Arcos Dorados Reports Second Quarter 2018 Financial Results

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 second quarter ended June 30, 2018.

Second Quarter 2018 Key Results – Excluding Venezuela

• On a constant currency basis2, consolidated revenues grew 7.0%. As reported consolidated revenues decreased 5.7% to $734.5 million versus the second quarter of 2017.
• Systemwide comparable sales2 rose 5.9% year-over-year.
• As reported, Adjusted EBITDA2 decreased 17.1% to $48.8 million compared with the prior-year quarter.
• Consolidated Adjusted EBITDA margin contracted 100 basis points year-over-year to 6.6%.
• As reported, General and Administrative (G&A) expenses decreased by 1.7% versus the prior year quarter.
• As reported, net income increased to $10.7 million, from $1.1 million in the second quarter of 2017.

“Value-driven pricing, a compelling product mix, and the best restaurant experience in the QSR industry continued to draw more customers to our stores for the seventh consecutive quarter. While a prolonged truck drivers’ strike impacted our ability to fully leverage our scale, the Company’s performance in the second quarter underscores the strength of our business, enabling us to deliver steady results even in the face of short-term spikes in volatility.

Despite the difficult economic climate in some of our key markets, our strategy to drive top-line growth delivered a 7.0% increase in consolidated revenues on a constant currency basis, and we continue to believe that we will expand our Adjusted EBITDA margin by 100 to 200 basis points over the next two to three years.

We remain focused on bringing more guests to our restaurants more often and, looking forward, our strong restaurant portfolio, popular menu items and outstanding team continue to be our strategic pillars to drive long term shareholder value," said Sergio Alonso, Chief Executive Officer of Arcos Dorados.

Second Quarter 2018 Results

Consolidated

(2Q18 = 2Q17 + 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 for the quarter reflect significant non-cash accounting impacts from operations in that market. Thus, the discussion of the Company’s operating performance is focused on consolidated results, excluding Venezuela.

Consolidated – excluding Venezuela

Excluding the Company’s Venezuelan operation, as reported revenues decreased 5.7% year-over-year, primarily due to the negative impact of the 50% and 12% year-over-year average depreciations of the Argentine peso and the Brazilian real, respectively. This was partially offset by constant currency revenue growth of 7.0%. Constant currency revenue growth was supported by a 5.9% increase in systemwide comparable sales, largely driven by average check growth combined with positive traffic.

Second quarter consolidated as reported Adjusted EBITDA, excluding Venezuela, decreased 17.1% or 9.3% in constant currency terms. The Adjusted EBITDA margin contracted by 100 basis points to 6.6%, mainly driven by the step up in Royalty Fees as well as higher G&A and Occupancy and Other Operating Expenses as a percentage of revenues. These were partially offset by efficiencies in Payroll and Food and Paper (F&P). Refranchising activity was also higher during the same quarter of last year. Excluding the Royalty Fee and refranchising comparisons, the Adjusted EBITDA margin would have been nearly flat, year-over-year.

As reported, consolidated G&A decreased by 1.7% year-over-year and increased by 30 basis points as a percentage of revenues largely due to the timing of certain IT project expenses.

Main variations in other operating income (expenses), net

Included in Adjusted EBITDA: In the second quarter of 2018, the Company recorded an inventory write down of $14.7 million in Venezuela, compared to an inventory write down of $3.5 million in the second quarter of 2017. Proceeds from refranchising were less than $0.2 million in the second quarter of 2018, compared to $3.1 million in the prior year comparable quarter.

Excluded from Adjusted EBITDA: In the second quarter of 2018, the Company did not record proceeds from its re-development initiative, compared with $4.2 million recorded in the second quarter of 2017.

Non-operating Results

Non-operating results for the second quarter reflected a $3.0 million non-cash foreign currency exchange loss, versus a non-cash loss of $15.6 million in 2017. Net interest expense was $10.6 million lower year-over-year, largely explained by the incurrence, in the second quarter of last year, of certain transaction costs in connection with the debt restructuring completed in April of 2017.

The Company reported an income tax expense of $2.2 million in the quarter, compared to an income tax benefit of $6.0 million in the prior year period.

Second quarter net income attributable to the Company totaled $10.7 million ($1.1 million, including Venezuela), compared to net income of $1.1 million (net loss of $4.1 million, including Venezuela) in the same period of 2017. Last year’s higher operating income, which included $4.2 million from the Company’s re-development initiative compared with no re-development proceeds in 2018, combined with a negative variance in income tax expenses, was more than offset by positive variances in net interest expenses, derivative instruments and foreign exchange results.

