Arcos Dorados Holdings Inc (ARCO) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Arcos Dorados Third 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 Patricio Esnaola, Director of 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'd 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.

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.

For that reason, and unless otherwise indicated, all results referenced in our comments today are 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, with our earnings release.

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

Thank you, Iñaki.

Hello, everyone, and thank you for joining us today.

Please turn to Slide 3. We have spent the last couple of years putting in place the initiatives necessary to drive long-term sustainable value creation for our shareholders.

Our strategic plan is focused on attracting more guests to our restaurants more often in a consistently profitable manner.

Today, we have a leaner, more efficient business structure, along with a sound balance sheet.

During the third quarter, we saw the benefits of our work as our team and operating structure were tested by volatile environments in our 2 largest markets, Brazil and Argentina.

In this context, comparable sales increased 7.4% on top of the 10.4% achieved last year.

Consolidated EBITDA margin expanded 340 basis points to 12.3%, and we delivered strong double-digit net income growth as well as cash generation.

These results demonstrate our unique ability to attract customers to our restaurants by offering compelling value and to manage our cost and balance sheet effectively.

Many of our markets are performing really well, and I'd just like to highlight some of the turnaround success stories.

In NOLAD, we saw very positive sales expansion above the blended inflation rate, driven by a combination of value and average check growth, particularly in Mexico.

In the Caribbean, comparable sales growth in Colombia, Puerto Rico were substantially above inflation in these countries and the division delivered a 140 basis point improvement in adjusted EBITDA margin.

In this region as well, our initiatives around G&A, payroll and Food and Paper are all paying off.

While SLAD results are heavily impacted by Argentina, volumes, sales and margins are all improving in each of the Andean countries.

We're taking the long view in Brazil.

Our business is all about finding the right balance between protecting the customer base without compromising margins.

This quarter in particular, we skewed more total margin by volume growth.

Turning up our promotion machine allows us to increase volumes, and we are poised to do this going into 2019.

Bottom line, offering compelling value in modern family friendly environment with warm hospitality consistently brings more guests to our restaurants.

We strongly believe that there is significant potential for the McDonald's brand to continue growing in the region.

Restaurant level profitability has been driven by level of productivity improvements from our Cooltura de Servicio program.

Additionally, our scale, scale procurement teams and hedging practices delivered reduction in Food and Paper as a percentage of sales in the third quarter.

Our strategy of gaining G&A leverage has been successful.

A leaner, highly dedicated team is continuing to deliver in an efficient manner.

And in fact, this quarter's G&A costs were below our blended inflation rate.

In Brazil, the EBITDA margin expanded 130 basis points as compared to the third quarter of 2017 and excluding a tax-related credit despite the royalty step-up, which accounted for 40 basis points as compared to last year.

There is no magic here.

These are results based on clear productivity initiatives throughout the business.

We expect to see much of the same through the end of the year, and we'll continue to focus on our strategies to get top line growth to award-winning market initiatives while strengthening our margins as we move into 2019.

Regarding the $660 million CapEx plan, which includes $390 million other investment and the opening of at least 200 restaurants between 2017 and 2019.

We remain on track to deliver these investments across our markets.

Now I will hand the call over to Marcelo for an overview of our operating performance.

Thank you, Sergio.

Now please turn to Slide 4. As you know, innovation is at the heart of what we do and has been a key contributor to our success over the years.

Being perceived as a modern brand is a major force driving customer preference, guest traffic, market share, average check growth and the efficiency that Sergio has already touched upon.

Given the connected world that we live in, the importance of mobile marketing is increasing.

And as such, we are very proud of the numerous marketing awards that Arcos Dorados received this year from the Mobile Marketing Association, the leading group in the industry.

Not only were we recognized as the marketer of the year across all industries in Latin America, but we also won 8 of the 9 awards that McDonald's received in the global category, helping McDonald's take home honors as the Global Marketer of the Year.

The award that Arcos Dorados won at the global level includes marketing within the mobile gaming environment, CRM, promotion and lead generation.

The innovative marketing initiatives behind these awards are a big part of driving traffic to our restaurants throughout our region, reinforcing our brand and keeping us top of mind with our consumers.

When customers arrive at our restaurants, they find an inviting environment that reflects the quality and value of the McDonald's brand.

Elevating our guests' dining experience is why we remain focused on modernizing our restaurants through the deployment of Experience of the Future, which includes digital upgrades in the form of modern menu boards, self-order kiosks, tables with digital entertainment, in some cases an upgraded WiFi, among other new features.

At the end of this quarter, we have 196 EOTF restaurants, and we are making progress on our plan to have approximately 650 EOTF restaurants by the end of 2019, primarily in Brazil and Argentina.

