Edited Transcript of ARCO earnings conference call or presentation 18-Mar-20 2:00pm GMT

Let me start with pointing out a few key highlights of our fourth quarter and full year results on Slide 4. The focused and disciplined execution of our 3-pillar strategy, which includes: running great restaurants; featuring the most attractive menus; and enhancing the customer experience through exceptional interactions with our team, once again drove growth in guest traffic and average check.

Maintaining our strong momentum, we generated consolidated comparable sales growth of 10.4% in the fourth quarter and 11.8% for the full year, which was solidly above the company’s blended inflation for both periods. Our performance in Brazil last year is particularly gratifying, considering the level of competition and the relatively soft economic environment.

EOTF delivery and digital, along with our affordability and premium platforms as well as engaging marketing initiatives also drove the strong 9.5% increase in the quarter and 9.7% increase for the full year in comparable sales. These figures exceeded inflation and we’re about double the average reported by the entire Brazilian Food Service industry, which includes our results.

At the end of 2019, we had 683 EOTF restaurants, exceeding our target of 650 by year-end. We introduced EOTF restaurants to 7 more markets in 2019 and increased the EOTF network in Brazil, Argentina and Uruguay. This new format resonated strongly with our guests, providing a substantially better sales lift versus our initial expectations, which is why we accelerated the implementation.

Turning to the future, I am pleased to announce that we have concluded our discussions with McDonald’s Corporation regarding our next 3-year expansion plan, which Mariano will explain in more detail. Again, as a sign of its confidence in our business prospects, McDonald’s is providing us with growth support for the 2020 to 2022 period, which will reduce the impact of royalty fees.

I’ll turn the call over to Mariano now for a further review of our operating and financial results. Mariano, please go ahead.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [4]

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Thanks, Marcelo. Let’s take a look at some of the details of our operating and financial results on Slide 5. Total revenue for the company grew 12.9% in constant currency in the fourth quarter and 1% in U.S. dollars, mostly due to the depreciation of the Argentine peso with double-digit comparable sales above blended inflation for the company.

While we are very encouraged with the results of our Brazilian division, our NOLAD division also performed extremely well. Importantly, in Mexico, sales exceeded inflation for the third year in a row, backed by 11 consecutive quarters of growth.

Our brand perception has improved considerably and during 2019, we strengthened our operating position by rebalancing our restaurant portfolio in the country, closing poor performers and reopening restaurants in more promising locations particularly in larger cities. Additionally, revenues benefited from the acceleration of restaurant openings throughout the year as well as the continued pickup in the pace of our EOTF rollout plan.

Taking you quickly through our top line results at the divisional level on Slide 6, Brazil’s strong comp sales performance clearly demonstrates the progress we made with our strategic initiatives to accelerate growth in an increasingly competitive environment and our brand’s relevance in the Brazilian market. In our SLAD division, comp sales increased 20.9%, which was below the division’s blended inflation. Traffic continued to be impacted by the weak consumer environment in Argentina and the social unrest that affected our operations in Chile during the quarter.

NOLAD’s 4.7% increase in comp sales, which was almost 2.5x blended inflation, was the result of both higher traffic and average check in the quarter. This growth was broad-based across all 3 countries and was mainly driven by our affordability platform, the diesel category and the execution of strong marketing initiatives around the core of our business.

Growth in our delivery business, along with digital innovation also played an important strategic role in the division’s performance.

Finally, in the Caribbean, we saw the benefits of operating across a large and diverse geography. Strong performances in Puerto Rico and the French West Indies helped to mitigate the comp sales growth impact from the decline in Colombia as a result of the implementation of the tax reform effective July 1, 2019. Revenues in U.S. dollars were also impacted by the 7% year-over-year depreciation of the Colombian peso.

Consolidating the performance of our business, we had a very solid end to a very strong year, as Q4 marked the fourth consecutive quarter of double-digit system-wide comp sales growth. Additionally, our continued focus on managing our costs and expenses, led to efficiencies in all our cost line items, including the lowest payroll expense as a percentage of sales in our history.

To Marcelo’s point, with respect to our position of operating and financial strength, this combination of top line performance and operating efficiencies resulted in a full year 2019 adjusted EBITDA margin of 10%, which was our highest full year EBITDA margin since we became a public company in April of 2011.

