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spk00: Good morning, everyone, and thank you for joining our second quarter 2022 earnings webcast. With us today are Marcelo Rabach, our Chief Executive Officer, Louis Faganato, our Chief Operating Officer, and Marina Tannenbaum, our Chief Financial Officer. Today's webcast, which is being recorded, will consist of prepared remarks from our leadership team, which will be accompanied by a slide presentation, also available in the investor section of our website, www.arcosdorados.com.ir. As a reminder, to better view the presentation on the webcast platform, please scroll over the upper left-hand part of the screen and click on the arrows to maximize the slides. After we conclude our opening remarks, we will answer your questions, which you can submit using the chat function on the left-hand side of the screen. You will need to minimize the slides to access the chat function. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found on the press release and unaudited financial statements filed today with the SEC on Form 6K. Our discussion today excludes the results of the Venezuelan operation, both at the consolidated level as well as for the SLAB division. For your reference, we include a full income statement excluding Venezuela with today's earnings release. Marcelo, over to you.
spk03: Thank you, Dan. Good morning, everyone, and thank you for joining us again today. I am pleased to report a strong set of results for the second quarter of 2022. Today, Luis, Mariano, and I will take you through the highlights of our consolidated and divisional results. Mariano will also cover our balance sheet and growth metrics, while Luis will provide an update on the 3D strategy of digital, delivery, and drive-through that has been driving performance. Before I turn to the highlights of the quarter, let's take a look back at how we built the foundation to deliver today's results and drive sustainable growth in the years to come. Fifteen years ago last week, Arcos Dorados began operating with the exclusive rights to run and sub-franchise McDonald's restaurants in 19 countries and territories across Latin America and the Caribbean. Shortly thereafter, we added a 20th country and began the transformation of the company's operations and restaurant portfolio with a long-term sustainable growth strategy. Over that period, we expanded our footprint to almost 2,300 restaurants, including nearly 900 Experience of the Future locations. Freestanding units were the cornerstone of our unit growth and now represent 50% of total restaurants. We have also contributed to the economic and social fabric of the communities we serve by generating hundreds of thousands of first formal job opportunities for young people throughout our footprint. Discipline execution over the last 15 years allowed us to generate consistent unit sales growth in local currency, navigate some very challenging economic periods, and improve operating results even as competition intensified in the region's under-penetrated QSR industry. We carried significant operating momentum into 2020, by re-accelerating unit growth, reinvigorating the restaurant experience, and recapturing the magic of the McDonald's brand. When 2020 began, we were just beginning the company's digital transformation, focused on developing mobile app capabilities, deploying self-order kiosks, and growing our delivery sales. Today, we have the industry's leading digital platform, with the most downloaded and used mobile app, highest self-order kiosk penetration, and still growing delivery channel, despite the ongoing normalization of the on-premise business. Sales growth focused on higher restaurant volumes helped offset the cost pressures we have faced over the last few years. And the McDonald's brand is as strong as it has ever been in our region. This includes Brazil, where sales growth had been very strong and we have expanded the favorable gaps in both the favorite brand and top of mind index versus our main competitor. There were no shortcuts along the way, but the hard work is now paying off and we have the structural competitive advantages to keep this momentum going. Let's turn to the key highlights from the second quarter. Total revenue surpassed $880 million, and comparable sales grew about 48% versus the prior year. Most of that growth came from higher restaurant volumes rather than aggressive price increases. We have avoided contributing to the problem of high consumer inflation in our region. Instead, we are offering our guests a good value to build long-term loyalty through a responsible menu pricing architecture and the best restaurant experience in the industry. Topline grew well above inflation across our markets, driven by the 3D strategy and the largest freestanding restaurant footprint in the region. This, combined with effective cost and expense management, led to significant operating leverage and a 230 basis points EBITDA margin expansion. Excluding the Brazilian tax credit from last year's result, EBITDA margin expanded by 430 basis points and total EBITDA almost tripled versus last year. Net income was $15.6 million, or 7 cents per share, up from 3 cents per share in the second quarter last year. Finally, with 30 restaurants open so far this year, including 26 freestanding units, we are on pace to exceed the growth guidance we provided for 2022. Luis, over to you for a closer look at our sales results.
