ARCO - Arcos Dorados Reports Third Quarter 2022 Financial Results

• Systemwide comparable sales¹ grew 34.2% year-over-year, boosted by higher guest traffic and market share gains across the region
• Digital channels (Delivery, Mobile App and Self-order Kiosks) contributed 42% of systemwide sales ¹ and set a new Digital sales record in US dollars, with strong growth in all channels
• Consolidated Adj. EBITDA¹ of $103.0 million, up 15.0% in US dollars and 27% in constant currency
• Net Income¹ reached $47.7 million, or $0.23 per share, almost double the prior year result

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 financial results for the three and nine months ended September 30, 2022.

Third Quarter 2022 Highlights – Excluding Venezuela

• Systemwide comparable sales grew 34.2% versus the prior year quarter, twice the period’s blended inflation rate, driven by higher guest traffic and market share gains in all divisions.
• Consolidated revenue totaled $916.3 million, rising 26.7% in US dollars and 38.9% in constant currency.
• Digital channels contributed 42% of systemwide sales, totaling nearly $500 million in the quarter.
• Consolidated Adjusted EBITDA of $103.0 million rose 15.0% in US dollars versus the prior year result, and 27.0% in constant currency.
• Consolidated Adjusted EBITDA margin reached 11.2% in the quarter, with strong profitability in all geographic divisions.
• Net income per share was $0.23, almost double the net income per share of $0.12 in the prior year quarter.
• Net Debt to Adj. EBITDA leverage ratio improved to 1.0x at the end of the third quarter of 2022.
• Gross restaurant openings reached 15 new units in the quarter, including 14 freestanding units, of which 9 freestanding restaurants were opened in Brazil.

^{¹Excluding the results of the Venezuelan operation except Balance Sheet and Debt Ratio information
Note: For definitions, please refer to page 17 of this document.}

Message from Marcelo Rabach, Chief Executive Officer

The McDonald’s Brand is as strong as it has ever been in Latin America and the Caribbean. I firmly believe the key to the successful repositioning of the Brand over the last few years has been the execution of our strategy. This starts at the restaurant level. By consistently delivering the best guest experience in our restaurants, every single day, we are now driving sustainable, long-term revenue growth. This generates opportunities to capture operational efficiencies and dilute fixed costs to enhance profitability. Prudent capital structure management and data-driven investment decisions complete the picture of profitable growth we are delivering, all the way down to the bottom line.

Unlike the special sauce in the Big Mac, there is no secret to this growth recipe. However, achieving it requires an incredible amount of work, discipline and dedication from everyone involved. So, I would like to congratulate and thank all our employees, suppliers and franchisees for their contributions to our shared success in Latin America and the Caribbean.

Although execution at the restaurant level is what makes it all a reality, there are many other factors driving these historic results. Guest excitement and strong Brand metrics, effective cost control without sacrificing quality, food safety or product availability and historically high returns on investment with a robust pipeline to support future unit growth are all contributing to these results. We have also been recognized for offering a Great Place to Work®, as evidenced by our 8 ^th place ranking in Brazil (among 150 large companies) and 1 ^st place ranking in Ecuador as a Great Place to Work® for women, to name a few. And our Recipe for the Future ESG platform is making a positive impact on the communities we serve while building brand trust with our employees, guests, local governments and other stakeholders throughout the region.

When 2022 began, we estimated unit growth potential of about one thousand additional McDonald’s locations over the next ten years in our footprint. With higher sales per restaurant and above average returns on investment from recent openings, I believe our estimate was conservative. The pipeline for the next few years is now in view and we see an opportunity to accelerate unit growth even further.

We operate the region’s largest freestanding restaurant portfolio, which is a structural competitive advantage that maximizes the potential of the Three D’s strategy. The omnichannel approach to building our Digital platform is enhancing guest engagement with new and improved capabilities offering optionality and ease of use. Consistent execution has allowed McDelivery to consolidate its position as the favorite Delivery service in the QSR industry. Finally, Drive-thru remains very sticky even as the front counter and other on-premise channels normalize. Guests are coming back because we have done the heavy lifting necessary to ensure we stay true to our mission to “make delicious, feel-good moments easy for everyone.”

