Q2 2021 Arcos Dorados Holdings Inc Earnings Call
Weighted level as well as for the Caribbean Division due to the country's ongoing macroeconomic volatility.
For your reference we included the full income statement, excluding Venezuela with our earnings release.
As part of today's presentation of Marcello will provide an overview of our second quarter 2021 consolidated results Louisa Mariano will take you through sales and profitability of the divisional level as well as providing an update on the main elements of our <unk> strategy of drive thru delivery and digital along with our growth investments and capital structure Marci.
Total wrap up by sharing some news about a recipe for the future ESG platform.
So over to you.
Thank you Dan and thanks to all of you for joining us on today's webcast.
Since the beginning of the pandemic, we have prioritized the safety of our people and guests while also focusing on ensuring the long term health of the article hurdle of weakness.
We have done this by leveraging the complexity of vintages of the Tvs.
And and much freestanding restaurant portfolio and strong balance sheet and superior cash flow generation the.
We began the year expecting to face a challenging first semester, followed by a much stronger second semester as operating conditions normalized in the region.
So far we are trending in language or even better than we initially expected.
There is still a long way to go.
Given the impact of the pandemic on last year's results for the remainder of this year, we will be comparing 2021 quarterly results not just with the prior year or prior quarter, but also with the same period of 2019.
We are very pleased with the progress we have made.
And returning to 2019 of local currency sales levels, while also approaching pre pandemic profitability.
All the conditions are normalizing and government restrictions continue to hamper our ability to operate normally at the night and on the weekends.
Or benefit from entertainment activities.
Such as the movie theaters that usually helped generate the guest traffic.
Despite these for the fourth quarter two year systemwide comparable sales were essentially flat on a consolidated basis, including positive for growth in May and June.
In fact, three of the for divisions delivered positive comparable sales for the entire quarter versus the same period in 2019.
Looking ahead, we are excited and preparing for the return of the on premise business in both freestanding are mall based restaurants as of the year progresses.
Let's take a closer look at our second quarter 2021 results.
The strong systemwide comparable sales trends I, just mentioned continued into July with.
With momentum building in all divisions on the two year comparable basis.
Adjusted EBITDA grew sequentially from $24.7 million last quarter to more of them $48 million this quarter.
And the tax credit of volume of $12 million in Brazil, which largely offset the impact of government restrictions in that market.
Importantly, all of the divisions were able to generate significant operating leverage with the strongest growth coming in the Caribbean and slab.
As a result, we generated a 12, 6% increase in constant currency adjusted EBITDA on the two year basis.
The three of these are driving this recovery.
Drive thru sales remained strong despite a modest recovery in on premise sales while the EBIT.
Sales have not stopped growing sequentially setting new records in each passing month.
According to App Annie we have the industry's highest rated mobile app and we are expanding the digital capabilities that will allow our guests to move seamlessly across our on premise takeaway and the liberty sales channels, enhancing convenience and improving personalization.
Notably these competitive advantages have supported strong market share gains and our main markets, including Brazil.
I will now turn it over to Luis for a closer look at our divisional sales performance.
Thanks for.
The geographic diversity and simple brand focus of the animals and also operation served to smoothed out the crisis management and recovery periods of the last 18 months without disruptions.
And as a result comparable sales were within 1% of the second quarter of 2019 with positive two year comparable sales in three of the for divisions.
As we mentioned on our last call, Brazil began April down, 40% compared with 2019, but the sales performance improved with the relaxation of government restrictions over the course of the quarter.
More importantly, we continued gaining market share.
According to crest, the Mcdonald's brand gained two three percentage points of market share versus 2020 and for one one percentage points versus 2018 far more than any other competitor in debt market.
Brazil is capitalizing on the unique emotional bond the Mcdonalds brand has weeks guests.
Marketing activities in the second quarter focused on our strength and core menu favorites and the <unk>.
In addition to participating in the global famous <unk> platform with the launch of the Bts Neal we introduced our drive thru based loyalty program in the quarter.
In just three months the Mickey VIP drive cloud the cash surpassed 1 million registered members and has already become an important frequency driver.
No thats growth sequentially year over year and on a two year basis was driven by Mexico, which more than offset tough conditions in both Costa Rica and Panama.
