Carrols Restaurant Group's (TAST) CEO Dan Accordino on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: Carrols Restaurant (TAST)

Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q1 2014 Earnings Conference Call

May 6, 2014 8:30 am ET


Paul Flanders - CFO

Dan Accordino - President & CEO


Bryan Hunt - Wells Fargo Securities

Will Slabaugh - Stephens

James Fronda - Sidoti & Co.


Ladies and gentlemen, thank you for standing by. Welcome to the Carrols Restaurant Group First Quarter 2014 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. (Operator Instructions).

I would like to remind everyone that this conference call is being recorded today Tuesday, May 6, 2014 at 8:30 am Eastern time.

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

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

With that, then 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 we indicated on our last earnings call, first quarter sales trends were impacted by the severe and persistent winter weather affecting restaurants in virtually all of our markets. These conditions were not only worse on a relative basis compared to 2013 but also far more widespread. However, due to improvements in our restaurant level margins compared to the first quarter of 2013 overall adjusted EBITDA was unchanged and our restaurant level EBITDA was actually 11.5% higher in the first quarter this year compared to the prior year period.

Comparable restaurant sales were down 2.5% against a positive 1% comparison for the first quarter last year. We had guided to 1.5% to 2.5% comparable sale decrease and we're within the guidance albeit on the lower end of our expectations.

While April was still a little soft due to the Easter calendar shift and some timing differences and our promotional schedule, we expect sales trends to continue to improve in the second quarter and over the course of the year.

We are maintaining our full year comparable restaurant sales guidance of an increase of 1.5% to 3.5% positive, but given our first quarter results we could more likely be on the lower to mid end of that range.

In terms of our top-line drivers, the Burger King menu strategy centers on launching fewer but more impeccable products that offer customers fresh new taste without adding operational complexity. We think this balance of promotional activity combined with better operational efficiency is working well.

During the first quarter, four items were introduced including a spicy chicken sandwich and an improved BIG KING sandwich. The spicy chicken sandwich provides a fresh bold take on the original chicken sandwich while the BIG KING sandwich is now bigger than before. Both products have been successful additions and have rotated through our 2 for $5 promotion. We also unveiled two items as part of the King Deals Value Menu the Rodeo Chicken Sandwich and a Rodeo Burger, both of which sell for $1 and feature our signature barbecue sauce and onion rings.

We've also expanded our value proposition into breakfast to roll out of the King Deals breakfast value menu which provides us a platform to drive traffic during the morning day part where we believe there still is a significant opportunity to grow sales. More broadly we are addressing the competitive environment with a balanced marketing approach that encompasses refreshed value options with an all layers of the menu.

In terms of profitability, restaurant-level EBITDA was actually higher in the first quarter this year despite our top-line challenges. Restaurant-level EBITDA totaled $13.2 million compared to $11.8 million in the first quarter of 2013 and restaurant-level EBITDA margin increased 113 basis points versus the prior year period. These increases reflected at 330 basis point improvement in restaurant EBITDA margin at our restaurants acquired in 2012 from Burger King. We continue to make progress narrowing the margin difference between these units and our legacy restaurants. In the first quarter this difference was reduced by 400 basis points compared to the first quarter of 2013 and by another 170 basis points sequentially from the fourth quarter of 2013.

Adjusted EBITDA in the first quarter was $3.2 million or essentially flat compared to $3.3 million in the prior year period. The increase in restaurant EBITDA was offset by a $1.3 million increased in G&A expense due to the elimination of payments from the Fiesta Restaurant Group for administrative services transitioned in late 2013, which was previously reflected in our guidance.

Less than two weeks ago, we completed an equity offering in which we sold 10 million shares of new common stock at $6.20 per share up another 1.5 million shares following the underwriters exercise of their over-allotment option. Net proceeds from the transaction, which closed on April 30, were approximately $67.2 million after underwriting discounts and other expenses.

In the near-term we plan to use some of this new capital to accelerate our 2014 remodeling program. We intend to remodel approximately 105 restaurants to 115 restaurants, which is 40 more than the 65 restaurants to 75 restaurants originally planned to upgrade this year. By the end of 2014, we expect to have almost 60% of our restaurants updated to the new design. We are also in position to use this new capital to opportunistically and selectively acquire additional Burger King Restaurants as we move forward.

