Arcos Dorados Holdings Inc (ARCO) Q4 2017 Earnings Conference Call Transcript

Arcos Dorados Holdings, Inc. (ARCO 2.56%)
Q4 2017 Earnings Conference Call
March 21, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Arcos Dorados Fourth Quarter and Full Year 2017 Earnings Call. A slide presentation will accompany today's webcast, which will be available in the Investors section of the company's website, www.arcosdorados.com/ir. And as a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Today's conference call is also being recorded.

At this time, I'd like to turn the call over to Mr. Daniel Schleiniger, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Daniel Schleiniger -- VP Corporate Communications & IR

Thank you. Good morning, everyone, and thank you for joining us today. With me on today's call are Sergio Alonso, our Chief Executive Officer; Marcelo Rabach, our Chief Operating Officer; and Mariano Tannenbaum, our Chief Financial Officer.

Before we proceed, I would like to read the following Safe Harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statement 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 filed today with the SEC on Form 6-K. Additionally, we would like to note that unless otherwise indicated, all results referenced today exclude Venezuela. I would now like to turn the call over to our CEO, Sergio Alonso.

Sergio Daniel Alonso -- Chief Executive Officer

Thank you, Dan. Hello, everyone, and thank you for joining us today. Please turn to Slide 2. We had a very solid end to a strong year. We achieved high single-digit comparable sales in the fourth quarter and volume increases in every quarter of the year. Our successful strategy to drive topline growth, combined with the work we have done to optimize our cost structure, generated adjusted EBITDA margins for the fourth quarter and the full year that were our highest since 2011.

We achieved our primary goal for 2017, which was to serve more customers more often. Notably, we more than tripled, as reported, net income in the quarter with reported net income for the full year more than doubling as compared to 2016. Comparable sales gained 9.1% in the fourth quarter of 2017 on top of the particularly strong growth we experienced in the prior year quarter. Our constant currency revenues grew 9%, supported by our company menu offerings.

Our customer satisfaction scores also continue to improve across the region. Strong topline growth, as well as healthy margins in the Brazil and SLAD divisions drove operating profitability at the divisional as well as consolidated levels during the quarter. Finally, the improved operating results and our successful redevelopment plan has increased net income in the quarter to $62.7 million.

On a full year basis, we achieved comparable sales growth of 10.6% and dollar revenue growth of 11.9%. Consolidated adjusted EBITDA expanded by 18.6%, which led to a 50 basis point margin expansion in 2017. The improvement in our results is a testament to a strategic plan we initiated three years ago, to drive topline growth, capture efficiencies in our restaurant operations, streamline our cost structure, and reduce our debt levels.

Although I'm very pleased with our progress so far, there is more work to be done to continue to capture the tremendous potential of the McDonald's brand in the region. We're leveraging our leading market share, size, and scale to capture the opportunity in front of us. We ended 2017 with more than kind of experience of the future restaurants. We also opened 50 new restaurants, which was at the top end of our guidance for the year.

Thanks to the disciplined execution of our strategy over the last few years, we are leaner, more efficient, and have a stronger balance sheet. We have built a sizable cash balance, with strong operating cash generation as well as funds from our asset monetization modification initiatives. Importantly, we are accelerating our investment plan, which includes adding more restaurant openings and upgrading existing restaurants with EOTF concepts in some of our main markets over the coming years.

Last year, we announced our 2017-2019 growth plan, which was aligned with the minimum commitments that we made to McDonald's Corporation. Strategically, our plan was to open a minimum of 180 new restaurants, reinvest at least $292 million in our existing restaurant base, and invest a total amount of $500 million in CapEx, to be funded with cash from operations. We have mounted a significant cash balance, and are ahead of schedule on our plans of the current three-year period.

As a result, I am very happy to tell you that we are revising our targets to open at least 200 new restaurants with increased goal in primarily to building additional freestanding units in Brazil. We invest at least $390 million in existing restaurants to accelerate the deployment of EOTF. And, invest around $650 million in total tactics to, among other things, further support the acceleration of our UTF rollout.

So, specifically for 2018, we plan to open between 65 and 70 new restaurants and invest between $200-230 million in total tactics. We plan to fully fund our reinvestment plans with currently available cash as well as cash from operations. In other words, we do not expect to increase gross debt to attend these new targets.

Additionally, management recommended on March 20, 2018, our board of directors approved the assumption of dividend payments. For 2018, the company will pay a dividend of $0.10 per share to all Class A and Class B shareholders in two equal installments of $0.05 per share on April 5, 2018 and October 5, 2018. The dividend will be paid to shareholders of record as of April 2, 2018 and October 2, 2018 respectively.

As we look forward, I am confident that we have the right strategy to leverage our strong restaurant portfolio, locate new menu items, and be able to continue on the path to sustainable growth and significant shareholder creation.

I will now hand the call over to Marcelo for a review of the key drivers of fourth quarter topline results.

Marcelo Rabach -- Chief Operating Officer

Thank you, Sergio. Please turn to Slide 3. As Dan mentioned, all of my comments on our consolidated and current divisional results exclude Venezuela. The momentum we saw earlier in the year continued into the fourth quarter, resulting in strong sales performance, even on top of the particularly solid final quarter in 2016. Throughout 2017, our guests responded to the company value that we offered at every tier of our menu boards. We have also worked hard to revolutionize our service culture to enhance our second-to-none restaurant experience. As a result of these efforts, we generated restaurant volume growth in each quarter of the year.

Please turn to Slide 4 for more detail on our divisional results. In Brazil, our consumption environment in 2017 improved over prior years. GDP rates fell short of earnings releases forecast, but recent consumption grew quarter-over-quarter for the final nine months of the year. With this improved backdrop, our advances in elevating the customer experience, and strong marketing activities, we were able to drive slowly revenue growth. Reported revenues grew 6.6%, supported by constant currency growth of 5.1% and 1.4% year-over-year average appreciation of the Brazilian real.

As was the case throughout 2017, our constant currency revenue growth was reduced by refranchising as our company operated sales are replaced by the rental income that we'll receive from our franchisees. For the quarter, total systemwide sales grew 9.2% in constant currency. The Brazil division's comparable sales grew faster than the average for the members of the Brazilian Food Service Institute in both the fourth quarter and full year 2017, expanding our leading market share position.

Our balanced approach to growth led to 6.7% higher comparable sales versus the prior year quarter. Comparable sales benefited from a favorable shift in mix as well as our fourth consecutive quarter of positive traffic in Brazil.

Moving to Slide 5, revenues increased 8.7% year-over-year, supported by constant currency growth of 7.6% and 4% year-over-year average appreciation of the Mexican peso. The combination of increasing traffic across all the divisions' markets, combined with a favorable shift in mix, resulted in 7.2% increase in comparable sales. We are particularly pleased with the results that we are achieving in Mexico. Volumes grew in each quarter of the year and comparable sales grew significantly above inflation. Our new affordability platform, innovative marketing, visional initiatives, as well as our focus on delivering a better guest experience are driving the improved performance.

Please turn to Slide 6. In Argentina, we saw some deceleration in economic activity in the fourth quarter, as well as a 14% depreciation of the Argentinian peso versus the prior year quarter. However, this did not have a significant impact on Argentinian consumption, which continued to increase to the end of the year and fueled our results in flat. Reported revenue for the division increased 11.3%, or 20.2% in constant currency. The division's comparable sales rose by 20.5% due to both a favorable shift in mix and restaurant traffic growth.

Please turn to Slide 7. During the fourth quarter, the Caribbean division's revenues grew 2.1%, primarily as a result of positive currency translation. While results in the rest of the division, particularly Columbia and the French West Indies, remain strong. The effect from the hurricanes in Puerto Rico and the US Virgin Islands impacted traffic in the fourth quarter. Despite an improvement in mix, comparable sales declined 3.5%.

As you can see on Slide 8, for full year 2017, we opened 50 new restaurants, which was at the top end of our guidance for the year. Most openings took place in Brazil, which remains the focus of additions to our footprint. We ended the year with 2,188 restaurants, which included more than 120 EOTF locations. We also added 223 dessert centers, bringing the total to 2,877. McCafes totaled 316 as of December 31, 2017.

Across the region, we are prioritizing the highest impact initiatives that are the most appealing for our customers. Our redesigned affordability platform, with a wide selection of core products at good prices, is proving a powerful draw for both our most loyal customers, as well as a key driver for converting our occasional customers into more frequent visitors. We are very pleased that overall customer satisfaction scores, as measured by both internal and external sources, are on the rise throughout the region.

These metrics are telling us that our employees have truly embraced the Cooltura de Servicio program and are bringing their energy and passion to their interactions with our customers. Mariano will now take you through a discussion of our adjusted EBITDA and key balance sheet metrics.

Mariano Tannenbaum -- Chief Financial Officer

Thanks, Marcelo. Please turn to Slide 9. As Sergio mentioned, we delivered strong results in 2017. Our adjusted EBITDA margins for the fourth quarter and the full year were our highest in 2011 despite the increase in our royalty fees. We also achieved the main targets of our three-year plan in terms of margin expansion, G&A reduction, and balance sheet optimization.

Please turn to Slide 10. As you can see, our adjusted EBITDA increased 6.3%, or $5.3 million, versus the prior year quarter. Brazilian and SLAD profitability expanded. NOLAD was essentially flat and the Caribbean division was lower in the quarter. Our adjusted EBITDA margin was essentially flat in the quarter. Operating and G&A leverage were offset by the higher royalty fee as well as higher franchisee occupancy expenses as a percentage of revenues.

Moving to Brazil, the adjusted EBITA grew a robust 24% and margin expanded by 270 basis points to 19.4%. We achieved these results by taking a balanced approach to growing topline without sacrificing gross margins. Notably, we reduced our food and paper costs as a percentage of sales. In addition, we achieved both G&A and other operating income leverage in the quarter. These efficiencies more than offset higher labor costs, occupancy, and other expenses.

During the quarter, we also received growth support from McDonald's corporation, which partially reduced the royalty fee increase in Brazil. For NOLAD, adjusted EBITDA margin contracted 90 basis points to 9.9%, primarily due to higher royalty fees. In SLAD, adjusted EBITDA expanded by 3.9% versus the prior year quarter. The 70 basis point margin contraction came mainly from the higher royalty fees. The SLAD division also received growth support from McDonald's Corporation in the quarter.

The Caribbean division saw it's adjusted EBITDA margin contract 40 basis points to 5.4 %, mainly due to higher food and paper costs and royalty fees, which were partly offset by efficiencies in payroll costs, occupancy, other operating expenses, and G&A expenses as a percentage of revenues. As a reminder, we had sufficient insurance to cover the property damage and business interruption losses suffered from hurricanes Irma and Maria in Puerto Rico and the US Virgin Islands.

As you have already heard, we have explained our consolidated and Caribbean division results, excluding Venezuela. Our 2017 reported results reflected the materially positive impact from the uneven relationship between Venezuela's high inflation and less substantial exchange rate evaluation. Recent evaluations generated a significant noncash negative accounting impact, which will be reflected in the company's first quarter of 2018 consolidated results.

Given the ongoing volatile nature of the situation in Venezuela, and its noncash accounting impact, the discussion of the company's performance -- we continue to focus on consolidated results, excluding Venezuela.

Turning to Slide 11, non-operating results reflected a noncash $4.2 million foreign currency exchange gain versus a noncash gain of $3.5 million last year. Net interest expense remained stable year-over-year at $13.9 million in the quarter. Moving to the bottom line, in this quarter, we generated $69.3 million of net income compared to $21.2 million in the same period last year. This reflects higher year-over-year operating results combined with a net positive variance below the operating line.

On Slide 12, you can see that we continued to strengthen our balance sheet during the quarter. As of December 31, 2017, cash and equivalents were $328.1 million and our net leverage ratio was 1.0x adjusted EBITDA. We continue balancing the FX exposure of our long-term debt. As of the end of December, the FX exposure of our long-term debt stood at approximately 50% US dollars and 50% Brazilian reals.

Finally, we are very pleased with the strong results we have delivered this year, focusing on sustainable topline growth drivers to support operating leverage and, more importantly, increased cash flow generation. As Sergio noted, with our solid cash flow generation and healthy balance sheet, we are well positioned to accelerate our expansion and reinvestment plans, and continue on this sustainable path to growth.

I will now hand the call back to Sergio.

Sergio Daniel Alonso -- Chief Executive Officer

Thank you, Mariano. Please turn to Slide 13. Looking back over the last three years, we had to contend with a deeper than anticipated recession in our key markets as well as the more recent natural disasters. Despite these challenges, we substantially met the goals we set for ourselves through our focused execution of our strategic plan. One of our most important achievements is attracting more customers more often to our restaurants by continuing to offer compelling value and great food, rolling out Experience of the Future, and changing our service culture. We're looking to build on 2017's four consecutive quarters of restaurant traffic growth and strong comparable sales performance.

As the clear market leader in most of our major markets, we're also taking a leadership role in the industry when it comes to being socially and environmentally responsible. We're aligned with the announcement you have seen recently from McDonald's Corporation with respect to packaging and recycling, kids' nutrition, as well as yesterday's announcement on climate change.

Arcos Dorados is a leader in the effort to part of the solution to youth unemployment in our region. In 2017, many of our markets partnered with local NGOs to raise funds during our Gran Dia. These successful campaigns drove strong results, allowing us to continue backing Ronald McDonald Health Charities as well as support young people through our new NGO partnerships.

...

So, thank you for your attention. I would now like to open the call to questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions]. The first question comes from Robert Ford with Bank of America Merrill Lynch. Please go ahead.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Thank you, and good morning, everybody. Congratulations for the traffic and mix improvements across the markets. I was hoping you could focus a little bit, or provide some detail, on the other income line. It's a big number. It's $23.3 million in the fourth quarter. In the press release, your reference refranchising revenues, tax credits, growth support -- the language suggests that there could also be a tax charge in there in the period. Are there other charges?

And, from a cash flow perspective, there's a reference to $21.8 million in asset monetization, but I'm not sure if any of that is in the other income line. Further on that theme, if you could just give us a sense for what your expectations are in terms of other income over the foreseeable future. Thank you.

Sergio Daniel Alonso -- Chief Executive Officer

I'll pass it to Mariano for the answer.

Mariano Tannenbaum -- Chief Financial Officer

Bob, as we mentioned in pervious calls, the redevelopment process actually -- we are not proceeding with that process in 2018. We have seen results in the fourth quarter '17 in the income statement of $35.6 million. Actually, $17.3 million of that was cash. Regarding the tax credit, as we also have mentioned, the redevelopment process is efficient from a tax perspective for us. So, going to the part of your question of looking forward, we are not expecting to see more redevelopment proceed in the near future.

Refranchising -- we're taking that as a normal part of our business. So, you will see also refranchising proceed as we see the opportunity in 2018. Basically, I think that would answer you question.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Mariano, I'm trying to understand how you get to the $23.3 million in other income. You mentioned that there was $35.6 million in redevelopment income in the fourth quarter, of that $17.3 was cash. But then, how do I get to $23.3. There is also tax credits and growth support in that line item, so there must be charges as well.

Mariano Tannenbaum -- Chief Financial Officer

Yes. The growth support is not in that line. The growth support is expressed in the service fee line. It's not part of that. In the operating income, yes. We operate in 20 different markets, so we have different charges in that line. We can reconcile that for you, if you want. The positive number would be the redevelopment. And, of course, we have impairment in the financial statements as well for operations in the market. So, we can give you a full reconciliation of that line.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Operator

The next question comes from Ravi Jain with HSBC. Please go ahead.

Ravi Jain -- HSBC -- Analyst

Good morning. I had a question on the EOTF. It's now in 120 restaurants. Could you give us some color on the initial impact you're seeing on the sales line from this initiative? On that team, could you give us an update on your plan? How do you expect to roll out the EOTF in all of your restaurants? Should we take the increase in CapEx in your existing restaurants as a sign that you're going to activate the EOTF? Could you give us some guidance and color on that, please?

Sergio Daniel Alonso -- Chief Executive Officer

Sure. We started the EOTF rollout last year. Back then, the idea was first to develop different legal packages with the need of these legal packages to be developed locally. That is due to the cost control and minimizing the exposure to FX and other external factors. Second, we opened the first one in Argentina at the end of 2016, and then Brazil was started. We had 120 at the end of 2017, but we continue with 150 as of today. This process obviously will continue. As we referred previously, we're focusing our efforts in Brazil mostly. Around 70% of the restaurants we will deploy in this period, this cycle of 2017-2019, will be in Brazil. Argentina and Uruguay are following.

The average cost that we're expecting is not significantly higher than the one we use to include when we were doing the traditional -- the previous restaurant. Keep in mind, this is pretty much a standard process that is going through all McDonald's systems. It's not something we're creating for ourselves. We're bringing in all of the digital package through the change in legal in the restaurants.

The results we're getting so far are also in line with what is found in McDonald's systems -- in the mid-single digits. We're not upset. We have to say that only one year ago we had just a handful of restaurants, so it's very early to say what is going to be the full impact of the rollout of EOTF throughout the company. But, the reality is, we're focused on bringing it out in Brazil and then Argentina and Uruguay for this 2017-2019 cycle. Of course, we're doing some other things -- basically at the divisional level -- to get the company ready for continued deployment of EOTF in 2020 and beyond.

Marcelo Rabach -- Chief Operating Officer

I would like to add a couple of points to Sergio's answer. First of all, one of the key elements in order to keep the costs pretty much at the same level that we had for the corporative of the previous franchise process is that we are taking advantage of scale, seeing as we are rolling out this in a very aggressive manner in countries like Brazil and Argentina. We are leveraging our scale. At the same time, we are leveraging all the investment with our Cooltura de Servicio program, where we are trying to make a big differentiation between us and the rest of the QSR players in our region, through our people.

I think the kinds of results we're seeing in volumes are validating that we are in the right path in order to differentiate us and obtain a sustainable growth in terms of volumes, sales, and profitability.

Ravi Jain -- HSBC -- Analyst

Thank you. That's helpful. Just to clarify, did you mention that it was 70% of all restaurants would be EOTF, or would it be 70% of the Brazilian and Argentinian restaurants would be EOTF by 2019?

Sergio Daniel Alonso -- Chief Executive Officer

70% of Brazilian restaurants will be EOTF by the end of 2019.

Ravi Jain -- HSBC -- Analyst

Got it. Thank you.

Operator

[Operator instructions] The next question comes from Robert Schweich with RMB Capital. Please go ahead.

Robert Schweich -- RMB Capital -- Analyst

Good morning. I'm very pleased to see that you've established a dividend. I have several questions. What do you think other operating income might run in 2018 since it was a total of $68 million in 2017, and a very small number in 2016, before you began the redevelopment? Second, could you please tell us the effective royalty fees for 2017, 2018, and 2019 -- the royalty fees you pay McDonald's? Finally, what do you think your store closings will be in 2018?

Sergio Daniel Alonso -- Chief Executive Officer

I will pass it to Mariano for the first question and then I'll take the royalty one.

Mariano Tannenbaum -- Chief Financial Officer

If you follow our net income in 2017, it was impacted by two main reasons. First, our EBITDA 2017 compared to 2016 moved considerably. So, there is an operating part of that EBITDA that translates into a much better net income. Then, we have the redevelopment piece that also is contributing to our net income results. So, you know that we don't give guidance on our EBITDA, but we already mentioned that we are not going to have the redevelopment proceed that we had in the past couple of years. So, next year, we should expect a net income more related to our growth in EBITDA than to one of developments like the one I mentioned before.

Sergio Daniel Alonso -- Chief Executive Officer

For the royalty piece, the reality is on a consolidated basis, and for the fourth quarter, royalty fees as a percentage of company sales increased by 40 basis points. On a consolidated basis for the full year, royalty fees as a percentage of company sales increased by 10 basis points. That is because the step-up was effective on August 3, 2017. We only had three-plus months of step-up in royalties.

We call to your attention that we have different percentages in SLAD and Brazil compared to NOLAD and Caribbean. That is because the growth support McDonald's is providing us has been redirected to both Brazil division and SLAD division. As you mentioned before, this growth support is a fixed amount that is linked to investment that will be reflected in the royalty free line in that division where we're actually growing the resources that were Brazil and SLAD.

Operator

The next question comes from Richard Cathcart with Bradesco. Please go ahead.

Richard Cathcart -- Bradesco BBI

Good morning. I wanted to ask a question about one of the comments you made on Brazil during your opening remarks. You mentioned that you're trying to strike a decent balance between driving the topline -- sales growing mid-single digit -- but also managing to preserve gross margin. There was also a very big expansion of the EBITDA margin. What can we expect for 2018? Are you still looking to play this balance between the two, or do you think your margins have now got back to a decent enough level for you to perhaps begin focusing a little bit more on sales growth?

Sergio Daniel Alonso -- Chief Executive Officer

The momentum we had in the last quarters, since the end of 2016, continued all the way into 2017 and continues the first months of 2018. Our strategy continues to be the same, which is bringing in additional traffic in a sustainable way that will ensure that our profitability will continue to grow as we move forward. We are focused and concentrated on increasing the number of customers that we serve in our restaurants, but without compromising margins -- particularly, food and paper costs. We want to drive the business in a positive way, but also have it be sustainable.

With that said, we expect our volumes to continue to grow in the market this year and then we may get some additional gains in margin as a consequence of the increase in total volumes, as we did, by the way, in 2017.

Richard Cathcart -- Bradesco BBI

Thanks. Maybe just one follow-up about pricing in 2018. Will you be looking at toughing through inflation broadly inline with the overall index inflation of around 3-4% in Brazil in 2018?

Sergio Daniel Alonso -- Chief Executive Officer

I'm not sure I get the question. We always manage our risk rather than pricing on product mix separately. We believe that, in managing our risk, it's the safer way to drive sales up on top of volumes. As we mentioned, we were able to grow comp sales in Brazil last year as a combination of positive traffic and also positive risk check, despite of our pricing, which is slightly below inflation. That is because the marketing strategy we have led us to increase risk check on top of product mix, which we believe is the right place to be.

Richard Cathcart -- Bradesco BBI

Thanks very much.

Operator

The next question comes from Robert Ford with Bank of America Merrill Lynch.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Thank you very much. One follow-up -- in the press release you mentioned that your occupancy costs and some of the other operating expenses rose in terms of sales in Brazil. Given the low inflation, it came as a bit of a surprise. Could you tell us what's behind some of the expense pressures that you're seeing in Brazil?

Sergio Daniel Alonso -- Chief Executive Officer

Mariano?

Mariano Tannenbaum -- Chief Financial Officer

Yes. In terms of occupancy expenses, we have some franchisee occupancy costs that went up, and that's related to the higher franchisee -- the refranchising process that we are following in Brazil. That's in line with that process of refranchising rather than that our occupancy in the stores we are operating is coming up.

Sergio Daniel Alonso -- Chief Executive Officer

So, more franchise restaurants in the pervious period that will explain the increase in that line.

Mariano Tannenbaum -- Chief Financial Officer

Exactly.

Sergio Daniel Alonso -- Chief Executive Officer

It's not an increase in absolute terms. It's a consequence of the refranchising.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Okay. But, that's just passed through to the franchisee, correct?

Mariano Tannenbaum -- Chief Financial Officer

Yes.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Or, is there a delay in that and that's what causes the expense of the period?

Mariano Tannenbaum -- Chief Financial Officer

Exactly. You have two lines -- you have the income in one line and the cost in another line.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

I just want to make sure the cost isn't exceeding the income. Is that fair?

Mariano Tannenbaum -- Chief Financial Officer

Oh, no, no. That's not happening.

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Operator

The next question comes from Robert Schweich. Please go ahead.

Robert Schweich -- RMB Capital -- Analyst

I didn't hear an answer to my question about the effective royalty fee -- the increase that's going to occur in 2018. Nor did I hear an answer as to your expected number of store closings for 2018.

Sergio Daniel Alonso -- Chief Executive Officer

No. I'm not sure I get the question clearly, but as I said before --

Robert Schweich -- RMB Capital -- Analyst

Royalty fee to McDonald's. What percentage increase will it be over 2017?

Sergio Daniel Alonso -- Chief Executive Officer

On August 3, 2017, the royalty fee to McDonald's was stepped up from 5% to 6%. The effective impact in 2017 was only 10 basis points because the remaining part of August plus September, October, November, and December. The consolidated effective royalty rate was 5.2% for 2017. It's expected to be 5.7% in 2018 and 5.9% in 2019 respectively, just because we are recording the gross report that we get from McDonald's in the same line. That has partially offset the 6% royalty that we have effective in 2018 and 2019.

Robert Schweich -- RMB Capital -- Analyst

And store closing for 2018?

Sergio Daniel Alonso -- Chief Executive Officer

We don't have a number to provide you today, but the reality is that closing some restaurants is part of the normal way of running a business like ours. We have some patients where the lease expires, and we don't have the chance to renew it or we have, in one case, in one of the markets, where there's a huge bridge that's been built, so it wouldn't make sense to have a restaurant below the bridge. But, I can tell you that you should not expect any number that is out of norm compared to what happened in the years before.

Operator

The next question comes from Ravi Jain with HSBC. Please go ahead.

Ravi Jain -- HSBC -- Analyst

Thank you for the follow-up. In the South Latin American division, the same to sales was 20.5% this quarter. How does that compare to the blended inflation there? Could you give us some color on how much is traffic and are you pricing in line or below inflation in those countries? Thank you.

Marcelo Rabach -- Chief Operating Officer

Those comparable sales were above the blended inflation in that division. That was a result of pricing going a little bit behind inflation, but in SLAD we had the same kind of shift in mix -- a favorable one to more premium products that we have in our country. So, that's why the combination of the additional traffic and a better mix from the comp sales above inflation. That happened not only in Argentina, which is the main country in that division, but in most of the countries of SLAD and most of the countries of the company.

Ravi Jain -- HSBC -- Analyst

Thanks. Would the blended inflation be mid-teens, would you say?

Sergio Daniel Alonso -- Chief Executive Officer

No. The blended inflation is around 22-22%.

Ravi Jain -- HSBC -- Analyst

Even in the fourth quarter.

Sergio Daniel Alonso -- Chief Executive Officer

In Argentina. We're talking about Argentina, right?

Ravi Jain -- HSBC -- Analyst

Oh, no, no. I was mentioning about the South Latin division. What would be the blended --

Sergio Daniel Alonso -- Chief Executive Officer

19% for the division.

Ravi Jain -- HSBC -- Analyst

Thank you so much.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Sergio Alonso for any closing remarks.

Sergio Daniel Alonso -- Chief Executive Officer

Sure. Thank you for your questions and your attention today. I have one additional announcement to make. Unfortunately, due to the weather conditions in the Northeast United States, we recently learned that our flight from Buenos Aires to New York tonight has been cancelled. So, we're now in the process of rescheduling our Investor Day. That will happen in the first half of April and we'll be announcing the new date very shortly. We apologize for any inconvenience that this change could generate, but it was beyond our control.

In the meantime, the team always remains available to meet with you and to answer any questions you may have. Thank you very much. Enjoy the rest of your day.

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Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 50 minutes

Call participants:

Daniel Schleiniger -- VP Corporate Communications & IR

Sergio Daniel Alonso -- Chief Executive Officer

Marcelo Rabach -- Chief Operating Officer

Mariano Tannenbaum -- Chief Financial Officer

Robert Schweich -- RMB Capital -- Analyst

Robert Ford -- Bank of America Merrill Lynch -- Analyst

Richard Cathcart -- Bradesco BBI

Ravi Jain -- HSBC -- Analyst

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