Nov 11, 2014
Executives
Woods Staton - Chairman and CEO Sergio Alonso - COO German Lemonnier - CFO Daniel Schleiniger - IR Director
Analysts
Bob Ford - Bank of America Merrill Lynch Jeronimo De Guzman - Morgan Stanley Martha Shelton - Itau BBA Roy Yackulic - Bank of America John Ivankoe - JPMorgan Robert Schweich - Burnham Securities Mostafa Maleki - Jadara Capital Mark Jason - Invesco
Operator
Good morning and welcome to the Arcos Dorados Third Quarter 2014 Earnings Call. With us today are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, Chief Operating Officer; The company’s Chief Financial Officer, German Lemonnier; and Daniel Schleiniger, Investor Relations Director.
A slide presentation accompanies today’s webcast, which is also available in the Investor Relations section of the company’s website, www.arcosdorados.com/ir. As a reminder, all participants will be in listen only mode.
There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) Today’s conference call is being recorded.
At this time, I would like to turn the call over to Daniel Schleiniger. Please go ahead.
Daniel Schleiniger
Thank you good morning. Before we proceed, I would like to make the following Safe Harbor statement.
Today’s call will contain forward looking statements, and I’d 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 filed with the SEC on Form 6-K.
I would now like to turn the call over to our Chairman, Woods Staton. Woods, please proceed.
Woods Staton
Thank you, Dan. Hello everyone, and thank you for joining us today.
Similar to the second quarter our third quarter was strongly impacted by volume decline during the final two week of the FIFA World Cup. In addition, once the tournament was over we encountered continued weakness in the operating environment of our key markets which pressure our result.
As we mentioned in our last call we have launched efforts to support our customers for offering more affordable dining options. Well it is too early to come to any conclusion, we've seen stabilization in volumes towards the end of the third quarter and into the fourth quarter.
During the quarter, slow economic growth, political uncertainty and rising inflation continue to dampen consumer spending in the region. Our largest market Brazil was particularly impacted by the overhang of FIFA World Cup in July.
As a result, consolidated third quarter results fell short of our already lowered expectations. Organic revenue grew 9.7% year-over-year backed by a 7.4% increase in comparable sales.
As predicted, although we were able to achieve further efficiencies in G&A and other cost items our EBITA margin deteriorated with promotional efforts designed to the defend traffic in the current environment. At the start of the fourth quarter, we are seeing some evidence of stabilizing volume trends and are optimistic that we can benefit from the seasonal pick-up in consumer activity and the promotional campaign to be a planned through year end.
However, we now expect organic revenue growth to be on the low end of guidance. Our 2014 opening schedule remains on track and we expect to achieve our target of 84 new restaurants.
35 restaurants were opened this year to September 30 of which approximately 60% are freestanding. As is customary, the bulk of opening will be concentrated in the fourth quarter.
With completion of the remaining 49 units currently scheduled for the last three months of the year. Accordingly, our full-year CapEx guidance remains unchanged at approximately $180 million.
In terms of EBITA, our visibility of the remaining month of the year particularly the traditionally strong month of December has been impaired to a high level of volatility and deterioration in the macro environment in our markets. Currently, fourth quarter’s results are trending below forecast due to promotional efforts of defend traffic and a rising cost environment.
Our focus on this market environment is to two folds. First, we will drive traffic by expanding our valued platform and second we will advance on our near term plans reduced leverage and increased profitability, traditional cost saving and efficiency improvement.
Today, I would like to spend some time talking about the longer term aspect of the strategy. Having completed the first stage of our planning process for 2015, we will review of our capital allocation policy and in the context of lower free cash flow generation which GAAP challenging operating environment I will be recommending to the Board of Directors at our December meeting to suspend the dividend payment for 2015.
Instead, cash from operations will be used to repay debt in particular short term debt, so as to bring leverage back in mind we are target ratio of around 2.5 times. Capital expenditure will be used selectively to fund new development next year.
We expect overall expenditure will be lower and will concentrate most of our new restaurants opening in our highest potential markets particularly Brazil. Over the next two years or so, across the region, we planned to shift the higher percentage of unit well to sub franchisees.
As we increase our of share investments to upgrading our existing restaurant base. Around 30% of our opening this year will be sub franchisee operated restaurants.
