Q4 2022 Arcos Dorados Holdings Inc Earnings Call
Before joining us today.
Speaker 1: Good morning everyone and thank you for joining us today.
Speaker 1: Today we will take you through the best results in our Colorado's history.
Speaker 1: and remind you of the reasons we feel confident we can continue improving on these results in 2023 and beyond.
Speaker 1: Let's start with the key highlights of the fourth quarter and full year 2022.
Speaker 1: Fourth quarter revenue and adjusted EBITDA were the highest ever for a single quarter.
Speaker 1: Net income in the quarter was second only to the fourth quarter of 2017, which included significant non-operating income from our redevelopment program. More importantly, fully adjusted EBITDA and net income reached new records in 2022.
Speaker 1: including our best ever EBITDA machine for a full year.
Speaker 1: As you saw during the investor update event six weeks ago, system wide comparable growth was very strong throughout 2022 and across all divisions.
Speaker 1: Restaurant volumes continued normalizing.
Speaker 1: We all see channels performing well.
Speaker 1: And our market share gains show McDonald's brand sales deliver the strongest growth in the industry left here by far.
Speaker 1: The 3Ds strategy set records with our highest ever sales in digital delivery and drive-through.
Speaker 1: with much more growth still to come.
Speaker 1: We also delivered on our promised unit growth for the year.
Speaker 1: With 66 restaurants open, including 40 in Brazil, 90 percent free standing units.
Speaker 1: We have the largest free standing restaurant portfolio in the Latin American QSR industry by a wide margin.
Speaker 1: We leverage this structural competitive advantage with the industry's most robust digital platform.
Speaker 1: taking an omnichannel approach to meet our guests' needs and preferences.
Speaker 1: This is why the McDonald's brand is as strong as ever in our region and we were able to gain so much market share in all our main markets.
Speaker 1: I fully expect these trends to continue for the foreseeable future.
Speaker 1: Please, let's take a look at test performance at the division level.
Speaker 2: Thanks Marcelo. Hello again everyone.
Speaker 2: Systemwide comparable sales grew 1.9 times blended inflation in the fourth quarter of 2022.
Speaker 2: and 2.4 times blended inflation for the full year.
Speaker 2: In Brazil comparable sales were up 3.6 times inflation in the fourth quarter.
Speaker 2: with 52% coming from digital sales channels.
Speaker 2: This included 41% growth in the market's own channels of MOP and MAC delivery.
Speaker 2: As an example of the traction we are gaining in digital, on Black Friday in Brazil, we achieved a record for digital sales in a single day, with the McDonald's app being the second most downloaded of all apps in the country.
Speaker 2: not just in the restaurant industry.
Speaker 2: Campaigns designed around McDonald's global sponsorship of the FIFA World Cup leveraged the 3Ds.
Speaker 2: and partnered with local celebrities and sports personalities to drive sales in the quarter as well.
Speaker 2: In NOLAD, comparable sales grew at a rate of 3.1 times blended inflation in the quarter.
Speaker 2: Menu innovation has drive sales across the region.
Speaker 2: with the launch of World Cup theme sandwiches in Mexico, Panama and Costa Rica.
Speaker 2: In Mexico, the hashtag McDonald's Mexico Mejicanta brand building campaign partnered with Sergio Chico Perez, the popular Mexican Formula One driver with special activations during Mexico's Grand Prix in October .
Speaker 2: And Costa Rica strengthened the beef segment with the implementation of pest burger with sales growing 21% year-over-year achieving the market's highest sales for a single quarter.
Speaker 2: In SLAT, comparable sales rose 1.6 times blended inflation in the quarter, and most markets achieved their best scores ever for brand love and affinity.
Speaker 2: Digital sales grew an outstanding 55% versus the prior year period and achieved the highest digital penetration to date.
Speaker 2: Beef and chicken campaigns reinforce the value for money proposition as well as quality and taste perception.
Speaker 2: This including the launch of the Mac Quested Chicken Sandwiches in Colombia and Chile and the FIFA World Cup Sandwiches, Selecciones McDonoughs, in several sled markets.
Speaker 2: We also run a special campaign for the World Cup champions in Argentina.
Speaker 2: where we are official digital sponsors of the country's national team.
Speaker 2: The sales trends from the fourth quarter have carried into the first quarter of 2023 as well.
Speaker 2: In fact, January and February comparable sales were very strong, growing a combined 1.9 times inflation with solid growth across all divisions.
Speaker 2: As we have seen for the last two years, off-premise channel growth remains very strong, especially the library.
