Good morning, and welcome to the Arcos Dorados Third Quarter 2020 Earnings Call. A slide presentation will accompany today's webcast, which will also be available in the Investors section of the company's website, www.arcosdorados.com/ir. [Operator Instructions] And today's conference call is being recorded. At this time, I'd like to turn the conference call over to Dan Schleiniger, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone, and thank you for joining our earnings call. With me on today's call are Marcelo Rabach, our Chief Executive Officer; Mariano Tannenbaum, our Chief Financial Officer; and Luis Raganato, our Chief Operating Officer. Please turn to Slide 2. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found in the press release and unaudited financial statements, we will file with the SEC on Form 6-K. Our discussion today excludes the results of the Venezuelan operation, both at the consolidated level as well as for the Caribbean division, due to the country's ongoing macroeconomic volatility. For your reference, we include a full income statement, excluding Venezuela, with our earnings release. I would now like to turn the call over to our CEO, Marcelo Rabach.

Thanks, Dan, and good morning, everyone. I hope you and your families are doing well. Today, we will review the topics listed on Slide 3. We will start with an operational update. Then we will take you through the details of our third quarter results and more recent events. We will wrap up with some early thoughts on next year. You have heard me say on each of our calls that without a doubt, we have the best restaurant system in Latin America. The heart and soul is our people, who have worked hard and overcome significant obstacles to ensure that our guests enjoy the safest and most convenient restaurant experience in our region. They make us very proud every single day. The 3 phases of our plan to navigate the pandemic are summarized on Slide 4. Our proactive and aggressive approach to the crisis management phase in both prioritizing our people and guests, supporting our communities and stabilizing our cash flows, to ensure the long-term health of our business. We are now solidly in the recovery phase of our plan, operating at least 1 sales segment in 99% of our restaurants. By focusing on the Three D's of our business, drive-thru, delivery and digital, while also building consumer confidence with our McProtegidos or McSafe program, we are gaining market share across the board. Sometime next year, we expect to enter the full revival phase of our plan. That is when all or substantially all our restaurants should return to full operations. We will build on the successes and learnings from 2020 to support a further recovery in sales and capitalize on the renewed excitement for the McDonald's brand in our region. Taking a more detailed look at our operations on Slide 5. In addition to reopening 99% of our…

Thanks, Marcelo, and good morning to all. You have just heard about our consolidated top line results. So let's take a look at how sales performed on a divisional level on Slide 7. System-wide comparable sales remained highly correlated to the penetration of free-standing restaurants in our divisions. The Caribbean division delivered comparable sales growth of 1% in the quarter. 2/3 of our restaurants are free-standing, allowing us to leverage the drive-thru and expanded delivery sales segments. Brazil's comparable sales improved by about 20 percentage points versus the second quarter. Free-standing units generated positive comparable sales starting in September, boosted by sustained growth in drive-thru and delivery. The trend continued in October when comparable sales for all of Arcos Dorados were above 90% of last year's levels. NOLAD and SLAD had a slower recovery due to stricter government restrictions and operations. We were only recently able to reopen some mall-based stores in Panama, while operations in Argentina are still limited due to ongoing virus-related restrictions. Although the recovery has been slower, we are still operating from a much stronger competitive position in most of the division's markets and expect to capture significant share moving forward. Let's talk about how the Three D's are performing, on Slide 8. Starting with drive-thru. We generated record sales levels for this segment during the third quarter. On a constant currency basis, drive-thru sales rose 54% versus the prior year period and contributed 46% of the third quarter's system-wide sales. Delivery also had the best sales quarter ever, growing more than 180% in constant currency terms versus last year. In fact, delivery's community sales for the first 9 months of 2020 are already 36% higher versus the full year 2019. The service continues to grow in popularity and is now available in 17 of our…

