Arcos Dorados Holdings Inc. (ARCO) Q4 2012 Earnings Report, Transcript and Summary

Good morning everyone and welcome to the Arcos Dorados Fourth Quarter and Full Year 2012 Earnings Conference Call. With us today are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, Chief Operating Officer, and the company's CFO, Germán Lemonnier; and Sofia Chellew, Investor Relations Director. A slide presentation accompanies today's webcast, and this is available at the Investors section of the company's website, www.arcosdorados.com. As a reminder, all participants will be in a listen-only mode. There will be an opportunities for you to ask questions at the end of today's presentation. [Operator Instructions]. Today's conference is being recorded and at this time, I would like to turn the conference call over to Sofia Chellew. Please go ahead.

Hello everybody. 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 statement 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 measures to the comparable GAAP results, which can be found in the press release filed with the SEC on Form 6-K. I would like to now turn the call over to our Chairman, Woods Staton. Woods, please proceed.

Thank you, Sofia. Hello everyone and thank you very much for joining us today. I am pleased to report solid underlying growth in our business in 2012, which is a testament to our ability to achieve improved performance and cement our leading regional position in the QSR industry. Double digit organic growth was driven by our largest regions, and demonstrates the continued strength of the McDonald's brand throughout Latin America. During the year, we set the stage for future earnings growth, with the opening of 130 new restaurants, which is exactly in line with our guidance. This is almost 30% more than 2011, and a record number of openings for the company, and we extended the McDonald's brand to 16 new cities. We know it's not just about quantity, but also about the quality of our openings. We opened full-fledged freestanding restaurants, not just points-of-sale. As an example, in Brazil, we'd open 32 freestanding restaurants in 2012. More than five times the number of our largest listed competitor. This strong pace of expansion enabled us to maintain our leading regional marketing share, which is more than three times the size of our closest competitor. Despite increasing competition in the region, this share has grown, since we acquired the operations from McDonald's in 2007. Last year, our comp sales significantly outperformed all the large competitors in each of our key markets. But more importantly, there remains a vast opportunity for the continued expansion of the QSR segment, and our role in leading and dominating growth. As experienced (inaudible) for years in Latin America, we know that the long term ultimate growth trajectory will not be without its cycles. That's precisely why we have assembled a team with decades of operating experience, who can handle challenging environments, like the one we live in, in Latin America. Excluding the depreciation global currencies, organic revenues grew 14.2% in 2012 year-over-year. System-wide comparable sales rose 9.2% in 2012, which is an addition to a 13.7% gain in 2011. Consolidated adjusted EBITDA was driven by growth in all divisions, except Brazil with a currency decline by 16.5%, and as a result, we experienced a reduction of EBITDA. Consolidated adjusted EBITDA was stable, and excluding the currency impact and special items, increased 1.2%. Net income was largely unchanged at $114.3 million as compared to one year ago. We are encouraged by the pickup and the pace of revenue growth in the fourth quarter. In the final quarter, consolidated revenues increased 13.8% in organic terms. Adjusted EBITDA increased 6.7% in the quarter, which includes the impacts of special items. On an organic basis then, it grew 4.7% despite an ongoing sluggish consumption environment in Brazil. System-wide comparable sales were up 8.6% in the fourth quarter year-over-year. In our largest market, Brazil, we maintained our dominant position with the largest coverage of any QSR in the country. While competition is intensifying, today, we succeeded in overcoming pricing pressure, thanks to our GPVP value platform. Based on internal and public data, in 2012, we significant outperformed our listed peers in terms of comparable sales, and we were able to grow either in line with or in excess of most consumption metrics. Arcos Dorados now has a stabilized G&A structure in place, that is prepared to manage further expansion. This, combined with increased contributions from new restaurants, means we began to see G&A leverage in 2012. We expect this to continue as each area of the organization focuses on cost controls. Some of the areas, we made significant headway on, include stabilizing headcount and systems of control. During the year, we completed a rollout of (inaudible) in Brazil and Argentina, and incorporated additional suppliers to strengthen our procurement efforts. In 2013, we expect cost containment to improve further, with a smaller incremental minimum wage increase in Brazil, and the hedging of a majority (inaudible) for food and paper costs in the country. Over the past year, our marketing efforts were focused on maintaining and driving traffic, especially through our unique value platforms. We are the only ones that provide everyday good value to all of our customers with core products at accessible prices. This is our mantra and helps us stay ahead of the competition and gain share even when consumption slows. Alongside our strength and value platform, new sales and the launch in the Caribbean was a combined beverage business, which is also part of our expansion of day parts. In addition, we began rolling out the CBB in Brazil during the fourth quarter. Initial sales and customer feedback is very encouraging and we expect to complete the rolling in Brazil this year. We are also leveraging our premium products encourage [trade-up] [0:36], drive average check and gross margins and reinforce the aspirational nature of our brands and products. Our strategies are focused on driving long term profitability, and we have a resilient business model, with experience in operating in dynamic environments. We continue to strengthen our dominant brand image in the communities in which we operate. In the fourth quarter, we held our annual McDonald's 5K Women's run. With more than 60,000 participants, it's the biggest woman's run in Latin America. Plus, the thing we are most proud of, is that in 2012, we ranked among the top four best multinational companies to work for in all of Latin America. This is how we are able to track the best and the brightest talent to our company. Overall, the expansion of our footprints and advances on our profitability initiatives in 2012 has set the stage for improved results in coming years. I will now hand the call over to Sergio Alonso, who will go through Arcos Dorados fourth quarter performance by division in more detail. Sergio?

