Country Style Cooking Restaurant Chain's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Country Style (CCSC)

Start Time: 19:37

End Time: 20:23

Country Style Cooking Restaurant Chain Co., Ltd. (NYSE:CCSC)

Q4 2013 Earnings Conference Call

February 27, 2014 07:30 PM ET

Executives

Hong Li - Chairman and Chief Executive Officer

Adam J. Zhao - Chief Financial Officer

Bill Zima - ICR Inc.

Analysts

Vivian Mau - Woodberry Management

Operator

Good day everyone and welcome to the Country Style Cooking Restaurant Chain Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. All participants will be in listen only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I’d now like to turn the conference over to Mr. Bill Zima of ICR. Please go ahead.

Bill Zima

Thank you, operator. Hello and thank you for joining us on today’s call. Today, you will hear from Country Style Cooking’s Chairwoman and Chief Executive Officer, Ms. Hong Li, who will give an interview of the quarter and full-year, followed by the Company’s Chief Financial Officer, Mr. Adam Zhao, who’ll provide business updates and financial results. Slides that illustrate aspects of the com1pany’s operations and financials can be accessed at Country Style Cooking’s Investor Relations website at ir.csc100.com.

Before we get started, let me review the Safe Harbor statement regarding this conference call. Please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to Company’s prospectus filed with the Securities and Exchange Commission on September 27, 2010. Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Additionally during this call, the financial results will be referred to in Chinese RMB unless otherwise noted.

At this point I’d like to introduce Ms. Hong Li, Chairwoman and Chief Executive Officer of Country Style Cooking. Ms. Li will speak in Mandarin and Mr. Zhao will translate into English. Ms. Li, please go ahead.

Hong Li

[Foreign Language]

Thank you, Bill. Welcome everyone to Country Style Cooking’s fourth quarter and fiscal year 2013 earnings call.

We are pleased that we complete a year of gradual recovery and steady growth. Our financial results saw a balanced improvement reflected in our year-over-year mid teen percentage of revenue increase, positive same-store sales growth, and return to upgrading profitability. Our server and expansion remained on track during the course of the year as well. At the end of 2013, we had a total 293 restaurants covering today's cities, including: 44 Country Style Cooking and 49 Mr. Rice rented restaurant.

Throughout the year we made efforts to differentiate our two brands gradually upgrading CSC into a more fashionable fast casual restaurant experience, while branding Mr. Rice as a cafeteria type, quick service brand for white collar workers. In the second half of 2013, we managed to raise the average launch in supper tickets diet at CSC, while approximately 25% year-over-year mainly through introducing new courses and combo offerings.

Marketed recognition for this brand that may change has been positive, especially in the suburban area where the trend for casual dining is [taking us] [ph] and competition is relatively less intense.

Compared to CSC’s restaurants, which are often located in commercial centers, Mr. Rice restaurant tended to locate a near office buildings where the rent is cheaper and customer traffic is more concentrated. It requires around a 20% less capital expenditure, 20% less sales to breakeven and restaurant level operating efficiency at Mr. Rice tends to be slightly higher.

In certain local markets like in Yunnan province for example, Mr. Rice has demonstrated a great vitality -- it is greater potential for further accelerate our restaurant openings. In 2014, the Company again plans to open around 60 new restaurants, of which more Mr. Rice stores will be opened than last year.

As part of our efforts to enhance branding awareness and improve our operational efficiency, we’ve been promoting our online and mobile ordering system, as well as credit pay cards. The management will continue to evaluate new geographic markets along with innovative marketing strategies. We believe such efforts can drive our top line growth and profitability in the long run.

Finally, I’d like to touch upon industrial changes before I handling over the call to our CFO, Adam for financial details. According to various industry reports published in the recent months, mass-market dining in China saw a healthy growth during 2013 compared to a decline in high ended dining; we believe CCSC will benefit from such trend with a delicious and affordable everyday Chinese food offerings.

Also, general retail sales in China’s Central and Western provinces including Sichuan, Chongqing and Hunan, has again outgrown Eastern provinces during the last Chinese New Year. This is a encouraging signal for our outlet in the Central region where we primarily operate.

On that note, I'll now turn the call over to Adam.

Adam Zhao

Thank you, Ms. Li, and thank you, everyone for joining us. For those of you who choose to access our IR website, ir.csc100.com, you can review the investor presentation slides that we have posted there, which illustrates some of the points that I’ll be addressing on this call.

