Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Start Time: 08:30

End Time: 08:53

Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q4 2013 Earnings Conference Call

February 27, 2014, 08:30 AM ET

Executives

Daniel T. Accordino - President and CEO

Paul R. Flanders - VP, CFO and Treasurer

Analysts

Bryan Hunt - Wells Fargo Securities

James Fronda - Sidoti & Co.

Bryan Elliott - Raymond James & Associates

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Carrols Restaurant Group Fourth Quarter 2013 Earnings Conference Call on the 27th of February, 2014. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I'll now hand the conference over to Paul Flanders, Carrols Chief Financial Officer. Please go ahead, sir.

Paul R. 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, 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.

Please note that during today's call we will discuss certain non-GAAP measures which we believe to be useful in evaluating our performance. A presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation table comparable with GAAP measures is available in our earnings release.

I thought it might also be helpful to clarify certain of these non-GAAP financial measures from a definitional perspective before we get started. Throughout the discussion today we will refer to adjusted EBITDA and restaurant level EBITDA since we believe that they provide a more meaningful comparison of our operating results than EBITDA without these adjustments.

EBITDA has been adjusted to exclude stock compensation impairment and other lease charges and in 2012 to exclude acquisition and integration costs from the 2012 acquisition, cost related to the EEOC litigation and settlement and the loss from extinguishment of debt on our 2012 refinancing. Restaurant level EBITDA, which is essentially EBITDA before G&A expense, has been adjusted in 2012 to exclude the integration costs that we incurred at the restaurant level.

With that said, I will now turn the call over to the President and CEO of Carrols Restaurant Group, Dan Accordino.

Daniel T. Accordino

Thanks, Paul, and good morning, everyone. We consider 2013 to have been a very successful and transitional year for the company. Our financial performance reflected the continuing effectiveness of Burger King's product and marketing initiatives as both sales and operating margins increased across our entire business.

In addition, they should be evident from our fourth quarter results that we made considerable progress throughout 2013 improving the operations and profitability of the restaurants that we acquired from Burger King in May 2012. Those restaurants significantly contributed to the increase in adjusted EBITDA and our overall operating margins for both the quarter and the full year.

The combination of these factors, particularly a 751 basis point expansion in adjusted restaurant level EBITDA margins at the acquired units, reported a more than tripling of adjusted EBITDA to 10.4 million in the fourth quarter and a strong finish to the year.

Fourth quarter comparable restaurant sales increased 1.7% despite a strong prior year comparison, expanding our track record of positive comparable restaurant sales growth with 10 consecutive quarters. Our fourth quarter comparable restaurant sales trends which were tracking at about 3% through November are dampened somewhat by the severe weather conditions late in the quarter as you might expect.

Unfortunately, these adverse weather conditions have persisted in January and February notable due to their widespread effect across most, if not all, of our markets. We will touch on this later when we discuss our 2014 guidance.

On a full year basis, comparable restaurant sales rose 9% reflecting Burger King's success in widening the brand's appeal and the effectiveness of its balanced marketing approach in the face of heightened competition in an economically sensitive consumer. Premium menu items featured in the fourth quarter included the new Big King Sandwich that was introduced as part of the 2 For 5 Mix and Match platform. Also a new Barbecue Rib Sandwich was added to the King Deals menu during the quarter and Satisfries, our better-for-you french fry which was introduced late in the third quarter continued to drive incremental french fry sales.

More recently in the first quarter, the Rodeo Burger and Rodeo Chicken Sandwich were added to the Value menu and we introduced a new premium Spicy Chicken Sandwich. The Spicy Chicken Sandwich is also available as part of the 2 For 5 promotion through early March alongside the original Chicken Sandwich, Big King Sandwich and Big Fish Sandwich. Balanced promotion of both value and premium products has continued to be effective in both driving sales and addressing their competitive environments.

Turning to the rest of the P&L, we narrowed our net loss from continuing operations to $0.09 per diluted share in the fourth quarter of 2013 from $0.39 per diluted share in the prior year and increased our adjusted EBITDA by over 200% to 10.4 million. Adjusted EBITDA margin improved 430 basis points to 6.3% for the quarter and a 1.8% increase in total restaurant sales.

