Arcos Dorados : Reports 1Q 2024 Financial Results

Arcos Dorados

1Q 2024 Results

May 15, 2024

ARCOS DORADOS REPORTS STRONG FIRST QUARTER

FINANCIAL RESULTS

• Total revenues of $1.1 billion in the first quarter, up 9.1% versus the prior year.
• Systemwide comparable sales¹ grew 38.6% in the first quarter, supported by the twelfth consecutive quarter of guest volume growth.
• Digital channels (Mobile App, Delivery and Self-order Kiosks) generated 55% of systemwide sales in the period, including 22% identified sales.
• Loyalty Program reached 8 million registered members, more than double the year-end 2023 total.
• Consolidated Adjusted EBITDA¹ was $108.9 million, rising 8.4% year-over-year.
• Net Income was $28.5 million in the first quarter, or $0.14 per share.

Montevideo, Uruguay, May 15, 2024 - Arcos Dorados Holdings Inc. (NYSE: ARCO) ("Arcos Dorados" or the "Company"), Latin America and the Caribbean's largest restaurant chain and the world's largest independent McDonald's franchisee, today reported unaudited results for the three months ended March 31, 2024.

First Quarter 2024 Highlights

• Consolidated revenues totaled $1.1 billion, up 9.1% in US dollars versus the prior year period.
• Systemwide comparable sales¹ increased 38.6% versus the first quarter of 2023, supported by positive guest traffic at the consolidated level, which grew for the twelfth consecutive quarter.
• Consolidated Adjusted EBITDA¹ of $108.9 million, grew 8.4% in US dollars versus the prior year period, with strong performances in both Brazil and the North Latin American Division (NOLAD).
• Adjusted EBITDA margin expanded 90 basis points in Brazil and 30 basis points in NOLAD.
• Net income was $ 28.5 million in the quarter, or $0.14 per share.
• Net Debt to Adjusted EBITDA leverage ratio ended the first quarter at 1.2x.
• The Company opened 22 restaurants in the quarter, including 19 free-standing locations.

1 For definitions, please refer to pages 15 and 16 of this document.

Message from Marcelo Rabach, Chief Executive Officer

The strength of these results demonstrate how far we have come as a company over the last decade. The Arcos Dorados business model delivered solid US dollar growth to start 2024, despite a challenging economic environment in one of our main markets. Importantly, by operating responsibly and managing the business with a long-term mindset, we built our strongest ever Brand reputation among Latin America's quick service restaurant (QSR) customers.

Over the last ten years we diversified our business to reduce our exposure to any single country. While Brazil remains our biggest market, both NOLAD and SLAD now contribute significantly to sales and EBITDA. NOLAD generates results in hard or very stable currencies while high growth potential markets in SLAD, such as Chile, Colombia and Uruguay, have also increased their contributions to consolidated results.

The business model and the Three-D's strategy (Digital, Delivery and Drive-thru) are working well together. We are focused on generating sustainable profitability growth over the long term. Our balanced approach to managing pricing, product mix and guest volumes is driving above-inflation comparable sales growth throughout our operations. Guest volumes are key to driving sustainable sales growth, and the McDonald's Brand captures the highest volume per restaurant in our region.

We see significant growth potential in Latin America and the Caribbean, and we are accelerating restaurant openings. We expect investments in the McDonald's Brand to foster a virtuous cycle of growth in our communities and local economies. A more robust local economy should, in turn, support our long-term expansion plans while insulating the business from short-term volatility.

Before closing, I want to express how saddened we are by the severe flooding in Brazil's southernmost state: Rio Grande do Sul. Since this is an ongoing situation, it is too early to estimate the long-term human and environmental impacts of this natural disaster. In the meantime, we are actively supporting our people, suppliers, sub-franchisees and the communities we serve.

Our efforts are focused on our employees and their families, including by providing basic necessities and by guaranteeing their job security during this difficult period. We have also begun distributing food within the communities we serve as well as to first responders. Our restaurant spaces have been made available to people seeking shelter, food or even just a place to charge their cell phones. Moving forward we will be working on several initiatives, in coordination with local governments and NGO's to continue supporting our people and to aid in reconstruction.