spk01: Thanks, Marcelo. All divisions grew comparable sales by at least three times inflation in the second quarter. This is a testament to the experience we are delivering in our restaurants. The cultura de servicio mindset we began implementing in 2016 is now an important competitive advantage. Offering value to restaurant guests is about much more than pricing or affordability platforms. It's about the experience we deliver and the service we provide, no matter how guests choose to interact with the McDonald's brand. That is what makes it real in the restaurants. In Brazil, digital channels generated 52% of system-wide sales. higher guest volume across nearly all channels, and a responsible menu pricing architecture drove sales growth. We strengthened McDonald's brand equity in the country with the Make It Easy campaign, where some of Brazil's most popular celebrities and influencers described their favorite orders. We also launched the McCrispy chicken lineup with a very encouraging result. Brazil enjoys one of our highest levels of digital channel penetration and guests are loving the flexibility only we can offer. In fact, the McDonald's brand preference index was two times that of our closest competitor in the market during the second quarter. Mexico, Costa Rica, and the French West Indies markets were the strongest contributors to NOLA's comparable sales growth. It is worth mentioning that the U.S. dollar markets of Panama and Puerto Rico also grew comparable sales at or near double digits. We ran the Mas Sabor, Mas Diversión campaign in Mexico, leveraging the iconic Big Mac, while in Costa Rica, we launched the McCrispy Chicken platform. The family business continues to benefit from our exclusive rights to Disney properties, with Happy Meal sales in Nolad and the entire company registering a very solid quarter. Finally, we took another step toward increasing digital channel penetration in the division by rolling out the order ahead functionality across Nolad markets. Slabs comparable sales growth benefited from important contributions from Argentina, Colombia and Chile. Marketing activities were a key factor in building sales and traffic growth momentum in the quarter. Guests enjoyed innovation in the premium menu lines with new sandwiches in Argentina, Chile and Uruguay. We also boosted our chicken credentials in Colombia, Ecuador and Peru with the launch of the delicious, craveable and juicy spicy McNuggets. Underlying the strong sales performance has been the success of the 3D strategy. Digital channels generated 41% of sales in the quarter and drive-through has remained sticky as well. In the coming quarters and years, we will roll out new technologies and capabilities in restaurants, the mobile app, and the back end to support future sales growth. I will be back later to talk about the three Ds in more detail. But first, I will turn it over to Mariano for a look at our divisional profitability, capital structure, and restaurant growth.
spk02: Thanks, Luis. The second quarter adjusted EBITDA we are reporting today is the highest ever US dollar total for a second quarter in our history. Importantly, all three divisions contributed strongly to the result. Brazil's EBITDA more than doubled versus the second quarter of 2021 when we exclude the tax credit from last year's result. All restaurant operating expenses plus G&A declined as a percentage of revenue in the division. NOLAD sustained its double-digit EBITDA margin, demonstrating that it is operating at a higher level than before the pandemic. SLAD nearly tripled its US dollar EBITDA from the prior year and is also sustaining a double-digit margin. The EBITDA margin improvement versus the prior year quarter reflects significant operating leverage coming from strong revenue growth across the business. Food and paper costs, occupancy and other operating expenses, and G&A were all lower as a percentage of revenue. Thanks to our diversified geographic presence, Brazil's improved gross margin more than offset modest pressures in NOLA and SLAD. payroll expenses reflect excellent productivity. In fact, excluding last year's number that benefited from non-recurring government support, we have not seen these productivity levels since 2011. Revenue growth, together with the effective management of rent expense and delivery take rates, helped us leverage occupancy and other operating expenses. G&A expenses grew well below the benchmark inflation rate and were further diluted by top-line growth. With these results, our operating cash flow and financial leverage position us to continue capturing the growth opportunity for the McDonald's brand in all 20 markets where we operate. Cash generated from operations reached almost $122 million in the first half of this year, which is about 3.5 times as much as the same period last year. Our highest ever trading 12-month EBITDA and a strong cash position helped keep net leverage at a healthy 1.1 times as of June 30, 2022. We expect this cash on hand and future cash from operations to fund accelerated restaurant openings in the coming years. In fact, we still expect to exceed this year's growth guidance by about 10 units. During the quarter, we opened 14 restaurants, including 9 in Brazil, and of the 12 freestanding openings in the period, 8 were in Brazil. As Marcelo already mentioned, This brings the company's first half total to 30 restaurant openings, with 21 opened so far in Brazil. I should also note that we are very pleased with how revenue growth and disciplined operational execution have improved recent returns on investment, which are now above our historical average for restaurant openings. Looking ahead, we expect second half profitability to be very strong. Keep in mind that we have a difficult comparison with the second half of 2021. Additionally, we are facing tough operating and macroeconomic environments with several factors outside our control. And beginning August 3rd, our effective royalty rate went up by about one percentage point versus the prior year. Our plan is to focus on capturing additional operating leverage through revenue growth. We expect to get there with the strength of the 3D strategy and the structural competitive advantages offered by our freestanding restaurant portfolio. Luis, back to you.