Our customers are loving the changes we are making.

Elevating our guests' dining experience and the implementation of our Cooltura de Servicio program is resulting in improved customer satisfaction scores.

This program encourages our employees to be themselves and empowers them to provide the best possible level of service.

And it is really working.

In Brazil, for example, customer satisfaction scores have reached their highest levels since we began monitoring them.

Our investments in digital capabilities include delivery, and our McDelivery service is now available in 10 markets.

During the same period of 2017, McDelivery was in just 3 of these countries.

As an example, more than 300 of our restaurants in Brazil provide delivery today, which is growing faster than we expected.

We continuously enhance the functionality of our mobile app.

We have now launched our app in all 20 countries where we operate, totaling more than 17 million downloads by the end of the quarter and growing.

It is now one of the most downloaded apps in the food category in those markets.

Our menu boards also showcase our focus on innovation.

Besides the iconic menu items we offer, we are continually introducing innovative products in each of our markets.

In Brazil, for instance, this quarter we launched Triplo Quarterão, Egg Quarterão and Egg junior sandwiches.

In Mexico, we launched premium Chipotle Ranch in the Signature Line and McFlurry Choco Roles in the dessert category.

In Argentina, we launched Chicken Sticks, the first product in Arcos Dorados new Snacks platform.

Earlier, I touched upon the McDonald's brand.

Our brand remains the favorite QSR brand across the vast majority of the markets in our region.

In good part, our brand's top ranking can be attributed to our market-leading footprint and our award-winning advertising and marketing innovation.

Please turn to Slide 5. We continue to have, as well as grow, the largest restaurant footprint in the QSR sector in our region.

I would also like to highlight that with over 1,300 freestanding and in-store locations and nearly 2,200 restaurants in total, we have the highest sales per unit of any major QSR chain in Latin America.

The combination of elevating our restaurant experience, producing innovative menu items and empowering our employees to deliver a higher level of service is creating distinct and sustainable competitive advantages that will support our growth in the years ahead.

As always, we look forward to updating you on our progress.

Mariano will now discuss our key financial results with you.

Thanks, Marcelo.

Please turn to Slide 6. The third quarter of 2018 was a challenging quarter in terms of the macro trends in some of our main markets.

Still we were able to deliver a solid performance that reflects our ability to navigate very volatile environments in addition to our continued efforts to streamline our cost structure.

Our total revenues increased 8.3% in constant currency in the third quarter, supported by a 7.4% growth in comparable sales.

The sharp depreciation of the Brazilian real and the Argentine peso heavily impacted our reported revenues.

Please turn to Slide 7. Moving on to our operations, we continued to improve productivity in our restaurants, resulting in significant savings in payroll costs as a percentage of revenues in all our divisions.

Our G&A expenses decreased by $9.5 million in absolute terms or 30 basis points as a percentage of revenues, mainly benefiting from the depreciation of the Argentine peso and the Brazilian real.

As a percentage of systemwide sales, we recorded the lowest G&A since we became public.

Please turn to Slide 8. Adjusted EBITDA increased 19.7% to $88.2 million, benefiting from a onetime income of $23.2 million recorded in other operating income.

This was mainly related to a PIS/COFINS tax credit in Brazil.

Still, excluding this effect, the adjusted EBITDA margin expanded 10 basis points.

Moving to the bottom line.

During this quarter, we generated $42.7 million of net income compared to $25.3 million in the same period last year.

Net interest expense decreased $2.8 million year-over-year, mainly resulting from the impact of the BRL depreciation on our debt structure.

Please note that per our risk management strategy, we keep a 50-50 balance between debt exposed to BRL and USD that protects us against the depreciation of local currencies.

Similarly, we see the same effect in the 9-month period, which last year included the costs related to the liability management exercise implemented in March 2017.

Also, we reported better noncash foreign exchange results and higher income tax expenses.

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

In Brazil, as Sergio noted, this quarter, we delivered more margin expansion than volume growth.

Moving to SLAD.

Our Andean markets are performing very well, while Argentina was impacted by the volatile macroeconomic environment.

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

We posted our sixth consecutive quarter of strong comparable traffic growth in Mexico.

Through an aggressive affordability platform, our innovative market initiative as well as our focus on delivering an innovative guest experience, we're growing across every single category.

In Puerto Rico, we maintained our successful affordability platform, which generated a significant increase in comparable sales, mainly driven by strong traffic growth.

Please turn to Slide 10.

In Brazil, adjusted EBITDA increased 37%, with the margin expanding from 13% to 21.8%, mainly benefiting from the previously mentioned tax recovery.