Adjusted restaurant level EBITDA increased significantly to 20.2 million in the fourth quarter from 12.4 million in the prior year period while adjusted restaurant level EBITDA margins increased 460 basis points to 12.2%. Adjusted restaurant level EBITDA margins improved over 200 basis points at our legacy restaurants and by over 750 basis points at our acquired restaurants compared to the fourth quarter of 2012.

We achieved P&L improvements across the board with notable progress lowering costs of sales by over 500 basis points of the acquired restaurants since the fourth quarter of 2012. Adjusted restaurant level EBITDA margin differences between our legacy and acquired restaurants also continued to narrow. These differences are reduced by 525 basis points in the fourth quarter of 2012 and by 234 basis points sequentially in the third quarter of 2013, even as our legacy margins continued to expand.

While we still have ways to go to further narrow this gap, clearly much progress was made throughout 2013 and the heavy lifting of the integration process is largely behind us. During the fourth quarter we acquired one restaurant and opened two new units, one of which was a relocation of an existing restaurant. We also closed three restaurants in the fourth quarter and 11 for the year, including the relocated restaurant.

In 2014 we intend to close an additional 15 to 20 restaurants, many of which are underperforming acquired restaurants which were identified at the time of the acquisition. Remodeling has been an important element of Burger King's brand evolution and we completed 111 upgrades to the 20/20 design image in 2013, bringing our total remodels to over 200 since early 2012, approximately a third of all of our restaurants now featured a new design.

In closing, we feel very good about what we accomplished in 2013 and expect to make continued progress in 2014. Most importantly, we give recognition to our more than 17,000 employees for their part in facilitating this transition and for their accomplishments throughout 2013.

With that, I'll turn the call over to Paul to continue our financial review.

Paul R. Flanders

Thanks, Dan. Restaurant sales increased 1.8% to 165.5 million in the fourth quarter of 2013 from 162.6 million in the prior year period. Legacy restaurants generated 92.7 million in sales for the quarter, up 2% from 90.8 million in 2012 while the acquired restaurants generated 72.8 million in sales, up 1.5% compared to 71.7 million in 2012. Note that we had 8 fewer restaurants in operation as of the year of the year.

Comparable restaurant sales increased 1.7% in the quarter on an overall basis compared to 7.3% in the prior year period including an increase of 1.8% at the legacy restaurants and a 1.6% increase in acquired restaurants. Average check was 3% higher while customer traffic decreased 1.3% due to declines experienced in December from the weather.

Adjusted EBITDA was 10.4 million in the fourth quarter of 2013 compared to 3.3 million in the prior year and adjusted EBITDA margin increased to 6.3% in the quarter compared to 2% in the prior year.

Adjusted restaurant level EBITDA was 20.2 million in the quarter and increased 7.8 million or more than 60% from the prior year. As Dan said, adjusted restaurant level EBITDA margin increased 460 basis points on an overall basis including improvements of more than 200 basis points in our legacy restaurants and over 750 basis points in our acquired restaurants.

Adjusted restaurant level EBITDA in our legacy restaurants increased 2.3 million or almost 22% to 14.2 million in the fourth quarter. Restaurant level EBITDA margins were 15.3% at our legacy restaurants and increased 227 basis points from the prior year period. Much of this improvement stems from 107 basis points decline in cost of sales due to favorable mix shifts, effective pricing and favorable commodity costs.

Adjusted restaurant level EBITDA at the acquired restaurants was 6.0 million in the fourth quarter reflecting a 5.5 million improvement from the prior year period while adjusted restaurant level EBITDA margin at the acquired restaurants increased 751 basis points. We leveraged a number of expense items; however, most notably cost of sales was reduced 513 basis points reflecting the operating of total legacies restaurants throughout 2013.

General and administrative expenses were 9.9 million or 6% of sales in the fourth quarter [Technical Difficulty] 2.6 million compared to the fourth quarter of 2012 due to the $2.6 million charge in 2012 related to our litigation and settlement with EEOC. Including the 2012 charge, G&A was essentially flat in absolute dollars and leveraged slightly as a percentage of sales.

