Good morning, and thank you for joining Arcos Dorados First Quarter 26 Earnings Webcast. With us today are Luis Raganato, Chief Executive Officer; and Mariano Tannenbaum, our Chief Financial Officer. Today's webcast is being recorded and will consist of prepared remarks from our leadership team, which will be accompanied by a slide presentation that is also available in the Investors section of our website, ir.arcosdorados.com. To better follow the presentation, please note that you can set your view to full screen on the webcast platform. Additionally, you can submit your questions at any time during the presentation using the Q&A function on the bottom of the screen. After we conclude our opening remarks, we will answer your questions. Today's call will contain forward-looking statements and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC.
We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial results as compared with GAAP results, which can be found in today's earnings press release and conference call presentation as well as the unaudited financial statements filed today with the SEC on Form 6-K.
Thank you, Daniel, and good morning, everyone. Over the last several years, we consistently added to our dominant market share position, and elevated brand attributes to historical highs across Arcos Dorados' operating footprint. As a result, for the six years ended 2025, total revenue grew approximately 60%, EBITDA nearly doubled and net income was up more than 2.5x in U.S. dollars. Moving forward, our objective is to build on this incredible foundation and capitalize on the significant competitive advantages we built over the period. With that in mind, 2026 is off to a good start. First quarter 26 highlights included some important milestones within the context of a challenging consumer environment. Total revenue grew about 13% and surpassed $1.2 billion for the first time in the first quarter, overcoming relatively soft consumption in certain markets. This included 16% growth in system-wide comparable sales, which was driven mainly by average check, but we also saw improvements in guest traffic in several markets. Similar to total revenue, we generated the highest adjusted EBITDA for the first quarter in U.S. dollars. The $119 million result was driven mainly by strong top-line growth combined with very solid margin expansion, especially in Brazil and SLAD. We have pursued strategies that capitalize on the brand to monetize the significant market share advantage we hold in the region. This, together with very strong EBITDA growth, is adding to cash flow performance as well. Along these lines, in a few minutes, Mariano will take you through how we measure adjusted free cash flow to drive shareholder value. Marketing campaigns focus on offering value platforms that appeal to lower-income consumers, and core menu items that drive brand love as well as licenses and partnerships that keep McDonald's culturally relevant. The brand experience continued to expand beyond our restaurants, bolstered by the region's most comprehensive digital platform, and loyalty program. As much as digitalization has and will change the business, 55% of sales continue to be generated inside our restaurants. During the quarter, we added 19 new restaurants to the footprint, including 13 freestanding units, with a more efficient capital deployment. Not all markets are in the same phase of the economic cycle, so our local teams have deployed specific strategies to adapt to their specific operating environment. In Brazil, marketing campaigns during the quarter spanned core menu, affordability and partnerships. For example, the introduction of Best Burger leveraging limited-time offers through EconoMeki, the first promotions associated with the FIFA World Cup, and a strong presence at Lollapalooza Brazil. In NOLAD, marketing initiatives drove sales performance across the division. Mexico, Panama, and Costa Rica continued to leverage affordability platforms and localized offerings. Across markets, family-focused initiatives, seasonal menu and licensed activations such as the Friends menu complemented core and value execution, reinforcing brand affinity and readiness. In SLAD, menu innovation was a key growth driver. For example, in the beef category, we introduced the Tasty B.F.T. Cuarto in Chile, blending the popular tasty sauce with the core favorite Quarter Pounder with Cheese to delight guests. In Argentina, we leveraged the successful premium sandwich platform by introducing a limited time only Grand Beef Clubhouse featuring Franco Colapinto, the well-known Formula 1 driver and local hero. Within the chicken platform, Colombia introduced twist strips, and the PozoMix shareable option, with an encouraging guest response. Finally, we reinforced the brand's cultural relevance in Argentina, Chile, and Colombia through music, a key consumer passion, at Lollapalooza and Estereo Picnic. Digital channels including mobile app, delivery and self-order kiosks grew 21% versus the prior year and contributed about 64% of system-wide sales. Sales growth in delivery remained strong, boosted by promotional activity by new third-party partners in Brazil. Of course, with an increasingly modernized restaurant base, self-order kiosk sales also grew at an accelerated rate. The loyalty program topped 30 million registered members at the end of the quarter, and we expect the program to grow quickly with more active members who visit us more often now that the rollout phase is nearly complete. U.S. dollar revenue performance was strong in all three divisions. Brazil delivered the highest growth, thanks mainly to contribution from new