Thanks Woods and hello everyone. I would like to take you through some of the key marketing strategies, that we implemented in the fourth quarter, which can be found on slide 3. During the quarter, we launched a number of marketing initiatives, which resulted in driving comparable sales for the quarter, led by Brazil and SLAD. On slide 4, we can see that Brazil's revenues were impacted by the Brazilian real's 14.4% devaluation, versus the US dollar year-over-year, resulting in a decline in revenues of 1.6% in the fourth quarter. Excluding the currency movement, and despite continued soft consumer spending, organic revenues grew 12.6%, and the net addition of almost 70 restaurants during the past 12 months, contributed $34.8 million to revenues. We increased comparable sales by 6.3%, despite a weak environment and thanks to successful campaigns in our affordability platform. The inclusion of the Big Mac and new Gran Verano sandwich within the GPVP value platform were the main drivers of increased sales and outperformed those of the year-ago period. In addition, the introduction of new sandwiches like Angus Barbecue within the Angus platform, also contributed to comparable sales growth. As a result and based on internal market share estimates, during 2012, we maintain our leadership position, versus our closest competitor. Please turn to slide 5; in our North Latin America division, fourth quarter revenues grew 13% or 9.2% on an organic basis versus the prior year period. [Our goal] in NOLAD has reached a great traffic, particularly in Mexico, by investing in our value meal offerings, and at the same time, managing margins through productivity measures, such as Made for You. In the fourth quarter, we maintained (inaudible) of our marketing efforts, and in Mexico, included more a la carte options and compelling affordability offers, along with a (inaudible) of premium products. Systemwide comparable sales growth was modest at 0.5%. In Mexico, the turnaround of our operations continued. As discussed in our third quarter results, we have a more conservative pricing strategy in place, as we continue to work towards building traffic in a highly competitive environment. The net addition of approximately 20 restaurants over the past 12 month period, contributed $8.7 million to revenues in constant currency. Openings for NOLAD were concentrated in Costa Rica and Panama, two countries that have strong presence and potential. Please turn to slide 6. SLAD continued to be a strong contributor to consolidated results in the fourth quarter, as consumption in Argentina and Venezuela remain stable, despite geopolitical and macroeconomic headwinds. Revenues increased 14.6% and 19.2% on an organic basis, compared to the fourth quarter of 2011. The increase in [13:01] growth of systemwide comparable sales of 16.4%, driven by the solid performance of the Triple Bacon in Argentina's GPVP value platform as an example. In Argentina, our growth exceeded over the consumption growth in the country. While in Venezuela, a market where the QSR [capacity] shrunk, we gained market share. A net addition of almost 30 restaurants during the last 12 month period contributed $13.5 million to revenues. In February, the Venezuelan government devalued the Bolivar. Germán will go into further details on this. The announcement had been rumored for some time. Thought in this environment, our focus will be to continue supporting the (inaudible) brand, with the quality products and service our customers expect from us. We are also focusing our resources on other high potential countries in this region, such as Colombia, which is a fast growing country in Latin America, with low QSR penetration. Five years ago, we were the number four restaurant chain in the country, and today we are number one. As a fast growing country in Latin America, and with low QSR penetration, we see a lot of potential in this market. Turning to slide 7, the Caribbean division reported revenue growth of 3.3% and 4.4% on an organic basis. Systemwide comparable sales gained 3.1%, and was positively impacted by the combined various business, which was launched in early 2012. The increased participation of every daily value meals, also benefitted comparable sales, and was fueled by successful marketing campaigns on premium products, including the CBO and McRib. In summary, consolidated revenues grew 5.3%, reaching more than $1 billion and were impacted by the depreciation of local currencies, versus the US dollar, mainly in Brazil and SLAD. Excluding this impact, organic revenue growth was 13.8%. Now please turn to slide 8; our dominant position in iconic locations within Latin America is extremely hard to replicate. In 2012, we extended our footprint with 130 gross openings. As is normal for our industry, the openings were back ended. However, the distribution of openings improved, as compared to the previous year, and is the result of a solid pipeline of attractive opportunities. At the end of December, our restaurant base reached 1,948, more than half of the new restaurants opened in 2012 were in Brazil, which remains one of our highest potential market. Our restaurant count far exceeds our closest competitor, and the competitive environment has not been [more difficult] to obtain strategic locations. We are not only the preferred brand by consumers, but by (inaudible) and major shopping centers as well. During the year, we also added 245 Dessert Centers, bringing the year in total to around 1,950, and 33 (inaudible), reaching close to 340. These formats provide (inaudible) returns on investment, adding to consumption opportunities, as well as brand positioning. We ensure our customers enjoy a contemporary setting. Almost half of our restaurant base has the current image. In addition, I will like to comment on operating advances made to support our market strategies. With Made for You in our principal markets, we have been able to better manage (inaudible) cost pressure, and more importantly, continue to improve upon an already high product quality, and this translates into happy customers. In 2012, customer satisfaction levels at crossover system improved for the sixth consecutive year, and in Brazil, these satisfaction levels were amongst the highest within the McDonald's system, worldwide. We also advanced in maximizing peak hour traffic. Finally, we continue to focus on our resources around high potential countries. Today, we announce the reorganization of our SLAD and Caribbean division, to maximize the contribution of Colombia, which has enjoyed over a decade of strong economic growth and is set to become the third largest economy in the region, after Brazil and Mexico. Under the new structure, Colombia and Venezuela will shift from SLAD and join the territories of the Caribbean division. The division's headquarter have been located in Bogota, Colombia, to further promote the country's significant potential. McDonald's is a preferred brand in the market, which position us to benefit from increasing this crossover income in this underpenetrated region. Now Germán will discuss our adjusted EBITDA generation, financial metrics, and outlook for the remainder of the year. Germán Lemonnier: Thanks Sergio. Please turn to the