Arcos Dorados Reports Third Quarter 2020 Financial Results

• The Company is solidly in the Recovery Phase of its Plan, with September systemwide comparable sales already at about 85% of the prior year

• Drive-Thru and Delivery posted record sales in the quarter, growing 54% and 180% in constant currency versus the prior year, respectively

• Adjusted EBITDA reached $25.8 million in the quarter, positive in all Divisions, benefitting from better sales and effective cost and expense management initiatives

• Operating cash flow generation of $28.6 million in the quarter and strengthened balance sheet following the recent liability management transactions

MONTEVIDEO, Uruguay–(BUSINESS WIRE)–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 three months ended September 30, 2020.

Third Quarter 2020 Highlights – Excluding Venezuela

• Consolidated revenues were 37.7% lower in US dollars and 24.5% on a constant currency basis¹, versus the prior year.
• Systemwide comparable sales¹ declined 27.2% versus the prior year, which included strong sequential monthly improvement throughout the quarter.
• All four Divisions contributed to a positive Consolidated Adjusted EBITDA¹ margin of 5.5%, compared to (14.3)% in 2Q20 and 10.2% in 3Q19.
• Basic net loss was $(0.14) per share, compared to basic net income of $0.13 per share in the prior year quarter.
• Net Debt to Adjusted EBITDA ratio was 4.7x at the end of the third quarter, versus 3.4x and 1.6x at the end of June 2020 and December 2019, respectively.

Approximately 99% of the Company’s systemwide restaurants were operating as of the date of this release, with approximately 70% operating all sales segments.

¹ For definitions please refer to page 14 of this document

“By focusing on the Three D’s of our business – Drive-Thru, Delivery and Digital – and taking proactive management steps to reduce costs and stabilize cash flows, we quickly started rebuilding the momentum that marked the start of 2020. We are now solidly in the Recovery Phase of our plan and managing through the current crisis. Sales trends have improved sequentially and consistently in each of our markets while profitability, measured in US GAAP, also rebounded during the third quarter. Not only did we generate positive Adjusted EBITDA in each of our operating Divisions as well as at the consolidated level, but we also generated positive operating cash flows, especially in Brazil and our ‘hard currency’ markets in the Caribbean division,” said Marcelo Rabach, Chief Executive Officer of Arcos Dorados.

“We achieved this turnaround with the hard work of our people, the superiority of our Brand and restaurant portfolio and the return of our guests, who feel safe coming back to our restaurants thanks to our unmatched McProtegidos, or McSafe, program. We have only begun to scratch the surface of what we can do with our industry-leading work in the digital arena, which already contributed 40% of our systemwide sales in both the second and third quarters of this year. Our leadership in the Digital space has also supported important market share gains across the region. In other words, our long-term strategic approach to growth and brand building, which paid off last year and is getting us through the crisis this year, will also support the consolidation of our leadership position as we head into the Full Revival Phase of our plan next year,” he concluded.

Third Quarter 2020 Results

Consolidated

Arcos Dorados’ consolidated results may continue to be impacted by Venezuela’s macroeconomic volatility, including the ongoing hyperinflationary environment, which has historically led the Company to record significant non-cash accounting charges to operations in this market. As such, the discussion of the Company’s operating performance is focused on consolidated results that exclude Venezuela.

Main variations in Other Operating Income / (Expenses), net

Included in Adjusted EBITDA: There were no material variations.

Excluded from Adjusted EBITDA: The positive variation is mainly explained by an insurance recovery in the SLAD division, and lower expense from property and equipment write off, versus the third quarter of last year.

Third quarter net loss attributable to the Company totaled $(29.6) million, compared to net income of $24.4 million in the same period of 2019. Arcos Dorados’ reported loss per share of $(0.14) in the third quarter of 2020 compared to earnings of $0.12 per share in the corresponding 2019 period. Total weighted average shares for the third quarter of 2020 amounted to 205,990,486 compared to 204,069,355 in the prior year’s quarter.

