Arcos Dorados Holdings Inc. (NYSE:ARCO) Q3 2023 Earnings Call Transcript

Arcos Dorados Holdings Inc. (NYSE:ARCO) Q3 2023 Earnings Call Transcript November 18, 2023

Daniel Schleiniger: Good morning, everyone, and thank you for joining our Third Quarter 2023 Earnings Webcast. With us today are Marcelo Rabach, our Chief Executive Officer; Luis Raganato, our Chief Operating Officer; and Mariano Tannenbaum, our Chief Financial Officer. Today’s webcast, which is being recorded, will consist of prepared remarks from our leadership team, which will be accompanied by a slide presentation also available in the Investors section of our website, www.arcosdorados.com/ir. As a reminder, to better view the presentation on the webcast platform, please scroll over the upper left-hand part of the screen and click on the arrows to maximize the slides. After we conclude our opening remarks, we will answer your questions, which you can submit using the chat function on the left-hand side of the screen.

You will need to minimize the slides to access that chat function. Today’s call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found in the press release and unaudited financial statements filed today with the SEC on Form 6-K. Marcelo, over to you.

Marcelo Rabach: Thank you, Dan. Good morning, everyone, and thank you for joining us today. We are very pleased to report strong results for the third quarter 2023. McDonald’s brand strength, structural competitive advantages and unparalleled execution continued to drive sales growth and market share gains across the Arcos Dorados footprint. We have articulated and are executing a clear strategy, designed to drive sustainable sales growth supported by both restaurant volume and average check to generate operating leverage and long-term profitability growth. Among the most important elements of this strategy is value. Guests measure value based on more than price. Their value perception includes quality, service, convenience and optionality as well.

This is where the region’s largest freestanding restaurant portfolio and our 3D’s strategy of Digital, Delivery and Drive-thru boost guests’ value perceptions. Perhaps the best indicator the strategy is working is that comparable sales continued growing well above inflation across our business, with strong guest volume growth in nearly all main markets. Even as consumption moderated in the region, sales growth remained strong, delivering cost and expense leverage to generate improved profitability. We are reinvesting our cash generation to expand the restaurant footprint in a highly underpenetrated industry. First year returns on investment for new restaurants remain well above historical average, proving that penetration continues to generate demand in our region.

New restaurants also bring significant economic benefit to the communities we serve, especially through the creation of first-time jobs and long-term career opportunities for young people. Let’s take a look at consolidated results for the third quarter of 2023. Total revenue surpassed $1.1 billion, rising 22.1% in U.S. dollars versus the prior-year period. Guest traffic grew in the mid to high single-digits in most markets, in-line with our sales growth strategy. Adjusted EBITDA rose with revenue growth, reaching $129.1 million. U.S. dollar EBITDA growth was driven mainly by higher sales, but we also managed to expand margins, thanks to better food and paper costs and some fixed cost leverage in the quarter. Net income of $59.7 million, or $0.28 per share, rose 27.4% over last year’s strong results.

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Q&A Session

System-wide comparable sales grew 37.3% or about 1.4 times blended inflation across the company. All markets outgrew inflation, and the gap in business share between the McDonald’s brand and our nearest competitor expanded in our main markets as well. Among the markets with the strongest business share performance were Brazil, Chile, Costa Rica and Mexico. Digital sales accounted for 50% of system-wide sales with 20% identified sales across the business. A few weeks ago, we launched our loyalty program, which will help us reach the goal of 40% identified sales by the end of 2025. Luis will touch on that later. Delivery has proved to be a remarkably consistent sales channel with a 48% increase in local currency sales over the prior year. And Drive-thru sales rose 17% in local currency, complementing the strong rebound in on-premise sales channels.

For the year-to-date through September, we opened 45 restaurants, including 41 freestanding units. Growth accelerated in the third quarter with 27 restaurant openings, and we fully expect to meet openings guidance for the full year 2023. In fact, as of today, we have opened 60 restaurants in our footprint since the beginning of the year. Let’s go to Luis for an overview of sales performance in each division.

Luis Raganato: Thanks, Marcelo, and good morning, everyone. Brazil’s comparable sales rose 10.8% or 2.3 times inflation in the quarter. Remarkably, guest volume rose mid-single digits, building on last year’s strong results despite a more challenging consumption environment. Our value and convenience offerings are resonating with guests in Brazil. About 61% of sales came through digital channels in the country, where we were able to identify 25% of sales to drive increased guest frequency and average revenue per user. Delivery sales also remained strong in the Brazilian market, rising 32% versus last year in local currency. The McDonald’s brand consolidated its market share leadership in the country with more than twice the market share of our nearest competitor.

Marketing initiatives in the quarter included strong brand experience campaigns focused on important passion points for younger guests. The highlight was the sponsorship of The Town, the biggest music festival in Brazil this year. We built Latin America’s largest McDonald’s restaurant to serve festival goers and launched a limited edition McMelt The Town sandwich in all restaurants to bring a taste of the festival to the entire country. We also maintained the brand’s connection to sports with the sponsorship of the FIFA Women’s World Cup online broadcasts on Cazé TV, Brazil’s biggest streaming channel. Finally, the launches of McFlurry Ovomaltine Mesclado and McFlurry Kit Kat boosted traffic by bringing innovation to the desert category. NOLAD’s comparable sales grew 11.5%, which was 4 times the division’s blended inflation in the quarter.

Volume growth accounted for about two-thirds of comp sales growth with all markets outgrowing inflation by 2.5 times to 8.5 times inflation in the period. The NOLAD division reached some of its highest-ever market share levels backed by positive brand attribute trends. Marketing activities featured many innovations across the region, including the launch of GRANDS sandwiches, an indulgent and tasty platform. In Mexico, the #McDonaldsMexicoMeEncanta brand campaign was endorsed by Sergio Checo Pérez, the popular Mexican Formula 1 driver, and included the Menú Checo famous order campaign. And in Puerto Rico, we launched the Saca tu Encanto brand-building campaign partnered with Tommy Torres, a popular local musical artist. SLAD’s comparable sales grew 1.3 times the division’s blended inflation rate.

Inflation-aided growth in Argentina was complemented by mid-teens comp sales growth in both Chile and Uruguay. As in Brazil and NOLAD, we generated strong guest value in nearly all SLAD markets in the quarter. SLAD’s markets captured additional market share with improved scores in brand attributes, reinforcing McDonald’s brand preference across the division. To continue strengthening our leadership in the beef segment, we launched the Bacon Cheddar McMelt sandwich and the Pileta de Cheddar in Argentina, Chile, Colombia and Ecuador with strong sales results in all four countries. We also continued the rollout of Best Burger, extending the platform to Aruba, Curaçao and Trinidad. The dessert platform produced excellent results with the launch of McFlurry products with locally relevant brands in markets like Chile, Colombia, Peru and Uruguay.

And the good news is that we’re generating positive sales trends halfway through the fourth quarter as well. Guest volume growth remains solid in most markets as we head into the end of the year. Over to you, Mariano.

Mariano Tannenbaum: Thanks, Luis. Good morning, everyone. The quarter’s adjusted EBITDA growth of 25.8% in U.S. dollars was driven by both increased sales and margin expansion. Consolidated EBITDA margin improved by 40 basis points. While we continued offering value to our guests with competitive pricing at the best restaurant experience in the industry, a lower commodity cost environment flowed through to our gross margin. These, combined with G&A expense leverage, drove the quarter’s margin improvement. Food and paper costs declined by 90 basis points as a percentage of revenue, with gross margin expansion in all three divisions. G&A improved by 40 basis points due to sales growth and the devaluation of the Argentine peso, which represents an important part of our corporate G&A.

Most other expense line items were relatively flat versus the prior year, except for other operating expenses, which had a negative variance due to several puts and takes, primarily in SLAD. Third quarter adjusted EBITDA grew strongly in all three divisions, with double-digit growth in Brazil and NOLAD, where top-line growth drove operational leverage. Brazil’s EBITDA grew 24.8% in U.S. dollars, which was in line with top-line growth in the division. EBITDA margin was flat with lower food and paper, payroll and G&A, offset mainly by higher occupancy and other operating expenses. NOLAD’s EBITDA grew 42% in U.S. dollars, including 110 basis points of margin expansion in the quarter. Food and paper, together with occupancy and other operating expenses, drove the margin improvement.