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Arcos Dorados Holdings, Inc. (NYSE:ARCO)

Q2 2012 Earnings Call

August 7, 2012 10:00 AM ET

Executives

Sofia Chellew – Director, IR

Woods Staton – Chairman and CEO

Sergio Alonso – COO

Germán Lemonnier – CFO

Analysts

John Glass – Morgan Stanley

Jeronimo De Guzman – Morgan Stanley

John Ivankoe – JP Morgan

Robert Ford – Bank of America/Merrill Lynch

Mitchell Speiser – Buckingham Research

Nitin Saigal – Bridger Capital

Operator

Good morning everyone and welcome to the Arcos Dorados Second Quarter 2012 Earnings Conference Call. With us today are Woods Staton, Chairman and Chief Executive Officer; Sergio Alonso, Chief Operating Officer, the company’s CFO, Germán Lemonnier; and Sofia Chellew, Investor Relations Director.

As a reminder, all participants will be in a listen-only mode. There will be an opportunities for you to ask questions at the end of today’s presentation. (Operator Instructions) Today’s conference is being recorded.

Sofia Chellew

Hello everybody, this is Sofia Chellew. Before we proceed, I would like to make the following Safe Harbor statement. Today’s call will contain forward-looking statement and I will refer you to the forward-looking statement 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 measures to the comparable GAAP results, which can be found in the press release filed with the SEC on Form 6-K.

I’d now like to turn the call over to Woods Staton, our CEO and Chairman.

Woods Staton

Thank you, Sofia and hello to everyone. I’d like to thank you all for joining us today for a second quarter 2012 review of results. After some brief comments, we will open the call to questions. During the quarter, we remain focused on McDonald thus best that is providing the highest quality customer experience, delivering the most relevant menu items and increasing accessibility to the McDonald’s brand.

Our operations continue to be strong in the second quarter driven by higher check growth and increased guests counts, successful marketing activities and continued operational efficiencies. The result is double digit comparable sales growth and solid operating profitability despite macroeconomic headwinds in some of our key markets.

To mention a few highlights comp sales growth 10.4% year-over-year. This is particularly significant as it comes on top of a double-digit increase in the year-ago period. Revenue growth excluding the impact of currencies was 15.5%. Our reported adjusted EBITDA and net income were particularly impacted by the sharp depreciation of 23% in the Brazilian currency.

Excluding the impact of currency translation, and other special items, adjusted EBITDA rose 6.3% year-over-year. You all have notice, we are now reporting organic results, which shifts out the impact of currency translation and special items alongside reported results to better reflect to health and growth of our business on the ground. We identify special items and analysis.

We hope that this new format will make it easier for you to track our underlying performance. Our leadership position and ability to adapt marketing activates to changing conditions led to increase sales in Brazil in the second quarter even as economic activity was sluggish.

We reported 0.75% year-over-year growth in the first half, when is well is Argentina also continued to be important contributors to consolidate results and we’re monitoring those two markets carefully. We’re pleased with the progress that we are making in our turnaround plan for Mexico and expect to continue to benefit better macroeconomic scenario in that country as we go forward. Operations are attributing also improved, stronger performance from Puerto Rico, fueled by innovative marketing initiatives that are driving revenue growth.

Our result is double-digit organic revenue growth for the company which is on target with our stated expectations. And while various macroeconomic and geopolitical issues persist in the region, the underlying strength of our enterprise is indisputable and we’ll serve the driver of ongoing future revenue growth. We continue to expect to achieve our full year revenue growth target. However given the slower than expected pickup in economic activity in our largest market Brazil and the impact on dollar costs and currency weakness we now anticipate achieving an adjusted EBITDA growth rate for the year 2012 of between 8% and 10% on a constant currency basis.

Turning to slide three, we will all be familiar with McDonald successful growth roadmap, the plan to win.

As McDonald’s largest franchisee Arcos Dorados forms an important part of this plan. To compliment this strategy and to take a count of Arcos Dorados unique operating environment we have created our own gross blueprints the Receta Para Ganar or recipe to win.

For our team members there as little will coming to surprise in this strategy. Every Arcos Dorados colleague is where the emphasis we placed on customer’s satisfaction in sales growth. Our first vector as one of our focus on margin management, the third vector, as such, all these planned us additionalize something.