Back to you, Marcelo.

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [5]

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Thank you, Mariano. Looking at our strategic growth drivers on Slide 7, our delivery service is now available through more than 1,500 restaurants in 11 key markets. This fast-growing segment that leverages the capacity and costs of our existing restaurants strengthens our omnichannel approach and allows our guests to enjoy the McDonald’s experience when they prefer to stay at home. We will come back to this concept when we discuss some of the ways in which we are prepared to manage the ongoing coronavirus situation.

Our mobile app is integral to supporting our delivery business and maintaining direct communications with our customers on promotions and new menu items. In fact, we have just added the ability to order delivery through our app in Brazil, in addition to working with all of the major delivery app platforms and we will soon roll out this capability to our other delivery markets. We believe that the app will allow us to communicate constantly with our customers, and will not only help us through the coronavirus crisis, but it should also allow us to accelerate revenue recovery once the situation normalizes.

With over 34 million downloads to date and 65% more active users than our nearest QSR competitor, we are the undisputed leaders in our industry when it comes to digital maturity. Part of our digital maturity relates to our aggressive expansion of EOTF locations, in Brazil and across the region. And of course, our Cooltura de Servicio program that encourages our teams to serve our guests by being themselves continues to support higher retention and lower absenteeism among employees. Largely as a result of this clear sign of improved employee satisfaction we are seeing our customers satisfaction scores rising as well.

All of these investments and initiatives are about making the McDonald’s brand more relevant and engaging for our guests in Latin America and the Caribbean.

On Slide 8, you’ll see that our investments are also increasing accessibility with the opening of new restaurants. We added 90 new restaurants to our footprint in 2019, ending the year with 2,293 locations. Our freestanding restaurant footprint is unmatched in our region. As of the end of 2019, we have almost 1,100 freestanding units. This includes more than 460 freestanding restaurants in Brazil or about 2.5x more freestanding units than our closest competitor in that country. Importantly, this format offers the full McDonald’s experience to our guests including the possibility for takeout and Drive-Thru ordering. Given that it includes all our revenue segments, this restaurant format has also historically provided us with the greatest base of support to protect our sales in challenging economic periods.

Back to Mariano again to review our performance in terms of costs and profitability.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [6]

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Thanks, Marcelo. Let me walk you through our costs and expenses during the fourth quarter on Slide 9. In the fourth quarter of 2019, adjusted EBITDA increased almost 17% in dollar terms and 25% in constant currency. The margin expanded 180 basis points, including the reversal of a bad debt reserve in our Puerto Rico market. Excluding this noncash reversal, our adjusted EBITDA margin expanded 50 basis points in the quarter.

For our annual disclosures, along with McDonald’s Corporation, we have been involved in litigation with our eight Puerto Rican sub-franchisees for several years. During the fourth quarter, we reached an agreement with 4 of the 8 sub-franchisees. As a result of that agreement, we received all 20 McDonald’s restaurants previously operated by the 4 sub-franchisees in consideration for about $10 million in receivables for various services rendered. This 10 generated a noncash reversal of bad debt reserves related to those receivables in our franchised restaurants occupancy expense line.

Finally, we are also operating with a streamlined G&A structure. U.S. dollar G&A expenses declined by 10% versus the prior year quarter or 90 basis points as a percentage of revenues. On a constant currency basis, it increased 3.5%, well below the blended inflation rate for G&A.

Taking a look at adjusted EBITDA at the divisional level on Slide 10, we captured margin expansion in Brazil, NOLAD and in the Caribbean, including the reversal of the bad debt reserve in Puerto Rico. I want to highlight the impressive increase in margin generated in both Brazil and NOLAD of 240 basis points. The fourth quarter was an inflection point in Mexico, as we achieved our highest level of EBITDA since we began operating in this country. We will remain focused on driving more efficiencies to leverage the strong top line growth in that market.

For the full year, I mentioned our adjusted EBITDA margin of 10%, which reflects 120 basis points of margin expansion between 2017 and 2019. This is within the range of the 100 to 200 basis points that we promised to deliver by the end of 2020 during our April 2018 Investor Day.