We are progressing in the integrate process of evaluating the optimal geographic presence. Return and risk mitigation scenario for Arcos Dorados, as we seek to leverage expansion to our current or new franchisees going forward.
We remain committed to our strategy of opening a higher percentage of freestanding units which provide greater revenues for restaurants multiple revenue generating opportunities and significantly more branding then the simple point of sale. Cost saving is our another key area focus going forward.
We’ve already taken steps that will deal an annualized reduction in G&A or at least $20 million. And during the third quarter, we achieved a 46 basis points year-over-year reduction in G&A as a percentage of revenue.
Looking ahead of 2015, we’ve planned a maintain G&A growth below inflation, resulting in our reduction in oil in real returns. Last quarter we announced that we’ll began working to identify and realize savings in our non-product purchase process which is a part of occupancy and other expenses.
This coverage has already yield annualize savings of $7 million to the implementation of our reverse auctions and scale driven cost reduction among our initiative next year we expect this figure to increase to around $50 million. This is one of the key elements of our planning process for next year and beyond.
A further growth of cost savings and margin improvements in 2015 is expected to come from system wide advances in technology which raise the efficiency of our operations. In recent months, we’ve been piloting a new scheduling system in Brazil which has significantly lowered labor cost in test locations.
Based on this initial success, we’re now rolling up system throughout Brazil and expected to be fully implemented by July of next year. Thereafter and assuming we achieved the results we expect, we will implement this system in Argentina by the end of 2015.
Given these two markets account our half our company operated restaurant base, we expect the roll out of a new system for substantially lower labor cost in 2015, with a full impact to be realized in 2016. As a single brand with a single cooking system, we are in a unique position to capture scale advantages such as this.
Despite current market conditions, we know that McDonald’s continue to be the preferred brand in the minds of casual dinners in Brazil. Based on our long-standing internal brand tracking surveys, when asked to rate the dominant branded QSRs from the country on a range of key metrics including value commodity convenient, décor and ingredient quality responded in favor of McDonald’s over our competitors.
And also like to make a comment on the category the majority of people who eat out in informal dining segment in Brazil do so at burger establishments. And the preferred venue with those people of McDonalds with four times the market share of the next brand QSR.
In the current environment, the frequency of visits within the formal sector has declined. However, when growth in our markets recover and our markets recover.
I am confident that continued brand preference McDonalds along with the steps that we are taking to improve our operation efficiencies will mean the we too will recover and at a fast phase that appears. I will now turn the call over to Sergio for a more detailed look of our third quarter performance.
Sergio Alonso
Please turn to slide 2. During two years of weak economic growth our core strategy to protect traffic and market share during the quarter we increased our focus on our GPPP platform and we continue to leverage as trend of the McDonalds brand in our marketing activities, focusing on the family experience and iconic products.
As an example, towards the end of the quarter, we introduced the Super Mac and Mega Mac promotions in Brazil and have received a positive response from our customers. Key third quarter marketing activities included the re-hit of Chicken McBites in the largest markets, the introduction of Danonino in the Happy Meal in Brazil, Argentina and Uruguay and the inclusion of sandwiches such as Triple Bacon with Cheese, the McBacon and the Duplo Pampa is our always attractive affordability platforms.
Additionally, the dessert category performed well with introductions such as McFlurry Oreo and the McFlurry Milka Choco Swing. Looking ahead to the fourth quarter, we have stepped to drive topline growth to increase advertising of the GPPP platform the roll out of product that have historically performed well and strong Happy Meal properties.
Please turn to slide 4, consumer sentiment remain weak in Brazil in the third quarter due to low economic growth. As we discussed last quarter the FIFA World Cup might once in a lifetime marketing opportunities for the McDonalds brand in Latin America.
However, during game days we did experience a significant decline on profit. There resulting increase of 3.7% in as-reported revenues in the third quarter was below our expectations.
In organic terms, revenue growth was 3% as the Brazilian real appreciated modestly against the U.S. dollar following several consecutive quarters of year-over-year declines.
Comparable sales declined 2.4% in the quarter. Growth in average check was offset by a decline in traffic which in addition to the FIFA World Cup was impacted by a calendar shift in winter holidays an ongoing soft consumption in the country.
Although we’ve not yet seen growth in traffic, I am pleased to report that we did see a stabilization in traffic trends towards the end of the third quarter and at the start of the fourth quarter, which is evidenced that our promotional activities are taking effect. Despite the weak macroeconomic backdrop, I am pleased to report that McDonalds visit share increased versus the second quarter which again shows that our marketing activities are taking hold.
