basis points for the regions I have already mentioned.

Moving to the bottom line, in this quarter, we generated $10.7 million of net income compared to $1.1 million in the same period last year.

Moreover, the prior year result including -- included $4.2 million from our redevelopment initiative, which concluded in 2017.

Net interest expense was $10.6 million lower year-over-year.

This was due to 2 main factors: the restructured debt carries a lower financial cost; and the previous quarter results included certain transaction expenses incurred in connection with the debt restructuring.

The noncash foreign currency exchange result was better, while the income tax expense variance versus last year was negative.

Please turn to Slide 9 for more detail on our divisional results.

The 10-day truckers' strike in May lead to the 1% drop in comparable sales in Brazil in the quarter.

Importantly, it took an additional 10 days in June to normalize our operations as our producers, suppliers, distribution centers and restaurants with these inventories.

Excluding the impact of the strike, we estimate that we would have posted comparable sales growth of 3.7% in the quarter, mainly as a result of our continued efforts to drive traffic to our stores.

Top line performance in our other divisions remained on track with NOLAD, SLAD and Caribbean, all generating comparable sales growth in line with or above blended inflation in the quarter.

I am particularly pleased with the results we are achieving in Mexico, where we posted our sixth consecutive quarter of strong comparable traffic growth.

Despite the negative effect of the Easter holiday shift, volumes in that market continued to perform strongly, significantly outpacing the competition.

Our innovative marketing and digital initiatives as well as our focus on delivering the better guest experience are driving the improved performance.

Please turn to Slide 10.

Brazil's adjusted EBITDA margin contracted 200 basis points to 10.9% in the quarter.

We captured efficiencies in food and paper, which benefited from a favorable shift in mix as well as our currency hedging strategy.

However, the sales decline resulting from the truckers' strike led to a deleveraging of our other expense line items.

Additionally, the comparison with last year's re-franchising activities representing -- represented 70 basis points of the margin decline in the division.

Our NOLAD adjusted EBITDA margin contracted 140 basis points, mainly due to high royalty fees.

In SLAD, we posted almost 22% constant currency adjusted EBITDA growth, which was above the division's blended inflation, with a margin expansion of 10 basis points.

Adjusted EBITDA in the Caribbean was $7 million, an increase of $3.4 million year-over-year.

Adjusted EBITDA margin expanded by 210 basis points with efficiencies in most line items, except for royalty fees.

In addition, this quarter's results include an insurance recovery from the damages caused by last year's hurricanes in Puerto Rico and the U.S. Virgin Islands.

On Slide 11, you can see that we continued to maintain a strong and healthy balance sheet during the quarter.

Our net leverage ratio was 1.4x adjusted EBITDA, well below our target range of 2 to 2.5x and stable versus the prior quarter.

As a reminder, our leverage ratios are calculated using consolidated, as-reported results.

Moving to our capital allocation strategy, we are focused on opening at least 200 restaurants and reinvesting $390 million to accelerate the deployment of EOTF in our markets from 2017 to 2019.

While we are confident that our operational focus will deliver growth and shareholder value in the long term, we are committed to generating shareholder value in the short term as well.

Under our recently announced share repurchase program, we used $20 million to repurchase nearly 2.7 million Class A shares during the quarter.

In April, we also paid $0.05 per share or $10.6 million in dividends, with another $0.05 per share to be paid in October of this year.

Finally, we are confident that we will resume our path to expanded margins and cash flow growth in the short-term.

The numerous external factors that impacted our results in the second quarter seem to have stabilized or were nonrecurring.

We are working on both operating and nonoperating initiatives to generate efficiencies in our business and support our consolidated results this year and beyond.

I will turn the call back over to Sergio for his closing remarks.

Thank you, Mariano.

Please turn to Slide 12.

While we look forward with our strategic plan, we will also continue to leverage our scale to make a positive impact on our region.

