Q1 2023 Arcos Dorados Holdings Inc. Earnings Call
The last couple of years.
Speaker 1: the world for the last couple of years.
Speaker 2: Arcozordados is no exception.
Speaker 3: This is a direct result of our long-term strategic approach to generating value for our shareholders.
Speaker 4: And we expect the structural competitive advantages of our restaurant portfolio and platform to continue to drive value creation for the foreseeable future.
Speaker 5: Our guests have spoken. There is no doubt we are operating the most beloved brand in the QSR industry in Latin America and the Caribbean.
Speaker 6: They recognize the value we offer in our restaurants on a daily basis.
Speaker 7: and the positive impact we make in our communities every year.
Speaker 8: This is why restaurant volumes continue to grow and brand trust metrics are at all times and highs.
Speaker 9: Each time we open a restaurant, we bring McDonald's favorite menu items closer to our guests.
Speaker 10: while also creating new job opportunities for young people and investing in the economic development of local communities.
Speaker 11: We are operating in a vastly underpenetrated region for the QSR industry.
Speaker 12: which represents a significant growth opportunity.
Speaker 13: Against that backdrop, we are working to support a sustainable future for our business and the communities we serve as we capture the substantial potential that lies ahead of us.
Speaker 14: This is the first year we know material COVID impacts since the pandemic began.
Speaker 15: And we are off to a strong start.
Speaker 16: Let's take a look at the consolidated results for the first quarter of 2023.
Speaker 17: Total revenue in the first quarter rose 25.3% in US dollars versus the prior year.
Speaker 18: supported by double digit guest traffic growth.
Speaker 19: Strong top line growth, growth operating leverage and improved profitability.
Speaker 20: Adjusted EBITDA was up 28% in the quarter, including modest margin expansion.
Speaker 21: Net income in the quarter also improved significantly.
Speaker 22: growing 52.7% versus last year.
Speaker 23: System-wide comparable sales grew a robust 1.7 times blended inflation across the company.
Speaker 24: and at least 1.5 times in each division.
Speaker 25: Market share trends remain positive as well.
Speaker 26: Madonna's brand, BC Charing the Quarter, was about two and 3.5 times as big of that of our two closest competitors, respectively.
Speaker 27: The 3D strategy drove sales higher in the quarter.
Speaker 28: Total digital sales accounted for 47% of system-wide sales.
Speaker 29: With 18% identifiable saves across the business.
Speaker 30: This included strong performance in both the delivery and drive-through sales channels.
Speaker 31: despite an acceleration of sales growth at the prompt counter.
Speaker 32: And our development plan is on track.
We opened eight free standing restaurants in the quarter.
and expect the pace of openings to pick up as we move through the year with a higher number of openings in the second half of 2023.
Mariano will talk more about that in a few minutes.
I turn it over to Luis now for an overview of sales performance in each division.
Thanks, Barcelona, and good morning, everyone.
System-wide comparable sales growth was strong in all divisions in the first quarter.
Brazil's comparable sales rose 2.6 times inflation in the period.
About two-thirds of the growth came from higher guest volumes as we maintained a competitive pricing strategy to support volume growth given the softer consumer environment in the country.
Digital sales accounted for 57% of total sales in Brazil, including 23% identifiable sales, which are users that provide their contact information and explicitly allow us to use it.
Brazil sponsorships of Big Brother Brazil, among the most highly rated television programs in the country.
and Lollapalooza, one of its most popular music festivals.
Connected the brand with younger consumers.
New product launches included premium offerings in both the beef and chicken platforms.
and digital sales benefited from channel-specific campaigns in DriveThru, early access to new products for app users, and a marked delivery activation during Lola Panusa.
Now let's comparable sales grew 2.8 times blended inflation in the water.
Similar to Brazil, about two-thirds of NOLA's comparable sales growth came from increased guest volumes.
Mexico and the friends within this were the strongest performers.
Costa Rica, Panama, and Puerto Rico also delivered solid top-line roads in the quarter.
Marketing activities in NOLAR included the big Macchicken launch in Mexico on Costa Rica.
Liberating an iconic product to expand the T-CAN platform.
We continue the rollout of the best burger platform to Panama.
Capitalizing on best practices from the implementation in Costa Rica.
Panama's compatible sales growth topped 14% in the quarter.
