Arcos Dorados Holding Inc. (NYSE:ARCO)
Q2 2014 Earnings Conference Call
August 5, 2014 10:00 AM ET
Daniel Schleiniger – Investor Relations Director
Woods Staton – Chairman and CEO
Germán Lemonnier – Chief Financial Officer
Sergio Alonso – Chief Operating Officer
John S. Glass – Morgan Stanley & Co. LLC
Roy Yackulic – Bank of America Merrill Lynch
John W. Ivankoe – JPMorgan Securities LLC.
Jeronimo De Guzman – Morgan Stanley & Co. LLC
Rachel Chong – Hartford Investment Management Co.
Robert J. Schweich – Burnham Securities Inc.
Good morning and welcome to the Arcos Dorados Second Quarter 2014 Earnings Call. With us today are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, Chief Operating Officer; The company’s Chief Financial Officer, Germán Lemonnier; and Daniel Schleiniger, Investor Relations Director. A slide presentation accompanies today’s webcast, which is also available in the Investor Relations section of the company’s website, www.arcosdorados.com/ir.
As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) Today’s conference call is being recorded.
At this time, I would like to turn the call over to Mr. Staton. Please go ahead.
This will be Daniel Schleiniger speaking first. Thank you and hello everyone. Before we proceed, I would like to make the following Safe Harbor statement. Today’s call will contain forward-looking statements, and I’d 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 filed with the SEC on Form 6-K.
I would now like to turn the call over to our Chairman, Woods Staton. Woods, please proceed.
Thank you, Dan. Hello everyone, and thank you for joining us today. Everyday, McDonald’s is a destination for approximately 4.3 million customers in the Latin America and Caribbean markets. And our top priority is to serve them great tasting, high-quality food in a contemporary setting. This focus on our customers is particularly important in today’s economic environment, for weak economic growth, and rise, and inflation continued to dampen consumer sentiment and buying power in some of our largest markets.
While we anticipated much of the decline in traffic have resulted the FIFA World Cup, and a tough year-over-year comparison in our largest market, Brazil. we have also faced that we couldn’t expect in the consumer environment in the second quarter.
given this backdrop, I’m pleased to announce that we achieved another quarter of double-digit organic revenue growth, supported by a high single-digit increase in comparable sales. The result demonstrates our ability to continue to grow sales, even in challenging market conditions and underscores our operational and brand strength.
On the topic of branding, the second quarter marked a once-in-a-lifetime marketing opportunity for the McDonald’s brand in Latin America. The World Cup is the most widely watched sporting event in the world, exceeding even the Olympic Games. as an official sponsor, McDonald’s is the only restaurant brand visible across the event, venues during all 64 games. and based on a GlobalWebIndex survey to track awareness levels among people watching the UK, USA and Brazil, McDonald’s is the second most recognized official sponsor of the event.
This visibility will no doubt increase the dominance in McDonald’s brand in the region over the long-term. We were successful in leveraging the brand sponsorship of the World Cup to exciting marketing activities, including new product introductions and event-related promotions, which positively impacted sales in the lead up to the event.
However, during game days, we did experience a significant lunch time decline in traffic, which was exacerbated by the advancement of many of our Latin America national teams to the final stages of the event. This factor combined with a tough year-over-year comparison due to the inclusion of the Monopoly promotion in the second quarter of 2013 impacted top line growth in our largest market, Brazil and in turn, our consolidated results.
Looking ahead, we expect economic challenges in several of our key markets to persist in the near-term. Our annual guidance was based on projections that included third-party forecasts for economic and consumption growth in our markets.
Since the time that we provided guidance, actual economic data has underperformed this forecast and the outlook for the balance of the year has deteriorated substantially. As an example, GDP forecast have been revised to 1.1% across our territories, excluding Venezuela versus the 2.1% use in original projections. Similarly, expectations for growth in private consumption had declined sharply to 1.6% from 2.5% in our original projections. And Brazil is our largest market; the slowdown in economic growth in that market has played a key part in this deceleration.
