ARCO Arcos Dorados Holdings Inc

Arcos Dorados Holdings Inc. (NYSE: ARCO) (“Arcos Dorados” or the “Company”), Latin America’s largest restaurant chain and the world’s largest McDonald’s franchisee, today reported unaudited results for the second quarter ended June 30, 2011.

Second Quarter 2011 Highlights

• Revenues increased by 28.7% year-over-year, or by 18.5% on a constant currency basis, to US$ 888.5 million
• Systemwide comparable sales increased by 14.8% year-over-year
• 72 net additions of restaurants over the last 12 months
• Adjusted EBITDA1 increased by 47.6% year-over-year, or by 29% on a constant currency basis, to US$ 67.9 million; Net income increased by 5.6% to US$ 14.2 million
• Guidance for 2011 revised upward: Revenue growth of 22-24%, Adjusted EBITDA1 growth of 18-20% and Net Income growth of 35-45% in 2011

“In the second quarter, Arcos Dorados continued to build upon its solid foundation for market growth and development. With the completion of our IPO and debt restructuring, the Company is continuing to implement its strategic priorities and deliver long term attractive returns for its shareholders,” said Sergio Alonso, COO of Arcos Dorados.

“In addition to the robust results we achieved in Brazil, SLAD also made strong contributions during the period, with revenue growth of 43.2% year-over-year. Our ability to maintain growth and profitability in the face of inflationary pressure in several of our key operating countries highlights the success of the Arcos Dorados’ menu offering, our ability to achieve the right mix of products and constantly enhance operating efficiencies,” Mr. Alonso concluded.

Second Quarter Results

Arcos Dorados’ second quarter revenues increased by 28.7% to US$ 888.5 million. On a constant currency basis, revenue growth was 18.5%. The increase was driven by systemwide comparable sales growth of 14.8% and the net addition of 72 restaurants over the last 12-month period.

The Company’s solid revenue performance was driven by growth across all of its divisions. Brazil, the Company’s largest division, reported revenue growth of 26.9% year-over-year, including 10.2% growth in systemwide comparable sales. NOLAD’s (Mexico, Panama and Costa Rica) revenues increased by 21.8% year-over-year, with a systemwide comparable sales increase of 9.7%. SLAD’s (Argentina, Venezuela, Colombia, Chile, Perú, Ecuador, and Uruguay) revenues grew by 43.2% compared to the second quarter of 2010, mainly driven by a 33.1% increase in systemwide comparable sales. The Caribbean division (Puerto Rico, Martinique, Guadeloupe, Aruba, Curaçao, F. Guiana, US Virgin Islands of St. Thomas and St. Croix) reported revenue growth of 3.9% above the second quarter of 2010, and stable systemwide comparable sales.

Adjusted EBITDA1 for the second quarter of 2011 was US$ 67.9 million, a 47.6% increase over the same period of 2010 (or 29% on a constant currency basis). Arcos Dorados’ Adjusted EBITDA1 improvement in the second quarter of 2011 was driven by revenue growth and improvements in labor productivity in the Company’s Brazilian division, controlled salary increases in SLAD, and increased operating leverage in NOLAD. These improvements were partially offset by (i) higher corporate expenses, which included increased outsourced and professional services in line with the expansion of the Company; (ii) as well as higher payroll resulting mainly from the impact of higher inflation in Argentina, where the majority of corporate headcount is located; (iii) higher share-based compensation (primarily related to ongoing CAD and EIP grant) and, to a lesser degree, by (iv) lower Adjusted EBITDA1 in the Caribbean Division of US$ 1.7 million.

The Adjusted EBITDA1 margin as a percentage of total revenues was 7.6% for the quarter, up 98 bps compared to the second quarter of 2010. Overall, the Company continued driving revenue growth through new product launches and offering relevant food and beverage choices, while also effectively managing costs as a percentage of revenues.

Additionally, during the second quarter, the Company registered a special charge of US$ 13.6 million, which was excluded from adjusted EBITDA1 and is related to (i) an incremental compensation expense related to its existing liability awards (CADs) and which corresponds to the remeasurement of the accrued liability based on the opening share price on the first day of trading (US$ $21 per share); and (ii) IPO-related special awards.

Net income attributable to the Company was US$ 14.2 million in the second quarter of 2011, up 5.6% from the US$ 13.5 million reported in the second quarter of 2010. This is mainly due to improved operating and foreign currency exchange results. These were partially offset by higher losses on derivative instruments. The above-mentioned mark-to-market charges are expected to be reduced going forward, given the cancellation of many of these derivative instruments in July 2011 (please refer to “Debt Restructuring”). Income tax expense for the period totaled US$ 4.8 million, resulting in an effective tax rate of 24.8% for the quarter.

