Arcos Dorados Reports First Quarter 2013 Financial Results

Arcos Dorados Reports First Quarter 2013 Financial Results

Achieved double-digit organic revenue growth and high single-digit comparable sales expansion on solid contribution from largest regions

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 its unaudited results for the first quarter ended March 31, 2013.

First Quarter 2013 Highlights

• Revenues increased by 6.0% year-over-year to $976.9 million or by 15.7% on an organic basis, as high single-digit comparable sales growth and revenues from new restaurants partly offset reported revenues lowered by the depreciation of local currencies versus the US dollar

• Systemwide comparable sales increased by 9.9% year-over-year, primarily driven by average check growth

• Adjusted EBITDA decreased by 12.0% to $68.7 million. Excluding currency translation and special items, Adjusted EBITDA grew 1.7% in comparison with 1Q12, mainly impacted by higher dollar denominated costs

• The Company reported a net loss of $6.6 million compared to a gain of $25.4 million the previous year, mainly due to lower operating income and higher non-operating charges related to the official devaluation in Venezuela

"Our first quarter performance demonstrates Arcos Dorados' ability to consistently grow sales and achieve market share gains even in challenging markets. A strong marketing calendar and access to the largest product portfolio resulted in double-digit organic revenue growth and a high single-digit increase in comparable sales versus the prior-year period."

"The introduction of the highly successful and globally recognized Monopoly promotion in Brazil in April is driving consumption in a soft market. While we remain cautious on the outlook in markets such as Venezuela, our solid first quarter results are on target with our full year expectations and will benefit from easing comparable sales and cost containment initiatives in coming quarters," said Woods Staton, Chairman and Chief Executive Officer of Arcos Dorados.

Arcos Dorados' first quarter revenues increased by 6.0% to $976.9 million, as organic revenue growth of 15.7% was partly offset by depreciation of local currencies. Strong organic revenues were driven by systemwide comparable sales growth of 9.9%, despite the negative impact of an extra day in the month of February 2012. The net addition of 116 restaurants during the last 12-month period contributed $57.2 million in constant currency to revenues. Additionally, our three largest divisions achieved double-digit growth.

Systemwide comparable sales growth was mainly driven by average check growth. The Quality campaign "Mas allá de la Cocina", which commenced in the quarter, strengthened the brand by bringing our customers closer to the true origin of our food and highlighting the quality of our ingredients. This campaign, together with successful product launches and the introduction of new flavors such as Thai Sweet Chili sauce in a number of markets, form part of a strong 2013 marketing calendar designed to strengthen the brand over the long term and drive sales.

Adjusted EBITDA

Adjusted EBITDA for the first quarter was $68.7 million, a 12.0% decrease compared to the same period of 2012. Adjusting for special items and currency impact, organic Adjusted EBITDA grew by 1.7%.

Adjusted EBITDA comparisons were affected by special items in both periods consisting of higher corporate G&A of $3.8 million explained by a net gain of $0.3 million in 1Q13 and of $4.1 million in 1Q12 related to the CAD incentive plan (including the impact of hedging).

The Adjusted EBITDA margin as a percentage of total revenues decreased by 144 basis points to 7.0% compared to the year ago period. The decline mainly reflects the impact of currency devaluation over dollar-denominated costs in various countries, which offset an improved Adjusted EBITDA margin in NOLAD.

The Company reported a net loss of $6.6 million in the first quarter of 2013, compared to net income of $25.4 million in the same period of 2012. The result reflects lower operating results along with higher non-operating losses recognized in the quarter, which were partly offset by lower income taxes.

Non-operating Results

Non-operating results for the quarter reflected (i) a 12% increase in overall funding costs (interest expense plus results from derivative instruments), mainly due to higher debt levels related to the restructuring process carried out during the last twelve month period (please refer to prior releases), and (ii) a special item of $15.4 million from a foreign currency exchange loss in the first quarter of 2013 resulting from the impact of the devaluation of the Venezuelan Bolivar over net monetary assets, as previously announced.

Income tax expense for the quarter totaled $5.9 million, compared to $12.1 million in the year-ago period. The resulting increase in the effective tax rate primarily reflected the negative impact of the Venezuelan currency devaluation impacting the quarter, as the Company recorded a valuation allowance over the related tax benefits.

The Company reported a basic net loss per share of $0.03 in the first quarter of 2013, compared to earnings of $0.12 in the previous corresponding period.

Analysis by Division:

Beginning January 2013, the Company reorganized its SLAD and Caribbean division.The Venezuela and Colombia operations are now part of the Caribbean division.For comparison purposes, prior year information reflects these changes.

