Arcos Dorados Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 4 speakers on the call.

Operator

Morning, everyone, and thank you for joining our Q3 2023 earnings webcast. With us today are Marcelo Rabach, our Chief Executive Officer Luis Reganato, our Chief Operating Officer and Mariano Tannenbaum, our Chief Financial Officer. Today's webcast, which is being recorded, will consist of prepared remarks from our leadership team, which will be accompanied by a slide presentation also available in the Investors section of our website, www.arcosdrawautos.com/ir. As a reminder, to better view the presentation on the webcast platform, please scroll over the upper left hand part of the screen and click on the arrows to maximize the slides. After we conclude our opening remarks, we will answer your questions, which you can submit using the chat function on the left hand side of the screen.

Operator

You will need to minimize the slides to access that chat function. Today's call will contain forward looking statements, and I refer you to the forward looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to to update or revise any forward looking statements to reflect new or changed events or circumstances. In addition to reporting financial results In accordance with generally accepted accounting principles, we report certain non GAAP financial results. Investors are encouraged to review the reconciliation of these non GAAP financial results as compared with GAAP results, which can be found on the press release and unaudited financial statements filed today with the SEC on Form 6 ks.

Operator

Marcelo, over to you.

Speaker 1

Thank you, Dan. Good morning, everyone, and thank you for joining us today. We are very pleased to report strong results for the Q3 2023. McDonald's brand strength, Structural competitive advantages and unparalleled execution continues to drive sales growth and market share gains across the Arco Dorados footprint. We have articulated and are executing a clear strategy Designed to drive sustainable sales growth, supported by both restaurant volume and average check to generate operating leverage and long term profitability growth.

Speaker 1

Among the most important elements of this strategy is value. Guests measure value based on more than price. Their value perception includes Quality, service, convenience and optionality as well. This is where the region's largest freestanding restaurant portfolio and our 3 d strategy of digital delivery and drive thru whose guests' value perception. Perhaps the best indicator the strategy is working is that comparable sales continued growing well above inflation across our business, with Strong guest volume growth in nearly all main markets.

Speaker 1

Even as consumption moderated in the region, Sales growth remains strong, delivering cost and expense leverage to generate improved profitability. We are reinvesting our cash generation to expand the restaurant footprint in a highly underpenetrated industry. 1st year returns on investment for new restaurants remain well above historical average, proving that penetration continues to generate demand in our region. New restaurants also bring significant economic benefit to the communities we serve, especially through the creation of first time jobs and long term career opportunities for young people. Let's take a look at consolidated results for the Q3 of 2023.

Speaker 1

Total revenue surpassed $1,100,000,000 Pricing 22.1 percent in U. S. Dollars versus the prior year period. Guest traffic grew in the mid- to high single digits in most markets, in line with our sales growth strategy. Adjusted EBITDA rose with revenue growth, reaching $129,100,000 U.

Speaker 1

S. Dollar EBITDA growth was driven mainly by higher sales, but we also managed to expand margins, Thanks to better food and paper costs and some fixed cost leverage in the quarter. Net income of $59,700,000 or $0.28 per share rose 27 4.4% over last year's strong results. System wide comparable sales grew 37.3 percent or about 1.4 times blended inflation across the company. All markets outgrew inflation, and the gap in business share between the McDonald's brand and our nearest competitor expanded in our main markets as well.

Speaker 1

Among the markets with the strongest business share performance were Brazil, Chile, Costa Rica and Mexico. Digital sales accounted for 50% of system wide sales, with 20% identified sales across the business. A few weeks ago, we launched our loyalty program,

Operator

which

Speaker 1

will help us reach the goal of 40% identified sales by the end of 2025. Chris will touch on that later. Delivery has proved to be a remarkably consistent sales channel with a 48% increase in local currency sales over the prior year. And drive thru sales rose 17% in local currency, complementing the strong rebound in on premise sales channels. For the year to date through September, we opened 45 restaurants, including 41 freestanding units.

Speaker 1

Growth accelerated in the Q3 with 27 restaurant openings, and we fully expect to meet openings guidance for the full year 2023. In fact, as of today, We have opened 60 restaurants in our footprint since the beginning of the year. Let's go to Luis for an overview of sales performance in each division.

