Arcos Dorados (US:ARCO)2025-04-29 20:36PART I Key Information This section presents selected financial data, discusses currency risks in key markets, and outlines principal business risk factors Selected Financial Data This subsection provides selected financial data, operational metrics, and details on currency exchange rate movements Selected Income Statement Data (2022-2024) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | | Total revenues | $4,470,162 | $4,331,878 | $3,618,902 | | Operating income | $324,515 | $314,039 | $264,422 | | Net income attributable to Arcos Dorados Holdings Inc. | $148,759 | $181,274 | $140,343 | | Basic net income per common share | $0.71 | $0.86 | $0.67 | | Diluted net income per common share | $0.71 | $0.86 | $0.67 | Selected Balance Sheet Data (As of Dec 31, 2022-2024) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | | Total assets | $2,892,654 | $3,019,238 | $2,636,630 | | Total liabilities | $2,383,225 | $2,502,399 | $2,312,203 | | Total equity | $509,429 | $516,839 | $324,427 | Adjusted EBITDA (2022-2024) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | | Total Adjusted EBITDA | $500,100 | $472,304 | $386,564 | Systemwide Restaurant Count (As of Dec 31, 2022-2024) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Brazil | 1,173 | 1,130 | 1,084 | | NOLAD | 654 | 647 | 638 | | SLAD | 601 | 584 | 590 | | Total | 2,428 | 2,361 | 2,312 | - The Argentine peso experienced significant depreciation against the U.S. dollar, with rates of 72.4% in 2022, 357.4% in 2023, and 27.5% in 2024, while currency controls limit capital flows6061 Risk Factors This subsection details various risks affecting the company's business, financial condition, and operations - The company's rights to operate are entirely dependent on the Master Franchise Agreements (MFAs) with McDonald's, which expire in 204497 - McDonald's has the right to acquire the company's non-public shares at 80% of fair market value in the event of a material breach of the MFAs107109 - Digital channels accounted for 57.0% of systemwide sales in 2024, representing $3.3 billion, making growth dependent on these initiatives115294 - Inflation and exchange rate fluctuations in Latin America pose significant risks to costs, consumer spending, and reported results147150 - The company faces intense competition from international and local QSR chains like Burger King, KFC, and Subway178 - The Executive Chairman, Mr. Woods Staton, controls 75.38% of the company's voting interests, enabling control over shareholder votes217 Information on the Company This section provides an overview of the company's history, business model, operational structure, and property portfolio History and Development of the Company This subsection outlines the company's corporate history, key acquisitions, and capital expenditure plans - The company commenced operations on August 3, 2007, after acquiring McDonald's Latin American business232 - In March 2011, the company completed a split-off of its logistics and distribution operations, Axionlog, to its existing shareholders234 - The company plans to open 90-100 new restaurants in 2025, with expected capital expenditures between $300 million and $350 million236 Recent Restaurant Openings and Reimaging | Year | Restaurants Opened | Restaurants Reimagined | Dessert Centers Opened | | :--- | :--- | :--- | :--- | | 2024 | 85 | 160 | 164 | | 2023 | 81 | 241 | 117 | | 2022 | 66 | 114 | 107 | Business Overview This subsection details the company's market position, operational divisions, growth drivers, and ESG initiatives - Arcos Dorados is the world's largest independent McDonald's franchisee, with 2,428 restaurants representing 4.4% of McDonald's global sales in 2024238 Restaurant Portfolio by Division (as of Dec 31, 2024) | Division | Company-Operated | Franchised | Total | % of Total | | :--- | :--- | :--- | :--- | :--- | | Brazil | 723 | 450 | 1,173 | 48.3% | | NOLAD | 497 | 157 | 654 | 26.9% | | SLAD | 505 | 96 | 601 | 24.8% | | Total | 1,725 | 703 | 2,428 | 100.0% | - Digital channels comprised 57.0% of systemwide sales in 2024, totaling $3.3 billion, with the mobile app exceeding 147 million downloads294 - As of year-end 2024, there were 377 McCafé locations and 3,268 Dessert Centers, which are significant transaction generators263270 - The company is committed to ESG initiatives through its 'Recipe for the