Country Style Cooking's (CCSC) CEO Hong Li on Q2 2014 Results - Earnings Call Transcript

|
 |  About: Country Style Cooking Restaurant Chain Co., Ltd. (CCSC)
by: SA Transcripts

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

Q2 2014 Earnings Conference Call

August 15 2014 8:30 AM ET

Executives

Bill Zima - ICR Inc.

Hong Li - Chairman of the Board, Chief Executive Officer

Adam Zhao - Chief Financial Officer

Analysts

Michael Vieten - Stifel

Operator

Good day and welcome to the Country Style Cooking Restaurant Chain Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

Now, I would like to turn the conference over to Bill Zima of ICR. Please go ahead.

Bill Zima

Thank you, operator. Hello, everyone, and thank you for joining us on today's call. Today, you will hear from CCSC's Chairwoman and Chief Executive Officer, Ms. Hong Li, who will give an overview of the second quarter 2014, 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 company'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 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 the company's prospectus filed with the Securities and Exchange Commission on September 27, 2010.

We do not assume any obligation to update any forward-looking statements except as required under applicable law. Additionally, during this call, 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 Chie Executive Officer of the company.

Ms. Li will speak in Mandarin and Mr. Zhao will translate into English. Ms. Li, please go ahead.

Hong Li

Thank you, Bill. Welcome everyone to Country Style Cooking second quarter 2014 earnings call. We are please that she has managed to the respectable growth in revenue for the second quarter of 2014. And we remain on track with our network expansion. During this quarter, we opened 17 new stores and closed the three, bringing the total restaurants count to 317 stores. We open our first Mr. Rice restaurant in Hunan City in Hubei province in April. And the market response has been positive in the past few months. Comparable restaurant sales saw a negative growth of 4.1% for this quarter as customer traffic suffered in June stemming from higher level of raining, cooler days in Southwest China where the majority of our restaurants are located. This decline also impacted our profitability in the second quarter. Although we still saw some light lingering impact in early July. We believe the weather impact was a unique factor in our business and as we enter into our peak summer month, customer traffic is expected to gradually recover.

Some of you maybe aware of recent food supplier issue in China. The supplier was selling expired meat, Shanghai Husi Company, which is the division of OSI Group. It's not a supplier to Country Style Cooking. We at CSC take our sourcing and procurement seriously and have taken this situation to conduct a self audit to ensure raw material quality. This incident on one hand could weaken summer confidence in QSR and dining out in general. And to certain extent hurt ourselves for the remainder of this year. On other hand it is very possible that consumers may move away from the prestigious food served as big international fast food chain brand and switch to our everyday Chinese food offering. It is still early to draw any conclusion. But we will continue to monitor market conditions and consumer behavior as we continue to promote more of traditional cooking dishes. Preparation unique style like steaming or stewing are considered healthier than frying. And also vegetables on our rotating menu.

Now I would like to share some interesting update on our IT innovation. We have been investing in our IT infrastructure in areas that include yearly updating a 4-in-1 e-commerce ordering system which provide us with a solid IT support for accelerating service expansion next year and generating additional revenue. In addition, we've been testing stuff ordering and payment system in our stores in a second quarter to reduce their share position and long customer waiting line. We believe our technology innovation will help reduce labor expenses and improve overall customer experience.

Finally, as was announced early today, our plan to gradually transition away from CEO of Country Style Cooking over the course of the next six months. My husband Mr. Xingqiang Zhang who is our co-founder and executive director of CSC will take over the CEO role six months from now on. I am honor that you have led CSC for the past seven years. But after considerable reflection I intended to spend more time with my family. Mr. Zhang has in-depth knowledge of CSC's operation, significant understanding of China's QSR industry and is well equipped to lead company to its next stage of growth. I will remain as Chairman of CSC and I am confident that the transition will be smooth.

On that note, I'll now turn the call over to Adam who will review our financial results.

Adam Zhao

Thank you, Ms. Li. 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 illustrate some of the points that I will be addressing on this call.

For quarter two 2014, total revenue increased to 5.9% to RMB345 million mainly driven by our expanding restaurant network. By the end of quarter two, we had 64 restaurants under Mr. Rice brand which contributed RMB49.8 million total revenues during this quarter compared to 92.5% from the same period last year. We had a 317 restaurants in operation as up to end of quarter two 2014, up from 268 at the end of quarter two last year. Of these 317 restaurants, 164 are in Chongqing, 101 are based around the city of Chengdu in Sichuan province. Revenues from those two market accounted for 88% of our total revenues.

In quarter two 2014, cost of food and paper increased 3.9% year-over-year to RMB157 million primarily due to the expansion of our restaurant network. The percentage of revenues, cost and food and paper were 45.5% at this quarter compared to 46.4% in the same quarter last year.