restaurants, a higher average check, and the appreciation of the Brazilian real. The first six weeks of 2026 were ahead of expectations, but we experienced an important slowdown in restaurant volume in the weeks following Carnival. Our team in Brazil responded with initiatives designed to recapture volume without sacrificing profitability. By the end of the first quarter, we saw a promising reversal in guest value trends while also delivering better margins versus the prior year period. In other words, we took a balanced approach to monetize our significant market share advantage in Brazil. The second quarter is off to a very strong start with positive guest traffic and solid average check growth in April and the first half of May. Noted comparable sales rose due to higher guest traffic in a couple of key markets. The result was supported by disciplined pricing, targeted mix optimization, and continued momentum in Mexico. Panama and Costa Rica also achieved early progress toward rebalancing traffic and average check. The appreciation of the Mexican peso and Costa Rican colón helped contribute to revenue growth in the period as well. SLAD sustained strong momentum with internal research pointing to either maintained or expanded visit and value share in each SLAD market within the respective QSR industries. This performance underscores our ability to consistently gain market share. The currency environment in SLAD was mixed. Most local currencies appreciated versus the prior year, with the exceptions of Argentina and Venezuela. Elevated inflation in these two countries partly offset the currency devaluations and helped to generate U.S. dollar revenue growth in the quarter.
Over to you, Mariano Tannenbaum.
Thanks, Luis and good morning, everyone. As you just heard, we were able to monetize brand and market share advantages in several key markets during 2026. Adjusted EBITDA totaled $118 million, up almost 30% in U.S. dollars year over year. The consolidated margin expanded by 120 basis points with a very encouraging 60-basis-point contribution from Food and Paper and 60 basis points from G&A as well. Modest pressure in payroll and occupancy and other operating expenses was fully offset by income from certain sub-franchisee restaurant transactions in NOLAD and SLAD. Even without these transactions, consolidated EBITDA margin expanded by 70 basis points versus 2025. Going back to Food and Paper, both Brazil and SLAD were able to generate margin improvements versus last year, while NOLAD was stable as a percentage of revenue despite accumulated food inflation globally. Payroll expenses were up as a percentage of revenue in Brazil and NOLAD, mainly due to higher hourly crew wages, partially offset by leverage in SLAD. Occupancy and other operating expenses included modest pressure in each division whereas G&A was lower, partly reflecting the benefits of last year's restructuring process. First quarter adjusted EBITDA included $5.8 million from sub-franchisee restaurant transactions in SLAD and NOLAD, which added $2.7 million and $3.1 million respectively. In Brazil, adjusted EBITDA was up more than 20% in U.S. dollars. Improved Food and Paper was the main driver of the quarter's 30-basis-point margin expansion. NOLAD has had a more challenging time generating margin improvement in recent quarters. Excluding the income from the restaurant transaction, EBITDA margin was down approximately 40 basis points in the quarter. We are working with the leaders in each market to implement strategies that better balance guest volume and profitability. SLAD continued generating strong U.S. dollar growth and margin expansion in the quarter. Even without the income from the restaurant transaction with the local sub-franchisee, SLAD's EBITDA margin rose by approximately 120 basis points in the period. Moving ahead, we remain optimistic that SLAD is on track to deliver another positive performance this year, navigating the short term while building on the successes of 2025. Starting with today's earnings release, we will be publishing our adjusted free cash flow for the last 12 months. We believe this calculation over a full business cycle provides a clear picture of our ability to service our debt and fund our CapEx plans. Additionally, this is in line with the three pillars of focus that Luis introduced last year — targeting greater operational efficiency and cash flow generation to create long-term shareholder value. For the 12 months ended March 31, adjusted free cash flow generation reached almost $110 million versus a negative $3 million in the previous period. As a reminder, during the first quarter we also completed the liability management transaction we described on our last call. As of the end of the first quarter, net debt to adjusted EBITDA was unchanged compared with year end 2025. We continue to have a healthy cash balance and are combining improved profitability and cash flow generation with other initiatives to strengthen our balance sheet and support future growth and modernization. With that in mind, during the first quarter we invested $36.8 million including $16.7 million for new restaurants. Growth continues to be a priority for capital allocation as long as the returns on investment are strong. With all the uncertainty currently influencing local economies and behavior, we continue to focus on the factors we control to drive profitable sales growth and generate value through the investments we make inside and outside our restaurants. I am encouraged by the progress achieved during the first quarter and our objective remains to deliver improved underlying margin performance throughout the year.
