Carrols Restaurant Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Ladies and gentlemen, welcome to the Carrols Restaurant Group first-quarter 2015 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 everybody that this conference call is being recorded today, Tuesday, May 5 at 8

[Paul Flanders:]

Good morning. By now, you should have all had access to our earnings announcement released earlier this morning, which is available on our website, 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 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 can be useful in evaluating outperformance. A presentation of additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. A reconciliation table of the comparable GAAP measures is available in our earnings release. 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. As you can see from our earnings release this morning, we're off to a very good start in 2015 as positive sales trends continue to accelerate from last year. In the first quarter, our revenues grew by $41.7 million or 27.5% over the prior year period, which included $32.5 million from the restaurants we acquired in 2014. Comparable restaurant sales were very strong, balanced across all dayparts and increased 8.4% over the first quarter of 2014. No doubt some of this increase was driven by more favorable weather this past winter, particularly in the Midwest and mid-Atlantic regions. However, we believe that our 5.9% 2-year comparable restaurant sales increase demonstrates that the primary driver was the effectiveness of Burger King's marketing and promotional tactics. And while not easily measured, our sense is that higher consumer confidence and lower gasoline prices may be helping our customers spend a bit more freely. Burger King's marketing and menu strategy continues to focus on balancing value offerings and premium products that provide variety and new tastes, while minimizing operational complexity by leveraging the existing menu platforms. Our premium promotions during the first quarter included a Spicy BLT Whopper, the A.1. Ultimate Bacon Cheeseburger, and a Bacon Cheddar Tendercrisp. The 2 for $5 platform included promotions of a Spicy Big Fish Sandwich, the YUMBO Ham & Cheese sandwich, and our Original Chicken Sandwich. And last but certainly not least, our main value promotion was a return of the chicken nugget promotion featuring 10 nuggets for $1.49, which was, again, quite successful. The brand also garnered considerable attention with the return of Chicken Fries very late in the first quarter. This product was promoted extensively on social and digital media and continues to be an effective traffic driver while also appealing to a younger demographic. The promotion of Chicken Fries continued in April and has now been added as a permanent menu item. Strong sales results were also reflected in our overall financial performance. Restaurant level EBITDA was $18.8 million in the first quarter of 2015 and increased $5.6 million or almost 43% over the same period last year, while restaurant level EBITDA margin improved more than 100 basis points. The restaurants that we acquired in 2014 contributed $1.9 million to the increase in restaurant level EBITDA. Adjusted EBITDA, which is after administrative expenses, more than doubled to $5.7 million from $3.3 million in the first quarter of 2014. Over the past year, comparable restaurant sales and restaurant EBITDA have increased at a notably higher rate at the restaurants that we acquired in 2012. This reflects the ongoing operating and control improvements we've made at these units over the past couple of years. Improved sales performance, along with the favorable impact of closing 19 restaurants since the beginning of 2014, is favorably impacting both average sales volumes and our restaurant level EBITDA margins at these restaurants. Finally, although it is still early, we've made good progress with the restaurants that we acquired in 2014 as both operating and financial metrics of these units are improving. As we expected, restaurant operations and the operating culture at these restaurants was reasonably good to begin with to the credit of the previous owners. And although restaurant level EBITDA margins might not yet be at the optimal levels, we expect to demonstrate continued progress as we move through this year. As you are probably aware, we recently completed the refinancing of our debt in which we sold $200 million of 8% senior secured second lien notes to replace our existing $150 million 11.25% notes and increased our borrowing capacity under our senior credit facility. This financing significantly reduces our cost of capital while increasing the funds that we have available for continued expansion and for our remodeling program. We are looking to opportunistically employ and allocate this additional capital in order to continue building shareholder value. Early in the second quarter, we completed the acquisition of 4 restaurants in northern Vermont. As we move forward, we intend to acquire additional Burger King restaurants, given our expected returns on such investment. We continue to see deal flow, we are looking for opportunities to make additional investments, and we will update you on our progress in the future. In addition, we plan to moderately increase the pace of our remodeling and now expect to remodel at least 80 to 90 restaurants in 2015. In summary, we're pleased with our strong start to 2015 and look forward to a productive year as we continue executing our business plans. I will now turn the call over to Paul to continue our financial review.

