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ARCO Arcos Dorados


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from ________________ to ________________

Commission file number: 001-35129
Arcos Dorados Holdings Inc.
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Dr. Luis Bonavita 1294, Office 501
Montevideo, Uruguay, 11300 WTC Free Zone
(Address of principal executive offices)
Juan David Bastidas
Chief Legal Officer
Arcos Dorados Holdings Inc.
Dr. Luis Bonavita 1294, 5th floor, Office 501, WTC Free Zone
Montevideo, Uruguay 11300
Telephone: +598 2626-3000
Fax: +598 2626-3018
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Class A shares, no par value ARCO New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of the period covered by the annual report.
Class A shares: 124,070,029
Class B shares: 80,000,000
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No x

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o




Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerxAccelerated filerNon-accelerated filer  Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAPxInternational Financial Reporting Standards as issued by the International Accounting Standards Board  oOther  o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
  o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x








ARCOS DORADOS HOLDINGS INC.
TABLE OF CONTENTS
 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
All references to “U.S. dollars,” “dollars,” “U.S.$” or “$” are to the U.S. dollar. All references to “Argentine pesos” or “ARS$” are to the Argentine peso. All references to “Brazilian reais” or “R$” are to the Brazilian real. All references to “Mexican pesos” or “Ps.” are to the Mexican peso. All references to “Venezuelan bolívares” or “Bs.” are to the Venezuelan bolívar, the legal currency of Venezuela. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls” for information regarding exchange rates for the Argentine, Brazilian and Mexican currencies.
Definitions
In this annual report, unless the context otherwise requires, all references to “Arcos Dorados,” the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Arcos Dorados Holdings Inc., together with its subsidiaries. All references to “systemwide” refer only to the system of McDonald’s-branded restaurants operated by us or our franchisees in 20 countries and territories in Latin America and the Caribbean, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago, Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela, which we refer to as the “Territories,” and do not refer to the system of McDonald’s-branded restaurants operated by McDonald’s Corporation, its affiliates or its franchisees (other than us).
We own our McDonald’s franchise rights pursuant to a Master Franchise Agreement for all of the Territories, except Brazil, which we refer to as the MFA, and a separate, but substantially identical, Master Franchise Agreement for Brazil, which we refer to as the Brazilian MFA. We refer to the MFA and the Brazilian MFA, as amended or otherwise modified to date, collectively as the MFAs. We commenced operations on August 3, 2007, as a result of our purchase of McDonald’s operations and real estate in the Territories (except for Trinidad and Tobago), which we refer to collectively as the “McDonald’s LatAm” business, and the acquisition of McDonald’s franchise rights pursuant to the MFAs, which together with the purchase of the McDonald’s LatAm business, we refer to as the “Acquisition.”
Financial Statements
We maintain our books and records in U.S. dollars and prepare our financial statements in accordance with accounting principles and standards generally accepted in the United States, or “U.S. GAAP.”
The financial information contained in this annual report includes our consolidated financial statements at December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, which have been audited by Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, as stated in their report included elsewhere in this annual report.
We were incorporated on December 9, 2010 as a direct, wholly owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. The merger was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interest and the consolidated financial statements reflect the historical consolidated operations of Arcos Dorados Limited as if the reorganization structure had existed since Arcos Dorados Limited was incorporated in July 2006.
Our fiscal year ends December 31. References in this annual report to a fiscal year, such as “fiscal year 2019,” relate to our fiscal year ended on December 31 of that calendar year.
Operating Data
Our operating segments are composed of four geographic regions of operation: (i) the South Latin American division, or “SLAD,” which is comprised of Argentina, Chile, Ecuador, Peru and Uruguay, (ii) the Caribbean division, which is comprised of Aruba, Colombia, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela, (iii) Brazil and (iv) the North Latin American division, or “NOLAD,” which is comprised of Costa Rica, Mexico and Panama.

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We operate McDonald’s-branded restaurants under two different operating formats: those directly operated by us, or “Company-operated” restaurants, and those operated by franchisees, or “franchised” restaurants. All references to “restaurants” are to our freestanding, food court, in-store and mall store restaurants and do not refer to our McCafé locations or Dessert Centers. Systemwide data represents measures for both our Company-operated restaurants and our franchised restaurants.
We are the majority stakeholder in two joint ventures with third parties that collectively own 15 restaurants in Argentina and Chile. We consider these restaurants to be Company-operated restaurants. We also have granted developmental licenses to 11 restaurants. Developmental licensees own or lease the land and buildings on which their restaurants are located and pay a franchise fee to us in addition to the continuing franchise fee due to McDonald’s. We consider these restaurants to be franchised restaurants.
Market Share and Other Information
Market data and certain industry forecast data used in this annual report were obtained from internal reports and studies, where appropriate, as well as estimates, market research, publicly available information (including information available from the United States Securities and Exchange Commission, or the SEC, website) and industry publications, including the United Nations Economic Commission for Latin America and the Caribbean and the CIA World Factbook. Industry publications generally state that the information they include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal reports and studies, estimates and market research, which we believe to be reliable and accurately extracted by us for use in this annual report, have not been independently verified. However, we believe such data is accurate and agree that we are responsible for the accurate extraction of such information from such sources and its correct reproduction in this annual report.
Basis of Consolidation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Rounding
We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
FORWARD-LOOKING STATEMENTS
This annual report contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.
Forward-looking statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified in “Item 3. Key Information—D. Risk Factors” in this annual report. These risks and uncertainties include factors relating to:
effects of COVID-19 pandemic and private or government measures that could negatively affect the global economy and our markets’ economy and business;

changes in our liquidity or the availability of lines of credit and other sources of financing, including as a result of the COVID-19 pandemic;

general economic, political, demographic and business conditions in Latin America and the Caribbean;

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fluctuations in inflation and exchange rates in Latin America and the Caribbean;
our ability to implement our growth strategy;
the success of operating initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
our ability to compete and conduct our business in the future;
changes in consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, french fries or other foods or the effects of health pandemics and food-borne illnesses, such as COVID-19, “mad cow” disease and avian influenza or “bird flu,” and changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home;
the availability, location and lease terms for restaurant development;
our intention to focus on our restaurant reimaging plan;
our franchisees, including their business and financial viability and the timely payment of our franchisees’ obligations due to us and to McDonald’s;
our ability to comply with the requirements of the MFAs, including McDonald’s standards;
our decision to own and operate restaurants or to operate under franchise agreements;
the availability of qualified restaurant personnel for us and for our franchisees, and the ability to retain such personnel;
changes in commodity costs, labor, supply, fuel, utilities, distribution and other operating costs;
changes in labor laws;
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to our restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
changes in government regulation;
material changes in tax legislation;
other factors that may affect our financial condition, liquidity and results of operations; and
other risk factors discussed under “Item 3. Key Information—D. Risk Factors.”
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
ENFORCEMENT OF JUDGMENTS
We are incorporated under the laws of the British Virgin Islands with limited liability. We are incorporated in the British Virgin Islands because of certain benefits associated with being a British Virgin Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions, and the availability of professional and support services. However, the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, British Virgin Islands companies may not have standing to sue before the federal courts of the United States.

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A majority of our directors and officers, as well as certain of the experts named herein, reside outside of the United States. A substantial portion of our assets and several of such directors, officers and experts are located principally in Argentina, Brazil and Uruguay. As a result, it may not be possible for investors to effect service of process outside Argentina, Brazil and Uruguay upon such directors or officers, or to enforce against us or such parties in courts outside Argentina, Brazil and Uruguay judgments predicated solely upon the civil liability provisions of the federal securities laws of the United States or other non-Argentine, Brazilian or Uruguayan regulations, as applicable. In addition, local counsel to the Company have advised that there is doubt as to whether the courts of Argentina, Brazil or Uruguay would enforce in all respects, to the same extent and in as timely a manner as a U.S. court or non-Argentine, Brazilian or Uruguayan court, an original action predicated solely upon the civil liability provisions of the U.S. federal securities laws or other non-Argentine, Brazilian or Uruguayan regulations, as applicable; and that the enforceability in Argentine, Brazilian or Uruguayan courts of judgments of U.S. courts or non-Argentine, Brazilian or Uruguayan courts predicated upon the civil liability provisions of the U.S. federal securities laws or other non-Argentine, Brazilian or Uruguayan regulations, as applicable, will be subject to compliance with certain requirements under Argentine, Brazilian or Uruguayan law, including the condition that any such judgment does not violate Argentine, Brazilian or Uruguayan public policy.
We have been advised by Maples and Calder, our counsel as to British Virgin Islands law, that the United States and the British Virgin Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be automatically enforceable in the British Virgin Islands. We have been advised by Maples and Calder that a final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the British Virgin Islands under British Virgin Islands common law.


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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A.    Directors and Senior Management
Not applicable.
B.    Advisers
Not applicable.
C.    Auditors
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A.    Offer Statistics
Not applicable.
B.    Method and Expected Timetable
Not applicable.
ITEM 3. KEY INFORMATION
A.    Selected Financial Data
The selected balance sheet data as of December 31, 2019 and 2018 and the income statement data for the years ended December 31, 2019, 2018 and 2017 of Arcos Dorados Holdings Inc. are derived from the consolidated financial statements included elsewhere in this annual report, which have been audited by Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global. The selected balance sheet data as of December 31, 2017, 2016 and 2015 and the income statement data for the years ended December 31, 2016 and 2015 of Arcos Dorados Holdings Inc. are derived from consolidated financial statements audited by Pistrelli, Henry Martin y Asociados S.R.L., which are not included herein.
Our operating segments are composed of four geographic regions of operation: (i) the South Latin American division, or “SLAD,” which is comprised of Argentina, Chile, Ecuador, Peru and Uruguay, (ii) the Caribbean division which is comprised of Aruba, Colombia, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas and Venezuela (iii) Brazil and (iv) the North Latin American division, or “NOLAD,” which is comprised of Costa Rica, Mexico and Panama.
We were incorporated on December 9, 2010 as a direct, wholly-owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. The merger was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interest and the consolidated financial statements reflect the historical consolidated operations of Arcos Dorados Limited as if the reorganization structure had existed since Arcos Dorados Limited was incorporated in July 2006. We did not commence operations until the Acquisition on August 3, 2007.
We maintain our books and records in U.S. dollars and prepare our consolidated financial statements in accordance with U.S. GAAP. This financial information should be read in conjunction with “Presentation of Financial and Other Information,” “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, including the notes thereto, included elsewhere in this annual report.




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  For the Years Ended December 31,
  2019 2018 2017 2016 2015
  (in thousands of U.S. dollars, except for per share data)
Income Statement Data:          
Sales by Company-operated restaurants $2,812,287  $2,932,609  $3,162,256  $2,803,334  $2,930,379 
Revenues from franchised restaurants 146,790  148,962  157,269  125,296  122,361 
Total revenues 2,959,077  3,081,571  3,319,525  2,928,630  3,052,740 
Company-operated restaurant expenses:          
Food and paper (1,007,584)  (1,030,499)  (1,110,240)  (1,012,976)  (1,037,487) 
Payroll and employee benefits (567,653)  (607,793)  (683,954)  (607,082)  (660,773) 
Occupancy and other operating (799,633)  (803,539)  (842,519)  (752,428)  (793,622) 
Royalty fees (155,388)  (157,886)  (163,954)  (142,777)  (149,089) 
Franchised restaurants—occupancy expenses (61,278)  (67,927)  (69,836)  (55,098)  (54,242) 
General and administrative expenses (212,515)  (229,324)  (244,664)  (221,075)  (270,680) 
Other operating income (expenses), net 4,910  (61,145)  68,577  41,386  6,560 
Total operating costs and expenses (2,799,141)  (2,958,113)  (3,046,590)  (2,750,050)  (2,959,333) 
Operating income 159,936  123,458  272,935  178,580  93,407 
Net interest expense (52,079)  (52,868)  (68,357)  (66,880)  (64,407) 
Gain (loss) from derivative instruments 439  (565)  (7,065)  (3,065)  (2,894) 
Foreign currency exchange results 12,754  14,874  (14,265)  32,354  (54,032) 
Other non-operating (expenses) income, net (2,097)  270  (435)  (2,360)  (627) 
Income (loss) before income taxes 118,953  85,169  182,813  138,629  (28,553) 
Income tax expense (38,837)  (48,136)  (53,314)  (59,641)  (22,816) 
Net income (loss) 80,116  37,033  129,499  78,988  (51,369) 
Less: Net income attributable to non-controlling interests (220)  (186)  (333)  (178)  (264) 
Net income (loss) attributable to Arcos Dorados Holdings Inc. 79,896  36,847  129,166  78,810  (51,633) 
Earnings (Loss) per share:          
Basic net income (loss) per common share attributable to Arcos Dorados $0.39  $0.18  $0.61  $0.37  $(0.25) 
Diluted net income (loss) per common share attributable to Arcos Dorados $0.39  $0.18  $0.61  $0.37  $(0.25) 

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  As of December 31, 
  2019 2018 2017 2016 2015 
  (in thousands of U.S. dollars, except for share data) 
Balance Sheet Data:           
Cash and cash equivalent $121,880  $197,282  $308,491  $194,803  $112,519  
Total current assets 405,368  464,562  653,037  445,190  378,996  
Property and equipment, net 960,986  856,192  890,736  847,966  833,357  
Total non-current assets 2,152,317  1,113,477  1,150,706  1,059,863  1,024,206  
Total assets 2,557,685  1,578,039  1,803,743  1,505,053  1,403,202  
Accounts payable 259,577  242,455  303,452  217,914  187,685  
Short-term debt and current portion of long-term debt 16,529  4,192  4,359  28,099  163,740  
Total current liabilities 595,447  493,312  605,583  548,308  577,314  
Long-term debt, excluding current portion 623,575  626,424  629,142  551,580  491,327  
Total non-current liabilities 1,540,672  691,968  702,018  605,169  538,998  
Total liabilities 2,136,119  1,185,280  1,307,601  1,153,477  1,116,312  
Total common stock 516,119  512,760  509,647  506,884  504,772  
Total equity 421,566  392,759  496,142  351,576  286,890  
Total liabilities and equity 2,557,685  1,578,039  1,803,743  1,505,053  1,403,202  
Shares outstanding 204,070,029  205,232,247  211,072,508  210,711,224  210,538,896  

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 For the Years Ended December 31,
  2019 2018 2017 2016 2015
  (in thousands of U.S. dollars, except percentages)
Other Data:          
Total Revenues          
Brazil $1,385,566  $1,345,453  $1,496,573
  $1,333,237
  $1,361,989
 
Caribbean division(1) 399,251  483,743  474,822   409,671   398,144  
NOLAD 431,266  406,848  386,874   363,965   367,364  
SLAD 742,994  845,527  961,256   821,757   925,243  
Total 2,959,077  3,081,571  3,319,525   2,928,630   3,052,740  
Operating Income          
Brazil $164,342  $159,511  $160,608
  $122,636
  $116,820
 
Caribbean division(1) (1,100)  (49,567)  1,538   (12,392)   (40,102)  
NOLAD 16,539  7,726  99,152   45,145   8,710  
SLAD 42,410  53,777  71,718   66,359   78,022  
Corporate and others and purchase price allocation (62,255)  (47,989)  (60,081)   (43,168)   (70,043)  
Total 159,936  123,458  272,935   178,580   93,407  
Operating Margin(2)          
Brazil 11.9% 11.9% 10.7 % 9.2 % 8.6 %
Caribbean division(1) (0.3)  (10.2)  0.3   (3.0)   (10.1)  
NOLAD 3.8  1.9  25.6   12.4   2.4  
SLAD 5.7  6.4  7.5   8.1   8.4  
Total 5.4  4.0  8.2   6.1   3.1  
Adjusted EBITDA(3)          
Brazil $227,844  $218,391  $218,172
  $168,076
  $174,102
 
Caribbean division(1) 24,955  (8,281)  40,844   18,049   2,059  
NOLAD 39,027  32,313  33,717   36,288   31,424  
SLAD 63,120  73,670  87,083   76,327   100,718  
Corporate and others (63,171)  (58,096)  (74,879)   (60,295)   (78,132)  
Total 291,775  257,997  304,937   238,445   230,171  
Adjusted EBITDA Margin(4)          
Brazil 16.4% 16.2% 14.6 % 12.6 % 12.8 %
Caribbean division(1) 6.2  (1.7)  8.6   4.4   0.5  
NOLAD 9.0  7.9  8.7   10.0   8.6  
SLAD 8.5  8.7  9.1   9.3   10.9  
Total 9.9  8.4  9.2   8.1   7.5  
Other Financial Data:          
Working capital(5)  (190,079)  $(28,750)  $47,454
  $(103,118)
  $(198,318)
 
Capital expenditures(6) 267,893  197,041  175,636   92,282   92,055  
Dividends declared per common share $0.11  $0.10  $
  $
  $
 


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  As of December 31,
  2019 2018 2017 2016 2015
Number of systemwide restaurants 2,293  2,223  2,188  2,156  2,141 
Brazil 1,023  968  929  902  883 
Caribbean division 336  337  350  353  356 
NOLAD 530  524  519  517  518 
SLAD 404  394  390  384  384 
Number of Company-operated restaurants 1,580  1,540  1,546  1,553  1,588 
Brazil 612  584  579  584  615 
Caribbean division 251  251  263  266  267 
NOLAD 364  362  363  365  364 
SLAD 353  343  341  338  342 
Number of franchised restaurants 713  683  642  603  553 
Brazil 411  384  350  318  268 
Caribbean division 85  86  87  87  89 
NOLAD 166  162  156  152  154 
SLAD 51  51  49  46  42 
                
 
(1)Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. See “Item 5. Operating and Financial Review and Prospects-A. Operating Results-Foreign Currency Translation-Venezuela.”
(2)Operating margin is operating income divided by total revenues, expressed as a percentage.
(3)Adjusted EBITDA is a measure of our performance that is reviewed by our management. Adjusted EBITDA does not have a standardized meaning and, accordingly, our definition of Adjusted EBITDA may not be comparable to Adjusted EBITDA as used by other companies. Total Adjusted EBITDA is a non-GAAP measure. For our definition of Adjusted EBITDA, see “Item 5. Operating and Financial Review and Prospects-A. Operating Results-Key Business Measures.”
(4)Adjusted EBITDA margin is Adjusted EBITDA divided by total revenues, expressed as a percentage.
(5)Working capital equals current assets minus current liabilities.
(6)Includes property and equipment expenditures and purchase of restaurant businesses paid at the acquisition date.

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Presented below is the reconciliation between net income and Adjusted EBITDA on a consolidated basis:
  For the Years Ended December 31,

Consolidated Adjusted EBITDA Reconciliation
 2019 2018 2017 2016 2015
  (in thousands of U.S. dollars)
Net income (loss) attributable to Arcos Dorados Holdings Inc. $79,896
  $36,847
  $129,166
  $78,810
  $(51,633) 
Plus (Less):          
Net interest expense 52,079   52,868   68,357   66,880   64,407 
(Gain) loss from derivative instruments (439)   565   7,065   3,065   2,894 
Foreign currency exchange results (12,754)   (14,874)   14,265   (32,354)   54,032 
Other non-operating expenses (income), net 2,097   (270)   435   2,360   627 
Income tax expense 38,837   48,136   53,314   59,641   22,816 
Net income attributable to non-controlling interests 220   186   333   178   264 
Operating income 159,936   123,458   272,935   178,580   93,407 
Plus (Less):          
Items excluded from computation that affect operating income:          
Depreciation and amortization 123,218   105,800   99,382   92,969   110,715 
Gains from sale or insurance recovery of property and equipment

 (5,175)   (4,973)   (95,081)   (57,244)   (12,308) 
Write-offs of property and equipment 4,733   4,167   8,528   5,776   6,038 
Impairment of long-lived assets 8,790   18,950   17,564   7,697   12,343 
Impairment of goodwill 273   167   200   5,045   679 
Stock-based compensation related to the special awards in connection with the initial public offering under the 2011 Plan         ��   210 
Reorganization and optimization plan    11,003      5,341   18,346 
2008 Long-Term Incentive Plan incremental compensation from modification    (575)   1,409   281   741 
Adjusted EBITDA 291,775   257,997   304,937   238,445   230,171 
Exchange Rates and Exchange Controls
In 2019, 66.7% of our total revenues were derived from our restaurants in Brazil, Argentina and Mexico. While we maintain our books and records in U.S. dollars, our revenues are conducted in the local currency of the territories in which we operate, and as such may be affected by changes in the local exchange rate to the U.S. dollar. The exchange rates discussed in this section have been obtained from each country’s central bank. However, in most cases, for consolidation purposes, we use a foreign currency to U.S. dollar exchange rate provided by Bloomberg that differs slightly from that reported by the aforementioned central banks.
Brazil
Exchange Rates
The Brazilian real depreciated 47.0% against the U.S. dollar in 2015, and appreciated 19.4% in 2016, 1.7% in 2017, depreciated 19% in 2018, depreciated 25.5% in 2019 and depreciated 18.3% in the first quarter of 2020. As of April 24, 2020, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Brazil was R$5.65 per U.S. dollar.
Exchange Controls
Brazilian Resolution 3,568 establishes that, without prejudice to the duty of identifying customers, operations of foreign currency purchase or sale up to $3,000 or its equivalent in other currencies are not required to submit documentation relating

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to legal transactions underlying these foreign exchange operations. According to Resolution 3,568, the Central Bank of Brazil may define simplified forms to record operations of foreign currency purchases and sales of up to $3,000 or its equivalent in other currencies.
The Brazilian Monetary Council may issue further regulations in relation to foreign exchange transactions, as well as on payments and transfers of Brazilian currency between Brazilian residents and non-residents (such transfers being commonly known as the international transfer of reais), including those made through so-called non-resident accounts.
Brazilian law also imposes a tax on foreign exchange transactions, or “IOF/Exchange,” on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. As of October 7, 2014, the general IOF/Exchange rate applicable to almost all foreign currency exchange transactions was increased from zero to 0.38%, although other rates may apply in particular operations, such as the below transactions which are currently not taxed:
inflow related to transactions carried out in the Brazilian financial and capital markets, including investments in our common shares by investors which register their investment under Resolution No. 4,373;
outflow related to the return of the investment mentioned under the first bulleted item above; and
outflow related to the payment of dividends and interest on shareholders’ equity in connection with the investment mentioned under the first bulleted item above.
Notwithstanding these rates of the IOF/Exchange, in force as of the date hereof, the Minister of Finance is legally entitled to increase the rate of the IOF/Exchange to a maximum of 25% of the amount of the currency exchange transaction, but only on a prospective basis.
Although the Central Bank of Brazil has intervened occasionally to control movements in the foreign exchange rates, the exchange market may continue to be volatile as a result of capital movements or other factors, and, therefore, the Brazilian real may substantially decline or appreciate in value in relation to the U.S. dollar in the future.
Brazilian law further provides that whenever there is a significant imbalance in Brazil’s balance of payments or reasons to foresee such a significant imbalance, the Brazilian government may, and has done so in the past, impose temporary restrictions on the remittance of funds to foreign investors of the proceeds of their investments in Brazil. The likelihood that the Brazilian government would impose such restricting measures may be affected by the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole and other factors. We cannot assure you that the Central Bank will not modify its policies or that the Brazilian government will not institute restrictions or delays on cross-border remittances in respect of securities issued in the international capital markets.
Argentina
Exchange Rates
The Argentine peso depreciated 51.7% against the U.S. Dollar in 2015, 21.9% in 2016, 17.7% in 2017, 49.7% in 2018, 58.8% in 2019 and depreciated 7.7% in the first quarter of 2020. As of April 24, 2020, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Argentina was ARS$66.43 per U.S. dollar.
Exchange Controls
During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. Among other consequences, the crisis resulted in Argentina defaulting on its foreign debt obligations and the introduction of numerous changes in economic policies, including currency controls that tightened restrictions on capital flows, exchange controls, an official U.S. dollar exchange and transfer restrictions that substantially limited the ability of companies to retain foreign currency or make payments abroad. These foreign exchange controls were eased in a series of measures introduced by former President Mauricio Macri’s administration starting in December 2015.
For instance, on May 19, 2017, the Central Bank of Argentina issued Communication “A” 6244, effective as of July 1, 2017, which structurally modified the exchange regulations in force, establishing a new foreign exchange regime that significantly eased the access to the exchange market (“MLC,” Mercado Libre de Cambios). This regime was in force until September 1, 2019.

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On September 1, 2019, with the purpose of strengthening the normal functioning of the economy, fostering a prudent administration of the exchange market, reducing the volatility of financial variables and containing the impact of the variations of financial flows on the real economy, the Argentine government issued Decree No. 609/2019 whereby foreign exchange controls were reinstated. The decree: (i) reinstated, originally until December 31, 2019, exporters’ obligation to repatriate and settle for Argentine pesos (through the MLC) the proceeds from exports of goods and services on the terms and conditions set forth by the Central Bank of Argentina’s implementing regulations; and (ii) authorized the Central Bank of Argentina to (a) regulate access to the foreign exchange market for the purchase of foreign currency and outward remittances; and (b) set forth regulations to avoid practices and transactions aimed to circumvent, through the use of securities and other instruments, the measures adopted through the decree. On the same date, the Central Bank of Argentina issued Communication “A” 6770, which was subsequently amended and supplemented by further Central Bank of Argentina communications. As a consequence of the reimposition of exchange controls, the spread between the official exchange rate and other exchange rates resulting implicitly from certain capital market operations usually effected to obtain U.S. dollars has broadened significantly, reaching a value of approximately 72% above the official exchange rate as of April 27, 2020.
At present, foreign exchange regulations have been consolidated in a single regulation, Communication “A” 6844, as subsequently amended and supplemented from time to time by Central Bank of Argentina’s Communications, including without limitation Communications “A” 6862, 6869, 6882 and 6915 of the Central Bank of Argentina (jointly, the “Argentine FX Regulations”). Below is a description of the main exchange control measures implemented through the aforementioned regulations:
Specific provisions for inward remittances
Obligation to repatriate and settle in Argentine pesos the proceeds from exports of services
Section 2.2 of the Argentine FX Regulations imposes on exporters the obligation to repatriate, and settle in the MLC, the proceeds from exports of services within 5 business days following payment thereof.
Sale of non-financial non-produced assets
Pursuant to section 2.3 of the Argentine FX Regulations, the proceeds in foreign currency of the sale of non-financial non-produced assets must be repatriated and settled in Argentine pesos in the MLC within 5 business days following either the perception of funds in the country or abroad, or their accreditation in foreign accounts.
External financial indebtedness
Pursuant to section 2.4 of the Argentine FX Regulations, the new regulations have reinstated the requirement to repatriate, and settle in Argentine pesos through the MLC, the proceeds of new financial indebtedness disbursed from and after September 1, 2019 as a condition for accessing the MLC to make debt service payments thereunder. The reporting of the debt under the reporting regime established by Communication “A” 6401 (as amended and restated from time to time, the “External Assets and Liabilities Reporting Regime”) is also a condition to access the MLC to repay debt services.
Additionally, section 3.3 of the Argentine FX Regulations states that the Central Bank of Argentina’s prior approval will be required to access the MLC for the prepayment of debts for imports of goods and services.
Specific Provisions Regarding Access to the Exchange Market
Residents are authorized to access the MLC for the payment of import of goods in accordance with section 10.1 of the Argentine FX Regulations. This regulation sets forth different requirements depending on whether it relates to the payment of imports of goods with customs clearance or the payments of import of goods pending customs clearance. Moreover the imports and import payments monitoring system (SEPAIMPO) has been reinstated, setting forth rules governing such monitoring process and exceptions thereof. Importers will need to appoint a financial entity in charge of monitoring compliance with the aforementioned obligations.
Likewise, the local importer must designate a local financial entity to act as a monitoring bank, which will be responsible for verifying compliance with the applicable regulations, including, among others, the liquidation of import financing and the entry of imported goods.
Prior authorization by the Central Bank of Argentina is required for access to the MLC for payments of overdue or due to payment debts for imports of goods with related companies abroad when it exceeds the equivalent of U$S 2 million per month per resident customer, as stated by section 10.3.2.5 of the Argentine FX Regulations.

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It should be noted that all outstanding debts as of August 31, 2019, either those whose maturity had operated prior to such date or those that did not have a stipulated expiration date, are considered to be overdue or due to payment debts.
Payment of services provided by non-residents
Pursuant to section 3.2 of the Argentine FX Regulations, residents may access the MLC for payment of services provided by non-residents (except to affiliates), as long as it is verified that the operation has been declared, if applicable, in the last overdue presentation of the External Assets and Liabilities Reporting.
Access to the MLC for the prepayment of debts for services requires prior authorization by the Central Bank of Argentina.
Repayment of principal and interest of imports of goods and services
Access to the foreign exchange market for the repayment of principal and interest of imports of goods and services is granted, provided that the operation has been declared, if applicable, in the last overdue presentation of the External Assets and Liabilities Reporting Regime.     
Access to the MLC for the prepayment of debts for imports of goods and services shall require prior authorization by the Central Bank of Argentina.
Other Specific Provisions
Access to the MLC by non-residents
In accordance with section 3.12 of the Argentine FX Regulations, prior approval by the Central Bank of Argentina will be required for access to the foreign exchange market by non-residents for the purchase of foreign currency, except for the following operations: (a) International organizations and institutions that perform functions of official export credit agencies, (b) diplomatic representations and consular and diplomatic personnel accredited in the country for transfers made in the exercise of their functions, (c) Representatives in the country of Courts, Authorities or Offices, Special Missions, Commissions or Bilateral Bodies established by Treaties or International Agreements, in which the Argentine Republic is part, to the extent that transfers are made in the exercise of their functions, (d) foreign transfers in the name of individuals who are beneficiaries of retirement and / or pensions paid by the ANSES, for up to the amount paid by said agency in the calendar month and to the extent that the transfer is made to a bank account owned by the beneficiary in your registered country of residence, and (e) purchase of foreign currency (in cash) by non-resident individuals for tourism and travel expenses, up to a maximum amount of U$S100 dollars, to the extent the financial entity can verify that the client has settled an amount equal or higher than the sum to be purchased within 90 days prior to the operation.
Exchanges and arbitrage. Transactions involving securities
Pursuant to section 4.2 of the Argentine FX Regulations, entities are allowed to carry out exchange and arbitrage operations with their clients in the following cases: (i) such operation is not subject to the settlement obligation in the MLC; (ii) an individual transfers funds from their local accounts in foreign currency to own bank accounts abroad, (iii) when foreign currency transfers by local central collective deposit securities for funds received in foreign currency for capital services and income from National Treasury securities, (iv) arbitration operations not originated in foreign transfers provided that such funds are debited from an account in foreign currency of the client in a local entity, and (v) may be carried out without the need to obtain prior Central Bank of Argentina approval, provided that if structured as separate transactions, these would have access to the MLC without the need of an authorization by the Central Bank of Argentina.
Securities-related Operations
As per section 4.5 of the Argentine FX Regulations, if an individual purchases securities through payment in foreign currency, the same must have been held by the client for at least 5 business days since the settlement of the transaction before their subsequent sale or transfer to another depositary. This minimum holding period shall not apply if the sale of the securities is carried out in the same jurisdiction and the settlement of the transactions is made in the same foreign currency. In all cases, the client shall be obligated to submit a sworn statement expressing that the funds shall not be used for the secondary purchase of securities within the following 5 business days.
Moreover, when a mere transfer of foreign currency deposited in a local account of a resident individual to a foreign account of the same individual is done, a sworn statement must be submitted expressing that there has not been any sale of securities with local settlement in foreign currency within the last 5 business days.
Foreign Exchange Criminal Regime
Any operation that does not comply with the provisions of the foreign exchange regulations is subject to compliance with the Foreign Exchange Criminal Regime.

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Notwithstanding the above mentioned measures adopted by the current administration, the Central Bank of Argentina and the federal government in the future may impose additional exchange controls that may further impact our ability to transfer funds abroad and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina.
Mexico
Exchange Rates
The Mexican peso depreciated 0.27% against the U.S. dollar in 2018, appreciated 4.26% in 2019 and depreciated 24.8% in the first quarter of 2020. As of April 24, 2020, the free-market exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Mexico in the Federal Official Gazette as the rate of payment of obligations denominated in non-Mexican currency payable in Mexico was Ps.24.58 per U.S. dollar.
Exchange Controls
For the last few years, the Mexican government has maintained a policy of non-intervention in the foreign exchange markets, other than conducting periodic auctions for the purchase of U.S. dollars, and has not had in effect any exchange controls (although these controls have existed and have been in effect in the past). We cannot assure you that the Mexican government will maintain its current policies with regard to the Mexican peso or that the Mexican peso will not further depreciate or appreciate significantly in the future.

B.    Capitalization and Indebtedness
Not applicable.
C.    Reasons for the Offer and Use of Proceeds
Not applicable.
D.    Risk Factors
Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our class A shares could decline, and you could lose all or part of your investment. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company or investments in Latin America and the Caribbean described below and elsewhere in this annual report.
Certain Factors Relating to Our Business
The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.
Since mid-March 2020, the continued spread of COVID-19 has disrupted our operations in all of our markets. Several countries in which we operate have declared states of emergency and ordered their citizens to shelter in place in order to stem the spread of COVID-19. As of the date of this annual report, in certain markets, including Chile, Peru, Ecuador, Martinique, Guadeloupe, French Guiana and Curaçao, we have closed all of our restaurants in accordance with government orders and restrictions. In other markets, such as Brazil, Argentina, Puerto Rico, Trinidad and Tobago and Colombia, we have taken steps to limit operations based on government guidelines or our assessment of the operating environment. These steps have included reducing hours of operation, closing dining rooms and only operating the drive-thru and/or delivery segments. There has also been an increase in unemployment in several countries as businesses close, and we expect discretionary spending by consumers to decline accordingly. As a result of the foregoing, we have experienced a significant decline in sales at our restaurants since mid-March 2020, and expect to continue to see lower sales until such time as the pandemic is brought under control and consumer behavior normalizes. We may also be forced to lower prices in response to lower demand for our products, or we may see our supply chain disrupted as our suppliers experience disruption of their operations as a result of the pandemic. In some markets, we have also experienced difficulties obtaining gloves, masks and other protective equipment required to operate our restaurants during a pandemic. In addition to reduced sales, we have experienced other losses, such as food spoilage as a result of restaurant closures.

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Moreover, our franchisees began having difficulty meeting rent payments to us during the month of April 2020. In certain markets, including Mexico and Panama, we deferred rent payments for our franchisees for 90 days. In other markets, we began renegotiating rental terms and may receive lower rental payments as a result of such negotiations. Our franchisees also owe us continuing franchise fees, which we in turn owe to McDonald's under the MFAs. We are responsible for paying any ongoing franchise fees to McDonald's regardless of whether our franchisees are able to pay us. McDonald's has agreed to defer all franchise fee payments, whether they are related to company-operated or franchisee-operated restaurants, for March, April, May and June 2020 sales until 2021. If we are unable to pay such franchise fees when they are due, or we have further difficulty meeting our obligations in coming months and are unable to obtain a similar deferral, we will be in default under the MFAs.

While we cannot predict the duration or scope of the COVID-19 pandemic, it has negatively impacted our business and such impact could be material to our financial results, conditions and outlook. Consequently, we are taking measures to mitigate the potential effects on our Company from the pandemic by preserving cash and reducing our expenses, as well as capital expenditures and renegotiating terms and conditions with landlords and other suppliers. Also in connection with the COVID-19 pandemic, we have agreed with McDonald's to reduce the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020.
Regarding our liquidity, as of March 31, 2020, we had drawn $136 million of short-term indebtedness, including $35 million from our committed revolving credit facilities and expect to continue to draw on our available lines as needed and until the COVID-19 pandemic is brought under control. Any unavailability of such lines of credit may also negatively impact our liquidity. In addition, we are required to meet certain financial ratios under our revolving credit facilities. While we expect to be in compliance with such ratios in the first quarter of 2020, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen and will need to seek an amendment to our facilities or waivers from our lenders. If we are unable to obtain waivers for such non-compliance, we will be in default under our lines of credit and revolving credit facilities. In such event, in the case of our revolving credit facilities, any amounts drawn under such facilities may be declared immediately due and payable by the relevant lender. In the case of the non-committed lines of credit, if we have previously drawn any amounts, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit.

As a result of this impact, beginning in the second quarter of 2020 we do not expect to meet certain quarterly financial ratios specified in the MFAs. Although we have requested a waiver from McDonald's for these commitments for all of 2020, we cannot guarantee that McDonald’s will grant us that waiver, or that we will be able to meet our quarterly financial ratios or obtain additional waivers in the future once the COVID-19 pandemic has been brought under control. In addition, we currently have certain letters of credit in place that guarantee our obligations under the MFAs. Although we do not have any amounts outstanding under them at this time, certain of our lenders may terminate these letters of credit if we do not meet certain ratios thereunder or if we are in default under our other indebtedness, among other reasons. Any termination of our letters of credit would also constitute a material breach of our obligations under the MFAs.

Moreover, the spread of COVID-19 has led to disruption and volatility in the financial markets, which is likely to increase our cost of capital and may make it more difficult for us to obtain additional financing. As a result of the foregoing, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan and we do not expect to finalize a revised 2020-2022 plan at least until the COVID-19 outbreak is under control. If we are unable to meet our commitments under a future plan and we are unable to reach an agreement on revised terms of the restaurant opening plan and reinvestment plan or are otherwise unable to obtain a waiver from McDonald’s, we will be in default under the terms of the MFAs. Moreover, any increase in the cost of capital may negatively impact our other capital expenditure projects in process in 2020.

If the impacts of the COVID-19 pandemic become other than temporary, we may also need to consider it as an indicator of impairment in future quarters, which could further negatively impact our financial condition.

The duration and scope of the COVID-19 outbreak cannot be predicted at this time, and we expect to continue to experience these significant disruptions until the outbreak is brought under control.



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Our rights to operate and franchise McDonald’s-branded restaurants are dependent on the MFAs, the expiration of which would adversely affect our business, results of operations, financial condition and prospects.
Our rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore our ability to conduct our business, derive exclusively from the rights granted to us by McDonald’s in two MFAs through 2027. As a result, our ability to continue operating in our current capacity is dependent on the renewal of our contractual relationship with McDonald’s.
McDonald’s has the right, in its reasonable business judgment based on our satisfaction of certain criteria set forth in the MFAs, to grant us an option to extend the term of the MFAs with respect to all Territories for an additional period of 10 years after the expiration in 2027 of the initial term of the MFAs upon such terms as McDonald’s may determine. Pursuant to the MFAs, McDonald’s will determine whether to grant us the option to renew between August 2020 and August 2024. If McDonald’s grants us the option to renew and we elect to exercise the option, then we and McDonald’s will amend the MFAs to reflect the terms of such renewal option, as appropriate. We cannot assure you that McDonald’s will grant us an option to extend the term of the MFAs or that the terms of any renewal option will be acceptable to us, will be similar to those contained in the MFAs or will not be less favorable to us than those contained in the MFAs.
If McDonald’s elects not to grant us the renewal option or we elect not to exercise the renewal option, we will have a three-year period in which to solicit offers for our business, which offers would be subject to McDonald’s approval. Upon the expiration of the MFAs, McDonald’s has the option to acquire all of our non-public shares and all of the equity interests of our wholly owned subsidiary Arcos Dourados Comercio de Alimentos Ltda., the master franchisee of McDonald’s for Brazil, at their fair market value.
In the event McDonald’s does not exercise its option to acquire LatAm, LLC and Arcos Dourados Comercio de Alimentos Ltda., the MFAs would expire and we would be required to cease operating McDonald’s-branded restaurants, identifying our business with McDonald’s and using any of McDonald’s intellectual property. Although we would retain our real estate and infrastructure, the MFAs prohibit us from engaging in certain competitive businesses, including Burger King, Subway, KFC or any other quick-service restaurant, or QSR, business, or duplicating the McDonald’s system at another restaurant or business during the two-year period following the expiration of the MFAs. As the McDonald’s brand and our relationship with McDonald’s are among our primary competitive strengths, the expiration of the MFAs for any of the reasons described above would materially and adversely affect our business, results of operations, financial condition and prospects.
Our business depends on our relationship with McDonald’s and changes in this relationship may adversely affect our business, results of operations and financial condition.
Our rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore our ability to conduct our business, derive exclusively from the rights granted to us by McDonald’s in the MFAs. As a result, our revenues are dependent on the continued existence of our contractual relationship with McDonald’s.
Pursuant to the MFAs, McDonald’s has the ability to exercise substantial influence over the conduct of our business. For example, under the MFAs, we are not permitted to operate any other QSR chains, we must comply with McDonald’s high quality standards, we must own and operate at least 50% of all McDonald’s-branded restaurants in each of the Territories, we must maintain certain guarantees in favor of McDonald’s, including a standby letter of credit (or other similar financial guarantee acceptable to McDonald’s) in an amount of $80.0 million, to secure our payment obligations under the MFAs and related credit documents, we cannot incur debt above certain financial ratios, we cannot transfer the equity interests of our subsidiaries, any significant portion of their assets or certain of the real estate properties that we own without McDonald’s consent, and McDonald’s has the right to approve the appointment of our chief executive officer and chief operating officer. In addition, the MFAs require us to reinvest a significant amount of money, including through reimaging our existing restaurants, opening new restaurants and advertising, which plans McDonald’s has the right to approve. As a result of the business disruptions caused by COVID-19 outbreak, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan and we do not expect to finalize a revised 2020-2022 plan at least until the COVID-19 outbreak is under control. Also in connection with the COVID-19 outbreak, we have agreed with McDonald's to reduce the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020. In addition to using our cash flow from operations, we may need to incur additional indebtedness in order to finance future commitments, which could adversely affect our financial condition. Moreover, we may not be able to obtain this additional indebtedness on favorable terms, or at all. Failure to comply with our future commitments could constitute a material breach of the MFAs and may lead to a termination by McDonald’s of the MFAs. McDonald’s Corporation had also previously agreed to provide growth support, which we planned to use to support our restaurant opening plan and reinvestment plan for the 2020-2022 period. Until we are able to finalize a revised 2020-2022 restaurant opening plan and reinvestment plan, we can make no assurances related to receiving growth support for 2020-2022.

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Notwithstanding the foregoing, McDonald’s has no obligation to fund our operations. In addition, McDonald’s does not guarantee any of our financial obligations, including trade payables or outstanding indebtedness, and has no obligation to do so.
If the terms of the MFAs excessively restrict our ability to operate our business or if we are unable to satisfy our restaurant opening and reinvestment commitments under the MFAs, our business, results of operations and financial condition would be materially and adversely affected.
McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.
Pursuant to the MFAs, McDonald’s has the right to acquire our non-public shares or our interests in one or more Territories upon the occurrence of certain events, including the death or permanent incapacity of our controlling shareholder or a material breach of the MFAs. In the event McDonald’s were to exercise its right to acquire all of our non-public shares, McDonald’s would become our controlling shareholder.
McDonald’s has the option to acquire all, but not less than all, of our non-public shares at 100% of their fair market value during the twelve-month period following the eighteen-month anniversary of the death or permanent incapacity of Mr. Woods Staton, our Executive Chairman and controlling shareholder. In addition, if there is a material breach that relates to one or more Territories in which there are at least 100 restaurants in operation, McDonald’s has the right either to acquire all of our non-public shares or our interests in our subsidiaries in such Territory or Territories. By contrast, if the initial material breach of the MFAs affects or is attributable to any of the Territories in which there are less than 100 restaurants in operation, McDonald’s only has the right to acquire the equity interests of any of our subsidiaries in the relevant Territory. For example, since we have more than 100 restaurants in Mexico, if a Mexican subsidiary were to materially breach the MFA, McDonald’s would have the right either to acquire our entire business throughout Latin America and the Caribbean or just our Mexican operations, whereas upon a similar breach by our Ecuadorean subsidiary, which has less than 100 restaurants in operation, McDonald’s would only have the right to acquire our interests in our operations in Ecuador.
McDonald’s was granted a perfected security interest in the equity interests of LatAm, LLC, Arcos Dourados Comercio de Alimentos Ltda. and certain of their subsidiaries to protect this right. In the event this right is exercised as a result of a material breach of the MFAs, the amount to be paid by McDonald’s would be equal to 80% of the fair market value of the acquired equity interests. If McDonald’s exercises its right to acquire our interests in one or more Territories as a result of a material breach, our business, results of operations and financial condition would be materially and adversely affected. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Termination” for more details about fair market value calculation.
The failure to successfully manage our future growth may adversely affect our results of operations.
Our business has grown significantly since the Acquisition, largely due to the opening of new restaurants in existing and new markets within the Territories, and also from an increase in comparable store sales. Our total number of restaurant locations has increased from 1,569 at the date of the Acquisition to 2,293 restaurants as of December 31, 2019.
Our growth is, to a certain extent, dependent on new restaurant openings and therefore may not be constant from period to period; it may accelerate or decelerate in response to certain factors. There are many obstacles to opening new restaurants, including determining the availability of desirable locations, securing reliable suppliers, hiring and training new personnel and negotiating acceptable lease terms, and, in times of adverse economic conditions, franchisees may be more reluctant to provide the investment required to open new restaurants. In addition, our growth in comparable store sales is dependent on continued economic growth in the countries in which we operate as well as our ability to continue to predict and satisfy changing consumer preferences. In particular, we expect both new restaurant openings and growth in comparable store sales to be negatively affected as a result of the novel coronavirus (COVID-19) outbreak. See “—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”
We plan our capital expenditures on an annual basis, taking into account historical information, regional economic trends, restaurant opening and reimaging plans, site availability and the investment requirements of the MFAs in order to maximize our returns on invested capital. The success of our investment plan may, however, be harmed by factors outside our control, such as changes in macroeconomic conditions, including as a result of the COVID-19 outbreak, changes in demand and construction difficulties that could jeopardize our investment returns and our future results and financial condition.

