Arcos Dorados Reports Fourth Quarter & Full Year 2012 Financial Results

Arcos Dorados Reports Fourth Quarter & Full Year 2012 Financial Results

Achieved double-digit organic revenue growth and high single-digit comparable sales expansion for the year and quarter

BUENOS AIRES, Argentina--(BUSINESS WIRE)-- Arcos Dorados Holdings, Inc. (NYS: 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 fourth quarter and audited results for the full year ended December 31, 2012.

Full Year 2012 Highlights

• Revenues increased by 3.8% year-over-year to US$ 3,797.4 million, or by 14.2% on an organic basis, as high single-digit comparable sales growth and revenues from new restaurants offset reported revenues lowered by the depreciation of local currencies versus the US dollar

• Systemwide comparable sales increased by 9.2% year-over-year

• 130 gross new restaurants opened in 2012. Capital expenditures for the year totaled US$ 294.5 million and contributed to the overall restaurant count of 1,948

• Adjusted EBITDA¹ improved versus the prior year, increasing 0.2% to US$ 340.6 million, or 1.2% on an organic basis

• Net income was largely unchanged at US$ 114.3 million versus US$ 115.5 million one year ago

Fourth Quarter 2012 Highlights

• Revenues increased by 5.3% year-over-year to US$ 1,009.7 million or by 13.8% on an organic basis, as strong comparable and new restaurant sales growth outweighed local currency depreciation

• Systemwide comparable sales increased by 8.6% year-over-year, driven by average check growth

• Adjusted EBITDA increased by 6.7% to US$ 111.6 million, including special items. Excluding currency translation and special items, Adjusted EBITDA was 4.7% higher year-over-year, despite a continued weak consumption environment in Brazil

• Net income was US$ 44.2 million compared to US$46.2 million one year ago

"Arcos Dorados' ability to achieve high single-digit comparable sales growth in 2012 despite negligible economic expansion in our largest market underscores the strength of our brand, operational excellence and our earnings potential as Brazilian consumption recovers. In a soft market environment, we distinguished ourselves through promotional strategies of our iconic products and innovative offerings which resulted in double-digit organic revenue growth and solid market share. The opening of 130 new restaurants in 2012 will drive future earnings by capitalizing on a rapidly growing consumer base with a preference for convenience and away-from-home dining options in Latin America."

"We expect double-digit top line growth in 2013 as a strong marketing calendar and the largest product portfolio drive traffic and expand market share. The efficiency improvements we achieved in 2012 will remain a key focus throughout the organization in 2013."

"Our near 30-year history in the region equips our strong leadership teams with tested marketing strategies and operational expertise that have been honed in tough economic environments. As one of the world's most iconic brands in an underpenetrated region, the underlying strength and long-term prospects of our business remain indisputable," said Woods Staton, Chairman and Chief Executive Officer of Arcos Dorados.

Fourth Quarter 2012 Results
Consolidated

(4Q12 = 4Q11 + Special items + Currency translation + Organic growth)

To better discern underlying business trends, this release uses non-GAAP financial measures that segregate year-over-year growth into three categories: (i) currency translation, (ii) special items and (iii) organic growth. (i) Currency translation reflects the impact on growth of the appreciation or depreciation of the local currencies in which we conduct our business against the US dollar (the currency in which our financial statements are prepared). (ii) Special items include the impact of CAD related awards and other events that management does not consider part of the underlying performance of the business. (iii) Organic growth reflects the underlying growth of the business excluding the effect from currency translation and special items. Management believes organic growth better reflects the underlying growth from the ongoing activities of our business and provides improved comparability of results.

Arcos Dorados' fourth quarter revenues increased by 5.3% to US$ 1,009.7 million, as organic revenue growth of 13.8% was offset by depreciation of local currencies, mainly in Brazil and SLAD. Strong organic revenues were driven by systemwide comparable sales growth of 8.6% and US$ 57.3 million in constant currency from the net addition of 108 restaurants during the last 12-month period. Brazil and SLAD were strong contributors to revenue growth, with both reporting double-digit increases in organic revenues.

Systemwide comparable sales growth was driven by average check growth. Promotions in the Company's value platform designed to stimulate traffic outperformed those of the prior-year period. The Happy Meal promotion during the fourth quarter, including the Pokemon properties performed well. In the fourth quarter, the Company also held its annual McDonald's 5K-Women Run. With over 60,000 participants, it is the biggest woman's run in Latin America.

Adjusted EBITDA (US$ million)
Breakdown of main variations contributing to 4Q12 Adjusted EBITDA

Adjusted EBITDA for the fourth quarter was US$ 111.6 million, a 6.7% increase compared to the same period of 2011. Adjusting for special items and currency impact, organic adjusted EBITDA grew by 4.7%.

