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Edited Transcript of ARCO earnings conference call or presentation 15-May-19 2:00pm GMT

Q1 2019 Arcos Dorados Holdings Inc Earnings Call

MONTEVIDEO May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcos Dorados Holdings Inc earnings conference call or presentation Wednesday, May 15, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcelo Rabach

Arcos Dorados Holdings Inc. - COO

* Mariano Tannenbaum

Arcos Dorados Holdings Inc. - CFO

* Patricio Iñaki Esnaola

Arcos Dorados Holdings Inc. - Director of IR

* Sergio Daniel Alonso

Arcos Dorados Holdings Inc. - CEO & Director

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Conference Call Participants

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* Richard M. Cathcart

Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

* Robert Schweich

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Presentation

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Operator [1]

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Good morning, and welcome to the Arcos Dorados First Quarter 2019 Earnings Call. A slide presentation will accompany today's webcast, which will be available in the Investors section of the company's website, www.arcosdorados.com/ir. (Operator Instructions)

And today's conference call is being recorded. At this time, I would like to turn the conference call over to Patricio Esnaola, Director of Investor Relations. Please go ahead.

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Patricio Iñaki Esnaola, Arcos Dorados Holdings Inc. - Director of IR [2]

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Thank you. Good morning, everyone, and thank you for joining our earnings call. With me on today's call are Sergio Alonso, Chief Executive Officer; Marcelo Rabach, Chief Operating Officer; and Mariano Tannenbaum, Chief Financial Officer.

Please turn to Slide 2. Before we proceed, I would like to make the following safe harbor statement. 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 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 in the press release and audited financial statements filed today with the SEC on Form 6-K.

Our discussion today excludes the results of the Venezuelan operation, both on the consolidated level as well as for the Caribbean division, due to the differences in the exchange rates and inflation in the country. For your reference, we include a full income statement, excluding Venezuela, with our earnings release.

I would now like to turn the call over to our CEO, Sergio Alonso.

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [3]

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Thank you, [Iñaki]. Good day, everyone, and thank you for joining us today. Please turn to Slide 3. Last year, we expanded our margin at a faster pace than we projected, delivering [90] basis points of margin expansion. (inaudible) significant operating leverage in our business, we turn our attention to top line growth particularly in our largest market, Brazil. However, we have not lost sight of our commitment to deliver an additional 10 to 110 basis points of EBITDA margins within the next 18 to 24 months.

As you may recall, we committed to 100 to 200 basis points expansion at last year's Investor Day for the period. During the remainder of the year, we expect to expand our margin further as we accelerate sales growth.

At the end of the fourth quarter, we began executing strong marketing of promotional campaigns, which continued through the first quarter. We indicated this will result in stronger comp sales beginning the year. In fact, consolidated comparable sales grew 10% on top of 9.8% in the prior year's first quarter. Excluding Venezuela and Argentina, both had an inflationary economies, comp sales would have been 1.6x blended inflation, a healthy growth rate.

Our adjusted EBITDA in constant currency terms increased 6.5% in the first quarter. This growth was consistent throughout the quarter and in many of the markets of each division. Furthermore, we are maintaining this momentum in the current quarter and expect it to continue for the rest of 2019.

Of particular note, in Brazil, comp sales increased 6.8% well above inflation. In SLAD, outside of Argentina, we're seeing significant improvements in each market. These are countries with stable and growing economies, and they're acting as a counterweight to our business in Argentina, which continues to face strong macroeconomic headwinds.

In Chile, for example, we have a very strong leadership position. Year after year, our results in these countries have been improving and we've been gaining share for some time now. We expect the counterbalancing benefit to continue this year.

In NOLAD, we remain focused on increasing sales and guest counts. We delivered our eighth consecutive quarter of sales growth in Mexico despite the Easter holiday being outside the first quarter, unlike last year.

