Q1 2021 Arcos Dorados Holdings Inc Earnings Call
<unk> they make impact on this years first quarter, which saw operating restrictions throughout the period.
I will highlight three.
First government restrictions are more targeted.
In nearly every market dining room capacity is still severely limited.
Most markets also impulse operating hour restrictions that require restaurants to close as early as six P. M.
Meaning we cannot take full advantage of the important leaner on late night day parts.
Still we have been able to operate at least 91% of all restaurants this year.
Whereas last year, we were forced to close 50%.
As well as 100% of dining rooms at the peak of the crisis.
By the way currently around 98% of our restaurants are operating at least one sales segment.
On two thirds are operating all segments.
Second we have adapted the business to the realities on the ground on focused on the core menu on <unk> of drive thru delivery on digital.
We're enjoying a significant competitive advantage across all three pillars, which has ensured that guests are finding more ways to enjoy Mcdonald's with each passing day.
Our drive Thru service times are much faster and more efficient on ever without sacrificing customer satisfaction.
On his new volume records in the last several months.
Delivery volumes have also grown significantly thanks to extraordinary operational improvements on a reduced delivery times.
On the digital platform continues adding capabilities and sophistication to our marketing on E Commerce efforts.
Finally, our guests' trust, the Mcdonald's brand more than any other.
With the most extensive pre standing bresaola footprint on.
Largest delivery market share.
Supported by the industry benchmark multiple other heroes program guest survey confirmed that we offer the safest restaurant experience in Latin America and <unk>.
When we built the plan for this year, we assume the first half will remain challenging.
And that we could see a return of tighter restrictions in some markets.
But as I just explained the duration on impact of these restrictions has been much lower this year.
We are still hopeful debt by the middle of the year, there will be enough progress in vaccinations to support a full revival in the operating environment in the second half.
Even if our assumption is off by a month or two.
Our recent underlying trends in the business give us confidence in the direction of the plan.
In the case of Brazil, we are seeing how quickly sales levels recover once government restrictions are relaxed.
Compared with 2019 sales in the first week of April were down 40%.
By the last week of the month sales have recovered to 20% on.
And in the first week of May sales are already back to within 10% of the same period in 2018.
This is what we mean when we say that Dcs restrictions should be shorter lived on less impactful on our results this year.
Even though the operating environment is still far from normalized.
I will now turn it over to Luis.
For a look at divisional topline results on other operating highlights in the first quarter.
Thanks, Marcelo all for Arcos <unk> divisions <unk>.
Generated another sequential improvement in comparable sales despite ongoing operating restrictions in other markets.
Salt with a strongest in two divisions, the Caribbean, where Puerto Rico on the French West Indies drove the positive result, after being the hardest hit division in last year's first quarter and flat where comparable sales exceeded the division's blended inflation rate by about four.
<unk> points, mostly thanks to strong results in Chile and Argentina.
Non of continued on its path of gradual sequential improvement in comparable sales across all three of its markets.
Brazil started the quarter well, but finished in line with its fourth quarter result, due to tighter government restrictions throughout the month of March.
As you just heard from Marcello those restrictions continued into April but in the first week of May we were already at 90% of 2019 comparable sales.
Importantly, according to crest, the Mcdonald's brand gained four percentage points of market share in the quarter, reaching its highest level ever in the cross study.
We believe this is a tremendous vote of confidence and demonstrates the trust we have earned from Brazilian consumers through this period.
These results show the long term benefits of operating a single brand across a vast geographic footprint. We are able to focus on operational excellence by sharing best practices on learnings from market to market while building the region's best restaurant.
Portfolio and without diluting management's attention on the company's resources among competing brands.
Operating day brand throughout Latin America, and the Caribbean. We have also been able to mitigate the impact of the pandemic given the diverse economies currencies and consumer environments in the region.
The three DS are the main business drivers with no signs of slowing down in the quarter.
Drive thru sales were up more than 55% in constant currency and contributed 39% of system wide sales.
Throughout the quarter and in response to the modern way people are traveling today, we encourage guests to visit our drive through lanes any way day like by car motorcycle.