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We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.
Supply chain management is an important element of our success and a crucial factor in optimizing our profitability. We use McDonald’s centralized supply chain management model, which relies on approved third-party suppliers and distributors for goods, and we generally use several suppliers to satisfy our needs for goods. This system encompasses selecting and developing suppliers of core products—beef, chicken, buns, produce, cheese, dairy mixes, beverages and toppings—who are able to comply with McDonald’s high quality standards and establishing sustainable relationships with these suppliers. McDonald’s standards include cleanliness, product consistency and timeliness as well as commitments to follow internationally recognized manufacturing practices, to meet or exceed all local food regulations and to comply with our Hazard Analysis Critical Control Plan, a systematic approach to food safety that emphasizes protection within the processing facility, rather than detection, through analysis, inspection and follow-up.
Our 35 largest suppliers account for approximately 78% of our purchases excluding Venezuela. Very few of our suppliers have entered into written contracts with us as we only have pricing protocols with a vast majority of them. Our supplier approval process is thorough and lengthy in order to ensure compliance with McDonald’s high quality standards. We therefore tend to develop strong relationships with approved suppliers and, given our importance to them, have found that pricing protocols with them are generally enough to ensure a reliable supply of quality products. While we source our supplies from many approved suppliers in Latin America and the Caribbean, thereby reducing our dependence on any one supplier, the informal nature of the majority of our relationships with suppliers means that we may not be assured of long-term or reliable supplies of products from those suppliers.
In addition, certain supplies, such as beef, must often be locally sourced due to restrictions on their importation. In light of these restrictions, as well as the MFAs’ requirement to purchase certain core supplies from approved suppliers, we may not be able to quickly find alternate or additional supplies in the event a supplier is unable to meet our orders.
If our suppliers fail to provide us with products in a timely manner due to unanticipated demand, production or distribution problems, financial distress or shortages, if our suppliers decide to terminate their relationship with us or if McDonald’s determines that any product or service offered by an approved supplier is not in compliance with its standards and we are obligated to terminate our relationship with such supplier, we may have difficulty finding appropriate or compliant replacement suppliers. As a result, we may face inventory shortages that could negatively affect our operations.
Our financial condition and results of operations depend, to a certain extent, on the financial condition of our franchisees and their ability to fulfill their obligations under their franchise agreements.
As of December 31, 2019, 31.1% of our restaurants were franchised. Under our franchise agreements, we receive monthly payments which are, in most cases, the greater of a fixed rent or a certain percentage of the franchisee’s gross sales. Franchisees are independent operators with whom we have franchise agreements. We typically own or lease the real estate upon which franchisees’ restaurants are located and franchisees are required to follow our operating manual that specifies items such as menu choices, permitted advertising, equipment, food handling procedures, product quality and approved suppliers. Our operating results depend to a certain extent on the restaurant profitability and financial viability of our franchisees. The concurrent failure by a significant number of franchisees to meet their financial obligations to us could jeopardize our ability to meet our obligations. As a result of the COVID-19 pandemic, we expect many of our franchisees to have difficulty meeting their financial obligations to us. We are also deferring rent payments for 90 days in certain of our markets and are in the process of renegotiating rental terms in other markets as a result of the pandemic. See “—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”
We are liable for our franchisees’ monthly payment of a continuing franchise fee to McDonald’s, which represents a percentage of those franchised restaurants’ gross sales. To the extent that our franchisees fail to pay this fee in full, we are responsible for any shortfall. As such, the concurrent failure by a significant number of franchisees to pay their continuing franchise fees could have a material adverse effect on our results of operations and financial condition.

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We do not have full operational control over the businesses of our franchisees.
We are dependent on franchisees to maintain McDonald’s quality, service and cleanliness standards, and their failure to do so could materially affect the McDonald’s brand and harm our future growth. Although we exercise significant influence over franchisees through the franchise agreements, franchisees have some flexibility in their operations, including the ability to set prices for our products in their restaurants, hire employees and select certain service providers. In addition, it is possible that some franchisees may not operate their restaurants in accordance with our quality, service, cleanliness, health or product standards. Although we take corrective measures if franchisees fail to maintain McDonald’s quality, service and cleanliness standards, we may not be able to identify and rectify problems with sufficient speed and, as a result, our image and operating results may be negatively affected.
Ownership and leasing of a broad portfolio of real estate exposes us to potential losses and liabilities.
As of December 31, 2019, we owned the land for 494 of our 2,293 restaurants and the buildings for all but 11 of our restaurants. The value of these assets could decrease or rental costs could increase due to changes in local demographics, the investment climate and increases in taxes.
The majority of our restaurant locations, or those operated by our franchisees, are subject to long-term leases. We may not be able to renew leases on acceptable terms or at all, in which case we would have to find new locations to lease or be forced to close the restaurants. If we are able to negotiate a new lease at an existing location, we may be subject to a rent increase. In addition, current restaurant locations may become unattractive due to changes in neighborhood demographics or economic conditions, which may result in reduced sales at these locations.
The success of our business is dependent on the effectiveness of our marketing strategy.
Market awareness is essential to our continued growth and financial success. Pursuant to the MFAs, we create, develop and coordinate marketing plans and promotional activities throughout the Territories, and franchisees contribute a percentage of their gross sales to our marketing plan. In addition, we are required under the MFAs to spend at least 5% of our sales on advertising and promotional activities in the majority of our markets. In connection with the COVID-19 outbreak, we have agreed with McDonald's to reduce this spending requirement from 5% to 4% of our gross sales for the full year 2020. Pursuant to the MFAs, McDonald’s has the right to review and approve our marketing plans in advance and may request that we cease using the materials or promotional activities at any time if McDonald’s determines that they are detrimental to its brand image. We also participate in global and regional marketing activities undertaken by McDonald’s and pay McDonald’s approximately 0.1% of our sales in order to fund such activities.
If our advertising programs are not effective, or if our competitors begin spending significantly more on advertising than we do, we may be unable to attract new customers or existing customers may not return to our restaurants and our operating results may be negatively affected.
We use non-committed lines of credit to partially finance our working capital needs.
We use non-committed lines of credit to partially finance our working capital needs. In response to the COVID-19 pandemic and related disruption in regional and global economic activity, as of March 31, 2020, we had drawn $101 million of short-term indebtedness from these lines of credit, and we expect to continue to draw on our available lines as needed and until the COVID-19 pandemic is brought under control. Given the nature of these lines of credit, they could be withdrawn and no longer be available to us, or their terms, including the interest rate, could change to make the terms no longer acceptable to us. The availability of these lines of credit depends on the level of liquidity in financial markets, which can vary based on events outside of our control, including financial or credit crises. Any inability to draw upon our non-committed lines of credit could have an adverse effect on our working capital, financial condition and results of operations.
Covenants and events of default in the agreements governing our outstanding indebtedness could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
As of December 31, 2019, we had $595.8 million in total outstanding indebtedness, consisting of $626.8 million in long-term debt, $13.3 million in short-term debt and $(44.3) million related to the fair market value net of our outstanding derivative instruments. The agreements governing our outstanding indebtedness contain covenants and events of default that may limit our financial flexibility and ability to undertake certain types of transactions. For instance, we are subject to negative covenants that restrict some of our activities, including restrictions on:
creating liens;
paying dividends;

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maintaining certain leverage ratios;
entering into sale and lease-back transactions; and
consolidating, merging or transferring assets.
If we fail to satisfy the covenants set forth in these agreements or another event of default occurs under the agreements, our outstanding indebtedness under the agreements could become immediately due and payable. In addition, we are required to meet certain financial ratios under our line of credit and revolving credit facilities. While we expect to be in compliance with such ratios in the first quarter of 2020, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen and will need to seek an amendment to our facilities or waivers from our lenders. If we are unable to obtain waivers for such non-compliance, we will be in default under our line of credit and revolving credit facilities. In the case of our revolving credit facilities, any amounts drawn under such facilities may be declared to be immediately due and payable by the relevant lender, who may also terminate its obligation to provide loans under such agreements. In the case of our non-committed line of credit, if we have previously drawn any amount, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit. If our outstanding indebtedness becomes immediately due and payable and we do not have sufficient cash on hand to pay all amounts due, we could be required to sell assets, to refinance all or a portion of our indebtedness or to obtain additional financing. Refinancing may not be possible and additional financing may not be available on commercially acceptable terms, or at all.

Uncertainty relating to the calculation of LIBOR and other reference rates and their potential discontinuance may materially adversely affect the value of our indebtedness and as a result our business, results of operations, financial condition and prospects.
As of December 31, 2019, we had $2.5 million outstanding indebtedness with third parties pursuant to our revolving credit facilities, which are tied to LIBOR. In recent years, national and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, such as LIBOR, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Notwithstanding the foregoing, it appears highly likely that LIBOR will be discontinued or modified by 2021.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, other benchmarks or floating rate debt securities, including the floating rate notes. Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates or other reforms may materially adversely affect the value of certain of our credit agreements that are tied to LIBOR. Furthermore, the use of alternative reference rates or other reforms could cause the interest rate calculated for such indebtedness to be materially different than expected. Any of the foregoing could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our inability to attract and retain qualified personnel may affect our growth and results of operations.
We have a strong management team with broad experience in human resources, product development, supply chain management, operations, finance, marketing, real estate development and training. Our growth plans place substantial demands on our management team, and future growth could increase those demands. In addition, pursuant to the MFAs, McDonald’s is entitled to approve the appointment of our chief executive officer and chief operating officer. Our ability to manage future growth will depend on the adequacy of our resources and our ability to continue to identify, attract and retain qualified personnel. Failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Also, the success of our operations depends in part on our ability to attract and retain qualified regional and restaurant managers and general staff. If we are unable to recruit and retain our employees, or fail to motivate them to provide quality food and service, our image, operations and growth could be adversely affected.

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The resignation, termination, permanent incapacity or death of our Executive Chairman could adversely affect our business, results of operations, financial condition and prospects.
Due to Mr. Woods Staton’s unique experience and leadership capabilities, it would be difficult to find a suitable successor for him if he were to cease serving as Executive Chairman for any reason. In the event of Mr. Woods Staton’s death or permanent incapacity, pursuant to the MFA, McDonald’s has the right to acquire all of our non-public shares during the twelve-month period beginning on the eighteen-month anniversary of his death or incapacity.
In addition, in the event that we need to appoint a new CEO, pursuant to the MFA, we must submit to McDonald’s the name of such proposed successor for McDonald’s approval. If we and McDonald’s have not agreed upon a successor CEO after six months, McDonald’s may designate a temporary CEO in its sole discretion pending our submission of information relating to a further candidate and McDonald’s approval of that candidate. A delay in finding a suitable successor CEO could adversely affect our business, results of operations, financial condition and prospects.
Labor shortages or increased labor costs could harm our results of operations.
Our operations depend in part on our ability to attract and retain qualified restaurant managers and crew. While the turnover rate varies significantly among categories of employees, due to the nature of our business we traditionally experience a high rate of turnover among our crew and we may not be able to replace departing crew with equally qualified or motivated staff.
As of December 31, 2019, we had 80,855 employees in our Company-operated restaurants and staff. Controlling labor costs is critical to our results of operations, and we closely monitor those costs. Some of our employees are paid minimum wages; any increases in minimum wages or changes to labor regulations in the Territories could increase our labor costs. For example, during 2019, Venezuela implemented three increases in the minimum wage. In addition, in December 2019, the government of Argentina enacted a decree establishing that employees dismissed without cause in the following six months are entitled to double indemnification from employers in an effort to mitigate the impact of economic difficulties facing the country at the time, and in April 2020, amid the COVID-19 outbreak, the government prohibited dismissals with or without cause under the argument of force majeure or lack of/reduction of work not imputable to the employer until June 30, 2020 (this last cause also applies for temporary suspensions). These or similar regulations, if adopted, may have an adverse impact on our results of operations. Competition for employees could also cause us to pay higher wages.
We are also impacted by the costs and other effects of compliance with regulations affecting our workforce. These regulations are increasingly focused on employment issues, including wage and hour, healthcare, employee safety and other employee benefits and workplace practices. Claims of non-compliance with these regulations could result in liability and expense to us. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our franchisees or suppliers, including those giving rise to claims of sexual harassment or discrimination (or perceptions thereof) could have a negative impact on consumer perceptions of us and our business. In 2019, two of our restaurant employees in Peru died in a workplace accident at one of our restaurants. This accident is under investigation by Peruvian authorities, and while we do not expect a material impact from this event, any future workplace accidents could have a material adverse effect on our business, financial condition and results of operations.
Some of our employees are represented by unions and are working under agreements that are subject to annual salary negotiations. We cannot guarantee the results of any such collective bargaining negotiations or whether any such negotiations will result in a work stoppage. In addition, employees may strike for reasons unrelated to our union arrangements. Any future work stoppage could, depending on the affected operations and the length of the work stoppage, have a material adverse effect on our financial position, results of operations or cash flows.
A failure by McDonald’s to protect its intellectual property rights, including its brand image, could harm our results of operations.
The profitability of our business depends in part on consumers’ perception of the strength of the McDonald’s brand. Under the terms of the MFAs, we are required to assist McDonald’s with protecting its intellectual property rights in the Territories. Nevertheless, any failure by McDonald’s to protect its proprietary rights in the Territories or elsewhere could harm its brand image, which could affect our competitive position and our results of operations.

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Under the MFAs, we may use, and grant rights to franchisees to use, McDonald’s intellectual property in connection with the development, operation, promotion, marketing and management of our restaurants. McDonald’s has reserved the right to use, or grant licenses to use, its intellectual property in Latin America and the Caribbean for all other purposes, including to sell, promote or license the sale of products using its intellectual property. If we or McDonald’s fail to identify unauthorized filings of McDonald’s trademarks and imitations thereof, and we or McDonald’s do not adequately protect McDonald’s trademarks and copyrights, the infringement of McDonald’s intellectual property rights by others may cause harm to McDonald’s brand image and decrease our sales.
Non-compliance with anti-terrorism and anti-corruption regulations could harm our reputation and have an adverse effect on our business, results of operations and financial condition.
A material breach under the MFAs would occur if we, or our subsidiaries that are a party to the MFAs, materially breached any of the representations or warranties or obligations under the MFAs (not cured within 30 days after receipt of notice thereof from McDonald’s) relating to or otherwise in connection with any aspect of the master franchise business, the franchised restaurants or any other matter in or affecting any one or more Territories, including by failing to comply with anti-terrorism or anti-corruption policies and procedures required by applicable law.
We maintain policies and procedures that require our employees to comply with anti-corruption laws, including the Foreign Corrupt Practices Act of 1977 (the “FCPA”), and our corporate standards of ethical conduct. However, we cannot ensure that these policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents. If we are not in compliance with the FCPA and other applicable anti-corruption laws, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, and results of operations. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or other governmental authorities could adversely impact our reputation, cause us to lose or become disqualified from bids, and lead to other adverse impacts on our business, financial condition and results of operations.
Any tax increase or change in tax legislation may adversely affect our results of operations.
Since we conduct our business in many countries in Latin America and the Caribbean, we are subject to the application of multiple tax laws and multinational tax conventions. Our effective tax rate therefore depends on these tax laws and multinational tax conventions, as well as on the effectiveness of our tax planning abilities. Our income tax position and effective tax rate are subject to uncertainty as our income tax position for each year depends on the profitability of Company-operated restaurants and on the profitability of franchised restaurants operated by our franchisees in tax jurisdictions that levy income tax at a broad range of rates. It is also dependent on changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules, changes to these rules and tax laws and examinations by various tax authorities. If our actual tax rate differs significantly from our estimated tax rate, this could have a material impact on our financial condition. In addition, any increase in the rates of taxes, such as income taxes, excise taxes, value added taxes, import and export duties, and tariff barriers or enhanced economic protectionism could negatively affect our business. Fiscal measures that target either QSRs or any of our products could also be taken.
We cannot assure you that any governmental authority in any country in which we operate will not increase taxes or impose new taxes on our operations or products in the future.
Tax assessments in any of the jurisdictions in which we operate may negatively affect our business and results of operations.
As part of the ordinary course of business, we are subject to inspections by federal, municipal and state tax authorities in Latin America. These inspections may generate tax assessments which, depending on their results, may have an adverse effect on our financial results. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

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Litigation and other pressure tactics could expose our business to financial and reputational risk.
Given that we conduct our business in many countries, we may be subject to multi-jurisdictional private and governmental lawsuits, including but not limited to lawsuits relating to labor and employment practices, taxes, trade and business practices, franchising, intellectual property, consumer, real property, landlord/tenant, environmental, advertising, nutrition and antitrust matters. In the past, QSR chains have been subject to class-action lawsuits claiming that their food products and promotional strategies have contributed to the obesity of some customers. We cannot guarantee that we will not be subject to these or similar types of lawsuits in the future. We may also be the target of pressure tactics such as strikes, boycotts and negative publicity from government officials, suppliers, distributors, employees, unions, special interest groups and customers that may negatively affect our reputation.
Information technology system failures or interruptions or breaches of our network security may interrupt our operations, exposing us to increased operating costs and to litigation.
We rely heavily on our computer systems and network infrastructure across our operations including, but not limited to, point-of-sale processing at our restaurants. We implement security measures and controls that we believe provide reasonable assurance regarding our security posture. However, there remains the risk that our technology systems are vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events. If those systems were to fail or otherwise be unavailable, and we were unable to recover in a timely way, we could experience an interruption in our operations. Moreover, security breaches involving our systems may occur from time to time. These include internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Our information technology systems contain personal, financial and other information that is entrusted to us by our customers, our employees and other third parties, as well as financial, proprietary and other confidential information related to our business. For example, on September 20, 2019 a journalist gained access to sensitive employee and partner information in Brazil due to a misconfigured service system provided by one of Arcos’ service providers. Our IT team discovered and resolved the breach in a matter of hours in conjunction with the service provider and we engaged a well-known consultancy firm to help us perform an investigation of the breach and its ramifications. While our investigation determined that the impact of the breach was low, we cannot assure you that we will not experience similar security breaches in the future. Moreover, our increasing reliance on third party systems also present the risks faced by the third party’s business, including the operational, security and credit risks of those parties. An actual or alleged security breach of our or their systems could result in disruptions, shutdowns, theft or unauthorized disclosure of personal, financial, proprietary or other confidential information. The occurrence of any of these incidents could result in reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and criminal penalties or civil liabilities.
Our insurance may not be sufficient to cover certain losses.
We face the risk of loss or damage to our properties, machinery and inventories due to fire, theft and natural disasters such as earthquakes and floods. While our insurance policies cover some losses in respect of damage or loss of our properties, machinery and inventories, our insurance may not be sufficient to cover all such potential losses. For example, we suffered losses in connection with a truck drivers’ strike in Brazil in 2018, which disrupted our supply chain that were not covered by our insurance policies. We also do not expect our insurance to cover losses due to lower sales as a result of the COVID-19 pandemic. In the event that any losses exceed our insurance coverage or are not covered by our insurance policies, we will be liable for the excess. In addition, even if such losses are fully covered by our insurance policies, such fire, theft or natural disaster may cause disruptions or cessations in its operations and adversely affect our financial condition and results of operations.

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Certain Factors Relating to Our Industry
The food services industry is intensely competitive and we may not be able to continue to compete successfully.
Although competitive conditions in the QSR industry vary in each of the countries in which we conduct our operations, we compete with many well-established restaurant companies on price, brand image, quality, sales promotions, new product development and restaurant locations. Since the restaurant industry has few barriers to entry, our competitors are diverse and range from national and international restaurant chains to individual, local restaurant operators. Our largest competitors include Burger King, Yum! Brands (which operates KFC restaurants, Taco Bell and Pizza Hut and Pizza Hut Express restaurants), Carl’s Junior and Subway. In Brazil, we also compete with Habib’s, a Brazilian QSR chain that focuses on Middle Eastern food, and Bob’s, a primarily Brazilian QSR chain that focuses on hamburger product offerings. We also face strong competition from new businesses targeting the same clients we serve, as well as from street vendors of limited product offerings, including hamburgers, hot dogs, pizzas and other local food items. We expect competition to increase as our competitors continue to expand their operations, introduce new products and market their brands.
If any of our competitors offers products that are better priced or more appealing to the tastes of consumers, increases its number of restaurants, obtains more desirable restaurant locations, provides more attractive financial incentives to management personnel, franchisees or hourly employees or has more effective marketing initiatives than we do in any of the markets in which we operate, this could have a material adverse effect on our results of operations.
Increases in commodity prices or other operating costs could harm our operating results.
Food and paper costs represented 35.8% of our total sales by Company-operated restaurants in 2019, and 21.5% of our food and paper raw materials cost is exposed to fluctuations in foreign exchange rates. We rely on, among other commodities, beef, chicken, produce, dairy mixes, beverages and toppings. The cost of food and supplies depends on several factors, including global supply and demand, new product offerings, weather conditions, fluctuations in energy costs and tax incentives, all of which makes us susceptible to substantial price and currency fluctuations and other increased operating costs. Our hedging strategies on the imported portion of our food and paper raw materials may not be successful in fully offsetting cost increases due to currency fluctuations. Furthermore, due to the competitive nature of the restaurant industry, we may be unable to pass increased operating costs on to our customers, which could have an adverse effect on our results of operations.
Demand for our products may decrease due to changes in consumer preferences or other factors.
Our competitive position depends on our continued ability to offer items that have a strong appeal to consumers. If consumer dining preferences change due to shifts in consumer demographics, dietary inclinations, trends in food sourcing or food preparation and our consumers begin to seek out alternative restaurant options, our financial results might be adversely affected. In addition, negative publicity surrounding our products could also materially affect our business and results of operations.
Our success in responding to consumer demands depends in part on our ability to anticipate consumer preferences and introduce new items to address these preferences in a timely fashion.
Our investments to enhance the customer experience, including through technology, may not generate the expected returns.
We are engaged in various efforts to improve our customers’ experience in our restaurants. In particular, in partnership with McDonald’s, we have invested in Experience of the Future (“EOTF”), which focuses on restaurant modernization and technology and digital engagement in order to transform the restaurant experience. As we accelerate our pace of converting restaurants to EOTF, we are placing renewed emphasis on improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives and payment systems.
We have also started a digital transformation with the goal of increasing our engagement with our customers and using data in order to improve our decision-making. In order to accomplish this goal, we are making structural changes in our IT, including creating a “digital factory” to facilitate collaboration across groups within Arcos Dorados and adopting agile methodologies and principals to aid different groups in transforming products and services and the customer experience, or in otherwise achieving a specific business objective. We may not fully realize the intended benefits of these significant investments, or these initiatives may not be well executed, and therefore our business results may suffer.

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Our business activity may be negatively affected by disruptions, catastrophic events or health pandemics.
Unpredictable events beyond our control, including war, terrorist activities, political and social unrest and natural disasters, could disrupt our operations and those of our franchisees, suppliers or customers, have a negative effect on consumer spending or result in political or economic instability. These events could reduce demand for our products or make it difficult to ensure the regular supply of products through our distribution chain.
In addition, incidents of health pandemics, food-borne illnesses or food tampering could reduce sales in our restaurants. Widespread illnesses such as avian influenza, the H1N1 influenza virus, e-coli, bovine spongiform encephalopathy (or “mad cow” disease), hepatitis A or salmonella could cause customers to avoid meat or fish products. Furthermore, our reliance on third-party food suppliers and distributors increases the risk of food-borne illness incidents being caused by third-party food suppliers and distributors who operate outside of our control and/or multiple locations being affected rather than a single restaurant. In addition, recurrent events in our region related to Dengue, Yellow Fever and Zika viruses, as well as the COVID-19 outbreak in 2020, have resulted in heightened health concerns in the region, which could reduce the visits to our restaurants if these cases are not controlled.
Food safety events involving McDonald’s outside of Latin America or other well-known QSR chains could negatively impact our business industry. Another extended issue in our region is the use of social media to post complaints against the QSR segment and the use of mobile phones to capture any deviation in our processes, products or facilities. Media reports of health pandemics, such as the COVID-19 outbreak, or food-borne illnesses found in the general public or in any QSR could dramatically affect restaurant sales in one or several countries in which we operate, or could force us to temporarily close an undetermined number of restaurants. As a restaurant company, we depend on consumer confidence in the quality and safety of our food. Any illness or death related to food that we serve could substantially harm our operations. While we maintain extremely high standards for the quality of our food products and dedicate substantial resources to ensure that these standards are met and well communicated publicly the spread of these illnesses is often beyond our control and we cannot assure you that new illnesses resistant to any precautions we may take will not develop in the future.
In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or customers, such as the addition of foreign objects to the food that we sell. Reports, whether true or not, of injuries caused by food tampering have in the past negatively affected the reputations of QSR chains and could affect us in the future. Instances of food tampering, even those occurring solely at competitor restaurants, could, by causing negative publicity about the restaurant industry, adversely affect our sales on a local, regional, national or systemwide basis. A decrease in customer traffic as a result of public health concerns or negative publicity could materially affect our business, results of operations and financial condition.
Restrictions on promotions and advertisements directed at families with children and regulations regarding the nutritional content of children’s meals may harm McDonald’s brand image and our results of operations.
A significant portion of our business depends on our ability to make our product offerings appealing to families with children. Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay are considering imposing, or have already imposed, restrictions that impact the ways in which we market our products, including proposals that would have the effect of restricting our ability to advertise directly to children through the use of toys and to sell toys in conjunction with food.
In June 2012, Chile passed a law banning the inclusion of toys in children’s meals with certain nutritional characteristics (Law Nº 20,606). This law came into effect on June 26, 2016. The ban in Chile also restricts advertisements to children under the age of 14. As a result of these laws, we modified our children’s meals in order to continue offering toys in them. However, we were subject to several audits by the Chilean authorities. Chilean Law Nº 20,869, which also came into effect on June 26, 2016, restricts advertisements on television and in movie theaters between 6:00 a.m. and 10:00 p.m. This law affects food products that exceed certain standards of nutritional quality set by the Chilean authorities. These restrictions on advertisements did not affect or have any impact on our sales. On June 26, 2019, strict standards of nutritional quality set by the Chilean authorities came into effect. As a result of modifications that we made to the contents of some of our products in adherence with these stricter standards, we were able to continue offering toys in children’s meals. However, the volume of Happy Meals sold in Chile has been declining since 2016.
Similar to Chile, in 2013, Peru approved Law No. 30021, which, together with the corresponding Regulatory Decree approved in June 2017, restricts the advertising of processed food products and non-alcoholic beverages intended for children under 16. In addition, regulations establish that advertisements of food products and non-alcoholic beverages containing trans-fat and high levels of sodium, sugar and saturated fat must contain a warning stating that excessive consumption should be avoided. These regulations do not include food prepared on the spot at the request of a customer, and as a result, Arcos Dorados’ products are excluded from the scope of application of such law.

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Since 2014, the Mexican Ministry of Health empowered the Federal Commission for Prevention of Sanitary Risks (Comisión Federal para la Protección contra Riesgos Sanitarios or COFEPRIS) to regulate advertising directed at families with children. On April 15, 2014, COFEPRIS issued certain regulations which establish the maximum contents of fat, sodium and sugars that every meal advertised to children on television and in cinemas may contain. In February of 2015, COFEPRIS ordered us to stop advertising Happy Meals on television until we disclosed all the nutritional information for Happy Meals to COFEPRIS. We provided this information to COFEPRIS, but we have not yet received any legal authorization to advertise Happy Meals either during the general times when children may be watching television or during any programming geared towards children. We have developed a Happy Meals with chicken nuggets that complies with COFEPRIS’ nutritional requirements and will begin a pilot advertising program that complies with the advertising requirements in select areas of Mexico. However, generally, we are prohibited from advertising Happy Meals from 2:30 p.m. to 7:30 p.m., Monday through Friday, and from 7:00 a.m. to 7:00 p.m. on Saturday and Sunday.
In Brazil, the Federal Prosecutor’s Office filed suit in 2009 seeking to enjoin various QSRs, including us, from including toys in our children’s meals. The Lower Federal Court in São Paulo ruled that the lawsuit was without merit. The Prosecutor’s Office filed an appeal against this decision, which will be adjudicated by the Regional Federal Court in São Paulo. As of the date of this annual report, this appeal is still pending and the outcome remains uncertain. In addition, the number of proposed laws seeking to restrict the sale of toys with meals increased significantly in Brazil at the federal, state and municipal levels. In April 2013, a consumer protection agency in Brazil fined us $1.6 million for a 2010 advertising campaign relating to our offering of meals with toys from the motion picture Avatar. We filed a lawsuit seeking to annul the fine. The lower court ruled there was no basis for the penalty, which was upheld by the appellate court. The consumer protection agency filed a special appeal against this decision, which is pending final decision. Although similar fines relating to our current and previous advertising campaigns involving the sale of toys may be possible in the future, as of the date of this annual report, we are unaware of any other such fines, and in 2018, our subsidiaries in Brazil and Mexico joined the International Food and Beverage Alliance that regulates advertising for kids to help ensure our ongoing compliance with advertising restrictions.
On July 28, 2014, Colombia enacted Decree 975 of 2014, which sets forth certain directives regarding advertising directed at children. These directives include, (i) limiting any insinuation that the food and beverage being advertised is a substitute for any of the principal daily meals; (ii) any advertising directed at children or adolescents, during certain times of the day when children and adolescents are more likely to be consuming such advertising, must include disclosure that the advertisement is not part of the actual program; and (iii) requiring parental approval for any advertisement through a child/adolescent digital platform that requests any download or purchase.
Certain jurisdictions in the United States are also considering curtailing or have curtailed food retailers’ ability to sell meals to children including free toys if these meals do not meet certain nutritional criteria.
In Argentina, there are currently several bills in Congress aimed at restricting advertising of high-calorie or processed food and beverages and promoting healthy food/nutrition habits, which are being discussed. Although as of the date of this annual report there are currently no federal regulations in force, some of these bills might be enacted in the short term. In addition, at the local level, the Province of Santa Fe and the City of Buenos Aires have enacted local regulations, imposing certain restrictions on the advertisement of high-calorie or processed foods and beverages targeting underage consumers.
Although we have introduced changes in our Happy Meals in order to offer more balanced and healthy options to our customers and in many cases been able to mitigate the impact of these types of laws and regulations on our sales, we may not be able to do so in the future and the imposition of similar or stricter laws and regulations in the future in the Territories may have a negative impact on our results of operations. In general, regulatory developments that adversely impact our ability to promote and advertise our business and communicate effectively with our target customers, including restrictions on the use of licensed characters, may have a negative impact on our results of operations.

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We are subject to increasingly strict data protection laws, which could increase our costs and adversely affect our business.
On August 2018, Brazil approved the General Data Protection Law (“Lei Geral de Proteção de Dados” or “LGPD”), federal law 13,709/2018. Very similar to the European Union General Data Protection Regulation (“GDPR”), the LGDP significantly improves Brazil’s existing legal framework by regulating the use of personal data by the private and public sectors. The concept of “data processing” is broad and includes the collection, storage, transfer, deletion and other activities related to personal data; penalties include warnings, single and daily fines, blocking and elimination of the personal data at stake. By the time of its enforcement , Arcos Dourados Comercio de Alimentos Ltda. will need to ensure that personal data processing is grounded on at least one legal basis provided for in the LGPD and will need to adopt administrative and technical security measures to protect personal data. The implementation of these and similar laws and regulations in the other countries in which we operate may increase our operation costs, which could have a material adverse effect on our business. Another example is Peru, where the Personal Data Protection Law (Law No. 29733) was approved in 2011; and the Supreme Decree No. 003-2013-JUS, Regulation of the Personal Data Protection Law, in 2013. All companies are required to comply with these regulations since May 2015. This legal framework regulates the use of personal data, which is defined as any operation that allows the recompilation, registration, organization, conservation, elaboration, modification, suppression, transference, or any other operation that facilitates access, correlation or interconnection of personal data. Failure to comply is punishable with economic fines by the Personal Data Protection Authority. In November 2019, Peru approved the Directorial Resolution No. 80-2019-JUS/DGTAIPD, Practical Guide to Comply with the “Obligation to Inform.” This is a general guideline to facilitate compliance with the obligation to inform the various owners of personal data of the processing of their personal data and provides information about the obligation and various exceptions to it.
Environmental laws and regulations may affect our business.
We are subject to various environmental laws and regulations. These laws and regulations govern, among other things, discharges of pollutants into the air and water and the presence, handling, release and disposal of, and exposure to, hazardous substances, single use plastics and recycling. These laws and regulations provide for significant fines and penalties for noncompliance. Third parties may also assert personal injury, property damage or other claims against owners or operators of properties associated with release of, or actual or alleged exposure to, hazardous substances at, on or from our properties.
Liability from environmental conditions relating to prior, existing or future restaurants or restaurant sites, including franchised restaurant sites, may have a material adverse effect on us. Moreover, the adoption of new or more stringent environmental laws or regulations could result in a material environmental liability to us.
In addition, beginning in 2018, Latin America experienced a wave of regulatory attempts to eliminate single use plastic products in the region. In many countries, new laws and regulations, especially in relation to the use of plastic straws, have already been approved and in many cases will carry stiff penalties for violations. We have addressed this issue in our business by removing all the plastic straws and instead using alternative products. Additionally, we removed plastic tops from products used in our business and changed the salad containers in Argentina for carton containers. We will need to find suitable alternatives before these new laws and regulations become effective. Regulations tend to be replicated across countries, and we are seeing an increase in related activity, both nationally and locally, in Brazil, Mexico, Colombia, Argentina, Ecuador, Chile, Peru among other territories. We may need to quickly replace other plastic products that we continue to use should additional laws and regulations be put in place. These alternatives may be more expensive than the plastic products we currently use, which may increase our costs and have a material adverse effect on our business.
We may be adversely affected by legal actions with respect to our business.
We could be adversely affected by legal actions and claims brought by consumers or regulatory authorities in relation to the quality of our products and eventual health problems or other consequences caused by our products or by any of their ingredients. We could also be affected by legal actions and claims brought against us for products made in a jurisdiction outside the jurisdictions where we are operating. An array of legal actions, claims or damaging publicity may affect our reputation as well as have a material adverse effect on our revenues and businesses. See “Item 8. Financial Information —A. Consolidated Statements and Other Information—Legal Proceedings.”

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Unfavorable publicity or a failure to respond effectively to adverse publicity, particularly on social media platforms, could harm our reputation and adversely impact our business and financial performance.
The good reputation of our brand is a key factor in the success of our business. Actual or alleged incidents at any of our restaurants could result in harmful publicity. Moreover, we have seen a significant increase in the use of our delivery options as a result of the COVID-19 pandemic. Any actual or perceived delay in the delivery of orders could also result in harmful publicity. Even incidents occurring at restaurants operated by our competitors or in the supply chain generally could result in negative publicity that could harm the restaurant industry and thus, indirectly, our brand. In particular, in recent years, there has been a marked increase in the use of social media platforms and similar devices which give individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their participants’ posts, often without filters or checks on accuracy of the content posted. A variety of risks are associated with the dissemination of this information online, including the improper disclosure of proprietary information, negative comments about our company, exposure of personally identifiable information, fraud or outdated information. The inappropriate use of social media platforms by our customers, employees or other individuals could increase our costs, lead to litigation or result in negative publicity that could damage our reputation. If we are unable to quickly and effectively respond, we may suffer damage to our reputation or loss of consumer confidence in our products, which could adversely affect our business, results of operations, cash flows and financial condition, as well as require resources to rebuild our reputation.
Certain Factors Relating to Latin America and the Caribbean
Our business is subject to the risks generally associated with international business operations.
We engage in business activities throughout Latin America and the Caribbean. In 2019, 72.3% of our revenues were derived from Brazil, Argentina, Mexico and Chile. As a result, our business is and will continue to be subject to the risks generally associated with international business operations, including:
governmental regulations applicable to food services operations;
changes in social, political and economic conditions;
transportation delays;
power, water and other utility shutdowns or shortages;
limitations on foreign investment;
restrictions on currency convertibility and volatility of foreign exchange markets;
inflation;
import-export quotas and restrictions on importation;
changes in local labor conditions;
changes in tax and other laws and regulations;
expropriation and nationalization of our assets in a particular jurisdiction; and
restrictions on repatriation of dividends or profits.
Some of the Territories have been subject to social and political instability in the past, and interruptions in operations could occur in the future. See also “—Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect business, results, financial conditions and prospects.”

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Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect business, results, financial conditions and prospects.
Arcos Dorados’ growth and profitability depend on political stability and economic activity in Latin America and the Caribbean, especially in emerging market countries. Recent political unrest and social strife could affect developments and perception of risk in this region. For example, in 2019, political and social unrest in Latin American countries, including Ecuador, Chile, Bolivia and Colombia sparked political demonstrations and, in some instances, violence. In October 2019, presidential elections were held in Bolivia, Uruguay and Argentina. Controversial outcomes in Bolivia and Uruguay led to violent protests and claims of fraudulent elections in Bolivia and a runoff election in Uruguay.
Similarly, Chile experienced political unrest and social strife, including a wave of protests and riots, beginning on October 18, 2019, sparked by an increase in the subway fare of the Santiago Metro and widened to reflect anger over living costs and inequality.  The unrest in Chile and associated civil protests caused political and economic instability and led to damage of property and other vandalism. Six of our restaurants in Chile were closed due to significant damages caused by fire and a seventh suffered minor damages but remains closed because the shopping center where it is located has not re-opened. Although our insurance will cover all of the physical damage and our direct losses as a result of the restaurant closures, there are certain losses that may not be recoverable, such as losses suffered from adjusted business hours to ensure the safety of our staff and other travel and safety measures.
As a result of this political and social turmoil there was a decrease in demand at our restaurants in certain regions and certain of our restaurants experienced physical damage in Chile as a result of the civil protests. While this damage did not have a material adverse effect on our business, any further turmoil could have such an effect on the business. Accordingly, the political unrest and social strife, including waves of protests, civil demonstrations and riots could have a significant impact on us. We cannot assure you that future developments affecting the political and social situation, including economic or political instability, in this region will not adversely affect our business, results of operations, financial condition and prospects.
Changes in governmental policies in the Territories could adversely affect our business, results of operations, financial condition and prospects.
Governments throughout Latin America and the Caribbean have exercised, and continue to exercise, significant influence over the economies of their respective countries. Accordingly, the governmental actions, political developments, regulatory and legal changes or administrative practices in the Territories concerning the economy in general and the food services industry in particular could have a significant impact on us. We cannot assure you that changes in the governmental policies of the Territories will not adversely affect our business, results of operations, financial condition and prospects.
Latin America has experienced, and may continue to experience, adverse economic conditions that have impacted, and may continue to impact, our business, financial condition and results of operations.
The success of our business is dependent on discretionary consumer spending, which is influenced by general economic conditions, consumer confidence and the availability of discretionary income in the countries in which we operate. Latin American countries have historically experienced uneven periods of economic growth, recessions, periods of high inflation and economic instability. In 2019, the economic growth rates of the economies of many Latin American countries slowed and some entered recessions, and we expect to see further slowdowns in 2020 as a result of COVID-19. Any prolonged economic downturn could result in a decline in discretionary consumer spending. This may reduce the number of consumers who are willing and able to dine in our restaurants, or consumers may make more value-driven and price-sensitive purchasing choices, eschewing our core menu items for our entry-level food options. We may also be unable to sufficiently increase prices of our menu items to offset cost pressures, which may negatively affect our financial condition.
In addition, a prolonged economic downturn may lead to higher interest rates, significant changes in the rate of inflation or an inability to access capital on acceptable terms. Our suppliers and service providers could experience cash flow problems, credit defaults or other financial hardships. If our franchisees cannot adequately access the financial resources required to open new restaurants, this could have a material effect on our growth strategy.

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Many of our customers depend on remittances from family members living overseas. Laws, regulations or events that limit such remittances or any changes to United States immigration policy may adversely affect our financial condition and results of operations.
Many of the jurisdictions in which we operate depend on remittances as a source of revenue. Many of our customers rely on remittances from family members living overseas as a primary or secondary source of income. Any law, regulation or event that restricts, taxes or prevents those remittances may adversely affect demand for our products and our customers’ ability to repay their consumer loans, which in turn may adversely affect our financial condition and results of operations. In particular, President Trump’s administration has in the past mentioned the possibility of taxing remittances to Mexico. We cannot assure you that the Trump administration will not implement taxing of remittances to Mexico or the other countries in which we operate. The implementation of any such measure may have a material adverse effect on our financial condition and results of operations.
Inflation and government measures to curb inflation may adversely affect the economies in the countries where we operate, our business and results of operations.
Many of the countries in which we operate, have experienced, or are currently experiencing, high rates of inflation. For example, as of July 1, 2018, Argentina is considered highly inflationary under U.S. GAAP. In addition, Venezuela has been considered hyperinflationary under U.S. GAAP since 2010. Although inflation rates in many of the other countries in which we operate have been relatively low in the recent past, we cannot assure you that this trend will continue. The measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in many of these countries and to heightened volatility in their securities markets. Periods of higher inflation may also slow the growth rate of local economies that could lead to reduced demand for our core products and decreased sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to fully pass on to our customers, which could adversely affect our operating margins and operating income.
Exchange rate fluctuations against the U.S. dollar in the countries in which we operate have negatively affected, and could continue to negatively affect, our results of operations.
We are exposed to exchange rate risk in relation to the United States dollar. While substantially all of our income is denominated in the local currencies of the countries in which we operate, our supply chain management involves the importation of various products, and some of our imports, as well as some of our capital expenditures and a significant portion of our long-term debt, are denominated in U.S. dollars. As a result, the decrease in the value of the local currencies of the countries in which we operate as compared to the U.S. dollar has increased our costs, and any further decrease in the value of such currencies will further increase our costs. Although we maintain a hedging strategy to attempt to mitigate some of our exchange rate risk, our hedging strategy may not be successful or may not fully offset our losses relating to exchange rate fluctuations.
As a result, fluctuations in the value of the U.S. dollar with respect to the various currencies of the countries in which we operate or in U.S. dollar interest rates could adversely impact our net income, results of operations and financial condition.
Price controls and other similar regulations in certain countries have affected, and may in the future affect, our results of operations.
Certain countries in which we conduct operations have imposed, and may continue to impose, price controls that restrict our ability, and the ability of our franchisees, to adjust the prices of our products. For example, there are currently certain price control regulations in force in Argentina. Although the industry in which we operate is not yet subject to these regulations, it is not clear whether the current administration will apply or enforce price controls in the future on the industry in which we operate.
Moreover, the Venezuelan market is subject to a regulation establishing a maximum profit margin for companies and maximum prices for certain goods and services. Although we managed to navigate the negative impact of the price controls on our operations from 2013 through 2019, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment. See “Item 4. Information on the Company—B. Business Overview—Regulation.”

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The imposition and enforcement of these and similar restrictions in the future may place downward pressure on the prices at which our products are sold and may limit the growth of our revenue. We cannot assure you that existing price controls will not be enforced or become more stringent, or that new price controls will not be imposed in the future, or that any such controls may not have an adverse effect on our business. Our inability to control the prices of our products could have an adverse effect on our results of operations.
We are subject to significant foreign currency exchange controls and currency devaluation in certain countries in which we operate.
Certain Latin American economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into U.S. dollars. This may increase our costs and limit our ability to convert local currency into U.S. dollars and transfer funds out of certain countries, including for the purchase of dollar-denominated inputs, the payment of dividends or the payment of interest or principal on our outstanding debt. In the event that any of our subsidiaries are unable to transfer funds to us due to currency restrictions, we are responsible for any resulting shortfall.
For example, in 2019, our subsidiaries in Argentina represented 13.2% of our total revenues. Since September 2019, the current Argentine government has tightened restrictions on capital flows and imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments outside of Argentina. Furthermore, the Central Bank of Argentina implemented regulations requiring its prior approval for certain foreign exchange transactions otherwise authorized to be carried out under the applicable regulations, such as dividend payments or repayment of principal of inter-company loans as well as the import of goods. As a consequence of the reimposition of exchange controls, the spread between the official exchange rate and other exchange rates resulting implicitly from certain capital market operations usually effected to obtain U.S. dollars has broadened significantly, reaching a value of approximately 72% above the official exchange rate as of April 27, 2020. The implementation of the above-mentioned measures could impact our ability to transfer funds outside of Argentina and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina. As a result, if we are prohibited from transferring funds out of Argentina, or if we become subject to similar restrictions in other countries in which we operate, our results of operations and financial condition could be materially adversely affected.

In addition, the continuing devaluation of the Argentine peso since the end of 2015 and the Venezuelan bolivar since 2010 has led to higher inflation levels, has significantly reduced competitiveness, real wages and consumption and has had a negative impact on businesses whose success is dependent on domestic market demand and supplies payable in foreign currency.
Further currency devaluations in any of the countries in which we operate could have a material adverse effect on our results of operations and financial condition. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls.”
If we fail to comply with, or if we become subject to, more onerous government regulations, our business could be adversely affected.
We are subject to various federal, state and municipal laws and regulations in the countries in which we operate, including those related to the food services industry, health and safety standards, importation of goods and services, marketing and promotional activities, nutritional labeling, zoning and land use, environmental standards and consumer protection. We strive to abide by and maintain compliance with these laws and regulations. The imposition of new laws or regulations, including potential trade barriers, may increase our operating costs or impose restrictions on our operations, which could have an adverse impact on our financial condition.
For example, Argentine regulations require us to seek permission from the Argentine authorities prior to importing certain goods. Although these regulations do not currently affect us, they may in the future prevent or delay the receipt of goods that we require for our operations, or increase the costs associated with obtaining those goods, and therefore have an adverse impact on our business, results of operations or financial condition. Additionally, in 2017, Venezuela enacted the Productive Foreign Investments Constitutional Act, which replaced the Foreign Investment Act of 2014. This law establishes the requirements and limitations for the transfer of dividends and repatriation of foreign investments. It also establishes a minimum investment sum to be registered with the Ministry of Popular Power with Foreign Investment, limits access to internal financing, modifies the criteria of foreign investments and creates a new penalty system for those who do not comply with the law.