chart in slide 9 to review our adjusted EBITDA performance. Adjusted EBITDA increased 6.7% to $111.6 million compared to the fourth quarter of 2011. The increase was primarily due to a special item from the resolving of Brazilian tax credit related to certain import costs. Adjusting for special items and the impact of currency translation, organic growth was 4.7%. In addition to the Brazilian tax credit, special items in the quarter, included a net charge of $1.7 million related to the current incentive program, a gain of $1.2 million related to the royalty waiver from Venezuela, and a gain of $5.3 million in the fourth quarter of the previous year related to a rebate from Venezuelan suppliers. As well as a charge related to CIDE tax recognized in the fourth quarter of 2011. The adjusted EBITDA margin grew 14 basis points to 11.1% in the quarter. The increase, primarily reflects improvements in all divisions with the exception of SLAD. In addition, organic G&A as a percent of sales decreased compared to a year ago period, for the third consecutive quarter. The entire (inaudible) has made progress in stabilizing our structure, continued professional services, and improving system of control among other initiatives. In the fourth quarter, the (inaudible) adjusted EBITDA was (inaudible). The increase was mainly due to special items in both periods of $21.2 million, which related to nine months of accrual of CIDE tax in the fourth quarter of 2011, and the tax recovery from prior periods registered in the fourth quarter of 2012. These effects, together with the impact of 14.4% reais devaluation of the dollar denominated costs and higher operating costs resulted in an 11.2% decline in organic adjusted EBITDA in the quarter. All of our other regions (inaudible) higher adjusted EBITDA on a year-over-year basis. In NOLAD, adjusted EBITDA almost doubled to $9.1 million from $4.7 million in the fourth quarter of 2011. On an organic basis, growth was 87.1%. (Inaudible) efficiencies, combined with G&A leverage, among other efficiencies, resulted in an adjusted EBITDA margin of 9% in the quarter. In the fourth quarter, revenue from (inaudible) Costa Rica and Panama leveraged G&A and were an important contribution to adjusted EBITDA. In SLAD, adjusted EBITDA was 7.9% higher in the fourth quarter. The increase reflected temporary royal relief in Venezuela, as well as a [rebate] on certain suppliers in the final quarter of 2011. On an organic basis, adjusted EBITDA rose by 22.2%, reflecting G&A leverage, which was partially offset by higher [retail] costs at the (inaudible). Adjusted EBITDA margin reached 12.8% in the quarter. In the Caribbean division, adjusted EBITDA grew by $2.2 million and reached $3.7 million for the quarter. The adjusted EBITDA margin increased 3.1 percentage points to 5.2% of revenues, mainly driven by efficiencies in payroll, as well as fixed cost leverage. On slide 10, non-operating charges for the full quarter reflects a stable overall funding costs, despite higher debt levels. Thanks to the (inaudible) we implemented over the past year. In addition to providing financing, the (inaudible) also reduced the impact of the reais devaluation and currency valuation on intercompany loan that previously impacted the income statement. Income tax expenses reached $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 reducing certain valuation allowances over deferred tax assets. Net income was relatively stable, amounting $44.2 million versus $46.2 million in the year ago period. The results reflect stable operating results and a decline in income taxes, which was offset by lower non-operating results. The company reported basic earnings per share of $0.21 in the full quarter, compared to $0.22 in the year ago period. Turning to slide 11, you can see our full year results. Revenues increased 3.8% or 14.2% on an organic basis. (Inaudible) comparable sales gain, 9.2%, and included is 19.9% increment in SLAD and 5.2% [are invested] alongside growth in the remaining divisions. The result is an addition to a 13.7% increase in comparable sales in 2011. We achieved a full year of restaurant opening target, with gross openings reaching 130, ending the year, with an overall restaurant count of 1,948. Adjusted EBITDA (inaudible) for the year was between 3% to 5% growth, in constant currency and excluding 2012 share price variation. Based on this criteria, adjusted EBITDA grew 6.8%. If the (Inaudible) recovery for the full quarter are excluded, adjusted EBITDA grew 2.8% versus 2011. Net income was virtually unchanged at $114.3 million versus $115.5 million one year ago. The effective tax rate for the year reached 28.8% and was below the guidance range of 31% to 33%. Capital expenditures for the quarter reached $123.3 million and primarily reflects the distribution of our restaurant opening plan. For the year, capital expenditures were $294.5 million, relatively in line with guidance. In slide 12, we will review our debt indicators. Our [annual quarter] net debt to adjusted EBITDA ratio was 1.4 times. If needed, the ratio can accommodate future development plans. We ended the year with cash and cash equivalents of $184.9 million. Coming now to slide 13, I will give you an update on Venezuela and guidance for 2014. In a long anticipated move, the Venezuela government last month devaluated its currency from 4.3 to 6.3 bolivars per dollar. At the same time, the (inaudible) exchange rate of bolivar is 5.3 per dollar, which the company used to translate the Venezuela [austral] to US dollar for accounting purposes, was in fact, eliminated. Based on the announced rate of 6.3 bolivars per dollar, the company estimates that it will have to recognize the onetime pretax charge of approximately $40 million in the third quarter of 2013, related to the balance of monetary assets and liabilities in Venezuela. In the (inaudible) in the Venezuela market, and the operating history of [all the] failures were well prepared to mark through the current challenges and we are focused on continuing to sell to our clients, and reduce our cost of currency exposure by initiatives such as increasing sourcing from local suppliers. The company (inaudible) for a full year 2013 growth with respect to 2012 is based on a year-over-year organic growth, which is in constant currency, and excludes the special items in both years. We have detailed the special items included in 2012 in our earnings releases. Revenue growth of 2013 would be between 16% to 18%. Adjusted EBITDA growth between 8% to 10%. The effective tax rate, between 33% to 35%, capital expenditure approximately $280 million, and gross, (inaudible) openings approximately 140. (Inaudible) growth is expected to be mainly affected by the Venezuelan operation, in the recent devaluation along with the elimination of the (inaudible) exchange rate, and its consequent impact also on paper costs. We do not have -- we don't provide guidance by region, I would like to highlight that the (inaudible) EBITDA margin in our large market, Brazil. Related to our CapEx budget, I would like to point out that the last year, (inaudible) non-development funds or initiatives such as Made for You, which we have now completed. I will now hand the call back to Woods.