At the beginning of the year, market economist forecast economic growth of around 1.8% for 2014. Currently, they expect Brazilian GDP to grow below 0.9% this year. More specifically, the QSR sector in Brazil has been losing share to the informal sector as a result of broad economic weakness and we expect this to continue in the near term. While we have seen a return to pre World Cup sales and traffic in Brazil is following the conclusion of the tournament and we expect to benefit from an easier year-over-year comparison of the third quarter. These soft economic and consumer trend will limit revenue growth in Brazil in the second half of the year.
Turning to our second largest division, the South Latin America division or SLAD, mounting inflation in Argentina and a lack of a resolution of debt situation in that country are expected to continue to dampen consumer sentiment and spending. In response to the total event, the significant deterioration in regional macroeconomic conditions during the first half. And the impact of the World Cup on sales in June, we are revising our full-year guidance. On an organic basis and excluding the Venezuelan operation, we now anticipate revenue growth for the year 2014 between 9% and 11%, and adjusted EBITDA growth between 5% and 8%.
We also now expect to open 84 new restaurants, which is in line with a three-year average of our commitment with our partner McDonald’s Corporation. Our capital expenditures are therefore also expected to be lower reaching $180 million for the full year 2014. Our full year effective tax rate projections remain unchanged. However, we expect to come out in the top end of that range. In this environment, we are balancing our focus and maintaining traffic and market share with our long-term plans to realize cost savings become more efficient and agile as an organization and improved profitability.
Having taken advantage with an opportunity to increase prices will lead up to the World Cup. We will increase our focus on growing traffic in our restaurant by leveraging McDonald’s classic brand attributed value to clean restaurants and great service together with our worldwide favorite menu product. We’ve already taken steps that will yield an annualized reduction in G&A of at least $20 million, and in the quarter, we were able to achieve G&A leverage of approximately 46 basis points, excluding a one time $4.5 million expense related to the headcount reduction that we implemented in May.
Additionally, we have already identified opportunities to improve our purchasing of non-product supplies and input and reviewing additional options in this and another areas. By balancing cost containment initiatives with the growth of our footprint, we are able to respond to current challenges, while positioning ourselves for a future reacceleration in growth.
Accordingly, during the first half of the year, we opened 21 new restaurants of which 11 were freestanding, thereby expanding our portfolio to 2,075 restaurants as of June 30 this year. Well, we maintain our commitment to open a minimum 250 restaurants from 2014 to 2016. We believe that current economic conditions warranty review of our capital allocation policy, including the optical mix among capital expenditures, debt, and dividend. We will update the market once progress has been made on this issue.
I would like to stress that the immediate challenges do not take away from the region strong long-term prospects. The size of the consumer base in our territories is approximately 520 million people is equivalent to the combined population of the U.S., Germany, the UK and Italy. Not only this is very strong, but the proportion of young people, our target market is higher than that of developed countries. This young and growing consumer base favors convenience and away-from-home eating options, and we will continue to drive sales in years to come.
And despite current challenges, the market remained substantially under penetrated. In Latin America, we still have only one-third of the penetration, the McDonald’s has in the U.S. under purchasing power priority basis. So, as you can see, although we are facing some short-term challenges, we continue to have a lengthy runway for future growth.
Finally, with an unmatched footprint in Latin American and the dominant brand in the region, we stand to benefit the most from these favorable long-term demographic trends. Sergio Alonso will now provide a more detail discussion of our second quarter performance.
Thank you, Woods and hello everyone. Please turn to Slide 3, as Woods mentioned the working capital percentage as one of our kind marketing opportunity for the McDonald’s brand in the region. On the final week of the tournament McDonald’s was the second most recognized sponsor of the event, achieving recognition levels of 49% according to our market (indiscernible) index. I am confident that this improvement of recognition levels will have a positive long-lasting impact on the brand on our business in the region.
