Arcos Dorados Reports Strong First Quarter Financial Results

Arcos Dorados Holdings, Inc. (NYSE: ARCO), Latin America’s largest restaurant chain and the world’s largest independent McDonald’s franchisee, today reported unaudited results for the three months ended March 31, 2023.

First Quarter 2023 Highlights

• Systemwide comparable sales¹ increased 37.6%, with strong sales growth in all divisions.
• Consolidated revenues reached $990.8 million, growing 25.3% in US dollars, or 43.9% in constant currency, versus the prior year period.
• Consolidated Adjusted EBITDA¹ of $100.5 million rose 28.0%, or 42.7% in constant currency, versus the prior year quarter.
• Consolidated Adjusted EBITDA margin reached 10.1% in the quarter, expanding by 20 basis points, with solid margin performance in Brazil and SLAD compared to the prior year period.
• Net income was $37.4 million, up 52.7% versus the first quarter of 2022.
• Basic net income per share was $0.18 in the quarter, versus $0.12 per share in the first quarter of 2022.
• Net Debt to Adjusted EBITDA leverage ratio remained at a healthy 1.0x at the end of the first quarter 2023.

Message from Marcelo Rabach, Chief Executive Officer

Arcos Dorados, like the McDonald’s system globally, has been generating consistently strong results for the last couple of years. This is a direct result of our long-term, strategic approach to generating value for our shareholders and we expect the structural competitive advantages of our restaurant portfolio and digital platform to continue to drive value creation for the foreseeable future.

Our guests have left no doubt we are operating the most beloved brand in the QSR industry in Latin America and the Caribbean. They recognize the value we offer in our restaurants on a daily basis and the positive impact we make in our communities every year. This is why restaurant volumes continue to grow and brand trust metrics are at all-time highs.

Each restaurant opening brings McDonald’s favorite menu items closer to our guests while also creating new job opportunities for young people and investing in the economic development of local communities. Latin America and the Caribbean is a widely underpenetrated region for the quick service restaurant industry, which represents a significant growth opportunity for Arcos Dorados. Against that backdrop, we are working to support a sustainable future for our business and the communities where we operate as we capture the vast potential that lies in front of us.

We have certainly strengthened the Brand through our marketing and communications campaigns. But true brand strength comes from the experience we deliver to more than four million guests every day in a modernized restaurant portfolio and with a “Coolture” of Service mentality. The Three D’s strategy provides guests the opportunity to choose the experience that best fits their individual needs and the value we are offering today makes the Brand more accessible than ever.

To sustain the business model and brand trust, we must operate responsibly. This is why we have the industry’s leading environmental, social and governance platform. Our Recipe for the Future includes ambitious initiatives and goals, designed to benefit the business, the communities we serve and the planet we all share.

Thank you for your ongoing support.

Consolidated Results

Arcos Dorados’ free-standing restaurant portfolio, which provides structural competitive advantages in Drive-thru and Delivery, together with recovering front counter sales volume and increased Digital sales penetration, drove strong revenue growth in the quarter. Systemwide comparable sales for the first quarter rose 37.6%, growing well above inflation in all divisions. Total revenues in US dollars increased 25.3%, or 43.9% in constant currency, versus the prior year period.

Front counter sales grew more than 50% in constant currency versus the prior year and generated 59% of systemwide sales in the first quarter of 2023. Drive-thru and Delivery sales increased 13% and 40% in constant currency, respectively, despite the acceleration in front counter sales. Total restaurant volumes continued to grow as the Company’s omnichannel offerings drove increased guest frequency.

The Company’s long-term strategy is designed to generate sustainable revenue and adjusted EBITDA growth by offering the best value, quality and experience in the industry. In line with this strategy, Digital, which includes sales from Delivery, Mobile App and Self-order kiosks, reached $598.9 million, or 47% of systemwide sales in the first quarter.

As of the end of March 2023, the Mobile App had reached more than 93 million cumulative downloads and more than 15 million average monthly active users. During the quarter, identifiable sales rose to 18% of consolidated sales and 23% of total sales in Brazil, which has the highest penetration of Digital channels in the Company’s footprint.

Arcos Dorados’ Customer Relationship Management platform also continued to grow and reached more than 68 million unique registered users by the end of March 2023. The platform provides convenient solutions, combined with insights from the Company’s data analytics capabilities, aiming to drive greater guest frequency through a more personalized experience.

Adjusted EBITDA

1Q23 Adjusted EBITDA Bridge

($ million)

First quarter consolidated Adjusted EBITDA reached $100.5 million, up 28.0% versus the prior year quarter. The Adjusted EBITDA margin of 10.1%, rose 20 basis points versus the prior year, driven by solid margin expansion in Brazil and SLAD. All divisions generated US dollar EBITDA growth versus the prior year quarter.

