Carrols Restaurant Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Good day, and welcome to the Carrols Restaurant Group’s Third 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. I would like to remind everyone that this conference is being recorded today, Tuesday, November 8, 2016 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 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. Reconciliation to comparable GAAP measures is available with our earnings release. As a remainder, a Carrols Restaurant preferred those restaurants acquired from 2014 to 2016, while legacy restaurants include all of the Company’s other restaurants, including the restaurants acquired before 2014. 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. Over the past year, we expand that our restaurant portfolio by more than 11% that enabled us to increase both sales and adjusted EBITDA in the third quarter. However, comparable restaurant sales were flat against a strong 6.5% comparable sales increase in the same period last year. As many others, have noted, we believe that the cautious state of the consumer and the current environment has had some impact on their spending patterns. Adjusted EBITDA increased in the third quarter as we continue to benefit from favorable commodity costs and we also continue to improve margins at the restaurants that we have acquired over the past couple of years. Still we were unable to leverage higher labor advertising and depreciation and amortization cost, which negatively impact that our overall operating margins for the quarter. Based upon our year-to-date sales, we have modestly lowered our guidance for total restaurant sales and adjusted EBITDA, which Paul will cover more detail later in the call. Against this backdrop, BURGER KING's marketing initiatives are providing our customers with a variety of value and premium offerings and keeping the brand competitive and a somewhat challenging macro environment, some opens during the quarter included the two-for-$10 whopper meal deal that was first introduced in late May, this promotion remains popular and features to whopper sandwiches that are bundled with too small fries and too small drinks. We also continue to promote our five-for-$4 meal and promoted on limited time premium sandwich offerings with the two-for-$5 mix and match promotion. The two-for-$5 promotion highlighted the extra-long cheeseburger, thick bread [ph] sandwich and original chicken sandwich. During the quarter, BURGER KING also introduced a number of differentiated limited time offers including a new Cheetos Chicken Fries, Mac n' Cheetos and the Waferitos [ph]. More recently, BURGER KING introduced the premium bacon thin [ph] sandwich, which has received positive customer reaction has improved both sales and customer traffic trends in October. Lastly, breakfast continued to be our strongest day partner in the third quarter with the two-for-$4 promotion of the breakfast plus sandwich line as well as the newly introduced Egg Normous Burritos. Regarding our remodeling and expansion efforts, we continue to make meaningful progress in both fronts. Inclusive of 35 restaurants remodels completed during the third quarter, we remodeled 78 restaurants this year through the end of the third quarter and are on track to completed total approximately 85 remodels, as well as rebuild or relocate another 10 restaurants by the end of the year. This could bring the total number of our locations that have been upgraded to the 2020 design image since 2012 to over 525 restaurants. Regarding expansion, we purchased 11 BURGER KING restaurants during the third quarter in Maine in Michigan, which brought us to 29 restaurants acquired in the first nine months of the year. In October, subsequent to the end of the third quarter we purchased three additional BURGER KING restaurants in Raleigh, North Carolina. We also have agreements in place for the purchase of an additional 24 restaurants, what we believe will close over the next few weeks and we are reviewing a number of other possible transactions. Acquisition multiples remain attractive and we believe these transactions will continue to be accretive as we plan to acquire an integrated additional restaurant. In summary, we view our first quarter performance partly as a reflection of the macro pressures affecting our industry. Despite these, we remained focused on our stated objectives, including our acquisition growth strategy, as we positioned the company to build shareholder value over the long run. With that, I will now turn the call over to Paul for our financial review.

[Paul Flanders:]

