Arcos Dorados [ARCO] Conference call transcript for 2023 q3
2023-11-18 00:53:11
Fiscal: 2023 q3
Daniel Schleiniger: Good morning, everyone, and thank you for joining our Third Quarter 2023 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. 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 Investors 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 that 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 in the press release and unaudited financial statements filed today with the SEC on Form 6-K. Marcelo, over to you.
Marcelo Rabach: Thank you, Dan. Good morning, everyone, and thank you for joining us today. We are very pleased to report strong results for the third quarter 2023. McDonald's brand strength, structural competitive advantages and unparalleled execution continued to drive sales growth and market share gains across the Arcos Dorados footprint. We have articulated and are executing a clear strategy, designed to drive sustainable sales growth supported by both restaurant volume and average check to generate operating leverage and long-term profitability growth. Among the most important elements of this strategy is value. Guests measure value based on more than price. Their value perception includes quality, service, convenience and optionality as well. This is where the region's largest freestanding restaurant portfolio and our 3D's strategy of Digital, Delivery and Drive-thru boost guests' value perceptions. Perhaps the best indicator the strategy is working is that comparable sales continued growing well above inflation across our business, with strong guest volume growth in nearly all main markets. Even as consumption moderated in the region, sales growth remained strong, delivering cost and expense leverage to generate improved profitability. We are reinvesting our cash generation to expand the restaurant footprint in a highly underpenetrated industry. First year returns on investment for new restaurants remain well above historical average, proving that penetration continues to generate demand in our region. New restaurants also bring significant economic benefit to the communities we serve, especially through the creation of first-time jobs and long-term career opportunities for young people. Let's take a look at consolidated results for the third quarter of 2023. Total revenue surpassed $1.1 billion, rising 22.1% in U.S. dollars versus the prior-year period. Guest traffic grew in the mid to high single-digits in most markets, in-line with our sales growth strategy. Adjusted EBITDA rose with revenue growth, reaching $129.1 million. U.S. dollar EBITDA growth was driven mainly by higher sales, but we also managed to expand margins, thanks to better food and paper costs and some fixed cost leverage in the quarter. Net income of $59.7 million, or $0.28 per share, rose 27.4% over last year's strong results. System-wide comparable sales grew 37.3% or about 1.4 times blended inflation across the company. All markets outgrew inflation, and the gap in business share between the McDonald's brand and our nearest competitor expanded in our main markets as well. Among the markets with the strongest business share performance were Brazil, Chile, Costa Rica and Mexico. Digital sales accounted for 50% of system-wide sales with 20% identified sales across the business. A few weeks ago, we launched our loyalty program, which will help us reach the goal of 40% identified sales by the end of 2025. Luis will touch on that later. Delivery has proved to be a remarkably consistent sales channel with a 48% increase in local currency sales over the prior year. And Drive-thru sales rose 17% in local currency, complementing the strong rebound in on-premise sales channels. For the year-to-date through September, we opened 45 restaurants, including 41 freestanding units. Growth accelerated in the third quarter with 27 restaurant openings, and we fully expect to meet openings guidance for the full year 2023. In fact, as of today, we have opened 60 restaurants in our footprint since the beginning of the year. Let's go to Luis for an overview of sales performance in each division.