We are revealing certain existing opportunities and believe that there will be others overtime including those presented through the Burger King's assignment of its right of first refusal to us for a 20 state territory. There are more than 2000 Burger King Restaurants that could be subject in our right of first refusal and we are pretty approved by Burger King for expansion. We believe that combined with our operational and financial disciplines, along with our ability to leverage our infrastructure, we can accretively enhance shareholder value with this expansion strategy.

Consistent with this strategy on April 30, we completed the acquisition of four Burger King Restaurants in Fort Wayne, Indiana, for approximately $700,000 following our exercise of the right of first refusal on a proposed sale of those restaurants.

In closing, while we got off to a slower start this year than we would have liked given the effect of the adverse weather conditions, we continue to have confidence with Burger King's marketing approach and are benefiting from our ongoing remodeling activities. With additional capital now in place, we are also positioned to begin executing our longer-term strategic growth plan.

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

Paul Flanders

Thanks, Dan. Restaurant sales decreased 3% to $151.5 million in the first quarter of 2014 from a $156.1 million in the prior year period. Legacy restaurants generated $83.9 million in sales for the quarter, down 2.2% from $85.8 million in 2013, while the acquired restaurants generated $67.5 million in sales, down 4% compared to $70.4 million in 2013. Note, that we had 11 fewer restaurants in operation as of the end of the quarter, so as we continue to close certain underperforming locations.

Comparable restaurant sales decreased 2.5% in the quarter on an overall basis compared to 1% gain in the prior year period, including a decrease of 1.8% in our legacy restaurants, and a 3.4% decrease of the 2012 acquired restaurants. Average check was 4.2% higher, while customer traffic decreased 6.7% due to the effects of the weather had on both traffic and a reduction in our operating hours.

Adjusted EBITDA was $3.2 million in the first quarter of 2014 compared to $3.3 million in the prior year and adjusted EBITDA margin remained flat at 2.1% for both periods.

Restaurant level EBITDA was $13.2 million in the quarter and increased $1.4 million or 11.5% from the prior year, despite the softness in sales. Restaurant level EBITDA margin increased 113 basis points on an overall basis, including an improvement of 330 basis points in our 2012 acquired restaurants, slightly offset by a 30 basis points deleveraging in our legacy restaurants.

Restaurant level EBITDA at our acquired restaurants was $3.9 million, reflecting a $2.2 million improvement from the prior year period and a margin increase of 330 basis points due to a 420 basis point reduction in cost of sales. This reflects the operating and controlled progress made at these restaurants over the past year, as well as higher vendor rebates.

Restaurant level EBITDA in our legacy restaurants decreased $0.8 million to $9.3 million in the first quarter of 2014 with restaurant EBITDA margins of 11.1%, which deleveraged 70 basis points from the prior year.

Labor and other operating cost were higher as a percentage of sales due mostly to the lower sales. And despite higher commodity cost this was offset somewhat by a 115 basis point improvement in cost of sales due to favorable mix shifts, reduced promotional activity, and price increases over the past year.

General and administrative expenses were $10.3 million or 6.8% of sales in the first quarter of 2014, and increased $1.2 million compared to the first quarter of 2013. This increase reflected the elimination of payments for Fiesta Restaurant Group as Dan just mentioned.

Depreciation and amortization expense was $8.8 million and increased from $8.1 million in the first quarter of 2013, due primarily to the remodeling initiatives over the past year.

Interest expense was flat at $4.7 million for the quarter.

Our net loss was $7.4 million or $0.32 per diluted share, compared to a net loss of $5.2 million in the prior year period or $0.23 per diluted share. Although, EBITDA was essentially flat in the quarter compared to the prior year period, our net loss increased due to a $0.7 million increase in depreciation, but mostly due to a lower tax benefit caused by timing differences we laid into our WOTC tax credits over the last three years from the Congresses delay in extending these hiring incentives.

