Nov 8, 2017
Executives
Daniel Schleiniger – Vice President of Corporate Communications and IR Sergio Alonso – Chief Executive Officer Marcelo Rabach – Chief Operating Officer Mariano Tannenbaum – Chief Financial Officer
Analysts
Robert Schweich – RMB Capital
Operator
Good morning everyone, and welcome to the Arcos Dorados Third Quarter 2017 Earnings Call. A slide presentation will accompany today's webcast, which will be available in the Investors section of the company's Web site, www.arcosdorados.com/ir.
And 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.
Today's conference call is also being recorded. At this time, I'd like to turn the conference call over to Mr.
Daniel Schleiniger, Vice President of Corporate Communications and Investor Relations. Sir, please go ahead.
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 Mariano Tannenbaum, our Chief Financial Officer. Before we proceed, I would like to make the following Safe Harbor statement.
Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.
In addition to reporting financial results, in accordance with Generally Accepted Accounting Principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found in the press release and unaudited financial statements filed today with the SEC on Form 6-K.
I would now like to turn the call over to our CEO, Sergio Alonso.
Sergio Alonso
Thank you, Dan. Hello everyone, and thank you for joining us today.
This morning we reported another strong quarterly result as the positive momentum we delivered in the first-half of the year continued into the third quarter. But before we take you through the results, I would like to saw a few words about our operations in Mexico, Puerto Rico, and the U.S.
Virgin Islands. As you know, each of these markets was impacted by severe natural disasters during the month of September.
We do not expect a material impact on our financial performance given that we have sufficient insurance coverage for both the property loss and the interruption to our business that resulted from these disasters. Fortunately, our business in Mexico was not materially impacted by the earthquakes.
The vast majority of our restaurants and those of our sub-franchisees were back up and running within a couple of days. In the case of Puerto Rico and the U.S.
Virgin Islands the impact of hurricanes Irma and Maria was much more severe. We are now working to assist our employees as they recover from the hurricanes.
From a business perspective these markets represent around 1% of our consolidated EBITDA, and we are working with our insurance providers to assess and cover the property damage in Puerto Rico, Saint Thomas, and Saint Croix. We currently have more than 70% of our restaurants back in operation, and expect to have substantially all of our restaurants operating by the end of the year.
Employees and sub-franchisees from other Arcos Dorados' markets have provided donations that both Arcos Dorados and McDonalds Corporation have matched [ph] in order to support our colleagues in Mexico, Puerto Rico, Saint Thomas, and Saint Croix. We appreciate these contributions which show us once again why the McDonalds system is so strong worldwide.
Now, please turn to slide two. Our strategic approach to top line growth drove high [indiscernible] volumes in our biggest markets.
Better volumes combined with [indiscernible] growth supported stronger revenues and expanded consolidated adjusted EBITDA in the period. Importantly, we also delivered positive net income in the quarter.
More specifically, growth in both traffic and average check resulted in a 10.4% increase in comparable sales and constant currency revenue as well of 9.7% both excluding Venezuela, this sales growth exceeded blended [ph] inflation for our business and reflect the broad-based strength in our fundaments. Our strong top line performance was the main reason we were able to generate a stronger operating result in the Brazil and [indiscernible] divisions as well as at the consolidated level.
As reported, adjusted EBITDA rose 17.5% in the third quarter on the back of top line growth and leverage in food and papers costs and G&A. During the period, we captured and additional 70 basis points of adjusted EBITDA margin versus the prior year.
Finally, the improved rate in result and lower below-the-line [ph] expenses led to a net income of $23.4 million in the quarter. Please turn to slide three, our plans to expand our footprint and modernize our base to keep guests coming back to our restaurants remains on track.
Early results from the rollout of Experience of the Future are in line with our expectations and are within the range of result experience on average in the McDonalds system globally. By focusing on providing a better customer experience through service-oriented employee training and technological upgrades we are transforming our restaurants and de-levering a more convenient, personalized, and enjoyable experience to our guests.
Now, looking ahead, we remain cautious with respect to our short-term performance given that economic recoveries are rarely linear, and we're facing a tough comparison to our strong fourth quarter 2016 operating results. In the medium-to-long-term, we will continue to focus on offering compelling value across our menu board while updating our restaurant base to deliver an unmatched guest experience.
