Group 1 - The company's operations are experiencing growth, with the exception of challenges faced in Argentina due to a deep recession [1] - Despite the growth, margins do not appear to be improving any further [1] Group 2 - The investment approach focuses on long-only strategies, evaluating companies from an operational and buy-and-hold perspective [2] - The emphasis is on understanding the long-term earnings potential and competitive dynamics of the industries involved [2] - Most recommendations are expected to be holds, with only a small fraction of companies deemed suitable for buy at any given time [2]

Core Viewpoint - Arcos Dorados Holdings Inc. (ARCO) reported third-quarter 2024 results with earnings and revenues exceeding expectations, although the bottom line showed a significant decline year over year [1][2]. Financial Performance - Adjusted earnings per share (EPS) for Q3 were 17 cents, surpassing the Zacks Consensus Estimate of 16 cents, but down 39.3% from 28 cents in the same quarter last year [2]. - Revenues reached $1.13 billion, beating the consensus mark of $1.09 billion, reflecting a year-over-year increase of 0.8% [2]. Sales and Growth Metrics - Digital channel sales grew by 16% year over year, accounting for 58% of systemwide sales, driven by strong performance in Mobile App and Delivery services, as well as the expansion of the Loyalty Program [3]. - Comparable restaurant sales increased by 32.1% year over year, attributed to a significant rise in guest volume [3]. Operating Highlights - Operating income for the quarter was $79.8 million, down from $91.1 million in the prior-year quarter [4]. - Food and paper costs were reported at $381.2 million, slightly up from $376 million in the previous year [4]. - General and administrative expenses increased to $68.1 million from $67.8 million year over year [4]. EBITDA and Cash Flow - Adjusted EBITDA for Q3 was $125 million, compared to $129.1 million in the same quarter last year [5]. - Total cash and cash equivalents as of September 30, 2024, were $115.9 million, down from $196.7 million at the end of 2023 [6]. - Net debt increased to $598.3 million from $481.3 million at the end of 2023 [6]. Store Developments - The company opened 19 Experience of the Future (EOTF) restaurants during the third quarter, with 11 located in Brazil [7].

Financial Data and Key Metrics Changes - Third quarter 2024 revenue reached a new high in US dollars, with systemwide comparable sales increasing by over 32% despite a challenging economic environment [5][12] - US dollar EBITDA was the second highest for a third quarter, although there was a 50-basis point margin contraction due to currency devaluations, particularly in SLAD [5][12] - Cash flow from operating activities in the third quarter was approximately $96 million, with expectations for continued seasonal strength in the fourth quarter [19] Business Line Data and Key Metrics Changes - Brazil's third quarter comparable sales increased by 6.8%, building on last year's double-digit growth, driven by guest count growth and higher average checks [7] - NOLAD's comparable sales rose by 6.2%, with digital channels accounting for 40% of sales, up from 30% last year [9] - SLAD experienced a remarkable 90.4% growth in comparable sales, largely influenced by Argentina's high inflation, while digital sales accounted for 57% of the division's sales [10] Market Data and Key Metrics Changes - The McDonald's brand gained five points of value share across its footprint in the third quarter, with significant market share gains in Brazil [11] - Digital sales grew by 16%, contributing to 58% of systemwide sales, with delivery and drive-thru channels generating 43% of total sales [15][16] - The loyalty program has seen robust membership growth, reaching about 14 million registered members across Brazil, Costa Rica, and Uruguay [17] Company Strategy and Development Direction - The company is focusing on a four D strategy: Digital, Delivery, Drive-thru, and Development, with plans to expand its restaurant footprint significantly [4][24] - The modernization of the restaurant portfolio and the digitalization of operations are seen as key competitive advantages that will drive long-term growth [15][23] - The company aims to maintain healthy market share levels and capitalize on the under-penetrated QSR market in Latin America [11][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving full-year 2024 EBITDA that exceeds last year's results in US dollar terms, despite ongoing economic challenges [12][13] - The company is optimistic about the potential for growth in Argentina as the economy is expected to recover in the near future [43][44] - Management highlighted the importance of digital tools and operational efficiencies in improving profitability margins over time [14][15] Other Important Information - The company received an upgrade in its debt rating to Ba1 from Moody's, reflecting strong operating performance and geographic diversification [18] - The net debt-to-adjusted EBITDA ratio remained steady at 1.2x, indicating a strong balance sheet [18] Q&A Session Summary Question: How does the competitive environment look in Brazil? - The competitive landscape remains similar, with a focus on value platforms and promotional activities. The company gained significant market share and continues to offer a compelling value proposition [26][27][28] Question: How did the post-elections macroenvironment in Mexico impact the consumer environment? - The company is pleased with trends in Mexico, noting strong growth and positive guest responses to their value proposition and improved execution [29] Question: Regarding food and paper cost pressures in Brazil, what are the expectations? - The modest increase in food and paper costs was not specifically related to protein prices but general cost increases. The company is confident in managing pricing to mitigate impacts [30][31] Question: What are the expectations regarding labor cost pressures in NOLAD? - There have been increases in minimum salaries, but the company does not expect these to continue at the same pace in 2025 [33] Question: Can you provide an update on digital and delivery investments? - Digital sales were up 16%, with home delivery representing 12% of total delivery sales. The company is working on scalable logistics models [34] Question: What are the prospects for Venezuela and Argentina? - Venezuela remains a small business with no significant impact on financial results, while Argentina has shown resilience and market share gains despite negative consumption trends [42][43]