Key quarterly marketing activity included the return of Chicken McBites and the launch of McFlurry Talento Castanhas-do-Pará and McFlurry Oreo in the Dessert Category. The Company’s affordability platform performed as expected and included the Crispy Tasty and Duplo Pampa in the quarter.
The net addition of 71 restaurants during the last 12 month period, of which more than half were free-standing units, contributed $24.4 million to revenues in constant currency during the quarter. As you can see on Slide 5, top line growth in NOLAD was also impacted by a weaker consumer environment and sharp drop in traffic around the FIFA World Cup.
Reported revenues declined 7.8% year-over-year or 5.1% on an organic basis. System-wide comparable sales were down 8.3% due to declines in average check and traffic.
The decrease in average check primarily reflected a shift in May. As part of strategy in Mexico, we have tested a new menu which enables consumers to personalize their dining experience and integrate more locally relevant flavors.
We have been listed into our Mexican customers and we understand every value, variety of choice and the ability customize their meals. We believe that this new menu strategy will cater directly to these preferences leveraging the McMio cooking system in our Mexican restaurants to deliver a more relevant dining experience for them.
Once we have gathered sufficient information and have made the appropriate adjustments, we expect to rollout the concept to all of our Mexican restaurants. Another initiative that is also gaining traction in Mexico and elsewhere in the region is our open doors program, or else we call it puertas abiertas.
So far we have guided over 250,000 guests to our Mexican kitchens so that they can see first time the high quality ingredients that we use and superior hygiene standards that we apply in our kitchens. We plan to expand this program, which raises consumer perfection in the quality and freshness of our ingredients.
Key quarterly marketing activities included the launch of Chicken Festival in Panama and the Big Mac Manía in Costa Rica as well as Happy Meal properties with great results. Finally, the net addition of eight restaurants during the last 12-month period contributed $4 million to revenues in constant currency.
Please turn to Slide 6; SLAD achieved organic revenue growth of 19.5% versus the prior year period. However, taking into account of 48.4% year-over-year depreciation of the Argentine peso reported revenues decreased by 12.2%.
Comparable grew 18.5% in the quarter, this was driven by average check growth of the impact of the FIFA World Cup and deterioration in the macroeconomic environment in Argentina, spread about a slight decline in traffic. Quarterly marketing activities included the return of Chicken McBites and the inclusion of the Triple Bacon with Cheese in the affordability platform.
The dessert category performed well and included the launch of the McFlurry Tres Suenos and the McFlurry Milka Choco Swing. The net addition of eight restaurants, during the last 12 months, period contributed $6 million to revenues in constant currency.
Moving to slide 7, excluding Venezuela, the Caribbean division’s revenue decreased by 2.9% both on an as reported and organic basis during the quarter. Comparable sales decrease 11.2% due to nearly to a negative charges and the shift in mix in both Puerto Rico and Colombia.
Notable marketing activities in the division including the long term Chicken McBite for the first time in Venezuela, the re-run of Chicken Bacon Onion both beef and chicken in Colombia and the McBacon platform also beef and chicken as part of the affordability platform in Puerto Rico among others. The net addition of six restaurants during the last 12 months period contributed $8 million to revenues in growth comparison.
Overall, consolidated reported revenues excluding Venezuela decreased 2.9% but were 6% higher on an organic basis year-over-year. Please turn to slide 8, during the last 12 months we extended our portfolio with the opening of 108 restaurants.
As Woods mentioned, we continue invest in freestanding restaurants which we regard as a long term investment in our customers. Accordingly, just under high of our covered portfolio is made of a standing restaurant like more than 50% of our openings in 2014 will also be freestanding units.
At the end of September, our restaurant base reached 2086 restaurants. And during the past 12 months, we added 297 new dessert centers and 16 new McCafes, bringing the total to 2425 and 344 respectively.
I will now hand over to German for discussion in our adjusted EBITDA and key balance sheet metrics.
German Lemonnier
Thanks Sergio please turn to slide 9. Our third quarter consolidated adjusted EBITDA decline to 6.9% that increased 11.2% on an organic basis that to the prior year quarter measured in constant currency.
