Arcos Dorados Holdings, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Operating Performance: Total revenue reached $1.1 billion, about equal to last year. Operating performance improved sequentially, with March as the best month and April the strongest so far.
• Omnichannel Experience: Off-premise channels remained resilient, generating about 43% of total system-wide sales. Digital sales rose 6.3%, with digital channels accounting for almost 60% of system-wide sales. The Loyalty Program had 18.8 million registered members.
• Division Performance: Brazil saw growth in constant currency; NOLAD faced headwinds from QSR traffic decline; SLAD had strong comp sales growth.
• Capital Structure and Investments: Total debt and cash were higher due to a liability management transaction. Expect lower debt and less cash by end of Q2. Added 12 new restaurants, invested $48.8 billion in capital expenditures.

Segment Performance

• Brazil: Total revenue in constant currency grew 5.5% in the first quarter. McDonald's brand preference increased, value share reached a new record (almost 47% of Brazil's QSR industry sales). Digital channels generated almost 70% of system-wide sales. Menu innovation included new sandwich flavors and dessert options.
• NOLAD: Total revenue was flattish in constant currency but declined in US dollars due to peso depreciation. Comparable sales were positive in Mexico, offset by lower sales in Panama and Costa Rica. Digital campaigns drove engagement, and Puerto Rico launched a breakfast campaign.
• SLAD: Comp sales rose 38.7% in the first quarter (over 10% excluding Argentina). Argentina rebounded strongly. Digital channels rose by about 33% in US dollars. Identified sales grew more than 50% year-over-year, representing about 26% of SLAD's system-wide sales.

Guidance

• Sales performance is expected to improve as the year progresses with a robust marketing plan.
• Underlying margin performance is expected to improve in coming quarters by mitigating margin pressures.
• Maintain a net debt to adjusted EBITDA ratio of about 1.4 times. No material debt maturities until 2029.

Risks

• Volatile market conditions in Latin America's QSR industry.
• Impact of currency fluctuations on revenue and profitability.
• Challenges in consumer spending and out-of-home dining trends.

Question and Answer

• Q: Comment on sales trends in early second quarter of 2025, especially in Brazil and NOLAD, under a more normalized quarter in terms of calendar effects?

A: Marcelo noted NOLAD faced QSR traffic headwinds in Mexico, Panama, and Costa Rica, with April showing strong performance. Luis discussed Brazil's QSR visit decline due to lower purchasing power, but delivery was a strong performer.

• Q: Food and paper costs impact on margins?

A: Mariano discussed margin outlook, stabilization of gross margin, and FX tailwinds, expecting margins to stabilize with revenue management and supplier negotiations.

• Q: Royalty expense decline?

A: Marcelo explained the royalty rate change due to the new MFA, leading to a 10 basis points decline in consolidated royalty expense.

• Q: FX impact on central administrative expense?

A: Mariano discussed the offsetting impact of Argentine peso appreciation on G&A expenses, with positive performance in the Argentine business offsetting negative impacts.

• Q: Same-store sales and consumption trends?

A: Marcelo and team discussed calendar impacts (Leap Day and Holy Week), improving trends, and a prudent pricing strategy to maintain traffic.