Arcos Dorados (ARCO) - 2024 Q2 - Quarterly Report

Financial Performance and Position Consolidated Statements of Income Arcos Dorados' H1 2024 revenues increased 7.9% to $2.19 billion, but net income decreased 16.2% to $55.1 million, with diluted EPS of $0.26 | Financial Metric | H1 2024 (in thousands USD) | H1 2023 (in thousands USD) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | 2,192,257 | 2,031,313 | +7.9% | | Company-operated restaurants | 2,092,131 | 1,940,884 | +7.8% | | Franchised restaurants | 100,126 | 90,429 | +10.7% | | Operating Income | 141,770 | 141,177 | +0.4% | | Net Income Attributable to Company | 55,141 | 65,775 | -16.2% | | Earnings Per Share | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Basic EPS | $0.26 | $0.31 | | Diluted EPS | $0.26 | $0.31 | Consolidated Balance Sheets As of June 30, 2024, total assets decreased to $2.90 billion, primarily due to reduced cash, leading to a 9.0% decline in equity to $470.5 million | Balance Sheet Item | June 30, 2024 (in thousands USD) | Dec 31, 2023 (in thousands USD) | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 104,216 | 196,661 | -47.0% | | Total Current Assets | 513,133 | 605,278 | -15.2% | | Total Assets | 2,896,023 | 3,019,238 | -4.1% | | Total Current Liabilities | 816,618 | 841,670 | -3.0% | | Total Liabilities | 2,425,495 | 2,502,399 | -3.1% | | Total Equity | 470,528 | 516,839 | -9.0% | Consolidated Statements of Cash Flows H1 2024 operating cash flow decreased to $63.7 million, while investing activities used $134.0 million, resulting in a $92.4 million net decrease in cash | Cash Flow Activity (H1) | 2024 (in thousands USD) | 2023 (in thousands USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | 63,707 | 84,256 | | Net cash used in investing activities | (134,031) | (109,032) | | Net cash used in financing activities | (17,566) | (27,871) | | Decrease in cash and cash equivalents | (92,445) | (65,445) | | Cash and cash equivalents at end of period | 104,216 | 201,492 | - Property and equipment expenditures increased to $148.9 million in H1 2024 from $123.1 million in H1 2023[13] - Dividend payments to shareholders increased to $25.3 million in H1 2024 from $21.1 million in H1 2023[13] Notes to the Condensed Consolidated Financial Statements Business Overview and Accounting Policies Arcos Dorados operates McDonald's in 20 Latin American territories under MFAs through 2027, remeasuring financials for hyperinflationary economies - The company's rights to operate McDonald's-branded restaurants in Latin America and the Caribbean derive from Master Franchise Agreements (MFAs) with McDonald's Corporation, which are effective through 2027[24] - The company operates in twenty territories, including major markets like Brazil, Mexico, and Argentina[25] - Due to being considered highly inflationary economies, the financial statements of the Argentinian (since July 2018) and Venezuelan (since Jan 2010) subsidiaries are remeasured using the US dollar as the functional currency[33] - The company is assessing the impact of new accounting standards, ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures), which will be effective for future fiscal years[39] Debt and Financing The company's debt structure includes $38.6 million in short-term debt and $715.8 million in long-term debt, with compliance across all covenants Short-term Debt Short-term debt increased to $38.6 million, supported by two $25 million revolving credit facilities, with the company in compliance with debt covenants | Debt Component | June 30, 2024 (in thousands USD) | Dec 31, 2023 (in thousands USD) | | :--- | :--- | :--- | | Short-term bank loans | 37,581 | 29,502 | | Bank overdrafts | 1,042 | 31 | | Total | 38,623 | 29,533 | - The company renewed its $25 million revolving credit facility with J.P. Morgan, maturing in Feb 2026, and signed a new $25 million facility with Itaú Unibanco, maturing in April 2025[46] - The company was in compliance with its consolidated net indebtedness to EBITDA ratio covenant, which was 1.18x as of June 30, 2024, well below the required maximum of 3.00x[48] Long-term Debt Total long-term debt remained stable at $715.8 million, primarily comprising 5.875% Senior Notes due 2027 and 6.125% Senior Notes due 2029 | Debt Component | June 30, 2024 (in thousands USD) | Dec 31, 2023 (in thousands USD) | | :--- | :--- | :--- | | 2029 Notes | 334,200 | 334,200 | | 2027 Notes | 379,265 | 379,265 | | Other (Finance leases, etc.) | 10,121 | 10,198 | | Total (before discounts/costs) | 723,586 | 723,663 | | Total Long-term Debt (net) | 715,805 | 714,841 | Financial Instruments and Risk Management The company uses derivatives, mainly swaps and forwards, to manage foreign exchange and interest rate risks, with $66.1 million in derivative assets Derivative Instruments The company uses cash flow hedges, including forwards and swaps, to mitigate foreign exchange risk, with total derivative assets of $66.1 million | Derivative Fair Value | Assets (in thousands USD) | Liabilities (in thousands USD) | | :--- | :--- | :--- | | Designated as Hedges | 56,564 | (1,560) | | Forward contracts | 1,377 | — | | Swaps (various) | 55,187 | (1,560) | | Not