Brazil revenues grew by 2.4% and were impacted by a higher average exchange rate when compared to the previous year's first quarter. Excluding the 13% average devaluation of the Real, organic revenues grew 15.9%. Systemwide comparable sales growth was 9.1% in the quarter, mainly driven by increased average check resulting from the product mix shift along with higher prices over the past twelve months. The overall Brazilian consumption environment remained slow. In response, the Company launched marketing activities to drive sales, including the nationwide roll-out of wraps and the Triple Cheeseburger in the Affordability platform, among others.

The net addition of 69 restaurants during the last 12-month period contributed $31.3 million to revenues in constant currency during the quarter. The openings brought the restaurant count to a total of 735.

Adjusted EBITDA decreased by 11.6% in the first quarter of 2013. Organic Adjusted EBITDA remained stable as increased revenues and G&A leverage were offset by (i) higher payroll as a percentage of sales; (ii) higher food and paper costs as a percentage of sales due to the impact of the year-on-year Real devaluation over dollar denominated costs; and (iii) higher operating costs Adjusted EBITDA margin for the quarter reached 12.0%.

NOLAD's (Mexico, Panama and Costa Rica) revenues grew by 9.6% or 7.0% on an organic basis, year-over-year. Systemwide comparable sales grew by 1.5% in the quarter, mainly driven by new products and Happy Meals. Comparable sales also benefitted from the Easter holiday shift in March. Additionally, the net addition of 13 restaurants during the last 12-month period contributed $ 5.7 million to revenues in constant currency.

Adjusted EBITDA grew by 53.8% to $4.7 million from $3.1 million in the prior year. On an organic basis, Adjusted EBITDA grew by 51.7% mainly due to the leveraging of F&P costs. As a result, margin improved 139 basis points to 4.8% in the quarter.

SLAD's (Argentina, Chile, Peru, Ecuador, and Uruguay) revenues grew by 10.0% and 20.5% on an organic basis compared to the first quarter of 2012. Value Meals and the inclusion of the Triple-Bacon sandwich in the affordability platform in Argentina contributed strongly to a systemwide comparable sales increase of 14.6% in the quarter. The net addition of 23 restaurants during the last 12-month period contributed $12.6 million to revenues in constant currency in the quarter.

Adjusted EBITDA remained stable versus the prior year, resulting in a margin of 9.0%. Adjusted EBITDA rose by 9.8% on an organic basis driven by higher revenues, which were partly offset by higher payroll as a percentage of sales and higher occupancy and other operating expenses (primarily energy costs).

The Caribbean division (Colombia, Venezuela, Puerto Rico, Martinique, Guadeloupe, Aruba, Curaçao, French Guiana, Trinidad & Tobago, and the US Virgin Islands of St. Thomas and St. Croix) reported revenue growth of 8.7% despite the negative impact of the official devaluation of the Venezuelan Bolivar Fuerte in February 2013. On an organic basis, revenues increased by 13.9% compared to the first quarter of 2012, driven by systemwide comparable sales growth of 12.1%. Despite challenging conditions in markets such as Venezuela, brand preference remains strong. The Company's superior product offering and successful regional and local marketing campaigns, such as Fish McBites in Puerto Rico and "Arepas" in Venezuela, have helped mitigate traffic declines. The net addition of 11 restaurants during the last 12-month period contributed $7.6 million to revenues in constant currency during the quarter.

Adjusted EBITDA declined by 6.3% and amounted to $12.2 million in 1Q13. On an organic basis, Adjusted EBITDA increased by 1.4% compared to one year ago, mainly due to the higher cost of dollar-denominated inputs in Venezuela. This factor more than offset revenue growth and improvements in payroll and G&A as a percentage of sales.

As a result, Adjusted EBITDA margin decreased by 102 basis points to 6.4% of revenues.

Gross openings of 133 restaurants over the twelve month period ended March 31, 2013, resulted in a total of 1,959 restaurants, 1,997 Dessert Centers, and 339 McCafe's. The Company's openings plan remains on-track, and more than 75% of full year 2013 openings were secured as of period end.

Balance Sheet & Cash Flow Highlights

Cash and cash equivalents were $145.0 million at March 31, 2013. The Company's total financial debt (including derivative instruments) was $682.9 million, which included $306.9 million corresponding to the accounting balance of the 2019 USD Notes and R$ 675 million (equivalent to $336.6 million) related to the BRL 2016 Notes. Net debt was $537.9 million and the Net Debt/Adjusted EBITDA ratio was 1.6 at March 31, 2013.

Net cash used by operating activities was $14.2 million in the first quarter of 2013. During the quarter, capital expenditures amounted to $37 million.

Quarter Highlights & Recent Developments

Venezuela Royalty Waiver

The Company obtained a temporary royalty waiver from McDonald's Corporation for Venezuela of $5 million for the full year 2013 and a proportionate amount was registered in 1Q13. Subsequently, the amount was increased, resulting in a total royalty relief for the year 2013 of $8 million, which will be recorded in the 2Q13 on an accumulated pro-rata basis.