Arcos Dorados Reports Third Quarter 2018 Financial Results

November 14, 2018

MONTEVIDEO, Uruguay--(BUSINESS WIRE)--Nov 14, 2018--Arcos Dorados Holdings, Inc. (NYSE:ARCO) (“Arcos Dorados” or the “Company”), Latin America’s largest restaurant chain and the world’s largest independent McDonald’s franchisee, today reported unaudited results for the third quarter ended September 30, 2018.

Third Quarter 2018 Highlights – Excluding Venezuela

On a constant currency basis 2, consolidated revenues grew 8.3%. As reported, consolidated revenues decreased 12.9% to $720.3 million versus the third quarter of 2017. Systemwide comparable sales 2 rose 7.4% year-over-year. As reported, Adjusted EBITDA 2 increased 19.7% to $88.2 million compared with the prior-year quarter. Consolidated Adjusted EBITDA margin expanded 340 basis points year-over-year to 12.3%. As reported, General and Administrative (G&A) expenses decreased 16.2% versus the prior-year quarter. As reported, net income increased 68% to $42.7 million, from $25.3 million in the third quarter of 2017.

“Systemwide comparable sales grew 7.4% on top of the 10.4% achieved last year, with strong contributions from most of our markets throughout Latin America and the Caribbean. Our operating structure and disciplined approach to growth was supported by restaurant level, bottom line profitability and cash flow generation. In Brazil, sales grew over 2% in constant currency terms as we focused on consistently growing in a profitable manner. We achieved adjusted EBITDA margin expansion of 130 basis points, excluding other operating income mostly related to a tax credit, as we effectively managed food and paper as well as labor costs.

Our investments in innovative marketing and digital initiatives and in enhancing the guest experience also contributed to comparable sales growth, as guest traffic continued rising in increasingly important markets, such as Mexico and the Andean markets within the SLAD division. Comparable sales in our NOLAD division grew 6.7% in the quarter.

With the uncertainty about Mexico’s presidential election and the US trade agreement behind us and the choice of Brazil’s president decided, we are more optimistic about the macro environments of these two important markets. However, even under improving market conditions, we will remain vigilant, protecting and expanding our customer base across our markets while seeking to preserve and enhance our margins.

We are strong in a number of ways that support Arcos Dorados’ long-term, financial sustainability. Through leveraging our scale, vast geographic footprint, compelling line-up of menu items, and obsession with elevating our guests’ dining experience, we will successfully execute on our strategic plan,” said Sergio Alonso, Chief Executive Officer of Arcos Dorados.

Third Quarter 2018 Results

(3Q18 = 3Q17 + Currency Translation Excl. Venezuela + Constant Currency Growth Excl. Venezuela + Venezuela). Refer to “Definitions” section for further detail.

Arcos Dorados’ consolidated results continue to be heavily impacted by Venezuela’s macroeconomic volatility, including the ongoing hyperinflationary environment and the country’s heavily regulated currency. As such, reported results may contain significant non-cash accounting charges to operations in this market. In this quarter, we recorded a long-lived asset impairment charge of $11.1 million. Accordingly, the discussion of the Company’s operating performance is focused on consolidated results that exclude Venezuela.

Excluding the Company’s Venezuelan operation, as reported revenues decreased 12.9% year-over-year, primarily due to the negative impact of the 85% and 25% year-over-year average depreciations against the US dollar of the Argentine peso and the Brazilian real, respectively. This impact was partially offset by constant currency revenue growth of 8.3%. Constant currency revenue growth was supported by a 7.4% increase in systemwide comparable sales, largely driven by average check growth.

Adjusted EBITDA ($ million)

Third quarter consolidated as reported Adjusted EBITDA, excluding Venezuela, increased 19.7%, or 50.1% in constant currency terms. Adjusted EBITDA included a one-time amount of $23.2 million in other operating income, mostly related to a tax credit in the Brazil division. The Adjusted EBITDA margin expanded by 340 basis points to 12.3%. Excluding the aforementioned one-time other income amount, the Adjusted EBITDA margin would have expanded 10 basis points year-over-year, mainly driven by efficiencies in Payroll and G&A offset by a step up in Royalty Fees.

As reported, consolidated G&A decreased by 30 basis points as a percentage of revenues and was 16.2% lower year-over-year. On a constant currency basis, G&A increased 6.2%, below the blended inflation for the Company’s G&A.

Main variations in other operating income (expenses), net

Included in Adjusted EBITDA: In the third quarter of 2018, the Company recorded a one-time income of $23.2 million, mostly related to a tax credit in the Brazil division. Proceeds from refranchising were $2.2 million in the third quarter of 2018, compared to $1.7 million in the prior-year quarter.

