Diversified Restaurant Holdings' (BAGR) CEO Michael Ansley on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Diversified Restaurant (SAUC)

Diversified Restaurant Holdings, Inc. (BAGR) Q2 2014 Earnings Conference Call August 8, 2014 10:00 AM ET

Executives

Deborah Pawlowski – Investor Relations

Michael Ansley – President, Chief Executive Officer and Chairman of the Board of Directors

David Burke – Chief Financial Officer, Treasurer and Director

Analysts

Justin Ruiss – Sidoti & Co.

Shannon Richter – Feltl & Co.

Greg McKinley – Dougherty & Company

Operator

Greetings, and welcome to the Diversified Restaurant Holdings Second Quarter 2014 Financial Results Conference Call. At this time, all the participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Deborah Pawlowski, Investor Relations for Diversified Restaurant Holdings. Thank you. You may begin.

Deborah Pawlowski

Thank you, Diego, and good morning, everyone.

We certainly appreciate your time today and your interest in Diversified Restaurant Holdings. On the call with me is Michael Ansley, President and Chief Executive Officer and Board Chairman; as well as David Burke, our Chief Financial Officer.

Michael and David will review the second quarter financial results, as well as the company’s outlook. This call will conclude with a question-and-answer session. If you do not have the release or the slides that will accompany our discussion, both can be found on our website at www.diversifiedrestaurantholdings.com.

If you would please refer to slide two, as you are aware, we may make some forward-looking statements during the formal discussion and the Q&A portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from what we state here today.

These factors are outlined in our earnings release, as well as in documents filed by the company with the Securities and Exchange Commission. These can be found on our website or at www.sec.gov.

So, with that, let me turn the call over to Michael to begin. Michael?

Michael Ansley

Thank you, Debbie, and good morning, everyone. We appreciate your time today and your interest in Diversified Restaurant Holdings. Let me give you a brief overview of our results and progress. We had over 11% growth in sales and achieved revenue of $30 million in the quarter, consolidated, comparable. Same store sales were 2.3% when adjusted for Easter Holiday. We continued our streak of 14 consecutive quarter of positive comparable store growth with two year comparable store sales of 7.9%.

Although not part of the quarter, we're reporting, we recently acquired three Buffalo Wild Wings units in Florida market giving us full control of that DMA in which we have been developing for over 10 years.

In early July, we opened the new Stadia design Buffalo Wild Wings in Florida, after lagging in recovery from recession this market is improving and we are benefitting. We are now up to 60 restaurants with 20 Bagger Dave's and 40 Buffalo Wild Wings. That's an increase of 13 restaurants over the last year's second quarter.

We had a record quarterly adjusted EBITDA of $3.9 million which was nearly 20% higher over the prior year. Margin expanded 110 basis points to 12.9%. Operationally, we were also very pleased with the performance of 19.9% restaurant level EBITDA margin.

Other highlights in the quarter include two successful relocations to the new Buffalo Wild Wings Stadia design, one in Florida, one in Michigan. They demonstrated continued – demonstrates our continued investment to remain at forefront providing the best possible Buffalo Wild Wings customer experience.

We've had two successful openings of Bagger Dave's with the new prototype interior and exterior design continuing the brand evolution of our own Bagger Dave's concept of building on the momentum generated in the Midwest. We fully implemented tableside handheld ordering technology in all Bagger Dave's which has been well received and will contribute to delighting our guests and operational efficiencies.

A successful reload of our $20 million development line of credit with RBS Citizens a lead facilitator at the end of March. We are on track with our growth plans, increasingly gaining traction with our Bagger Dave's concept. Continually improving our profitability and ready to deliver on eighth consecutive year of record revenue. Remain on track to have 68 restaurants and over 25% unit growth in 2014, inclusive of recent acquisition and eight restaurant openings planned during the second-half of the year.

With that I will turn it over to David to review the financials. David?

