Arcos Dorados Holdings Inc. (NYSE:ARCO) Q4 2023 Earnings Call Transcript

Arcos Dorados Holdings Inc. (NYSE:ARCO) Q4 2023 Earnings Call Transcript March 13, 2024

Arcos Dorados Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Daniel Schleiniger: Good morning, everyone, and thank you for joining our Fourth Quarter and Full Year 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 the 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. I am very pleased to confirm that we had a very strong year in 2023. Our 3D’s strategy of Digital, Delivery and Drive-thru continues to evolve, while leveraging the industry’s largest freestanding restaurant portfolio. Digital sales includes mobile app, Delivery and Self-order Kiosk consumptions. The penetration of these channels is expanding throughout footprint. Thanks to a mobile app that has evolved into an ecommerce platform offering incentives and convenience to increase guest loyalty and visit frequency. A delivery sales channel which continues to work strongly in a segment where we are the established industry leaders. On self-order kiosks that are capturing an increasing share of on-premise orders with above 60% of Arcos Dorados restaurants already modernized to the experience of the future format.

Our 3D’s strategy continues to drive sustainable sales growth supported by both restaurant volume and average check. Importantly, we are implementing the strategy in a way we believe we deliver above inflation growth in system-wide comparable sales to then drive operating leverage and profitability growth. Our balance sheet is very strong which allows us to accelerate restaurant openings and capture significant growth opportunities for years to come, all while operating responsibly and supporting the communities we serve. Let’s turn to our consolidated results for the fourth quarter and full year 2023. Total revenue surpassed $1.2 billion in the quarter, and $4.3 billion for the full year, which was the highest U.S. dollar total in our history for each period.

Guest volumes were up mid-single-digits in each division this year helping to drive the 19.7% increase in US dollar revenue in 2023. In line with our strategic approach, adjusted EBITDA grew with revenue reaching almost $133 million in the quarter, and more than $472 million for the full year. These results were also the highest US dollar total in our history for each period. US dollar adjusted EBITDA grew 16.3% in the fourth quarter and 22.2% for the full year on top of the prior year’s record results. This included incremental margin improvements in both periods, thanks mainly to better food and paper costs and G&A expenses. Net income for the quarter was almost $56 million, or $0.26 per share. We generated the best ever full year net income of more than $181 million or $0.86 per share last year.

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Q&A Session

System-wide comparable sales grew 32.4% in the fourth quarter, rising with or above inflation in all divisions and above 1.1 times the company’s blended inflation demonstrating the strength of the 3D’s strategy. Our restaurant pipeline continues to demonstrate the growth opportunity that lies ahead of us. During the fourth quarter, we opened 36 restaurants bringing the full year total to 81 new restaurants across our footprint. This included 72 new freestanding locations. In Brazil, we opened 50 total restaurants last year including 44 freestanding units. Importantly, first year redundant investment for the restaurants we opened in each of the last three years has been in the mid to high 20s which supports our outlook for long-term unit growth potential.

Our market share in all mid-markets is a testament to the strong brand positioning we have built and the significant consumer preference we enjoy versus our nearest competitors. According to a research, we gained more market share that our main competitors in the fourth quarter, further strengthening our leadership position. Notably, these gains came in markets where McDonald’s brand share is already two to almost four times that of our main competitors. Luis, over to you for divisional sales performance .

Luis Raganato: Thanks, Marcelo, and good morning, everyone. Brazil’s comparable sales rose 6.2% in the quarter and 9.9% for the full year. Comparable sales rose 1.3 times inflation in the quarter and 2.1 times inflation for the year with about equal contribution from guest values and average check over the course of full year 2023. About 63% of sales came through digital channels in Brazil, with identified sales representing 26% of the total. The loyalty program we launched at the end of October helped improve performance on both fronts, especially after Black Friday. As Marcelo just showed you, McDonald’s brand market share in Brazil remained at more than twice that of our nearest competitor. The quarter included 12 of the top 20 strongest sales days of the year driving market share gains in both guest visits and sales.