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Regulations governing the food services industry have become more restrictive. We cannot assure you that new and stricter standards will not be adopted or become applicable to us, or that stricter interpretations of existing laws and regulations will not occur. Any of these events may require us to spend additional funds to gain compliance with the new rules, if possible, and therefore increase our cost of operation.
We could be subject to expropriation or nationalization of our assets and government interference with our business in certain countries in which we operate.
We face a risk of expropriation or nationalization of our assets and government interference with our business in several of the countries in which we do business. These risks are particularly acute in Venezuela. The current Venezuelan government has promoted a model of increased state participation in the economy through welfare programs, exchange and price controls and the promotion of state-owned companies. We can provide no assurance that Company-operated or franchised restaurants will not be threatened with expropriation and that our operations will not be transformed into state-owned enterprises. In addition, the Venezuelan government may pass laws, rules or regulations which may directly or indirectly interfere with our ability to operate our business in Venezuela which could result in a material breach of the MFAs, in particular if we are unable to comply with McDonald’s operations system and standards. A material breach of the MFAs would trigger McDonald’s option to acquire our non-public shares or our interests in Venezuela. See “—Certain Factors Relating to Our Business—McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.”
Certain Factors Relating to Our Class A Shares
Mr. Woods Staton, our Executive Chairman, controls all matters submitted to a shareholder vote, which will limit your ability to influence corporate activities and may adversely affect the market price of our class A shares.
Mr. Woods Staton, our Executive Chairman, owns or controls common stock representing 39.61% and 76.49%, respectively, of our economic and voting interests. As a result, Mr. Woods Staton is and will be able to strongly influence or effectively control the election of our directors, determine the outcome of substantially all actions requiring shareholder approval and shape our corporate and management policies. The MFAs’ requirement that Mr. Woods Staton at all times hold at least 51% of our voting interests likely will have the effect of preventing a change in control of us and discouraging others from making tender offers for our shares, which could prevent shareholders from receiving a premium for their shares. Moreover, this concentration of share ownership may make it difficult for shareholders to replace management and may adversely affect the trading price for our class A shares because investors often perceive disadvantages in owning shares in companies with controlling shareholders. This concentration of control could be disadvantageous to other shareholders with interests different from those of Mr. Woods Staton and the trading price of our class A shares could be adversely affected. See “Item 7. Major Shareholders and Related Party Transactions―A. Major Shareholders” for a more detailed description of our share ownership.
Furthermore, the MFAs contemplate instances where McDonald’s could be entitled to purchase the shares of Arcos Dorados Holdings Inc. held by Mr. Woods Staton. However, our publicly held class A shares will not be similarly subject to acquisition by McDonald’s.
Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our class A shares to decline.
Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our Class A shares to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Under our articles of association, we are authorized to issue up to 420,000,000 class A shares, of which 124,070,029 class A shares were outstanding as of December 31, 2019 and 7,993,602 class A shares were held in treasury. We cannot predict the size of future issuances of our shares or the effect, if any, that future sales and issuances of shares would have on the market price of our class A shares.

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As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our Class A shares.
Section 303A of the New York Stock Exchange, or NYSE, Listed Company Manual requires listed companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. British Virgin Islands law, the law of our country of incorporation, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee, and our board thus may not include, or may include fewer, independent directors than would be required if we were subject to these NYSE requirements. Since a majority of our board of directors may not consist of independent directors as long as we rely on the foreign private issuer exemption to these NYSE requirements, our board’s approach may, therefore, be different from that of a board with a majority of independent directors, and as a result, the management oversight of our Company may be more limited than if we were subject to these NYSE requirements.
Certain Risks Relating to Investing in a British Virgin Islands Company
We are a British Virgin Islands company and it may be difficult for you to obtain or enforce judgments against us or our executive officers and directors in the United States.
We are incorporated under the laws of the British Virgin Islands. Most of our assets are located outside the United States. Furthermore, most of our directors and officers reside outside the United States, and most of their assets are located outside the United States. As a result, you may find it difficult to effect service of process within the United States upon these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for you to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an action against us or these persons in a British Virgin Islands court predicated upon the civil liability provisions of the U.S. federal securities laws.
As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States and the British Virgin Islands, courts in the British Virgin Islands will not automatically recognize and enforce a final judgment rendered by a U.S. court.
Any final and conclusive monetary judgment obtained against us in U.S. courts, for a definite sum, may be treated by the courts of the British Virgin Islands as a cause of action in itself so that no retrial of the issue would be necessary, provided that in respect of the U.S. judgment:
the U.S. court issuing the judgment had jurisdiction in the matter and we either submitted to such jurisdiction or were resident or carrying on business within such jurisdiction and were duly served with process;
the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of ours;
in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court;
recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and
the proceedings pursuant to which judgment was obtained were not contrary to public policy.
Under our articles of association, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions.

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You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.
Our affairs are governed by the provisions of our memorandum of association and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law. The rights of our shareholders and the responsibilities of our directors and officers under the British Virgin Islands law are different from those applicable to a corporation incorporated in the United States. There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the British Virgin Islands regulations governing the securities of British Virgin Islands companies may not be as extensive as those in effect in the United States, and the British Virgin Islands law and regulations in respect of corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.
You may not be able to participate in future equity offerings, and you may not receive any value for rights that we may grant.
Under our memorandum and articles of association, existing shareholders are entitled to preemptive subscription rights in the event of capital increases. However, our articles of association also provide that such preemptive subscription rights do not apply to certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC.
ITEM 4. INFORMATION ON THE COMPANY
A.    History and Development of the Company
Overview
We were incorporated as Arcos Dorados Holdings Inc. on December 9, 2010 under the laws of the British Virgin Islands as a direct, wholly owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. Following the merger, we replaced Arcos Dorados Limited in the corporate structure and replicated its governance structure.
We are a British Virgin Islands company incorporated with limited liability and our affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law, including the BVI Business Companies Act, 2004, or the BVI Act. Our company number in the British Virgin Islands is 1619553. As provided in sub-regulation 4.1 of our memorandum of association, subject to British Virgin Islands law, we have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction and, for such purposes, full rights, powers and privileges.
Our principal executive offices are located at Dr. Luis Bonavita 1294, Office 501, WTC Free Zone, Montevideo, Uruguay (CP 11300). Our telephone number at this address is +598 2626-3000. Our registered office in the British Virgin Islands is Maples Corporate Services (BVI) Limited, Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands.
The SEC maintains an internet website that contains reports, proxy, information statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. Our website address is www.arcosdorados.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this annual report.
Important Events
The Acquisition
McDonald’s Corporation has a longstanding history in Latin America and the Caribbean, dating to the opening of its first restaurant in Puerto Rico in 1967. Since then, McDonald’s expanded its presence across the region as consumer markets and opportunities arose, opening its first stores in Brazil in 1979, in Mexico and Venezuela in 1985 and in Argentina in 1986.

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We commenced operations on August 3, 2007, as a result of the Acquisition of McDonald’s LatAm business. Woods Staton, our Executive Chairman and controlling shareholder, was the joint venture partner of McDonald’s Corporation in Argentina for over 20 years prior to the Acquisition and also served as President of McDonald’s South Latin American division from 2004 until the Acquisition. Our senior management team includes executives who had previously worked in McDonald’s LatAm business or with Mr. Woods Staton.
We hold our McDonald’s franchise rights pursuant to the MFA for all of the Territories except Brazil, executed on August 3, 2007, as amended and restated on November 10, 2008 and as further amended on August 31, 2010, June 3, 2011 and March 17, 2016, entered into by us, LatAm, LLC (the “Master Franchisee”), our former wholly owned subsidiary Arcos Dorados Coöperatieve U.A., Arcos Dorados B.V., certain subsidiaries of the Master Franchisee, Los Laureles, Ltd. and McDonald’s. On March 21, 2018, Arcos Dorados Group B.V. (together with Arcos Dorados B.V. and us, the “Owner Entities”) replaced Arcos Dorados Coöperatieve U.A. as party to the MFA. On August 3, 2007, our subsidiary Arcos Dourados Comercio de Alimentos Ltda., or the Brazilian Master Franchisee, and McDonald’s entered into the separate, but substantially identical, Brazilian MFA, which was amended and restated on November 10, 2008. See “Item 10. Additional Information―C. Material Contracts―The MFAs.”
The Axionlog Split-off
We used to own and operate some of the distribution centers in the Territories, which operations and related properties we refer to as Axionlog (formerly known as Axis). As of the date of the split-off, Axionlog operated in Argentina, Chile, Mexico and Venezuela, and its main third-party customers were Sodexho, Eurest, Sadia, WalMart, Carrefour, Subway and Dairy Queen. We effected a split-off of Axionlog to our existing shareholders in March 2011. For additional information about the split-off of Axionlog, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Axionlog Split-off.”
Capital Expenditures and Divestitures
Under the MFAs, we are required to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period during the term of the MFAs. The restaurant opening plan specifies the number and type of new restaurants to be opened in the Territories during the applicable three-year period, while the reinvestment plan specifies the amount we must spend reimaging or upgrading restaurants in the Territories during the applicable three-year period. Prior to the expiration of the then-applicable three-year period we must agree with McDonald’s on a subsequent restaurant opening plan and reinvestment plan. In the event that we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing reinvestment plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan. We may also propose, subject to McDonald’s prior written consent, amendments to any restaurant opening plan and/or reinvestment plan to adapt to changes in economic or political conditions.
As a result of the business disruptions caused by COVID-19 outbreak, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan and we do not expect to finalize a revised 2020-2022 plan at least until the COVID-19 outbreak is under control. If we are unable to meet our commitments under a future plan and we are unable to reach an agreement on revised terms of the restaurant opening plan and reinvestment plan or are otherwise unable to obtain a waiver from McDonald’s, we will be in default under the terms of the MFAs. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”
As a result of our previous restaurant opening plan and reinvestment plan, property, property and equipment expenditures were $265.2 million, $197.0 million and $174.8 million in 2019, 2018 and 2017 respectively. In 2019, we opened 90 restaurants, reimaged 271 existing restaurants, opened 6 McCafé locations and 296 Dessert Centers. In 2018, we opened 70 restaurants, reimaged 173 existing restaurants, opened 6 McCafé locations and 375 Dessert Centers. In 2017, we opened 50 restaurants, reimaged 124 existing restaurants and opened 2 McCafé locations and 223 Dessert Centers. In 2019, 2018 and 2017, we closed 20, 35 and 18 restaurants, respectively.
In addition, outflows related to purchases of restaurant businesses paid at acquisition date totaled $2.7 in 2019 and $0.9 million in 2017. We had no such outflows in 2018.

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Proceeds from the sale of property and equipment and sales of restaurant businesses, including related advances, totaled $8.2 million, $13.0 million and $72.4 million in 2019, 2018 and 2017, respectively.
Prior to the inception of the COVID-19 pandemic, we planned to open at least 285 to 300 new restaurants and invest approximately $1.0 billion in total capital expenditures, which includes reinvestment capital expenditures, from 2020 through 2022. Due to the COVID-19 outbreak, as of the date of this annual report, we have withdrawn this plan and do not expect to finalize a revised plan for 2020 to 2022 at least until the COVID-19 outbreak has been brought under control. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”
In March 2015, we announced a plan to monetize certain real estate assets in our portfolio that are either non-core or operating assets where the value significantly exceeds the operating potential of the asset, through which we received over $170 million from the sale of these properties. The main goal of the redevelopment initiative was to reduce debt levels. We have concluded with this plan.

B.    Business Overview
Overview
We are the world’s largest independent McDonald’s franchisee in terms of systemwide sales and number of restaurants, according to McDonald’s, representing 3.99% of McDonald’s global sales in 2019. We have the exclusive right to own, operate and grant franchises of McDonald’s restaurants in 20 countries and territories in Latin America and the Caribbean, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago, Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela, which we refer to collectively as the Territories. As of December 31, 2019, we operated or franchised 2,293 McDonald’s-branded restaurants, which represented 6.35% of McDonald’s total franchised restaurants worldwide. In 2019 and 2018, we accrued $155.4 million and $157.9 million, respectively, in royalties to McDonald’s (not including royalties accrued on behalf of our franchisees).
We operate in the QSR sub-segment of the fast food segment of the Latin American and Caribbean food service industry. In Latin America and the Caribbean, the fast food segment has benefited from the region’s increasing modernization, as people in more densely populated areas adopt lifestyles that increasingly seek convenience, speed and value.
We commenced operations on August 3, 2007, as a result of the Acquisition. We operate McDonald’s-branded restaurants under two different operating formats, Company-operated restaurants and franchised restaurants. As of December 31, 2019, of our 2,293 McDonald’s-branded restaurants in the Territories, 1,580 (or 68.9%) were Company-operated restaurants and 713 (or 31.1%) were franchised restaurants. We generate revenues primarily from two sources: sales by Company-operated restaurants and revenues from franchised restaurants. Revenues from franchised restaurants primarily consist of rental income, which is generally based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. We own the land for 494 of our restaurants (totaling approximately 1.1 million square meters) and the buildings for all but 11 of our restaurants.
Our business has grown significantly in the last three years: we have increased our presence in existing and new markets in the Territories by opening a net total of 70 restaurants (90 total restaurants opened, including 65 Company-operated and 25 franchised, while 20 closed), 6 McCafé locations and 296 Dessert Centers (see “—Our Operations—McCafé Locations and Dessert Centers”).
We divide our operations into four geographical divisions: Brazil; the Caribbean division, consisting of Aruba, Colombia, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela; NOLAD, consisting of Costa Rica, Mexico and Panama; and SLAD, consisting of Argentina, Chile, Ecuador, Peru and Uruguay.
As of December 31, 2019, 44.6% of our restaurants were located in Brazil, 17.6% in SLAD, 23.1% in NOLAD and 14.7% in the Caribbean division. We believe our diversified market presence reduces our dependence on any one market and helps stabilize the impact of individual countries’ economic cycles on our revenues. We focus on our customers by managing operations at the local level, including marketing campaigns and special offers, menu management and monitoring customer

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satisfaction, while leveraging our size by conducting administrative and strategic functions at the divisional or corporate level, as appropriate.
The following table presents a breakdown of total revenues by division:
  For the Years Ended December 31,
  2019 2018 2017 2016 2015
  (in thousands of U.S. dollars)
Total Revenues          
Brazil $1,385,566  $1,345,453  $1,496,573  $1,333,237  $1,361,989 
Caribbean division(1) 399,251  483,743  474,822  409,671  398,144 
NOLAD 431,266  406,848  386,874  363,965  367,364 
SLAD 742,994  845,527  961,256  821,757  925,243 
Total 2,959,077  3,081,571  3,319,525  2,928,630  3,052,740 

 
(1)Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Foreign Currency Translation—Venezuela.”
Our Operations

Company-Operated and Franchised Restaurants
We operate our McDonald’s-branded restaurants under two basic structures: (i) Company-operated restaurants operated by us and (ii) franchised restaurants operated by franchisees. Under both operating alternatives, the real estate location may either be owned or leased by us.
We own, fully manage and operate Company-operated restaurants and retain any operating profits generated by such restaurants, after paying operating expenses and the franchise and other fees owed to McDonald’s under the MFAs. In Company-operated restaurants, we assume the capital expenditures for the building and equipment of the restaurant and, if we own the real estate location, for the land as well.
In contrast to Company-operated restaurants, franchised restaurants are operated and managed by the franchisee with technical and operational support from us as master franchisee, including training programs, operations manuals, access to our supply and distribution network and marketing assistance. Under our conventional franchise arrangements, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurants, and by reinvesting in the business over time. We are required by the MFAs to own the real estate or to secure long-term leases for franchised restaurant sites. We subsequently lease or sublease the property to franchisees. This arrangement allows for long-term occupancy of the property and assists in the alignment of our franchisees’ interests with our own.
In exchange for the lease and services, franchisees pay a monthly rent to us, generally based on the greater of a fixed rent or a certain percentage of gross sales. In addition to this monthly rent, we collect the monthly continuing franchise fee, which generally is 5% of the U.S. dollar equivalent of the restaurant’s gross sales, and pay these fees to McDonald’s pursuant to the MFAs. However, if a franchisee fails to pay its monthly continuing franchise fee, we remain liable for payment in full of these fees to McDonald’s. Pursuant to the MFAs, franchisees pay an initial franchise fee in connection with the opening of a new franchised restaurant and a transfer fee upon transfer of a franchised restaurant, both of which are subsequently shared by McDonald’s and us. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Franchise Fees.”

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The chart below illustrates the economics for Company-operated restaurants and franchised restaurants in the case of owned and leased real estate:
arcos20f2019_image1a11f.jpg
 
Source: Arcos Dorados
In addition, we are the majority stakeholder in two joint ventures that collectively own 15 restaurants in Argentina and Chile. We have also granted developmental licenses to 11 restaurants. Pursuant to the developmental licenses, the developmental licensees own or lease the land on and building in which the restaurant is located and pay a franchise fee to us in addition to the continuing franchise fee due to McDonald’s. All of our joint ventures and developmental licenses were in existence at the time of the Acquisition.
Restaurant Categories
We classify our restaurants into one of four categories: (i) freestanding, (ii) food court, (iii) in-store and (iv) mall stores. Freestanding restaurants are the largest type of restaurant, have ample indoor seating and include a drive-thru area and parking lot. Food court restaurants are located in malls and consist primarily of a front counter and kitchen and do not have their own seating area. In-store restaurants are part of a larger building, but they do not have a drive-thru area or a parking lot. Mall stores are located in malls like food court restaurants, but have their own seating areas. As of December 31, 2019, 1,083 (or 47.3%) of our restaurants (not including non-traditional satellite stores) were freestanding, 594 (or 25.9%) were food courts, 294 (or 12.8%) were in-stores and 320 (or 14.0%) were mall stores. These percentages vary by country, and may shift as opportunities in malls and more densely populated areas become available in some of the Territories.


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Below are examples of each of our restaurant categories:
freestanding1.jpg
instore2.jpg
FreestandingIn-store
  
mallstore3.jpg
foodcourt.jpg
Mall StoreFood Court
 
Source: Arcos Dorados
Returns on investment in each type of restaurant vary significantly due to the different capital expenditures required and their different sales potential; mall stores generally provide the highest return on investment while freestanding restaurants generally provide the lowest. Moreover, returns vary significantly on a country-by-country basis.
Reimaging
An important component of our development plan is the reimaging of existing restaurants. As of December 31, 2019, we had completed the reimaging of 1,018 of the 1,569 restaurants we purchased in the Acquisition, an increase of 177 restaurants as compared to December 31, 2018. Our restaurants that have undergone reimaging during the past three years have experienced an additional increase in sales per restaurant over the comparable sales growth experienced by restaurants which have not been reimaged in the same period. Both we and McDonald’s are committed to maintaining an image for our restaurants that creates a contemporary dining experience. Over the last few years, we have invested substantially in the reimaging of our restaurants, and we, pursuant to the MFAs, have committed to a significant reimaging plan. See “Item 10. Additional Information—C. Material Contracts.”
Objectives of the reimaging include elevating the customer’s perception of McDonald’s and creating a more sophisticated and highly aspirational environment. We have developed systemwide guidelines for the interior and exterior design of reimaged restaurants. When carrying out a reimaging project, we try to minimize the impact on the operations and sales of the restaurants, for instance, when possible, by keeping the restaurants open and operating during the renovations and working in specific areas of the location at particular times.

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Below are images of the exterior of a few of our restaurants that have benefited from reimaging:
arcos20f2019_image3a05f.jpg
arcos20f2019_image4a05f.jpg
 
Source: Arcos Dorados
McCafé Locations and Dessert Centers
Our brand extension efforts focus on the development of additional McCafé locations and Dessert Centers. McCafé locations are stylish, separate areas within restaurants where customers can purchase a variety of customizable beverages, including lattes, cappuccinos, mochas, hot and iced premium coffees and hot chocolate. McCafé locations have been very successful in creating a different customer experience, optimizing the use of our restaurants at all hours of operation and providing a higher profit margin than our regular restaurant operations. We believe the primary benefit of McCafé locations is that they attract new customers by increasing the variety of our product offerings and improving our image.
McCafé locations have been a key factor in adding value to our customers’ experience and represented 9.3% of the total transactions and 5.6% of total sales of the restaurants in which they were located in 2019. As of December 31, 2019, there were 258 McCafé locations in the Territories, of which 17.1% were operated by franchisees. Argentina and Brazil, with 81 locations, each, have the greatest number of McCafé locations. The first McCafé in Latin America was opened in Argentina in 1999. Pursuant to the MFAs, we have the right to add McCafé locations to the premises of our restaurants.

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Below are images of the interior of two of our McCafé locations:
mccafeinside1and2.jpg
Dessert Center - Ice Cube

icecube1and2.jpg
 
Source: Arcos Dorados
In addition to McCafé locations, Dessert Centers have been a very successful brand extension. Dessert Centers operate separately from existing restaurants, but depend on them for supplies and operational support. For example, a mall store restaurant can provide support for several Dessert Centers located in different locations throughout the same mall. Our Dessert Centers are conveniently located to attract customers, thereby serving as important transaction generators and providing an effective method of extending our band presence to non-traditional areas. At Dessert Centers, customers can purchase a variety of dessert items, including the McFlurry and soft-serve ice cream. Dessert Centers require low capital expenditures and provide returns on investment and operating margins that are significantly higher than our regular restaurant operations. As such, we believe they are an important driver in increasing our market penetration.
Dessert Centers represented 43% of our transactions and 14.7% of our total sales in 2019. As of December 31, 2019, there were 3,326 Dessert Centers in the Territories. Dessert Centers are highly successful in Brazil, where we have 2,000 locations. The first Dessert Center was created in Brazil in 1979.

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The following maps set forth our McCafé locations and Dessert Centers in each of the Territories as of December 31, 2019:
Network of McCafé LocationsNetwork of Dessert Centers
258 total McCafé locations3,326 total Dessert Centers
map1mccafecapture.jpg
map2mccafecapture.jpg
 
Source: Arcos Dorados
The McDonald’s Brand
Interbrand, a brand consulting firm, ranked McDonald’s ninth among the top twenty global brands in 2019. In addition, we believe that in Latin America and the Caribbean, the McDonald’s brand benefits from an aspirational cachet as a “destination” restaurant with a reputation for safe, fresh and good-tasting food in an attractive setting. McDonald’s strong brand equity stems from the dedicated execution of its brand promise and its ability to associate with the local community where it operates. McDonald’s sets the standard in the restaurant industry worldwide for brand stewardship and marketing leadership.
Product Offerings
A crucial part of delivering the brand to clients depends on our product offerings, or more specifically, our menu strategy and management. The key objective of our menu strategy is the development and offering of quality food choices that attract customers to our restaurants on a regular basis. The elements we utilize to achieve this goal include offering McDonald’s core menu, our product innovation initiatives and our focus on food safety.

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Our menus feature three tiers of products: (i) affordable entry-level options, such as our Combo del Día (Combo of the Day), McTrio 3x3 in Mexico and Almuerzo Colombiano (Colombian Lunches) in Colombia, (ii) core menu options, such as the Big Mac, Happy Meal and Quarter Pounder, and (iii) premium options, such as Big Tasty and Signature Collection or Picanha hamburgers, chicken sandwiches and salads or wraps for those clients that want low calorie options. These platforms can be based on the type of products, such as beef, chicken, salads or desserts, or on the type of customer targeted, such as the children’s menu. We have offered a new menu with fewer calories and less sugar and sodium in the majority of our Territories since 2011. Since 2013, we have offered dairy products, fresh fruits or vegetables with our Happy Meals in all of the Territories except Venezuela.
Our core menu is the most important element of our menu strategy and includes well-recognized food choices that have global customer acceptance and are what customers repeatedly order at McDonald’s-branded restaurants worldwide. During 2019, we evolved the Happy Meal Menu making significant reductions in fat, sodium and added sugars, making it more nutritious in all of our markets. We also made extensions of our core products, such as Big Mac Bacon and Triple Quarter Pounder with Cheese in Brazil, Quarter Pounder with Bacon, Lettuce and Tomato in Argentina and the McNuggetear with different sauces in Mexico.
Product Development
We have been very innovative in our product development in Latin America and the Caribbean. In key countries, our understanding of the local market has enabled us to successfully introduce new items to appeal to local tastes and to provide our customers with additional food options. Our chicken-based offerings include bone-in chicken in markets such as Colombia, Peru, Panama and Costa Rica. We also offer Signature Collection hamburgers with innovative flavors and premium offerings, such as Club House, Bacon Smoke House, Mushroom Deluxe, Egg and Bacon, Crispy Onion Barbecue. Also, we carefully monitor the sales of our products and are able to quickly modify them if necessary. For instance, although we always offer the McFlurry dessert product, we include in this product platform a promotional topping that is offered for a limited period of time, followed by a new promotional topping to maintain the sales momentum (for example, Oreo, Ovomaltine, Hershey’s, Milka and Kit Kat). In August 2019, we also updated our Happy Meal menus to include more fruits and vegetables and reduce fat, sodium and added sugars. See “—Social Initiatives and Charitable Activities—Nutrition and Well-Being.”
In 2011, we began the rollout of Made For You, or MFY, a new kitchen operating platform that allows us to improve the quality and freshness of our products, provide faster service and diversify our offerings. MFY’s implementation is funded by cutting waste and productivity gains. As of the end of 2018, we had implemented MFY in all of the territories in which we operate.
We work closely with McDonald’s to develop new product offerings and McDonald’s considers our recommendations regarding regional tastes and preferences and works with us to accommodate such tastes and preferences. We continue to benefit from McDonald’s product development efforts following the Acquisition and have access to a library of products developed globally for the McDonald’s system. In addition, we continue to benefit from the Hamburger Universities in the United States and Brazil and the food studio located in Brazil that aims to develop locally relevant products for the region. The Hamburger Universities and the food studio models have been McDonald’s main global source of people and product development. The Hamburger Universities provide restaurant managers, mid-managers and owner/operators with training on best practices in different aspects of the business, like restaurant and people management, sales and accounting, while emphasizing consistent restaurant operations procedures, service, quality and cleanliness.
Product and Pricing Strategy
Value perceptions change significantly between markets and even between areas within a single market. In order to adjust pricing to meet customers’ expectations in each market, we have developed local expertise aimed at understanding the dynamics of the local marketplace and the characteristics of its customers. We also examine trends in the pricing of raw materials, packaging, product-related operating costs as well as individual item sales volumes to fully understand profitability by item. In addition, we use international consultants with particular experience in this area to understand marketplace dynamics and consumer characteristics. These insights feed into the local markets’ menu, promotional and pricing strategy as well as the marketing plan that is disseminated to both Company-operated and franchised restaurants. Restaurants may then adjust pricing and/or item offerings as they choose in an attempt to optimize sales, profitability and local preferences. This cycle is part of an overall revenue management philosophy and is part of our business management practices utilized throughout the region.

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Advertisement & Promotion
We believe that sales in the QSR sub-segment can be significantly affected by the frequency and quality of our advertising and promotional programs. In particular, we benefit from the strength of McDonald’s global resources, including its global alliances with some of the largest multinational conglomerates and sponsorship of sporting events such as the FIFA World Cup and participation in various movie promotions, which provides us with important advertising and promotion opportunities.
We promote the McDonald’s brand and our products by advertising in all of the Territories. We create, develop and coordinate marketing plans and promotional activities throughout the Territories; however, pursuant to the MFAs, McDonald’s reserves the right to review and approve any advertising materials and related promotional activities and may request that we cease using the materials or promotional activities at any time if McDonald’s determines that they are detrimental to its brand image. We are required under the MFAs to spend at least 5% of our gross sales, and our franchisees generally are required to pay us a certain percentage of their gross sales for the portion of advertising expenditures related to their restaurants, on advertisement and promotion activities. The only exception to this policy is in Mexico, where both we and our franchisees contribute funds to a cooperative that is responsible for advertisement and promotion activities for Mexico. In connection with the COVID-19 outbreak, we have agreed with McDonald's to reduce the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020.
Our advertisement and promotion activities are guided by our overall marketing plan, which identifies the key strategic platforms that we aim to leverage to drive sales. The advertisement and promotion program is formulated based on the amount of advertisement and promotion support needed for each strategic platform for the year. Our key strategic platforms include menu relevance, by introducing premium products and extending core product lines, convenience and strengthening the kids and family experience. In terms of pricing, we understand that our customers seek great-tasting food at affordable prices and that their perception of value while at the restaurant is a significant factor in determining overall satisfaction and frequency of visits. Other initiatives included the “books or toys” campaign in all our markets in Latin America, through which we sold more than 18 million books since 2013, which aims to encourage children’s creativity. We also continued our premium platform through which we offered new, premium dishes, such as the Bacon Smoke House, Mushroom Deluxe, Egg and Bacon, Crispy Onion Barbecue, Picanha and McVeggie preparations of our Signature Collection burgers.
Through the execution of these initiatives, we work to enhance the McDonald’s experience for customers throughout the Territories, and increase our sales and customer counts. We aim to position ourselves as a “forever young” brand by delivering a youthfully energetic, distinctly casual, personally engaging and delightful dining/brand experience.
Regional Operations
The Company is divided into four geographical divisions: Brazil, the Caribbean division, NOLAD and SLAD. Except for Brazil, the divisions are subsequently divided into sub-groups comprised of individual Territories. The presidents of the divisions report directly to our chief operating officer.

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The following map sets forth the number of our restaurants in each of our operating divisions as of December 31, 2019:
arcos20f2019_image14.gif
 
Source: Arcos Dorados
We remain close to customers by managing operations at the local level, including implementing recruiting centers, conducting marketing campaigns and promotions, monitoring consumer perception and managing menu offerings. We conduct administrative and strategic activities at either the divisional level or at our headquarters, as appropriate. In addition, we have designed standardized crew recruiting manuals and have implemented an online communication platform for crew and managers. These centralized operations help us maintain consistent procedures, quality control and brand management across all of our markets.
Set forth below is a summary of our restaurant portfolio as of December 31, 2019.
 Ownership
Store Type(1)
Real Property(2)
Portfolio by DivisionCompany-OperatedJoint VentureFranchisedDevelopmental LicenseTotalFreestandingFood CourtIn-StoreMall StoreDessert CentersMcCafé LocationsOwnedLeased
Brazil612041101,023462350921192,00081108915
Caribbean Division251084133622421365531136128207
NOLAD364015610530273146515962613160360
SLAD33815510404124771158738912898306
Total   
1,56515702112,2931,0835942943203,3262584941,788

 
(1)Non-traditional satellite restaurants are not included in these figures.
(2)Developmental licenses and mobile stores are not included in these figures.


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Brazil
Brazil is our largest division in terms of restaurants, with 1,023 restaurants as of December 31, 2019 and $1,385.6 million in revenues in 2019, representing 44.6% and 46.8% of our total restaurants and revenues, respectively. Our operations in Brazil are based in Sao Paulo and McDonald’s has been present in Brazil since opening its first restaurant in Rio de Janeiro in 1979.
Caribbean Division
The Caribbean division includes eleven territories with 336 restaurants as of December 31, 2019 and $399.3 million in revenues in 2019, representing 14.7% and 13.5% of our total restaurants and revenues, respectively. Its primary market in terms of number of restaurants is Venezuela, representing 35.7% of the Caribbean division’s restaurants. Venezuela is our fourth-largest market in terms of restaurants. McDonald’s has been present in Venezuela since opening its first restaurant in Caracas in 1985. In terms of revenues, however, our primary market in this region is Puerto Rico, accounting for 35.7% of the Caribbean division’s revenues.
NOLAD
NOLAD includes three countries with 530 restaurants as of December 31, 2019 and $431.3 million in revenues in 2019, representing 23.1% and 14.6% of our total restaurants and revenues, respectively. Its primary market is Mexico, where the division’s management is based. McDonald’s has been present in Mexico since opening its first restaurant in Mexico City in 1985. Mexico represents 73.0% of NOLAD’s restaurants and 45.8% of NOLAD’s revenues, and Mexico is our second-largest market in terms of restaurants.
SLAD
SLAD includes five countries with 404 restaurants as of December 31, 2019 and $743.0 million in revenues in 2019, representing 17.6% and 25.1% of our total restaurants and revenues, respectively. Its primary market is Argentina, where the division’s management is based. McDonald’s has been present in Argentina since opening its first restaurant in Buenos Aires in 1986. As of December 31, 2019, Argentina represented 57.2% of SLAD’s restaurants and 52.7% of SLAD’s revenues in 2019. Argentina is our third-largest market in terms of restaurants.
Seasonality
Our sales and revenues are generally greater in the second half of the year than in the first half. Although the impact on our results of operations is relatively small, this impact is due to increased consumption of our products during the winter and summer holiday seasons, affecting July and December, respectively.
Supply and Distribution
Supply chain management is an important element of our success and a crucial factor in optimizing our profitability. Currently, we have an integrated and centralized supply chain management system that focuses on (i) the highest possible quality and food safety, (ii) competitive market pricing that is predictable and sustainable over time, and (iii) leveraging of local, regional and global sourcing strategies to obtain a competitive advantage. This system consists of the selection and development of suppliers that are able to comply with McDonald’s high quality standards and the establishment of the appropriate type of relationships with these suppliers. These standards, which are based on the highest industry standards, such as International Organization for Standardization (ISO) standards, British Retail Consortium (BRC) standards and others, include cleanliness, product consistency and timeliness, meeting or exceeding all local food regulations and compliance with our Hazard Analysis Critical Control Plan, or HACCP, a systematic approach to food safety that emphasizes protection within the processing facility, rather than detection, through analysis, inspection and follow-up. Due to our supply chain management and high quality standards, we believe our products have a competitive advantage because they have many attributes that make them appealing to our customers. For instance, our McNuggets are made of 100% white meat; our frying oil is 100% free of trans fatty acids; the dairy mix for our sundaes and the McFlurry undergo aseptic processes to rid them of bacteria; our vegetables are washed and sanitized; and our hamburger patties are made with 100% beef and do not contain additives.

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Pursuant to the MFAs, we purchase core products and services, such as beef, chicken, buns, produce, cheese, dairy mixes and toppings, from approved suppliers and distributors who satisfy the above requirements. If McDonald’s determines that any product or service offered by an approved supplier is not in compliance with its standards, it may terminate the supplier’s approved status. Beyond the purchase of core products and services, we have no restrictions on which suppliers or distributors we may use. We have largely continued the supply relationships that McDonald’s had established prior to the Acquisition, and we develop relationships with new suppliers in accordance with McDonald’s product and supplier protocols, including the following: Supplier Quality Management System, (SQMS), Social Workplace Accountability (SWA), Distributor Quality Management Program (DQMP), Animal Health and Welfare (AHW) or Packaging Quality Management Systems (PQMS).
Since the process to become an approved supplier is lengthy, expensive and requires proof of compliance with McDonald’s high quality standards, we have found that oral agreements with our approved suppliers generally are sufficient to ensure a reliable supply of quality food products, and we have developed long-term relationships with many of our suppliers. In addition, we enter into written agreements with most of our suppliers regarding the cost of such goods, which can be based on pricing protocols, formula costing, benchmarking or open bidding, as appropriate. Our 35 largest suppliers account for approximately 78% of our supplies excluding Venezuela, and no single supplier or group of related suppliers account for more than 15% of our total food and paper costs. Among our main suppliers are McCain Foods Limited, HAVI Group L.P., JBS S.A., Reyes Holdings L.L.C., BRF S.A., The Coca-Cola Company, Campo del Tesoro S.A., Polenghi Industrias Alimenticias Ltda., Bimbo S.A., Arytza S.A., Dohler S.A, Axionlog B.V, Eco Axial S.A., Frima S.A., AB Brasil Industria e Comercio de Alimentos LTDA, Tyson Foods, Golden State Foods, Kerry Group plc., Schreiber Foods Inc., Griffith Foods Worldwide Inc., Granja Tres Arroyos SRL, Panifresh S.A., Lactalis, Brasilgrafica S.A., Sergesa, Lacteos de Poblet S.A, Bemis Company Inc., Fortunato Mangravita SA, Terbium Industrial S.A. de C.V., Bunge Limited, J F C & Natural Salads Distribuidora de Produtos Hortifrutigranjeiros Ltda, 2 F Alimentos LTDA, Trenier Grafica E Industria De Artefatos De Papel Ltda, Marfrig Global Foods S/A e Industrial and American Beef S.A.
Our integrated supply chain management optimizes value as we work with suppliers to develop pricing protocols, inventory, planning and product quality. As of December 31, 2019, approximately 21.5% of the food and paper products used in our restaurants were exposed to fluctuations in foreign exchange rates. This percentage varies among the Territories; for example, 31.7% of the products consumed in Mexico are exposed to fluctuations in foreign exchange rates, while 13.8% and 49.3% of the products consumed in Brazil and Colombia, respectively, are exposed. This includes the toys distributed in our restaurants, which are imported from China. Certain supplies, such as beef, must often be locally sourced in 2019 due to restrictions on their importation. Combined with the MFAs’ requirement to purchase certain core supplies from approved suppliers, although we maintain contingency plans to back up restaurant supplies, we may not be able to quickly find alternate or additional supplies in the event a supplier is unable to meet our orders. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.” The suppliers send almost all of their products to distribution centers that are in charge of transportation, warehousing, financial administration, demand and inventory planning and customer service. The distribution centers interact directly with our Company-operated and franchised restaurants.
Until March 16, 2011, we owned and operated some of the distribution centers in the Territories, which operations and related properties we refer to as Axionlog (formerly known as Axis). See “—A. History and Development of the Company—Important Events—The Axionlog Split-off.” In 2011, we entered into a master commercial agreement with Axionlog on arm’s-length terms pursuant to which Axionlog provides us with distribution inventory, storage (dry, frozen and chilled) and transportation services in Argentina, Chile, Colombia, Mexico, Uruguay, Peru, Venezuela and Ecuador. For additional information about our transactions with Axionlog, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Axionlog Split-off.”

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Supply Chain Management and Quality Assurance
All products that we sell meet McDonald’s specifications, including new products and promotions. We work with our suppliers to implement key standards testing at each stage of our supply chain, including raw materials, processing and distribution. With respect to raw materials, we verify that produce suppliers undergo verification audits. All protein suppliers also undergo Animal Welfare Policy, “mad cow” disease and HACCP audits. At the processing stage, we implement a supplier quality management system that encourages continuous improvement in each key product category. We conduct seminars annually with all key suppliers on topics such as standards calibration, product sensory evaluation and best practices, and all suppliers are audited annually by a third party for compliance with McDonalds’s SQMS. As members of the Global Food Safety Initiative (GFSI), we encourage our suppliers to adopt any norm under the umbrella of GFSI that is recognized globally. We measure compliance through visits to processing plants, supplier summits, regularly scheduled audits and sensory testing that is achieved through a combination of product, equipment and operational procedures. At the distribution stage, we have implemented the Distribution Quality Management Program, which includes a shelf-life management system, strict temperature controls for receiving and storage of food products, a sophisticated stock recovery program and a quality inspection program. In 2017, we complemented our audit process with the implementation of unannounced checks at the facilities of high-risk suppliers.
Our quality testing extends to restaurant operations. The Quality Program that includes Across The Counter Quality (ATCQ), Behind The Counter Quality (BTCQ) and Field Service Support is designed for restaurant improvement and food safety verification processes that allow us to track the implementation of changes in restaurant operations, new products, procedures and equipment. Moreover, in 2017 we introduced a Food Safety Restaurants audit, which is an audit of our vendors run by a third-party contractor. We participate in the restaurant operations improvement process designed by McDonald’s, under which Company-operated and franchised restaurants are visited at least three times in any 12-month cycle to identify system opportunities to continuously improve our operations. Visits are conducted by our operation consultants, who assess restaurants based on food quality, service and cleanliness. We also participate in the worldwide mystery shopper program designed by McDonald’s, where all restaurants are visited twice a month by a third-party vendor who provides us with feedback from a customer perspective. This feedback, called customer satisfaction opportunity reports, is sent to a centralized monitoring system that evaluates key operations indicators. Our multidisciplinary teams, which include members of our Supply Chain and Marketing and Operations teams, work to improve quality and efficiency at the restaurant level throughout the Territories.
Our Competition
We compete with international, national, regional and local retailers of food products. We compete on the basis of price, convenience, service, menu variety and product quality. Our competition in the broadest perspective includes restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, ice cream vendors, convenience food stores, delicatessens and supermarkets.
Our Customers
We aim to provide our customers with safe, fresh and good-tasting food at a good value and a favorable dining experience in the family friendly environment demanded by our target demographic of young adults and families with children. Based on data from the United Nations Economic Commission for Latin America and the Caribbean, the Territories represented a market of approximately 550 million people in 2019—equivalent to the combined population of the United States, Germany, France and the United Kingdom—of which approximately 23.1% are under 14 years old and 39.2% are under 25 years old. As a business focused on young adults in the 14 to 35 age range and families with children, our operations have benefited, and we expect to continue to benefit, from our Territories’ population size, age profile when compared to more developed markets and improving socio-economic conditions.
The McDonald’s brand in Latin America is positioned as an aspirational experience and a destination for our guests. In order to maintain that brand positioning, we have implemented several initiatives focused on providing our guests with a differentiated customer experience. EOTF provides an innovative experience with a noticeable change in the areas of service, hospitality, and atmosphere in the restaurant. We will evolve to an integrated vision, based on 5 fundamental pillars to transversally deliver the expected experience for our guest: atmosphere, people, family, menu and technology.
Despite ongoing risks generally associated with international business operations, the confluence of favorable factors throughout many of the Territories, including growth in our target demographic markets, offer an opportunity of profitable growth and the ability to serve an ever-increasing number of customers.

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Regulation
We are subject to various multi-jurisdictional federal, regional and local laws in the countries in which we operate affecting the operation of our business, as are our franchisees and suppliers. Each restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, tax, operating, building and fire agencies in the jurisdiction in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals can delay or prevent the opening of a new restaurant in a particular area. Restaurant operations are also subject to federal and local laws governing matters such as wages, working conditions and overtime. We are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.
Substantive laws that regulate the franchisor/franchisee relationship presently exist in several of the countries in which we operate, including Brazil. These laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply and regulate franchise sales communications.
Certain countries in which we conduct operations have imposed, and may continue to impose, price controls that restrict our ability, and the ability of our franchisees, to adjust the prices of our products.
For example, in September 2014, Argentina passed: (i) Law No. 26,991, the “Regulation on Production and Consumption Relationships Act,” which reformed a 1974 Act (Law on Supply of Goods and Services); and (ii) Law No. 26,992, the “Creation of the Observatory of Prices and Availability of Inputs, Goods and Services Act.”
The Regulation on Production and Consumption Relationships Act empowers the Secretary of Commerce to, among other things: (i) establish profit margins and set price levels (setting maximum, minimum and benchmark prices); (ii) issue regulations on commerce, intermediation, distribution or production of goods and services; (iii) impose the continuance of production, industrialization, commercialization, transport, distribution or rendering of services or impose the production of goods; (iv) set subsidies; (v) request any kind of documentation and correspondence related to commercial activities or the management of the businesses and impose the publication of prices and availability of goods and services and seize such documentation for up to 30 working days; (vi) impose registration and recordkeeping requirements; and (vii) impose licensing regimes for commercial activities. In addition, the Secretary of Commerce is entitled to impose certain penalties for failure to comply with the Regulation on Production and Consumption Relationships Act, including fines, temporary closure of businesses, seizure of goods and products and loss of fiscal benefits.
The Creation of the Observatory of Prices and Availability of Inputs, Goods and Services Act created a technical agency under the Secretary of Commerce (the Observatory of Prices and Availability of Inputs, Goods and Services) to control and systematize prices. The Argentine government has not enforced the aforementioned regulations since 2015 and neither this agency nor those regulations has had an adverse impact on us. As of the date of this annual report, we are not aware of any measures carried out implementing the abovementioned regulations in Argentina. However, a new administration took office in Argentina in December 2019. Therefore, we cannot assure you that such regulations will not be enforced and impact our business and results of operations in the future.
Similarly, in Venezuela, the Fair Price Act has been in force since 2013, which seeks to lower high inflation by controlling prices and costs in the chain of production. The Fair Price Act generally sets forth a profit cap of 30% on the cost structure of goods and services, thus reducing management’s ability to freely determine final prices. According to regulations passed under the Fair Price Act, to determine a final and fair price, management must observe and consider all of the costs of production, including (i) acquisition costs of raw materials, the determination of which must comply with existing regulations on transfer pricing (i.e., price, freight, primary storage, non-recoverable taxes and other costs directly attributable to the acquisition of raw materials), (ii) labor costs, and (iii) indirect costs of production.
The Fair Price Act also empowers the National Agency for the Defense of Socio-economic Rights to implement provisions and regulations on “fair pricing” and to oversee and audit businesses in Venezuela. Breaches of the Fair Price Act can result in criminal charges against merchants or business people. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Latin America and the Caribbean—Price controls and other similar regulations in certain countries have affected and may continue to affect our results of operations.” Although we managed to navigate the negative impact of the price controls on our operations from 2013 through 2019, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment.