The Company reported earnings per share of $0.05 ($0.01, including Venezuela) in the second quarter of 2018, compared to earnings per share of $0.01 (loss per share of $0.02, including Venezuela) in the previous corresponding period. Total weighted average shares for the second quarter of 2018 were 210,579,612, as compared to 210,881,194 in the prior year quarter.

Analysis by Division:

Brazil Division

Brazil’s as reported revenues decreased by 10.7%, impacted by the 12% year-over-year average depreciation of the Brazilian real, the truck drivers’ strike and, to a lesser extent, the FIFA World Cup. Excluding currency translation, constant currency revenues remained flat while systemwide comparable sales declined 1.0%.

Marketing activities in the quarter included the launch of the FIFA World Cup-related “Sanduíches Campeões” campaign and the Player Escort program. Also during the quarter, the Company launched the McFlurry and McShake “Ouro Branco” along with the “Triplo Chocolate Kopenhagen” in the Dessert category. The “Justice League Action” and “Jurassic World" Happy Meal also performed well.

As reported Adjusted EBITDA decreased 24.8% year-over-year and 15.9% on a constant currency basis. The Adjusted EBITDA margin contracted 200 basis points to 10.9%, with efficiencies in F&P costs offset by increases in most other expense line items as a percentage of sales. The second quarter of 2017 included $2.9 million from refranchising, compared with $0.2 million for the same period in 2018. Excluding refranchising activity from both years, the Adjusted EBITDA margin would have declined 130 basis points.

NOLAD

NOLAD’s as reported revenues increased 3.0% year-over-year, supported by constant currency growth of 4.9%, partially offset by a negative currency translation impact derived from a 5% year-over-year average depreciation of the Mexican peso. Systemwide comparable sales increased 5.3%, driven by traffic growth. Despite the negative effect of the Easter calendar shift, Mexico guest traffic continues to perform strongly, having recorded the fifth consecutive quarter with positive comparable traffic growth. The Company’s innovative marketing and digital initiatives, as well as its focus on delivering an enhanced guest experience, continue to drive the improved performance.

Marketing activities in the quarter included a new phase of the affordability platform “McTrío 3x3” in Mexico and the introduction of the “Cheesy Italiana” burger in Costa Rica, among others. The dessert category performed well, with a new phase of the McFlurry Crunch Rocks and the McFlurry Oreo. Also in the quarter, the Company included “Justice League Action” and “The Amazing World of Gumball” in the Happy Meal.

As reported Adjusted EBITDA decreased by 13.4%, or by 13.6% on a constant currency basis. The Adjusted EBITDA margin contraction of 140 basis points to 7.3% in the second quarter mainly reflects the increase in Royalty Fees, which caused a 90 basis point margin reduction in the quarter. Additionally, efficiencies in F&P costs were offset by an increase in other expense line items as a percentage of revenues.

SLAD

SLAD’s as reported revenues decreased 6.9% as constant currency growth of 19.6% was more than offset by negative currency translation impacts resulting from the 50% year-over-year average depreciation of the Argentine peso. Systemwide comparable sales increased 20.0%, in line with blended inflation, driven by the combination of average check growth and an increase in traffic.

Marketing activities in the quarter included the introduction of the Blue Cheese & Bacon premium burger in the Signature Line, among others. Also in the quarter, the Company launched the FIFA World Cup-related campaign “La Hinchada Pide Cuarto”, built on the iconic Quarter Pounder burger. The dessert category performed well with the introduction of the McFlurry Milka Almendras and McFlurry Milka Triolade. The Happy Meal featured “Justice League Action” and “The Amazing World of Gumball” during the quarter.

Adjusted EBITDA decreased 6.1% on an as reported basis and rose 21.6% in constant currency terms, which was above the division’s blended inflation. The Adjusted EBITDA margin expanded 10 basis points to 7.8%, as efficiencies in Payroll and Occupancy and Other Operating Expenses were partially offset by higher Royalty Fees and F&P costs as a percentage of revenues.

Caribbean Division

The Caribbean division’s 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 in the quarter reflect significant non-cash accounting impacts from operations in that market. Thus, the discussion of the Caribbean division’s operating performance is focused on results, excluding Venezuela.

