Carrols Restaurant Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 3 Mar 2021

[Operator:]

Good morning. Welcome to the Carrols Restaurant Group, Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. I would like to remind everyone that this conference call is being recorded today, Wednesday, March 3, 2021, at 8

[Anthony Hull:]

Thank you, Melisa, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning and an earnings review presentation that are both available on our website at www.carrols.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions or plans. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We also refer you to our filings with the SEC for more details, forward-looking statements as well as risk and early impact of the business and results including the impact of COVID-19.

[Daniel Accordino:]

Thanks, Tony, and good morning, everyone. Let me begin by briefly recapping the current state of our business and then briefly review our quarterly results. Tony will follow by discussing our financials in greater detail. After enduring one of the most challenging periods in our country's history we believe the fundamentals of our business and the health of our company are extremely strong. Our liquidity position has improved substantially. Our near-term capital requirements are very manageable. We continue to de-leverage and we have grown comparable restaurant sales for the company's Burger King Restaurants for three consecutive months through January. We further believe that the combination of vaccinations, continued stimulus stating our core customer base and easier year ago comparisons will add to that momentum this year. For a long time a recurring concern we have heard from investors regarding franchisees including large ones like Carrols was that we would be perpetually hampered by onerous capital requirements imposed by the franchisors. Any free cash flow generated by the business would be required to go towards seemingly endless new store construction, refurbishments and renovations. Additionally, some portion of those projects would inevitably have low returns on invested capital. Over the last three quarters and even through a pandemic we believe we have demonstrated that those concerns were misguided. The nature of the franchisee-franchisor relationship can in fact be equitable and despite being a franchisee our business model enables us to generate significant pre-cash flow and direct a thoughtful capital allocation program to benefit our shareholders. In January we shared that we had elected to amend our area development agreement with Burger King Corporation forfeiting our right of first refusal on any Burger King Franchise sale and portions of our geographic footprint. We felt then as we do now that Carrols was being given little to no value for it. We also believe strongly that our ability to opportunistically acquire stores should that be attractive won't suffer as a result. In fact we are still pre-approved to acquire up to 500 Burger King Restaurants and territories where we currently operate.

[Anthony Hull:]

Thanks Dan. Total restaurant sales for the 14 week fourth quarter of 2020 increased 5.8% to $420.5 million compared to the prior year 13-week period of $397.6 million. During the incremental 14th operating week we generated $28.4 million in restaurant sales. Comparable restaurant sales for our Burger King restaurants decreased 0.9% during the fourth quarter of 2020 outpacing the U.S. Burger King system by 200 basis points. You can see that our trend strengthened in November, December or else with October results we previously reported.

[Operator:]

Thank you. At this time we'll be conducting a question and answer session. Our first question comes from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

[Jake Bartlett:]

Great. Thanks for taking the questions. My first is kind of a broad one. But it's really the impact of reopening post-COVID or as COVID wanes and the impact on the QSR industry and so it was really helpful to see your stance for sales by region but I'm also noting that there seems to be a correlation between positive same store sales and in markets where that are most closed from restaurant perspective. So broadly do you expect the reopening or what impact do you expect the broad reopening and consumers getting out and about and also going and dining in to have on the QSR space for instance the spike and drive-through sales that you've had?

[Daniel Accordino:]

Jake this is Dan. Our experience has been that as states reopen in whatever fashion and it's difficult to define what reopen means because they'll open dining and then close dining and reduce capacity and that's what I think as more people are out and about, excuse me and on the road our sales benefit whether you have more casual dining or full-service restaurants open with any seating or not. So I would expect that fast food sales in general will still continue to be a very resilient sector as it relates to increased delivery which is ever increasing and continual utilization not a very high level of take out and drive through.

[Jake Bartlett:]

Great. Helpful and then also as we think about kind of recent trends it was helpful to see and encouraging to see the spike in January. It sounds like there's been a reversal in February and understandable with weather, but could you give us a sense as to how the kind of the February sales have been on a regional basis? I'm up here in the northeast and it seems pretty normal year-over-year but any kind of comfort we can have with the trajectory of the business by looking at the regions may be least impacted by the weather.