For quarter four 2013, total revenues increased 13.5% to RMB336.4 million mainly driven by our expanding restaurant network, as well as same-store sales growth. We had 293 restaurants in operation by the end of reporting period, up from 256 at the end of quarter four 2012. Out of 293 restaurants, 150 are located in Chongqing and 96 are based in around the City of Chengdu in the Sichuan province.

Revenues for this two markets make up 90% of the total revenues and if we breakdown the total restaurant numbers by brand, we had a 244 Country Style Cooking and 49 Mr. Rice branded restaurants at the end of 2013. In quarter four 2013, cost of food and paper increased 13% year-over-year to RMB153 million, primarily due to the expansion of our restaurant network. As a percentage of revenues, cost of food and paper was 45.5% in this quarter compared to 45.7% in the same quarter last year.

Restaurant wages and related expenses during this quarter, increased by 24% to RMB68.7 million. The increase was attributable to increased employee wages associated with the increased workforce. Share-based compensation to restaurant staff was RMB1.6 million. As a percentage of revenues, restaurant wages and related expenses were 20.4% in this quarter, up from 18.7% this in quarter four last year.

Restaurant rent expenses increased to 6.7% to RMB33.7 million in quarter four this year along with network expansion. As a percentage of revenues, restaurant rent expenses dropped slightly to 10% in quarter four of 2013 from 10.7% in quarter four 2012.

Restaurant utility expenses increased 14.1% to RMB19.3 million in quarter four this year. As a percentage of revenues, restaurant utility expenses were stable at 5.7%. Other restaurant operating expenses remained stable at RMB12.8 million in quarter four of 2013. As a percentage of revenues, other revenue -- other restaurant operating expenses was 3.8% in quarter four of 2013 compared to 4.3% a year-ago.

Restaurant-level operating margin was 14.6% in this quarter, a slight decrease from 14.9% in the same quarter last year. If we breakout our restaurant portfolio into two groups with 209 restaurants in the comparable base and the other 84 outside the comparable base. Hence the store level operating margin for the comparable base was 15.9% versus 8.4% for the non-comparable base. This compares to the previous quarter’s operating margin of 20.9% and 13.2% for the comparable base and non-comparable base respectively.

SG&A expenses grows 17.3% into RMB23.6 million in quarter four of 2013, reflecting a increase in one-time general and administrative expenses and miscellaneous. Share-based compensation expenses included in SG&A were RMB2.4 million. As a percentage of revenues, SG&A expenses were 7% in quarter four this year, compared to 6.8% in quarter four of last year.

Pre-opening expenses were RMB3.8 million in quarter four 2013, accounting for 1.1% of the total revenues. Depreciation expenses was RMB18.4 million, representing an increase of 14.7%, primarily because of the increase in the total fixed assets. As a percentage of revenues, depreciation expenses was 5.5% in quarter four of 2013. Impairment charges fell to normal level of RMB1.5 million in quarter four this year. Income from operations was RMB1.7 million compared to a loss of RMB1.9 million in the same quarter last year.

Now I’d like to go through certain below-the-line items. Interest income for quarter four 2013 was RMB5.9 million. Foreign exchange loss was RMB0.7 million. Other income was RMB1.1 million quarter four of 2013 as compared to RMB7.2 million in the same quarter last year, which mainly represents government subsidies received.

The total below-the-line other income was RMB6.2 million in this reporting quarter as compared to RMB12.7 million in quarter four of last year. Income tax expenses in quarter four of this year was RMB4.9 million compared to RMB4.1 million in the same quarter last year.

Net income for this quarter was RMB3 million compared to RMB6.6 million in the same quarter of 2012. Non-GAAP net income was RMB7.1 million compared to RMB9.9 million in quarter four 2012. Diluted net income for ADS was a RMB0.11, which is US$0.02 in quarter four 2013 compared to RMB0.25 in quarter four last year

Non-GAAP adjusted diluted net income per ADS which excludes share based compensation expenses was RMB0.26, which is US$0.04 in quarter four 2013 compared to RMB0.38 in quarter four 2012. The company had approximately RMB26.9 million weighted average diluted ADS outstanding during this quarter ended December 31, 2013.

Non-GAAP EBITDA remained stable at RMB20.4 million in quarter four 2013. Adjusted nom-GAAP EBITDA was RMB25.7 million in quarter four this year compared to RMB23.7 million in quarter four last year.

Now for the full-year revenue increased 14.4% to RMB1.36 billion, same-store sales growth was 25%, restaurant level operating margin was 15.1%. Income from operations increased by 23.6% to RMB33.8 million. Adjusted EBITDA was RMB128.3 million.