Financial Performance - Arcos Dorados reported quarterly earnings of $0.17 per share, exceeding the Zacks Consensus Estimate of $0.16 per share, but down from $0.30 per share a year ago, representing an earnings surprise of 6.25% [1] - The company posted revenues of $1.13 billion for the quarter ended September 2024, surpassing the Zacks Consensus Estimate by 3.97%, compared to revenues of $1.12 billion in the same quarter last year [2] - The current consensus EPS estimate for the upcoming quarter is $0.14 on revenues of $1.16 billion, and for the current fiscal year, it is $0.66 on revenues of $4.4 billion [7] Market Performance - Arcos Dorados shares have declined approximately 33.8% since the beginning of the year, contrasting with the S&P 500's gain of 25.5% [3] - The company has surpassed consensus EPS estimates only once in the last four quarters, while it has topped consensus revenue estimates three times during the same period [2] Earnings Outlook - The estimate revisions trend for Arcos Dorados is currently unfavorable, resulting in a Zacks Rank 4 (Sell) for the stock, indicating expected underperformance in the near future [6] - The sustainability of the stock's price movement will largely depend on management's commentary during the earnings call [3][4] Industry Context - The Retail - Restaurants industry, to which Arcos Dorados belongs, is currently ranked in the top 33% of over 250 Zacks industries, suggesting a favorable outlook compared to the bottom 50% [8]