While we are still refining specific targets for the plan, we have chosen to communicate (inaudible) stakeholders because much like the plan to win, it will governed on our approach to growth over the next five-years.

Also I want to be clear about our areas of focus and how we plan to improve our business. The first vector, comparable sales growth, is the key pillar of Receta Para Ganar and it’s always been at the forefront of our efforts to expand the business. We have a number of initiatives in place to grow sales including brand extensions like McCafe and Dessert Centers. Most recently we launched a combined beverage business in the Caribbean, which is proving to be highly successful.

Going forward, we should be able to expand guest counts, increase average check and further refine (inaudible) dynamic pricing strategy while keeping at the forefront of our commitment to customer satisfaction levels. Our next vector development refers to increasing sales from new restaurants, improving the quality of existing stores through imaging and maximizing our return on investments.

We are focused on conducting a thorough planning process and maintaining a balanced approach for openings plan. I strongly believe that it is the key differentiating elements of the strength of the brand and to sustainable revenue generation. The highest selling restaurant in Brazil was only opened in 2009. The opportunity remains enormous in all of our markets. Our third vector is margin management which is crucial of the balance to growth of our footprint to take advantage of increased purchasing power with a need to contain costs and achieve operational leverage.

When we think about margins, we’re particularly focused on food and paper, payroll and operating expenses. The use of currency hedges benefited food and paper margins in the first half of the year for example. Additional programs to better align the rate of cost growth to revenue growth focuses on productivity and fixed cost optimization at the restaurant level. Made for you is an example of such an initiative.

In the second quarter, we made headway on our fourth vector, G&A leverage when measured excluding the effect of currency and special items. As we continue to open restaurants and generate additional volumes was a relatively stable structure. We see more evidence of this leverage.

And finally, our fifth factor improving our EBITDA to net income yield requires us to refine our taxation structure, managed to the impact the foreign exchange movements, and reduce financing costs, all of which we are currently working on and have demonstrated advancement. All of our initiatives contribute to this (inaudible) which also serves to keep our focus in the key factors to generate value for our business.

During the second half, as the economic environment begins to recover, we are focused on strategic initiatives to drive down costs, improve efficiencies and increase margins, coupled with the marketing initiatives that will continue to support our leadership positions. Specifically, we are very pleased with the role of Made For You platform, which has exceeded internal targets we will excepts to food quality, the increased productivity and reduced waste. Made for you has been an important strategy to help mitigate the increased labor related costs you will otherwise have to full absorb while delivering a superior customer experience.

I’ll now hand the call over to Sergio Alonso, who will go through our Arcos Dorados key marketing initiatives and top line performance by regions in the second quarter in greater detail. Sergio?

Sergio Alonso

Thank you Woods and hello everyone and just a reminder this presentation is available on our website and also in the webcast. Now, I would like to take you through some of the key market initiatives that shaped out our second quarter results which can be found on slide number four. As you will know, McDonald’s has been a sponsor of the Olympics for more than 35 years and in 1986 it become the official restaurant of the Olympic Games.

The games trend is our brand on an international level as well as throughout our specific markets, promotions including a giveaway of Coca-Cola glasses during this period. This is an important part of the run-up to the 2016 summer Olympic Games, hosted by Rio de Janeiro where we will play an active role of coast country sponsors.

Promoting a balance lifestyle is a key positioning elemental of our brand an increasing represses of sponsor of sporting events throughout the region as well as open tasty and healthy options on our menu underscores these positions.

Additionally during the second quarter we reinforce sudden traffic in most of our markets to successful happy me promotions with Madagascar. We have also entered new segments with the launch of (inaudible) in many markets with a new and investing packaging solution to strong in consumption on the whole. All of this addition is the systemwide comparable sales growth, which primarily reflected average sales growth when compared to one year ago. In addition, traffic is also showing positive momentum.

Please turn to slide five, as Woods mentioned we are now highlighting results on a divisional basis, so that you can obtain a complete impression of each individual regions performance. Starting with Brazil, the macroeconomic environment was challenging in the second quarter, as growth on consumer spending remain weak. On top of that, on average, the Brazilian real show 22%, versus U.S. dollar, which resulted in an 9.1% decline in reported revenues. While excluding the sharp level of depreciation in the Brazilian currency, organic revenue growth was 11.5% this increase was driven by system-wide comparable sales growth of 5.6% in the quarter. And additionally we had a net addition of 52 restaurants over the past 12 months, which contributed $26 million to revenues.