Luis Raganato: Thanks, Marcelo, and good morning, everyone. Brazil's comparable sales rose 10.8% or 2.3 times inflation in the quarter. Remarkably, guest volume rose mid-single digits, building on last year's strong results despite a more challenging consumption environment. Our value and convenience offerings are resonating with guests in Brazil. About 61% of sales came through digital channels in the country, where we were able to identify 25% of sales to drive increased guest frequency and average revenue per user. Delivery sales also remained strong in the Brazilian market, rising 32% versus last year in local currency. The McDonald's brand consolidated its market share leadership in the country with more than twice the market share of our nearest competitor. Marketing initiatives in the quarter included strong brand experience campaigns focused on important passion points for younger guests. The highlight was the sponsorship of The Town, the biggest music festival in Brazil this year. We built Latin America's largest McDonald's restaurant to serve festival goers and launched a limited edition McMelt The Town sandwich in all restaurants to bring a taste of the festival to the entire country. We also maintained the brand's connection to sports with the sponsorship of the FIFA Women's World Cup online broadcasts on Cazé TV, Brazil's biggest streaming channel. Finally, the launches of McFlurry Ovomaltine Mesclado and McFlurry Kit Kat boosted traffic by bringing innovation to the desert category. NOLAD's comparable sales grew 11.5%, which was 4 times the division's blended inflation in the quarter. Volume growth accounted for about two-thirds of comp sales growth with all markets outgrowing inflation by 2.5 times to 8.5 times inflation in the period. The NOLAD division reached some of its highest-ever market share levels backed by positive brand attribute trends. Marketing activities featured many innovations across the region, including the launch of GRANDS sandwiches, an indulgent and tasty platform. In Mexico, the #McDonaldsMexicoMeEncanta brand campaign was endorsed by Sergio Checo Pérez, the popular Mexican Formula 1 driver, and included the Menú Checo famous order campaign. And in Puerto Rico, we launched the Saca tu Encanto brand-building campaign partnered with Tommy Torres, a popular local musical artist. SLAD's comparable sales grew 1.3 times the division's blended inflation rate. Inflation-aided growth in Argentina was complemented by mid-teens comp sales growth in both Chile and Uruguay. As in Brazil and NOLAD, we generated strong guest value in nearly all SLAD markets in the quarter. SLAD's markets captured additional market share with improved scores in brand attributes, reinforcing McDonald's brand preference across the division. To continue strengthening our leadership in the beef segment, we launched the Bacon Cheddar McMelt sandwich and the Pileta de Cheddar in Argentina, Chile, Colombia and Ecuador with strong sales results in all four countries. We also continued the rollout of Best Burger, extending the platform to Aruba, Curaçao and Trinidad. The dessert platform produced excellent results with the launch of McFlurry products with locally relevant brands in markets like Chile, Colombia, Peru and Uruguay. And the good news is that we're generating positive sales trends halfway through the fourth quarter as well. Guest volume growth remains solid in most markets as we head into the end of the year. Over to you, Mariano.
Mariano Tannenbaum: Thanks, Luis. Good morning, everyone. The quarter's adjusted EBITDA growth of 25.8% in U.S. dollars was driven by both increased sales and margin expansion. Consolidated EBITDA margin improved by 40 basis points. While we continued offering value to our guests with competitive pricing at the best restaurant experience in the industry, a lower commodity cost environment flowed through to our gross margin. These, combined with G&A expense leverage, drove the quarter's margin improvement. Food and paper costs declined by 90 basis points as a percentage of revenue, with gross margin expansion in all three divisions. G&A improved by 40 basis points due to sales growth and the devaluation of the Argentine peso, which represents an important part of our corporate G&A. Most other expense line items were relatively flat versus the prior year, except for other operating expenses, which had a negative variance due to several puts and takes, primarily in SLAD. Third quarter adjusted EBITDA grew strongly in all three divisions, with double-digit growth in Brazil and NOLAD, where top-line growth drove operational leverage. Brazil's EBITDA grew 24.8% in U.S. dollars, which was in line with top-line growth in the division. EBITDA margin was flat with lower food and paper, payroll and G&A, offset mainly by higher occupancy and other operating expenses. NOLAD's EBITDA grew 42% in U.S. dollars, including 110 basis points of margin expansion in the quarter. Food and paper, together with occupancy and other operating expenses, drove the margin improvement. SLAD's underlying operating results were very strong in the quarter. Restaurant margins improved with lower food and paper, payroll and occupancy and other operating expenses. Royalties were higher due to the final step-up in our royalty rate. Additionally, a