Good morning, and welcome to the Arcos Dorados' Second Quarter 2016 Earnings Call. A slide presentation will accompany today's webcast, which will also be available in the Investors section of the company's website, www.arcosdorados.com/ir. [Operator Instructions] At this time, I would like to turn the call over to Mr. Daniel Schleiniger, Senior Director of Corporate Communications and Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today. With me on today's call are Sergio Alonso, our Chief Executive Officer; Marcelo Rabach, our Chief Operating Officer; and Jose Carlos Alcantara, our Chief Financial Officer. 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 statements 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 Acceptable Accounting Principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results, as compared with GAAP results which can be found in the press release and unaudited financial statements filed with the SEC on Form 6-K. I would now like to turn the call over to our CEO, Sergio Alonso.

Thank you, Dan. Hello everyone and thank you for joining us today. Let me start as we initially do by providing you with an overview of the progress against our three years strategic plan. Over the last 18 months, we have worked to execute a plan designed to capture efficiencies in our restaurant operations, streamline our cost structure and review our debt levels. To the second quarter we have made solid progress against the key components of our plan. Operating margins are improving as a result of technology upgrade and other management actions to run more efficient restaurants. And we are delivering our G&A reduction target well ahead of schedule. At the same time we continue to identify and realize additional G&A saving opportunities. Earlier this year we successfully refinanced our Brazilian Reais denominated debt within challenging capital market conditions. Our asset monetization initiative has delivered more than $90 million in cash proceeds which we have used to reduce our total debt levels. At the end of the quarter, we have reached nearly 40 re-franchising agreements. Of those more than 20 restaurant operations have already been transferred to our top franchises. While we expect short-term volatility to continue, I am confident in the long-term potential of our business. With a newly streamlined and more efficient organization, we will be able to quickly leverage our turnaround in economic growth in our key markets. Coming now to our second quarter results, we continued the positive trend in our consolidated EBITDA margins. This was despite a difficult operating environment. We achieved more than 50 basis points of margin expansion at the consolidate level. This improvement was supported by strong EBITDA performance in our NOLAD and Caribbean divisions, as well as by important G&A leverage across the company. The current consumer fundamentals in Brazil…

Thank you, Sergio. Please turn to Slide 3, the slowdown in consumer behavior in Argentina and Brazil that we saw at the end of the first quarter continued into the second quarter. On a constant currency basis, revenues grew 10.1% but by a 9.5% increase in comparable sales. Revenues were once again impacted by the depreciation of local currencies mainly in Argentina and Brazil where consumer confidence continues to be under pressure. However the NOLAD and Caribbean divisions have achieved consistent positive performance. We continue to leverage our affordability platform and the success of the Happy Meal across all markets. Please turn to Slide 4, for more detail on our divisional results. In Brazil, retail sales and consumer spending faced additional pressure in the second quarter. The economic recession, political instability, declining employment and real wages all drove consumption down. Take on the most recent data, retail sales fell the most on record for the month of May in Brazil. Against this backdrop, our constant currency revenues were broadly flat year-over-year as our comparable sales we have increase in average check offset by a decline in profit. To put these into perspective the second quarter faced a tough traffic comp from the Monopoly promotion in the prior year quarter. Key marketing initiatives included the launch of Almoço Completo in the affordability platform, strong promotional activities and the Grand Big Mac campaign. Other initiatives included the Angry Birds in the Happy Meal, the continuation of the ClubHouse burger and the launch of the Mushroom Dijon burger both from McDonald's Signature line. Moving to Slide 5, second quarter revenues for the NOLAD division rose by mid-single digit on a constant currency basis and comparable sales were broadly flat. The results was helped by average check growth partially offset by a slight moderation…

