Carrols Restaurant Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Welcome to the Carrols Restaurant Group First Quarter 2016 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. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Tuesday, May 10, 2016 at 8

[Paul Flanders:]

Good morning. By now, you should have access to our earnings announcement released earlier today, which is 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, 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 results. During today's call, we will discuss certain non-GAAP measures, which we believe can be 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 comparable GAAP measures is available with our earnings release. I also want to quick point out that we've modified how we're grouping our restaurants for reporting and analysis. Namely we finally combined the restaurants that we acquired from BURGER KING back in 2012 with our legacy restaurants. We see no reason to continue to break these out moving forward. We will though continue to separately group and report on our more recent acquisitions namely those restaurants acquired between 2014 and 2016. With that said, I will now turn the call over to the President and CEO of Carrols Restaurant Group, Dan Accordino.

[Dan Accordino:]

Thanks, Paul and good morning, everyone. I am very pleased to report strong operating results for our first quarter and 2016. Our revenues increased 15.2% over the prior year period to $222.5 million. We posted a 5.7% increase in comparable restaurant sales, a solid performance on top of the 8.4% increase from the first quarter of last year. Total revenues also included $53.4 million of sales from the 190 restaurants acquired from 2014 to 2016. Coupled with favorable commodity cost, largely due to a 23% year-over-year decline in beef cost, we successfully leveraged our topline performance into a meaningful increased profitability. Based on first quarter results and our current outlook for the remainder of the year, we're modestly raising our 2016 guidance, which Paul will discuss in a moment. Despite the increase in re-competitive and promotional environment, BURGER KING's marketing and product initiatives proved effective in driving both positive traffic and increasing our average check. The brand is doing an effective job, promoting both value and premium products in a balanced way and continues to be creative with its marketing and innovative with its products. During the quarter, we launched our 5 for $4 offering, which includes a bacon cheeseburger, four piece chicken nuggets, small fry, a small drink and chocolate chip cookie. We believe that this bundled offering is a compelling value relative to other competing promotions. We also continued our 2 for $5 mix and match promotion, featuring premium sandwiches like the new flame-grilled chicken burger, the extra long buttery cheese burger and the extra long fish sandwich. There were also a number of product introductions during the quarter, but two particularly stood out is they garnered much press social media buzz and customer attention. First BURGER KING introduced a new menu platform grilled hot dogs, which is one of our biggest new product launches in some time. The new grilled box included both the Classic Grilled Dog and the Chili Cheese Grilled Dog. Customers are purchasing the hot dogs in both meals and as ad-on orders and sales of these products have been effective in building our average check. We also introduced the angriest WHOPPER Sandwich, a differentiated addition to our premium sandwich line. This limited time offer featured our signature flame-grilled WHOPPER and a red bun with baked in spicy sauce topped with the flaming onion paddles, spicy angry sauce and Hollapinos. Our chicken fried platform also continued to gain traction with the addition of hollapino chicken fries and our $1.49 promotion of chicken nuggets early in the quarter continue to be an effective traffic driver. We also featured our 2 for $4 bacon egg and cheese with sausage egg and cheese for our sandwiches, which have worked well in driving increases in our breakfast business and lastly I would be remised to not acknowledge that better weather early in 2016 upped our sales trend somewhat as well. As I said earlier, our strong topline performance along with more favorable commodity cost translated well into higher profitability. For the quarter, restaurant level EBITDA increased 63% to $30.7 million from the prior year period and included a $5.9 million contribution from the acquired restaurants. Restaurant level EBITDA margin increased over 400 basis points to 13.8% and adjusted EBITDA more than doubled to $18.5 million. Let me also update you on two of our other strategic objective, our remodeling program and our expansion strategy. We completed the reimaging of 10 restaurants in the first quarter and expect to complete 85 to 95 remodels for the full year. As mentioned on our last call, we expect to have approximately 75% of our restaurants remodeled by the end of this year and what anticipate a reduction in our remodel spending in 2017 as we slow down these activities after this year. We also continue to focus on the execution of our expansion strategy. During the first quarter we completed the acquisition of 12 BURGER KING Restaurants in Central Pennsylvania. We also have a number of potential transactions that are in various stages of evaluation or negotiation and believe that some of these could be completed in the second quarter. We will provide future updates as these deals progress. In summary, we had a good start to the year with a good performance or a solid performance in the first quarter. Sales were strong, operating margins improved considerably and we increased both our adjusted EBITDA and net income significantly. I will now turn the call over to Paul for our financial review.