We introduced “McCrispy Chicken Elite sandwich in October, combining crispy and juicy breaded chicken with the new Honey & Fire sauce. The sandwich is already one of the best sellers in the country where we are committed to growing the chicken category. In November, we reinforced the beef platform bringing back the famous Big Mac jingle with the launch of two limited timed offers: the “Double Big Mac” and the “Big Mac Bacon”. As of the end of 2023, we had more than 3 million registered members in the loyalty program across a 100% of restaurants in Brazil including all sub-franchisees. The division’s traditional Méqui Friday campaign in November helped generate record mobile app downloads and active users. NOLAD’s comparable sales grew 5.4% in the quarter and 10.6% for the full year, which was 2.1 times and 2.9 times to division’s blended inflation respectively.

Volume growth accounted for about two-thirds of comparable sales growth last year. The division reinforced its market leadership in the fourth quarter achieving its highest level of visit share while growing key brand attributes such as “Top of Mind”, “Favorite Brand” and “High-Quality Food”. Mexico’s sales momentum remains strong with mid-teens year-over-year growth in the quarter. Marketing activities were key to support this growth with the launch of GRANDS Tasty and Bacon, new platform focused on large and indulgent burgers to engage guests. In Puerto Rico, we continued gaining market share leading the island’s highly competitive QSR industry. The brand campaign Saca Tu Encanto supported brand love in that market. Finally , we are making good progress with the digitalization of Nolad where 34% of sales came from digital channels in the quarter, up from just 22% last year.

At last comparable sales grew in line with the division’s blended inflation rate for the quarter and 1.2 times blended inflation for the year. Guest volume growth in 2023 was in the mid to high-single-digit range, while comparable sales were impacted by inflation aided growth in Argentina all year. Brand strength has been a consistent contributor to market share gains and sales growth for the entire company including SLAD where we added significant market share in the period. The fourth quarter included the launch of brand affinity campaigns such as, Pasan Cosas Lindas” in Argentina and “Me Gustas Así” in Chile. The results were important sequential improvements in key brand attributes such as favorite brand and branded trust in both markets.

Brand innovation included new large sandwiches such as the Grand Tasty Spicy in Argentina and the Bacon Cheddar McMelt in Chile and Colombia to boost the beef platform. We also supported the desert category taking advantage of local flavors with new McFlurry in several SLAD markets. After Mariano takes you through divisional profitability, I will come back to tell you about the performance of the 3D’s strategy.

Mariano Tannenbaum: Thanks, Luis. Good morning, everyone. We are very pleased to be reporting the strongest ever EBITDA results for a fourth quarter and full year in Arcos Dorados history. Adjusted EBITDA grew 16.3% in US dollars, slightly above total revenue growth in the quarter. Similarly, full year EBITDA grew 22.2% in US dollars, leveraging 19.7% revenue growth in 2023. Moving forward, we expect to continue generating profitability growth by offering value to our guests and by opening new restaurants to drive sales growth. We should also capture some operating leverage to support incremental margin improvements. Consolidated EBITDA margin rose by 10 basis points in the quarter and 20 basis points for the full year. Food and paper, payroll and G&A, all contributed to margin expansion last year helping offset the higher effective royalty rates in 2023.

Excluding the impact of the royalty rate, our full year 2023 EBITDA margin rose 60 basis points over the prior year. Fourth quarter adjusted EBITDA grew strongly in all three divisions. In Brazil, EBITDA was up 15.4% in US dollars, lower food and paper and G&A expenses were offset mainly by higher payroll and occupancy and other operating expenses as a percentage of revenue. For the full year, Brazil’s EBITDA grew 23.9% in US dollars, boosted by a 60 basis points increase in margin. Margin expansion for the full year included better food and paper, payroll and G&A expenses, which were partially offset by small increases in occupancy and other operating expenses, as well as royalties as a percentage of revenue. NOLAD’s EBITDA grew 11.7% in US dollars, lower food and paper costs were offset mainly by higher payroll and occupancy and other operating expenses as a percentage of revenue.