Back to you, Luis Raganato.
Thanks, Mariano. I have just a few more things to mention before we open up for Q&A. Arcos Dorados is in a unique position in the Latin American consumer space. We operate in a segment of the economy that will never disappear as we meet a basic need for guests. Within that segment, we developed significant competitive advantages spanning the emotional connection we have with consumers, the multiple channels we use to generate sales, the business foundation built on operational efficiency, and the prudent management of the company's capital structure. We also partner with the communities we serve to support economic development and new formal job opportunities for young people. In fact, over the last several months, we have been recognized by Great Place to Work among large companies as the #1 Great Place to Work in both Argentina and Uruguay, and the #4 Great Place to Work in Brazil, the highest ever ranking in that country's history. In Mexico, the prestigious Expansion Media Group publishes an annual Super Empresas ranking which evaluates organizational culture among the country's largest companies. The ranking is based on factors including leadership, professional growth, company policies and social responsibility, among others. We were honored to have been ranked #1 in the 2026 ranking. The recognition we received in each of these markets is a reflection of a company-wide commitment to running their restaurants while also generating new formal job opportunities that have a positive impact on the communities we serve. Soon, we will publish the Arcos Dorados 2025 social impact and sustainable development report. In addition to the impact team's ongoing work on youth opportunity and the other pillars of the Recipe for the Future, you will find the details of how we met the targets of the sustainability-linked bond we issued back in 2022. Check back on the website recipeforthefuture.com in the next few weeks to download the report. Also, please mark your calendars for Arcos Dorados' next Investor Day. We are working on an agenda for the morning of October 1st in New York with the participation of several members of the company's executive leadership who will provide an update on how we are addressing the business's three pillars of focus: today, growth, and tomorrow. In the coming weeks, we will provide more details on how you can participate in the event. We hope you will join us. Finally, let me reinforce a couple of key messages from today's presentation. The plan for 2026 was developed to optimize sales growth drivers over the course of the year and capture efficiencies to drive improved profitability. This should help us generate positive adjusted free cash flow to create additional shareholder value. The team is focused and the second quarter is off to a good start. Thank you for joining today's call.
Daniel, back to you. Thanks, Luis. We will now begin the Q&A session. You can submit your questions using the Q&A function on the bottom of the screen. Please limit yourself to one or two questions so that I can read, understand, and convey them to our speakers. We will now pause briefly to compile your questions. Okay, thanks. We actually have quite a few questions already in the queue. We are going to try to go systematically through these. We are going to start with a question related to our beef costs. We have from both Bob Ford of Bank of America who asks, how should we think about beef costs and pricing for the balance of the year across markets? And also from Froylan Mendez of JPMorgan: can you provide more detail on the evolution of beef prices in Brazil during the first quarter and quantify how much of the margin improvement was attributed to this tailwind? And also, how do you expect beef prices to trend for the remainder of the year and what implications could this have for your margin performance in full year 2026 in Brazil? So with all of that, I will turn it over to you, Mariano.
Thank you. Good morning, everyone, and thank you, Bob and Froylan, for the question. Regarding Food and Paper, I would start with Brazil. Food and paper and beef in particular were the main driver of margin improvement in Brazil during this quarter. As I already mentioned during the previous call, this is the second quarter where we are seeing beef cost reduction in Brazil, so we are very pleased with that. Compared to last year, there is a clear moderation on price increases, and that is, of course, helping our margin performance at the restaurant level. Looking ahead, we expect costs, especially beef, to remain dynamic. Global demand, as you know, is still shaping domestic prices. Brazil is still with beef costs lower than in many places in the world. For the outlook, we are cautiously optimistic about the evolution of Food and Paper costs in Brazil. Besides beef, we are seeing the rest of the main categories pretty stable. And going out from Brazil, we have not seen the same pressure that we saw last year in beef costs in Brazil in the rest of the countries where we operate, and we are not seeing further pressures during this year. So in summary, we are very pleased with the performance in the last two quarters. We have seen beef cost reductions, and we are cautiously optimistic for the outlook for the remainder of 2026.
Great. Thanks, Mariano. The next question, we are going to stay with Bob Ford from Bank of America. Can you talk about loyalty penetration rates in your bigger markets and what that is doing to frequency and average ticket and where are you rolling out loyalty or have yet to lap in terms of the markets what has already been rolled out? That one is for you, Luis.