Physical or any other means of transportation.
As a result of awareness of the versatility of the dry true segment among consumers rose from on average of around 25% to more than 45% across many of our most important markets.
Delivery growth remained strong as well rising more than 200% in constant currency and concrete building, 17% of system wide sales in the quarter.
As a central pillar of our <unk> strategy.
Liberi segment is benefiting from at least three factors.
Strong volume growth from sustained consumer demand.
<unk> marketing and digital initiatives to leverage group orders and higher average check, which supported our highest ever quarterly delivery sales.
That business model for this sales segment, which has seen significant gains in popularity with consumers is evolving.
There are now 93 restaurants in Argentina, and 45 restaurants in Brazil, running self delivery pilots.
We're on the right track with sales delivery, but before we can expand this capability and take it to other markets, we need to offer the best consumer experience and ensure a seamless no matter who is executing that delivery.
The advanced team continuous driving sales with about 37% of sales coming through digital channels in the quarter.
The Mcdonald's mobile App has the highest user rating in the industry and he has surpassed 52 million downloads as of last week with mobile order on paint sales starting to gain momentum as well.
According to App Annie.
End of the first quarter of 2021, we had more than two times the number of active users as our closest competitor in our key markets, including a 30 percentage point expansion in the GAAP sales last year.
As we continue our journey from mass marketing to mass personalization, we are exploring different avenues to increase guest visit frequency.
Latin America's growth potential is not limited to just opening restaurants.
In fact organic growth through an increase in visit frequency can be just as powerful a growth engine.
One lever we are using to increase frequency is the drive thru VIP club loyalty program.
I already told you about the increased awareness of the versatility of this segment.
Health net loyalty program, which was a base level in 10 countries. During the first quarter already reached one 1 million registered members.
In April we launched the program in Brazil to leverage the competitive advantage provided by more than 470 free standing restaurants in debt market.
So far visit frequency is much higher than the average mobile app user.
Visit frequency will also increase as we move to mass personalization.
Our CRM capabilities are already starting to interact with guests on an individual basis.
Using their past orders and other mobile app usage data to send personalized messages and offers.
We will soon rollout customized mobile app home screens.
Further strengthening each guest personal connection with the brand.
Finally guests will continued to sing the brands and experiences day trust and where they feel the safest.
To that end, we're keeping a strong focus on the macro to Helios program and protocols to ensure that consumers choose the mcdonalds experience more often than any other restaurant in the region.
Over to you.
Thanks Louise.
On our last call. We told you that January and February results were roughly in line with our internal expectations.
As Marcel already explained we assumed the first half of 2021.
<unk> challenging.
Lunches and vaccination programs and other measures, which supported a more normalized operating environment and stronger results in the second half of the year.
With that in mind.
We can close to or exceeding our expectations in the Caribbean sled and NOLA.
Where our sales results, which started off strongly were impacted by increased government restrictions in March and a weaker than expected currency throughout the quarter.
Chile on Argentina drove the strong rebound in slots profitability.
On the Caribbean Division result was even more impressive.
EBITDA margin expanded by 840 basis points, if we exclude the $4 $7 million non cash item from last year's results.
The 100% company operated U S dollar and euro markets of Puerto Rico, and the French West Indies, respectively are generating strong cash flow to offset the temporary challenges we are facing in other markets.
A clear benefit of operating in more than one market across the region.
On a consolidated basis, the company's cost structure continues to respond well to the changing operating environment.
Gross margin rose 20 basis points versus last year, despite important cost pressures.
In addition, <unk>.
Better employee productivity and the resumption of growth support from Mcdonalds allowed us to offset higher occupancy advertising and promotion.
Other operating and G&A expenses as a percentage of sales.
Consolidated adjusted EBITDA reached $24 $7 million on.
On margin expanded by 30 basis points versus the prior year, excluding last years non cash items.
We still expect full year profitability to be significantly better versus 2020, starting with the second quarter.