Speaker 2: And we are very happy with the acceleration of growth in on-premise channels, which is now ahead of our expectations.
Speaker 2: This speaks to the essence of the McDonald's brand in Latin America and the Caribbean.
Speaker 2: We remain very much a family restaurant experience and guests.
Speaker 2: still love coming into a restaurant for a visit.
Speaker 2: This is just one more growth lever we expect to help drive sales growth this year.
Speaker 2: Mariano will now show you how this strong top line growth generated significant profitability growth in each division as well.
Speaker 3: Thanks, Luis.
Speaker 4: And good morning everyone.
Speaker 3: The Arcos Dorados operation generated adjusted EDB growth of 21.3% in the fourth quarter on an apples-to-apples basis versus last year.
Speaker 3: For the year, adjusted EBITDA growth was very strong, rising 41.8% in US dollars.
Speaker 3: and almost 48% in constant currency compared with 2021.
Speaker 3: This is a testament to our strategic approach to generating top line designed to drive sales through volume growth.
Speaker 3: As a result, we captured market share and maximized cash flow growth even as we faced our toughest ever comparisons in the second half of 2022.
Speaker 3: As expected, gross margin remained relatively flat for the full year.
Speaker 3: with some food and paper cost pressure in the second half of the year.
Speaker 3: Peril increased slightly versus the prior year, mainly due to the discontinuation of government subsidies in 2021.
Speaker 3: but payroll should remain close to today's very productive levels.
Speaker 3: Additionally.
Speaker 3: This year we had the final step up in our royalty rate.
Speaker 3: which took effect on August 3rd.
Speaker 3: The good news is that our sales growth far outpaced inflation, which helped generate significant operating leverage in our fixed costs, both in the occupancy and other operating line as well as in our GNA.
Speaker 3: As a result, we more than offset expense headwinds and reached our highest ever fully adjusted EBITDA margin.
Speaker 3: Looking ahead, we are focused on continuing to deliver strong adjusted beta growth.
Speaker 3: while maintaining healthy margins.
Speaker 3: Profitability growth was strong across all divisions.
Speaker 3: Brazil's adjusted EBITDA grew more than 19% on an apples-to-apples basis.
Speaker 3: No lascivita, we're almost 24% also on a comparable basis.
Speaker 3: and SLATs IBD was up double digits when we exclude the royalty rate step up from the fourth quarter 2022 result. As Luis just mentioned, 2023 is off to a strong start and we are confident that our plans for the rest of the year will be complete.
Speaker 3: We continue to unlock value in our business.
Speaker 3: value in our business. Luis?
Speaker 3: Back to you for the main highlights of our investor update.
Speaker 2: The recording and presentation from our investor update are available for download from our website.
Speaker 2: I would like to take you through one slide for each of the DIS we covered during the event.
Speaker 2: digital, delivery, drive-through and development.
Speaker 2: By now, it should be clear that Arco Storados has developed the most robust digital platform in the Latin America QSR industry.
Speaker 2: Digital sales grew 55% in the fourth quarter versus the prior year period.
Speaker 2: reaching record penetration as a percentage of total sales.
Speaker 2: We also made significant progress last year with identified sales.
Speaker 2: During the fourth quarter, 17% of sales were identified.
Speaker 2: meaning guests have shared their data and importantly given us permission to use their data.
Speaker 2: and the results are very compelling.
Speaker 2: When we are able to identify a sale, we use personalized insights and communication to drive higher average revenue per user by increasing both frequency and average check with those guests.
Speaker 2: Sales in the second D delivery have more than tripled since 2019.
Speaker 2: Even as on-premise sales channels normalized in 2022, delivery growth remained incredibly strong.
Speaker 2: In fact, we had the highest ever delivery sales total in the fourth quarter, which was up an impressive 52% versus the prior year quarter.
Speaker 2: While most of the QSR industry has seen delivery sales remain relatively flat, the McDonald's brand has captured nearly all the growth in the sales channel.
Speaker 2: which led to significant market share gains relative to our main competitors in the region.
Speaker 2: Trends in drive-thru, the 3rdD, reflect the structural competitive advantage of our freestanding restaurant portfolio.
Speaker 2: Sales in this channel are at about 50% since 2019, even though on-premise volume is now accelerating.
Speaker 2: But it's not just the sheer number of restaurants.
Speaker 2: Guest experience is the main driver of frequency and sales growth.
Speaker 2: We've made operational improvements over the last several years to speed up total experience times.
Speaker 2: and reduce inaccuracy that took customer satisfaction to all-time highs.