Thank you very much Germán. 2012 was a year shaped by changing economic landscape, and shifting geopolitical realities. Nevertheless, we underlined drivers of our business, mainly a growing population, growing middle class, great brands and a preference for high convenience have not changed. Revisiting our five vectors of performance, throughout the year, we have fortified our leadership position through, number one; the launch of over 100 products and flavors; two, the expansion into 16 cities, with McDonald's brand that didn't exist previously. Three, successes in tightening our cost structure, while at the same time, improving the quality of our products, and the completion of initiatives such as Made for You, and expanding our supplier base; and four, the achievement of G&A leverage across the organization, as I mentioned before. Finally, reduce foreign exchange volatility to hedging and accessing local Brazilian currency debt. As we enter into 2013, we have an exciting marketing calendar, which combines compelling value, strong local activities, new product introductions, along with a refreshing of our Happy Meal marketing, that includes the launch of the happy character. One initiative I am particularly proud of, is the launch last month of our quality campaign, which demonstrates McDonald's commitment to bring our customers closer to the true origin of our food. Focusing on funds and the sourcing of high quality ingredients, and highlighting the investment of local communities to support our supply chain. In addition, we are well on our way to another year of record store openings, while we also have many initiatives in place, to manage our costs. I know many of you have been following the events in Venezuela. Let me assure you, that the priority of our local management and local franchises, is to continue to work hard to deliver the high quality food and a superior experience that our clients expect from us. I would like to reiterate my confidence in the McDonald's brands, our absolutely fantastic management team, and the enormous potential of Latin America. We have unparalleled footprint in the sizeable and growing industry. A dominant brand is continuously strengthened by our product mix, and access to a large portfolio of products, I am confident that we will continue to deliver value to our customers, partners, and especially shareholders over the long term. Thank you for your attention. I would now like to open the call up to questions.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from John Glass from Morgan Stanley. Please go ahead with your question.