Within the next few days, we will be publishing our social impact report, with an overview of the initiatives we implemented in 2017.

These included over 20 programs and partnerships with various NGOs that benefited thousands of young people across the region.

In addition, we are aligned with McDonald's Scale for Good Initiatives related to packaging and recycling, kids nutrition and climate change.

Benefiting the communities where we operate is one of our core values as a company, and we will continue to work towards our long-term commitment in that regard.

Now before opening the call up for questions, I'd like to share a couple of thoughts with you.

As we enter the second half, the remaining part of the year, we know that we'll continue to face challenges in some markets and particularly, in the case of Brazil and Argentina as well to some extent.

We know we have elections in October in Brazil.

So we believe that visibility for the last part of the year will be kind of limited, but we also know now that even in this scenario, we're going to have percentage-wise margin expansion.

And we believe this is a remarkable thing.

And we believe it's not a consequence of any functional decision that we made, but it's also the result of a long-time effort that we're making to keep improving the efficiency in our restaurants.

And same thing...

Sergio, sorry to interrupt you, but these you're mentioning applies not only to Brazil, but to the whole company.

For example, for several months now, we've been pushing for productivity increases in all of our markets.

And that's why even in this tough environment that we saw and we faced in the second quarter, we had leverage in payroll costs.

So this is completely aligned with what you are mentioning, Sergio.

Sure, sure.

And, of course, and as I was saying, I mean (inaudible) Argentina, where we faced similar challenges and actually even much more complicated scenarios in recent years, and we explained that.

I mean, in a very challenging environment, we managed to grow our customer base.

And at the same time, gain market share.

So we are and we will be better positioned to capture incremental margins once the economy resumes growth, which we, by the way, expect to happen early next year.

So finally, we obviously know that our financial statements are expressed in U.S. dollars.

That's for sure.

But we do not control foreign exchanges.

We sell and we operate every day in local currencies.

This is why we explained in our results in the currency that we do business, which is, in our view, the most accurate way to measure our real business performance.

Now -- I mean, and all that said, we're confident that, just as happened in the past, the economies will recover.

And the long-term relationship between currencies and inflation will normalize, will equalize somehow.

So I want to make 1 thing crystal clear.

We are managing this business for the long term.

And we will capture the significant growth opportunity that our region, Latin America, still presents.

We have the best brand.

We have the best operators and we have the best management in the business.

And we will benefit also from our undisputed leadership in the region.

So thank you once again for your continued support, and we'll go to Q&A.

(Operator Instructions) The first question will come from Robert Ford of Bank of America Merrill Lynch.

Sergio, you mentioned the greater labor productivity and expectations of margin improvement across or right over the next couple of years.

So when it comes to Brazil specifically, can you comment a little bit on some of the benefits you're seeing from the labor reform and the anticipation that you have as a result of that over the next year or 2?

Marcelo, why don't you take that up?

Yes.

As we mentioned, we are experiencing increases in productivity, which is allowing us to see some leverage in terms of payroll in the P&L.

We will continue to push those improvements in terms of productivity.

And particularly in the case of Brazil, after the labor reform, as you may already know, we have several deals with different authorities and unions in Brazil that we are visiting, looking at them after the labor reform, but what we are already seeing, a positive impact as a result of the labor reform, is a significant reduction in the number of labor claims, which usually were -- what used to be a main issue in this country.

So these reductions in the number of new labor claims over time could bring significant cost savings in the P&L of Brazil.

That's very important for us.

And again, this is on top of the -- all the work that we are doing in order to improve productivity and reduce labor costs.

You are right.

I mean, Bob, remember that when we spoke about this while we -- in the last couple of years, when we implemented the new scheduling system.

And the reality is that system, that implementation continues to bring additional opportunities because it's -- it helped us big time to improve the accuracy of our sales projection, we believe, to a better full scheduling otherwise (inaudible).

So the reality is, there are several components.