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We are also subject to labor laws applicable in the countries in which we operate. The adoption of new or more stringent labor laws or regulations could result in a material liability to us. For example, during 2019, Venezuela implemented three increases in the minimum wage and the United States Virgin Islands approved the final wage increase in a three-stage increase started in 2015. In addition, in Argentina, certain proposed bills have attempted to implement overtime payments for weekends and mandatory employee profit-sharing, although none of those have been enacted by Congress. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—Labor shortages or increased labor costs could harm our results of operations.”
In September 2014, Argentina enacted Law No. 26,993 (the “Prior Conciliation Service in Consumer Relations”). The Prior Conciliation Service in Consumer Relations is an administrative dispute resolution service within the Argentine Ministry of Production, by which consumers may freely submit their claims, with the purpose of reaching a settlement enforceable before the courts in case of noncompliance before a mediator within 30 days from the filing of the relevant claim. Consumers may only carry out proceedings before this administrative entity when the claims do not exceed a value equivalent to 55 times the minimum wage. Pursuant to Law No. 26,993, companies that are summoned to, but do not appear before, the Prior Conciliation Service in Consumer Relations may be subject to a fine equivalent to one minimum wage.
In addition, we may become subject to legislation or regulation seeking to regulate high-fat and/or high-sodium foods, particularly in Argentina, Brazil, Chile and Uruguay. Moreover, restrictions on advertising by food retailers and QSRs have been proposed or adopted in Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay, including proposals to restrict our ability to sell toys in conjunction with food. Certain jurisdictions in the United States are considering curtailing or have curtailed McDonald’s ability to sell children’s meals including free toys if these meals do not meet certain nutritional criteria. Similar restrictions, if imposed in the Latin American countries where we do business, may have a negative impact on our results of operations. We will comply with any laws or regulations that may be enacted, and we can provide no assurance of the effect that any possible future laws and regulations will have on our operating results. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Industry—Restrictions on promotions and advertisements directed at families with children and regulations regarding the nutritional content of children’s meals may harm McDonald’s brand image and our results of operations.”
Environmental Issues
To the best of our knowledge, there are currently no international, federal, state or local environmental laws, rules or regulations that we expect will materially affect our results of operations or our position with respect to our competitors. However, we can provide no assurance of the effect that any possible future environmental laws will have on our operating results.
For example, in 2019, there was increased attention on single-use plastic products, such as plastic straws, and various countries and big cities in Puerto Rico, Uruguay, Argentina, Peru and Brazil, among other countries, began implementing regulations prohibiting or restricting the use of certain plastic products. The implementation of these and similar laws and regulations may increase our supply costs if we are required to change the types of disposable products that we use in our restaurants, which could have a material effect on our business. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Industry—Environmental laws and regulations may affect our business.”
Insurance
We maintain insurance policies in accordance with the requirements of the MFAs and as appropriate beyond those requirements, to the extent we believe additional coverage is necessary. Our insurance policies include commercial general liability, workers compensation, “all risk” property and business interruption insurance, among others. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Insurance.”
Social Initiatives and Charitable Activities
The well-being of the communities where we operate is of considerable importance to us and we are engaged in a wide range of programs focused on positively impacting those communities. In addition to the support we give to Ronald McDonald House Charities, both currently and historically, we expanded our social reach in 2018 to the areas of Youth Employment and Sustainable Development and have strengthened our efforts in these areas in 2019 to reinforce our position as a socially responsible company.

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Our social initiatives and charitable activities are often aligned with McDonald’s Scale for Good, which has five key pillars: youth opportunity, climate change, packaging and recycling, sustainable beef and commitment to families. We seek to embody these pillars through our Receta del Futuro. The following paragraphs summarize some of our principal programs and contributions in these areas.
Youth Employment
Youth unemployment is one of the most critical issues facing countries in Latin America. Through our Youth Employment initiative, we promote social mobility by providing employment opportunities to young people in Latin America that help them develop valuable customer service and leadership skills that can be applied to a wide range of career paths in the future. We are implementing this initiative through strategic alliances and by leveraging our trajectory and experience in this field. We are also developing projects for labor participation that include technical training and programs to support the employment of people with disabilities, as well as financial literacy for our employees. For instance, we partnered with the Ministries of Labor of Mexico, Argentina, Costa Rica, Puerto Rico and Ecuador to promote employment participation of certain minority groups and provided financial training through online education platforms that foster the development of such life skills.
We increased our focus on Youth Employment because it has been one of the most significant problems facing Latin American countries in recent years. According to the Interamerican Development Bank (“IDB”), 40% of the working-age population in the region is young, between the ages of 15 ad 29 years old. The unemployment on this particular age bracket is 20%. Informality in the youth job sector in our region is amongst the largest in the world, reaching almost 60% according to the International Labour Organization’s (“ILO”), and we play a significant role in helping to fix this problem. Being one of the largest youth employers in Latin America and the Caribbean, over 80% of our new hires during 2019 were young adults between the ages of 16 to 24.
Arcos Dorados also engaged in the “future of work” discussion through our “CREATON” initiative, where more than 500 young people, along with governments, unions, research bodies and companies, all came together to reflect and co-curate a comprehensive vision for the future of the workplace. The results were collected and combined into a book published in Argentina titled “Creatones. Protagonistas de la experiencia que vendra.”
Another initiative is Empleo con Apoyo, which aims to provide employment opportunities to youth with disabilities, encouraging the development of their skills and raise awareness with respect to the needs of individuals with disabilities. During 2019, more than 3,000 employees were part of this program. In addition and related to Empleo con Apoyo, in 2018 we received the Global Recognition Award from the United Nations for our exemplary employment practices for disabled people in the State of Sao Paulo, Brazil. We maintain these practices in several of our markets through alliances with local organizations, such as the one with DISCAR in Argentina, which offers formal job opportunities to people with disabilities. In 2019, we were invited to present our work in the ILO “Decent Jobs for Youth” conference held in Rome. Arcos Dorados was the only company in our sector from Latin America invited to participate, which we believe is a testament and a recognition of the efforts we are making in helping this group of young people move forward with their lives as productive citizens. We also work with Liceo Impulso in Uruguay to provide education to young people with disabilities. In Ecuador, we also make contributions to Fundacion el Triangulo in order to support their local work in promoting employment opportunities for people with disabilities.
In addition, in April 2012, we became one of the founders and partners of the New Employment Opportunities (NEO) Program developed by the Inter-American Development Bank and the International Youth Foundation, which promotes the employability of the region’s youth. One of our most important soft skills training programs is Creating Your Future, a program supported by the Ministry of Education in Argentina that provides opportunities for skills development for our employees. This program was implemented with Kuepa, an organization dedicated to providing professional and soft skills training in Latin America, and the Global Fairness Initiative, an international non-profit organization focused on economic development. Additionally, we have continued to strengthen our partnerships with other organizations that focus on soft skills training, such as the Forge Foundation (including its branches in Argentina, Mexico, Uruguay, Peru and Mexico), Aldeas SOS and Movimiento Nueva Generación, Instituto Ayrton Senna (Brazil), and Junior Achievement Americas, among others. In 2019, we donated over $5.0 million in connection with Gran Dia and McHappy Day. Those funds were transferred to non-governmental organizations that support the development of soft skills and the employability skills of young people across the region as well as supporting the local chapters of the Ronald McDonald Foundation.

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In addition, in partnership with the JPMorgan Chase Foundation and IOS (Institute of Social Opportunities) in Brazil, we signed an alliance to develop a certified academic program in IT, Talentos del Futuro. Approximately 100 young people from our crew graduated from the program after studying to acquire technical knowledge in programming, networks and system languages.
In Puerto Rico, we’ve signed a collaboration agreement with “Jovenes de Puerto Rico en riesgo,” a nongovernmental organization that focuses on early detection of young people at risk and then develops specific support programs that monitor their progress, through coaching sessions, job readiness training and life skills. In 2019, we provided support to more than 1,000 young women and men in the market.
Our partnership with Digital House, a leading digital development institution in Argentina, allowed us to offer scholarships to young people interested in developing those skills, gaining significant brand exposure.
Fundacion Si in Argentina builds and operates student houses for low income young people that don’t have access to universities in their local communities. Through our alliance with them, more than 400 students were able to continue with their studies.
Instituto Ayrton Senna in Brazil is a renowned NGO working to improve education at all levels. Our strong partnership allowed Arcos Dorados to reach more than 250,000 young students in their last year of public education, through the program called “socio-emotional conversations”
We also participate in programs in Mexico and Colombia, including the Jovenes Construyendo el Futuro program in Mexico, which helps teach life skills such as financial planning to young people, and the 40,000 Employees initiative in Colombia, which has created a consortium of companies with the goal of providing job opportunities to 40,000 people. We also have an alliance with Movimiento Nueva Generacion in Panama, through which we support community centers for young people in Panama.
Community
In 2019, we executed our yearly Gran Dia and McHappy campaigns, which seeks to broaden the social impact of Arcos Dorados. Through this campaign, funds raised through the sale of Big Macs were donated to local organizations supporting youth employment and the Ronald McDonald House Charities. We raised more than $5.0 million.
We primarily contribute to the communities in which we operate through the Ronald McDonald House Charities, which is dedicated to creating, finding and supporting programs that directly improve the health and well-being of children by providing “a home away from home” to children undergoing medical treatment in hospitals and their families. As of December 31, 2019, there were 61 Ronald McDonald House Charities programs in 13 countries in Latin America and the Caribbean, including 26 Ronald McDonald Houses, 33 Ronald McDonald Family Rooms and 2 Ronald McDonald Care Mobiles, which were built to deliver pediatric care services to remote locations.
Nutrition and Well-Being
As part of our commitment to offering nutritious and high quality products to our customers, we are dedicated to actively promoting a balanced lifestyle. This includes providing reliable, accessible information to guide educated nutritional decisions. We were the first restaurant chain in Latin America to provide full nutritional and calorie information about our menu on our websites in every country. In 2014 we added a nutritional calculator on our websites to complement nutritional transparency with a personalized tool to enable our customers to make the right nutritional choices for their lifestyle. In addition, in 2017, we developed our Receta para el Futuro, which focuses, among other goals, on offering balanced meals that meet certain criteria regarding saturated fat, added sugar and sodium. We also updated our Happy Meal menus in all of our markets between 2018 and 2019 by including more fruits and vegetables and reducing fat, sodium and added sugars. It now contains less than 600 calories in total and is comprised of the four basic food group (fruits and vegetables, whole grains, lean proteins and dairy products), offering enhanced nutritional value for children. As of August 2019, Happy Meal offerings in all of our markets complied with the nutritional criteria set by the Scale For Good program’s standards. Several associations supported these changes, such as the Interamerican Society of Cardiology, the Brazilian Association of Nutrition, the Cardiologic Foundation of Argentina, the Peruvian Society of Nutrition and the Uruguayan Association of Dieticians and Nutritionists.

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From a safety and quality perspective, we only use products that have passed strict quality and hygiene controls throughout the production chain, inside our restaurants and up to the moment they are served to our customers. These products are sourced from our approved supplier network for all McDonald’s restaurants. We seek to adhere to the strictest food safety standards in the industry and we pay special attention to the enforcement of those standards. All of our restaurants are audited on a yearly basis by a third party entity.
We also run the so called “Puertas Abiertas” program in the region, in which customers and key stakeholders are invited to visit our behind-the-counter operations. This program is aimed at greater transparency and has hosted over 13 million customers across the region since 2015 when the program was created. In 2019, approximately 2.3 million customers visited our kitchens.
We also participate in several educational, sports and well-being programs throughout Latin America and the Caribbean, promoting our brand and encouraging our employees and customers to participate.
Sustainable Development
We strive to be an environmental steward dedicated to conserving natural resources and minimizing waste. We have developed sustainability initiatives with a focus on sustainable supplies, energy and water efficiency. To carry out these initiatives, we have developed strategic partnerships with prestigious organizations such as the World Wildlife Fund (“WWF”), the Nature Conservancy, the Rainforest Alliance the Forest Stewardship Council and the Marine Stewardship Council. For the eleventh consecutive year, together with the WWF, all restaurants in our 20 markets have participated in Earth Hour by switching off their external lights and canopies.
As part of our Receta del Futuro platform, we have focused on several initiatives relating to climate change, packaging and recycling and sustainable food sourcing in recent years.
Climate Change
We are following McDonald’s commitment to reduce greenhouse gas (“GHG”) emissions from 2015 levels by 36% in our restaurants and offices. In addition, we are also committed to reducing GHG emissions from 2015 levels by 31% in our supply chain processes. In order to achieve these reductions at the restaurant level, we’re taking specific actions, such as our Programa Natal, which is aimed at conserving and reducing our water consumption, especially in regions with limited access to water. The program has been implemented in more than 500 restaurants as of December 31, 2019. In 2019, we saved and reused more than 90 million liters of water through Programa Natal. We have also deployed LED lighting in all our restaurants and were able to reduce our electricity consumption by more than 150,000,000 KWH. In our offices, we have eliminated single use hot and cold cups and replaced traditional printer paper with sugar-based paper. We are also participating in the Carbon Disclosure Program, pursuant to which we respond to questionnaires relating to water usage, deforestation and climate change and are ranked based on our contribution to each issue. Workshops were conducted in our major markets, along with our key suppliers. In 2018, Arcos Dorados was recognized as the company with the highest response rate in Latin America.
Packaging and Recycling
Our goal is to guarantee that 100% of our packaging comes from renewable, recycled or certified sources by 2025. Also, by 2025, we seek to offer recycling in all our restaurants. We understand that recycling infrastructure, regulations and consumer behaviors vary city to city and country to country, but we plan to be part of the solution and help influence powerful change.
In this sense, in certain markets, we are members of CEMPRE (Compromiso Empresarial para el Reciclaje), a group comprised of leading companies from different industries such as Coca Cola, Nestle, Unilever and Natura, that is dedicated to working on environmental issues in Latin America. The company is also an active member of CEADS (Consejo Empresario Argentino para el Desarrollo Sustentable), as well as similar organizations in other countries.
We took a leadership position in 2018 when we proactively started to provide plastic straws only when requested by customers, rather than automatically providing them. By the end of 2019, we had eliminated more than 200 tons of plastic from our supply chain, just by taking this important step. We continue eliminating packaging through innovation, shifting to materials from 100% renewable, recycled or other certified sources. Well ahead of schedule, 100% of our packaging comes from certifiable sources, a process followed by the Forest Stewardship Council and similar organizations.

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In all our restaurants, we recycle used cooking oil, which is being reused according to local regulations in a series of different ways. For example, in Mexico, we have recycled more than 150,000 liters of used cooking oil, which was then used to manufacture biodiesel, and in Ecuador, we recycled more than 72,000 liters of used cooking oil for other uses.
In Brazil, as well as other markets, we are partnering with several organizations that are focused on creating employment and economic development opportunities through the recycling and selling of recycled materials in the open market. Through these alliances, we seek to provide a solution to multiple problems while creating opportunities for disadvantaged communities at the same time.
More than 600 restaurants in the region have already implemented our Programa de Desarrollo Sustentable, which we developed with the objective of increasing awareness of climate change in our customer base as well as employees. Through this program, we provide education, waste sorting bins, United Nation’s SDG’s materials, community opportunities, beach cleaning programs and composting classes.
We have also signed a unique collaboration agreement with UBQ, an Israeli company specializing in materials and innovation. Through this alliance, we are innovating and taking leadership by producing restaurant items, such as trays, with organic waste, thereby reducing waste and the environmental impact of our restaurants. We are also partnering with Tetra Pack in order to manufacture restaurant furniture with recycled Tetra Pack containers, such as McCafe tabletops and newspaper stands.
Reverse logistics is another component of our recycling program. We are leveraging our logistics provider structure to recover cardboard from our restaurants, which is then recycled and reused in generating new packaging. The solution is being tested in several markets.
Sustainable Beef and Responsible Sourcing of Materials
We work hard to continuously improve how we source our ingredients in a way that allows people, animals and the planet to thrive. We’re focusing our efforts in beef, coffee, fish, palm oil and chicken.
We strive to work with suppliers that have strong standards of animal welfare and that meet McDonald’s standards and policies. We have committed to ensuring that all pork used in our restaurants will be sourced by producers that can demonstrate plans to promote group housing for their pigs. We are actively working with our pork suppliers, producers and other stakeholders to transition over time to this standard. The responsible use of antibiotics is important for animal health, as well as to ensure the future effectiveness of antimicrobial medicines. In March 2015, we announced that we will only source from suppliers who can guarantee that their animals (i) are raised without growth-stimulating antibiotics; (ii) have only received antibiotics to cure or prevent disease under veterinary supervision; (iii) are only administered antibiotics approved for veterinary use; and (iv) are raised in environments that encourage healthy animal welfare and husbandry conditions to help reduce the need for antibiotic use. We are continuously working with our suppliers and producers to achieve this goal for the responsible use of antibiotics. Based on the premise that our customers deserve high quality products originating from healthy animals, together with McDonald’s, we have been pioneers in prioritizing animal welfare. We have a specific committee for animal welfare issues, which acts under the guidelines of the Professional Animal Auditor Certification Organization (PAACO), an animal welfare organization.
Protecting the forests is a top priority. In 2017, McDonald’s publicly announced its Commitment on Forests, which aims to eliminate deforestation from our supply chains and promote responsible forestry and production practices that benefit people, communities and the planet. This commitment includes the Amazon, the Cerrado and the Chaco, a province in Argentina. In October 2011, McDonald’s signed a global moratorium against harvesting soy from the Amazon region and has maintained this commitment every year since, including actively supporting the 2014 renewal of the Brazilian Soy Moratorium. In August 2016, we sourced the first sustainably-produced beef in Latin America from the Novo Campo Project, an initiative that complies with the standards of the Brazilian Roundtable for Sustainable Beef. With this initiative, we were the first restaurant in the QSR industry in Brazil to acquire the product from production cycles that meet global principles and criteria established by the Global Roundtable for Sustainable Beef. Among other criteria, this meets our commitments to end deforestation, not source products within Conservancy and/or Indian areas, ensure that child labor or slavery conditions do not occur and pass through a third-party verification audit regarding each of these commitments.

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Arcos Dorados is also an active member of several working groups and has a leadership position regarding the development of sustainable agricultural practices in the region. Our teams work with farmers, environmental groups and governments to discover, test and scale methods that support decent farming livelihoods, while protecting resources for generations to come. In Brazil, we are active members of the Grupo de Trabalho de Pecuaria Sustentavel, a group that facilitates collaboration among industry leadings as well as NGOs and to find solutions that allow farmers to produce more meat in a less impactful way. Our work is focused on managing natural resources responsibly, respecting people and communities, caring for the welfare of animals, ensuring the safety and quality of beef and driving efficiency and innovation. In 2019, we doubled our purchases of sustainable beef in Brazil, while monitoring deforestation via satellite in collaboration with Agrotools and Proforest.
Arcos Dorados has partnered with coffee roasters to help advance coffee sustainability over the last decade and we remain committed to further progress. We source coffee from suppliers that meet internationally certified sustainability standards. In 2019, more than 93% of all the coffee served in our restaurants was sourced from verifiable sustainable sources, while we continue to develop programs to reach 100% by 2020.
In the markets where we sell fish products, we partner with the Marine Stewardship Council to identify ways to protect long term fish production and improve the marine ecosystem. Our suppliers are responsible for maintaining sustainably produced fish stocks, minimizing the impact of fishing and conserving the environment.
High demand for palm oil has had an impact on natural forests which are being replaced by palm oil plantations. We are partnering with key stakeholders, growers, traders and food manufacturers to guarantee that all palm oil used in manufacturing processes is certified by the Roundtable on Sustainable Palm Oil. At the end of 2019, 100% of the palm oil used in our extensive supply chain was sustainably produced and verified.
Arcos Dorados is committed to ensuring a sustainable supply of chicken. We do this by sourcing from suppliers that reduce or eliminate the use of antibiotics to protect human health as well as ensure animal welfare. In addition, in October 2016, we announced that we would begin sourcing only cage free eggs in various countries, with the goal of having 100% of the eggs served at our restaurants coming from cage free eggs by 2025. We started partially sourcing cage free eggs in Brazil as part of our commitment to a more sustainable chicken industry.
As of December 31, 2019, we had 4 LEED-certified restaurants and 1 LEED-certified corporate university. Leadership in Energy & Environmental Design, or LEED-certified buildings are more environmentally responsible and resource-efficient buildings throughout their lifecycle. In December 2008, we opened the first LEED-certified restaurant in Latin America in Bertioga on the coast of São Paulo, Brazil. This restaurant received its LEED certification in September 2009, becoming the first McDonald’s restaurant in Latin America to receive such certification. In August 2010, we opened our second LEED-certified restaurant in Pilar, Argentina. In July 2011, we re-inaugurated the McDonald’s at Parque Hundido, in Mexico DF, as our third LEED-certified restaurant. In January 2013, we opened the fourth LEED-certified restaurant in Guaynabo, Puerto Rico, which obtained its LEED certification in November 2013. The McDonald’s University in São Paulo, Brazil, was remodeled and reopened in April 2011 as a LEED-certified building. This McDonald’s University, one of seven such units in the world, is the corporate education center for employees from all over Latin America and the Caribbean. Among the programs offered at the McDonald’s University in São Paulo is an MBA in Strategies for Sustainable Development, the only educational program of its kind at this level in Latin America.
The know-how accumulated in the construction of these ecological buildings is being used for the development of new McDonald’s restaurants, such as our High Efficiency Restaurants, developed in Brazil in compliance with McDonald’s standards as required by the MFAs, at which efficiencies have been achieved by implementing sustainability measures for, among others, the reuse of water and the use of more efficient lightning technics and using a more efficient architectural design with regard to the amount of equipment, kitchen and support areas. These architectural changes allow a reduction in carbon footprint associated to building process.
C.     Organizational Structure
We conduct substantially all of our business through our indirect, wholly owned Dutch subsidiary Arcos Dorados B.V. Our controlling shareholder is Los Laureles Ltd., a British Virgin Islands company, which is beneficially owned by Mr. Woods Staton, our Executive Chairman. Under the MFAs, Los Laureles Ltd. is required to hold at all times at least 51% of our voting interests, which is accomplished through its ownership of 100% of the class B shares of Arcos Dorados Holdings Inc., each having five votes per share. Los Laureles Ltd. has established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. See “Item 7. Major Shareholders and

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Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.” Arcos Dorados B.V. owns all the equity interests of LatAm, LLC, the master franchisee, and owns, directly or indirectly, all the equity interests of the subsidiaries operating our restaurants in the Territories.
The following chart shows our corporate structure as of April 2020.
corporatestructurechart.jpg
 
(1)Includes class A shares and class B shares beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. is beneficially owned by Mr. Woods Staton. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.”
(2)Includes operating subsidiaries held directly and, in some cases, indirectly through certain intermediate subsidiaries.
Other than as described above, all of our significant subsidiaries are wholly owned by us, except Arcos Dorados Argentina S.A., of which Mr. Woods Staton owns 0.003%.
D.    Property, Plants and Equipment
Property Operations
Our long-standing presence in Latin America and the Caribbean has allowed us to build a significant property portfolio with hard-to-replicate locations in key markets across the region that enhance our customers’ experience and ultimately support our brand and market position. As of December 31, 2019, we owned the land for 494 of our 2,293 restaurants (totaling approximately 1.1 million square meters). We owned the buildings for all but 11 of our stand-alone restaurants, all of which are under developmental licenses, whereby the licensees own or lease the land on and buildings in which the restaurants are located. We lease the remaining real estate property where we operate. Accordingly, we are able to charge rent on the real estate that we own and lease to our franchisees. The rental payments generally are based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. When we lease land, we match the term of our sublease to the term of the franchise. We may charge a higher rent to franchisees than that which we pay on our leases, therefore deriving additional rental income.
The selection, construction and maintenance of restaurant locations and other related real estate assets, which is a key element of our performance, is determined based on an evaluation of expected returns on investment and the most efficient allocation of our capital expenditures. In addition to our restaurant property, we have (i) corporate offices in Montevideo, Uruguay; Buenos Aires, Argentina; and Sao Paulo, Brazil; and regional offices in Mexico City, Mexico and Bogota, Colombia; (ii) distribution centers in the Caribbean; (iii) an industrial center called Food Town in Sao Paulo, Brazil, where our logistics operator is located; and (iv) training centers in Sao Paulo, Brazil and Buenos Aires, Argentina.

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ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.    Operating Results
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, and the notes thereto, included elsewhere in this annual report, as well as the information presented under “Presentation of Financial and Other Information” and “Item 3. Key Information—A. Selected Financial Data.”

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”
Segment Presentation
We divide our operations into four geographical divisions: Brazil; the Caribbean division, consisting of Aruba, Colombia, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas and Venezuela; the North Latin American division, or NOLAD, consisting of Costa Rica, Mexico and Panama; and the South Latin American division, or SLAD, consisting of Argentina, Chile, Ecuador, Peru and Uruguay. As of December 31, 2019, 44.6% of our restaurants were located in Brazil, 17.6% in SLAD, 23.1% in NOLAD and 14.7% in the Caribbean division. We focus on our customers by managing operations at the local level, including marketing campaigns and special offers, menu management and monitoring customer satisfaction, while leveraging our size by conducting administrative and strategic functions at the divisional or corporate level, as appropriate.
We are required to report information about operating segments in our financial statements in accordance with ASC 280. Operating segments are components of a company about which separate financial information is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess performance. We have determined that our reportable segments are those that are based on our method of internal reporting, and we manage our business and operations through our four geographical divisions (Brazil, the Caribbean division, NOLAD and SLAD). The accounting policies of the segments are the same as those for the Company on a consolidated basis.
Principal Income Statement Line Items
Revenues
We generate revenues primarily from two sources: sales by Company-operated restaurants and revenue from franchised restaurants, which primarily consists of rental income, typically based on the greater of a flat fee or a percentage of sales reported by our franchised restaurants. This rent, along with occupancy and operating rights, is stipulated in our franchise agreements. These agreements typically have a 20-year term but may be shorter if necessary to mirror the term of the real estate lease. In 2019, sales by Company-operated restaurants and revenues from franchised restaurants represented 95% and 5% of our total revenues, respectively. In 2018 and 2017, sales by Company-operated restaurants and revenues from franchised restaurants represented 95.2% and 4.8% and 95.3% and 4.7% of our total revenues, respectively.
Operating Costs & Expenses
Our sales are heavily influenced by brand advertising, menu selection and initiatives to improve restaurant operations. Sales are also affected by the timing of restaurant openings and closures. We do not record sales from our franchised restaurants as revenues.
Company-operated restaurants incur four types of operating costs and expenses:
food and paper costs, which represent the costs of the products that we sell to customers in Company-operated restaurants;

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payroll and employee benefit costs, which represent the wages paid to Company-operated restaurant managers and crew, as well as the costs of benefits and training, and which tend to increase as we increase sales;
occupancy and other operating expenses, which represent all other direct costs of our Company-operated restaurants, including advertising and promotional expenses, the costs of outside rent, which are generally tied to sales and therefore increase as we increase our sales, outside services, such as security and cash collection, building and leasehold improvement depreciation, depreciation on equipment, repairs and maintenance, insurance, restaurant operating supplies and utilities; and
royalty fees, representing the continuing franchise fees we pay to McDonald’s pursuant to the MFAs, which are determined as a percentage of gross product sales.
Franchised restaurant occupancy expenses include, mainly, as applicable, the costs of depreciating and maintaining the land and buildings upon which franchised restaurants are situated or the cost of leasing that property. A significant portion of our leases establish that rent payments are based on the greater of a flat fee or a specified percentage of the restaurant’s sales.
We promote the McDonald’s brand and our products by advertising in all of the Territories. Pursuant to the MFAs, we are required to spend at least 5% of our sales on advertisement and promotion activities annually. These activities are guided by our overall marketing plan, which identifies the key strategic platforms that we leverage to drive sales. Our franchisees are generally required to pay us a certain percentage of their sales to cover advertising expenditures related to their restaurants. We account for these payments as a deduction to our advertising expenses. As a result, our advertising expenses only reflect the expenditures related to Company-operated restaurants. Advertising expenses are recorded within the “Occupancy and other operating expenses” line item in our consolidated income statement. The only exception to this policy is in Mexico, where both we and our franchisees contribute funds to a cooperative that is responsible for advertisement and promotion activities for Mexico. In connection with the COVID-19 outbreak, we have agreed with McDonald's to reduce the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020.
General and administrative expenses include the cost of overhead, including salaries and facilities, travel expenses, depreciation of office equipment, buildings and vehicles, amortization of intangible assets, occupancy costs, professional services and the cost of field management for Company-operated and franchised restaurants, among others.
Other operating income (expenses), net, include gains and losses on asset acquisitions and dispositions, gains related to sales of restaurant businesses, write-offs of property and equipment, insurance recovery, impairment charges, rental income and depreciation expenses of excess properties, accrual for contingencies, write-offs and write-downs of inventory, recovery of taxes and other miscellaneous items.
Other Line Items
Net interest expense primarily includes interest expense on our short-term and long-term debt as well as the amortization of deferred financing costs. Gain (loss) from derivative instruments relates primarily to the results of derivatives that are not designated for hedge accounting.
Foreign currency exchange results relate to the impact of remeasuring monetary assets and liabilities denominated in currencies other than our functional currencies. See “—Foreign Currency Translation.”
Other non-operating (expenses) income, net, primarily include contingencies, certain results related to tax credits, asset taxes that we are required to pay in certain countries and other non-operating charges.
Income tax expense includes both current and deferred income taxes. Current income taxes represent the amount accrued during the period to be paid to the tax authorities while deferred income taxes represent the earnings impact of the change in deferred tax assets and liabilities that are recognized in our balance sheet for future income tax consequences.
Net income attributable to non-controlling interests relate to the participation of non-controlling interests in the net income of certain subsidiaries that collectively owned 15 restaurants at December 31, 2019 (15 restaurants at December 31, 2018).



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Impact of Inflation and Changing Prices
Some of the countries in which we operate have experienced, or are currently experiencing, high rates of inflation. In general, we believe that, over time, we have demonstrated the ability to manage inflationary environments effectively. During 2019 and 2018, our revenues were favorably impacted by our pricing strategy in many of these inflationary environments, as we were able to increase average check to keep pace with inflation.
The Venezuelan market is also subject to price controls, which limit our ability to increase prices to offset the impact of continuing high inflation on our operating costs. Although we managed to navigate the negative impact of the price controls on our operations from 2015 through 2019, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment.
Key Business Measures
We track our results of operations and manage our business by using three key business measures: comparable sales growth, average restaurant sales and sales growth.
In analyzing business trends, management considers a variety of performance and financial measures which are considered to be non-GAAP including: Adjusted EBITDA, comparable sales growth, systemwide data and constant currency measures.
Comparable Sales
Comparable sales is a key performance indicator used within the retail industry and is indicative of the success of our initiatives as well as local economic, competitive and consumer trends. Comparable sales are driven by changes in traffic and average check, which is affected by changes in pricing and product mix. Increases or decreases in comparable sales represent the percent change in sales from the prior year for all restaurants in operation for at least thirteen months, including those temporarily closed. Some of the reasons restaurants may close temporarily include reimaging or remodeling, rebuilding, road construction and natural disasters. With respect to restaurants where there are changes in ownership, all previous months’ sales are reclassified according to the new ownership category when reporting comparable sales. As a result, there will be discrepancies between the sales figures used to calculate comparable sales and our results of operations. We report on a calendar basis, and therefore the comparability of the same month, quarter and year with the corresponding period for the prior year is impacted by the mix of days. The number of weekdays, weekend days and timing of holidays in a period can impact comparable sales positively or negatively. We refer to these impacts as calendar shift/trading day adjustments. These impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales while annual impacts are typically minimal.
We calculate and analyze comparable sales and average check in our divisions and systemwide on a constant currency basis, which means that sales in local currencies, including the Argentine peso and Venezuelan bolivar, are converted to U.S. dollar using the same exchange rate in the applicable division or systemwide, as applicable, over the periods under comparison to remove the effects of currency fluctuations from the analysis. We believe these constant currency measures, which are considered to be non-GAAP measures, provide a more meaningful analysis of our business by identifying the underlying business trend, without distortion from the effect of foreign currency fluctuations.
Company-operated comparable sales growth refers to comparable sales growth for Company-operated restaurants and franchised comparable sales growth refers to comparable sales growth for franchised restaurants. We believe comparable sales growth is a key indicator of our performance, as influenced by our strategic initiatives and those of our competitors.
Average Restaurant Sales
Average restaurant sales, or ARS, is an important measure of the financial performance of our systemwide restaurants and changes in the overall direction and trends of sales. ARS is calculated by dividing the sales for the relevant period by the arithmetic mean of the number of restaurants at the beginning and end of such period. ARS is influenced mostly by comparable sales performance and restaurant openings and closures. As ARS is provided in nominal terms, it is affected by movements in foreign currency exchange rates.



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Sales Growth
Sales growth refers to the change in sales by all restaurants, whether operated by us or by franchisees, from one period to another. We present sales growth both in nominal terms and on a constant currency basis, which means the latter is calculated by converting sales in local currencies, including the Argentine peso and Venezuelan bolivar, to U.S. dollar using the same exchange rate over the periods under comparison to remove the effects of currency fluctuations from the analysis.
Adjusted EBITDA
We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is defined as our operating income plus depreciation and amortization plus/minus the following losses/gains included within other operating income (expenses), net, and within general and administrative expenses in our statement of income: gains from sale or insurance recovery of property and equipment; write-offs of property and equipment; impairment of long-lived assets and goodwill; stock-based compensation related to the special awards in connection with the initial public offering, under the 2011 Equity Incentive Plan; reorganization and optimization plan expenses; and incremental compensation related to the modification of our 2008 long-term incentive plan. See “Item 3. Key Information—A. Selected Financial Data.”
We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations such as capital structures (affecting net interest expense and other financial charges), taxation (affecting income tax expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. In addition, we exclude gains from sale or insurance recovery of property and equipment not related to our core business; write-offs of property and equipment and impairment of long-lived assets and goodwill that do not result in cash payments; stock-based compensation related to the special awards under the 2011 Equity Incentive Plan; reorganization and optimization plan expenses; and incremental compensation expense related to the modification of our 2008 long-term incentive plan. While a GAAP measure for purposes of our segment reporting, Adjusted EBITDA is a non-GAAP measure for reporting our total Company performance. Our management believes, however, that disclosure of Adjusted EBITDA provides useful information to investors, financial analysts and the public in their evaluation of our operating performance.
Systemwide data
Systemwide data represents measures for both Company-operated and franchised restaurants. While sales by franchisees are not recorded as revenues by us, management believes the information is important in understanding our financial performance because these sales are the basis on which we calculate and record franchised restaurant revenues and are indicative of the financial health of our franchisee base. Systemwide results are driven primarily by our Company-operated restaurants, as 68.9% of our systemwide restaurants are Company-operated as of December 31, 2019.
Foreign Currency Translation
The financial statements of our foreign operating subsidiaries are translated in accordance with guidance in ASC 830, Foreign Currency Matters. Except for our Venezuelan and Argentine operations, the functional currencies of our foreign operating subsidiaries are the local currencies of the countries in which we conduct our operations. Therefore, the assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rates as of the balance sheet date, and revenues and expenses are translated at the average exchange rates prevailing during the period. Translation adjustments are included in the “Accumulated other comprehensive loss” component of shareholders’ equity. We record foreign currency exchange results related to monetary assets and liabilities transactions, including intercompany transactions, denominated in currencies other than our functional currencies in our consolidated income statement.
Under U.S. GAAP, an economy is considered to be highly inflationary when its three-year cumulative rate of inflation meets or exceeds 100%. Since January 1, 2010 and July 1, 2018, Venezuela and Argentina, respectively, were considered to be highly inflationary, and as such, the financial statements of each of these subsidiaries are remeasured as if its functional currency was the reporting currency of the relevant subsidiary’s immediate parent company (U.S. dollars for Venezuelan operations and Brazilian reais (“BRL”) for Argentine operations). As a result, remeasurement gains and losses are recognized in earnings rather than in the cumulative translation adjustment component of “Accumulated other comprehensive loss” within shareholders’ equity.



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Venezuela
Venezuela’s exchange rate system is administered by the Central Bank of Venezuela, and currently consists of a unified foreign exchange market called DICOM, which operates through an auction mechanism and which was introduced in February 2018, replacing the previous dual exchange rate system. During 2018, the Company accessed to DICOM at an exchange rate greater than the one published by the governmental authorities. This rate is considered for remeasurements purposes.
On August 20, 2018, the Venezuelan government announced the removal of five zeros from the Venezuelan currency and renamed it the “Sovereign Bolivar” (VES). In addition, the new currency experienced devaluation from 2.48 to 59.93 VES per U.S. dollar. Since 2018, the Sovereign Bolivar has continued depreciating in value against U.S. dollar. As of December 31, 2019, the exchange rate was 44,080.58 VES per U.S. dollar.
As of December 31, 2019, our local currency-denominated net monetary position in Venezuela, that would be subject to remeasurement in the event of further changes in the exchange rate, was a net asset of $0.2 million. In addition, our Venezuelan subsidiary’s non-monetary assets were $13.6 million (mainly fixed assets).
Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. For more details about the Venezuelan exchange rate used for financial reporting, see Note 22 to our consolidated financial statements.
Critical Accounting Policies and Estimates
This management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.
We consider an accounting estimate to be critical if:
the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
the impact of the estimates and assumptions on our financial condition or operating performance is material.
We believe that of our significant accounting policies, the following encompass a higher degree of judgment and/or complexity.
Depreciation of Property and Equipment
Accounting for property and equipment involves the use of estimates for determining the useful lives of the assets over which they are to be depreciated. We believe that the estimates we make to determine an asset’s useful life are critical accounting estimates because they require our management to make estimates about technological evolution and competitive uses of assets. We depreciate property and equipment on a straight-line basis over their useful lives based on management’s estimates of the period over which these assets will generate revenue (not to exceed the lease term plus renewal options for leased property). The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. We periodically review these lives relative to physical factors, economic considerations and industry trends. If there are changes in the planned use of property and equipment, or if technological changes occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense or write-offs in future periods. No significant changes to useful lives have been recorded in the past. A significant change in the facts and circumstances that we relied upon in making our estimates may have a material impact on our operating results and financial condition.

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Impairment of Long-Lived Assets and Goodwill
We review long-lived assets (including property and equipment, intangible assets with definite useful lives and lease right of use assets, net) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We review goodwill for impairment annually, primarily during the fourth quarter. In assessing the recoverability of our long-lived assets and goodwill, we consider changes in economic conditions and make assumptions regarding, among other factors, estimated future cash flows by market and by restaurant, discount rates by country and the fair value of the assets. Estimates of future cash flows are highly subjective judgments based on our experience and knowledge of our operations. These estimates can be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. A key assumption impacting estimated future cash flows is the estimated change in comparable sales.
See Note 3 to our consolidated financial statements for a detail of markets for which we performed impairment tests of our long-lived assets and goodwill, as well as impairment charges recorded.
If our estimates or underlying assumptions change in the future, we may be required to record additional impairment charges.
Leasing Arrangements
The Company leases locations through ground leases (the Company leases the land and owns the building) and through improved leases (the Company leases land and buildings). The operating leases are mainly related to restaurant and Dessert Center locations. The right-of-use assets and lease liabilities reflect the present value of the future minimum lease payments, which include renewal options provided by the agreement or government regulations, as they are reasonably certain to be exercised. Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed the initial lease term, and the sales performance of the restaurant remains strong. Therefore, its associated payments are included in the measurement of the right-of-use asset and lease liability. As the interest rate implicit in the Company’s leases was not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments.
Accounting for Taxes
We record a valuation allowance to reduce the carrying value of deferred tax assets if it is more likely than not that some portion or all of our deferred assets will not be realized. Our valuation allowance as of December 31, 2019, 2018 and 2017 amounted to $194.4 million, $219.9 million and $271.7 million, respectively. We have considered future taxable income and ongoing prudent and feasible tax strategies in assessing the need for the valuation allowance. This assessment is carried out on the basis of internal projections, which are updated to reflect our most recent operating trends, such as the expiration date for tax loss carryforwards. Because of the imprecision inherent in any forward-looking data, the further into the future our estimates project, the less objectively verifiable they become. Therefore, we apply judgment to define the period of time to include projected future income to support the future realization of the tax benefit of an existing deductible temporary difference or carryforward and whether there is sufficient evidence to support the projections at a more-likely-than-not level for this period of time. Determining whether a valuation allowance for deferred tax assets is necessary often requires an extensive analysis of positive (e.g., a history of accurately projecting income) and negative evidence (e.g., historic operating losses) regarding realization of the deferred tax assets and inherent in that, an assessment of the likelihood of sufficient future taxable income. In 2019, 2018 and 2017, we recognized net gains amounting to $23.9 million, $24.6 million and $19.1 million, respectively. If these estimates and assumptions change in the future, we may be required to adjust the valuation allowance. This could result in a charge to, or an increase in, income in the period this determination is made.
In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Company assesses the likelihood of any adverse judgments or outcomes on its tax positions, including income tax and other taxes, based on the technical merits of a tax position derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position.
As of December 31, 2019, there are certain matters related to the interpretation of income tax laws which could be challenged by tax authorities in an amount of $183 million, related to assessments for the fiscal years 2009 to 2014. No formal claim has been made for fiscal years within the statute of limitation by tax authorities in any of the mentioned matters; however, those years are still subject to audit and claims may be asserted in the future.

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It is reasonably possible that, as a result of audit progression within the next 12 months, there may be new information that causes the Company to reassess its tax positions because the outcome of tax audits cannot be predicted with certainty. While the Company cannot estimate the impact that new information may have on its unrecognized tax benefit balance, it believes that the liabilities recorded are appropriate and adequate as determined under ASC 740.
 Provision for Contingencies
We have certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. Accounting for contingencies involves the use of estimates for determining the probability of each contingency and the estimated amount to settle the obligation, including related costs. We accrue liabilities when it is probable that future costs will be incurred and the costs can be reasonably estimated. The accruals are based on all the information available at the issuance date of the financial statements, including our estimates of the outcomes of these matters and our lawyers’ experience in contesting, litigating and settling similar matters. If we are unable to reliably measure the obligation, no provision is recorded and information is then presented in the notes to our consolidated financial statements. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs. Because of the inherent uncertainties in this estimation, actual expenditures may be different from the originally estimated amount recognized. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for a description of significant claims, lawsuits and other proceedings.
See Note 18 to our consolidated financial statements.
Results of Operations
We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.
In a number of places in this annual report, in order to analyze changes in our business from period to period, we present our results of operations and financial condition on a constant currency basis, which is considered to be a non-GAAP measure. Constant currency results isolate the effects of foreign exchange rates on our results of operations and financial condition. In particular, we have isolated the effects of appreciation and depreciation of local currencies in the Territories against the U.S. dollar because we believe that doing so is useful in understanding the development of our business. For these purposes, we eliminate the effect of movements in the exchange rates by converting the balances in local currency for both periods being compared from their local currencies to the U.S. dollar using the same exchange rate.
Key Business Measures
The following tables present sales, sales growth, sales growth on a constant currency basis, comparable sales growth and average restaurant sales increases/(decreases):
  Sales Sales growth 
Sales growth in
constant currency
 Comparable sales growth
  
For the Years Ended
December 31,
 For the Years Ended December 31, For the Years Ended December 31, For the Years Ended December 31,
  2019 2018 2017 
2019(1)
 
2018(3)
 
2019(1)
 
2018(3)
 
2019(2)
 
2018(4)
  (in thousands of U.S. dollars, except percentages)
Sales by Company-operated restaurants 2,812,287  2,932,609  3,162,256  (4.1)% (7.3)% 2,606.9% 1,244.5% 2,649.4% 1,270.4% 
Franchised
sales(5)
 1,189,533  1,200,112  1,250,606  (0.9)% (4.0)% 6,118.5% 3,100.2% 6,040.1% 2,983.0% 
Systemwide sales 4,001,820  4,132,721  4,412,862  (3.2)% (6.3)% 3,626.7% 1,770.4% 3,654.4% 1,778.1% 
 
(1)In nominal terms, sales decreased during 2019 due to the negative impact of the depreciation of currencies mainly in Venezuela, Argentina and Brazil against the U.S. dollar. This was partially offset by comparable sales growth of 3,654.4%, as a result of hyperinflation in Venezuela. We had 1,580 Company-operated restaurants and 713 franchised restaurants as of December 31, 2019, compared to 1,540 Company-operated restaurants and 683 franchised restaurants as of December 31, 2018.

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(2)Our comparable sales growth on a systemwide basis in 2019 was driven by the increase in average check, which resulted mainly from price increases in Venezuela and Argentina (driven by the hyperinflation), and from increased traffic at our restaurants, especially in Brazil.
(3)In nominal terms, sales decreased during 2018 due to the negative impact of the depreciation of currencies mainly in Venezuela, Argentina and Brazil against the U.S. dollar. This was partially offset by comparable sales growth of 1,778.1%, as a result of hyperinflation in Venezuela. We had 1,540 Company-operated restaurants and 683 franchised restaurants as of December 31, 2018, compared to 1,546 Company-operated restaurants and 642 franchised restaurants as of December 31, 2017.
(4)Our comparable sales growth on a systemwide basis in 2018 was driven by the increase in average check, which resulted mainly from price increases in Venezuela (driven by the hyperinflation) and in Argentina and from increased traffic at our restaurants.
(5)Franchised sales correspond to sales generated by franchised restaurants, which we do not collect. Revenues from franchised restaurants primarily consist of rental income.