Thank you, Marcelo. We continue to see strong results from our cost efficiency program. This important reductions in payroll and G&A in the quarter. These factors drove margin expansion and should enable greater leverage of our operating model once the environment improves. During the quarter, consolidated G&A fell 100 basis points at a percentage of sales and was 5.8% lower year-over-year on a constant currency basis. This reflects efficiencies from our reorganization plan and certain non-recurring expenses in the prior year quarter. These factors more than offset the inflation driven growth of Argentina based corporate expenses. As Sergio mentioned, we're on track to deliver on our targeted 10% G&A reduction in absolute terms by the end of this year. Please turn to Slide 9. On a constant currency basis, our consolidated adjusted EBITDA grew 34.7% in the period. However this growth was offset by the impact of currency translation mainly in Argentina, Brazil and Venezuela. As a result, as reported adjusted EBITDA fell 0.6% in the quarter. Excluding Venezuela consolidated adjusted EBITD declined 3.7% but increased 14.2% in constant currency terms. The adjusted EBTIDA margin grew by about 50 basis points to 5.9% in the second quarter. Efficiencies and G&A expenses, payroll and a positive variance in other operating income more than offset higher food and paper costs in occupancy and other operating expenses as a percentage of revenues. I'm particularly pleased with the payroll efficiencies we are seeing which are a direct benefit of technology upgrades and other actions we have implemented to improve the efficiency of our restaurants. Please turn to Slide 10. Expansion in the consolidated adjusted EBITDA margin was supported by margin growth in NOLAD and in the Caribbean division, partially offset by margin contraction in Brazil and SLAD and the devaluations in Brazilian Reais and…

Thank you, Jose Carlos. We have made important progress on the targets, in our three-year strategic plan. This plan not only responds to current challenges but positions Arcos Dorados to benefit from the longer term growth opportunity in our industry. We have made meaningful reductions to our G&A base as well as restaurant level cost structure through strategies that streamline management decision making and bring us closer to our customers. We got implement a forecasting and scheduling system in our largest market that optimizes our personal costs without sacrificing customer service and we got to strengthening our balance sheet through our asset monetization initially and subsequent debt reduction. These strategies have not deflected our focus on the most important aspect of our business, our customers. We have reformulated the affordability platform, introduced new and innovative menu items and we’ll continue to benefit from the many advancements of the global McDonald system. In addition to the many offerings we are also investing in the customer experience with technology upgrades and other steps aligned with McDonald’s global plans for offering modern and progressive restaurant environments. This Friday is the opening ceremony of the 2015 Olympic Game in Rio de Janeiro. As part of McDonald’s official sponsorship of the event last week we began serving athletes and other attendees of our McDonald’s restaurant in the Olympic village. On Saturday we will open the world’s largest research center in the Olympic park to serve the thousands of visitors that have arrived from all over the world for the event. There is much more potential we can capture in Latin America. With our clear strategy and are taking the necessary steps to strengthen our leadership position. The continued execution of our plan will result in sustained profitable growth for our company and our shareholders. We are confident that we are taking the appropriate steps to build on Arcos Dorados' position as the premier QSR brand in Latin America. So thank you for your attention and I will now open the call to questions.

[Operator Instructions] Our first question comes from Martha Shelton of Itau. Please go ahead.

Hi, thanks for taking the question. Very quickly if you could offer an update on same-store sales in Brazil thus far in the third quarter of 2016 and then also if you could give us an estimate of the affordability labor scheduling tools benefit on Brazil margins, if you could just estimate that. Thanks so much.

Thank you. Good morning, Martha. Just to give you some context to the volume and sales situation in Brazil in Q2, the consensus obviously, the conservative view that we have and we see the economic it is under pressure and would remain under pressure throughout this year. Having said that, we expect certainly changing of the economic environment by the end of the year and we also expect a return to some growth in 2017. So with all that in mind obviously we faced tough comps in second quarter basically against Q2 2015 where we run the monopoly promotion in Brazil so that is to obviously with the campaign we see that we will experience some difficult trends over the last two year periods. But again if we take a longer view what will happen in the volumes in the longer period view four to five years, you will find that the trend is very, very positive. So all that said, although traffic has been varyingly difficult this quarter, we expect to gain additional traction out of the enhancement on the affordability platform that we will deploy in the market this year. That's on the same-store sales situation. Then on the update on the Kronos scheduled system update, Marcelo…

Yes. Hi, Martha. As you know, we finished the implementation of the Kronos last year in October in Brazil. And since then, we are seeing - we are right on track to get the deficiencies that we were looking for. We are seeing something around 100 basis points in terms of leverage in our P&L. So we are very confident that the investments we made in the last year will pay us back in terms of margin improvement.

And our next question comes from Robert Ford of Bank of America Merrill Lynch. Please go ahead.