Thanks. Good morning. My question has to do with your 2013 guidance, just understanding it a little bit better, (inaudible) as a group. So first of all, I assume that you used the $340 million this year as the base to grow that EBITDA off of in 2013. I know you cited Venezuela as being the primary pressure point there, can you just maybe elaborate in dollars, what you think the pressure is from Venezuela in 2013? And outside of that, I know you have talked about generally stable to improving Brazil, but what is your assumption for example in same store sales in Brazil, that would get you that flat to improving results, when you didn't have -- at least in this quarter, with pretty strong same store sales?

Thank you, John. Let me pass it to Germán, so he can answer you. Germán Lemonnier: Hi John. Mainly saying that the guidance is based on organic growth. So you need to extract the 2012 EBITDA, the special items that are detailed in the earning release, and that (inaudible). In terms of impacting for Venezuela, it's very difficult to quantify. Let's begin that we convert or translate the financial statements now at 6.30 instead of 5.30. But the big impact in Venezuela is basically the elimination in fact of the (inaudible) exchange rates, where a lot of local suppliers ask the company (inaudible) dollars to pay imports. The cost of (inaudible) unclear. So it's very difficult to try to project the impact that we are particularly -- the big impact in Food and Paper costs, because of the elimination of this -- officials generate. In this, basically, you need to have in mind that we have obviously the translation impact. In 2012, the revenues -- the Venezuela revenues consolidated were about 10% and in EBITDA 14%. The dollar component in food and paper is around 40%, and in the last 18 months, we have tried to localize as much as possible, and in this environment, basically, we need to see the reaction of the suppliers and consumers, because of devaluation, not only exchange rate, it's the real economy, and we take a focus in finding the right balancing between average check and traffic, as well as containing costs.

