Landry’s Restaurants, Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript

| About: Landry's Restaurants (LNY)

Landry’s Restaurants, Inc. (LNY) Q3 2008 Earnings Call November 10, 2008 1:00 PM ET

Executives

Rick Liem – EVP & CFO

Analysts

Reza Vahabzadeh – Barclay’s Capital

Michael Gallo – CL King

Brian Hunt - Wachovia

Operator

Good day and welcome to the Landry’s Restaurants Inc. third quarter 2008 earnings release conference call. (Operator Instructions) This conference call contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended which are intended to be covered by Safe Harbor’s created thereby.

Stockholders are cautioned that all forward-looking statements are based largely on the company’s expectations, and involve risks and uncertainties some of which cannot be predicted or are beyond the company’s control.

The statement about the merger agreement entered into by the company and Fertitta Holdings and whether it will be consummated or if the merger agreement is not consummated, whether the alternative financing under the alternative financing commitment will be in fact provided, or a statement containing a projection of revenues, income, earnings per share, same store sales, capital expenditures, or future economic performance, are just a few examples of forward-looking statements.

Some factors that could realistically cause results to differ materially from those projected in the forward-looking statements include the inability to complete the merger due to the failure to obtain stockholder approval for the merger, or the failure to satisfy any condition to completion of the merger including the financing conditions, the failure to satisfy the conditions for the alternative financing, if applicable, and effective marketing or promotions, competition, weather, store management turnover, a further weakening of the economy, negative same store sales, or the company’s inability to continue its expansion strategy.

The company may not update or revise any forward-looking statements made during this call. At this time I’d like to turn the conference over to Chief Financial Officer, Mr. Rick Liem; please go ahead sir.

Rick Liem

Thank you, good afternoon. I’d like to welcome everybody to Landry’s third quarter 2008 conference call. This morning we reported our third quarter 2008 results from continuing operations of a loss of $0.50 per share on revenues of $289.7 million versus a loss of $0.17 in the prior year on revenues of $295.8 million.

Current quarter includes an asset impairment charge of $0.79 per share net of insurance proceeds primarily due to hurricane Ike. Expenses associated with amending our $400 million senior notes included in the third quarter of 2007 were $0.48 per share.

On September 13, 2008 hurricane Ike struck the Gulf Coast of the United States causing considerable damage to the cities of Galveston, Kemah and Houston, Texas and surrounding areas. Several of our restaurants in Galveston and Kemah sustained significant damage as did the amusement rides, the boardwalk itself, and some infrastructure at the Kemah Boardwalk.

Wide spread power outages led to the closure of 31 Houston area restaurants until power was restored. We lost 535 operating days resulting in an estimated lost revenue of $6.8 million in September due to Ike.

We maintained business interruption insurance coverage and have recorded approximately $2.5 million in recoveries related to lost profits at our effected locations in Galveston and the Kemah Boardwalk.

Nine restaurants have reopened in Galveston and Kemah, while seven restaurants remain closed. In addition the amusement rides and much of the complementary businesses at the Kemah Boardwalk also remain closed.

Additional business units will reopen each month. We expect to be fully reopened with all business units by March of 2009. The Kemah and Galveston properties were a significant driver of our overall performance in 2008.

Same store sales for the quarter were negative 2%, excluding storm related impact from Ike, Hannah, Gustav, and Eduard. Total storm related sales loss for the quarter is estimated at $7.8 million. Overall unit margins in our restaurant and hospitality business were favorable in the third quarter compared to the prior year.

We were able to maintain margins on lower sales volumes due to revenue shifts in mix to higher margin hotel and amusement revenues, with minimal cost to sales. Additionally price increases, effective food cost controls, and oversight of labor scheduling allowed us to maintain margins.

This was offset somewhat by higher energy costs, and spoilage and maintenance costs due to Ike. We opened our T-Rex unit in Disney, on October 14, 2008 and the construction of the new tower at the Golden Nugget continued during the quarter.

We anticipate completing the tower in late 2009 or early 2010. We have no units planned for the remainder of 2008.

Golden Nugget revenue in the third quarter decreased 3.5% to $60.6 million from $62.7 million. Revenue decreased due to reduced slot activity, lower occupancy, and average room rates, offset by increased food and beverage revenues.