Caribbean Division – excluding Venezuela

As reported revenues in the Caribbean division, excluding Venezuela, increased 7.1%, driven by constant currency growth of 4.4% and a positive currency translation impact. Comparable sales increased by 5.1%, well above blended inflation, driven by average check growth. Marketing activities in the quarter included the launch of the Buttermilk Crispy Tenders and the Bistró burger in the premium category, among others. Also in the quarter, the Company introduced the Malteada and McFlurry MiniChips in the dessert category, and included “Justice League Action” in the Happy Meal.

Adjusted EBITDA totaled $7.0 million, compared to $4.4 million in the same period of 2017. The Adjusted EBITDA margin expanded 210 basis points to 6.8%, reflecting efficiencies in all cost line items, except Royalty Fees. In addition, this quarter’s results included an insurance recovery from the damages caused by last year’s hurricanes in Puerto Rico and the US Virgin Islands.

New Unit Development

The Company opened 46 new restaurants during the twelve-month period ended June 30, 2018, resulting in a total of 2,191 restaurants. Also during the period, the Company added 247 Dessert Centers, bringing the total to 2,973. McCafés totaled 316 as of June 30, 2018.

Balance Sheet & Cash Flow Highlights

Cash and cash equivalents, including short-term investments, were $218.9 million at June 30, 2018. The Company’s total financial debt (including derivative instruments) was $583.7 million. Net debt (Total Financial Debt minus Cash and cash equivalents) was $364.8 million and the Net Debt/Adjusted EBITDA ratio was 1.4x at June 30, 2018.

Net cash provided by operating activities totaled $57.5 million for the quarter, and cash used in net investing activities totaled $29.3 million, which included capital expenditures of $39.4 million. Cash used in financing activities amounted to $32.6 million including $20.0 million of treasury stock purchases and $10.6 million of dividend payments.

First Half 2018

Excluding the Venezuelan operation and for the six months ended June 30, 2018, the Company’s as reported revenues decreased by 0.2% to $1,537.3 million, as constant currency growth of 8.8% was offset by negative currency translation. As reported Adjusted EBITDA was $116.8 million, a 2.1% decrease compared to the first half of 2017. On a constant currency basis, Adjusted EBITDA increased by 3.4%. The reported Adjusted EBITDA margin contracted by 20 basis points to 7.6%, as efficiencies in F&P and Payroll mostly offset the increase in Royalty Fees.

Year-to-date consolidated net income amounted to $24.3 million, compared with net income of $42.1 million in the first half of 2017. The prior year result included $56.1 million from the Company’s re-development initiative compared with $0.2 million this year. The result also reflects lower net interest expenses, lower losses from derivative instruments, lower income tax and a positive variance in foreign currency exchange results in the first half of 2018.

During the first half of 2018, capital expenditures totaled $63.1 million.

Quarter Highlights & Recent Developments

Share Repurchase Program

On May 22, 2018, the Board of Directors approved the adoption of a share repurchase program, pursuant to which the Company may repurchase from time to time up to $60 million of issued and outstanding Class A shares of no par value of the Company. The repurchase program began on May 22, 2018 and will expire at the close of business on May 22, 2019. As of June 30, 2018, the Company purchased 2,656,552 shares with a total cost of $20 million.

Argentina accounting developments – highly inflationary status

Effective July 1, 2018, Argentina is considered to be highly inflationary. Under U.S. GAAP, an economy is considered to be highly inflationary when the three-year cumulative rate of inflation meets or exceeds 100%. Under the highly inflationary basis of accounting, the financial statements of the Company’s Argentine subsidiaries will be remeasured in accordance with ASC 830 "Foreign Currency Matters".

Dividends

On April 5, 2018, the Company paid the first of the two equal installments of $0.05 per share to all Class A and Class B shareholders of record as of April 2, 2018. The second installment will be paid on October 5, 2018 to shareholders of record as of October 2, 2018.

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.

Excluding Venezuela basis: due to the ongoing political and macroeconomic uncertainty prevailing in Venezuela, and in order to provide greater clarity and visibility on the Company’s financial and operating overall performance, this release focuses on the results on an “Excluding-Venezuela” basis, which is non-GAAP measure.

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 of property and equipment; impairment of long-lived assets and goodwill; 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 independent 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 2,190 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 2018. 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.

Second Quarter 2018 Consolidated Results

(In thousands of U.S. dollars, except per share data)

Second Quarter 2018 Consolidated Results – Excluding Venezuela

(In thousands of U.S. dollars, except per share data)

Second Quarter 2018 Results by Division

(In thousands of U.S. dollars)

Summarized Consolidated Balance Sheets

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