Q4 2019 Earnings Call

Dead dead dead dead dead.

Dead dead dead.

Good morning, and welcome to the Arcos Dorados fourth-quarter and full-year 2019 earnings call a slide presentation will accompany today's webcast which will also be available in the investor section of the company's website. And as a reminder all participants will be off only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Today's conference call is being recorded at this time. I would like to turn the call over to Dan shy linger vice president of investor relations, please go ahead.

Thank you. Good morning, everyone and thank you for joining our earnings call with me on today's call are Marcelo chief executive officer and Mariana Torres our Chief Financial Officer, please turn this light to

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.

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 gap results, which can be found in the press release and audited financial statements filed today with the SEC unformed 6K.

Our discussion today excludes the results of the Venezuelan operation both at the Consolidated level as well. As for the Caribbean division due to the country's ongoing macroeconomic volatility.

For your reference. We include a full income statement excluding Venezuela with our earnings release.

I would now like to turn the call over to our CEO my celebraba.

Thank you, Dan and good day everyone.

You know, we are holding today's call in the middle of the global Health crisis that has generated significant uncertainty in the marketplace.

So we will follow the agenda on light 3.

Mariana and I will highlight some of the strong results from operations that we generated during the last quarter and full year of 2019.

We will also provide you with some color on our performance during the first two months of 2020 before the coronavirus began to disrupt our markets.

We believe it is important to review our recent performance because it shows that we can effectively meet disruptions from undeniably strong position on both an operating and financial perspective and without adapt as the strongest player in our industry.

While we do not have certainty in terms of how long the coronavirus crisis will disrupt our Market. We do have certainty that we will overcome this situation as we have overcome other crises in the past with that in mind. We will also review the ambitious openings and reinvestment plan that we both agreed with our partner McDonald's corporation.

Against this backdrop. We will provide you with the best possible update on how the coronavirus is impacting our business.

Let me start with pointing out a few key highlights of our fourth-quarter and full-year results on slide for.

The focused and disciplined execution of our three pillars strategy which includes running great restaurants featuring the most attractive menus and enhancing the customer experience through exceptional interactions with our team. Once again drove growth in guess traffic and other check.

Montagne in our strong momentum, we generated Consolidated comparable sales growth of 10.4% in the fourth quarter and 11.8% for the full year, which was solidly above the company's Blended inflation for both periods.

What performance in Brazil last year is particularly gratifying considering the level of competition and the relatively soft economic environment?

UDF delivery and digital along with our affordability and premium platforms as well as engage in marketing initiatives also drove the strong 9.5% increase in the quarter and 9.7% increase for the full year in comparable sales.

These figures exceed inflation and worry about double the average reported by the entire Brazilian food service industry which includes our results month.

At the end of 2019 we had 683 restaurants exceeding our Target of 650 by Aaron.

We introduced votf restaurants to seven more markets in 2019 and increased the network in Brazil, Argentina and Uruguay.

These new format resonated strongly with our guests providing is substantially better sales lift vs. Our initial expectations, which is why we accelerate the implementation.

Don't need to the future. I am pleased to announce that we have concluded our discussions with McDonald's Corporation regarding our next three-year expansion plan. Which Mariano could explain in more detail.

Again, as a sign of its confidence in our business prospects McDonald's is providing us with broad support for the 2020 to 2022. Which will reduce the impact of royalty fees.

I started the call over to Mariano now for the further review of our operating and financial results Mariano, please go ahead.

Thanks for sale.

Let's take a look at some of the details of our operating and financial results on Slide Five.

Total revenue for the company grew 12.9% in constant currency in the fourth quarter and 1% in US Dollars mostly due to the depreciation of the artificial with double-digit comparable sales above lending inflation for the company while we are very encouraged with the results of our Brazilian Division division. Also performed extremely well.

importantly in Mexico safe succeeded inflation for the third year in a row, but by eleven consecutive quarters of growth

Our brunch perception has improved considerably and during 2019. We strengthen our operating position by rebalancing a restaurant portfolio in the country song closing poor performers and reopening restaurants in more promising locations particularly in larger cities.

additionally

Revenues benefited from the acceleration of restaurant openings throughout the year as well as the continued pick up in the face of our votf roll-out plan.