The company's balance sheet remains strong and we generated positive operating cash flow. Despite the challenges of renewed government restrictions.
We had a very comfortable cash position of $148 million as of the end of the quarter.
Zero shorts on debt outstanding.
And no long term debt maturities until 2023.
Cash flow in the quarter included a semi annual interest payments on our 2023 notes and.
And catching up on three of the five deferred royalty payments from last year.
As of today, all deferred royalty payments have been made.
Net debt remained relatively stable versus the year end, but as we anticipated the leverage ratio ticked up modestly given the lower quarterly EBITDA result versus last year.
Beginning with the projected improvement in the second quarter profitability, we still expect to end 2021 with a net debt to EBITDA ratio close to the high end of our comfort range.
Capital expenditures in the quarter were $17 $6 million.
Fortunately given the investments and construction progress we made at the end of 2020.
We're able to open 10, new restaurants in the first quarter, which puts US ahead of our typically back ended openings calendar.
All 10 openings were in Brazil, with seven freestanding locations two in store and one food Court restaurant.
We also modernized 24 restaurants in the quarter, bringing the total number of experience of the future locations to 767, including about 60% of the Brazilian restaurants footprint.
For the year to date through April we have opened 15, new restaurants, adding new freestanding locations in Brazil, Chile, and Costa Rica.
We have already surpassed the number of openings in all of 2020.
And are on track to deliver our targeted 40 to 50 openings in 2021.
We also remain comfortable with our Capex guidance range of $110 million to $130 million this year.
We have successfully navigated the most challenging period of our lifetimes by making our company more agile and adaptable.
Looking ahead.
We will continue investing to capitalize on long term consumer trends.
While remaining focused on non local unlocking the value of the brand and the company.
For the benefit of our shareholders.
Marcello back to you.
Thanks Mariano.
This strategy. This year focuses on leveraging mcdonalds menu favorites on Reenergizing the family business.
The pillars of that strategy are the three DS plus ESG.
On the keys to success are running great restaurants.
On keeping the Mcdonald's brand relevant to maximize sales returns on market share.
With that in mind, our brand focused marketing campaigns, including the Mickey ceases campaign in Brazil.
Focused on guests' individual rituals when enjoying their favorite Mcdonald's items.
In Costa Rica, we celebrated the brand's 50th anniversary in the market by reconnecting guests with their memories of growing up with Mcdonalds.
In Mexico, we brought back the popular Mercury, but sandwich.
Which had not been sold in the market for at least 10 years.
Guests response was better than expected to this limited time offer and we sold out in just three weeks.
Okay.
Both Caribbean on slab run the drive thru campaign that Bruce described earlier on also boosted chicken sales by leveraging existing menu items, such as the chicken mcnuggets as well as introducing new menu items like the crispy chicken Sandwich line in Puerto Rico.
This represents a multi year journey into the chicken segment on.
On just two months after the introduction the crispy chicken sandwiches continue exceeding our sales expectations.
And quickly back to Brazil, we had a very successful response from ship or big brother, Brazil in the quarter.
We chose this TV program because of its 60% penetration in Brazilian households.
40% penetration among young consumers.
It received ratings that rival the Super Bowl every single week in the country.
The results were 170 million consumers impacted by TV.
Record mobile app downloads on the record month delivery sales among others.
This shows Mcdonald's Beach on a party also generated the largest merchandising campaign in the history of Brazil, well developed reality television industry.
Later this month, we will join the global Mcdonald's Bts meal campaign.
The promotion associate Cape ups, most popular group with our iconic chicken mcnuggets.
It will be available in six arcos <unk> markets, Brazil.
Rico, Colombia on all three NOLA markets and will feature chicken mcnuggets medium price and medium beverage and two sources sweet chili on occasion.
I, usually conclude my remarks by mentioning news related to the receptor Alpha total ESG platform.
Without taking away from our net social impact on sustainable development report that will be published in the next few days here.
Here are a few highlights.
This year, we move closer to an integrated reporting approach.
By developing the content of this report together with our recent 20-F annual report filings.
