Mar 16, 2016
Executives
Daniel Schleiniger - Senior Director of Corporate Communications and Investor Relations Sergio Alonso - Chief Executive Officer Marcelo Rabach - Chief Operating Officer José Carlos Alcantara - Chief Financial Officer
Analysts
Jeronimo De Guzman - Morgan Stanley Roy Yackulic - Bank of America Merrill Lynch Edward Santevecchi - Nomura Securities International, Inc. Andrew De Luca - Credit Suisse
Operator
Good morning, and welcome to the Arcos Dorados’ Fourth Quarter 2015 Earnings Conference 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.
As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation.
As a reminder, today’s conference call is being recorded. At this time, I would like to turn the call over to Daniel Schleiniger, Senior Director of Corporate Communications and Investor Relations.
Please go ahead, sir.
Daniel Schleiniger
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 José Carlos Alcantara, our Chief Financial Officer. Before we proceed, I would to 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 Acceptable 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 audited financial statements filed with the SEC on Form 6-K today.
I would now like to turn the call over to our CEO, Sergio Alonso.
Sergio Alonso
Thank you, Dan. Hello, everyone, and thank you for joining us today.
A year ago, we announced a three-year strategic plan to strengthen our financial structure to better position our company to capture the long-term potential for the McDonald’s as well in Latin America. The key elements of this plan are improving our operating efficiency, reducing our cost structure, monetizing the value of certain assets are reducing net debt levels.
These steps reflect our commitment to managing the business for the long-term. And I’m confident this strategic plan will position Arcos Dorados for sustained profitable growth.
I’m pleased with the progress we have made so far. We’re on track to meet our three-year target and I will now provide you with an update of our remaining initiatives.
We ended the year with positive momentum achieving double-digit consolidated comparable sales growth and margin expansion across all divisions in the fourth quarter. The improvement in our consolidated EBITDA margin is in part a testament to the early success of our efforts to drive operational efficiencies under three-year strategic plan.
Our monitoring actions are driving improved operating performance in our local markets, despite the challenging economic environment, softer consumer spending, and continued currency depreciation in our largest markets. On a full-year basis, comparable sales grew in the high-single digits, and we also delivered double-digit organic revenue growth as well as margin expansion in each of our divisions last year.
We begin 2016 with a lower cost base, having implemented a reorganization plan at the end of last year that would allow us to exceed the minimum target of a 10% reduction of G&A well ahead of the schedule. These savings will be captured in 2016 trend to streamline, corporate, divisional, and country level cost structures.
And moving forward, we will continue working to realize additional efficiencies in other costs. Another initiative that is improving our key component of our cost structure and thus our consolidated EBITDA margin was the rollout of our scheduling and forecasting system in Brazil.
This was completed in the final quarter of 2015 and already we’re seeing improvements in operational efficiency and restaurant level margins following its implementations. Turning to our asset monetization strategy, we have now signed agreements that represent more than half of our total target.
As you know, a key element of this plan consist of an initiative to monetize the value of certain operating and other non-core real estate assets. So far, we have advanced on this initiative in Mexico, where we have signed agreements to redevelop a small number of our high-value properties.
In addition to our products in Mexico, we have hired Jones Lang LaSalle club advise us on the sale of certain non-core assets in Brazil. We continue to be on track to reach our redevelopment targets by the end of 2017.
The plan also contemplates refranchising. Our efforts are also advancing as planned and I’m confident we’re on the right path to achieve our goal.
We have now reached agreement to refranchise more than 25 of our company-operated restaurants. The enthusiasm exist in franchises to invest in additional restaurants, demonstrates their confidence in the long-term opportunity for the McDonald’s brand in the region.
Keep in mind that the primary objective of the monetization strategy is to reduce net debt levels. With respect to our long-term debt structure, José Carlos will update you shortly on the progress we’re making to address the July maturity of our 2016 Brazilian real denominated bond.
But let me just say that we are in the documentation stage of a loan structure with our banking partners. The ultimate goal of our three-year strategic plan is to strengthen our leadership position in Latin America.
We’re focused on improving our top line performance and remain committed to growing comparable sales approximately in line with inflation. We will also stimulate traffic in each of our markets over the medium to long-term.
