Carrols Restaurant Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Welcome to the Carrols Restaurant Group First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, Tuesday, 8th May, 2018, at 8

[Paul Flanders:]

Good morning. By now you should have access to our earnings announcement released earlier this morning, which is available on our website at www.carrols.com under the Investor Relations section. Before we begin our remarks, I'd like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, guidance, or plans. These statements are not guarantees of future performance and therefore, undue reliance should not be placed on them. We also refer you to our filings with the SEC for more details, especially the risks that could impact our business and our results. During today's call, we will discuss certain non-GAAP measures, which we believe useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with Generally Accepted Accounting Principles. A reconciliation to complete GAAP measures is available with our earnings release. Please note that with the start of 2018, we no longer plan to separately breakout our more recently acquired restaurants since this has become less meaningful as we've grown larger. We will however continue to provide commentary for any meaningful impacts from the acquired restaurants and maybe noteworthy. And with that, I'll now turn the call over to President and CEO of Carrols Restaurant Group, Dan Accordino.

[Dan Accordino:]

Thanks, Paul, and good morning everyone. As you could see from our earnings release, we are off to a solid start in 2018 from the sales and profitability standpoint and are increasingly confident in achieving our full-year guidance as updated in today's release. We generated double-digit sales growth in the first quarter including a robust 6.2% increase in comparable restaurant sales, with momentum across all day parts. This is a testament to the effectiveness of BURGER KING's marketing and its barbell menu strategy which balances premium, value, and limited time products that continue to resonate well with consumers. We also posted a strong improvement in both restaurant-level EBITDA and adjusted EBITDA as we successfully leveraged our strong sales performance against nearly all operating costs. Restaurant-level EBITDA grew nearly 20% on an absolute basis resulted in 60 basis points of margin improvement compared to the prior year period. Adjusted EBITDA grew nearly 37% and resulted in 118 basis points of margin improvement. And on a promotional front, BURGER KING continues to enhance its 2 for $6 platform that was introduced last year. In the first quarter, the Crispy Chicken Sandwich and then the Spicy Crispy Chicken Sandwich were added as options for the 2 for $6 WHOPPER promotion. These products additions have bolstered the platforms variety, popularity, and unit sales. Other value drivers during the quarter included the two Cheeseburger meal for 349 as well as 10 piece regular or spicy chicken nuggets for $1.69. Premium offerings include additions to the KING Sandwich line, DOUBLE KING QUARTER POUNDER, the Rodeo KING, and the Bacon KING Junior. Towards the end of the first quarter, BURGER KING also introduced the Sourdough KING as an addition to the KING platform. All of these new products had been well received by customers. Our breakfast day part continues to grow with a 2 for $4 mix-and-match breakfast sandwich offering, the Sourdough CROISSAN'WICH biscuits and most recently with the new breakfast Sourdough KING products. With respect to acquisitions, we closed the one store transaction during the quarter and we have two small transactions expected to close in the next few weeks. And while we are not currently in a position to disclose any other transactions at this time, we are evaluating a number of potential opportunities in [indiscernible] towards these developments. So as you can see, Carrols is benefiting from BURGER KING's product and marketing strategy as the brand increases market share within the QSR category. We have also demonstrated our ability to leverage the related growth in sales and to improve overall profitability. Given our results this quarter, we have updated our annual guidance as we are increasingly confident that 2018 will be solid year for our company. With that, I will now turn the call over to Paul for a financial review.

[Paul Flanders:]