The report, which has been audited by <unk> on fall of both GR II on SaaS reporting standards will include new and updated information related to our main ESG pillars youth opportunity sustainable sourcing climate change.
But cashing on recycling and commitment to families.
Yeah.
In the commitment to family section for example, you will learn about all the changes we have made over the last several years to improve the nutritional content of the happy meal.
With reduced calories.
No other sugar low sodium and fat content as well as new fruit ambitious about choices and with no artificial flavors or colors, providing a fun and nutritious option for our youngest to enjoy.
You will also find a more robust section on our efforts to promote diversity and inclusion alcohol dose, which we are adding a sixth pillar of our recipient for total ESG program.
In line with increasing diversity I am proud to announce that as of July 1st we will be welcoming cutting them on deal to the company's senior leadership team as our new Vice president of supply chain.
Kadena, who began her career with us in 1996 on is the current finance director in Brazil is another example of the deep talent in our cohort house.
I truly believe our management team is second to none.
And we manage the business. According to our long term strategic view of the Latin American restaurant industry.
This is why we have a modernized restaurant portfolio.
Focus on freestanding units on.
On expanding digital platform with the most sophisticated capabilities in the industry.
Positive operating cash flows on EBITDA since at least June of 'twenty 'twenty on.
Strong balance sheet to support the expansion of Latin America on consumers' favorite Brits are on brand for.
For many years to come.
Done.
I'll now turn the call back to you to start the Q&A session.
Sure Marcello in order to get started please minimize the presentation slides. So that you can make access the chat function on the left hand side of the webcast platform.
Please limit yourself to one or two questions. So that I can read understand on convey them to our speakers.
We'll now pause briefly to compile all of your questions.
Okay.
Great. So let's get started we have a couple of questions here from Ian lucrative shift JP Morgan I think this is for you Marcello.
DNS is absurd to say that market share improved improvement is related to our large number of freestanding restaurants, and also our higher exposure to delivery than competitors.
In other words, he's wondering if this market share sustainable once markets are fully reopened and if the market share gains have been across all regions or just in Brazil.
Okay. Thank you on good morning, thanks for being with US in this call.
First we measure on truck market share in all our markets using a variety of sources that we tried to triangulate in order to identify trends on opportunities and based on all of this information in the first quarter of 2021 regain market share most of all.
Key markets.
According to growth for example, during the first quarter of this year, we gained four two percentage points of market share in Brazil USR industry.
Versus the prior year on the.
This is significant significantly more than any other brand in the market in fact, we reached our highest ever.
Since Chris is available on the market on our share today is more than two times the share of our closest competitor.
And I think that obviously as you mentioned in your question we are benefiting from our.
Footprint, particularly on.
All the restaurants, we have street facing.
Which includes obviously the industry's leading drive through network.
Almost 500 growth was in Brazil, and Thats by far the highest amount of drive throughs in the country on.
From those restaurants or using it.
Very.
Importantly, operational delivery, because we have an easy access and we can capture more sales through the segment too but on top of us retail and other tools that we have leverage in recent months that allowed us to increase market share everything around digital our more white house is the highest rating in the.
Industry on it.
Is capable of delivering segmented offers.
Which are increasingly personalized on.
Chris.
Frequencies on.
We have the highest number of downloads of overlap.
And more importantly around two five times more active users from the closest competitor. According.
Two up on.
Information on we have the highest brand awareness on consumer preference in the industry, but supported by strong brand Activations. For example, we mentioned in the first quarter of this year.
Yes.
The huge success of our partnership with Big brother in Brazil.
On at the same time in the base of everything we are doing I think that execution of our macro the program provides a strong sense of safety and hygiene to both customers on.
Price and that's driving our market share a higher I think for sure. We are the best position players in the market to capitalize on the acceleration of the recovery going forward.
Great and <unk> follow up question Marcelo is related to Mei sales and profitability. Since we mentioned that May was already was a 90% of 2019 levels our margins performing under this scenario.
Yes, yes, we tried to give you some color on what information.
On sales in the second quarter.