Some of them are continuing to bring help to increase efficiency in the labor line in Brazil, mostly out of the implementations as well -- and all the work that Marcelo and the team has discussed [on full] years.

That's very helpful.

But just in terms of the labor claims, right?

Because now you've got -- and it's losing [40] days in terms of the legal costs, right?

My understanding is that these contingencies or these lawsuits that are being fathered down dramatically across the board and I was just hoping, you might be able to comment more specifically on the annual average cost of your litigation and maybe some of the settlements you had over the last 4 or 5 years before the reform?

And what you expect it to normalize to because it's not a small number, right?

No.

It's not a small number.

You said it right.

It's -- we have to predict though -- because in this regard would actually, right, at the early stages, right?

We don't know exactly what the final outcome will be.

What I can share with you, though, on this model is that it helps.

It will help dramatically to bring this number to a regional average level when compared to other (inaudible) markets.

Brazil was completely out of the curve.

And I -- I had this chance of bringing some material cannot say if it was totally accurate or not.

But I was told that in Brazil, about 80% of the total labor claims that are in the world are based in Brazil.

I believe that will happen as a consequence of the tax -- or the law reform.

It's something that it will play very good for the market and then as a consequence for us in the business.

So I believe that probably by mid-next year, we will have a more stable situation.

And that is -- why is that?

That is because of the average length of the claims, right?

There's a process.

So we believe that about 1 year from now, we're going to be in a much more stable platform.

And then we'll be able to calculate the net effect.

But as you said, it is not minimal.

The next question will come from Richard Cathcart of Bradesco.

So I just wanted to ask about the CapEx that you're investing in the reimaging.

I mean, you reiterated the $392 million target between 2017 and 2019.

So I just kind of wanted to understand where you're up to, like I think you're accelerating through 2018.

But it would just be interesting to know how many restaurants have been done, specifically in Argentina and Brazil?

Then also, if you can give us any indication kind of, of the sales just that you're seeing in those restaurants?

Sure.

(inaudible), Richard.

I'll just take the first part of the (inaudible).

If you want to know something, Marcel, Mariano just jump in.

Again, we have a commitment with McDonald's more than 3-year period, which has not changed.

And it's still open at least 180 new restaurants that we've changed to 200 new restaurants when we announced the increase in $160 million for total CapEx.

So we plan to open at least 200 restaurants.

Keep in mind, Richard, that we have 3-year cycles in terms of investment that we -- with McDonald's.

The second component is to reinvest at least $390 million in existing restaurants to accelerate the deployment of Experience of the Future.

And we're concentrated in these 2-year cycle to Brazil, Argentina and Uruguay.

And, Sergio, if I could.

In terms of the openings, we already opened 50 restaurants in 2017.

And as Sergio mentioned, the 200 that we are planning to open in the cycle 2017 to 2019.

So this year, we gave some guidance around 65 to 70 openings.

So we are ramping up the number of openings.

We will have the balance to reach the 200 in 2019.

And the same happens with EOTF.

We closed the first semester of this year with 158 restaurants under the EOTF contract.

And we are planning to close 2019 with around 650 EOTF restaurants.

So in this case, we are ramping up the investments in terms of EOTF, too.

Let me add 1 thing, Marcelo.

And Richard, actually, in summary, when we announced the initial commitment with McDonald's was for a 200 new restaurants and $290 million in modernization.

We increased that by $160 million.

And it's important to note that, that increase will be funded by cash that either we already have in our balance sheet or that we're planning to generate along these 3 years, but we're not planning to increase our debt to fund this additional CapEx.

That's an important thing to note.

Yes.

Finally, the capital comments, obviously, the big effort is kind of back ended for the period.

And that is -- there's a reason for that is that we're local -- the Experience of the Future initially it's a system, it's an advanced system-wide initially.

The decor packages that are being implemented on the same -- on the global scale.