Finally, as Marcelo anticipated, we have come to an agreement with McDonald’s Corporation on an expansion plan for the 2020 to 2022 period, as described on Slide 11. We developed this ambitious plan based on our assessment of the optimal combination of growth and profitability for the McDonald’s brand across our footprint. So we expect to open between 285 and 300 new restaurants with total capital expenditures of about $1 billion from 2020 to 2022. I should note that the timing of deployment of capital is under our control. In addition, McDonald’s Corporation agreed to continue providing growth support for the plan over this period. Thus, we project the effective royalty rate to average about 5.5% over the 3-year period. Marcelo?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [7]

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Thanks, Mariano. Now let me take you through the current situation on Slide 12. First of all, we must recognize that we are actively managing a very fluid situation on a country-by-country and market-by-market basis. The world is moving quickly and governments and businesses are mobilizing to slow the spread of the coronavirus and protect the public health. Likewise, we are prioritizing the health and safety of our guests and employees as well as protecting our long-term business results through this uncertain time.

Based on the most recent data available to us from the World Health Organization, there are over 1,000 confirmed cases of Coronavirus across our markets. The countries with the highest numbers of confirmed cases in our footprint are Brazil, Chile and Peru. Fortunately, as of this morning’s call, we do not have any confirmed cases of Coronavirus among our employees at any level. As you have just heard, we are entering the Coronavirus crisis from an unquestionably strong position, and we are, by far, the best positioned company in our industry to effectively respond to the risks associated with this pandemic, while also serving the needs of our guests through our ability to offer delivery, Drive-Thru and take out on a widespread basis.

We have established a cross-functional team at the corporate level that is constantly monitoring and evaluating the situation to implement necessary actions in partnership with our in-market teams. The working group is coordinating efforts across the organization and sharing all available information to ensure an agile and appropriate response.

Local leadership teams are also monitoring developments in coordination with government and health officials. Since local measures vary from country to country and region to region within those countries. We are also aligned with the 5 principles that McDonald’s Corporation’s CEO, Chris K, outlined on Monday, providing a global consistency in approach and to ensure that our system emerges stronger than ever from this crisis.

First, we are all in this together. McDonald’s has been a supportive partner of ours throughout this process and when we face challenging times in the past as well. And just as we know that we can count on their support, we will support the 3-legged stool in our markets as well, working together with our people, our sub franchisees and our suppliers to help them through this pandemic.

Second, and this is very important to us, we will think and act with a long-term mindset. Having the certainty that life will normalize again, we know that our decision-making we have will have a lasting impact on our business. We will act accordingly. Third, we will be transparent with each other and with all our stakeholders. As the situation evolves, we will share information and best practices internally to pursue the most effective strategy through this crisis. And we will be back with you no later than 8 weeks from now when we have our first quarter 2020 earnings call on May 13, to provide you with an additional update.

Fourth, we will lead by example. We will never ask customers or our people to go where we wouldn’t go or work where we wouldn’t work. Our decisions on operations will continue to be guided by expert local and global health authority guidance, and we will be pragmatic in our approach. We, at Arcos Dorados, have a long-standing commitment to the communities that we serve, which is as important as ever in times like this.

And fifth, is to stay true to that purpose. Wherever we can, we will make every effort to keep our restaurants open, while making sure to always operate with our industry benchmark standards of hygiene and food safety.

Additionally, we are using the power of our media reach to support important public service messaging in our markets. This includes staying at home, social distancing and other recommended actions to curb the spread of the virus.

Mariano, why don’t you say a word about some of the potential financial impacts as well as our balance sheet position and capital commitments?

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [8]

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Sure. From a business perspective, on Slide 13, we feel we are facing this crisis from a position of strength. We built momentum through 2019, delivering one of the best performances in our history, and that momentum carried into 2020. We saw better U.S. dollar profitability during the first 2 months of the year, including our best February ever despite the strong depreciation of the Brazilian real since last year.

In terms of our cost structure, nearly 90% of Arcos Dorados Food and Paper suppliers are local to our markets, so we are able to work closely with this network of approved suppliers to reduce the risks of disruptions within our supply chain as well as to certify the quality and safety of the food that we serve to our guests.