combination of items in other operating expenses this year compared to other operating income last year, generated a negative variance in SLAD's EBITDA margin. Let's turn to the 3D strategy of Digital, Delivery and Drive-thru. Digital sales grew 47% year-over-year, with sales from delivery, the mobile app and self-order kiosks providing half of system-wide sales in our geography. Identified sales improved from 16% last year to 20% in the most recent quarter. We now have over 75 million unique registered users in our database and more than 17 million average monthly users of the mobile app. Its ease of use and multitude of functionalities, make it by far the most popular app in Latin America's QSR industry. Even in Mexico, where we're working hard to increase digital sales penetration, and we have the third largest QSR restaurant portfolio, our mobile app is by far the most popular in the country's QSR industry as measured by active users. Delivery and Drive-thru sales rose by 48% and 17% in constant currency during the third quarter. Delivery accounted for 17% of system-wide sales with several markets generating a much higher contribution to sales. Delivery continued to expand, and we are still learning from the process. So far, the evolution is encouraging. Drive-thru sales rose 17%, accounting for 25% of system-wide sales in the period. We have been very pleased with the sales growth in both off-premise channels, in addition to the strong results we have seen in on-premise channels for the last several quarters. Importantly, the Mobile Order and Pay functionality on the app is growing exponentially and supporting all sales channels, especially in SLAD. MOP has the second highest customer satisfaction scores across all those channels, which is helping increase overall customer satisfaction scores. As part of our successful digital strategy last month, we executed the nationwide launch of our new loyalty program to all restaurants in both Brazil and Uruguay. We are encouraged by guest response so far, and we have already reached 1.8 million members. We built on learnings from My McDonald's Rewards around the world as well as insights generated through local pilots and a drive-thru-based loyalty platform. Our plan is to roll out the loyalty program to several additional markets by the end of next year. Loyalty boosts the power of the mobile app by driving visit frequency while increasing the percentage of identified sales to provide a more personalized guest experience. We look forward to sharing progress on future calls. With above average returns on investment, we are accelerating opening some modernizations into the end of 2023, supported by stronger cash from operations and a healthy balance sheet. EBITDA growth continues to offset the planned deployment of balance sheet cash to fund restaurant openings and modernizations this year. As a result, the net leverage ratio at the end of September was a very healthy 1x and remained flat versus the end of last year. Total debt rose modestly versus year-end 2022 due to the appreciation of the Brazilian real, which reduced the value of our derivative instruments. Also, as expected, cash flow from operations improved sequentially in the third quarter with seasonally higher EBITDA and an improvement in working capital performance. We expect to see similar or stronger cash flow from operations during the fourth quarter. Marcelo told you about our pace of openings so far this year and our confidence in meeting this year's guidance. I wanted to add that 30 of the 45 restaurants we opened in the first nine months of 2023, used the modular and highly efficient restaurant 2.0 design, we told you about during our Investor Day at the beginning of this year. We also opened a flagship sustainable restaurant in Sao Paulo, Brazil with multiple sustainability initiatives, including 20 that have already been rolled out to all restaurants in the country. It is worth repeating that the above-average ROI from both restaurant openings and modernizations provides compelling evidence that we still have significant room to grow for many years to come. These higher returns are expected to support continued growth and long-term free cash flow generation. More than half of all restaurants now have the experience of the future format. And we are very encouraged by the results from restaurant modernizations, which are generating at least high single-digit sales lifts and mid-teens returns on investment. We do not take these achievements for granted. Above-average ROIs are the result of a very disciplined and careful approach to restaurant development that has also benefited from favorable shifts in consumer behavior. Once restaurants are open, operational execution becomes the key to success, and we have decades of experience on both fronts. Capital expenditures in the third quarter were $105 million, bringing the nine-month total to $228 million. We expect to accelerate growth over the coming years while retaining discipline with the development processes and return expectations and the healthy balance sheet that delivered outperformance over the last several years. There is still so much room to grow, and we intend to capture the growth potential in the most sustainable and profitable manner possible. Marcelo, up to you.