Consolidated – Excluding Venezuela

Excluding Arcos Dorados’ Venezuelan operation, total revenues in US dollars decreased 37.7% year-over-year, due to a 24.5% decline in constant currency, from the impact of the COVID-19 pandemic, as well as the significant average depreciation of key local currencies, including the Brazilian real, the Argentine peso and the Mexican peso.

The percentage of restaurants operating at least one sales segment continued to increase sequentially from 55% at the end of the first quarter to 88% and 95% at the end of the second and third quarters, respectively. The steady re-opening of restaurants across all divisions, combined with the strong growth in the Company’s Drive-thru and Delivery segments, drove the sequential improvement of systemwide comparable sales over the course of the quarter, from a decline of 40.7% in June to a decline of 15.9% in September. Systemwide comparable sales for the quarter were down 27.2%.

Comparable sales returned to growth versus the prior year in the Company’s free-standing restaurants beginning in September, including in Brazil and in many of the markets of the Caribbean division, where the Company benefits from its best in class footprint of free-standing restaurants. In compliance with applicable protocols, many of the free-standing restaurant dining rooms have been reopened, while sales and guest traffic in mall and food court restaurants remained challenging due to limited operating hours and closed seating areas in most malls.

Third quarter consolidated Adjusted EBITDA, excluding Venezuela, reached $25.8 million, and was positive in all four divisions, despite the impact of the COVID-19 pandemic. Adjusted EBITDA margin was down 4.7 percentage points versus the prior year driven by the year-over-year decline in sales, but improved by a notable 19.8 percentage points compared with the second quarter of 2020, which was the peak of the crisis.

Consolidated G&A expenses decreased 24.9% year-over-year in US dollars, or 8.2% in constant currency terms, despite weighted inflation on G&A of 9.8%.

Non-operating Results

Arcos Dorados’ non-operating results for the third quarter, excluding Venezuela, included an $8.6 million non-cash foreign currency exchange loss, compared to a non-cash gain of $4.9 million in the same period of 2019. This year’s loss mainly reflects the impact of the depreciation of the Brazilian real, as well as other currencies, on intercompany balances. Additionally, the $4.9 million gain recorded last year included a gain related to Argentina’s highly inflationary status. The Company also recorded a non-cash gain of $5.1 million, related to transactions with certain securities. Net interest expense was $2.5 million higher year-over-year. Excluding Venezuela, the Company estimated income tax expenses of $7.1 million in the third quarter, compared to $10.4 million in the prior-year period.

Third quarter net loss attributable to the Company, excluding Venezuela, totaled $(28.2) million, compared to net income of $25.8 million in the prior year period. Net loss per share of $(0.14) in the third quarter 2020, excluding Venezuela, compared to earnings per share of $0.13 in the prior year quarter.

Analysis by Division:

Brazil Division

As reported revenues decreased 44.4%, due the challenging operating environment, in addition to the 26% year-over-year average depreciation of the Brazilian real against the US dollar. Systemwide comparable sales decreased 26.2%, with a strong sequential improvement over the course of the quarter, from a decline of 39.1% in June to a decline of 14.5% in September.

Almost 55% of the division’s restaurants are street-facing, which includes more than 460 free-standing restaurants, or 3.0 times as many as its closest competitor. Nearly all free-standing restaurants remained open during the quarter and returned to positive comparable sales growth starting in September. Performance in the Company’s mall-based restaurants was challenging due to capacity and operating hour restrictions. The Brazil division was operating 99% of its restaurants at the end of the quarter with 60% operating all sales segments.

Marketing activities for the third quarter focused on celebrating the Company’s iconic products such as the “Big Mac #1” campaign, which received strong consumer response with promotional items lasting just ten days compared to the original six-week plan. Also, during the quarter, the Company continued strengthening the Drive-thru segment, which grew 52% in constant currency versus the prior year, by offering exclusive promotions and dedicated media. Digital sales also expanded significantly versus the prior year, representing 46% of systemwide sales, through segmented offers and promotions. The McDonald’s App added new functionalities, such as the ability to order through the WhatsApp platform using artificial intelligence to interact with guests as well as Mobile Order and Pay, all of which will reinforce its place as the undisputed leader in mobile Apps in the Brazilian restaurant industry. Delivery continued to be a key sales driver in constant currency, growing about 22% versus the second quarter of 2020 and 147% versus the prior year quarter despite a relatively high base.