Excluding Venezuela third quarter adjusted EBITDA was down 32.1% 5.9% organic terms. This decline was driven by higher food and paper and occupancy and other operating expenses which more than offset level G&A expenses up to percentage sale.
As we discussed in the opening remarks, we continue a efficiency improvement through our organization and during the third quarter we achieved the first fifth basis point year-over-year reduction G&A at a percent of revenue. This comes in top of 83 basis points savings in the first half of the year.
G&A leverage reflect a lower G&A rate and a headcount reduction at the end of 2013 and also during the second quarter of this new year as you know Venezuela hedge basin our corporate headquarters in Argentina. Negative G&A and food and paper cost were not sufficient to offset higher achievements in our base incidences as a percent of sales.
As a result the adjusted EBITDA margins decrease 154 basis points to 7.3% is mostly decline this is to effect all division excluding the Venezuela the operation that will be imagine between 89 basis points and 7.6%. Turning to our division result, the fleet reported adjusted EBITDA decrease like 1.3% and 4.8% on organic basis in the third quarter.
As anticipated recently, effort to protect market share and estimated traffic to promotional activities resulted in deterioration in adjusted EBITDA margin which declined 61 per basis points to 12.1%. In the quarter, both G&A growth were lower at a bedding sales related benefit from adjustment to delivery compensation and mutual year-over-year comp.
However, this factored one more than offset by higher food and paper cost due to the shift in mix and occupancy and other operating brand as a percent of good sale. As we have closely disclosed our food and paper costing 1% hedge against currency exposure to imported groups and we also already hit 100% of our expected U.S dollar exposure to DRO 4215.
Turning to NOLAD adjusted EBITDA decreased 19.7% year-over-year or 16.7% on organic basis. Adjusted EBITDA margins declined 97 basis points to 6.7% as a lower food and paper cost was more than offset by higher payroll cost and occupancy and other operating expenses as a percentage of sales.
Adjusted EBITDA was down 27.4% in SLAD but up 1.7% on organic basis. The adjusted EBITDA margin constructed 216 basis points to 10.3% as a higher food and paper cost as a percentage of sales more than offset efficiency to level cost G&A and occupancy and other operating expenses.
The increase in food and paper cost as a percentage of sales was primarily reduced due to the start-up cost increases in excess of price adjustment in Argentina combined with negative mix effect. In the Caribbean division, excluding Venezuela, adjusted EBITDA declined 26.2% as an on-reported basis and 26.9% as on an organic basis.
Adjusted EBITDA margin dropped 103 basis points to 3.2% as the higher occupancy and other operating expenses as a percentage of sales more than offset leverage on food and paper, payroll cost and G&A. Our business in Venezuela continue to face difficult and [dynamic] operating environment.
However, the difficulty mentioned the division also still generating cash in local currency terms and it’s not expected to require cash injections throughout the remaining of this year. When we able to obtain almost $3 million so far to just to get to a mechanism although the availability of U.S.
dollars reduce mechanism declined over the curse of the third quarter. Coming to slide 10, non-operating results reflected a non-cash 7.7 million increase in FX exchange losses.
FX losses for the quarter were mainly driven by the impact of the depreciation of the Brazilian Real, which generated a loss on intercompany balance, partially offset by a gain related to the BRL-denominated long-term debt. And $8.8 million decrease in net-interest expense also impacted non-operating results.
Net income was $240,000 compared to $19.6 million in the same period of 2013. The decline primarily reflects lower operating results and higher foreign exchange losses which were partially offset by lower net-interest and income tax expenses.
Earnings per share were $0.001 in the quarter for 2014 compared to $0.09 in the previous corresponding period. Slide 11, contained our debt indicators.
Cash and cash equivalents were 94.8 million at September 30, total financial debt was $886.5 million while net debt was $791.7 million and the net debt to adjusted EBITDA ratio was 2.9 times. As we’ve mentioned the level of ratio is expected to decline back in line with our targeted ratio of around 2.5 times by the end of 2015.
I will now hand the call back to Woods. Woods?
Woods Staton
Thanks German. Before I open up the call for questions, let me reiterate that we remain deeply committed to our market.
We’ve been in the region long enough to know that while cyclical our sector produces strong growth in times of robust economic activity. The steps that we’re taking to streamline organization now we’ll not only improve our short term result but we’ll also position us well for the next upturn in the cycle.