[Paul Flanders:]

Thanks, Dan. Restaurant sales increased 27.5% to $193.2 million in the first quarter from $151.5 million in the prior year period, including $32.5 million of sales from the 123 restaurants that we acquired in 2014. Comparable restaurant sales grew by 8.4% with increases of 10.5% at the restaurants acquired in 2012 and 6.8% in our legacy restaurants. The overall increase reflected a solid 6.3% increase in customer traffic and a 2.1% increase in average check. Adjusted EBITDA more than doubled to $7.7 million in the first quarter compared to $3.3 million in the prior year period, and adjusted EBITDA margin increased 181 basis points to 4.0%. Restaurant level EBITDA was $18.8 million in the first quarter of 2015 and increased $5.6 million or almost 43% over the same period last year. Restaurant level EBITDA margin was 9.7% and improved more than 100 basis points over the year ago period as we effectively leveraged higher sales across most expense line items. At $2.42 per pound, the average beef costs declined 9% sequentially from the fourth quarter of 2014, but were still 11% higher than the first quarter last year, negatively impacting cost of sales 77 basis points on a year-over-year basis. In addition, restaurant level EBITDA margin was negatively impacted approximately 80 basis points from the effect of lower margins at the restaurants that we acquired in 2014. Despite these factors, our strong operating leverage enabled us to expand restaurant level EBITDA margin and to effectively leverage the higher sales. General and administrative expenses were $11.6 million in the first quarter compared to $10.3 million in the first quarter last year. These expenses increased due primarily to additional costs related to the restaurants acquired in 2014, including district manager costs, travel and restaurant manager training. However, as a percentage of restaurant sales, general and administrative expenses decreased 78 basis points to 6%. Depreciation and amortization expense was $10 million in the first quarter, an increase from $8.8 million in the prior year period due primarily to remodeling initiatives and our acquisition activity over the past year. Interest expense was $4.8 million compared to $4.7 million in the first quarter of last year. Impairment and other lease charges totaled $1.6 million in the first quarter of 2015. Of this amount, impairment charges were approximately $450,000 and were primarily due to maintenance capital expenditures required at a number of restaurants had been previously impaired. We also recorded $1.2 million in other lease charges related to 8 restaurants that were closed prior to the end of their lease and/or franchise term. Such charges represented accruals for ongoing rent applications and certain termination costs under the related franchise agreements. With respect to income taxes, we do not anticipate recording any tax benefit in 2015 since we recorded evaluation allowance against our net deferred tax assets in 2014. Accordingly, no such tax benefit was recognized in the first quarter. At the end of the quarter, our cash balances were $24.3 million with total outstanding debt of $159.6 million. Total capital expenditures during the first quarter were $12.1 million and included $8.8 million for remodeling 10 restaurants. As Dan indicated, we completed a refinancing in April, and speaking for both of us, I want to say that we are quite pleased with the execution and ultimate outcome. We want to acknowledge the joint book runners, Wells Fargo and Stephens, the comanagers Rabobank and Raymond James, along with our external advisors and internal personnel, all of which assisted to make this happen. We lost a tender for the existing $150 million of 11.25% senior secured second lien notes on April 15 and proceeded to complete the pricing and sale of $200 million of 8% senior secured second lien notes the same day. On April 29, we closed these transactions. After the cost of the tender, the redemption of some bonds not tendered and all the related fees and expenses, we raised approximately $35 million of new capital. We also amended and extended our existing revolving credit facility, increasing our borrowing capacity under this line to $30 million. We had significantly lowered the interest rate on our debt and lowered our total interest cost while raising a substantial amount of new capital. We now are looking for opportunities to put this capital to work. Lastly, I will review our outlook for 2015, which as a reminder is a 53-week fiscal period. Total restaurant sales are now expected to be $815 million to $830 million compared to $810 million to $830 million previously estimated. Comparable restaurant sales on a comparable 52-week basis are expected to increase 3% to 5% compared to our previous estimate of 2% to 4%. Commodity costs are now expected to increase 1% and 2% compared to 2% to 3% previously. Based on trends in the first quarter and our current expectations for the rest of the year, we expect the increase in beef costs to be somewhat lower than our initial projections. General and administrative expenses are expected to be approximately $44 million to $46 million, excluding stock compensation costs unchanged from our prior guidance. Adjusted EBITDA is now anticipated to be $48 million to $52 million, which has increased from our prior guidance of $44 million to $48 million. Capital expenditures, excluding acquisitions, are now expected to be approximately $45 million to $50 million, including $37 million to $44 million to remodel a total of 80 and 90 restaurants and for final expenditures on certain 2014 remodels. Capital expenditures were previously estimated to be $37 million to $44 million. And lastly, we expect to close 20 to 25 restaurants, 15 of which were closed in the first quarter. That concludes our prepared remarks, and with that, we will now open the line for questions.

[Operator:]

Thank you. [OperatorInstructions]. Our first question does come from Bryan Hunt from Wells Fargo.

[Bryan Hunt:]

Thank you and good morning.