Sustainable growth across the company is being driven by accelerators that includes delivery, mobile and EOTF, which comprised our omnichannel approach in our markets. But delivery is now available through 45% of our restaurants and (inaudible) approximately 70% of incremental sales.

Our mobile channel, combined with digital menu boards, self-order kiosks and enhanced payment technology for drive-throughs represent a powerful technology ecosystem. These channels significantly enhance the guest experience and strengthen brand loyalty in addition to generating sales lifts.

The complete digital experience is embodied in our [variety] of restaurants, not just in menu boards and customized ordering via kiosks but digital table entertainment and our (inaudible) as well.

The [mobile] app plays an integral role in communicating with our customers in the way they want to engage with us. With over 24 million downloads today, our app is by far the most downloaded in the entire food and beverage segment in the region.

Earlier, I noted Chile and the growth we're tapping there. Starting this year, we began extending EOTF to the country. This most recent rollout reflects our agility as a business and the flexible approach we take to capital allocation. In other words, we direct our investments towards those markets within our vast geographic footprint that have the most growth potential.

Marcelo will not review on our EOTF landscape today. But I would like to emphasize here that they generate sales lifts beyond their first year of operation, in addition to strengthening our competitive position.

Another important source of growth is our digital channels. We are the leading dessert brand in the region with the most sales of ice cream in the broader food segment. And now with McCafé, our dessert centers are also powerful brand attentions.

Arcos Dorados is proud to operate under the McDonald's brand, which continues to [serve] in the region. Based on our ongoing research, we remain the #1 QSR brand in the vast majority of our territories.

In April, Folha de São Paulo, one of Brazil's leading newspapers, named McDonald's the Top Preferred Restaurant brand in the state of São Paulo. This state is by far the most populous and represents approximately 1/3 of Brazil's total GDP. This was the second year in a row that our brand was ranked at the top and also the gap between us and the nearest competitor widened versus last year.

Keep also in mind that we have multiple standalone brands not just the Big Mac. For example, this include McFlurry and the Signature collection among many other leading product brands that are important brand extension platforms. Marcelo will also discuss how we are extending our Signature collection brand.

[Strengthening] our brand is also being the most sustainable restaurant company in Latin America. Equally important, we have the most socially beneficial as the largest formal employer of youth in the region among other important contributions to society. This is a key brand differentiator across our markets, and we believe that this kind of commitment will only become more important among future generations as they choose the brand that matter to them.

In addition to featuring sustainable beef in our menus as well as other important food certifications, we maintain multiple sustainability programs in the areas of water and energy savings in our restaurants. We are also piloting in novelty projects with regard to paper, plastic and waste. And most recently on the social front, the Global Council of Corporate Universities, the most prestigious entity in this field, recognized Arcos Dorados for having one of the best corporate universities. Each year, we host over 1,000 managers and provide online courses to over 50,000 employees.

Also for the second year in a row, we earned the #2 spot as the best employer in Mexico as ranked by top companies.

Returning to our first quarter performance it is sustainable, we grow in markets in each of our divisions, counterbalancing countries that are currently facing headwinds. In Brazil, first quarter momentum continues with the strong marketing calendar we have in place. And we will also have easier comps as you know, given the trucker strike in the second quarter of last year.

In SLAD, Argentina's [micro] environment continues to be very difficult. While their numbers are better than reports from the association of medium-sized retailer, it is a challenging environment nonetheless. But we continue to do very well in the rest of the division, and we also expect to maintain our [solid] momentum in NOLAD, particularly in Mexico.

In Panama and Costa Rica, we're seeing good sales with implementation of a new affordability platform that is resonating strongly in this countries among others. Marcelo will also expand on this platform.

So with that, Marcelo, the call is yours.

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Marcelo Rabach, Arcos Dorados Holdings Inc. - COO [4]

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Thank you, Sergio. Please turn to Slide 4. With digital tools and delivery now playing an increasingly important role in our business, our omnichannel approach to serving guests is contributing significantly more to growth. The technology-enabled approach is no longer just about supporting our business. It is consistently driving incremental sales as well providing seamless customized experiences for our guests.

