Arcos Dorados [ARCO] Conference call transcript for 2022 q2
2022-08-10 22:01:27
Fiscal: 2022 q2
Dan Schleiniger: Good morning, everyone, and thank you for joining our second quarter 2022 earnings webcast. With us today are Marcelo Rabach, our Chief Executive Officer; Luis Raganato, our Chief Operating Officer; and Mariano Tannenbaum, our Chief Financial Officer. Todayâs 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 Investors section of our website, www.arcosdorados.com/ir. Todayâs 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 in the press release and unaudited financial statements filed today with the SEC on Form 6-K. Our discussion today excludes the results of the Venezuelan operation, both at the consolidated level as well as for the SLAD division. For your reference, we included a full income statement, excluding Venezuela with todayâs earnings release. Marcelo, over to you.
Marcelo Rabach: 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-thru that has been driving performance. Before I turn to the highlights of the quarter, letâs take a look back at how we build the foundation to deliver todayâs results and drive sustainable growth in the years to come. 15 years ago, last week, ArcosDorados began operating with exclusive rights to run and sub-franchise McDonaldâs 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 companyâs 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. Disciplined execution over the last 15 years allowed us to generate consistent unit sales growth in local currency, navigate some very challenging economic periods and improved operating results even as competition intensified in the regionâs underpenetrated QSR industry. We carried significant operating momentum into 2020 by reaccelerating unit growth, reinvigorating the restaurant experience and recapturing the magic of the McDonaldâs brand. When 2020 begun, we were just beginning the companyâs digital transformation focused on developing mobile app capabilities, deploying self-order kiosks and growing our delivery sales. Today, we have the industryâs 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 McDonaldâs brand is as strong as it has ever been in our region. This includes Brazil, where sales growth has 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. Letâs 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 to a responsible menu pricing architecture and the best restaurant experience in the industry. Top line grew well above inflation across our markets, driven by the 3 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 yearâs result, EBITDA margin expanded by 430 basis points and total EBITDA almost tripled versus last year. Net income was $15.6 million or $0.07 per share, up from $0.03 per share in the second quarter last year. Finally, with 30 restaurants opened 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.
Luis Raganato: Thanks, Marcelo. All divisions grew comparable sales by at least 3x inflation in the second quarter. This is a testament to the experience we are delivering in our restaurants. The culture 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. Itâs about the experience we deliver and the service we provide, no matter how guests choose to interact with the McDonaldâs brand. That is what makes it real in the restaurants. In Brazil, digital channels generated 52% of systemwide sales, higher gas volume across nearly all channels and responsible menu pricing architecture drove sales growth. We strengthened McDonaldâs brand equity in the country with the Mequizices campaign, where some of Brazilâs most popular celebrities and influencers described their favorite orders. We also launched the McCrispy Chicken line-up with a very encouraging result. Brazil enjoys one of our highest levels of digital channel penetration and guests are loving the flexibility on the weekend offer. In fact, the McDonaldâs brand preference index was 2x 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 NOLADâs 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 run the Mas sabor, mas diversion 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 NOLADâs markets. SLADâs 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 this 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 3Ds in more detail. But first, I will turn it over to Mariano for a look at our divisional profitability, capital structure and restaurant growth.
Mariano Tannenbaum: Thanks, Luis. The second quarter adjusted EBITDA we are reporting today is the highest ever U.S. dollar total for a second quarter in our history. Importantly, all 3 divisions contributed strongly to the result. Brazilâs EBITDA more than doubled versus the second quarter of 2021 when we exclude the tax credit from last yearâs results. All restaurant operating expenses plus G&A declined as a percentage of revenue in the division. NOLA sustained its double-digit EBITDA margin, demonstrating that it is operating at a higher level than before the pandemic. Slab nearly tripled its U.S. 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, Brazilâs improved gross margin more than offset modest pressures in NOLAD and SLAD. Payroll expenses reflect excellent productivity. In fact, excluding last yearâs number that benefited from nonrecurring government support, we have not seen lease 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. Finally, 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 McDonaldâs 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 3.5x as much as the same period last year. Our highest ever trailing 12-monthddEBITDA and a strong cash position helped keep net leverage at a healthy 1.1x 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 yearâs 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 companyâs 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 3, our effective royalty rate went up by about 1 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.
