Good morning, and welcome to the Arcos Dorados Second Quarter 2019 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].Also, today's conference is being recorded. At this time, I would like to turn the call over to Patricio Esnaola, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our earnings call. With me on today's call are Marcelo Rabach, Chief Executive Officer; and Mariano Tannenbaume, Chief Financial Officer. Please turn to Slide 2. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I'll refer you to the forward-looking statements section for 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 results as compared with GAAP results, which can be found in the press release and audited financial statements filed today with the SEC on Form 6-K. Our discussion today excludes the results of the Venezuelan operation, both at the consolidated level, as well as for the Caribbean division, due to the country's ongoing macroeconomic volatility. For your reference, we include our full income statement, excluding Venezuela with our earnings release.I would now like to turn the call over to our CEO, Marcelo Rabach.

Thank you, Iñaki. Hello, everyone. I am excited to host my first earnings call as Arcos Dorados' CEO. I am truly honored to have the opportunity to lead this company as we continue to move forward. I would like to thank our Executive Chairman, Woods Staton, and the Board for their confidence in me. I spent my entire career within the material system, building solid relationships with my colleagues, suppliers, franchisees and partners. I am confident that together, we will continue to manage through any challenge, while we continue to expand our market leadership across the region.I still remember my first days on the job, almost 30 years ago, when I started as a crew member in Buenos Aires, Argentina. I am one of many examples of the commitment that Arcos Dorados has always had: to providing youth with high-quality job opportunities and professional career development. I have held many senior leadership positions across our four geographic regions before the last job as COO commencing in 2015, including Divisional President of NOLAD and Divisional President Progressive. Just as my predecessors, my focus has always been on instilling and driving operational excellence and consistently delivering higher levels of performance. I assure you that this will not change.Luis Raganato, who is stepping into my former role, and I have worked together for many years, and I am looking forward to continuing our partnership. We are committed to leading the company toward the continued successful execution of our 3-pillar strategy comprised of: delivering an enhanced customer experience, providing the most relevant and desirable menu offerings and running the best restaurants. Now please turn to Slide 3. Strong momentum continued through the second quarter, reflected not only in our reported results, highlighted by 14.2% comparable sales growth, strong cash flow generation and an additional…

Thanks, Marcelo. Please turn to Slide 4. The positive momentum continued as we delivered another quarter of strong results. The successful marketing and promotional campaigns that we have been executing since the end of last year, coupled with strong offerings, have proven to be key in achieving significant top line growth. Given the continued volatility in a number of our key markets, we have focused on offering an appealing, affordability platform, making this menu even more relevant to our customers.Following the first quarter trend of double-digit consolidated comparable sales growth, in the second quarter of this year, we achieved comparable sales of 14.2% above blended inflation. We also somewhat benefited from easier comps in Brazil, where trucker’s strike in 2018 significantly impacted Q2 consumption across the board in that market.While last reported revenues continued to be impacted by the depreciation of our key currencies, as we anticipated in our previous call, this quarter, the currency translation impact was lower. The significant depreciation of the Argentine peso and the Brazilian real took place in the second quarter of last year.Please turn to Slide 5 for more details on our divisional top line. We again outperformed the sector in Brazil this quarter and achieved comparable sales growth of 12.1%, well above inflation. On top of the strong marketing campaigns, profit growth was also driven by the rollout of EOTF, the expansion of our Dessert Centers and the continued growth of our delivery channel.Moving to SLAD, comparable sales increased 27.7% below the division's blended inflation. While traffic is still impacted by the weak consumer environment in Argentina, we saw a slight recovery by the end of the quarter, posting better figures than the reports from the association of medium-sized retailers. However, we remain cautious about Argentina in the short-term as we continue to…