Thanks Dan. Restaurant sales for the first quarter increased 13.2% with the prior year period to $271.6 million. Comparable restaurant sales increased 6.2% reflecting a 5.9% increase in average check and a 0.3% increase in customer traffic. The increase in average check included 3.3% of menu pricing along with favorable sales mix shifts. Adjusted EBITDA increased 36.3% to $18.9 million in the first quarter from $13.9 million in the prior-year period, while adjusted EBITDA margin increased 118 basis points to 7% of restaurant sales. Restaurant-level EBITDA increased 19.8% to $33.4 million in the quarter from $27.9 million in the first quarter of 2017. Restaurant-level EBITDA margin was 12.3% of restaurant sales and 67 basis points higher than the prior-year period. As Dan mentioned, we favorably leveraged our strong first quarter sales performance against most operating costs. Cost of sales did however increase slightly by 10 basis points as a percentage of sales compared to the prior-year period. This reflected higher ground beef prices which average $2.04 per pound in the quarter or approximately 6.3% higher in the first quarter of 2017, our low-point in 2017. We were able to offset the higher beef cost and slightly higher promotional levels versus the prior-year quarter with modest menu price increases and improved operating performance including improvements at recently acquired restaurants. As you may recall, beef costs was at elevated levels in the second and third quarters last year. Our updated guidance which I will get to in a moment reflects our current outlook that beef costs should remain lower than last year over the next few quarters. Restaurant labor expense decreased 24 basis points to 33.6% of restaurant sales compared to the prior-year quarter as we were able to leverage restaurant labor costs due to the robust increase in sales. Although our restaurant hourly wage rate inflation did increase, we were able to offset this as we improve productivity and leveraged our fixed costs particularly management lever. We also favorably leveraged other restaurant operating expenses by 57 basis points as a percentage of sales and leveraged general and administrative expenses by 55 basis points. Our net loss in the first quarter of 2018 which reflects seasonably lower revenues in the first quarter was $3.1 million or $0.09 per diluted share. This improved notably from the prior-year period's net loss of $5.6 million or $0.16 per diluted share. The net loss in the first quarter of 2018 includes $0.3 million of impairment and other lease charges and $0.1 million of acquisition expenses. For the same period last year, the net loss included $0.5 million of impairment and other lease charges and $0.7 million of acquisition expenses. The adjusted net loss was $2.8 million or $0.08 per diluted share compared to an adjusted net loss of $4.8 million or $0.14 per diluted share in the prior-year period. A reconciliation of the net loss under GAAP to the adjusted net loss which is a non-GAAP measure is provided in the supplemental tables included with today's release. Total capital expenditures excluding acquisitions were $17.9 million in the first quarter of 2018. The end of the quarter, our cash balances were $34.5 million and total outstanding debt was $285.9 million including $4.5 million outstanding on our revolving credit facility. With that, let me review our updated guidance for 2018. As a reminder, our guidance does not include any impact from potential acquisitions that we may complete during the year. We expect total restaurant sales of $1.15 billion to $1.17 billion previously $1.14 billion to $1.17 billion including an estimated 3% to 5% growth in comparable restaurant sales. Commodity costs are expected to increase 1% to 2% previously 2% to 3% including a 2% to 3% increase in beef costs was previously estimated at 3% to 5%. General and administrative expenses is still expected to be $58 million to $60 million excluding stock compensation and potential acquisition-related costs. Adjusted EBITDA is expected to be $95 million to $102 million previously $93 million to $100 million. Our effective income tax rate is estimated to be 0% to 5%. Capital expenditures before discretionary growth-related expenditures are expected to be $50 million to $60 million which is previously $45 million to $50 million. In addition, expenditures for the construction of 10 to 15 new restaurants and remaining costs from our 2017 construction late last year are expected to be $15 million to $25 million. We expect to complete sale leasebacks of restaurant properties with $10 million to $15 million in expected proceeds. And lastly, we expect to close 20 to 25 restaurants in 2018, three of which were closed in the first quarter. That concludes our prepared remarks. So with that operator, let's go ahead and open the line for questions.

[Operator:]

Thank you. [Operator Instructions]. We will take our first question from Will Slabaugh from Stephens, Inc. Please go ahead.

[Will Slabaugh:]

Yes, thank you. Wonder if you can talk a little bit more about the trends throughout the quarter, I know you said you were trending kind of solidly mid-singles quarter-to-date and then we actually had some rough winter weather in the Northeast end of March. So curious if that winter weather had any real impact on your traffic or to your results overall. And also any color on how things have been trending through kind of April and May would be helpful as well if you speaking to that?

[Paul Flanders:]

Sure, hey Will, it's Paul. Yes, we sequentially through the quarter probably our strongest months was January, if you recall, in 2017, we get out to little slow start given the nature of the promotions early than January. So this year we have the strongest in that month and we were -- I would say February and March were equally, both of those two months ran about the same in terms of caps. And I think with respect to the weather, it's starting to hurt to quantify the weather. I think our sense is that we were really impacted by a lot of the storms which seem to hit the East Coast the further East where most of our markets are. And I think, then lastly, I think as we go into April, we continued those trends which are mid-single-digits but I will note that the two-year trends have improved certainly as we moved into the second quarter.

[Will Slabaugh:]

Great to hear. And also I was curious on wage inflation, you mentioned that was again a headwind but that was I think if I'm looking at the numbers right probably even a bigger headwind last year. So can you talk about what that wage inflation number was for you in 1Q and how that compared to what you saw last year?

[Paul Flanders:]

Yes, we can expect wages to continue to go up this year albeit at a little bit lower rate. I would say that in the first quarter, our rates were up between 5% and 6%, so they come down slightly where we were -- we were running over 6% last year as you may recall. The offset was the fact that we were more productive relative to our labor formulas in the restaurants and given the sales increase, we obviously leverage the fixed cost as well.