Taking your quickly through our top-line results at the divisional level on slide. Six brushes strong compensates performance clearly demonstrates the progress we met with our strategic initiatives to accelerate growth in an increasingly competitive environment and Our Brands relevance in the Brazilian Market.

You know where slab division from sales increased 20.9% which was the loaded Vision Splendid inflation traffic continued to be impacted by the weak consumer environment in Argentina and the social unrest that affected our operations in Chile during the quarter.

No, that's 4.7 increasing from sales, which was almost two point five times plenty inflation was the result of both higher traffic and average check in the quarter off. These girls was broad-based across all three countries and was mainly driven by our affordability platform the diesel category and the execution of strong Mark. You should use around the corner of our business.

Girls, you know or delivery business along with digital Innovation also played an important strategic role in the divisions performance.

Finally in the Caribbean. We saw the benefits of operating across a large and diverse geography strong performance is important recall on the French West Indies wage to mitigate the complex growth impact from the declining Columbia as a result of the implementation of the tax reform effective, July 1st, 2019 revenues in the owners were also affected by the 7% year-over-year depreciation of the Colombian Peso consolidating the performance of our business. We had a very solid end to a very strong year off ask you for Monday the 4th consecutive quarter of double-digit system-wide comps its growth additionally our continued focus on managing our costs and expenses led to efficiencies in all our cost line items including the lowest payroll expense as a percentage of sales in our history.

Too much saying this point with respect to our position of operating and financial strength this combination of toppling performance and operating efficiencies resulted in a four-year 2019 adjusted ebitda margin of 10% which was our highest fully reboot the margin since we became a public company in April of two thousand.

Talk to Human.

Thank you Mariano looking at our strategic growth drivers on slide. Seven. Our delivery service is now available through more than 1,500 restaurants in 11 key markets.

Growing segment that deliberate is the capacity and costs of our existing restaurants strengthens. Our only Channel approach and allows our guests to enjoy the McDonald's experience when they prefer to stay at home.

Welcome back to his concept when we discuss some of the ways in which we are prepared to manage the ongoing current coronavirus situation.

I want a mobile app is integral to supporting our delivery business and maintaining Direct Communications with our customers on promotions and new menu items.

In fact, we have just added the ability to order delivery throw up in Brazil in addition to working with all of the measure delivery platforms. I will soon roll up this capability to our other delivery markets. We believe that the app will allow us to communicate constantly with our customers off and we're not only helped us through the coronavirus crisis, but it should also allow us to accelerate revenue recovery once the situation normalizes.

With over thirty four million downloads to date and 65% more active users than our nearest competitor. We are the Undisputed leaders in our industry when it comes to digital maturity.

Part of our digital maturity relates to our aggressive expansion of votf locations in Brazil and across the region and of course our cool to direct your program that encourages our teams to serve our guests by being themselves continues to support higher retention and lower absenteeism among countries. Largely as a result of this clear sign of improved employee satisfaction. We are seeing our customers satisfaction scores Rising as well.

All of these Investments and initiatives are about making the McDonald's brand more relevant and engaging for our guests in Latin America and the Caribbean Dead ones like 8, you'll see that our investments are also increasing accessibility with the opening of new restaurants. We are the 90 new restaurants to our footprint a 2019 and in the year with 2293 locations.

Oh, we're a freestanding restaurant Footprints is unmatched in our region as of the end of 2019. We had almost 1,100 free-standing needs this includes more than 460 free-standing restaurants in Brazil for about two point five times more free-standing units that our closest comparable in that country.

important

These format offers the full McDonald's experience to our guests, including the possibility for takeout and drive-through ordering.

Even that it includes all our Revenue segments. This restaurant format has also historically provided us with the greatest base of support to protect our faith in challenging economic periods.

Back to Merion again to review our performance in terms of costs and profitability.

Text Marcelo. Let me walk you through our costs and expenses during the fourth quarter and slide nine in the fourth quarter of 2019 Dodge GB data increased almost 17% in dollar terms and 25% in constant currency.

The margin expanded 180 basis points including the reversal of a bad debt Reserve in our Puerto Rico Market, excluding this non-cash reversal. Our adjusted gross margin expanded fifty basis points in the quarter.