spk01: As you just heard, digital delivery and drive-through remain the foundation of our strategy. The second quarter of 2022 set new records for digital sales, including delivery, self-order kiosks, order ahead, and mobile app offers. Delivery sales grew 23% versus the prior year, with similar growth rates across all three divisions. Drive-thru rose 13%, with especially strong growth in NOLAD and SLAD, despite improving on-premise channel sales. We have almost 900 experience of the future restaurants and depending on the market between 60 and 90% of on-premise volume in those restaurants now runs through self-order kiosks. As a result, The normalizing on-premise volume is contributing a higher average check compared with the pre-pandemic period, when less than 20% of that volume came through self-order kiosks. In other words, we're achieving unit-level sales growth with increasing off-premise sales combined with more efficient and growing on-premise transactions. What makes this strategy sustainable over time is that it is based on maintaining the affordability of our menu board to drive gift volume to all sales segments. Beyond the strategy is the way we are working today. True teamwork across borders and disciplines is leading to improved execution. We facilitated this teamwork by empowering local teams to be more agile in the day-to-day running of their businesses. The best measure of this execution is the strong sales growth and improved profitability we are delivering each quarter. In fact, I am happy to share an early indicator of the continued execution of this winning strategy. The second half of 2022 is off to a great start with July revenue exceeding our expectations, despite the challenging operating environment. Guest volume growth validates our focus on offering unmatched value, and we have a robust marketing plan to keep the momentum going in the second half of the year. McDonald's brand market share is increasing across the region, reflecting our strong sales trends. We gained additional visit share compared with the first half of last year, while the two main competitor brands saw share declines. The same is true for brand preference. Based on our tracking, McDonald's favorite brand index expanded and is now at least twice as high as the two main competitor brands across our entire footprint. While we should not minimize the headwinds we are facing, it is also true that we are managing through this period from a position of strength. And as a data-driven management team, we are focused on accelerating the momentum we began building in the second half of 2020. we are serious about Arcos Dorados' leadership role in Latin America and the Caribbean. This is why we developed the Recipe for the Future ESG platform to bring positive change to important environmental and social issues. Marcelo has some news to share with you on this today. Marcelo?
spk03: Thanks, Luis. On our last call, we took you through the details of the sustainability-linked bond we issued in the second quarter. One of the two sustainability performance targets associated with the SLB is the reduction of scope 1 and 2 greenhouse gas emissions. Among the initiatives we are pursuing to achieve this SPT is a transition to renewable energy sources. The latest advancement on this front is a partnership we formed in Brazil with EDP, a leading global provider of energy from renewable sources. EDP will be building three new solar power plants to supply 100% of the energy to a number of our restaurants in that country. We are also in talks with similar providers in Argentina, Colombia and Mexico to continue advancing on this journey. We have already made significant progress by tripling the usage of energy from renewable sources from 4% in 2020 to 12% in 2021. We are also progressing on the social side of our ESG platform. Arcos Dorados was recognized by the City of Buenos Aires with its seal of social inclusion for opening a new restaurant in the underprivileged Barrio 31 neighborhood. This restaurant provided formal job opportunities to young people who live in one of the city's poorest communities, including the location's manager, Charmina, who received a business loan from Arcos Dorados to become the owner-operator of the restaurant. Diversity and inclusion is also about gender equality and we were proud to be recognized during the quarter as the number one great place to work for women in Ecuador and Uruguay. As we have mentioned many times before, ESG is part of our DNA and we remain committed to supporting the communities we serve and having a positive impact in the environment, through the Recipe for the Future platform. Before we open the call for Q&A, I want to make a few final comments. I am very pleased with our execution level and the results we are delivering, but I believe we have not reached our limit. We are operating in a challenging economic environment, which we cannot control. but we have many initiatives that we can control and execute to improve operations. Luis mentioned recent brand and market share gains since last year, showing the McDonald's brand experience is capturing the lion's share of guest volume in a consolidating industry. This experience is defined by great salaries, the flexibility and optionality of the 3Ds, and the trust we are building by offering value through responsible menu pricing architecture. Cash flow from operations has been strong, and we expect it to be even stronger in the second half of 2022. The company's balance sheet has never been so solid, with a very strong cash position that we will use in part to support additional growth. Earlier this year, we said we could open at least 1,000 restaurants across the Arco Dorado's footprint over the next 10 years. Today, you heard from Mariano that we are achieving above average ROIs from recent year's openings, and we are on pace to exceed this year's guidance for new unit growth. The openings pipeline is growing. and the digitalization of the operation is accelerating. We are no longer looking back at how the business was before the pandemic. Instead, we are imagining where the business will be in the coming 5, 10 and 15 years, while delivering our best results ever in a new normal for the QSR industry. I am confident we have the right combination of strategy and execution with a data-driven leadership team to continue improving results and generate significant shareholder value for many years to come. Dan, over to you to start the Q&A session.