Future' platform, focusing on key sustainability pillars349356365376386 - By the end of 2024, 99% of primary fiber-based guest packaging was sourced from certified or recycled sources373 Organizational Structure This subsection describes the company's corporate structure and controlling shareholder arrangement - The company conducts substantially all business through its wholly-owned Dutch subsidiary, Arcos Dorados B.V.401 - The controlling shareholder, Los Laureles Ltd., is beneficially owned by Executive Chairman Mr. Woods Staton and holds 75.38% of the voting interest401699 Property, Plants and Equipment This subsection details the company's real estate portfolio of owned and leased properties - As of December 31, 2024, the company owned the land for 472 of its 2,428 restaurants406 - The company owns a total of 528 properties, including restaurants, corporate offices, and training centers408 Operating and Financial Review and Prospects This section provides management's discussion and analysis of financial results, liquidity, and business trends Operating Results This subsection presents a detailed analysis of operating results by geographic division for 2024 versus 2023 Consolidated Results of Operations (2024 vs. 2023) | | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | | Total revenues | $4,470,162 | $4,331,878 | 3.2% | | Operating income | $324,515 | $314,039 | 3.3% | | Net income attributable to Arcos Dorados | $148,759 | $181,274 | (17.9)% | - In 2024, total revenues increased by 3.2% to $4.47 billion, driven by 32.8% systemwide comparable sales growth, offset by currency depreciation460464468 - Food and paper costs as a percentage of sales decreased to 35.1% in 2024 due to pricing and waste management efficiencies476 - Payroll costs as a percentage of sales decreased to 18.7% in 2024, driven by a social security recovery in Brazil and crew efficiencies480 - Net income for 2024 decreased by 17.9% to $148.8 million, primarily due to negative foreign currency exchange results and higher income tax506508511 Systemwide Comparable Sales Growth (2023-2024) | Division | 2024 | 2023 | | :--- | :--- | :--- | | Brazil | 7.9% | 9.9% | | NOLAD | 6.5% | 10.6% | | SLAD | 91.6% | 90.9% | | Total | 32.8% | 34.6% | Liquidity and Capital Resources This subsection details the company's financial strategy, cash position, debt profile, and contractual obligations - As of December 31, 2024, the company had a cash and short-term investments position of $138.6 million and $75 million in committed credit lines565566 Consolidated Cash Flows (2022-2024) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | | Net cash provided by operating activities | $266,847 | $381,965 | $345,437 | | Net cash used in investing activities | ($280,331) | ($380,349) | ($259,649) | | Net cash used in financing activities | ($37,162) | ($11,823) | ($59,978) | - In January 2025, the company issued $600 million in notes due 2032 and redeemed its 2027 notes, extending its debt maturity profile568608625 - The company's $350 million 2029 notes are sustainability-linked, with interest rates tied to greenhouse gas emission reduction targets611614 Contractual Obligations as of Dec 31, 2024 | Obligation Type | Total | Due in 2025 | Due in 2026-2027 | Due Thereafter | | :--- | :--- | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | | | Operating lease obligations | $1,874,969 | $149,581 | $280,446 | $1,444,942 | | 2027 and 2029 notes | $861,283 | $42,750 | $453,628 | $364,905 | | Contractual purchase obligations | $222,148 | $122,915 | $59,831 | $39,402 | | Total (selected) | $2,958,400 | $315,246 | $793,905 | $1,849,249 | Trend Information This subsection identifies key positive, challenging, and emerging trends affecting the company's business - Key positive trends include social upward mobility in Latin America, demand for healthier products, and the popularity of value menus635 - Significant challenges include increased competition, persistent inflation, foreign exchange volatility, and social unrest in key markets635 - Emerging trends shaping the business are a growing consumer focus on sustainability and diversity, and the adoption of Artificial Intelligence635638 Directors, Senior Management and Employees This section provides information on the company's leadership, compensation structure, and workforce composition Directors and Senior Management This subsection introduces