Where I know these closures along with McDonald's Corporation, we have been involved in litigation with our eight Porto Rican franchisees for several years during the month quarter. We reached an agreement with four of the eight sub franchise's as a result of that agreement. We received all 20 McDonald's restaurants previous owner operated by the force of parentheses in consideration for about ten million dollars in receivables for various services rendered

Vistana generated a non-cash reversal of Baghdad reserves related to those receivables in our franchise restaurants or coupons expense Lane.

Finally, we are also operating with a streamlined DNA structure u.s. Dollar G&A expenses declined by 10% versus the prior-year quarter or 90 basis points as a percentage of revenues.

On a constant currency basis increased 3.5% Well below the Blended inflation rate for g n a

Taking a look at adjusted ebitda the divisional level and slide ten. We captured margin expansion in Brazil and in the Caribbean including the reversal of God, but the preserving Puerto Rico. I want to highlight the impressive increase in margin generated in both Brazil and knowledge of 240 basis points.

The fourth quarter was an inflection point in Mexico as we achieved our highest level of since we began operating in this country.

We would have remained focused on driving more efficiencies to leverage the strong top-line growth in that market.

For the food year, I mentioned our adjusted ebitda margin of 10% which reflects 120 basis points of margin expansion between 2017 and 2019. This is within the range of the 100 to 200 basis points that we promised to deliver by the end of 2020 during our April 2018 investor day.

Finally as Merced anticipated. We have come to an agreement with McDonald's corporation on an expansion plan for the 2020 to 2022. As described above like 11.

We developed this ambitious plan based on our assessment of the optimal combination of growth and profitability for the McDonald's brand across our footprint off. So we expect to open between 285 and 300 near restaurants with total Capital expenditures of about 1 billion dollars from 2020 to 2022. I should note that the timing of deployment of capital is under our control.

in addition McDonald's Corporation agreed to continue providing growth support for the plan of a lease. That's we project the effective royalty rate down to average about 5.5% over the three-year period but middle

Thanks, buddy. I know now let me take you through the current situation on slide twelve.

First of all, we must recognize that we are actively managing a very fluid situation when it country-by-country a market-by-market basis. The world is moving quickly and government and businesses are mobilizing to slow the spread of the coronavirus and protect the public health.

Likewise we are prioritizing the health and safety of our guests and employees as well as protecting our long-term business results through this entire time.

Based on the most recent data available to us from the World Health Organization. There are over 1,000 confirmed case of coronavirus across our markets off the countries with the highest numbers of cases in our footprint orbeseal Chile and Peru fortunately as of this morning. All we do not have any confirmed cases of coronavirus among our employees at any level.

You just hurt. We are entering the coronavirus crisis from an unquestionably strong position and we are by far the best position company or industry to effectively respond to the risks associated with this pandemic while also serving the needs of our guests through our ability to offer delivery service drive through and take out on a widespread basis.

We got the start.

It goes functional team at the corporate level that is constantly monitoring and evaluating the situation to implement necessary actions in partnership with our home in Market teams.

The working group is coordinating efforts across the organization and sharing all available information to ensure and agile and appropriate response.

Local leadership teams are also monitoring developments in coordination with government and health officials in local marriage measures vary from country to Country Club ocean within those countries.

We are also aligned with the five principles that McDonald's corporation's CEO Chris K outline on Monday providing a global consisted of an approach and to ensure that our system emerges stronger than ever from this crisis.

First we are all in this together. McDonald's has been a supportive partner of hours throughout this process and when we Face challenging times in them as well.

Just as we know that we can count on their support. We will support the three-legged stool in our Market as well working together with our people. Franchise's and our suppliers to help them through this tunnel emack.

Second and this is very important to us. We will think that with a long-term mindset having the certainty that life will normalize again Thursday. We know that our decision-making we have will have a lasting impact on our business. We will act accordingly.

Third we will be transparent with each other and with all our stakeholders of the situation evolves. We will share information and best practices with internally to pursue the most effective strategy through this crisis.

We will be back with you no later than eight weeks from now when we have our first quarter 2020 earnings call or May 13th to provide you with an additional update.

Fourth we will lead by example. We will never have customers or our people to go where we couldn't go or work. We would work our decisions on operations will continue to be guided by expert local and Global health authority guidance and we will be pragmatic in our approach. We have a long-standing commitment to the communities that we serve which is as important as ever in times like this.

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used to stay true to that purpose

wherever we can we will make every effort to keep our restaurants open while making sure to always operate with our industry Benchmark standards of hygiene month on food safety.