And the investments we’ve made in platform such as Made For You will allow us to leverage the global personalization initiative being spearheaded by McDonald’s. Looking ahead to 2015, our focus is on defending traffic containing those cost under our control, reducing leverage and strategically expanding our footprint.
We’ve a strong marketing calendar in place that draws tried and tested promotional activities and strong Happy Meal properties with which we expect to drive top line growth in the slow economy. We do not expect a better macro and operating climate next year but the absence of one off again such as FIFA World Cup will enable plan to marketing activities to achieve their full potential, while easier year-over-year comparisons should also benefit results.
In addition to the top line growth, we expect margin improvement in 2015 as we take steps to control labor and other non-product cost as well as to continue to reduce our G&A expenses in near term. We are in the final stages of our planning cycle by early 2015 I expect to come back to you with a more detailed look at our major goals for the coming years.
Thank you for attention. I would now like to open the call up to questions.
Operator
(Operator Instructions) Our first question is from Bob Ford, Bank of America Merrill Lynch, please go ahead.
Bob Ford - Bank of America Merrill Lynch
I was hoping if you could discuss or give your CapEx plans for 2015 as well as discuss any store closure or sub-franchising plans as well as their associated costs for next year please.
German Lemonnier
We revised our operating guidance from 90 to 84 this year. And we’re still doing our plans for next year and so we still don’t have the numbers we’ll get back to you early next year with that.
As far as store closings are concerned, we have over years been closing non-performing stores as they show up. And so that’s part of our opening and closing process, there’s nothing that we foresee that is major in that sense.
And the last part of your question on sub-franchising. We’re looking at sub-franchise system, we have the ability to go from up to 60% of our stores as per MSA.
Today around 75% of our restaurants are company operated and the remaining 25% is franchised, this year just so you know about 30% of the total openings on hands of sub-franchisees and for the next two years or so we plan to continue to shift from a higher percentage or our unit growth to our existing or new sub-franchisee base as we focus our investments on upgrading our existing restaurant base as I mentioned before. So I think some of this is important to say here, this is a very complex process and need to make sure we mitigate the potential risk for the shift in our current mix.
Operator
Our next question is from Jeronimo De Guzman from Morgan Stanley. Please go ahead.
Jeronimo De Guzman - Morgan Stanley
I had a question on your margin outlook for next year. I think you mentioned that you expect to have some margin recovery in 2015, but just wanted to see how you reconcile that with an outlook for likely still lower same store sales growth and also a value focus which should hit the food and paper costs.
So are you saying that the G&A savings will help offset -- the G&A and labor pressures will help offset these other pressures on your margins?
Woods Staton
Let me say we’re working as we said earlier on reducing G&A in real terms, they want a technology to help us with technology to help us with labor cost, to give you more color on this question let me pass you to German.
German Lemonnier
So it’s too early to say anything about the plan, we’re planning to remodel but reproductive with more details at the Division of Mexico.
Operator
Our next question is from Martha Shelton of Itau BBA. Please go ahead.
Martha Shelton - Itau BBA
Quick question for you regarding some of the payroll benefits that you mentioned that we'll see by the end of 2016. Can you quantify the expected benefits from the new labor scheduling system?
I don't know if you can give us a dollar amount or as a percentage of sales. I guess what I am coming at is, do you think this will be enough to offset the royalty step-up that commences in 2017?
Woods Staton
We’ve had some pilots in this have been very encouraging, we now have 11 stores in Brazil working in this new system, as I said there is encouraging. I don’t want to extrapolate this early stage to the rest of the Brazilian Company or even to the whole Arcos Dorados, but I would say that we can get perhaps 0.5 even better out of all those, that it’s all speculation, the pilots are giving me much better numbers by the way.
But that is going to help us what about I think important thing to see here is this is not just a questioning of taking people off they are schedule a shift and lowering the experience of the customer. What we are doing here is we are going to becoming a much more efficient in to allocation of our people per hour.
So to do this we’re not lowering quality standards and to do it effectively is quite a few so we’re very happy with that.
Operator
Our next question is from Roy Yackulic from Bank of America. Please go ahead.
Roy Yackulic - Bank of America
Yes. I’m wondering if you can talk about free cash flow expectations next year and where we might expect leverage to peak before you start to turn it down to your target of 2.5?
Woods Staton
Yes let me pass it to German.