In Brazil, our guest counts benefit from the inclusion of the Quarter Pounder in the value platform at R$5 and the successful Happy Meal promotion with Madagascar. And while the aspirational quality of our brand is consistent with an expanding middle class, our main use contain a mix of products and price points enable us to average price sensitivity customers and different traffic levels.

Slide six shows the performance of our NOLAD division, which was a solid contributor to second quarter performance, the overall economic condition and progress in the turnaround of our Mexican operations. The division revenues grew 15.4% on an organic basis year-over-year. The increase was driven by systemwide comparable sales growth of 9.2% due primarily to increase transactions. While the net addition of 19 restaurants during the past 12 months contributed with $12.2 million to revenues. The combination of successful marketing activities and operational enhancement is translating into increased section and improved margins, as we have been our turnaround effort in that market.

Turning to slide seven, the flat division was another strong contributor to our quarterly results. Revenue grew about 24.7% on an organic basis in the second quarter. The significant improvements reflect a 21.9% increase in system-wide comparable sales and the net addition of 28 restaurants during the last 12 months in periods which contributed with $9.2 million to variance.

The increase in comparable sales reflect a strong average ticket growth in most countries in the division, particularly in Argentina and Venezuela, which have higher inflation levels than the other countries within the division. These two markets have held up well despite geopolitical headwinds and slowing growth. We are closely monitoring conditions in these two countries.

Turning to slide eight, the Caribbean division experienced revenue growth of 5.6% on an organic basis; systemwide comparable sales of 2.8% were mostly result of average check growth despite weak economic output in the region. The launching of combined beverage business or CBB as what’s mentioned early this year is providing positive results and has been well received by customers with an offering of cafes, frappe’s, smoothies and beverages. These opens up a new carnival for us and captures new consumption opportunities that complements our existing menu offering and additionally Chicken McBites has boost sales in the quarter.

Now please turn to slide nine, as you know the execution of our ambitious opening schedule is crucial to extending our footprint in Latin America in order to take advantage of the low penetration of the QSR formats and segment our leadership position. Over the last 12 months, the pace of restaurant openings accelerated with the net addition of 91 new restaurants, up from 86 in the previous 12 months period.

These restaurants contributed $40.4 million of revenues and it will fuel sales growth in the years to come. Just as important of the size of our restaurant base is the mix. We maintain a balanced portfolio restaurants with freestanding making up about tough of our base. This is higher than the industry standards and ensures long-term brand development and growth potential in key locations as we are able adopt our offerings to meet changes customers needs as well as provide where we call the full McDonald’s experience.

Now, German will discuss our adjusted EBITDA generation, balance sheet and our outlook for the remainder of the year.

Germán Lemonnier

Thanks Sergio. Please turn to the chart on slide 10 to review in more details component of adjusted EBITDA.

Overall adjusted EBITDA was impacted by margin variations, currency and special items. Excluding currency impact on a special items we consider to cap, we exceeded tax in Brazil and the Venezuela temperately waiver, adjusted EBITDA rose 6.3% as compared to the second quarter 2011.

Consolidated the amounted to a benefit of $6.3 million in 2012, compared with a charge of $1.4 million in 2011. The adjusted EBITDA margin as a percent of total revenue saw 200 basis points to 7.4% in the quarter mainly due to the Brazilian cost growth. More or less however, experience a margin improvement of 230 basis points, our Mexico’s turnaround plans adjusted EBITDA contribution improved.

In Brazil, organic adjusted EBITDA contracted 3.5% excluding the CIDE tax on royalty payments for $2.7 million and that was not recognized until fourth quarter of 2011. Despite we will be continuing going forward and will no longer be considered a special item in 2013 for comparison purposes.

Adjusted EBITDA was also impacted by a modest increase in Food & Paper costs as a percentage of sales on higher apparel cost as a result of increased minimum wage. (inaudible) adjusted EBITDA grew 54% on an organic basis, reflecting increase traffic, which turns lead to reduce apparel as a percentage of sales and G&A leverage. Adjusted EBITDA increased as a temporary loyalty relief in Venezuela of $1.2 million combined with G&A leverage offset the negative impact of currency comparison on higher parallel as a percent of sale.