We cannot comment on short term profitability trends, but what I can tell you is that there is a lot of operational leverage in the business. So.
With a quick rebound in sales as we saw in recent weeks, we expect a stronger rebound in profitability.
Great next question is from Marcella Recchia from credit Suisse.
Marcellus is a once again arcos has been successful in managing input cost pressures and protecting gross margins on a consolidated level. She's wondering if we can comment on how that looked in Brazil, and how you should think about gross margin moving forward considering that.
On the cost pressures are a reality on margin.
I think balance for you.
Perfect.
Good morning to everybody and thanks for your question Marcello.
Yes, so far we have been able to manage the food and paper line on the gross margin I think very efficiently in 2020 with a minor impact versus <unk>.
Very good 2019.
And we are very happy to say that in the first quarter of 2021.
We achieved a gross margin expansion of 20 basis points.
On this first quarter against the same quarter of last year.
Despite of course food inflation that we are seeing.
Well above CPI in many of our markets, including Brazil.
As part of your question, how we are performing in Brazil.
In this market we are.
Performing worse, that's at the consolidated level.
Yeah.
Market conditions, but it's I think very important too.
To highlight that here is where we can see the benefits of.
The geography, where articles, let us operate and.
Being.
Or have progressed since then.
20 markets allowed allows the company to increase EBITDA margin despite pressures in some split.
Going forward well, they're a protein cost pressures.
They are a reality in the entire food industry.
Everybody is dealing with them no debt.
And of course, our non debt the kyocera restaurants.
Alright.
Okay.
We on the biggest buyers of beef in our model so what's important to say by.
Many times from three times things with long long standing supplier relationships.
And this gives us the ability to negotiate.
Best price.
But also it's important to bad debt.
The gross margin so affected by pricing.
The mix is not only about cost pressures.
This year, we will continue working on on all the levers that form or.
Comprised the gross margin and they are under our control such as inventory management deflation cost controls pricing power on product mix.
So.
Yes.
Fernanda feats of moving from mass marketing to mass personalization and we are saying here is that we're trying to maximize our product mix.
On the components of the gross margin.
So going forward the evolution of the gross margin or the food and paper line.
<unk> will depend on how these three factors the cost the pricing and product mix will play, but we feel very confident that we will be able to manage it as efficiently as during this first quarter of 2021.
Great.
So the next question is from Java Bertolucci from Goldman Sachs I believe from your Marcellus leaves us. Thanks for the presentation on the Q&A in the first quarter of 'twenty, one, we highlighted Chile and Argentina as the key drivers from our South Latin America Division could.
Could we please share some recent systemwide sales trends for those countries.
Okay. Thank you Taylor.
Jim.
We are very pleased with the sales trends.
In those markets on.
In slab division in general.
We saw a very strong momentum at the end of the first quarter and that momentum momentum continued in the second quarter. Despite some additional restrictions we are on.
The Union, Argentina, but it's important to mention that on.
The restrictions we are facing this year are.
Less.
<unk>.
On a more targeted on last year, so results in Argentina, and Chile continued to be very strong and we are very.
Or at least with the trends in those markets.
Great. The next question is from Jim Sanderson of Northcoast research, Yes, if we have any concerns with respect to supply availability for poultry given grain trends.
Especially because of the expected strong demand from our Bts per.
The motion.
No really we do not expect any.
And the issue with the idea that we have in previous from supply chain.
And we do not expect any.
Sure.
Okay and then in terms of I have another question from Bob Ford of Bank of America.
How was mix evolving in terms of higher margins margin desserts beverages in sandwiches and also how are we thinking about input cost pass through on how our consumers and competition responding.
Okay. Thank you Bob for being with Us today.
Sure.
Our industry on customers in general.
<unk> seen a significant increase in food inflation.
In most of this guidance.
So there have been room to increase prices in our markets.
With inflation, obviously is happening not only on the restaurant level and groceries so people.
Very.
We're essentially to that.
Fortunately in terms of input costs, we have agreements with our suppliers that allow us to plan.
The magnitude of the cost increases.