Mexico is capitalizing on the brand's reputation for food safety and hygiene, while leveraging one of the largest free standing restaurants portfolios and the country.
Drive thru sales have been particularly strong and Mexico, and we are making upgrades to the operations. It infrastructure as we prepare to introduce significant digital capabilities to guests in that market.
Marketing activities and know that continued to focus on our core products and brand building activities.
All three markets boosted the chicken mcnuggets platform with the introduction of the bps Neil on June 1st selling out within just a few days.
Delivering accelerated sales supported by co branding campaigns with the delivery Aggregators and proud of bundles to celebrate various indications and special dates.
These mobility campaigns helped generate double digit sales growth on a two year basis in Mexico one of them.
We also opened the country's first <unk> restaurant.
So less top line growth was driven by the strength of the Chilean and Argentine markets. Despite persistent government restrictions across the division.
The division's two year comparable sales were positive in both May and June.
The complementary is Latin America's most important international soccer tournament, which took place from June to.
The July 11.
We were able to capitalize on the building excitement and Argentina through our digital sponsorship of the country's National Soccer Association.
The sponsorship, which allowed us to use the image of some of the country's biggest soccer stars, including Jan and messy kit boost digital sales and improved guest experience through promotional activities and the restaurants.
Finally, the Caribbean delivered another quarter of solid results from its main markets, Puerto Rico, Colombia, and the Prince with seamless.
And we supported the chicken platform with the launch of the Bts meeting, Puerto Rico, and Colombia building on the momentum of the successful introduction of the crispy chicken sandwiches, and Puerto Rico and the first quarter.
Drive the sales have also grown significantly thanks to improved service times reduced menu complexity focus on customer experience and growth in the club VIP out on that program.
For several quarters now the Caribbean has been proven and the benefit of operating across the broad and diverse geographic footprint.
Just a few years ago. This was of course that I was most challenging and division and today. It is among our best performance contributing strong use daughter and Europe denominated cash flows.
The division, which benefits from the highest freestanding restaurant penetration and the company generated almost double digit comparable sales growth on a two year basis.
As Marcelo already mentioned this momentum continued across the business in July with another month of positive comparable sales on a two year basis, including flat comps in Brazil and sequentially higher results in the other three divisions.
The three of these continued driving growth and delivering results drive from sales rose, 29% and constant currency and contributed 39% of system wide sales.
Even with the gradual improvement in the on premise business in our free standing restaurants, we have been able to sustain growth and the drive through segment through operational improvements advertising campaigns promotional activity and the VIP Automap program.
Delivery was up 94% on top of 150% growth last year on a constant currency basis contributing more than 19% of system wide sales in the quarter.
This included 91% growth and Brazil in local currency on top of 152% growth in the prior year period in that market.
We said another of quarterly sales record for delivery, even with recovering on premise sales in both freestanding and mall based stores.
This is strong evidence that the library has generated and additional consumption occasion for our guests and should bring incremental growth even with normalized sales at the from color.
Our relationships with the delivery Aggregators are evolving and remained strong across the region as we work to improve the business model for the segment.
The digital platform generated 39% of total sales in the quarter. This includes delivery mobile app and self order kiosk sales.
We have the highest rated mobile app in just about all our main markets.
With cumulative downloads nearing 54 million across the region, including 29 million and Brazil, where we have a two to one advantage and active users against our nearest competitor according to App Annie.
We believed and running great restaurants, and focusing on great guest experiences no matter, how guests choose to enjoy the Mcdonald's menu, including given the more reasons to visit us more often.
And that in mind, we introduced the VIP program in several markets late last year.
Quickly exceeding 1 million registered members by the end of the first quarter of 2021.
In April we launched a similar program and the Brazil, adding another 1 million registered members in that market and just three months.
The program provides members with exclusive offers early access to new product launches and other personalized experiences.
We saw so far have been compelling with registered members already helping to boost frequency.
This program liver adjusted rate for the segment, where we enjoy a significant competitive advantage and can test a number of loyalty program concepts.
We are also monitoring other models across the Mcdonald's system to evaluate which can be good alternatives for our markets in the future.
Today, we are feverishly preparing for guests to return to our from counters, the sort centers and mocha face.