Speaker 2

Thanks, Marcelo, and good morning, everyone. Brazil's comparable sales rose 10.8 percent or 2.3 times inflation in the quarter. Remarkably, guest volume rose mid single digits, building on last year's strong results despite a more challenging consumption environment. Our value and convenience offerings are resonating with guests in Brazil. About 61% of sales came through digital channels in the country, where we were able to identify 25% of sales to drive increased guest frequency and average revenue per user.

Speaker 2

Delivery sales also remained strong in the Brazilian market, rising 32% versus last year in local currency. The McDonald's brand consolidated its market share leadership in the country with more than twice the market share of our nearest competitor. Marketing initiatives in the quarter included strong brand experience campaigns focused on important passion points for younger guests. The highlight was the sponsorship of the town, the biggest music festival in Brazil this year. We built Latin America's largest McDonald's restaurant to serve festival goers and launched a limited edition Mac Melt, the Towne sandwich in all restaurants to bring a taste of the festival to the entire country.

Speaker 2

We also maintain the brand's connection to sports with the sponsorship of the FIFA Women's World Cup, online broadcast on Caseteve, Brazil's biggest streaming channel. Finally, The launches of MacFerry, Ovo Mauteyne Mescalado and MacFerry KitKat boosted traffic by bringing innovation to the diesel category. No less comparable sales grew 11.5%, which was 4 times the division's blended inflation in the quarter. Volume growth accounted for about 2 thirds of comp sales growth With all markets of growing inflation by 2.5 times to 8.5 times inflation in the period. The NOLA division reached some of its highest ever market share levels, backed by positive brand attribute trends.

Speaker 2

Marketing activities featured many innovations across the region, Including the launch of Grand Sandwiches, an indulgent and tasty platform. In Mexico, The McDonald's Mexico Mecanta brand campaign was endorsed by Sergio Checo Perez, The popular Mexican Formula 1 driver and including the Menucheco famous order campaign. And in Puerto Rico, we launched the Saka to Encanto brand building campaign, partnered with Tommy Torres, a popular local musical artist. SLAD's comparable sales grew 1.3 times the division's blended inflation rate. Inflation aided growth in Argentina was complemented by mid teens comp sales growth in both Chile and Uruguay.

Speaker 2

As in Brazil noted, we generated strong guest volume in nearly all slab markets in the quarter. Slab's markets captured additional market share with improved scores in brand attributes, Reinforcing McDonald's brand preference across the division. To continue strengthening our leadership in the beef segment, We launched the bacon cheddar mac melt sandwich and the pilita de cheddar in Argentina, Chile, Colombia and Ecuador with strong sales reserve in all four countries. We also continued the rollout of Best Burger, extending the platform to Aruba, Curacao and Trinidad. The Dessert platform produced excellent results with the launch of McFlurry products with locally relevant brands In markets like Chile, Colombia, Peru and Uruguay.

Speaker 2

And the good news Is that we are generating positive sales trends halfway through the Q4 as well. Guest volume growth Remain solid in most markets as we head into the end of the year. Over to you, Mariano.

Speaker 3

Thanks, Luis. Good morning, everyone. The quarter's adjusted EBITDA growth of 25.8 percent in U. S. Dollars was driven by both increased sales and margin expansion.

Speaker 3

Consolidated EBITDA margin improved by 40 basis points, while we continued offering value to our guests with competitive pricing and the best Restaurant experience in the industry, a lower commodity cost environment flowed through to our gross margin. This, combined with G and A expense leverage, drove the quarter's margin improvement. Food and Paper costs declined by 90 basis points as a percentage of revenue, with gross margin expansion in all three divisions. G and A improved by 40 basis points Due to sales growth and the devaluation of the Argentine peso, which represents an important part of our corporate G and A. Most other expense line items were relatively flat versus the prior year, Except for other operating expenses, which had a negative variance due to several puts and takes, primarily in SLAD.

Speaker 3

3rd quarter adjusted EBITDA grew strongly in all three divisions, with double digit growth in Brazil and NOLED, where top line growth drove operational leverage. Rasik's EBITDA grew 24.8 percent in U. S. Dollars, which was in line with top line growth in the division. EBITDA margin was flat with lower Food and Paper, payroll and G and A, offset mainly by higher occupancy and other operating expenses.

Speaker 3

No less EBITDA grew 42% in U. S. Dollars, including 110 basis points of margin expansion in the quarter. Food and Paper, together with occupancy and other operating expenses, drove the margin improvement. Slat's underlying operating results were very strong in the quarter.