German Lemonnier
Yes several things to comment on that first of all we believe that we have a healthy balance sheet and the reason to be strong length and aspect. As we must remain that our June 1st we began to way to get through effects translate in Venezuela and we got from a lower still rate of 50 and that’s create significant impact in long touch impacting our duty and EBITA.
Basically this non cash impact are good ratio of 2.9 times effects to tender fairy. In 2015 we expect to reduce the net debt to EBITA ratio for different reason one it fully adjusted EBITDA should be not blamed there expected by the non-cash impact related to the translated Venezuela did you get through that is very important because the impact was significant this year.
And adjusted EBITDA should concept that everybody mentioned taking to whether and lining for profitability of our business and efficiency of our business and access cash with focusing debt reduction for more short term debt reduction and in number of year planning to an update delay next year and basically that nature we plan to reach around 2.5 time EBITA at the end of 2015.
Operator
Our next question is from John Ivankoe from JPMorgan. Please go ahead.
John Ivankoe - JPMorgan
Great, thank you. Just wondering if kind of your current economic outlook in Brazil, your competitive outlook in Brazil has maybe affected your thoughts of how many ultimate McDonald’s that you think could be in the market.
And quite frankly, I don’t remember even what that target is. But considering what kind of the way that you’d be in the markets today and you understanding the trade areas better than any of us on the call, how many McDonald's units do you think that you could successfully have in taking economic growth and competition into consideration?
And a follow-up as well.
Woods Staton
Hi John. The potential for Brazil in the long term is still there and is still very it’s very present and so I think we’re going through right now is a cynical thing in Brazil.
We’re having a problem with stores so much time we’ve open recently because all the tenants frontier goals shopping centers. But those are things that are temporary so I would think our long term deal in Brazil has not changed at all.
The consumer environment remain mute today and the economist are predicting a deceleration in growth and everything from 0.1% to 1% growth to next year I guess too early to talk but we are not going to do. In response to all of these challenging environment we are focusing on succession a traffic in market share with value proposition.
And we’ve also been focusing on variables within our control. We’ve lost in some of the key interest is implemented hedges environment to stabilize some dollars cost like toy and some important French fries at 238 while you say hedging for 2015.
We have a very strong marketing calendar for next year plus as we have mentioned before should be come to the little trust for early this year. But I think the important thing to mentioned here is the Brazil’s long term fundamentals are backed by very, very strong long term demographic trend, burgeoning middle class what was talked about and the preference for community.
Operator
Our next question is from Jeronimo De Guzman from Morgan Stanley. Please go ahead.
Jeronimo De Guzman - Morgan Stanley
Hi. Just one clarification and a follow-up question.
I think you mentioned you’re hedged at 238, is that for 2015 in Brazil for FX? And then the follow-up I had was on Venezuela.
I noticed that the EBITA margin was negative this quarter. The EBITDA was slightly negative.
And just wanted to see what drove that because I thought the underlying EBITDA would still be positive, if you kind of once you remove all the impacts that you had in the prior quarters.
Woods Staton
Yes they hedge I mentioned is variables for 2014 and the answer for question on Venezuela I’ll pass you to German.
German Lemonnier
Yes with the two rated to the first in 2015 and Venezuela improvement in margin in the last quarter was basically created because some reversion in account between the Venezuela operating business and the distribution center. It's normally that you try to keep up the cost increases, trying to giving advantage specifically in some accounts, every several time you review the account and if there are any difference in favor or against the company, we adjust the account.
Obviously with 82 plus inflation and basic evaluation in Venezuela it’s very difficult to [consolidate] this account. So basically we adjust the account in Venezuela but it’s more related to that in term of margins but the economic or improvement annually in any macro environment there.
Operator
Our next question is from Martha Shelton from Itau, please go ahead.
Martha Shelton - Itau
Hey, thanks for the follow up. So really quickly on Mexico, can you tell me if you're losing market share to Burger King in Mexico or/and the informal sector?
And then also a follow-up is, I'm not sure if I heard you correctly regarding non-product input cost savings, was that $15 million or $50 million for 2015? And if you could give some examples of these savings.
Thanks.
Woods Staton
Yes, let me pass it to Sergio so he can give me some color on -- .