Strong sales growth drove margin expansion with efficiencies in payroll expenses and operating leverage in both occupancy & other operating expenses as well as general and administrative (G&A) expenses. These more than offset moderately higher food & paper (F&P) costs as a percentage of revenue and the impact of the final step up of the royalty rate, which became effective as of August 3, 2022.

Notable items in the Adjusted EBITDA reconciliation

Included in Adjusted EBITDA: There were no notable items included in Adjusted EBITDA in either the first quarter of 2023 or the first quarter 2022.

Excluded from Adjusted EBITDA: There were no notable items excluded from Adjusted EBITDA in either the first quarter of 2023 or the first quarter 2022.

Non-operating Results

Arcos Dorados’ non-operating results for the first quarter included a $2.4 million gain from non-cash foreign exchange and derivative instruments.

Net interest expense and other financing results were stable year-over-year. The Company recorded an income tax expense of $21.0 million in the first quarter, compared to an income tax expense of $17.2 million in the prior-year period.

First quarter net income attributable to the Company totaled $37.4 million, compared to net income of $24.5 million in the same period of 2022. Arcos Dorados generated net income of $0.18 per share in the first quarter 2023 compared to net income of $0.12 per share in the prior year quarter. Total weighted average shares for the first quarter of 2023 were 210,594,545 compared to 210,478,322 in the prior year’s quarter.

For reference:

Divisional Results

Brazil Division

Brazil’s revenues increased 19.9% in US dollars versus the first quarter 2022, reaching $374.2 million, due to a strong traffic increase in the period. Systemwide comparable sales rose 13.8% versus the prior year, more than 2.6x inflation.

Digital sales in Brazil reached $322.7 million in the first quarter, up 38% versus the prior year, and represented 57% of the division’s systemwide sales in the period. Delivery sales rose 23% in constant currency versus the prior year. Importantly, this increase included both higher guest volume and average check, demonstrating Delivery’s continued popularity among guests, even as front counter sales accelerated in the period.

Results were positively impacted by strong marketing campaigns and brand activations such as the Big Brother Brazil and Lollapalooza sponsorships. The quarter also included new product launches in the premium segment with Brabos, a new indulgent beef burger, and McCrispy Chicken Legend, an extension of the McCrispy Chicken platform that brought back the popular CBO sauce and reinforced the Company’s chicken portfolio. Channel-specific campaigns such as “Singing in Drive-Thru,” early access to new products for App users, gamification in the App with “MequiHit” and a McDelivery activation in Lollapalooza all contributed to strong digital sales growth in the period.

As reported Adjusted EBITDA in the division reached $59.5 million in the quarter, rising 29.2% versus the prior year in US dollars. Adjusted EBITDA margin rose 110 basis points in Brazil, with efficiencies in payroll and operating leverage in both occupancy and other operating expenses as well as G&A. These more than offset moderately higher F&P costs as a percentage of revenue and the impact of the final step-up in the Company’s royalty rate.

North Latin American Division (NOLAD)

As reported revenues totaled $259.3 million, up 27.2% in US dollars and 21.4% in constant currency versus the prior year quarter. NOLAD’s systemwide comparable sales rose 16.6% year-over-year, or 2.8x blended inflation in the period, with particularly strong growth in Mexico and the French West Indies markets, while Costa Rica, Panama and Puerto Rico also delivered solid topline growth.

Marketing activities in NOLAD continued to build sales momentum. Mexico and Costa Rica launched the “Big Mac Chicken,” which leverages a core menu item to support sales in the chicken platform. The Company also continued the roll out of Best Burger, extending the platform to Panama and capitalizing on Costa Rica’s best practices for implementation. Best Burger is a new quality standard for McDonald’s classic burgers. It makes McDonald’s core burgers even better with small changes that add up to a big difference. Guests experience hotter, juicier, and tastier hamburgers. Puerto Rico strengthened brand equity with the launch of the “Bacon Ranch McCrispy Chicken”, adding to its chicken platform, and the “McCriollo”, strengthening its leadership in the breakfast day part with a locally relevant sandwich.

As reported Adjusted EBITDA in the division reached $23.7 million in the quarter, rising 10.7% versus the prior year in US dollars. Adjusted EBITDA margin contracted primarily due to higher F&P costs as a percentage of revenue as well as the impact of the final step-up in the Company’s royalty rate. These were partially offset by operating leverage in occupancy & other operating expenses as well as G&A.

South Latin American Division (SLAD)

Revenues in SLAD increased 30.0% in US dollars, or 88.5% in constant currency terms. Systemwide comparable sales rose 91.8%, or 1.5x the division’s blended inflation rate, supported by robust volume growth in all markets.