On an organic basis, adjusted EBITDA rose 27.4%, in the guidance as of the EBITDA increase 15.4% on an organic basis on the EBITDA margin both improved mainly driven by efficiencies in parallel on higher comparative sales.

In summary, consolidated reported revenues of $904.2 million are impacted by the precision of local currency. While once you exclude the impact from currency calculation, our top line results were better with revenue growth amounting to 15.5% on organic basis. Consolidated adjusted EBITDA totaled $67.3 million.

Now turning to the non-operating results. Non-operating charges were partially offset by lower overall financial costs including the asset of derivatives in the second quarter of 2011 mainly due to the debt to inventory in July 2011.

Finally, net income reached $12.1 million in the second quarter, down from $14.2 million one year ago, as improved operating income and funding cost were upset by foreign exchange losses on higher tax charge. The company reported basic earnings per share of $0.06 in the second quarter of 2012, compared to $0.07 in the previous corresponded period.

Now taking a quick look at our balance sheet on slide 11. The company maintained its solid debt to equity ratio of 1, and ended the quarter with two $245 million in cash and cash equivalents, which give us this liquidity to fund our business and pursue future development.

For the full year, the expected capital expenditure plan remained the same, which more than 130 gross openings. Due the reevaluation in local currency, they result in a lower full year capital in U.S. dollar terms and that should amount to $300 to $320 million. Financial ratios continue a healthy level on well below any going on requirements.

Please turn to slide 12. Based on the current environment on markets planned for the remaining of the year, the company is maintaining its full year on effective revenue, on effective tax rate outlook provided at the beginning of the year. However, given its lower than expected pick-up in consumption in Brazil along with potential pressure in Portugal from prevailing currency rates. We now expect to achieve adjusted EBITDA growth based on constant currency and excluding the GAAP’s related impact of between 8% to 10%. As a reminder revenue growth remain at the regional anticipated in the rate of 15% to 17% and the effective tax rate for the year is expected to be in the range of 31% to 33%.

I will now hand this call back to Woods for some closing remarks.

Woods Staton

Thank you, German. The strength of our operations is indisputable, and is reflected in our ability to drive sales growth, and increase operating income despite macroeconomic headwinds, in some of the key markets we operated. But we are focusing on staying in the quarter and achieving our goals, I would also like to emphasize our long-term focus.

The current environment does not detract from Latin America’s long-term positive outlook. Healthy population growth and tap demand for our products and a swelling middle class will continue to lived for our profitability and submit our leadership for the years to come.

Thank you for your attention, we will now open the call up to questions. John?

Question-and-Answer Session

Operator

And at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from John Glass from Morgan Stanley. Please go ahead with your question.

John Glass – Morgan Stanley

Hi, thanks very much and I appreciate the increased disclosure in slides that’s helpful. I guess my question is a larger one than just on your revised full year guidance. You didn’t change your revenue guidance, you change your EBITDA guidance and yet you’ve talked about increased or slower than expected macro recovery. So specifically did you change your same store sales guidance in Brazil?

And what is the new expectation there? And then also in answering that can you talk about what your unit development goals are for this year? You’ve opened up 18 stores year-to-date and we’d at least initially thought that the full year you might get to somewhere north of 100, even 120 stores. So is that still a viable goal given where you are a year-to-date on unit development? Thanks.

Woods Staton

Yes, let me start. Hi John, how are you?

John Glass – Morgan Stanley

Fine.

Woods Staton

John, we are continuing on track with our openings, store openings as you would probably know, we are always back ended, we get most of our store openings in the third and fourth quarters where we upgrade every year. So that’s going to happen again this year. We are ahead, however of last year’s opening plan to-date. So we are doing fine and we are comfortable.

We are still bullish with Brazil and we are still keeping to the guidance of revenue for the whole company. But we feel that even though Brazil is going to be okay, we feel that the uptick in economic activities is going to happen maybe towards the latter part of the third quarter versus earlier. So that’s...

Sofia Chellew

Thank you. And next question please.

Operator

Our next question comes from Jeronimo De Guzman from Morgan Stanley. Please go ahead with your question.