Financial Performance - Total revenues for the nine-month period ended September 30, 2024, increased to $3,325,942, up 5.4% from $3,156,423 in 2023[10] - Net income attributable to Arcos Dorados Holdings Inc. for the same period was $90,355, a decrease of 28.1% compared to $125,496 in 2023[10] - Basic and diluted net income per common share attributable to Arcos Dorados Holdings Inc. was $0.43, down from $0.60 in 2023[10] - Total operating costs and expenses rose to $3,104,347, an increase of 6.2% from $2,924,171 in 2023[10] - Comprehensive income attributable to Arcos Dorados Holdings Inc. was $47,479, significantly lower than $158,135 in 2023[13] - Adjusted EBITDA for the same period was $352,716, up from $339,680 in 2023, reflecting a growth of 3.05%[94] Cash Flow and Liquidity - Cash and cash equivalents decreased to $115,908 as of September 30, 2024, from $196,661 at the end of 2023[16] - Net cash provided by operating activities for the nine-month period was $159,794, down from $232,277 in 2023[18] - The company maintained a provision for contingencies of $36,151 as of September 30, 2024, down from $50,619 at the end of 2023[87] - The fair value of cash equivalents as of September 30, 2024, was $57,381,000, compared to $113,726,000 at December 31, 2023, reflecting a decrease of 49.5%[121] Assets and Liabilities - Total assets decreased to $2,961,117 as of September 30, 2024, from $3,019,238 at the end of 2023[16] - Total liabilities decreased to $2,447,643 as of September 30, 2024, from $2,502,399 at the end of 2023[16] - The company reported a retained earnings balance of $510,410 thousand at the end of the period, up from $424,936 thousand at the beginning of the fiscal year[23] - Long-term debt totaled $719,307 thousand as of September 30, 2024, slightly up from $714,841 thousand as of December 31, 2023, reflecting a marginal increase of approximately 0.65%[53] Shareholder Information - The company declared cash dividends of $0.19 per share, totaling $40,022 thousand to shareholders during the nine-month period[23] - The company plans to distribute a cash dividend of $0.24 per share in four installments throughout 2024, with $37,917 paid as of September 30, 2024[104] - As of September 30, 2023, total shareholders' equity amounted to $442,681 thousand, reflecting an increase from $441,763 thousand at the beginning of the fiscal year[23] Market Presence and Operations - The company operates and franchises McDonald's restaurants across 20 territories in Latin America and the Caribbean, indicating a strong market presence[27] - The company plans to finalize a new 20-year Master Franchise Agreement with McDonald's Corporation, effective January 1, 2025, which will enhance its operational framework[26] - The company plans to open at least 200 new restaurants and modernize at least 400 restaurants, with capital expenditures of approximately $650 million from 2022 to 2024[80] Foreign Currency and Derivatives - The company reported a foreign currency translation loss of $51,044 for the nine-month period ended September 30, 2024[13] - The Company has implemented measures to mitigate foreign currency fluctuations through various derivative instruments, including cross-currency interest rate swaps and foreign currency forwards[56] - The total fair value of derivative instruments was $70,176,000, compared to $46,605,000 as of December 31, 2023, representing a significant increase[58] Debt and Financing - The Company renewed its revolving credit facility with J.P. Morgan for $25 million, maturing on February 17, 2026, and signed additional revolving credit facilities totaling $50 million with Itaú Unibanco S.A. and Banco Santander (Brasil) S.A.[47] - The net indebtedness to EBITDA ratio was reported at 1.23x as of September 30, 2024, well below the covenant requirement of 3.00x[49] - The maximum leverage ratio required by the banks was 4.25, while the actual ratios were significantly lower at 0.27 for Itaú and 0.46 for both Credit Suisse and J.P. Morgan as of September 30, 2024[85] Other Comprehensive Income - The company reported a net current-period other comprehensive loss of $42,876,000 for the nine-month period ended September 30, 2024[106] - As of September 30, 2024, total accumulated other comprehensive loss was $605,957,000, compared to $563,081,000 at December 31, 2023, indicating an increase of 7.6%[106] Expenses - For the nine-month period ended September 30, 2024, food and paper expenses amounted to $255,469,000, an increase of 9.7% from $232,755,000 in 2023[110] - The company reported property and equipment expenditures of $239,169 for the nine-month period, compared to $227,753 in 2023, indicating an increase of 5.88%[96]

Core Viewpoint - Arcos Dorados Holdings Inc. (ARCO) is expected to report a decline in earnings and revenues for Q3 2024, primarily due to high costs and weakened consumer demand, particularly in Argentina [2][3]. Group 1: Earnings and Revenue Estimates - The Zacks Consensus Estimate for ARCO's earnings is 16 cents per share, reflecting a 46.7% decrease year over year [2]. - The consensus revenue estimate is $1.11 billion, which represents a 0.4% decline compared to the previous year [2]. Group 2: Factors Impacting Performance - High operational costs, including labor, utilities, and IT, are likely to have negatively affected margins across ARCO's key markets, with Mexico facing increased payroll expenses due to wage inflation [3][4]. - The company's significant investments in digital and IT infrastructure, aimed at enhancing long-term efficiency and customer experience, may have led to increased short-term operational expenses [3]. Group 3: Positive Indicators - Despite challenges, ARCO is expected to benefit from robust comparable sales, expansion efforts, and strong performance in Brazil and North Latin America, which may have contributed to positive guest traffic during the quarter [5]. - Strong digital sales are anticipated to have supported ARCO's quarterly performance [5]. Group 4: Earnings Prediction Model - Current analysis indicates that ARCO's model does not predict an earnings beat, as the Earnings ESP stands at 0.00% and the Zacks Rank is 4 (Sell) [6][7].