Alright. Thank you very much, Bob, for the question. First to start, loyalty boosts the power of the app because it brings visit frequency while increasing the percentage of identified sales. The program continued to grow this first quarter, reaching more than 30 million registered members, an increase of 62% versus the end of last year, representing 25% of total sales. In the first quarter, we launched one additional market, Panama, so our loyalty program is available in 10 countries now. That accounts for 90-4 percent of our stores. Regarding the KPIs, analyzing the transactions of the program, we calculated a 20% to 25% increase in visit frequency, and the performance of 90-day active users, frequency and redemption rates is above the average of the market. Regarding margins, we are seeing a positive impact since redeemed products have on average a higher margin. We are seeing a minimal impact on average check and this is compensated greatly by the increase in frequency. Another advantage is that it helps us to analyze customer behavior to better manage customer lifetime value, which has reached record high figures.
Thanks, Luis. We actually have a couple more from Bob. Both of them will be for you, Mariano. Go one at a time here. First is: what is behind your sub-franchisee acquisitions and sales in NOLAD and SLAD versus SLAD these days? How do you think about the optimal balance of corporate versus sub-franchise locations?
Perfect. Basically, this is business as usual for us. We currently have more than 2,500 restaurants in the region, and it is normal for us to acquire some restaurants from sub-franchisees and to sell some restaurants operated by us to sub-franchisees; that happens on a regular basis. This quarter, we acquired some restaurants in Mexico and we sold a restaurant in SLAD. So this is normal for us. You are going to see these type of transactions as you have seen them in the past, and you will see them in the future. Regarding the mix between Arcos-operated restaurants and sub-franchisees, we are not expecting any big changes in the percentage. You recall we operate roughly 70% of total restaurants and the sub-franchisees operate around 30% and we are planning to maintain that percentage quite stable throughout this year and next years.
Great. Thanks, Mariano. And then the final one from Bob Ford, Bank of America. How should we think about the cuts to the central administrative structure net of the severance and opportunities for further improvement due to AI or other efficiencies? That is back to you, Mariano.
Perfect. Well, as you know, maintaining strong discipline over G&A expenses is a core priority for Arcos as we continue to focus on efficiency and operating leverage while supporting the needs of the business. Following the G&A restructuring that started in November through January, we entered 2026 with a leaner and more agile cost structure that is better aligned with our strategic priorities and growth agenda. At a consolidated level, G&A over revenues is down 60 basis points versus the prior year, and that is supported, of course, by sales growth and the reductions I just mentioned. The appreciation of local currencies in recent months is helping our results and our EBITDA but at the same time is making our G&A in dollars a bit higher. Throughout the year, we expect to maintain the leverage that we obtained during this first quarter, and we are very pleased with these results. In terms of AI, we are beginning this journey with training and adoption of AI tools, and we are convinced that we have the scale to generate value through AI and agents. We will talk about this with much more detail during our Investor Day in September.
Thanks, Mariano. The next question is going to be a combination of three questions for Luis. I will start with Eric Huang from Santander: comm sales in Brazil remained quite pressured, but we saw a sequential improvement in your main competitors' indicator in the quarter. Could you walk us through the competitive environment and current expectations toward a rebound in comp sales in Brazil? Combine that with one from Thiago Bortolucci from Goldman Sachs, who asked: could you comment on how traffic has sequentially evolved since mid last year and how it is into the second quarter? And I will add to that Julia Rizzo from Morgan Stanley who says she would like to hear management's expectations on the pace of sales recovery in Brazil and then has a second part about margins in Brazil. I will come back to you on that one.