[Daniel Accordino:]

Yes, the northeast is still performing at the highest level and that's been at least impacted on a year-over-year basis by the weather. The primary weather impact has been in Tennessee, Mississippi some of the Carolinas in that area. Tennessee was particularly hit hard at one point in time Memphis had more snow than Syracuse.

[Jake Bartlett:]

Right. Can we as we look at the northeast in February was it similar to January or was there any kind of anything else impacting the trajectory of sales than weather than you can tell?

[Daniel Accordino:]

Yes, as soon as the stimulus we got a big impact as soon as the stimulus came out and then as the stimulus were used you could see a bit of a sales deterioration across the board. So the stimulus absolutely helped and now we're very much looking forward to the next round of stimulus checks.

[Jake Bartlett:]

Great. And then last question what influence your decision to step up capital spending and increase remodels open a few more stores? What was the driver of that versus kind of a couple of months ago when you had a lower expectation?

[Daniel Accordino:]

Well, the free model, go ahead Tony.

[Anthony Hull:]

I was just going to say that yes, we were on the high end of remodels and we just saw the opportunity to step up those restaurants and improve those restaurants. We had room under our dollars budget. The biggest thing I think was the restaurant equipment that was neat that we didn't really foresee as much as it came to light in the fourth quarter in terms of what we had to spend both at Popeyes and at Burger King for the equipment I think that was pretty that plus the outdoor digital menu boards added about $15 million. So that's really the delta between where we were and where we are and once those are installed and once that equipment is installed we'd expect it to be kind of a one-time issue but we still wanted to build the base and have the organic growth in the base that we had forecasted before and actually are at the high end of those levels.

[Jake Bartlett:]

And just to understand I'm surprised that the equipment was a surprise. I mean I understand it's the sandwich has been in test. Has there been a shift in or some sort of a change in how operationally how this is going to be executed?

[Daniel Accordino:]

No. We only had the chicken sandwich in half a dozen restaurants. So we had only bought the equipment for that number of restaurants. So now that we're in the throes of a national rollout we've had to buy that equipment for the whole balance of the Burger King system.

[Jake Bartlett:]

Okay. Thank you very much. I appreciate it.

[Operator:]

Thank you. Our next question comes from the line of James Rutherford with Stephens Inc. please proceed with your question.

[James Rutherford:]

Hi Dan, Tony. Good morning and starting advanced I've been bouncing between calls so if you've talked about this my apologies but I wanted to talk about that chicken sandwich. You noted that it is best in class in your view. Can you talk about what portion of your sales the previous chicken sandwich drove at least roughly and then what kind of uplift you're seeing in tests so really that uplift help us kind of gauge that and then if you expect you would need to modify labor hours given the additional complexity of the sandwich production.

[Daniel Accordino:]

James this is Dan. We're just now in the very early stages of the chicken sandwich so and it has not yet been advertised. So I can only respond to what's happened in the other test markets outside of Carrols where there's been more restaurants involved and as I said on the last call, I think that was doing quite a bit better than the significantly better than the existing chicken sandwich but at this point in time, I would be reluctant to put any sales lift on what we think it will do because we're just now rolling it out. In terms of the labor impact it will require a dedicated person if the number of sandwich units that we hope for in terms of when it's marketed if it generates that level of revenue it'll be one more person.

[James Rutherford:]

Okay fair enough and one more if I may on restaurant level margins 12.3% in the quarter I think I saw that 70 basis points of that came from the extra week, but even excluding that it's still up nicely from the 10.7 year-over-year. What were the biggest pieces of that and more importantly how do you think about sustainability of these elevated unit margins for the full year of 2021? I heard some of the color that Tony gave on the various lines within restaurant expenses but just in terms of sort of the overall impact as we calibrate our models to restaurant margins and how those would progress through 2021? Thank you.

[Daniel Accordino:]

Yes the other item, the biggest item was labor in Q4 that drove the improved margins and then other operating costs were better than we had, better than we had expected. So I think those two things were the big driver of the $2 million deed on adjusted EBITDA. Going forward for the first half of the year there are very few costs that are coming back there's some increment in the number of managers in the stores coming back in the first half just to relieve some of the pressure there and then we'll see how the market opens up but we expect that there will be some headwinds on labor in the back of the year and then some of the other cost savings particularly in the corporate overhead that we put in place for the most part especially related to trade, training and that sort of thing we should we expect to stay at sort of the lower levels that we saw last year because it was effective in the way we did it last year with less travel. But there will be some travel coming back on the G&A line this year. You would expect and there's some other and as I mentioned some labor some productive labor in the back half of the year should go up a little bit. So those are some headwinds that that will come sort of post-COVID but we expect to expect to see things stay pretty steady in the first half of the year.