By division
  Sales Sales growth 
Sales growth in
constant currency
 Comparable sales growth
  
For the Years Ended
December 31,
 For the Years Ended December 31, For the Years Ended December 31, For the Years Ended December 31,
  2019 2018 2017 2019 2018 2019 2018 2019 2018
  (in thousands of U.S. dollars, except percentages)
Sales by Company-operated restaurants:                  
Brazil $1,283,005  $1,251,458  $1,396,411  2.5% (10.4)% 11.1% 2.0% 9.5% 1.1%
Caribbean division 390,589  467,352  457,033  (16.4)% 2.3% 16,275.6% 8,559.0% 16,506.1% 8,719.4%
NOLAD 410,601  388,233  370,457  5.8% 4.8% 6.3% 6.3% 5.3% 6.4%
SLAD 728,092  825,566  938,355  (11.8)% (12.0)% 27.0% 19.7% 25.1% 19.6%
Total Sales by Company-operated restaurants 2,812,287  2,932,609  3,162,256  (4.1)% (7.3)% 2,606.9% 1,244.5% 2,649.4% 1,270.4%
                   
Franchised-sales:(3)                  
Brazil 834,653  773,908  815,184  7.8% (5.1)% 16.8% 8.1%  9.8%  2.3%
Caribbean division 64,813  120,702  127,599  (46.3)% (5.4)% 60,683.6% 30,277.9%  61,561.5%  30,716.2%
NOLAD 171,672  159,180  142,657  7.8% 11.6% 7.9% 13.5%  4.3%  6.8%
SLAD 118,395  146,322  165,166  (19.1)% (11.4)% 26.9% 31.3%  26.4%  22.3%
Total Franchised sales 1,189,533  1,200,112  1,250,606  (0.9)% (4.0)% 6,118.5% 3,100.2% 6,040.1% 2,983.0%
                      
Systemwide sales:                     
Brazil 2,117,658  2,025,366  2,211,595  4.6% (8.4)% 13.3% 4.3%  9.7%  1.6%
Caribbean division 455,403  588,054  584,632  (22.6)% 0.6% 25,390.7% 13,299.2%  25,753.0%  13,557.8%
NOLAD 582,273  547,414  513,114  6.4% 6.7% 6.8% 8.3%  5.0%  6.5%
SLAD 846,486  971,887  1,103,521  (12.9)% (11.9)% 27.0% 21.4%  25.3%  20.1%
Total Systemwide sales 4,001,820  4,132,721  4,412,862  (3.2)% (6.3)% 3,626.7% 1,770.4% 3,654.4% 1,778.1%

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  Sales Number of restaurants Average restaurant sales
  For the Years Ended December 31, For the Years Ended December 31, For the Years Ended December 31,
  2019 2018 2017 2019 2018 2017 2016 2019(1) 2018(2) 2017
  (in thousands of U.S. dollars, except for number of restaurants)
Sales by Company-operated restaurants $2,812,287  $2,932,609  $3,162,256  1,580  1,540  1,546  1,553  $1,780 $1,901 $2,041
Franchised sales(3) $1,189,533  $1,200,112  $1,250,606  713  683  642  603  $1,668 $1,811 $2,009
Systemwide sales $4,001,820  $4,132,721  $4,412,862  2,293  2,223  2,188  2,156  $1,745 $1,874 $2,032
 
(1)Our ARS decreased in 2019 due to the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar. This was partially offset by comparable sales growth of 3,654.4%, mainly driven by Venezuela´s hyperinflation.
(2)
Our ARS decreased in 2018 due to the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar. This was partially offset by comparable sales growth of 1,778.1%, mainly driven by Venezuela’s hyperinflation.
(3)Franchised sales correspond to sales generated by franchised restaurants, which we do not collect. Revenues from franchised restaurants primarily derive from rental income.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Set forth below are our results of operations for the years ended December 31, 2019 and 2018.
  For the Years Ended December 31, 
%
Change
  2019 2018 
  (in thousands of U.S. dollars)  
Sales by Company-operated restaurants $2,812,287  $2,932,609  (4.1)%
Revenues from franchised restaurants $146,790  $148,962  (1.5)%
Total revenues $2,959,077  $3,081,571  (4.0)%
Company-operated restaurant expenses:      
Food and paper $(1,007,584)  $(1,030,499)  (2.2)%
Payroll and employee benefits $(567,653)  $(607,793)  (6.6)%
Occupancy and other operating expenses $(799,633)  $(803,539)  (0.5)%
Royalty fees $(155,388)  $(157,886)  (1.6)%
Franchised restaurants – occupancy expenses $(61,278)  $(67,927)  (9.8)%
General and administrative expenses $(212,515)  $(229,324)  (7.3)%
Other operating income (expenses), net $4,910  $(61,145)  (108.0)%
Total operating costs and expenses $(2,799,141)  $(2,958,113)  (5.4)%
Operating income $159,936  $123,458  29.5%
Net interest expense $(52,079)  $(52,868)  (1.5)%
Gain (loss) from derivative instruments $439  $(565)  (177.7)%
Foreign currency exchange results $12,754  $14,874  (14.3)%
Other non-operating (expenses) income, net $(2,097)  $270  (876.7)%
Income before income taxes $118,953  $85,169  39.7%
Income tax expense $(38,837)  $(48,136)  (19.3)%
Net income $80,116  $37,033  116.3%
Less: Net income attributable to non-controlling interests $(220)  $(186)  18.3%
Net income attributable to Arcos Dorados Holdings Inc $79,896  $36,847  116.8%

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Set forth below is a summary of changes to our systemwide, Company-operated and franchised restaurant portfolios in 2019 and 2018.

Systemwide Restaurants
 
For the Years Ended
December 31,
  2019 2018
Systemwide restaurants at beginning of period 2,223  2,188 
Restaurant openings 90  70 
Restaurant closings (20)  (35) 
Systemwide restaurants at end of period 2,293  2,223 
Company-Operated Restaurants 
For the Years Ended
December 31,
  2019 2018
Company-operated restaurants at beginning of period 1,540  1,546 
Restaurant openings 65  42 
Restaurant closings (17)  (28) 
Net conversions of franchised restaurants to Company-operated restaurants (8)  (20) 
Company-operated restaurants at end of period 1,580  1,540 

Franchised Restaurants
 
For the Years Ended
December 31,
  2019 2018
Franchised restaurants at beginning of period 683  642 
Restaurant openings 25  28 
Restaurant closings (3)  (7) 
Net conversions of franchised restaurants to Company-operated restaurants 8  20 
Franchised restaurants at end of period 713  683 


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Revenues
  
For the Years Ended
 December 31,
 % Change
  2019 2018 
  (in thousands of U.S. dollars)  
Sales by Company-operated restaurants      
Brazil $1,283,005  $1,251,458  2.5%
Caribbean division $390,589  $467,352  (16.4)%
NOLAD $410,601  $388,233  5.8%
SLAD $728,092  $825,566  (11.8)%
Total $2,812,287  $2,932,609  (4.1)%
Revenues from franchised restaurants      
Brazil $102,561  $93,995  9.1%
Caribbean division $8,662  $16,391  (47.2)%
NOLAD $20,665  $18,615  11.0%
SLAD $14,902  $19,961  (25.3)%
Total $146,790  $148,962  (1.5)%
Total revenues      
Brazil $1,385,566  $1,345,453  3.0%
Caribbean division $399,251  $483,743  (17.5)%
NOLAD $431,266  $406,848  6.0%
SLAD $742,994  $845,527  (12.1)%
Total $2,959,077  $3,081,571  (4.0)%

Sales by Company-operated Restaurants
Total sales by Company-operated restaurants decreased by $120.3 million, or 4.1%, from $2,932.6 million in 2018 to $2,812.3 million in 2019. In Argentina, total sales by Company-operated restaurants decreased by $93.7 million, mainly due to depreciation of the Argentine peso, against the U.S. dollar, which caused sales to decrease by $291.1 million. This was partially offset by comparable sales growth of 38.7%, which caused sales in this market to increase by $186.4 million, mostly due to price increase related to the hyperinflation, together with 1 net restaurant opening and 3 franchised restaurants converting into Company-operated restaurants since January 1, 2018 which increased sales by $11.0 million. Additionally, the sharp currency depreciation in Venezuela caused a $61.2 million net negative impact on sales by Company-operated restaurants in 2019 compared to 2018. Moreover, in the other markets, sales by Company-operated restaurants increased $34.6 million mainly due to comparable sales growth of 6.8%, which caused sales to increase by $159.7 million, coupled with 53 net restaurant openings since January 1, 2018, which caused sales to increase by $31.1 million, partly offset by depreciation of currencies against the U.S. dollar, which caused sales to decrease by $156.1 million.
In Brazil, sales by Company-operated restaurants increased by $31.5 million, or 2.5%, to $1,283.0 million. This was primarily a consequence of comparable sales growth of 9.5%, mainly driven by the increase in traffic, which caused sales to increase by $116.4 million. Also, 56 net restaurants openings coupled with the conversion of 23 Company-operated restaurants into franchised restaurants since January 1, 2018, caused sales to increase by $22.4 million. This was partially offset by the depreciation of the Brazilian real against the U.S. dollar, which caused sales to decrease by $107.3 million.
In the Caribbean division, sales by Company-operated restaurants decreased by $76.8 million, or 16.4%, to $390.6 million. The hyperinflationary environment in Venezuela caused a $61.2 million net negative impact on sales by Company-operated restaurants in 2019 compared to 2018. In the other markets of the Caribbean division, sales by Company-operated restaurants decreased by $15.6 million mainly due to the depreciation of currencies against the U.S. dollar, which caused sales to decrease by $17.6 million and the closing of 15 company operated restaurants. This was partly offset by the opening of 3 Company-operated restaurants, which led to a $0.1 million increase in sales, and comparable sales growth of 0.5%, which caused sales to increase by $1.9 million.

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In NOLAD, sales by Company-operated restaurants increased by $22.4 million, or 5.8%, to $410.6 million. This was a consequence of comparable sales growth of 5.3%, driven by traffic increase, which contributed $19.9 million to the increase in sales, and 9 net restaurant openings, partially offset by the conversion of 8 Company-operated restaurants into franchised restaurants since January 1, 2018, which contributed in $4.5 million to sales. This was partially offset by the depreciation of local currencies, which had a negative impact of $2.0 million in sales.
In SLAD, sales by Company-operated restaurants decreased by $97.5 million, or 11.8%, to $728.1 million. This was a consequence of the depreciation of currencies against the U.S. dollar, in particular the Argentine peso, which caused sales to decrease by $320.3 million. This was partially offset by 25.1% growth in comparable sales, which caused sales to increase by $207.8 million, driven by an increase in average check, mainly related with Argentine inflation. Additionally, the opening of 16 restaurants, together with the conversion of 3 franchised restaurants into Company-operated restaurants, partly offset by the closing of 7 restaurants, since January 1, 2018 contributed $15.0 million to the increase in sales.
Revenues from Franchised Restaurants
Our total revenues from franchised restaurants decreased by $2.2 million, or 1.5%, from $149.0 million in 2018 to $146.8 million in 2019. In Argentina, revenues from franchised restaurants decreased $5.5 million mainly explained by the depreciation of the Argentine peso against the U.S. dollar that reduced revenues by $7.7 million, along with the decrease in rental income as a percentage of sales which had a negative effect of $1.8 million. This was partly offset by comparable sales growth of 33.1%, which caused revenues to increase $4.0 million. Additionally, sharp currency depreciation in Venezuela caused a $7.5 million net negative impact on revenues from franchised restaurants. These decreases were partly offset by an increase of revenues from franchised restaurants in other markets of $10.8 million, mainly due to comparable sales growth of 8.3%, which caused revenues from franchised restaurants to increase by $10.9 million. Additionally, the conversion of 38 Company-operated restaurants into franchised restaurants and the net opening of 31 franchised restaurants caused revenues to increase by $7.4 million. Also, a slight increase in rent due to different conditions in new contracts caused an increase in revenues of $1.9 million. These increases in our other markets were partly offset by the effect of currencies depreciation against the U.S. dollar which had a negative effect of $9.4 million.    
In Brazil, revenues from franchised restaurants increased by $8.6 million, or 9.1%, to $102.6 million primarily due to comparable sales growth of 9.8%, which increased revenues by $9.7 million, the net opening of 38 franchised restaurants and the conversion of 23 Company-operated restaurants into franchised restaurants, since January 1, 2018, which caused revenues from franchised restaurants to increase in $6.4 million along with the increase in rental income as a percentage of sales, which increased revenues by $1.1 million. This was partially offset by the depreciation of the real against the U.S. dollar that decreased revenues by $8.6 million.
In the Caribbean division, revenues from franchised restaurants decreased by $7.7 million, or 47.2%, to $8.7 million. The hyperinflationary environment in Venezuela caused a $7.5 million net negative impact on revenues from franchised restaurants in 2019 compared to 2018. In Puerto Rico, the other market of the division with franchised restaurants, revenues decreased by $0.2 million, mainly due to a decline in comparable sales growth of 1.4%, which caused revenues of franchised restaurants to decrease by $0.1 million, coupled with the closing of 2 restaurants since January 1, 2018, with a negative impact in revenues of $0.1 million.
In NOLAD, revenues from franchised restaurants increased by $2.1 million, or 11.0%, to 20.7 million. This increase was a result of comparable sales growth of 4.3%, which resulted in a $0.8 million increase in revenues, coupled with the conversion of 8 Company-operated restaurants into franchised restaurants and the net opening of 2 restaurants since January 1, 2018, which caused revenues to increase by $0.7 million, coupled with increase in rental income as a percentage of sales, which increased revenues by $0.6 million.
In SLAD, revenues from franchised restaurants decreased by $5.1 million, or 25.3%, to $14.9 million. This decrease is mainly explained by the depreciation of the currencies against the U.S. dollar, especially the Argentine peso, which represented a decrease in revenues of $8.5 million. In addition, a decrease in rental income as a percentage of sales reduced revenues by $1.5 million This was partially offset by comparable sales growth of 26.4%, which resulted in a $4.5 million increase in revenues, driven by an increase in average check strongly related with the inflation in Argentina, coupled with the net opening of 5 restaurants and the conversion of 3 franchised restaurants into Company-operated restaurants since January 1, 2018, which caused revenues to increase by $0.4 million.


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Operating Costs and Expenses
Food and Paper
Our total food and paper costs decreased by $22.9 million, or 2.2%, to $1,007.6 million in 2019, as compared to 2018. As a percentage of our total sales by Company-operated restaurants, food and paper costs increased 0.7 percentage points to 35.8%, primarily as a result of product mix in Brazil and Argentina.
In Brazil, food and paper costs increased by $33.0 million, to $439.3 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs increased by 1.7 percentage points to 34.2%, primarily as a result of an unfavorable change in product mix, derived from promotional activities carried out with the goal of increasing traffic in response to the unfavorable macroeconomic conditions and strong competitive environment.
In the Caribbean division, food and paper costs decreased by $30.7 million, or 18.1%, to $139.5 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs decreased by 0.7 percentage points to 35.7%, primarily due to the hyperinflationary environment and sharp currency depreciation in Venezuela.
In NOLAD, food and paper costs increased by $7.3 million, or 4.8%, to $158.4 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs decreased by 0.3 percentage points to 38.6%, resulting primarily from higher price increases as compared to cost increases in every market of the division.
In SLAD, food and paper costs decreased by $32.5 million, or 10.7%, to $270.4 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs increased by 0.4 percentage points to 37.1%, mainly due to cost increases above price increases, related to the effect of the depreciation of the Argentine peso against the U.S. dollar in imported products coupled with product mix, also primarily in Argentina.
Payroll and Employee Benefits
Our total payroll and employee benefits costs decreased by $40.1 million, or 6.6%, to $567.7 million in 2019, as compared to 2018. As a percentage of our total sales by Company-operated restaurants, payroll and employee benefits costs decreased 0.5 percentage points to 20.2%. The decrease is mostly attributable to higher productivity in Brazil, tax reform in Argentina and operational efficiencies in almost all markets.
In Brazil, payroll and employee benefits costs decreased by $8.2 million, or 3.0%, to $267.4 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs decreased by 1.2 percentage points to 20.8%, mainly as a result of efficiencies in management payroll, coupled with higher productivity and lower labor contingencies.
In the Caribbean division, payroll and employee benefits costs decreased by $4.1 million, or 4.6%, to $84.2 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs increased by 2.7 percentage points to 21.6%, mainly due to lower income related to government benefits in Colombia and higher management salaries in Venezuela.
In NOLAD, payroll and employee benefits costs increased by $2.5 million, or 3.9%, to $66.3 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs decreased by 0.2 percentage points to 16.2%, resulting primarily from higher price increases as compared to cost increases together with operational efficiencies, all in Mexico.
In SLAD, payroll and employee benefits costs decreased by $30.3 million, or 16.9%, to $149.6 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits decreased by 1.2 percentage points to 20.6% mainly as a result of tax benefits in Argentina and Uruguay.

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Occupancy and Other Operating Expenses
Our total occupancy and other operating expenses decreased by $3.9 million, or 0.5%, to $799.6 million in 2019, as compared to 2018. As a percentage of our total sales by Company-operated restaurants, occupancy and other operating expenses increased 1.0 percentage points to 28.4%, mainly due to higher delivery costs and IT expenses in Brazil and Argentina. Additionally, there were higher depreciation and amortization expenses in Brazil.
In Brazil, occupancy and other operating expenses increased by $16.2 million, or 4.8%, to $352.9 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased by 0.6 percentage points to 27.5%, mainly due to higher delivery costs and IT expenses coupled with higher depreciation and amortization related to the 2017-2019 reinvestment plan and dessert center openings.
In the Caribbean division, occupancy and other operating expenses decreased by $18.2 million, or 13.6%, to $116.0 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased 1.0 percentage points to 29.7%, mainly due to higher utilities in Venezuela, Colombia and Puerto Rico, coupled with higher maintenance and repair costs in Venezuela and Colombia. In addition, higher depreciation and amortization expenses in Venezuela and Colombia also contributed, explained by lower sales in both countries. This was partially offset by lower insurance payments in Venezuela compared to 2018.
In NOLAD, occupancy and other operating expenses increased by $8.4 million, or 6.8%, to $133.0 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased by 0.3 percentage points to 32.4% due to higher delivery costs and IT expenses, partially offset by lower depreciation and amortization expenses in Mexico.
In SLAD, occupancy and other operating expenses decreased by $18.0 million, or 8.2%, to $201.9 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased by 1.1 to 27.7%, due to higher depreciation and amortization expenses in Argentina and Chile, coupled with higher delivery costs, utilities and IT expenses in Argentina.
Royalty Fees
Our total royalty fees decreased by $2.5 million, or 1.6%, to $155.4 million in 2019, as compared to 2018. As a percentage of sales, royalty fees increased by 0.1 percentage points to 5.5% due to lower growth support funding that McDonald’s Corporation began providing in August 2017 and waiver of royalty fees in Venezuela.
In Brazil, royalty fees increased by $0.5 million, or 0.8%, to $67.2 million in 2019. As a percentage of sales, royalty fees remained almost flat.
In the Caribbean division, royalty fees increased by $0.6 million, or 2.7%, to $22.7 million in 2019, as compared to 2018. As a percentage of sales, royalty fees increased by 1.1 percentage points to 5.8%, due to waiver of royalty fees in Venezuela.
In NOLAD, royalty fees increased by $1.4 million, or 6.2%, to $24.1 million in 2019, as compared to 2018. As a percentage of sales, royalty fees increased by 0.1 percentage points to 5.9%, due to an increase in the sales subject to royalty fees.
In SLAD, royalty fees decreased by $5.0 million, or 10.8%, to $41.5 million in 2019, as compared to 2018. As a percentage of sales, royalty fees increased by 0.1 percentage points to 5.7%, as a result of lower growth support funding that McDonald’s Corporation began providing in August 2017.
Franchised Restaurants—Occupancy Expenses
Occupancy expenses from franchised restaurants decreased by $6.6 million or 9.8%, to $61.3 million in 2019, as compared to 2018, mainly due to depreciation of currencies, mainly in Venezuela, Brazil and Argentina against the U.S. dollar. This was partially offset by higher rent expenses for leased properties, as a consequence of the increase in comparable sales from franchised restaurants, the conversion of Company-operated restaurants into franchised restaurants and store openings.

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In Brazil, occupancy expenses from franchised restaurants increased by $2.8 million, or 6.2%, to $47.2 million in 2019, as compared to 2018, primarily due to higher rent expenses for leased properties, as a consequence of the increase in comparable sales from franchised restaurants, the conversion of Company-operated restaurants into franchised restaurants and store openings. This was partially offset by depreciation of the Brazilian real against de U.S. dollar.
In the Caribbean division, occupancy expenses from franchised restaurants decreased by $10.3 million, or 94.6% to $0.6 million, mainly explained by the reduction of the allowance for doubtful accounts, in Puerto Rico due to the executed agreement with certain Puerto Rican franchisees in the market, mentioned in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Puerto Rican Franchisees.” Also, the depreciation of the Venezuelan bolivar against the U.S. dollar, partly offset by higher rent expenses for leased properties, as a consequence of the increase in sales from franchised restaurants, caused by the hyperinflation in Venezuela contributed to the reduction in occupancy expenses.
In NOLAD, occupancy expenses from franchised restaurants increased by $0.8 million, or 9.7%, to $9.3 million in 2019, as compared to 2018, mainly due to higher rent expenses for leased properties, as a consequence of the increase in comparable sales from franchised restaurants and the conversion of Company-operated restaurants into franchised restaurants and stores openings.
In SLAD, occupancy expenses from franchised restaurants decreased by $0.8 million, or 14.6%, to $4.7 million in 2019, as compared to 2018, mainly due to the depreciation of the Argentinean peso against the U.S. dollar. This was partially offset by higher rent expenses for leased properties as a consequence of the increase in comparable sales from franchised restaurants.
Set forth below are the margins for our franchised restaurants in 2019, as compared to 2018. The margin for our franchised restaurants is expressed as a percentage and is equal to the difference between revenues from franchised restaurants and occupancy expenses from franchised restaurants, divided by revenues from franchised restaurants.
  
For the Years Ended
December 31,
  2019 2018
Brazil 54.0% 52.8%
Caribbean Division 93.1% 33.2%
NOLAD 54.9% 54.3%
SLAD 68.4% 72.3%
Total 58.3% 54.4%

General and Administrative Expenses
General and administrative expenses decreased by $16.8 million, or 7.3%, to $212.5 million in 2019. This is explained primarily by the depreciation of currencies, especially the Argentine peso and the Brazilian real, that contributed $40.4 million to the reduction in general and administrative expenses and a reduction of expenses in Venezuela of $2.2 million as well as lower expenses in Brazil, NOLAD and other markets in the Caribbean of $9.2 million, primarily due to the fact that we had no severance payments in 2019 as compared to 2018. These reductions were partially offset by an increase in general and administrative expenses in Argentina and corporate of $36.1 million, mainly related to the hyperinflation in Argentina.
In Brazil, general and administrative expenses decreased by $10.6 million, or 13.8%, to $66.6 million in 2019, as compared to 2018. The decrease resulted from the depreciation of the Brazilian real against the U.S. dollar amounting to $5.7 million, and lower other and outside services amounting to $1.1 million as compared to 2018. In addition, we did not have any severance payments in 2019 as compared to $5.2 million in severance payments in 2018. This was partially offset by higher occupancy expenses for an amount of $1.3 million.

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In the Caribbean division, general and administrative expenses decreased by $6.7 million, or 20.7%, to $25.8 million in 2019, as compared to 2018. The sharp currency depreciation in Venezuela caused general and administrative expenses to decrease by $2.2 million. Moreover, in the other markets in this division, general and administrative expenses decreased by $4.5 million as compared to 2018 mainly due to higher severance payment in 2018 of $1.9 million coupled with a reduction in occupancy expenses, outside services, other expenses and travel for an amount of $0.9 million and savings in payroll and variable compensation of $0.8 million in 2019. In addition, the depreciation of various currencies against the U.S. dollar decreased general and administrative expenses by $1.0 million.
In NOLAD, general and administrative expenses decreased by $0.8 million, or 3.3%, to $24.4 million in 2019, as compared to 2018. This decrease is a result of $1.3 million lower severance payment than in 2018 and lower other expenses amounting to $0.1 million. This was partially offset by higher payroll and bonuses amounting to $0.6 million.
In SLAD, general and administrative expenses decreased by $4.2 million, or 13.0%, to $28.1 million in 2019, as compared to 2018. This decrease was mostly due to the depreciation of various currencies against the U.S. dollar, mainly the Argentine peso, amounting to $8.7 million, lower severance payment than in 2018 for an amount of $1.5 million and lower occupancy expenses amounting to $0.8 million. This was partially offset by higher payroll, mainly as a result of inflation in Argentina, coupled with other variable compensation amounting to $4.4 million and $1.0 million, respectively. In addition, there were higher outside services and other expenses for an amount of $1.5 million.
General and administrative expenses for Corporate and others increased by $5.6 million, or 9.0%, to $67.6 million in 2019, as compared to 2018. This increase was mostly due to higher payroll related to Argentina’s inflation, as a portion of our corporate expenses are nominated in Argentine pesos, amounting to $11.0 million, coupled with higher bonuses and other variable compensation provisions, for an amount of $3.3 million. Additionally, higher outside services, occupancy, other and travel expenses for an amount of $16.6 million also contributed. This was partially offset by the depreciation of currencies against the U.S. dollar, especially the Argentine peso, amounting to $24.9 million and no severance payment in 2019 as compared to severance payments of $0.4 million in 2018.

Other Operating Income (Expense), net
Other operating income (expense), net increased by $66.1 million, to a gain of $4.9 million in 2019 from a loss of $61.1 million in 2018. This increase was primarily attributable to a lower inventory write down in Venezuela of approximately $56.5 million and lower impairment of long-live assets of approximately $9.6 million, both as compared to 2018.
Operating Income
  
For the Years Ended
December 31,
 % Change
  2019 2018 
  (in thousands of U.S. dollars)  
Brazil $164,342  $159,511  3.0%
Caribbean division $(1,101)  $(49,567)  97.8%
NOLAD $16,539  $7,726  114.1%
SLAD $42,410  $53,777  (21.1)%
Corporate and other and purchase price allocation $(62,254)  $(47,989)  29.7%
Total $159,936  $123,458  29.5%

Operating income increased by $36.5 million, or 29.5%, to $159.9 million in 2019, as compared to 2018, as a result of the foregoing.
Net Interest Expense
Net interest expense decreased by $0.8 million, or 1.5%, to $52.1 million in 2019, as compared to 2018. The decrease was primarily explained by lower interest expenses from the derivatives held by our Brazilian subsidiary, amounting to $1.2 million.

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Gain (Loss) from Derivative Instruments
Gain (loss) from derivative instruments increased by $1.0 million to a gain of $0.4 million in 2019, from a loss of $0.6 million in 2018, attributable primarily to the results of derivatives that are not designated for hedge accounting.
Foreign Currency Exchange Results
Foreign currency exchange results decreased by $2.1 million, from a gain of $14.9 million in 2018 to a gain of $12.8 million in 2019. The variation is primarily attributable to a loss of $5.6 million related to a significant devaluation of the Venezuelan bolivar against U.S. dollars during 2018 in comparison with a lower devaluation in 2019, partially offset by a gain of $3.7 million related to the impact of operating lease liabilities denominated in currencies other than their functional ones.
Other Non-operating (Expenses) Income, Net
Other non-operating (expenses) income, net decreased by $2.4 million to a $2.1 million loss in 2019, as compared to a $0.3 million gain in 2018, primarily related to contingencies.
Income Tax Expense
Income tax expense decreased by $9.3 million, from $48.1 million in 2018 to $38.8 million in 2019. The consolidated effective tax rate was 32.6% in 2019, as compared to 56.5% in 2018, primarily explained by Venezuela remeasurement and inflationary impacts (amounting to $1.7 million) and income tax withholding on intercompany transactions (amounting to $5.0 million); each representing a higher effective tax rate of 1.5% and 4.2% in 2019 with respect to the weighted-average statutory income tax rate, compared to a higher effective tax rate of 19.8% and 9.1% in 2018, respectively.
See Note 16 to our consolidated financial statements for additional information
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests for 2019 remained unchanged from 2018.
Net Income Attributable to Arcos Dorados Holdings Inc.
As a result of the foregoing, net income attributable to Arcos Dorados Holdings Inc. increased by $43.0 million, or 116.8% from $36.8 million in 2018, to $79.9 million in 2019.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
For a discussion of our results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Year Ended December 31, 2018. Compared to Year Ended December 31, 2017” of our annual report on Form 20-F for the year ended December 31, 2018.
B.    Liquidity and Capital Resources
Our financial condition and liquidity are and will continue to be influenced by a variety of factors, including:
our ability to generate cash flows from our operations;
the level of our outstanding indebtedness and the interest we pay on this indebtedness;
our dividend policy;
changes in exchange rates which will impact our generation of cash flows from operations when measured in U.S. dollars; and
our capital expenditure requirements.

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We also expect our liquidity and capital resources in 2020 to be negatively impacted by the COVID-19 outbreak, the duration and scope of which are uncertain. In particular, we rely on short term funding from several uncommitted lines of credit, which we began to drawn on in March 2020 to maintain our liquidity in the face of the COVID-19 pandemic and the related disruption to our business. We expect that we will need to continue drawing on such credit lines while the pandemic is ongoing. Any unavailability of such credit lines may also negatively impact our liquidity in 2020 and capital resources.
Under the MFAs, we are required to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period during the term of the MFAs. The restaurant opening plan specifies the number and type of new restaurants to be opened in the Territories during the applicable three-year period, while the reinvestment plan specifies the amount we must spend reimaging or upgrading restaurants during the applicable three-year period. See “Item 4. Information on the Company—A. History and Development of the Company—Capital Expenditures and Divestitures.” In the event we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing reinvestment plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan. As a result of the business disruptions caused by COVID-19 outbreak, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan and we do not expect to finalize a revised 2020-2022 plan at least until the COVID-19 outbreak is under control. If we are unable to meet our commitments under a future plan and we are unable to reach an agreement on revised terms of the restaurant opening plan and reinvestment plan or are otherwise unable to obtain a waiver from McDonald’s, we will be in default under the terms of the MFAs.
Our management believes in our ability to obtain the sources of liquidity and capital resources that are necessary in this challenging economic environment and also believes that our liquidity and capital resources, including working capital, are adequate for our present requirements and business operations and will be adequate to satisfy our currently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so” and “—We use non-committed lines of credit to partially finance our working capital needs.”

Overview
Net cash provided by operations increased by $43.8 million, from $179.7 million in 2018 to $223.5 million in 2019. Cash used in our investing activities was $261.0 million in 2019, compared to $163.8 million in 2018. Cash used in financing activities was $29.6 million in 2019, compared to $73.4 million in 2018. Cash used in financing activities was primarily used for the purchase of treasury stock amounting to $14.0 million and the payments of dividends of $22.4 million. This was partially offset by cash inflows of $13.2 million from net short-term borrowings.
Net cash provided by operations decreased by $75.4 million, from $255.2 million in 2017 to $179.7 million in 2018. Cash used in our investing activities was $163.8 million in 2018, compared to $124.5 million in 2017. Cash used in financing activities was $73.4 million in 2018, compared to $3.4 million in 2017. Cash used in financing activities was primarily used for the purchase of treasury stock amounting to $46.0 million and the payments of dividends of $20.9 million.
At December 31, 2019, our total financial debt was $595.8 million, consisting of (i) $626.8 million in long-term debt (of which $346.5 million related to the 2023 notes, including the original issue discount, $265.0 million related to 2027 notes, $13.3 million in other long-term borrowings, and $5.4 million in finance lease obligations, partially offset by $3.4 million related to deferred financing costs) the amount of which was offset by $44.3 million related to the fair market value of our outstanding derivative instruments and (ii) $13.3 million in short-term debt.
At December 31, 2018, our total financial debt was $589.8 million, consisting of (i) $630.3 million in long-term debt (of which $346.1 million related to the 2023 notes, including the original issue discount, $265.0 million related to 2027 notes, $16.7 million in other long-term borrowings, and $6.5 million in capital lease obligations) the amount of which was offset by $40.9 million related to the fair market value of our outstanding derivative instruments, (ii) $4.0 million related to deferred financing costs and (iii) $0.4 million in short-term debt.
Cash and cash equivalents were $121.9 million at December 31, 2019 and $197.3 million at December 31, 2018.

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Comparative Cash Flows
The following table sets forth our cash flows for the periods indicated:
  For the Years Ended December 31,
  2019 2018 2017
  (in thousands of U.S. dollars)
Net cash provided by operating activities $223,481  $179,731  $255,170 
Net cash used in investing activities (260,991)  (163,784)  (124,480) 
Net cash used in financing activities (29,632)  (73,442)  (3,353) 
Effect of exchange rate changes on cash and cash equivalents (8,260)  (53,714)  (13,649) 
(Decrease) increase in cash and cash equivalents (75,402)  (111,209)  113,688 
Operating Activities
  For the Years Ended December 31,
  2019 2018 2017
  (in thousands of U.S. dollars)
Net income attributable to Arcos Dorados Holdings Inc. $79,896  $36,847  $129,166 
Non-cash charges and credits 117,498  121,448  60,926 
Changes in assets and liabilities 26,087  21,436  65,078 
Net cash provided by operating activities 223,481  179,731  255,170 

For the year ended December 31, 2019, net cash provided by operating activities was $223.5 million, compared to $179.7 million in 2018. The $43.8 million increase is attributable to the increase in net income and the positive change in assets and liabilities of $47.7 million and a decrease of non-cash charges of $4.0 million.
For the year ended December 31, 2018, net cash provided by operating activities was $179.7 million, compared to $255.2 million in 2017. The $75.4 million decrease is attributable to the decrease in net income and a negative change in assets and liabilities of $136.0 million and a positive change of non-cash charges of $60.5 million.
Investing Activities
Investments in new restaurants and the modernization of existing restaurants are primarily concentrated in markets with opportunities for long-term growth and returns on investment above a pre-defined threshold that is significantly above our cost of capital. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market and are affected by foreign currency fluctuations. These costs, which include land, buildings and equipment, are managed through the use of optimally sized restaurants, construction and design efficiencies and the leveraging of best practices.
The following table presents our cash (used in) provided by investing activities by type:

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  For the Years Ended December 31,
  2019 2018 2017
  (in thousands of U.S. dollars)
Property and equipment expenditures $(265,235)
  $(197,041)
  $(174,766) 
Purchases of restaurant businesses paid at acquisition date (2,658)      (870) 
Proceeds from sales of property and equipment and related advances 3,340   2,891   61,983 
Proceeds from sales of restaurant businesses and related advances 4,818   10,158   10,407 
Recovery (acquisitions) of short-term investments    19,588   (19,588) 
Others, net (1,256)   620   (1,646) 
Net cash used in investing activities (260,991)   (163,784)   (124,480) 
The following table presents our property and equipment expenditures by type:
  For the Years Ended December 31,
  2019 2018 2017
  (in thousands of U.S. dollars)
New restaurants $88,427  $55,982  $41,557 
Existing restaurants 149,681  107,202  105,396 
Other(1) 27,127  33,857  27,813 
Total property and equipment expenditures 265,235  197,041  174,766 
 
(1)Primarily corporate equipment and other office expenditures.
In 2019, net cash used in investing activities was $261.0 million, compared to $163.8 million in 2018. This $97.2 million increase was primarily attributable to an increase in property and equipment expenditures of $68.2 million, the recovery of short-term investments in 2018 for $19.6 million, a decrease in proceeds from sale of restaurant businesses and related advances of $5.3 million, the purchases of restaurant businesses for $2.7 million and a decrease in other investing activities of $1.9 million. This was partially offset by the increase in proceeds from sales of property and equipment and related prepayments of $0.4 million.
Property and equipment expenditures increased by $68.2 million, from $197.0 million in 2018 to $265.2 million in 2019. The increase in property and equipment expenditures is explained by an increase in investment in new restaurants of $32.4 million, as well as in existing restaurants of $42.5 million, and a decrease in corporate equipment and other office expenditures of $6.7 million. In 2019, we opened 90 restaurants and closed 20 restaurants.
Proceeds from sales of restaurant businesses and related advances decreased by $5.3 million, mainly as a result of a lower rate of conversion of company-operated restaurants into franchised restaurants in 2019 compared with 2018.
In 2018, net cash used in investing activities was $163.8 million, compared to $124.5 million in 2017. This $39.3 million increase was primarily attributable to an increase in property and equipment expenditures of $22.3 million, a decrease in proceeds from sales of property and equipment and related advances of $59.1 million, partially offset by the collection of short-term investments, made during 2017, amounting to $39.2 million.
Property and equipment expenditures increased by $22.3 million, from $174.8 million in 2017 to $197.0 million in 2018. The increase in property and equipment expenditures is explained by an increase in investment in new restaurants of $14.4 million and an increase in investment in existing restaurants, $13.9 million, partly offset by a decrease in corporate equipment and other office expenditures of $6.0 million. In 2018, we opened 70 restaurants and closed 35 restaurants.
Proceeds from sales of property and equipment and related advances decreased by $59.1 million to $2.9 million in 2018, as compared to 2017, primarily as a consequence of a decrease in sales from the Company’s asset monetization plan.

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Financing Activities
  For the Years Ended December 31,
  2019 2018 2017
  (in thousands of U.S. dollars)
Repayment of 2016 Secured Loan Agreement $
  $
  $(169,511)
 
Dividend payments to Arcos Dorados Holdings Inc. shareholders (22,425)   (20,937)     
Net payment of derivative instruments       (40,822)  
Purchase of 2023 Notes       (48,885)  
Issuance of 2027 Notes       265,000  
Treasury stock purchases (13,965)   (46,035)     
Net short-term borrowings 13,159        
Other financing activities (6,401)   (6,470)   (9,135)  
Net cash used in financing activities (29,632)   (73,442)   (3,353)  

Net cash used in financing activities was $29.6 million in 2019, compared to $73.4 million used in 2018. The $43.8 million decrease in the amount of cash used in financing activities was primarily attributable to lower purchase of treasury stock amounting to $32.1 million and issuance of short-term debt for $13.2 million.

Net cash used in financing activities was $73.4 million in 2018, compared to $3.4 million used in 2017. The $70.1 million increase in the amount of cash used in financing activities was primarily attributable to the purchase of treasury stock amounting to $46.0 million and the payments of dividends of $20.9 million.
The 2016 Secured Loan Agreement
On March 29, 2016, our Brazilian subsidiary, Arcos Dourados Comércio de Alimentos Ltda. (“Arcos Comércio”), entered into a secured loan agreement with Citibank N.A., Bank of America, N.A., Itau BBA International plc, JPMorgan Chase Bank, N.A. and Banco Santander (Brasil) S.A., Cayman Islands Branch, as initial lenders, under which Arcos Comércio received total proceeds of $167.3 million (R$613.9 million as of the signing date).
On April 11, 2017, we repaid the Secured Loan Agreement, plus accrued and unpaid interest and certain transaction costs for a total of $169.7 million. In addition, on April 13, 2017 and April 17, 2017, we unwound the related derivative instruments for a total of R$122.7 million. These payments were made using the proceeds of the offering of the 2027 notes. For more information on the 2027 notes, see “The 2027 Notes.”
Revolving Credit Facilities
We and Arcos Dorados B.V. entered into revolving credit facilities in order to borrow money from time to time to cover our working capital needs and for other lawful general corporate purposes. Interest on each loan under these facilities is payable on the date of any prepayment, at maturity and on a quarterly basis, beginning with the date that is three calendar months following the date on which the applicable loan was made.
On August 3, 2011, our subsidiary, Arcos Dorados B.V., entered into a committed revolving credit facility with Bank of America, N.A., as lender, for $50 million. We have renewed this loan annually since 2015, including most recently on August 2, 2019 for $25 million maturing on August 2, 2020, with an annual interest rate equal to LIBOR plus 2.40%.
As a result of the Company’s decision to change the exchange rates used for remeasurement of its bolivar-denominated assets and liabilities and operating results in Venezuela, we were not in compliance with the indebtedness to EBITDA ratio under the revolving credit facility as of June 30, 2014. At such date our consolidated indebtedness to EBITDA ratio was 2.73. On July 28, 2014, we reached an agreement with Bank of America, N.A. to change the consolidated net indebtedness to EBITDA ratio from 2.5 to 1 to 3.0 to 1. We subsequently amended the ratios in 2015 and 2016. On August 1, 2016, we amended the revolving credit facility, which resulted in changes to our net indebtedness to EBITDA ratio. As of the last day of the fiscal quarter ended September 30, 2016 the ratio changed to 3.25 to 1, and as of the last day of the fiscal quarter ended December 31, 2016, the ratio changed to 3.0 to 1.

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On November 10, 2016, Arcos Dorados B.V. entered into a revolving credit facility with JPMorgan Chase Bank, N.A. for up to $25 million maturing on November 10, 2017. We renewed this revolving credit facility annually until its maturity in November 2019. On December 11, 2019, the Company entered into a substantially similar agreement with JPMorgan Chase Bank, N.A. for up to $25 million maturing on December 11, 2020. Each loan made to Arcos Dorados B.V. or the Company, as applicable, under this agreement bears interest at an annual rate equal to LIBOR plus 2.25%.
The obligations of Arcos Dorados B.V. and the Company under both revolving credit facilities are jointly and severally guaranteed by certain of the Company’s subsidiaries on an unconditional basis. Furthermore, both agreements include customary covenants including, among others, restrictions on the ability of Arcos Dorados B.V., the Company, the guarantors and certain material subsidiaries to: (i) incur liens, (ii) enter into any merger, consolidation or amalgamation; (iii) sell, assign, lease or transfer all or substantially all of the borrower’s or guarantor’s business or property; (iv) enter into transactions with affiliates; (v) engage in substantially different lines of business; (vi) engage in transactions that violate certain anti-terrorism laws; and (vii) permit the consolidated net indebtedness to EBITDA ratio to be greater than 3.0 to 1. The revolving credit facilities provide for customary events of default, which, if any of them occurs, would permit or require the relevant lender to terminate its obligation to provide loans under the relevant revolving credit facility and/or to declare all sums outstanding under the loan documents immediately due and payable.
As of December 31, 2019, the net indebtedness to EBITDA ratios for us and for Arcos Dorados B.V. were 1.66 and 0.95, respectively, and as such we were in compliance with such ratios. We expect to be in compliance with such ratios in the first quarter of 2020. However, as a result of the COVID-19 pandemic, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”
2023 Notes
In September 2013, we issued senior notes for an aggregate principal amount of $473.8 million under an indenture dated September 27, 2013, which we refer to as the 2023 notes. The total aggregate principal amount of the 2023 notes consists of $375 million issued for cash and $98.8 million issued in exchange for the 7.5% senior notes due 2019 issued by Arcos Dorados B.V. in October 2009 (the “2019 notes”) that were properly tendered (and not validly withdrawn) pursuant to a tender offer, exchange offer and consent solicitation we launched in September 2013 (the “2013 Tender and Exchange Offer). The 2023 notes mature on September 27, 2023 and bear interest of 6.625% per year. Interest is paid semiannually on March 27 and September 27. The proceeds from the issuance of the 2023 notes were used to pay the principal and premium on the 2019 notes in connection with the 2013 Tender and Exchange Offer, to repay certain of the short-term indebtedness we had with Banco Itaú BBA S.A., to unwind a cross-currency interest rate swap with Bank of America, N.A. and for general corporate purposes.
The 2023 notes are redeemable at our option at any time at the applicable redemption price set forth in the indenture.
The 2023 notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries. The 2023 notes and guarantees (i) are senior unsecured obligations and rank equal in right of payment with all of our and the guarantors’ existing and future senior unsecured indebtedness; (ii) will be effectively junior to all of our and the guarantors’ existing and future secured indebtedness to the extent of the assets securing that indebtedness; and (iii) are structurally subordinated to all obligations of our subsidiaries that are not guarantors.
The indenture governing the 2023 notes limits our and our subsidiaries’ ability to, among other things, (i) create certain liens; (ii) enter into sale and lease-back transactions; and (iii) consolidate, merge or transfer assets. These covenants are subject to important qualifications and exceptions. The indenture governing the 2023 notes also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then-outstanding 2023 notes to be due and payable immediately.
On June 1, 2016, we launched a cash tender offer to purchase up to $80 million of the outstanding 2023 Notes (the “2016 Tender Offer”) at a redemption price equal to 98%, which expired on June 28, 2016. The holders who tendered their 2023 Notes prior to June 14, 2016 received a redemption price equal to 101%. As a result of the 2016 Tender Offer, we redeemed 16.89% of the outstanding principal amount of the 2023 notes. The total payment was $80.8 million (including $0.8 million of early tender payment) plus accrued and unpaid interest. The results related to the 2016 Tender Offer and the accelerated amortization of the related deferred financing cost were recognized as interest expense in the income statement.