Our operations are becoming more efficient everyday, and our capital structure is as strong I think has ever been. I'm confident that it's likely to drive top line and adjusted EBITDA growth by bringing more customers back more often, regenerate shareholder value and help us to continue capturing the potential of the McDonald's brand in Latin America for many years to come.
I will now hand the call to Marcelo for a review of the key drivers of third quarter top line results.
Marcelo Rabach
Thank you, Sergio. Please turn to slide four.
We continued to generate positive business momentum by focusing on capturing profit growth with affordable menu offerings both Classics and McDonald's Signature Line. In the quarter, we recorded positive right from volume trends in most of our markets, which combined the average check growth to drive our strong top line results.
Reported revenues grew 8.6% with constant currency revenue growth of 17.5%. System-wide comparable sales increased 20.3%.
Thanks to average check growth combined with positive traffic in every religion, with a better result. Comparable sales exceeded value inflation, supported by Brazil, NOLAD, and FILAD [ph].
Please turn to slide five, for a more detailed look of our divisional results. In Brazil, reported revenues grew 6%, supported by the 3.7% year-over-year appreciation of the Brazilian Real.
Excluding this currency tailwind, constant currency revenues rose 3.3%. Consistent with recent quarter, the company's reported revenues were impacted by the re-franchising of certain company-operated restaurants, as company operated sales are replaced by the rental income, we did from our sub-franchise.
From a system-wide basis and constant currency total sales in Brazil grew 8%, while comparable sales gained 6.3% versus the prior year. The comparable sales were sold which was more than doubled the prevailing inflation rate was supported by average check growth and another quarter of positive traffic.
Notably, we achieved this result in the context of an improvement but still soft consumer environment Key marketing activities in the quarter included the introduction of core extensions such as the Duplo Quarterão, the Grand Cheddar McMelt, and the McFritas Cheddar Bacon. We also launched the McFlurry and McShake Prestígio in the Dessert category and included Despicable Me 3 and Emoji in the Happy Meal.
Turning to slide six, NOLAD's revenues rose 8% year-over-year reflecting constant currency growth of 7% and there is more benefit from currency translation. Comparable sales increased 5.9% during the quarter driven by average check growth and increased profit in all of the divisions market.
While our performance in Mexico was strong compared with our peers, the consumer environment remained challenging and we've concerns about the pace of economic recovery. As Sergio already mentioned, the earthquakes in Mexico have a relatively minor impact on our people, property, operations and results in the quarter.
NOLAD's marketing initiatives in the period included the launch of the premium Guacamole and Barbeque Crispy Onion burgers in the Signature Line, and the continuation of the affordability platform McTrío 3x3 in Mexico. The dessert category performed well with the launch of the McFlurry Hershey's Mini Kisses and the continuation of the McFlurry Hershey's Cookies and Crème Bites.
In addition, we included Despicable Me 3 in the Happy Meal. Moving to slide seven, SLAD reported revenues increased 13.6% in the quarter as constant currency growth of 24.5% more than offset negative currency translation impact, resulting from the 16% year-over-year average depreciation of the Argentine peso.
System-wide comparable sales grew 24.9%, well above the divisions blended inflation rate, driven by a combination of average check growth and solid increase in traffic. Large successful marketing activities in the quarter included the launch of the Guacamole burger in the Signature Line and the McFlurry Abuela Goye in the dessert category.
We continued our new affordability platform Combo del Día, while The Happy Meal performed well with Despicable Me 3. Please turn to slide eight, excluding Venezuela, the Caribbean division's as reported revenues rose 2.5%, driven by constant currency growth of 1.6% and a positive currency translation impact.
Comparable sales remain flat as other expense growth was offset by continued traffic primarily in Puerto Rico and U.S. Virgin Islands.
As Sergio has described, the divisions with sales were impacted by the effect of Hurricane Irma and Maria on our businesses in Puerto Rico and the U.S. Virgin Islands, consolidated results to suffer materially of the result of the other events.
Results in the rest of the division was strong, particularly in Colombia and the French, West Indies. Marketing initiatives in the quarter included the launch of the affordability platform McCombo del Día in Colombia and the continuation of the Barbeque Crispy Onion premium burger in the Signature Line.
In addition, we introduced the McFlurry Jet Cookies and Cream in the dessert category and included Despicable Me 3 and Emoji in the Happy Meal. Please turn to slide nine; for the 12 month period ended September 30, we opened 39 new restaurants, resulting in a total of 2,150 restaurants.
