Arcos Dorados Reports Second Quarter 2014 Financial Results

2014-08-05
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  • Arcos Dorados Achieved double-digit organic revenue growth and high single-digit expansion in comparable sales, in addition to adjusted G&A leverage

    Arcos Dorados Holdings, Inc. (NYSE:ARCO), 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, 2014.

    Second Quarter 2014 Highlights

    • Consolidated revenues were $917.9 million, a 7.2% decline versus the second quarter of 2013. On an organic basis and excluding Venezuela, consolidated revenues grew 9.6% in the quarter.
    • Systemwide comparable sales increased by 7.8% year-over-year.
    • As reported General and Administrative expenses (G&A) as a percentage of revenues declined by 46 basis points versus last year, excluding one-time expenses related to the Company’s G&A optimization plan.
    • Adjusted EBITDA was $42.0 million, or 37.8% lower year-over-year. Organic Adjusted EBITDA excluding Venezuela, was flat versus the prior year quarter.
    • The Company reported a net loss of $99.0 million, compared to net income of $8.8 million in the year-ago period, mainly due to the impact of the transition to the SICAD II foreign exchange rate in Venezuela.

    “Second quarter results were impacted by weak economic growth in several of our key markets. In Brazil, our largest market, consumer trends have continued to be soft since the beginning of the year and in the second quarter we experienced a greater than anticipated decline in traffic as a result of the FIFA World Cup. Given this backdrop, I am pleased to announce that we have achieved another quarter of double-digit organic revenue growth, supported by a high single-digit increase in comparable sales”.

    “Expectations for economic and consumption growth across our territories have deteriorated substantially versus our original outlooks for this year. In response to the effect of the deteriorating macroeconomic conditions on our first half results, recent developments in one of our major markets and the short-term impact of the FIFA World Cup, we are revising our full year guidance. In this environment we will be balancing our focus on maintaining traffic in our restaurants with our long-term plans to realize operational cost savings, become more efficient and improve profitability”.

    “Despite current challenges, the QSR industry in Latin America is backed by strong, long-term demographic trends. As operators of the region’s dominant QSR brand with an unmatched footprint, I am confident that we will be at the forefront of the recovery in growth,” said Woods Staton, Chairman and Chief Executive Officer of Arcos Dorados.

    Second Quarter 2014 Results

     

    Consolidated

    Figure 1. AD Holdings Inc Consolidated: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

     

    2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units)   1,971         2,075   5.3 %  
     
    Sales by Company-operated Restaurants 947.7 (179.2 ) 112.9 881.4 -7.0 % 11.9 %
    Revenues from franchised restaurants 41.5 (7.6 ) 2.7 36.5 -11.9 % 6.4 %
    Total Revenues 989.2 (186.8 ) 115.5 917.9 -7.2 % 11.7 %
    Systemwide Comparable Sales 7.8 %
    Adjusted EBITDA 67.4 4.7 (20.1 ) (10.1 ) 42.0 -37.8 % -14.8 %
    Adjusted EBITDA Margin 6.8 % 4.6 %
    Net income (loss) attributable to AD 8.8 (80.4 ) (13.6 ) (13.8 ) (99.0 ) -1226.8 % -144.4 %
    No. of shares outstanding (thousands) 209,749 210,117
    EPS (US$/Share)   0.04                 (0.47 )        

    Due to the depreciation of local currencies, mainly in Brazil and Argentina, and the change in the exchange rate used to remeasure the financial results of the Company’s Venezuelan operation, Arcos Dorados’ second quarter as reported revenues decreased by 7.2%, whereas organic revenues grew by 11.7%. For more details, please refer to the Quarter Highlights & Recent Developments section on page 10 of this earnings release.

    Organic revenue growth was driven by a 7.8% expansion in systemwide comparable sales and the contribution of $52.8 million in constant currency from the net addition of 104 restaurants during the last 12-month period.

    Marketing activities in the second quarter included the launch of several promotions related to the FIFA World Cup, including the World Cup Sandwiches in Brazil, “Campeones Mundialistas” in NOLAD and the continuation of the “McCombo de la Copa” in Argentina. Other notable marketing activities included the launch of the Monopoly promotion in Argentina and the introduction of new products, such as the Habanero Ranch in NOLAD, among others.