NOLAD’s full year EBITDA grew 21.1% in US dollars. Margin was down 20 basis points, due mainly to the higher effective royalty versus 2022, which was partially offset by a net improvement in other cost and expense line items. SLAD’s adjusted EBITDA grew 31% in US dollars in the fourth quarter. EBITDA margin improved by 160 basis points with lower payroll and occupancy and other operating expenses, partially offset by higher food and paper costs as a percentage of revenue. For the full year 2023, SLAD’s EBITDA grew 19.5% in US dollars including an incremental improvement of 10 basis points over the prior year’s margin with improvements in most cost and expense line items, offsetting the higher effective royalty rates versus 2022. Luis, back to you.

Luis Raganato: Let’s turn to the 3D’s strategy of Digital, Delivery and Drive-thru. Digital sales grew 39% in US dollars and contributed 53% of system-wide sales in the quarter. We also identified 21% of the quarter’s system-wide sales and this figure should continue to rise as we roll out the loyalty program to more markets. The goal is to identify 40% of sales by the end of 2025 keeping in mind our ability to positively impact the customers’ average and visit frequency with significant increases the value of an identified customer. The mobile apps downloads and monthly active users continued to grow during the quarter receiving boosts from the launch of the loyalty program in Brazil and Uruguay, as well as the increasing popularity of the mobile order and pay functionality.

As we have said in the past, the only channel approach we are taking across geographies restaurant formats and digital platforms is allowing us to serve more customers the way they want to be served. This is why it was so important to evolve the mobile app from a couponing to, to an ecommerce platform with personalized offers multiple ways to place and receive orders and a loyalty program. In addition to the mobile app and deliveries which I will tell you about on the next slide, let’s not forget that Digital sales also include the self-order kiosks in EOTF restaurants. In some markets, self-order kiosks are the number one sales channel delivering higher average checks and operation efficiency while capturing the lion’s share of on-premise value.

Both Delivery and Drive-thru contributed to the strong sales growth in the quarter with combined off-premise US dollar sales rising 16% versus the prior year, taking advantage of our freestanding restaurant portfolio, Delivery became almost a billion dollar sales channel for us in 2023 growing from less than 5% of sales in 2019. We have also developed plans in each of our markets to continue boosting Drive-thru sales in 2024, which is a channel we already dominate across the region. In late October of last year, we launched a new loyalty program in two of our markets, Brazil and Uruguay. At the end of February, the program had grown to more than 5 million members adding 2 million members in just the last months. We monitor several important KPIs and compare them with benchmarks within both the McDonald system, as well as industry peers and similar programs in other industries.

So, March, we have very healthy results in terms of active customers, visit frequency and retention rates. We will soon roll out the loyalty program to additional markets in NOLAD and SLAD and expect it to be fully implemented by the end of 2025. We look forward to sharing the progress on future calls. Now that you have seen this trend of our operating results, let’s take a look at the balance sheet and cash flows that will support accelerated unit growth in the coming years. Net leverage at the end of 2023 was unchanged from the end of 2022 or just 1x. Assessing the difference throughout the year, total debt rose modestly versus the prior year-end as we deployed cash to fund capital expenditures. Additionally, the appreciation of the Brazilian real reduced the value of our derivative instruments, certain increase in net debt was offset by the EBITDA growth we presented earlier.

Cash flow from operating activities grew 11% versus the prior year, allowing us to meet our ambitious capital expenditure plans for the year, while keeping net leverage unchanged. As Marcelo already shared, restaurant openings were just above the top end of our 75 to 80 openings guidance range for full year 2023, just above 90% being freestanding openings increasingly structural competitive advantage across our markets. Capital expenditures for the full year totaled $360 million in line with our guidance. With that, we met our openings guidance, modernized another 10% of our existing restaurants, performed required maintenance on all other restaurants and enhanced our information technology infrastructure and digital capabilities. Returns on investments from both openings and modernizations remain well above historical averages and part of the CapEx at the end of 2023 was invested in openings planned for the first quarter of 2024.