Thanks, Luis. As Marcelo already mentioned, we generated positive adjusted EBITDA in the quarter, both at the consolidated level and in each of our 4 divisions. It is worth repeating how pleased we are to see the performance in our main market, Brazil, and in the Caribbean division, where we generate hard currency cash flows and see significant opportunities moving forward. Taking a look at our EBITDA margin on Slide 10, we had an important sequential improvement of 19.8 percentage points versus the second quarter. Our food and paper costs demonstrated continued resilience, generating 90 basis points of EBITDA margin leverage versus the second quarter and 30 basis points versus the prior year. These improvements came as a result of the success of the Three D's, together with effective revenue and menu management, plus our sophisticated, localized supply chain. Payroll costs also improved significantly gaining 330 basis points of productivity versus the second quarter due largely to improved sales trends and optimized restaurant staffing. The occupancy and other operating expense line also saw a material rebound from the second quarter when we had nonrecurring expenses related to PPE for our employees, and higher commissions to the delivery aggregators, given the increase in sales in that segment. I should also mention the great work by our real estate team which has kept the increase in outside rent expenses to a minimum, while we work to leverage our remaining fixed costs. Strict controls on G&A resulted in an 8.2% decline in constant currency despite a 9.8% weighted inflation rate. We are proud to have achieved this real reduction without implementing layoffs. As our sales continue recovering and growing through the end of the year and into 2021, we expect most of our cost and expenses to normalize further. Before moving to our…

Thanks, Mariano. Before we talk about expectations for next year, let's turn to our ESG framework on Slide 14. On prior calls, you heard me talk about our Receta del Futuro or Recipe for the Future. I am pleased to report that we just released our sixth annual social impact and sustainable development report, detailing the progress we are making against our 5 pillars of sustainable sourcing, climate change, packaging and recycling, youth opportunity and commitment to families. Importantly, this year's report was prepared in line with both global reporting initiative and sustainability accounting standards board guidelines. Today, I want to briefly highlight recent developments in 3 of our ESG pillars. In commitment to families, we have constantly enhanced the nutritional value and quality of our products, with the most recent step, being the elimination of artificial colors and flavors from some of our most popular products, with our clean label initiative. Youth opportunity is important for Arcos Dorados and for the communities in which we operate. Each year, we hold the Gran Dia, or big day, donating the days Big Mac sales proceeds to our partner NGOs. Last year, we donated more than $5 million, and this year started strongly with the Gran Dia in Chile. Incredibly, despite holding a most virtual event, Chile's Gran Dia raised more money this year than last year. Packaging and recycling is a growing area of opportunity to make a positive impact. In Costa Rica, we recently continued eliminating single-use plastics from our packaging, removing more than 16 million units from our restaurants. As a company, we eliminated 600 tons of single-use plastic in 2018, another 700 tons in 2019, and we expect to eliminate another 300 tons this year. The most powerful part of these initiatives is that 1600 tons of plastic…

[Operator Instructions] And our first question today comes from Ian Luketic from JPMorgan.

I have a couple of questions, if I may. To start here, it will be interesting to get a glance on how same-store sales is performing in October and November by region, if possible. Also on sales, how is in dining performing throughout all regions, given the lower restrictions that we're now seeing? And on the margin side, I think it was a pleasant surprise to see margins in Brazil and Caribbean at -- close to 11%. But when we look at 2021, we see likely higher COGs, less financial aid from the government and likely lower disposable income. So my questions are, two, what to expect for next year? And what initiatives are you working with to cope with this headwinds. And lastly, if I may, also -- sorry for the long questions here, how has evolved your talks with McDonald's in regards to your expansion plan? So any update on timing and size?

Okay. Ian. I will try to cover as much of your question as possible, and obviously, Mariano will help me with that. So let's start with the first part, the same-store sales and let me say that we are very pleased with the improving trends of comparable sales in the recent months, and particularly in the recent weeks, as we mentioned in our opening remarks, October comparable sales rose to more than 90% of the prior year period. So that's a sequential improvement when compared with the last month of the third quarter. And in terms of the different regions, I would say that, the Caribbean division continued to lead the way. Particularly in October, we generated in the Caribbean division, double-digit positive comps. So very strong results and a very important contributor to our results, given the fact that, as you know, there, we have many markets that produce results in hard currencies, which are very important for the company. The other divisions also continued generating sequential improvements last month, and we are very excited with November figures. November continues to see improving trends. And we are pleased with the performance of each division. Each of them in a different context in terms of the operating conditions and government restrictions. But I would say that a good news coming from the sales part of the business. In terms on-premise dining, I would say that the main challenges remain in the malls. Even though many malls have reopened, we are still facing some restrictions in terms of hours of operations in malls. So obviously, there is a recovery in on-premise sales in all the restaurants that are allowed to operate their dining rooms. But particularly in shopping malls, we are facing some challenges, additional challenges, given the fact that, as…

Our next question comes from Marcella Recchia from Crédit Suisse.