Thanks, Dan. Restaurants sales during the third quarter increased 9.7% to $238.9 million from $217.7 million in the prior year period. Restaurants acquired since the beginning of 2014 contributed sales of $62.7 million compared to $39.4 million in the third quarter of last year. Comparable restaurant sales were flat against the strong increase of 6.5% in the third quarter of 2015. Comparable restaurant sales decreased 0.1% and our legacy restaurants it increased 0.4% in our comparable acquired restaurants which primarily consisted as a restaurant acquired in 2014. Overall comparable restaurants sales reflect a 2.3% increase in the average check, offset by a 2.3% decrease in customer traffic. Turning to profitability. Adjusted EBITDA increased 3.2%, $22.7 million from $22 million in the prior year period, while adjusted EBITDA margin decreased to 9.5% from 10.1%. Restaurant level EBITDA increased 4.4% to $34.8 million, restaurant level EBITDA margin was 14.6% and decreased 74 basis points from the year ago period, reflecting overall sales deleveraging despite favorable commodity cost. Restaurant level EBITDA margin decreased 66 basis points and our legacy restaurants have increased 44 basis points at the acquired restaurants. Cost to sales as a percentage of sales was a 115 basis points lower in the third quarter compared to the prior year period. This primarily reflect the impact from more favorable commodity cost including lower ground beef cost. Effective menu pricing was 2.7% and help the assets some of the impact from higher discounting. Beef cost was $99 per pound in the third quarter of 2016, which was almost 11% lower than the $2.23 per pound in the prior year period. We expect our average beef cost to be down 13% to 14% for the full year and below a $1.90 per pound in the fourth quarter. Restaurant label expenses increased 85 basis points to 31.7% of sales compared to the prior year quarter, due to a 7% increase in our average hourly rate and deleveraging and management cost. Advertising expense increased from 3.8% of sales in the third quarter to 4.5% due to increase in spending and local advertising and the 2015 expiration of advertising credits that we had been receiving from BURGER KING for 2012 restaurant equipment investments. General and administrative expenses in the $13 million in the third quarter compared to $11.8 million in the prior year, we held steady is a percentage of restaurants sales of 5.4% excluding acquisition cost these expenses were slightly lower as a percentage of sales compared to the prior year period. Net income for the third quarter was $4.5 million or $0.10 per diluted share compared to $7.2 million and $0.16 per diluted share in the third quarter of 2015. Net income in the third quarter of 2016 included $0.7 million of impairment and other lease charges and 0.5 million of acquisition expenses. For the same period, last year, net income included $0.4 million of impairment and other lease charges and $0.1 million of acquisition expenses. Adjusted net income was $5.6 million and $0.13 per diluted share compared to $7.7 million or $0.17 per diluted share in the prior year period. Both net income and adjusted net income were lower than the third quarter of last year largely reflecting the $2.7 million increase in depreciation and the amortization expense from our remodeling and our acquisitions of over the past year. As a reminder, we're not currently recording any income tax expense as a result of having a net preferred tax asset valuation allowance since 2014. Accordingly, there was no income tax expense or benefit reflected in the end of the 2015 or 2016 results. Total capital expenditures in the third quarter were $25.9 million with total remodeling expenditures of $19.2 million inclusive of $2.7 million for rebuilding two restaurants. In addition, we invested $14.2 million in the quarter including $10.7 million for fee on real estate for the acquisition of four BURGER KING restaurants in the Detroit market and seven restaurants in New Portland, Maine. In the third quarter, we completed the sale leaseback of restaurant properties with net proceeds of $11.7 million. In the fourth quarter, we expect to complete sale leasebacks for net proceeds as an additional of $18 million to $22 million consisting of restaurant properties acquired in our 2016 acquisitions and owned restaurants recently constructed or remodeled. At the end of the quarter, our cash balances were $10.1 million and total outstanding debt was $219.1 million, including $10.5 million drawn under our revolver. Our lease adjusted leverage ratio on a pro forma basis was approximately 4.5 times. Lastly, I will review our 2016 guidance, which we've lastly revised in light of the third quarter results and our outlook for the balance of the year. We expect total restaurant sales to be $940 million to $950 million down from our previous guidance of $945 million to $960 million. This projection includes an estimated 1.5% to 2% growth in comparable restaurant sales on a comparable 52-week basis compared to our previous estimate of 2% to 4%. Our outlook for commodity cost is improved as these costs continue to be lower than we anticipated. Overall, we expect commodities to be down approximately 3% for the year with beef cost decreasing 13% to 14%. We previously estimated 2% to 3% decrease in commodity cost. Our estimated general and administrative expenses remain the same at $51 million to $53 million excluding stock compensation cost. Adjusted EBITDA is now expected to be $88 million to $92 million compared to $90 million to $95 million previously estimated. Total capital expenditures excluding acquisitions are expected to be $90 million to $95 million compared to our previous estimate of $85 million to $90 million. This includes the remodeling of approximately 85 restaurants and rebuilding of 4 restaurants and the construction of 6 new restaurants all of which are relocations of existing restaurants. Total expected capital expenditures is increased due to acquired investments to support certain BURGER KING initiatives, the purchase of chip enabled credit card terminals and for franchises to expand a number of franchise agreements to remodel restaurants. Last for 2016, we expect to complete sale leasebacks of owned restaurant properties with net proceeds of $47 million to $51 million including $18 million to $22 million in the fourth quarter. And that concludes our prepared remarks. With that Keith, let's go ahead and open the lines for questions.