As always, we will continue to reinforce the customer experience combining our brand favorites with new and compelling menu offerings from the McDonald’s global portfolio. We are focused on delivering great tasting, high-quality food convenience and value in a family-friendly environment to our guests.
I will now hand the call over to Marcelo for a review of our fourth quarter top line results in more detail.
Marcelo Rabach
Thank you, Sergio. Please turn to Slide 3.
We saw a pickup in seasonally check activity at the end of the year. Organic revenue growth reached 13.6% in the fourth quarter, supported by a 12% increase in comparable sales, due to average check growth of outpacing inflation.
Reported revenues were once again impacted by currency depreciation in key countries, especially Brazil and Argentina. Traffic levels on a consolidated basis were lower year-over-year, due to a difficult economic environment in the Brazil division and a couple of key markets in the Caribbean.
However, NOLAD and SLAD achieved flat to higher traffic in the period, as consumers responded positively to our promotional strategies. Please turn to Slide 4, for a closer look at our divisional results.
In Brazil, organic revenue growth was backed by a mid single-digit increase in comparable sales and the contribution of new restaurant openings. Average check growth get pace with inflation in the quarter are more than offset a mid single-digit decline in traffic.
We continue to face significant headwinds in terms of the broader retail sales environment in the county. For the first time in more than a decade, Brazilian retail sales declined in 2015, in the phase of economic uncertainty, high inflation, and interest rates.
Our strategy in these challenging environment is to implement appealing promotional activities that support restaurant traffic levels and provide more value to customers. In keeping with this approach, fourth quarter marketing activities included the Big Cheddar campaign, which is an extension of one of the most popular menu items in Brazil.
In addition, our marketing activities included the Angry Birds campaign, the Quarter Pounder in the affordability platform, and new flavors in the McFlurry. Turning to Slide 5, much like the third quarter, NOLAD’s fourth quarter organic revenue and systemwide comparable sales growth was driven by an increasing average check on flat traffic versus the year-ago period.
Last year, we gained traffic in Costa Rica and saw consistently strong performance in that market. Overall, our management team is executing on point, marketing initiatives included the 30-year anniversary campaign for the Big Mac in Mexico.
Our family business remains a key driver of results backed by successful properties, such as Angry Birds, Hotel Transylvania 2, Mario Kart, and Barbie in the Happy Meal. Please turn to Slide 6, SLAD’s double-digit organic revenue and systemwide comparable sales growth in the quarter reflected higher average check and a low single-digit increase in traffic.
In Argentina, we were pleased with our efforts to retrain traffic and improve average check in the final months of the year, given uncertainty surrounding the changing government and subsequent currency devaluation. Our fourth quarter marketing activities included the Angry Birds campaign and the Big Mac in affordability platform in Argentina.
We also featured the Kit Kat flavor in the McFlurry and the Happy Meal performed well. Turning to the Caribbean’s division’s results on Slide 7.
Organic revenue growth excluding Venezuela reflected a slight increase in comparable sales in the quarter, supported by the ongoing strong performance in Colombia, where we continued offering the Almuerzos Colombianos or Colombian lunch menu. The marketing activities in the period included the Combo ConTo’ in Puerto Rico, strong properties in the Happy Meal and the introduction of new flavors in the McFlurry.
Please turn to Slide 8. We opened 36 new restaurants over the course of 2015, resulting in a total of 2,141 restaurants.
We also added 165 Dessert Centers and two McCafé. During the year, some of our restaurant openings took place in Brazil, where we’ve seen the highest long-term return potential.
Approximately 70% of these restaurants are freestanding units and the footprint remains an important competitive advantage for Arcos Dorados. We are also making strategic investments in our existing restaurant base.
In addition to technology on systems upgrades, we completed 53 restaurant re-imagings in 2015, as we work to continue providing a modern and progressive restaurant experience to our guests. I will now hand the call over to José Carlos for a discussion of our adjusted EBITDA and give balance sheet metrics.
José Carlos Alcantara
Thank you, Marcelo. In 2015, we took some difficult yet necessary measures to strengthen our financial situation and position the business for sustainable growth and value creation in the coming years.