Additionally we are using the power of our Media Ridge to support important Public Service messaging in our markets. This includes standard home distancing and other recommended actions to curb the spread of the virus.

Madea I know why don't you say a word about some of the potential Financial impact as well as our balance sheet position and capital commitments.

Sure from a business perspective on slide fourteen. We feel we are facing this crisis from a position of strength. We build momentum through 2019. Bring one of the best performances in our history and that momentum carried into twenty-twenty.

We so better used on our profitability during the first two months of the year, including our best February ever despite the strong depreciation of the Brazilian real since last year.

In terms of our cost structure nearly 90% of articles that have food and paper suppliers are local to our markets. So we are able to work closely with this net worth of approved suppliers to reduce the risks of disruptions within our supply chain as well as to certify the quality and safety of the food that we serve to our guests.

We have disclosed in the past that around 20% of our total company food and paper costs are exposed to affects operations. This number is lower in our largest market Thursday. We're only about 16% of our food and paper costs are exposed to affect fluctuations. In order to manage these risks. We have rolling hedges in place to cover about 50% of our estimated exposure to effects going out over the next six to twelve months.

And in the case of Brazil, we have hatched our exposure at the rate of about 4 reais during the first half of 2020.

Additionally we're closely and regularly communicating with our sub franchise's providing guidance and support to ensure that they are implementing this same precautionary measures in the restaurants.

Turning to our balance sheet on slide 14. We ended 2019 with 122 million dollars in cash and a net debt-to-ebitda ratio of 1.6 time, which is way below our Comfort Range importantly. We currently also have a solid cash position and will access our and run fifty million dollar committed credit line just necessary.

our debt

Heading to long-term bonds with Explorations in 2023 and 2027 and total interest payments of around fifty million dollars per year dead importantly we swapped about fifty percent of the principal and interest of that debt into Brazilian reais when the bonds were issued.

In other words only about twenty-five million dollars of our annual interest payments are in US Dollars, which we can comfortably cover with cash generation from u.s. Dollar wage. They're strong currency markets such as Puerto Rico Panama and Costa Rica and the French West Indies to name a few.

We would prioritize our cash in the short-term as we navigate the uncertainty of the current situation. We have full discretion and how and how long when we deploy our Capital to meet our plans.

like humor sailor

Thanks. Let me take you through some of the steps. We are taking at the operating level on slide fifteen.

Every day our restaurants teams practice the highest standards of hygiene and food safety in our industry.

From the frequency of hand-washing to the extensive procedures. We follow to avoid cross-contamination of our ingredients.

I know we're guess know that they can trust McDonald's in our Latin American and Caribbean markets. This is because more than two million of them have visited our kitchen in each of the last several years through our Puerto severe or open doors program. They have seen for themselves that we wrote the book on service quality and cleanliness is among the last to be impacted by the virus and our cross-functional team has implemented a robust contingency plan based on best practices and learnings from the global McDonald's System including McDonald's China and other Asian markets.

We also have the benefit of having a medical doctor as a full-time member of our staff in Brazil to help guide our decision-making depending on the age of the virus in each country. We have been implementing a set of protocols and procedures such as increased frequency of sanitization in all restaurants areas of Engagement kiosks operating only with delivery and drive through as permitted when we are no longer able to operate our restaurant counter or dining rooms down a protocol for closing and reopening a restaurant if an employee receives a positive diagnosis for the coronavirus all these measures will be continuously receives an adjusted as necessary in accordance with the latest guidelines from local Health officials and Global best practices for mitigating the potential.

Spread of the virus we are.

Starting to see limited operating hours and in some cases restaurant closures in some of our markets, however with more options than ever for our guests to enjoy the McDonald's experience, including our fast-growing delivery segment and the industry largest network of drive-thru locations. We expect to be available to the majority of our guests throughout this crisis.

Wrapping up my comments with slight 16. We are facing an unprecedented Global Health crisis. However, we are confident that our strength in particular on the strength of the McDonald's system globally will shine through this difficult. The fundamentals of our business are the strongest they have been in many years our results demonstrate that we we have a solid strategy in place to continue growing our business. Once this storm has passed.

Excellence in execution with a continued focus in enhancing the guest experience will continue to underscore how we operate our business.