[Operator:]

We will now move to Greg Badishkanian with Citi. Please go ahead.

[Fred Wightman:]

Hey guys, this is actually Fred Wightman on for Greg. If we look at that full-year comp guidance, I think last quarter you said given the strong 2017 you could be at the low to mid point of that range, is that still on the table or have you sort of moved within that range?

[Paul Flanders:]

This is Paul. I think we’re still cautious in terms of range. Our sense was little early to retract guidance. But I think cautioned last quarter and I think we probably carry that forward, I think little bit lower on the range. I think and the reason we're saying that is primarily because we've got some strong comps in the back half of the year particularly in the fourth quarter we're coming up against. Clearly the trends continue, we will feel better as the year moves on but I think for the moment we're going to remain somewhat cautious in that sense.

[Fred Wightman:]

Great. And then if we look at, I think the commentary in the prepared remarks you mentioned that the Breakfast day part was still strong, have you see any signs of increased competition in that from some of the promotional offers from your competitors?

[Daniel Accordino:]

This is Dan. Excuse me no not really, I think the -- what the competitors are doing is pretty similar to the competition that we experienced for the last several months.

[Fred Wightman:]

Okay, great. Then the last one, can you just sort of walk through what changed in the CapEx outlook versus last quarter, looks like it’s up a decent amount?

[Paul Flanders:]

The major change was that our plan calls for remodeling say 30 to 35 restaurants this year and we've shifted -- we actually increased the number that we’re actually going to scrape and rebuild versus a more traditional remodel. We haven't change the overall number of restaurants and we’re reinvesting in, we are spending, could spend a little more to scrape, rebuild them conventionally we will see higher returns on that capital.

[Operator:]

We will take our next question from Jeremy Hamblin from Dougherty & Company.

[Jeremy Hamblin:]

Hey guys, congratulations on the strong results. Paul, I wanted to follow-up on that last point on the CapEx, the remodels versus the scrape and build, what is the average cost at this point when you're doing a scrape and rebuild versus the average cost of remodel and then what is the typical sales lift that you're seeing on the remodel versus the scrape and rebuild?

[Paul Flanders:]

The cost on the scrapes is about twice what we’re spending on our remodels. The remodels are running, say $650,000, so the scrape and rebuilds going to be about $1 million, $1.2 million quite twice. That obviously is much greater, they could be all over the board but I would say if not again you'll be able to see a 20% to 30% increase in sales at some of these scrape and rebuilds. I don't know if you want to add anything, Dan?

[Daniel Accordino:]

Yes, the way we look at it Will is -- Jeremy is you look at the cost of the remodel, the age of the asset and also where the asset is located on the lot. Most of these scrapes are repositioning the building, so that we can add a double drive-through which as Paul said is giving us a lift in sales.

[Jeremy Hamblin:]

Okay, got it. Thanks for that color. And then I also wanted to follow-up on the labor point, I know you've run some really strong comps here now for several quarters, it is notable to see this is two quarters in a row where your labor has actually leveraged, there aren’t that many restaurants out there seeing that with wage rates up over 5%, what's -- can you just provide any additional color on you had a 7.5% comp in Q3 a year ago but you had 40 bps of deleverage, now you’re kind of even a little bit lower than that and your comps still very strong. But you saw 20, almost 25 basis points of leverage here in Q1, is there something that you’re adapting either in your food prep stations or in how you’re running those labor matrices to get that leverage and how should I be thinking about that for the remainder of the year?

[Daniel Accordino:]

This is Dan. We assume that the leverage is going to continue to be favorable for the balance of the year. A lot of this frankly is driven by the BURGER KING promotional strategy, we’re doing it two for Chicken deal or two for WHOPPER deal actually the labor efficiencies associated with that are quite good. But beyond that the kitchen layout and that sort of thing really we haven’t done anything, we haven’t added any additional equipment, but it’s primarily the training that we’ve done in the restaurants as well as the items that are being sold under the various promotional opportunities.

[Jeremy Hamblin:]

Because they’re gravitating to these -- to a lot of sales of these fewer number of items?

[Daniel Accordino:]

That's right. Yes, we’re selling a lot of the two for items here.

[Jeremy Hamblin:]

Got it. Okay. And then I also wanted to ask just on the line items, rent expense was flat despite the 6% comp, are you seeing anything there in terms of thinking about how that's going to play out over the rest of the year presumably comps are going to slow a little bit considering what you're lapping, are we just seeing higher rent costs that have something to do with kind of the new units you're building any color that you could provide on rent?

[Daniel Accordino:]

Well, rent, yes, as you said rent was flat. I think the -- if you recall we had increase on the rent from stores in BURGER KING middle of last year, the rent we're not -- we've owned the stores five years, beginning in towards the end of May I guess and so those rents increased a little bit which was an explanation for why we had a little bit of deleveraging in back half of last year. And so what you’re seeing here is we’re just lapping those increases in the first part of the year here. And maybe you can go through the year there is no reason I think for the full-year we're not going to -- we shouldn't leverage the rent line.

[Jeremy Hamblin:]

Okay. So that and then that switch would happen maybe about in Q3?

[Daniel Accordino:]

Yes, the exact second half.

[Jeremy Hamblin:]

Okay. And then the company has been very successful obviously with its promotional strategies, as we're looking forward you guys often times have some pretty good insight into the pipeline. Can you give us any color on directionally where they might be looking continuing to build-out on the KING series, are there other kind of dynamic product launches that are outside the box that you have visited on at this point without getting specifics?

[Daniel Accordino:]

We are very excited about the promotional calendar for the second half of this year.

[Jeremy Hamblin:]

Okay. And then last one, the unit acquisition pipeline, you mentioned that you only closed one, you have two active deals but they’re small; is there anything out there in terms of the franchisees that are currently in the system that's changed, it does seem like the pipeline of deals has slowed just a little bit, any color that you can share on why that might be? Is price a factor, are there other factors that we’re not seeing there?

[Daniel Accordino:]

Yes, the deal -- this is Dan. The deal flow tends to ebb and flow and what we’re seeing now is we are looking at a fair number of deals currently more so than what we were evaluating in the fourth quarter or the first quarter. So I don’t really think that the dynamic has changed terribly much. I think it’s simply a function of timing and the flow of these and there are some reasonably good sized opportunities that we’re currently looking at.

[Operator:]

[Operator Instructions]. We’ll take our next question from Brian Vaccaro from Raymond James. Please go ahead.

[Brian Vaccaro:]

Good morning. Paul, I appreciate you’re no longer breaking out the details of the legacy versus acquired units, but could you please give us some high level color on how each cohort performed year-on-year and maybe quantify the COGS improvement that you referenced in the acquired units?

[Paul Flanders:]

Yes. I'm not prepared to give a lot of detail but I would say it’s fair to say that the margins have continued to improve at the stores that we acquired and while the effect gets lost a little bit given the relative size to the whole. Individually I would say that it had been pretty significant. By example I think if we look at cost of sales, I would say that overall cost of sales on the Group's stores we acquired at least in the last couple of years, year-over-year improved probably 70 or 80 basis points in the quarter and margins at the restaurant level, EBITDA margins more than that probably 100 to 120 basis points. So they clearly -- we can clearly continue to make progress as we integrate those stores and they're positively contributing to both EBITDA and margins.

[Brian Vaccaro:]

Okay, thank you. And on the COGS outlook, I just wanted to make sure I understood your commentary. So you expect year-on-year deflation on the overall basket led by lower beef in the second and the third quarter and then maybe a return to slight inflation in the fourth, did I interpret that correctly?

[Paul Flanders:]

Yes, I think that's fair. I mean beef costs were very high, it's been throughout the third and fourth quarters and we anticipated it should be relatively stable for the balance of the year, at least that’s our current view. So yes, the beef will be -- should inflationary over the next couple of quarters.

[Brian Vaccaro:]

Okay, great. And shifting gears to the acquisition pipeline if I could. I know they were small but how many units were acquired in the quarter and how many are expected to close in the next few weeks that you referenced in the release?

[Paul Flanders:]

Yes, what we said was we closed one. It was one, one store transaction that was closed in and we've got a couple transactions for a couple of stores each.

[Brian Vaccaro:]

Okay, it’s encouraging to hear that there are some facilities with some size to them. Is there the potential or reasonable expectation that the pace of acquisitions could be for 50 this year, is the cards play out correctly or as you [indiscernible]?

[Daniel Accordino:]

Yes, I think -- it's Dan, that's a reasonable expectation.

[Brian Vaccaro:]

Okay. All right. And then just last one on the balance sheet, Paul with the first call option now upon us what's your latest thinking around the potential on interest rate and potentially restructuring the debt at this point?

[Paul Flanders:]

Yes, we haven't made any decisions definitively one way or the other at this point.

[Operator:]

It appears, there are no further questions at this time. I would like to turn the call back over to Mr. Flanders for any additional or closing remarks.

[Paul Flanders:]

No, we have no more comments today other than to thank you for your time and we look forward to updating you in another three months from now. Have a good day.

[Operator:]

That will conclude today's conference. Thank you for your participation and have a good day.