Thank you, Mariano. Please turn to Slide 6. As you can see, our second quarter performance demonstrates the effectiveness of the key growth accelerators that comprise our omnichannel approach to our markets: delivery, digital and EOTF, with Cooltura de Servicio enhancing the overall guest experience that clearly differentiates our brand. Along with our menu, we are driving guest counts, volumes and market share. With regard to delivery, we continue leveraging more of our restaurant footprint and adding delivery partners, such as Bringg in Puerto Rico. Delivery is now available in 11 markets, at over 1,100 restaurants. This area of our business is growing much faster than we initially anticipated, and incremental sales in restaurants that offer delivery are in line with the global McDonald's system.On the digital front, the number of downloads of our app, an important component of our powerful technology ecosystem, grew to over 26 million. Our app is an important direct channel to communicate product launches and appealing promotions. During the second quarter, we added 79 EOTF restaurants, and it is important to highlight that EOTF restaurants are producing sales lift beyond their first year, going from mid- to high single-digit growth in our main markets. EOTF is definitely working.Along with Cooltura de Servicio, which result in exceptional levels of hospitality, we offer a truly differentiated guest experience that is 100% consistent with being an aspirational brand. We continue rolling out EOTF and are on track to deliver the 650 targets by the end of this year. Please turn to Slide 7. Finally, at the end of June, we have opened a total of 71 new restaurants during the prior 12 months, expanding our already dominant footprint. On top of this, we opened 385 Dessert Centers and 6 McCafés.Now back again to Mariano to talk more about our performance below the top line.

Thanks, Marcelo. Now let's move to our cost structure and profitability on Slide 8. Now top line growth above inflation, combined with our ongoing efforts to capture efficiencies in all our cost line items resulted in an expansion of our adjusted EBITDA margin of 120 basis points to 7.8% this quarter. Despite currency impacts, adjusted EBITDA increased 15.9% in dollar terms and 25.1% in constant currency.Expanding on our cost structure, the main driver for our operating expenses leverage is attributable to scale. Additionally, we continue to achieve efficiencies in payroll due to higher productivity and lower claims, particularly in Brazil. All of these are done while increasing customer satisfaction. Therefore, we were able to more than offset the impact in gross margin, resulting from our change in product mix, reflecting our more promotional strategy to drive traffic in a still challenging economic environment. At the same time, it is important to note that we have been able to keep our Food and Paper cost growth in line or below blended inflation. Finally, our G&A expense decreased by $5.6 million in absolute terms and was down 60 basis points as a percentage of revenues.Please turn to Slide 9 for more details on our divisional results. In this quarter, we achieved adjusted EBITDA margin expansion in Brazil and NOLAD, partially offset by the performance of our SLAD and Caribbean divisions. The performance in SLAD continued to be affected by some cost pressures and changes in mix, mainly arising from Argentina.Moving to the bottom line on Slide 10. We generated $11 million of net income during the quarter compared to $10.7 million in the same period last year. On top of higher operating income, we reported better noncash foreign currency exchange results, partially offset by higher income tax and interest expenses versus last year.Please turn to Slide 11. On the back of our strong cash position and better results, we have been able to accelerate our CapEx program to $57.6 million compared to $39.4 million in the previous year's quarter. We ended this quarter with a net leverage ratio of 1.6x adjusted EBITDA, which is well below our target range of 2x to 2.5x. As a reminder, our leverage ratios are calculated using consolidated as reported results.Finally, I am very encouraged by the performance of our company and the opportunities we have ahead. Despite macroeconomic headwinds that we still face in some of our markets, we have never lost sight of the long-term opportunity, and we continue investing in our business to offer the best guest experience, while maintaining our streamlined cost structure. We remain totally committed to following this path. Our model is built on leveraging scale. So as we continue to grow our top line, we expect to continue to drive additional margin expansion in the coming years.That concludes the review of our financial and operating results. Marcelo has some additional remarks before the Q&A portion of this call. Back to you, Marcelo.