We are pleased to have reached an agreement with our partner McDonald's regarding our next three-year openings on topics plan. And we look forward to continuing our close working relationship as we work through this. And deliver on our long-term plan.

Finally, we expect to navigate any disruptions to local economies including those costs by the coronavirus by leveraging our operational excellence strong balance sheet Improvement Capital allocation. This will support continued growth in sales increased market share and and expand a footprint as we profitably capture the full potential of the McDonald's brand in the 20 countries and territories that we operate operator. Please open the call to questions.

Yes, thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two in order to allow listeners to participate to participate. Please limit yourself to one question and one follow-up question at this time. We will pause momentarily to assemble our roster.

Our first question comes from Robert Ford with Bank of America, please go ahead.

Thank you and good day everybody Marcelo. Can you share your experience across markets in the last week in terms of drive-through and delivery Trends as well as updates on the number of stores and dessert centers and malls versus your priest standing locations with drive-thrus, please.

Okay. Good morning, Bob. Yes, what we saw in the last few days as expected is a much better performance and increase in wage in terms of delivery delivery is growing and we are fortunate to have been pushing hard with delivery offering that service in fifteen hundred restaurants across the region. Uh, so that's it key part in order to deal with the with the headwinds that coronavirus is having some in some of our markets wage in terms of restaurant format. That's another trend for us since we have the more extensive footprint of free-standing units almost 45% of our restaurants are free-standing units offering drive-thru. It's it's key in order to have better results in terms of sales and traffic and we are experiencing birth.

No, it's not the first time in the past. It was the same case during periods of economic crisis. Typically those formats of restaurants where we can offer the whole the complete McDonald's experience to our customers. Typically those restaurants in that. Did better and it is the same case nowadays. So we may have two point five times more drive-thrus for example in Brazil than our closest competitor. And if you take the three biggest markets for us Brazil May in Argentina, we have two point two times more units or priest under compared with our large sheets or closest competitor. So we are shifting a part of our media budgets to to communicate and and to incentivize sales through delivery and through drive-thru wage.

Very focused in terms of operations in in giving the best service through those those channels and on top of that. For example, we continue to add a new capabilities suck Ur mobile app. So for example in the case of delivery as as you know, we work typically with the main Partners three at least main partners for delivery in each market wage, but on top of that we add the the the possibility to order delivery through our app, we implemented that last week in Brazil, but this week we accelerate the rollout of that and we already have in the 11 markets where we operate delivery the opportunity to order delivery through our. So we are very focused in this initiatives, uh, as we see that these channels and these strengths that our footprint cast allows us to log

in a much better position with this, uh

these head winds

our next question comes from Gary Barnes with PG TM, please go ahead.

Hi. This is Gary calling from Peter Jim. Just a question whether you could remind me you mentioned that the leverage currently at one point six times as well under your target. Can you just remind me what your target is the second question? Maybe you could also custom light on what you expect to be paying out in dividends going forward or if you have a policy in place there. Thank you.

Okay, good morning. And thank you very much for your question. Maybe Mariano you can take this one. Yes, of course potato. Hi Gary. Yes our net worth net debt-to-ebitda ratio by the end of December was 1.6 times and we have always mentioned that our Target level is 2.5 * -80. So we feel comfortable with that range since we closed our financial life the fourth quarter. We have not taken any any any debts. So and also, please keep in mind that our total debt wage half of it is converted or swapped into Brazilian reais.

After the huge and important depreciation of the DRL in the last three months actually our net debt at this time is I know because that's how these hatch works as long as the real devalues our total net goes down.

Yeah, let me in terms of dividends our board of directors declare dividends for 20 20 on March 3rd a couple of weeks ago on the first installment will be on April 10th. If five cents per share installment and as part of our cash reservation made sure we saw the legal Consul and and were advised that once the dividend was declared power board two weeks ago. It became a regulated and legal obligation to our shareholders. So we will meet this commitment of about a million dollars on April 10th the other two installments which are planned for August 13th and December 10th of each one of three cents per sure we expect one or the commitment but the board may be able to revisit the topic if there are any regulatory changes due to to

With this new market conditions, so that's what we are working on in terms of of dividends.

Thank you.

Our next question comes from an attic with JPMorgan, please go ahead.