Net income in this year was RMB39.6 million or RMB1.49 which is US$0.25 diluted per ADS. Non-GAAP net income was RMB56.3 million which is also equivalent to RMB2.9, which is equivalent to US$0.35 per ADS.

As of December 31, 2013, the company had cash, cash equivalents and short-term investments of RMB581.9 million compared to RMB550.1 million as of December 31, 2012. As of today, we have US$15.8 million of debt we intended to convert into RMB in the next few quarters.

Net cash provided by operating activities was RMB141.4 million for the year ended at December 31, 2013 compared to RMB173.7 million in the same quarter last year. Inventory was RMB52.6 million compared to RMB42.2 million in the same quarter of 2012. For the full-year of 2013 inventory turnover days was 28 days.

Turning to our outlook, for the first quarter of 2014, the company currently estimates that its revenue will be in the range of RMB333 million which is US$55 million and RMB343 million which is US$56.7 million, representing year-over-year growth of approximately 8.4% and 11.6%.

For the full year, the company plans to open approximately 16 new restaurants of which 32 are expected to be CSC restaurant locations while the remaining 28 are expected to the Mr. Rice locations. In 2014, we estimate our same-store sales growth will be in the low single digit. We’ll continue to maintain cost control mechanisms to keep expenses under control and aim to further improve operating margins.

This concludes our prepared remarks. At this point we will start taking questions.

Question-and-Answer Session

Operator

At this time we will begin the question-and-answer session. (Operator Instructions) And showing no questions, I will turn the conference back to management. I apologize, we do have a question just came into the queue for [Joe Riser of J&B Investments] [ph].

Unidentified Analyst

Yes, my name is [Joe Riser of J&B Investments] [ph]. I am from Kansas City, and please excuse me if my -- if I make any (indiscernible) political mistakes here. But I have got -- my group has, is accumulating some of your shares and we’re looking to buy more. And the first question I have got is for the CFO.

Adam J. Zhao

Yes, thank you. Welcome. Yes, go ahead.

Unidentified Analyst

Yes, sir. I think you have your budget for this year and at the end of this year would you -- what's your best guess as to the enterprise value of the business to EBITDA?

Adam J. Zhao

Okay, thank you. Officially or usually we don’t give annual guidance so far. But we do have our annual budget plan already and we also have our annual operating target. But it's not in a good position to talk about it here. As far as we disclose it, that we’re going to open up another 60 new restaurants. We’re expecting to open up those new restaurants with higher quality, with higher profitability so that we can improve our operating margin and we try to maintain a positive same-store sales as we disclosed that we plan to deliver single digit same-store sales. The annual growth if we do the simple math would be around high teen percent annual growth, as we said like …

Unidentified Analyst

High teen?

Adam J. Zhao

Yes, 17%, 18%, that can be a good guess. The top line growth and -- yes, and also we wanted to maintain a compatible bottom line growth both paid along with the top line. So, you can do the simple math and you can be …

Unidentified Analyst

The expenses are really growing.

Adam J. Zhao

Yes, and …

Unidentified Analyst

They’re really growing.

Adam J. Zhao

Sorry, sir. What was that?

Unidentified Analyst

The expenses are really growing.

Adam J. Zhao

Yes. If we talk about expenses mainly or we’ll talk about cost. From the cost side we do have our labor cost and our rent which are quite going wild in the inflationary environment in general, that they are really challenges to me, but we do have our strategy to sort of control both labor cost and rent with our techniques to handle. And for the expenses, especially administrative. Last year -- I do have an explanation here for last years SG&A relative expenses. That’s not really administrative -- not only the administrative staff really did cost, but also some local tax and also miscellaneous. And I do have my tools in minds that to take them under control this year and it's not a guarantee, but I promise we’ll try our best efforts to take them under control.

Unidentified Analyst

Yes, well expenses are always hard to control. Are you able to pass along those expenses and price increases or as a competition?

Adam J. Zhao

Yes, we’re good that -- yes there are strong R&D and new food offering combos, there was a food offering program and manual shuffle program. We are gaining the pricing power to the market and starting from quarter two last year we started offering rotation menu with new price tags. My answer is that yes, with the increase in pricing power we do pass all those cost pressures to our customers which are all the customers are quite aware of, I mean the inflation problems.

Unidentified Analyst

Right, okay. I understand. Next question, looking out about five years on your strategic plan, roughly how many well, I am sorry, let me start over. I think you closed about 40 stores right, or 35, 40 stores?

Adam J. Zhao

Yes, over 30 stores, yes.

Unidentified Analyst

Yes, over 30 stores. At what point do you determine that a store should be closed?

Adam J. Zhao

Okay. Yes, in the past few quarters or so we did close around or may be over 30 stores. For some of the store closures, they are quite attributable to our strategic change I want to say. We entered the tier 1 cities like Beijing and Shanghai three years ago. It turns out that there was quite a unsuccessful trial operations, primarily due to the cost structure namingly rent and labor in tier 1 cities are quite high, and it's not only the competition, it's just mainly the cost structure.

Unidentified Analyst

I understand.

Adam J. Zhao

Thanks to our operations. So talking about our future expansion, what we can ensure is that; number one, we do have our systematic assessment mechanism or model to fully evaluate the opportunity of open up new stores. Number two is that, geographically we would rather expand our new stores in the south west and middle of China. They are geographically near by our home market of Hunan and Sichuan. We have no intention to re-enter the tier 1 cities like Beijing and Shanghai one, two or three years. Number three is that, we do have our strategic plan of opening up new stores in the future. I can give you a framework of our strategic expansion. To mention I believe that we do have our opportunity to open up new stores by 2020 our network can reach as many as like 1,000 stores. We are working on that way, yes.

Unidentified Analyst

Okay, great. Good answers for all those questions. I appreciate it.

Adam J. Zhao

Thanks.

Unidentified Analyst

Have you just -- I know this is kind of a difficult question, but of your -- of the top 25% of your profitable stores, what kind of free cash flow do they generate -- free cash flow?

Adam J. Zhao

Free cash flow, yes. From the entire portfolio wise we’ll see a turning positive free cash flow overall in our group. I am talking about the whole 300 stores.

Unidentified Analyst

Okay.

Adam J. Zhao

For the top 20% or top 25% of stores they are our cash [call] [ph] and they are generating most of the -- they are contributing most of our profit. And most of them are based in our home market in Chongquin; they tended to have bigger size because they have been running for years through our flagship. For new stores like, in other locations the performance is slightly lower; it's like 70%, 80% if we put them into the comparison with the older stores. But we did find some dynamic area that we’re dominating the market. I am talking about new provision market like Hunan. So, talking about free cash flow, I think we’re quite optimistic to maintain a positive free cash flow in the coming quarters and we do have a very strong cash reserve portfolio especially that way.

Unidentified Analyst

Okay. One complement I’d like to give yourself and the CEO. You’re aware of Renaissance Technologies, aren’t you?

Adam J. Zhao

Yes. My personal background has a lot to do with -- yes or with me. I mean, I do have a picture of …

Unidentified Analyst

Do you know who runs the Renaissance Technologies?

Adam J. Zhao

Yes.

Unidentified Analyst

They own a percentage of your company, Jim Simons. Did you know that?

Adam J. Zhao

I miss the last sentence.

Unidentified Analyst

Renaissance Technologies, they are an investment company and it's owned by Jim Simons and they own a percentage of your company.

Adam J. Zhao

Okay.

Unidentified Analyst

Are you aware of that?

Adam J. Zhao

No. I wish I had.

Unidentified Analyst

He is one of the richest guys. I mean this is just for your information; he’s one of the richest guy’s in the world. He’s worth about US$35 billion.

Adam J. Zhao

Okay, that’s great. I mean the company is quite open minded to absorbing information of technology and to -- opportunities working with technology companies. I mean if he do have …

Unidentified Analyst

It's an investment company actually, but anyway that’s -- while it's good for you to know. I mean it's a positive sign for you, lets put it that way. Of your top three holders that don’t -- that are outside investors, who are they and also the Chief Executive Officer and the Chief Operating Officer, the top three holders as a percentage and the CEO and COO, what percentages of the company do they own?

Adam J. Zhao

Okay. Our CEO is also our Founder, our Chairwomen. She owns about 45% of the total outstanding shares and other management members like COO and me; we have some, not a very significant shares and options of the company.

Unidentified Analyst

Is that with her husband also? The 45% is with her husband?

Adam J. Zhao

I mean her family. Let’s put it that way.

Unidentified Analyst

Family, I am sorry -- I am sorry, family.

Adam J. Zhao

Yes.

Unidentified Analyst

It seems like somewhere I saw there was another outside investor that owned quite a bit.

Adam J. Zhao

Yes, we don’t have top three institutions which owns quite a significant place at the company. We got three private equity firm or firms, Sequoia and …

Unidentified Analyst

Oh, Sequoia.

Adam J. Zhao

I’m sorry? Yes, Sequoia is the number two.

Unidentified Analyst

Okay.

Adam J. Zhao

I mean they are equally number two. It owns 11% of the company.