Finally, as we think about the future of Arcos Dorados, we believe all the levers we pulled to generate the strong results of the first quarter and, indeed, the last several years, will continue to drive results into the future. This is why we are confident we will be able to generate significant shareholder value for many more years to come.

Thank you for your continued support of Arcos Dorados.

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1 Consolidated Results

Consolidated Results

Figure 1. AD Holdings Inc Consolidated: Key Financial Results (In millions of U.S. dollars, except as noted)

		Currency	Constant
	1Q23	Translation	Currency	1Q24	% As	% Constant
	(a)	(b)	Growth	(a+b+c)	Reported	Currency
			(c)
Total Restaurants (Units)	2,312			2,381
Sales by Company-operated Restaurants	946.4	(365.5)	450.5	1,031.4	9.0%	47.6%
Revenues from franchised restaurants	44.4	(8.1)	13.6	49.9	12.4%	30.6%
Total Revenues	990.8	(373.6)	464.1	1,081.4	9.1%	46.8%
Systemwide Comparable Sales						38.6%
Adjusted EBITDA	100.5	6.9	1.6	108.9	8.4%	1.6%
Adjusted EBITDA Margin	10.1%			10.1%	-
Net income (loss) attributable to AD	37.4	1.8	(10.7)	28.5	-23.8%	-28.7%
No. of shares outstanding (thousands)	210,595			210,656
EPS (US$/Share)	0.18			0.14

Arcos Dorados' total revenues reached $1.1 billion, up 9.1% in US dollars versus the prior year quarter. Systemwide comparable sales in the first quarter rose 38.6%, with nearly all the Company's markets growing sales above local inflation. Importantly, consolidated guest volume grew for the twelfth consecutive quarter. The Company's systemwide comparable sales grew 2.2x blended inflation for the period, excluding Argentina.

Off-premise sales (Delivery and Drive-thru) increased 14% in US dollars versus the prior year, and generated 44% of systemwide sales in the first quarter of 2024. On-premise sales (front counter, dessert centers and McCafé) grew 7% in US dollars versus the prior year, accounting for 56% of systemwide sales in the quarter.

Digital channel sales rose 30% versus the prior year and represented 55% of systemwide sales. The Company's Digital platform continued to drive topline performance in the first quarter, boosted by the strong penetration of sales through Self-order kiosks and the Own Delivery and Mobile Order and Pay functionalities on the Mobile App.

The Company's Digital platform drove visit frequency by offering an increasingly personalized experience to guests. As of the end of March 2024, Arcos Dorados' Customer Relationship Management platform had about 85 million unique registered users and the Company's Mobile App surpassed 123 million cumulative downloads, reaching more than 19 million monthly active users in the quarter. During the quarter, identified sales represented 22% of total sales.

Notably, in the first quarter of 2024 the Company signed an agreement to become a regional sponsor of Formula One in Latin America. The sport has become very popular with families throughout the region, bridging all demographic, gender and socioeconomic groups. This agreement is expected to provide significant brand presence and the sponsorship will focus on further leveraging the Company's successful Three-D's strategy, especially the Drive-thru segment with its precision, teamwork and speed of service.

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Adjusted EBITDA

1Q24 Adjusted EBITDA Bridge

($ million)

First quarter consolidated Adjusted EBITDA reached $108.9 million, up 8.4% in US dollars over the prior year quarter, with strong performances in Brazil and NOLAD more than offsetting the decline in the South Latin American Division (SLAD). The significant devaluation of the Argentine peso in December 2023 and a weaker consumption environment in Argentina impacted SLAD's results in the quarter. Consolidated Adjusted EBITDA margin remained flat at 10.1% versus the prior year, with margin expansion in Brazil (90 basis points) and NOLAD (30 basis points) offsetting a margin contraction in SLAD.

Consolidated margin performance included lower Food and Paper (F&P) costs as a percentage of revenue, driven by a better gross margin in Brazil, coupled with operating leverage in General and Administrative expenses (G&A) when compared with the prior year. Payroll expenses were flat as a percentage of revenue compared with the prior year quarter. These effects were offset by moderately higher Occupancy & Other Operating expenses in the first quarter as a percentage of revenue, primarily explained by a decline in operating leverage due to below inflation sales growth in Argentina.

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 2024 or the first quarter of 2023.