Sergio Alonso
You want me to take the first part of the question about competition in Mexico. Well, given the strong competition that we faced in the country both from informal and formal players our value offerings in new products and categories combined have been a key part of our strategy to remain competitive in the market just for you to have an example in this quarter we continued with the Habanero Ranch on the hamburger category, McFlurry Milky Way on the dessert, good proposition Happy Meal of risottos.
A consequence of that, we saw good times for restaurant per month increased actually in the last couple of quarters that obviously led us to believe that when compared to branded competitors we’re gaining share that is out of discussion and quite clear. You can put this also when you compare to the performance of our comp sales with that of our formal public branded competitors in the market.
Regarding the informal sector where we don’t know that in Latin America this is a situation that is pretty common I would say in most of the region when the economy sort of stabilize or tend to enter a week cycle obviously people tend to increase a visits to informal venues because of the consequence of they’re not paying taxes they can have lower prices but that’s a we believe a temporary situation and as long as the economies recoup, they’re bounded to recoup then we will gain those customers back. It also taken --
Woods Staton
Yes, and I think I mentioned 15 not 50, I will it will 50 but it’s 15.
Operator
Our next question is from John Ivankoe from JPMorgan.
John Ivankoe - JPMorgan
Great, thanks for the follow-up. Regarding growth in franchisees or even re-franchising, I mean is it still the case and I just want to make sure that I understand it that the franchisee royalty gets paid up to MCD and where you make the money is basically on the rental income from the land and the building.
In other words, that franchisees grow well at least for a while that growth still happened on your CapEx or is there perhaps another alternative to a more capital like model where you can benefit from that? Thanks.
Woods Staton
Yes, John. As you said, loyalty payment flows straight up to the McDonald’s Corporation and I do also think we make income on the rental income from the sub franchises.
So what we’re doing is we’re looking at the maps of all of the companies but for us you will see we can restructure and refit the franchises versus the our own company owned stores to get maximum benefit not only from an economic point of view, now only from a cost savings point of view or capital allocation point of view but also from a long term operating view. So it’s work in progress and there are lot of it’s a complicated process but yes we’re looking at it and this company is that’s hold potential.
Operator
Our next question is from [Renata Komanova], please go ahead.
Unidentified Analyst
Hello, Can you give more clarity on -- you mentioned in the beginning of the call that you want to increase the freestanding stores and I thought that they were lower return and the same goes to increasing sub-franchisees. So if you can give more clarity on that.
Unidentified Company Representative
Yes, how are you? We are here for the long term.
This is the long term business and while we’re talking about having a balanced view to our growth so we’ve a large part of our stores are freestanding, they’re more expensive the return might be bit slower but over the time we’re gaining truly what McDonald’s is all about. We’re giving them a drive thru.
We’re giving them – ability to have 24 hour service, I mean 24 hour service to people. You would have play land, you also birthday parties.
So this is what McDonalds really is all about. Now we also want to go to where people go, food court and malls also, we continue with that.
But I think the key word here is that we’re looking at balanced growth of our real estate portfolio and we’re very comfortable of what we’re doing, if something has worked for McDonalds in the past and all over the world, so we’re not going to reinvent anything in this sense. And as far as the sub-franchisees, we mentioned also they’re going to be doing the same kind of things because it depends on what you want to do and how best you want to exploit the opportunities in a new city or existing cities.
So I think that their strategy and our strategy with them will be similar to the strategy we have with our own stores.
Operator
Our next question is from Robert Schweich of Burnham Securities. Please go ahead.
Robert Schweich - Burnham Securities
I have two questions. My recollection of the sub-franchisee was often those would be located in the markets that are more distant and where you don't have the mechanism of control.
And I'm wondering in your thinking in this area, are you changing your point of view on that aspect of it because it's not clear and perhaps you might -- do you have a number that John Ivankoe asked for as your ultimate goal in Brazil, about the long-term target? Now that's all one question.
The second question that I have is a macroeconomic question. I think that -- I think we would all agree that the significant part of Arcos Durados issues these days are the difficulties in not only foreign exchange, but the cyclical downturn that's occurred particularly in Brazil.
And I am wondering if you would comment your views on the effect and the outcome of the election in Brazil and the impact that this might have going forward?
Woods Staton
The sub-franchisee part, as I mentioned this is -- we’re looking at this tactically for the next two years where we’re still working on this matter, not necessary a long-term thing. But yes you’re right, we’re willing to look at areas where they’re more distant from a main center and we also might do some reengineering of cities.