Our mobile app, innovative payment system for drive-throughs in Brazil as well as digital menus and kiosks are among the modern service features that create memorable experiences with our brand.

Our EOTF restaurant environments are driving sustainable growth. For EOTF restaurants in operation over 12 months, average sales lift continues to be in the mid-single digits. Contributing to this lift are self-order kiosks which now represent around 1/3 of in-store transactions. The higher level of average check generated by these kiosks is also consistent with increases across the McDonald's system. As an investment, EOTF is delivering above our initial expectation, that's why we are rolling out this format in Chile this year. Chile is the fourth market in which we have introduced EOTF and as Sergio noted, we see strong growth opportunities in this country. At the end of the first quarter, we have 349 EOTF restaurants in operation, and we remain on track to reach our target of 650 by the end of this year.

Delivery is another additive sales channel. Our dominant footprint, which on scale, provide us with a substantial competitive advantage in this space. Because of these distinct advantages, delivery has been highly successful initiative since we launched this service. McDelivery is now available in 11 markets with almost 1,000 restaurants serving as a platform. To give you an idea of the size of this business, on a run-rate basis as of March, delivery have reached the sales level of our business in Panama. We believe there's a lot more room to grow through this channel, and we are working with various partners such as UberEATS, [Grabby] iFood and [lolo] to raise awareness of this service.

Our reach includes the McDonald's app, which as Sergio said, is not only the most downloaded app in the food and beverage space but it is now on some 7% of Internet-connected smartphones in Latin America. The drive through experience is also an important differentiator for McDonald's in the region. The partnership with [Simporal], which we announced during our previous earnings call, has been extended to all of our freestanding units in the state of São Paulo or approximately half of our freestanding restaurants in Brazil. This hands-free payment technology via customers [car phone] passes, is a convenience that is increasing average check by more than 20%.

Along with our EOTF restaurants, Cooltura de Servicio continues to enhance the guest experience, improving both customer and employee satisfaction levels. Customer satisfaction scores have been improving across all categories from speed of service to friendliness, to accuracy of orders. In March, the percentage of customers who said they were very satisfied with their experience reached its highest level, which was 70% on a consolidated basis. Employee satisfaction plays a crucial role in customer satisfaction, of course. In Brazil, for example, Cooltura has reduced turnover and absenteeism by nearly half over the last 3 years, which contributes to efficiency gains.

In addition to the overall guest experience, our menu plays a key role in what keeps bringing customers back to our restaurants. We recently extended our Signature collection to our dessert menu with the initial launch in Argentina last month. In addition to the revenue potential, we believe this will help us to extend our lead as the top dessert brand in the region. Also during the first quarter, we added core items to our affordability platform in most of our markets to make this menu more relevant to our customers. This initiative is related to our efforts to drive top line growth, which Sergio discussed earlier.

(inaudible) the menu and aligning our interest with those of our customers is fundamental to our relationship with them. And so we believe it is the right thing to do for McDonald's to lead the way among QSR restaurants in Latin America to promote healthier eating habits. As a result of our efforts, we are gaining recognition and endorsements from key medical and health organizations throughout the region. An example at the end of last year, the Inter-American Society of Cardiologists (sic) [Cardiology] endorsed our option of a new nutrition policy for our children's menu, the Happy Meal. We look forward to updating you on this initiatives as we continue to make progress.

Please turn to Slide 5 to review our progress on restaurants and brand extension openings. Total restaurant openings during the last 12 months were 69, of which 25 were freestanding units. In Brazil, we opened 44 restaurants while in SLAD and NOLAD, we opened 8 and 16, respectively. We also opened 384 Dessert Centers across the region.