[Paul Flanders:]

Thanks Dan. Restaurant sales during the first quarter increased 15.2% to $222.5 million from a $193.2 million in the prior year period. Comparable restaurant sales increased 5.7% compared to increases of 8.4% in the first quarter of 2015. Restaurants that we acquired from 2014 to 2016 contributed sales of $53.4 million compared to $32.5 million in the first quarter of last year. Comparable restaurant sales increased 5.7% in our legacy restaurants and 5.8% through restaurants from our 2014 acquisitions that are now in the cap base. The overall increase reflected a 3.2% increase in average check and a 2.5% gain in customer traffics. We effectively leverage these topline gains into substantially higher profitability and margins. Adjusted EBITDA more than doubled to $18.5 million compared to $7.7 million in the prior year period and adjusted EBITDA margin improved from 4% to 8.4%. Restaurant level EBITDA increased 63% to $30.7 million. Restaurant level EBITDA margin was 13.8% and improved 407 basis points from the year ago period as we leverage to the higher sales across nearly every expense line item. Restaurant level EBITDA margin increased 413 basis points in our legacy restaurants and increased 531 basis points at the acquired restaurants. Cost of sales of the percentage of sales was 291 basis points lower in the first quarter compared to the prior year period, due to the favorable impact of lower commodity cost, namely ground beef. This decrease in cost of sales also reflected effective menu price increases of 2.5% and improvements in operating performance at both our legacy and acquired restaurants. Beef cost averaged $1.86 per pound in the first quarter of 2016 and were approximately 23% lower than the prior year period. We continue to expect beef cost to be down 5% to 10% for the full year compared to 2015. Restaurant labor expenses decreased 38 basis points from the prior year quarter to 32.4% of sales due to our leveraging of sales increases against fixed management labor and from lower medical claims. However, this was partially offset by deleveraging in our hourly labor cost from a 5.8% increase in our average wage rate and due to sub optimal efficiency at out acquired restaurants. We expect the latter to improve as we continue to enhance operating effectiveness at the acquired restaurants. General and administrative expenses were $13.2 million in the first quarter, compared to $11.6 million in the prior year period and as the percentage of restaurant sales decrease slightly to 5.9%. These cost increased due to incremental field management and training cost associated with restaurants acquired over the last year. Depreciation and amortization increased $1.1 million to $11.1 million primarily due to our ongoing remodeling initiatives and from our acquisition of BURGER KING Restaurants over the past year. Interest expense decreased from $4.8 million in the first quarter of last year to $4.5 million due to our 2015 refinancing, which reduced our borrowing rate. Our overall profitability increased significantly. Income from operations was $6.7 million in the quarter compared to a loss from our operations of $4.5 million in the first quarter of 2015. Net income for the first quarter was $2.1 million or $0.05 per diluted share, compared to a net loss of $9.3 million or $0.27 per diluted share in the first quarter of 2015. Net income in the first quarter included impairment and other lease charges of $0.2 million, $0.4 million of acquisition expenses and $0.5 million gain from a settlement of a partial [fulfillment], the net loss in the prior year period including impairment and other lease charges of $1.6 million and acquisition expenses of $0.2 million. Adjusted net income was $2.3 million or $0.05 per diluted share, a substantial increase over the adjusted net loss of $7.4 million or $0.21 per diluted share in the prior year period. As a reminder we are not currently reporting any income tax expenses as a consequence of having a established a net deferred tax asset valuation allowance in 2014. Accordingly there was no income tax expense or benefit reflected in that in the 2015 or 2016 results. Total capital expenditures in the first quarter were $18.7 million and included $12.7 million for remodeling. In addition, we invested $7.1 million for the acquisition of the 12 BURGER KING Restaurants in Central Pennsylvania. At the end of the quarter, our cash balances were $12.3 million, total outstanding debt was $209.1 million and our lease adjusted leverage ratio at a pro forma basis was approximately 4.5 times. We've considerably reduced our financial leverage over the past year with a significant increase in EBITDA and as we have effectively invested the capital raised in 2015 to acquire additional restaurants. Lastly, I’ll provide an update to our 2016 guidance. We're raising our expectations for total restaurant sales to $935 million to $960 million from our previous guidance of $930 million to $955 million. Included in this projection is an estimated 2% to 4% growth in comparable restaurant sales on a comparable 52-week basis, which remains unchanged. Our toughest sales comparison for the year is in the second quarter as we lap a 10.3% increase in comparable restaurant sales from 2015. Given this comparison, in the general pause and consumer spending, that I think many others have experienced in April, we expect our Q2 comparable sales increase to be a bit far muted in the first quarter. We do however expect the second half of the year to be stronger as our prior year comparisons ease. Commodity cost are expected to be somewhat better than originally projected. We currently expect commodities to be flat to down 2% with beef cost down 5% to 10% on a year-over-year basis. General and administrative expenses are still expected to be between $50 million and $52 million, excluding stock compensation costs. Adjusted EBITDA is now expected to be between $85 million and $90 million compared to $80 million to $90 million previously estimated, so we've tightened this guidance somewhat. We’ve left our capital expenditure guidance unchanged and expect total expenditures excluding acquisitions to be $75 million to $85 million. This covers the remodeling of 85 to 95 restaurants and the construction of six to eight new or relocated restaurants. Lastly, we expect to complete the sale leaseback of 12 properties acquired in 2015 for net proceeds of $17 million to $18 million in 2016. We completed three of these sales leasebacks for $5 million in net proceeds in the first quarter of 2016 and expect the balance to be completed in the second quarter. We previously estimated that we will complete 13 sales leasebacks for net proceeds of $18 million to $19 million. And that concludes our prepared remarks. So with that operator, let's now go ahead and open the lines for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll go first to Jeremy Hamblin of Dougherty and Company.