We believe it is just a matter of time for the on premise business to recover and we know how important it is to provide the service.
Quality and cleanliness, they have always associated with our restaurants.
It is important to keep in mind that the on premise business includes both freestanding and mall based restaurants.
Pre pandemic freestanding restaurants generated about 70% of sales of on premise meaning.
Meaning at the from counter these are centers and Mcafee.
Mall based store sales were even more concentrated in the on premise sales segments.
So far when government restriction of sellout and guests feel comfortable they still see our restaurants as the destination, where they can order and enjoy their favorite menu items and desserts.
This gives us great confidence and optimism for the second half of this year as well as for the medium to long term growth prospects of the Mcdonalds brand in Latin America and the Caribbean.
And <unk> over to you.
Thanks Luis.
As is the case with our sales figures profitability and the second quarter is already near or above pre pandemic levels in all divisions.
The sales recovery and the streamlined operations are generating significant operating leverage and the business.
Such that our adjusted EBITDA improved sequentially and rebounded strongly from the peak of the pandemic last year.
We were already very close to 2019 results at the consolidated level and constant currency.
Even excluding the tax credit in Brazil.
As Marcelo mentioned, the second half of the year started out strongly.
This is also the case in terms of profitability and July which has historically been one of the two most important months of the year for us.
Barring any significant setbacks, we are on track to deliver a strong second half of 2021.
And in line with the outlook, we provided at the beginning of the year.
Remember that we reported in U S. GAAP. So all of our operating income includes lease expenses above the line.
Which is the basis for our adjusted EBITDA calculation.
Furthermore, while currencies have not been kind to our U S dollar numbers.
Local currency performance has been very strong over the last several years and recent performance has been no exception.
Consolidated adjusted EBITDA performance in the quarter reflects operating leverage and most restaurant level line items, which drove the 12, 6% increase and constant currency on a two year basis.
Notably, both food and paper costs and favorable expenses were lower as a percentage of revenue versus the pre pandemic second quarter of 2019.
The strongest growth in the period came from sled and hard currency markets in the Caribbean.
Once again, demonstrating the benefit of operating across a broad geography.
Brazil's adjusted EBITDA margin reached 15% and the second quarter for nine 7%, excluding the $11.9 million piece of <unk> tax credit.
We saw significant operating leverage in most cost and expenses, despite very difficult operating conditions at the beginning of the quarter.
The exception was higher food and paper cost due to commodity price pressures.
Through revenue management and strong supplier relationships, we were able to keep the increase in food and paper costs to less than 80 basis points as a percentage of sales.
No less EBITDA margin came within 50 basis points of the second quarter of 2019, driven by Mexico and continued strong performance.
Again, we had significant operating leverage across all line items, thanks to the rebounding sales and the more streamlined operation.
Similarly, slide came within 30 basis points of its second quarter 2019 margin with adjusted EBITDA growing eight 7% and constant currency on a two year basis.
Chile, and Argentina more than offset tough conditions in the divisions smaller markets.
Last but not least the Caribbean divisions, adjusted EBITDA grew nearly 150% on a two year basis and constant currency, including a 560 basis points margin expansion.
For this division, which generates largely hard currency cash flows has benefited from the rebound in Puerto Rico continue.
Continued strong results in the French West English and.
And then improving business in Colombia.
Looking at our cost structure compared with the second quarter of 2019, our streamlined operation is generating leverage where we expected.
For the paper despite commodity cost pressures.
Payroll with.
With increased productivity royalties with resumed growth support.
And franchised restaurants occupancy expenses were.
All of lower as a percentage of revenues.
Occupancy and other operating expenses were higher primarily due to the growth and delivery and the improvement and other operating income largely reflects the benefit of the tax credit in Brazil.
Total G&A expenses declined seven 2% and U S dollars versus the second quarter of 2019.
The 27, 2% increase and constant currency was below the two year G&A weighted inflation of 28, 5%. Thanks.
Thanks to our ongoing focus on expense control.
Consolidated adjusted EBITDA reached $48.3 million compared.
Compared with last years negative $41.7 million of result.
And $19 million positive swing.
We are very pleased with the momentum and the business and the results were generated in U S dollars and despite the significant depreciation of many of our currencies from two years ago.