the Board of Directors and senior management team, highlighting their experience - The Board of Directors consists of eleven members, seven of whom are independent, serving staggered three-year terms636637 - The leadership team is led by founder and Executive Chairman Woods Staton and CEO Marcelo Rabach, both with long careers in the McDonald's system642643 Compensation This subsection details the compensation structure and long-term incentive plans for directors and officers - In 2024, the aggregate annual total cash compensation was $13.4 million for executive officers and $1.1 million for directors680 - The company uses a Phantom RSU Plan for long-term incentives, which provides cash payments based on share price upon vesting676680 Phantom RSU Compensation Expense (2022-2024) | Year | Compensation Expense (in millions) | | :--- | :--- | | 2024 | $1.0 | | 2023 | $15.6 | | 2022 | $7.4 | Employees This subsection provides an overview of the company's workforce distribution and composition Employee Distribution by Division (as of Dec 31, 2024) | Division | Crew | Restaurant Managers | Professional Staff | Total | | :--- | :--- | :--- | :--- | :--- | | Brazil | 32,942 | 6,923 | 992 | 40,857 | | NOLAD | 17,394 | 3,165 | 674 | 21,233 | | SLAD | 31,084 | 4,027 | 963 | 36,074 | | Corporate and other | 0 | 0 | 451 | 451 | | Total | 81,420 | 14,115 | 3,080 | 98,615 | - Approximately 41% of the company's total employees are located in Brazil, with the workforce composed of 83% crew685 Share Ownership This subsection details the beneficial ownership of the company's shares by directors and senior management - Executive Chairman Woods Staton, through Los Laureles Ltd., beneficially owns 100% of the Class B shares, granting him 75.38% of the total voting power695696 Major Shareholders and Related Party Transactions This section details the company's ownership structure and significant transactions with related parties Major Shareholders This subsection provides a breakdown of the company's major institutional and controlling shareholders Major Shareholders' Ownership | Shareholder | % of Outstanding Class A Shares | % of Outstanding Class B Shares | Total Economic Interest | Total Voting Interest | | :--- | :--- | :--- | :--- | :--- | | Los Laureles Ltd. (Woods Staton) | — | 100.0% | 37.98% | 75.38% | | TIAA Board of Overseers | 10.50% | — | 6.52% | 2.59% | | T. Rowe Price Associates, Inc. | 10.46% | — | 6.49% | 2.58% | Related Party Transactions This subsection describes the company's transactions with related parties, primarily its logistics provider Axionlog - In 2011, the company split off its logistics business, Axionlog, which is now controlled by the company's controlling shareholder, Mr. Woods Staton705 - In 2024, Arcos Dorados incurred $67.3 million in distribution fees payable to Axionlog, representing 4.5% of total food and paper costs708 - The company is a minority stakeholder in a joint venture with a Mexican sub-franchisee formed in November 2021711 Financial Information This section addresses key financial disclosures, including legal proceedings, contingency provisions, and dividend policy Consolidated Statements and Other Financial Information This subsection covers significant legal proceedings and the company's dividend policy and declarations - The company is facing a lawsuit from a coalition of labor unions in Brazil alleging inadequate working conditions, with appeals pending715717 - An administrative investigation by the Labor Prosecutor's Office in Brazil regarding harassment allegations was archived in January 2025721722 - As of December 31, 2024, the company had a provision for contingencies of $36.7 million for various legal proceedings725 - The Board of Directors declared a cash dividend of $0.24 per share for 2024 and approved the same amount for 2025732 Additional Information This section provides supplementary corporate information on governing documents, material contracts, and taxation Memorandum and Articles of Association This subsection details the company's governing documents, share structure, and key differences in corporate law - The company is authorized to issue 420,000,000 Class A shares (one vote per share) and 80,000,000 Class B shares (five votes per share)742 - Class B shares are convertible into Class A shares and will automatically convert if aggregate ownership falls below 20%746 - Unlike Delaware