Please turn to Slide 4, taking into account an 8% year-over-year depreciation in the Brazilian Real, reported revenues were unchanged versus the prior year period. Comparable sales were relatively stable year-over-year, whereas organic revenues increased 7.7% in the second quarter. Quarterly revenue growth in Brazil was mainly impacted by our calendar shift in the Monopoly promotion, which run in the first quarter of this year versus the second quarter on 2013. The promotion inclusion in the year-ago period drove comparable sales growth of 10% in that quarter, resulting in a strong year-over-year comparison.
In addition, continued soft consumer spending strikes the disruptive transportation prior to the World Cup and sharp declines in traffic during World Cup matches, which by the way took place during our lunch time mainly on top line growth. Key quarterly marketing activities including the World Cup Sandwiches. The launch of the McFlurry Kit Kat in the Dessert category and the addition of the Crispy Tasty sandwich into the GPPP value platform.
The net addition of 78 restaurants during the last 12-month period, of which half were free-standing units, contributed $34.2 million to revenues in constant currency during the quarter.
As you can see on Slide 5, NOLAD reported revenues decline 4.8% year-over-year, but was stable on an organic basis. Systemwide comparable sales were down 2.7% due to declines in average check and traffic. The decline in average check primarily reflected a shift in mix, while traffic was impacted by the World Cup and the weak consumer environment, especially in Costa Rica.
Mixed economic growth signals Mexico continue to impact consumption and have prompted consumer to seek out more affordable menu options in the reportable segment. On a positive note, however, guest count per store per month increased, as we continue to implement strategies that are attracting more guests as part of our turnaround in that country.
We have also made significant strides in our overall consumer satisfaction score over the last year. Key quarterly marketing activities included the launch of FIFA World Cup campaigns such as Campeones Mundialistas and the Desayuno de la Copa, and the addition of the McFlurry Milky Way to the Dessert category.
Finally, the net addition of seven restaurants during the last 12-month period contributed $4.1 million to revenues in constant currency.
Please turn to Slide 6. While slight revenues were impacted by the depreciation of the Argentine Peso, geopolitical tensions and high inflation top line growth remains strong on an organic basis, increasing 21.1% year-over-year.
Taken into consideration the 54% year-over-year depreciation of the Argentine Peso, reported revenues decreased 13.5%. Systemwide comparable sales increased by 19.1% in the quarter, driven by average check growth.
Traffic in SLAD was down, due to declining macro environment in Argentina and again the impact of the World Cup. Quarterly marketing activities included the addition of the Monopoly promotion in Argentina, as well as the continuation of the World Cup promotion McCombo de la Copa.
The net addition of nine restaurants during the last 12 months contributed $7.7 million to revenues in constant currency.
Moving to Slide 7, excluding Venezuela, the Caribbean division second quarter reported revenue increased by 2% or the 1.7% on an organic basis. While traffic remains flat to slightly positive in Colombia and Puerto Rico, comparable sales decreased 5.4%, due to a shift in mix, and the net addition of 10 restaurants during the last 12-month period, contributing $6.8 million to revenues in constant currency.
Despite continuing challenging conditions in Venezuela, the company maintained its leading market share through the execution of a strong marketing calendar, included the introduction of the campaign McCombo de la Copa and the addition of the McFlurry Samba to the Dessert category. Other notable marketing activities in the division included the launch of the Bacon Clubhouse sandwich in Puerto Rico and the Bone in Chicken in Colombia.
In summary, consolidated reported revenues, excluding Venezuela declined 3.8%, but were up 9.6% on an organic basis versus the year-ago period. During periods of week economic activity in consumer spending, our growth strategy has been to perfect traffic and market share.
As a result, in the coming quarters, we plan to expand value platforms; a level of McDonald’s unique attributes such as the family experience along with the iconic McDonald’s properties. We would also explore efforts to better leverage the scale of our business.
Please turn to Slide 8. Our footprint in Latin America is unrivaled, and during the last 12 months, we extended our portfolio with the opening of 120 restaurants. As we have discussed in the past, what fits stronger expansion strategy apart is a concentration of freestanding restaurants, which provide multiple revenue generating opportunities and significantly, more branding than the simple point of sale.