As a reminder, Best Burger is a new quality standard for McDonald's Classic Burgers.
It makes our burgers even better, with small changes that add up to a big difference.
guests experience hotter, juicier and takes your hamburgers.
Results in these first two markets demonstrate that this new standard tells drive even more robust sales growth.
Comparable sales grew 1.5 times inflation in slag in the first quarter.
including mid-themed guest following growth and strong inflation-aided average check growth.
Performance was consistent at close to the division with all markets delivering strong volume and total revenue growth.
SLAT maintained strong sales growth momentum while reinforcing its leadership position in the QSR industry by reaching its highest value share on record.
SLAG also reached its highest penetration of digital identifier sales.
growing 91% compared to the prior year quarter. The division rolls out the mock-mistake chicken platform in Argentina and Chile, with strong consumer response in both markets.
The launch of the signature Turbo Tasty platform strengthened the line of premium beef products in Chile.
We'd help fuel sales while reinforcing value for money perception.
SLAD also connected with younger consumers with sponsorships of some of the most relevant music festivals in the region.
Lola Palus, an Argentinian Chile, and a stereotype technique in Colombia.
We have always enjoyed a significant competitive advantage from our freestanding restaurant portfolio.
This is especially pronounced in challenging economic times when mall-based restaurants tend to suffer most. Listen from the past also have us well positioned in terms of pricing that should support continued volume growth even in a softer economic environment.
Over to Mariano for a closer look at consolidated and division of profitability in the quarter.
Thanks Luis. Good morning everyone.
A competing value proposition drives guest volume and top-line growth above inflation.
which then leads to operating leverage and improved profitability.
With that, first quarter adjusted EBITDA grew 28% in U.S. dollars versus the prior year.
It is worth remembering that the first quarter of 2022 was the easiest comparison we would face this year.
since it was the last period to include a material impact from COVID.
due to the Omicron's train of the vines.
Adjusting the beta margin improved by 20 basis points versus the first quarter of last year.
We generated efficiencies and operating leverage in payroll, occupancy and other operating expenses and G&A. These were partly offset by higher food and paper costs as a percentage of revenue due to our pricing strategy.
and a tough comparison with the first quarter of last year.
I should note that food and paper costs have been well controlled over the last three plus years.
have a very good preparation. Despite the long list of services.
The first quarter of 2023 margin also included the impact of the final step up for the Royalty rate.
For the full year 2023, we expect food and paper costs to be relatively flat as a percentage of revenues versus 2022.
Sustained sales growth will be the key driver of operating leverage, needing to offset the impact of the higher royalty on our full-year margins.
And as has been the case for the last few years, we would prioritize sales as the main generator of adjusted EBITDA growth in US dollars in 2023.
During the first quarter, we get with that priority.
adjusted to be double digits in all three divisions.
Resilience labs benefit from higher sales per restaurant, which is the main driver of operating leverage over fixed costs.
This generated strong U.S. dollar growth in EBITDA as well as margin expansion in both divisions. This is a new growth in EBITDA as well as margin expansion in both divisions.
No left-wing big-duck growth benefited from total sales growth.
but sales per unit is still below company average.
This made it more difficult for operating leverage to offset the margin impact of the higher royalty versus last year.
By now, most of you are familiar with the 3D strategy of digital delivery and driving.
All three components of the strategy performed well in the water.
Digital, which includes sales from delivery, the mobile app, and self-order kiosks achieved its highest ever penetration in system-wide sales.
As you already heard, the percentage of identifiable sales continued growing in the quarter as well.
We expect to see this penetration increase once we launch our rewards program in all of Brazil.
Our pilot program has generated encouraging results and is being expanded to more restaurants in the country.
We are still on track to launch the program in all of Brazil later this year and to the rest of our markets over the next couple of years.
Delivery and drive-through sales were up year over year and sequentially.
We are particularly pleased with the sustained sales performance in these channels.
Especially with front-owner sales growing more than 50% versus the prior year in constant currency.
Delivery sales grew across the entire Arcozodados footprint, supported by strong risk volume growth in both SLAT and Brazil.
Brazil's delivery sales grew by more than 22% in constant clearance in the period and generated more than 17% of the division sales.
Drive-thru sales rose by 13% in the first quarter versus last year. As expected, guest traffic in drive-thru is beginning to moderate given the growth in front counter sales.
Our balance sheet remains strong even as we invest some of the cash to fund our growth plan.
Our net leverage ratio remained at a very healthy 1x. We expect the net leverage ratio to remain well below our historical comfort range of 2 to 2.5 times at the end of 2023.
Historically, cash flow from operations
is relatively low during the first half of the year due to the seasonality of our working capital needs.
This year's first quarter also reflects the additional openings at the end of 2022 and the increased opening plan for 2023.
We expect cash conversion to remain in the 85-90% range for the full year.
Last year, we exceeded opening guidance partly by accelerating a few restaurant openings.
You are marked for the first quarter of 2023.
We still expect to open between 75 and 80 restaurants this year, with a higher concentration of openings in the second half.
We opened 8 free-standing restaurants and capital expenditures were $47 million in the quarter.
Finally, we paid the first of four installments of this year's dividend at the end of March.
Finally, we paid the first of four installments of this year's dividend at the end of March. Marcelo, back to you.
In the next few days, we will publish our 2022 Social Commitment and Sustainable Development report.
In the report you will see all the work we did last year across the six pillars of our recipe for the future.
For example, the strong results we are generating make it impossible to continue investing in our growth and in the communities we serve.
Last year we increased our renewable energy usage by nearly 2.5 times.
expanded our circular economy initiatives.
expanded our circular economy initiatives, such as the recycling of oil and packaging.
Intensify our efforts to procure our ingredients from responsible sources.
offer thousands of development and job opportunities for young people.
and distributed over 890,000 books for children to enjoy with their happy meals.
You can learn more about all these initiatives by downloading the report in English from www.recipeforthefuture.com.
First, we believe that building a loved brand creates value for the company and its shareholders.
This is why our marketing spend has shifted over time.
to focus on culturally relevant brand activations in our markets.
rather than just pricing and products.
Examples include the Big Brother Brazil and Lollapalooza's sponsorship.
that drove brand affinity among younger guests.
But the brand lives every day in the more than 2,300 restaurants we operate.
We have the largest freestanding restaurant portfolio by a wide margin.
And as someone who began his career in the operation, I believe our operational expertise is second to none.
Almost half of the portfolio has already been modernized to experience of the future. And all restaurants were converted to our cultural service several years ago.
This service-oriented culture is what truly distinguishes the McDonald's restaurant experience in Latin America and the Caribbean.
We are also part of the global maternal system. We develop tools such as the 3D strategy.
that help us maximize the potential of our restaurant footprint and operational expertise.
Clearly these channels are driving engagement with guests and offering them the choice of when, where and how to enjoy their favorite McDonald's orders.
Finally, to build a strong brand and sustainable business model, we must operate responsibly.
This is why we have the industry's leading ESC platform with ambitious initiatives and goals aimed at benefiting our business, the communities we serve, and the planet we all share.
Thank you for your ongoing support. Then, over to you to start the Q&A session.
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. Please limit yourself to 1 or 2 questions so that I can read, understand, and convey them to our speakers.
We will now pause briefly to compile your questions. Great, so our first question this morning comes from Joaquin Le of Itau and I'm going to combine it with a question that Giago Bertolucci from Goldman Sachs sent us.
Guoqin says, congratulations on the results and can you please elaborate on the reasons explaining the very different margin performances in Brazilian FLAD versus NOLAD.
And Chagua has a similar question that says, margins for NOLAB came in a touch lower, even if adjusted for the royalties, despite solid same-store sales growth. Why is that and what's the outlook? Indonesia's Gracias.
So that question I'm going to turn over to you again
Good morning everybody and thank you for being here for the question
Well, first of all, the three divisions are showing sales growing well above inflation. We are very pleased with that.
The three divisions are showing double digits with a growth in US dollars.
Brazil in this respect is growing almost 30%, 39.2%, slash 34.3%, and not at 10.7%.
Slap a brady with higher stakes per unit.
Slang regimes with higher stakes per unit are more capable of leveraging on fixed costs.
And with that, even all said, the Royalty Step-up that happened in August last year. Not us, on the other hand, with lower stakes restored.
And also with a higher exposure to food and paper imported goods, it's less capable for the moment to leverage on those six costs. And that's the main reason why we are seeing different behavior between religion, class, on one side and knowledge on the other.