As well for which products or platforms.
Could be impact.
And we were able to liberate us overly obviously, our scale to negotiate better than on the restaurant on the industry in this scenario the competitive on.
The activity has been more rational during the last couple of quarters, because everyone is facing the same continental operations.
We have different tools.
To work with.
In order to improve our margins, particularly on the because prices yourself.
True.
For example, as we mentioned a couple of calls ago, we have simplified our menu.
In order to focus on the highest margin on most popular products.
<unk>, our digital capabilities to segment our customers.
On drive revenue towards more profitable growth meters higher average check on.
Vince per order and we know that customers choose the best value which is solely.
It's also not only price it's about service quality at USC on.
On safety.
Where macro the heels plays a role.
A good indicator of that.
The way the customers are responding we have we are gaining share.
Yes.
We are building very well in terms of.
Or are those monitoring laila.
So that's the way we are dealing with all the things related with gross margin improving prices.
In terms of the search I think that you mentioned that particularly part of our relative mix in your question.
We still are facing some restrictions per day range youll be months that are affecting our.
Our footprint.
These are the tenders.
Good news in that sense is once these restrictions are lifted.
We immediately see the return of the customers.
Important segment for us So we expect some additional contribution coming from.
Part of our pro mix, which is for sure one of the best in terms of growth.
Gross margin.
Okay.
Okay. So Bob has a follow up question related to our soft delivery as compared to the work today with the Aggregators and he wants to know how the economics and flow of the business compare.
For our delivery people versus the Aggregators.
Stability on service level last mile versus Aggregators on economics and flow of business for our delivery people.
And I'll turn it over to Luis.
Thank you Bob for the question, we still don't have economics, because we are on the early stages, what I can tell you as debt, we think that self delivery.
<unk> is a strategic initiative because it gives us greater control over the sales and from information of our customers.
<unk> works is the process.
Okay.
In the process took place the other is done through the Mcdonald's App and logistics is done through expert home delivery companies in each country I would say, even though we are in different stages. We're piloting now running pilots in Argentina, and Brazil, 93 restaurants in Argentina in 45 restaurants in Brazil.
Neil.
We think debt we are in the right track, but before we can expand this capability and take it to other markets, we need to offer the best customer experience and ensure excellence in execution and this is today our focus.
Greg and we have a question here from Pierre I'm on.
On a butcher your name sorry to hear of Src from Securities and he's asking if we can elaborate on our adjusted EBITDA margin contraction.
When compared quarter over quarter in other words.
The bridge between the first half of the first quarter on the fourth quarter, but maybe more of a trend in terms of margins.
And how things are evolving.
Marty on I think Thats for you.
Yes.
Thanks again for the question well in this case.
Our business.
It is.
Is seasonal usually the first quarter of <unk>.
Each year.
<unk> has much lower margins than the fourth quarter.
The fourth quarter for our our company.
Always.
In terms of EBITDA.
Hi.
In this particular six months, what we can say as well on top of the seasonality.
Is that in terms of the pandemic during March of <unk>.
This year, we had very strong January and February but during March we had additional restrictions that we didn't have.
By the end of last year as we already mentioned.
I would say that.
It's it's not a fair comparison fourth quarter of 2020, a wave of first quarter of 'twenty. One that's why we prefer the breach.
The comparisons with the first quarter of 2020, and usually we don't on.
Per.
Sequential or on consecutive.
Quarters.
In terms of.
The trends we are seeing.
And because exactly of what im talking about about the.
Seasonality on.
And the effect of different quarters in our margins.
We are expecting to see a sequential improvement in our margins throughout.
This year.
<unk>.
Things continue as we are seeing right now.
Okay Greg.
We actually don't have any more questions in the chart. So.
I can ask you to wait a couple of minutes per se I'm not here to see if anybody wants to add one other question.
Okay. So it looks like we've reached the end of the Q&A session. We want to thank you once again for your interest in the company and for taking the time this morning to John join Us.
We look forward to speaking with you again in our on our August earnings call and until then stay safe and have a great day.
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