We have disclosed in the past that around 20% of our total company Food and Paper costs are exposed to FX fluctuations. This number is lower in our largest market, Brazil, where only about 16% of our Food and Paper costs are exposed to FX fluctuations. In order to manage this risk, we have rolling hedges in place to cover about 50% of our estimated exposure to FX, going out over the next 6 to 12 months. And in the case of Brazil, we have hedged our exposure at a rate of about BRL 4 during the first half of 2020.

Additionally, we are closely and regularly communicating with our sub-franchisees, providing guidance and support to ensure that they are implementing these same precautionary measures in their restaurants.

Turning to our balance sheet on Slide 14. We ended 2019 with $122 million in cash and a net debt-to-EBITDA ratio of 1.6x, which is well below our comfort range. Importantly, we currently also have a solid cash position and will access our undrawn $50 million committed credit lines as necessary. Our debt is held in 2 long-term bonds with expirations in 2023 and 2027 and total interest payments of around $50 million per year. Importantly, we swapped about 50% of the principal and interest of that debt into Brazilian reais when the bonds were issued. In other words, only about $25 million of our annual interest payments are in U.S. dollars, which we can comfortably cover with cash generation from U.S. dollar and other strong currency markets such as Puerto Rico, Panama, Ecuador, Costa Rica and the French West Indies, to name a few.

We will prioritize our cash in the short term as we navigate the uncertainty of the current situation. We have full discretion on how and when we deploy our capital to meet our plans.

Back to you, Marcelo.

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [9]

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Thanks. Let me take you through some of the steps we are taking at the operating level on Slide 15. Every day, our restaurant teams practice the highest standards of hygiene and food safety in our industry from the frequency of hand washing to the extensive procedures we follow to avoid cross-contamination of our ingredients. And our guests know that they can trust McDonald’s in our Latin American and Caribbean markets. This is because more than 2 million of them have visited our kitchens in each of the last several years through our Puertas Abiertas or Open Doors program. They have seen for themselves that we wrote the book on service, quality and cleanliness.

Our region is among the last to be impacted by the virus, and our cross-functional team has implemented a robust contingency plan, based on best practices and learnings from the global McDonald’s system, including McDonald’s China and other Asian markets.

We also have the benefit of having a medical doctor as a full-time member of our staff in Brazil to help guide our decision-making. Depending on the evolution of the virus in each country, we have been implementing a set of protocols and procedures such as: Increased frequency of sanitization in all restaurant areas and engagement kiosks; operating only with delivery and Drive-Thru as permitted, when we are no longer able to operate our restaurant counter or dining rooms; establishing protocols for closing and reopening a restaurant if an employee receives a positive diagnosis for the coronavirus.

All these measures will be continuously reviewed and adjusted as necessary in accordance with the latest guidelines from local health officials and global best practices for mitigating the potential spread of the virus. We are starting to see limited operating hours and in some cases, restaurant closures in some of our markets. However, with more options than ever for our guests to enjoy the McDonald’s experience, including our fast-growing Delivery segment and the industry largest network of Drive-Thru locations, we expect to be available to the majority of our guests throughout this crisis.

Wrapping up my comments with Slide 16. We are facing an unprecedented global health crisis. However, we are confident that our strength, in particular, and the strength of the McDonald’s system globally will shine through this difficult period. The fundamentals of our business are the strongest they have been in many years. Our results demonstrate that we have a solid strategy in place to continue growing our business once this storm has passed.

Excellence in execution with a continued focus in enhancing the guest experience will continue to underscore how we operate our business. We are pleased to have reached an agreement with our partner, McDonald’s, regarding our next 3-year openings and CapEx plan, and we look forward to continuing our close working relationship as we work through this period and deliver on our long-term plan.

Finally, we expect to navigate any disruptions to local economies, including those caused by the coronavirus by leveraging our operational excellence, strong balance sheet and prudent capital allocation. This will support continued growth in sales, increased market share and an expanding geographic footprint as we profitably capture the full potential of the McDonald’s brand in the 20 countries and territories that we operate.

Operator, please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Robert Ford with Bank of America.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division – MD in Equity Research [2]

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Marcelo, can you share your experience across markets in the last week in terms of Drive-Thru and Delivery trends as well as update us on the number of stores and Dessert Centers in malls versus your freestanding locations with Drive-Thrus, please?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [3]

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Okay. Good morning, Bob. Yes, what we saw in the last few days, as expected, is a much better performance and increase in traffic in terms of Delivery. Delivery is growing, and we are fortunate to have been pushing hard with Delivery, offering that service in 1,500 restaurants across the region. So that’s a key part in order to deal with the headwinds that coronavirus is having in some of our markets.