Jeronimo De Guzman – Morgan Stanley

Hi, good morning. A couple of questions, the first one was if you have any more color on how the sales performance has been trending in Brazil so far in the quarter and also in terms of the – in the second quarter if it was mostly driven by ticket or if there is, just kind of how the same store sales behave and then if you have any color on the combined beverage business in the Caribbean. What kind of – any insides on results so far in terms of how much its helping sales for restaurants that have it and then any views on a timeline regarding implementation in other regions?

Woods Staton

Lemonnier take that one.

Sergio Alonso

Yeah.

Germán Lemonnier

Okay. First part of the question, Jeronimo, related to Brazil since performing in Q2, the main driver for sales were average check for this quarter in Brazil. And the second question was about the CBB performance, well what’s mentioned in this presentation, we have already implemented in Puerto Rico, which is doing very well, is actually creating a new category. Our restaurants are performing very well actually, slightly higher than the average in the sales. So we do have plans, but we are still in terms of discussing how fast are we going to develop the segment in other markets in the company.

Jeronimo De Guzman – Morgan Stanley

But I mean do you have any metric in terms of how much it’s helps, sales for specific units what you put in the CBB anything that?

Germán Lemonnier

Because the main driver, sure in the case of Puerto Rico again we are pretty much in line we are not been in Brazil. The main driver for a sales were average check and we believe those are very significant portion of these our check increase came from the addition of Selby. Some a relevant portion of our customers they are turning up the beverage of the EVMs of the menus for beverages and that for sure helps our checks out.

Jeronimo De Guzman – Morgan Stanley

Okay thank you.

Sofia Chellew

Thank you. Next question please.

Operator

Our next question comes from John Ivankoe from JP Morgan. Please go ahead with your question.

John Ivankoe – JP Morgan

Hi great, but I think it’s all one question. I firstly, just in terms of setting expectations if I can I mean the third quarter of 2011 you know very difficult comp quarter even more difficult than the second I mean just to keep everyone on the same page, should we expect a similar, greater, or lesser number than the second quarter that’s the first broad question?

And secondly, what’s I think in your prepared remarks I mean – I interpreted something about you know some hedges that you had in commodities that may have kind of offset some other volatility in the first half, I mean could you make a comment in terms of what they may be in the second half especially with the U.S. dollar being stronger year-over-year especially in the third quarter?

Sergio Alonso

Okay.

Woods Staton

Yeah, let me pass you to Germán, Hi John.

Germán Lemonnier

Hi, John, how are you?

John Ivankoe – JP Morgan

Hi, fine, thank you.

Germán Lemonnier

Well, seasonally thinking the third quarter is normally is little bit better than second one and we expect that. So the issue I would mention basically the Brazil is delays a little bit that’s why we adjust the guidance. In terms of hedge, we’ve mentioned that we cover the Food & Paper in part of the Brazilian, Food & Paper cost with a hedge for the first part of the year. We will probably see an impact in the Food & Paper costs for this 20% of the total Food & Paper costs in Brazil, because we don’t have any longer hedge in place in the second part and that part of the direction if you like in the 2012 guidance?

John Ivankoe – JP Morgan

German, could I – can I ask you to clarify the comments that you just made on comps, do you – the third quarter normally being seasonally stronger than the second quarter but of course it’s kind of seasonally stronger every year-on-year-on-year basis. Are you suggesting that the third quarter in terms of year-on-year comp growth will be higher than the second quarter? I just wanted to make sure I heard you correctly.

Germán Lemonnier

Well, it’s similar, a little bit better than on the second one.

John Ivankoe – JP Morgan

Okay, great. Thank you very much.

Sofia Chellew

Thank you. Next question please.

Operator

Our next question comes from Bob Ford from Bank of America/Merrill Lynch. Please go ahead with your question.

Robert Ford – Bank of America/Merrill Lynch

Hey, good day everybody. I had a question with respect to Venezuela. If I’m looking at this correctly, it looks as if your – your net income that you’re reporting is twice your EBIT in Venezuela and you look like you are up 64% versus the first quarter. Could you explain what’s happening there please?

Woods Staton

Yes, hi Bob. This is Woods. Yeah let me start – let me say – and then I’ll pass it over to German. But basically what we’ve done as we’ve raised prices to cover the cost of importing things in Venezuela, so when we originally started with our price increases in Venezuela we thought there would be a higher drop-off of transitions and that did not come. So you know we’ve got much higher prices to cover the – to reflect the value of the money on the parallel market and – at which our imports are brought into the country and without any ensuing loss of transitions.