Hi, thanks and good day everybody. I had a question with respect to redevelopment and refranchising. And I was curious if you could give us a number of properties in terms of the redevelopment effort that you’ve made so far in terms of the number of properties, locations, any expected temporary store closures as those locations are redeveloped? And then how many additional locations do you expect to redevelop and the timeframe for those please? And then with respect to refranchising, can you talk a little bit more about the number of units that you’ve refranchised so far? It doesn't simply appear to be gross openings less closures, which would suggest about 16 units that you’ve sold for about 875K each. And then with respect to the transfer of those assets to sub-franchisees, how will the economics of those sub-franchise units now work, is there a rental income spread that Arcos will receive in exchange for the sale of those locations. Thank you.

Good morning, Bob. I think the first part of the redevelopment and we can share the situation of the refranchising. By the way, you’re right on the thing. Redevelopment, we’re on track, as we’ve mentioned during the speech and we have signed agreements that represent about half of our three year pipeline that we announced in March last year. As of today, we raised over $80 million in cash from our redevelopment initiatives and we also expect some additional inflows within the balance of the year and entering in 2017. We have to keep in the mind that the main goal of this initial is both in this case not redevelopment and balance refranchising is to reduce the company net levels and the realities so far as Jose Carlos mentioned, we have reduced around $80 million our $[223] [ph] U.S. dollars loans. Having said all this our focus remain to be reduce our debt levels and bring in the net debt to EBITDA ratio back to between 2 times and 2.5 times range. Even if we get to this levels without the need of executing, the entire site around $200 million that we announced. So far we have very, very small number of units in Mexico, but we are not talking about the large number of our restaurants that will be redeveloped to some extent. I want to say we can wrap up this which also is it gearing obviously that period were the real estate will be developed, we have a pretty good time when the restaurant will be closed while we wait the building or shopping mall to be rebuild and we put our restaurant back on the same site, if you remember keeping the ownership on that real estate.

Yes. May I add something around this? And the good news is that we will have in the future, it's a brand new McDonalds. We have better trading area with traffic generators, so after that deal and the restaurant will be closed. We expect much better results in terms of serving traffic and profit from those new ones. So we are waiting for the next month in order to these properties we have developed and those from new restaurants.

And on the refranchising piece where we said so far we already transferred over 20 restaurants out of the refranchising efforts. We've reached for the agreement which is an ongoing process. We have a pipeline of restaurants to be refranchised mostly in Brazil, but we get some other markets as we mentioned before like Argentina and Chile. The franchises that those restaurants are existing franchises, which we take that as a proof of our share confidence in the future prospects of the business, and the value of this is model, yes of course once we refranchise our restaurant we make our profit from collective rents from a franchise and there is a what we call rental margin that is composed by the difference between the rent that we get from the franchise and the occupancy cost of those restaurants.

And Sergio I read the press release correctly, it seem to suggest that there was a drag on an earnings because of some of the stores that may have been refranchised, is that the case or some of these stores loss making an effect, or less profitable than average so that may also be a lift in terms of earnings as you go through this transition period?

I will pass to Jose Carlos

No, there was no drag on our profitability because it started transferred.

And in terms of future profitability we expect it to be neutral.

[Operator Instructions] Our next question comes from Jeronimo De Guzman of Morgan Stanley. Please go ahead.

Hi. Good morning. I just want to start with a couple of follow-ups from some of you've mentioned, maybe on the same-store sales in Brazil, you mentioned there is new reformulated affordability platform, and I just wanted to see as if you could give us some color on why we still haven't seen a pick-up in traffic gains, if you think this is just a timing issue, where we'll see more of a reaction going forward, or is there anything that needs to be - anything else that that you think needs to happen before we start seeing that acceleration? And also if you can give us some color maybe also on the - if there is any difference in the traffic trends or the top line trends when you look at the mall units versus the standalone units? And then I also wanted to follow-up on what you mentioned on Kronos just kind of wanted to check where you are on the roll out in other markets?

Of course, yes. You're monitoring only on Europe, you are perfectly on the point. I think said before in this particular quarter we face tough comparison against last year because of the monopoly promotions that is one important point that we need to put in place. Second one is the rate of business performance between different store pipes, Marcelo, why don't you…

Yes. As we mentioned we see for the full year on the - for the second quarter the better performance in our freestanding units, our units where we rely on our ability in order to bring profit to restaurants and it's better situation at malls where obviously traffic relies mainly of these malls to bring customers. So I think that this was the trend for the last few months and we are in the same for the rest of the year.

And then on the Kronos piece, the market is - lot of is complete here, but as we said last year it would take some time to get all the restaurants we will debate running in perfect shape, as we are today that is why we are seeing the benefits in the labor line [indiscernible]. We had all these markets up and running and the benefits that we expected to get are coming through.