We also added 189 Dessert Centers, bringing the total to 2,791. McCafés totaled 317 at the end of the quarter.
Mariano, will now take you through a discussion of our third quarter adjusted EBITDA, and key balance sheet metrics.
Mariano Tannenbaum
Thanks Marcelo. Please turn to slide 10, as you can see our adjusted EBITDA grew by 17.5% or $11 million versus the prior year quarter.
Our strong comparable sales growth along with operating leverage grow both the operating performance as well as the positive net income result in the quarter. Notably, our cash generation would also have the net cash provided by operating activities reaching $67 million for the three months ended September 30.
Consolidated G&A expenses grow 10 basis points as a percentage of revenues. As reported adjusted EBITDA growth was supported by strong constant currency result particularly Brazil and flat partly offset by NOLAD and the Caribbean division.
Please turn to slide 11, our adjusted EBITDA margin rose 70 basis points versus last year mostly due to cost leverage in Brazil. We achieved margin expansion primarily by factoring efficiencies in food and paper, which benefited largely from negotiations earlier in the year to consolidate suppliers as well as from the declining beef prices in Brazil.
Brazil's adjusted EBITDA margins gained 200 basis points to 13% driven by lower food and paper cost, occupancy and other operating expenses and royalty fees as a percentage of revenues. Royalty fees benefited from growth support which McDonald's Corporation began providing during the quarter.
This growth support is expected to be primarily directed towards Brazil and SLAD divisions with a majority of our investments are planned to occur over the next three years. For NOLAD, adjusted EBITDA margin contracted 140 basis points to 9.7%, reflecting higher occupancy and other operating expenses largely due to increases in utility cost as well royalty fees and payroll cost as a percentage of revenue.
This was partially offset by franchising inflows. As Marcelo mentioned concern around the speed of Mexico's economy recovery has impacted consumer backdrop in that market.
In SLAD, adjusted EBITDA margin rose 10 basis points to 10.4%, driven by efficiencies in food and paper cost, partially offset by higher payroll expenses and royalty fees. The royalty fee increase was partly mitigated by the growth support received from McDonald's Corporation.
The Caribbean division, excluding Venezuela, saw its adjusted EBITDA margin contract 70 basis points to 5.4% due to higher occupancy and other operating expenses, food and paper cost, and royalty fees which was partly offset by efficiencies in payroll and G&A expenses as a percentage of revenues. As noted by both, Sergio and Marcelo, we do not expect our medium to long term consolidated results to be materially impacted by the hurricanes.
In the short term, we are working with our insurance providers to assess and fully cover the impact of both, the property damage as well as the interruption of our business in Puerto Rico and The U.S. Virgin Islands.
On Slide 12, non-operating results reflected a non-cash $5.6 million foreign currency exchange gain versus a non-cash loss of $3.3 million last year. The net gain related to insurance company balance was mainly due to depreciation of the Brazilian real from the previous quarter end compared to depreciation last year.
Net interest expense fell $3.2 million year-over-year to $15 million in the quarter given the lower financing cost of our structured long term debt. We generated $23.4 million of net income compared to a net loss of $1.8 billion in the same period last year.
This reflects higher year-over-year operating result combined with the positive volumes in non-cash foreign exchange reserve, lower net interest expenses, and lower income tax expenses. On Slide 13, you can see that debt metric remained strong at the end of the quarter.
As of September 30, 2017, our net debt to adjusted EBITDA ratio was 1.3 times. We continue balancing the FX exposure of our long term debt.
As of the end of September, the FX exposure of our long term debt stood at approximately 50% U.S. dollar and 50% Brazilian real.
We are winding down our redevelopment initiative. For September 30, 2017, we have received cumulative cash proceed of approximately $150 million from the redevelopment of certain of our properties mainly Mexico.
As a reminder, we used $80 million of these funds for debt reduction. We expect the total redevelopment proceeds to reach approximately $170 million with the final amount to be received by the end of 2017.
We are pleased with the progress we have made so far by focusing on sustainable top line growth drivers to support operating leverage and more importantly increased cash flow generation. Looking ahead, we remain committed to fully funding our expansion and investment plans with cash flows from operations while maintaining a healthy balance sheet, Fx exposure, and debt metrics.
I will now turn the call back to Sergio.
Sergio Alonso
Thank you, Mariano. Please turn to the final slide.