During the quarter, the Company launched the “McCrispy Chicken” platform in Argentina and Chile, improving the Brand’s quality and taste perception, with strong consumer response in both markets. The launch of the “Signature Turbo Tasty” platform in Chile strengthened the market’s premium beef product offerings and reinforced the Brand’s value for money perception. Finally, the Company connected younger guests with the Brand by sponsoring Lollapalooza in Argentina and Chile and Estereo Picnic in Colombia, some of the most relevant music festivals in the region.

Adjusted EBITDA reached $40.7 million, compared with $30.3 million in the prior-year quarter, representing a year-over-year increase of 34.3% in US dollars. Adjusted EBITDA margin in the quarter benefitted from lower F&P costs as a percentage of revenue and operating leverage in occupancy & other operating expenses as well as G&A. These more than offset a moderate increase in payroll expenses as a percentage of revenue and the impact of the final step-up in the Company’s royalty rate.

For reference:

New Unit Development

During the first quarter of 2023, Arcos Dorados opened 8 restaurants, all of them free-standing units, including 7 restaurants in Brazil. Free-standing restaurants, which represent a structural competitive advantage due to their ability to adapt to changing consumer trends and preferences, make up 50% of the Company’s total restaurant portfolio.

The Company’s restaurant opening pipeline remains robust for the remainder of 2023 and beyond. Restaurant openings and modernizations in 2023 are expected to be more concentrated in the second semester of the year.

As of the end of March 2023, Arcos Dorados was operating 1,072 Experience of the Future restaurants, the most modern format in the global McDonald’s system, making up 46% of its total restaurant footprint.

Balance Sheet & Cash Flow Highlights

As of March 31, 2023, Cash and cash equivalents were $263.8 million and Total Financial Debt (including the net derivative instrument position) was $688.8 million. Net Debt (Total Financial Debt minus Cash and cash equivalents) was $425.0 million, up from $370.0 million at the end of 2022, due to lower cash balances and higher accrued interest on the Senior Notes.

The Net Debt to Adjusted EBITDA leverage ratio remained at a healthy 1.0x as of the end of March 2023, with higher trailing-twelve-month Adjusted EBITDA offsetting a modest increase in Net Debt.

Net cash generated from operating activities for the three months ended March 31, 2023, totaled $29.5 million versus $35.2 million in the same period last year. Cash used in net investing activities totaled $42.0 million, with capital expenditures of $47.0 million. Net cash used in financing activities was $17.2 million, including the first installment of the 2023 dividend and certain open market repurchases of the Company’s outstanding debt amounting to $4.7 million.

Recent Development

2023 Annual General Shareholders’ Meeting (AGM)

The Company held its AGM on April 28, 2023. All proposals were approved at the meeting.

Ms. Karla Berman was elected for the first time to the Board of Directors to serve as an independent Class III director, whose term will expire at the annual meeting of shareholders to be held in 2026. She is a board member for Endeavor Mexico and member of the Latin America Advisory Board for Harvard Business School. Ms. Berman is an angel investor, non-executive co-founder of NaranXadul.com, the largest Mommy blog in Mexico, and participates in the Mexican version of the TV show Shark Tank. She is a former board member of Mezcal Amarás and of the investment committee of IGNIA.

Ms. Berman began her career in Mexico as a reporter for the newspaper Reforma in 2002. She then worked at McKinsey & Company in Mexico from 2003 until 2005. From 2006 until 2012 she joined Grupo Expansion (Time Inc.) as Digital Director. In 2012, Ms. Berman joined Google Mexico, working as head of branding solutions for Spanish Latam and held this role until 2015 and was a CPG Sales Director from 2016 to 2020. From 2020 until November 2021, Ms. Berman was VP of sales and Chief Marketing Officer for Yalo Mexico, and most recently she was the Director for Softbank in Mexico. Ms. Berman has an Industrial Engineering degree from Universidad Iberoamericana of Mexico City, Mexico, and has an MBA from Harvard Business School.

About Arcos Dorados

Arcos Dorados is the world’s largest independent McDonald’s franchisee, operating the largest quick service restaurant 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 with more than 2,300 restaurants, operated by the Company or by its sub-franchisees, that together employ over 95 thousand people (as of 03/31/2023). The Company is also committed to the development of the communities in which it operates, to providing young people their first formal job opportunities and to utilize its Recipe for the Future to achieve a positive environmental impact. Arcos Dorados is listed for trading on the New York Stock Exchange (NYSE: ARCO).

First Quarter 2023 Consolidated Results

First Quarter 2023 Results by Division

Summarized Consolidated Balance Sheets