Good morning. Y'all. Thank you for taking my questions. I have a couple of ones I may so first of all like to understand how many stores you have with drive-thru and how many have delivery so trying to set off if you did potential slowdown sales is let them countries follow and Implement a lot down and in that regards and have you spoke to McDonald's Corporation to try to understand what are the sales tax from in these countries such as Italy Spain and so on and my other question will be if you can mention what the magnitude of the reported one off 2017 just isn't resolved. Thank you.

Okay, nice. Nice to hear from you. I will take the first part and and obviously all this coronavirus situation is a very important topic. So maybe let us give you a comprehensive analysis on this. So I think that at this time neither the duration or the scope of the disruption can be predicted there for the negative Financial impact or results cannot reasonably estimate it yet. But a good thing is our region is among the last to impacted by the virus which has informed and help us to build a robust contingency plan implemented by our cross-functional team, which is based mainly in best practices and learnings from the global McDonald's System including McDonald's in countries, like China and other Asian markets, we we had contact with and and we get information from them all they're learning some best practices wage.

At the same time Latin American governments are also responding with the benefit of of This Global learnings. And there are a number of proposals being discussed to protect local economies. So we are very we are keeping a very close eye to to that as I mentioned before we we think and we are sure that we have a couple of strings that allows us to face these these crises in a much better position in the best position in our industry in our region to deal with this with this situation. I always mention our extensive extensive free sender unit. Uh, um footprint we have around one thousand three standard units in the ignition. So that's a complete differential positive differential differentiation for us when compared to most of our peers and as I mentioned before 1500 Restaurant and Pub

Offering delivery across the 11 main markets where we operate.

We also believe that our Geographic diversity is another strength and and we see that we are operating in 20 different markets and territories and the impacts are completely different from what other so we are taking a closed-loop to that and obviously we are following all the recommendations from coming from the authorities and the health club specialists in each market. We are labeled as in at the same time our relationship with McDonald's McDonald's Corporation has been very supportive in in Thursday's on it was the same in the past during some economic crisis that we faced. Unfortunately or fortunately some of us are emerging as you know being in different crisis many times in this thirty years with the company. So in some way we have those learnings and and that flexibility to

deal with this kind of situations and and

We are following again the the best practices and and the main recommendations coming from the authorities to to deal with this situation I have on front page front of me a dashboard in terms of operation so I know exactly how many restaurants are closed how many restaurants have limited operations to to drive through and delivery or only drive through it. If it is a very small portion of restaurants right now around 3% of our restaurants are closed Monday to Thursday. By the authorities, there are others where we can operate only through drive-thru. For example, for example, most of them in Puerto Rico where drive-thru represents off at 60% of the sales. So we are okay in in that sense and this is a very fluid and and a very Dynamic situation. So this is been dead.

Led by a market-by-market and city-by-city by by our local teams who are making are doing a tremendous job in terms of a line all the company all the resources of the company Behind these efforts. So maybe Mariano you can cover the the second part of the question again.

Yes things Mercedes your can you can you refer to the question again about contingencies in Brazil, please? Yeah, of course. So I would like you to know what the magnitude of his reported one-off provision?

Yes. Yeah. Well the first first let me let me refer you to our Cashflow situation right now given that you were worried about restaurants operating in in in the region. So the first the first part let me remind you that well first as you know, we started the year with a very favorable position, we still have and wrong committed credit lines of fifty million dollars in addition to many other lines of credits to support our operation cash needs long as I explained before our financial leverage is low and half of our debt is converted to to realize on top of that we had plans to meet our next financial obligations. As you know, we have the maturity of of the two of the two bonds and my main focus is of birth.

Reserving the table liquidity position that we have taken and we will continue taking actions to prioritize our cash until this situation of course improves first. It's important to note that our largest non operating cash flow outflow is kathlin else, you know, Catholics mainly is concentrated in in in in Arcos Dorados and the second half of the year, but on top of that and even more important thing is that we have full discretion on when we can do this this outflows and how we decide when to do it. So that's that's something very important to take into account. Our Catholic is very granular and very short term. So we have that ability to postpone birth.

Play those.

Outflows that in our cash flow statements are the most important ones also to keep in mind is that the majority of the costs at the Restaurant level variable costs. So when sales go down the main portion of our costs go down as well. Also, our inventories are food off. The main inventories are food-related. So in this case the the the days that we have inventories in hand is also very low. So I'm limited risk on on that and we have also taken steps to protecting our people and reducing our G&A for example provision of travel for all our personal cancellation of meetings with third parties and others as myrcella mentioned. We don't know the duration of the scope of the disruption still to come off.