We begin 2016 with a streamlined cost structure, having realized operating efficiencies to a meaningful reduction in our G&A expenses. As Sergio mentioned, in the fourth quarter of last year, we implemented a reorganization and optimization plan, aimed at reducing our G&A by 10% on an absolute U.S.
dollar basis. Our fourth quarter results include an associated charge of $15.8 million in our G&A, which we exclude from our adjusted EBITDA calculation.
Over the course of 2016, we expect to capture additional leverage from the lower G&A base with reduced corporate expenses, as well as to benefit from the impact of the devaluation of the Argentine peso on our reported G&A figures. Turning to our adjusted EBITDA performance on Slide 9.
Fourth quarter adjusted EBITDA increased 3.2% year-over-year, primarily due to a $32.6 million net PIS/COFINS recovery in the Brazil division relating to previous years. The special item combined with the company’s organic growth more than offset currency translation impacts in Brazil, Venezuela, Argentina, and other markets.
On an organic basis, adjusted EBITDA grew 21.6% backed by positive organic growth across all our operating divisions. Excluding Venezuela, adjusted EBITDA increased 6.7% and 15.3% in organic terms in the quarter.
The consolidated adjusted EBITDA margin expanded by more than 230 basis points to 12.6% and benefited from the net PIS/COFINS recovery in Brazil, which more than offset higher G&A payroll costs and occupancy and other operating expenses as a percentage of sales. G&A increased by 18.1%, or 49.6% on a constant currency basis versus last year.
Excluding the $15.8 million reorganization charge, G&A would have increased by 21.3% on a constant currency basis. This initiative will allow us to achieve annualized cost savings of $20 million during 2016.
On Slide 10, you can see that we achieved adjusted EBITDA margin expansion across all operating divisions during the quarter. In Brazil, the net PIS/COFINS recovery offset increases in key cost line items.
This resulted in more than 600 basis points of margin expansion to 23.4% in the quarter. Food and Paper costs were negatively impacted by a shift in product mix and cost increases above price adjustments, partially due to a shortfall in our currency hedges.
While we begin the year fully hedged from our projected potato and toy imports, these hedges were consumed faster than expected, as we sold more fries and Happy Meals than initially projected. The increasing payroll expenses was mostly explained by the recovery of payroll taxes in the prior year quarter.
The NOLAD division continue to expand its adjusted EBITDA margin in the quarter, reflecting continued operational improvements and better productivity levels. The division’s margin expanded by more than a 130 basis points to a 11.1%, reflecting efficiencies in payroll and occupancy and other operating expenses.
SLAD’s adjusted EBITDA margin increased by nearly a 100 basis points to a 11.7%, driven by improvements in food and paper, which more than offset increases in other line items. Excluding Venezuela, the Caribbean division’s adjusted EBITDA margin grew by more than 270 basis points to 3.3%.
Turning to Slide 11. Fourth quarter non-operating results reflected a $6.1 million foreign exchange currency loss compared to an $11 million loss last year.
The foreign exchange loss was mainly due to the continued depreciation of the Brazilian real, which impacted the intercompany balances and was partially offset by the decline in the U.S. dollar equivalent principal of the BRL Bond.
Net interest expense declined by $1.2 million year-over-year to $16.7 million in the quarter. Fourth quarter net income was $5.6 million, down from $10 million in the same period of 2014.
The decline reflects a higher loss from derivative instruments and income tax expenses, partially offset by lower net interest expenses in foreign currency exchange results. Slide 12 contains our debt metrics.
As of December 31, 2015, our net debt to adjusted EBITDA ratio was 2.4 times, down from 2.6 times at the end of the third quarter. Our strategic focus on cash flow improvement, the temporary reduction in capital expenditures, and proceeds from our asset monetization strategy brought the ratio back within our target range of 2 to 2.5 times.
While we expect some seasonal fluctuation in the quarter and ratio over the course of 2016, we also expect to end the year within our targeted range. With respect to the July 2016 maturity of our BRL denominated bond, we’re finalizing the documentation of a loan structure with a number of our banking partners.
The loan will be denominated in Brazilian reais with a principal of approximately $170 million over a four-year term. We will provide you with more details of this loan agreement once it is finalized.
We expect the transaction to close within the next two to three weeks. We have signed agreements to redevelop some of our properties and refranchise some of our restaurant locations, representing more than half of our asset monetization target.