Depreciation and amortization expense was 8.6 million and increased from 7.8 million in the fourth quarter of 2012 due primarily to the remodeling initiatives over the past year. Interest expense was flat at 4.7 million for the quarter. Net loss from continuing operations was 2.1 million or $0.09 per diluted share, including impairment and other lease charges of 0.6 million or $0.01 per diluted share after tax. This compares to a net loss from continuing operations of 8.8 million in the prior year period or $0.39 per diluted share which included integration costs related to the acquisition of EEOC litigation costs of 4 million in total or $0.11 per diluted share after tax.

As you will note, our net loss has been reduced by federal tax benefits which we believe will be used to offset taxable income in the future. In 2013 we also amended prior year tax returns to carry back our 2012 net operating loss to prior years which resulted in a tax refund of 4.2 million. 1.7 million of this refund was received during the fourth quarter of 2013 with a $2.5 million balance expected in mid 2014.

At the end of the quarter, our cash balances were 28.3 million including 20 million of restricted cash held as collateral for our revolving credit facility. Total outstanding debt was 160.5 million at quarter end, essentially unchanged from last quarter.

Capital expenditures in the fourth quarter of 2013 totaled 10.1 million including 5.9 million for restaurant remodeling and 2.6 million for new or relocated restaurants. Total capital expenditures for all of 2013 were 50.5 million, 18 remodels were completed in the fourth quarter and 111 restaurants were remodeled over the course of the entire year.

Finally, I will discuss our guidance for 2014. Let's start with our first quarter sales trends, which as Dan said has been affected by the severe and persistent winter weather conditions. Winter weather is certainly not unusual in our more northern markets but it has certainly been worst on a relative basis compared to last year. More notable is the severity of the weather and the widespread impact in our markets that do not typically experience the extreme conditions that we've seen early in the year.

While we are reluctant to predict how the weather might affect our sales during the remainder of the quarter, our guidance is based on the expectation that comparable restaurant sales in the first quarter will decrease between 1.5% and 2.5%. Total restaurant sales for 2014 are expected to be 665 million to 680 million, including comparable restaurant sales increase of 1.5% to 3.5%. Commodity costs are expected to increase 2% to 3% for the year with increasing beef cost largely responsible for the overall increase.

G&A is expected to be approximately 39 million to 41 million excluding stock compensation costs. Adjusted EBITDA is projected to be 38 million to 42 million. Our annual effective income tax benefit is estimated to be 33% to 35% that could increase as the worker opportunity tax credit is reinstated or extended.

Capital expenditures are projected to be 30 million to 35 million including 18 million to 20 million for remodeling 65 to 75 restaurants and 4 million to 5 million for cost to scrap and rebuild three restaurants. We also plan to close approximately 15 to 20 restaurants in 2014.

That concludes our prepared remarks. With that, we'll now open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). The first question comes from Bryan Hunt from Wells Fargo Securities. Please go ahead, sir.

Bryan Hunt - Wells Fargo Securities

First, I was wondering if you could give us an idea. How much of a price increase was in the 3% check during the fourth quarter?

Daniel T. Accordino

We had about a 3% price increase in the quarter.

Bryan Hunt - Wells Fargo Securities

And is that something that will carry on into 2014?

Daniel T. Accordino

Of that 3%, we got about – the carryover is about 1.2% to 1.5%.

Bryan Hunt - Wells Fargo Securities

Okay, great. And then second, I mean when you look at the remodels, what type of sales lift are you getting on the newer remodels? Is it consistent with what you seen for the last year and a half?

Daniel T. Accordino

What we said up till now is that the remodels have been in the 8% to 10% range. What seem to be happening is more that we do, the incremental effect of the more recent ones seems to be getting a little bit greater. I think for all of 2013 we would say we were probably a little bit over 10%.

Bryan Hunt - Wells Fargo Securities

That's good news. And then my last question is you all made a lot of progress on the acquired restaurants. It looks like operating costs or other restaurant operating costs still remain elevated relative to legacy stores. When you look up and down the P&L across the operations, where does your biggest opportunity still remain on those acquired restaurants?

