Q2 2023 Arcos Dorados Holdings Inc Earnings Call
Speaker 1: on restaurant opens. Importantly, these investments provide more than short financial returns. They also make us the largest generators of first-time job opportunities for young people in the region. These first-time jobs can lead to long-term opportunities.
Speaker 1: If they did for me, and for so many other people across Arco Dorados who began their careers in one of ouracings.
Speaker 1: I hope we can inspire even more young people to join the Arcode de la Loz family and build a better future for the families, communities and the planet. Let's take a look at the consolidated results for the second quarter of 2023.
Speaker 1: You will see that the strong trends of the last several quarters continue into the second quarter of this year. Total revenue surpassed $1 billion for the first time in the second quarter.
Speaker 1: rising 17.2% in US dollars versus the value of your period. This included gastrofical growth in the mid-signal dishes in all three divisions.
Speaker 1: Even though last year's numbers were also very strong, consistent with recent quarters, above inflation, top-line growth drove operating leverage and improved profitability. Adjusted EBITDA was up 20.5% in the quarter.
Speaker 1: with 30 basis points of margin expansion. Net income was also strong, nearly doubling last year's result.
Speaker 1: System Boy comparado sales group 31.5%, or about 1.6 times blended inflation across the company. With traffic continuing to grow, we increased the visit share gap versus our close-up competitors in our main markets.
Speaker 1: This is among our core goals. Continue to grow comparable CES above inflation in each market.
Speaker 1: Game market share and labour as fixed cost to drive sustainable cash flow generation. Perhaps the most important key to our success has been the 3D strategy. Digital sales accounted for 49% of system world sales.
Speaker 1: With 20% identified sales across the business.
Speaker 1: Delivering continues to be an important CES driver.
Speaker 1: As it captures a bigger and bigger share of the overall markets.
Speaker 1: And right to save, have established a new baseline, even though growth has moderated with guests returning to restaurant dining rooms. Finally, as we mentioned on our last call, we expect restaurant openings and modernizations to be back and waited in 2023. For the year to date, we've opened 18 restaurants, including 16 free-standing units. Opening are beginning to accelerate. In fact, since the beginning of July , we have opened an additional 12 restaurants, and we have already made all the ground breaks required to meet our opening guidance for the full year 2023. We are expanding our food print in a fast-lipped other penetrated regions.
Speaker 2: Thanks for watching and good morning everyone.
Speaker 1: System-wide comparable sales growing remains strong across the board in the second quarter. With all divisions growing well above inflation.
Speaker 1: Over the last few years, we pursued a competitive marketing strategy about in the temptation to use break increases at the main tool to offset higher costs.
Speaker 1: We have learned from experience that while aggressive price increases can bring a short-term margin benefit, they can also have a long lasting negative impact on these volumes. Instead, by offering compelling value, a much quantity and great service, we have sustained value growth and really gets frequency.
Speaker 1: Taking a closer look at each division, Brazil's comparable sales rose 2.5 times inflation in the quarter. Guest volume was up in the mid-single digits, despite a very strong performance in the prior year quarter. Visitor penetration continues to rise in Brazil. The making-fed campaign that provided guests with a festival of offers held right 26% growth in digital sales by encouraging consumers to download and use the mobile app.
Speaker 1: Digital sales are now responsible for 61% of total sales in the country, including 25% identified sales, the highest penetration for both indicators across all markets.
Speaker 1: McDonald's brand market share remained very strong in the Brazilian QSR market during the Second World War and needs more than two times the share of the nearest competitor.
Speaker 1: According to our internal research, brand health is at an old time high with a top of mine's core three times higher than the closest competitor. We also have some exciting news during the border with the addition of the big tasty bacon barbecue to the premium beef segment.
Speaker 1: Cheap and sales are growing strongly across the region.
Speaker 3: adding even more relevance to this important category.
Speaker 3: With great media offerings and daily daily marketing campaigns, such as the celebration of the chicken McNaggets for a university in all alcohol-dolls markets.
Speaker 3: Now that's comparable sales grew 2.8 times the divisions blended in the water.
Speaker 3: Volume growth was robust across none of it. With particularly strong volume growth in Mexico where almost double-digit volume growth helped ride 16% higher comparable sales.