[Paul Flanders:]

Good morning, Bryan

[Bryan Hunt:]

First of all, it's been all over the headlines, avian influenza on CNBC this morning again. Can you talk about your breakfast daypart and maybe just your egg costs as a percent of sales so we can understand what the potential risk may be here? It's great to hear your food costs are coming down on the beef side. I understand that's the biggest part of your mix, but just to gauge a better understanding would be great, thanks.

[Dan Accordino:]

Our breakfast as a percent of sales is 14.6%. In terms of our cost of sales on eggs, I don't know what the cost of sales on eggs is. Paul may have that, I don't know.

[Paul Flanders:]

I don't have that handy, no.

[Bryan Hunt:]

It's not that material, even if you were to see a substantial increase. Can you talk about maybe your pricing on the breakfast daypart? Have you all taken pricing on those products in the last couple years, and do you feel like there's opportunity to move prices up?

[Dan Accordino:]

That is the day part that I have increased prices the least. That is probably the most competitive daypart that we have. And because it is habitual, people are very mindful of what they pay each time they go through the restaurant each morning to the drive-through or what they are paying for their breakfast products. So my guess would be that if our overall pricing is 2.5%, our breakfast pricing is probably half that.

[Bryan Hunt:]

Great. And then switching gears and looking at the 20 to 25 restaurant closures that you all are now announcing, can you give us an idea of whether those restaurants are at the end of their leasing period, as well as whether those restaurants were money losers at the end of the day and what they might add to EBITDA year over year?

[Dan Accordino:]

Generally the restaurants that we are closing were at the end of their lease and the end of their franchise, the vast majority of them. Many of the ones that were already closed were part of the 2012 group that we purchased nearly 3 years ago. So the anticipation was at the time of the acquisition that these restaurants would close at the balance of their lease. In terms of EBITDA, they generally were not negative EBITDA, and consequently I don't think there will be much of a benefit to EBITDA. There will, however, be a benefit in terms of average unit volume, and it improves our cash position because they are restaurants that we otherwise would not have wanted to remodel and extend.

[Bryan Hunt:]

Great. And then lastly and I let someone else help in here. You all have great same-store sales momentum. Can you talk about how it played out over the quarter and maybe how April looked as well? Thanks.

[Paul Flanders:]

We actually got sequentially a little bit better. We were up – the largest amount in January, we were up about 9.5%, February was up 7.7%, and then March which was actually a more difficult comparison on a relative basis, and January and February was up 8%. So we – and going into April, we've seen our comps go up to about 11.5%. So when I look at this on a 2-year basis, our trends have actually continued to accelerate as we've gone a little further into the year here.

[Bryan Hunt:]

And maybe last – one last question. When you look at this accelerating comp, up 11% in April, is there anything unique going on with regards to mix? Are you seeing acceleration of value added in the mix or an acceleration of the premium product? Again, is there any comments you can make with regards to mix?

[Dan Accordino:]

No, it's pretty well-balanced, and it's balanced across all dayparts, and it's reasonably well-balanced between the value part of the menu and the core items. Many of the items that Burger King has added, which they are not new items, they are modifications to the existing platform in terms of the premium products, have done very well. So it's been a good balance, and breakfast is still very strong as well.

[Bryan Hunt:]

Very good. As I said, I will let someone else ask a question. Thanks for your time. I appreciate it.

[Dan Accordino:]

Thank you.

[Operator:]

Our next question comes from Jeremy Hamblin from Dougherty & Company.

[Jeremy Hamblin:]

Good morning. Congratulations. Thanks for taking my questions. I just wanted to ask a question first on the remodels. So you are increasing your CapEx range by $6 million to $8 million and 20 more stores that you are remodeling this year. I think that comes out to about $350,000 a store at the midpoint. Would that imply that your remodels are maybe coming at a slightly lower cost than you had initially anticipated for the year?

[Paul Flanders:]

No, I think what's causing that – to turn it a different way, if you look at our average cost in the first quarter, it was very, very high. And part of what happened is we had some expenditures related to 2014 acquisition or remodels that rolled into the first quarter. And then conversely we've spent a fair amount in the first quarter on remodels that didn't actually get completed until the second quarter. So I think when you look – you need to look at this for a full year. I think our cost still is around $400,000 a remodel.

[Jeremy Hamblin:]

And your performance on the 2012 acquired stores was pretty extraordinary, the 355 basis point improvement year over year on the margins there. How close, given that they still have lower AUVs than your legacy stores, how close are those now to what you would consider standard, given their level of AUVs? How much more margin can you squeeze out of those moving forward?

[Paul Flanders:]

Well, if you look, the margin on those stores last year was about 7.5%, and I think when we look at the effect of the closings, the fact that the comps are running at higher levels than the legacy units at this point, given some of the improvements we've made, we would expect a more normal level at those volumes – at their current volumes that they should probably be around 10%. We would anticipate that's probably where we're going to be this year.