We have now delivered four consecutive quarters of positive cash flow from operations.
Even though this year include the payment of five months of deferred royalties.
<unk> to sales from March through July of 2020.
In may of this year, we monetized a portion of our derivatives by unwinding to swap structures in Brazil.
A combination of core spreads and interest coupon only swaps.
This balance sheet transaction and converting the asset value from the derivative instrument to on equivalent of $23.2 million of cash.
During the quarter, we used a little over $6.5 million of this cash to repurchase some of our outstanding 23, and 27 notes.
Since the beginning of July we have deployed an additional $8 million to repurchase more of both the outstanding notes.
As we anticipated the company's leverage ratio dropped significantly from the prior year and given the strong rebound and trailing 12 month EBITDA.
For the second half of the year, we expect this ratio to continue dropping primarily as a result of improving EBITDA.
Finally, I want to point out the.
And then we do not have any material debt maturities until September of 'twenty three.
And we have more than sufficient cash to manage our business on an ongoing basis.
Capital expenditures were $29.9 million from the second quarter, which included opening 19, new restaurants of which 14 were freestanding units in Brazil.
For the year to date through June we opened 29, new restaurants, and the pipeline for future and restaurants openings remains very attractive.
We have also begun the planning process for next year and the long term to ensure we continue to make good capital allocation decisions to generate value for our shareholders.
This will include an update of our assessment for long term unit growth potential in the region, which we believe remains robust in many markets, especially in Brazil, and Chile, and Puerto Rico among others.
At the same dose Rome wasn't built in the day and neither of our unmatched freestanding restaurant portfolio and our industry leading digital capabilities.
Looking ahead as we continue to leverage our many competitive advantages through our three DS strategy.
Expect cash generation to accelerate through the end of this year and.
And operating profitability margins to return to pre pandemic levels by the fourth quarter.
Moving forward with strong cash flow generation.
And proven the access to capital markets, we plan to support the fever expansion of the Mcdonalds brand in Latin America, and the Caribbean, which is still highly underpenetrated in all our main markets.
Hello, and back to you.
Thanks Mariano.
One of the most important learnings from the last 18 months has been the difference we can make them the lives of our people and the communities we serve.
Salaries and has long been among the most important values of particle hotels from.
And the concept has the vote will be on the experience we provide the gifts when they visit our restaurants.
Service is also were bulk using our scale to have a positive impact on the planet, which is why we have established goals related to sustainable sourcing packaging and recycling and climate change.
And our latest social impact on sustainable development report, which for the first time was obesity by the way and can be downloaded from our website you will learn more about the progress we are making towards the science based goals.
As part of our commitment to families. We have consistently improved the nutritional content of our true by reducing sodium and other sugars.
As well of calories and cloud content and the happy meal.
Parent can choose from a number of options to provide their till then we are well around the meal aligned with the daily nutritional recommendations of the work sales organization.
I am proud to tell you debt during the second quarter, we took another important step on the spot.
Removing all artificial flavors and colors from happy meal ingredients.
Finally youth opportunity is one of the most natural elements of our recipe for the future ESG platform.
We hired thousands of young people every year.
And by the most of them with the FERC formal job opportunities.
We provide them with the wide range of personal and professional life Skus that will last for the rest of the lives.
We also offer a viable long term career path.
Could even take them to the highest levels of vertical hurdle of management.
Today, we are announcing a new program offered through our award winning Hamburger University.
And that will make free online and certificate courses available to all young people and Latin America and the Caribbean.
Informed by the study conducted by <unk>, a leading Latin America and research organization that celebrates young people and the reason we identified five areas of the instruction they need to help them enter the workforce and build successful careers.
The fight disciplines are.
The personal finances and the.
The the pronounced sheet emotional intelligence customer service and.
On wellness.
This afternoon, our team along with the Hamburger University of administrative doors, and <unk> will be presenting the results of this study and <unk>.
Providing more details on how this free online program will work.
You can join the slight event on the adequate level of lingering profile on the <unk>.
And more about our recipe for the future platform by visiting our website.
Don I will now turn the call back to you to start the Q&A session.
Sure Marcello.
In order to get started please and minimize the presentations by and so that you can access the chat function on the left hand side of the webcast platform.