And our next question comes from Robert Schweich of Burnham. Please go ahead.

Hello, Sergio. I am wondering to what extent Arcos Dorados maybe utilizing some of the newer ideas and programs coming out the McDonald's in Chicago. There is a lot going on in terms of development there in terms of menu and I don’t know how much breakfast and all of this sort of things and I am wondering how much has been applicable for you and do you envision this having an impact on your business to your own implementation of some of these programs?

Sure. Good morning, Bob. It's nice to talk to you. By pieces, number one the straight answer on all the work front that has to do with what it is a habit on common in our markets. I think Latin American most of the markets we have served are different culture in terms of breakfast habit. Having said that, Puerto Rico is the market that we have is closest breakfast culture than U.S. and that is why we do have all the breakfast in Puerto Rico which by the way is very, very vast robust have been in the U.S. So we need to say that on the product side and the product offerings, we are always looking at opportunities not only in the U.S. in reality both we have the advantage of having the capability of to cap in different development for new products everywhere in the world. That is our sheer experience that we also develop some products when we take into other geographies. So we always benefit from this. Marcelo?

It's maybe another good example of what's Sergio talking about is the signature line that's the creation of McDonald's and we are taking advantage of that development and right now we launch the ClubHouse burger of the first step on that platform. And the second one was the Mushroom Dijon that we're launching in our main markets. So, obviously we will continue to work closely with our gear to McDonald's in order to take advantage of all the research and development that have been doing around the globe.

And on the other piece of the question Robert, I refer in a speech as a experience of the future pilot implementation that we are moving ahead in our geography and that is also our - reflect and global effort for McDonald’s system. This is basically enhancing the consumer experience obviously by adding some kind of digital interfaces basically for the ordering process and some customization of the products the customer will buy obviously brings also benefits on menu with improvement on customization as I said before and brings up also an important thing which is to enhance the look and feel of the restaurant where the customer sees every time enters a restaurant and goes to [indiscernible]. We are part of that effort and we’re working on our implementation plan for that initiatives in the years to come.

Thank you. And I realize that all of these specifics related to what's going on out through the McDonald system all this is important but the macro economic, political environment situation that you are expecting to see improvement major improvement starting next year is probably the most important variable in the results of Arcos Dorados.

Yes, of course. We tried to say that a couple of times. The reality is there is an additional boost factor that we believe in that sense which is we work particularly in the last 18, 24 months on streamlining our business on making the company and the restaurants more efficiently and cover leaner G&A and all those effect combined will put us in a much better position when the economy start to recover to capture additional margin expansion quicker than before I am sure.

[Operator Instructions] Our next question is a follow-up from Martha Shelton. Please go ahead.

Hi, thanks for taking follow-up. Very quickly on NOLAD, I’ve been noticing good EBITDA margin performance for the past several quarters and I just wanted to get a sense from you regarding what sort of EBITDA margins you think that the NOLAD division could top out at, you know, are thinking like low double-digits, are you thinking about teens, something in that neighborhood. My understanding is that it’s largely a volume oriented story. And then another question I had for you was when should we expect to hear updates regarding the opening plan for McDonald over the three-year period and capital expenditures for McDonald over the three-year period? Thanks.

Okay, for the first part, Martha we do not provide a future projections for EBITDA but I believe Martha maybe there are some clearance on the actual performance of the division in the quarter we can…

As we mentioned in the call before we’re seeing great results coming from Costa Rico mainly and Panama and this the result of all the efforts that the company is doing across the market in order to streamline our P&L and improve our cost. So the economic in the rest of the company bring us better times to the main market obviously we are waiting for same kind of results in the rest of the divisions.

And on the negotiations with McDonald’s, well you know that we’ve already initiated compensation in McDonald’s about the 2017, 2019 cycle but as you know we have to get an agreement before the end of the year. So obviously as soon as we reach, we finalize the compensation from McDonald’s and we reach an agreement we will update you on the earnings call for sure.

And this concludes our question and answer session. I would like to turn the conference back over to Mr. Sergio Alonso for closing remarks.

Thank you very much for your questions and for your attention today. I will certainly look forward to speaking with you again for next quarter results conference call. In the interim, our team remains available to meet with you and answer any questions that you might have. So on that said, thank you very much and enjoy the rest of your day.

And ladies and gentlemen the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.