Designated as Hedges | 9,486 | (17,071) | | Total | 66,050 | (18,631) | - The company uses forward contracts to hedge foreign exchange risk on forecasted imports of goods, with gains/losses expected to be reclassified into earnings within 12 months[59] - Through its Brazilian subsidiary, the company uses various swaps to hedge exposure on intercompany loans, with gains/losses expected to be reclassified into earnings within the next 5 years[60] Fair Value Measurements Financial assets and liabilities are measured at fair value, with total assets at $138.4 million and debt fair value at $707.5 million - Derivative contracts are valued using models with observable market parameters (interest rate curves, volatilities), classifying them as Level 2 in the fair value hierarchy[129][132] | Fair Value Hierarchy (June 30, 2024) | Level 1 (in thousands USD) | Level 2 (in thousands USD) | Total (in thousands USD) | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash equivalents | 37,242 | — | 37,242 | | Short-term Investments | 30,000 | 5,140 | 35,140 | | Derivatives | — | 66,050 | 66,050 | | Total Assets | 67,242 | 71,190 | 138,432 | | Liabilities | | | | | Derivatives | — | 18,631 | 18,631 | | Total Liabilities | — | 18,631 | 18,631 | - The estimated fair value of the company's short-term and long-term debt was $707.5 million, which is lower than its carrying amount of $762.5 million as of June 30, 2024[133] Equity and Compensation The company uses a cash-settled Phantom RSU Award plan for incentives, with 2.18 million units outstanding, and approved a $0.24 per share dividend for 2024 Share-based Compensation The cash-settled Phantom RSU Award plan is the primary long-term incentive, with 2.18 million units outstanding and a total fair value of $19.7 million - The company implemented a cash-settled Phantom RSU Award plan in May 2019 as its new long-term incentive program[74] | Phantom RSU Plan (as of June 30, 2024) | Value | | :--- | :--- | | Number of units outstanding | 2,183,364 | | Total fair value of the plan | $19.65 million | | Accrued liability | $7.93 million | | Compensation expense not yet recognized | $11.72 million | Shareholders' Equity The company's capital includes Class A and B shares, with 210.7 million outstanding, and approved a $0.24 per share cash dividend for 2024 - Holders of Class A shares have one vote per share, while holders of Class B shares have five votes per share[106] - On March 12, 2024, the company approved a total cash dividend of $0.24 per share for 2024, payable in four quarterly installments[107] Operational and Segment Information The company operates across Brazil, NOLAD, and SLAD, with Brazil leading H1 2024 performance, while adhering to McDonald's Corp. commitments and covenants Segment Performance In H1 2024, Brazil led segment performance with $890.9 million in revenues and $161.6 million in Adjusted EBITDA, contributing to an 8.1% consolidated increase | H1 2024 Revenues by Segment | Revenue (in thousands USD) | vs. H1 2023 | | :--- | :--- | :--- | | Brazil | 890,927 | +14.3% | | NOLAD | 612,926 | +14.2% | | SLAD | 688,404 | -3.7% | | Total | 2,192,257 | +7.9% | | H1 2024 Adjusted EBITDA by Segment | Adj. EBITDA (in thousands USD) | vs. H1 2023 | | :--- | :--- | :--- | | Brazil | 161,614 | +25.7% | | NOLAD | 54,763 | +5.5% | | SLAD | 55,312 | -28.7% | | Total Reportable Segments | 271,689 | +5.3% | - Total capital expenditures for H1 2024 were $148.9 million, with SLAD accounting for the largest portion at $60.8 million[101] Commitments and Contingencies The company commits to a growth plan with McDonald's, including $650 million in capex, is compliant with MFA covenants, and holds $33.5 million in contingency provisions - The company has a growth plan with McDonald's to open at least 200 new restaurants and modernize 400 others from 2022 to 2024, with capex of ~$650 million. In return, McDonald's provides royalty rate support[82] - The company was in compliance with its MFA covenants, with a Fixed Charge Coverage Ratio of 2.25 (vs. min 1.50) and a Leverage Ratio of 3.17 (vs. max 4.25) as of June 30, 2024[81][84] | Provision for Contingencies | June 30, 2024 (in thousands USD) | Dec 31, 2023 (in thousands USD) | | :--- | :--- | :--- | | Tax contingencies in Brazil | 24,844 | 40,583 | | Labor contingencies in Brazil | 10,751 | 12,674 | | Others | 5,442 | 5,929 | | Net Provision | 33,506 | 50,619 | - The company disclosed a potential loss contingency for certain matters ranging from $471 million to $513 million, for which a loss is reasonably possible but not yet probable[88] Related Party Transactions The company incurred $173.6 million in costs with related party Axionlog for logistics and distribution services during the first six months of 2024 - The company has a master commercial agreement with Axionlog, a related party, for logistics and distribution services in most of its operating territories[117] | Expenses with Axionlog (H1) | 2024 (in thousands USD) | 2023 (in thousands USD) | | :--- | :--- | :--- | | Food and paper | (168,216) | (152,063) | | Occupancy and other operating expenses | (5,366) | (4,547) | | Total | (173,582) | (156,610) |