Get yourself to one or two questions. So what I can read understand and convey them to our speakers.
We'll now pause briefly to compile of your questions.
Okay.
Okay. So the first couple of questions and we have here are from our sale of <unk> of credit Suisse. The for.
First one of your few Marcello Marcella asks for an update on same store sales trends and July and early days of August and Brazil.
Okay.
Good morning, muscular and thank you for for your question.
Let me recap the second quarter first.
Of course, looking at detail World Cup and sequentially within the second quarter I think that will help you to understand what's going on in recent weeks.
Systemwide comparable sales and the second quarter rebounded strongly.
<unk> seen more than 98 per cent compared with last year and <unk>.
More importantly, systemwide comparable sales for the fourth quarter were nearly flat on a tour of races on the consolidated basis. Despite the tough start two of water over the course of the quarter, we saw a steady sequential improvement and comparable sales performance on a two year basis in order for.
For the reasons.
Three of the four of the regions generated positive comparable sales on a degree of races for the entire quarter.
Brazil was the most challenging division.
Given the fact that we saw at Titan and the restrictions due to net build but since then the sequential improvement was.
Very good on a consolidated level systemwide comparable sales moving into positive territory in May and we have even better results in June So we're happy and July on the first week of August.
Is that the strong momentum we built during the second quarter continued into the beginning of the third quarter also on a tour of bet per year basis July which is historically one of the two strongest months of the year ended with Brazil, essentially flat and comparable sales versus.
2019.
On the other half of the other three divisions, which were already positive and the second quarter.
Based on those is strong and our numbers and as a result, we are extremely pleased with july's sales performance on the two year basis July and in fact, it's the same for the first week of August systemwide comparable sales growth in the mid teens on a consolidated basis.
Remarkably even though the on premise business is still down due to government and both operating and restrictions mainly on hours and capacity. This comparable sales of results are already in line with the benchmark blended inflation for the period.
And this is why we freedom and we believe that the second half of the year will be much stronger than the first half for us assuming operating conditions will continue to normal ex.
So on so.
And if I can let net and let me add a few comments.
I think it's worth mention debt. This is the fourth consecutive quarter debt, we delivered a sequential improvement income sales and it is the first positive quarterly comp sales results in the fourth quarter of 2018, and so the reality of that.
As government restrictions are relaxed.
<unk> traffic increases in our restaurants and this is because.
And there is clearly built up demand for Mcdonald's and as I already mentioned and some of the marketing activities. We have implemented in each division as part of my opening remarks, but from an operating perspective, we're focused on people.
Product and technology, not only to enhance the guest experience, but to prepare our teams to this full revival face.
And for our on premise business on that again on premises is of centers marketplace and of course from color and if you. Let me double click on that we have assembled multidisciplinary squats to focus on the operational excellence, not only and drive thru, but and delivery.
And each freestanding restaurants.
Also have and an expert team dedicated to the drive thru segment and as you know we have simplified.
On our menu. This has benefited not only supply chain, but it has also reduced complexity and.
And our restaurants of.
Of course, we will launch new products that are relevant and exciting to our guests, but we want to be smart about it we're focusing on smart innovation. So.
Well the focus is to.
Introduce products that not only bring sales, but are accretive to margins and easily incorporated into the operation and I would say debt of my last point here is that we know that accuracy and speed are very important for us.
And for guest satisfaction.
And.
And that's why we're continually improving and investing in technology.
And that allows us to measure and track. These kpis. So I hope that provides a little bit more insight about how we're generating of the operating leverage on the early this quarter, but moving ahead.
So that's a good segue to lose the Marcellus and the second the second part of the question relates to.
Operating performance rights zone and in terms of margins. So she asked about operating leverage on the payroll line mentioning that it's near the lowest historical levels of around 18, 5%. She is asking what drove that performance.
And also ask for a little bit of of <unk>.
Insight into Brazil's gross margin both year over year, and also versus 2019 levels and I'm going to take advantage of this because we have a question from <unk> from from Goldman Sachs. We'll also asks of our gross margin and.
And you have the was asking about the gross margin improvement at the consolidated level and the context of of Brazil.
Brazil's performance of being down a bit so how does the gross margin performance of the other divisions, yes, right. So it's kind of a true person question related to payroll and gross margin and maybe Mariano you can get us started perfect yes.