Luis Raganato: 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 kiosk, order ahead and mobile app offers. Delivery sales grew 23% versus the prior year, with similar growth rates across all 3 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 to self-order kiosk. In other words, we are 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 gas volume to all sales segments. Beyond the strategy is the way we are working today. Through 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 a much value and we have a robust marketing plan to keep the momentum going in the second half of the year. McDonaldâs 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 2 main competitor brands saw share declines. The same is true for brand preference based on our tracking McDonaldâs favorite brand index expanded and is now at least twice as high as the 2 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 ArcosDoradosâ 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?
Marcelo Rabach: 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 2 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 3 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 tripping 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. ArcosDorados was recognized by the city of Buenos Aires with its seal of social inclusion for opening a new restaurant in the underprivileged neighborhood. This restaurant provided formal job opportunities to young people who live in one of the cityâs poorest communities, including the locations manager, Carmina, who received a business loan from Arco 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 #1 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 canât control and execute to improve operations. Luis mentioned recent brand and market share gains since last year, showing the McDonaldâs brand experience is capturing the lionâs share of guest volume in a consolidated industry. This experience is defined by great series, 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 companyâs 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 ArcosDorados footprint over the next 10 years. Today, you heard from Mariano that we are achieving above average ROIs from recent yearsâ openings, and we are on pace to exceed this yearâs 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. Then over to you to start the Q&A session.
A - Dan Schleiniger: Thanks, Marcelo. The first question came from Bob Ford of Bank of America. Congratulations on the quarter. He asked 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. I said yes, if we can elaborate on the business trends there. And I guess weâll start with you, Marcelo.
Marcelo Rabach: Okay. Bob. Thanks for the question. Well, in the case of Venezuela, you can see the numbers since 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 flat division. And when we reported our last 20-F, 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 didnât change materially, and this contribution in terms of sales is a good indicator of the contribution in terms of results. So Argentina, itâs worth to mention that itâs doing extremely well. We are very pleased with the performance of the business because the McDonaldâs 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 thatâs thanks to the 3D strategy success. Initially, after a very tough 2020, the volume growth was very strong through both delivery and Drive-thru, 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 date and having personalization a lot in Argentina, and that obviously contributed 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.
Mariano Tannenbaum: Yes. Perfect. Bob, and thank you for the question. When analyzing also the Argentina 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 G&A 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 balancing our EBITDA generation in the country. Yes. And to add about Venezuela, itâs 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 thatâs part of the explanation why thereâs some kind of dollarization in the market, but itâs 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 loan growth ahead in order to see that market coming back to historical levels. Great. The second part of Bobâs 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 thatâs related to questions that we received also from Marcella 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 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 the sort of overlapping questions, Iâll turn it over to you, Luis.
Luis Raganato: All right. Thank you, Dan, and good morning Bob, Marcela and Thiago. Let me give you an overall picture of all the segments before we talk about these centers and how we think this is going to evolve. Delivery and Drive-thru as you know are clearly operating well above pre-pandemic volumes. And on-premise channels that, as you know, our food courts and these are 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 corner. Itâs 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, weâre being able to capture 60% to 90% of that volume through those self-order kiosks that generate a higher average check. So what weâre seeing is that weâre having better sales and profitability mix than we had pre-pandemic. And talking specifically about these 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. Dan?
Dan Schleiniger: Great. Thanks, Luis. And actually, youâve answered Marcellaâs second question. Marcelo would thank us for us and congratulated us on the results. I had another question, which was owing to the harder comps against second half of â21, what can be shared in terms of expectations for second half of â22 in terms of EBITDA growth and margin dynamics? And so Iâll turn it over to you, Mariano.
Luis Raganato: Yes, maybe I can start, Mariano, his Marcella, because everything begins with the first line where income statement, which is sales. And itâs 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 expectations, both in terms of revenue and in terms of profitability. And itâs important to mention that the whole business is performing well across our geographies. I think that the pandemic was a catalyst that permanently changed our channel mix and off-premise channels are still generating a significant portion of system oil sales. Guests have responded very well to the ease and convenience of Delivery and Drive-through. And thatâs why these 2 business their channels have been very sticky even as on-premise sales 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. Itâs 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 full 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, itâs not only about paper and sales. So maybe, Mariano, you can elaborate a little bit more on top of this.