Robert Ford – Bank of America/Merrill Lynch

Then just on the net side, your – the EBIT actually compared to the first quarter is down 35% almost 36%, so you know I can really see the pressure on what you’re going through but the net, the net is more than twice the EBIT. So there is something below the operating line that seems to be having a very favorable impact as well. And I was curious just to what that might be?

Germán Lemonnier

Okay remember that we are just – because – prices in the fourth quarter and we’ve adjusted the cost in the fourth quarter of last year, and that is basically we keep this prices in line with the last negotiation that helps a lot in terms of – cost when you compare to second quarter versus second quarter last year.

Woods Staton

Thank you.

Robert Ford – Bank of America/Merrill Lynch

Okay thanks.

Sofia Chellew

I am sorry, next question please.

Operator

(Operator Instructions). And our next question comes from Mitchell Speiser from Buckingham Research. Please go ahead with your question.

Mitchell Speiser – Buckingham Research

Great thanks very much. Just want to understand better how you do think that the Brazil economy is little slower than what you’ve thought. But you are keeping the top line revenue growth guidance a 15% to 17%. You did lower your EBITDA growth guidance which means that there is some less than expected profitability I guess in the back half. So are you – you plan to maintain lower prices or more aggressive pricing on the value menu particularly in Brazil? I just want to get a sense of why you think revenues will hold in but EBITDA a little bit slower and why did it effect that you think that the Brazil economy is a little bit slower than you originally thought? Thank you.

Woods Staton

Yeah, hi, Mich. A couple of things. One, we have don’t think we have a 20% component of imported goods in Brazil especially Happy Meals Toys. So obviously the weaker currency affects our margins right there. And then also our basic job within a more competitive environment of a slowdown in the economy is to be more competitive. And we have, we will be protecting and defending our market share through probably more aggressive pricing it may be. So that’s the – those are the main two components of that reduction in EBITDA.

Mitchell Speiser – Buckingham Research

Okay that makes sense, thank you. And just one quick follow-up, I don’t think you’ve talked much pricing in Brazil in the second quarter? Will there be a little bit more pricing in the back half, or is it simply or somewhat how you answered the last question that probably enough?

Woods Staton

It depends. I mean as the economy evolves, we will evolve with it. And as, as we see the competition moving, we try to have a balanced approach to this and have dynamic pricing and we will see in it.

Mitchell Speiser – Buckingham Research

Yes, thank you.

Sofia Chellew

Thank you. Next question please.

Operator

Our next question comes from Nitin Saigal from Bridger Capital. Please go ahead with your question.

Nitin Saigal – Bridger Capital

Hey guys, congrats and thanks for the more helpful disclosure, this was (inaudible). Just could you get a little bit more detail on the comps, traffic versus average check in Brazil and NOLAD, so Brazil 5.6% comp, how much was traffic, up or down year-over-year in the same for NOLAD? Thanks.

Woods Staton

Yeah, let me pass you to Sergio for that answer?

Sergio Alonso

What I would say overall Nitin is 80% average check, 20% profit, in the particular case of Brazil it’s slighter higher 85% – around 85% average check and 15% profit. There is very much the split for the quarter.

Nitin Saigal – Bridger Capital

Okay, so Brazil traffic was up year-over-year in the quarter?

Sergio Alonso

Slightly yes.

Nitin Saigal – Bridger Capital

Yeah. And was there any – I think last time you guys mentioned that you were the biggest difference was the shopping centers versus non-shopping center traffic? Are you seeing any pickup in the shopping centers or any trends there to talk about different from last quarter?

Woods Staton

No, I would say that remains pretty much the same, the difference in performance the number of changes.

Nitin Saigal – Bridger Capital

Okay. Thanks, all the best.

Sofia Chellew

Thank you.

Sergio Alonso

Thank you.

Sofia Chellew

Next question please.

Operator

Our next question comes from Robert (inaudible) Securities. Please go ahead with your question.

Unidentified Analyst

Good morning I have two questions, could you be more specific on the number of openings that you expect do this year. You were a little bit vague in answering the first question. And secondly, could you give us a preliminary thought as to numbers of store openings next year?