In terms of restaurant formats, that’s another strength for us since we have the more extensive footprint of freestanding units, almost 46% of our restaurants are freestanding units, offering Drive-Thru its key in order to have better results in terms of sales and traffic, and we are experiencing that. It’s not the first time in the past, it was the same case during periods of economic crisis. Typically those formats of restaurants where we can offer the complete McDonald’s experience to our customers, typically, those restaurants in that period did better. And it is the same case nowadays. So we have 2.5x more Drive-Thrus, for example, in Brazil than our closest competitor. And if you take the 3 biggest markets for us, Brazil, Mexico and Argentina, we have 2.2x more units of freestanding compared with our largest or closest competitor.

So we are shifting part of our media budgets to communicate and to incentivize sales through Delivery and through Drive-Thru. We are very focused in terms of operations in giving the best service through those channels. And on top of that, for example, we continue to add new capabilities to our mobile app. So for example, in the case of Delivery, as you know, we work typically with the main partners, 3 at least main partners for Delivery in each market. But on top of that, we have the possibility to order Delivery through our app. We implemented that last week in Brazil. But this week, we accelerate the rollout of that, and we already have in the 11 markets where we operate Delivery, the opportunity to order Delivery through our McDonald’s app.

So we are very focused in these initiatives as we see that these channels and these strengths that our footprint has allows us to deal in a much better position with these headwinds.

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Operator [4]

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Our next question comes from [Gary Barnes] from [PGTM].

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Unidentified Analyst, [5]

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This is [Gary Barnes] from [PGTM]. Just a question whether you could remind me, you mentioned that the leverage currently at 1.6x is well under your target. Can you just remind me what your target level is? And the second question, maybe you could also cast some light on what you expect to be paying out in dividends going forward or if you have a policy in place there?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [6]

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Okay. Thank you very much for your question. Maybe, Mariano, you can take this one?

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [7]

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Yes, of course, Marcelo. Gary, yes, our net debt-to-EBITDA ratio by the end of December was 1.6x, and we have always mentioned that our target level is 2.5x net debt-to-EBITDA. So we feel comfortable with that range. Since we closed our financials by the fourth quarter, we have not taken any debt. So — and also please, keep in mind that our total debt, half of it is converted or swapped into Brazilian reais. After the huge and important depreciation of the BRL in the last 3 months, actually our net debt at this time is lower because that’s how these hedge works as long as the real devalues our total debt goes down. And Marcelo?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [8]

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Yes. And let me add in terms of dividends. Our Board of Directors declared dividends for 2020 on March 3, a couple of weeks ago, and the first installment will be on April 10, a $0.05 per share installment. And as part of our cash preservation measures, we sought legal counsel and were advised that once the dividend was declared by our Board 2 weeks ago, it became a regulated and legal obligation to our shareholders, so we will meet this commitment of about $10 million on April 10. The other 2 installments, which are planned for August 13 and December 10, each one of $0.03 per share. We expect to honor the commitment, but the Board may be able to revisit the topic if there are any regulatory changes due to these new market conditions. So that’s what we are working on in terms of dividends.

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Operator [9]

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Our next question comes from Ian Luketic with Jpmorgan.

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Ian Luketic, JP Morgan Chase & Co, Research Division – Analyst [10]

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I have a couple of ones, if I may. So first of all, I’d like to understand how many stores you have with Drive-Thru and how many have Delivery? So trying to assess what could be the potential slowdown in sales in case LatAm countries follow Italy and implement a lockdown. And in that regard, have you spoken to McDonald’s Corporation to try to understand what are the sales impact from — in these countries, such as Italy, Spain and so on? And my other question will be, if you can mention what’s the magnitude of the reported one-off provision for contingencies in Brazil?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [11]

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Okay. Nice to hear from you. I will take the first part. And obviously, all this coronavirus situation is a very important topic, so maybe let us give you a comprehensive analysis on this. So I think that at this time, neither the duration nor the scope of the disruption can be predicted. Therefore, the negative financial impact to results cannot reasonably estimate it yet. But a good thing is, our region is among the last to be impacted by the virus, which has informed and helped us to build a robust contingency plan implemented by our cross functional team, which is based mainly in best practices and learnings from the global McDonald’s system including McDonald’s in countries like China and other Asian markets, we had contact with and we get information from them all their learnings and best practices. At the same time, Latin American governments are also responding with the benefit of these global learnings. And there are a number of proposals being discussed to protect local economies, so we are very we are keeping a very close eye to that.