Regarding the outlook in general on a consolidated basis,
Here our plan is clear and that's our expectations for the rest of the year. We remain very focused on driving top line with sustainable oil growth in all channels to deliver the heat data growth in water.
with a very healthy margin profile. This is what we have been doing last year. We are continuing to do during this year and that's our expectation for the year. Regarding, for example, food and paper, we expect to have a similar figure than we had last year and we expect.
to leverage on all the fixed costs, maybe you will see that on payroll, on G&A, and other and other companies, that when sales continue to grow above inflation, we will expect to see leverage on those lines.
leverage for all the fixed costs, maybe you will see that on payroll, on G&A and other and other companies that when sales continue to grow above inflation we will expect to see leverage on those terms. Great, thanks Mariano.
The next question actually is the first two parts of Jadgo's original question. Morning team, congrats on the amazing results.
A couple of questions, both of which will be for Marcelo.
Brazil, how have same-store sales performed throughout the quarter especially in March and what does the quarter performance imply for market share evolution?
That's the first part. And maybe Marcelo, you want to start with that. I'll give you the second one here in a second.
Excellent, thank you Dan and Hi Thiago to have you in the call. Well, we are very pleased with the performance.
of sales in the whole company, but particularly in Brazil. We did extremely well across the quarter, even though during the first two months, number of figures for comparable sales were better because the base of comparison.
in 2022 was still affected by the Omicron impact in some restrictions but we did well very well in March. We grew sales, comparable sales, well above inflation and we grew volumes which is very very important for us.
And most importantly, the trends that we are seeing in the second quarter shows that we are keeping momentum in Brazil and in the whole company. So, sales trends in the second quarter are doing extremely well.
So, we remain cautiously optimistic as we go through the rest of this year. We knew by the figures published by other retailers in the market that there are some headwinds in Brazil, but we are beating the market. And that's reflected in – Thank you very much.
market share figures in Brazil. We continue to do extremely well. We have more than doubled the market share of our closest competitor and based on the public figures about comparable sales in the market. We are – –
getting the gap even bigger thanks to our acceleration in the comparable sales performance. Perfect. And the second part of Chago's question, Marcelo, is Argentina has been extremely volatile and apparently you closed some stores in SLAD. How are you seeing the consumer backdrop in the region?
First, let me tell you that the restaurants that we closed in SLAT, most of them are in Venezuela. We closed six restaurants in Venezuela, so we didn't close any restaurant in Argentina. Despite the challenging macro environment in the market in Argentina, we closed six
We are very pleased with the performance of our business in that country where the McDonald's brand has gained preference and market share in the last several quarters. The volume growth has been the real story in Argentina.
at the beginning thanks to the 3D strategy. But more recently, from counter volume, has re-accelerated and is now above pre-pandemic levels in Argentina. So Argentina has one of the highest levels of guest traffic per restaurant in all of our markets, in all of our crowd.
Digital channels have a lot to do with that. The digital phase penetration in Argentina is one of the highest in our region. That allows us to work with segmentation and personalization. These tools help us not only in terms of growing sales and volumes, but also in terms of growing sales and volumes.
but gets us in terms of improving our profitability in the market. So we are very, very pleased with the performance in Argentina despite the challenging macro environment.
Perfect. Our next question is also a two-parter from Melissa Bione of Bank of America. The first one for you, Mariano, can you please discuss the outlook for protein and other food costs and any hedges or purchase commitments you've made?
Perfect, thanks Mennisa for the question. In terms of food and paper costs, we are expecting for the full year a similar cost to last year as I mentioned in the previous question. Regarding protein and other food cost pressures, we are seeing actually less pressure on that front.
in the beginning of the year, but that together with our proven pricing strategy that is allowing us to grow safe above inflation, that's the reason why we're expecting stable student paper costs throughout this year.
Regarding the hedges, as we already mentioned, our policy is to hedge 50% of projected for paper exposure on a rolling basis. So we are doing that with an outlook of 2 to 3 quarters.
And that's what we continue to do and we will do that for this year.
Great. The second part of Melissa's question is, can you comment on the pricing and promotional environment in your major markets?
Are you seeing any acceleration in the market share shift from the informal and independent to the formal and chained operators? She says thank you that one for you.
Thank you, Lisa for the question. I will start with the second part of the question. We do not see an acceleration in the market share sheet from informal to formal operators.