Excluded from Adjusted EBITDA: There were no notable items excluded from Adjusted EBITDA in either the first quarter of 2024 or the first quarter of 2023.

Non-operating Results

Arcos Dorados' non-operating results for the first quarter included net interest expenses of $16.4 million and a non-cash foreign exchange loss of $1.0 million. The Company recorded an income tax expense of $19.0 million in the quarter.

Net income attributable to the Company totaled $28.5 million, or $0.14 per share, in the first quarter of 2024. Total weighted average shares for the first quarter of 2024 amounted to 210,655,747 compared to 210,594,545 in the prior year's quarter.

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2 Divisional Results

Brazil Division

Figure 2. Brazil Division: Key Financial Results (In millions of U.S. dollars, except as noted)

		Currency	Constant
	1Q23	Translation	Currency	1Q24	% As	% Constant
	(a)	(b)	Growth	(a+b+c)	Reported	Currency
			(c)
Total Restaurants (Units)	1,091			1,141
Total Revenues	374.2	20.8	54.0	448.9	20.0%	14.4%
Systemwide Comparable Sales						9.4%
Adjusted EBITDA	59.5	3.5	12.5	75.4	26.9%	21.0%
Adjusted EBITDA Margin	15.9%			16.8%	0.9 p.p.

Brazil's revenues increased 20.0% in US dollars versus the first quarter 2023, reaching $448.9 million. Systemwide comparable sales rose 9.4% year-over-year, or 2.2x the country's inflation in the period.

Guest traffic and sales growth were driven by a strong performance of Digital channels. Digital sales rose 38% versus the prior year and contributed more than 65% of the division's systemwide sales in the period, including 26% identified sales. Delivery sales grew 44% in US dollars versus the prior year and reached a new quarterly sales record for this channel in the country. Off-premise channel sales represented 42% of Brazil's systemwide sales in the quarter.

The Loyalty program "Meu Méqui" continues to grow and had more than 8 million registered members at the end of April 2024, up from 3.2 million at the end of 2023. The program continued driving improvements in guest frequency, average check and redemption rates.

Brazil's marketing plans and campaigns included the continuation of the successful "Méqui Me Pega" campaign and the launch of the "Big Tasty Turbo Cheese" sandwich. The market engaged with Generation Z customers by continuing its sponsorship of the region's most popular music festival, Lollapalooza, in São Paulo as well as the country's most popular primetime television program, Big Brother Brazil. The division also drove brand excitement and customer engagement across all sales channels by bringing back the McFish sandwich as a limited time offer, selling out in a short time. In the dessert category, Brazil introduced the McFlurry "Chocrocante" with a popular local chocolate known as "Diamante Negro".

The Brazil division continued to strengthen its brand leadership position, achieving an all-time-high visit share score over the trailing 12 months. The market share gain in Brazil was accompanied by record high scores in brand equity, including Top of Mind and Favorite Brand, which were 4.0x and 2.0x the main competitor's scores, respectively, according to the Company's proprietary research. In fact, all brand attributes tracked by the Company presented favorable gaps compared with the nearest competitor in the market.

As reported Adjusted EBITDA in the division reached $75.4 million in the quarter, rising 26.9% versus the prior year in US dollars. Adjusted EBITDA margin was 16.8%, up 90 basis points versus the prior year period, including lower F&P costs as a percentage of revenue and operating leverage in both Payroll and G&A due to strong sales growth in the division.

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North Latin American Division (NOLAD)

Figure 3. NOLAD Division: Key Financial Results (In millions of U.S. dollars, except as noted)

		Currency	Constant
	1Q23	Translation	Currency	1Q24	% As	% Constant
	(a)	(b)	Growth	(a+b+c)	Reported	Currency
			(c)
Total Restaurants (Units)	639			647
Total Revenues	259.3	14.9	28.6	302.7	16.8%	11.0%
Systemwide Comparable Sales						8.0%
Adjusted EBITDA	23.7	1.5	3.4	28.6	20.7%	14.3%
Adjusted EBITDA Margin	9.1%			9.4%	0.3 p.p.

As reported revenues in NOLAD reached $302.7 million, up 16.8% in US dollars versus the prior year quarter. Systemwide comparable sales rose 8.0% year-over-year, or 3.1x the division's blended inflation in the period, with sales increasing above inflation in all markets. The result also included particularly strong traffic growth in Mexico, Costa Rica, Panama and the French West Indies. Additionally, the quarter benefitted from the extra trading day on February 29 and a positive impact from Holy Week, particularly in Mexico.