Alright. Thank you, Daniel. Thank you, Eric, Thiago, and Julia, for the questions. Bear with me while I try to cover everything. First, although I cannot speak to a specific competitor's performance, I can tell you that we believe that we are managing top-line growth in a way that is sustainable over time. It is important to understand that the Brazilian QSR industry is undergoing a correction in guest volume. Since this is an industry-wide reality, we have focused our effort on monetizing the significant market share advantage we have, while also improving profitability margins. In the first quarter we delivered EBITDA margin expansion while also increasing the brand's visit share versus the prior year quarter. We experienced a challenging 2025, and volume trends remained under pressure during the first quarter of this year, which was the main reason for the quarter's comparable sales result. The industry experienced volumes down mid- to high-single digits, and this was especially evident in the post-Carnival season in March, when we experienced an important decline in guest volumes. We are seeing that disposable income among consumers continues to be limited, which is why it was important for us to maintain our focus on offering a compelling value proposition with competitive pricing — that is where EconoMeki, the national value platform, starts to play. We try to do this without sacrificing margins and while delivering a great experience through all channels. The focus of the operations team is to have the right profiles, the right quantity, and the right level of training to deliver the best accuracy and speed through all channels. When the industry continued to focus on promotional activities that are very transactional and driven by pricing, we focused on a more comprehensive plan that complements actions targeted to increase traffic and shield market share with actions that aim to build brand love. As a result of the mix of these initiatives, guest volume trends in March improved significantly. The contribution to sales in the first quarter came more from average check and channel shifts than volume, but we generated important improvements in margins. Even though we had flattish comparable sales, we achieved our highest visit share level since 2022 according to Crest. We have managed to maintain a multiple of more than 2x the guest traffic of the nearest competitor and we also saw some of the brand equity scores we track, like value, quality, top of mind, and brand preference, at or near their highest levels. This not only supports current sales performance but also puts us in a position of strength for when market conditions improve. Regarding the second quarter, we have continued supporting guest volume and sales growth by making the brand both more affordable and more aspirational. We have initiatives including doubling down on EconoMeki. Today the attractive price that we have is 19.90 reais; with less than $4 you can make your own combo. We introduced World Cup sandwiches, a lineup inspired by different countries participating in the FIFA World Cup — this has been part of our program for the last 20 years. The results so far have been promising. April's guest volume and comparable sales reached the best growth levels out of the last 20 months, and so far, May is following a similar trend. So with that, we are convinced that we are in a position of strength to face the current situation. Our 2026 plan was designed to optimize sales growth drivers and improve profitability to generate additional shareholder value.
Thank you, Luis. And I think you just answered another question that came in. I will mention it very quickly, but I think you just addressed it, which is from Alvaro Garcia of BTG: what do you think is driving the traffic pickup in second quarter in Brazil, considering the pickup in inflation and weaker purchasing power? I am going to shift back to the second part of Julia's question from Morgan Stanley which was the sustainability of first quarter 26 margin tailwinds through the year. That will go to Mariano.
Thanks, Julia, for the question. I already talked about Food and Paper dynamics in Brazil, but in general your question is about the sustainability of the margin tailwinds in Brazil. This quarter, we saw an EBITDA margin expansion of 30 basis points, reaching a 12.7% EBITDA margin in the division. This increase was mainly driven by the reduction of Food and Paper costs, with less pressure from beef prices and very good results from our revenue management strategies. In addition, we saw leverage in G&A, similar to the consolidated level after the restructuring process. On the other hand, we experienced small deleveraging in payroll and occupancy and other operating expenses but we expect to reverse that with increases in sales in the coming months. The appreciation of the Brazilian real was a relevant factor for EBITDA growth. Looking ahead to 2026, after a tough 2025 in Brazil in terms of margins because of beef cost increases, we are cautiously optimistic in relation to Food and Paper expenses. Of course, we expect to continue to increase sales which will allow us to generate additional leverage on fixed-cost lines.
Great. Thanks, Mariano. We are going to stay with you for a couple more questions from Eric Huang of Santander. His second question: the tax rate in the quarter showed improvement on a quarter-over-quarter basis. What can we think about in terms of the effective tax rate going forward?
Yes. We always say that we need to look at the effective tax rate on an annual basis. In this respect, we expect the ETR to be in line with the ETR we saw last year. Of course, we are always looking at different projects and different ways, like the one we mentioned in the last call about Brazil, to improve our ETR. We are working on several projects, but for now I would say we expect an ETR in line with what we had during 2025.
Great. And then the final one from Eric, also for Mariano: NOLAD's margins were somehow pressured year over year. What are the main drivers for the pressure in the quarter and what could be expected going forward?