What we are seeing is a rational competitive environment and sales recovery of smaller branded competitors of the sector.
competitive environment and sales recovery of smaller branded competitors of the sector of the keto sausage.
But we are prepared to face future competitive pressures. We think we have the right strategies and we are focusing on execution at the restaurant level. Our strategy is built on offering value with the pricing architecture that...
maximizes the targeted or addressable market and that was to offer attractive value for our guests. So we have positive results in market share in the first quarter of 2023. Our business share advantage was 2 to 3.5 times as big.
as that of our diagnosis competitors. Yeah? Thanks please.
Our next question actually a couple of questions come from Antonio Hernandez of bar plays hi good morning My questions are number one. Where are you seeing more payroll and labor headwinds?
questions come from Antonio Hernandez of Barclays. Hi, good morning. My questions are number one. Where are you seeing more payroll and labor headwinds? We'll start with you, Megan.
Perfect. Thanks Antonio for your question. First of all, let me say that we are very pleased with the level we are having in Peru, on a consolidated level, below 20% of revenues.
That's a very healthy figure for anacosts. And we expect to continue to obtain leverage on the ferroline as we continue to grow, say, about inflation. Having said that, what we are observing is that we are having...
for you, Luis.
Is the deceleration and drive-through changing your pipeline for this format in terms of openings and modernizations? Alright, uh,
Yes, hello Antonio, thank you for the question. The first thing is important to say that the Drive-Thru channel had a strong growth during the pandemic. And we had the chance to have new customers, new guests that had the opportunity to thrive even though we were protected in our market.
to try this challenge for the first time. Okay? They found out that it was not only fun, convenient, safe, but cool. And now, with a very strong recovery in front cover, with more than 50% in the first quarter of 2022, even with that,
the sales are growing about 13% versus the first quarter of 2022. So this is expected in moderation in this traffic today, in cars that we attend. But our challenge...
is now to continue making drive-through, a growth engine for the company, and we have to make adjustments in operations and we have the right set of problems in place for marketing and digital. Even with the modernizations we make with the adjustments that we make in the buildings.
We make, not only for driver, but for delivery, we make our operation easier and that allows to capture additional sales.
Yeah. Thanks, Luis. The next question comes from Ulises Agote of JP Morgan. Hi team, congrats on the results. Just a quick one on the sales trends. Any color on how performance has been until the start of second quarter 23 and how sales performed sequentially through the first quarter 23.
we rolled out the effect from Omicron on the base. And that one I'll turn over to you, Marcelo. Okay, thank you. Thank you, Ulises, for the question. As I mentioned, when I answered the first question about Brazil's performance in the...
comparable sales figures for the first quarter. That was the same case for the whole company. So within the quarter, the base of comparison of the first quarter 2022 was easier for the first couple of months. But again, we saw very strong results.
both in terms of volumes growth and in terms of comparable sales growth, well above inflation during the first quarter. And in the second quarter, same that I mentioned before for Brazil, we continue to see very strong sales performance. In fact, I would say that May has been a very positive year for us.
to this.
to these points that brought us to this leadership position, continue to deliver against the environment that we are facing in the different markets. So very encouraging figures coming from sales and volume growth in the second quarter of the year.
Perfect. So we have a question from Anik. And Anik, I apologize if I don't pronounce your last name correctly. Mutsudi from American Trust Investment Advisors. Congratulations on the performance and can you please expand more on the latest digital program expected to release in Brazil later this year in other regions in the following years? And that one is for you, Luis.
Hello Alek. We currently have a loyalty program that is exclusive to DriveThru that is called the Glue VIP Out-of-Mark.
By the end of March we have had around 4.4 million members But we have launched, we've mentioned this before in the last course, we've launched a pilot of our loyalty program with very very good results.
without even, without a massive media launch, we noticed not only an increase in volume of identifiable sales but an increase in visit frequency.
That's why today we are starting with the expansion of the program to more restaurants including several sub-parenthesis. And the intention is, like I said, to launch in all of Brazil later this year and to the rest of our 20 markets.
over the next couple of years.
Yeah.
Great. Thanks, Luis. I'm showing no more questions in the queue here, so I guess we've reached the end of our Q&A session. I want to thank everyone again for your interest in Arca Drados and for joining today's webcast. Look forward to speaking with you again in the middle of August on our second quarter of the 2023 Earnings webcast. Until then, stay safe and have a great day, everyone.