And just thinking about your guidance for the -- excluding Venezuela for 2013, you mentioned, I know you got relief on the minimum wage. But in Brazil, for example, you mentioned that you have got more food locked in, so you'd have better visibility on your food costs, what is your same store sales assumption in that country for 2013? Germán Lemonnier: The main -- the drop in margin is basically because of Venezuela. We do not provide guidance, but we can give you a [market], but let me tell you that in Brazil, margins will be stable or improved, so that could help a lot in terms of guidance. We obviously, the minimum wage increase in 2013 is significantly lower than in 2012. The Food and Paper is stable, and we expect to leverage G&A.

Our next question comes from Mitch Speiser from Buckingham Research. Please go ahead with your question.

Great. Can you hear me?

Yes.

Great, thanks. Just to make clear on the 2013 guidance, Germán, you reported $340.6 million in EBITDA in 2012, should we subtract the $28.6 million in benefits included in that number. So call it $312 million is the base? Germán Lemonnier: Yes, that's right.

The growth? The EBITDA? Okay. I just wanted to clarify that, thank you. And my follow-up question is just on the combined beverage business? I believe, you mentioned its rolling out in Brazil. Can you give us a sense of how many stores it is in Brazil? You said you wanted the -- (inaudible) Brazil at some time in 2012, can you give us maybe a more detailed time table, and perhaps maybe why it's not rolling out quicker? I know you started rolling it out, I believe in November, and just trying to get a sense of why it would not be systemwide at this point? Thank you.

Hi Mitch, this is Woods. We are now in 250 restaurants in Brazil. We will roll it out to the full system in Brazil by the end of the year, and no, it's right on schedule. Don't forget we have a lot of in-stores, there are some space constraints. So it's not as easy as doing a free standard. So we are not at all frustrated with the roll out and we are quite happy with the results.

Our next question comes from (inaudible) from JPMorgan. Please go ahead with your question.

Hi, thanks. Can you discuss the hedging of the commodity costs in a little more detail? I think typically its 20% to 25% of your costs that are exposed to US dollars. So how much of that has kind of been mitigated for 2013?

Yeah, I will pass this question to Germán. Germán? Germán Lemonnier: Hi Ahmed. Basically, we are trying to give credibility to our costs. We are not trying to get [effect]. So in this line, we are doing several hedging to cover the food and paper cost dollar base. At a consolidated basis, this food and paper costs is 30% imported. In Brazil its 20%, for Colombia and Argentina it's 10%, and where in Mexico its approximately [50%]. So what we are doing, we are trying to give credibility. We are closing some hedge in Brazil, for our food and paper costs, for the past, and we are doing some hedges in Uruguay, Chile, Colombia and Mexico.

Okay, great. Then on the (inaudible) volume side in Brazil, it's very helpful, thanks for adding that information. It seems like (inaudible) volumes are pretty stable. Can you talk about what kind of the 2013 mix of openings and results is going to be like, both in terms of regions where you might be opening, maybe outside of Rio or Sao Paulo, and in terms of whether or not they are going to be more freestanding versus (inaudible) and vice versa?

Yeah, we don't give information by region. But we continue to be very interested in Brazil. It's a great market, and we will have a balanced portfolio of new restaurants for that country.

Our next question comes from Lore Serra from Morgan Stanley. Please go ahead with your question.

Good morning and thanks for the call. I wanted to talk a little bit about Brazil and we follow same store sales growth of 6% in the fourth quarter. I wonder if you could give us a sense for how that broke down between transaction counts and average ticket, and I guess what I'd like to understand maybe from Sergio is last year, you felt a need to invest in the value portion to gain back traffic. As you are looking at 2013, how do you feel about the affordability of your mix, and do you see, maybe a bit more renewed pricing power looking into 2013, that you didn't have in 2012 please?

Thank you. Good morning Lore. In general what I would say though is that mostly, the comp came from our check through -- it's not only for Brazil, but for most of the regions for the year. Now having said that, we also increased traffic in all divisions, except Caribbean, where we had a mild decline. So even though, we get the majority of the cap increase in terms of average check. That is a consequence of basically product mix shifts, because we had a really strong (inaudible) platform in the country, in the last quarter of 2012.

Okay, so I mean. How do you feel about your ability to price with inflation into 2013 in Brazil?

This is what we have been doing so far, and we get -- if you look at those numbers we had last year, also compared with most of our competitors, as Woods mentioned in his speech, we did actually very-very well in that. We believe that having the leadership position that we have, we are very well positioned to price properly and -- and achieve a target which is sustained volumes. So, we don't see a major issue on that topic for this year.

Our next question comes from Julio Zamora from Citi. Please go ahead with your question.

Hello. Thank you for the call. To discuss a little bit more, your scenarios for both Colombia, where you are going to be placing more emphasis, and for Argentina, what are you looking at in terms of openings, and how are you -- what's your outlook specifically in terms of same store sales inflations?

Hi Julio. I think Colombia obviously is growing very quickly. I think Sergio mentioned, we were the number four chain some years ago, we are the number one chain today. We have for a long time now, more than five or six years been increasing our investment and bets in that country, and I think that paid off now, because it's the third largest economy in Latin America. So that's wonderful. I mean, Colombia has certain challenges, because it has a lot of different cities which are big, and distribution costs are expensive. But you know, being the first mover, gives us ability to get the better real estate, so it's an ongoing challenge in Colombia, but it's a good challenge, and it's paying off, and it's the highest growth rate country of our portfolio of countries. Argentina, as Sergio mentioned, has a slowdown in the consumption. I think if you look at what you read in the press about Argentina and its financial things with bonds and so forth, you have to take that away, and that's a financial thing, but we are focused on building our volumes. We have a very strong marketing schedule for Argentina. They are going to have elections in October of this year. Probably that will be -- that means there will be a lot of money in the street. So we feel comfortable about Argentina.

Thank you very much. A quick follow-up; could you tell us a little bit about how you are seeing same-store sales year-to-date across the system in the particular regions?

Yes, we don't give data by countries, but we are doing very well against the plan, and your -- that's it. We are doing very well against the plan, so we are optimistic.

[Operator Instructions]. Our next question comes from [Robert Schwank] from Burnham Securities. Please go ahead with your question.

I know you are reluctant to say much more about Brazil, but it's such an important variable in your outlook. You must have somewhat more you could share with us on the exchange rate prospects in that country, which are still likely to be unfavorable in the first quarter, and even in the second quarter, but theoretically, could begin to be a real plus for you in the second half of the year. Would you comment further on what you think is going on in Brazil, in terms of the exchange rate?