Looking ahead, there are still many opportunities in each market to improve performance and continue generating shareholder value. We fully intend to capture them.

Consolidated Results

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 continues to be focused on consolidated results that exclude Venezuela both at the Consolidated level as well as for the South Latin American Division.

Third quarter net income attributable to the Company totaled $46.9 million, compared to net income of $24.7 million in the same period of 2021. Arcos Dorados’ recorded earnings of $0.22 per share in the third quarter of 2022 compared to $0.12 per share in the corresponding 2021 period. Total weighted average shares for the third quarter of 2022 amounted to 210,594,545 compared to 210,478,322 in the prior year’s quarter.

Consolidated – excluding Venezuela

Total revenues reached $916.3 million, with strong growth in US dollars and constant currency, thanks to broad-based increases in both guest traffic and market share. Systemwide comparable sales grew 34.2%, or about two times blended inflation, including 2.5x in Brazil and 2.6x in NOLAD.

Digital channels generated 42% of systemwide sales in the quarter, growing 47% versus the prior year, and setting a new quarterly sales record of almost $500 million. As of the end of September, the Company’s Mobile App had reached over 79 million accumulated downloads, consolidating its undisputed leadership position in the region. This important marketing and communication tool has added a growing number of functionalities and leveraged guest data that produced a 67% increase in the number of identified sales versus the same period last year. It is also helping drive an increase in the average revenue per user, which is a testament to the Company’s successful strategy to increase visit frequency by offering the industry’s most robust Digital experience.

The structural shift to higher sales in off-premise sales channels, even as on-premise channels continue normalizing, was evident in the quarter’s results. Arcos Dorados’ Delivery sales grew strongly, rising 34% in constant currency versus the prior year period, despite signs that industrywide Delivery sales are relatively flat in the region. Drive-thru sales growth has moderated as on-premise channels normalize, but still grew 11% and represented 28% of systemwide sales in the quarter.

Front counter and McCafé generated the strongest sales growth among on-premise sales channels, up 41% and 62% in constant currency versus the prior year quarter, respectively. The strong rebound of on-premise channels proves the McDonald’s Brand remains culturally relevant and aspirational to guests who continue to enjoy the full restaurant experience.

Adjusted EBITDA – Excluding Venezuela ()

Breakdown of main variations contributing to 3Q22 Adjusted EBITDA

Consolidated Adjusted EBITDA excluding Venezuela reached $103.0 million, growing 15.0% in US dollars and 27.0% in constant currency over the prior year quarter, with continued strong contributions from all divisions.

Strong sales growth across all divisions generated fixed expense leverage, lowering Occupancy & Other Operating expenses as a percentage of revenue. In line with previous Company comments, margin pressure stemmed partly from Food & Paper costs (F&P) given the cumulative effects of the high input cost environment in the quarter. Payroll & Employee Benefits rose as a percentage of revenue since the prior year result included the benefit of COVID-related government support programs, which were discontinued in 2022. Excluding these programs from last year’s results, Payroll & Employee Benefits declined as a percentage of revenue compared with the prior year. Finally, the effective Royalty rate in the quarter rose due to the final step-up in the Royalty rate from the Company’s Master Franchise Agreement with McDonald’s Corporation, which became effective as of August 3, 2022.

General & Administrative (G&A) expenses included in the Company’s Adjusted EBITDA remained approximately flat as a percentage of revenue compared with the prior year period.

Notable items in the Adjusted EBITDA reconciliation

Included in Adjusted EBITDA : Other operating income / (expense) included a $6.5 million net tax credit in Brazil in the third quarter of 2021.

Excluded from Adjusted EBITDA : Reorganization and optimization expenses of $7.2 million within G&A were excluded from the third quarter of 2021.

Non-operating Results – Excluding Venezuela

Arcos Dorados’ non-operating results for the third quarter included a non-cash $1.5 million gain in foreign currency exchange results. Additionally, the Company recorded a non-cash $7.6 million gain from derivative instruments in the third quarter.

Net interest expense totaled $3.2 million in the quarter. The Company recorded an income tax expense of $32.6 million in the third quarter, compared to an income tax benefit of $1.4 million in the prior-year period.