And accordingly, just under half of our current portfolio comprises freestanding restaurants, which is in keeping with the composition of the 2014 opening plan. At the end of June, our restaurant base reached 2075 restaurants and during the past 12 months, we added 339 dessert centers and 15 McCafés, bringing the total to 2,380 and 341 respectively.
I will now hand it over to Germán who will discuss our adjusted EBITDA generation and other financial matters.
Thanks, Staton. Please turn to slide 9. During the second quarter, our reported adjusted EBITDA declined 37.8%, primarily due to the impact of our transition to the pickup to generate probably measurement of the company’s operations in Venezuela effective as of June 4. Excluding Venezuela, adjusted EBITDA was stable in organic terms, and down 1.7% as reported.
Operating profitability improved in the second quarter in Brazil at average check growth of check payroll another cost pressures. We also saw operating improvements for the second consecutive quarter in NOLAD. and on a consolidated basis, adjusted EBITDA margin expanded 15 basis points year-over-year excluding Venezuela.
This follows the 50 basis points margin increase that we delivered in the first quarter of this year and reflects the company’s cost containment initiatives, as we streamline that this is in response to challenging market conditions.
As Woods mentioned in his opening remarks, efficiency improvements remain a key area of focus throughout the company. During the first quarter, we achieved a 90 basis point year-over-year reduction G&A as a percentage of revenue, and in the second quarter, we extend the savings with the addition of probably 6 basis points year-over-year reduction, excluding the impact of one-time severance payment.
The main drivers for this G&A leverage included a lower G&A base from the headcount reduction that we implemented towards the end of 2013, and the natural hedge that comes from maintaining our corporate headquarters in Argentina.
Turning to our divisional results, I am pleased to report that Brazil adjusted EBITDA increased by 5.1% in the second quarter, while the adjusted EBITDA margin grew 59 basis point to 12%. Payroll costs in the second quarter of 2014 benefits from adjustment in variable compensation, and from easier comparison versus the second quarter of 2013, which included the PAT provision. This factor was partially offset by higher Food and Paper, and Occupancy and Other Operating Expenses.
I would like to remind you that we are 100% hedged in our current specialty imported goods and we have lowered our blended exchange rate for the second half of the year. NOLAD experienced second consecutive quarter of margin improvement, despite a tough operating environment.
The reported adjusted EBITDA margin increased by 136 basis points to 6.2%, as lower Food and Paper especially with sales more than offset higher payroll occupancy and other operating expense. Adjusted EBITDA also rose gaining 22.1% year-over-year, or 21.81% on an organic basis.
Moving ahead, we do not expect margin expansion in Brazil to be maintaining as we expand our value plus from in order to protect market share and stimulate traffic in this current environment. Adjusted EBITDA is a lot decreased by 25.5% year-over-year, but was up 8.5% on an organic basis.
The adjusted EBITDA margin contracted 148 basis points to 9.2%, primarily due to higher Food and Paper costs as a percent of sales. Food and Paper costs outpaced average check growth during the quarter, mainly as a consequence of the depreciation of the Argentine Peso and its impact on local inflation.
Before I turn to the Caribbean division result, I would like to update you on our Venezuela operation. As of June 1, we transitioned to the SICAD II, floating exchange rate for the measurement of our assets and liabilities, and operating results in Venezuela. The change was primarily a result of the company’s lack of access to the SICAD rate this year and our recent ability to settle transactions at the SICAD II rate of approximately 50 bolivars per U.S dollar.
Second quarter results include one-time charges for the change to SICAD II during April and May, and the SICAD II in June. Our Brazil results in the quarter included $11.7 million write-down on certain inventories and $11.1 million loss related to lower margin and $45.2 million impairment of Venezuelan fixed assets. Furthermore, our non-operating results include the recognition of foreign exchange loss of approximately $39 million in Venezuela due to the remeasurement of operations local currency denominated net monetary asset position during second quarter of 2014. For more details in this non-cash impact on our second quarter result please refer to our earnings release and the 6-K filed with SEC today.