Marcelo Rabach: Thanks, Mariano. During the third quarter, we received recognition for the commitments we have made to benefit the communities we serve and to provide the best work environment in the QSR industry. Three of the six pillars of our Recipe for the Future are Youth Opportunity, Commitment to Families and Diversity & Inclusion. We received recognition related to these three pillars and across all three divisions from prestigious organizations like Great Place to Work, Revista SUMMA and MERCO. We are making progress with the other three pillars as well: Sustainable Sourcing, Circular Economy and Climate Change. So far, four countries have transitioned to 100% cage-free eggs, and we remain aligned with the U.S. market's commitment to being 100% cage-free in all countries by 2025. In Mexico, we received a Premios Goula, recognizing our cooking oil recycling program as being among the best sustainability practices in the country's food and beverage industry. And we recently signed new agreements to increase the amount of renewable energy sources we use in our operation, which we will tell you more about on our next call. To learn more about the Recipe for the Future ESG platform, you can visit our website and download the audited ESG report for 2022. To wrap up our prepared remarks, I would like to share a few final thoughts with you. The strong results we reported today demonstrate the importance of a consistent long-term strategic approach to delivering value and convenience to restaurant customers. As you have heard many times, our objective is clear, to drive sustainable top-line growth over the long term, and as top-line growth, so should profitability. As we open even more freestanding units, modernize even more existing restaurants and develop even more digital capabilities, we are strengthening and expanding the structural competitive advantages that make McDonald's by far the preferred brand in the Latin American QSR industry. There is still so much work to be done to normalize our operations across the region. And there is still so much growth potential ahead of us. But thanks to the consistency of our strategy and execution, we are capturing our opportunities and tackling our challenges from a position of strength. We expect to have a solid final quarter to a very strong 2023, and we will provide you with our 2024 guidance for restaurant openings and capital expenditures early next year. Thank you all for your continuing support. Dan, over to you to start the Q&A session.
A - Daniel Schleiniger: 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. Well, actually, we have quite a few questions today, and we're going to try to get to as many of them as we possibly can. Thanks, everybody, for your participation. And we'll get started today with Thiago Bortoluci from Goldman Sachs, who says, "Hi Arcos team, congrats on another solid quarter, and thanks for taking questions." Thiago has a multipart question or set of questions that I want to split among our speakers here. The first for you, Marcelo. Thiago says, "Repeating my question from the second quarter, once again, you outperformed the industry by far. While your competitors continue to note a weak consumption backdrop, not just in burger but across multiple QSR categories. How are you seeing demand going forward? Do you think this trend is exclusive for McDonald's or broad market based?"
Marcelo Rabach: Okay. Good morning, Thiago, and thank you for your questions. For sure, we are very pleased with the results we published today in terms of sales growth, particularly. And it's important to mention that we expect to have a solid fourth quarter too and in that sense, to close a very, very strong 2023. The momentum we captured at the beginning of the year in the first half continued throughout the third quarter. And comparable sales growth well above inflation was driven by several things, and most of them, I would say, that are long-term things or fundamentals of the business. Beginning with the structural advantage that we have in terms of our footprint, the freestanding restaurants, the amount of freestanding restaurant that we have is a huge advantage. And this is getting bigger since we are accelerating our expansion and 90% or more of the new restaurant units are freestanding. Then, we have the consistent execution of our 3D's strategy. our robust digital platform. And finally, I think that it is important to mention that we are executing a pricing strategy based on offering compelling value across the entire menu board, which is huge -- it has a huge impact in terms of the value perception of the customers. That's why not only comparable sales results are very strong, but the McDonald's brand strength is at an all-time high in the region. So our plan is clear, is to continue to drive sustainable sales growth and in that way, generate operating leverage and improve long-term profitability, and we are pretty confident in our ability to continue capturing opportunities to sustain strong operating results since none of the current growth drivers are short term.
Daniel Schleiniger: Great. And then Thiago has a sequence of questions that I think are most appropriate for you, Luis. First is, "We're seeing your closest competitor being selectively more aggressive on pricing. I believe he's talking about Brazil here. What is your strategy to fight this? And what were the implications in terms of traffic and tickets in same-store sales in the third quarter of '23?"
Luis Raganato: Yeah. Okay. Thank you, Thiago. Between going to the part of the question that is talking about the traffic and the ticket, they are evenly split, okay, as we've already mentioned. And the second part of the question, the answer is that we're going to sustain the growth, like Marcelo already remarked, primarily focusing on improving first, our operations that today, operational excellence, we believe, is an important competitive advantage and strategic pillar for us. We will keep on offering good value for our guests through every channel, Digital, Delivery, Drive-thru, front counter, and, of course, these are centers, and we're very confident that we have a very solid strategy for the near future.