Third quarter net income attributable to the Company totaled $47.7 million, compared to net income of $25.2 million in the prior-year period. Earnings per share were $0.23 in the third quarter of 2022, almost double the $0.12 per share generated in the prior year quarter.

Divisional Results

Brazil Division

As reported revenue reached $352.8 million, increasing 28.2% year-over-year. Systemwide comparable sales rose 21.8% versus the prior year, or 2.5x inflation in the period.

Digital channels generated 52% of systemwide sales in Brazil, boosted by a 29% constant currency increase in Delivery sales versus the prior year quarter. These results were achieved against a backdrop of declining Delivery sales in the country’s QSR industry, demonstrating the strength of the Company’s unmatched restaurant footprint to consolidate its market leadership in this new consumption occasion.

Third quarter marketing activities focused on programs and investments designed to reinforce the Brand’s core strengths. For example, the Company partnered with one of Brazil’s hottest pop artists, Thiaguinho, for the latest installment of its successful “Famous Orders” campaign. To drive further digital adoption, the Company also invested in a 360-degree campaign to promote the Mobile Order and Pay feature of its Mobile App. This omnichannel approach to its Digital strategy is generating positive sales momentum and strengthening brand perception in this growing channel.

The Company also ran its most successful McDía Feliz (McHappy Day) ever, receiving record contributions from guests’ purchases of the Big Mac. Proceeds from those sales were donated to charities focused on two pillars of the Company’s Recipe for the Future, Youth Employment and Commitment to Families, including the Instituto Ayrton Senna.

As reported Adjusted EBITDA in the division reached $62.4 million in the quarter, with operational leverage driving improvements in all operating costs and expenses. This more than off-set the final step-up in the Company’s royalty rate versus the prior year. Excluding the net tax credit from the prior year’s result, Brazil’s Adjusted EBITDA margin in the third quarter rose 110 basis points year-over-year.

North Latin American Division (NOLAD)

As reported revenues were $232.9 million, up 13.8% in US dollars versus the prior year quarter. Systemwide comparable sales rose 18.3%, about 2.6x the division’s blended inflation. Mexico, Costa Rica and the French West Indies markets continued to deliver the strongest comparable sales growth. The Company’s sales and profitability were negatively impacted by the effects of Hurricane Fiona, which temporarily disrupted operations in Puerto Rico in September.

Marketing activities in NOLAD featured menu innovations such as the introduction of the “Ultra-Hyper-Mega Tasty” campaign that leverages the Signature Beef and McCrispy Chicken platforms in Mexico. Costa Rica became the first market in the Arcos Dorados footprint to launch Best Burger. This ambitious, global project provides an enhanced flavor profile and improved quality perception among guests, which is showing strong preliminary results.

Digital sales in NOLAD grew approximately 200% versus the prior year quarter, aided by the continuous improvements in each market’s Mobile App functionality, including Mobile Order and Pay, as well as greater marketing investments to promote the Digital platform.

As reported Adjusted EBITDA reached $22.7 million in the third quarter compared with $22.3 million in the prior year quarter, representing a year-over-year increase of 2.1%, or 7.6% on a constant currency basis. Adjusted EBITDA margin declined by 110 basis points against 2021. Higher F&P costs as a percentage of revenue as well as the final step-up in the Company’s royalty rate were partially offset by operating leverage in other expense line items.

South Latin American Division (SLAD)

Revenues in SLAD, excluding Venezuela, reached $330.7 million, rising 35.8% in US dollars. Systemwide comparable sales were up 67.8% versus the prior year, about 1.8x the division’s blended inflation in the period. All main markets in the division generated strong topline growth in the quarter. Both off-premise and on-premise sales growth were robust in the period with Drive-thru and Delivery sales up 39% and 45% in constant currency, respectively, and front counter rising 95% in constant currency as well.

Marketing activities in SLAD continued building brand love with Generation Z guests thanks to a “Famous Orders” campaign with Latin pop artist Sebastián Yatra. During the quarter the Company introduced the McCrispy Chicken platform to the menu in Colombia and Chile, where it received strong guest response. The dessert platform also produced encouraging results with the launch of the McFlurry Chocoramo in Colombia. This locally relevant product generated guest excitement and drove unit sales to the highest level ever in Colombia.