The Company reported basic earnings per share (EPS) of US$ 0.07 in the second quarter of 2011, compared to US$ 0.06 in the second quarter of 2010. This increase of 22.8% was a result of the 5.6% growth in net income, as well as a lower weighted-average number of outstanding shares (please refer to Axis Split-off and IPO explanations in previous releases).

Balance Sheet & Cash Flow Highlights

Cash and cash equivalents were US$ 254.4 million at June 30, 2011. The Company’s total financial debt (including derivative instruments) was US$ 573.9 million, with net debt (total financial debt less cash and cash equivalents) of US $ 319.5 million and a Net Debt/Adjusted EBITDA1 ratio of 1.0x at June 30, 2011. Cash generated from operating activities was US$ 50.1 million in the second quarter of 2011, increasing over the same period last year, and driven by improvements in operating results. In addition, during April 2011, the Company collected net proceeds from its Initial Public Offering in the amount of US$ 152.3 million and on April 1, 2011, the Company paid a dividend of US$ 12.5 million. Capital expenditures (CapEx) for the period were US$ 71.5 million, with the funds mainly being utilized for restaurant openings and re-imagings during the quarter.

First Half 2011

For the six months ended June 30, 2011, the Company’s revenues grew by 25.9% (17.4% on a constant currency basis) to US$ 1,715 million, with all divisions posting revenue growth. Additionally, adjusted EBITDA1 reached US$ 140.2 million, an increase of 21.6% compared to the first half of 2010, which was driven by growth in the Brazil, SLAD, and NOLAD divisions. The Company has managed overall operating costs, while G&A has grown in anticipation of the expansion of new units. Year-to-date consolidated net income amounted to US$ 49.7 million, increasing by 39.1% over the first half of last year. Additionally, total CapEx amounted to US$ 104.3 million for the period, compared to US$ 40.8 million in the first half of 2010.

Quarter Highlights & Recent Developments

Revised Guidance 2011

Based on stronger than forecasted year-to-date results and the current outlook for operations and currencies for the remainder of 2011, Arcos Dorados has modified its outlook for the full-year 2011. The Company now expects year-over-year consolidated revenue growth of 22-24% and Adjusted EBITDA1 growth of 18-20%. Additionally, the Company estimates an increase in net income of 35-45% in 2011.

New Independent Board Member Appointed

On June 6, 2011 Arcos Dorados announced the appointment of José Alberto Vélez, CEO of Cementos Argos, S.A. as an independent Director of its Board.

Dividend

On July 6, 2011, the Company paid a cash dividend of US$ 12.5 million or US$ 0.0597 per share of outstanding Class A and Class B shares to shareholders of record at June 17, 2011.

Debt Restructuring

In July 2011, the Company concluded a series of transactions to restructure its debt profile: On July 8, 2011, the Company issued 5-year R$ 400 million BRL-denominated Senior Unsecured Notes at a rate of 10.25% (US$ equivalent of approximately $255.1 million). The Notes mature on July 13, 2016. Subsequently, on July 18, 2011, the Company redeemed a portion (31.42% or $141.4 million) of its outstanding 7.50% Senior Notes due in 2019 at a redemption price equal to 107.50%, plus accrued and unpaid interest. Finally, in July 2011, the Company cancelled certain derivative instruments in the amount of US$ 91.6 million.

As a result of the aforementioned transactions, the Company was able to:

i. reduce its cost of funding generating future savings of approximately 300-400 basis points per year without significantly changing its gross debt position;

ii. maintain an adequate level of US Dollar exposure in its debt structure in accordance with its financial policies; and

iii. significantly reduce the foreign exchange volatility on its Income Statement related to the use of derivatives

In the third quarter of 2011, the Company will recognize one-time charges before taxes associated with the senior notes redemption as well as the unwinding of its derivative instruments, of approximately US$ 16.6 million.

Expanded Menu Options

On July 26, 2011, Arcos Dorados announced its plans to expand menu options on October 1, 2011 for all of its territories to include an array of fresh produce, reduced calorie and sodium content for some of its menu items, as well as certain reduced portion sizes. In addition, it will offer a new lower calorie Happy Meal. This initiative complements the Company’s iconic menu items and strengthens Arcos Dorados’ portfolio and overall nutritional profile. Arcos Dorados seeks to offer a wide array of options to customers while actively balancing flavor with the nutritional attributes of each new menu item.

Senior Management Appointment

The Company has appointed José Valledor to the position of Divisional President of the Brazil Division. Mr. Valledor was most recently the Regional Director for the Southern Cone operations since 2008 and has over 20 years’ experience in the McDonald´s system. Brazil’s current Divisional President, Marcelo Rabach, has been named Vice President of Operations Development for the Company.