Speaker 3: No less markets also capture markets share in the water and have seen consistent positive momentum in brand attributes across the division.
Importantly from a strategic standpoint.
These transactions on disposal option, particularly allows us to continue concentrating our own operation the Arco Corporation in larger cities.
With our supplements Acs operating in a smaller or more remote geographies, which is the case of eastern section.
Bob It's follow up to that question Marcello is how many units were sold on were there any other closures or other disposals in slide.
As I mentioned before the eastern section evolved to a restaurant that was they were sold on one that was buying.
And we only close three restaurants in slot during this quarter and those three restaurants were in Venezuela great.
We continued on with also can you touch on the underlying margin pressure and operating challenges in the region, which I assume what you're talking about slide and I'll give that one to earmark money on them.
Perfect. Thank you very much good morning, everybody and thanks for the question.
Even though we see some challenging macro environment in some countries.
In slag SR. What sales comps grew one point in times, a one two times inflation, which is aligned with our strategy of growing sales above inflation to gain.
The margin leverage the EBITDA grew 12.
12% in dollar terms.
And in this in the different lines of the P&L and what we are seeing is first of all we're very happy with the level that we're seeing in gross margin, which is slightly improving.
And take into account that slot is taking the full impact of increasing royalties compared with last year of 100 basis points, so even though there.
Margin contraction of 40 basis points, we are comparing with 100 basis points of the increase in the royalty rates.
Perfect.
And then Bob wraps up with a question related to the effective tax rate.
Similar questions by the way from Antonio Hernandez from Barclays releases are worth it from JP Morgan and walking away from it though a bunch of question, which is repeated as I've mentioned.
There was a spike in the effective tax rate what was behind that and how should we think about taxes over the balance of this year and into 2024. Thank you.
Perfect I'll take that one.
What on a quarterly basis as we already mentioned the effective tax rate tax rate sorry is somewhat volatile evenly.
Given the various rules governing the calculation of this liability in each of our markets. We are operating in 20 markets with different 20 different tax rules as well as within our holding company structure.
So while the second quarter.
Correct 2023, we had a higher.
Tax rate than last year, if you consider the first half of 2023.
Compared with the first half of 2022 the tax the effective tax rates are quite similar 47 five versus $45 six on 2022.
For the full year in 2023, we expect the effective tax rate to be slightly higher than normal than previous years.
Because of several impacts higher withholding taxes in an.
In our corporate structure.
So lower usage of net operating losses from prior periods that is aligned with the EBITDA growth that we are seeing in several of our markets.
Somehow greater nondeductible expenses in certain markets compared to previous year.
And additionally, inflation and other adjustments related to the macro environment in Argentina.
Finally, we are not seeing at this moment and impact from the tax reforms, but we are hearing about different projects in different markets that we cannot measure yet, but could have an impact going forward.
So looking ahead, we believe that 35% to 40% is a reasonable level to expect on a full year basis.
For 2024.
Perfect.
Thanks Mariano.
The next question comes from Java Bertolucci of Goldman Sachs.
Marcel about on TMR gross congrats on another solid print.
And so I would send us for questions. So we're going to work for me as well.
Brazil same store sales is it possible to comment on traffic versus price.
And how are the performance evolved monthly over the course of the quarter and how do we see our prices versus competition I think all three of those I'll start with your voice.
Alright, Thank you Dan and good morning, everyone and thank you Thiago for the question.
Brazil's traffic was up mid single digits and the rest of the growth came from.
A higher average check and above the monthly evolution of the performance of the country, we have challenging comps in April of last year and strong in.
In May and June and in general competition remains rational during the second quarter, although in some markets like in Brazil, we have seen increased promotional activity with that said I'll.
Our volume and sales trends remained strong and we continue shielding our gaming even market share and our strategy will continue to be focusing in a responsible pricing policy offering compelling value and to deliver the best experience to our guests.
Great.
Second question relates to market share with us and will be for you as well can you elaborate on where is the average market share in Brazil, and how it compares to our market share within delivery.
Alright.
I will start with a general context, our comparable sales grew 31, 5% or about one three times blended inflation across the company.
