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 third quarter ended September 30, 2011.

Third Quarter 2011 Highlights

• Revenues increased by 24.7% year-over-year, or by 19.8% on a constant currency basis, to US$ 984.0 million
• Systemwide comparable sales increased by 15.7% year-over-year
• 64 net additions of restaurants over the last 12 months
• Adjusted EBITDA1 increased by 11.5% year-over-year, or by 2.0% on a constant currency basis, to US$ 95.0 million; Net income amounted to US$ 19.6 million
• Trinidad & Tobago becomes 20th territory, first restaurant is opened
• Debt profile restructured to reduce cost of funding, more closely match currency exposure and diminish foreign exchange volatility
• Given recent currency movement, guidance for 2011 is revised: Revenue growth of between 21-23%, Adjusted EBITDA1 growth of between 14-16% and Net Income growth of between 16-18% 2011 (based on current foreign exchange and stock market levels).

“During the third quarter Arcos Dorados experienced enhanced systemwide comparable sales both on a year over year and sequential basis, demonstrating the sustained demand of our consumers throughout the region. We also continued to reimage and open new restaurants at an impressive pace in accordance with our plan, contributing to overall revenue growth. On a store level, strong growth persists as customers continue to prioritize the McDonald’s brand, products and customer service,” said Woods Staton, CEO of Arcos Dorados.

Third Quarter Results

Arcos Dorados’ third quarter revenues increased by 24.7% to US$ 984.0 million. On a constant currency basis, revenue growth was 19.8%. The increase was driven by systemwide comparable sales growth of 15.7% and the net addition of 64 restaurants over the last 12-month period.

All of the Company’s divisions posted revenue growth, with the Brazil division growing 24.4% year-over-year. Systemwide comparable growth of 11.7% was primarily a result of average ticket expansion through a combination of pricing and product mix changes. NOLAD’s (Mexico, Panama and Costa Rica) revenues increased by 17.4% year-over-year, with a systemwide comparable sales increase of 8.6%. SLAD’s (Argentina, Venezuela, Colombia, Chile, Perú, Ecuador, and Uruguay) revenues grew by 33.9% compared to the third quarter of 2010, mainly driven by a 31.7% increase in systemwide comparable sales. The Caribbean division (Puerto Rico, Martinique, Guadeloupe, Aruba, Curaçao, F. Guiana, Trinidad & Tobago, US Virgin Islands of St. Thomas and St. Croix) reported revenue growth of 2.6% above the third quarter of 2010, with a decline in systemwide comparable sales of 1.9%, impacted primarily by the difficult economic climate in that region.

Adjusted EBITDA1 for the third quarter of 2011 was US$ 95.0 million, an 11.5% increase over the same period of 2010 (or 2% on a constant currency basis). Arcos Dorados’ Adjusted EBITDA1 in the third quarter of 2011 was driven by revenue growth and consolidated improvements in Food & Paper costs as a percentage of sales, which included Adjusted EBITDA1 growth in the three major divisions (Brazil, SLAD, and NOLAD). These improvements were partially offset by (i) higher payroll expenses; (ii) higher share-based compensation (primarily related to ongoing CAD and EIP grant) of approximately US$ 9 million; (iii) higher corporate expenses, relating to increased payroll resulting mainly from the impact of inflation significantly above currency devaluation in Argentina, where the majority of corporate headcount is located as well as headcount increases consistent with regional growth needs; and (iv) lower Adjusted EBITDA1 in the Caribbean division.

The Adjusted EBITDA1 margin as a percentage of total revenues was 9.7% for the quarter, down 1.1 percentage points compared to the third quarter of 2010. Overall, the Company’s business remained strong at the restaurant level, with continued gains in food and paper efficiencies pressured by the growth in G&A consistent with the overall expansion of the Company.