spk00: Thanks, Marcelo. In order to get started, please minimize the presentation slides so that you can access the chat function on the left-hand side of the webcast platform. Please limit yourself to one or two questions so that I can read, understand, and convey them to our speakers. We will now pause briefly to compile your questions. Okay, great. We actually have a number of questions in the queue and some overlaps, a few two and three-parters. So what we're going to try to do is get through all the questions and also probably combine a few. The first question came from Bob Ford of Bank of America. Congratulations on the quarter, and thanks for taking my questions. He asks, what would sales, EBITDA, and earnings be, excluding Venezuela and Argentina? And with Venezuela, there seems to be an economic recovery underway and a greater dollarization of the economy. So he asks if we can elaborate on the business trends there. I guess we'll start with you, Marcelo. Okay.
spk03: Good morning, everyone. Good morning, Bob. Thanks for the question. we are reporting with and without Venezuela. And in the case of Argentina, maybe for your reference, what we can say is that Argentina is part of the SLAT division. And when we reported our last 20F, we disclosed that Argentina contributed around 13% of sales in 2021. If you take a look at our numbers this year, that contribution coming from Argentina didn't change materially. And this contribution in terms of sales is a good indicator of the contribution in terms of results. So Argentina, it's worth to mention that it's doing extremely well. We are very pleased with the performance of the business. because the McDonald's brand that historically was a leader in the market has gained preference and market share in the last several quarters. Volume growth is the main explanation for that. And I think that that's thanks to the 3D strategy success. Initially, after a very tough 2020, the volume growth was very strong through both delivery and drive-through. But more recently, on-premise volume also rebounded. and is closing the gap significantly to pre-pandemic levels. Some additional advantage we have in Argentina is that digital channels generate a significant part of sales. So we can segment data and having personalization a lot in Argentina and that obviously contribute to sales and at the same time to improve profitability as well. Maybe, Mariano, you can add something about Argentina and the business for us in general.
spk02: Yes, perfect. Hi, Bob, and thank you for the question. When analyzing also the Argentinian business, we need to keep in mind that in Argentina, we cover the costs for nearly our entire corporate back office. That includes the accounting, finance, treasury, all the shared services. and also the costs for the advanced team that manages all our customer facing digital capabilities all the it infrastructure and data analytics these costs are accounted in our our gna and corporate expenses and provide a natural hedge for the argentine business of course in case of a devaluation or depreciation of the currency, we have that natural hedge in place that is, you know, balancing our EBITDA generation in the country. Marcelo?
spk03: Yeah, and to add about Venezuela, it's right, Bob, as you mentioned, that market is showing some signs of recovery. particularly as a consequence of the remittances from outside the country that many Venezuelans that left the country are sending those remittances to her families and parents and friends in the market. part of the explanation why there's some kind of dollarization in the market, but it's important to mention that we are coming off a very low base. So there is some signs of recovery, but I think that we still have a long road ahead in order to see that market coming back to historical levels.