So far, we have received proceeds of over $25 million from these agreements and are working through regulatory approval for some of the redevelopment agreements in Mexico and the transfer of operations for the refranchised restaurants. We are progressing within the timeframe that we expected for both initiatives and we are confident that we will achieve the total targeted amount by the end of 2017.
During the fourth quarter, we also amended the cross-currency interest rate swap agreement that we have in place to hedge about 10% of the US$2,023 bond. As a result of this amendment, we monetized the mark-to-market value of the swap collecting $19.8 million and recording a loss of $2.6 million in derivative instrument losses.
With a portion of those proceeds, we then repurchased $11.7 million, or 47 million reais of the outstanding 675 million principal of our BRL Bond. Before outlining our plans for 2016, let me first summarize our key full-year financial results.
Excluding Venezuela, systemwide comparable sales grew 6.1%, and on an organic basis, revenue were 8.9% higher year-over-year. Adjusted EBITDA increased 4.9% on an organic basis and the adjusted EBITDA margin contracted slightly 7.9% from 8% in 2014.
Moving to Slide 13, for the full-year 2016, we expect capital expenditures to be between 90 and $120 million. As part of our restaurant opening plan agreed too with McDonald’s for the current three-year period 2014 through 2016, we have committed to open a cumulative minimum of 150 new restaurants.
We will meet this commitment by the end of 2016. Approximately 65% of our new restaurant openings will be in Brazil this year.
In summary, our fourth quarter performance was positive, despite the macroeconomic challenges in Latin America. We made clear progress on the goals included in our three-year plan.
Our asset monetization plan and debt refinancing strategy are focused on improving our balance sheet, while the achievement of operational efficiency – efficiencies is positioning Arcos Dorados for profitable long-term growth. I’ll now hand the call back to Sergio.
Sergio Alonso
Thank you, José Carlos, and please turn to Slide 14. We begin 2016 in a stronger financial position versus 12 months ago.
We have made important progress towards delivering of the targets set in our three-year plan and executing against that, this strategy remains our main focus. We’re fully committed to delivering sustainable profitability and our marketing efforts are aimed at stimulating traffic and key component of sales and delivering value to our customers.
This combined with our recently streamlined cost structure will enhance our financial results going forward. Although, we expect many of our markets to continue facing headwinds in 2016, we remain confident in the long-term potential of the McDonald’s brand in Latin America.
Through achieving operating efficiencies, monetizing certain assets, and reducing our debt levels, we will overcome the short-term challenges we are facing and position Arcos Dorados for continued growth and value creation in the years to come. So thank you for your attention.
And I’ll now open the call to questions.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions]. And our first question today comes from Jeronimo De Guzman of Morgan Stanley.
Please go ahead.
Jeronimo De Guzman
Hi, good morning. I had a question, I mean, first, operationally, wanted to see if you could give us an update on whether you have hedged any of the FX exposure in Brazil for your raw material purchases?
Sergio Alonso
Okay, good morning. Jeronimo, I’ll pass the question to José Carlos.
José Carlos Alcantara
Yes, good morning, Jeronimo. Yes, we have similarly to 2015, we have hedged a 100% of our exposure in Brazil food and paper items, which are the potatoes and the toys.
Jeronimo De Guzman
And is there – do you have any details on the average rate you were able to hedge it for the year?
José Carlos
The average rate for the year is approximately 4.1.
Jeronimo De Guzman
Okay, thanks. And then just on the guidance you gave on the CapEx $90 million to $120 million, what we saw last year was kind of – you gave the same guidance and it was on the lower end.
This year, you’ll probably have similar to lower number of opening. So is there anything that we should think of that would cause you to be on the higher-end of that guidance, because it seems like, I mean, I guess, my expectation would be that you would continue to be on the lower-end?
Marcelo Rabach
Yes, Jeronimo, one of those – the most relevant target that is part of the CapEx that is number of restaurants that we’re going to open. So you will say, we expect to have, at least, 32 openings for this year.
The reality is that their range is a bit wide, because we could either potentially increase our investment during the year, its conditions in cash and cash flow are appropriate. And also keep in mind that the target is set in U.S.
dollars. So we may have an impact in terms of a total dollar from CapEx, as a consequence of currency fluctuation.