Now I'll turn the call over to Mariano to discuss the details of our quarterly financial and operating results.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. - CFO [5]

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Thanks, Marcelo. Please turn to Slide 6. We had a strong start to the year, which gives us confidence in our ability to balance growth and profitability. As a result of our successful marketing strategy, in this quarter, we achieved comparable sales growth of 10%, in line with our blended inflation and also on top of a very strong first quarter 2018. It is also important to highlight that if we exclude Argentina, which as you know, continues to face significant macro headwinds and high inflation rates, comparable sales would have reached 1.6x our blended inflation. This was mainly driven by solid performance in Brazil, Chile, Peru, Panama and Mexico.

While as reported revenues continued to be impacted by the sharp depreciation of our key currencies, we expect this trend to ease in the coming quarters as the significant depreciation of the Argentine peso and the Brazilian real took place in the second quarter of last year. Additionally, analyst consensus estimates for the current macro FX projections for these countries supports our expectation.

We also anticipate easier comps in Brazil where a trucker strike in 2018 significantly impacted Q2 consumption across-the-board in that market.

Now let's move to our cost structure and profitability on Slide 7. Our marketing strategy, which boosted traffic and sales in our main markets, affected our product mix during the quarter. However, we were able to mitigate the impact in gross margin with efficiencies in payroll and other fixed costs. Thus, we show no impact in our adjusted EBITDA margin, which remained stable at 8.5%.

Adjusted EBITDA in dollar terms decreased 9.2%, as already mentioned, impacted by the depreciation of our main currencies and increased 6.5% in constant currency.

Expanding on our cost structure, in addition to changes in mix, we faced some cost inflation pressures primarily coming from meat in Argentina. Other expenses as a percentage of revenues increased as we expanded delivery and was also impacted by rising utility costs, primarily in Brazil and Argentina. We achieved savings in payroll costs in all our division. Increasing productivity continues to underscore our efforts in driving down payroll as a share of revenues. All of this is done while increasing customer satisfaction.

Finally, our G&A expenses decreased by $6.2 million in absolute terms and remained stable as a percentage of revenues.

Moving to the bottom line on Slide 8. We generated $14.5 million of net income during the quarter, compared to $13.6 million in the same period last year. Net interest expense was $2.2 million lower year-over-year and we reported better noncash foreign currency exchange results and income tax expenses versus last year.

Please turn to Slide 9 and 10 for more details on our divisional results. In Brazil, as we anticipated, we are now starting to see the full impact of our shift towards driving strong top line growth. In this quarter, we achieved comparable sales growth of 6.8%, well above inflation, and approximately double our segment as measured by the Food Service Institute of Brazil. In addition to the strong marketing campaigns we have been executing since the end of 2018, profit growth was also driven by the rollout of EOTF, the expansion of our research centers and the continued growth of our delivery channel.

Moving to SLAD, comparable sales increased 23.6%, below the division's blended inflation. Traffic was impacted by the weak consumer environment in Argentina. By contrast, we are very encouraged by the results we are seeing in Chile, Ecuador and Peru, all posting comparable sales growth well above inflation. Particularly in Chile, in this quarter, we posted a record high in traffic and we expect this trend to continue as we roll out our EOTF initiative in this country. These markets are gaining more share within the division, with 50% of the revenues now being generated outside Argentina.

In NOLAD, we continue to report solid results with comparable sales growth of 3.9%, well above blended inflation and mainly driven by average check growth. Both Panama and Costa Rica contributed to traffic growth. Momentum continues in Mexico where we delivered our eighth consecutive quarter of strong comparable sales growth despite the impact of the Easter holiday shift from March last year to April this year.

Top line growth in the Caribbean was affected by tough comparisons against last year. In the first month of last year, we experienced a boost in sales due to the blackout that affected a significant number of households following Hurricane Maria, resulting in increased eating out. As electricity was restored, eating habits went back to normal.