Despite current challenges, we remain the leading QSR brand in Venezuela and have committed to our operation there. With nearly 30 years of operation in the country we have build an unmatched foothold. We have held this asset in strong revenue growth on organic basis. We continue to expect that this is will not require operating cash supporting 2014.
The Caribbean division, excluding Venezuela, reported 5.3% reduction in adjusted EBITDA and 8.9% decline on an organic basis. Adjusted EBITDA margin declined by 28 basis points to 3.6%. Including the Venezuela operation, adjusted EBITDA in the division declined back to negative $10.2 million, resulting in a negative adjusted EBITDA margin of 6.4%, mainly due to the losses in the Venezuelan operation.
We received a $3.1 million royalty waiver for the Venezuela operation from McDonald’s Corporation in the second quarter of this year versus $2.9 million in the second quarter last year underscoring the continued support from our efforts in the region. For the remainder of the year we expect to pay royalties using the SICAD II exchange rate.
Turning to Slide 10, our second quarter foreign currency exchange losses were largely driven by the losses in our Venezuela operations. Our non-operating result also experienced a $3 million increase in net interest expenses and a $5.7 million increase in income taxes. The Company reported a net loss of $99 million, compared to net income of $8.8 million in the seam period of 2013, mainly due to the transition to SICAD II. Basic net loss per share was $0.47 in the second quarter of 2014, compared to the gain of $0.04 a year-ago.
Slide 11 contains our debt indicators. Cash and cash equivalents were $101 million at June 30. Total financial debt was $891.3 million, while net debt was $790.3 million and the net debt-to-EBITDA ratio was 2.6 times, including the one-off impact in the Venezuelan operation. Without this one-off impact, the leverage ratio should decline significantly next year. As we’ve discussed early in the call, duration is the economic environment in the several of key markets since the beginning of the year has countered us to revise our full year guidance, as you can see in Slide 12.
In summary, on an organic basis, excluding the Venezuela operations, we now anticipate revenue growth for the full year 2014 of between 9% and 11% and adjusted EBITDA growth of between 5% and 8%. We also now expect to open 84 restaurants, which is in line with the three-year average of our commitment with (indiscernible) McDonald’s.
Our capital expenditure are therefore also expected to be lower, reaching $180 million for the full year 2014. Our full year effective tax rate prediction remain unchanged, although we now expect to come in at the top of the range.
I’ll now hand the call back to Woods. Woods?
Thank you, Germán. Our team has made up of seasoned professionals each with decades of experience operating in Latin America. So we understand first hand that our businesses long-term growth path will not be without it cycles. The current challenges we face are considerable, weak economic growth, soft consumer trends, foreign exchange, volatility as well as geopolitical and stability in several key markets, are all impacting our business and reported numbers.
In response, we are focused on those factors within our control, such as continuing to streamline our business to targeted cost savings, ensuring that in this way we can provide a compelling value proposition to our customers. We’re also refocusing our marketing efforts on the family and our iconic McDonald’s menu.
We’ve already taken the steps required to achieve $20 million in annualized G&A cost reductions. And year-to-date we have identified an additional $7 million in annualized cost savings to our non-product purchasing processes. These include such strategies as implementing reverse auctions, as well as utilizing our scale to lower costs across the various countries. We are beginning our planning cycle and as part of this process we will continue to review all areas across the organization for opportunities, to extract further savings. I expect to be able to provide you with further information on this ongoing process by the end of the year.
I would like to conclude by reminding you that economic growth in this region is inherently cyclical. And the QSR industry in particular is backed by strong, long-term demographic trends including population growth of budgeting middle class, a preference of convince and untapped demand for our products. In the future, as it has done in the past, I’m sure that economic growth will rebound.
And to ensure you we are at the forefront of this recovery, in addition to the cost saving opportunities we mentioned already. We are taking steps to improve the efficiency of our operations to system wide advances in technology. These initiatives will capitalize on the scale and competitive advantages that we derived from being a single brand with single cooking system which no other regional QSR player can leverage.