I mean there are some cities where we our own stores our own restaurants plus franchisee stores and clearly, we might have an only as franchisee store. So there is a reengineering part and also the growth part.
But you’re right, as far as foreign exchange and the business type being a challenge for us, yes. And in Brazil I don’t want to comment on politics but I think with Brazil is long-term story, we hear things that Brazil and the present government is taking steps to become more business friendly and we look at that very happily.
But we’re expecting the short-term to be challenging. No matter what the outcome of what Dilma does as far as her cabinet is concerned.
They’ve been experiencing a slower and economic activity for a while and we believe 2015 will be just another one of the challenging year. I mean every month we’ve had a weak collection of the GDP growth for 2014.
Having said all of that we’re very confident of the long-term of Brazil is huge and it has this huge potential for our business. And the story of Latin America is that it took all economy.
So we’re trying to position our company as best as we can, so you can go from different cycles and they’re working hard at that, it’s a lot of work and we will hear.
Operator
Our next question is from Mostafa Maleki from Jadara Capital. Please go ahead.
Mostafa Maleki - Jadara Capital
Two questions. First one is what's the expected uplift in average unit volumes between a freestanding restaurant and a regular one?
And what percent of the mix, of the restaurant mix do you expect freestanding ones to be in say five years? Then the second question is regarding your debt, and in particular where you stand vis-a-vis any of your debt covenants?
Woods Staton
Let me pass the first part of the question to Sergio Alonso on the restaurants and then I’ll pass to German to answer on the debt covenants.
Sergio Alonso
I would like to complete what you mentioned about the food standards and the difference between these type of restaurants and the other four. Aside from the difference in investment the standard they have more capacity to grow over time.
There we only depend on ourselves and our capacity to attract customers while we provide the full experience in Playlands and McCafes also to drive through with market that we dominate in Northern America. So they typically have a has a potential to grow all the busy years if you compare the performance try to restaurants of your standard you need a shopping mall.
In the shopping mall we will always depend and they are really create mall to attract traffic okay they are not self-sufficient there and we are the expense of increasing competition in for instance a new shopping opened in the century. Which is something that really happen last particularly in Brazil in the last couple of years.
So again in spite being knowing more intend to the instance of capital requirement we prefer to a sustain a significant share of pretending units. Because we believe that is the way to differentiate our brand from the others.
German Lemonnier
Okay in some of columns take afford most important that long term debt don’t have in government so we are free of government in the DRL debt and 20-20 bound debt because some column with the shift increased line with Bank of America that we have to wait last quarter so we are free in going to that and is Bank of America could rise a column that without penalties. At the same time we have come rationality to cover the McDonald’s operation particular fix trial superior ratio and level ratio as explain before the main reason of our relation was the one time charge cashing benefit at McDonald survey we waived the ratio for rest of 2014 it has not been seen and bit one time one cash input in our PNL with clear and then the way to longer mix so summary we don’t have any concern in terms of governance in our debt.
Operator
Our next question is from Mark Jason from Invesco. Please go ahead.
Mark Jason - Invesco
I also was asking about the covenants, but besides that, I’d like to hear more specific comment on free cash flow and how you intend to generate free cash flow going forward. I know you spoke about your stores being freestanding, which building those stores are obviously we know that you’ve some of the best goes towards the CapEx, higher CapEx, lower free cash flow.
When do you anticipate or how are you anticipating to improve your free cash flow situation?
Woods Staton
Let me pass through German.
German Lemonnier
Okay lot of wait to see that in the short term next year 14 that several times we are going to eliminate for 2015 that’s with the same opportunity with $50 million we’ve have a plan to our cost initiative reduction initiative technology G&A. So we plan to recover EBITA our cash incoming from operation we plan the capital allocation for growth trying to balance the free cash flow you need to reduce our short term debt.
That is basically because what we have. We don’t want to increase our debt.
In fact we clearly want to reduce our debt and with the mix in percentage [indiscernible] fee and including technology general reductions, we plan to create cash flow coming from operations and with that eventually he future opportunity free cash flow.
Operator
To stay within the hour this concludes our question and answer session. I would like to turn the conference back over to Woods Staton for any closing remarks.
Woods Staton
Thank you all for your questions and your attention today. We look forward to speaking you with next quarter and in the interim the team remains available to meet with all of you and answer any questions you might have.
Thank you and have a very good day today.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.