Speaker 2: It's no surprise to see we have dominant drive-through market share where the McDonald's brand now accounts for more than half the entire drive-through market in our region.
Speaker 2: We mentioned one more DINO presentation, Development.
Speaker 2: The strong results of the last two years have also benefited from having best-in-class tools.
Speaker 2: processes, and teams managing our expansion.
Speaker 2: No other operator in the region has our knowledge and track record to investigate, acquire, and support new restaurant builds.
Speaker 2: Freestanding restaurant sales are up 16% per unit in US dollars since 2019.
Speaker 2: and the return on investment from openings over the last three years is higher than ever.
Speaker 2: We operate in a highly underpenetrated region.
Speaker 2: where consumer habits have changed and companies with multiple sales channels will benefit the most from this new normal.
Speaker 2: This is why we are so confident in the long-term potential of the McDonald's brand in our region.
Speaker 2: Back to Mariano to tell you about how we're positioned to capture this potential.
Speaker 3: Strong EBITDA growth last year translated into robust cash flow from operations as well.
Speaker 3: This will be the primary source of funding for our expansion and investment plans in the coming years.
Speaker 3: In addition, we have a very strong cache position to support expansion.
Speaker 3: So we do not expect to increase growth debt in the near future.
Speaker 3: The net leverage ratio may increase modestly as we deploy some of the excess cash, but we expect it to remain well below our comfort range.
Speaker 3: leverage ratio may increase modestly as we deploy some of the excess cash but we expect it to remain well below our comfort range. A couple of weeks ago,
Speaker 3: We received the good news that Fitch upgraded our debt rating to BB+, with a stable outlook, one notch below investment grade.
Speaker 3: As the basis for the upgrade, Fitch noted our strong operating performance and healthy bed profile.
Speaker 3: Importantly, they also mentioned our increased cash flow currency diversification and positive free cash flow outlook.
Speaker 3: Importantly, they also mentioned our increased cash flow currency diversification and positive free cash flow outlook. In other words...
Speaker 3: Arcos Dorados is well positioned to navigate the challenging macroeconomic environment that Fitch recently noted is impacting other Latin American corporates.
Speaker 3: We are moving quickly with disciplined capital deployment to capture profitable growth.
Speaker 3: Last year's openings exceeded guidance and we also accelerated the modernization of the existing portfolio.
Speaker 3: with more than 110 experiences of the future remodels in 2022.
Speaker 3: For 2023, total capital expenditures should be about $350 million.
Speaker 3: About 75 to 80 percent will go to development capex directly related to our restaurants.
Speaker 3: The other 20 to 25 percent will be for non-development CAPEX, mostly IT and digital.
Speaker 3: On the development side, we expect to open 75 to 80 restaurants.
Speaker 3: Again, more than 90% freestanding.
Speaker 3: We will modernize at least 250 existing restaurants to the EOTF format.
Speaker 3: with plans to exceed 90% of the portfolio by the end of 2027. We will also make the required maintenance capex investments in our base.
Speaker 3: Non-development CAPEX will help us introduce new digital platforms and capabilities.
Speaker 3: Some of this will be customer facing.
Speaker 3: We will also invest in upgrading existing digital, technological, and other infrastructure in restaurants and offices. We will also invest in expanding existing digital, technological, and other infrastructure in restaurants and offices.
Speaker 3: Finally, as part of its ongoing commitment to provide shareholders with multiple sources of return, we began to look over one hundred thousand dollars of funds per month in the form of
Speaker 3: Arcos Dorados board of directors has approved a cash dividend of 19 cents per share to be paid in four installments at the end of each calendar quarter.
Speaker 3: The first three payments in March, June , and September will be five cents per share, and the final payment in December will be four cents per share.
Speaker 3: The first three payments in March, June , and September will be five cents per share, and the final payment in December will be four cents per share. Marcelo, back to you.
Speaker 1: Over the last few years, you have heard us talk a lot about our industry-leading ESC platform, recipe for the future and its 6-speeders.
Speaker 1: We reviewed the platform six weeks ago during our investor update and I invite you to learn more about the program by visiting the recipe for a future website.
Speaker 1: By the time we meet again in the middle of May for our first quarter 2023 ERMINS webcast, we will have published our 2022 Social Commitment and Sustainable Development Report.
Speaker 1: Once again, it will contain content audited by EY and will update you on our progress with the impactful programmes and initiatives in the Recipe for the Future platform.
Speaker 1: I will wrap up with a few final thoughts on 2022 and our outlook for 2023.
Speaker 1: Last year was a historic year for our Godorados.
Speaker 1: with outstanding financial results supported by sustainable long-term business trends.