Thank you for your attention. I would now like to open the call up to questions.
We will now begin the question-and-answer session. (Operator Instructions) Our first question is from John Glass of Morgan Stanley. Please go ahead.
John S. Glass – Morgan Stanley & Co. LLC
Thanks. Couple on Brazil, first, if I missed it, I’m sorry, did you quantify the traffic decline in Brazil in a more broad terms, can you talk about how you are now modifying your marketing calendar in Brazil in the second half, if it’s more value sensitive consumer and the macro is not where you thought it would be. What are you going to do differently specifically in the back half of the – that traffic back?
Yes, hi John. Look, we’ll answer this in two parts, first part is, for the second semester, we will do total focus on value propositions and our value platform, affordability is the standard of McDonald’s and we’re going to focus much more on that than we have. And with that, let me pass you to Sergio Alonso for the first part of your question.
Sure, I think. Hi, John. What I’ve been – and particularly, as you maybe aware, and particularly in June, we are in the weeks immediately before the World Cup starts, we have some raise on transport price – sorry, thank you for that, that actually affected a bit on the volume in our restaurant mainly, in São Paulo city. And then on June 13, the World Cup started, and the reality is that even though, we’re not expecting to have additional traffic as we discussed previously, the reality is that we’re sort of supervised by additional loss or decline in volumes, particularly on the days where the national teams played.
And on top of that, be aware that most of the Latin American teams made up to the quarter final. So the reality is that that affect extended mostly, all length of the tournament. So all those effects compounded really led us to have, we’re not taking about a big decline in traffic, was a low single-digit I would say, and but on the other part of the question for the second half was already covered I guess.
Our second question is from Roy Yackulic from Bank of America. Please go ahead.
Roy Yackulic – Bank of America Merrill Lynch
Thanks. Can you talk about your expectations on increasing prices this year to make up for the – if I guess the change of the SICAD II in Venezuela, and what kind of leverage guidance can you give us for year-end?
I’ll answer the first part Roy, welcome and I’ll let Germán answer the second part. We can make up some of the pricing in Venezuela. We are not controlled in prices there, but take in mind – keep in mind also we already are at high prices. So we can’t make it all up. What we’re doing also in Venezuela, which is important, is we’re substituting as many imports as we can. We are substituting and we’re bringing in substitutions for french fries, the yucca, which is a very good product, which is local. So we’re trying to reduce our food cost as well and our dependence on buying dollars, which is difficult to find today in this environment. And with that, let me pass to Germán.
Hi, Roy. Based on our projections, we – remember that we got a healthy balance sheet; our business is very long-term perspective. In the past some other time we target our net debt levels around two times. And at the end of this quarter, we reached the number 2.6 times, but that’s what mainly as a result of the company decision to move the figure to FX rates for investment purpose in Venezuela and that’s obviously reduced the EBITDA and created a series of one-off impact in litigate number.
We next year eliminate this impact, basically we were around 2.3 times net debt EBITDA, and we feel comfortable at this level of leverage. We don’t see any reason to change that number.
Our next question is from John Ivankoe from JP Morgan. Please go ahead.
John W. Ivankoe – JPMorgan Securities LLC.
Hi, thank you. The question is on your credit profile and CapEx. Firstly, could you, you kind of talk about how much comfort that you have with your current debt in terms of where your EBITDA is, in other words how much flexibility there is for changes in EBITDA, relative to the forecast? And secondly, in 2014 of the $180 million in CapEx, how much of that is discretionary versus non-discretionary, non-discretionary in terms of what McDonald’s requires you to build or I guess McDonald’s Corporation requires you to build, versus what is maintenance CapEx? And of course where I’m going with this question and in terms of like what the minimal amount of CapEx would be in 2015, based on contractual obligations and what you perceived as required maintenance? Thank you.
Hi, John, let me pass it to Germán, so he can answer you.
John could you repeat the first part of your question?