Thanks, Mariano. Please turn to Slide 12. Before opening the call for questions, I'd like to put our most recent quarter's performance in context and comment on two areas that we are extremely proud of for taking a leadership role in our region. Through assigned capital allocation focused on areas with the highest growth potential, our investments in delivery, digital, EOTF and Cooltura de Servicio are clearly paying off, further distinguishing our market-leading brand, strengthening customer loyalty and driving sustainable top line growth. Importantly, we have been driving operating leverage significantly.With our performance year-to-date, we expect to continue expanding our margin, which, combined with sustained revenue growth above inflation, will generate higher returns for our shareholders. Earlier, I touched upon our company's dedication to youth employment and development, which is one of several Scale for Good initiatives that make us the most socially impactful and sustainable restaurant company in Latin America. Another initiative is the commitment to promoting healthier eating habits for kids and families. I am happy to announce that starting tomorrow, our Happy Meal offering, in most of the Arcos Dorados countries, will feature food combinations that are even more nutritive, including more fruits and vegetables with a strong reduction in the levels of fat and sodium and no added sugar. We are the first QSR players to take this step, and this is a key part of our continuing commitment to offering our consumers delicious and nutritive food.Operator, please open the call to questions.

[Operator Instructions]. Our first question today will come from Ian Luketic with JPMorgan.

I have a couple of questions, if I may. So first, on Brazil, I would like to know how has the third key store. And what's the outlook for the full year? So in terms of margins, I understand that a 14.5% margin that you reported last year starts to become easy given the bid on first half. So curious on your expectations. My second question is on Argentina. So with primary scheduled for Sunday, has the company already elaborated different strategies depending on the outcome of the elections? And lastly, is it possible to extrapolate how much of the same-store sales in Brazil was helped by delivery and EOTF initiatives?

Okay. A good one, Ian. Let me begin with Brazil. I'm talking about the trend of the first weeks of the third quarter. What I can share with you is that we are very pleased with the momentum in the first half of the year. And we are very pleased that, that momentum continue in the first weeks of the third quarter. And it's important to mention that the Brazilian economy is not doing as well as expected. The net numbers we got from the market is that the consensus is, for the GDP growth this year, is below 1%, which is far lower than what we were expecting at the last quarter of last year. So the good momentum and the good results we are getting from Brazil is completely related with our strategy and the way we are managing the business. I could mention that we have a very strong affordability platform in place, which is bringing traction and bringing more and more customers to our restaurants.And on top of that, you mentioned a couple of drivers of our growth, which are the deployment of EOTF, where we are seeing very healthy sales lift in the restaurants that are changing the image and introducing all these digital features that comes with EOTF.And on top of that, we are growing delivery. As we mentioned, we are operating delivery in 11 countries, in Brazil, one of those. So those are initiatives, those are part of the strategies that we are implementing in Brazil and are helping us to grow sales like we did in the first quarter and the second quarter. Our momentum continues in the third quarter. Obviously, we remain cautiously optimistic about Brazil for the rest of the year because there is still some uncertainty, but we are very pleased. Obviously, we are the strong leaders in that market, and I think that we are in the right path, with the right establish in place to keep that leadership position and to increase our market share. Maybe Mariano can comment something about margins.

Yes. Yes, in terms of margins also, we are very pleased that we already mentioned during the call, we are seeing the sales growing well above the inflation, we are seeing that gross margin is decreasing, but at the same time, it's important to note that the cost of Food and Paper is not increasing. The gross margin is decreasing mainly because of a change in mix, because we are being promotional, as Marcelo just mentioned. And that's the strategy we are following. And on top of that, I'm mentioning that the cost of Food and Paper is not increasing above inflation. It's important to note that we are seeing some leverage in the payroll line, actually overcoming the loss of gross margin. And on top of that, we are managing the G&A, and we are seeing leverage on that line as well. As we have been mentioning in the past, that's something as long as our sales are growing well above inflation or above inflation, we have -- we are able to manage the P&L in order to gain leverage on the EBITDA margin, and that's what we are seeing so far this year, and that's what we are expecting for the remaining of the year. The only comment we want to make is, in the third quarter of last year, remember that we have a positive tax recovery that was recorded on the third Q. And that was approximately $20 million that was going through the EBITDA. But on top of that, I think that's mainly the explanation.