In the second quarter only in Brazil. This growth was two five times inflation and the strong comparable sales growth.
In many of our markets supported positive market share trends. So according to crest in Brazil increased visit share by one six percentage points in the last 12 months today in this country our share more than doubles the share of our main competitor and according to internal.
Search there.
The visit share gap remained very strong across the region. For example, the recent share was three times higher than our nearest competitor in Argentina and Chile.
Two times higher in Mexico, and Colombia, and specifically about delivering in Brazil and.
And this is based on public information also our gap in sales is three five times compared with our main competitor.
Great.
Gyros third question, he said that some of our competitors called the Chuck called on a challenging industry mentioning short term growth will likely be driven by efficiency rather than demand and he asks if we're seeing the same I'll pass that one to myself. Okay. Thank you.
Absolutely nuts.
We are very pleased with how the year is developing a we've seen strong sales growth in the first half in order to do the ratios in particular in Brazil with two five times, our systemwide comparable sales on top of inflation.
And importantly, we continue to see solid sales strength in the third quarter as well.
We see some more comparable sales growing world Eh, although inflation.
The three regions I think that the Mcdonalds brand in our region you must see them on the rest of the markets is now positioned in a way that it should perform well in good macroeconomic times on a more challenging environment. Unfortunately, the structural advantages of.
Our freestanding footprint freestanding restaurants, this strong performance our glove with Tvs.
It prudent competitive pricing strategy are driving sustained sales growth all across the region even in the current environment. So we still see and we are very confident.
On our ability to continue to grow sales above inflation on having growth.
In our profitability coming from volumes additional profit.
Additionally, our check.
Perfect.
Marcelo and juggling last question this wont be for your money on them. If we can have any quantification on how the Argentine peso devaluation could impact our EBITDA and you still got this.
Perfect. Thanks Taylor for the question.
A devaluation of the Argentine peso reduces the countries U S dollar contributor contribution to consolidated revenue and EBITDA.
But the impact to EBITDA as well as partially offset by a reduction of corporate G&A expenses also denominated in Argentine pesos.
With what we know today with the announcement made so far.
And this week devaluation of the Argentine peso will not significantly impact consolidated EBITDA in the second half of the year from a fewer effects perspective, having said that we need to be prudent to see how these measures will affect consumption in the remaining part of the year.
But from a pure.
FX and evaluation.
Perspective that that was the question we are not seeing a significant impact on consolidated EBITDA.
Great. Thanks, Mariano and by the way before I continue I just wanted to recognize that if anybody was Martin also submitted a couple of questions. I don't know I think we've answered your questions numbers on slide, but if not please feel free to resubmit.
We have a next question from Lojack over Colorado from JP Morgan and she asked what's the level of cash we feel comfortable operating getting back to you one of them.
Perfect. Thanks.
<unk> for the question.
First we ended June with cash and equivalents plus short term investments.
In our balance sheet.
A total of $222 million with no material short term debt with a very healthy net leverage ratio.
So we're very confident with that.
That figure to operate in our markets in the 20 markets, we estimate that between 60 and $80 million in cash is more than enough to.
Right.
Run the business from a working capital perspective.
Okay, well since you touched on working capital and my own on what it is.
Actually perfect timing because the next question is from again from Jaguar, but once you're at Goldman Sachs. If I may one more could you. Please give us more color on your working capital dynamics the consumption of suppliers in the first quarter and from all lines in the second quarter should we expect it to be net.
In the full year.
Perfect.
Well first I would like to clarify that if we compare.
Last year 2022 with 2023, the first half we have different dynamics going on.
Because both cigarettes are comparing 1020 <unk> with December 2021 numbers.
This year is comparing wave December 'twenty two figures.
So what happened last year is that we were increasing our cash flow because we were comparing to December 21, when the business will still normalizing coming out of the pandemic. So the first half of last year activity was much higher than prior year end and that.
What it.
It's why we saw the increase in cash flow in 2022.
So significant increases in sales they generate more working capital.
So in 2023, what we are seeing is.
That we steam generating more sales and.
And also we have not some payments to suppliers in June 2023.
I would ask to locking better prices from some ingredients and better manage our gross margin that you can see in our gross margin results, but at the same time consume a bit more cash than normal in the period as well.