Thanks for the question. Margins at the consolidated level are about 50 basis points above prior year, but the main explanation in NOLAD is the gain that we recorded from the restaurant transaction that happened in Mexico. The other positive in terms of margin in NOLAD is leverage in the G&A line. In terms of Food and Paper, it remained flat. We saw improvements in SLAD and in Brazil, while in NOLAD we saw flattish Food and Paper. We do see sequential improvement compared to both the previous quarter and the 2025 run rate. In terms of payroll and occupancy and other expenses, those two lines remain under some pressure. We have seen minimum wage increases in many of the NOLAD countries, and sales growth at 1.6% comparable sales has been running below labor and other cost inflation, and that resulted in temporary deleveraging in the quarter. That said, the underlying performance of the business remains solid. Mexico, our largest market in the division, continues to perform very well with positive traffic, robust comparable sales growth, and Food and Paper costs in Mexico below prior year. So we are confident that the initiatives we are implementing and the expected recovery in sales will support a path to higher profitability in the coming quarters. We need to work hard to improve and we acknowledge that to improve margins in the division.
Great. Thanks, Mariano. We are going to move now to Thiago Bortolucci from Goldman Sachs who had a couple more questions. The first one for you, Luis: the gap between total sales, same-store sales and unit growth suggests there is better productivity in NOLAD. Can you give us a little more color there?
Alright. Thanks again, Thiago, for the question. The answer is yes: we are seeing better productivity in the division. We have a very solid expansion plan and we are very pleased in particular in Mexico with the organic and inorganic evolution of the business. We are focused on improving the return on investments to increase our cash flow generation, not only in NOLAD but in the company as a whole.
Thanks, Luis. And then the final one from Thiago is related to capital allocation. You are splitting your store growth into a broader ownership and format mix, which has materially reduced your average cost per store opening. How should we think about this composition going forward and how should it move the ROIC curve versus previous cohorts? That is for Mariano.
Perfect. Thanks, Thiago. How we are seeing this is that we are not planning to change the ownership mix, as I mentioned before. We are pleased with the split between restaurants operated by Arcos and restaurants operated by sub-franchisees. We are still opening the majority of stores as freestanding units. We are convinced that is where we should focus the majority of our store openings. Having said that, if there are opportunities in other store formats with good returns, we will pursue them. The main source of CapEx efficiency is not about format and not about ownership; it is more about the overall approach of maximizing returns through better execution, supplier localization, more efficient construction, while maintaining the high standards of each restaurant we open. We have a very disciplined investment approach. We have been searching for higher returns on new store openings and moving investments from markets where we were seeing lower returns to markets where we see higher returns. That overall strategy is giving us the efficiencies we are seeing in CapEx. Also, you can see that in the new adjusted free cash flow chart that we are including starting this quarter. Capital expenditure in this first quarter totaled $36.8 million, down from $48.8 million in the prior year period. In this period, we opened 19 restaurants versus 10 in the previous year period, so having opened nine more restaurants, the investment is much lower. That is all about discipline, focus, and a more disciplined approach to investment.
Great. Thanks, Mariano. The next question is from Froylan Mendez at JPMorgan. This one will be for you, Luis. With digital sales reaching very high penetration, how should we think about the impact on total CapEx and the CapEx mix in terms of store openings and format mix over the next few years? Also, could this be managed under the restrictions or commitments of the MFA?
Right. Thank you very much, Froylan. This answer is related to the one Mariano just gave. Our growth plan is aligned with our long-term vision to unlock McDonald's full potential in the region. It already incorporates market opportunities and funding strategies to support the expansion. We keep the same focus on modernization and digitalization that we have had in the last couple of years. We are currently at 75% of Experience of the Future restaurants. The objective is to achieve 90% in the next couple of years. Of course, if conditions change, we are flexible in adjusting the pace and focus of investments as needed, as Mariano discussed. We are prioritizing the most profitable markets and restaurant formats. The relationship with McDonald's Corporation is stronger than ever, so we have space to adjust anything we think we need. We are revisiting elements of our development process to ensure every dollar invested brings the best possible return.
We will stick with you, Luis. Also similar and on the topic of digital sales from BTG: on digital sales penetration, Luis stressed that 55% of sales remained in-store and this quarter saw more normalized growth of digital sales. How should we think about digital sales penetration in a weaker purchasing power environment?
Alright. Hello, Alvaro, and thank you for the question. The 55% of on-premise sales we talked about refers to the opportunity we still have in sales delivered by our full brand experience. That is a testament to how aspirational the experience inside our restaurants in the region is. On-premise and digital sales do not conflict: digital sales are built largely by our self-order kiosks that are inside our restaurants. So we expect to keep growing both digital sales and on-premise sales despite market situations.