[Operator:]

[Operator Instructions] And we can take our first question from Will Slabaugh with Stephens Inc. please go ahead.

[Will Slabaugh:]

Yeah, thanks guys. Just a question on the trends, you mentioned the top year-over-year comparisons is one of the reasons for the comps. So, you're still continuing to out gain the broader BURGER KING system that you compare again to get a little bit easier going forward. So, I wonder if you could talk about if you expect to return to positive comps fairly quickly and then whatever you're willing to say about the quarter-to-date period will be appreciated.

[Paul Flanders:]

I think as Dan mentioned, the October trends have improved somewhat with launch of this new sandwich. We are both total sales and traffic are positive in October. I think if we look at the - so yes, they've improved sequentially I think from where we were in the third quarter. I think it will look out a little bit I think probably would be little cautious in the fourth quarter given that we had pretty mild winter last year and we had a strong December.

[Will Slabaugh:]

Got it. And then on the pipeline of acquisition, it was encouraging to see that the 24 stores and the three additional you announced this morning. Curious if you can talk about what you’re seeing out there if you have any indication of what your number of stores you would like to acquire in 2017 and if that’s starting to shape up at all or say something it’s too early to say at this point?

[Dan Accordino:]

This is Dan. The deal flow work is very robust at this point in time and the multiples are favorable so the opportunities certainly exist in the fourth quarter of 2016 and we will continue to see those opportunities through 2017. We’ll determine how many of these remodels will move or how many of acquisitions will move forward as we get further into the year.

[Will Slabaugh:]

Got it. Thanks, guys.

[Operator:]

And we’ll take our next question from Jeremy Hamblin with Dougherty & Company. Please go ahead.

[Jeremy Hamblin:]

Hey, good morning, guys. So, I wanted to just delve into the comp trends as well a little bit and just see how much of this you mentioned it’s a softer consumer environment obviously, you guys are lapping much tougher compares than your competition, but how much of this would you say is also a reflection of maybe some limited time offers, maybe the Waferitos [ph] are not performing quite as well as it had been expected?

[Dan Accordino:]

Well, I think it’s difficult to determine how much of it is the overall consumer macroeconomic trend and how much of it is simply the LPLs I think the Waferitos [ph] was not as robust as one would have hoped it started out very strong and then it tailed off a bit but I think it probably has more to do with the overall economic environment then it does on the specific product.

[Jeremy Hamblin:]

Okay. And wanted to get just some thoughts to on the G&A cost, $51 million or $53 million kind of reiterating that guidance on that is there any, but you are pointing down your sales range a little bit is that a reflection on just higher operating cost that are embedded within having more units in your locations now and having add more managers and so forth?

[Paul Flanders:]

That’s a large reason for the increase, as we’ve added restaurants, we’ve added district managers to the extent that we’ve been and plan to be acquisitive we have built some capacity into the existing infrastructure at the regional level, including putting this system district managers in place. So, we have promotable persons as we buy additional stores. So yeah I would say most of this have been added in the field level. And training cost have been up as a consequence of the acquisitions.

[Dan Accordino:]

This is Dan. I mean the way I think about this field overhead is then when we buy these restaurants there is 200, 250 basis points of inefficiency in the P&L. If we can improve upon that which we do within a nine to 12-month period that more than pays in a seven-store district that more than pays for the incremental cost of the district manager. And we’ve got that P&L efficiency on a go-forward basis, so that’s really the way we think about it is the G&A really is a good investment relative to the P&L performance.