[Jeremy Hamblin:]

Okay. Great. And then just beef prices, what did they average in the first quarter?

[Paul Flanders:]

We were at $2.42 a pound this year, and that compared to $2.18 last year.

[Jeremy Hamblin:]

And what did they average thus far in Q2?

[Paul Flanders:]

They've gone up a little bit. We started going from about their low points were below $2.30, and they picked up to about currently they are about $2.50, and we would anticipate in the second quarter we're going to be right about at that level on average.

[Jeremy Hamblin:]

Right. Thanks for taking my questions.

[Operator:]

Our next question comes from Will Slabaugh of Stephens.

[Will Slabaugh:]

Hey. Thanks, guys, and congrats, again, on another great quarter. I just want to take a little step back here and get kind of related to that last question, get a broad view of an update on the new store integration, and maybe a little color on how much those new stores have been acquired are contributing to that EBITDA growth, and how much of that is actually coming from leverage at the legacy stores?

[Paul Flanders:]

In terms of the stores we acquired in 2014, they contribute about $1.9 million in restaurant level EBITDA. As I said, they had about an 80 basis point negative impact on our overall restaurant margins, just given that they are still a little bit lower than where they should be. Our legacy units actually margins improved almost 50 basis points, and that was despite the impact of the beef costs, which was, as I said, probably close to 80 basis points as well. So we leveraged the sales increase on those pretty good. And then probably most significantly, given the strong comps that we saw in the units acquired in 2012, we had significant leverage in the P&L with about 360 basis point margin improvement.

[Will Slabaugh:]

Great. Thanks, guys. Congrats again.

[Operator:]

Our next question comes from Jon Evans from JWest.

[Jon Evans:]

Yes. 2 questions, you averaged $2.42 for beef last quarter. Can you give us any insight kind of where April came out and kind of what you're seeing so far in May on a weekly basis, right?

[Dan Accordino:]

As I said, we've started to tick up a little bit since the first quarter. The lows were around $2.30. That's ticked up to $2.40 or so, which was where I think we averaged in April. And then the current price is about $2.50.

[Jon Evans:]

Okay. And then the other question is just when you look at the comp in the second quarter, you said you were running 11 in April. What month is the toughest comparison? Is it the June, or can you help us remind us on that?

[Paul Flanders:]

The toughest comparison actually was April. We were about 3.5 negative in April. So, as I just said, we were up about 11.4 this year, so the 2-year trend has gotten pretty strong.

[Jon Evans:]

Got it. OK. Hey, thank you so much.

[Paul Flanders:]

Yes.

[Operator:]

[OperatorInstructions]. Our next question comes from Brian Vaccaro from Raymond James.

[Brian Vaccaro:]

Hey. Good morning, guys, and thanks for taking my question. Paul, I want to just clarify something you said on the legacy stores, you mentioned beef up 80 BPS. Was that an overall COG deleveraged number on the legacy stores, or was that just beef specifically?

[Paul Flanders:]

It was about the same, frankly. The beef was – I think beef was, remember, 77 basis points, and the deleveraging on cost of sales at those restaurants was 81. Beef was the sole driver on this.

[Brian Vaccaro:]

And staying on the legacy stores, I guess can you give an update on what you're seeing in terms of the labor costs there as it relates specifically to wage inflation and any changes in turnover that you are seeing?

[Dan Accordino:]

In terms of – in terms of wage inflation, the wage inflation, as we've said on previous calls, is pretty much a function of minimum wage mandates, primarily in New York State. That's where the majority of the inflation is coming. We have certain markets where we are seeing competitive wage inflation. It happens to be in those markets where sales are the most robust as well. But overall it's primarily New York State where we had a $0.75 increase in the minimum wage in 2014 and another $0.75 in 2015. So that's been primarily where it's been.

[Brian Vaccaro:]

Okay. And then 2 nitpick items. Paul, did you say what cash flow from ops was? I might've missed it.

[Paul Flanders:]

I didn't say that. I think we were around $12.5 million roughly.

[Brian Vaccaro:]

Okay. And then last nitpick from me, do you have the ending store count by class, the 659 broken up by legacy 2012 and 2014?

[Paul Flanders:]

We do. We had 659 broken out, 284 legacy units, 252 from the 2012 acquisition and 123 from last year's acquisitions.

[Brian Vaccaro:]

Excellent. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our question-and-answering session. I would like to turn the call back over to Mr. Paul Flanders for closing remarks.

[Paul Flanders:]

As Dan said, we thought it was a pretty good quarter. We are looking forward to continuing these good results for the rest of the year, and we certainly appreciate your time and attention today, and we look forward to talking to you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference. On behalf of Carrols Restaurant Group, we do appreciate your participation. Please have a good day.