[James Rutherford:]

Okay. Much appreciated. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

[Jeremy Hamblin:]

Thanks and I wanted to just come back to the February results just to see if we could pin it down a little bit more. So obviously some deceleration. Could you quantify the magnitude of that in more detail?

[Daniel Accordino:]

Sure. We expect it to be about a 2% to 2.5% impact on February but again it's weather related. It's very unusual what happened in February. So we really now that spring that we've seen in February since the weather has sort of it's been passed us that things are improving back towards what we were seeing in January. So frankly the first week or so of February. So we're seeing those things normalized pretty quickly close to storm. So it's a one-time flip everyone in the industry is going to feel the pain of that but it's a modest it's 2% to 2.5% of we've lost 2% - 2.5% in February. So it's not obviously not a big thing and overlapping as we start to lap the March COVID reductions last year that were 20 plus percent we think that the comps will recover nicely in the end for the quarter.

[Jeremy Hamblin:]

Got you and in terms of thinking about that weather impact that just pointed out in Northeast it's kind of been somewhat typical type of weather. Are you seeing a bigger impact in that South Central and Southeast more than that 2% and 2.5% in terms of impact on the weather versus the Northeast maybe having a very minor or no impact?

[Daniel Accordino:]

Definitely. Definitely.

[Jeremy Hamblin:]

Okay. Fair enough. I wanted to ask about store closures in Q4, 21. You ended up with like 34 total closures in 20 in terms of thinking about a range of expectation on 21 I might have missed that but what are you looking at?

[Daniel Accordino:]

Our current view is we sort of took care of business, that business in 2020 so maybe one or two in this year. So it shouldn't be it, it won't be a big factor. The growth is obviously going to outweigh the closure in 2021. That's our current expectation for sure.

[Jeremy Hamblin:]

Okay and then the next question comes back to the chicken sandwich and I think the last messaging corporate wide was a little bit of a cryptic message in terms of wanting to get the launch right which we assume meant that there it was going to be a little bit later than maybe previously had been viewed in which I would have thought the launch was happening first half of the year maybe even by April time frame. Can you give us a sense for because this really implies a national marketing campaign and support for it? Is this something that we should now be thinking about in like the second half of 21 in terms of national?

[Anthony Hull:]

No. The launch will be completed in May.

[Jeremy Hamblin:]

Okay. Great. And then just coming back to the trends on delivery. I think you quoted that the average ticket was like just over $17 in Q4. In terms of the trend on that had that been slightly pulling back from what you had been, I think the number was maybe a little closer to $18 before. Any noticeable trends that you're seeing in terms of the size of your average ticket on delivery?

[Daniel Accordino:]

In January it went back over $18 Jeremy and it was I think it was like as we said in the script 4.5% of sales. So it's picked up in volume and it's picked up in I mean I think we generated $6 million in January in delivery sales. So it's double what we were seeing when we first launched it or when we were sort of mid-launched. So it's definitely picked up, it's definitely picking up steam in January. So it was a temporary decline in the fourth in that $17 number I think. Definitely saw a pickup as the weather got colder.

[Jeremy Hamblin:]

Got you. And then I think you decided beef price $2.04 a pound in Q4. Where is that level today and then what are some of the other because you noted the cost of sales you expect to be in that kind of 29.2% to 29.3% range for the year? What are some of the other commodity pressures or benefits that you're seeing for where the beef prices is today?

[Daniel Accordino:]

Beef today is $2.07.

[Anthony Hull:]

And I would say the other I'd say chicken is probably some short term pressure on chicken but as I've learned in the last year of doing this job that the chicken supply can be filled faster than the beef supply. So I think that will that will adjust as we go forward but that definitely we're seeing some increase there and that's about 10 at on the Burger King level that's about 10% pre-chicken sandwich long so it might go up a little bit in terms of the total commodity basket.

