Arcos Dorados' Q3 2025 Earnings Call: Contradictions Emerge on Brazil Market Share, Tax Benefits, and Sports Betting Impact

Date of Call: None provided

Financials Results

• Revenue: $1.2 billion, a new high for a single quarter; systemwide comparable sales +12.7% (driven by average check growth)

Guidance:

• FY2025 openings guidance: 90-100 restaurants (22 opened in Q3; 54 YTD).
• Loyalty program to be available in ~90% of restaurants by end-2025; 23.6M members (+~50% vs end-2024).
• Expect to resume more normalized top-line and EBITDA growth when consumer/macro conditions improve; target EBITDA margin expansion in 2026.
• Brazil federal tax credit (~$125M) will be used to offset federal tax obligations starting 2026 and recovered over five years.
• 2026 financial guidance will be provided in Q1 2026.

Business Commentary:

• Revenue and Profitability Growth:
• Arcos Dorados reported $1.2 billion in total revenue for the third quarter, setting a new high for the company.

• The growth was driven by balanced US dollar revenue growth across divisions, with systemwide comparable sales rising 12.7% in line with blended inflation.

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• Operational Efficiency and Cost Management:

• The company generated more than $200 million in adjusted EBITDA, despite a decline of about 3% due to food and paper cost pressures.

• Operational efficiencies were achieved through improved labor productivity, leveraging occupancy, and lower royalties, which offset some of the margin pressure.

• Digital Sales and Marketing Strategy:

• Digital channel sales rose more than 11% year-on-year, contributing to 61% of systemwide sales in Q3.

• The growth was supported by strong performance in delivery and self-ordered kiosks, with notable contributions from Brazil and SLAD.

• Regional Market Performance:

• Brazil's total revenue grew 4.9%, with stabilizing sales performance despite challenging consumer dynamics.

• The NOLAD region, particularly Mexico, saw comparable sales grow 6.3%, driven by strong brand campaigns and value platforms.

• Tax Credit and Financial Outlook:

• Arcos Dorados benefited from a $125.2 million net federal tax credit in Brazil, expected to positively impact cash flow over five years.
• The company maintained a comfortable net debt-to-adjusted EBITDA ratio of 1.2 times and expects to return to healthier sales growth and profitability as economic conditions improve.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record quarterly revenue of $1.2B and >$200M adjusted EBITDA, noted market-share leadership across key markets, and stated they are "well positioned to resume more normalized top-line and EBITDA growth" while targeting EBITDA margin expansion in 2026.

Q&A:

• Question from Alessandro Giannelli (Sal. Oppenheim): If I adjust out the tax credit from EBITDA, then it was down year over year. Was that related to food and paper costs? And could you give some color on that?
  Response: Excluding one-offs, adjusted EBITDA contracted mainly due to elevated food and paper costs—particularly a ~35% rise in beef costs in Brazil—partially offset by payroll efficiencies (+60 bps), occupancy gains (+20 bps) and lower royalties (~10 bps).

• Question from Eric Huang (Santander): In Brazil, how has the company’s market share evolved in the previous quarter? How has competition been moving given a challenging macro backdrop? Does management foresee additional initiatives to boost revenues or is the balance between market share protection and profitability at comfortable levels?
  Response: Market share remains near record highs with a positive gap vs competitors; competitors focus on transactional promos while Arcos balances competitive value (e.g., Economeki) with brand-building (co-branding, sponsorships) to protect share and pursue margin recovery.

• Question from Eric Huang (Santander): Given the potential for dividend taxation in Brazil starting in 2026, does the company see any potential impacts on repatriation of results from the Brazilian entity to the parent/holding company?
  Response: The tax change is not approved; company has efficient cash-management and will assess impacts if law passes, so no immediate effect expected.

• Question from Eric Huang (Santander) and Florian Mendez (JP Morgan): If softness persists entering 2026, would you scale down openings and accelerate renovations (e.g., Mexico)? Thoughts on pricing vs affordability in 2026 and any market-share strategy?
  Response: Growth plan is flexible: prioritize most profitable markets/formats and adjust pace of openings or renovations as needed; maintain customer-focused pricing and value offers while targeting EBITDA margin expansion in 2026.