Okay. So that's for Brazil. In the case of Argentina, I think that your question was around if we have different strategies depending on the outcome of the elections. No, we do not have that kind of approach. What we are seeing in Argentina, obviously, is a consumer environment, which is soft. So we need to be aggressive in terms of our price points, in terms of our affordability platform. And on top of that, we take advantage of our app, which brings us a very good channel of communication with customers in Argentina, where we can share with them the new promotions and some coupons in order to bring additional traffic to our restaurants.So in the case of Argentina, is that the outlook we have for the remaining of the year, so we will continue to work with this kind of approach with an aggressive affordability platform for the next coming months. But it's important to mention that, obviously, for Argentina, this is a very important market for us. We remain very positive in the long-term possibilities and potential of this market. That's why we continue to roll out EOTF in Argentina at this time, at a slower pace for now. And that, in that sense, we are taking advantage of our flexibility to reallocate investments towards other promising markets in the SLAD division, and that's the case this year for Chile, Ecuador and Peru. That's why we announced that we are introducing EOTF in 6 additional markets this year, 2 of those are Ecuador and Peru, which are doing extremely well. And that's an advantage of our portfolio of markets and how we deal with this agile approach to investment. So that I think I have to say about Argentina. Thank you for your question.

Our next question will come from Robert Ford with Bank of America Merrill Lynch.

Marcelo, first, congratulations on the promotion. I don't think there are many folks in the entire system with your level experience across multiple markets and functions. And I wish you all the very best. Now I know you're lapping the truck strike, but I was still very impressed with the gains in Brazil. In your press release, you mentioned productivity, labor claims and G&A sources of leverage. And I was curious if those were listed in the order of importance. And with labor productivity being listed as possibly the biggest source of operating leverage, when it comes to productivity, are there processes or technology elements that contributed to that margin lift? Or is productivity gain simply coming from better use of existing capacity?

Okay. Thank you. Thank you very much for your comments. As you say, you are right. The main contributor for our leverage in labor costs was volatility. And that's because our increases in sales and audience were very strong. And typically, a portion of our labor cost is fixed. So for example, most of the management costs in the -- at the restaurant area, and obviously, at G&A too, is almost fixed. So we gained leverage with the kind of increases in sales and the accounts we are having in that area. And there's big changes in technology. But obviously, we are focusing the execution at the restaurant level and looking for additional improvements and gaining efficiencies in every single restaurants, in every single initiative that we deploy, in some case, technology is helping with that, too. So the main contributor was -- the productivity increases, and we are very pleased the kind of management we are gaining in Brazil at the restaurants level for the line of labor.

Let me add more color. Yes. Payroll, in general, was the main contributor to the increase in margins. Secondly, I would mention the G&A in the market, we are continuously looking for opportunities for efficiencies in our G&A structure. But obviously, when sales increase at this pace, this G&A is mainly fixed. So it's illogical that we see leverage on that line. On top of that, we are seeing also leverage on occupancy and other. Many of the others, for example, include utilities and other fixed costs like insurance, that's when the sales are increasing above inflation. It's normal, natural to see leverage on those lines as well.

And I was curious, with respect to the big tax increase. I don't know if that's just because of the foreign exchange gain or if this is incurred or largely deferred? But I was curious as to whether they step-up into tax rate during the period and your expectations for 2019. And then, again, within this tax hit, how much of this is deferred versus actually being [Technical Difficulty].