Net income attributable to the Company was US$ 19.6 million in the third quarter of 2011, down from the US$ 29.1 million reported in the third quarter of 2010. The Company’s improved operating income was offset by higher net interest expense, which included previously disclosed one-time charges (US$ 13.9 million) for the redemption of 2019 Senior Notes, (please refer to “Debt Restructuring”) and by foreign currency exchange charges of US$ 20.9 million principally related to the impact on balance sheet accounts of the Brazilian currency depreciation from R$1.56 on June 30, 2011 to R$1.87 on September 30, 2011, on (i) debt in the Brazilian subsidiary of US$ 70 million in a currency (US dollar) different from the subsidiary’s functional currency (Brazilian reais) and (ii) a net receivable denominated in Brazilian reais of R$73.6 million at the holding company level, where the functional currency is the US dollar. These charges are non-cash accounting charges. These effects were partially compensated by a gain from derivative instruments of US$ 4.7 million in the quarter which mainly included (i) a gain for the mark-to-market of existing coupon-only cross currency swaps to hedge interest payments, (ii) a charge of US$ 2.7 million corresponding to the mark-to-market of derivative instruments until July, 2011, and which were settled during the same month and (iii) a US$ 2.7 million one-off charge for the unwinding of said derivative instruments in July, 2011 (please refer to “Debt Restructuring”).

Income tax expense for the period totaled US$ 9.5 million, resulting in an effective tax rate of 32.3% for the quarter.

The Company reported basic earnings per share (EPS) of US$ 0.09 in the third quarter of 2011, compared to US$ 0.12 in the third quarter of 2010. The decrease was a result of lower net income, partially offset by 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$ 251.1 million at September 30, 2011. The Company’s total financial debt (including derivative instruments) was US$ 547.9 million, which included US$ 306.5 million corresponding to the accounting balance of the 2019 USD Notes and R$ 400 million BRL 2016 Notes issued in July, 2011. Net debt (total financial debt less cash and cash equivalents) was US$ 296.8 million and the Net Debt/Adjusted EBITDA1 ratio was 0.9x at September 30, 2011. Cash generated from operating activities was US$ 90.7 million in the third quarter of 2011, in line with the same period last year. In addition, during July 2011, the Company restructured a portion of its debt, by which it (i) collected proceeds of R$400 million related to the BRL bond issuance, (ii) redeemed a portion of its outstanding 2019 USD Notes for US$ 152 million (equivalent to US$ 141.4 million of the principal amount), (iii) paid US$ 91.6 million for unwinding the majority of the then outstanding derivative instruments related to a notional amount of US$ 200 million, and (iv) paid a dividend of US$ 12.5 million. Capital expenditures (CapEx) for the period were US$ 78.1 million, with the funds mainly being utilized for restaurant openings and re-imagings during the quarter.

Nine Months 2011

For the nine months ended September 30, 2011, the Company’s revenues grew by 25.5% (18% on a constant currency basis) to US$ 2,699.1 million, with revenue growth in all divisions. Additionally, adjusted EBITDA1 reached US$ 235.2 million, an increase of 17.3% compared to one year ago, which was driven by growth in the Brazil, SLAD, and NOLAD divisions. The Company has managed overall operating costs, while G&A grew in anticipation of the expansion of new units. Year-to-date consolidated net income amounted to US$ 69.3 million, increasing by 6.8% over the first nine month period in 2010. Additionally, total CapEx amounted to US$ 182.5 million for the period, compared to US$ 84.7 million in the first nine months of 2010.

Quarter Highlights & Recent Developments

Revised Guidance 2011:

Although the Company is experiencing strong market momentum at the restaurant level, recent currency volatility, especially in the Brazil division, could impact consolidated fourth quarter results. As a result, and based on the current foreign exchange rate for the Brazilian reais (R$1.71/ US$1.00) for the remainder of 2011, along with the current quoted market price of the Company’s shares (US$22.89 per share), the Company expects consolidated revenues to grow by 21-23% and growth in Adjusted EBITDA of 14-16% compared with 2010. Additionally, the Company estimates an increase in net income of 16-18% in 2011.

Similarly, the capital expenditures plan continues and the Company expects an important number of restaurant openings during the fourth quarter 2011.

Dividend

On October 5, 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 September 27, 2011.

Debt Restructuring

In July 2011, the Company concluded a series of transactions to restructure its debt profile: On July 13, 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 recognized one-time charges before taxes associated with the senior notes redemption as well as the unwinding of its derivative instruments, of US$ 16.6 million.

Secondary Offering

On October 19, 2011, the Company completed a secondary public offering of 44,457,958 Class A shares (including over-allotment), listed on the New York Stock Exchange at a price of US$ 22.00 per share. The selling shareholders received the net proceeds from the offering and included DLJ South American Partners L.P., DLJSAP Restco Co-Investments LLC, Capital International Private Equity Fund V, L.P., CGPE V, L.P. and Gavea Investment AD, L.P. The Company’s controlling shareholder did not sell any shares in the offering.

Addition of new master franchise territory; Trinidad & Tobago

On September 30, 2011, Arcos Dorados opened its first restaurant in Trinidad & Tobago. The Company was granted an additional exclusive master franchise right from the McDonald’s Corporation for the territory. The country has an estimated population of 1.23 million; an estimated GDP of US$ 20.6 billion in 2010, and per capita income in 2009 of US$ 20,000. (Source: World Economic Fund - April 2010) This is an attractive opportunity for the Company and extends its presence to a total of 20 countries.

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 20 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, Trinidad & Tobago, 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, as of December 2010. 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 the Investors section of our website: www.arcosdorados.com.

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.

   

Third Quarter 2011 Consolidated Results (Unaudited)

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

      For Three Months ended September 30, 2011     2010 REVENUES Sales by Company-operated restaurants 943,166 756,405 Revenues from franchised restaurants   40,837     32,480   Total Revenues   984,003     788,885     OPERATING COSTS AND EXPENSES Company-operated restaurant expenses: Food and paper (328,173 ) (269,562 ) Payroll and employee benefits (189,371 ) (148,249 ) Occupancy and other operating expenses (242,345 ) (190,241 ) Royalty fees (45,732 ) (36,657 ) Franchised restaurants - occupancy expenses (13,252 ) (10,978 ) General and administrative expenses (89,403 ) (58,636 ) Other operating income/(expenses), net   (1,466 )   (5,840 ) Total operating costs and expenses   (909,742 )   (720,163 ) Operating income   74,261     68,722   Net interest expense (27,996 ) (9,925 ) Gain (loss) from derivative instruments 4,675 (14,154 ) Foreign currency exchange results (20,909 ) 6,128 Other non-operating expenses, net   (725 )   (82 ) Income before income taxes   29,306     50,689   Income tax expense   (9,476 )   (21,443 ) Net income   19,830     29,246   Less: net (income) attributable to non-controlling interests   (248 )   (123 ) Net income attributable to Arcos Dorados Holdings Inc.   19,582     29,123     Earnings per share information ($ per share):     Basic net income per common share attributable to Arcos Dorados Holdings Inc. $ 0.09   $ 0.12   Weighted-average number of common shares outstanding-Basic   209,529,412     241,882,966     Adjusted EBITDA Reconciliation Operating income 74,261 68,722 Depreciation and amortization 18,089 14,111 Other net operating charges excluded   2,662     2,381   Adjusted EBITDA   95,012     85,214   Adjusted EBITDA Margin as % of total revenues 9.7 % 10.8 %    

Nine Months 2011 Consolidated Results (Unaudited)

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

      For Nine Months ended September 30, 2011     2010 REVENUES Sales by Company-operated restaurants 2,586,560 2,063,509 Revenues from franchised restaurants   112,589     87,187   Total Revenues   2,699,149     2,150,696     OPERATING COSTS AND EXPENSES Company-operated restaurant expenses: Food and paper (908,343 ) (733,061 ) Payroll and employee benefits (517,077 ) (406,222 ) Occupancy and other operating expenses (684,999 ) (548,834 ) Royalty fees (125,687 ) (100,627 ) Franchised restaurants - occupancy expenses (37,645 ) (30,259 ) General and administrative expenses (253,848 ) (163,776 ) Other operating income/(expenses), net   (604 )   (13,962 ) Total operating costs and expenses   (2,528,203 )   (1,996,741 ) Operating income   170,946     153,955   Net interest expense (48,195 ) (29,562 ) Loss from derivative instruments (7,550 ) (22,144 ) Foreign currency exchange results (19,045 ) 3,018 Other non-operating expenses, net   (1,908 )   (2,000 ) Income before income taxes   94,248     103,267   Income tax expense   (24,422 )   (38,316 ) Net income   69,826     64,951   Less: net (income) attributable to non-controlling interests   (519 )   (84 ) Net income attributable to Arcos Dorados Holdings Inc.   69,307     64,867     Earnings per share information ($ per share):     Basic net income per common share attributable to Arcos Dorados Holdings Inc. $ 0.32   $ 0.27   Weighted-average number of common shares outstanding-Basic   217,405,469     241,882,966     Adjusted EBITDA Reconciliation Operating income 170,946 153,955 Depreciation and amortization 49,212 42,479 Other net operating charges excluded   15,048     4,117   Adjusted EBITDA   235,206     200,551   Adjusted EBITDA Margin as % of total revenues 8.7 % 9.3 %    

Third Quarter and Nine Months 2011 Results by Division (Unaudited)

(In thousands of U.S. dollars)

                      For Three Months ended % Increase For 9 Months ended % Increase September 30, / September 30, / 2011     2010     (Decrease) 2011     2010     (Decrease)

Revenues

        Brazil 507,683 407,956 24% 1,399,746 1,126,476 24% Caribbean 67,963 66,233 3% 200,019 193,618 3% NOLAD 93,681 79,765 17% 265,424 221,229 20% SLAD 314,676     234,931     34% 833,960     609,373     37% TOTAL 984,003     788,885     25% 2,699,149     2,150,696     26%  

Adjusted EBITDA (1)

Brazil 80,625 64,827 24% 209,191 164,068 28% Caribbean 1,762 6,134 -71% 8,044 15,665 -49% NOLAD 6,961 5,869 19% 14,829 10,071 47% SLAD 36,296     25,313     43% 79,229     58,055     36% TOTAL 95,012     85,214     11% 235,206     200,551     17%    

Total Restaurants (eop) & Systemwide Comparable Sales Growth

               

Total Restaurants*

Comp. Sales 3Q11vs. 3Q10 (%)

Brazil   627 11.7% Caribbean 144 (1.9)% NOLAD 473 8.6% SLAD 533 31.7% TOTAL 1,777 15.7%  

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

   

Summarized Consolidated Balance Sheet

(In thousands of U.S. dollars)

             

 

As of, As of,

September 30,2011 (Unaudited)

December 31,2010

  ASSETS Current assets Cash and cash equivalents 251,129 208,099 Accounts and notes receivable, net 72,762 79,821 Other current assets (1) 203,692 264,435 Total current assets 527,583 552,355   Non-current assets Property and equipment, net 954,253 911,730 Net intangible assets and goodwill 52,629 47,264 Deferred income taxes 171,149 190,764 Other non-current assets (2) 67,683 82,153 Total non-current assets 1,245,714 1,231,911 Total assets 1,773,297 1,784,266   LIABILITIES AND EQUITY Current liabilities Accounts payable 120,146 186,700 Taxes payable (3) 113,629 124,677 Accrued payroll and other liabilities 225,281 211,231 Other current liabilities (4) 19,442 24,631 Financial debt (5) 20,585 57,909 Total current liabilities 499,083 605,148   Non-current liabilities Accrued payroll and other liabilities 53,624 53,475 Provision for contingencies 40,198 63,940 Financial debt (5) 527,346 506,130 Deferred income taxes 6,228 6,378 Total non-current liabilities 627,396 629,923 Total liabilities 1,126,479 1,235,071 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 2,843 (2,468) Retained earnings 303,055 271,387 Accumulated other comprehensive loss (145,170) (98,664) Total Arcos Dorados Holdings Inc shareholders’ equity 645,297 547,801   Non-controlling interest in subsidiaries 1,521 1,394 Total Equity 646,818 549,195     Total liabilities and Equity 1,773,297 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 September 30, 2011 December 31,   (Unaudited)       2010   Cash & cash equivalents 251,129 208,099 Total Financial Debt (i) 547,931 564,039 Net Financial Debt (ii) 296,802 355,940 Total Financial Debt / LTM Adjusted EBITDA ratio 1.6 1.9 Net Financial Debt / LTM Adjusted EBITDA ratio 0.9 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