[Jeremy Hamblin:]

Well, actually you’re bringing up a great point that I wanted to just explore a little more detail. You did see fairly significant labor deleverage in the quarter and yet the comps were while they may not have met your expectations, they were flat which in this environment and lapping to 6.25 really isn’t bad, but you didn’t see fairly significant labor deleverage of more than 80 basis points. Can you just help me just think about on a go-forward basis should we be thinking that if you’re not running comps up at least 2% is that a line item we should be expecting a little bit of deleverage given what we’re seeing in the fee environment?

[Paul Flanders:]

So, I think it’s fair, certainly near-term. We need a couple points of cap sales, I think given these labor increases that we’ve seen, I think our sense is that the pace of those may slow down a little bit. I don't think we expect to continue to see some percent of increases for the next year.

[Jeremy Hamblin:]

On labor cost you mean?

[Paul Flanders:]

Average labor rate.

[Jeremy Hamblin:]

Yeah, okay. And then last thing is just on the - we noted that your CapEx went up a $5 million on the range. You've remodeled though are actually at the lower end of your prior range. Is that just an implying that they're coming at a little bit more expensive that you're doing more things in those remodels than you had previously expected?

[Dan Accordino:]

Yeah, I mean I think certainly overtime those costs have continue to increase a little bit. I don't know that we're including more work I think it's more of a function and some of the buildings so forth a little bit older instead of requiring more interior and structural work. The positive is that we're sort of the at the end of have remodel cycle. So, I think a lot of that's behind us.

[Jeremy Hamblin:]

Okay. Sorry, and just one last quick one on the Q4 comps, first you guys do have a lot of exposure in the Carolina's. Did you have any negative impact from the Hurricane that came through early on in October. And then the second thing I just want to make sure for here what you implied Q4 same store sales guidance. I think the range sounds like it's kind of down 50 basis points to maybe up 1%. Is that accurate Paul and what you guys are implying in your guidance?

[Paul Flanders:]

I think it's I believe high. I think we're implying probably 0 to 2.

[Jeremy Hamblin:]

Okay, and then any hurricane impact?

[Dan Accordino:]

As far as the first part of your question in the North Carolina impact, it was minimal. Fortunately, we didn't have a lot of damage. We had some restaurants that were closed for couple of days because of power outages and that sort of things. But generally, those sales transferred to another restaurant but it is okay.

[Jeremy Hamblin:]

Okay, great. Thanks, guys for taking the questions and best of luck.

[Operator:]

[Operator Instructions] We can go next to Brian Vaccaro with Raymond James. Please go ahead.

[Brian Vaccaro:]

Thanks, and good morning. Just wanted to follow-up on that last line of questioning. Paul, can you sort of little finer point on sort of wage inflation outlook into '17. It sounds like you expect maybe a little less pressure than you saw this quarter. And then maybe also touch on the early read on food cost trends into '17?

[Paul Flanders:]

I mean obviously, we're going to give our formal guidance on the next call. So, it's little premature I think to give some guide. I think generally we're we wage at the average hourly rate maybe 3% or 5% next year. I think our sense that commodities that they kind of continue to be pretty benign I guess as the word I would use. And we don't really expect any significant increases in beef cost. That sort of our view at this point. We'll formulize that later obviously.

[Brian Vaccaro:]

Okay, that's helpful. And I wanted to clarify on the sale leaseback proceeds, I think you said $11.7 million in the quarter. how many units of that and then how many are reflected in the fourth quarter guidance?

[Paul Flanders:]

No, I don't have a number of units in front of me I'm sorry, Brian. I can get that later for you.

[Brian Vaccaro:]

Okay, all right. Fair enough. And then just one last one do you happen to have we can get this offline too, but the number of legacy versus acquired units at the end of the third quarter just the unit count.

[Paul Flanders:]

Yeah, 527 legacy restaurants and the acquired units which is from 2014 to 2016 was 207.

[Brian Vaccaro:]

All right, great. Thank you.

[Operator:]

And it does appear we have no further questions. I'll return the floor to our presenters for any additional comments.

[Paul Flanders:]

That really concludes our prepared remarks today. We certainly appreciate your time again. And we will look forward to updating you again I guess probably late February. Thanks a lot.

[Operator:]

And this will conclude today's program. Thanks for your participation. You may now disconnect and have a great day.