David Burke

Thanks, Michael. Starting on Slide 4, food, beverage and packaging costs as a percentage of revenue improved from 28.7% compared to 29.7% in the second quarter of 2013, a 100 basis point improvement was primarily due to lower chicken wing prices and the average cost per pound for bone-in chicken wings was $1.40 in the second quarter of 2014, compared to the $1.61 in the second quarter of 2013.

Compensation costs increased by $0.9 million or 12.9% to $7.8 million, this increase was driven by additional staffing required for the nine new restaurants. As a percentage of revenue, compensation costs were 25.9% compared with 25.5% in the same quarter last year.

Moving to Slide 5, second quarter general and administrative expenses increased by $0.1 million, or 6.3%, to $2.1 million over the prior period; however, as a percentage of revenue, G&A improved to 7% from 7.3% in the second quarter of 2013.

Pre-opening costs increased by $0.1 million, or 13.2%, to $0.9 million in the 2014 second quarter. As a percentage of revenue, preopening costs remained consistent with the prior-year period at 3%. We continue to expect preopening expense to average between $200,000 and $250,000 per store.

On Slide 6, we review EBITDA. Adjusted EBITDA improved to $3.9 million or 12.9% of revenue for the 2014 second quarter, while restaurant level EBITDA increased 15.8% to $6 million. Depreciation and amortization as a percentage of revenue increased to 8.3% in the 2014 second quarter from 6.7% in the second quarter of 2013, primarily due to the increase in real estate purchases as an alternative to leasing.

As a result, operating profit was $0.3 million compared with $0.5 million. Net loss for the second quarter was $0.1 million compared with break-even for the prior-year period.

Slide 7, shows first-half EBITDA results. Adjusted EBITDA increased to $7.6 million for the first-half of 2014, from $6.3 million in the corresponding period of 2013, an increase of more than 21%. Restaurant level EBITDA was $11.8 million in the first-half of the year, an increase of 20.9% over the prior period – year-to-date period.

Net income for six months ended June 29, 2014 was $0.3 million, a slight increase over the comparable period of 2013.

Looking at our balance sheet on Slide 8, cash and cash equivalents and investments were $17.3 million at June 29, 2014 compared with $18.1 million at the end of last year. Our company believes that its existing cash, cash from operations and its credit facility will be sufficient to meet its operational funding, development and obligations for at least the next 12 months. We're also growing shareholder's equity with book value per share now at $1.32.

Slide 9, has our annual expectations for 2014. We continue the company's peer-leading 20% organic unit growth, with the planned addition of eight locations by year-end. Seven of those are currently under construction. Revenue for fiscal year 2014 is expected to be in the range of $128 million to a $133 million, up from the previous range of $125 million to $130 million to include the recent acquisition.

The adjusted range represents an increase of approximately 17% to 22% over 2013. We're comfortable with this target given the fact that we have not only achieved $60.5 million in sales for the first-half of year, but we also acquired three new Buffalo Wild Wings restaurants. The company's adjusted EBITDA is expected to be in the range of $14 million to $15 million. Restaurant level EBITDA for 2014 is expected to be around $22.6 million to $24.1 million.

I will now turn the call over to Michael for his closing remarks. Michael?

Michael Ansley

Once again, we are pleased with results from second quarter. We are excited about our new branding and advertising strategy with Bagger Dave's that clearly demonstrates the differentiators of Bagger Dave's brands. On Slide 10, you can see the brand evolution of Buffalo Wild Wings and Bagger Dave's.

As I mentioned in the beginning of today's call, we have opened two examples of both the Buffalo Wild Wings Stadia design and the Bagger Dave's prototype in the second quarter. These new designs have been extremely well received. We know that investment on our brands will lead to the best possible customer experience.

Highlights – on Slide 11, the highlights, some of the publicity of Bagger Dave's uniqueness is created in the second quarter. On three separate occasions different items from our menu are highlighted by the media. In fact, one station noted that Bagger Dave's has become a Michigan staple. Some of our key differentiators are the gluten free menu and its full offering, our 8oz Prime Rib Recipe Burger. We continue to focus on that.

Our Turkey Burger which is a leaner option and 18% of our burger sales. Our fresh cut French fries which our specialty boutique potato and locally sourced products and our local beers on tap, our own handcrafted soda and specialty flavors that are now bottled in store, local craft beers again and our free range grilled chicken.