So what we're doing today is, we're concentrated in localizing all these of decor packages in order to minimize the cost implication of it.

So we're working very diligently, actually.

We're a bit ahead of schedule in these matters to localize the decor package what really is the -- the actual reason.

So we will have an accelerated implementation towards the last couple of months of this year and then for the remaining part of the 3-year cycle.

Regarding the checklist, it's a question about when we get -- just like the decor packages, I would say that were prealigned with the results that the system is getting everywhere, with just some new, single-digit size list when compared and fully implemented EOTF restaurants where we say, as a benchmark, which are the -- I'll call (inaudible) which will be a restaurant on the same format being a small store freestanding on each direction and located in similar marketplace.

The next question will come from Anthony Bitz of Fierro Capital Management LLP.

My -- I had a 1 main question and a follow-up, if possible.

In terms of the franchisees, I was wondering if you could give any color in terms of their operations vis-à-vis the owned locations?

And whether they were able to operate as strongly as you all have been?

And then in terms of average check increases in constant currency terms, could you give any color as to how that's broken down between volume and price?

Well, I'll take the first one, and then jump in Mariano.

Yes, yes.

Okay.

Our mission for what we call the ownership split, I mean, the restaurants that we operate and the restaurants that we subfranchised, actually follows the idea of us running restaurants in bigger markets, bigger cities and don't rely on franchisees operators for small and mobile markets that we believe -- we have proven many, many times.

And that combination makes us much more efficient in terms of running the business.

In terms of performance and in sales volumes, we don't see any major difference.

And when you compare our restaurants with our subfranchisees' restaurants, in fact, there are couple of markets where we share restaurants in some cities, some old restaurants.

And we do not see significant differences that could be explained just for the reason of who owns or who runs a restaurant.

When you talk about margins, that could be a slight different story because -- and having a small operation in a remote market, you can have some more flexibility when it comes to, I don't know, cash collection or payroll or some of the elements of the P&L, but a more efficient sort of saying when you've got a smaller local kind of operation compared to a company of our size moving to a centralized other functions that at the end of the day, they're much more expensive.

This holds true.

I would say not for our (inaudible) but for the entire McDonald's system.

Yes, in line with what Sergio mentioned in terms of the strategic approach to the way that we operate in each city or in each restaurant, we did during the re-franchising process that we did in Brazil, for example.

We select those remote cities and smaller restaurants and we re-franchise those.

And that's why I think that we are seeing excellent results in terms of volumes and sales in Brazil.

And we are concentrating our operations in the bigger cities.

In terms of sales and how they are [compound] between guests counts on an average check, well, we are very pleased to see that we had the seventh consecutive quarter of positive guest counts, with a tough environment in some of our major countries like Brazil, for example, and Argentina.

But at the same time, we are moving very cautiously our prices in order to be slightly below inflation to allow our customers to visit us as frequent as possible.

And I think that, that's the main explanation of why we are gaining share in this tough environment, and why we are seeing positive traffic in our restaurants when some of our competitors are thin on other kind of features.

So we are very pleased with this kind of results.

In terms of sales most of the improvements coming from traffic in most of our markets.

An important point I will add, Anthony, if I may, is that the affordability platform that we have, which is actually pretty much across all the markets we run, it's based on food news.

They're not perceptions when it comes to pricing, but they certainly are when it comes to value providing.

And we believe that the improvement we are getting in our check in most of the markets is actually higher than the pricing that we are doing or the smart pricing we're doing, but it's a -- it's a consequence of people shifting what they buy to full meals, which is (inaudible) -- we're in the right place to be, we believe, particularly in a condition that we have in most of the markets, in the bigger markets where the economy is kind of facing some challenges.

(Operator Instructions) The next question will come from Robert Schweich of RMB Capital.

I have no doubt about the better operational capabilities of Arcos Dorados.

And I'd to spend -- you to spend some time on the macro environment.

The currency situation is quite negative.