    Reported Adjusted EBITDA for the second quarter was $42.0 million, representing a 37.8% year-over-year decrease, primarily due to the impact of changing the exchange rates used to remeasure the Venezuelan operation. Second quarter results include one-time charges from the change to SICAD, during April and May, and then to SICAD II in June. The Company’s operating results in the quarter included (i) an $11.7 million write down of certain inventories due to the impact of the currency exchange rate change on their net recoverable value, of which $9.9 million corresponded to the transition to SICAD II, and (ii) an $11.1 million loss related to lower margin due to the impact of inventories measured at the historical exchange rate, of which $3.2 million corresponded to the transition to SICAD II. Please refer to page 13 of this earnings release for a definition and to page 14 for a reconciliation of Adjusted EBITDA. Adjusting for special items and currency impacts, organic Adjusted EBITDA declined by 14.8%.

    Special items impacting Adjusted EBITDA consisted of:

    Special Items

    (In thousands of U.S. dollars)

               
      2Q   2Q   Variation
        2014   2013      
    Accrual of PAT provision in Brazil (i) - (1,958 ) 1,958
    Royalty waiver from Venezuela 3,124 2,750 374
    CADs net gain (loss) (ii) 839 (1,540 ) 2,379
    TOTAL   3,963   (748 )   4,711
     

    Consolidated – excluding Venezuela

    Figure 2. AD Holdings Inc Consolidated - Excluding Venezuela: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

      2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units) 1,832         1,939   5.8 %  
     
    Sales by Company-operated Restaurants 866.3 (117.3 ) 81.6 830.5 -4.1 % 9.4 %
    Revenues from franchised restaurants 32.5 (3.9 ) 5.0 33.6 3.6 % 15.5 %
    Total Revenues 898.7 (121.2 ) 86.6 864.2 -3.8 % 9.6 %
    Systemwide Comparable Sales 3.8 %
    Adjusted EBITDA 60.3 4.3 (5.3 ) (0.0 ) 59.2 -1.7 % -0.1 %
    Adjusted EBITDA Margin 6.7 % 6.9 %
    Net income (loss) attributable to AD 3.9 (3.8 ) 0.9 (4.0 ) (3.0 ) -175.2 % -53.9 %
    No. of shares outstanding (thousands) 209,749 210,117
    EPS (US$/Share)   0.02                 (0.01 )        
     

    Excluding the Venezuelan operation, the Company’s Adjusted EBITDA declined by 1.7%, or by 0.1% on an organic basis. Adjusted EBITDA margin improved 15 basis points to 6.9%, as lower labor and G&A expenses offset higher Food and Paper (F&P) as well as Occupancy and Other Operating Expenses as a percentage of sales.

    Non-operating Results

    Non-operating results for the quarter reflected a $22.7 million increase in foreign currency exchange losses. FX losses for the quarter were mainly driven by the impact of the change in the Venezuelan exchange rate used for reporting purposes. A $3.0 million increase in net interest expense, mainly attributable to additional year-over-year debt and derivative instruments, also impacted non-operating results.

    Income tax expense for the quarter totaled $6.3 million, compared to $0.6 million in the year-ago period.

    Net loss attributable to the Company was $99.0 million in the second quarter of 2014, compared to a net income of $8.8 million in the same period of 2013. The net loss was mainly explained by the impact of the transition to the SICAD II foreign exchange rate in Venezuela, which included an impairment on its Venezuelan fixed assets of $45.2 million (primarily related to the real estate acquired during the fourth quarter of 2013) classified as an operating charge excluded from the Adjusted EBITDA computation.

    The Company reported a basic net loss per share of $0.47 in the second quarter of 2014, compared to a gain of $0.04 in the previous corresponding period. Total weighted average shares for second quarter of 2014 were 210,116,897 as compared to 209,748,728 in the second quarter of 2013, reflecting the issuance of shares as a result of the partial vesting of restricted share units.