[Daniel Accordino:]

Tony you can speak to the fact that we put our delivery fees and our cost of sales not in operating expenses as well.

[Anthony Hull:]

That's true too.

[Daniel Accordino:]

So when you're comparing Jeremy our cost with sales to others we look at the delivery fee as a cost of sales expense and I know at least in Burger King System the majority of the operators put as an operating expense.

[Jeremy Hamblin:]

That's helpful color and what was the delivery fee in terms of basis points on your COGs in 2020?

[Daniel Accordino:]

About 40 basis points.

[Jeremy Hamblin:]

Great guys. Thanks so much and best of luck this year in 21.

[Operator:]

Thank you. Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.

[Brian Vaccaro:]

Thank you and good morning. I just wanted to circle back I appreciate the incremental color on the February trends just to make sure I'm interpreting your comments correctly I think you said you lost about 2% or 2.5% points of that's versus January. So it's right to interpret that that your Burger King system was somewhere in the threes? I just wanted to clarify that.

[Daniel Accordino:]

That was calculated it's really as a percent of sort of the days in February that we lost compared to the total restaurant days in February. So be February –

[Brian Vaccaro:]

Okay. But the underlying momentum of the business somewhere what was in the mid single digits the comparisons are pretty similar February versus January before COVID hit. So I guess could you just help us with what just to make sure we're on the same page?

[Daniel Accordino:]

Well, I mean I think the important thing is that March 2020 was down 16.8% last year and January was up 5.5% and you're going to see stimulus. So again I view the one week in February is first of all industry wide is not that material. I think the big comp momentum is going to come as we start lapping March 2020 and even if we stayed where we were if we stayed flat to January obviously we'd see some nice numbers in large metal, and that'll really help the quarter but I do have, I don't pay too much attention to a weather anomaly as a long-term driver of our value in our business when March and April was down 22% last year and we're going to see some very strong comps from this month on first for several months. And then we have the chicken sandwich and we have stimulus and so again I wouldn't put too much emphasis on a strange very anomalous winter storm that affected a week in February.

[Brian Vaccaro:]

Tony, I couldn't agree with you more. I'm trying to level set expectations and models for the first quarter. It's noise that's under water under the bridge at this point. It's more about just setting expectations maybe I'll ask it this way could you level set where average weekly sales trends are a quarter-to-date for each brand?

[Anthony Hull:]

I don't have that quarter-to-date, I mean January we were up 6.5% versus last year I think. So.

[Brian Vaccaro:]

Okay. I will follow up offline on that. Switching to the dining room status of the dining rooms I think you said nearly all are still currently closed. What's the latest thinking on the potential timeline for when those might reopen across your system?

[Daniel Accordino:]

Well closed is, this is Dan closed is a nebulous term. All of our dining rooms are open. We have opportunities for seating in probably 30% of our system whether or not they get used on a regular basis is another matter but we've been open for takeout every place and still are. In terms of opening the dining rooms for a greater level of seating it's store specific frankly. We've got some rural stores where the guests really want to sit there because that's a social gathering place and that sort of thing and we have more seats available and in some cases the entire dining room available in those restaurants. So we're making those decisions individually by restaurant but all of our dining rooms are open and have been open and open for takeout.

[Brian Vaccaro:]

All right. Thanks for that clarification and you talked about adding some hours in as you move through 2021 is part of that related to an assumption that you reopen dining rooms further or seating capacity further later in the year?

[Daniel Accordino:]

They are the second half of the year we're assuming that once the vaccinations are further ahead and COVID is in a different place that we will have more opportunities for seating. As you have more opportunities for seating we're going to have to add a bit of labor in order from a maintenance standpoint for maintain the restrooms and the dining rooms. So there will be some of that but as I indicated around the chicken sandwich, the chicken sandwich the expectation is that will be a dedicated person that not only in terms of the amount of sandwiches that we expect to sell but you're dealing with a raw product and as you're dealing with a raw product that person has to be dedicated to that station. They can't move between areas.

[Brian Vaccaro:]

Yes. Understood. Last one for me I just want to ask about the digital menu board. Can you remind me how many you have installed at this point the outdoor digital menu boards at the end of 20 and then could you expand on the benefits that you're seeing? What are you seeing in terms of average check customer satisfaction? Any improvements in terms of throughput and the drive through? Thank you.