And the present rate on Brazil is less favorable than an average for the second quarter.

In the newspapers here in the United States, there was a negative article in the past week about wealthy Brazilians leaving the country because of the -- their fears of safety.

And you have this election coming up.

I'd like you to discuss the macro environment in -- as best you can for us to benefit from that?

Bob, let me take Mariano first speaker and then you can add some color on the FX situations, implications in our business.

Bob, we don't work like 2 months ahead of the elections.

And we don't have elections in Brazil in October.

As you know, certain regions in our countries -- when we approach elections, the economy activity kind of slows down.

There are clear expectations about what's going to happen, and who's going to take office for the next period.

In the particular case of Brazil, well, we have been seeing lately it's a decrease in consumer optimism and expectation.

That is something that we are seeing currently in the marketplace.

Whether that will go after -- continue after the elections or not?

We don't know yet, right?

But our sense is that the country is set to improve and to recover once we -- this kind of lack of visibility or uncertainty phase, which we believe will be towards the end of the year.

Regarding the FX decision -- because of it is -- in most of our markets, well, kind of (inaudible), right?

Elections and (inaudible) -- and then FX would happen.

Mariano?

Yes, regarding the FX, as Sergio mentioned, is linked to the macro volatility and the uncertainty regarding the elections in Brazil.

I think last -- in last quarter, we discussed how we are -- what's our strategy to face this volatility in the FX.

First of all, in terms of translation of our results from -- in Brazil from year-end to USD, then, of course, when the Brazilian real depreciates against the dollar, our results will be effected.

What we can do, actually, is in terms of our imports.

And as a reminder, in Brazil, more or less 15% of our total food and paper costs are dollar-linked.

And regarding that exposure, what we do is, we have a hedging program where we hedge on a rolling basis 50% of that cost.

And actually, we have done that for the full year 2018.

And we already, in fact, started hedging as well for 2019.

I think one of the reasons that if you look at our margins, our gross margin in Brazil, an improvement in the food and paper costs over sales is because our hedges are in place.

Having said that, we are not doing those hedges in terms of speculative strategy.

It's just to give certainty and visibility on our cost structure and to have an efficient operation and to be able to plan ahead.

But mainly those are the 2 ways the FX is affecting our results.

Maybe let me add that because we have our debt also expressed or issued in U.S. dollars.

Half of that debt is swapped back to BRLs as well.

So when the BRL depreciates against the U.S. dollar, actually, the cost of our debt does not increase as much as if it were only exposed to the U.S. dollar.

I think we are trying to cover all the risks that we can manage in this volatile region.

And I think mainly that's the answer to your question regarding FX.

Yes.

Let me add a couple of words about Argentina about -- that I believe will be of your interest as well.

In Argentina, well, the peso depreciated significantly.

We said it, I believe, a few minutes ago, 50%.

And that is -- it's a big impact to our numbers, when we translate the results into U.S. dollars.

So the second thing we do is, we monitor and we compare our results, our growth in profits with inflation and, in fact, we've been above inflation.

So that is a testimony of the evolution of the business in local currency is performing well.

We need to understand some other elements that are at the core of what's going on in the market.

When inflation rate is (inaudible), it's got 30%.

Interest rates are over 40%.

So what I would say we're at the peak of the -- of a number of things that are going on in the marketplace.

I mean, 30% inflation coupled with 40 plus percent interest rate, coupled with the government removing subsidies from electricity, oil, water, all these -- what we call it, the tariff -- as a tariff -- I don't know how to say it in English.

But all these elements are affecting -- and affecting significantly people's disposable income.

As inflation starts to go down, so will interest rates and so will people recover purchasing power.

That is pretty much where we're going today.

So that is why we believe that in a few months away and you won't see inflation rates start to show signals of going down.

That will help the marketplace significantly.

Mariano?