Speaker 3

Restaurant margins improved with lower Food and Paper, payroll and occupancy and other operating expenses. Royalties were higher due to the final step up in our royalty rate. Additionally, a combination of items in other operating expenses this year compared to other operating income last year, generating the negative variance in SLAD's EBITDA margin.

Speaker 2

Let's turn to the 3 d strategy of digital, delivery and drive thru. Digital sales Grew 47% year over year with sales from delivery, the mobile app and self order kiosks providing half of system wide sales in our geography. Identified sales improved from 16% last year to 20% in the most recent quarter. We now have over 75,000,000 unique registered users in our database and more than 17,000,000 average monthly users of the mobile app. Its ease of use and multitude of functionalities make it by far the most popular app in Latin America's QSR industry.

Speaker 2

Even in Mexico, where we're working hard to increase digital sense penetration and we have the 3rd largest QSR restaurant portfolio, Our mobile app is by far the most popular in the country's QSR industry as measured by active users. Delivery and drive thru sales rose by 48% 17% in constant currency during the 3rd quarter. Delivery accounted for 17% of system wide sales with several markets generating a much higher contribution to sales. On delivery continued to expand and we are still lingering from the process. So far, the evolution is encouraging.

Speaker 2

Drive Thru sales rose 17%, accounting for 25% of system wide sales in the period. We have been very pleased with the sales growth in both off premise channels, in addition to the strong results We have seen in on premise channels for the last several quarters. Importantly, the mobile order and pay functionality on the app He's growing exponentially and supporting all sales channels, especially in SLAD. MOP has the 2nd highest customer satisfaction scores across all sales channels, which is helping increase overall customer satisfaction scores. As part of our successful digital strategy, last month we executed the nationwide launch of our new loyalty program to all restaurants in both Brazil and Uruguay.

Speaker 2

We are encouraged by guest response so far And we have already reached 1,800,000 members. We built on learnings from MyMcDonald's Rewards around the world as well as insights generated through local pilots and a drive through based loyalty platform. Our plan is to roll out the loyalty program to several additional markets by the end of next year. Loyalty boosts the power of the mobile app by driving visit frequency while increasing the percentage of identified sales to provide a more personalized guest experience. We look forward to sharing progress on future calls.

Speaker 3

With above average returns on investment, we are accelerating openings and modernizations into the end of 2023, supported by stronger cash from operations and a healthy balance sheet. EBITDA growth continues to offset the planned deployment of balance sheet cash to fund restaurant openings and modernizations this year. As a result, the net leverage ratio at the end of September was a very healthy 1x and remained flat versus the end of last year. Total debt rose modestly versus year end 2022 due to the appreciation of the Brazilian real, which reduced the value of our derivative instruments. Also as expected, cash flow from operations improved sequentially in the 3rd quarter With seasonally higher EBITDA and an improvement in working capital performance, we expect to see Similar or stronger cash flow from operations during the Q4.

Speaker 3

Marcelo told you about our pace of openings so far this year and our confidence in meeting this year's guidance. I wanted to add That 30 of the 45 restaurants we opened in the 1st 9 months of 2023 used the modular and highly efficient Restaurant 2.0 design we told you about during our Investor Day at the beginning of this year. We also opened a flagship sustainable restaurant in Sao Paulo, Brazil, with multiple sustainability initiatives, including 20 that have already been rolled out to all restaurants in the country. It is worth repeating that the above average ROI from both restaurant openings and modernizations Provides compelling evidence that we still have significant room to grow for many years to come. These higher returns are expected to support continued growth and long term free cash flow generation.

Speaker 3

More than half of all restaurants now have the experience of the future format, And we are very encouraged by the results from restaurant modernizations, which are generating at least high single digit sales lift and mid teens returns on investment. We do not take these achievements for granted. Above average, ROIs are the result of a very disciplined and careful approach to restaurant development that has also benefited from favorable shifts in consumer behavior. Once restaurants are open, Operational execution becomes the key to success and we have decades of experience on both fronts. Capital expenditures in the Q3 were $105,000,000 bringing the 9 month totaled to $228,000,000 We expect to accelerate growth over the coming years, While retaining discipline with the development processes and return expectations and the healthy balance sheet that delivered outperformance over the last several years.