Good morning, everybody and.
Thanks, Marcella and.
The Reno for the questions.
The first part regarding payroll I would mentioned that the reason why.
The payroll of line is performing so well.
Is that.
We are seeing of course are recovering sales.
And in many markets above 2019, and that will help to gain leverage on that line and that happens in many of our markets and.
And in the markets, where we're not having sales recovery or where we experienced during the quarter.
<unk> of restaurants, we are receiving government support and that line of slow and that helps compensate the.
<unk>.
On the costs the extra costs that we are having because of those restaurants are closed.
And on top of that we are experiencing productivity gains since 2019 productivity has been going up in in our restaurants.
And I would say that the importance of it.
Alternative segments like drive thru and delivery gaining share of our total sales are also reflected in these gains that we are seeing and the payroll line.
And lastly.
Lastly, I would mention as flow of that.
Weaker economies as we are experiencing and many of our markets are related to the correlated with lower salary increases as well. So overall I think thats. The explanation of why the payroll line is performing.
As we are seeing so well and near the historic low levels.
Now I will move to the to the to the gross margin quest.
Question.
And regarding Brazil, and as well as the consolidated.
<unk>.
Let me start debt.
We mentioned this many times, but the beauty of Arcos. The analysis that we operating 20 different markets across the vast geography.
For that reason consolidated for the paper costs in the second quarter of 2021, we're just not not just lower versus the second quarter of 2020, but more importantly, we delivered lower food and paper costs versus the pre pandemic second quarter 2019.
So.
And now focusing on in Brazil the per.
Protein cost pressures are a reality, we mentioned this already in previous calls.
And.
We see and and the fact is that these are a reality not only for <unk>, our restaurants, but also to the entire food industry, So everybody and Brazil has experienced experiencing lease cost pressures.
But we have been able to secure the best prices through longstanding supply of protocols and because we are the largest buyer of beef and the market by a factor of free.
In addition.
We also apply best practices in terms of revenue management, where we include.
Intelligent pricing and product mix for the more segmented and targeted marketing.
And the inventory management, and Thats, reflecting moving and we did that during the pandemic. Our win many restaurants were closed moving inventories from closed mall based restaurants, two freestanding units during the pandemic that of course helped us to reduce the costs in the food and paper line.
And also last year, we reduced the number of menu items by at least 30%. This menu simplification strategy streamline the supply chain and the operation itself.
So, although Brazil second quarter 2021 for the paper costs were higher versus the second quarter of 2020 as a percentage of revenue.
Keep in mind that our best in class supply chain kept increasing for the paper cost to just hundreds of basis points versus last year.
Now on the construct going back to the consolidated level.
And I think it's important to mention this because we have good news to tell here one of the main benefits of operating in this.
Already mentioned this vast geography is then we have another tool to smooth out the impacts of difficult operating conditions in one market or the other.
So.
Adding to all of the measures that we took in Brazil.
And that I already.
Explain.
All of the three divisions are experiencing gains in the food and paper cost line. So we are having efficiency in the three other divisions and.
And our our food and paper costs that we developed over the years.
The more localized reducing our consolidated exposure to imported goods are localized market disruptions.
So using many of the same tools, we used to minimize food and paper cost increases and Brazil, our other free divisions as I already mentioned have been able to reduce food and paper costs fully offsetting the higher costs in Brazil, and that's why we are seeing again in the line on the consolidated level.
Now with the I.
I will end up with an outlook of 2021 for the paper cost as a percentage of revenue on the consolidated level should once again remained relatively flat versus the prior year and that's what we are expecting strong performance and nolette sled and the Caribbean divisions, and they will be we are expecting the there will be offsetting.
Honestly higher food and paper costs and risks.
And.
Perfect. Thanks Mariano the.
<unk> actually had on from Goldman had on a second follow up question and.
And she has from.
And the various geographies, where we had a very helpful to hear more about our CRM strategy and.
And I think it's within the digital sort of.
Pillar of our <unk> strategy, So I will turn it over to you is maybe you can go start line yes.
Thank you the Gino I would give you a.
And little bit of color of the deep digital.