spk00: Great. The second part of Bob's question is if we can comment on the traffic at our Brazilian dessert centers versus pre-pandemic figures, and how should we think about that going forward? And that's related to questions that we received also from Marcelo Recchia at Credit Suisse, who was asking how on-premise sales are, how far or how behind on on-premise sales are we from pre-pandemic levels in each region? And Thiago Bortolucci from Goldman Sachs asked a similar question. wondering if we could provide an update on traffic versus pre-pandemic levels across geographies. So with all those sort of overlapping questions, I'll turn it over to you, Luis.
spk01: All right. Thank you, Dan. And good morning, Bob, Maricela, and Thiago. Let me give you an overall picture of all the segments before we talk about the resource centers and how we think this is going to evolve. Delivery and drive-through, as you know, are clearly operating well. above pre-pandemic volumes. And on-premise channels that, as you know, are food courts and dessert centers are still down versus the second quarter of 2019. But they are growing steadily. And the main driver here is, it has been the front counter. It's important to keep in mind that the front counter includes in EOTF restaurants, they include self-order kiosks. This means that as volume grows at the front counter, we're being able to capture 60 to 90% of that volume through those self-order kiosks that generate a higher average check. So what we're seeing is that we're having better sales and profitability mix than we had pre-pandemic. And talking specifically about dessert centers, you know that historically, represented a high percentage of our total transactions. And they are mostly based on malls. So they are the furthest away from 2019 volumes. And similar to the front counter, it might take a little while to reach pre-pandemic volumes. But the segment already has evolved and is today and is going to be much more than just a volume driver.
spk00: Dan? Great. Thanks, Luis. Actually, you've answered Marcela's second question. Marcela, who thanked us for taking your questions and congratulated us on our results, had another question, which was, owing to the harder comps against the second half of 21, what can be shared in terms of expectations for second half of 22 in terms of EBITDA growth and margin dynamics? And so I'll turn it over to you, Mariano.
spk03: Yeah, maybe I can start, Mariano. Hi, Marcela. because everything begins with the first line in our income statement, which is sales. And it's important to mention, as we said some minutes ago, that the momentum we saw during the first half of 2022 have continued into the third quarter, particularly July, was well above our our expectations both in terms of revenue and in terms of profitability and it's important to mention that the whole business is performing well across our geographies i think that the the pandemic uh was a catalyst that permanently changed our channel mix and off-premise channels are still generating a significant portion of system-wide sales guests have responded very well to the ease and convenience of delivery and drive-through and that's why these two business channels have been very sticky even as on-premises continue to recover. Part of the explanation is that digital tools are helping us to drive sales in general and with a much more profitable mix. It's worth mentioning that we are following a very responsible menu pricing architecture. The idea is to offer value to our guests and at the same time without contributing to food inflation in the countries where we operate. So we have been able to absorb higher costs with higher guest traffic with greater segmentations through our digital channels and a simplified menu we implemented during the pandemic and at the same time we continue to have very effective supplier negotiations and not just price increases obviously it's not only about paper and sales so maybe Mariano you can elaborate a little bit more on top of this perfect and thanks Marcela for your question
spk02: In the second quarter of this year, we achieved 92, more than 92 million dollars in EBITDA, which is an all time record for a second quarter for Arco Dorados. We are very pleased with the results so far. But of course, as I already mentioned, we expect some headwinds for the second half of the year in terms of market conditions and Also keep in mind that as of August 3rd, we will experience a step up in royalty payments to McDonald's that according to the MFA, they go up from 6% to 7%. Having said that, and as Marcelo just mentioned, the dynamics that we are seeing in July and in months ahead, we are confident that it's going to be a very good second part of the year. In terms of margin dynamics, what we can tell you is that in 2019, we achieved a 10% EBITDA margin, which was a record for the company. In 2021, we achieved 10.4% of EBITDA margin, which was, of course, record at that time and we are using those you know 2019 and 2021 as our benchmark and as our base uh margin uh expectations uh going forward and of course as marcelo mentioned in terms of sales dynamic as we see sell sales continue to to grow we will be able to leverage on all our fixed costs, and we should be improving our margins moving forward.
spk00: Perfect. Thanks, Mariano. The next set of questions come from Rodrigo Almeida from Santander. He says, good morning, ARCO's team. Congratulations on another quarter of solid results, and thanks for taking the questions. His first question has to do with same-store sales. Could we please help with a breakdown of same-store sales growth between pricing and volumes? He says that we mentioned very well in the press release that these were primarily driven by higher sales volumes. He thinks it would be helpful for us to better understand how pricing strategy drove top-line growth. And so we'll start with you, Marcelo.