Speaker 3

There is still so much room to grow And we intend to capture that growth potential in the most sustainable and profitable manner possible. Marcelo,

Speaker 1

up to you. Thanks, Mariano. During the Q3, we received recognition for the commitments we have made to benefit the communities we serve and to provide the best work environment in the QSR industry. 3 of the 6 pillars of our recipe for the future are youth opportunity, commitment to families and Diversity and Inclusion. We received recognition related to these 3 pillars and across all three divisions, from prestigious organizations like Great Place TO Work, Revista Zuma and Merco.

Speaker 1

We are making progress with the other 3 pillars as well: sustainable sourcing, circular economy and Climate Change. So far, 4 countries have transitioned to 100% Cage3x, And we remain aligned with the U. S. Market's commitment to being 100% cage free in all countries by 2025. In Mexico, we received a PREMIO GOLA, recognizing our cooking oil recycling program has been among the best sustainability practices in the country's food and beverage industry.

Speaker 1

And we recently signed new agreements to increase the amount of renewable energy sources we use in our operation, which we will tell you more about on our next call. To learn more about the Recipe for the Future ESC platform, You can visit our website and download the audited ESG report for 2022. To wrap up our prepared remarks, I would like to share a few final thoughts with you. The strong results we reported today demonstrate the importance of a consistent long term strategic approach to delivering value and convenience to restaurant customers. As you have heard many times, our objective is clear: Right sustainable top line growth over the long term.

Speaker 1

And as top line grows, So should Profitability. As we open even more freestanding units, modernize even more existing restaurants And develop even more digital capabilities, we are strengthening and expanding the Structural competitive advantages that make McDonald's by far the preferred brand in the Latin American QSR industry. There is still so much work to be done to normalize our operations across the region, And there is still so much growth potential ahead of us. But thanks to the consistency of our strategy and execution, We are capturing our opportunities and tackling our challenges from a position of strength. We expect to have a solid final quarter to a very strong 2023, And we will provide you with our 2024 guidance for restaurant openings and capital expenditures early next year.

Speaker 1

Thank you all for your continued support. Dan, over to you to start the Q and A session.

Operator

Thanks, Marcelo. In order to get started, please minimize the presentation slides so that you can access the chat function on the left hand side of the webcast platform. Please limit yourself to 1 or 2 questions so that I can read, understand and convey them to our speakers. We will now pause briefly to compile your questions. Okay.

Operator

Well, actually, we have quite a few questions today, And we're going to try to get to as many of them as we possibly can. Thanks everybody for your participation. And we'll get started today with Thiago Bertolucci from Goldman Sachs, who says, Hi, Arcos team. Congrats on another solid quarter, and thanks for taking questions. Chago has a multipart question or set of questions that I'm going to split among our speakers here.

Operator

The first for you, Marcelo. Thiago says, repeating my question from the Q2, once again, you outperformed the industry by far. While your competitors continue to note a weak consumption backdrop, not just in burger, but across multiple QSR categories, how are you seeing demand going forward? Do you think this trend is exclusive for McDonald's or broad market based?

Speaker 1

Okay. Good morning, Thiago, and thank you for your questions. For sure, we are very pleased with the results we published today in terms of sales growth particularly. And it's important to mention that we expect to have a solid Q4, too, and in that sense, To close a very, very strong 2023. The momentum we captured at the beginning of the year in the first half continued throughout the Q3.

Speaker 1

And comparable sales growth well above inflation was driven by several things, and most of them, I would say, are long term things or fundamentals of the business. Beginning with the structural advantage that we have in terms of our footprint, The freestanding restaurants, the amount of freestanding restaurant that we have is a huge advantage. And this is getting bigger Since we are accelerating our expansion and 90% or more of the new restaurant units are freestanding. Then We have the consistent execution of our 3 d strategy, our robust digital platform. And finally, I think that it is important to mention that We are executing a pricing strategy based on offering compelling value across the entire menu board, which is A huge it has a huge impact in terms of the value perception of the customers.

Speaker 1

That's why not only Comparable sales results are very strong, but the McDonald's brand strength is at an all time high in the region. So our plan is clear, is to continue to drive sustainable sales growth and in that way generate operating leverage and improve long term With that, I'm pretty we are pretty confident in our ability to continue capturing opportunities to sustain strong operating results Since none of the current growth drivers are short term.

Operator

Great. And then, Tiago has a sequence of questions that I think are Most appropriate for you, Luis. First is, we're seeing your closest competitor being selectively more aggressive on pricing. I believe he's talking about Brazil here. What is your strategy to fight this?