So it's very difficult to to estimate the negative Financial impact to ourselves. And that's mainly from from that perspective on how we are facing and dealing with this disruption regarding the contingency that you asked at the end of part of your your your own second question. These the bulk of that contingency is coming from one state in Brazil where in December 2009 and a 1920 nineteen month. We recorded a reverse position given a positive outcome to the legal proceedings against us for further information. Remember that in our financial statements in June 20th. We have all that information, but now the Civil complaints are now concluding and that's the reason for the reversal.

again, if you'd like to ask a question, or you have a follow-up, please press * then 1

our next question will come from Robert private investor, please go ahead.

I want to compliment you on a really extraordinarily complete presentation of a situation and your own answers to the questions under these unusual circumstances while you have considerable flexibility on the timing of opening stores and capital expenditures related to that that process does is an advanced process to a certain degree and I'm planning on opening any stores in the second half of this year my guesses. You already have commitments on a certain number of units and I'm curious if you could tell us how many units and how much Capital expenditures you're actually committed for during the current year under the at this time.

Okay, first of all, thank you very much Robert for your comments, uh us Mariano told us and and that's typical year after year. Our our capex investments are are typically at the end of the year the majority of those so we still have a lot of restaurants Thursday's arent being built yet so we can we can stop or delay huge part of our a graphics program for this year. So, uh, obviously we are taking a very close look to this because we we keep in mind that one of the page both which is guiding us is thinking long-term in terms of the business results. And that's why we are taking a look restaurant by restaurant ma'am.

Tuition by situation in some cases we can maybe uh, make Ugg stop for a couple of months or for some weeks. In other cases. Okay, we can put them under supervision if we are going to put those resources there or not in the future. But we are we are taking this a process in a very detached tail way in order to uh, make the best decision between taking in acount the situation in the short-term and long-term effect in the the the cash flow of the company and not compromising any anything in that sense. But at the same time thinking long-term and and and obviously with the idea that we will overcome this and we will overcome this in a in the strongest way that any company in our sector will overcome this in Latin America. Yep.

So that's the way we are thinking on this but for your records your information most of the topics plan for this year is just need to be applied. So we are in a good position regarding that in order to to protect the the cash of the company. I appreciate your answer and I do you think it and I realize that you're thinking longer-term as well as shorter-term and the longer-term thought process may may lead you to open some units even though there's uncertainty because of coronavirus. Do you think you're likely to open at least 25 restaurants this year off of factors considered?

Yeah, I do not have the exact number right now. And obviously the situation is so volatile and unpredictable. That isn't going to make an estate office in any number or commit to any number but the idea is to have obviously much more detail in the coming weeks a month. Uh, but again for the short-term our cash protection and and the focus on on cash is the priority off the plan is for much more than that and and taking a look on on the long-term involves other things. And and again we are trying to bash seeing those those two variables obviously when when we announced that we were planning to open between 285 to 300 restaurants in this

three years

That's because our results has had been extraordinary. I think in the last couple of years. We we had a a very strong momentum that was generated to the first couple of months of this year. Then this is Crisis came up and we are trying to overcome this as soon as possible in the best way of keeping an eye on on a new strategic eye on the long-term of the business and on the business results. So maybe Mariano you want to add something. Yes, Marcella and high birth. Yes, but it's important to mention that at this time. Our main priority is to you know, keep and protect the cash of the company until we have more certainty on how things will develop in the in the next month as as I mentioned in the previous question from from Ian dead.

We have the ability to stop and then start again if situation changes in the in the next month, and we will of course be monitoring dead by day how this situation evolves. But if uh at this time, the main priority is to preserve our cash flow and afterwards, of course if she improves then we are as I mentioned in an excellent position to resume our capex plan because in the long term, we think that the situation the situation for us is extremely good

There are no further questions. I would like to turn the call back over to mr. Robot, please. Go ahead. Okay. Thank you again you all for joining our today and for your questions my team, and I look forward to speaking with you again in the future. We encourage you to follow the recommendations of your government and health officials to combat the spread of coronavirus in your communities, and please stay stay safe and have a good day. Thank you very much.

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