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On March 16, 2017, we announced the commencement of a second tender offer to purchase for cash up to $80 million aggregate principal amount of the properly tendered (and not validly withdrawn) outstanding 2023 notes (the “2017 Tender Offer”). As a result of the early settlement of the 2017 Tender Offer, we repurchased $45.3 million of the 2023 notes on April 5, 2017. The 2017 Tender Offer expired on April 12, 2017. As a result of the final settlement of the 2017 Tender Offer, we repurchased an additional $0.4 million of the 2023 notes on April 19, 2017. As of December 31, 2019, $348.1 million aggregate principal amount of the 2023 notes was outstanding.
The 2023 notes are listed on the Luxembourg Stock Exchange and trade on the Euro MTF Market.
We may issue additional 2023 notes from time to time pursuant to the indenture governing the 2023 notes.
2027 Notes
In April 2017, we issued senior notes for an aggregate principal amount of $265.0 million under an indenture dated April 4, 2017, which we refer to as the 2027 notes. The 2027 notes mature on April 4, 2027 and bear interest of 5.875% per year. Interest is paid semiannually on April 4 and October 4, commencing on October 4, 2017. The proceeds from the issuance of the 2027 notes were used to repay the 2016 Secured Loan Agreement and unwind the related derivative instruments, to pay the principal and premium on the 2023 notes in connection with the 2017 Tender Offer and for general corporate purposes.

The 2027 notes are redeemable at our option under certain circumstances as set forth in the indenture at the applicable redemption prices set forth therein.

The 2027 notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries. The 2027 notes and guarantees (i) are senior unsecured obligations and rank equal in right of payment with all of our and the guarantors’ existing and future senior unsecured indebtedness; (ii) will be effectively junior to all of our and the 'guarantors' existing and future secured indebtedness to the extent of the assets securing that indebtedness; and (iii) are structurally subordinated to all obligations of our subsidiaries that are not guarantors.

The indenture governing the 2027 notes limits our and our subsidiaries’ ability to, among other things, (i) incur additional indebtedness; (ii) make certain restricted payments; (iii) create certain liens; (iv) enter into sale and lease-back transactions; and (v) consolidate, merge or transfer assets. These covenants are subject to important qualifications and exceptions. The indenture governing the 2027 notes also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then-outstanding 2027 notes to be due and payable immediately.
C.    Research and Development, Patents and Licenses, etc.
We have not had significant research and development activities for the past three years because we rely primarily on McDonald’s research and development. McDonald’s operates research and development facilities in the United States, Europe and Asia, and independent suppliers also conduct research activities that benefit McDonald’s and us. Nevertheless, we have developed certain menu items, such as Almuerzos Colombianos in Colombia or McPicanha in Brazil, to better tailor our product offerings to local tastes and to provide our customers with additional food options.
D.    Trend Information
Our business and results of operations have been impacted by increasingly negative macroeconomic and consumer trends in some of our main markets. We expect economic growth and consumption rates to decrease further in the near-term in 2020 as a result of the COVID-19 pandemic, which has caused us to close or reduce the operations of a significant percentage of our restaurants, led to a significant decline in sales and disrupted our supply chain. We expect these trends to continue until the COVID-19 pandemic is brought under control, which cannot be predicted at this time. We expect that these trends will lead to a significant decline in revenue and cash from operations beginning in mid-March 2020. Moreover, if the impacts of the COVID-19 pandemic become other than temporary, we may also need to consider it as an indicator of impairment in future quarters, which could further negatively impact our financial condition.

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Moreover, in response to the COVID-19 pandemic and related disruption in regional and global economic activity, as of March 31, 2020 we had drawn $136 million of short-term indebtedness from our lines of credit, including $35 million from our committed revolving credit facilities, and we expect to continue to draw on our available lines as needed and until the COVID-19 pandemic is brought under control. As a result of the availability of our lines of credit and revolving credit facilities, we do not at this time expect an impact on our liquidity due to the availability of our lines of credit and revolving credit facilities. However, due to the negative impact of the COVID-19 pandemic on our results of operations since mid-March 2020, we may not meet our financial ratios under our lines of credit and revolving credit facilities in the future. While we expect to be in compliance with such ratios in the first quarter of 2020, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen and will need to seek an amendment to our facilities or waivers from our lenders. If we are unable to obtain waivers for such non-compliance, we will be in default under our lines of credit and revolving credit facilities. In the case of our revolving credit facilities, any amounts drawn under such facilities may be declared immediately due and payable by the relevant lender, who may also terminate its obligation to provide loans under such agreements. In the case of the non-committed lines of credit, if we have previously drawn any amounts, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit. Any default under our lines of credit or revolving credit facilities and any inability to draw upon our non-committed lines of credit and revolving credit facilities in the future could have an adverse effect on our liquidity, working capital, financial condition and results of operations. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so” and “—We use non-committed lines of credit to partially finance our working capital needs.”
Our business and results of operations have also recently experienced the following trends, which we expect will continue in the near term:
Social upward mobility in Latin America and the Caribbean: Historically, our sales have benefited, and we expect to continue to benefit, from our Territories’ population size, younger age profile and improving socio-economic conditions when compared to more developed markets. This has led to a modernization of consumption patterns and increased affordability of our products across socio-economic segments, leading to greater demand for our products. While consumer behavior will continue to be cyclical and dependent on macroeconomic activity, we expect to continue to benefit from this trend in the long term.
Nutrition & Healthier products: Growing interest for products that are perceived to be healthy. Consumers are looking for more information regarding nutritional facts and demanding healthier products.
Product offerings: Our beverages, core meals, desserts, breakfast, reduced calorie and sodium products, and value menu item offerings have been popular among customers and—combined with our revenue management—have helped us remain relevant with our customers.
Increased competition in some markets: The popularity of the QSR concept in Latin America has attracted new competitors. Even though we have been able to protect our market share in many of these markets, we have seen a reduction in pricing flexibility and have increased the focus of our marketing efforts on value offerings.
Inflationary environment: Over the last few years, we have been able through our revenue management strategy to partially mitigate cost increase tied to inflation. However, inflation has been, and will continue to be, an important factor affecting our results of operations, specifically impacting our labor costs, food and paper costs, occupancy and other operating expenses and general administrative expenses.
Increased volatility of foreign exchange rates and impact of currency controls: Our results of operations have been impacted by increased volatility in foreign exchange rates in many of the Territories, particularly the significant devaluation of local currencies against the U.S. dollar. We expect that foreign exchange rates will continue to be an important factor affecting our foreign currency exchange results and the “Accumulated other comprehensive loss” component of shareholders’ equity and, consequently, our results of operations and financial condition.
Social unrest: Towards the end of 2019, there was a significant uptick in social unrest in several countries in which we operate. There were large social protests against inequality in many of these countries, and certain of our properties were damaged. Although social unrest had generally calmed down by the end of 2019 and most of our losses were covered by our insurance, any continuation of or increase in social unrest in 2020 could lead to further damage to our properties, a decline in sales or otherwise negatively impact our results.

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Environmental Consciousness: Over the last few years, our customers have demonstrated a growing interest in sustainable practices, including as it relates to sourcing our ingredients and paper and packaging costs. In particular, movements such as the anti-plastic movement have gained momentum in recent years and caused us to make changes in the sourcing of our raw materials. We may need to make further changes in our supply chain and food and paper costs in the future in order to adequately respond to our customers’ focus on sustainability.
E.    Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
F.    Tabular Disclosure of Contractual Obligations
The following table presents information relating to our contractual obligations as of December 31, 2019.
  Payment Due by Period
Contractual Obligations Total 2020 2021 2022 2023 2024 Thereafter
  (in thousands of U.S. dollars)
Finance lease obligations(1) $9,383  $864  $787  $919  $427  $427  $5,959
 
Operating lease obligations $1,660,260  149,369  140,667  133,459  128,213  124,138  984,414  
Contractual purchase obligations(2) $108,821  61,057  19,728  14,958  8,406  2,336  2,336  
2023 and 2027 notes(1) (3) $822,076  38,629  38,629  38,629  386,698  15,569  303,922  
Other long-term borrowings(1) $16,384  3,930  3,653  3,390  3,126  2,285    
Derivative instruments $(44,321)  9,908  8,834  7,663  (46,442)  1,278  (25,562)  
Total $2,572,603  $263,757  $212,298  $199,018  $480,428  $146,033  $1,271,069
 

 
(1)Includes interest payments.
(2)Includes automatic annual renewals, which contains only enforceable and legally binding unconditional obligations corresponding to prevailing agreements without considering future undefined renewals when the agreement is cancellable by us. This type of purchase obligation represents $21.0 million of contractual obligations for 2020 only.
(3)Does not include the impact of the deferred financing costs and the net discount related to the issue of the 2023 notes.
The table set forth above excludes projected payments on our restaurant opening plans and reinvestment plans pursuant to the MFAs in respect of which we do not yet have any contractual commitments.
G.    Safe Harbor
See “Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.    Directors and Senior Management
Board of Directors
Our Board of Directors currently consists of eleven members, five of whom are independent directors. In case of a tie vote by the Board of Directors, the Executive Chairman will have the deciding vote. Our memorandum and articles of association authorize us to have eight members, and the number of authorized members may be increased or decreased by a resolution of shareholders or by a resolution of directors.

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Pursuant to our articles of association, our Board of Directors is divided into three classes. There is no distinction in the voting or other powers and authorities of directors of different classes. The members of each class serve staggered, three-year terms. Upon the expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of shareholders in the year in which their term expires. At our most recent annual general meeting of shareholders, held on April 22, 2019, our shareholders re-elected Mr. Hernández-Artigas and Mrs. Franqui to serve as Class II directors.
The classes are currently composed as follows:
Mr. Woods Staton, Mr. Gutiérrez, Mr. Alonso and Mr. Francisco Staton are Class I directors, whose term will expire at the annual meeting of shareholders to be held in 2021;
Mr. Hernández-Artigas,Mrs. Franqui, Mr. Rabach and Mrs. Presz Palmaka De Luca are Class II directors, whose term will expire at the annual meeting of shareholders to be held in 2022; and
Mr. Chu, Mr. Vélez and Mr. Fernández are Class III directors, whose term will expire at the annual meeting of shareholders to be held in 2020.
Any additional directorships resulting from an increase in the number of directors and any directors elected to fill vacancies on the board will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of our directors. This classification of our Board of Directors may have the effect of delaying or preventing changes in control of our company. Any director may be removed, with or without cause, by a resolution of shareholders or a resolution of directors. Our directors do not have a retirement age requirement under our memorandum and articles of association.
The following table presents the names of the members of our Board of Directors:
NamePositionAge
Woods StatonExecutive Chairman70
Marcelo Rabach(1)CEO50
Sergio Alonso(1)Director56
Annette FranquiDirector58
Carlos Hernández-ArtigasDirector55
Michael ChuDirector71
José Alberto VélezDirector70
José FernándezDirector57
Ricardo Gutiérrez MuñozDirector76
Francisco StatonDivisional President – Caribbean39
Cristina Presz Palmaka De LucaDirector52
 
(1)Mr. Rabach was appointed as, and succeeded to the role of, Chief Executive Officer effective July 1, 2019. Mr. Alonso stepped down from his role as Chief Executive Officer effective as of the same date and remained a member of the Board of Directors.

The following is a brief summary of the business experience of our directors. Unless otherwise indicated, the current business addresses for our directors is Dr. Luis Bonavita 1294, Office 501, WTC Free Zone, Montevideo, Uruguay (CP 11300) and Roque Saenz Peña 432, Olivos, Buenos Aires, Argentina (B1636 FFB).

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Woods Staton. Mr. Staton is our Executive Chairman. He was our Chairman and Chief Executive Officer from 2007 through October 2015. Mr. Staton holds an MBA from the International Institute for Management Development (IMD) in Switzerland and a Bachelor’s degree in economics from Emory University in Atlanta. As McDonald’s joint venture partner, Mr. Staton opened the first McDonald’s restaurant in Argentina in 1986 and later served as President of McDonald’s South Latin American Division. He founded Arcos Dorados in 2007 when he led a consortium of investors in the purchase of McDonald’s operations in Latin America. Mr. Staton is co-founder of Endeavor Argentina, an organization for promoting entrepreneurship. He is a member of the Latin America Advisory Board of Harvard Business School and is also a Board Member of the IMD Foundation in Lausanne, Switzerland. In addition, he serves as Chair of the Advisory Board of the Latin American Program at the Woodrow Wilson International Center for Scholars and is also on the Chairman’s International Advisory Council of the Americas Society/Council of the Americas.
Marcelo Rabach. Mr. Rabach, 50, has been our Chief Executive Officer since July 2019. Prior to his appointment, he was the Chief Operating Officer from August 2015 to July 2019, Divisional President for NOLAD from 2013 to August 2015, Vice President of Operations Development since 2012 and Divisional President in Brazil since 2008. He graduated with a degree in Business Administration from Universidad Argentina de la Empresa in 2002. He began his career at McDonald’s Argentina in 1990 and has over 20 years of line operations experience, starting as a crew employee and steadily advancing into larger operational roles. From 1999 until his appointment as McDonald’s Chief Operating Officer in Venezuela in 2005, Mr. Rabach was responsible for the operations, real estate, construction, human resources, local store marketing, and training and franchising of a region within Argentina, holding the positions of Operations Manager and Operations Director. He was the Chief Operating Officer in Venezuela from 2005 until 2008.
Sergio Alonso. Mr. Alonso has been a member of our board of directors since 2010. Mr. Alonso was our Chief Executive Officer from 2015 to 2019 and was, prior to his appointment as such, our Chief Operating Officer from 2007 to 2015. Prior to that, he was McDonald’s Divisional President in Brazil. He graduated with a degree in Accounting from Universidad de Buenos Aires in 1986. He began his career at McDonald’s as Accounting Manager and subsequently moved to the operations area, eventually being promoted to Vice President of Operations in six years. From 1999 until 2003, Mr. Alonso was involved in the development of the Aroma Café brand in Argentina. In addition, in July 2017, Mr. Alonso was appointed as a member of the board of directors of Loma Negra Compañía Industrial Argentina S.A., a leading cement producer in Argentina.
Annette Franqui. Mrs. Franqui has been a member of our board of directors since 2007 and is a member of the Compensation and Nomination Committee. She graduated with a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania in 1984 and an MBA from the Stanford Graduate School of Business in 1986. She is also a Chartered Financial Analyst. Mrs. Franqui began her career in 1986 with J.P. Morgan and joined Goldman Sachs in 1989. In 1994, she returned to J.P. Morgan where she became a Managing Director and the Head of the Latin America Research Department. Mrs. Franqui joined Panamco in 2001 as Vice President of Corporate Finance and became the Chief Financial Officer in 2002. She is one of the founding partners of Forrestal Capital and is a board member of many of its portfolio companies as well as of LatAm, LLC, and, on a volunteer basis, AARP.
Carlos Hernández-Artigas. Mr. Hernández-Artigas has been a member of our board of directors since 2007 and is Chairman of the Compensation and Nomination Committee. He graduated from the Escuela de Derecho at Universidad Panamericana, in 1987 and University of Texas at Austin, School of Law in 1988. He received an MBA from IPADE in Mexico City in 1996. Mr. Hernández-Artigas worked as a lawyer for several years in Mexico and as a foreign attorney in Dallas, Texas and New York. He served as the General Counsel, Chief Legal Officer and Secretary of Panamco for ten years. He is an advisor at Big Sur Partners in Miami, Florida and is currently a board member of MAC Hospitales in Mexico and board member of iinside, a technology company in Anaheim, California.
Michael Chu. Mr. Chu has been an independent member of our board of directors since April 2011 and is a member of our Audit Committee. He graduated with honors from Dartmouth College in 1968 and received an MBA with highest distinction from the Harvard Business School in 1976. From 1989 to 1993, Mr. Chu served as an executive and limited partner in the New York office of the private equity firm Kohlberg Kravis Roberts & Co. From 1993 to 2000, Mr. Chu was with ACCION International, a nonprofit corporation dedicated to microfinance, where he served as President and CEO and participated in the founding and governance of various banks in Latin America. Mr. Chu currently holds an appointment as Senior Lecturer at the Harvard Business School, where he is the Faculty Chair for Latin America, and is Managing Director and cofounder of the IGNIA Fund, a venture capital firm dedicated to investing in commercial enterprises serving the emerging middle class and low-income populations in Mexico. He was a founding partner of, and continues to serve as Senior Advisor to, Pegasus Group, a private equity firm in Buenos Aires. He also serves on the board of Sealed Air Corporation (NYSE:SEE) and Takeoff Technologies, Inc, a private company in Boston, Massachusetts.

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José Alberto Vélez. Mr. Vélez has been an independent member of our board of directors since June 2011 and is a member of our Audit Committee. Mr. Vélez received a Master of Science degree in Engineering from the University of California, Los Angeles, and a degree in Administrative Engineering from Universidad Nacional de Colombia. Mr. Vélez previously served as the CEO of Suramericana de Seguros, the leading insurance company in Colombia, and as the CEO of Inversura, a holding company that integrates the leading insurance and social security companies in Colombia. He was the Chief Executive Officer of Cementos Argos S.A. between 2003 and 2012. From 2012 until March 2016, he was the President of Grupo Argos, a holding group with investments in cement, energy and infrastructure concessions (roads and airports). He is currently a member of the Boards of Directors of Grupo Crystal and Grupo Daabon in Colombia. He also is Chairman of the Board of Trustees of the Universidad EAFIT. In addition, he is member of the Latin American Chapter of the Wilson Center in Washington D.C.
José Fernández. Mr. Fernandez has been a member of our board of directors since October 1, 2013 and is a member of the Compensation and Nomination Committee. Mr. Fernández was the Divisional President of operations for SLAD until 2013. Mr. Fernández is a Mechanical Engineer from Instituto Tecnológico Buenos Aires and began his career at McDonald’s in 1986. He held the positions of Development Director, Development Vice President and Managing Director of McDonald’s Argentina before becoming the Divisional President of operations of SLAD. In August 2019, Mr. Fernández was appointed as a member of the board of directors of Cencosud Shopping S.A. in Chile.
Ricardo Gutiérrez Muñoz. Mr. Gutiérrez Muñoz is an independent member of our board of directors since July 1, 2016 and is a member of our Audit Committee. He graduated with a Bachelor’s Degree in Accounting from the Instituto Politécnico Nacional (Mexico City) and a Master’s Degree in Financing from the Universidad Lasalle (Mexico City). He also pursued postgraduate studies in Mexico and in the USA. Mr. Gutiérrez Muñoz was CEO of Mexichem from 1994 to 2010. Before joining Mexichem, he was Vice-President of Empresas Lanzagorta, CEO and board member of Industrias Synkro and CFO of the Indetel/Alcatel Company. Currently he is the CEO of the CP Latina Company, a drilling Pemex contractor. In addition, he is also board member of Grupo Kaluz, Cinépolis (Organización Ramírez), Empresas ICA, Genommalab e Industria Mexicana del Aluminio (IMASA).
Francisco Staton. Mr. Francisco Staton has been a member of our board of directors since April 2018. Mr. Francisco Staton is Divisional President for the Caribbean. Prior to his appointment as such in 2019, he was Arcos Dorados’ Managing Director for Colombia, Aruba, Curaçao and Trinidad & Tobago. He joined the Arcos Dorados executive team in 2013 as Senior Manager of Business Development for our NOLAD Division. Prior to serving as Senior Manager of Business Development for our NOLAD Division, he held different operating roles within the organization and also worked as a consultant at the Boston Consulting Group office in Buenos Aires. He completed his undergraduate studies at Princeton University in 2003, and subsequently earned an MBA from Columbia Business School in 2010. He has served on the board of Princeton in Latin America since 2015. Mr. Francisco Staton is the son of our Executive Chairman, Woods Staton.
Cristina Presz Palmaka De Luca. Ms. Palmaka has been an independent member of our board of directors since November 12, 2019. Ms. Palmaka has been the Managing Director and President of SAP Brazil since October 2013. Ms. Palmaka also sits on the advisory board of Eurofarma. Ms. Palmaka holds an accounting degree from Fundação Álvares Penteado (Brazil) and received her MBA from Fundação Getúlio Vargas (Brazil). She also holds a master’s degree in International Business & Marketing from the University of Texas.
Executive Officers
Our executive officers are responsible for the management and representation of our company. We have a strong centralized management team led by Mr. Marcelo Rabach, our CEO, with broad experience in development, revenue, supply chain management, operations, finance, marketing, legal affairs, human resources, communications and training. Most of our executive officers have worked in the food service industry for several years. Many of the members of the management team have a long history with McDonald’s operations in Latin America and the Caribbean and with Mr. Rabach, as they have worked together as a team for many years. Our executive officers were appointed by our Board of Directors for an indefinite term.

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The following table lists our current executive officers:
NamePositionInitial Year of AppointmentAt Arcos Dorados Since
Marcelo RabachChief Executive Officer20191990
Luis RaganatoChief Operating Officer20191991
Mariano TannenbaumChief Financial Officer20172008
Juan David BastidasChief Legal Counsel20102010
Paulo CamargoDivisional President—Brazil20152011
Alejandro YapurDivisional President—SLAD20131986
Rogério BarreiraDivisional President—NOLAD20151984
Francisco StatonDivisional President—Caribbean20192013
Sebastian MagnascoVice President of Development20071994
Santiago BlancoChief Marketing and Digital Officer20192019
Diego BenenzonVice President of Human Resources20142009
José Valledor RojoVice President of Supply Chain20151990
Marlene Fernandez del GranadoVice President of Government Relations20112009
David GrinbergVice President of Corporate Communications20182010
Marco CordónChief Transformation Officer20192019
Daniel SchleinigerVice President of Investor Relations20202020*
 
* Mr. Schleiniger first joined Arcos in 2014 then left for 15 months in 2018 and rejoined Arcos in 2020.

The following is a brief summary of the business experience of our executive officers who are not also directors. Unless otherwise indicated, the current business addresses for our executive officers is Roque Saenz Peña 432, Olivos, Buenos Aires, Argentina (B1636 FFB) and Dr. Luis Bonavita 1294, Office 501, WTC Free Zone, Montevideo, Uruguay.
Luis Raganato. Mr. Raganato, 49, has been our Chief Operating Officer since July 2019. Prior to his appointment as such, he was the Divisional President for the Caribbean, and before that, the General Director of Arcos Dorados in Peru. Mr. Raganato began his career at Arcos Dorados in 1991 as a Trainee in the Nuevocentro Shopping location in the province of Córdoba, Argentina and has held various positions in Operations Management over the years. Mr. Raganato holds a Bachelor’s degree in Business Administration from Instituto Aeronáutico de Argentina, a Master’s degree in Marketing and Business Development from Escuela Superior de Estudios de Marketing de Madrid and an MBA from Universidad de Piura, Peru.
Mariano Tannenbaum. Mr. Tannenbaum, 46, is our Chief Financial Officer. He joined Arcos Dorados in 2008 and has held several positions at the corporate level, with his last position being Senior Director of Corporate Finance. Previously, Mr. Tannenbaum had a long international career in Europe and the United States. He worked for the IFG Group in Switzerland, for Tyco International in Switzerland and Princeton, New Jersey and for Sabre Holdings in London. He began his career working for an economic consulting firm in Argentina as well as for the Argentine government, as part of the Ministry of Treasury and Public Finances. Mr. Tannenbaum has an economics degree from the Universidad de Buenos Aires, a Master’s in finance from the Universidad Torcuato Di Tella and an MBA with a concentration in finance from the London Business School.
Juan David Bastidas. Mr. Bastidas, 52, is our Chief Legal Counsel. He attended Universidad Pontificia Bolivariana in Colombia, where he received a Law Degree in 1989. He graduated in 1990 as a Business Law Specialist from the same university. He also pursued postgraduate studies in Business Administration at New York University, which he completed in 1994. He also graduated in 2000 from the International Business program at EAFIT University and from the Senior Management Program at Los Andes University, which he completed in 2009 in Colombia. He also attended the Executive Directors Training Program from IAE Business School in Argentina (2017). Mr. Bastidas worked from 1994 to 1995 as an international operations lawyer for Banco Industrial Colombiano (Bancolombia). He served as Chief Legal Counsel and Secretary of the board of directors of Interconexión Electrica S.A. E.S.P.–ISA from 1995 to 2010 before joining us in July 2010.

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Paulo Camargo. Mr. Camargo, 51, was appointed Divisional President for Brazil in October 2015. Prior to Mr. Camargo’s promotion, he served as Vice President of Operations for the Brazil Division for four years. Mr. Camargo has over 20 years of experience in the consumer, retail and services industry. He has worked for companies such as PepsiCo, FASA Corporation and Iron Mountain across a variety of geographies. Before joining Arcos Dorados in 2011, he was President of the Spain Division at Iron Mountain. Mr. Camargo holds a postgraduate degree in Business Administration from Mackenzie University in São Paulo, and also holds an MBA from Universidad Europea de Madrid.
Alejandro Yapur. Mr. Yapur, 51, was appointed Divisional President of SLAD in July 2013. He began his career in 1986 as a crew member at the first McDonald’s restaurant in Argentina and had the opportunity to serve as Manager in the Marketing, Operations and Corporate Communications areas of Arcos Dorados in Argentina. In 2005 he was promoted to Managing Director of Uruguay and in 2007 became responsible for the Company’s Chilean operations. In 2011, Mr. Yapur became Regional Managing Director for the Southern Cone Region (Argentina, Chile and Uruguay) until 2013 when he was promoted to his current position. He holds a Master’s degree in Communications from Universidad Austral in Buenos Aires, Argentina. He has also received executive training from IAE Business School in Argentina, IPADE Business School in Mexico and IESE Business School in Spain. Mr. Yapur has also completed the Digital Business Management Program at the San Andres University in Buenos Aires.
Rogério Barreira. Mr. Barreira, 51, was appointed Divisional President for NOLAD in October 2015. Prior to Mr. Barreira’s promotion, he served as Vice President of Operations for the Brazil Division for four years. Mr. Barreira has over 35 years of experience at Arcos Dorados, acting in different key positions role in Brazil. Mr. Barreira has a Master in Business Administration from Foundation Getulho Vargas in Brazil and also holds a degree in Marketing and Business Planning from Anhembi-Morumbi University in Brazil. He also received executive training from IAE Business School in Argentina, IPADE Business School in Mexico.
Sebastian Magnasco. Mr. Magnasco, 50, is our Vice President of Development and served, prior to his appointment as such, in the same capacity in SLAD. He graduated with a degree in Engineering from Instituto Tecnológico Buenos Aires, in 1990. He began his career at McDonald’s in 1994 and held the positions of Real Estate & Equipment Director of Argentina and IT, Real Estate and Equipment Director of Argentina until his appointment as Vice President of Development of SLAD in 2005.
Santiago Blanco. Mr. Blanco, 49, is our Chief Marketing and Digital Officer. He joined the company in 2019 and is responsible for designing and implementing the marketing and digital strategy. Prior to joining Arcos Dorados, he served as Chief Marketing, Digital & Communications Officer at ALSEA from 2017 to 2019. Mr. Blanco holds a Bachelor’s degree in Marketing from the Instituto Tecnológico de Monterrey and an MBA from University of Texas at Austin.
Diego Benenzon. Mr. Benenzon, 53, is our Vice President for Human Resources. He joined the Company in June 2009. He has extensive experience as an executive of high responsibility in multinational companies. He has also served as a senior consultant to various large companies and NGOs and has teaching experience. Mr. Benenzon graduated with a degree in psychology from Universidad John F. Kennedy and holds postgraduate degrees on strategic consultancy and organizational behavior from the Universidad de Buenos Aires. He also graduated from the Management Development Program at IAE Business School.
José Valledor. Mr. Valledor, 53, is our Vice President of Supply Chain. Prior to his appointment as such, he was Divisional President in Brazil. He joined us in 1990 as an assistant in the accounting department, and four years later he became Manager of that department. In 2005, he became Regional Operations Director, responsible for the markets of Uruguay, Paraguay and Argentina. Two years later, he became Argentina’s General Director while continuing to supervise the market operations in Uruguay, Chile and Paraguay. Mr. Valledor Rojo has a degree in Business Administration and a postgraduate degree from the Instituto de Altos Estudios (IAE) in Buenos Aires, Argentina.
Marlene Fernandez. Ms. Fernandez, 58, is Corporate Vice President for Government Relations. Prior to joining Arcos Dorados in 2009, she served as an elected Member of the House of Representatives in Bolivia where she held various leadership positions, including Ambassador of Bolivia to the United States of America, Ambassador to the Organization of American States, Ambassador to the Government of Italy and Representative of Bolivia to different specialized agencies of the United Nations. She was also Bureau Chief and Main Political Correspondent for CNN Spanish in Washington, D.C. Ms. Fernandez holds a Master of Science in Broadcast Journalism from Boston University, graduated Summa Cum Laude from the Universidad Argentina John. F. Kennedy and has completed courses in Finance for Executives, Strategic Communications, Conflict Resolution and Negotiations in Conflict at Harvard University.

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David Grinberg. Mr. Grinberg, 41, is our Vice President of Corporate Communications.  Mr. Grinberg joined Arcos Dorados in 2010, after leading the Communications division at Samsung and serving as Sports Marketing Head and, later, as Corporate Communications Director, Brazil Division of Nike. Mr. Grinberg holds a Bachelor’s Degree in Social Communication from FIAM and a Master’s Degree in Corporate Communication & Public Affairs from the Cásper Líbero Foundation.
Marco Cordón. Mr. Cordón, 51, was appointed as our Chief Technology Officer in October 2019. Mr. Cordón has more than 30 years of experience in the restaurant industry, and held various leadership positions at McDonald’s Mesoamerica, which covers Guatemala, El Salvador, Honduras and Nicaragua, between 1997 and 2019, including Operations Manager, Director of Operations and Vice President from 2013 to 2019. Mr. Cordón holds a degree in Industrial engineering from the University of San Carlos de Guatemala and an MBA from Pontificia Universidad Católica de Chile.
Daniel Schleiniger. Mr. Schleiniger, 46, is our Vice President of Investor Relations. He joined Arcos Dorados in 2014 and, after leaving us for fifteen months to serve as Vice President of Investor Relations for BrightView Holdings, Inc., Mr. Schleiniger rejoined the Company in January 2020. Prior to joining Arcos Dorados, he worked at the Cisneros Group from 2000 to 2014, holding progressively more senior roles within investor relations, finance and treasury. Mr. Schleiniger’s experience also includes equity research at Morgan Stanley corporate banking with Unibanco and consulting work for Wharton Econometric Forecasting Associates (WEFA) in Philadelphia. He holds a Bachelor of Science degree in chemistry as well as an MBA with a concentration in finance, both from the University of Delaware.
B.    Compensation
Long-term and Equity Incentive Plans
Equity Incentive Plans
The 2011 Plan
In March 2011, we adopted an equity incentive plan (the “2011 Plan”), to attract and retain the most highly qualified and capable professionals and to promote the success of our business. The 2011 Plan is being used to reward certain employees for the success of our business through an annual award program. The 2011 Plan permits grants of awards relating to class A shares, including awards in the form of share (also referred to as stock) options, restricted shares, restricted share units, share appreciation rights, performance awards and other share-based awards as will be determined by our Board.
The maximum number of shares that may be issued under the 2011 Plan is 5,238,235 Class A shares, equal to 2.5% of our total outstanding class A and class B shares immediately following our initial public offering on April 14, 2011. In 2018, 494,775 Class A shares were issued pursuant to the 2011 Plan.
We carried out a special grant of stock options and restricted share units in 2011 in connection with our initial public offering, which are fully vested. We also made recurring grants of stock options and restricted share units in each of the fiscal years from 2011 to 2019 (from 2015 to 2019 only restricted share units). Units granted from 2011 to 2014 are fully vested. Both types of these recurring annual awards vest as follows: 40% on the second anniversary of the date of grant and 20% on each of the following three anniversaries, except for the 2019 award which vests on May 10, 2020. In the event of death, disability or retirement of the employee, any unvested portion of the annual award will fully vest. For all grants, each stock option granted represents the right to acquire one Class A share at it’s a strike price equal to fair market value, while each restricted share unit represents the right to receive one Class A share when vested.
The following table shows unvested restricted share units as of December 31, 2019:
Date of the grantRestricted share units
May 8, 201599,604
May 10, 2016220,566
May 10, 2017186,455
May 10, 2018396,214
May 10, 201935,000


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In addition, although all of the stock options issued under the 2011 Plan have vested, 247,440 stock options issued in 2013 and 2014 remain outstanding and unexercised.
We issued 470,558 Class A shares during 2019, of which 10,870 were related to the partial vesting of restricted share units issued in 2018.
We currently intend to make the 2020 annual grant under the 2011 Plan during the second quarter of 2020.
Phantom RSU Award

In May 2019, the Company implemented a new long-term incentive plan (the “Phantom RSU Plan”) to provide employees the opportunity to share in the success of the Company. Through this plan, the Company issues phantom restricted share units (“Phantom RSUs”). When vested, Phantom RSUs entitle the employee to a cash payment equal to the closing price of one Class A shares on the date of vesting, including any dividends declared and paid on the Class A shares, if any, since the grant date.

There are two types of Phantom RSUs. Type one Phantom RSUs vest over a requisite service period of five years as follows: 40% at the second anniversary of the date of grant and 20% at each of the following three years. Type two Phantom RSUs vest 100% on the fifth anniversary of the grant date. In the event of death, disability or retirement of the employee, any unvested portion of the annual amount will fully vest. The grant-date stock price of both types of grants was $6.78. The Company recognizes compensation expense related to these benefits on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The total compensation cost as of December 31, 2019, relating to the Phantom RSUs amounted to $2.2 million and is recorded under “General and administrative expenses” within the consolidated statement of income. The accrued liability is remeasured at the end of each reporting period until settlement.

The following table shows Phantom RSUs issued as of December 31, 2019:
Date of the grantPhantom RSU, Type 1Phantom RSU, Type 2
May 10, 2019454,3651,207,455
See Note 17 to our consolidated financial statements for additional information.
We intend to make an annual grant of Phantom RSUs in the second quarter of 2020.
Compensation of Directors and Officers
General
The approximate aggregate annual total cash compensation for our executive officers in 2019, including to Mr. Alonso for his service as CEO until July 2019, was $9.5 million. The approximate annual total cash compensation for our directors in 2019 was $1.0 million. We also issued an aggregate of 35,000 RSUs to our directors in 2019.
 
We have not entered into any service contracts with our directors to provide for benefits upon termination of employment

C.    Board Practices
Our Committees
Audit Committee
Our audit committee consists of three directors, Mr. Chu (chairman of the committee), Mr. Vélez and Mr. Gutiérrez, who are independent within the meaning of the SEC and NYSE corporate governance rules applicable to foreign private issuers. Our Board of Directors has determined that Mr. Chu, Mr. Vélez and Mr. Gutiérrez are also “audit committee financial experts” as defined by the SEC.
The charter of the audit committee states that the purpose of the audit committee is to assist the Board of Directors in its oversight of:
the integrity of our financial statements;

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the annual independent audit of our financial statements, the engagement of the independent auditor and the evaluation of the qualifications, independence and performance of our independent auditor;
the performance of our internal audit function; and
our compliance with legal and regulatory requirements.
Compensation and Nomination Committee
Our compensation and nomination committee consists of Mr. Hernández-Artigas (chairman of the committee), Ms. Franqui and Mr. José Fernández. Pursuant to its charter, the compensation and nomination committee is responsible for, among other things:
approving corporate goals and objectives relevant to compensation, evaluating the performance of executives in light of such goals and objectives and recommending compensation based on such evaluation, recommending any long-term incentive component of compensation and approving the compensation of our executive officers;
reviewing and reporting to the board of directors on our management succession plan and on compensation for directors;
evaluating our compensation and benefits policies;
evaluating the structure of our board of directors;
nominating candidates to executive positions and to the board of directors; and
reporting to the board periodically.
D.    Employees
Our employees are a crucial component of our customers’ restaurant service experience. As such, we consistently train our employees to deliver fast and friendly service through a series of training programs. We support our McDonald’s-based training programs with an extensive set of quality controls throughout production, processing and distribution and also in our restaurants, where we monitor restaurant managers’ performance and use ongoing external customer satisfaction opportunity reports that analyze key operating indicators.
Our employees can be divided into three different categories: crew, restaurant managers and professional staff. Due to the different tasks of each of these categories of employees, turnover rates differ significantly. Crew turnover is considerably higher than turnover for managers and professional staff.
As of December 31, 2019, we had a total of approximately 80,855 employees in Company-operated restaurants and staff throughout the Territories. Of this number, 82% were crew, 15% were restaurant managers and the remainder were professional staff. Approximately 41% of our employees were located in Brazil.
We have various types of employment arrangements with our employees in Brazil. Some of our employees receive monthly wages whereas others are paid by the hour, and all of our employees have fixed work schedules due to a settlement signed with Labor Prosecutor Office of the State of Pernambuco. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Brazilian Labor Litigation.” Most of our employees in Brazil, in particular students and minors, work schedules of less than 180 hours per month. Brazilian law requires that employers provide a minimum monthly wage, which, in the case of employees who are paid by the hour, is prorated in terms of wages per hour.

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The following table illustrates the distribution of our employees by division and employee category as of December 31, 2019.
DivisionCrewRestaurant ManagersProfessional StaffTotal
Brazil26,9805,68174633,407
Caribbean division8,1891,43041810,037
NOLAD8,1862,09947910,764
SLAD23,0582,82046926,347
Corporate and other--300300
Total   
66,41312,0302,41280,855

Restaurant managers are responsible for the daily management of our restaurants. As such, we have a comprehensive training program for them that is focused on customer management practices, food preparation and other operational procedures. Standards are taught and continuously reinforced through the use of such training programs. We also use performance measurements on a continual basis, both internally and externally in connection with all our restaurants. Our internal on-site visit restaurant operations improvement process evaluates operational standards, which are compared globally to assure continuous improvement. We also contract third parties, which we refer to as third-party shoppers, to visit our restaurants anonymously and report on our performance. Our external third-party shopper measurements and customer satisfaction opportunity reports help maintain our competitiveness. In addition, Hamburger University provides restaurant managers, mid-managers and owner/operators with training on best practices in different aspects of our business. In 2019, approximately 17,723 people attended different courses or events, in person or online, organized by Hamburger University in areas such as restaurant and customer management, sales and accounting.
The role performed by our crew is of critical importance in our interactions with our customers. Employee relations are thus key to maintaining the level of motivation and enthusiasm on the part of our crew that help differentiate our restaurants from those of our competitors. We have been recognized by many independent organizations for being a “great place to work.”
Although we have unions in some of our most important markets, including Brazil, Argentina and Mexico, the unions only have an active role in our Brazil restaurants. In these markets, the restaurant industry is unionized by law. However, in Brazil every employee and company are necessarily represented by unions. Workers unions can negotiate directly with companies through Collective Bargaining Agreements, or CBAs, or with the company’s union through Collective Convention. Under Brazilian law, employees or groups of employees cannot opt-out of the terms under union agreements, which integrate the employment contract for all legal purposes. In Brazil, the CBA or the Collective Convention should provide, on a yearly basis, the salary adjustment to be afforded by all employees, and may also provide certain additional guarantees or rights, to be applicable to all employees, regardless of their unit or position in the company, during a certain term (maximum of two years). All collective agreements are mandatory in Brazil.
On November 11, 2017, an overhaul in the labor laws in Brazil (the “Labor Overhaul”) entered into effect and brought significant changes to labor relations and labor law itself. Prior to the Labor Overhaul, the Consolidated Labor Statutes governed labor relations in Brazil. The Labor Overhaul introduces and changes several articles of the Consolidated Labor Statutes aiming to give more flexibility and legal certainty to the legal framework around labor relations thus meeting current demands of modern society. Out of several changes made in the Labor Overhaul, the most relevant for us is a change providing that collective labor agreements (CBAs or Collective Convention) will now prevail over statutory law in certain circumstances, giving priority to what has been agreed over what has been legislated and providing greater autonomy to the parties.

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E.    Share Ownership
The following table presents the beneficial ownership of our shares owned by our directors and officers as of the date of this annual report. Other than those persons listed below, none of our directors or officers beneficially own any of our shares.
ShareholderClass A Shares
Percentage of Outstanding Class A Shares(1)
Class B Shares
Percentage of Outstanding Class B Shares(1)
Total Economic Interest(1)
Total Voting Interest(1) (2)
Los Laureles Ltd.(3)(4)   


80,000,000
100.00%39.20%76.33%
Woods Staton(4)   
828,955
0.67%

0.41%0.16%
Sergio Alonso*
*


*
*
Annette Franqui*
*


*
*
Carlos Hernández-Artigas*
*


*
*
Juan David Bastidas*
*


*
*
José Valledor Rojo*
*


*
*
José Fernandez*
*


*
*
Marcelo Rabach*
*


*
*
Mariano Tannenbaum*
*


*
*
Sebastian Magnasco*
*


*
*
Diego Benenzon*
*


*
*
Marlene Fernandez*
*


*
*
Luis Raganato*
*


*
*
Rogério Barreira*
*


*
*
Alejandro Yapur*
*


*
*
Paulo Camargo*
*


*
*
Dan Gertsacov(5)   
*
*


*
*
Santiago Blanco*
*


*
*
David Grinberg*
*


*
*
Francisco Staton*
*
__
__
*
*
Marco Cordón*
*
__
__
*
*
Daniel Schleiniger*
*
__
__
*
*
 
*Each of these directors and officers beneficially owns less than 1% of the total number of outstanding class A shares.
(1)Percentages are based on 124,070,029 Class A shares issued and outstanding as of the date of this annual report and exclude 7,993,602 Class A shares issued and held in treasury.
(2)Class A shares are entitled to one vote per share and class B shares are entitled to five votes per share.
(3)Los Laureles Ltd. is beneficially owned by Mr. Woods Staton, our Executive Chairman. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.”
(4)
In addition to the class B shares he beneficially owns through Los Laureles Ltd., Mr. Woods Staton beneficially owns 828,955 class A shares (includes 30,784 shares of common stock issuable upon exercise of stock options, 113,150 restricted share units that have vested or will vest within 60 days of this annual report and excludes 55,908 unvested restricted share units) directly, and indirectly through Chablais Investments S.A. (“Chablais”). Of these 828,955 class A shares, Chablais has pledged an aggregate of 684,971 shares for the benefit of JPMorgan Chase Bank, N.A., in connection with a financing transaction. On a combined basis, Mr. Woods Staton is the beneficial owner of an aggregate of 39.61% of the total economic interests of Arcos Dorados and 76.49% of its total voting interests. The address of Mr. Woods Staton is Mantua No. 6575 (esquina Potosí), Montevideo, Uruguay 11500. The address of Chablais is Level 1, Palm Grove House, Wickham’s Cay 1, Road Town, Tortola, BVI.
(5)Resigned from his role effective March 1, 2019.

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As of the date of this annual report, our 17 officers had been granted (i) a total of 978,325 restricted share units and 54,919 stock options at an exercise price of $14.31 per share pursuant to the 2011 Plan. For more information, see “—B. Compensation—Long-term and Equity Incentive Plans” above. Our non-executive directors had been granted a total of 35,000 restricted share units, 66,888 stock options at an exercise price of $14.31 and 176,768 options at an exercise price of $8.58 per share per share pursuant to the 2011 Plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.    Major Shareholders
As of the date of this annual report, under our memorandum and articles of association, we are authorized to issue a maximum of 420,000,000 class A shares, no par value per share, and 80,000,000 class B shares, no par value per share. Each of our class A shares entitles its holder to one vote. Each of our class B shares entitles its holder to five votes. Los Laureles Ltd., our controlling shareholder, owns 39.61% of our issued and outstanding share capital, and 76.49% of our voting power by virtue of its ownership of 100% of our class B shares. The following table presents the beneficial ownership of our shares as of the date of this annual report:
ShareholderClass A Shares% of
Outstanding Class A Shares
Class B Shares(1)
% of
Outstanding Class B Shares
(1)
Total Economic Interest(1)
Total Voting Interest(1) (2)
Los Laureles Ltd(3)(4)   


80,000,000
100.0%39.20%76.33%
Woods Staton(4)   
828,955
0.67%

0.41%0.16%
William H. Gates III(5)   
11,641,400
9.38%

5.70%2.22%
Invesco Ltd.(6)   
8,612,670
6.94%

4.22%1.64%
TIAA-CREF Investment Management, LLC (7)   
11,838,125
9.54%

5.80%2.26%
Teachers Advisors, LLC (8)   
8,722,405
7.03%

4.27%1.66%
International Value Advisers, LLC (9)
2,379,000
1.92%  1.17%0.45%
Public80,047,474
64.52%

39.23%15.27%
Total(11)   
124,070,029
100.00%(10)

80,000,000
100.00%100.00%
100.00%(10)

 
(1)Percentages are based on 124,070,029 Class A shares issued and outstanding as of the date of this annual report and exclude 7,993,602 Class A shares issued and held in treasury.
(2)Class A shares are entitled to one vote per share and class B shares are entitled to five votes per share.
(3)The address of Los Laureles Ltd. is 325 Waterfront Drive, Omar Hodge Building, 2nd Floor, Wickham’s Cay 1, Road Town, Tortola, British Virgin Islands. Los Laureles Ltd. is beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. See “—Los Laureles Ltd.”
(4)
In addition to the class B shares he beneficially owns through Los Laureles Ltd., Mr. Woods Staton beneficially owns 828,955 class A shares (includes 30,784 shares of common stock issuable upon exercise of stock options, 113,150 restricted share units that have vested or will vest within 60 days of this annual report and excludes 55,908 unvested restricted share units) directly, and indirectly through Chablais Investments S.A. (“Chablais”). Of these 828,955 class A shares, Chablais has pledged an aggregate of 684,971 shares for the benefit of JPMorgan Chase Bank, N.A., in connection with a financing transaction. On a combined basis, Mr. Woods Staton is the beneficial owner of an aggregate of 39.61% of the total economic interests of Arcos Dorados and 76.49% of its total voting interests. The address of Mr. Woods Staton is Mantua No. 6575 (esquina Potosí), Montevideo, Uruguay 11500. The address of Chablais is Level 1, Palm Grove House, Wickham’s Cay 1, Road Town, Tortola, BVI.
(5)William H. Gates III (“Mr. Gates”) indirectly owns Class A shares through Cascade Investment, LLC (“Cascade”) and the Bill & Melinda Gates Foundation Trust (the “Trust”). Cascade, the Trust, Mr. Gates and Melinda French Gates (“Mrs. Gates”) filed with the SEC a Schedule 13G/A dated February 13, 2015. Based solely on the disclosure set forth in such Schedule 13G/A, (i) Cascade has sole voting power with respect to 8,580,900 class A shares and sole dispositive power with respect to 8,580,900 class A shares; (ii) the Trust has shared voting power with respect to 3,060,500 class A shares and shared dispositive power with respect to 3,060,500 class A shares; (iii) Mr. Gates has, through Cascade, sole voting power and sole dispositive power with respect to 8,580,900 class A shares and has, through the Trust, shared voting power and shared dispositive power with respect to 3,060,500 class A shares; and (iv) Mrs. Gates has, through the Trust, shared voting power with respect to 3,060,500 class A shares and shared dispositive power with respect to 3,060,500 class A shares. The address of Cascade Investment, LLC is 2365 Carillon Point, Kirkland, Washington 98033. The address of the Trust and Mrs. Gates is 500 Fifth Avenue North, Seattle, Washington 98119. The address of Mr. Gates is One Microsoft Way, Redmond, Washington 98052.
(6)Invesco Ltd. filed with the SEC a Schedule 13G/A dated February 11, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, Invesco Ltd. has sole voting power with respect to 8,612,670 class A shares and sole dispositive power with respect to 8,612,670 class A shares. The address of Invesco Ltd. is 1555 Peachtree Street NE, Suite 1800, Atlanta, GA 30309.