spk03: Okay, excellent. And thank you, Rodrigo, for the questions. Yes, I mentioned it a couple of minutes ago. We've been very prudent in terms of of price increases. We try to be in line or below, slightly below general inflation, despite we are facing some extra pressures in terms of food inflation. And I think that that gave us an advantage with many other players in the market. who had no other tool than pricing in order to deal with cost pressures. That's why most of our system-wide compatible sales for this quarter, and I would say for the whole first half of this year, came in the vast majority from volume. And most of that coming from the on-premise channels, which are normalizing month after month. So that's the split between the two components of same-store sales.
spk00: Perfect. Rodrigo's second question relates to market share dynamics. Could we please comment on the market share dynamics across the region and especially in Brazil, given the strong same-store sales growth and volume growth. It'll be interesting to understand how they behaved in the competitive environment that's playing out today, as well as our differentiated initiatives. And he talks about loyalty, mobile app, and delivery. We have a similar question related to market share from Ulisses Argote from JP Morgan, who asks if we can give more details on the increase in market share. Is it more driven from formal to informal? Are we seeing anything particular changing with the way the competition is approaching the business? So again, back to you Marcelo.
spk03: Okay, let me start and maybe Luis can add some color. Yeah, during the call we have mentioned that we saw the expansion of the McDonald's brand market share across the region. And this is effectively true for all our major markets. In all of them, we have gained market share. within a qsr industry which is gaining micro share there's a consolidation in the market qsr is gaining share within that that broader market and we are the main driver for that growth in in the qsr segment uh for example in the case of the brazilian market We saw recently top of mind and favorite brand measurements showing double digit increases in the gap to the nearest competitor. And that when compared with the first half and the first quarter of 2021, this brand preference obviously led to market share gains and this is happening within a consolidating restaurant industry. Importantly, our strong revenue growth was driven primarily by higher restaurant volume in Brazil with modest price increases and the industry's best restaurant experience for sure where we are offering a very compelling value to our guests. We believe this is a testament to our competitive advantages and particularly our successful 3D strategy. Our digital platform has contributed to this increase and digital channels show or set a new quarterly sales record generating 41% of system-wide sales in the second quarter of 2022 for the whole company. In the case of Brazil, that contribution is even higher. And in July, by the way, sales through digital channels reached a new monthly record. So we continue to build on the momentum we have in the business. I think that all these things are behind the excellent performance we saw in terms of market share so far this year, and in fact, for the last several quarters.
spk01: Yeah, and if you let me add, Marcelo, talking specifically about delivery, digital, and the loyalty program, I would say that both delivery and drive-through have remained sticky during the second quarter. They both generated 45% of sales over total sales. And this has happened even as we just said, on-premise channels continue to normalize. Delivery went up plus 23%. And what we think is that this segment is still evolving as a business in two terms, consumption habits and the operating model itself. So we believe we can sustain above average growth for a while longer. Talking about digital, as you just heard in the opening comments, we have implemented several initiatives regarding product launches and marketing initiatives. And digital, as Marcelo just said, has been very, very important, representing 41% of total sales. As we said, very few calls away, we are our clear goal is to strengthen our leadership in the qsr industry's digital race and if you let me give you some numbers our mobile app today continues to consolidate its position as uh number one in the industry and um we have already reached as of june 2022 72 almost 73 million downloads and we have the highest number of active users in the industry. This is 2.2 times the number of average monthly active users versus our nearest competitor. And our mobile app today is a powerful communication tool that is in eight markets already and is under implementation in another three markets and has increased the sales more than five times when you compare versus the second quarter of 2021. And talking about the loyalty program, as you know, we're on the first stage of that. We have the club VIP Automac. It's exclusive to the drive-through channel. It has already 4.2 million identifiable members and has generated, I would say, between 15% to 20% increase in frequency. And today we're working on a more comprehensive loyalty program. We are going to learn from this club, VIP Automag, and the best practices that we're receiving from 40 markets around the world. That is another advantage that we have to learn from the system around the world because they are implementing my McDonald's rewards program. So with those two learnings, we're going to Um, launch this, uh, new loyalty program is going to be Larry later this year to continue leveraging on our digital platform. The good news is that it's not going to be about points or discounts. Uh, it's also about, it's going to be also about experience. So that's why we have worked so hard to ensure that, uh, our experience, the McDonald's experience in our region is second to none.
spk00: Thanks, Luis. I mentioned that there's some overlap between or among the questions. Rodrigo's final question, which has some overlap with what Barbara Haberstadt from JP Morgan has asked, is if we could provide an updated view on restaurant openings, given the indication for openings communicated in the first quarter, and what would our pace of planned openings be for this back half of this year? That's Rodrigo's question. Barbara asks if we can provide an update on CapEx plans. and how much will be invested in the second half of 22 and also in 23 and what kind of flexibility we have to work around that number. Marcelo, I guess we'll turn it to you.
spk03: Okay, thank you both for the questions. We gave guidance at the beginning of the year saying that for the three-year cycle, 2022, 2024, we were planning to open at least 200 restaurants with a total capex of around $650 million. That includes not only restaurant openings, but modernizations, maintenance, and all the investments we are doing in terms of digital. So those numbers didn't change. What we said at that time is that from those 200 new restaurant openings for the three-year cycle, we were planning to do at least 55 this year. And given the fact that our results are better than expected, our cash generation, we have a very robust pipeline, particularly for new freestanding units. We are in a position where we can accelerate our pace this year and we are planning to exceed those 55 new restaurant openings that we We said at the beginning of the year, we are planning to exceed that number at about 10 additional restaurants. This didn't change our vision for the three-year cycle, but it's a good indication that we are looking for additional opportunities and try to accelerate our pace when it makes sense to do that. It is worth mentioning that we will always remain focused on our proven underwriting process to maximize ROI. In fact, in most recent openings, we saw average ROIs above historical numbers. So I think that we are in a very good position in order to continue capturing the opportunities we still see in an under-penetrated QSI industry in most of our markets. So that's for 2022. We will give you for sure some indication in terms of 2023 and 2024, but so far we didn't change our guidance for the
spk00: year cycle and in terms of capex for this year for 2022 we have a range between 180 and 200 million dollars we feel comfortable with that range at this time great the next question comes from Luis Delgado from Banco Financia he asks if we can specify gains in the first half of 22 related to our hedging policy actually has three questions so let's start with that one Mariano
spk02: Perfect. Thanks Luis for the question. First, let me describe you our hedging policy regarding our food and paper imports. Our policy is to hedge 50% of the projected food and paper exposure on a rolling basis. And we do that looking ahead two to three quarters in advance. These hedges, what they do is that they provide predictability and reduce the volatility of our input costs, and that in that way, it facilitates our work and strategy in the markets where we do these hedges. We do these hedges nowadays in five of our markets, Brazil, Colombia, Chile, Mexico, and Uruguay. But it's important to note that the hedging policy is not about gains, it's about giving predictability to our business and to our markets to have an efficient strategy in terms of pricing and costs. In case of you know, going to what happened in this first semester of 2022, and because we do the hedges well in advance, usually when you have a depreciation of local currencies, as was the case during this first half of the year, what happens is that you obtain a benefit that is reflected in our gross margin. So the currency, we set up the hedges in advance at a certain FX value. Then if the currency depreciates, then we are having a benefit in our gross margin. When the currencies appreciate, we are having higher costs in our food and paper line. But again, this is about predictability and not about speculative and trying to beat the effects because of course nobody knows what the effects will be in the future.
spk00: So a couple of quick ones from Luis. One is if we have any plans for dividend distribution in 2022.
spk02: Well, the company already announced a dividend distribution for 2022 of 15 cents $0.15 per share that are going to be paid already. Two of them have been paid $0.04 in March, $0.04 in June, $0.04 in September, and $0.03 in December. That's already announced. And then he also asked if we have a target for maximum debt for the near future. No, we don't have a target for maximum debt, but we have just finished a liability management exercise where we didn't issue or we didn't look in the market for new money. We are comfortable with our cash position. and we think that the cash generated by the business will be sufficient to fund our capex expectations for the next years. Of course, in case we need to, our net debt at this time is low, so we have debt capacity, but we're not planning to issue new debt in the short term.