[Jeremy Hamblin:]

Good morning, guys. Congratulations on another terrific quarter. Paul, I wanted to see if I could just get a little more color on that comment about more muted expectation for Q2? Are you still expecting positive same-store sales in Q2?

[Paul Flanders:]

Yeah, at this point, yes.

[Jeremy Hamblin:]

Okay. And if I’m not mistaken, April was your toughest monthly comparison from last year? I think you did 11.5%.

[Paul Flanders:]

That’s exactly right. You're correct.

[Jeremy Hamblin:]

Okay. Is there anything noticeable on the trend from a -- I know there has been tougher weather in the Northeast in particular with tremendous amount of rainfall, but just generally cooler weather. Is there anything noticeable from that impact that you’ve seen quarter to date thus far?

[Paul Flanders:]

No, I think you're fair. We gave some weather some credit for the first quarter. So we can take some back I guess in April. There has been colder obviously in the Northeast better than normal, how much that impact sales, it's hard to judge.

[Jeremy Hamblin:]

Okay. And then I think comparisons ease beginning in August, is that right? I know you had a huge July last year?

[Paul Flanders:]

Yeah, July is on a big month and then the back half of the year last year, we -- our cost between 5% and 6%.

[Jeremy Hamblin:]

Okay. Just one additional follow-up on that, in terms of the Nugget deal, I think the Nugget deal was brought back towards the end of April launched at the same time at Chicken Fries. I know you didn’t call that out, but we heard that may be chicken price was not a huge launch as an addition or an extension of that menu line item. But can you speak to the 10 Nugget deal bringing traffic back. Is that still having a similar effect to when you re-launch that or brought it back in November of last year?

[Paul Flanders:]

Yes, that been consistently strong traffic driver each time that we've run the promotion. So yes it's had some favorable impact more recently.

[Jeremy Hamblin:]

Okay. And then just a follow-up on beef prices, what does the -- you said a $1.86 in Q1, what is the level that you've experienced quarter-to-date in Q2 on beef prices?

[Paul Flanders:]

About a $1.91 in April I think roughly. So we’re still a little bit below obviously where we've guided to. We'll see if our guidance turns out to be conservative whether these prices do go back up a little bit, which we expect they will.

[Jeremy Hamblin:]

Okay. I am sorry, last one, labor costs you -- impressive, how you guys levered that in the first quarter given that 5% -- 5.8% increase in hourly cost, what would you need in terms of same-store sales results to see leverage on labor in Q2 specifically? I know you mentioned that you expect actually better performance from the acquired stores, but would you need a positive comp to leverage labor in the second quarter given that increase in hourly wage cost?

[Paul Flanders:]

I think -- no, my guess is that labor will be probably negative leverage to some degree just because the comp is likely to be a little softer.

[Jeremy Hamblin:]

So little de-leverage on that year-over-year.

[Paul Flanders:]

Little bit.

[Jeremy Hamblin:]

Okay. Great. Thanks for taking my questions. Best of luck guys.

[Paul Flanders:]

Thanks.

[Operator:]

We’ll go next to Will Slabaugh of Stephens Inc.

[Will Slabaugh:]

Yeah, thanks guys. Wanted to ask on the acquisition pipeline first, I know you mentioned that briefly, but just curious if you're seeing a lot of activity out there and just what your appetite you think may be for this year? And then maybe if you could speak more broadly on an annual basis what you would hope to be able to acquire if that makes sense at this point?

[Dan Accordino:]

Yeah, well this is Dan. Yeah, we’re seeing a fairly robust pipeline of deal flow activity and as we said in our prepared statements, we would expect that some of those deals will close in the second quarter and we’ve got several other opportunities that we're evaluating that will be potentially closing throughout the year.

[Will Slabaugh:]

Great. And then switching gears to the group of the -- even new group I guess of the acquired stores that you talked about, so those margins are obviously moving in the right direction and look very good this quarter. I am wondering how much room you think you have to go there? And I guess what I am getting at is, is there any reason to believe that over time, that those margins shouldn’t be getting close or equal to what we're seeing in the legacy stores now?