Adjusting for this, the margin would have expanded 130 basis points to 14.3%.

On top of the higher productivity that drove efficiencies in labor costs, we were able to reduce our Food and Paper cost.

This reflects in part our ability to manage currency exposure in our supply chain in a very volatile environment.

For NOLAD, our adjusted EBITDA margin contracted 140 basis points or 30 basis points if we exclude last year's refranchising activities.

The margin decline in the division was mainly due to higher royalty fees.

In SLAD, our adjusted EBITDA margin contracted 180 basis points.

Efficiencies in labor costs and G&A were more than offset by increases in other expense line items.

Adjusted EBITDA in the Caribbean was $7 million, an increase of $1.9 million year-over-year.

The corresponding margin expanded by 140 basis points with efficiencies in most line items, except for royalty fees and occupancy and other operating expenses.

Turning to Slide 11.

On the back of our strong cash flow generation and debt management initiatives, we continued to maintain a strong and healthy balance sheet during the quarter.

Our net leverage ratio was 1.3x adjusted EBITDA, well below our target range of 2x to 2.5x and slightly lower than the prior quarter.

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

Moving to our capital allocation strategy.

Cash used for capital expenditure was around $56 million, and we used $8.3 million to repurchase nearly 1.2 million Class A shares under the share repurchase program that we announced in May this year.

Finally, we are confident that despite the macroeconomic headwinds, we will continue our path to grow in our top line, which will drive additional margin expansion.

We remain totally committed to generating efficiencies in our business and improving our consolidated results for 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.

As I've mentioned earlier, we expect continued short-term macro challenges, and we'll continue to pursue our strategy to manage our margins through the end of the year while delivering solid top line growth across our markets.

Our long-term plan includes modernizing our restaurants, providing the best guest experience and offering the best value for money in the QSR segment in addition to driving efficiencies.

We would also like to take a moment to update you on our social responsibility initiatives.

As we have discussed in the past, we're leveraging our scale to make a positive impact on our region and so we are aligned with McDonald's Scale for Good initiatives related to packaging and recycling, kid's nutrition and climate change.

We are also aligned with some of the United Nations' development goals.

The 3 pillars that we're focused on are youth employment, sustainability and family well-being.

We have dedicated marginal efforts to the enormous challenges surrounding youth employment in the LATAM and Caribbean regions.

We employ over 72,000 young people.

And for most of them, it's their first job as the first step in terms of social mobility.

We also continue to maintain alliances with various nonprofit organizations that support youth employment programs.

These organizations include the International Youth Foundation, Child Foundation, Citi Foundation as well as the Ayrton Senna Institute in Brazil.

Recently, we established a partnership with Ayrton Senna Institute for a Happy Day in this country, where 100% of the proceeds from the sale of the Big Mac hamburgers are allocated to fund social projects related to youth and family health care and to youth education.

Regarding the sustainability pillar, we have eliminated all foam packaging from virtually all of our restaurants and are now only providing plastic straws upon request.

We delivered EBITDA margin expansion in the third quarter, and that we expect we will do the same in the fourth quarter of this year.

These results are coming through management actions that have been taken over the last years.

Further, we will continue to seek opportunities to improve efficiency, not only at the restaurant level but across the entire company.

The outlook for Argentina remains complicated, and I'd like to remind everyone that we are not new to navigating challenging environments in this country and others.

And even in some of the most complex situations, we have to serve our customer base.

Now we have said several times that during adverse economic scenarios like the one we're currently going through, we need to focus more than ever in finding the right balance between sales and margins.

Having said that, there's always a possibility of doing better in 1 of the 2 attributes.

I believe this quarter, we did well in margins, particularly in Brazil.

And although we cannot say it's an easy fix, we can push harder on the promotional activities in our marketing calendar, then move the needle to our sales.

You should expect this to happen right at the beginning of 2019, but also without losing sight on profitability as we have done in all this time.

Again, we're managing this business for the long term, and we will capture the significant growth opportunity that our region presents.

So thank you for your continued support, and let's go to Q&A.

(Operator Instructions) And our first question comes from Robert Schweich of RMB Capital.

I wonder if you would discuss whether there has been any impact yet from the changing political situation in Brazil.

And do you anticipate that your comp store sales in Brazil will show a better than 1% gain in the fourth quarter?

Okay.

This is Sergio.

Well, first, the political outlook, what I would say, Bob, is that we're cautiously optimistic about the near-term outlook for the country, particularly now that the elections are behind us.

We also know that the elected President has named in his team of ministers really strong and business experienced people.

So all that are leading us to believe that the context in general will be positive for business development.