As reported Adjusted EBITDA reached $40.0 million, compared with $26.7 million in the prior-year quarter. Adjusted EBITDA margin was 12.1%, or 110 basis points higher than the prior year quarter. Sales growth above inflation and significant operating leverage more than offset the final step-up in the Company’s royalty rate versus the prior year.

New Unit Development

Arcos Dorados opened 15 restaurants during the third quarter of 2022, including 14 freestanding units. In Brazil, the Company opened 9 freestanding restaurants in the period. For the first nine months of 2022, the Company opened 45 new restaurants, including 40 freestanding units. This included 30 restaurant openings in Brazil, with 27 freestanding units opened during the same period.

As of the end of September 2022, the Company was operating 918 Experience of the Future locations offering the most modern and engaging restaurant experience in the region.

The pace of openings and modernizations in 2022 is ahead of the Company’s original guidance, thanks partly to a larger Development team. Moving forward, the team is focused on developing an even more robust openings pipeline and accelerating the implementation of the Company’s growth and modernization plans while meeting or exceeding the historical return on investment.

Balance Sheet & Cash Flow Highlights

During the third quarter, the Company repurchased a total of $1.3 million, $2.7 million and $2.3 million of the outstanding nominal amount of its 2023 Notes, 2027 Notes and 2029 Notes, respectively. As of September 30, 2022, cash and cash equivalents were $319.1 million and total financial debt (including the value of derivative instruments) was $698.6 million. Net debt was $379.5 million, in-line with the year-end 2021 total.

The net debt to Adjusted EBITDA leverage ratio ended the quarter at a historically low 1.0x as record trailing-twelve-month Adjusted EBITDA and strong cash generation more than offset the modest increase in debt and lower value of the Brazilian-real linked derivative instruments compared with December 31, 2021.

Net cash generated from operating activities for the nine months ended September 30 totaled $235.4 million, up about 70% from last year’s $138.6 million. Cash used in net investing activities totaled $153.8 million, which included capital expenditures of $124.0 million. Net cash used in financing activities was $40.6 million, including $25.3 million corresponding to the payment of the first three installments of the 2022 dividend declared by the Company’s Board of Directors.

Recent Developments

2027 and 2029 Senior Notes Repurchase

Beginning in October 2022, the Company has repurchased an additional $2.0 million and $10.5 million of the outstanding nominal amount of its 2027 Notes and 2029 Notes, respectively, for an amount equal to $11.7 million plus accrued and unpaid interest.

Third Quarter 2022 Earnings Webcast

A webcast to discuss the information contained in this press release will be held today, November 16, 2022, at 10:00 a.m. ET. In order to access the webcast, members of the investment community should follow this link Arcos Dorados Third Quarter 2022 Results Webcast .

A replay of the webcast will be available later today through March 2023 in the investor section of the Company’s website: www.arcosdorados.com/ir .

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 (year-over-year basis). 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, equity method investments, or insurance recovery of property and equipment; write-offs of property and equipment; impairment of long-lived assets and goodwill; and reorganization and optimization plan expenses.

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. Figures 10 and 11 of this earnings release include a reconciliation for Adjusted EBITDA. For more information, please see Adjusted EBITDA reconciliation in Note 9 – Segment and geographic information – of our 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, 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 with almost 2,300 restaurants, operated by the Company or by its sub-franchisees, that together employ over 90 thousand people (as of 09/30/2022). The Company also utilizes its Recipe for the Future ESG platform to positively impact the communities in which it operates. Arcos Dorados is listed for trading 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 growth and investments in 2022. 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.

Third Quarter 2022 – Consolidated Results

Third Quarter 2022 – Consolidated Results Excluding Venezuela

Third Quarter 2022 – Results by Division

Figure 12. Third Quarter 2022 Consolidated Results by Division

(In thousands of U.S. dollars)

Summarized Consolidated Balance Sheets

View source version on businesswire.com: https://www.businesswire.com/news/home/20221116005240/en/

Investor Relations Contact
Dan Schleiniger
VP of Investor Relations
Arcos Dorados
daniel.schleiniger@mcd.com.uy

Media Contact
David Grinberg
VP of Corporate Communications
Arcos Dorados
david.grinberg@mcd.com.uy

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