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.

About Arcos Dorados

Arcos Dorados is the world’s largest McDonald’s franchisee in terms of systemwide sales and number of restaurants, operating the largest quick service restaurant (“QSR”) chain in Latin America and the Caribbean. It has the exclusive right to own, operate and grant franchises of McDonald’s restaurants in 19 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, Uruguay and Venezuela. The Company operates or franchises 1,755 McDonald’s-branded restaurants with over 80,000 employees serving approximately 4 million customers a day. 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 our website: www.arcosdorados.net

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 for 2011. 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.

Use of Non-GAAP Financial Measures(1)

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 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 expenses, net and within general and administrative expenses in our statement of income: compensation expense related to a special award granted to our chief executive officer, incremental compensation expense related to our 2008 long-term incentive plan, gains from sale of property and equipment, write-off of property and equipment, contract termination losses, and impairment of long-lived assets and goodwill, and stock-based compensation and bonuses incurred in connection with the Company’s initial public listing.

Second Quarter 2011 Consolidated Results (Unaudited)

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

          For Three Months ended June 30, 2011 2010 REVENUES Sales by Company-operated restaurants 852,042 663,460 Revenues from franchised restaurants   36,447     27,126   Total Revenues   888,489     690,586     OPERATING COSTS AND EXPENSES Company-operated restaurant expenses: Food and paper (302,336 ) (238,117 ) Payroll and employee benefits (167,791 ) (136,273 ) Occupancy and other operating expenses (231,302 ) (184,288 ) Royalty fees (41,484 ) (32,553 ) Franchised restaurants - occupancy expenses (11,973 ) (9,516 ) General and administrative expenses (95,698 ) (54,788 ) Other operating income/(expenses), net   (1,801 )   (2,534 ) Total operating costs and expenses   (852,385 )   (658,069 ) Operating income   36,104     32,517   Net interest expense (10,415 ) (10,065 ) Loss from derivative instruments (7,898 ) (2,892 ) Foreign currency exchange results 2,105 (343 ) Other non-operating expenses, net   (745 )   (834 ) Income before income taxes   19,151     18,383   Income tax expense   (4,754 )   (4,989 ) Net income   14,397     13,394   Net (income) loss attributable to non-controlling interests   (162 )   85   Net income attributable to Arcos Dorados Holdings Inc.   14,235     13,479     Earnings per share information ($ per share):     Basic net income per common share attributable to Arcos Dorados Holdings Inc. $ 0.07   $ 0.06   Weighted-average number of common shares outstanding-Basic   208,063,349     241,882,966     Adjusted EBITDA Reconciliation Operating income 36,104 32,517 Depreciation and amortization 15,998 13,997 Other operating expenses classified as non-cash 1,367 553 Other operating (income) expenses classified as non-recurring 810 (1,080 ) Special charges   13,590     0   Adjusted EBITDA   67,869     45,987   Adjusted EBITDA Margin as % of total revenues 7.6 % 6.7 %    

First Half 2011 Consolidated Results (Unaudited)

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

      For Six Months ended June 30, 2011     2010 REVENUES Sales by Company-operated restaurants 1,643,394 1,307,104 Revenues from franchised restaurants   71,752     54,707   Total Revenues   1,715,146     1,361,811     OPERATING COSTS AND EXPENSES Company-operated restaurant expenses: Food and paper (580,170 ) (463,499 ) Payroll and employee benefits (327,706 ) (257,973 ) Occupancy and other operating expenses (442,654 ) (358,593 ) Royalty fees (79,955 ) (63,970 ) Franchised restaurants - occupancy expenses (24,393 ) (19,281 ) General and administrative expenses (164,445 ) (105,140 ) Other operating income/(expenses), net   862     (8,122 ) Total operating costs and expenses   (1,618,461 )   (1,276,578 ) Operating income   96,685     85,233   Net interest expense (20,199 ) (19,637 ) Loss from derivative instruments (12,225 ) (7,990 ) Foreign currency exchange results 1,864 (3,110 ) Other non-operating expenses, net   (1,183 )   (1,918 ) Income before income taxes   64,942     52,578   Income tax expense   (14,946 )   (16,873 ) Net income   49,996     35,705   Net (income) loss attributable to non-controlling interests   (271 )   39   Net income attributable to Arcos Dorados Holdings Inc.   49,725     35,744     Earnings per share information ($ per share):     Basic net income per common share attributable to Arcos Dorados Holdings Inc. $ 0.22   $ 0.15   Weighted-average number of common shares outstanding-Basic   221,408,769     241,882,966     Adjusted EBITDA Reconciliation Operating income 96,685 85,233 Depreciation and amortization 31,123 28,368 Other operating expenses classified as non-cash 1,685 754 Other operating (income) expenses classified as non-recurring (2,889 ) 982 Special charges   13,590     0   Adjusted EBITDA   140,194     115,337   Adjusted EBITDA Margin as % of total revenues 8.2 % 8.5 %    