Yes. Yes. Related to the tax, we always mention that it's more understandable to see the tax throughout the year and not in each quarter. Because sometimes it's a little bit clear when you see it in the quarters, you see an increase of approximately $3 million in this quarter compared with last year. It has to do as well with the different tax rates in different markets. So it's mainly -- it's not that market about deferred taxes, but is about different rates in different markets and where we have the income and where we don't have it. So in this case, it's mainly coming from more income in Brazil. And that's the main contributor to this increase. But going forward, we are not seeing any changes in this line, and it should be in line with what we saw last year and what we are expecting for 2020 is in line with what we are seeing here so far in 2019.

[Operator Instructions]. At this time, there are no further questions. It looks like we have a follow-up from Ian Luketic from JPMorgan.

So a quick follow-up here. So I was wondering if you're already negotiating your protein prices for the following year. So if you could give us a couple of sensitivity, maybe your outlook on what are the negotiations going and what we should expect for the next year.

Okay, Ian. Well, we are not ready to share much more detail on that. We are very encouraged with the discussions we are having with McDonald's regarding our next three year cycle investment plan. But we do not have all the details. There is still a bit work we've done in this area in order to close the discussions and the negotiations with McDonald's. And as soon as we have any information to share with you, obviously, we will do that. So, sorry, but that's the situation with this matter.

I'm not sure if I was clear. So my question was regarding the negotiation with the protein companies. So regarding beef, poultry and pork prices for the next year.

Okay, sorry. Sorry. So I misunderstood your question. We are beginning to work in our 2020 plan, particularly in terms of costs. We are not foreseeing any relevant additional pressure. There were, in the past, questions around the swine fever, and if that was impacting somehow in a relevant manner our beef cost, which is not the case. So I would tell you that our supply chain team is doing an extremely good job in the area of keeping our costs, Food and Paper costs, growing in line or below inflation, which has helped us to be as aggressive as possible in terms of the offers and the promotions that we run in the different markets. So that's the outlook right now. Maybe Mariano can add some color on this.

Yes. I just wanted to add that we already finished our hedging program for 2019 and we already started hedging for the first quarter of 2020. Remember that we hedged our Food and Paper, the imported part of our Food and Paper costs on a rolling basis, on a 9-month rolling basis. That's our hedging policy. So we already have some certainty on the effects that we would face for the coming months. We do that not only, of course, in Brazil, but in all the markets where these instruments are available: mainly Colombia, Hawaii, Chile, Argentina and Mexico, Peru.

Our next question will come from Pedro Fagundes with Bradesco BBI.

I have a very quick follow-up, actually. I think we have stretched on it a couple of times, but I just wanted to check. Regarding margins for delivery orders, I think you guys mentioned last time that it is accretive for EBITDA. So I was just wondering, when you say accretive, you mean that delivery margins are accretive to EBITDA margin or for cash EBITDA?

Yes. Thank you, Pedro. Yes, if you want -- Pedro, what we mean there is that this is adding to our margin, is we are making cash out of the business. That's what we meant. Sorry, if that was not clear.

Okay. Got it. So the margin per se is lower at the -- for delivery orders, right?

It depends. It depends. You have different things to take into consideration. You have to pay -- it's a different business. You have to pay a fee to the third-party operator, you have different pricing strategies, you have some fixed costs at the restaurant level that are diluted well and it starts to be -- take advantage of those fixed costs when you do delivery at times when the restaurant has capacity, in terms of payroll, in terms of utilities, in terms of a lot of things. Analyzing that in a different way, so different type of business. Also we mentioned that there is no -- it's 70% of delivery sales are incremental. We all know that. What we are saying is that delivery is bringing cash...

Additional cash.

Additional cash to the business.

This concludes our question-and-answer session. I would now like to turn the call over to Mr. Rabach for any closing statements.

Okay. I would like to thank everybody in my first earnings call as CEO of Arcos Dorados. I was a little bit nervous here. But thank you. Thank you, everybody. As always, we will be available, our IR team, for any additional questions or follow-up. And I look forward to speaking with you again soon. So have a very nice day, and thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.