[Dan Accordino:]

Yeah, again you got the 2014 group of acquisitions that were lower volumes and so structurally just because the volume differences you can have margin differences even as those are operating at the full efficiency. What I will say is the group, the restaurants we bought in 2015, volumes were a little higher and the ones we brought so far in 2016 were even where their legacy volumes are. So those two groups over time should get in culture to where the legacy units are. I think when we look at the opportunity here that you just focused, if I just focus on cost of sales and labor where as we said we've made some progress already; however have our ways to go. I think which was probably a good 70 basis points of so according to sales to get the optimal levels and probably another 40-50 basis points in the labor line. So I think if you think about those numbers in context of where we were on the 2012 acquisition a few years ago. We've obviously made a lot of progress with those restaurants very quickly.

[Will Slabaugh:]

Got it. That's helpful. And lastly for me just wondering if you could talk a little bit more about sales trends, we've heard a number of guys in addition to you talk about a little bit of softness as we get through March and then especially into April for quick service. So I am curious if you have any details for us, is that happening more at a particular day for, is it happening geographically or is it very much across the Board and do you have any sort of color you can provide us as far as rational behind it?

[Dan Accordino:]

No, I don't think it's any one particular day. Pardon me if we call it day part out, I think the focus on it all will be breakfast. We've count up considerably at a higher level for either breakfast day part. So the answer is average in some of the late night business later in the day. So that's in terms of geographic reason I think is generally we're seeing various places in Northeast perhaps a little softer.

[Will Slabaugh:]

Got it. Thank you.

[Operator:]

[Operator Instructions] We'll go next to Brian Vaccaro of Raymond James.

[Brian Vaccaro:]

Thanks and good morning. I just wanted to start back on the Q1 comp trends and can you give some color on the monthly cadence as the quarter progressed? Maybe touch on day part trend, is breakfast still leading the way and sort of change in relative performance at lunch and dinner and maybe following on that comment you just made there Paul, the softness you're seeing later in the day. Was that a comment on April specifically or was that back on Q1?

[Paul Flanders:]

Well, in terms of the first quarter, we're not -- I don't think when I talk about monthly numbers, in precise terms, but I would tell you that the comps were reasonably strong throughout the quarter. If they softened up a little bit, then more towards the end of March as we got closer to April, which we've said obviously has slowed up a bit. In terms of the day parts, I think if I look at the first quarter numbers, our comp number was 5.7% as I said earlier. Our breakfast comp was 10.7%. So a lot of what we're doing in terms of national promotion and the breakfast side seems to be working very effectively. Obviously they've come out of some other, there has been a shift in day parts I guess is a better way to describe it because we are positive across the day in the quarter, but I think our sense is that the shift probably come out a little bit late night business.

[Brian Vaccaro:]

Okay. That's helpful. Shifting gears to the product offerings and promotions in the first quarter, I guess if we could just touch on two of them real quick, on 5 for $4, with a few months under your belt now, how is the sales mix sort of trending on this promotion? Any color on order ad-ons and general ordering patterns that you're seeing, the incrementality to your sales would be helpful?

[Paul Flanders:]

Do you want that Dan, or…

[Dan Accordino:]

I am not really certain at which day part the 5 for $4 is having the greatest influence. We're equally positive across for lunch dinner and the snack period. So I can't specifically speak to if it's having more of an effect on one day part or another.

[Paul Flanders:]

Yes, I think Brian in terms of buyers, I think we're seeing the 5 for $4 day part as probably averaging $30 to $40 a day as high as $50 in some cases. There are returns and the average check is above $5. So inherently there is the ad-on to the ordering and it's probably taken a little bit of business away from the 2 for $5 I think makes sense, not little bit, not too much.

[Brian Vaccaro:]

Okay. All right. That's very helpful and just last one also on the grilled hot dog product launch, I think initially you mentioned you were selling the $80 to $100 a day, can you give an update on how you're now that you're thought the initial period? How those sales volumes look and also comment on the margin profile of this product. Thank you.

[Paul Flanders:]

The margin is very good. It's primarily being purchased as an ad-on. The volumes are somewhere in the $50 to $60 area and that of course moves around based on whatever it is that we're promoting on television that was higher. One of the hot dogs were promoted to grill dogs were, promoted on television and then when we reintroduced the $1.49 and the angry WHOPPER, there was a little bit of a shift to that point, but it's still a very strong product offering with a very good margin and very good incrementality in terms of check.

[Brian Vaccaro:]

Thank you. That's helpful.

[Operator:]

That does conclude our question-and-answer session. At this time, I would like to turn the call back over to Management for any additional or closing comments.

[Paul Flanders:]

Don't have anything really to add, but we appreciate everybody's attention today and for joining us and we'll update you and talk to you in a couple of months. Thank you.

[Operator:]

Thank you. That does conclude our conference for today. We thank you for your participation.