    Analysis by Division:

     

    Brazil Division

    Figure 3. Brazil Division: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

     

    2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units)   746         824   10.5 %  
     
    Total Revenues 459.0 (35.3 ) 35.4 459.1 0.0 % 7.7 %
    Systemwide Comparable Sales 0.8 %
    Adjusted EBITDA 52.5 2.0 (4.0 ) 4.7 55.2 5.1 % 8.7 %
    Adjusted EBITDA Margin   11.4 %               12.0 %        
     

    Brazil revenues were flat on an as reported basis due to the 8% year-over-year average depreciation of the Brazilian Real. Excluding currency movements, organic revenues grew by 7.7%. Systemwide comparable sales growth was driven by average check, which offset a decline in traffic in the quarter. The Monopoly promotion ran in the first quarter of this year versus the second quarter of 2013, when it was an important driver of that quarter’s comparable sales growth of 10%. In addition, traffic was impacted by a soft consumption environment as well as strikes and social unrest leading into the start of the FIFA World Cup. On game days traffic declined with customers staying home to watch the games. During the quarter, the Company’s marketing activities included the “World Cup Sandwiches”, the launch of the McFlurry Kit Kat in the Dessert category and the addition of the Crispy Tasty sandwich to the GPPP value platform.

    The net addition of 78 restaurants during the last 12-month period, of which half were free-standing units, contributed $34.2 million to revenues on a constant currency basis during the quarter. The openings brought the restaurant count in Brazil to a total of 824.

    Adjusted EBITDA increased by 5.1% in the second quarter of 2014. The reported Adjusted EBITDA margin grew by 59 basis points to 12.0%, mainly as a consequence of reduced payroll expenses as a percentage of sales. Payroll costs in the second quarter of 2014 benefited from adjustments in variable compensation, and from an easier comparison versus the second quarter of 2013, which included the PAT provision. This factor was partially offset by higher F&P and Occupancy and Other Operating Expenses.

    Special items impacting Adjusted EBITDA in the quarter included a net gain of $2.0 million against the PAT provision included in the second quarter of 2013 that was fully reversed in 4Q13. Excluding currency movements and the aforementioned special item, second quarter organic Adjusted EBITDA increased by 8.7%.

     

    NOLAD

    Figure 4. NOLAD Division: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

     

    2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units)   502         509   1.4 %  
     
    Total Revenues 101.6 (4.7 ) (0.2 ) 96.7 -4.8 % -0.2 %
    Systemwide Comparable Sales -2.7 %
    Adjusted EBITDA 4.9 0.0 (0.3 ) 1.4 6.0 22.1 % 28.1 %
    Adjusted EBITDA Margin   4.8 %               6.2 %        
     

    NOLAD’s revenues decreased by 4.8% or 0.2% on an organic basis, year-over-year. Systemwide comparable sales declined 2.7%, due to declines in average check and traffic. The decline in average check primarily reflected a shift in mix, while traffic was impacted by the weak consumer environment in the division and the occurrence of the FIFA World Cup. Key quarterly marketing activities included the launch of FIFA World Cup campaigns such as the “Campeones Mundialistas” and “Desayuno de la Copa”, and the addition of the McFlurry Milky Way to the Dessert category.

    The net addition of 7 restaurants during the last 12-month period contributed $4.1 million to revenues in constant currency.

    Adjusted EBITDA increased by 22.1% year-over-year, or 28.1% on an organic basis. The reported Adjusted EBITDA margin increased by 136 basis points to 6.2% due to lower F&P as a percentage of sales, which in part reflects efficiencies gained in controllable food costs. This factor more than offset higher Payroll and Occupancy & Other Operating Expenses as a percentage of sales due to negative comparable sales growth.

     

    SLAD

    Figure 5. SLAD Division: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

     

    2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units)   369         378   2.4 %  
     
    Total Revenues 235.2 (81.5 ) 49.6 203.3 -13.5 % 21.1 %
    Systemwide Comparable Sales 19.1 %
    Adjusted EBITDA 25.2 0.0 (8.6 ) 2.1 18.8 -25.5 % 8.5 %
    Adjusted EBITDA Margin   10.7 %               9.2 %        
     

    SLAD’s revenues declined by 13.5%, primarily related to the 54% year-over-year average depreciation of the Argentine Peso. However, organic revenues increased by 21.1% year-over-year. Systemwide comparable sales increased by 19.1% in the quarter, driven by average check growth. Traffic in SLAD experienced a decline, due to the deteriorating macro environment in Argentina and a negative impact from the FIFA World Cup. Quarterly marketing activities included the re-edition of the Monopoly promotion in Argentina, as well as the continuation of the FIFA World Cup promotion McCombo de la Copa.