As reported Adjusted EBITDA rebounded strongly from the second quarter, reaching $21.5 million. The result was 62.6% lower year-over-year, or 49.6% in constant currency terms, reflecting the continued impact of COVID-19 in the period. Adjusted EBITDA margin was down 5.4 percentage points as the decline in sales outpaced the reduction in costs and expenses during the quarter.

NOLAD

As reported revenues decreased 37.9%, due to the difficult operating environment. Systemwide comparable sales decreased 35.6%, with a strong sequential improvement over the course of the quarter, from a decline of 43.9% in June to a decline of 25.0% in September.

Above 93% of the division’s restaurants were operational at the end of the third quarter with 67% operating all sales segments. Around one third of the restaurants in Panama were still closed at the end of the quarter, since shopping malls had not yet reopened in the country.

During the third quarter, restrictions on mobility began to ease and front counter sales began to recover. However, Drive-thru and Delivery segments continued being the key business pillars for NOLAD. The Company continued fueling both segments through exclusive marketing programs and promotions, as well as through improved operations.

Marketing campaigns for the quarter were focused on its core products and the “Happy Week” designed to drive sales leveraging the Company’s digital and CRM capabilities. One week per month, customers receive offers and news about the Company’s iconic products, creating sales peaks while generating brand excitement through “Feel Good” moments. This digital program resulted in a sales boost in the three countries. The Company continued promoting family bundles and special packs for group occasions. Finally, the Company executed the McProtegidos program with excellence across the division, which remained an important factor in consolidating McDonald’s as the most trusted brand in the restaurant industry.

As reported Adjusted EBITDA was positive in the quarter, reaching $0.7 million. The result represents a year-over-year decline of 93.1%, or 95.1% in constant currency terms. Adjusted EBITDA margin fell 8.7 percentage points as the decline in sales outpaced the reduction in costs and expenses during the quarter.

SLAD

As reported revenues decreased 49.9%, due largely to continued operational restrictions, in addition to the 31% year-over-year average depreciation of the Argentine peso against the US dollar. Systemwide comparable sales decreased 37.8%, with a strong sequential improvement over the course of the quarter, from a decline of 54.4% in June to a decline of 26.6% in September.

The SLAD division was operating above 90% of its restaurants at the end of the quarter, and 30% were operating all sales segments.

Marketing activities for the third quarter included the launch of the “Happy Week” program. The Company continued bringing product innovation to guests with the launch of the Grand McBacon and Extra McNifica Core Extensions, in all five markets. The Company also strengthened the Drive-thru channel with the launch of the new “Drive-Thru VIP Club” loyalty program. After only a few weeks there were already 350 thousand new registered users.

As reported Adjusted EBITDA reached a positive $2.7 million. The result was 85.8% lower versus the prior year, or 86.0% in constant currency terms. Adjusted EBITDA margin was down 6.9 percentage points as the decline in sales outpaced the reduction in most costs and expenses during the quarter.

Caribbean Division

The Caribbean division’s results may continue to be impacted by Venezuela’s macroeconomic volatility, including the ongoing hyperinflationary environment, which has historically led the Company to record significant non-cash accounting charges to operations in this market. As such, the discussion of the Caribbean division’s operating performance focuses on results that exclude the Company’s operations in this country.

Caribbean Division – Excluding Venezuela

Revenues in the Caribbean division, excluding Venezuela, increased 11.7% in US dollars, or 12.7% in constant currency terms. Systemwide comparable sales increased 1.0%, with a strong sequential improvement over the course of the quarter, from a decline of 17.2% in June to a positive 9.9% in September.