That's the point surrounding the political situation, well, obviously, the new president will take office January 1. Regarding the sales performance in this particular quarter, we said several times -- I said, it's all about finding the right balance between sales and margins.

The reality is that in this particular quarter, we did better in margins than in sales.

And that is [probably] because we did not understand and we did not catch how promotional the market was in this time.

We sensed that probably the market will recover somehow in a faster pace, so we were not as aggressive, if you will, as we should be, but particularly in the bottom part of our product lineup.

If you look what happened, Bob, and you know that we're very detail on numbers, you will see that we did only 1% in sales.

But at the same time, we grew gross margin by about 40 basis points, which is an indicator of what happened is we actually did less traction in the lower range of pricing products in our business.

We did better in the upper range.

We used the Signature Line.

That explains why -- I mean, we had an increase in our check simply because we did better in the upper range than in the lower range, and that actually explains the margin expansion that we had from Food and Paper lines.

What you should expect is obviously we're going to turn up the promotional side of our marketing calendar.

But the reality is that we are, obviously, concerned that out of all the possible combinations, this is, I would say, the most favorable to turn things differently, right?

Because it's all about increasing revenue and our activity to promote the lower range, what we call the affordability category.

And Sergio, let me add.

Hi, Bob, this is Mariano.

What Sergio mentioned about the improvement in margin was not only in gross margin, but margin at restaurant level improved considerably also when we exclude the tax recovery.

So not only we improved the gross margin, but we also have seen improvements in other lines of our cost structure, which is also encouraging.

As a follow-up question, could you be specific on your net store expansion for the fourth quarter and for calendar 2019?

Yes.

Marcelo?

Okay, yes.

In terms of openings as it happened in the last few years, most of our openings for this 2018 will be in the fourth quarter.

We are planning to open between 65 and 70 restaurants for the whole year, so most of those will come in the fourth quarter.

And the same applies for the deployment of Experience of the Future.

We mentioned during the call that we have around 200 restaurants with Experience of the Future as of September 30, but we are planning to close the year with more than 300 EOTF restaurants.

So we are ramping up the deployment on these initiatives.

And this is related mostly with the idea to localize all the decor packages in order to maintain investments at the right level and get the returns that we're waiting for.

So you'll see again more openings during the fourth quarter of the year.

And we're planning to achieve our guidance of around 65 to 70 openings for the whole year 2018.

And regarding the 2-year period, I think I said -- we have said in the first part, we're very well on track to achieve our target of opening at least 200 restaurants in this cycle from 2017 to 2019.

Did you discuss the results of the Experience of the Future conversions?

What impact that has had on their business?

Have you been able to analyze that in a meaningful way?

Or is it too early?

Yes, yes, Bob.

Basically, we are very pleased with the results that we are getting after the implementation of EOTF.

We are in line with the expectations that we have previously, which is to have a sales lift in those restaurants of mid-single digit.

And really, the results are very encouraging.

So we are completely aligned with the budget that we had in terms of investments and again, in terms of the impact in sales lift and obviously in the returns that we're waiting for those investments.

Also, in fact, for the 3-year period.

Yes, yes.

We mentioned during the call that we are on track to reach at least or around 650 EOTF restaurants at the end of next year.

So again, we're very encouraged by the results that we're seeing from -- coming from those restaurants.

(Operator Instructions) And our next question comes from Sam Bevan of Aberdeen Asset Management.

Just I've got a couple of questions.

Firstly, on leverage calculation used under the MFA so on a rent adjusted basis because you haven't presented maybe an update there and then how close you are to the covenant.

And the second question is a bit more info around the hedge that you've done from dollars to BRL, like what instrument have you used pro forma as a color.

Yes.

Mariano, will you take those questions?

Yes, Sam, thank you.

Yes, regarding the MFA ratios, we are in complete compliance with them.

The third quarter regarding the leverage ratio, we -- the threshold is 4.25.

We're at 3.83.

Regarding the fixed charge coverage ratio, the threshold is 1.5x, we're 1.81.

So we are in complete compliance of those ratios so no issue.

Regarding the hedges, we hedged -- if the question was related to our debt, we hedged our corporate debt, the 2 bonds outstanding with cross-currency swaps.

So those are the instruments that we implemented.

Regarding the hedges that we do on the Food and Paper side, we will use these forwards.

So we have forward contracts with banks to cover for the Food and Paper exposure.

And we have hedges in place if you want in the majority of the countries where we operate.

We have in Brazil, Colombia, Uruguay, Chile, Argentina, Mexico and Peru as well.

And this concludes our question-and-answer session.

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

Okay.

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

The team always remain available to meet with you and answer any other questions that you may have.

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

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.