Speaker 1: and 2023 is off to a very strong start as well.
Speaker 1: Gift habits have changed over the last two years and certain paradigms have shifted.
Speaker 1: I believe the competitive advantages we enjoy today will last for many years to come.
Speaker 1: including the largest freestanding restaurant portfolio in the industry.
Speaker 1: the best digital platform in Latin America's QSR segment, and the operational excellence of the world's favorite USR Brown.
Speaker 1: Guests reinforce these perceptions by choosing to visit us more often in 2022 as well.
Speaker 1: Last year we gained market share across all main markets.
Speaker 1: with an average increase of more than four percentage points versus 2021.
Speaker 1: The McDonald's brand has never been stronger in Latin America.
Speaker 1: In fact, last year we improved on 24 of the 25 brand attributes we track.
Speaker 1: We are capturing today's potential with our 3D strategy.
Speaker 1: While we seek to always be a destination for our guests, we have also adapted the business to meet guests on their own terms.
Speaker 1: The omnichannel approach has strengthened our competitive position by allowing guests to choose what – please click the YouTube Liberties mom link to organ world,
Speaker 1: when, how, and where to enjoy their McDonald's experience.
Speaker 1: This has allowed us to capture today's market potential like never before.
Speaker 1: We will seize tomorrow's potential with the industry's best-in-class development tools, processes, and team. America remains one of the most under-penetrated regions in the world for the QSR industry.
Speaker 1: And we firmly believe there is no other QSR company or brand positioned to grow as fast or as profitably in our region as Arco, Redos and McDonald's for the foreseeable future.
Speaker 1: Thank you for your ongoing support. Then over to you to start the Q&A session.
Speaker 5: Thanks, Marcelo. In order to get started, please minimize the presentation slides so that you can access the chat function on the left-hand side of the webcast platform.
Speaker 5: Please limit yourself to one or two questions so that I can read, understand, and convey them to our speakers. We will now pause briefly to compile your questions.
Speaker 5: Okay, our first question today comes from Melissa Buhn of Bank of America. Thank you, Melissa and good morning. Hi, everyone.
Speaker 5: The two-part question. The first part is for Marcelo.
Speaker 5: How are sales performing in the first quarter to date across markets? And are you seeing any change in underlying trends considering Omicron and Carnival impacts?
Speaker 1: Okay, good morning everyone. Comparable sales growth in the first two months of this year, of 2023, remain very strong.
Speaker 1: They grew almost two times, blended inflation for the company.
Speaker 1: And it's important to notice that the growth remains strong across all three divisions, just as it was the case in 2022. So based on our aggressive marketing plans and these recent trends, we are confident that we can deliver another euro.
Speaker 5: comparable sales growth, well above inflation in our markets which will then generate the expected operational leverage. Great, thanks Marcelo. And the second part of Melissa's question has to do with our loyalty program. This one is for you Luis.
Speaker 5: Are there any initial indications or learnings from the MyMcDonalds Rewards pilot that we can share? And what's the timeline for the broader rollout of the program? Thank you.
Speaker 2: All right. Hello, Melissa. Thanks for the question. Yeah, we are running today the pilot in Riva y Raul, Preto in Brazil. The objective is to validate our assumptions and to get feedback from customers and operations. And what I can share is that even without in practice for a few seconds, the cracks in the network deal between Squ Fried Chicken
Speaker 2: massive media launch customers are joining the program that is surpassing our expectations and we are increasing our identified sales and as we introduce those new customers to the program we see an increase inIgnition frequency
Speaker 2: because they are exposed to new functionalities. And as we said in the investor update, once we learn from this experience, we're going to be able to start the work.
Speaker 5: Thanks, Liz.
Speaker 5: Actually, I think that was the only question we've received so far. Another one is coming in now, and please remember that you can submit your questions via the chat function on the webcast.
Speaker 5: and the
Speaker 5: the chat function. It's a busy day in the markets obviously. So just jump one in from Hirani Mulyuswan from Inka Investments.
Speaker 5: We mentioned food and paper costs in the second half of 2022. How are we seeing these pressures going into 2023? And considering this and the benefit we mentioned from operational leverage, what's our expectation for margin expansion or contraction in 2023? That one is for you, Ayatnab. Thank you then and thank you, Geronimo, for the question.
Speaker 3: in this respect is very clear. We remain focused on driving top line with sustainable volume growth. That's what we have done in 2022 and the plan to continue in 2023. We already started with a very healthy sales trend as we mentioned in the first two months.