An entirely different subject, I wonder if you with this – you’ve been around with dealing with the Brazilian currency up and down for a long time, and I’d be interested in your comments on your expectations over the next couple of years and what’s likely to happen underscore and in that context could you discuss and a little more detail your view point on the way you handled your debt financing whether you feel you should be – should have done something differently where are you satisfied with the profit balancing that existed at this point in time?

Woods Staton

Yeah hi Bob how are you? Bob, we’re going to open up a 130 stores gross opening this year and that’s basics that given and going next year we will do at least that I mean where we look to be on track for that we have not finished our plan to next year, but you know we feel comfortable with that numbers. So that takes part your first question going to the question that real and were we see going that’s any bodies guess I mean if you look at Brazil over the last years.

There has been a lot of volatility, but I think over the last perhaps, I don’t know eight, 10 years, was in power or even before in the prior government. I think there has been lot more fiscal responsibility in all of Brazil – in the Brazil as particularly in all of Latin America.

So I think fiscal or monetary policy are being managed – are being managed, although you’ve seen greater erosion rather than we would have expected in the last year, it’s not crazy as it use to be. So we feel that within that range, we can operate that. And there is no hyperinflation if you have before because really the big problem.

As far as our debt is concerned, we are comfortable that debt levels we have now, we have space to increase our debts but at the time being we have no, no plans to. I think in anything we – or I or all of us serve a bit more on the conservative and cautious side of the balance sheet – of the balance on that specific question.

Unidentified Analyst

Thank you.

Sofia Chellew

Thank you. Next question please.

Operator

(Operator Instructions) And we have one additional question from Mitchell Speiser from Buckingham Research. Please go ahead with your question.

Mitchell Speiser – Buckingham Research

Great thanks very much. And the combined beverage business initiative seems to be going well in the Caribbean. Can you talk about – if what the timetable could be to roll that out to other markets particularly Brazil, Argentina Mexico, other operational issues and maybe just in general, how you are thinking about the timetable to roll this out to your key markets?

Woods Staton

I am interested in what? Listen Mitch, we are looking that, it’s a very good product it’s something that we are – it’s been the company very well all over the world and that’s (inaudible) and Caribbean as well for us. We are doing our plans for next year, and one of the barriers that we have or opportunities that we have is supply chain.

So that’s where we’re looking at right now to make sure that’s properly lined-up and that you know we have good margins. We are – we’ve started off with it in Mexico, and it’s doing very well, it’s too early to really give any good coloring about it but it’s doing well in) Mexico’s well and as you can well imagine both the Caribbean and Mexico are supply out of the U.S. that, that cannot necessarily be the case in other countries.

Mitchell Speiser – Buckingham Research

I got it, great and if I made a slip one other question in. If I could just ask just in terms of housekeeping the 10% to 12% EBITDA growth guidance for this year, what is the first half comparison? Is it the organic number? Is it just the adjusted number? Or if you can just gave that first half EBITDA growth result that’s included in the 10% to 12% for the year?

Germán Lemonnier

No, that – remember the guidance is excluding GAAP in constant currency, the first half of the year grew almost 1%. So the rest of the EBITDA growth is coming in the second half of the year.

Mitchell Speiser – Buckingham Research

And just in the release, you said the first half organic constant EBITDA growth was up 13.3%, is that the – is that not the number to compare to the 10% to 12% for the full-year?

Germán Lemonnier

No, again when you compare the first part of the year with the second part of the year, obviously as we mentioned from the beginning, the first part of the year was weaker versus the second one and the difference between the 10% to 12% – with the 8% to 10% is basically because of the delay in the...

Mitchell Speiser – Buckingham Research

Right, yes, I do understand. I guess just one last way to ask the question is the first half of the year, constant dollar EBITDA growth, what was the result in the first half of the year or the actual...?

Germán Lemonnier

What, I don’t understand really your question.

Mitchell Speiser – Buckingham Research

The first half of 2012 which is now complete the constant dollar EBITDA growth for the first half that is a part of your full year target of 10% to 12%, and is it the up 13.3% that’s organic constant dollar, yet the 10% to 12% target, I don’t know if it that’s organic or which is constant down.

Germán Lemonnier

Remember that the first part in the 6.3% in the first half – part includes exceeded tax in Brazil and the Venezuela to – Venezuela royalty wavier from McDonald. And that is different, that the target that we gave to you for the full year.

Mitchell Speiser – Buckingham Research

Okay I will follow up later thank you.