    The net addition of 9 restaurants during the last 12-month period contributed $7.7 million to revenues in constant currency in the quarter.

    Adjusted EBITDA decreased by 25.5% year-over-year, but gained 8.5% on an organic basis. The reported Adjusted EBITDA margin contracted 148 basis points to 9.2%, primarily due to higher F&P costs as a percentage of sales. F&P costs outpaced average check growth during the quarter, mainly as a consequence of the depreciation of the Argentine Peso and its impact on local inflation.

     

    Caribbean Division

    Figure 6. Caribbean Division: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

     

    2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units)   354         364   2.8 %  
     
    Total Revenues 193.4 (65.3 ) 30.6 158.8 -17.9 % 15.8 %
    Systemwide Comparable Sales 19.2 %
    Adjusted EBITDA 11.2 0.4 (12.3 ) (9.5 ) (10.2 ) -190.9 % -112.3 %
    Adjusted EBITDA Margin   5.8 %      

     

          -6.4 %        
     

    The Caribbean division’s revenues declined by 17.9%. However, excluding currency movements primarily related to the remeasurement of the Venezuelan operation’s financial results at a weaker exchange rate, organic revenues increased by 15.8% year-over-year. Systemwide comparable sales increased by 19.2%, driven by growth in average check. Despite ongoing challenging conditions in Venezuela, the Company maintained its leading market share through the execution of a strong marketing calendar, including the introduction of the campaign “Celebrando el Mundial”, and the addition of the McFlurry Samba to the Dessert category. Other notable marketing activities in the division included the launch of the Bacon Clubhouse sandwich in Puerto Rico and the Bone in Chicken in Colombia.

    The net addition of 10 restaurants during the last 12-month period contributed $6.8 million to revenues in constant currency.

    Adjusted EBITDA in the division declined to negative $10.2 million, resulting in a negative Adjusted EBITDA margin of 6.4%, mainly due to losses in the Venezuelan operation on an as reported basis, driven by the change in the foreign exchange rate used for remeasurement purposes.

     

    Caribbean Division – excluding Venezuela

    Figure 7. Caribbean Division - Excluding Venezuela: Financial Highlights

    (In millions of U.S. dollars, except as noted)

        2Q13

    (a)

     

    Special

    Items

    (b)

     

    Currency

    Translation

    (c)

     

    Organic

    Growth

    (d)

     

    2Q14

    (a+b+c+d)

     

    % As

    Reported

      % Organic
    Total Restaurants (Units)   215         228   6.0 %  
     
    Total Revenues 103.0 0.3 1.7 105.0 2.0 % 1.7 %
    Systemwide Comparable Sales -5.4 %
    Adjusted EBITDA 4.0 0.0 0.1 (0.4 ) 3.8 -5.3 % -8.9 %
    Adjusted EBITDA Margin   3.9 %               3.6 %        
     

    Revenues in the Caribbean division excluding Venezuela grew by 2.0% in the quarter, or by 1.7% on an organic basis. While traffic remained flat to slightly positive in Colombia and Puerto Rico, comparable sales decreased by 5.4%. The decline was due to a shift in mix. Adjusted EBITDA margin declined by 28 basis points to 3.6%. This was primarily due to higher Occupancy and Other Operating Expenses as a percentage of sales due to negative comparable sales growth, which offset leverage in payroll costs.

     

    New Unit Development

    Figure 8. Total Restaurants (eop)*
       

    June

    2014

     

    March

    2014

     

    December

    2013

     

    September

    2013

     

    June

    2013

    Brazil   824   816   812   762   746
    NOLAD 509 509 507 503 502
    SLAD 378 379 378 372 369
    Caribbean 364 365 365 356 354
    TOTAL 2,075 2,069 2,062 1,993 1,971
    LTM Net Openings   104   110   114   113   113

    The Company completed 120 new restaurant openings for the twelve month period ended June 30, 2014, resulting in a total of 2,075 restaurants. Also in the period, the Company added 339 dessert centers and 15 McCafés, bringing the total to 2,380 and 341, respectively.

    Balance Sheet & Cash Flow Highlights

    Cash and cash equivalents were $101.0 million at June 30, 2014. The Company’s total financial debt (including derivative instruments) was $891.3 million. Net debt was $790.3 million and the Net Debt/Adjusted EBITDA ratio was 2.6x at June 30, 2014.