Finally, in terms of profitability, we achieved adjusted EBITDA margin expansion in Brazil and the Caribbean, which was offset by the performance of our SLAD and NOLAD divisions.

Please turn to Slide 11. On the back of better results and lower working capital needs, we continued to improve our operating cash flow. Due to this strong cash flow generation, we have been able to accelerate our CapEx program while keeping a strong balance sheet. Along these lines, we ended this quarter with the net leverage ratio of 1.5x adjusted EBITDA. This was well below our target range of 2x to 2.5x. As a reminder, our leverage ratios are calculated using consolidated as-reported results.

Finally, we remain totally committed to growing our top line that will drive additional margin expansion in the coming years. Our geographic diversification, along with our flexible capital allocation strategy, are key differentiators. These allow us to mitigate difficult macro headwinds in some of our markets by focusing on those with higher growth potential.

That concludes the review of our financial and operating results. Sergio has some additional remarks before the Q&A portion of this call.

Sergio, back to you.

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [6]

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Thanks, Mariano. As you have heard, we remain on track to deliver the EBITDA margin expansion committed at our Investor Day, and we're widening the gap in terms of market share across the region with sustainable top line growth.

We have the largest and most comprehensive omnichannel guest experience and the leading brand in the QSR segment. Additionally, we have an agile capital allocation strategy that allows us to focus our investments on areas with the highest growth potential. Taken all together, we have strengthened our competitive position within our region.

Equally important to gaining and regaining customer loyalty is our unmatched commitment with the QSR sector to the communities we serve. We're extremely proud of our ability to use our [scale for good] and believe this philosophy not only resonates with our current customers but will also resonate with future generations to come.

So thank you very much. And operator, please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Robert Ford from Bank of America Merrill Lynch.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [2]

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Congratulations on the improvements. Sergio, of the 349 experience of the future remodelings or re-imagings, how many of those were in Brazil? And also in Brazil, there was some EBITDA margin expansion despite delivery and heavier promotional activity. Can you expand on where you're finding those opportunities to improve efficiency or lower food and paper costs? And I'm particularly curious about the efficiencies that you're generating from the EOTF concept?

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [3]

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Sure. And Marcelo, will take the EOTF and (inaudible) margin.

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Marcelo Rabach, Arcos Dorados Holdings Inc. - COO [4]

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Yes. Out of the 349 restaurants we already have running with EOTF, 274 are in Brazil. So we are in a pretty good shape in that market. We've been rolling out for the last 1.5 years, and the results that we are seeing in terms of sales lifts are pretty solid and are improving. (inaudible) importance is that in those restaurants with more than 12 months of operation, we continue to see visit (inaudible), which is very encouraging and (inaudible) is the right strategy for us to be as aspirational as possible in the (inaudible) and in the whole region. Maybe Mariano can add (inaudible) around the margin part of the question.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. - CFO [5]

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Yes. Regarding margins, you first mentioned about despite delivery, please always keep in mind that delivery is accretive in our EBITDA margin for us, even though we have a cost and we always mention that in terms of revenue, the line of other expenses increases. Actually, as I mentioned, delivery is accretive for us because we have a whole fixed cost structure that actually doesn't change [the] delivery and at the end of the day, it's a very profitable segment for us.

Going to the general margin question. Actually, we increased sales and as I mentioned before, with some pressure in the gross margin, but we were very efficient in keeping our Food and Paper cost under control and growing in line or even below inflation. And also we have some leverage as well in the payroll line. So actually, that's where we are seeing this margin expansion and that also allowed us to grow sales in the way we had during the first quarter, with some pressure in the mix but we benefit and leverage it on the other lines that I just mentioned.

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Operator [6]

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Our next question comes from Richard Cathcart from Bradesco.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [7]

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Just a couple of questions for me. Firstly, I just want to talk about your expectations for COGS going forward, particularly around the food -- the food prices as a result of kind of price increases that we're seeing from African swine fever, just what your expectations are around that for the second quarter and perhaps more significantly, into the second half of the year?