As I mentioned before, we think and we are sure that we have a couple of strengths that allows us to face this crisis in a much better position, in the best position in our industry, in our region to deal with this situation. I already mentioned our extensive freestanding units footprint, we have around 1,000 freestanding units in the region. So that’s a complete differential — positive differentiation for us when compared to most of our peers. And as I mentioned before, 1,500 restaurants are offering deliveries across the 11 main markets where we operate.

We also believe that our geographic diversity is another strength. And we see that we are operating in 20 different markets and territories, and the impacts are completely different from one to the other. So we are taking a close look to that. And obviously, we are following all the recommendations coming from the authorities and the health specialists in each market. We are leveraging at the same time, our relationship with McDonald’s. McDonald’s Corporation has been very supportive in these days, and it was the same in the past during some economic crisis that we faced. Unfortunately or fortunately, some of us, I’m Argentinean, as you know, have been in different crisis many times in these 30 years with the company. So in some way, we had those learnings and that flexibility to deal with these kind of situations, and we are following again, the best practices and the main recommendations coming from the authorities to deal with this situation.

I have in front of me, a dashboard in terms of operations. So I know exactly how many restaurants are closed, how many restaurants have limited operations to Drive-Thru and Delivery or only Drive-Thru. It is a very small portion of restaurants right now, around 3% of our restaurants are closed, mandated or obligated by the authorities. There are others where we can operate only through Drive-Thru, for example, most of them in Puerto Rico, where Drive-Thru represents more than 60% of the sales. So we are okay in that sense. And this is a very fluid and a very dynamic situation. So this has been led by market-by-market and city-by-city, by our local teams who are making and are doing a tremendous job in terms of align all the company, all the resources of the company behind these efforts.

So maybe, Mariano, you can cover the second part of the question of Ian.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [12]

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Yes. Thanks, Marcelo. Your — Ian, can you refer to the question again about contingencies in Brazil, please?

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Ian Luketic, JP Morgan Chase & Co, Research Division – Analyst [13]

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Yes, of course, Mariano. So I would like to know what the magnitude of this reported one-off provision.

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [14]

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Yes. Yes. Well, first, let me refer you to our cash flow situation right now, given that you were worried about restaurants operating in the region. So the first part, let me remind you that, well, first, as you know, we started the year with a very favorable cash position. We still have undrawn committed credit lines of $50 million in addition to many other lines of credit to support our operation cash needs. As I explained before, our financial leverage is low, and half of our debt is converted to reais. On top of that, we have cash in hand to meet our next financial obligations. As you know, we have the maturity of the 2 bonds. And my main focus is of — on preserving the favorable liquidity position that we have taken, and we will continue taking actions to prioritize our cash until this situation, of course, improves.

First, it’s important to note that our largest nonoperating cash flow, outflow, is CapEx. And as you know, CapEx mainly is concentrated in Arcos Dorados in the second half of the year. But on top of that, and even more important is that we have full discretion on when we can do these outflows and how we decide when to do it. So that’s something very important to take into account. Our CapEx is very granular and very short term. So we have that ability to postpone or delay those outflows that in our cash flow statements are the most important ones.

Also to keep in mind is that the majority of the costs at the restaurant level are variable costs. So when sales go down, the main portion of our costs go down as well. Also, our inventories, our food — the main inventories are food related. So in this case, the days that we have inventories in hand is also very low. So there’s limited risk on that. And we have also taken steps to protecting our people and reducing our G&A, for example, provision of travel for all our personnel, cancellation of all meetings with third parties and others.

As Marcelo mentioned, we don’t know the duration nor the scope of the disruption still to come. So it’s very difficult to estimate the negative financial impact to our results. And that’s mainly from a cash flow perspective and how we are facing and dealing with this disruption.