    Net cash provided by operating activities was $24.1million in the second quarter of 2014, while cash provided by financing activities amounted to $18.3 million. During the quarter, capital expenditures totaled $40.3 million.

    First Half 2014

    For the six months ended June 30, 2014, the Company’s revenues declined by 6.7% to $1,833.4 million. On an organic basis however, revenues grew by 12.3%. Adjusted EBITDA reached $92.3 million, a decrease of 32.2% compared to the first half of 2013. On an organic basis, Adjusted EBITDA decreased by 9.6%. The year-to-date consolidated net loss amounted to $119.6 million, compared with income of $2.2 million in the first half of 2013, mainly due to the impact of the transition to the SICAD I (as of March 1, 2014) and the SICAD II (as of June 1, 2014) foreign exchange rates used to remeasure the Venezuelan operation. The change in the exchange rate generated impacts of $36.5 million and $140.3 million in Adjusted EBITDA and Net Income, respectively. Additionally, capital expenditures amounted to $61.0 million for the period.

    Excluding the Venezuelan operation, the Company’s revenues declined by 5.3%, but increased by 10.6% on an organic basis. Adjusted EBITDA declined by 0.8%, as reported, and increased by 9.0%, on an organic basis. Reported Adjusted EBITDA margin improved by 32 basis points to 7.0%, driven by leverage in payroll costs and G&A, which offset higher F&P and Occupancy and Other Operating Expenses.

    2014 Guidance Revision

    Economists’ expectations for GDP and consumption growth across the Company’s territories have deteriorated substantially compared with the assumptions in the Company’s original projections. Growth expectations in Brazil have been cut in half while mounting inflation in Argentina along with the lack of resolution to its debt situation are expected to continue to dampen consumer trends in that country.

    Given the effect of the deteriorating macroeconomic conditions on its first half results, recent developments in one of its major markets and the short-term impact of the FIFA World Cup, the Company is revising its full year guidance. The Company now expects the growth rates for 2014 with respect to 2013, in constant currency, excluding special items and excluding the Venezuelan business to be:

    2014 Guidance Revision

    (Organic basis and excluding Venezuela)

       
      Original   Revised
        Guidance   Guidance
    Revenue Growth +13% to +16% +9% to +11%
    Adjusted EBITDA Growth +15% to +18% +5% to +8%
    Effective Tax Rate (ETR) 35% to 37% 35% to 37%
    Capital Expenditures (US$) $200 million $180 million
    Restaurant Openings (Gross)   90   84
     

    Quarter Highlights & Recent Developments

    Change in Venezuelan exchange rate used for financial reporting

    On July 14, 2014, the Company announced that it has transitioned to the SICAD II floating exchange rate for remeasurement of its bolivar-denominated assets and liabilities and operating results in Venezuela, effective as of June 1, 2014. The change was primarily a result of the Company’s lack of access to the SICAD rate during 2014 and its recent ability to settle transactions at the SICAD II rate of approximately 50 bolivars per U.S. dollar. Trading on the SICAD II system began on March 24, 2014.

    Since March 1, 2014, the Company reassessed the exchange rate used for remeasurement purposes of its Venezuelan operation and moved to the SICAD exchange rate, resulting in an average rate of 7.88 VEF per U.S. dollar for the first quarter. Similarly, April and May results were remeasured at the SICAD floating exchange rate, whereas June results were remeasured at the SICAD II floating exchange rate. As of June 30, 2014, the SICAD II exchange rate was 49.98 VEF per US dollar and the resulting average rate for the second quarter was 23.37 VEF per US dollar.

    During the three-month period ended June 30, 2014, the Company recognized a foreign currency exchange loss of $39.0 million, due to the remeasurement of its local currency denominated net monetary asset position as a result of the exchange rate change. The Company’s operating results included (i) an $11.7 million write down related to certain inventories, due to the impact of the currency exchange rate change on their net recoverable value, of which $9.9 million corresponded to the transition to SICAD II, and (ii) an $11.1 million loss, related to lower margin due to the impact of inventories measured at the historical exchange rate, of which $3.2 million corresponded to the transition to SICAD II. Additionally, the Company also recorded an impairment on its Venezuelan fixed assets of $45.2 million, primarily related to the real estate acquired during the fourth quarter of 2013. At June 30, 2014, the Company’s local currency denominated net monetary asset position was $11.0 million (including $8.2 million of cash and cash equivalents). Venezuela’s non-monetary assets were $73.0 million at June 30, 2014, and included approximately $64.6 million of fixed assets. Please refer to the Company’s Form 6-K filed with the SEC today for more information on the Venezuelan operation.