Bob, it's important to mention that in that challenging environment that Sergio described for Argentina, we had positive traffic in SLAD and Argentina was part of that positive result.

So I think that we are doing very well in that challenging environment.

And on top of that, in terms of FX in Argentina particularly, since we have the vast majority of our corporate structure baked in Buenos Aires that works like some kind of natural hedge in terms of FX exposure in Argentina.

So that's why our G&A in dollar terms reduced as a consequence of the Argentine peso devaluation.

Marcelo?

Let me add to that, on top of that, 90% of our food and paper costs in Argentina are local in -- [generally maybe] in Argentinian peso.

So the exposure there as well is minimal.

Okay.

Do you see the election leading to a safer environment in Brazil?

Well, that's -- it's more of a personal opinion.

I would say yes, Bob, number one, because it will bring visibility.

Secondly, yes, as well, because we will have a President that is elected.

We have sort of a concessional situation today, as you know.

And all those elements should bring a more stable situation in the market and then leading to a resuming growth or -- and economic performance.

Yes, I'm sure.

(Operator Instructions) The next question will come from Jeronimo de Guzman of INCA Investments.

I'm trying to better understand the one-off impact of the truckers' strike in Brazil versus kind of the macro environment.

So I was just wondering if you could give us some more color on how those same-store sales trends have been looking in April and May?

Or alternatively, how they were looking after those first days of June, how they were looking there in June or into July?

I'll take the first part and then Mariano, you comment.

I believe we said it.

And there's like a 5 percentage point gap between the comp sales trend that we were having right before the strike and the actual figure that we recorded for the quarter.

So 5 percentage points for the quarter in Brazil after 10 days of strike, which is May 21 towards the end of the month, and then another 10 days' period that took us to restock the restaurants levels -- inventory levels back to normality.

So we are -- the combination of sale in the normal (inaudible).

Yes, and that period of time involves all the supply chain because the strike affected not only the deliveries to the restaurants, but the distribution centers and even the suppliers.

So you can do the math.

I mean, I believe that -- to calculate that what would happen should the strike didn't happen, I believe you can do the math.

I have to say, though, that what happened after the strike and in the activity levels did not came back to the previous situation, which we believe is a consequence of when we're discussing before of the election approaching and the highest degree of uncertainty, if you will, when that was going to happen with the election process that we have in 2 months or so.

Okay.

That's very helpful.

And then just on a follow-up on Argentina.

I mean, I understand also based on what you mentioned that the consumption remains very uncertain.

But I was just wondering if you could comment on your -- what you see as your pricing power in the market?

I mean, it seems like you've been -- you've done a very good job.

You've been able to continue pricing in line with inflation, and I was just wondering if you think you can continue doing that is this kind of environment?

Jeronimo, it's a balance, I mean, it's a balance.

Of course, when you run a market with 30%, 30-plus percent inflation, it is -- it's a situation that you have to monitor very closely, very, very closely.

Because if you get too behind inflation, it is really hard to recover the pricing of the products.

But sometimes, if you go ahead of inflation, that will hurt significantly volumes because, as I was saying before, I mean, we are in the current situation in Argentina, we are probably the worst of the possible times because, again, I mean, people are suffering from the purchasing power standpoint as much as they can, if you will.

As the inflation starts to go down, this situation will improve obviously.

We're focused on remaining at a very, very compelling value proposition, which we believe is the right thing to do.

And in fact, (inaudible) well because Marcello was explaining our possibility to invest in the traffic and evolution.

We know that Argentina is a big -- majority of the region.

So that is a testimony of what we believe is the right thing to do, right?

We just protect the value we'll provide to the customers, protect the customer base and at the same time, ensure that we won't compromise margins by being far behind the inflation evolution in the market.

This concludes our question-and-answer session.

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

Well, so thank you, thank you for your questions and your attention today.

I mean, as we always say, the team remains available to meet you and answer any questions that you may have.

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

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.

Have a great day.