John W. Ivankoe – JPMorgan Securities LLC.
Of course, so the question was regarding your current debt I mean I think your rated investment grade, just in terms of how much flexibility you have in terms of continuing to achieve your covenants relative to where your current EBITDA, or cash flow, or, however, those covenants are written?
Okay, basically in the long-term debt we don’t have any covenants. We already have and there was an update which maintaining our investor rating. So have flexibility to increase our debt in the long-term if we like. But as I mentioned before, today we feel comfortable 2.3 around two times in net debt EBITDA ratio. So we are not expecting to increase that right now. Obviously we are entering the planning process, we will decide what we want to do next year and the following years. But today we are not planning to increase the debt. But in any case, we got the flexibility to do that, and we believe that today we are totally committed to achieve the number of obligations that we have this year. So…
Yes, John, we have several variables that we can control in order to meet our expansion plans, including the timing of openings, we’re committed to 250 in this three-year cycle of 2014 to 2015. The restaurant formats also we’ve been focusing on drive two sources which are considerably more expensive than others. And ownership structure, I mean we’re looking at ways of may be gaining – putting in more franchisees as a percentage of our restaurants. And we’re now in the process of looking at all of this and all the ramifications of that.
And John, another question that you asked is about how much is the amount that McDonald’s Corporation requires to maintain our survey. We basically have $60 million per year and in the McDonald’s commitments is in fact $180 million for a three-year period.
Our next question is from Jeronimo De Guzman from Morgan Stanley. Please go ahead.
Jeronimo De Guzman – Morgan Stanley & Co. LLC
Hi, just had a follow-up and then a question. The follow-up was just in Brazil, you mentioned that there is a one off effects from the World Cup I just wanted to see how the trends are looking in – are looked in July, did you see any pickup there without the traffic impact? And then the other question was in Argentina, just wanted to hear your views on the outlook there, given that you did see weaker traffic trends in the second quarter? And kind of given the current macro situation, just kind of wanted to see how you’re thinking about the operation for the second half.
Hi, Jeronimo. Today I’ll start with Argentina part. I’ll pass to Brazil with plenty of that. In Argentina today’s comparable sales have remained pretty solid. The brand is very strong and we have been able to effectively drive average check this year. As we said, traffic in the second quarter declined. A lot of that is due to the World Cup, but also to macro environment. We are right now monitoring the currency depreciation, the mounting inflation, lack of the resolution of this debt situation with in with (indiscernible) and the Argentine. But we feel that the situation is going to continue to dampen consumer sentiment in spending.
Analysts came out predicting that there’s going to be decline in the GDP of Argentina of minus 1.5 from flat prediction earlier. On the good side, we have commodity exports remain strong and the government is taking measures to create economic activity. They’re pumping money into the systems sold. We don’t think that they’re going to be effect this year. And to sort of round that, we have a strong brand in Argentina and we saw good rebound in traffic after the World Cup.
And with that, let me pass to Sergio so he can talk about...
Hi, Jeronimo, how are you? Well, on top of what we said about the dealing part of the World Cup and the strides before the World Cup, the reality is that the traffic in Brazil continuous to be impacted by, I would say, a top consumer environment and the shape. As a consequence of that the shape is still the informal sector. So without adding mind and, I’d say, response to our sort of challenging environment, we’ll what’s focus on growth in traffic and market share and the remaining part of the year with an enhancement or overvalue proposition and platforms. And we’re focusing our marketing efforts towards the family business and we conceded iconic properties. Nevertheless, the actual situation on volumes and sales is already considered in the margin and EBITA projection that we just...
(Operator Instructions) Our next question is from Rachel Chong of Hartford Investment Management. Please go ahead.
Rachel Chong – Hartford Investment Management Co.
Hi. Thank you for the call. Since you have not yet provided your cash flow statements, I would like to ask you for more color in cash items. Your net debt rose by about $72 million, but if you take EBITDA, subtract CapEx, interest income taxes, dividends and book networking capital, your net debt should really only go up by about $33 million. So again, where your large additional cash flow items, actual derivatives for the cash losses and working capital? And finally are these recurring?