Operator

And what were the implications in terms of traffic and tickets in same store sales in the Q3 of 'twenty three.

Speaker 2

Yes, okay. Thank you, Thiago. Between going to the part of the question that is Talking about the traffic and the ticket, they are evenly split, okay, as we've already mentioned. And The second part of the question, the answer is that we're going to sustain the growth, like Marcelo already remarked, Primarily focusing on improving, 1st, our operations, that today operational excellence, we believe, is an Important competitive advantage and strategic pillar for us. We will keep on offering good value for our guests through every channel, Digital delivery drive through from counter and of course, these are centers.

Speaker 2

And we're very confident That we have a very solid strategy for the near

Operator

future. Great. Ulises also sorry, Thiago also asks, You apparently gained significant market share and delivery in Brazil this quarter. Could you please share more color on the performance within the on premise channel for both Freestanding and Food Courts.

Speaker 2

Yes. We had a very expressive increase in our delivery, Not only sales and volumes and market share, and we did this despite a very important recuperation in front counter and the search centers In both restaurant formats, freestanding and front counters and food courts, I'm sorry. This recuperation in the sales in FrontCounter and D'Searns were aided By a very effective affordable platform and a special focus, like I said, on operational excellence.

Operator

Great. And then finally for you, Luis, NOLAD posted a nice sequential acceleration in growth. And Thiago asked what drove this?

Speaker 2

Okay. NOLAD's evolution, the explanation is not one single bullet. We have a very solid plan in the division. It includes a product mix strategy. And when I said product mix, I'm talking about the course, The premiums, desserts, chicken, a very aggressive set of actions in delivery, Drive Thru and Digital and in many markets several brand building campaigns, okay.

Speaker 2

So Very solid and aggressive plan, but the beauty is that most of the divisions country are contributing to this result and mostly In hard or very consistent currencies.

Operator

Great. Thanks, Luis. The next one also from Thiago for you, Mariano. You mentioned some pressure on rents in Brazil despite the negative IGPM index. How should we add this up and how much of a tailwind Could this be to margins going forward?

Speaker 3

Hi, Thiago. Thank you for the question. Actually, it's not rank itself. The line with some modest pressure is occupancy and other operating expenses, which consist of many items with different trends, And we are not seeing a specific pressure in rent, in particular in Brazil. Having said that, We are, of course, very pleased with the 25% growth in EBITDA in the quarter.

Operator

And actually back to you, Luis. Last one from Thiago, can you share more about your app's Net Promoter Score and potential areas for improvement in Brazil?

Speaker 2

The app has the greatest rating in the country and we will continue to invest to maintain the connection. And I would say, Thiago, the level of favoritism that it has with our customers, okay? So we're going to keep on Investing on features or new functionalities. Perfect.

Operator

Let's move now to Bob Ford from Bank of America. Congratulations on the quarter. Bob also with a multipart question. He starts with, how do you expect results like this to influence your MFA renewal? Does McDonald's appreciate the high cost of capital and volatility in the region?

Operator

What are your early thoughts on the new MFA in terms of royalty rates and capital investment commitments? And I'll give that one to you, Marcelo.

Speaker 1

Okay. Thank you, and thank you, Bob, for your questions and being here today. I think that this renewal process is taking place in a very favorable time For the McDonald's system in general and for Arcos Dorados, the McDonald's brand attributes are the strongest they have ever been in the region, in almost all countries in Latin America and the Caribbean. Both companies have been generating strong financial results, which is very important. Arco Jourados is consolidating its leadership position with historically High market share, including in some cases 2 or 3 times as much market share as our nearest competitor in main markets, in very important markets.

Speaker 1

And Argos is also generating returns on investment for both openings and modernizations, well above our historical average. Maybe a very important point, I think that both companies see significant growth potential in the region for many years to come. So that's why I say that this renewal process is taking place in a favorable time. With all that said, we do not expect to have news and details. We expect to the MFA renewal Until next year.

Speaker 1

So stay in touch, and we will share as soon as possible any news around this process.

Operator

Great, thanks. Bob's next question is also how are you thinking about labor reform risks in Mexico and the step up in wages for 2024, where do you perceive opportunities to mitigate? And I'll give that one to you, Mariano.