Second Quarter and First Half 2011 Results by Division (Unaudited)

(In thousands of U.S. dollars)

                    For Three Months ended % Increase For Six Months ended % Increase June 30, / June 30, / 2011   2010     (Decrease)

2011

  2010     (Decrease)

Revenues

    Brazil 461,936 363,902 27% 892,063 718,520 24% Caribbean 67,483 64,919 4% 132,056 127,385 4% NOLAD 89,510 73,463 22% 171,743 141,464 21% SLAD 269,560   188,302     43% 519,284   374,442     39% TOTAL 888,489   690,586     29% 1,715,146   1,361,811     26%    

Adjusted EBITDA (1)

Brazil 62,074 40,962 52% 128,566 99,241 30% Caribbean 3,074 4,760 -35% 6,282 9,531 -34% NOLAD 4,883 2,204 122% 7,868 4,202 87% SLAD 23,568 14,442 63% 42,933 32,742 31% Corporate and Other (25,730)   (16,381)     57% (45,455)   (30,379)     50% TOTAL 67,869   45,987     48% 140,194   115,337     22%    

Total Restaurants (eop) & Systemwide Comparable Sales Growth

           

TotalRestaurants*

Comp. Sales 2Q11vs. 2Q10 (%)

Brazil 625 10.2 % Caribbean 144 (0.3 )% NOLAD 473 9.7 % SLAD 525 33.1 % TOTAL 1,767 14.8 %

* Considers company-operated and franchised restaurants at period-end

Summarized Consolidated Balance Sheet

(In thousands of U.S. dollars)

        As of, As of,  

June 30, 2011(Unaudited)

December 31,2010

  ASSETS Current assets Cash and cash equivalents 254,404 208,099 Accounts and notes receivable, net 82,917 79,821 Other current assets (1) 189,323 264,435 Total current assets 526,644 552,355   Non-current assets Property and equipment, net 1,015,671 911,730 Net intangible assets and goodwill 56,436 47,264 Deferred income taxes 206,361 190,764 Other non-current assets (2) 68,085 82,153 Total non-current assets 1,346,553 1,231,911 Total assets 1,873,197 1,784,266   LIABILITIES AND EQUITY Current liabilities Accounts payable 118,604 186,700 Taxes payable (3) 110,835 124,677 Accrued payroll and other liabilities 217,162 211,231 Other non-current liabilities (4) 24,682 24,631 Financial debt (5) 65,281 57,909 Total current liabilities 536,564 605,148   Non-current liabilities Accrued payroll and other liabilities 55,077 53,475 Provision for contingencies 52,337 63,940 Financial debt (5) 508,645 506,130 Deferred income taxes 8,658 6,378 Total non-current liabilities 624,717 629,923 Total liabilities 1,161,281 1,235,071 Shareholders’ equity Class A shares of common stock 351,654 226,528 Class B shares of common stock 132,915 151,018 Additional paid-in capital (48) (2,468) Retained earnings 296,103 271,387 Accumulated other comprehensive loss (70,135) (98,664) Total Arcos Dorados Holdings Inc shareholders’ equity 710,489 547,801   Non-controlling interest in subsidiaries 1,427 1,394 Total shareholders’ equity 711,916 549,195     Total liabilities and shareholders’ equity 1,873,197 1,784,266     (1) Includes "Other receivables", "Inventories", "Prepaid expenses and other current assets" and "Deferred income taxes". (2) Includes "Miscellaneous", "Collateral deposits" and "McDonald´s Corporation´ indemnification for contingencies". (3) Includes "Income taxes payable" and "Other taxes payable". (4) Includes "Royalties payable to McDonald´s Corporation" and "Interest payable". (5) Includes "Short-term debt", "Long-term debt" and "Derivative instruments"    

Consolidated Financial Ratios

(In thousands of U.S. dollars, except ratios)

          As of As of June 30, 2011 December 31, (Unaudited) 2010 Cash & cash equivalents 254,404 208,099 Total Financial Debt (i) 573,926 564,039 Net Financial Debt (ii) 319,522 355,940 Total Financial Debt / LTM Adjusted EBITDA ratio 1.8 1.9 Net Financial Debt / LTM Adjusted EBITDA ratio 1.0 1.2   (i) Total financial debt includes short-term debt, long-term debt and derivative instruments

(ii) Total financial debt less cash and cash equivalents