Woods Staton

Okay, thanks.

Sofia Chellew

Thank you. Next question please.

Operator

Our next question comes from John Ivankoe from JPMorgan. Sir your line is open is it possible your phone is on mute.

John Ivankoe – JP Morgan

Yeah yes it was thank you. Thank you so much. It just I’ll be mentioned favor and then all of that just make sure that we understand this question that I have one. I mean his question was in the first half of 2012, some of the adjusted cost and currency operating income grow 13.3%, which is what you have in your press release?

Woods Staton

Yes.

John Ivankoe – JP Morgan

Okay that’s fine. I wanted to get – I wanted to get that other way. And then secondly, I’m just on your website in Brazil and I thought that this is the case that I wanted again just to clarify. How many stores are touched by McCafe because it does, I know it’s not all that CBD but things like cappuccinos and smoothies, you already have in a lot of the stores. So it sounds like how new with CBD, I mean if it was brought to Brazil, how new would it be in the stores and in other words how many new products how much with the new offering really affective Brazilian stores relative to what’s already there?

Woods Staton

German, do you want to address them?

Germán Lemonnier

John, the McCafe that we have in Brazil is a different customer experience. It has a dedicated space. The products are mostly based – and they done in a – in an equipment that is manually operated it’s a different product profile. CBD which – some confusion because actually in United States, as well as in Puerto Rico, it is called McCafe as well, but it is different product line. That sometimes leads to confusions. In Brazil, we’ve got actually a bit less than 80, 70, 76 McCafe’s out of almost 700 restaurants, so it’s relatively small base.

John Ivankoe – JP Morgan

In those 76 McCafe’s, how many restaurants does it touch; I know I think in some release what I see?

Germán Lemonnier

76 restaurants. We do not have, we don’t have standalone McCafe’s. They are always part of a restaurant.

John Ivankoe – JP Morgan

Okay. And that’s only a 10% of the unit currently yeah...

Germán Lemonnier

Yeah.

John Ivankoe – JP Morgan

And how many do you think it could have, I mean if there was a like it was just like the U.S. like if you want to have the stores and the store what have you, how many of those 700 restaurants could support McCafe in your opinion?

Woods Staton

Well, that’s part of the work that we are doing these days, John, we are still, that’s working progress for us.

John Ivankoe – JP Morgan

Okay. Thank you.

Woods Staton

You’re welcome.

Sofia Chellew

Thank you. Next question?

Operator

(Operator Instructions) And we do have an additional question this comes from John Glass from Morgan Stanley.

John Glass – Morgan Stanley

Thanks, can you – have you think about your cash generation longer term say this year and next year. You’ve been borrowing to some degree to make-up for that short fall I know you haven’t generated enough internal cash to pay for the CapEx of the development. When does that and then when do you feel that you can be self funding, I know there is a lot of working, moving pieces here or currency changing on CapEx budgets and dollars. So I want to make sure I am getting this straight as you see it in your local currencies? Are you able to fund – fully fund your development this year? Do you think you will be able to fully fund it internally next year or when is that point where you break-even?

Woods Staton

Yeah, hi John. The construction costs go down as the devaluations success. So we have an important component of always have the equipment and all that so CapEx will also go down, as a result of currency depreciation, but not track it precisely because of that imported component. We, as we said, we put in 50% of our stores more or less this year in pre-standard; going forward we can change the mix, but we would like to be able to grow our store base, based on the cash that we generate, and that is our objective, and we may have to tweak the mix of stores by store types between Swiss standards and shopping malls et cetera to get there, but that’s our objective.

John Glass – Morgan Stanley

But just a follow up, where you self fund your capital development this year 2012 and or where you self funded in 2013 or do you think it require additional borrowings this year and or next year to archive that?

Woods Staton

We will not have – we will not need additional funding this year and we don’t think it will be required for next year; that’s the objective, for next year.

John Glass – Morgan Stanley

Okay, thank you.

Sofia Chellew

Thank you. I’m going to turn the call back over to Woods Staton, please.

Woods Staton

Okay, thanks a lot Sofia. We listen and thank all of you for joining us today. I’m glad you for the statements you’ve made where you said you like our reporting format – reporting formats and please contact Sofia, our Investor Relations person for further information and thanks for being with us.

Operator

Ladies and gentlemen this concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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