Evolution that we're having to be fair our digital journey started many years ago and since then we have made huge progress in the digital transformation of our company. If you. Let me give you some numbers and the first half of 2021 digital.
Sales represented 39% of total sales, we have nearly 54 million downloads of our App and.
And it has the highest customer ratings.
In the regions <unk> industry. So the this is an average of four six points out of five and we have 9 million active users per month.
The access.
And we're out to have to put betting into context, according to App Annie who have.
Twice as many active users us our nearest competitor.
Brazil today, and we keep doubling down I would say on.
And are creating a personalized experience.
And thanks to our growing CRM capabilities.
We're gaining new data new insights into guest preferences and just a for example, we have just learned from the digital space debt campaigns based on users' favorite products have a 15% to 25% greater conversion than Moscow.
Indications so.
With this in mind and just as an example in Brazil, we applied this data to capitalize on the popularity of the big Tasty Sandwich.
So how we work with debt.
And our mobile App users.
We identified.
Fans of the big Tasty sandwich.
Received premier access to vital tasty source and these generated outstanding sales and very positive customer feedback so.
And another another point that we would like to tell you of all of these debt. Another feature that we are developing is MLP mobile order and pay sales increased by 50% sequentially and the second quarter compared with the first quarter of this year.
We are in the first stages and this is a new feature that we are helping guests to adopt to recap we have the most robust digital platform with the most downloaded and highest rated mobile app and today, we are expanding CRM capabilities and.
And our goal is to provide the most I would say seamless guest experience in the industry.
Great. Thanks Bruce.
The next question, we have is from Bob The Florida Bank of America.
Good morning, and thanks for the call how should we be thinking about food inflation and pass through across markets. Thank you. So ill turn it over to the mazo, okay, great. Thanks, Bob and good morning.
I think the mud and already cover of our expectations in terms of for.
Inflation and particularly for us for on paper the cost pressure, we foresee for the rest of the year. The same kind of pressure, we are leading with as of today.
And that's the reality of all of our gross duration on on for everybody consumers have seen a significant increase in food inflation in most countries. So.
We saw that there has been the room to increase prices where markets for us.
In order to meet the eight different paper cost pressures, but dealing with cost pressures is not just the bulk increasing prices. Fortunately, we have on and why.
And the agreements with our suppliers the allow us to plan for the timing and magnitude of.
For price increases as well as for which product category in order to make the impact the list of possible for our customers on.
And we saw at the same time, Doug in terms of the competition on order the competitive of CBD.
It has to be more rational during the last.
The couple of quarters, particularly since the pandemic began because obviously everyone is facing the same kind of pressures.
And on top of the agreements we have with the suppliers. We were very focus in the simplification of our menu concentrating our efforts in the most popular approach the of the same time are typically the ones with the highest margins and.
On top of that on US <unk> already mentioned, we have lived with US all of our digital capabilities in order to.
And make a good segmentation of our customer base and drive revenue towards more profitable product mixes with higher average check and a more items per hour per order and I've seen that we know the the customers used to to look for the best value equation, which is not only about price.
But the bulk of service quality speed and accuracy of and that's why our operation.
The focus on improving those those kind of attributes.
And I think that we are doing very well.
In fact, a good indicator of that my opinion on these.
The of market share growth, we saw in many of our markets.
For the company and the Greece, and Brazil, where we have the.
The advantage of having Chris.
And we captured 230 basis points of market share in Brazil, and this quarter compared with last year.
And on enjoy more than two percentage points of.
What percentage for next closest competitor and so I think that we are dealing well, we aren't having space to pass through prices some of the pressure on.
The activate on the other levers in order to sustain or even increase our gross margin and the second quarter.
Great. Thanks, Mark So we have a question from of releases on royalty from Jpmorgan and.
And he says if we can please provide an update.
Related to store opening base.
Beyond the guidance that we provided for this year. If you can comment on market share evolution across the market.
So I.
And I guess back to the muscle.
In terms of.
Our guidance for openings.
For this year.
We are still on track to meet our guidance of opening between 40 and 50.
On new restaurants.
And the focus will continue to be us. It has been in the first of orders in drive thru in freestanding restaurants, where we can operate drive thru and truck or you would say that we are close to.
The 90% range of.