Speaker 3

Perfect. Thank you, Bob. Thank you for being again in the call. In Mexico, in the last 3 years, in fact, we have seen several pressures Having salaries growing well above inflation, and we have been able to mitigate This impact by improving productivity in our restaurants. And in fact, we have been doing that extremely well.

Speaker 3

But most important, I would remark that the increase of disposable income in consumers' pockets, coupled, of course, with the right Strategy to attract these customers to our stores resulted in sales increases in Mexico well above inflation, And I think that they help to explain the great growth story we are seeing in that market.

Operator

Great. Thanks, Mariano. And then last one from Bob that actually is also related to a question that we received from Ulises of JPMorgan. So I'll read it from Bob first. Lastly, can you comment on your loyalty program So far in terms of adoption, costs and returns, also our frequency and average ticket actually changing or is there a selection bias?

Operator

And then Ulises asks a similar question or a related question to loyalty. Ulises Argote from JPMorgan. With the broader rollout of the loyalty program, can you comment on the engagement you're seeing both for in store and digital channel dynamics? So all sort of loyalty related, and I'll give those to you, Luis.

Speaker 2

All right. Hello, Bob and Good morning. As we've mentioned, we're very happy. In October, we've launched our loyalty program in all restaurants in Brazil, And we were able to accelerate the process and add Uruguay too. We have already reached 1,800,000 members and we expect to increase the volume of identified sales as the program grows.

Speaker 2

This is important because Loyalty, what it does is boosts the power of the mobile app, okay? And thus this increasing or driving More frequency, okay. It drives visit frequency, while increases the percentage of identified sales. And that combination Gives us or allows us to provide a more personalized guest experience. So and this New or more personalized guest experience allows us to increase our ticket that every ticket, Every transaction can be more profitable.

Speaker 2

And of course, what it does is our marketing efforts with our marketing investments. So that would be the impact and we intend to roll out the program to most markets by the end of next year.

Operator

Great. Thanks, Luis. Next, a couple of questions from Julia Rizzo of Morgan Stanley. She starts with, could you please break down same store sales growth in Brazil by freestanding stores and malls? And also mentions that the impressive same store sale year to date despite macro headwinds, I understand comps are harder in the Q4 of 'twenty 3.

Speaker 1

So what should we expect

Operator

for same store sales? So what should we expect and how are same store sales doing now? Let's start with those 2, Marcelo.

Speaker 1

Okay. Good morning, Giulio, and thanks for your questions. In terms of restaurant formats, We did extremely well in Brazil and in the whole company in all different formats. Obviously, in the case of freestanding units, It's a competitive advantage, the fact that you can operate drive thru in that format, which is still contributing to our sales and Delivery is much easier to be operated from those formats, from the freestanding units. But We did well even in shopping malls, particularly in July.

Speaker 1

The traffic generated by cinemas Was pretty impressive, and we did well in shopping malls, too. And in the second part of the question, as I mentioned, I think in the first question that Came from Tiago. We are very pleased with the trends and the momentum we are experiencing in terms of sales. The base of comparison is getting harder and harder to beat because we are in a run of several quarters of expressive and material comparable sales growth well above inflation. But again, there are many drivers, many venues of bringing Even more sales to our restaurants, and we continue to execute our strategy with a very disciplined approach.

Speaker 1

And there are still opportunities to improve our results. So we are pretty convinced that We will do well for the rest of the year and next year too.

Operator

Okay. And then Julius, last question, little bit different topic, but we'll stay with you, Marcelo. Can you remind me how is the evolution of new openings in terms of sales and margins for year 1, year 2 and maturity?

Speaker 1

Okay. In terms of the maturity of the restaurants, typically in the past, we talked about 3 to 4 years For the restaurants to get to the mature level of sales, I would say that after the pandemic, we are talking more about 3 years than 4. I think that the curve of maturity got shorter, but That's something that we continue to look at and to get information from the recent investments. And in terms of returns, what we expect at least is a 20% return cash on cash for the 1st year. So obviously, that number gets better from year 2 and so on.

Speaker 1

And in the last 2 or 3 years, the returns We're above that 20%. That is the minimum we asked for the openings. So we are Very pleased with the kind of results that our new restaurants are generating from day 1.

Operator

Great. Thanks, Marcelo. Next from Felipe Casimiro from Bradesco. He actually asked a couple of questions that we've, I think, already answered. Could you break down Brazil same store sales between average check Growth and guest volume, I think Luis touched on that, about evenly split.