For the rest of the year and with more activity, what we would see an increase in cash flow for the second half of the year that will more than compensate.
From an operational cash flow perspective, the decrease that you saw in the first half of this year.
Great.
Next question is coming from what he says I've worked at JP Morgan as.
As I mentioned you had a couple of questions that I think we've already answered. Please go ahead.
Congrats on the results thanks for the space for questions and the ones. We're good side, one was the tax rate, which I think my name is already answered and detail. The second has to do with the divestment of restaurants and so on and is this a specific situation, whereas something ongoing are things Marcello left derivatives, a specific situation and the third question.
He has his focus on remodeling remains what's the trend for sales list on the remodeled restaurants and I'll give that one to your Mysore excellent fingers uses for the question.
Yes, we said that we are planning to modernize to the E. L. F. Four months approximately 250 restaurants this year.
We are doing this because we are experiencing a very good impact on these investments in terms of the sales list that they generate since the very beginning when we started with this initiative.
Four or five years ago.
In the South part of the reason we saw that every single restaurant that was converted to <unk> hub.
A sales lift of mid to high single digits, when compared with the other restaurants in the Senate in the market. So we continue to experience those kind of three years for example in countries like Mexico, where we still have a lot of room to deploy youll be at four months and we are very pleased with this.
Because these will be a huge a source of growth going forward, because we still have approximately 50% of our restaurant base to be converted.
To be more of a knife and converted to <unk>. So we will have.
The boost in sales coming from those investments coming from those restaurants, which is very good to sustain the kind of results. We are delivering in recent quarters.
Great. Thanks Marcello.
A couple of questions from Christopher strike.
The first one is related to profitability margin, but the second one has to do with a target share price.
Christopher we're not going to comment on targets are looking for somebody who can get from the sell side.
With respect to your other question what do we expect in terms of profitability margins to be in the future with the opening of the new restaurants, and I'll give that one to many of them.
Perfect and.
Thanks.
Chris for the question.
In terms of general margin outlook. Our plan is clear and we are delivering we remain focused on driving top line with sustainable volume growth in alternatives to deliver EBITDA growth in U S dollars with a healthy margin profile and we are delivering that in this quarter with a more than 20% increase in our EBITDA in dollar terms.
And.
And you can see the results in second quarter figures, we are seeing improvements in all restaurant level expense items as a percentage of sales with the exception of royalties in terms of openings, we're seeing a very good ROI on the openings as Martina mentioned, we're opening mainly for standing and we are seeing.
Very attractive ROI on those openings.
Great. Thanks, Mariano and we have another one here from Gladys there was Chris Weber from Morgan Stanley .
Her question is will your expansion strategy or operations will be impacted in Argentina with the impending change in leadership towards the end of the year and that one's for you myself, okay figure glad as far the question last Sunday there were primary presidential elections in Argentina.
There is still at least one more round of a legacy Charles you know Dover.
And it would be inappropriate I think to speculate on the outcome, especially because there are three different candidates.
Within three percentage points in terms of the boats that they received in the in the primary so I think that anything anything can happen in Argentina, we cannot speculate around that but having said that it's important to note is that the business itself remains very strong in Argentina.
Even these days with our system wide comparable sales still growing well above inflation.
In fact, our business in Argentina, cooperating with one of the highest levels of guest traffic.
In the region.
We continue to.
Execute our strategy in the market to shield, our market share, which is very high in the country to continue to produce.
Produced excellent results like if it was the case in Argentina for for the recent quarters.
Part of the information that this kind of volatility in Argentina is not new I've been in the reasons for more than 30 years.
Big part of those years I spent my professional life in Argentina, we've been leasing.
With these kind of situations for many years and I think that we have the right knowledge on the right tools to to to make the best.
The initiatives that we're executing in terms of generating the best possible results.
Anything else.
Great. Thanks Marcelo.
Really don't have any more questions in the queue. So we've reached the end of the Q&A session. Today. Thank you. Once again all of you for your interest in Arcos or autos and for joining today's webcast. We look forward to speaking with you again in the middle of November on our third quarter 2023 earnings webcast until then stay safe and have a great day.
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