Special items in both periods consisted of:

• A gain of US$ 12.0 million in 4Q12 from the recovery of Brazilian tax credits mainly related to certain input costs in prior years

• A gain of US$ 5.3 million in 4Q11 related to rebates from Venezuelan suppliers

• A gain in 4Q12 of US$ 1.2 million related to the royalty waiver for Venezuela

• A charge in 4Q11 of US$ 9.2 million related to the Brazil CIDE tax charge on royalty payments related to prior quarters in 2011

• A net charge in 4Q12 related to the CAD incentive plan (including the hedging) of US$ 1.7 million. This compares with a gain of US$ 4.4 million in 4Q11

The Adjusted EBITDA margin as a percentage of total revenues increased by 14 basis points to 11.1% year-over-year in the quarter. With the exception of SLAD, the remaining divisions posted improved margins versus the previous year. In addition, organic G&A (constant currency and excluding special items) as a percentage of revenues decreased for the third consecutive quarter compared to the year-ago period.

Net income attributable to the Company was US$ 44.2 million in the fourth quarter of 2012, compared to US$ 46.2 million in the same period of 2011. The result reflects stable operating results and a decline in income taxes, which was more than offset by lower non-operating results.

Non-operating Results

Non-operating results reflected stable overall funding costs (interest expense plus loss from derivative instruments) despite higher debt levels, as a result of the restructuring process carried out during the last twelve months (please refer to prior releases). Other non-operating results decreased in 4Q12 when compared to 4Q11. This primarily reflects a gain recorded in 2011 related to the monetary actualization of certain tax credits in Brazil.

Income tax expense for the quarter totaled US$ 15.7 million, resulting in an effective tax rate of 26.2% for the quarter compared to 30.5% in the year-ago period. This lower effective tax rate was primarily the result of the reduction of certain valuation allowances over deferred tax assets in 4Q12.

The Company reported basic earnings per share (EPS) of US$ 0.21 in the fourth quarter of 2012, compared to US$ 0.22 in the previous corresponding period.

Brazil revenues declined by 1.6% mainly due to a higher average exchange rate as compared to the previous year's fourth quarter. Excluding the 14.4% average devaluation of the Real, organic revenues grew by 12.6%, driven by systemwide comparable sales growth of 6.3% in the quarter. The overall Brazilian consumption environment remained sluggish. In response, the Company defended traffic through the inclusion of iconic products such as the Big Mac and the addition of the new Gran Verano ("Grand Summer") sandwich on the GPPP value platform.

The net addition of 69 restaurants during the last 12-month period contributed US$34.8 million to revenues in constant currency during the quarter. The openings brought the year-end restaurant total to 731.

Adjusted EBITDA increased by 2.6% in the fourth quarter 2012. Special items in the quarter included a charge in 4Q11 related the accrual of CIDE tax corresponding to the first nine months of 2011, and the recovery of tax credits from prior periods in 4Q12. Excluding currency translation and special items, the impact of the Real devaluation over dollar denominated costs and higher operating costs resulted in an 11.2% decline in organic Adjusted EBITDA in the quarter.

NOLAD's (Mexico, Panama and Costa Rica) revenues grew by 13.0% or 9.2% on an organic basis, year-over-year. Modest systemwide comparable sales growth of 0.5%, reflected increased competition. Additionally, the net addition of 19 restaurants during the last 12-month period contributed US$ 8.5 million to revenues in constant currency. Restaurant openings were mainly focused on Costa Rica and Panama.

Adjusted EBITDA almost doubled year-over-year to US$ 9.1 million from US$ 4.7 million in the previous corresponding period. On an organic basis, growth was 87.1%. F&P efficiencies together with G&A leverage, among other efficiencies, resulted in an Adjusted EBITDA margin of 9.0% in the quarter.

SLAD's (Argentina, Venezuela, Colombia, Chile, Perú, Ecuador, and Uruguay) revenues grew by 14.6% and 19.2% on an organic basis compared to the fourth quarter of 2011. Systemwide comparable sales increased by 16.4% and the net addition of 28 restaurants during the last 12-month period contributed US$ 13.5 million to revenues in constant currency in the quarter.

Adjusted EBITDA increased by 7.9% versus the prior year, reaching a margin of 12.8%. Special items included temporary royalty relief in Venezuela amounting to US$1.2 million in 4Q12, and rebates from certain suppliers in 4Q11 amounting to US$ 5.3 million. Adjusted EBITDA rose by 22.2% on an organic basis driven by higher revenues, which were partly offset by increased payroll costs as a percentage of sales.