As we continue to grow we're getting greater impact from our marketing spend driving brand recognition for both of our brands. To improve efficiencies we have transitioned 80% of our Buffalo Wild Wings to the Aloha POS system. Over half are now operating integrated online ordering. All units will be fully transitioned by the end of the year.

Our Florida acquisition furthers our Buffalo Wild Wings penetration into the Tampa, St. Petersburg market. We understand that our future growth depends on consistency providing high quality, fresh, flavorful food, outstanding service and entertainment in a clean fresh facility. We are continuing to deliver our sector leading unit growth by returning a remarkable 14 straight quarters of positive same-store sales.

We're confident that we remain in a strong position to meet our revised revenue growth expectations. Operator, we can open the call for questions now.

Question-and-Answer Session

Operator

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Justin Ruiss with Sidoti. Please state your question.

Justin Ruiss – Sidoti & Co.

Good morning, Mike, Dave, and how are you?

David Burke

Good morning. I'm good.

Justin Ruiss – Sidoti & Co.

Just had a quick question on can do same-store sales, I was wondering if you could break-out ticket versus traffic, was there any price taken on the menu at all?

David Burke

Yes, definitely. As you know, we take many prices every time we have the opportunity, so there has been too many price increases over the course of 12 months typically. Of that we reported the adjusted same-store sales, the majority of that is priced in the range of upwards of 2%. There is a little bit of the traffic as well.

Justin Ruiss – Sidoti & Co.

Got you and then if you could just speak to the nature of the rest of the commodity costs. I know chicken wing price as you’ve mentioned in the prepared remarks were down, which is great. But could you speak to just what you are seeing on the beef side and maybe some other commodity costs that you are dealing with?

David Burke

Yes, we're clearly seeing that increases on beef which is our biggest product from Bagger Dave's standpoint. We're also seeing inflation on bacon.

Michael Ansley

Oils.

David Burke

Oils, potatoes, quite a few products there, we are – we are making, so we have some interactions in place to hedge what we can do there, has the volatility et cetera, but we definitely are seeing the pressures in this commodity costs.

Justin Ruiss – Sidoti & Co.

Got you, and that’s it for me for now. I'll get jump back in the queue.

Operator

Our next question comes from Mark Smith with Feltl & Co. Please state your question.

Shannon Richter – Feltl & Co.

Yes, this is Shannon Richter on for Mark Smith, just a few questions for you guys. Can you let me know what the cadence is in the second-half for the openings?

Michael Ansley

We've not given that guidance for this year. We've just given store counts on an annual basis, but it will be more back-end loaded on result and just more standalone restaurants. And we've been seeing this for about the last year-and-a-half is municipal governments and cities have been reluctant or strapped to hire additional people in their building and planning departments. So we are seeing huge backlogs and that's quite frankly, it’s Florida, Indiana, Michigan, all three, where it's taking months for them to read our plans.

And sometimes I can give you one specific county. We are waiting for them to give us a 15-minute review to give us a final, okay. And it’s just – there is no hurry to help us, but we still feel really good about our numbers. But not – the stores that we've opened this year have opened a lot stronger than we expected. So that gives us a lot of confidence in our revenue and our EBITDA.

Shannon Richter – Feltl & Co.

Great. Thank you. Second question, can you discuss your occupancy expense in Q2, it was a little bit – seems a little low to us?

David Burke

Yes, a couple of things I can disclose here. One of which is obviously we're buying more properties, so our lease expense is going to – as a percentage of sales, it’s going to decrease. There is a one-time expense related to the fact that we did a relocation of – one of our Florida stores and with the accounting of straight line leases and we haven't put some of that on the balance sheet, when we get out of that lease, move into another lease, you get that one-time benefit (inaudible). The magnitude is around $100,000.

Shannon Richter – Feltl & Co.

Perfect. And then just last question related to the beef prices again, can you talk about on a comp basis as well as on restaurant level margin given beef prices?

David Burke

Given our portfolio right now as a percentage of totals we don’t breakout the two concepts in the P&L standpoint, but you can just look at the sales piece of it, Bagger Dave's between Buffalo Wild Wings and using those estimates. It’s a relatively insignificant to our bottom line and our total cost of sales.

The greatest impact is going to be with our chicken wings right now, and the it's – the price impact there is great in terms of – in our favor for chicken prices that more than offsets a great deal, all of our product cost inflation for the Bagger Dave's concept.

Shannon Richter – Feltl & Co.

Perfect. Thank you, guys, so much for taking my questions.

Michael Ansley

Yes, thank you.

Operator

(Operator Instructions) Our next question comes from Greg McKinley with Dougherty & Company. Please state your question.

Greg McKinley – Dougherty & Company

Yes, thank you. Michael, you had talked about some strong initial experience with your recent Bagger Dave's openings, two of those in 2Q. I wondered if you can add any color to that. Obviously, I'd love it if you can quantify some of that. I don't know if you're able to do that. But what can you tell us if you can quantify some of the experience you've had there.

Michael Ansley

Yes, we have the – it's early, we're excited about it. And I'm kind of reluctant to quantify it and I don't know that I can but – well, Carmel and Woodhaven are both been the exceptionally strong, especially Woodhaven, which is in our home market, so I think there's better brand recognition but obviously better focus on real estate, and it's been in prototype, standalone and it doubled our previous record, I can say that and – I guess, it's a good problem, but we got to get a refrigerator truck in the parking lot to handle the additional business until we can get three deliveries a week, so…

Greg McKinley – Dougherty & Company

When you say doubled your previous record, you mean in terms like grand opening volumes?

Michael Ansley

Yes, weekly grand opening volume, so.

Greg McKinley – Dougherty & Company

Okay.

Michael Ansley

And it's continuing to perform at a pretty high rate. We're also seeing those stores that we had at the tail-end of 2013 are continuing continue to perform well too. So again a better focus on real estate, obviously, we did some reimaging of the brand. We added the grilled chicken. We enhanced the salads, we have the 8oz Burger which is made of – it is way more competitive in the segments that we operate.

And efficiencies in the kitchen, where there's been huge enhancements in the kitchen and we were not been able to do that volume a year ago.

Greg McKinley – Dougherty & Company

Okay.

Michael Ansley

So we're excited about the restaurants under construction because we feel like they're very similar sites.

Greg McKinley – Dougherty & Company

Yes, actually that's what – it was my next question. So what are the – I don't know if you could just provide more color on that, what are the attributes that you see having contributed to success at Woodhaven and Carmel compared to these next, what is it, five or six Bagger Dave's you plan to open in the second-half? I mean, part of it might be prototype design, I don't know, real estate quality, if you can comment on that type of thing.

Michael Ansley

Yes, real estate quality is key, the enhanced kitchen with better KDU programming we're able to make burgers from two different directions. There hasn't been some other – the handheld devices are helping push orders to the kitchen faster. The new prototype design, interior look has just got a much hipper, cooler look. The exterior got better branding elements, obviously, addition of grilled chicken, which obviously immediately enhanced our salads.

I think we're getting less push back on the burger because, not that our burger was bad before, it's same formulation, but the two patty burger versus the single eight ounce cooked to temperature is I think helping us retain guests much better than previous openings.

Greg McKinley – Dougherty & Company

Okay.

Michael Ansley

So new menu design, there is a lot, not any one thing but it all seems to be coming together and we're seeing improvements in the older stores as well, so pretty excited about the fall.

Deborah Pawlowski

Yes, Greg, before you ask another question. Michael, did you move on your phone or something. We are getting a lot of reverberations.

Michael Ansley

No.

Deborah Pawlowski

Okay. Interesting. All right, I'm sorry, Greg, go ahead.

Greg McKinley – Dougherty & Company

Well, that's all right, thank you. Can you comment on – so you changed your revenue and EBITDA guidance, maybe to the extent you can tell us how much revenue, what's the revenue run rate of the three acquired Florida stores, Buffalo stores? And is the change in guidance there entirely attributable to that acquisition or is there any movement related to the previously existing business?