law, British Virgin Islands law allows for the removal of directors with or without cause by shareholder resolution760766 Material Contracts This subsection summarizes the company's material contracts, focusing on the Master Franchise Agreements with McDonald's - The Master Franchise Agreements (MFAs) grant exclusive rights through 2044, with a new 20-year term starting January 1, 2025791793 - Royalty fees payable to McDonald's are set at 6.0% of gross sales for the first ten years of the new MFA, escalating thereafter799 - The company is required to spend at least 5% of its gross sales on advertising and has committed to opening 90-100 new restaurants in 2025813814 - McDonald's holds a call option to acquire non-public shares at 80% of fair market value in the event of a material breach816819 Taxation This subsection outlines the tax considerations for the company and its U.S. shareholders - As a British Virgin Islands (BVI) company, Arcos Dorados is not liable for corporate taxation in the BVI835 - For U.S. Holders, distributions on Class A shares are generally treated as foreign-source dividend income851 - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2024 taxable year853 Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to foreign currency, commodity price, and interest rate risks - The company is exposed to foreign currency risk as revenues are in local currencies while debt is largely U.S. dollar-denominated868869 - To mitigate foreign exchange risk, the company uses derivative instruments, including forward contracts and cross-currency swaps868869870 - A sensitivity analysis shows a 10% appreciation of the Euro against the USD would result in an $8.4 million foreign exchange loss871 - A 10% depreciation of the Brazilian real against the USD would result in a net foreign exchange loss of $1.7 million874 - Commodity price risk for key supplies is managed through supplier hedging programs and pricing agreements887 PART II Controls and Procedures This section addresses the effectiveness of the company's internal controls over financial reporting and disclosure - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024900901 - Management's annual report concluded that the company's internal control over financial reporting was effective as of December 31, 2024905906 - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of internal controls907908 Corporate Governance and Other Disclosures This section covers corporate governance practices, accountant fees, and cybersecurity risk management Principal Accountant Fees (2023-2024) | Fee Type | 2024 | 2023 | | :--- | :--- | :--- | | | (in thousands of U.S. dollars) | | | Audit fees | $3,272 | $2,574 | | Audit-related fees | $4 | $10 | | Tax fees | $507 | $440 | | All other fees | $29 | $48 | | Total | $3,812 | $3,072 | - As a foreign private issuer, the company follows home country practices in lieu of certain NYSE governance standards931932 - The company has a cybersecurity risk management program aligned with the NIST framework, with no material threats identified in 2024941942943 PART III Financial Statements This section contains the company's audited consolidated financial statements and accompanying notes for fiscal years 2022-2024 Notes to the Consolidated Financial Statements This subsection provides detailed notes on accounting policies, segment performance, debt, and contingencies - The company applies hyperinflationary accounting for its Venezuelan and Argentine subsidiaries, remeasuring financials to the U.S. dollar992 - In 2024, the company recorded an impairment charge of $1.1 million on long-lived assets in several smaller markets1013 Long-Term Debt Composition (as of Dec 31, 2024) | Debt Instrument | Principal Amount (in thousands) | | :--- | :--- | | 2029 Notes | $334,200 | | 2027 Notes | $379,265 | | Finance lease obligations | $9,087 | | Other long-term borrowings | $2,791 | | Total (before discounts/premiums) | $725,343 | - The company uses various derivative instruments to hedge foreign exchange risk, with a net fair value asset of $81.1 million as of Dec 31, 2024107810791080 - As of December 31, 2024, the company had a provision for contingencies of $36.7 million, primarily for tax and labor claims in Brazil11351136 - Subsequent to year-end, the company issued $600 million in new notes due 2032 to redeem its 2027 notes and approved a dividend118111831187