Executive Summary / Key Takeaways

• Arcos Dorados, the world's largest independent McDonald's (MCD) franchisee, is strategically leveraging its "Four D's" (Digital, Delivery, Drive-thru, Development) to drive robust growth and maintain market leadership across Latin America and the Caribbean.
• The company delivered strong second-quarter 2025 results, with systemwide comparable sales growing 12.1% and digital channels contributing over 60% of total systemwide sales, underscoring the success of its technology-driven approach.
• Despite macroeconomic volatility and cost pressures, particularly in Brazil, Arcos Dorados has demonstrated financial resilience, achieving investment-grade debt ratings and maintaining a healthy leverage ratio, which supports its ambitious EOTF restaurant expansion plans.
• Its extensive digital ecosystem, including a loyalty program with 21.5 million members, provides a significant competitive moat, enhancing customer engagement and driving higher frequency and average checks.
• The outlook for 2025 remains positive, with management guiding for continued EOTF openings and stable EBITDA margins (excluding one-offs), underpinned by strategic investments in technology and operational efficiencies.

Latin America's QSR Powerhouse: A Foundation of Brand and Strategy

Arcos Dorados Holdings Inc. stands as a formidable entity in the quick-service restaurant (QSR) landscape, holding the exclusive rights to own, operate, and franchise McDonald's restaurants across 21 countries and territories in Latin America and the Caribbean. This foundational position, established in 2007, has cemented its status as the world's largest independent McDonald's franchisee. The region itself presents a compelling growth narrative, characterized by an underpenetrated QSR market and a growing consumer class, offering substantial long-term potential.

The company's overarching strategy, encapsulated in its "Four D's" – Digital, Delivery, Drive-thru, and Development – is designed to capitalize on these market dynamics. This strategic framework has been instrumental in shaping its current market position and driving its responses to evolving consumer preferences and economic shifts. Historically, Arcos Dorados has built a robust digital platform, evidenced by the McDonald's app, which boasts 147 million downloads and a database of 99 million unique registered users, significantly enhancing customer engagement and operational efficiency. This digital transformation, coupled with a disciplined development approach, enabled the company to achieve a significant financial milestone in 2024, recording $500 million in Adjusted EBITDA for the first time in its history, alongside its highest-ever full-year EBITDA margin.

Technological Edge: The Digital Ecosystem and EOTF Transformation

Arcos Dorados' core technological differentiation lies in its advanced digital platform, a multi-faceted ecosystem encompassing the McDonald's Mobile App, Self-order Kiosks, and a growing Own Delivery service. This integrated approach provides an omnichannel experience, allowing guests to choose when, where, and how they interact with the brand. The tangible benefits of this technology are substantial and quantifiable. In the second quarter of 2025, digital channels collectively contributed more than 60% of total systemwide sales, demonstrating their pervasive impact on the business.

The loyalty program, a cornerstone of the digital strategy, had 21.5 million registered members by the end of the second quarter of 2025 across six active markets. This program is responsible for 22.6% of total sales in these markets, with loyalty members exhibiting a significantly higher visit frequency—between 1.5x to 2x—compared to non-loyalty guests, and also driving higher average checks. The Own Delivery service has also shown remarkable growth, increasing by 21% in constant currency during the first quarter of 2025 and contributing 13% of total delivery sales, up from less than 10% in the prior year.

Beyond these customer-facing innovations, Arcos Dorados is committed to continuous modernization through its "Experience of the Future" (EOTF) restaurants. By the end of June 2025, 1,732 EOTF restaurants were in operation, representing 70% of the total portfolio. The company is also exploring innovative and sophisticated tools, including artificial intelligence, to better estimate sales and manage construction processes, aiming to maintain its leadership position beyond 2035. For investors, this technological leadership translates into a robust competitive moat, driving sales growth, improving operational efficiencies, and ultimately contributing to higher margins and enhanced customer lifetime value.

Competitive Positioning: Dominance in a Dynamic Market

Arcos Dorados holds a commanding competitive position in the Latin American QSR market, consistently outperforming rivals in market share. According to internal research, the McDonald's brand's preference is almost twice that of its nearest competitor across the region, and it leads its nearest competitor by a factor of 2.2 in Brazil and 3x in Argentina. This dominance is further evidenced by market share gains against the top three QSR operators in 2024, including outperforming the main competitor in Brazil while the second largest saw a decline.

The competitive landscape is dynamic, with key players like Restaurant Brands International (QSR) (Burger King), Yum! Brands (YUM) (KFC, Pizza Hut), and Alsea (ALSEA.MX) (Domino's Pizza, Starbucks) vying for market share. Arcos Dorados' exclusive McDonald's franchise provides unparalleled brand prestige, customer loyalty, and operational familiarity with local regulations, giving it a distinct advantage. While competitors like Restaurant Brands International emphasize aggressive digital integration and Yum! Brands boasts a multi-brand portfolio with faster innovation cycles, Arcos Dorados counters with its focused brand strength, extensive EOTF modernization, and a prudent pricing strategy designed to protect traffic and market share. The company's scale in fast-food operations allows it to benefit from economies of scope in marketing and distribution.

Even in specific categories, such as desserts, where competition is intensifying, Arcos Dorados strategically maintains affordable entry-level pricing and introduces innovations like the Grimace Shake and local McFlurry flavors to retain its edge. The company's ability to adapt its value proposition and leverage its digital channels ensures it remains close to consumers, even in challenging macroeconomic environments.

Financial Performance: Resilience Amidst Headwinds

Arcos Dorados demonstrated solid financial performance in the second quarter of 2025, navigating dynamic macroeconomic conditions. Total revenues reached $1.1 billion, with systemwide comparable sales growing 12.1% year-over-year, outpacing blended inflation. Consolidated Adjusted EBITDA stood at $110.1 million. Excluding the impact of a prior-year labor contingency reduction in Brazil, Adjusted EBITDA grew by 7.1% in U.S. dollars, accompanied by a 40 basis point margin expansion. Net income for the quarter was $22.6 million, or $0.11 per share, representing a net income margin of 2%.

Divisional performance showcased varied dynamics. Brazil's revenues grew 2% in constant currency, with comparable sales up 0.3%, but faced margin pressure due to higher beef costs. In contrast, NOLAD's revenues rose 6.9% in constant currency, with comparable sales increasing 4.4%, including a robust 12.4% growth in Mexico, significantly outperforming competitors. NOLAD's margin improved by 450 basis points, benefiting from operational efficiencies and a gain from a sub-franchisee transaction. SLAD delivered strong results, with revenues up 37.8% in constant currency and comparable sales increasing 38.2%, leading to a 260 basis point margin expansion (adjusted for prior-year one-offs).

The company's balance sheet remains strong, with a comfortable net debt to Adjusted EBITDA leverage ratio of 1.4x as of June 30, 2025. This, coupled with investment-grade debt ratings of BBB- from both S&P Global Ratings and Fitch Ratings, provides significant financial flexibility for future capital market transactions and growth initiatives. Cash flow from operating activities for the first half of 2025 totaled $57.7 million, supporting capital expenditures of $104.2 million.

Outlook and Strategic Initiatives: Building for Tomorrow

Arcos Dorados' forward-looking strategy is firmly rooted in its commitment to sustained, profitable growth. For 2025, the company maintains its guidance to open between 90 and 100 new EOTF restaurants, with capital expenditures projected to be between $300 million and $350 million. Management expects the net debt-to-Adjusted EBITDA ratio to remain near 1.4x for the remainder of the year.

Under the leadership of new CEO Luis Raganato, the strategic priorities are clear: optimizing "today's business" through enhanced customer experience and operational excellence, "growing the business" via a disciplined development strategy focused on maximizing returns on investment, and preparing for "tomorrow's business" by anticipating future customer expectations and leveraging innovative technologies like artificial intelligence. The loyalty program is on track to be available in all main markets by year-end 2025, further enhancing customer engagement and driving sales. The recent acquisition of Saint Martin as the 21st territory underscores the company's commitment to regional expansion. While Brazil's consumer environment remains challenging, management anticipates no further significant beef cost pressures in the second half of 2025 and expects overall EBITDA margins for 2025 to be close to 2024 levels, excluding one-off items.

Risks and Challenges: Navigating Volatility

Despite its strong position, Arcos Dorados operates within a region prone to macroeconomic volatility, which presents inherent risks. The challenging consumer environment in Brazil, characterized by reduced QSR traffic and weakening confidence, continues to exert pressure on performance. Higher beef costs in Brazil and currency devaluations across key markets have impacted margins, requiring continuous efforts in pricing, product mix management, and supplier negotiations. The dessert category faces increasing competition, necessitating ongoing innovation and value offerings. Furthermore, the company's dependence on the McDonald's brand, while a strength, also exposes it to shifts in consumer preferences, and regional economic fluctuations can impact profitability and cash flow.

Conclusion

Arcos Dorados stands as a compelling investment proposition, underpinned by its market-leading position as the largest independent McDonald's franchisee in Latin America and the Caribbean. The company's "Four D's" strategy, particularly its advanced digital ecosystem and aggressive EOTF modernization program, provides a robust framework for sustained growth and operational efficiency in an underpenetrated QSR market. The strong financial performance in the second quarter of 2025, coupled with investment-grade debt ratings and a disciplined capital allocation approach, reinforces its capacity to execute on its strategic initiatives.

While macroeconomic headwinds and cost pressures, especially in Brazil, present ongoing challenges, Arcos Dorados' diversified geographic footprint, strong brand attributes, and commitment to technological leadership position it favorably to capitalize on long-term growth opportunities. The company's focus on enhancing customer experience, expanding its loyalty program, and making prudent investments in new restaurant development suggests a clear path to continued shareholder value creation, even amidst regional volatility.