ARCOS DORADOS HOLDINGS INC. 2026 Q2 Earnings Call

Good morning, and thank you for joining Arcos Dorados' second quarter 2026 earnings webcast. With us today are Luis Raganato, our Chief Executive 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 that is also available in the investor section of our website, ir.arcosdorados.com. To better follow the presentation, please note that you can set your view to full screen on the webcast platform. Additionally, you can submit your questions at any time during the presentation using the Q&A function on the bottom of the screen. After we conclude our opening remarks, we will answer your questions. 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 today's earnings press release and conference call presentation, as well as the unaudited financial statements filed today with the SEC on Form 6-K. I will now turn the call over to Luis.

Thank you, Dan, and good morning. Before getting into the second quarter results, I would like to start with a few words about Venezuela. The earthquake at the end of June impacted the entire country in one way or another, including Arcos Dorados. I am very proud of the local team's effort to support our people, suppliers, franchisees, and the communities they serve. Working with local authorities and medical professionals in the hardest-hit part of the country, they quickly converted one restaurant into a medical center and another into a shelter for people who lost their homes. While recovery efforts continue, we are beginning to see signs of progress. People are gradually returning to their daily routines, and other than the two locations I just mentioned, all other McDonald's restaurants are open in Venezuela.

As always, we stand with our team and will provide them with the support they need until the situation on the ground normalizes. Just this past Monday, Colombia also experienced a significant earthquake. Our first priority has been the safety and well-being of our people. We are still working closely with the local management team as they assess the full impact of the earthquake on our people and restaurant operations. Let me now turn to the second quarter. Total revenue, adjusted EBITDA, and net income all grew strongly in USD, despite challenging consumer dynamics and year-over-year comparisons in certain markets. This demonstrates that we have taken important steps to improve the resilience of the business model and monetize the market share advantage. Total revenue reached $1.3 billion, the highest ever quarterly revenue, and up more than 14% created currencies in several markets.

Stronger operating results, better results below the line, and a lower effective tax rate deliver record second quarter net income and drove sequential growth in adjusted free cash flow. The exclusive sponsorship of the FIFA World Cup allowed us to take full advantage of this important passion point for guests across the region. We executed unique marketing campaigns and activations across all sales channels. These helped drive digital sales penetration and identified sales to their highest ever levels, and we measured continued market share gains throughout the region. In terms of inorganic growth, we opened 16 restaurants in the quarter, bringing the first half total to 35 restaurant openings. The organic growth drivers in the business continued to perform well in the second quarter, including the solid market share, digital sales, and USD revenue growth I just mentioned.

Starting with market share, based on guest traffic, McDonald's restaurants in the Arcos Dorados footprint gained about half a point versus second quarter last year and remain more than two times as much as our main competitors. Market share gains in the main markets are a testament to the quality of the local leadership teams who have implemented successful strategies in a wide range of consumer environments. Digital sales grew by more than 25% year over year and generated about 66% of total sales. This included very strong growth from self-order kiosks, demonstrating the continued relevance of the on-premise experience and delivery, especially in Brazil, where new aggregators are pushing industry growth. Identified sales surpassed 28% of total sales in the period, with growing loyalty program membership helping us achieve the highest guest identification rate in our history.

Active loyalty program members who redeem points tend to visit us five times as frequently as non-loyalty members. We expect this to turn into an important long-term value driver for the business, since it significantly increases the lifetime value of those guests. The FIFA World Cup was a big success for the McDonald's brand in all of our markets. We took learnings from previous tournaments and began running regional campaigns about three months before the World Cup began. We used this period, which included the World Cup-themed Mundialista sandwiches and Panini sticker books, to generate excitement in anticipation of the tournament. The anticipation turned into euphoria once the tournament began, as we remained engaged with guests through conversations and special offers on the digital platform. Regional campaigns, combined with global FIFA World Cup campaigns, drove significant traffic and premium sandwiches sales growth, especially in Argentina, Brazil, Colombia, and Mexico.