• Question from Florian Mendez (JP Morgan): Should we expect lower input cost pressure in Brazil already in the fourth quarter given recent beef trends?
  Response: Yes—beef inflation was the main pressure (+35% last 12 months); Q2 was likely the worst point and early Q4 signs show improvement; currency appreciation also eases imported-cost pressures.

• Question from Álvaro Garcia (BTG Pactual): What are your thoughts on consumer weakness—could sports betting or GLP-1 drugs be impacting sales?
  Response: Sports betting is denting purchasing power among lower-income consumers; no material impact from GLP-1 treatments observed or expected in the region.

• Question from Álvaro Garcia (BTG Pactual): Double-checking on the $125 million tax credit in Brazil—how will those savings be phased over five years and is $125M the fair number?
  Response: $125M is management's fair estimate; expected to be gradually compensated against federal taxes and assumed to be evenly monetized over the next five years.

• Question from Álvaro Garcia (BTG Pactual): How do you see mix shifting toward chicken in beef-loving markets like Brazil and Argentina?
  Response: Chicken (McCrispy, McNuggets) is gaining share quarter-over-quarter and is a strategic growth pillar; growth is gradual but relevant and also benefits margins through category innovation.

• Question from Thiago Bortolucci (Goldman Sachs) / Alejandro Fuchs (Itaú) / Hanoy Mudeguzman (Inca Investments): Could you expand on same-store sales and foot-traffic performance in Brazil, Mexico, and Argentina, and comment on recent Q4 trends?
  Response: Brazil comps were positive driven by average check (traffic down), delivery strongest; Mexico comps (+6.3%) were traffic-driven with desserts and promotions key; Argentina was the strongest driver with market-share gains (>3x competitor). Management expects Q4 improvement aided by marketing plans.

• Question from Thiago Bortolucci (Goldman Sachs) / Hanoy Mudeguzman (Inca Investments): How has McDonald's value gap evolved vs food away from home and other burger QSRs in Brazil? How much pricing have you taken, impact on traffic, and pricing approach going forward?
  Response: Company increased prices above inflation this year to mitigate margin pressure while launching the Economeki national value platform to preserve affordability; value-for-money brand scores hit record highs and market share was maintained.

• Question from Alejandro Fuchs (Itaú): With more cash flow and MFA flexibility on CapEx, how do you feel about buybacks as a capital-allocation priority?
  Response: Board declared a $0.24/share dividend in 2025; buybacks remain an option under consideration depending on available cash, expected generation and capital priorities, but no decision now.

• Question from Bob Ford: Can you explain the source of the tax credit in Brazil and the rate at which you expect to monetize it over the next five years?
  Response: Credit arises from treatment of SMS subsidies in federal tax calculations; management expects to monetize the ~$125M credit evenly over five years in compliance with law.

• Question from Bob Ford: Update on promotional strategy in Mexico and sources of margin pressure in NOLAD given Mexico’s strength?
  Response: Mexico traffic engines are desserts, value platforms (MXN99 and Tres por Tres) and Happy Meal licenses; NOLAD margin pressure mainly from food and paper costs, with some timing effects in G&A expected to normalize.

• Question from Bob Ford: Outlook for key input costs in Brazil and other markets, and where do you see additional operating efficiencies?
  Response: Expect easing of Brazil input pressures; key efficiencies are payroll (scheduling system drove ~60 bps improvement), occupancy and delivery costs; these operational gains should support margin recovery as sales improve.

• Question from Bob Ford: How do you expect the World Cup to impact traffic, and are there global/regional McDonald's marketing campaigns planned?
  Response: World Cup expected to positively impact brand metrics and traffic across the region; delivery will be a major channel and the company will run significant marketing campaigns regionally during the event.

• Question from Jeroen (Oaktree Capital): When will operating leverage after strong top-line allow a higher level of margins, especially with digitalization improvements?
  Response: Management expects operating leverage to drive margin expansion by 2026 via sustained sales growth (at/above inflation), payroll and occupancy efficiencies and digital/back-office tools already delivering productivity gains.

Contradiction Point 1

Market Share and Traffic Trends in Brazil

It involves differing perspectives on the company's market share and traffic trends in Brazil, which are crucial for understanding the business's competitive position and growth strategy.