Unidentified Analyst

I am sorry, what was the last one?

Adam Zhao

That was (indiscernible) China based guy such as -- that’s a China based …

Unidentified Analyst

Okay.

Adam Zhao

Offshore domestic company.

Unidentified Analyst

Okay.

Adam Zhao

All of them or each of this three owns 11% of the company.

Unidentified Analyst

Okay. Good. I think I only have maybe one or two more questions. In each of the slides, your presentation slides are at IR.100.com?

Adam Zhao

No, no. csc100.com

Unidentified Analyst

I’m sorry, what was that again?

Adam Zhao

ir.csc, CSC means China Country Style Cooking and 100.com.

Unidentified Analyst

100.com, okay. Let’s see here.

Adam Zhao

Yes, you will get more information there.

Unidentified Analyst

I’m sorry?

Adam Zhao

You can get more information from our IR website as well as from the presentation.

Unidentified Analyst

Well, it looks like you’re making good progress and you’re managing cash really well. Did you have any cash or investments in the Trust Bank or the shallow banking system did you have to -- did you loose any money in …?

Adam Zhao

I know what you're talking. The Company has a very restrict rules relatively strong compliance system to control all our assets. So we’re not even bought any shadow banking products. All our cash assets are allocated in tier 1 banks like big banks -- national bigger banks in China. So you can relax that we -- it's not likely that we have any risk exposure related to shallow banking system. Just take it easy. We are good.

Operator

(Operator Instructions) And our next question will come from Vivian Mau of Woodberry Management.

Vivian Mau - Woodberry Management

Hi. Good morning, management. Congratulations for the results. I have a question on your fourth quarter operating numbers. So in the presentation slide …

Adam Zhao

Yes. Hi, Vivian.

Vivian Mau - Woodberry Management

Yes, hi. In the presentation slide, Page 25, there is a breakdown of the financial numbers into traffic and average ticket price. So it seems that in the fourth quarter in terms of your daily traffic and (indiscernible) isn’t that last year fourth quarter, where is a relatively big year-over-year decline? So I don’t know what was the reason behind that? So any color on that will be appreciated.

Adam Zhao

Okay. I will try to answer your question if needed and then obviously we will make any comments on that. Yes, we did see a declining traffic in quarter four. That primarily because of our brands depreciation strategy or brand split strategy. We’re positioning CSC little upgraded towards to those white color and casual fashionable dining and Mr. Rice remain targeting those daily working class. So you will see that we raised that the price through menu rotation and in new food offerings in quarter four by around 30% in that quarter, while our traffic dropped out 24%, that just something natural because of the price increase made with our or rule out some price sensitive customers. That’s one thing. The second thing is that which we terminated some of our breakfast offering stores in Chongqing. We had a 63 restaurant offering breakfast, but in quarter four we has stopped breakfast service in 19 restaurants out of those 36 stores. That also cost us some traffic numbers. Its -- that’s all from the operation consideration that shutting down the breakfast service in those mentioned, 19 restaurants what better for our operational profitability that’s purely from operational considerations. And I think that’s two main reasons, Vivian.

Vivian Mau - Woodberry Management

I see. Yes, so a quick follow-up to that. So, in terms of the menu price increase I understand that, that may rule out some price sensitive customers. But I wonder that in the further quarter year-to-date are we seeing that like some customers are gradually coming back after they get used to like -- after they get used to by the higher ticker menu price. So going like basically going forward is there any chance that the traffic may go back to previous level?

Adam Zhao

Yes, of course. The management are quite aware of the traffic drop and even though they’re reasonable. I mean, considering those brand splitting and also the breakfast operation. The management is quite confident that the traffic will be back to further operation. We have our mechanism or techniques to maintain an increase in traffic by -- like by offering some dynamic menu with dynamic pricing system and we'll see. I mean, in quarter one actually according to our first-half of quarter one’s operation we’ve founded the situation is getting around. It's getting better, so we know what we were doing regarding to which problem, yes.

Vivian Mau - Woodberry Management

Okay, got it. Thanks a lot.

Adam Zhao

Thank you, Vivian.

Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Adam Zhao

Okay. This concludes the fourth quarter and fiscal year 2013 earnings conference call for Country Style Cooking. Thank you for all your participation and ongoing support, and have a nice day.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Adam Zhao

Thank you.

Hong Li

Thank you.

Adam Zhao

Thank you very much.

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!

Country Style Cooking Restaurant (CCSC): Q4 EPS of $0.04. Revenue of $55.6M (+13.5% Y/Y) beats by $6.7M.