Daniel Schleiniger: Great. Well, this is also -- sorry, Thiago also asks, "You apparently gained significant market share in delivery in Brazil this quarter. Could you please share more color on the performance within the on-premise channel for both freestanding and food courts?"
Luis Raganato: Yes, we had a very expressive increase in our delivery, not only sales, volumes and market share. And we did this despite a very important recuperation in front counter and dessert centers in both restaurant formats, freestanding and front counters -- and food courts, I'm sorry. This recuperation in the sales in front counter and desserts were aided by a very effective, affordable platform and a special focus, like I said, on operational excellence.
Daniel Schleiniger: Great. And then finally, for you, Luis, "NOLAD posted a nice sequential acceleration in growth." And Thiago asks, "What drove this?"
Luis Raganato: Okay. NOLAD's evolution, the explanation is not one single bullet. We have a very solid plan in the division. It includes a product mix strategy. And when I said product mix, I'm talking about the cores, the premiums, desserts, chicken, a very aggressive set of actions in Delivery, Drive-thru and Digital. And in many markets, several brand-building campaigns, okay? So very solid and aggressive plan. But the beauty is that most of the divisions country are contributing to this result and mostly in hard or very consistent currencies.
Daniel Schleiniger: Great. Thanks, Luis. The next one also from Thiago for you, Mariano. "You mentioned some pressure on rents in Brazil despite the negative IGPM index. How should we add this up and how much of a tailwind could this be to margins going forward?"
Marcelo Rabach: Hi, Thiago, thank you for the question. Actually, it's not rent itself. The line with some modest pressure is occupancy and other operating expenses, which consists of many items with different trends, and we are not seeing a specific pressure in rent in particular, in Brazil. Having said that, we are, of course, very pleased with the 25% growth in EBITDA in the quarter.
Daniel Schleiniger: And actually, back to Luis, last one from Thiago. "Can you share more about your apps Net Promoter Score and potential areas for improvement in Brazil?"
Luis Raganato: Yeah. The app has the greatest rating in the country, and we will continue to invest to maintain the connection, and I would say, Thiago, the level of favoritism that it has with our customers, okay? So, we're going to keep on investing on features or new functionalities.
Daniel Schleiniger: Perfect. Let's move now to Bob Ford from Bank of America. "Congratulations on the quarter." Bob also with a multipart question, he starts with, "How do you expect results like this to influence your MFA renewal? Does McDonald's appreciate the high cost of capital and volatility in the region? What are your early thoughts on the new MFA in terms of royalty rates and capital investment commitments?" And I'll give that one to you, Marcelo.
Marcelo Rabach: Okay, thank you, and thank you, Bob, for your questions and being here today. I think that this renewal process is taking place in a very favorable time for the McDonald's system in general and for Arcos Dorados. The McDonald's brand attributes are at the strongest they have ever been in the region in almost all countries in Latin America and the Caribbean. Both companies have been generating strong financial results, which is very important. Arcos Dorados is consolidating its leadership position with historically high market share, including, in some cases, 2 times or 3 times as much market share as our nearest competitor in main markets in very important markets. And Arcos is also generating returns on investment for both openings and modernizations well above our historical average. And maybe a very important point, I think that both companies see significant growth potential in the region for many years to come. So that's why I say that this renewal process is taking place in a favorable time. With all that said, we do not expect to have news and details with respect to the MFA renewal until next year. So stay in touch, and we will share as soon as possible any news around this process.
Daniel Schleiniger: Great. Thanks. Bob's next question is also, "How are you thinking about labor reform risks in Mexico and the step-up in wages for 2024? Where do you perceive opportunities to mitigate?" And I'll give that one to you, Mariano.
Mariano Tannenbaum: Thank, Bob. Thank you for being, again, in the call. In Mexico, in the last three years, in fact, we have seen payroll pressures having salaries growing well above inflation. And we have been able to mitigate this impact by improving productivity in our restaurants. And in fact, we have been doing that extremely well. But most important, I would remark that the increase of disposable income in consumers' pockets, coupled, of course, with the right strategy to attract these customers to our stores, resulted in sales increases in Mexico well above inflation. And I think that they help to explain the great growth story we are seeing in that market.
