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McDonald's Franchiser Arcos Dorados Expects 2nd Half Income Rebound

05/04/2012 | 01:09pm US/Eastern

Arcos Dorados Holdings Inc. (ARCO), the largest McDonald's Corp. (>> McDonald's Corporation) restaurant franchiser in Latin America, is banking on a rebound in sales later this year after a disappointing start to 2012.

While the higher costs and cooling economic growth in the region took a toll during the first quarter, the company is confident that income will pick up during the second half of the year, the company's chief operating officer Sergio Alonso said in a conference call with investors following the earnings release.

Recent short-term fluctuations shouldn't overshadow strong prospects for growing sales due to the growing population and expanding middle class in Latin America, Alonso said.

Earlier Friday, Arcos Dorados said net profit during the first quarter fell 28.4% on the year as operating costs grew faster than sales. Investors were clearly unimpressed. Shares slumped almost 13% to $14.95 by midday in New York.

The company's net profit was $25.4 million, or $0.12 a share, down from $35.5 million, or $0.15 a share, in the first quarter of 2011. Revenues increased 11.5% to $921.6 million as the company added a net 86 restaurants in the region over the past year.

Arcos Dorados has about 1,840 restaurants across Latin America and the Caribbean and employs more than 90,000 people.

By the end of 2012, the company expects revenue to jump by 15% to 17% as it continues to expand its number of restaurants, Alonso said. Capital expenditure for 2012 is estimated at $340 to $350 million.

The Buenos Aires-based company said sales in Brazil, Arcos Dorados' largest market, rose 5% during the first quarter to $450 million.

Many analysts Friday questioned the company's optimistic sales growth expectations in light of the weak performance seen during the first quarter.

Growth cooled in Brazil at the start of this year but the company said it is implementing a number of marketing and pricing schemes it hopes will lure in more customers.

In addition, the Brazilian government has cut interest rates and is taking a number of other measures to stoke growth. "We expect the [Brazilian] economy to be neutral or better" during the rest of the year, Alonso said. He estimated GDP growth of between 2.5% and 2.7% in Brazil this year.

The company's earnings before interest, taxes, depreciation and amortization, or Ebitda, a measure of cash flow, during the first quarter rose 8% on the year to $78.1 million due to the revenue growth and a reduction in food and paper costs as a percentage of sales. Arcos Dorados is expecting Ebitda to rise by 10% to 12% in 2012.

The company is also facing soaring inflation and costs in many markets, particularly in Argentina and Venezuela.

That has taken a toll in Argentina where most of the company's management is stationed. Argentina's inflation over the past year topped 21%, while the peso eased just 8% relative to the U.S. dollar, the company's CFO German Lemonnier said.

In addition to signs that Argentina's economy is also cooling, the government has piled the pressure on local companies recently to prevent them from making dividend payments and taking cash out of the country. However, Alonso pointed out that the company isn't incorporated in Argentina, shielding it from some of those measures.

"There's a lot of noise, but we're not seeing a disruption," Alonso said of the economic situation in Argentina.

-By Shane Romig, Dow Jones Newswires; 54-11-4103-6738; shane.romig@dowjones.com

--Ken Parks contributed to this article.

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