Operator

And going forward, how can you sustain the solid same store sales growth and Brazil and Nolad, I think also Luis touched on sustaining sales. So I'll go to question number 2. If anybody has something to add to question 1, then we can come back to it. But Question number 2, which I believe is for you, Mariano. How should we think about gross margin expansion sustainability considering beef prices are likely to increase in the next 12 months.

Speaker 3

Yes. The outlook we have For margins, we have seen in this actually in this quarter an improvement in wood and paper costs of 90 basis points. And for the rest of 2023, We are also seeing that food and paper costs will remain higher Than what they were what it was in 2020, 22. So that's the main trend That we are seeing now in terms of gross margin for 2023 and The expectation, of course, is to continue negotiating with our main suppliers, taking advantage of All the large scale and the volumes that we have that actually are unique in the industry.

Operator

Okay. Let's stick with you, Mariano, and this is Felipe's last Multi part question. Could you please explore a bit more the Slat EBITDA margin drop due to higher other operating expenses and higher G and A? What are the main drivers of higher expenses? And should we expect continuous deterioration of expenses in SLAD?

Speaker 3

Yes. Well, first, don't take SLAD's Q3 as a trend. And also keep in mind that in SLAD, at the restaurant level, which includes food and paper, payroll, other operating expenses and royalties. We are seeing an expansion in margins of 120 basis points during the quarter. In terms of G and A and other operating income, there are several positives and negatives that apply during the quarter That should not be taken as the trend going forward.

Speaker 3

I think that answers the question for a bit.

Operator

Great. Thanks, Mariano. Next, Laura Irata from Santander. Good morning, everyone. Congratulations for these results.

Operator

Regarding same store sales growth, could you please share with us how much the digital sales have contributed for this strong increase in this quarter? And what can we expect of digital sales as a percentage of total sales going forward? And so over to you, Luce.

Speaker 2

All right. Thank you, Laura, for the question. Digital sales this last quarter were up 47% And reached more than $731,000,000 that this is a new quarterly record. This digital sales accounted for 50% of our system wide sales, and we have an opportunity to equalize, I would say the performance in many markets because we have big variations when we compare market to market. So there we have an opportunity.

Speaker 2

Our top in not only digital sales, but in identified sales is Brazil. The digital sales for the country accounts for 60% and identified sales for 25%. So what we can see what you can see in the near future is that we're going to keep on investing on developing This and developing this tool, this channel, because for us, it's going to be Really, really important in the future.

Operator

Great. Thanks. And earlier I had mentioned that Elyse Zagolte from JPMorgan had a couple of questions. Answered one already. The other one where he says, Hi, team congrats on the strong results.

Operator

You mentioned higher ROI on new restaurants. Can you comment on return metrics and sales list for the stores you're remodeling? And I'll give that one to you, Marcelo.

Speaker 1

Yes. Thanks, Luis, for the question. As we look at the numbers that we are experiencing in those restaurants that are converted are modernized and converted into the EOTF platform typically is in the high single digits when compared to the

Speaker 3

That brings

Speaker 1

a pretty solid, a pretty healthy return on that investment. And that's why We are experiencing the kind of comparable sales growth well above inflation, well above the rest of the market, our peers, in markets where we are deploying EOTF, which is Almost in every single market of the company. And that's why in markets where we started with the process later, for example, in the north part of Mexico, where we only have 20% of the restaurants converted to EOTF, that's one of the growth Drivers which are for the long term that I mentioned at the beginning. So we will continue to see this kind of positive impact in our Comparable sales coming from all the investments we are making in the EODF format.

Operator

Great. Thanks, Marcelo. We actually have a follow-up question from Julia Rizzo of Morgan Stanley. I think maybe just didn't hear the number. So Sorry, a follow-up here.

Operator

Sales in year 1 is how much of a mature store. And I believe Marcelo said in the 75% to 80% range for year 1. So that just so everybody has that number as well. And it looks like we actually don't have any additional questions. So we've reached the end of the Q and A session for today's call.

Operator

Thanks again, everyone, for your interest in Arcos Dorado and for joining today's webcast. Look forward to speaking with you again in the middle of March on our Q4 call. Until then, have a great day. Stay safe and happy Thanksgiving to those who celebrate.

Powered by Quartr
Earnings Conference Call
Arcos Dorados Q3 2023
00:00 / 00:00