Mariano Tannenbaum: Perfect and thanks Marcella for your question. In the second quarter of this year, we achieved $92 -- more than $92 million in EBITDA, which is an all-time record for a second quarter for ArcosDorados. 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 3, we will experience a step up in royalty payments to McDonaldâs, 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 itâs 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, the record at that time. And we are using those 2019 and 2021 as our benchmark and as our base margin expectations going forward. And, of course, as Marcelo mentioned, in terms of sales dynamic, as we see sales continue to grow, we will be able to leverage on all our fixed costs and we should be improving our margins moving forward.
Dan Schleiniger: The next set of questions come from Rodrigo Almeida from Santander. He says, good morning, Arcosâ team. Congratulations on another quarter of solid results, and thanks for taking the questions. His first question has to do with same-store sales. Can we please help with a breakdown of same-store sales growth between pricing and volumes? He said that we mentioned very well in the press release that these were primarily driven by higher sales volumes. Do you think it would be helpful for us to better understand how pricing strategy drove top-line growth? So weâll start with you, Marcelo.
Marcelo Rabach: Yes, I mentioned it a couple of minutes ago, weâve been very prudent in terms 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 gave us an advantage with many other players in the market who have no other tool than pricing in order to deal with cost pressures. Thatâs why most of our system-wide comparable sales for this quarter, 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 thatâs the split between the 2 components of same-store sales.
Dan Schleiniger: Rodrigoâs second question relates to market share dynamics. Will you please comment on the market share dynamics across the region, and especially in Brazil, given the strong same-store sales growth and volume growth that we seem to understand how they behaved in the competitive environment thatâs 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 Ulises ArgoteBolio from JPMorgan, 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.
Marcelo Rabach: Okay. Let me start -- and maybe Luis can add some color. Yes, during the call, we have mentioned that we saw the expansion of the McDonaldâs 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 market share. Thereâs a consolidation in the market. QSR is gaining share within that broader market. And we are the main driver for that growth in the QSR segment. 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 industryâs 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 3Dââ¬â¢s strategy. Our digital platform has contributed to this increase. And digital channels saw offset a new quarterly sales record, generating a 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.
Luis Raganato: Yes. And if you let me add, Marcelo, talking specifically about delivery, digital and the loyalty program. I would say that both delivery and drive-thru have remained sticky during the second quarter. They both generated 45% of sales in our 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 asset business in 2 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 branches and marketing initiatives and digital, as Marcelo just said, has been very, very important, representing 41% of total sales. As we said, very few goals away, we are -- our clear goal is to strengthen our leadership in the QSR industryâs digital race. And if you let me give you some numbers, our mobile app today continues to consolidate its position as #1 in the industry. And we have already reached as of June 2022, $72 million -- about $73 million downloads. And we have the highest number of active users in the industry. This is 2.2x the number of average monthly active users versus our nearest competitor. And our mobile app today is a powerful communication tool that is in 8 markets already. And we are -- and is under implementation in another 3 markets, and has increased the sales more than 5x when you compare versus the second quarter of 2021. And talking about the loyalty program, as you know, we are in the first stage of that. We have the Club VIP AutoMac is exclusive to the Drive-thru channel. It has already 4.2 million identifiable members and thus generated, I would say, between 15% to 20% increase in frequency. And today, weâre working in a more comprehensive loyalty program. We are going to learn from this Club VIP AutoMac. And the best practices that we are receiving from food markets around the world that is another advantage that we have to learn from the system around the world because they are implementing MyMcDonaldâs Rewards Program. So with those 2 learnings, weâre going to launch this new loyalty program. Itâs going to be later this year to continue leveraging on our digital platform. The good news is that itâs not going to be about points or discounts. Itâs also about -- itâs going to be also about experience. So thatâs why we have worked so hard to ensure that our experience -- the McDonaldâs experience in our region is second to none.
Dan Schleiniger: I mentioned that thereâre some overlap between among the questions. Rodrigoâs final question, which has some overlap with what Barbara Halberstadt from JPMorgan has asked is if we can provide an updated view on restaurant openings, given the indication for openings communicated in the first quarter? And what we our pace of plant openings to be for this back half of this year? Thatâs Rodrigoâs question. Barbara asks if we can provide an update on CapEx plans and how much will be invested in the second half of â22 and also in â23? And what kind of flexibility we have to work around that number? Marcelo, I guess weâll turn it to you.
Marcelo Rabach: We gave guidance at the beginning of the year, saying that for the 3-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 didnât change. What we said at that time is that from those 200 new restaurant openings for the 3-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 free-standing 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 said at the beginning of the year. And we are planning to exceed that number at about 10 additional restaurants. This didnât change our vision for the 3-year cycle, but itâs a good indication that we are looking for additional opportunities and try to accelerate our base 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. And 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 underpenetrated QSR industry in most of our markets. So thatâs for 2022? We will give you, for sure, some indication in terms of 2023 and 2024. But so far, we didnât change our guidance for the 3-year cycle. And in terms of CapEx for this year, for 2022, we have a range between $180 million and $200 million. We feel comfortable with that range at this time.
Dan Schleiniger: The next question comes from Luis Delgado from Banco Finantia. He asked if we can specify gains in the first half of â22 related to our hedging policy. Actually it he has 3 questions. So letâs start with that one, Mariano.
Mariano Tannenbaum: 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 2 to 3 quarters in advance. These hedges, what they do is that they provide predictability and reduce the volatility of our input costs. And in that way, it facilitates our work and strategy in all our -- in the markets where we do these hedges. We do these hedges in -- nowadays, in 5 of our markets, Brazil, Colombia, Chile, Mexico and Uruguay. But itâs important to note that the hedging policy is not about gains. Itâs about giving predictability to our business and to our markets to have an efficient strategy in terms of pricing and costs. In case of 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 obtained 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 FX because, of course, nobody knows what the effects will be in the future.
Dan Schleiniger: So a couple of quick ones from Luis. One is if we have any plans for dividend distribution in 2022?
Mariano Tannenbaum: Well, the company already announced a dividend distribution for 2022 of $0.15 per share that are going to be paid. Already 2 of them have been paid, $0.04 in March, $0.04 in June, $0.04 in September and $0.03 in December. Thatâs already announced.
Dan Schleiniger: And then you also ask if we have a target for maximum debt for the near future?
Mariano Tannenbaum: No, we donât have a target for maximum debt. But we have just finished a liability management exercise where we didnât issue or we didnât 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 that capacity, but weâre not planning to issue new debt in the short term.
Dan Schleiniger: Okay. And I mentioned earlier that Barbara Halberstadt from JPMorgan had asked about CapEx plans. You had another part for request which was inflation trends and initiatives related to cost cutting and how much space we have to reduce operating expenses do we see for continued pass-through in the second half of â22? So back to you Mariano.
Mariano Tannenbaum: Well, inflation has been high in LATAM during the first half of the year. And keep in mind that our performance in this environment high inflation was really good, as we just described our results. Looking forward, well, this week, Brazil announced deflation for the month of July. U.S. 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 are 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 are 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 G&A over system-wide sales is really at a very efficient -- I think, at a very efficient point at this time. And we will continue to look for initiatives to improve all these numbers.
Dan Schleiniger: Our next question comes from Ulises Argote from JPMorgan. We already mentioned this market share question. So he asked us about innovation, if we can talk about our approach to menu innovation? Weâve seen some recent examples of some not so successful rollouts of products in the U.S. related to plant-based. So happy to hear anything we can share on our thought process around menu innovation? And Luis, thatâs for you.
Luis Raganato: During the pandemic, we have simplified our menu, and this had very positive impacts in the whole supply chain and margins. And today, we are being very prudent launching new products and have to -- we say, earn their way back to the menu or to be at least consider to innovate. Okay. 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 you can assure that when -- you can be sure that when the time is right, and we believe that we can generate sufficient demand for the product, you will see it in our restaurants. But weâre being very, very prudent and trying to be smart with this matter.
Dan Schleiniger: We actually got a question from Joaquin Ley from Itau but I think weâve covered your question, Joaquin, which was 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. And he says, please, could you give us an idea of what the bond issue and repurchase of the -- 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 thatâs for you, Mariano.
Mariano Tannenbaum: Well, first of all, the bond issue actually was -- it was in U.S. dollars. So the new bond, the 2029, $350 million in U.S. dollar. We think this was a really good transaction with the perfect timing after we issued the markets for LatAm was practically closed. There has been almost no issuance after that. And interest rate forecasts are going up in U.S. dollars and in BRL. So what we have done with the cash -- with the liability management exercise was to cancel the bond 23 almost entirely. And also we did liability management with the 27. 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 29 with 6.125%. The impact of higher rates in Brazil, you know that 50% of our debt is in U.S. dollar. We convert using derivatives to Brazilian Real, our debt, in order to have a hedging in our interest and principal payment. 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 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.
Dan Schleiniger: And weâre 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.