At the end of the quarter, 100% of the division’s restaurants were operational, with 90% operating all sales segments. Free-standing restaurants, which represent 72% of the division’s footprint, continued generating positive sales growth versus the prior year. Strong results in the Caribbean division were also supported by the 100% company-operated market, in Puerto Rico.

Marketing activities included the expansion of the value platform in Colombia and continued bringing product innovations in Puerto Rico, to accelerate traffic during key dayparts such as breakfast and lunch. Also in the quarter, the Company continued focusing on the Drive-thru segment, with significant improvements in operations and reduced service time, enhancing the customer experience and making this channel a powerful sales growth engine. Delivery was another key contributor to sales growth in the quarter, which included the launch of “Pollo McCrispy”, an exclusive virtual store for chicken products with one of the Company’s delivery aggregators. Finally, the McProtegidos program solidified McDonald’s restaurants’ position as the safest place to eat and work.

As reported Adjusted EBITDA reached $11.8 million, growing 139% year-over-year, or 136.6% in constant currency terms. Adjusted EBITDA margin expanded 5.9 percentage points to 11.0% with efficiencies in almost all cost line items. Notably, the bulk of this Adjusted EBITDA generation was in the Division’s US dollar and euro markets.

New Unit Development

The Company opened 73 new restaurants during the twelve-month period ended September 30, 2020. At the end of the third quarter, the Company had 729 Experience of the Future Restaurants.

Balance Sheet & Cash Flow Highlights

Cash and cash equivalents were $136.5 million as of September 30, 2020. The Company’s total financial debt (including derivative instruments) was $661.1 million. Net debt (Total Financial Debt minus Cash and cash equivalents) was $524.6 million, while the Net Debt/Adjusted EBITDA ratio was 4.7x at the end of the reporting period.

Net cash generated from operating activities for the three months ended September 30, totaled $28.6 million, while cash used in net investing activities totaled $11.3 million. Capital expenditures in the quarter totaled $12.3 million, compared to $73.5 million in the previous year’s period. Net cash used in financing activities was $1.7 million.

First Nine Months 2020

Excluding the Venezuelan operation and for the nine months ended September 30, 2020, the Company’s revenues, in US dollars, decreased by 37.4% to $1.4 billion, impacted by the COVID-19 pandemic and the depreciation of several of the region’s key currencies. This led to a significant de-leveraging of the Company’s costs and expenses, resulting in a consolidated EBITDA margin contraction of 7.9 percentage points to 1.0%.

Year-to-date consolidated net loss amounted to $(166.0) million, compared with net income of $51.3 million in the first nine months of 2019.

Net cash used in operating activities for the nine months totaled $50.2 million, while cash used in net investing activities totaled $63.7 million. Capital expenditures for the first nine months totaled $64.8 million, compared to $167.1 million in the previous year’s period. Net cash provided by financing activities was $140.7 million, which included $153.4 million of the reopening of the 2027 Notes, that were mainly used to repay short-term borrowings.

Recent Developments

Reopening of 2027 Note

On September 11, 2020, the Company issued additional 2027 Notes for an aggregate principal amount of $150 million at a price of 102.250%. The proceeds from the second issuance were mainly used to fully repay short-term indebtedness. This was the lowest, fixed-rate cost of debt, with a yield to maturity of 5.46%, in the Company’s history.

Exchange of 2023 Notes

On September 15, 2020, the Company launched an offer to exchange any and all of its 2023 Notes for an additional issuance of 2027 Notes, that expired on October 13, 2020. As a result of the exchange, $138,354,000 aggregate principal amount of 2027 Notes were issued in exchange for $131,476,000 aggregate principal amount of 2023 Notes.

Contacts

Investor Relations Contact
Dan Schleiniger

VP of Investor Relations

Arcos Dorados

daniel.schleiniger@ar.mcd.com

Media Contact
David Grinberg

VP of Corporate Communications

Arcos Dorados

david.grinberg@br.mcd.com

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