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(7)TIAA-CREF Investment Management, LLC filed with the SEC a Schedule 13G/A dated February 14, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, TIAA-CREF Investment Management, LLC has sole voting power with respect to 11,814,337 class A shares and sole dispositive power with respect to 11,814,337 class A shares. In addition, an affiliate of TIAA-CREF Investment Management, LLC, Nuveen Asset Management, has sole voting power and sole dispositive power with respect to 13,788 class A shares. The address of TIAA-CREF Investment Management, LLC is 730 Third Avenue, New York, NY 10017-3206.
(8)Teachers Advisors, LLC filed with the SEC a Schedule 13G/A dated February 14, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, Teachers Advisors, LLC is the investment adviser to three registered investment companies and has sole voting power with respect to 8,722,405 class A shares and sole dispositive power with respect to 8,722,405 class A shares. The address of Teachers Advisors, LLC is 730 Third Avenue, New York, NY 10017-3206.
(9)International Value Advisers, LLC filed with the SEC a Schedule 13G/A dated February 13, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, International Value Advisers, LLC has sole voting power with respect to 2,210,768 class A shares and sole dispositive power with respect to 2,379,00 class A shares. The address of International Value Advisers, LLC is 717 Fifth Avenue, 10th Floor, New York, New York, 10022.
(10)Numbers do not sum to 100% due to the effects of rounding.
(11)Excludes 7,993,602 Class A shares issued and held in treasury.
As of April 24, 2020, there were 8 class A shareholders of record. We believe the number of beneficial owners is substantially greater than the number of record holders because a large portion of class A shares is held in “street name” by brokers.
Los Laureles Ltd.
Los Laureles Ltd. is our controlling shareholder and is beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. currently owns 39.20% of the economic interests of Arcos Dorados and 76.33% of its voting interests. Los Laureles Ltd. has established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. The voting trust exercises the vote of the class B shares through a voting committee, which consists of only Mr. Woods Staton. The decision of the voting committee must be approved by Los Laureles (PTC) Limited, a British Virgin Islands company that is a wholly owned subsidiary of Los Laureles Limited. Mr. Woods Staton is the sole director of Los Laureles (PTC) Limited. Without the consent of McDonald’s, Mr. Woods Staton may add any one or more of his descendants, certain other relatives, any board member of Arcos Dorados and the chief executive officer, chief operating officer or chief financial officer of Arcos Dorados to the committee.
Following Mr. Woods Staton’s death or during Mr. Woods Staton’s incapacity, the voting committee will consist of (1) certain officers or directors of Arcos Dorados, (2) certain descendants of Mr. Woods Staton or their representatives, and (3) other persons appointed by Los Laureles (PTC) Limited, subject to McDonald’s consent if such person is not one of Mr. Woods Staton’s descendants and is not the chief executive officer, chief operating officer or chief financial officer of Arcos Dorados. For the first five years from the date of the execution of the voting trust, the officers and directors of Arcos Dorados on the voting committee will have the tie-breaking vote (if any). Thereafter, Mr. Woods Staton’s descendants will have the tie-breaking vote.
B.    Related Party Transactions
Our Board of Directors has created and adopted a related party transactions policy for the purpose of assisting the Board of Directors in reviewing, approving and ratifying related party transactions. This Policy is intended to supplement, and not to supersede, our other policies that may be applicable to or involve transactions with related parties, such as our Standards of Business Conduct.
Axionlog Split-off
In March 2011, we effected a split-off of Axionlog (formerly known as Axis) to our principal shareholders. The split-off was effected through the redemption of 41,882,966 shares (25,129,780 class A shares and 16,753,186 class B shares). As consideration for the redemption, the Company transferred to its principal shareholders its equity interests in the operating subsidiaries of the Axionlog business totaling a net book value of $15.4 million and an equity contribution that was made to the Axionlog holding company amounting to $29.8 million. Following the split-off, Los Laureles Ltd. acquired the Axionlog shares held by Gavea Investment AD, L.P. and investment funds controlled by Capital International, Inc. and DLJ South American Partners L.L.C. (through its affiliates). The split-off of Axionlog did not have a material effect on our results of operations or financial condition.
In 2011, we entered into a master commercial agreement with Axionlog on arm’s-length terms pursuant to which Axionlog provides us with distribution inventory, storage (dry, frozen and chilled) and transportation services in Argentina,

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Chile, Colombia, Ecuador, Mexico, Venezuela, Uruguay and Peru. Pricing under the agreement is determined pursuant to an agreed upon formula that is considered standard in the distribution services industry. Additionally, Axionlog must comply with McDonald’s quality program, the Distributor Quality Management System (DQMP) and other supplier requirements to maintain its status as a McDonald’s-approved supplier pursuant to the MFA. The pricing formula considers certain variables to determine the applicable fees, including (i) cost inputs (i.e., transportation expenses and salaries); (ii) time required for completion; (iii) storage requirements; (iv) merchandise volume; and (v) inflation and exchange rate adjustments. We use similar pricing formulas with our other distribution service providers in the territories not covered by Axionlog. Under the terms of the agreement, the pricing formula is reviewed on a yearly basis. During these reviews, we share information in order to find potential cost efficiencies and savings. In addition, we or Axionlog may request a renegotiation of the pricing formula in the event that, due to factors outside of our or their control, the formula is substantially altered based on changes to its variable inputs.
During 2019, we incurred $38,658 million in total distribution fees payable to Axionlog, which accounted for approximately 4% of our total food and paper costs.
See Note 25 to our consolidated financial statements for details of the outstanding balances and transactions with related parties as of December 31, 2019 and 2018 and for the fiscal years ended December 31, 2019, 2018 and 2017.
Employment of Francisco Staton
Mr. Francisco Staton, Woods Staton’s son, is Arcos Dorados’ President of the Caribbean Division and a member of our board of directors. For his services as President of the Caribbean Division, Francisco Staton receives customary compensation and benefits commensurate with his level of responsibility within the Company. His compensation package is aligned with the compensation packages of similar positions in other companies in Colombia, according to external compensation surveys. Francisco Staton was appointed as a Board Member, Class I, at our Annual General (Shareholders) Meeting held on April 24, 2018.
C.    Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.    Consolidated Statements and Other Financial Information
Financial statements
See “Item 18. Financial Statements,” which contains our financial statements prepared in accordance with U.S. GAAP.
Legal Proceedings
Puerto Rican Franchisees
In January 2007, several Puerto Rican franchisees filed a lawsuit against McDonald’s Corporation and certain subsidiaries, which the Company purchased during the acquisition of the LatAm business (the “Puerto Rican franchisees lawsuit”). The lawsuit sought declaratory judgment and damages in the amount of $66.7 million plus plaintiffs’ attorney’s fees in connection with the alleged breach by the Company of the Dealers’ Act of Puerto Rico, which limited the grounds under which a principal may refuse to renew or terminate a distribution contract. The complaint also sought preliminary and permanent injunctions to restrict the Company from declining to renew the plaintiffs’ agreements except for just cause, and to prohibit the Company from opening restaurants or kiosks within a three-mile radius of a franchisee’s restaurant. In September 2008, the Company filed a counter-suit requesting the termination of the franchise agreements with these franchisees due to several material breaches. The case went to trial in the Court of First Instance in 2012 and at the end of 2014 the plaintiffs finalized their presentation of evidence. At that time, the Company filed a Motion of Non Suit seeking to dismiss the case. Although our assessment of the probability of loss was remote, on December 28, 2019 and March 31, 2020 we reached confidential settlement agreements with Puerto Rican franchisees finalizing all controversies and disputes among the parties. Because certain of these agreements were reached during the COVID-19 outbreak, we have been unable to file the final documentation to end the proceedings because the courts are closed in Puerto Rico. However, we will file such documentation and officially close these proceedings as soon as the courts reopen.


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During 2014, another franchisee filed a complaint (the “related Puerto Rican franchisee lawsuit”) against us and McDonald’s USA, LLC (a wholly owned subsidiary of McDonald’s Corporation), asserting a very similar claim to the one filed in the Puerto Rican franchisees lawsuit. The claim sought declaratory judgment and damages in the amount of $30 million plus plaintiff’s attorney’s fees. As of December 28, 2019, we reached a confidential settlement agreement with the Puerto Rican franchisee finalizing all controversies and dispute among us.

On March 26, 2010, we filed a collection claim against Puerto Rico Owner Operator’s Association (“PROA”), an association integrated by our franchisees that meets periodically to coordinate the development of promotional and marketing campaigns, for the reimbursement of the monetary contribution made during August 2007. On June 15, 2010, PROA, also known as the cooperative, filed a third party complaint and counterclaim (the “PROA claim”) against us and other third party defendants in the amount of $31 million. On June 9, 2014, after several motions for summary judgment duly filed and opposed by the parties, the Court entered a “Partial Summary Judgment and Resolution” in favor of PROA, before initiating the discovery phase, that requires us to participate and contribute funds to the association. However, the Court did not specify any amount for which we should be held liable due to its preliminary and interlocutory nature and the lack of discovery conducted regarding the amounts claimed by the plaintiffs. By means of a Motion to Reconsider, we opposed such determination. In December 2018, the First Instance Court confirmed this determination, and we filed a Writ of Certiorari in the Court of Appeals. In July 2019, the Court of Appeals overturned the Court of First Instance’s summary judgment in favor of PROA. PROA filed an appeal of such determination with the Puerto Rico Supreme Court, which was denied by the Court and PROA filed a reconsideration which was also denied. Although our assessment of the probability of loss was remote, on December 28, 2019 and March 31, 2020 we reached confidential settlement agreements with Puerto Rican franchisees, sole members of PROA, finalizing all controversies and disputes among the parties. Because certain of these agreements were reached during the COVID-19 outbreak, we have been unable to file the final documentation to end the proceedings because the courts are closed in Puerto Rico. However, we will file such documentation and officially close these proceedings as soon as the courts reopen.
Brazilian Labor Litigation
In August 2012, the Labor Prosecutor’s Office of the State of Pernambuco (Ministério Público do Trabalho do Estado de Pernambuco) in Brazil filed a civil complaint against us in the Labor Court of Pernambuco (Justiça do Trabalho de Pernambuco) in order to (i) compel us to change the variable work schedule applicable to our 14 restaurants in Pernambuco, a state in northeastern Brazil, to a fixed work schedule, (ii) seek fines of R$3,000 per employee per month for alleged noncompliance with labor laws related to, for example, overtime payment, breaks between workdays, night shift premiums, duration of breaks and weekly rest time, (iii) seek a penalty of R$20,000 related to the non-exhibition of documentation relating to audit labor inspections and (iv) seek collective damages of R$30,000,000 related to the variable work schedule practices in Pernambuco in recent years. In February 2013, the Labor Prosecutor’s Office of Pernambuco filed an additional petition seeking the extension of the original complaint throughout Brazil and increasing the amount of collective damages requested from R$30,000,000 to R$50,000,000. The Labor Prosecutor’s Office of the State of Pernambuco also added a demand that all employees should be allowed to bring their own meals for consumption during breaks in our restaurants.
We settled all of the pending claims with the Labor Prosecutor’s Office in March 2013, other than the claim to guarantee the payment of the minimum wage independently of working hours. In connection with the payment of the minimum wage, the Labor Court denied this plea.
In parallel with the judicial case, in December 2016, an administrative assessment of compliance with our 2013 settlement was initiated by a team composed of Labor Prosecutors. Additional audits of our compliance with the 2013 settlement were performed in relation to the period from March 2013 to March 2017, and we entered into a new settlement agreement in August 2018, which included paying a fine of R$7 million that was already paid. Subsequent to this, the Labor Prosecutor began a new investigation of our compliance with the 2018 settlement, in relation to the period of April 2017 to July 2018. The Labor Prosecutor concluded its investigation in 2019 and alleged that we were not in compliance with the 2018 settlement and owed an additional R$15.8 million in fines. We submitted a petition for review, including documentation defending our compliance with the settlement. In 2019, we entered into a new settlement with the Labor Prosecutor. As part of the settlement agreement, the additional fines previously imposed were waived and we agreed to use paper liners for one month on trays in our restaurants beginning in the second quarter of 2020 to further protect the health and safety of our employees.

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Sinthoresp – Brasília
On February 23, 2015, a coalition of labor unions filed a lawsuit against us, alleging that we have defaulted on our obligations to our employees with a variety of inadequate working conditions such as an unhealthy working environment, failure to pay the legal minimum wage or wages established through collective bargaining agreements, time-card fraud, failure to grant legally-mandated meal and rest periods and failure to pay corresponding overtime, among other claims.
The plaintiffs have requested an order requiring: (i) immediate rectification of the alleged practices; (ii) an injunction against opening any new restaurants until compliance with the labor practices is demonstrated; (iii) damages for pain and suffering equal to an amount between 1% and 30% of gross income; (iv) that the Economic Defense Administrative Council – CADE be placed on notice of these conditions; and (v) service of process to the Labor Prosecutor to require it to follow up on the lawsuit.
The lawsuit is currently before the 22nd DF Labor Court in Brasilia. On March 27, 2017, the Labor Court entered a judgment rejecting all claims made by the coalition of labor unions and affirmed that the coalition was not able to prove its allegations. The coalition filed an appeal against it, and the Regional Labor Court determined to reopen the discovery phase for the parties to take depositions of witnesses, after which the 22nd DF Labor Court in Brasilia (first instance) will judge the claim again. We presented an appeal against this decision that was denied, and the discovery phase was reopened. A new discovery hearing was scheduled for May 4, 2020.
Complaint 0528900-98.2006.5.02.0080
On December 13, 2006, a civil complaint was filed by the Labor Prosecutor’s Office in São Paulo, questioning our compliance with rules related to sanitary surveillance, workers’ health and safety, work ergonomics and working hours. After a preliminary injunction was granted for compliance with issues related to relevant rules cited in the complaint, an agreement (the “TAC”) was entered into between the Company and the Labor Prosecutor’s Office that provides for a daily fine of R$5,000 for non-compliance with the TAC provisions. The full contents of the TAC were ratified by the Labor Court on March 16, 2007.
On October 18, 2010, we entered into a new agreement with the Labor Prosecutor’s Office in São Paulo, which maintained the previous commitments assumed by us in the TAC, but also included an obligation to annually pay R$1,300,000 (as adjusted on a yearly basis from 2011 to 2019) towards the financing of campaigns against child labor and to make a one-time contribution in the amount of R$1,500,000 to the São Paulo’s Medical University’s Foundation. Furthermore, according to the agreement, the company was required to file a schedule for the compliance with the obligations set forth in the TAC. The company has been in compliance with this agreement, and the final payment of the annual R$1,300,000 obligatory contribution to help finance campaigns against child labor was made in 2019. While we have paid all fines due under the agreement, our agreement with the Labor Prosecutor’s Office remains in effect and we must continue to comply with the other requirements thereunder.
In parallel with the judicial lawsuit’s developments, the Labor Prosecutor’s Office initiated an administrative audit regarding the company’s compliance with the TAC. On November 2016, the Labor Prosecutor’s Office claimed that it had identified violations of the TAC and demanded R$13 million in connection with such violations. On April 3, 2017, we submitted a petition and documents as evidence that we have complied with the settlement, rejecting the Labor Prosecutor’s claims. We attended a series of hearings with the Labor Prosecutor’s Office to discuss TAC compliance, Arcos’ petition, and the possibility of entering into a new settlement in order to reduce the previous commitments and the fines assumed by us. A new hearing is expected to be scheduled soon.
Retained Lawsuits and Contingent Liabilities
We have certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. As of December 31, 2019 we maintained a provision for contingencies amounting to $38.8 million ($42.1 million as of December 31, 2018), which is disclosed net of judicial deposits amounting to $12.7 million ($13.6 million as of December 31, 2018) that we were required to make in connection with the proceedings. As of December 31, 2019, the net amount of $26.2 million included $24.1 million as a non-current liability. See Note 18 to our consolidated financial statements for more details.
Pursuant to the Acquisition, McDonald’s Corporation indemnifies us for certain Brazilian claims. As of December 31, 2019, the provision for contingencies included $1.6 million ($4.0 million as of December 31, 2018) related to Brazilian

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claims that are covered by the indemnification agreement. As a result, we have recorded a non-current asset in respect of McDonald’s Corporation’s indemnity in our consolidated balance sheet.
Several of these proceedings have already been resolved successfully, either by a judicial decision or a cash settlement. The cash settlements were made pursuant to the reopening of a 2009 amnesty granted by the Brazilian federal government, in which McDonalds opted to participate. The amnesty was originally granted in 2009 as a way to reduce litigation with federal authorities and increase tax collection during the financial crisis. The amnesty allowed Brazilian taxpayers to settle federal tax debts under favorable conditions, including reduced penalties and interest and the ability to pay principal in up to 180 installments. In 2014, pursuant to an additional amnesty, such outstanding Brazilian federal tax debts were paid in full using mainly applicable tax loss carryforwards. The remaining retained proceedings are pending a final decision.    
As of December 31, 2019, there are certain matters related to the interpretation of tax and labor law for which there is a possibility that a loss may have been incurred in accordance with ASC 450-20-50-4 within a range of $210 million and $227 million.
Other Proceedings
In addition to the matters described above, we are from time to time subject to certain claims and party to certain legal proceedings incidental to the normal course of our business. In view of the inherent difficulty of predicting the outcome of legal matters, we cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believe that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on our business, financial condition, or results of operations. However, in light of the uncertainties involved in these claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us; as a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of our income for that period.
Dividends and Dividend Policy
Our Board of Directors considers the legal requirements with regard to our net income and retained earnings and our cash flow generation, targeted leverage ratios and debt covenant requirements in determining the amount of dividends to be paid, if any. Dividends may only be paid in accordance with the provisions of our memorandum and articles of association and Section 57 of the BVI Business Companies Act, 2004 (as amended) and after having fulfilled our capital expenditures program and after satisfying our indebtedness and liquidity thresholds, in that order. Pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company.
Since the Acquisition, we declared the following dividends (all dividends shown in the aggregate for all outstanding shares, other than per share figures):
a $10.2 million dividend paid on April 10, 2020 and dividends of $0.03 per share to be paid on each of August 13, 2020 and December 10, 2020;
a $10.2 million dividend and two $6.1 million dividends in 2019;
a $10.6 million and a $10.4 million dividend in 2018;
four $12.5 million dividends in 2014;
four $12.5 million dividends in 2013;
four $12.5 million dividends in 2012;
four $12.5 million dividends in 2011; and
a $40 million dividend with respect to our results of operations for fiscal year 2009.

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The amounts and dates of future dividend payments, if any, will be subject to, among other things, the discretion of our Board of Directors. Accordingly, there can be no assurance that any future distributions will be made, or, if made, as to the amount of such distributions.
B.    Significant Changes
Except as otherwise disclosed in this annual report, we are not aware of any significant changes that have occurred since December 31, 2019.
ITEM 9. THE OFFER AND LISTING
A.    Offering and Listing Details
See “—C. Markets.”
B.    Plan of Distribution
Not applicable.
C.    Markets
Our class A shares have been listed on the NYSE, since April 14, 2011 under the symbol “ARCO.”
D.    Selling Shareholders
Not applicable.
E.    Dilution
Not applicable.
F.    Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.    Share Capital
Not applicable.
B.    Memorandum and Articles of Association
General
We are a British Virgin Islands company incorporated with limited liability and our affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law, including the BVI Business Companies Act, 2004, or the BVI Act.
Our company number in the British Virgin Islands is 1619553. As provided in sub-regulation 4.1 of our memorandum of association, subject to British Virgin Islands law, we have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction and, for such purposes, full rights, powers and privileges. Our registered office is at Maples Corporate Services (BVI) Limited, Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands.
The transfer agent and registrar for our class A and class B shares is Continental Stock Transfer & Trust Company, which maintains the share registrar for each class in New York, New York.
As of the date of this annual report, under our memorandum and articles of association, we are authorized to issue up to 420,000,000 class A shares and 80,000,000 class B shares. As of the date of this annual report, 124,070,029 class A shares and 80,000,000 class B shares are issued, fully paid and outstanding. In addition, 7,993,602 Class A shares are issued and being held in treasury.

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The maximum number of shares that we are authorized to issue may be changed by resolution of shareholders amending our memorandum and articles of association. Shares may be issued from time to time only by resolution of shareholders.
Our class A shares are listed on the NYSE under the symbol “ARCO.”
The following is a summary of the material provisions of our memorandum and articles of association.
Class A Shares
Holders of our class A shares may freely hold and vote their shares.
The following summarizes the rights of holders of our class A shares:
each holder of class A shares is entitled to one vote per share on all matters to be voted on by shareholders generally, including the election of directors;
holders of class A shares vote together with holders of class B shares;
there are no cumulative voting rights;
the holders of our class A shares are entitled to dividends and other distributions, pari passu with our class B shares, as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any, and pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company;
upon our liquidation, dissolution or winding up, the holders of class A shares will be entitled to share ratably, pari passu with our class B shares, in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities; and
the holders of class A shares have preemptive rights in connection with the issuance of any securities by us, except for certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC, but they are not entitled to the benefits of any redemption or sinking fund provisions.
Class B Shares
All of our class B shares are owned by Los Laureles Ltd. Holders of our class B shares may freely hold and vote their shares.
The following summarizes the rights of holders of our class B shares:
each holder of class B shares is entitled to five votes per share on all matters to be voted on by shareholders generally, including the election of directors;
holders of class B shares vote together with holders of class A shares;
class B shares may not be listed on any U.S. or foreign national or regional securities exchange or market;
there are no cumulative voting rights;
the holders of our class B shares are entitled to dividends and other distributions, pari passu with our class A shares, as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any, and pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company;
upon our liquidation, dissolution or winding up, the holders of class B shares will be entitled to share ratably, pari passu with our class A shares, in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities;

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the holders of class B shares have preemptive rights in connection with the issuance of any securities by us, except for certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC, but they are not entitled to the benefits of any redemption or sinking fund provisions;
each class B share is convertible into one class A share at the option of the holder at any time, subject to the prior written approval of McDonald’s; and
each class B share will convert automatically into one class A share at such time as the holders of class B shares cease to hold, directly or indirectly, at least 20% of the aggregate number of outstanding class A and class B shares.
Limitation on Liability and Indemnification Matters
Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent director would exercise in comparable circumstances. Our memorandum and articles of association provide that, to the fullest extent permitted by British Virgin Islands law or any other applicable laws, our directors will not be personally liable to us or our shareholders for any acts or omissions in the performance of their duties. This limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.
Our memorandum and articles of association provide that we shall indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings or suits. We may pay any expenses, including legal fees, incurred by any such person in defending any legal, administrative or investigative proceedings in advance of the final disposition of the proceedings. If a person to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.
We may purchase and maintain insurance in relation to any of our directors, officers, employees, agents or liquidators against any liability asserted against them and incurred by them in that capacity, whether or not we have or would have had the power to indemnify them against the liability as provided in our memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our directors, officers or controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
Shareholders’ Meetings and Consents
The following summarizes certain relevant provisions of British Virgin Islands law and our articles of association in relation to our shareholders’ meetings:
the directors of the Company may convene meetings of shareholders at such times and in such manner and places within or outside the British Virgin Islands as the directors consider necessary or desirable; provided that at least one meeting of shareholders be held each year;
upon the written request of shareholders entitled to exercise 30 percent or more of the voting rights in respect of the matter for which the meeting is requested, the directors are required to convene a meeting of the shareholders. Any such request must state the proposed purpose of the meeting;
the directors convening a meeting must give not less than ten days’ notice of a meeting of shareholders to: (i) those shareholders whose names on the date the notice is given appear as shareholders in the register of members of our company and are entitled to vote at the meeting, and (ii) the other directors;

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a meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding at least 90 percent of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation to all the shares that such shareholder holds;
a shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder;
a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50 percent of the votes of the shares or class or series of shares entitled to vote on resolutions of shareholders to be considered at the meeting;
if within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved; in any other case it shall be adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other date, time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the shares or each class or series of shares entitled to vote on the matters to be considered by the meeting, those present shall constitute a quorum, but otherwise the meeting shall be dissolved. Notice of the adjourned meeting need not be given if the date, time and place of such meeting are announced at the meeting at which the adjournment is taken;
a resolution of shareholders is valid (i) if approved at a duly convened and constituted meeting of shareholders by the affirmative vote of a majority of the votes of the shares entitled to vote thereon which were present at the meeting and were voted, or (ii) if it is a resolution consented to in writing by a majority of the votes of shares entitled to vote thereon; and
an action that may be taken by the shareholders at a meeting may also be taken by a resolution of shareholders consented to in writing by a majority of the votes of shares entitled to vote thereon, without the need for any notice, but if any resolution of shareholders is adopted otherwise than by unanimous written consent of all shareholders, a copy of such resolution shall forthwith be sent to all shareholders not consenting to such resolution.
Compensation of Directors
The compensation of our directors is determined by our Board of Directors, and there is no requirement that a specified number or percentage of “independent” directors must approve any such determination.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of Delaware and the British Virgin Islands in many respects are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt a memorandum of association and articles of association that will provide shareholders with rights that, except as described in this annual report, do not vary in any material respect from those they would enjoy if we were incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a summary of some of the differences between provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in Delaware and their shareholders.

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Director’s Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling stockholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
British Virgin Islands law provides that every director of a British Virgin Islands company, in exercising his powers or performing his duties, shall act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances, taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. In addition, British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the memorandum association or articles of association of the company.
Amendment of Governing Documents
Under Delaware corporate law, with very limited exceptions, a vote of the shareholders is required to amend the certificate of incorporation. In addition, Delaware corporate law provides that shareholders have the right to amend the bylaws, and the certificate of incorporation also may confer on the directors the right to amend the bylaws. Our memorandum of association may only be amended by a resolution of shareholders, provided that any amendment of the provision related to the prohibition against listing our class B shares must be approved by not less than 50% of the votes of the class A shares entitled to vote that were present at the relevant meeting and voted. Our articles of association may also only be amended by a resolution of shareholders.
Written Consent of Directors
Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote. Similarly, under our articles of association, a resolution of our directors in writing shall be valid only if consented to by all directors or by all members of a committee of directors, as the case may be.
Written Consent of Shareholders
Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or special meeting of shareholders of a corporation may be taken by written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to take that action at a meeting at which all shareholders entitled to vote were present and voted. As permitted by British Virgin Islands law, shareholders’ consents need only a majority of shareholders signing to take effect. Our memorandum and articles of association provide that shareholders may approve corporate matters by way of a resolution consented to at a meeting of shareholders or in writing by a majority of shareholders entitled to vote thereon.
Shareholder Proposals
Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum and articles of association provide that our directors shall call a meeting of the shareholders if requested in writing to do so by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested. Any such request must state the proposed purpose of the meeting.

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Sale of Assets
Under Delaware corporate law, a vote of the shareholders is required to approve the sale of assets only when all or substantially all assets are being sold. In the British Virgin Islands, shareholder approval is required when more than 50% of the Company’s total assets by value are being disposed of or sold if not made in the usual or regular course of the business carried out by the company. Under our memorandum and articles of association, the directors may by resolution of directors determine that any sale, transfer, lease, exchange or other disposition is in the usual or regular course of the business carried on by us and such determination is, in the absence of fraud, conclusive.
Dissolution; Winding Up
Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution must be approved in writing by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law and our memorandum and articles of association, we may be voluntarily liquidated under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities or we are able to pay our debts as they fall due.
Redemption of Shares
Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its option, at the option of the holders of that stock or upon the happening of a specified event, provided shares with full voting power remain outstanding. The stock may be made redeemable for cash, property or rights, as specified in the certificate of incorporation or in the resolution of the board of directors providing for the issue of the stock. As permitted by British Virgin Islands law and our memorandum and articles of association, shares may be repurchased, redeemed or otherwise acquired by us. However, the consent of the shareholder whose shares are to be repurchased, redeemed or otherwise acquired must be obtained, except as described under “—Compulsory Acquisition” below. Moreover, our directors must determine that immediately following the redemption or repurchase we will be able to pay our debts as they become due and that the value of our assets will exceed our liabilities.
Compulsory Acquisition
Under Delaware General Corporation Law § 253, in a process known as a “short form” merger, a corporation that owns at least 90% of the outstanding shares of each class of stock of another corporation may either merge the other corporation into itself and assume all of its obligations or merge itself into the other corporation by executing, acknowledging and filing with the Delaware Secretary of State a certificate of such ownership and merger setting forth a copy of the resolution of its board of directors authorizing such merger. If the parent corporation is a Delaware corporation that is not the surviving corporation, the merger also must be approved by a majority of the outstanding stock of the parent corporation. If the parent corporation does not own all of the stock of the subsidiary corporation immediately prior to the merger, the minority shareholders of the subsidiary corporation party to the merger may have appraisal rights as set forth in § 262 of the Delaware General Corporation Law.
Under the BVI Act, subject to any limitations in a Company’s memorandum or articles, members holding 90% of the votes of the outstanding shares entitled to vote, and members holding 90% of the votes of the outstanding shares of each class of shares entitled to vote, may give a written instruction to the company directing the company to redeem the shares held by the remaining members. Upon receipt of such written instruction, the company shall redeem the shares specified in the written instruction, irrespective of whether or not the shares are by their terms redeemable. The company shall give written notice to each member whose shares are to be redeemed stating the redemption price and the manner in which the redemption is to be effected. A member whose shares are to be so redeemed is entitled to dissent from such redemption, and to be paid the fair value of his shares, as described under “—Shareholders’ Rights under British Virgin Islands Law Generally” below.

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Variation of Rights of Shares
Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of that class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law and our memorandum of association, we may vary the rights attached to any class of shares only with the consent in writing of holders of not less than 50% of the issued shares of that class and of holders of not less than 50% of the issued shares of any other class which may be adversely affected by such variation.
Removal of Directors
Under Delaware corporate law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Our memorandum and articles of association provide that directors may be removed at any time, with or without cause, by a resolution of shareholders or a resolution of directors.
In addition, directors are subject to rotational retirement every three years. The initial terms of office of the Class I, Class II and Class III directors have been staggered over a period of three years to ensure that all directors of the company do not face reelection in the same year.
Mergers
Under Delaware corporate law, one or more constituent corporations may merge into and become part of another constituent corporation in a process known as a merger. A Delaware corporation may merge with a foreign corporation as long as the law of the foreign jurisdiction permits such a merger. To effect a merger under Delaware General Corporation Law § 251, an agreement of merger must be properly adopted and the agreement of merger or a certificate of merger must be filed with the Delaware Secretary of State. In order to be properly adopted, the agreement of merger must be adopted by the board of directors of each constituent corporation by a resolution or unanimous written consent. In addition, the agreement of merger generally must be approved at a meeting of stockholders of each constituent corporation by a majority of the outstanding stock of the corporation entitled to vote, unless the certificate of incorporation provides for a supermajority vote. In general, the surviving corporation assumes all of the assets and liabilities of the disappearing corporation or corporations as a result of the merger.
Under the BVI Act, two or more BVI companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent BVI company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders. One or more BVI companies may also merge or consolidate with one or more companies incorporated under the laws of jurisdictions outside the BVI, if the merger or consolidation is permitted by the laws of the jurisdictions in which the companies incorporated outside the BVI are incorporated. In respect of such a merger or consolidation a BVI company is required to comply with the provisions of the BVI Act, and a company incorporated outside the BVI is required to comply with the laws of its jurisdiction of incorporation.
Shareholders of BVI companies not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum of association or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders and other books and records. Under British Virgin Islands law, members of the general public, on payment of a nominal fee, can obtain copies of the public records of a company available at the office of the British Virgin Islands Registrar of Corporate Affairs which will include the company’s certificate of incorporation, its memorandum and articles of association (with any amendments) and records of license fees paid to date, and will also disclose any articles of dissolution, articles of merger and a register of registered charges if such a register has been filed in respect of the company.

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A member of a company is entitled, on giving written notice to the company, to inspect:
(a)the memorandum and articles;
(b)the register of members;
(c)the register of directors; and
(d)the minutes of meetings and resolutions of members and of those classes of members of which he is a member; and to make copies of or take extracts from the documents and records referred to in (a) to (d) above. Subject to the memorandum and articles, the directors may, if they are satisfied that it would be contrary to the company’s interests to allow a member to inspect any document, or part of a document, specified in (b), (c) or (d) above, refuse to permit the member to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records.
Where a company fails or refuses to permit a member to inspect a document or permits a member to inspect a document subject to limitations, that member may apply to the court for an order that he should be permitted to inspect the document or to inspect the document without limitation.
A company is required to keep at the office of its registered agent the memorandum and articles of the company; the register of members maintained or a copy of the register of members; the register of directors or a copy of the register of directors; and copies of all notices and other documents filed by the company in the previous ten years.
Where a company keeps a copy of the register of members or the register of directors at the office of its registered agent, it is required to notify any changes to the originals of such registers to the registered agent, in writing, within 15 days of any change; and to provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept. Where the place at which the original register of members or the original register of directors is changed, the company is required to provide the registered agent with the physical address of the new location of the records within fourteen days of the change of location.
A company is also required to keep at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors determine, the minutes of meetings and resolutions of members and of classes of members; and the minutes of meetings and resolutions of directors and committees of directors. If such records are kept at a place other than at the office of the company’s registered agent, the company is required to provide the registered agent with a written record of the physical address of the place or places at which the records are kept and to notify the registered agent, within 14 days, of the physical address of any new location where such records may be kept.
A company is further required to:
(a)keep at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors may determine, the records and underlying documentation of the company;
(b)retain the records and underlying documentation for a period of at least five years from the date: (i) of completion of the transaction to which the records and underlying documentation relate; or (ii) the company terminates the business relationship to which the records and underlying documentation relate; and
(c)provide its registered agent without delay any records and underlying documentation in respect of the company that the registered agent requests pursuant to the entitlement of the company’s registered agent to make such a request where the registered agent is required to do so by the British Virgin Islands Financial Services Commission or any other competent authority in the British Virgin Islands acting pursuant to the exercise of a power under an enactment.
The records and underlying documentation of the company are required to be in such form as:
(a)are sufficient to show and explain the company’s transactions; and
(b)will, at any time, enable the financial position of the company to be determined with reasonable accuracy.

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Where the records and underlying documentation of a company are kept at a place or places other than at the office of the company’s registered agent, the company is required to provide the registered agent with a written:
(a)record of the physical address of the place at which the records and underlying documentation are kept; and
(b)record of the name of the person who maintains and controls the company’s records and underlying documentation.
Where the place or places at which the records and underlying documentation of the company, or the name of the person who maintains and controls the company’s records and underlying documentation, change, the company must within 14 days of the change, provide:
(a)its registered agent with the physical address of the new location of the records and underlying documentation; or
(b)the name of the new person who maintains and controls the company’s records and underlying documentation.
For the foregoing purposes:
(a)“business relationship” means a continuing arrangement between a company and one or more persons with whom the company engages in business, whether on a one-off, regular or habitual basis; and
(b)“records and underlying documentation” includes accounts and records (such as invoices, contracts and similar documents) in relation to: (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company.
Conflict of Interest
Under Delaware corporate law, a contract between a corporation and a director or officer, or between a corporation and any other organization in which a director or officer has a financial interest, is not void as long as the material facts as to the director’s or officer’s relationship or interest are disclosed or known and either a majority of the disinterested directors authorizes the contract in good faith or the shareholders vote in good faith to approve the contract. Nor will any such contract be void if it is fair to the corporation when it is authorized, approved or ratified by the board of directors, a committee or the shareholders.
The BVI Act provides that a director shall, forthwith after becoming aware that he is interested in a transaction entered into or to be entered into by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the director’s interest was disclosed to the board prior to the Company’s entry into the transaction or was not required to be disclosed because the transaction is between the company and the director himself and is otherwise in the ordinary course of business and on usual terms and conditions. As permitted by British Virgin Islands law and our memorandum and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which it is considered and sign documents on our behalf which relate to the transaction, provided that the disinterested directors consent.
Transactions with Interested Shareholders
Delaware corporate law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by that statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that the person becomes an interested shareholder. An interested shareholder generally is a person or group that owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which the shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.

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British Virgin Islands law has no comparable provision. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although British Virgin Islands law does not regulate transactions between a company and its significant shareholders, it does provide that these transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Independent Directors
There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the Company’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of association and articles of association do not provide for cumulative voting.
Shareholders’ Rights under British Virgin Islands Law Generally
The BVI Act provides for remedies which may be available to shareholders. Where a company incorporated under the BVI Act or any of its directors engages in, or proposes to engage in, conduct that contravenes the BVI Act or the Company’s memorandum and articles of association, the BVI courts can issue a restraining or compliance order. Shareholders cannot also bring derivative, personal and representative actions under certain circumstances. The traditional English basis for members’ remedies has also been incorporated into the BVI Act: where a shareholder of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him, he may apply to the court for an order based on such conduct.
Any shareholder of a company may apply to court for the appointment of a liquidator of the company and the court may appoint a liquidator of the company if it is of the opinion that it is just and equitable to do so.
The BVI Act provides that any shareholder of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a) a merger, if the company is a constituent company, unless the company is the surviving company and the member continues to hold the same or similar shares; (b) a consolidation, if the company is a constituent company; (c) any sale, transfer, lease, exchange or other disposition of more than 50% in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the shareholders in accordance with their respective interest within one year after the date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; (d) a redemption of 10% or fewer of the issued shares of the company required by the holders of 90% or more of the shares of the company pursuant to the terms of the BVI Act; and (e) an arrangement, if permitted by the court.
Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the British Virgin Islands or their individual rights as shareholders as established by the Company’s memorandum and articles of association.
C.    Material Contracts
The MFAs
We received exclusive master franchising rights from McDonald’s for the Territories on August 3, 2007 when Mr. Woods Staton, our Executive Chairman and controlling shareholder and our founding private equity shareholders purchased McDonald’s LatAm business for $698.1 million (including $18.7 million of acquisition costs) and entered into the MFAs. Prior to the Acquisition, Mr. Woods Staton had been the joint venture partner of McDonald’s Corporation in Argentina for over 20 years and had served as President of McDonald’s South Latin American division since 2004.

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McDonald’s has a long-standing presence in Latin America and the Caribbean dating to the opening of its first restaurant in Puerto Rico in 1967. Since then, McDonald’s expanded its footprint across the region as consumer markets and opportunities arose, opening its first restaurants in Brazil in 1979, in Mexico and Venezuela in 1985 and in Argentina in 1986.
We hold our McDonald’s franchise rights pursuant to the MFA for all of the Territories except Brazil, executed on August 3, 2007, as amended and restated on November 10, 2008 and as further amended on August 31, 2010, June 3, 2011 and March 17, 2016, entered into by us, LatAm, LLC (the “Master Franchisee”), our former wholly owned subsidiary Arcos Dorados Coöperatieve U.A., Arcos Dorados B.V., certain subsidiaries of the Master Franchisee, Los Laureles, Ltd. and McDonald’s. On March 21, 2018, Arcos Dorados Group B.V. (together with Arcos Dorados B.V. and us, the “Owner Entities”) replaced Arcos Dorados Coöperatieve U.A. as party to the MFA. On August 3, 2007, our subsidiary Arcos Dourados Comercio de Alimentos Ltda., or the Brazilian Master Franchisee, and McDonald’s entered into the separate, but substantially identical, Brazilian MFA, which was amended and restated on November 10, 2008.
The MFAs set forth McDonald’s and our rights and obligations in respect of the ownership and operation of the McDonald’s-branded restaurants located in the Territories. The MFAs do not include the following Latin American and Caribbean countries and territories, among others: Anguilla, Antigua and Barbuda, the Bahamas, Barbados, Belize, Bolivia, the British Virgin Islands, the Cayman Islands, Cuba, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guiana, Haiti, Honduras, Jamaica, Montserrat, Nicaragua, Paraguay, Suriname, St. Barthélemy, St. Kitts and Nevis, St. Lucia, St. Maarten, St. Vincent and the Grenadines, Turks & Caicos Islands and the U.S. Virgin Islands, with the exception of St. Croix and St. Thomas.
The material provisions of the MFAs are set forth below.
Term
The initial term of the franchise granted pursuant to the MFAs is 20 years for all of the Territories other than French Guiana, Guadeloupe and Martinique. After the expiration of the initial term, McDonald’s may grant us an option to extend the term of the MFAs with respect to all Territories for an additional period of 10 years. The initial term of the franchise for French Guiana, Guadeloupe and Martinique was 10 years. Under the MFA, we had the right to extend the term of the MFA with respect to French Guiana, Guadeloupe and Martinique for an additional term of 10 years. On June 27, 2016, we exercised this right and McDonald’s granted us an extension of the initial term for the franchises in French Guiana, Guadeloupe and Martinique for a period of 10 years, expiring August 2, 2027.
Our Right to Own and Operate McDonald’s-Branded Restaurants
Under the MFAs, in the Territories, we have the exclusive right to (i) own and operate, directly or indirectly, McDonald’s restaurants, (ii) license and grant franchises with respect to McDonald’s-branded restaurants, (iii) adopt and use, and to grant the right and license to franchisees to adopt and use, the McDonald’s operations system in our restaurants, (iv) advertise to the public that we are a franchisee of McDonald’s, and (v) to use, and to sublicense to our franchisees the right to use the McDonald’s intellectual property solely in connection with the development, ownership, operation, promotion and management of our restaurants, and to engage in related advertising, promotion and marketing programs and activities.
Under the MFAs, McDonald’s cannot grant the rights described in clauses (i), (ii) and (iii) of the preceding paragraph to any other person while the MFAs are in effect. Notwithstanding the foregoing, McDonald’s has reserved, with respect to the McDonald’s restaurants located in the Territories, all rights not specifically granted to us, including the right, directly or indirectly, to (i) use and sublicense the McDonald’s intellectual property for all other purposes and means of distribution, (ii) sell, promote or license the sale of products or services under the intellectual property and (iii) use the intellectual property in connection with all other activities not prohibited by the MFAs.
In addition, under the MFAs, McDonald’s provides us with know-how and new developments, techniques and improvements in the areas of restaurant management, food preparation and service, and operations manuals that contain the standards and procedures necessary for the successful operation of McDonald’s-branded restaurants.
Franchise Fees
Under the MFAs, we are responsible for the payment to McDonald’s of initial franchise fees, continuing franchise fees and transfer fees.