Speaker 3: In all channels, we are committed to deliver US dollar absolute EBITDA growth, as we have done in 2022 as well, with a healthy margin profile, and of course, maintaining a disciplined cost and expense control.
Speaker 5: Great. Thanks, Mariano. The next question.
Speaker 5: Is actually John the theory by the way from first New York got to some of the question Do you have any forecast for margins in 23 and I think we just answered that And we have a question from Martin section from on the mental capital asks How does growth look for 2023 and is the main driver store openings?
Speaker 1: I think that's back to you, Marcelo. Okay, yeah, as it was the case in 2022, our plan is to do anything possible
Speaker 1: to continue building revenue through volume growth in the existing restaurant base, surpassing with our system-wide comparable sales, not only inflation but our competitors in the different markets. And that has been the case in 2022 and that's the base and the focus of our plan for this year, 2023.
Speaker 1: on the first couple of months of the year we are doing well against that plan. And on top of that we accelerated our pace of investments both in terms of expansion. Last year we opened 66 new restaurants.
Speaker 1: 90% of them free standing units for this year 2023. We are planning to open 75 to 80 restaurants. So we are accelerating our pace of growth. And on top of that, we are accelerating our modernization program.
Speaker 1: converting approximately 250 restaurants to the experience of the future format. So we are
Speaker 1: gaining traction both from the existing restaurant base and on top of that with the new restaurant openings that we accelerated last year and the same will be the case for this year. Great thanks Marcelo and I think the next one is for you as well.
Speaker 1: during 2022, particularly in the second half when we didn't face any restrictions related with it.
Speaker 1: 2022, particularly in the second half when we didn't face any restrictions related with the pandemic.
Speaker 1: So based on our research and some public information, QSR industry growth basically has been driven by McDonald's, Mintzy's,Beta 1, Inc worse,
Speaker 1: So, the QSR sector in general is keeping the gains it got during the pandemic. In our case, we continue to grow our market share. And it's important to mention that these improvements in terms of market share
Speaker 1: have been in all three divisions within NOLA and CELAD in all main markets. So our strategy continues to be built.
Speaker 1: value proposition all across our menu. That's why our pricing increases have been very prudent. And I think that maximizes the addressable market and the brand experience and the brand preference. That has been the case in 2022 and we plan to – In-ientity.
Speaker 5: sustain these efforts during 2023. Great, thank you. Next question comes from Jinju Hong from Auerbach-Rason. He asks a follow-up on new store openings. What's the typical payback period? That was for you, Maria.
Speaker 3: Thank you, Guin, for the question. Typically, payback period is between three to five years. What we can mention as well is that the return – the ROI on openings is right now at all times high.
Speaker 3: even all the channels and the sales that are related to the on-premise but also to the off-premise.
Speaker 3: saves and channels that we are improving. So we are very happy with the returns we are seeing for the openings.
Speaker 5: Thanks, Marianna. A follow-up from Hinoini Mooligusman from Inca Investments. He asked if we can update us on the sales improvement we're seeing from restaurants that are after they've been modernized. So I'll give this one to you, Luis.
Speaker 2: Yeah, okay. Hello, Geronimo. The self-lift of these modernizations are above the normal growth of the rest of the restaurants. The main impact here is that the front counter includes self-ordered kiosks.
Speaker 2: 60 to 90 percent of that volume is coming through the kilos that generate higher average check so.
Speaker 2: we're seeing not only better sales, but better profitability as well. Just as a reminder, today, by the end of 2022, 45% of our footprint was EOTF.
Speaker 1: Most of the restaurants have mid-single to high-single-digit sales lived after the modernization. So based mainly in the increasing frequency and as we mentioned before the improvement in the average check when the orders are made through the digital kiosks.
Speaker 5: Great. Our next question comes from Gabriel Axo from Athena Capital. Congratulations for the great year and thank you for the presentation. I'd like to know what drove the net interest so to a stronger result than last year and what our expectations are. Thank you. I have one for you, my young boy. Perfect. Thanks, Gabriel, for the question. This year in 2022, we benefited from a high cash balance that you could...
Speaker 3: did the liability management on our debt and for 2023 we expect to continue investing our excess cash but as we deploy cash in our investments we should see that interest income decreasing
Speaker 3: as we invest in our CAPEX initiatives that we already mentioned. Excellent. Thanks, Mariano.
Speaker 5: That actually brings us to the end of the Q&A session for today. Thanks everyone again for the interest and for joining us today. We look forward to speaking with you again in the middle of May on our first quarter of 2023 earnings webcast. Until then, stay safe and have a great day.
Speaker 6: The.