Core Viewpoint - Arcos Dorados stock is considered a bargain due to fast growth, a low valuation, and an unchanged royalty rate following the renewal of its master franchise agreement with McDonald's [1][2]. Group 1: Master Franchise Agreement Renewal - Arcos Dorados has replaced its existing master franchise agreement with a new 20-year agreement effective January 1, 2025 [2]. - The new agreement stipulates a royalty payment of 6% of gross sales for the first 10 years, increasing to 6.25% for years 11-15, and 6.5% for years 16-20 [2][3]. - The royalty rate will remain unchanged at 6% until 2034, providing stability for the company's profit margins despite potential sales growth [2]. Group 2: Growth Potential - Management believes there are significant growth opportunities in the 20 countries and territories where Arcos Dorados operates, including plans to open approximately 90 to 100 new restaurants in 2025 [3]. - Analysts project a 16% annualized earnings growth for Arcos Dorados over the next five years, supported by the new master franchise agreement [4]. Group 3: Valuation Metrics - The stock is currently valued at less than 11 times its trailing-12-month earnings, indicating a cheap valuation [4]. - The company has a PEG ratio of only 0.7, suggesting that the stock is undervalued relative to its expected growth [4].

Core Viewpoint - Three stocks have been added to the Zacks Rank 5 (Strong Sell) List, indicating a negative outlook for these companies based on recent earnings estimate revisions [1] Company Summaries - **Arcos Dorados Holdings Inc. (ARCO)**: This company, a franchisee of McDonald's, has seen its current year earnings estimate revised downward by 10% over the last 60 days [1] - **BM Technologies, Inc. (BMTX)**: A financial technology firm, BM Technologies has experienced a significant downward revision of 132.1% in its current year earnings estimate over the past 60 days [1] - **Bio-Techne Corporation (TECH)**: This life sciences and diagnostics company has had its current year earnings estimate revised downward by 9.2% in the last 60 days [1]

Core Insights - Arcos Dorados Holdings Inc. (ARCO) reported second-quarter 2024 results with earnings in line with estimates and revenues surpassing expectations for the fourth consecutive quarter [1][2] - The company's shares declined by 4.7% following the results announcement on August 15 [1] Financial Performance - Adjusted earnings per share (EPS) for the second quarter were 13 cents, remaining flat year over year [2] - Quarterly revenues reached $1,110.9 million, exceeding the consensus estimate of $1,056 million, and reflecting a year-over-year increase of 6.8% [2] - Systemwide comparable sales improved by 40.8% year over year, driven by increased guest traffic and effective omnichannel strategies [2] Operating Metrics - Operating income for the second quarter was $74.2 million, slightly down from $74.9 million in the prior-year quarter [3] - Food and paper costs increased to $372.9 million from $351.7 million year over year [3] - General and administrative expenses rose to $73 million compared to $69.5 million in the previous year [3] - Adjusted EBITDA was reported at $118.8 million, up from $110.1 million in the prior-year quarter [3] Balance Sheet Overview - As of June 30, 2024, cash and cash equivalents totaled $104.2 million, down from $196.7 million on December 31, 2023 [4] - Total financial debt decreased slightly to $724.6 million from $729.8 million as of December 31, 2023 [4] Expansion Initiatives - In the first half of 2024, the company launched 37 Experience of the Future (EOTF) restaurants, with 34 being free-standing locations [5] - In Brazil, the largest market, 21 EOTF restaurants were introduced, including 20 new free-standing units [5]

Core Viewpoint - Three stocks have been added to the Zacks Rank 5 (Strong Sell) List, indicating a negative outlook for these companies based on recent earnings estimate revisions [1] Company Summaries - **Arcos Dorados Holdings Inc. (ARCO)**: A franchisee of McDonald's restaurants, the Zacks Consensus Estimate for its current year earnings has been revised downward by 13.5% over the last 60 days [1] - **CONMED Corporation (CNMD)**: A medical technology company that sells surgical devices, the Zacks Consensus Estimate for its current year earnings has been revised downward by 7.2% over the last 60 days [1] - **CVS Health Corporation (CVS)**: A provider of healthcare solutions, the Zacks Consensus Estimate for its current year earnings has been revised downward by 6.4% over the last 60 days [1]