Brand favorability metrics also reached all-time highs throughout our footprint, which we believe ties directly back to the market share gains we delivered. At a divisional level, Brazil's comp sales continued the strong rebound that began at the end of the first quarter. On our last call, we mentioned the proactive and assertive steps the Brazilian team took to reverse negative guest volume trends after the end of Carnival. By quickly reconnecting with guests, they set the stage for a successful second quarter, which included an integrated FIFA World Cup campaign, strong delivered sales growth, a compelling value platform, and targeted digital campaigns such as McFest. According to third-party research, the good news is that the QSR segment of the country's restaurant industry resumed volume growth in the first half of 2026, and we began to see that reflected in our numbers during the quarter.

Strong comp sales, new restaurants, and an appreciated currency combined to drive USD sales up more than 25%. NOLAD's comparable sales performance in the quarter reflects a particularly demanding comparison base, even though we were able to generate modest guest volume growth. Three factors explain the year-over-year dynamic. First, last year's second quarter included the full Holy Week period, compared with this year, that included only part of the holiday in the second quarter. Second, the prior year quarter benefited from the Minecraft promotion, which generated exceptional results across several markets. Third, consumer spending remained under pressure across most markets. SLAD's sales growth was solid in the quarter, reflecting guest traffic growth in most markets and inflation-driven comp sales growth in Argentina and Venezuela. Marketing campaigns focused mainly on the FIFA World Cup, driving important market share gains.

Over to you, Mariano. Thank you, Luis, and good morning, everyone.

Similar to revenue, profitability in USD, as well as profitability margins, were resilient in the second quarter of 2026. Adjusted EBITDA totaled $126.8 million. This was more than 20% higher than last year in the second quarter, including a 70-basis point margin expansion when we exclude the transaction with a Mexican sub-franchisee from last year's result. In addition to benefiting from a stronger currency environment, we were very pleased to see continued improvement in both food and paper, as well as G&A expenses, which more than offset modest pressure in payroll. Favorable food and paper costs in Brazil and NOLAD drove a 70-basis point margin expansion in the second quarter, extending the positive result we generated in the first quarter.

Payroll expenses were higher as a percentage of revenue in all three divisions, but mostly in NOLAD due to hourly wages growing more than the average check. Pressure in Brazil and SLAD was much more modest. Occupancy and other operating expenses were almost flat, while G&A was lower as a percentage of revenue as a result of the restructuring we implemented late last year, and we expect this to continue through year-end. We were also very pleased to deliver strong net income results this quarter. Earnings per share in the quarter doubled versus last year, supported by solid operating performance, better non-operating results, and a lower effective tax rate. Net interest expense was lower compared to last year, thanks to the continued optimization of our capital structure, as well as to income related to last year's tax credit in Brazil.

Additionally, the lower effective tax rate reflects the early impact of initiatives designed to lower the company's consolidated effective tax rate over time to be more in line with the region's statutory rates. Brazil was the standout in terms of profitability in the quarter. Margin improved by 180 basis points, reflecting disciplined cost management, especially in food and paper and G&A. This, combined with solid revenue growth and stronger currencies, drove adjusted EBITDA up more than 40% in USD terms. NOLAD's margin pressure, excluding the income from last year's restaurant transaction, was 110 basis points. This was mainly due to reduced operating leverage, which more than offset better food and paper costs compared to the same period last year. In SLAD, adjusted EBITDA grew in line with revenue.

Improvements in G&A were offset by slightly higher food and paper costs, as well as occupancy and other operating expenses, leaving margins essentially unchanged versus the prior year-end. We are working hard to generate value for our shareholders, and the major part of that is maintaining a healthy balance sheet and driving sustainable cash flow generation. in July, we completed the second liability management transaction of the year. As a result, this year we have completely repaid the 2029 senior notes. We are very proud to have issued the first sustainability-linked bond in the QSR industry, which included ambitious targets associated with greenhouse gas emissions across Scope 1, 2, and 3. As we announced earlier this year, we are even prouder to have exceeded these commitments by the 2025 measurement date.