Regarding the contingency that you asked at the end, as part of your second question, this is — the bulk of that contingency is coming from one state in Brazil, where in December 2009 — ’19 — 2019, we recorded a reverse provision given a positive outcome to the legal proceedings against us. For further information, remember that in our financial statements in the 20-F, we have all that information, but now the civil complaints are now concluding, and that’s the reason for the reversal.

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Operator [15]

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(Operator Instructions) Our next question will come from Robert Schweich, private investor.

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Robert Schweich, [16]

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I want to compliment you on a really extraordinarily complete presentation of the situation and your answers to the questions under these unusual circumstances. While you have considerable flexibility on the timing of opening stores and capital expenditures related to that, that process is an advanced process to a certain degree. And if you’re planning on opening any stores in the second half of this year, my guess is you already have commitments on a certain number of units. And I’m curious if you could tell us how many units and how much capital expenditures you are actually committed for during the current year under — at this time?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [17]

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Okay. First of all, thank you very much, Robert, for your comments. As Mariano told us, and that’s typical year after year, our CapEx investments are typically at the end of the year, the majority of those. So we still have a lot of restaurants that aren’t being built yet. So we can stop or delay a huge part of our CapEx program for this year. So obviously, we are taking a very close look to this because we keep in mind that one of the principles, which is guiding us is thinking long-term in terms of the business results and that’s why we are taking a look restaurant by restaurant and situation by situation. In some cases, we can maybe make stop for a couple of months or for some weeks. In other cases, okay, we can put them under revision, if we are going to put those resources there or not in the future, but we are taking this process in a very detailed way in order to make the best decision between taking in account the situation in the short-term and protecting the cash flow of the company and not compromising anything in that sense. But at the same time, thinking long-term and obviously, with the idea that we will overcome this and we will overcome this in the strongest way that any company in our sector will overcome this in Latin America. So that’s the way we are thinking on this. But for your records, your information, most of the CapEx plan for this year is still to be applied. So we are in a good position regarding that in order to protect the cash of the company.

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Robert Schweich, [18]

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I appreciate your answer. And do you think — and I realize that you’re thinking longer-term as well as shorter term. And the longer-term thought process may lead you to open some units even though there’s uncertainty because of coronavirus. Do you think you’re likely to open at least 25 restaurants this year, all factors considered?

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [19]

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Yes, I do not have the exact number right now. And obviously, the situation is so volatile and unpredictable that I don’t want to make any statement in any number or commit to any number. But the idea is to have, obviously, much more detail in the coming weeks and months. But again, for the short term, our cash protection and the focus on cash is the priority. The plan is for much more than that and taking a look on the long-term involves other things. And again, we are trying to balance in those 2 variables. Obviously, when we announced that we were planning to open between 285 to 300 restaurants in these 3 years, that’s because our results have been extraordinary, I think, in the last couple of years. We had a very strong momentum that translated to the first couple of months of this year and then this crisis came up, and we are trying to overcome this as soon as possible in the best way and keeping an eye — a strategic eye on the long-term of the business and the business results.

So maybe, Mariano, you want to add something?

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Mariano Tannenbaum, Arcos Dorados Holdings Inc. – CFO [20]

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Yes, Marcelo and Bob, yes. But it’s important to mention that at this time, our main priority is to keep and protect the cash of the company until we have more certainty on how things will develop in the next month. As we mentioned in the previous question from Ian, we have the ability to stop and then start again if situation changes in the next month, and we will, of course, be monitoring day by day, how this situation evolves. But at this time, the main priority is to preserve our cash flow and afterwards, of course, if situation improves, then we are, as Marcelo mentioned, in an excellent position to resume our CapEx plan because in the long-term, we think that the situation for us is extremely good.

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Operator [21]

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There are no further questions. I would like to turn the call back over to Mr. Rabach. Please go ahead.

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Marcelo Rabach, Arcos Dorados Holdings Inc. – CEO [22]

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Okay. Thank you again, you all for joining our call today and for your questions. My team and I look forward to speaking with you again in the future. We encourage you to follow the recommendations of your government and health officials to combat the spread of coronavirus in your communities, and please stay safe and have a good day. Thank you very much.

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Operator [23]

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The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.