EBITDA was $12.6 million in the third quarter, down from $13 million in the prior year. EBITDA margins were essentially flat due to effective labor controls. We look forward to reopening all the units effected by Ike, continuing the Golden Nugget expansion, and focusing on the profitability of our existing restaurants through the remainder of 2008.

Now I’ll address the results in a little more detail. Revenue from continuing operations decreased to $289.7 million in the third quarter from $295.7 million in the third quarter of 2007, down $6 million or about 2%.

New unit openings contributed about $7.6 million offset by the hurricanes of $7.8 million resulting in the decline equal to our same store sales decline. We finished the quarter with 174 units; 45 Landry’s, 42 Saltgrass, 12 Charley’s Crabs, 27 Chart Houses, 29 Rainforest, two T-Rex, eight Crab Houses, and six specialty restaurants.

Cost of sales decreased 130 basis points to 25.5% in 2008 from 26.8% in Q3 2007. This was primarily driven by menu engineering, and pricing of about 60 basis points. We have a new ideal cost of sales software tool for the restaurants that allows them to identify shrinkage by ingredient. That contributed about 40 basis points. Business interruption recovery was about 30 basis points.

Restaurant labor for continuing operations decreased 140 basis points to 28.4% in the third quarter of 2008 from 29.9% in 2007. Management labor decreased 50 basis points. This is primarily due to headcount reductions from attrition, reduced sales, and reduced bench since we’re having fewer openings.

Hourly labor decreased about 80 basis points. Again this is menu price increases, productivity increases, and better overtime management. Overtime hours decreased 42% this quarter relative to last year.

Restaurant operating expenses increased 140 basis points to 25.0% from 23.6% in 2007. This was driven primarily by higher utility costs, rent costs, and some expenses associated with hurricane Ike and spoilage and repair and maintenance not covered by insurance.

Depreciation and amortization, depreciation increased 40 basis points excluding our asset impairment charge. Golden Nugget EBITDA was 12.7 for the quarter versus 13 last year, a decline of 2.4%.

Our general and administrative expenses decreased 90 basis points to 4%. This is a decrease in payroll, corporate payroll of about $1 million and the elimination of the charges last year that we incurred relative to refinancing our senior notes.

Pre-opening in the quarter was $554,000, all of it related to opening our T-Rex restaurants in October. Net interest expense was $19.5 million for the quarter versus $25.2 million in 2007, 2007 again included about $8 million in deferred financing charges written off in association with our refinancing.

Our interest rate at the end of the quarter was 8.4%. Our effective tax benefit for the quarter was about 21%. Capital expenditures for the quarter were $27.5 million which included $16 million for the Golden Nugget and the majority of the rest of it associated with building the T-Rex restaurants.

Total outstanding debt at the end of the quarter was $893 million, $429 million at the Golden Nugget and $464 million at Landry’s.

I’d be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh – Barclay’s Capital

Reza Vahabzadeh – Barclay’s Capital

On the discontinued operations, what businesses are you putting into discontinued operations right now?

Rick Liem

Those are the restaurants that we’re closing, exiting. So its primarily a bunch of Joe’s Crab Shacks.

Operator

Your next question comes from the line of Michael Gallo – CL King

Michael Gallo – CL King

The interest and other line was about $22 million in the quarter, I think the interest portion was broken out in the release as about $19.5 million, so what was the other $2.5 million, was that hurricane related stuff or what was that?

Rick Liem

No I think it would just be generally non-operating expense costs.

Operator

Your next question comes from the line of Brian Hunt – Wachovia

Brian Hunt – Wachovia

I was wondering if you could tell us what your LTM EBITDA is per the financing agreement for the restaurants and how many restaurants are in the discontinued number, are remain closed and what type of EBITDA did they contribute to LTM?

Rick Liem

There’s, we’re over $130 million in the restaurant EBITDA calculation. I’d say there’s probably about a dozen restaurants remaining in the discontinued ops and its diminimous from a ROP. Most of them are shut down.

The interest rate swaps on the Golden Nugget is the majority of the other in that $22 million.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Rick Liem

Thank you very much, we’ll talk to you all later.

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