Moving now to a couple of questions from Lan Wang from Loomis Sayles. Both of them are going to be for you, Mariano, but I will start with the first one: in the company's annual report, the CapEx for new restaurants is a blended figure that includes both company-operated and franchise restaurants. What do you expect the opening cost for a new restaurant to be going forward? Will it be more owned or leased properties?
Perfect. Thanks, Lan, for the question. Yes, the CapEx is all the CapEx that the company does. Remember that in the case of new restaurants, Arcos makes the investment in the building, and then Arcos also makes the investment in the inside of the store in case it is an Arcos-operated restaurant; the sub-franchisee makes the investment inside the store in case it is a sub-franchisee restaurant. But Arcos always has an investment as the developmental licensee. In terms of expected opening cost per new restaurant going forward, we are working hard and have been successful in reducing the average cost per restaurant opened and we will continue to look for opportunities to reduce this cost while maintaining high quality standards. We are seeing higher returns with lower investments while keeping sales and margins in the new restaurants. The vast majority of the stores we open are on leased properties and not on owned properties. That does not mean we do not buy any land, but in the majority of cases it is leased land.
Great. Thanks, Mariano. The second question from Lan: after reaching a 90% EOTF mix by the end of 2027 or so, how many restaurants do you expect to be reimaged or upgraded to EOTF each year thereafter?
Well, in the industry the standard is to modernize or remodel approximately 10% of the restaurant base each year. So that means roughly every 10 years a restaurant is due to modernization or redevelopment. We are expecting to continue modernizing our stores; that could be EOTF or something new we are working with McDonald's to develop. Modernization is a key component for being attractive to customers and to continue increasing same-store sales.
Thanks, Mariano. We have another question from Lorena Reich from Lucror Analytics. Good morning. Wondering why you no longer compare system-wide comparable sales blended inflation? Also, can you comment on the expected impact from the World Cup on guest traffic and sales in Q2 and Q3? This question is for you, Luis.
Right. Thank you, Lorena, for the question. I think I already covered the World Cup actions; we have seen and are pleased with the performance of that campaign in the first weeks. Regarding the comparison to inflation, under normal circumstances inflation is a good measuring stick for comparable sales, but it is not a rule. For example, in Brazil the QSR industry is undergoing a correction in guest traffic and when that occurs it is important to maintain as much traffic as possible which we believe we have done, and the evidence is that we have strong visit share performance. We believe it is also a time to monetize the market share advantage we built in the market to try to help offset cost increases that are also impacting the industry. That way, we build the top line in a sustainable way without buying traffic while also maintaining healthy margins. So at this moment, you can apply this concept to a couple of other markets as well in the region. Long term, we expect to maintain and optimize a combination of sales growth drivers based on market conditions and the factors we can control.
Great. Thanks, Luis. We have one more question from Thomas Jerez, an individual investor. He is asking: the Food and Paper cost as a percentage of revenue decrease, is it part of an average price increase or is it a cost efficiency initiative? If it is a cost efficiency initiative, could you elaborate on those initiatives? I will pass that one to you, Mariano.
Okay. I will be concise. Pricing strategy remains disciplined and closely aligned with inflation. We continue to avoid aggressive pricing actions to protect long-term brand health, so we are not increasing prices above inflation. Our affordability platform, such as EconoMeki in Brazil, is performing well, reinforcing value and traffic. At the consolidated level, Food and Paper improved 60 basis points versus prior year, but that is a mix between input cost trends, disciplined revenue management, and currency appreciation over imported items, as I mentioned regarding the real appreciation and other currencies. So there is a combination: reductions in costs and initiatives from our supply chain team, revenue management, and currency effects. With that mix, and keeping prices in line with or below inflation, we obtained this 60-basis-point improvement versus prior year and remain cautiously optimistic for the rest of 2026.
With that, Daniel, back to you. And before we wrap up the Q&A session, I think Luis you had a couple of things you wanted to mention.
Yeah. Thank you, Daniel. We will leave you with a couple of thoughts. Even though we continue to see a challenging environment in some markets with pressure on consumer confidence and private consumption, we remain very confident because we are in a position of strength and have exciting marketing plans that will help us face any situation. Let me mention again that we are targeting sustainable top-line growth and improved operational efficiency to drive profitability, generate free cash flow, and create shareholder value. Thank you for your time.
Thanks, Luis. So that does bring us to the end of the Q&A session. Thanks again for your interest in Arcos Dorados and for joining today's webcast. We look forward to speaking with you again in August on our second quarter 26 earnings webcast. Have a nice rest of your day.