Daniel Schleiniger: Great. Thanks, Mariano. And then last one from Bob that actually is also related to a question that we received from Ulises of JPMorgan. So, I'll read it from Bob first. "Lastly, can you comment on your loyalty program so far in terms of adoption, costs and returns? Also are frequency and average ticket actually changing, or is there a selection bias?" And then Ulises asks a similar question or a related question to loyalty, Ulises Argote from JPMorgan. "With the broader rollout of the loyalty program, can you comment on the engagement you're seeing both for in-store and digital channel dynamics?" So, all sort of loyalty related, and I'll give those to you, Luis.
Luis Raganato: All right. Hello, Bob and Ulises, good morning. As we've mentioned, we're very happy, in October, we've launched our loyalty program in all restaurants in Brazil, and we were able to accelerate the process and add Uruguay too. We have already reached 1.8 million members, and we expect to increase the volume of identified sales as the program grows. This is important because loyalty, what it does is boosts the power of the mobile app, okay? And that's this increasing or driving more frequency, okay? It drives visit frequency, while it increases the percentage of identified sales. And that combination gives us or allows us to provide a more personalized guest experience. So -- and this new or more personalized guest experience allows us to increase our ticket that every ticket, every transaction can be more profitable. And of course, what it does is [Technical Difficulty] our marketing efforts, with our marketing investments. So that would be the impact, and we tend to roll out the program to most markets by the end of next year.
Daniel Schleiniger: Great. Thanks, Luis. Next couple of questions from Julia Rizzo of Morgan Stanley. She starts with, "Could you please break down same-store sales growth in Brazil by freestanding stores and malls?" And also mentions that, "the impressive same-store sale year-to-date despite macro headwinds. I understand comps are harder in the fourth quarter of '23. So, what should we expect for same-store sales? So, what should we expect and how are same-store sales doing now?" Let's start with those two, Marcelo.
Marcelo Rabach: Okay. Good morning, Julia, and thanks for your questions. In terms of restaurant formats, we did extremely well in Brazil and in the whole company in all different formats. Obviously, in the case of freestanding units, it's a competitive advantage. The fact that you can operate Drive-thru in that format, which is still contributing to our sales and Delivery is much easier to be operated from those formats from the freestanding units. But we did well even in shopping malls, particularly in July, the traffic generated by Cinemas was pretty impressive, and we did well in shopping malls, too. And in the second part of the question, as I mentioned, I think in the first question that came from Thiago, we are very pleased with the trends and the momentum we are experiencing in terms of sales. The base of comparison is getting harder and harder to beat because we are in a run of several quarters of expressive and material comparable sales growth, well above inflation. But again, there are many drivers, many venues of bringing even more sales to our restaurants, and we continue to execute our strategy with a very disciplined approach, and there are still opportunities to improve our results. So, we are pretty convinced that we will do well for the rest of the year and next year, too.
Daniel Schleiniger: Okay. And then Julia's last question, a little bit different topic, but we'll stay with you, Marcelo. "Can you remind me how is the evolution of new openings in terms of sales and margins for year one, year one and maturity?"
Marcelo Rabach: Okay. In terms of the maturity of the restaurants, typically, in the past, we talked about three to four years for the restaurants to get to the mature level of sales, I would say that after the pandemic, we are talking more about three years than four. I think that the curve of maturity got shorter. But that's something that we continue to look at and to get information from the recent investments. And in terms of returns, what we expect at least is a 20% return cash on cash for the first year. So obviously, that number gets better from year two and so on. And in the last two or three years, the returns were above that 20% that it's the minimum we ask for the openings. So, we are very pleased with the kind of results that our new restaurants are generating from day one.
Daniel Schleiniger: Great. Thanks, Marcelo. Next, from Felipe Cassimiro from Bradesco. He actually asked a couple of questions that we've, I think, already answered. "Could you break down Brazil same-store sales between average check growth and guest volume?" I think Luis touched on that about evenly split. "And going forward, how can you sustain the same-store sales growth in Brazil and NOLAD?" I think also Luis touched on sustaining sales. So, I'll go to question number two. If anybody has something to add to question one, we can come back to it. But question number two, which I believe is for you, Mariano, "How should we think about gross margin expansion, sustainability, considering beef prices are likely to increase in the next 12 months?"