Michael Ansley

I didn't get save [ph] to say that we changed – the primary driver of the revenue guidance change was the acquisition.

Greg McKinley – Dougherty & Company

Okay. How do you think about the – maybe you can talk a little bit about tableside ordering, what are the – how are the handheld devices being used? Maybe, just tell us little bit about the technology and what that does to the guest experience?

David Burke

Yes, sure. Well, as we said it before we have the normal Bagger Dave's now, and it's been very well received. It actually depicts interest from the guests as well, which was unexpected consequence. You're genuinely interested, hey, this is really neat, this is different but the impact is that you get the speed of service changes. And especially with the larger table, the orders are inputted immediately as the server is speaking with the guests versus having to aggregate eight orders and then give a terminal and input them in.

The accuracy goes up significantly as well. There's really no loss, no error there, because you're repeating the order back to the customer as you are entering into the system. You're not distracted going to another table before you go the terminal or waiting in line at the terminal et cetera, et cetera.

So, you're getting a much more consistent throughput into the kitchen and much more accurate information going into the kitchen which ultimately improves the guest experience and ticket times.

Greg McKinley – Dougherty & Company

Okay. Maybe we can talk a little bit about your balance sheet. Remind us if you could please, where you stand today from a leverage standpoint in relation to your exist – the availability on your existing facilities, number one? And then number two; and I know you've contemplated monetizing some of your own real estate through the sale lease-back transaction. Maybe, comment on what you see the market environment for that being and where you stand with that?

David Burke

Okay. I'll let Michael talk to the sale lease-back in a second. I'll comment on our debt. We're currently about $53 million right now. And we are well within our covenant from lease adjusted leverage ratio and so we're in a very comfortable position from that perspective. And we're looking on alternatives here in the fall, and working with RGS and other banks for taking advantage of our sale lease-back, the proceeds coming in from that, then paying down some of our debt balance, and then re-amortizing, and to take advantage of the pay-down that we did back in April prior to our offering.

So we should – as a result of that, we would see a significant cash flow increase in a month-to-month basis, as a result of our debt payment. So (inaudible).

Greg McKinley – Dougherty & Company

So, what's your current borrowing availability? What's the size of the total facility?

David Burke

Well, we did a $20 million facility. And we are I'd say we're not quite halfway through that right now.

Greg McKinley – Dougherty & Company

But in the – so your $53 million of debt, what's that in relation to your total ability to borrow?

David Burke

Well, right now, we're going to be having another I should say $12 million on top of that, so we can go upwards of probably $65 million right now.

Greg McKinley – Dougherty & Company

Okay.

David Burke

And that's our current adjusted leverage ratio, which we look to kind of do a reset on that. Once we do a refinance, we should have a little more dry powder moving forward.

Michael Ansley

On the sale lease-back side we have five very good offers from some very reputable REITs that we are just determining who can close effectively. We have all the due diligence already on the drop-box. (inaudible) are here. There's probably one that is the lead and probably look to start amending of leases with all those old nuances that we have to negotiate.

But with any luck, we hope to be closed sometime in October.

Greg McKinley – Dougherty & Company

Okay. And…

Michael Ansley

But they're good offers, very attractive cap rates.

Greg McKinley – Dougherty & Company

Yes, okay. And what kind of proceeds would you anticipate from a transaction like that?

Michael Ansley

About $23.5 million roughly.

Greg McKinley – Dougherty & Company

Okay. Okay. All right, thank you.

David Burke

Thanks, Greg.

Operator

Thank you. There appears to be no further questions at this time. I will turn it back to management. Thank you.

Michael Ansley

We appreciate your continued interest and wish you a nice weekend. We look forward to talking to you in the future and updating you on our progress. Have a great day.

Operator

This concludes today's conference. All parties may disconnect. Thank you.

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!

Diversified Restaurant Holdings (NASDAQ:BAGR): Q2 EPS of $0 in-line. Revenue of $30.01M (+11.3% Y/Y) misses by $0.42M.