How has the company’s market share changed in Brazil over the past quarter? How has competition changed amid a still-challenging macroeconomic environment in Brazil? - Eric Huang(Santander)

2025Q3: Traffic in Brazil remains challenging due to factors related to disposable income, and consumer confidence is down. We've seen a reduction in cash traffic in the sector. The industry continued to focus on promotional activities. Our business share remains strong, near record highs, maintaining a positive gap versus our other main competitors. - Luis Raganato(CEO)

How do you balance foot traffic, pricing, product mix, and profitability in Brazil? What plans do you have to boost same-store sales growth by year-end? Do you have early insights on July demand trends in Brazil and Mexico? - Thiago Bortoluci(Goldman Sachs)

2025Q2: The market faces a challenging macroeconomic environment, and we're offsetting a drop in traffic with targeted price increases and product mix. We're focusing on balancing sales growth and profitability. Marketing actions like 'Mequi do Dia' and 'Mequi Fest' increased visit frequency and identified sales by 15%. Despite challenges, we've maintained market share, leading our nearest competitor by 2.2x. - Luis Raganato(CEO)

Contradiction Point 2

Consumer Environment and Revenue Management Initiatives in Brazil

It highlights differing views on the consumer environment and the effectiveness of revenue management initiatives in Brazil, which impact the company's strategy and performance.

What are your expectations for fourth-quarter performance in Brazil and what gives you confidence in those expectations? - Thiago Bortoluci(Goldman Sachs)

2025Q3: In Brazil, sales performance stabilized between Q2 and Q3, and we believe we can improve in the fourth quarter. NOLAD faces challenges but is expected to stabilize. - Luis Raganato(CEO)

How does the company view the consumer environment as it moves into the second half of 2025, and how are revenue management initiatives expected to boost sales momentum? - Eric Huang(Santander)

2025Q2: The consumer environment remains challenging, but we've delivered positive comp sales in Brazil by offsetting traffic drops with strategic pricing and product mix. Our marketing and digital strategies focus on value and brand strength to drive market share gains. Initiatives like 'Mequi do Dia' and 'Mequi Fest' have been successful, with identified sales contributing significantly. - Luis Raganato(CEO)

Contradiction Point 3

Market Share and Consumer Confidence in Brazil

It involves the company's assessment of its market share and consumer confidence in Brazil, which are crucial for strategic decision-making and investor expectations.

How has the company's market share changed in Brazil over the past quarter? How has competition evolved amid the challenging macroeconomic conditions in Brazil? - Eric Huang(Santander)

2025Q3: Traffic in Brazil remains challenging due to factors related to disposable income, and consumer confidence is down. - Luis Raganato(CEO)

Can you comment on Q2 2025 sales trends in Brazil and NOLAD, normalizing for calendar effects? And how much of Q1 2025's weak comp sales were due to negative calendar impacts? - Eric Huang(Santander)

2025Q1: In Brazil, comp sales for Q1 increased by 1.7%, including sales from systemwide menu price increases of 1.3 percentage points in part offset by lower guest traffic. - Marcelo Rabach(CEO)

Contradiction Point 4

Tax Benefit and Its Impact on Financials

It involves the company's reporting of a tax benefit and its impact on financial statements, which are crucial for financial analysis and investor confidence.

How will the $125 million Brazil tax credit savings be phased over the next five years? - Álvaro Garcia(BTG Pactual)

2025Q3: We are receiving a full 100% recognition of the SMS tax credit this year, which results in a tax benefit of $125 million. - Mariano Tannenbaum(CFO)

Regarding the $125 million tax credit in Brazil this quarter, how will the benefit be phased over the next five years? - André Ghazarossian(Credit Suisse)

2025Q2: I want to remind you that the tax credit in the second quarter of $125 million will be gradually offset by the recognition of federal taxes over the next five years. - Mariano Tannenbaum(CFO)

Contradiction Point 5

Impact of Sports Betting on Consumer Purchasing Power

It discusses the impact of sports betting on consumer purchasing power, which affects sales and financial performance.

How might sports betting or GLP-1 drugs affect your sales? - Álvaro Garcia(BTG Pactual)

2025Q3: Sports betting is affecting consumer purchasing power, especially for lower-income individuals. - Luis Raganato(CEO)

What are GLP1s, and is there any connection to sports betting? - Joe Cherner(Loop Capital)

2024Q4: We have seen a very indirect connection with the sports betting, which is affecting consumer purchasing power, especially for lower-income individuals. - Luis Raganato(CEO)