Mariano Tannenbaum: Yes. The outlook we have for margins we have seen actually in this quarter an improvement in food and paper costs of 90 basis points. And for the rest of 2023, we are also seeing that food and paper costs will remain higher than what it was in 2022. So that's the main trend that we are seeing now in terms of gross margin for 2023. And the expectation, of course, is to continue negotiating with our main suppliers taking advantage of all the large scale and the volumes that we have that actually are unique in the industry.
Daniel Schleiniger: Okay. Let's stick with you, Mariano, and this is Felipe's last multipart question. "Could you please explore a bit more the SLAD EBITDA margin drop due to higher other operating expenses and higher G&A? What are the main drivers of higher expenses? And should we expect continuous deterioration of expenses in SLAD?"
Mariano Tannenbaum: Yes. Well, first, don't take SLAD's Q3 as a trend. And also keep in mind that in SLAD at the restaurant level, which includes food and paper, payroll, other operating expenses and royalties, we are seeing an expansion in margins of 120 basis points during the quarter. In terms of G&A and other operating income, there are several positives and negatives that applied during the quarter that should not be taken as a trend going forward. I think that answers the question for EBITDA.
Daniel Schleiniger: Great. Thanks, Mariano. Next, Laura Hirata from Santander. "Good morning, everyone. Congratulations for these results. Regarding same-store sales growth, could you please share with us how much the digital sales have contributed for this strong increase in this quarter? And what can we expect of digital sales as a percentage of total sales going forward?" And so over to you, Luis.
Luis Raganato: All right, thank you, Laura, for the question. Digital sales this last quarter were up 47% and reached more than $731 million, that this is a new quarterly record. This digital sales accounted for 50% of our system-wide sales, and we have an opportunity to equalize, I would say, the performance in many markets because we have big variations when we compare market to market. So there, we have an opportunity. Our top in not only digital sales, but in identified sales is Brazil. The digital sales for the country accounts for 60% and identified sales for 25%. So, what we can see -- what you can see in the near future is that we're going to keep on investing on developing this tool, this channel because for us, it's going to be really, really important in the future.
Daniel Schleiniger: Great. Thanks. Earlier, I mentioned that Ulises Argote from JPMorgan had a couple of questions. We answered one already. The other one, where he says, "Team, congrats on the strong results. You mentioned higher ROI on new restaurants. Can you comment on return metrics and sales list for the stores you're remodeling?" And I'll give that one to you, Marcelo.
Marcelo Rabach: Yeah. Thanks, Ulises, for the question. [Technical Difficulty] that we are experiencing in those restaurants that are modernized and converted into the EOTF platform, typically is in the high single digits when compared to the [Technical Difficulty], that brings a pretty solid, pretty healthy return on that investment. And that's why we are experiencing the kind of comparable sales growth well above inflation, well above the rest of the market, our peers in markets where we are deploying EOTF, which is almost in every single market of the company. And that's why in markets where we started with the process later, for example, in the North part of Mexico, where we only have 20% of the restaurants converted to EOTF, that's one of the growth drivers, which are for the long term that I mentioned at the beginning. So, we will continue to see this kind of positive impact in our comparable sales coming from all the investments we are making in the EOTF format.
Daniel Schleiniger: Great. Thanks, Marcelo. We actually have a follow-up question from Julia Rizzo of Morgan Stanley. I think maybe just didn't hear the numbers. "So, sorry, a follow-up here. Sales in year one is how much of a mature store?" And I believe Marcelo said in the 75% to 80% range for year one. So that just so everybody has that number as well. And it looks like we actually don't have any additional questions. So, we've reached the end of the Q&A session for today's call. Thanks again, everyone, for your interest in Arcos Dorados and for joining today's webcast. Look forward to speaking with you again in the middle of March on our fourth quarter call. Until then, have a great day, stay safe and happy Thanksgiving to those who celebrate.