Hi Bob. Pleasure to have you on our call. Exchange rates in Brazil and GNP growth in Brazil are things that even the most sophisticated economists can't (inaudible). I mean, last year until the third or fourth quarter, we were talking about 4.5% to 5% growth of GDP and we ended up for the year with 0.9% GDP growth. We are going through the consensus, that's what we are doing. We, as Germán mentioned, got a hedge at 2.10 few weeks ahead, and now it will exchange at I think 1.97, more or less, no? I don't know Bob, I think the country is going well. I think there are a lot of things being done by the government, to contain inflation, I think that containment will really start taking effect in the second half, and I think the greatest thing for us, anyway as a company, is the minimum wage increases this year is substantially below the year before.

Well, not until the second half?

Minimum wage?

Oh, I am sorry, minimum wage increase. Now, that hedge at 2.10, if the rate stays at 1.97, that hurts you doesn't it?

No, I will have Germán explain that. Germán Lemonnier: Again, hi Bob, Germán speaking. Again, we tried to [predict easily] to our cost structure, but a lot of volatility in other markets, and if you remember, last year, we hedged the first part of the year in Brazil import, of 1.75. In the first quarter last year, the exchange rate was 1.70 and in December was 2 plus. So we are not trying to play against currency, only we try to give [credibility] to our food costs or to [credibility] our market gain strategy. (inaudible).

[Operator Instructions]. Our next question comes from [Ahmed Kazim] from JPMorgan.

Hi. I don't want a deep (inaudible), but I just want to be very clear about what the EBITDA base we should be using in terms of the guidance, of 8% to 10%? So I think there was something like $28 million of special charges in the EBITDA that was reported for 2012. But 312 should not be base we are using, right, because that also includes the effects of currency? Germán Lemonnier: No, 312 is the number I will use, and this is constant currency adjusted by the special items in 2012. The special items as detailed in the earnings release, and we call that organic growth. We try to use the same language in all the releases, and in our guidance, to be mostly most transparent in all our communications.

So gross adding currency and special items is 8% to 10% off of the 312? Germán Lemonnier: Yes. Correct.

Okay. Thank you.

[Operator Instructions]. We have an additional follow-up question from [Robert Schwank] from Burnham Securities. Please go ahead with your question.

Woods, that 312 figure, I have been thinking about that throughout the call. That tells that with your forecast, that doesn't imply a great deal of organic growth, considering that the basis is depressed. Are you just being conservative, or I am kind of curious to why you are so cautious on that score?

Well, Bob, hi. Yes, we are being conservative and one of the reasons we are being conservative is Venezuela. Venezuela still has not played itself out and we are early into the year. So there is a bit of conservativeness in there. Having said that, we are very much on track with all the other countries, especially Brazil, which is a huge component of our company.

But if I understand correctly, I think you said you are taking what was a $14 million charge in the first quarter? I don't remember, was it on Venezuela. Now looking forward, what happens with rate of exchange isn't going to affect this adjusted EBITDA is it?

Let me pass this to Germán, so he can elaborate. Germán Lemonnier: Yeah, correct. It will impact our results in the third quarter, for $2 million this is basically because of monetary, and perhaps secondary abilities at the end of the year. But it's balance sheet impact. Again you need to go through the valuation, as mentioned before, in the translation of the financial statement that is easy to calculate, because you need to -- (inaudible). But the most -- the pragmatic parts are calculated there, Food and Paper impact, why? Because, in the past, the (inaudible) market gave access to local suppliers and us through dollars to do imports. And now, (inaudible) was eliminated in fact. So we don't have the reference -- a clear reference to know how much could be because of this import. That's why the impact is higher because of the Food and Paper cost aligned, other than the (inaudible).

Ladies and gentlemen, at this time, I would like to turn the conference call back over to management for any closing remarks.

Okay. Thank you very much. Well I'd like to thank all of you for your interest in Arcos Dorados. Over the last few years, we have built a very strong foundation for [continued] growth, and we have employed, well honed strategies to best navigate the current environment. Our dominant brand provides us substantial long term growth opportunities in an underpenetrated market, and we are maintaining our focus on strengthening our brand, driving sales to new and existing restaurants, and improving our cost structure. Thank you very much, and we will see you next quarter.

Ladies and gentlemen, the conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.