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The initial franchise fee is payable upon the opening of a new restaurant and the extension of the term of any existing franchise agreement. For Company-operated restaurants, the initial fee is based on the term remaining under the MFAs for the country in which the restaurant is located. For franchised restaurants, we receive an initial fee from the franchisee based on the term of the franchise agreement (generally 20 years), and pay 50% of this fee to McDonald’s.
The continuing franchise fee is paid, with respect to each calendar month, to McDonald’s in an amount generally equal to 7% of the U.S. dollar equivalent of the gross sales, as defined therein, of each of the McDonald’s restaurants in the Territories for that calendar month, minus, as applicable, a brand building adjustment. During the first 10 years of the MFAs, the brand building adjustment is 2% of the gross sales, for a net continuing franchise fee payment of 5% of the gross sales. During years 11 through 15 of the MFAs, the brand building adjustment will be 1% of the gross sales, for a net continuing franchise fee payment of 6%; and the brand building adjustment will be 0% thereafter, for a net continuing franchise fee payment of 7% of the gross sales. In addition, on January 25, 2017, McDonald’s Corporation agreed to provide growth support for the years 2017, 2018 and 2019. The impact of this support resulted in an effective royalty rate of 5.2% in 2017, 5.4% in 2018 and 5.5% in 2019. McDonald’s Corporation had previously agreed to provide growth support for the years 2020, 2021 and 2022. However, due to the business disruptions caused by the COVID-19 outbreak, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan. We do not expect to finalize a revised 2020-2022 plan at least until after the COVID-19 outbreak is under control. As a result, until we are able to finalize a revised 2020-2022 restaurant opening plan and reinvestment plan, we can make no assurances related to receiving growth support for 2020-2022.
We are responsible for collecting the continuing franchise fee from our franchisees and must pay that amount to McDonald’s. In the event that a franchisee does not pay the full amount of the fee or any of our subsidiaries are unable to transfer funds to us due to currency restrictions or otherwise, we are responsible for any resulting shortfall. In connection with the COVID-19 pandemic, McDonald's has agreed to defer all franchise fee payments, whether they are related to company-operated or franchisee-operated restaurants, for March, April, May and June 2020 sales until 2021. If we are unable to pay such franchise fees when they are due, or we have further difficulty meeting our obligations in coming months and are unable to obtain a similar deferral, we will be in default under the MFAs. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—Our financial condition and results of operations depend, to a certain extent, on the financial condition of our franchisees and their ability to fulfill their obligations under their franchise agreements,” “—Certain Factors Relating to Latin America and the Caribbean—We are subject to significant foreign currency exchange controls and depreciation in certain countries in which we operate” and “—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”
In the event of a voluntary or involuntary transfer of any of the McDonald’s restaurants located in the Territories to a person other than a subsidiary of ours or an affiliate of one of our franchisees, we must charge a transfer fee of not less than $10,000 and must pay to McDonald’s an amount equal to 50% of the fee charged.
All payments to McDonald’s must be made in U.S. dollars, but are based on local currency exchange rates at the time of payment.
Material Breach
A material breach under the MFAs would occur if we, or our subsidiaries that are a party to the MFAs, materially breached any of the representations or warranties or obligations under the MFAs (not cured within 30 days after receipt of notice thereof from McDonald’s) relating to or otherwise in connection with any aspect of the master franchise business, the franchised restaurants or any other matter in or affecting any one or more Territories. The following events, among others, constitute a material breach under the MFAs: our noncompliance with anti-terrorism or anti-corruption policies and procedures required by applicable law; our bankruptcy, insolvency, voluntary filing or filing by any other person of a petition in commercial insolvency; our conviction or that of our subsidiaries, or of our or our subsidiaries’ agents or employees for a crime or offense that is punishable by incarceration for more than one year or a felony, or a crime or offense or the indictment on charges thereof that, in the determination of McDonald’s, is likely to adversely affect the reputation of such person, any franchised restaurant or McDonald’s; the entry of any judgment against us or our subsidiaries in excess of $1,000,000 that is not duly paid or otherwise discharged within 30 days (unless such judgment is being contested on appeal in good faith); our failure to maintain certain quarterly financial ratios and not cure any non-compliance within 30 days; our failure to achieve (a) at least 80% of the targeted openings during any one-calendar year of any restaurant opening plan; or (b) at least 90% of the targeted openings during the three-calendar year term of any restaurant opening plan; and our failure to comply with at least 80% of the funding requirements of any reinvestment plan with respect to any Territory for a period of one year.

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Business of the Company and the Other Owner Entities
In addition to the payment of franchise fees described above, we and the other Owner Entities are subject to a variety of obligations and restrictions under the MFAs.
Under the MFAs, we cannot, directly or indirectly, enter into any other QSR business or any business other than the operation of McDonald’s-branded restaurants in the Territories. Neither we nor any of the other Owner Entities can engage in a business other than holding, directly or indirectly, our equity interests. In addition, neither we nor any of the other Owner Entities can engage in any activity or participate in any business that competes with McDonald’s business.
Under the MFAs, Los Laureles Ltd., a British Virgin Islands company beneficially owned by Mr. Woods Staton, our Executive Chairman and controlling shareholder, is required to own not less than 40% of our economic interests and 51% of our voting interests. The MFAs do provide an exception for any dilution following an initial public offering, so long as such dilution does not cause Los Laureles Ltd. to be diluted below 30% of our economic interests. Also, under the MFAs, we are required to own, directly or indirectly, 100% of the equity interests of our subsidiaries and cannot enter into any partnership, joint venture or similar arrangement without McDonald’s consent. In addition, at least 50% of all McDonald’s-branded restaurants in the Territories must be Company-operated restaurants.
Real Estate
Under the MFAs, we must own or lease the real estate property where all of our Company-operated restaurants are located. In addition, we cannot transfer or encumber a significant portion of the real estate properties that we own without McDonald’s consent. Due to the geographic and commercial importance of certain restaurants, we may not sell certain “iconic” properties without the prior written consent of McDonald’s. For certain of these selected properties, we have already perfected a first priority lien in favor of McDonald’s.
Under the MFAs, no more than 50% of the total number of restaurants in each Territory, and no more than 10% of the total number of restaurants in all the Territories, can be located on real estate property that is owned, held or leased by our franchisees.
In addition, the MFA lists 25 restaurants that we are prohibited from selling or otherwise transferring without McDonald’s consent.
Transfer of Equity Interests or Significant Assets
Under the MFAs, neither we nor any of the other Owner Entities can transfer or pledge the equity interests of any of our subsidiaries, or any significant portion of our assets, without McDonald’s consent.
Operational Control
Under the MFAs, McDonald’s is entitled to approve the appointment of our chief executive officer and our chief operating officer.
In the event that McDonald’s modifies its standards applicable to technology and related equipment, we must purchase any new or modified technology, software, hardware or equipment necessary to comply with the modified standards.
Restaurant Opening Plan and Reinvestment Plan
Under the MFAs, we are required to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period during the term of the MFAs. The restaurant opening plan specifies the number and type of new restaurants to be opened in the Territories during the applicable three-year period, while the reinvestment plan specifies the amount we must spend reimaging or upgrading restaurants during the applicable three-year period. Prior to the expiration of the then-applicable three-year period we must agree with McDonald’s on a subsequent restaurant opening plan and reinvestment plan. We may also propose, subject to McDonald’s prior written consent, amendments to any restaurant opening plan and/or reinvestment plan to adapt to changes in economic or political conditions.
In the event we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing

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plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan.
Advertising and Promotion Plan
Under the MFAs, we must develop and implement a marketing plan with respect to each Territory that must be approved in advance by McDonald’s. The MFAs require us to spend at least 5% of our gross sales on advertisement and promotion activities. In connection with the COVID-19 outbreak, we have agreed with McDonald's to reduce this spending requirement from 5% to 4% of our gross sales for the full year 2020. Our advertisement and promotion activities are guided by our overall marketing plan, which identifies the key strategic platforms that we aim to leverage in order to drive sales.
Insurance
Under the MFAs, we are required to acquire and maintain a variety of insurance policies with certain minimum coverage limits, including commercial general liability, workers compensation, “all risk” property and business interruption insurance, among others.
Call Option Right and Security Interest in Equity Interests of the Company
Under the MFAs, McDonald’s has the right, or Call Option, to acquire our non-public shares or our interests in one or more Territories upon: (i) the expiration of the initial term of the MFAs on August 2, 2027 if the initial term is not extended, (ii) the occurrence of a material breach of the MFAs or (iii) during the period of 12 months following the earlier of (x) the 18th month anniversary of the death or permanent incapacity of Mr. Woods Staton or (y) the receipt by McDonald’s of notice from Mr. Woods Staton’s heirs that they have elected to have the period of 12 months commence as of the date specified in the notice. McDonald’s generally has the right either to exercise the Call Option with respect to all of the Territories, or, in its sole discretion, with respect to the Territory or Territories identified by McDonald’s as being affected by such material breach or to which such material breach may be attributable except upon the occurrence of an initial material breach relating to any Territory or Territories in which there are less than 100 restaurants in operation. In such case, McDonald’s only has the right to acquire the equity interests of any of our subsidiaries in the relevant Territory or Territories. As of December 31, 2019, we had more than 100 restaurants in operation in each of Argentina, Brazil, Mexico and Venezuela. In Puerto Rico, we had 99 restaurants in operation, and no other Territory had more than 85 restaurants in operation.
If McDonald’s exercises the Call Option upon the occurrence of the events described in clause (i) or (iii) of the preceding paragraph, it must pay a purchase price equal to 100% of the fair market value of our non-public shares. If the Call Option is exercised upon the occurrence of a material breach, however, the purchase price is reduced to 80% of the fair market value of all of our non-public shares or of all of the equity interests of the subsidiaries operating restaurants in the Territory related to such material breach, as applicable. The purchase price paid by McDonald’s upon exercise of the Call Option is, in all events, reduced by the amount of debt and contingencies and increased by the amount of cash attributable to the entity whose equity interests are being acquired pursuant to the Call Option. In the event McDonald’s were to exercise its right to acquire all of our non-public shares, McDonald’s would become our controlling shareholder.
If McDonald’s exercises the Call Option with respect to any of our subsidiaries (but not all of them) and the amount of debt and contingencies (minus cash) attributable to the equity interests of those subsidiaries is greater than the fair market value of those equity interests, we must, at our election, either (i) assume the debts and contingencies (minus cash) and deliver the equity interests to McDonald’s free of any obligations with respect thereto or (ii) pay to McDonald’s the absolute value of that amount. The fair market value of any of the equity interests is to be determined by internationally recognized investment banks without taking into consideration the debt, contingencies or cash attributable to the equity interests.
In order to secure McDonald’s right to exercise the Call Option, McDonald’s was granted a perfected security interest in the equity interests of the Master Franchisee, the Brazilian Master Franchisee and our subsidiaries other than our subsidiaries organized in Costa Rica, Mexico, French Guiana, Guadeloupe and Martinique. The equity interests of our subsidiaries organized in Costa Rica and Mexico were transferred to a trust for the benefit of McDonald’s. McDonald’s does not have a security interest in the equity interests of our subsidiaries organized in French Guiana, Guadeloupe and Martinique.
The equity interests were transferred to Citibank, N.A., acting as escrow agent. Subject to the terms of the Escrow Agreement and the Intercreditor Agreement, upon McDonald’s exercise of the Call Option and its payment of the respective purchase price, the escrow agent must transfer the equity interests, free of any liens or encumbrances, to McDonald’s.

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Limitations on Indebtedness
Under the MFAs, we cannot incur any indebtedness secured by the collateral pledged by us and certain of our subsidiaries in connection with the letters of credit or amend or waive any of the terms related to the collateral, without McDonald’s consent. The pledged collateral includes the equity interests of certain of our subsidiaries, certain of our rights under certain of the Acquisition documents, franchise document payment rights, and our intercompany debt and notes.
Under the MFAs, we must maintain a fixed charge coverage ratio (as defined therein) at least equal to 1.50 and a leverage ratio (as defined therein) not in excess of 4.25. If we are unable to comply with our original commitments under the MFA or to obtain a waiver for any non-compliance in the future, we could be in material breach. Our breach of the MFA would give McDonald’s certain rights, including the ability to acquire all or portions of our business. See “—Material Breach.” As of December 31, 2019, our Fixed Charge Coverage Ratio was 1.86 and our Leverage Ratio was 3.77.
Arcos Dorados Financial Ratios under the MFA
 Quarter ended
 
December 31,
2018
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
Leverage Ratio4.073.833.763.833.77
Fixed Charge Coverage Ratio1.701.831.861.801.86

Letters of Credit
As security for the performance of our obligations under the MFAs, we have obtained (i) on August 3, 2007, an irrevocable standby letter of credit in favor of McDonald’s in an amount of $65.0 million and later reduced to $45.0 million on October 30, 2015, issued by Credit Suisse acting as issuing bank through its Cayman Islands Branch, (ii) on May 9, 2011, an irrevocable standby letter of credit in favor of McDonald’s in an amount of $15.0 million, issued by Itaú Unibanco S.A. (“Itaú”), acting as issuing bank through its New York Branch, and (iii) on November 3, 2015, an irrevocable standby letter of credit in favor of McDonald’s in an amount of $20.0 million, issued by JPMorgan, acting as issuing bank through its New York Branch. The Credit Suisse, Itaú and JP Morgan letters of credit expire on November 10, 2022, April 24, 2021 and November 6, 2021, respectively, but we will be required by the MFAs to renew these letters of credit or obtain new standby letters of credit in the same amount.

The Credit Suisse letter of credit and reimbursement agreement contains a limited number of customary affirmative and negative covenants. These include limitations on (i) any transfer of the MFAs, (ii) amendment or waiver of the MFAs without the consent of the issuing bank, (iii) our leverage ratio, (iv) taking any action to elect to assume the debt of any of our subsidiaries upon McDonald’s exercise of a partial Call Option, (v) our ability to guaranty obligations of our subsidiaries, and (vi) amendments to the credit agreement.
Credit Suisse, as issuing bank, has a security interest in certain of our rights under certain Acquisition documents, franchise document payment rights and our intercompany debt notes. In addition, our subsidiaries (other than those organized in Ecuador, French Guiana, Guadeloupe, Martinique and Peru, and certain subsidiaries organized in Argentina, Colombia and Mexico) guaranteed to Credit Suisse the full and prompt payment of our obligations under the Credit Suisse letter of credit and reimbursement agreement.
The letter of credit that we obtained from Itaú effectively replaced the cash collateral that we had previously pledged in favor of McDonald’s in an amount of $15.0 million. The Itaú continuing standby letter of credit agreement contains a limited number of customary affirmative and negative covenants. These include limitations on (i) any transfer of the MFAs, (ii) amendment or waiver of the MFAs without the consent of the issuing bank, (iii) our leverage ratio, (iv) taking any action to elect to assume the debt of any of our subsidiaries upon McDonald’s exercise of a Call Option, and (v) permitting ourselves or any of our subsidiaries to become insolvent.
We delivered a promissory note to Itaú in an amount of $15.0 million evidencing our obligations to Itaú under the continuing standby letter of credit agreement and a guarantee letter from our Brazilian subsidiary guaranteeing the full and punctual payment when due of our obligations and liabilities to Itaú in respect of the Itaú letter of credit and the continuing standby letter of credit agreement, including without limitation our reimbursement obligations for any payments made by Itaú under the letter of credit.

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The letter of credit that we obtained from JPMorgan effectively replaced the $20.0 million reduction in the Credit Suisse letter of credit.
The JPMorgan letter of credit is guaranteed by certain of our subsidiaries and contains a limited number of customary affirmative and negative covenants. These include limitations on (i) our leverage ratio, (ii) the dissolution, liquidation or winding-up of the applicant or a guarantor, (iii) a material breach or failure to comply with the MFA, and (iv) permitting the applicant or any guarantor to become insolvent.
Although we do not have any amounts outstanding under our letters of credit at this time, any default under the letters of credit would also result in a material breach of our obligations under the MFAs. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”

Termination
The MFAs automatically terminate without the need for any party to it to take any further action if any type of insolvency or similar proceeding in respect of us or any of the other Owner Entities commences.
In the event of the occurrence of certain material breaches, such as if we fail to comply with the reinvestment plan or restaurant opening plan, McDonald’s has the right to terminate the MFAs.
Upon the termination of the MFAs, McDonald’s has the right to acquire all, but not less than all, of our equity interests at fair market value, which is to be calculated by internationally recognized investment banks selected by us and McDonald’s. The fair market value of our equity interests shall be calculated in U.S. dollars based on the amount that would be received for our equity interests in an arm’s-length transaction between a willing buyer and a willing seller, taking into account the benefits provided by the MFAs.
The 2023 Notes and the 2027 Notes
For a description of the 2023 notes and the 2027 notes, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
The Revolving Credit Facilities
For a description of the revolving credit facilities entered into by Arcos Dorados B.V. with Bank of America, N.A. and JP Morgan Chase Bank, N.A. see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Net Cash (used in) Financing Activities—Revolving Credit Facilities.”
D.    Exchange Controls
There are currently no exchange control regulations in the BVI applicable to us or our shareholders. For information about any exchange controls or restrictions in Argentina, Brazil and Mexico, see “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls.”
E.    Taxation
British Virgin Islands Tax Considerations
The following summary contains a general description of certain British Virgin Islands tax consequences of the acquisition, ownership and disposition of class A shares, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to hold class A shares. The general summary is based upon the tax laws of the British Virgin Islands and regulations thereunder as of the date hereof, which are subject to change.
We are not liable to pay any form of corporate taxation in the BVI and all dividends, interests, rents, royalties, compensations and other amounts paid by us to persons who are not persons resident in the BVI or providing services in the BVI are exempt from all forms of taxation in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of ours by persons who are not persons resident in the BVI are exempt from all forms of taxation in the BVI.

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No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligation or other securities of ours.
Subject to the payment of stamp duty on the acquisition or certain leasing of property in the BVI by us (and in respect of certain transactions in respect of the shares, debt obligations or other securities of BVI incorporated companies owning land in the BVI), all instruments relating to transfers of property to or by us and all instruments relating to transactions in respect of the shares, debt obligations or other securities of ours and all instruments relating to other transactions relating to our business are exempt from payment of stamp duty in the BVI.
There are currently no withholding taxes or exchange control regulations in the BVI applicable to us or our shareholders who are not providing services in the BVI.
The BVI has signed an intergovernmental agreement to improve international tax compliance and the exchange of information with the United States (the “U.S. IGA”). The BVI has also signed, along with over 100 other countries, a multilateral competent authority agreement to implement the Organisation for Economic Co-Operation and Development (OECD) Standard for Automatic Exchange of Financial Account Information - Common Reporting Standard (the “CRS”).
Amendments made to the Mutual Legal Assistance (Tax Matters) Act, 2003 (as amended) (the “2003 Act”) and orders have been made pursuant to the 2003 Act to give effect to the terms of the U.S. IGA and the CRS (together “AEOI”) under BVI law (the “BVI Legislation”).
All BVI “Financial Institutions” are required to comply with the registration, due diligence and reporting requirements of the BVI Legislation which also implements the CRS, except to the extent that they can rely on an exemption that allows them to become a “Non-Reporting Financial Institution” (as defined in the relevant BVI Legislation).
We do not believe we are classified as a “Foreign Financial Institution” or “Financial Institution” within the meaning of AEOI and the BVI Legislation. However, if we were to determine that our classification has changed, we may request additional information from any shareholder and its beneficial owners to identify whether shares in the Company are held directly or indirectly by “Reportable Persons” (as defined by AEOI). Information in respect of Reportable Persons would be disclosed to the International Tax Authority (“ITA”) of the BVI. The ITA in turn is required under AEOI and BVI Legislation to disclose information in respect of Reportable Persons to the foreign fiscal authorities relevant to such Reportable Persons.
There is no income tax treaty currently in effect between the United States and the BVI.
Material U.S. Federal Income Tax Considerations for U.S. Holders
The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of class A shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to own such securities. This summary applies only to U.S. Holders (as defined below) that own class A shares as capital assets for U.S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”) known as the Medicare contribution tax, and tax consequences applicable to certain U.S. Holders subject to special rules, such as:
certain financial institutions;
dealers or traders in securities who use a mark-to-market method of tax accounting;
persons holding class A shares as part of a hedge, “straddle,” wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the class A shares;
persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;
tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;
entities classified as partnerships for U.S. federal income tax purposes;
persons that own or are deemed to own ten percent or more of our shares, by vote or by value;

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persons who acquired our class A shares pursuant to the exercise of an employee stock option or otherwise as compensation; or
persons holding class A shares in connection with a trade or business conducted outside the United States.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds class A shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding class A shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the class A shares.
This discussion is based upon the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which may affect the tax consequences described herein—possibly with retroactive effect.
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of class A shares that is:
(1)a citizen or individual resident of the United States;
(2)a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
(3)an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of class A shares in their particular circumstances.
This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on class A shares, other than certain pro rata distributions of class A shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, we expect that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be eligible for taxation as “qualified dividend income” and therefore may be taxable at rates applicable to long-term capital gains. Non-corporate U.S. Holders should consult their tax advisers regarding the availability of the reduced tax rates on dividends in their particular circumstances. The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s receipt of the dividend.
Sale or Other Taxable Disposition of Class A Shares
For U.S. federal income tax purposes, gain or loss realized on the sale or other taxable disposition of class A shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder owned the class A shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the class A shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.
Passive Foreign Investment Company Rules
We believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for our 2019 taxable year. However, because the application of the Treasury Regulations is not entirely clear and because PFIC status depends on the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be a PFIC for any taxable year.

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If we were a PFIC for any taxable year during which a U.S. Holder owned class A shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the class A shares would be allocated ratably over the U.S. Holder’s holding period for the class A shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for each taxable year. Further, to the extent that any distribution received by a U.S. Holder on its class A shares exceeds 125% of the average of the annual distributions on the class A shares received during the preceding three years or such U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain on the disposition of a share of a PFIC, described immediately above. If we were a PFIC, certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the class A shares that differ from the treatment set forth in this paragraph.
In addition, if we were a PFIC or, with respect to any U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If we are a PFIC for any taxable year during which a U.S. Holder owned our class A shares, the U.S. Holder will generally be required to file IRS Form 8621 (or any successor form) with their annual U.S. federal income tax returns, subject to certain exceptions.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. Holders who are individuals (and specified entities that are formed or availed of for purposes of holding certain foreign financial assets) may be required to report information relating to their ownership of stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in certain accounts maintained by a U.S. financial institution). U.S. Holders should consult their tax advisers regarding the effect, if any, of these reporting requirements on their ownership and disposition of class A shares.
F.    Dividends and Paying Agents
Not applicable.
G.    Statement by Experts
Not applicable.
H.    Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains an Internet website that contains reports and other information filed by us electronically with the SEC. The address of that website is www.sec.gov.
As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.

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We will send the transfer agent a copy of all notices of shareholders’ meetings and other reports, communications and information that are made generally available to shareholders. The transfer agent has agreed to mail to all shareholders a notice containing the information (or a summary of the information) contained in any notice of a meeting of our shareholders received by the transfer agent and will make available to all shareholders such notices and all such other reports and communications received by the transfer agent.
I.    Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
In the ordinary course of our business activities, we are exposed to various market risks that are beyond our control, including fluctuations in foreign exchange rates and the price of our primary supplies, and which may have an adverse effect on the value of our financial assets and liabilities, future cash flows and profit. As a result of these market risks, we could suffer a loss due to adverse changes in foreign exchange rates and the price of commodities in the international markets. In addition, we are subject to equity price risk relating to our share-based compensation plans. Our policy with respect to these market risks is to assess the potential of experiencing losses and the consolidated impact thereof, and to mitigate these market risks. We do not enter into market risk sensitive instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
Foreign Currency Exchange Rate Risk in 2019
We are exposed to foreign currency exchange rate risk primarily in connection with the fluctuation in the value of the local currencies of the countries in which we operate, primarily the Brazilian real, the Argentine peso and the Mexican peso, among others. We generate revenues and cash from our operations in local currencies while a significant portion of our long-term debt is denominated in U.S. dollars. An adverse change in foreign currency exchange rates would therefore affect the generation of cash flow from operations in U.S. dollars, which could negatively impact our ability to pay amounts owed in U.S. dollars. In order to partially mitigate the foreign exchange rate risk related to our long-term debt, we entered into certain derivative instruments. See Note 13 to our consolidated financial statements for more detail. Moreover, our continuing franchise fee payments to McDonald’s pursuant to the MFAs must be translated into and paid in U.S. dollars using the exchange rate of the last business day of the month, payable on the seventh day subsequent to each month-end. As such, in the intervening period we are subject to foreign exchange risk.
While substantially all our income is denominated in the local currencies of the countries in which we operate, our supply chain management involves the importation of various products, and some of our imports are denominated in U.S. dollars. Therefore, we are exposed to foreign currency exchange risk related to imports. We have entered into various forward contracts to hedge a portion of the foreign exchange risk associated with the forecasted imports of certain countries. See Note 13 to our consolidated financial statements for more details. In addition, we attempt to minimize this risk also by entering into annual and semi-annual pricing arrangements with our main suppliers.
We are also exposed to foreign exchange risk related to U.S. dollar-denominated intercompany balances held by certain of our operating subsidiaries with our holding companies, and to foreign currency-denominated intercompany balances held by our holding companies with certain operating subsidiaries. Although these intercompany balances are eliminated through consolidation, a fluctuation in exchange rates could have a significant impact on our results through the recognition of foreign currency exchange losses in our consolidated income statement. To help mitigate some of these foreign currency exchange rate risks, we have entered into certain derivative instruments. See Note 13 to our consolidated financial statements for more details.

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A depreciation of 10% in the value of the Brazilian real against the U.S. dollar would result in a net foreign exchange loss totaling $4.5 million over (i) the cross-currency interest rate swap used to partially hedge the intercompany loan receivable of Arcos Dorados B.V. denominated in Brazilian reais (R$115 million including accrued interest), (ii) the Brazilian reais-denominated intercompany net receivable held by our subsidiaries, Arcos Dorados B.V. and LatAm LLC (R$46 million including accrued interest), and (iii) the outstanding balance of the U.S. dollar-denominated intercompany net debt held by our Brazilian subsidiaries of $9.5 million as of December 31, 2019. In addition, since July 1, 2018, when the functional currency of our Argentine subsidiaries was changed to Brazilian reais as result of the highly inflationary environment in Argentina, an appreciation of the Argentine peso against the Brazilian reais would result in a foreign currency exchange loss as a result of remeasuring of our net monetary liability position denominated in Argentine pesos.
An appreciation of 10% in the value of the Mexican peso against the U.S. dollar would result in a foreign exchange loss of $1.1 million, mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Mexico of $9.8 million as of December 31, 2019.
An appreciation of 10% in the value of the Uruguayan peso against the U.S. dollar would result in a foreign exchange loss of $6.2 million over the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiaries in Uruguay of $56 million as of December 31, 2019.
An appreciation of 10% in the value of the Costa Rican colones against the U.S. dollar would result in a foreign exchange loss of $5.8 million mainly related to the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiary in Costa Rica of $52.4 million as of December 31, 2019.
An appreciation of 10% in the value of the European euro against the U.S. dollar would result in a foreign exchange loss of $3.9 million mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Martinique of $35 million as of December 31, 2019.
A depreciation of 10% in the value of the Colombian peso against the U.S. dollar would result in a foreign exchange loss of $4.2 million mainly related to the outstanding U.S. dollar-denominated intercompany payable held by our subsidiary in Colombia of $46 million as of December 31, 2019.
A depreciation of 10% in the value of the Peruvian peso against the U.S. dollar would result in a foreign exchange loss of $1 million mainly related to the outstanding U.S. dollar-denominated intercompany payable held by our subsidiary in Peru of $11.6 million as of December 31, 2019.
Fluctuations in the value of the other local currencies against the U.S. dollar would not result in material foreign exchange gains or losses as of December 31, 2019 since there are no other significant intercompany balances exposed to foreign exchange risk.
We are also exposed to foreign currency exchange risk related to the currency translation of our Venezuelan operations. A devaluation of the Venezuelan bolívar against the U.S. dollar would result in a foreign currency exchange loss as a result of remeasuring monetary balances denominated in Venezuelan bolívares. See Note 22 to our consolidated financial statements for details about exchange controls affecting our operations in Venezuela.
Summary of Foreign Currency Exchange Rate Risk in 2018
A depreciation of 10% in the value of the Brazilian real against the U.S. dollar would result in a net foreign exchange loss totaling $7.2 million over (i) the intercompany loan receivable of Arcos Dorados B.V. denominated in Brazilian reais, partially offset by the cross-currency interest rate swap (R$964.2 million including accrued interest), (ii) the Brazilian reais-denominated intercompany net receivable held by our subsidiaries, Arcos Dorados B.V. and LatAm LLC (R$1,223.0 million including), and (iii) the outstanding balance of the U.S. dollar-denominated intercompany net debt held by our Brazilian subsidiaries of $7.6 million as of December 31, 2018. In addition, from July 1, 2018, when the functional currency of our Argentine subsidiaries was changed to Brazilian reais as result of the highly inflationary environment in Argentina, through the end of 2018, an appreciation of the Argentine peso against the Brazilian reais would result in a foreign currency exchange loss as a result of remeasuring of our net monetary liability position denominated in Argentine pesos.
An appreciation of 10% in the value of the Mexican peso against the U.S. dollar would result in a foreign exchange loss of $2.0 million, mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Mexico of $17.6 million as of December 31, 2018.

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An appreciation of 10% in the value of the Uruguayan peso against the U.S. dollar would result in a foreign exchange loss of $5.6 million over the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiaries in Uruguay of $50.5 million as of December 31, 2018.
An appreciation of 10% in the value of the Costa Rican colones against the U.S. dollar would result in a foreign exchange loss of $4.7 million mainly related to the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiary in Costa Rica of $42.5 million as of December 31, 2018.
An appreciation of 10% in the value of the European euro against the U.S. dollar would result in a foreign exchange loss of $3.3 million mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Martinique of $29.3 million as of December 31, 2018.
Fluctuations in the value of the other local currencies against the U.S. dollar would not result in material foreign exchange gains or losses as of December 31, 2018 since there are no other significant intercompany balances exposed to foreign exchange risk.
We are also exposed to foreign currency exchange risk related to the currency translation of our Venezuelan operations. A depreciation of the Venezuelan bolívar against the U.S. dollar would result in a foreign currency exchange loss as a result of remeasuring monetary balances denominated in Venezuelan bolívares. See Note 22 to our consolidated financial statements for details about exchange controls affecting our operations in Venezuela.
Commodity Price Risk
We purchase our primary supplies, including beef, chicken, buns, produce, cheese, dairy mixes and toppings pursuant to oral agreements with our approved suppliers at prices that are derived from international market prices, local conversion costs and local tariffs and taxes. We therefore carry market risk exposure to changes in commodity prices that have a direct impact on our costs. We do not enter into futures or options contracts to protect ourselves against changes in commodity prices, although we may do so in the future. We attempt to minimize this risk by entering into annual and semi-annual pricing arrangements with our main suppliers. This allows us to provide cost predictability while avoiding the costs related to the use of derivative instruments, which we may not be able to pass on to our customers due to the competitive nature of the QSR industry.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.    Debt Securities
Not applicable.
B.    Warrants and Rights
Not applicable.
C.    Other Securities
Not applicable.
D.    American Depositary Shares
Not applicable.

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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
A.    Defaults
No matters to report.
B.    Arrears and Delinquencies
No matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A.    Material Modifications to Instruments
None.
B.    Material Modifications to Rights
None.
C.    Withdrawal or Substitution of Assets
None.
D.    Change in Trustees or Paying Agents
None.
E.    Use of Proceeds
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
A.     Disclosure Controls and Procedures
As of December 31, 2019, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019 in ensuring that information we are required to disclose in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
B.    Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes, in accordance with generally accepted accounting principles. These include those policies and procedures that:

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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements, in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, effective control over financial reporting cannot, and does not, provide absolute assurance of achieving our control objectives. Also, projections of, and any evaluation of effectiveness of the internal controls in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have adapted our internal control over financial reporting based on the guidelines set by the Internal Control—Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), or COSO.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the guidelines set forth by the COSO.
Based on this assessment, management believes that, as of December 31, 2019, its internal control over financial reporting was effective based on those criteria.
Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, independent registered public accounting firm, has audited and reported on the effectiveness of our internal controls over financial reporting as of December 31, 2019.
C.     Attestation Report of the Registered Public Accounting Firm
Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, independent registered public accounting firm, has audited and reported on the effectiveness of our internal controls over financial reporting as of December 31, 2019, as stated in their report which appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ARCOS DORADOS HOLDINGS INC.:

Opinion on Internal Control over Financial Reporting

We have audited Arcos Dorados Holdings Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Arcos Dorados Holdings Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”) and our report dated March 18, 2020 expressed an unqualified opinion thereon.




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Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
 
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

  /s/ Pistrelli, Henry Martin y Asociados S.R.L.
  PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L.
  
Member of Ernst & Young Global

Buenos Aires, Argentina
March 18, 2020

D.    Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 or 15d-15 that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee consists of three directors, Mr. Chu, Mr. Vélez and Mr. Gutiérrez, who are independent within the meaning of the SEC and NYSE corporate governance rules applicable to foreign private issuers. Our Board of Directors has determined that Mr. Chu, Mr. Vélez and Mr. Gutiérrez are also “audit committee financial experts” as defined by the SEC.

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ITEM 16B. CODE OF ETHICS
Our Board of Directors has approved and adopted our Standards of Business Conduct, which are a code of ethics that applies to all employees of Arcos Dorados, including executive officers, and to our board members. Our Standards of Business Conduct are an exhibit to this annual report.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table describes the amounts billed to us by the principal accountant, for audit and other services performed in fiscal years 2019 and 2018.
 20192018
 (in thousands of U.S. dollars)
Audit fees$ 2,670$2,414
Audit-related fees2121
Tax fees273342
All other fees2236

Audit Fees
Audit fees are fees billed for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. It includes the audit of our annual consolidated financial statements, the reviews of our quarterly consolidated financial statements submitted on Form 6-K and other services that generally only the independent accountant reasonably can provide, such as comfort letters, statutory audits, attestation services, consents and assistance with and review of documents filed with the SEC.
Audit-Related Fees
Audit-related fees are fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements for fiscal years 2019 and 2018 and not reported under the previous category. These services would include, among others: employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.
Tax Fees
Tax fees are fees billed for professional services for tax compliance, tax advice and tax planning.
All Other Fees
All other fees are fees not reported under other categories. This category mainly includes advisory services on process improvement related to diagnostics and recommendations.
Pre-Approval Policies and Procedures
Our audit committee charter requires the audit committee to pre-approve the audit services and non-audit services to be provided by our independent auditor before the auditor is engaged to render such services. The audit committee may delegate its authority to pre-approve services to the Chair of the audit committee, provided that such designees present any such approvals to the full audit committee at the next audit committee meeting.
All of the audit fees, audit-related fees, tax fees and all other fees described in this Item 16C have been pre-approved by the audit committee in accordance with these pre-approval policies and procedures.

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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On May 22, 2018, our Board of Directors approved the adoption of a share repurchase program, pursuant to which the Company may repurchase from time to time up to $60 million of issued and outstanding Class A shares of the Company (the “Repurchase Program”). The Repurchase Program expired on May 22, 2019. As of February 15, 2019, the Company had repurchased 7,993,602 Class A shares amounting to $60 million.
Month of repurchaseTotal number of Class A shares purchasedAverage price paid per Class A shareTotal number of Class A shares purchased as part of publicly announced plans or programApproximate dollar value of Class A shares that may be purchased under the program
January, 20191,197,286$8.481,197,286$3,791,217
February, 2019435,490$8.68435,490$0
Total at end of period1,632,776$8.581,632,776
$0

 
(1) Amounts reflect commissions paid to the administrator of the repurchase program.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
Our class A shares are listed on the NYSE. We are therefore required to comply with certain of the NYSE’s corporate governance listing standards, or the NYSE Standards. As a foreign private issuer, we may follow our home country’s corporate governance practices in lieu of most of the NYSE Standards. Our corporate governance practices differ in certain significant respects from those that U.S. companies must adopt in order to maintain a NYSE listing and, in accordance with Section 303A.11 of the NYSE Listed Company Manual, a brief, general summary of those differences is provided as follows.
Director independence
The NYSE Standards require a majority of the membership of NYSE-listed company boards to be composed of independent directors. Neither British Virgin Islands law, the law of our country of incorporation, nor our memorandum and articles of association require a majority of our board to consist of independent directors. Our Board of Directors currently consists of eight members, three of whom are independent directors.
Non-management directors’ executive sessions
The NYSE Standards require non-management directors of NYSE-listed companies to meet at regularly scheduled executive sessions without management. Our memorandum and articles of association do not require our non-management directors to hold such meetings.
Committee member composition
The NYSE Standards require NYSE-listed companies to have a nominating/corporate governance committee and a compensation committee that are composed entirely of independent directors. British Virgin Islands law, the law of our country of incorporation, does not impose similar requirements. We do not have a nominating/corporate governance committee.

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Independence of the compensation and nomination committee and its advisers
NYSE listing standards require that the board of directors of a listed company consider two factors (in addition to the existing general independence tests) in the evaluation of the independence of compensation committee members: (i) the source of compensation of the director, including any consulting, advisory or other compensatory fees paid by the listed company, and (ii) whether the director has an affiliate relationship with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company. In addition, before selecting or receiving advice from a compensation consultant or other adviser, the compensation committee of a listed company is required to take into consideration six specific factors, as well as all other factors relevant to an adviser’s independence.
Foreign private issuers such as us are exempt from these requirements if home country practice is followed. British Virgin Islands law does not impose similar requirements.
Miscellaneous
In addition to the above differences, we are not required to: make our audit and compensation and nomination committees prepare a written charter that addresses either purposes and responsibilities or performance evaluations in a manner that would satisfy the NYSE’s requirements; acquire shareholder approval of equity compensation plans in certain cases; or adopt and make publicly available corporate governance guidelines.
We were incorporated under, and are governed by, the laws of the British Virgin Islands. For a summary of some of the differences between provisions of the BVI Act applicable to us and the laws application to companies incorporated in Delaware and their shareholders, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Differences in Corporate Law.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.

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PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Financial Statements are filed as part of this annual report. See page F-1.

ITEM 19. EXHIBITS
Exhibit No.Description
1.1
2.1
2.2
2.3*
3.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

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Exhibit No.Description
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24

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Exhibit No.Description
4.25
4.26
4.27
4.28
4.29
4.30*
4.31*

4.32
8.1*
11.1
12.1*
12.2*
13.1*
13.2*
15.1*
101.INS**XBRL Instance Document
101.SCH**XBRL Taxonomy Extension Schema Document
101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**XBRL Taxonomy Extension Label Linkbase Document
101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document
104**Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

124



 
*Filed with this Annual Report on Form 20-F.
**In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.


125




SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Arcos Dorados Holdings Inc.
By:/s/ Mariano Tannenbaum
 Name: Mariano Tannenbaum
 Title: Chief Financial Officer

Date: April 29, 2020




126





 
Arcos Dorados Holdings Inc.
 
 
Consolidated Financial Statements
As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019

F- 1


INDEX TO FINANCIAL STATEMENTS

Audited Consolidated Financial Statements – Arcos Dorados Holdings Inc.

Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the fiscal years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheet as of December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Equity for the fiscal years ended December 31, 2019, 2018 and 2017
Notes to the Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019

F- 2


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of

ARCOS DORADOS HOLDINGS INC.:
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of Arcos Dorados Holdings Inc. (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the company´s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 18, 2020, expressed an unqualified opinion thereon.
 
Adoption of New Accounting Standards
 
As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for leases. The Company adopted Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. As explained below, auditing the Company’s leases accounting method change was a critical audit matter.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
Critical Audit Matters
 
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the account or disclosure to which they relate.







F- 3


  Adoption of New Lease Accounting Standard
   
Description of the Matter 
As explained above and in Note 3 to the consolidated financial statements, the Company adopted Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. The adoption of ASC 842 resulted in the recognition of right of use assets and lease liabilities for thousands of $913,086 as of January 1, 2019. Management elected to adopt ASC 842 using the modified retrospective approach.
 
Certain aspects of adopting ASC 842 required management to exercise significant judgment. In particular, auditing management’s judgments involved in the determination of the lease term for a large volume of contracts in many jurisdictions and in estimating the incremental borrowing rate was complex and especially challenging.
 
How We Addressed the Matter in Our Audit 
We obtained an understanding, evaluated the design and tested the effectiveness of the Company’s internal controls around the implementation of the new guidance. For example, we tested controls over management’s review of the application of accounting policy elections to its portfolio of leases and over management’s review of the incremental borrowing rate (IBR) model.

To test the Company’s adoption of ASC 842, we performed audit procedures that included, among others, evaluating the completeness of the population of contracts that meet the definition of a lease under ASC 842, testing the assumptions made by management in determining the term of the contract based on the Company´s policy, and the accuracy of the Company’s calculations of right of use assets and lease liabilities. Additionally, we tested management’s model for estimating the IBRs, evaluating management’s methodology for developing the IBR and testing significant assumptions.
 
We also assessed the completeness of the related disclosures in Notes 3, 14 and 15 to the consolidated financial statements.
  Impairment of long-lived assets for markets with impairment indicators
   
Description of the Matter 
As of 31 December 2019, the carrying amount of long-lived assets is thousands of $1,919,412, including PPE, Leases right of use assets, net, and intangible assets. As a result of its impairment assessment exercise, the Company recorded a loss of thousands of $8,790, during 2019.
 
The Company operates in twenty countries in Latin America and the Caribbean with different economic and political circumstances. As explained in note 3 to the consolidated financial statements, management carries out an impairment assessment on long-lived assets annually that includes identifying the existence of impairment indicators at the country level. When impairment indicators are identified for any given country, an estimate of undiscounted future cash flows is prepared by the Company for each individual restaurant located in that country. The estimation of future cash flows requires management to make assumptions about the future business performance and other key inputs that entail significant judgments by management. These estimates can be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation, competition and consumer and demographic trends.
 
Auditing this area is especially challenging because the process of estimation of undiscounted future cash flows implies the determination of key assumptions that are complex and highly judgmental. The key assumptions used by management in the impairment calculation include country economic indicators projections of sales, margin growth rates, capital expenditures and useful lives of long-lived assets.
 
How We Addressed the Matter in Our Audit 
We obtained an understanding and evaluated the design, and tested controls of the impairment calculation process. For example, we identified and tested the operating effectiveness of the Company’s controls around the consistency of the estimation model inputs with the accounting records and the evaluation of the key assumptions made by management.
 
To test management assessment of impairment of long lived assets our audit procedures included, amongst others, testing the macroeconomic variables used by management, such as inflation rates and GDP growth, assessing the consistency between the estimated cash flows in the model and the business plan approved by management, comparing the remaining life of fixed assets with the accounting records and the clerical accuracy of the computations. Additionally, we evaluated the valuation methods used by management, including the key assumptions used in determining the undiscounted future cash flows of each restaurant. We also involved our valuation services personnel to assist in evaluating the methodology and the key assumptions used in the future cash flows estimation by management. We also compared forecasts to business plans and previous forecasts of projected cash flows to actual results to assess management estimation process.
 
We also assessed the completeness of the related disclosures in Note 3 to the consolidated financial statements.

F- 4


  Tax and labor contingencies
   
Description of the Matter 
The Company has operations in Brazil representing 47% of the revenues of the group for the year ended December 31,2019 and maintains a provision for tax and labor contingencies in that country that represents a 71% of the provision for contingencies balance of the group as of December 31, 2019. As described in Note 18, the Company assesses the likelihood of any adverse judgments in labor claims or outcomes on its tax positions, including income tax and other taxes, based on the technical merits of a tax position derived from legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position or labor claim.
 
Auditing the measurement of tax and labor contingencies related to certain claims and transactions was challenging because their measurement is complex, highly judgmental, and is based on interpretations of tax laws, case-law and jurisprudence and requires estimating the future outcome of individual claims.
How We Addressed the Matter in Our Audit 
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls around identification of matters, evaluation of tax and labor opinions, and tested management’s review controls over the assumptions made in the estimation of provisions and related disclosures.
 
To test the labor and tax contingencies provision, our audit procedures included, amongst others, involving personnel with specialized knowledge to assess the technical merits of the Company’s tax positions; assessing the Company’s correspondence with the relevant tax authorities; evaluating third-party tax opinions obtained by the Company; separately corresponding with certain key external tax and legal advisors of the Company, inspecting the minutes of the meetings of the Audit Committee and Board of Directors; obtaining a confirmation letter from the group’s chief legal counsel and evaluating the application of relevant tax law in the Company’s determination of its provision. As part of our evaluation, we have considered historical information to assess the assumptions made by management in relation to the potential outcomes.
 
We also evaluated the completeness of Company’s disclosures included in Note 18 to the consolidated financial statements in relation to these matters.
 

/s/ Pistrelli, Henry Martin y Asociados S.R.L.
 
PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L.
Member of Ernst & Young Global
We have served as the Company’s auditor since 2007.

Buenos Aires, Argentina
March 18, 2020
except for Note 27.b, as to which the date is
April 29, 2020





F- 5


Arcos Dorados Holdings Inc.
Consolidated Statements of Income
For the fiscal years ended December 31, 2019, 2018 and 2017
Amounts in thousands of US dollars, except for share data and as otherwise indicated
 
REVENUES 2019 2018 2017
Sales by Company-operated restaurants $2,812,287
 $2,932,609
 $3,162,256
Revenues from franchised restaurants 146,790
 148,962
 157,269
Total revenues 2,959,077
 3,081,571
 3,319,525
       
OPERATING COSTS AND EXPENSES  
  
  
Company-operated restaurant expenses:  
  
  
Food and paper (1,007,584) (1,030,499) (1,110,240)
Payroll and employee benefits (567,653) (607,793) (683,954)
Occupancy and other operating expenses         (799,633) (803,539) (842,519)
Royalty fees (155,388) (157,886) (163,954)
Franchised restaurants – occupancy expenses          (61,278) (67,927) (69,836)
General and administrative expenses (212,515) (229,324) (244,664)
Other operating income (expenses), net 4,910
 (61,145) 68,577
Total operating costs and expenses (2,799,141) (2,958,113) (3,046,590)
Operating income 159,936
 123,458
 272,935
Net interest expense (52,079) (52,868) (68,357)
Gain (loss) from derivative instruments 439
 (565) (7,065)
Foreign currency exchange results 12,754
 14,874
 (14,265)
Other non-operating (expenses) income, net  (2,097) 270
 (435)
Income before income taxes  118,953
 85,169
 182,813
Income tax expense (38,837) (48,136) (53,314)
Net income 80,116
 37,033
 129,499
Less: Net income attributable to non-controlling interests (220) (186) (333)
Net income attributable to Arcos Dorados Holdings Inc. $79,896
 $36,847
 $129,166
       
       
Earnings per share information:  
  
  
Basic net income per common share attributable to Arcos Dorados Holdings Inc. $0.39
 $0.18
 $0.61
Diluted net income per common share attributable to Arcos Dorados Holdings Inc. 0.39
 0.18
 0.61
  
See Notes to the Consolidated Financial Statements.

F- 6