spk00: Okay, and I mentioned earlier that Barbara Halberstadt from JP Morgan had asked about CapEx plans. She had another part to her question, which was about inflation trends and initiatives related to cost cutting. How much space do we have to reduce operating expenses? Do we see for continued pass-through in the second half of 2022? So back to you, Mariano.
spk02: Okay, thanks, Barbara. Well, inflation has been high in Latam during the first half of the year. And keep in mind that our performance in this environment of high inflation was really good, as we just described our results. Looking forward, well, this week Brazil announced deflation for the month of July. US CPI was announced today below expectations. So we are not seeing these inflation pressures on the second half of the year, but we are going to monitor all the forecasts looking ahead. Regarding cost-cutting initiatives, we're continuing looking for opportunities to improve efficiencies all the time. This is a continuous effort. We are keeping the dynamics started during the pandemic, trying to maintain all the savings we obtained during those difficult months. But our focus now is on growth and we're confident that with sales growth, we will continue to leverage on fixed costs like we have been doing so far. As an example, look at the GNA over system-wide sales is really at a very efficient, I think a very efficient point at this time. And we will continue to look for initiatives to improve all these numbers.
spk00: Great. Thanks, Mariano. Our next question comes from Ulysse Argote from JP Morgan. We'd already mentioned his market share question. So he asked us about innovation, if we can talk about our approach to menu innovation. We've seen some recent examples of some not so successful rollouts of products in the U.S. related to plant-based. So happy to hear on anything we can share on our thought process around menu innovation. Luis, that's for you.
spk01: Yeah. Okay, Dan. And thank you, Luis, for the question. During the pandemic, we have simplified our menu and this had very positive impacts in the whole supply chain and margins. And today we're being very prudent launching new products and have to, we say, earn their way back to the menu or to be at least considered to innovate. So the approach of the team is smart innovation. And regarding plant-based or similar products, we believe that consumer habits are trending in that direction and that a plant-based burger is not a matter of if, but when for us. The good news is that some regions of the world are further in terms of consumer habits and demand for this product. And this is going to give us the opportunity to learn from them. So, um, you can assure that when, uh, you can be sure that when, when the time is right, and we believe that we can generate sufficient demand for the product, you will see it in, in our restaurants, but we're being very, very prudent and, uh, trying to be smart with this matter.
spk00: Perfect. Thanks, Lise. We actually got a question from Joaquin Ley from Itaú, but I think we've covered your question, Joaquin, which related to price increases in revenue management and our competitive position versus informal players. We talked about market share and so on. But thanks for your question. And we have a question from Douglas Turnbull from Invesco. He says, please, could you give us an idea of what the bond issue and repurchase of some of the outstanding notes will do to borrowing costs moving forward? and also the impact of higher rates in Brazil and what we should expect for the interest cost line, which showed a jump in the second quarter. And that's for you, Mariano.
spk02: Perfect. And Douglas, thanks for the question. Well, first of all, the bond issue Actually, it was in US dollars. So the new bond, the 2029, $350 million in US dollars. We think this was a really good transaction with the perfect timing after we issued the markets for Latam insurers practically closed. There has been almost no issuance after that. and interest rates uh forecasts forecasts are going up in us dollars and in brl so what we have done with the cash uh with the liability management exercise was to cancel the bond 23 almost entirely and also we did liability management with the 27th In general, we think that the cost for our debt will be in line with what has been so far, maybe a bit lower because we are replacing the 23 that had a 6.625 interest rate with the 29 with 6.125. The impact of higher rates in Brazil, you know that 50% of our debt is in US dollar. We convert using derivatives to Brazilian real, our debt, in order to have a hedging in our interest and principal payments. Higher rates in Brazil, of course, they will have an impact in the new derivatives that we will take But again, in overall, we think that the interest line will remain at the same level that it was before or lower than, for example, last year. And regarding the jump in the second quarter, this is entirely due to the liability management transaction and the premiums we paid for, you know, taking out the 23 and the 27 bonds. But of course, this is a one time and will not be a recurring event. Going forward, you should see all the benefits of these new issuance.
spk00: Perfect. Thanks, Mariano. And we're right on time. So this is the end of the Q&A session. I wanted to thank you once again for the interest in the company and taking the time today to join us. We look forward to speaking with you again on our November 2022 earnings webcast. Until then, stay safe and have a great day. And happy to follow up with anyone on any pending questions over the course of the next several days. Have a great day, everybody. Thanks very much.
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