In 2014, tax benefit includes no WOTC credits since these incentives have not yet been extended since expiring at the end of 2013. Additionally, the first quarter last year not only included a benefit in 2013 WOTC credits, but also included all of the 2012 credits due to the delay extending the incentives in 2012.

Effective tax benefit was 33.6% in the first quarter compared to 50.5% in the first quarter last year.

Net loss included impairment and other lease charges in both years and some minor EEOC litigation cost in 2013. This charges totaled $0.6 million and $0.7 million in the first quarter of 2014 and 2013 respectively or $0.02 per diluted share after tax in both period.

End of the quarter, our cash balances were $21.4 million, including $20 million of restricted cash held as collateral for our revolving credit facility. Total outstanding debt was a $161.0 million at quarter-end, relatively the same as last quarter. Our cash balances have of course increased considerably following the completion of the equity offering last week.

Capital expenditures in the first quarter of 2013 totaled $7 million, including $4 million for restaurant remodeling and $1.4 million for new and relocated restaurants. 13 remodels were either completed or near completion through the first quarter.

Lastly, let's discuss our guidance for 2014, which is unchanged except for our planned capital expenditures which have been updated to reflect our more aggressive remodeling effort due to the recent equity offering. 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 inflation in ground 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 subjected to be $38 million to $42 million. Our annual effective income tax benefit is estimated to be 33% to 35% but could increase as the worker opportunity tax credit is reinstated or extended.

Capital expenditures are now projected to be $42 million to $47 million, up from $30 million to $35 million previously including $30 million to $32 million for remodeling a 105 to 115 restaurants and $4 million to $5 million for cost to scrape and rebuild three restaurants. We have previously projected that we would remodel 65 restaurants to 75 restaurants. And lastly we also plan to close approximately 15 restaurants to 20 restaurants in 2014.

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

Question-and-Answer Session


Thank you. (Operator Instructions).

The first question comes from Bryan Hunt with Wells Fargo Securities. Please go ahead.

Bryan Hunt - Wells Fargo Securities

First question, I was wondering, Paul, if you could give us what the total TSA payments received from Fiesta over last year as well as what they were in Q1 and 2013?

Paul Flanders

Total payments last year were about $3.5 million and that included about $1.3 million in the first quarter of 2013.

Bryan Hunt - Wells Fargo Securities

And with regards to offsetting those payments with cost reductions have you already gone through that process and completed it or kind of where do you stand?

Paul Flanders

We have, based on minor reductions and our corporate overhead is fairly fixed so the real intention here is to leverage this G&A as we start acquiring more restaurants. We should not Fiesta had hardly any corporate levels.

Bryan Hunt - Wells Fargo Securities

And with regards to the acquisitions just you made around -- you made four-store acquisition, can you talk about $700,000 seems like a relatively low purchase price with state of those stores, those stores indeed are remodeling other AUVs in line with may be what your core store base is?

Paul Flanders

I think the average unit volume for these four stores; the average is about $1.2 million. So it's right in line with the average, may be 1 unit is a little bit lower than the others and there's at least three of those stores that are going to need to be remodeled at some point I wouldn't call them distress, but it's certainly that this was again we exercise our right of first refusal and so that was the negotiated purchase price by another buyer but obviously includes reflects the fact there is (inaudible) credit.

Bryan Hunt - Wells Fargo Securities

Two last questions. One, when you look at the Virginia market it's been a market that's been called out in the last couple of quarters. How did that market perform in the most recent quarter and are we starting to see any changes in terms of sales tempo as you move into Q2?

Dan Accordino

It's still -- this is Dan. It's still our weaker market but again Bryan we may have unusually a difficult winter as well and we've got four, five restaurants under remodel. So it's difficult right now to determine how they're going to respond for the remodel but we're just now completing them and the quarter is just going to get a bit better. But it's early, there's going to be a while before that market responds to the level that some of the other markets are I think that's they're certainly a laggard.

Bryan Hunt - Wells Fargo Securities

And then my last question and I will get back on the queue. In your assumptions, you called up pricing for Q1, can you talk about how much pricing was taken in Q1 and may be what the outlook on pricing is for the year and your assumptions. Thanks.