Digital channels drove topline growth in the first quarter as the Company continued to invest in the modernization of its restaurants and the digitalization of the division. Digital sales reached 38% of systemwide sales in the quarter, compared with just 25% in the prior year quarter, boosted by a significant expansion of sales through self-order kiosks and Delivery versus the previous year.

NOLAD's key marketing activities included the launch of a new value platform "Elige tu Fav" in Mexico, which allows guests to choose between delicious beef or chicken combos at an attractive price. Also in Mexico, Digital channel sales doubled versus last year and the McDonald's App is now the most downloaded, and used, App across the country's QSR industry. Panama implemented a strong value platform, coupled with one of the highest brand equity scores in the region, to accelerate the business in that country. In Puerto Rico, the Company gained significant visit share as the new brand campaign "Saca tu Encanto" resonated well with guests. Each of these three important markets also achieved significant visit and sales share growth during the quarter.

As reported Adjusted EBITDA in the division reached $28.6 million in the quarter, rising 20.7% versus the prior year in US dollars. Adjusted EBITDA margin increased by 30 basis points in the quarter benefiting from operating leverage in Occupancy & Other Operating expenses as well as G&A due to the strong sales growth. These more than offset a modest increase in Payroll expenses as a percentage of revenue.

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South Latin American Division (SLAD)

Figure 4. SLAD Division: Key Financial Results (In millions of U.S. dollars, except as noted)

		Currency	Constant
	1Q23	Translation	Currency	1Q24	% As	% Constant
	(a)	(b)	Growth	(a+b+c)	Reported	Currency
			(c)
Total Restaurants (Units)	582			593
Total Revenues	357.3	(409.2)	381.6	329.7	-7.7%	106.8%
Systemwide Comparable Sales						103.0%
Adjusted EBITDA	40.7	(28.4)	12.5	24.7	-39.2%	30.6%
Adjusted EBITDA Margin	11.4%			7.5%	-3.9 p.p.

As reported revenues in SLAD totaled $329.7 million in the first quarter, down 7.7% year-over-year. Systemwide comparable sales, which includes the impact of Argentina and Venezuela's high inflation rates, rose 103.0% versus the prior year. SLAD's systemwide comparable sales grew 1.8x blended inflation, excluding Argentina.

The division's results were primarily impacted by the ongoing hyperinflationary environment in Argentina, which caused a material reduction of consumption in this market, as well as the significant devaluation of the country's currency at the end of 2023. The devaluation of the Chilean peso and the social unrest in Ecuador also contributed to offset strong sales performances in other markets such as Colombia, Peru and Uruguay.

Digital sales, which accounted for 53% of systemwide sales in SLAD, benefited from the improving performance of the Mobile Order and Pay and Own Delivery functionalities in the Mobile App, which led to an increase in identified sales across the division.

The SLAD division strengthened brand affinity among younger consumers, by sponsoring the most relevant music festivals in the region, including Lollapalooza in Argentina and Chile, as well as Estereo Picnic in Colombia. The Company brought menu innovation to SLAD's markets with the launch of the "Quarter Pounder Western BBQ" in Chile and Uruguay, "Quarter Pounder Cheesy Jalapeño" in Ecuador and the "Grand Tasty Spicy" in Argentina, among others. These new product launches helped drive restaurant traffic and average check growth. SLAD continued making inroads in the chicken category, with the launch of the "McCrispy Chicken" platform in Uruguay and the "McCrispy Chicken Legend" in Colombia, with the latter quickly becoming a guest favorite.

Despite some challenging economic conditions, many of SLAD's main markets continued gaining market share against their main competitors, a clear reflection of consumer preference for the McDonald's Brand across the division. This includes Argentina, where the Company's brand attributes strengthened, and market share increased strongly.

As reported Adjusted EBITDA totaled $24.7 million in the quarter and Adjusted EBITDA margin contracted 390 basis points versus the prior year quarter. The division's Adjusted EBITDA reflects reduced operating leverage in all cost and expense line items due to the below-inflation sales growth in the first quarter, mostly in Argentina and Ecuador.

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