Over the past several years, we have executed the key components of our turnaround plan by achieving efficiencies in our restaurants up gradations as well as meaningfully reducing our G&A expenses and long term debt levels. These initiatives combined with our successful marketing efforts and improving consumer environment are driving better top line and EBITDA performance.
As we have mentioned on previous calls, our growth strategy in the years to come will include expanding and modernizing our restaurant base by adding digital capabilities and enhancing the use of technology. In addition to these critical changes to our restaurant, we are also driving cultural shift across the organization.
For example, we are improving operational excellence and customer satisfaction as part of our Service Culture program which helps employees personalize guest experiences. During the quarter, we also maintained a strong commitment to the communities that we serve.
Notably in August we held the [indiscernible] in Brazil, which raised a record amount of funds to support the Ronald McDonald Institute in the country. And we also made further progress in our effort to support youth employment initiatives across the region by signing agreements with Ecuador's Labor Ministry.
Looking forward, our compelling menu, unmatched customer service, and investment plan that is modernizing our restaurant uniquely position us to benefit from an expected improvement in consumer trend in the region. We will continue to leverage the strong potential of the McDonald's brand in our markets to drive growth and generate shareholder value.
And finally, I want to thank all the employees, suppliers, and franchises who provided aide to the search and rescue operations in Mexico, Puerto Rico, and The U.S. Virgin Island.
We will continue to support this community as they recover from the natural disasters. So, thank you for your attention today.
And I will now like to open the call to questions.
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Robert Schweich from RMB Capital.
Please go ahead with your question.
Robert Schweich
Thank you. This was certainly an excellent report.
I would like you to elaborate please on your plans for restaurant expansion. As I looked at the figures in the report, you ended up with 21,060 restaurants, up four from the end of the year, with Brazil having an increase of eight and the other areas having a decline.
Could you elaborate on your plans for the fourth quarter of this year and 2018 and 2019?
Sergio Alonso
Yes, sure. Good morning, Bob.
This is Sergio. Well, if you recall, we gave -- reintroduced our two-year opening of [indiscernible] McDonald's we mentioned a plan of 180 gross [ph] new restaurants and we said at the time that the number of openings we projected this year 2017 we will be in the range of 45 to 50 units.
On top of opening, keep in mind that we also commit a reinvestment of at least $292 million for the period -- I mean 2017 to 2019, which adding out both eventually it will go around $500 million in total. If you look at the total count of evolution in the divisions, so for this year keep in mind that opening and closing some units each parcel of day to day running the company of our size and also keep in mind that most of the opening are typically back ended.
So you should expect a relevant increase of number of openings in Q4 before the end of the year to meet with our original guidance in terms of record holdings.
Robert Schweich
Now what about you mentioned 180 over three years, if I understood correctly, so what does that mean for 2018 and 2019 specific numbers?
Sergio Alonso
Well the remaining 130 openings for both 2018, 2019 should be close to even I would say between 55 and 60 units for next year and there from 65 and 70 units in 2019, Bob.
Robert Schweich
Are you satisfied with that rate of expansion?
Sergio Alonso
Look, we have to be cautious in terms of what do we expect from the economies looking forward we believe we have relevant investment plan again we plan to deploy over $500 million in these two year cycles, we also mentioned that considering the environment from the economic situation in most of our markets particularly in Brazil and Argentina, we would shift resources from -- investing in the actual restaurant base rather than dedicating the big of the dual piece to restaurant opens. Of course this is the dynamic situation that we monitor day-to-day and should be overall conditions change.
We may make some adjustments to our restaurants, keep in mind that as we said several times the opportunity to expand our footprint remains attractive but it's a matter of setting the right phase in terms of what we expect from the economies again mostly in Brazil and Argentina to happen have evolved in the particularly in 2018 and 2019.
Operator
[Operator Instructions] And at this time we've reached the end of today's question and answer session. I'd like to turn the conference call back over to Mr.
Sergio Alonso for any closing remarks.
Sergio Alonso
Well, thank you. Thank you very much for your attention today.
We certainly look forward to speaking with you for next quarter and of course we are very enthusiastic about what we expect for the end of the year. The December is a very important month for us and we're very optimistic and certainly very well prepared to maximize at the potential basis in all the market.
As always in the interim, our team remains available to meet with you and answer any questions that you might have. So, thank you again, and enjoy the rest of your day.
Operator
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation.
You may now disconnect your telephone lines.