Excluded from Adjusted EBITDA: In the third quarter of 2018, the Company recorded an impairment charge of $11.1 million related to its operations in Venezuela.

Non-operating Results

Non-operating results for the third quarter, excluding Venezuela, contain a $10.5 million non-cash foreign currency exchange gain, versus a non-cash gain of $6.0 million in 2017. Net interest expense was $2.8 million lower year-over-year.

The Company reported an income tax expense, excluding Venezuela, of $21.4 million in the quarter, compared to an income tax expense of $15.5 million in the prior year period.

Third quarter net income attributable to the Company totaled $42.7 million ($26.0 million, including Venezuela), compared to net income of $25.3 million ($23.4 million, including Venezuela) in the same period of 2017. This year’s higher operating income, which included the $23.2 million one-time income, combined with lower net interest expenses and a positive variance in foreign exchange results, was partially offset by higher income tax expenses.

The Company reported earnings per share of $0.20 ($0.12, including Venezuela) in the third quarter of 2018, compared to earnings per share of $0.12 ($0.11, including Venezuela) in the previous corresponding period. Due to share repurchases, total weighted average shares for the third quarter of 2018 decreased to 208,628,186 from 211,072,340 in the prior-year quarter.

Analysis by Division :

Brazil’s as reported revenues decreased 18.0%, impacted by the 25% year-over-year average depreciation of the Brazilian real. Excluding currency translation, constant currency revenues grew 2.1%, supported by systemwide comparable sales growth of 1.0%.

Marketing activities in the quarter included the launch of Triplo Quarterão and Egg Quarterão sandwiches, among others. Other marketing campaigns in the quarter included the launch of McFlurry Laka & Black Diamond in the dessert category, and My Little Pony and Transformers in the Happy Meal. Also, in the quarter, the Company commemorated 50 years of the Big Mac with a McCoin campaign and hosted McDia, which helps raise funds for the Ronald McDonald House and the Ayrton Senna Institute.

As reported Adjusted EBITDA increased 37.0% year-over-year and 73.0% on a constant currency basis. Adjusted EBITDA was positively impacted by a one-time amount in other operating income of $23.2 million, mostly related to a tax credit resulting from the exclusion of ICMS from the Pis/Cofins calculation base. The Adjusted EBITDA margin expanded from 13.0% to 21.8%, positively impacted by this one-time tax credit. Excluding the tax credit, the Adjusted EBITDA margin would have expanded 130 basis points year-over-year to 14.3%, mainly driven by efficiencies in Payroll and Food and Paper (F&P) costs.

NOLAD’s as reported revenues increased 3.7% year-over-year, supported by constant currency growth of 6.7%, partially offset by a negative currency translation impact resulting from the Mexican peso’s 6% year-over-year average depreciation against the US dollar. Systemwide comparable sales increased 6.7%, driven by growth in guest traffic. Mexico traffic continues to perform strongly, recording a sixth consecutive quarter of positive comparable sales growth. The Company’s compelling menu, innovative marketing initiatives, as well as its focus on delivering an enhanced guest experience, continue to drive this improved performance.

Third quarter movie tie-in promotions for the Happy Meal included Hotel Transylvania 3, My Little Pony, Transformers and Super Mario. A new phase of the affordability platform “McTrío 3x3” continued in Mexico with Hamburguesa Gourmet. Also during the quarter, the Company launched Chipotle Ranch in the Signature Line and McFlurry Choco Roles in the dessert category.

As reported Adjusted EBITDA decreased 11.2%, or 10.9% on a constant currency basis. The Adjusted EBITDA margin contracted by 140 basis points to 8.3%, or by 30 basis points when excluding refranchising inflows recorded in the same quarter of last year. The margin contraction mainly reflects an increase in Royalty Fees, which accounted for 40 basis points of the decrease in the quarter’s margin.

SLAD’s as reported revenues decreased 20.2%, as constant currency growth of 18.1% was more than offset by negative currency translation effects resulting from the 85% year-over-year average depreciation of the Argentine peso against the US dollar. Systemwide comparable sales increased 18.1%, driven by average check growth.

Marketing activities in the quarter included the introduction of an Egg & Bacon premium burger in the Signature Line and the continuation of the McCombo of the Day in the affordability platform. The Happy Meal performed well with Hotel Transylvania 3 and Super Mario movie tie-ins. Also during the quarter, the Company launched Chicken Sticks, the first product in its new Snacks platform.

Adjusted EBITDA decreased 34.1% on an as reported basis and rose 5.6% in constant currency terms. The Adjusted EBITDA margin contracted 180 basis points to 8.6%, as efficiencies in Payroll costs were more than offset by higher F&P costs, Occupancy and Other Operating Expenses, and Royalty Fees as a percentage of revenues.

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