Operator
And our next question comes from Roy Yackulic of Bank of America. Please go ahead.
Roy Yackulic
Yes. I’m sorry, just had a question, I was confused about the number of new openings in 2016.
From the press release you say there’s a three-year plan that you will first almost to open a 150 in-between 2014 and 2016, and I calculate that 79 were opened. So that would leave like about 71 left to be opened in 2016 to meet the MFA requirements.
And you just stated that they were – you are going to open 32, can you clarify that?
Sergio Alonso
Sure, sure. Good morning, Roy.
The – as I said before, we have the commitment to open 150 restaurants between 2014 and 2016, that’s our commitment with McDonald’s. In 2014, we opened 82 restaurants.
Last year, that is in 2015, we opened 36 restaurants. So the number of openings for this year 2016 would be, at least, 32 restaurants.
Roy Yackulic
Okay. So it’s not net openings, it’s just openings?
Sergio Alonso
It’s gross openings, yes.
Roy Yackulic
Yes, okay. Thank you.
Sergio Alonso
You’re welcome.
Operator
[Operator Instructions] And our next question is a follow-up from Jeronimo De Guzman of Morgan Stanley. Please go ahead.
Jeronimo De Guzman
Hi, good morning, again. Thanks for the follow-up.
Wanted to see, if you could give us a little bit more details on the asset monetization, I mean, it’s helpful and it’s – I think it’s great that you were able to already achieve more than half of it. But wanted to see kind of how – any details on kind of the further asset monetization if it’s goingto be more of the same, or if there’s a change in kind of where you have to go for the incremental proceeds?
Marcelo Rabach
So, Jeronimo, really we are exactly within the same target, the $200 million. We have established our pipeline of properties that we believe are the best candidates.
And keep in mind that there are a few number of properties, in particular, in the Mexican market that are really high value real estate. And those properties are typically much more resilient to ups and downs in the market and even in currency fluctuations.
So we know that said, we’re happy with the progress we have made so far and we are on track with our 2 million target by the end of 2017.
Jeronimo De Guzman
So, I guess, no change in the nature of the kind of assets you’re looking at versus what you’ve already been able to monetize?
Marcelo Rabach
No, not at all, Jeronimo. No.
Operator
And our next question comes from Ed Santevecchi of Nomura. Please go ahead.
Edward Santevecchi
Hi, guys. Just a quick follow-up.
On the loan structure that you mentioned, is that a 170 million reais, or is that in dollar?
José Carlos Alcantara
No, it’s approximately, I’m sorry [Multiple Speakers]. Ed, it’s approximately $170 million.
if you take our…
Edward Santevecchi
Dollars, okay.
José Carlos Alcantara
Yes, dollars. If you take our BRL bond 675, we already reduced $47 million – R$47 million of that.
So if you took exchange rate, I know where you want to take it 370, 380, that it comes to about $170 million.
Edward Santevecchi
Okay, perfect. Just wanted to clarify.
Thanks.
Operator
[Operator Instructions] Our next question comes from Andrew De Luca of Credit Suisse. Please go ahead.
Andrew De Luca
Hi, guys, thanks for taking my question. I’m not sure, if you’ve answered this already.
But on the asset monetization, you mentioned that you reached agreements for more than half of the $250 million targeted amount, and I think you said you also received $25 million in proceeds. So can you give us a timeline in terms of when we should expect the remaining, say, at least, 100 million to come in?
Sergio Alonso
Yes, José Carlos
José Carlos Alcantara
Yes. Andrew, yes, our timeline right now takes us towards the second-half of this year 2016, so between Q3 and Q4.
Again, a lot of these deals require approval or regulatory approval, but again, we expect to have the proceeds Q3 – Q4 of 2016.
Andrew De Luca
Great. Okay.
Thank you.
Operator
[Operator Instructions] I’m showing no further questions. I’d like to turn it back to management for any closing remarks.
Sergio Alonso
Okay. So thank you very much for your attention today.
And we certainly look forward to speaking with your again for the next quarter. So in the meantime, our team remain available to meet you and your answer any questions that you may have.
So, again, thank you very much and enjoy the rest of the day.
Operator
And ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.