Freestanding restaurants on the restaurants, we're opening on most of them.
Our embassies so.
We are not changing the guidance, we will continue to work in the remaining quarters to open additional restaurants, but we would be within the range.
On.
The second part of it of the question was about the <unk>.
The market share gains and the market share I already mentioned, Brazil, but.
And we have the advantage there to have Chris we choose the syndicated tool, but given the size of Brazil, that's available there and not in every other market, but based on all of the information internal and external debt we have in terms of.
Market share the gains we saw and Brazil are pretty similar and most of our main markets. That's why we are very pleased with the performance great.
The next question is from the drop on graduate from the escrow is the XIAFLEX type of for taking the question. How do you expect the other operating expenses line to evolve with the increased penetration of delivery for moving forward. So over to you Michael.
Perfect. Thanks, Joe for the for the question.
Yes, this line of occupancy and other operating expenses.
On includes three main.
The costs that I would like to mention first of all of the rent.
Our outlook is debt when we have done so far of instead, we have been successfully renegotiating of rental contracts and.
And we do not believe that.
And we would have.
Material margin impact versus 2019 in that line.
And then we have the advertising and promotion that.
Yes.
And it's.
The fixed in the in the MFA, where we are spending 5% of total sales and remember that last year. We received during the pandemic in 2020, a waiver from Mcdonalds and.
That line was 4%. So this year 2021, we're back to the 5% as we had back in 2019 of swap.
And then as you mentioned we have.
And the delivery take rates, that's where we include the fees that we pay to the third party operators, where we are.
And then we work with.
For for the delivery segment and.
And this line.
As long as delivery continues to increase.
And we'll have an impact but remember.
That the fees of the operators are reflected in these lines, but there are a lot of gains that are shown in other lines and that's why we always mentioned that delivery is accretive to the business, but if you look only to the occupancy and other operating expenses line, you will probably see and increase there on.
On the other hand for example, the cost of higher prices for the on paper receipts, some benefits payroll and other fixed costs are also leveraged by.
Delivery, because you don't pay extra utilities and year on us in many cases more employees for.
To perform those sales so.
<unk> delivery costs are included and the fees for the three sales are included in the line, but the benefits are widely spread along our P&L.
P&L.
Perfect.
And more question here from Roberto Browne from Morgan Stanley.
Hey, guys out of the several initiatives for cost and expense savings of the store and corporate levels, which ones could we expect to continue to have positive effects on margins after the pandemic.
I'll take this one and thanks Roberto for.
For the for the question.
While we already explained food and paper, we are seeing some pressures, but we are doing a lot of things in that.
All aspects in order not to.
Have significant impact going forward.
But maybe let me go once the back and remember that in 2019, which was the last normal year, we experienced the highest EBITDA margin ever for the company at 10%.
Of course, our goal is to go back to that to.
And so that margin level and as I was mentioning for the paper, we are experiencing pressures, but we're doing everything we can so far successfully to avoid.
And having an impact on that line.
And I already mentioned that at the beginning of the call and the payroll line is also performing well through productivity gains and efficiencies and Ah and.
And as long as sales continue to increase then we will see benefits on.
On that line are not high pressures occupancy and other I just explained as well the rent we are not seeing significant pressures and delivery as long as the increase will have some cost pressures in that line and then gains in other regarding royalty fees.
Seeing this year.
Growth support from Mcdonalds the.
And that we're seeing will lead to a five 3% effective royalty rate.
And this number we expect to be slightly lower than the five 5% debt. We paid in 2019 and in terms of finding and in terms of G&A G&A expenses were historically low interprets and 19 as a percentage of revenue.
But what I can say here is that as our strategic priorities evolve we may relocate resources to new disciplines, such as we have done with the digital team. We started building seven years ago, but we expect to continue generating leverage on that lie on the on that line as well as revenue growth. So I think the.
The outlook for our cost saving initiatives. We are confident that we will try to expanded to the future and try to increase and go back to 2019 levels as soon as we can.
Perfect. Thanks Mariano.
And we actually have no more questions in the queue on and we're almost the time. So this brings us to the end of the Q&A session. We want to thank everyone for joining us today for your interest and the company and we look forward to speaking with you again on our November earnings webcast until then please stay safe and have a great day.
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