Paul Flanders

Well we had about roughly 2% pricing as we came into the year in the acquired units particularly and I think on average overall base is about 1% to 1.5%. We did take a little bit of price in the first quarter due to a recent normal wage in New York State effect now we will hit about 2% total run rate.

Bryan Hunt - Wells Fargo Securities

Okay. And that's for the year?

Paul Flanders

Most of the year, yes.


Your next question comes from Will Slabaugh with Stephens. Please go ahead.

Will Slabaugh - Stephens

Want to ask you about the acquisition as well, so congrats on getting that done and I just want you to give us an update on what that pipeline looks like in terms of future opportunities and then also what your appetite is for year post your original offering?

Dan Accordino

Sure, Will, this is Dan again. We've got one deal currently that the 21 store transaction that our both our expectation is that will close that transaction sometime in June. And then we've got another 100 restaurants that are some form of being or completing due diligence. Some of those certainly will be completed in 2014.

We've got a pretty robust pipeline right now in terms of deal offerings; and with the proceeds from this equity offering, we certainly will move forward with our expansion plans at a more accelerated rate.

Will Slabaugh - Stephens

And then on the margin expansion front that was still strong this quarter at the restaurant level I think you mentioned despite the revenue softness from the weather. So as you work through a lot of easier cost from the acquired stores, I guess a lot of that the costs that came up front, can you update us on where you think you are in terms of improving the cost at the acquired restaurants; and sort of where you're seeing that benefit come most recently and where do you think it's coming this year?

Dan Accordino

Well, when we bought these restaurants two years ago, our cost of sales delta in these restaurants was close to 700 basis points in the first quarter of this year that number is down to 45 basis points. So most of the improvements that we've made have been cost of sales improvement, which is certainly -- which is only efficiency is that we're generating within the four wall in a restaurant. Every Burger King Restaurant faces the same for input cost or food. The menu prices have been relatively the same so consequently the improvement has been made, the operational improvement by virtue of us controlling our food slippage and waste within the restaurant, which is something that we've historically done with restaurants that we've purchased and that's exactly what we will be doing when we move forward with future acquisitions.

Will Slabaugh - Stephens

Lastly on the mix that was fairly substantially at 4.2%. Can you talk about what was the composition of that mix and are you missing the 2% pricing earlier that's in place and then where you may be seeing the trade up, if you know, as far as driving that segment higher?

Dan Accordino

Well, go ahead, Paul.

Paul Flanders

There are couple things going, I mean, in general, the level of promotions in the first quarter were a little bit lower than the first quarter of last year which was pretty heavy, which helped drive that check. And as you said there is obviously we're pricing that and that I think the similar margin better than we got was from BB plus were fairly high. We had a favorable sales mix given some of the chicken promotions and have been going on for the last couple three months.


(Operator Instructions).

Your next question comes from James Fronda with Sidoti & Co. Please go ahead.

James Fronda - Sidoti & Co.

Just following Bryan's point you used to give out same-store sale numbers by region; do you have that offhand with you right now?

Paul Flanders

I think we have not historically given out regional comp but we may have called out a certain markets that were out of the ordinary, but no we are not prepared to give that out right now.

James Fronda - Sidoti & Co.

And I guess, could you just talk about other inflationary pressures that you are seeing in both healthcare and I guess the minimum wage?

Dan Accordino

The minimum wage effect is in our first quarter numbers. The state minimum wage is well ahead of anything that might happen in the Federal Government and New York State raised their minimum wage to $8 in January of 2014 and it goes up again in 2015 and 2016 and Ohio and Michigan also have wages that are indexed inflation.

We took a 1.2% price increase in New York State in January period, which to some degree compensated to the minimum wage increase. So and that's already embedded in these numbers and it's actually getting worse.

The healthcare effect, we do not think it's going to have much effect at all on our business. We have very few people who will qualify for healthcare.


And there are no further questions at this time. Please continue.

Dan Accordino

Well if there is no further question we appreciate your time and attention this morning and look forward to speaking with you next quarter. Thank you for being on the call today.


Ladies and gentlemen, this does conclude our conference call for today. Thanks for participating. You may now disconnect your lines.

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