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [8]

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Richard, let me give you flavor on the first part of the question, [in regards of] what we expect in terms of sales for Q2 and going forward, And then Marcelo you can add comments on that and also (inaudible) Time period as well.

Let me give you some more color and going back a little bit when we released our third quarter 2018 results, we mentioned at that time that we were clearly below our expectations in terms of (inaudible) primarily in Brazil of [31%]. We said back then that we were honestly expecting an economic scenario that didn't happen, particularly right after the strike and well after the World Cup and, obviously it made us getting results that were clearly below our expectations. So we changed gears and we changed the approach to marketing actions toward the end of last year and entering this year. And we also anticipated that the full impact of the change would be in place at the beginning of 2019, which is exactly what will happen. And then what's going to happen in Q2, well, we see good momentum continuing, the impact accelerating in a little bit. Additionally too, the easier comps that we know we're going to have this quarter because of the truckers' strikes that we had in Chile. So so far, we're really pleased with the results we're getting. And the important thing I believe is also proper to mention is that it took us probably a few weeks more than expected but the change in (inaudible), but the reality is we always look for long-term sustainable decisions. So in other words, we didn't really want to simply chase margin expansion or chase volume increases in a sustainable way because we still get to get the results and we need to generate demand we need to (inaudible) well. So in summary, we're very pleased with the momentum we see in [Q2], and we expect this to continue towards the end of the year. Marcelo?

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Marcelo Rabach, Arcos Dorados Holdings Inc. - COO [9]

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Yes. We're going to [strength here] on how we are seeing this situation. Well, in fact, we are not seeing many but so far, obviously we are keeping a close eye on this issue. But it's important to mention that the (inaudible) is extremely low portion of our spend, around 2% of our food and paper costs. So this is not the issue in terms of the participation of this (inaudible) in our mix of products. And in most of our markets, pork prices are determined locally in local currencies based on local supply and demand dynamics. So this is not an issue.

However, should international supply tighten due to a limited availability in Asia, we could be facing cost increase pressure with this (inaudible). In markets where there are [financial] agreements in place because in many of our markets, the local production can be exported to Asia. So I think that this is not a big issue for us, we are keeping a close eye on this subject. But so far, no impacts to mention. I will let Mariano to talk a little bit about the COGS part of the question.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. - CFO [10]

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Richard, in terms of costs, as I mentioned in the previous question, regarding the food cost, we have been able so far, with some exceptions, to keep our food and paper costs under control, growing in line or below inflation. And another important thing to mention is our hedging strategy is that we hedge [50%] of our Food and Paper imported costs every year. So far in 2019, we have -- we're almost done with the hedging program because we hedged 2 or 3 quarters in advance. We only have a small portion of the fourth quarter still to hedge. And as I usually mention, this is not a speculative strategy, we just want to have visibility and predictability in our cost structure. But the good news so far is that the hedgings we have in place for this year are [at 3 points] all below the spots that we are seeing in the main markets. But just as a reminder, we have hedges in place for Brazil, Colombia, Uruguay, Chile, Argentina and Mexico and these hedges are almost done for 2019 in a successful way. That will give the company predictability in the costs that we would face in -- at least in 2019.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [11]

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Okay. If I may just one very quick follow-up. You talked about the pork prices there. So I kind of take from your comments that you haven't seen any increase in pressure on beef protein yet, just as a consequence of kind of tied to supply dynamics feeding through from other protein into beef, et cetera.

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [12]

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Yes. That's right. Obviously, we have pricing protocols in place with our suppliers. And depending on the market and the supplier, those protocols are updated quarterly, semiannually or annually. But for this year and based on the current information, we do not foresee any [big] pressure coming from the proteins basket that we are buying. So again, we are monitoring the situation. But as of today, we are comfortable with the position we have with our suppliers in our main markets.

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Operator [13]

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And our next question comes from Marcel [Morris] from Santander.

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Unidentified Analyst, [14]

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Congratulations on the results. I'm going to stick to the same subject, the swine fever and it being a potential impact on COGS going forward. And moreover, I think when it comes to Argentina, because the government implemented kind of price controls or agreement with key food suppliers, and being in -- do you have any kind of impact in Argentina operations? Is it good for you the fact that the government is trying to set up fixed prices for, I don't know, hamburgers or meat in general? So what do you think about this price control in Argentina? And when it comes to the swine fever, sorry, I couldn't hear all of your last answer, but do you think it would be -- I mean, if you could be [clear] a little bit more the way you've been setting up contracts, which (inaudible) I heard about the hedging strategy, but I don't know if you also have the 3 months contract with meat packing companies or something like that. If you could detail it a bit more, it would be very helpful.

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [15]

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Let me start with the swine fever. I mean, there's not much we can say in addition to what Marcelo said. And we have obviously plans at the beginning -- every time we plan the following year with sit down with the main suppliers. The beef suppliers are obviously the most relevant in terms of spend (inaudible) and obviously we project volumes and we negotiate the conditions for the next cycle.

Anything that happened so far, we did not foresee in major issues in this matter. That is to say apart from the thing that Marcelo said, pork is a protein but it's not relevant for us and [really not in our] product range. We (inaudible) What it is in the U.S. or in some other markets, are heavy consumers of pork meat, not our case.

I would assume though, that following up as close as we can. We have a supply chain team monitoring the situation. But as of today, we don't have any particular meat factor that is concerning us, okay? But from the swine issue and then from Argentina, the government did not force any price controls. They did an agreement with a number of products from several suppliers, but those products are on a supermarket level, not for restaurants or any of our categories. And this is not new either it is something that just taken back and (inaudible) launched by the previous government and it's a way to provide something (inaudible) into what's going to happen with pricing, some essential products, some cuts in beef, beef is very popular here in Argentina. So the price generators and bread, very basic things, that are not impacting our product or pricing policy at all.

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Operator [16]

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(Operator Instructions) Our next question comes from Robert Schweich from RMB Capital.

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Robert Schweich, [17]

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How important do you imagine that delivery will be in your system, particularly in Brazil?

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [18]

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I'll let Marcelo answer the question.

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Marcelo Rabach, Arcos Dorados Holdings Inc. - COO [19]

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Yes. As you may recall, we introduced delivery in Brazil last year. We began to rolling out the service mainly in the second quarter of 2018. And the company as a whole, we are in the 1,000 restaurants range of restaurants, which are offering this service delivery. In the case of Brazil, we are around 450 restaurants. So it's a little bit lower than the half of restaurants we have in the country. Still, the proportion of sales of delivery from the total sales is low, it's in the low single-digits as a proportion of sales. But obviously, we are working with several partners in different markets. In the case of Brazil, we're working with 3 main players in the market, iFood, UberEATS and [Grabby]. And we are very confident that this would be menu of building healthy sales going forward. As Mariano mentioned, it is an accretive segment for our business. And we have some plans, some (inaudible) Plans to grow the segment in the near future. This will come both from adding additional restaurants to -- with the service and at the same time, growing comp sales in the segment at a higher pace than the rest of the segment. So we are very confident and we are very encouraged by the results we are getting. We will see in the next -- in the coming quarters how fast we can grow this business and take advantage of our footprint because at the end of the day, we are present in most of the cities, which are fee for this service in Brazil, and we have that footprint as a competitive advantage. We have a lot of freestanding units, installed units, which are key and are very important for this kind of service. So that's mainly the situation around delivery. In Brazil and in general, in the 11 countries we're already operating in the segment.

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [20]

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And also have some side benefits I would say in terms of volume across the day, the delivery tends to be heavy volume towards late afternoon and night. While our biggest volume times in [the day are] particularly towards lunch. So it also helps mostly to better balance the production capacity we have in our restaurants. And also it's something that's happening in the market at the end of the day. And you see and what Marcelo said, it's mostly incremental. So it's either you pay or you're out of the game and we have to do in the game and take our share.

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Robert Schweich, [21]

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My follow-up question is on a different subject and that's the macro picture in Brazil, the political situation. Is it currency still is not going in the right direction, it's reasonably stable but still at a less favorable rate than for your first quarter. I'm wondering, how confident you are in the current administration moving forward and improving the economic environment in Brazil?

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [22]

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Well, let me take the first and then Mariano can think about the implications in the results. (inaudible) just like anybody else in the country we're all obviously, looking with optimism what's going to happen basically with the [reforms] that have been going through the economy and particularly the pension fund that should be released right after June, or the beginning of July. We believe just like most people in Brazil that, that could be a landmark and that will create another momentum, positive momentum with the economy. In the meantime, I have to say that we're pleased with the results we've been having so far in the market, I mean, they've clearly outbid the market and most our competitors and also the association that we follow. So I would say that within those factors that are under our control will be (inaudible) very well. I would say considering the constitution and we're hoping, of course, that in the second half of the year should be more clear and better in terms of [the ambience] and the optimism that there is in society in general. Apart from that, Mariano, you could maybe deal with the FX.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. - CFO [23]

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Yes. Regarding the FX, of course, when you converge or translate our EBITDA results in Brazil into U.S. dollars, it has some pressure on our numbers. Just to give you, the average BRL-USD FX rate for the Q1 2018 was [3.20]. And during this quarter was, of this year of course, [3.80]. So I think our results for the (inaudible) are more remarkable considering that looking forward, now the focus around 4 as I mentioned we had a question that, Bob's questions at the beginning, we have hedges in place. Regarding the full year in Brazil at rates that are below the current spot, also remember that our debt, half of our debt is converted into BRL, that also reduces pressure on our leverage ratios because when the Brazilian real depreciates, then the whole amount of debt that we have in place goes down. But as a result, yes, we are looking the reality, look at all analyst estimates, everybody is forecasting a real -- or almost all analysts are estimating a real below 4, today it's at 4. So we are looking this number very carefully, but there's not much that we can do with the effects besides all the policies and the risk management I already explained. We're looking at this number carefully. We think and we expect that the real will not go far beyond the figure it is now that is around 4. And that's it. I think that's in line with almost all analysts' expectations and forecasts.

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Robert Schweich, [24]

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Would you convert your debt into dollars if you felt that the Brazilian currency were to stabilize?

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. - CFO [25]

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No, no. The swaps that we have in place are already there, are for the long term, they are swaps that convert the U.S. dollar debt into real. But what -- we are not speculating with that. What we want to do is to match the outflow -- the cash outflows with the cash inflows. But the majority of our cash is generated in Brazilian real. We want and we prefer to have part of our liability expressed in the same currency. So that's the strategy that we have and it's not going to change according to the movements in the FX rates.

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Operator [26]

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(Operator Instructions) And ladies and gentlemen, at this point I'm showing no additional questions. We'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Sergio Alonso for closing remarks.

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Sergio Daniel Alonso, Arcos Dorados Holdings Inc. - CEO & Director [27]

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Well, thank you. Before we finish, I would like to point out that we launched today a new corporate website, one that we believe is more user-friendly and better conveys the essence of our brand and our strong company culture.

So I'd like to thank you again for participating in today's earnings call. We are pleased with the momentum we've built going into 2019 and we certainly look forward to updating you on our progress when we hold our second quarter earnings call. So in the meantime, please contact our Investor Relations team if you have any additional questions, and enjoy the rest of the day.

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Operator [28]

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Ladies and gentlemen, that does conclude today's presentation. We do thank you for joining. You may now disconnect your lines.