[Daniel Accordino:]

Yes. It's difficult to determine what the impact of digital menu boards is in a COVID environment when you've got 80 plus percent of our sales coming through the drive-thru and check averages are up whether you have a digital menu board or you don't. Customer satisfaction from an NPS standpoint seems to be a bit higher because of the visibility of the boards and in terms of throughput, the throughput is purely a function of whatever your staffing levels are in the restaurant and whether you have two windows so that you have a cash window and a pickup window and that sort of thing. The real benefits of the digital menu board other than the existing visibility improvement will occur when Burger King gets further along with the interfacing digital menu boards with a loyalty program where they can identify guests as they go through the drive-through with artificial intelligence that we will have software implemented in the new digital menu boards and the hope is that we'll have that in 2021 as well.

[Brian Vaccaro:]

Thank you. I will pass it on.

[Daniel Accordino:]

Yes Brian we are about 2 up to 250 and then we'll add another 500 this year.

[Brian Vaccaro:]

Great. Thank you Tony.

[Daniel Accordino:]

And we'll have them all in Popeyes too in 2000 by the end of 2021.

[Anthony Hull:]

Yes. That was another addition to CapEx for the year.

[Operator:]

Thank you. Our next question is a follow-up from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

[Jake Bartlett:]

Thanks a lot. Dan I had a question about the Burger King's focus on food quality and taking preservatives out of the whopper, etc. seems to be a real a brand building effort. What do you see maybe in terms of surveys or customer reactions to that? Do you think that's a either a long term or a near-term needle mover for sales or for brand perceptions?

[Daniel Accordino:]

You would have to ask Burger King in terms of the brand perception because I don't see the brand perception research. In terms of our guest satisfaction surveys it measures food temperature, food taste, food quality that sort of thing. It doesn't speak to whether or not you've improved or eliminated any artificial ingredients. So in terms of overall brand perception of everything being natural I guess that's where the industry is going. So I would expect that it's very it would be positive for the brand but I certainly couldn't put any sense of a sales improvement on it. No.

[Jake Bartlett:]

Okay. Great. And then Tony, you mentioned commodities being certainly being favorable now and it sounded like you're expecting to be favorable for the year as a whole. I have some commodity sources that think that are their investments are for a spike in beef costs and beef trimming costs and towards the back half of the year. How much visibility do you have on your supply and how confident are you that you're going to see a helpful kind of commodity environment?

[Anthony Hull:]

I mean, we get our information from -- which is our food co-op and based on their research that's what their, that's how we get our forecast which is that we put in our budget.

[Jake Bartlett:]

Okay. And then again maybe just lastly on acquisitions you've talked a couple times about some kind of bolt-on acquisitions not very big. Can you give us just a sense for modeling purposes how many of those might be or when they might be closed and then also just any insight as you rebuild the acquisition pipeline how that's coming together? Is it a good environment to acquire stores right now? How confident are you that acquisitions can really become a part of the growth story here?

[Daniel Accordino:]

We have got a few deals that we're currently working on Jake and I would expect that we will have two acquisitions with a total of 19 restaurants. We're going to go to contract on those within the next month. So I would expect that we would have those things closed in the early part of the second quarter and beyond that we've got a few more deals that we're taking a look at but in the near term I think it would be fair to model 19 restaurants.

[Jake Bartlett:]

Great. Are you feeling good about the supply of potential deals out there? I don't know what impact COVID has had on the dynamics that drive the transfers but any insight there would be helpful.

[Daniel Accordino:]

I think yes. I think that once now that we have signaled to the world that we're back in an acquisitive mode the number of inquiries certainly has increased and I would expect that that will continue to the balance of the year Jake.

[Jake Bartlett:]

Great. I appreciate it. Thank you.

[Operator:]

Thank you. Ladies and gentlemen that concludes our question and answer session. I'll turn the floor back to Mr. Hull for any final comments.

[Anthony Hull:]

Thank you. I appreciate everyone joining us for this call and we'll speak to you in May. Talk to you later. Bye-bye.

[Operator:]

Thank you. Ladies and gentlemen this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.