Paul R. Flanders

We still have an opportunity across the sales. I mean we brought it down, as Dan said, over 500 basis points in 2013. But if you look at the LTM, there's still about a 180 basis point difference year-over-year in 2013. The fourth quarter run rate – I think the way we're looking here is even in the fourth quarter we had difference in cost of sales alone down to about 85 basis points. So there's probably a $2.5 million difference in our EBITDA run rate for where we are in the fourth quarter. Beyond that I don't think as we look out into 2014, it's probably another 100 or 200 basis points on top of the cost of sales difference.

Bryan Hunt - Wells Fargo Securities

Okay. And then just a housekeeping; how many stores are in the legacy versus the acquired?

Paul R. Flanders

Acquired stores were about 270 at the end of the quarter out of the 564.

Bryan Hunt - Wells Fargo Securities

Okay, that's it from me. Thank you.

Daniel T. Accordino

Thanks, Bryan.

Operator

The next question comes from James Fronda from Sidoti & Company. Please go ahead.

James Fronda - Sidoti & Co.

Hi, guys. How are you?

Daniel T. Accordino

Good.

James Fronda - Sidoti & Co.

Can you just talk about, I guess, differences in areas of growth that you've seen throughout the country? I mean I know last time we talked there was some struggle in the Virginia area. Did that pick up at all during the quarter?

Daniel T. Accordino

Virginia still is a lagging market in terms of our portfolio. So if you look at the quarter, because in December it all depended on which weekend, which market got the most snow and ice? So for October and November, Virginia still was underperforming the other Carrols' markets.

James Fronda - Sidoti & Co.

Okay, all right. Thanks, guys.

Operator

(Operator Instructions). We do have a follow-up question from Bryan Hunt. Please go ahead.

Bryan Hunt - Wells Fargo Securities

I know weather has definitely dampened the outlook, but we've had a couple of nice weekends down here in the southeast. Are you seeing any spike in sales over the weekends when the weather has turned nice? I mean do you believe there is some type of cabin fever effect once the weather turned?

Daniel T. Accordino

Absolutely, Bryan, not just in southeast but anytime we get a couple of good days, our sales really take a significant increase which is I think you're exactly right. It's a function of people finally being able to get out and travel around a little bit. But every part of our company when we get a couple of sunny days drawn together, our sales have been very well.

Bryan Hunt - Wells Fargo Securities

Okay. And then with regards to your outlook for costs, I mean given beef is contributing to the biggest portion of the inflation outlook, do you all believe you'll spend or at least corporate will spend time promoting other proteins during the year?

Daniel T. Accordino

Yes.

Bryan Hunt - Wells Fargo Securities

Okay. And what type of cost increase are you looking for ground beef for 2014?

Daniel T. Accordino

We have forecast about 5.5%. The first quarter certainly is picking up a little higher than we expected. We hope it's because of this bad weather that's an aberration, at least that's what we're being told by the people who are doing the big purchasing for us. So we still think it's in the 5%, 5.5% range.

Bryan Hunt - Wells Fargo Securities

Very good. Thank you. That's it from me.

Operator

(Operator Instructions). We have a question from Bryan Elliott from Raymond James. Please go ahead.

Bryan Elliott - Raymond James & Associates

Thank you. Good morning. Just curious if you're seeing any [Technical Difficulty] lower income trade areas – I'm sorry, I had my headset wrong. Let me start again. Curious if in some of your lower income trait areas and markets, are you seeing any change in consumer behavior that you might be able to attribute to the reduction in food stamp benefits?

Daniel T. Accordino

I don't but it's difficult to say because of the weather, Bryan.

Bryan Elliott - Raymond James & Associates

Yes, that's true.

Daniel T. Accordino

I couldn't really make an assertion around that.

Bryan Elliott - Raymond James & Associates

Fair enough. Well, thanks and congrats on all the success.

Daniel T. Accordino

Thank you.

Operator

We appear to have no questions, sir. Please continue.

Daniel T. Accordino

We really have no more prepared remarks. We certainly appreciate you joining us this morning and we look forward to speaking with everyone next quarter. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude the conference call for today. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Carrols Restaurant Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts