Arcos Dorados Reports Second Quarter 2017 Financial Results

Arcos Dorados Holdings, Inc. (NYSE: ARCO) (“Arcos Dorados” or the “Company”), Latin America’s largest restaurant chain and the world’s largest McDonald’s franchisee, today reported unaudited results for the second quarter ended June 30, 2017.

Second Quarter 2017 Key Results

• As reported consolidated revenues increased 16.2% to $798.7 million versus the second quarter of 2016. On a constant currency basis1, consolidated revenues grew 18.3%, or 13.0% excluding Venezuela.
• Systemwide comparable sales1 rose 20.1% year-over-year, or 13.6% excluding Venezuela.
• Adjusted EBITDA1 increased 38.7% to $56.6 million compared with the prior-year quarter.
• Consolidated Adjusted EBITDA margin expanded 120 basis points to 7.1%.
• As reported General and Administrative (G&A) expenses decreased 10 basis points as a percentage of revenues.
• As reported net loss was $4.1 million, compared to net income of $43.4 million in the year-ago period, which included $50.1 million from asset monetization initiatives.

“We achieved mid-teen revenue and systemwide comparable sales growth, excluding Venezuela, which drove a strong increase in our Adjusted EBITDA in the second quarter. By continuing to deliver value and an unmatched experience to our customers, we were able to drive additional restaurant traffic in most of our markets. EBITDA margin expansion totaling 120 basis points reflected operating leverage, in keeping with a streamlined cost structure and more efficient restaurant operations. Consistent with our long-term strategic vision, we are focusing on our topline drivers as we transition into our growth strategy,” said Sergio Alonso, Chief Executive Officer of Arcos Dorados.

Second Quarter 2017 Results

Arcos Dorados’ second quarter as reported revenues increased 16.2%, driven by constant currency revenue growth of 18.3%, which was partially offset by the negative impact of currency translation. The currency translation impact mainly reflected the year-over-year average depreciation of the Venezuelan bolivar and the Argentine peso, which was partially offset by the appreciation of the Brazilian real. Constant currency revenue growth reflected a 20.1% expansion in systemwide comparable sales, driven by average check growth combined with positive traffic in most markets. Consolidated average check growth was strongly impacted by Venezuela’s high inflation rates.

Second quarter consolidated as reported Adjusted EBITDA increased 38.7%, driven by constant currency growth of 58.2%, which was supported by revenue growth and margin expansion. All four divisions delivered strong Adjusted EBITDA growth in the quarter. Brazil was the key contributor, followed by SLAD, the Caribbean division and NOLAD.

The Adjusted EBITDA margin expanded by 120 basis points to 7.1%, with margin improvements in Brazil and the Caribbean division partially offset by margin declines in NOLAD and SLAD. Efficiencies in Food and Paper (F&P) and Occupancy and Other Operating Expenses as a percentage of revenues drove the consolidated margin expansion.

As reported, consolidated G&A increased by 14.3% year-over-year. However, as a percentage of revenues it decreased 10 basis points. Importantly, G&A grew by 16.1% year-over-year on a constant currency basis versus the second quarter of 2016, which was below the estimated blended rate of inflation for the Company’s G&A.

Excluding the Company’s Venezuelan operation, as reported revenues increased 15.0% year-over-year. The result primarily reflects constant currency revenue growth of 13.0%, coupled with a positive impact from currency translation, as the appreciation of the Brazilian real more than offset the depreciation of the Argentine peso, as well as other currencies in the Company’s territories. Constant currency revenue growth was supported by a 13.6% increase in systemwide comparable sales, driven by average check growth and positive traffic in all divisions.

Adjusted EBITDA increased 35.6% on an as reported basis, or 28.0% in constant currency terms. The Adjusted EBITDA margin expanded 120 basis points to 7.6%, mainly driven by efficiencies in F&P and Occupancy and Other Operating expenses as a percentage of revenues.

Non-operating Results

Non-operating results for the second quarter reflected a $15.6 million foreign currency exchange loss, versus a gain of $15.5 million last year. The depreciation of the Brazilian real and the appreciation of the Mexican peso from the previous quarter-end generated a loss related to intercompany balances. Net interest expense increased $2.3 million year-over-year to $23.0 million in the quarter, largely explained by the incurrence of certain transaction costs in connection with the debt restructuring completed in April of 2017.

The Company reported an income tax benefit of $6.0 million in the quarter, compared to an income tax expense of $14.4 million in the prior year period.

Second quarter net loss attributable to the Company totaled $4.1 million, compared to net income of $43.4 million in the same period of 2016. The result reflects lower year-over-year operating results, given that the second quarter of last year included $50.1 million from the Company’s asset monetization initiatives, combined with the aforementioned negative variance in foreign exchange results and higher net interest expenses. These factors were partially offset by a positive variance in income tax expenses.

The Company reported a loss per share of $0.02 in the second quarter of 2017, compared to earnings per share of $0.21 in the previous corresponding period. Total weighted average shares for the second quarter of 2017 were 210,881,194, as compared to 210,625,444 in the prior year quarter.

Analysis by Division:

Brazil’s as reported revenues increased by 14.7%, supported by the 8% year-over-year average appreciation of the Brazilian real. Excluding the impact of currency translation, constant currency revenues grew 5.2% year-over-year and were negatively impacted by the refranchising of certain company-operated restaurants during the last twelve months. The shift to a greater percentage of franchised restaurants negatively impacts total revenue, as company-operated restaurant sales are replaced by rental income received from the Company’s sub-franchisees. In the quarter, total systemwide sales grew 10.5% in constant currency, while systemwide comparable sales increased 8.3%, driven by average check growth and positive traffic, despite a still soft consumer environment in the country.

Marketing activities in the quarter included the continuation of the new affordability platform “Clássicos do Dia” or “Daily Classics”, which continued to drive volume growth. Also in the quarter, the Company included Smurfs and Transformers in the Happy Meal and launched the McFlurry and McShake “Sonho de Valsa”, which contributed to growth in the Dessert category.

As reported Adjusted EBITDA increased 50.5% year-over-year and 37.7% on a constant currency basis. The Adjusted EBITDA margin expanded 300 basis points to 12.9%, mainly driven by lower F&P costs as a percentage of revenues.

NOLAD’s as reported revenues increased 9.0% year-over-year as constant currency growth of 12.2% more than offset negative currency translation impacts. Systemwide comparable sales increased 11.1%, driven by average check growth combined with an increase in traffic across all of the division’s markets.

Marketing activities in the quarter included the affordability platform “Combo of the Day” in Panama. Also in the quarter, the Company launched the McFlurry Hershey’s Cookies and Crème Bites in the Dessert category, among others. In Mexico, the Company continued to gain traction with the continuation of the affordability platform “McTrío 3x3” and also benefitted from a positive calendar effect with the shift of the Easter Holiday.

As reported Adjusted EBITDA increased by 7.0%, or 11.1% on a constant currency basis. The Adjusted EBITDA margin contracted 20 basis points to 8.7% in the second quarter, mainly due to higher F&P costs as a percentage of revenues, which resulted from cost increases above price increases, in keeping with the Company’s focus on protecting traffic.

SLAD’s as reported revenues increased 21.6% as constant currency growth of 28.6% more than offset negative currency translation impacts resulting from the 11% year-over-year average depreciation of the Argentine peso. Systemwide comparable sales increased 29.0%, driven by the combination of average check growth and a solid increase in traffic.

Marketing activities in the quarter included the continuation of the new affordability platform “Combo del Día” and the “Antojos” campaign, based on core menu items. Also in the quarter, the Company introduced Smurfs and Transformers in the Happy Meal, and the McFlurry Toblerone in the Dessert category, among others.

Adjusted EBITDA increased 14.7% on an as reported basis and rose 20.9% in constant currency terms. The Adjusted EBITDA margin contracted 50 basis points to 7.7%, mainly driven by higher Payroll expenses, which resulted from salary increases based on prior period inflation which was above the prevailing rate in Argentina. This was partially offset by efficiencies in F&P costs as a percentage of revenues.

The Caribbean division’s as reported revenues increased 16.8%, as constant currency growth of 44.7% exceeded currency translation impacts derived from the remeasurement of the results of the Venezuelan operation at a weaker year-over-year average exchange rate. Systemwide comparable sales increased 56.3%, with inflation-driven average check growth more than offsetting a slight decrease in total traffic in the division.

Marketing activities in the quarter included the continuation of the Crispy Onion BBQ in the Signature Line and the launch of the McFlurry Pirulin in the Dessert category. Also in the quarter, the Company launched the “MyCombo” campaign in Puerto Rico and introduced Smurfs and Super Mario in the Happy Meal, among others.

As reported Adjusted EBITDA totaled $2.1 million in the second quarter, compared with $1.5 million in the prior year quarter. The Adjusted EBITDA margin expanded 30 basis points to 1.8%, mainly driven by efficiencies in Payroll and G&A expenses, which were partially offset by higher F&P costs and Occupancy and Other Operating expenses as a percentage of revenues.

As reported revenues in the Caribbean division, excluding Venezuela, increased 7.5%, driven by constant currency growth of 7.3% and broadly stable year-over-year average exchange rates. The 5.5% expansion in comparable sales resulted from higher average check and positive traffic in the quarter.

Adjusted EBITDA totaled $4.4 million, compared to $4.1 million in the same period of 2016. The Adjusted EBITDA margin expanded 10 basis points to 4.7%, mainly driven by efficiencies in G&A and Payroll expenses, partially offset by higher Occupancy and Other Operating expenses as a percentage of revenues.

The Company opened 42 new restaurants during the twelve-month period ended June 30, 2017, resulting in a total of 2,160 restaurants. Also during the period, the Company added 166 Dessert Centers, bringing the total to 2,748. McCafés totaled 316 as of June 30, 2017.

Balance Sheet & Cash Flow Highlights

Cash and cash equivalents were $237.8 million at June 30, 2017. The Company’s total financial debt (including derivative instruments) was $627.0 million. Net debt (Total Financial Debt minus Cash and cash equivalents) was $389.2 million and the Net Debt/Adjusted EBITDA ratio was 1.4x at June 30, 2017.

Net cash provided by operating activities totaled $85.0 million for the quarter, and cash provided by financing activities amounted to $4.1 million. Cash used in net investing activities totaled $24.2 million, which included $12.8 million from asset monetization proceeds less total capital expenditures of $36.6 million.

First Half 2017

For the six months ended June 30, 2017, the Company’s as reported revenues increased by 17.4% to $1,580.2 million, largely driven by constant currency growth of 17.7%. As reported Adjusted EBITDA was $119.3 million, a 34.0% increase compared to the first half of 2016. On a constant currency basis, Adjusted EBITDA increased by 43.4%. The reported Adjusted EBITDA margin expanded by 90 basis points to 7.5%, driven by lower F&P costs, Occupancy and Other Operating expenses, and G&A as a percentage of revenues, partially offset by higher Payroll expenses.

Year-to-date consolidated net income amounted to $36.5 million, compared with net income of $59.5 million in the first half of 2016. The result reflects higher operating results in the first half of 2017, which were more than offset by a negative variance in foreign currency exchange results ($56.3 million) and net interest expenses. The Company reported an income tax expense of $16.4 million in the first half of 2017, compared to an income tax expense of $22.7 million in the prior year period.

Excluding the Venezuelan operation, the Company’s as reported revenues increased by 16.6%, and 11.2% on a constant currency basis. As reported Adjusted EBITDA rose by 30.5%, and by 17.7%, on a constant currency basis. The reported Adjusted EBITDA margin expanded by 90 basis points to 7.8%, as efficiencies in F&P costs, Occupancy and Other Operating expenses and G&A more than offset higher Payroll expenses as a percentage of revenues.

During the first half of 2017, capital expenditures totaled $65.2 million.

Quarter Highlights & Recent Developments

Re-Development Initiative

Since inception and through June 30, 2017, the Company has received cumulative cash proceeds of approximately $140 million from the redevelopment of certain of its properties, primarily in Mexico.

Definitions:

Systemwide comparable sales growth: refers to the change, measured in constant currency, in our Company-operated and franchised restaurant sales in one period from a comparable period for restaurants that have been open for thirteen months or longer. While sales by our franchisees are not recorded as revenues by us, we believe the information is important in understanding our financial performance because these sales are the basis on which we calculate and record franchised revenues, and are indicative of the financial health of our franchisee base.

Constant currency basis: refers to amounts calculated using the same exchange rate over the periods under comparison to remove the effects of currency fluctuations from this trend analysis.

To better discern underlying business trends, this release uses non-GAAP financial measures that segregate year-over-year growth into two categories: (i) currency translation, (ii) constant currency growth. (i) Currency translation reflects the impact on growth of the appreciation or depreciation of the local currencies in which we conduct our business against the US dollar (the currency in which our financial statements are prepared). (ii) Constant currency growth reflects the underlying growth of the business excluding the effect from currency translation.

Adjusted EBITDA: In addition to financial measures prepared in accordance with the general accepted accounting principles (GAAP), within this press release and the accompanying tables, we use a non-GAAP financial measure titled ‘Adjusted EBITDA’. We use Adjusted EBITDA to facilitate operating performance comparisons from period to period.

Adjusted EBITDA is defined as our operating income plus depreciation and amortization plus/minus the following losses/gains included within other operating income (expenses), net, and within general and administrative expenses in our statement of income: gains from sale or insurance recovery of property and equipment; write-offs and related contingencies of property and equipment; impairment of long-lived assets and goodwill; reorganization and optimization plan expenses; and incremental compensation related to the modification of our 2008 long-term incentive plan.

We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations such as capital structures (affecting net interest expense and other financial charges), taxation (affecting income tax expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. Figure 10 of this earnings release include a reconciliation for Adjusted EBITDA. For more information, please see Adjusted EBITDA reconciliation in Note 9 of our quarterly financial statements (6-K Form) filed today with the S.E.C.

About Arcos Dorados

Arcos Dorados is the world’s largest McDonald’s franchisee in terms of systemwide sales and number of restaurants, operating the largest quick service restaurant chain in Latin America and the Caribbean. It has the exclusive right to own, operate and grant franchises of McDonald’s restaurants in 20 Latin American and Caribbean countries and territories, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guyana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, St. Croix, St. Thomas, Trinidad & Tobago, Uruguay and Venezuela. The Company operates or franchises over 2,100 McDonald’s-branded restaurants with over 90,000 employees and is recognized as one of the best companies to work for in Latin America. Arcos Dorados is traded on the New York Stock Exchange (NYSE: ARCO). To learn more about the Company, please visit the Investors section of our website: www.arcosdorados.com/ir

Cautionary Statement on Forward-Looking Statements

This press release contains forward-looking statements. The forward-looking statements contained herein include statements about the Company’s business prospects, its ability to attract customers, its affordable platform, its expectation for revenue generation and its outlook and guidance for 2017. These statements are subject to the general risks inherent in Arcos Dorados' business. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, Arcos Dorados' business and operations involve numerous risks and uncertainties, many of which are beyond the control of Arcos Dorados, which could result in Arcos Dorados' expectations not being realized or otherwise materially affect the financial condition, results of operations and cash flows of Arcos Dorados. Additional information relating to the uncertainties affecting Arcos Dorados' business is contained in its filings with the Securities and Exchange Commission. The forward-looking statements are made only as of the date hereof, and Arcos Dorados does not undertake any obligation to (and expressly disclaims any obligation to) update any forward-looking statements to reflect events or circumstances after the date such statements were made, or to reflect the occurrence of unanticipated events.

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