Hi, Rachel, this is Woods. Let me pass you to Germán.
Rachel, obviously we are in the planning process or entering the planning process. So it’s too early to say it’d be $72 million, $100 million, but you are right. The cash flow high level is led from this year about how we expect to finish this year. But we have different ways to adequate our capital structure to our plans, we remember we have different options like that that we don’t want to touch significantly, dividends that we can reduce or cap if we need it. We can balance a type of personnel we are developing with CapEx, and basically, we have another alternative like page lining this year to build restaurant in local currency. So it’s too early to say and we have a lot of opportunities, and viable to define how much cash flow we have to deploy in CapEx, in dividends or whatever other purpose that we decide.
Our next question is from Robert Schweich from Burnham Securities. Please go ahead.
Robert J. Schweich – Burnham Securities Inc.
Thank you. It appears in general that you were dealing with what I would call a perfect storm in terms of the South American political circumstances, that isn’t to say, it can’t get still worse. I think it would be helpful if you could go through the three key countries and discuss this, and talk in terms also of elections and possibilities of change, particularly Brazil, Argentina and Venezuela?
Hi Bob, thanks for joining us. I guess you want a macro, sort of a macro-political view of this right, of these three countries.
Robert J. Schweich – Burnham Securities Inc.
Yeah. Well they happen to be close to 90% of our EBITDA base. So that’s your question is a good one. Let me start with Venezuela, Venezuela is a country that is going through a lot of issues, they don’t have enough money, they’re basically not very additional cash, very difficult to import. So what we’re doing there is what any sane person will do it, we’re trying to substitute imports with local products. And we’re trying to maintain as much of a market share as we can and keep the group of people together. And if you go there, Bob, you will go and you will see McDonald’s, which are absolutely fantastic. They are in great shape and they are doing very well.
So it’s a very good McDonald’s experience, but we have to say of course. We’ve had some decreases in traffic, as a result of social, political and economic turmoil there. And it’s difficult to project things in Venezuela, because it’s a dynamic situation. But we don’t plan on injecting any capital into Venezuela, it’s – we can sustain ourselves there and we’re getting enough dollars for our royalties and some imports that we’re making still. And so it’s a strong brand. I mean if all the countries McDonald’s brand has measured by third parties and brand awareness, and brand attributes, it’s the best in all of Latin America.
Brazil. Brazil is by far the largest country. It’s going through a down cycle in its economy. at the beginning of the year, growth was expected to be 1.8%. It was just restated today at 0.37%, I believe. So in half of the year, it goes down to half and that’s difficult. Consumer sentiment depends on who we’ve talked about I think it’s pretty difficult, most of the – there’s some shopping centers which are not being filled with retailers and so we’re not getting the mix that they want. But the fundamentals of Brazil are there. I mean it’s a huge market, it’s burdening the middle class, we’re very strong in that market as a brand. I think Sergio mentioned it, the brand was the second most watched in the FIFA Cup.
So I think it’s a short cycle, all right. We’ll short, maybe one year and we’ll see what happens in the elections, I don’t want to talk about politics and it’s not my place. But we have elections in October and that could change things radically.
And Argentina, Argentina is going through a difficult situation, I mean, as I said today comparable sales remain solid, the brand is very strong, there’s a decline of 1.5% in GDP. I think that the political situation is getting more and more complicated for the government. And how that reflects upon day to day life is – we’ll see, but it’s not about today’s economy, so commodity exports are strong. And as I said before, they are taking some macro measures with fiscal – stimulus to keep people employed and going. But they also have another issue which is how they get rid of all the subsidies. So it’s difficult, a difficult read.
This concludes our question-and-answer session. I would like to turn the conference back over to Woods Staton for any closing remarks.
Thank you. And thank you for your questions and attention today. We look forward to speaking with you next quarter. And in the interim the team remains available to meet with you and answer any questions you may have. Thank you for being with us.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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