    Covenant with Bank of America

    Under the Company’s Revolving Credit Facility with Bank of America, N.A., mentioned in Note 4 of its Financial Statements, the Company was required to comply with a maximum consolidated net indebtedness to EBITDA ratio of 2.5 to 1. Primarily as a result of the Company’s decision to change the exchange rates used for remeasurement of its bolivar-denominated assets and liabilities and operating results in Venezuela, as mentioned in Note 13 of its Financial Statements, the Company was not in compliance with this ratio as of June 30, 2014. However, on July 28, 2014 the Company reached an agreement with Bank of America, N.A. to amend the Revolving Credit Facility to change the consolidated net indebtedness to EBITDA ratio from 2.5 to 1 to 3.0 to 1. Consequently, the Company is currently in compliance with that covenant.

    Covenants under the Master Franchise Agreement (MFA)

    Under the terms of the MFA, the Company is required to maintain a minimum fixed charge coverage ratio as well as a maximum leverage ratio. Primarily as a result of the Company’s decision to change the exchange rates used for remeasurement of its bolivar-denominated assets and liabilities and operating results in Venezuela, as mentioned in Note 13, the Company was not in compliance with the minimum fixed charge coverage ratio and maximum leverage ratio specified in the MFA as of June 30, 2014. On July 31, 2014, McDonald´s Corporation granted the Company a waiver for six-months (through and including December 31, 2014), during which time period and including for the quarter ended June 30, 2014, the Company is not required to maintain the financial ratios set forth in the MFA. Notwithstanding the foregoing, the Company does not expect any material adverse effect to its business, results of operations, financial condition or cash flows as a result of this situation.

    Dividend

    On July 1, 2014, the Company paid the second installment of its 2014 Dividends. The total amount paid was $12.5 million or $0.0595 per share on outstanding Class A and Class B shares.

    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.

    Organic: 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 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.

    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 2,075 McDonald’s-branded restaurants with over 95,000 employees serving approximately 4.3 million customers a day, as of June 2014. 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). 

    Use of Non-GAAP Financial Measures

    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: gains from sale of property and equipment, write-off of property and equipment, impairment of long-lived assets and goodwill, stock-based compensation in connection with the Company’s initial public listing, one-time expenses related to its G&A optimization plan, and the ADBV Long-Term Incentive Plan incremental compensation from modification.

     

    Second Quarter & First Half 2014 Consolidated Results

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

     
    Figure 9. Second Quarter & First Half 2014 Consolidated Results

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

       
      For Three-Months ended For Six-Months ended
    June 30, June 30,
          2014       2013     2014       2013  
    REVENUES    
    Sales by Company-operated restaurants 881,387 947,698 1,759,445 1,881,761
    Revenues from franchised restaurants     36,535       41,487     73,971       84,334  
    Total Revenues     917,922       989,185     1,833,416       1,966,095  
    OPERATING COSTS AND EXPENSES
    Company-operated restaurant expenses:
    Food and paper (318,647 ) (334,411 ) (634,369 ) (665,658 )
    Payroll and employee benefits (192,232 ) (208,809 ) (381,801 ) (409,217 )
    Occupancy and other operating expenses (252,126 ) (260,693 ) (504,245 ) (523,155 )
    Royalty fees (41,127 ) (45,750 ) (82,513 ) (92,192 )
    Franchised restaurants - occupancy expenses (15,380 ) (15,911 ) (31,097 ) (31,619 )
    General and administrative expenses (77,399 ) (83,119 ) (144,575 ) (163,452 )
    Other operating expenses, net     (59,290 )     (2,143 )   (72,321 )     (5,236 )
    Total operating costs and expenses     (956,201 )     (950,836 )   (1,850,921 )     (1,890,529 )
    Operating (loss) income     (38,279 )     38,349     (17,505 )     75,566  
    Net interest expense (18,852 ) (15,822 ) (35,809 ) (30,787 )
    Gain from derivative instruments 42



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