I have a quick one. Just -- this Monday, McDonald's Corporation hosted its Investor Day and the overreaching theme of the event was accelerated investments to drive growth. So I just would like to hear from you what that so called accelerating the art strategy from the company could mean for Arcos going forward?

Thanks for the question, Marcella. I would say that, obviously, there are opportunities for the McDonald's brand in different areas of the world in different regions. We are seeing those kind of opportunities in our region. But as I mentioned before, we still do not have all the details on our plan for next year. I would say that we continue to see opportunities in improving our restaurant portfolio base. We have a very strong competitive advantage in our footprint. It was pretty clear this year how important is our base of free-standing units across the region. And we were, as you may recall, we were in the process of converting or modernizing many of those restaurants to the EOTF concept. I think that you will continue to see some of those kind of investments going forward, leveraging, again, all the learnings and all the success that we had during this year. And in terms of new units, we will have some additional news, some more details in the coming weeks, but we do see opportunities for the brand in different markets. Part of the announcements that the McDonald's team made this week on Monday, was around the different formats, restaurant formats that they were taking a look at. So for example, they talk about McDonald's on-the-go restaurants, which are are supposed to be restaurants that will have very small or no dinning rooms, and will be focused on operating delivery and drive-thru. So we will be monitoring the performance of these new concepts to determine which ones are appropriate for our region. And as always, leverage all the research and development that the McDonald's system does in other areas of the world. So we will take a close look to that in order to see what we can learn and leverage in this area. As always, we are very aligned with McDonald's strategy globally in general.

Our next question comes from Robert Ford from Bank of America.

Marcelo, what are you seeing in terms of mom-and-pop and smaller chain bankruptcy across your major markets? And how big of a market share opportunity do you anticipate?

Okay. Bob, nice to have you in the call. Yes, after the different periods in the different markets of shutdown or closing periods of -- as a consequence of the restrictions imposed by governments, we saw many mom-and-pops and small chain restaurants that didn't reopen. It varies from market to market from city to city, but definitely, there are some players, less players in the market. So that's a reality, and it's across the region. In that scenario and based in our figures for Q2 and Q3, as you know, we measure and track market share using a variety of sources that we try to triangulate to identify trends and areas of opportunity that includes own research, third-party sources, comparative growth rates. And all of these sources indicate that we have been gaining market share big time across the region. So we are growing either faster or at the expense of our direct competitors and/or other restaurant formats. And typically, those formats that you mentioned, dine-in, mom-and-pop or small chain restaurants are the ones that suffer the most. So we gained a lot of share, and we have a very strong plan basically around our Three D's, digital, delivery and drive-thru, in order to keep those gains going forward, and we are very optimistic in that sense. So we are in a pretty good position to keep this leadership growing going forward.

And Marcelo, in your earlier comments, you also mentioned safety, right? Food safety has been, I think, a big differentiator for a long time. But now with COVID risk and transmission risk, it's even greater, right? Do you have a sense of how important that safety consideration is and how it ranks versus other factors like price or experience or speed in a market like Brazil?

Yes, Bob. Yes, absolutely. It continues to be the first -- or between the first 2 variables that customers take in account at the moment of deciding where to eat out of home. So it continues to be a huge priority for our customers. And that's why our McProtegidos or McSafe program was so important at the very beginning. But what we saw after all these months of leading with the pandemic in the region is that, many of the improvements we did in terms of safety and all the recognition we got from all these efforts translated to other areas of the brand, to other attributes of the brand. I would say that all the attributes we measure in our own research, which is the same that McDonald's does around the world, all the attributes improved quarter-after-quarter, month-after-month, in almost all the markets. And I think that how seriously we took the McProtegidos or McSafe program, all the recognition we received from our customers, from our employees, which is very important, and from government authorities, all that kind of feedback we received from these stakeholders translated to the whole community. And that's why the brand trust -- results that we are having in recent months are at the highest level in many, many years. And I think that hygiene and food safety has a lot to do with that. That's why for us, will continue to be a priority, the execution of these McProtegidos or McSafe program because it is very important. And we understand that it will continue to be very important for the customers in their decision-making of where have their meals out of home.

And ladies and gentlemen, I'm showing no further questions. I would now like to turn the conference call back over for any closing remarks.

Okay. Thank you. Thank you very much. And thank you, everyone, for joining our call today and for your questions. I wish you all a happy holiday season. And look forward to speaking with you again, once we can provide you with more details on our plans for 2021. So please stay safe, and have a great day.

Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.