Restaurant wages and related expenses during this quarter increased by 14.2% to RMB74.7 million, this increase was attributable to increased wage levels and the company's overall expansion of its employee base. Shared base compensation to restaurant staff was RMB1.1 million. As percentage of revenues restaurant wages and related expenses were 21.6% in this quarter, up from 20.1% in quarter two last year.

Restaurant rent expenses increased to 16.2% to RMB36.5 million in quarter two this year along with network expansion as a percentage of revenues, restaurant rental expenses increased slightly to 10.6% in quarter two this year from 9.6% in quarter two last year.

Restaurant utility expenses increased 5.3% to RMB20.9 million in quarter two 2014, percentage of revenues, restaurant utility expenses stood at 6.1% similar to quarter two last year.

Other restaurant operating expenses increased to 7.4% to RMB13.8 million in quarter two 2014. As a percentage of revenues, other restaurant operating was 4% in quarter two this year compared to 3.9% a year ago.

Restaurant-level operating margin was 12.2% in this quarter, a decrease of 170 basis points over the same period a year ago.

Now if we breakout our restaurant portfolio in two groups with 220 restaurants into comparable base and the other 97 outside the comparable base. Then the store level operating margin for the comparable base was 14.7% versus 4% for the non comparable base. This compares to the previous quarter's operating margin of 17.1% and 5.3% for the comparable base and a non comparable base respectively.

SG&A expenses rose 11.1% to RMB20.6 million in quarter two this year. This increase was primarily due to an increase in share-based compensation expenses, an increase in disposal losses on leasehold improvements and equipment of closed stores, and an increase in miscellaneous expenses. Shared based compensation expenses include in SG&A were RMB3.2 million in quarter two 2014 compared to RMB2.8 million in the same period last year. As a percentage of revenues, SG&A expenses were 6% compared to 5.7% in quarter two last year.

Pre-opening expense were RMB3.3 million in quarter two 2014 accounting for 1% of total revenues.

Depreciation expense was RMB19.3 million representing an increase of 13.8% primarily because of the increase in total fixed assets. As a percentage of revenues, depreciation expense was 5.6% slightly up from 5.2% in quarter two 2013.

Impairment charges were at the normal level of RMB1.4 million. Loss from operations was RMB2.6 million compared to income of RMB5.9 million in the same quarter last year.

Now I would like to review certain below the line items.

Interest income for quarter two this year was RMB6.8 million. Foreign currency exchange gain was RMB4,000.

Other income was RMB1 million.

Total below the line other income was RMB7.7 million in a reporting quarter as compared to RMB5.6 million in the same quarter last year.

Income tax expense in quarter two 2014 was RMB1.8 million compared to RMB4.0 million in the same quarter last year.

Net income for this quarter was RMB3.3 million as compared to RMB7.5 million in the same quarter last year. Non-GAAP net income was RMB7.7 million compared to RMB12.3 million in quarter two 2013.

Diluted net income per ADS was RMB0.12 which is US $0.02 in quarter two 2014 compared to RMB0.29 in quarter two 2013. Non-GAAP adjusted diluted net income per ADS which excludes share-based compensation expenses was RMB0.28 which is US $0.05 in quarter two 2014 compared to RMB0.47 in quarter two last year. The Company had approximately 27 million weighted averages diluted ADS outstanding during this quarter ended June 30, 2014.

Non-GAAP EBITDA was RMB17.7 million quarter two 2014 compared to RMB21.2 million quarter two last year. Adjusted non-GAAP EBITDA was RMB22.5 million in quarter two 2014 compared to RMB28.2 million in quarter two last year.

As of June 30, 2014, the Company had cash, cash equivalents and short-term investments of RMB587.7 million compared to RMB581.9 million as of December 31, 2013.

Net cash provided by operating activities was RMB72.5 million for the six months ended June 30, 2014 compared to RMB84.3 million in quarter two last year. Inventory was RMB53.7 million compared to RMB41.6 million in quarter two last year. During this quarter, inventory turnover days were 29 days.

Turning to our outlook. For the third quarter of 2014, the Company currently estimates that its revenues will be in the range of RMB400 million to RMB420 million which is equivalent to $64.5 million to $67.7 million in US dollars representing a year-over-year growth of approximately 2.4% and 7.5%. The Company remains on track to open approximately 60 new restaurants in 2014.

We will continue to maintain cost control mechanism to keep expenses under control and expect a gradual improvement in our business enabling the execution of our new store expansion plan for the full year.

Now this concludes our prepared remarks. At this point, we would like to start taking questions.

Question-and-Answer Session

Operator

(Operator Instructions)

And our first question is from Michael Vieten of Stifel. Please go ahead

Michael Vieten - Stifel

Hi, good evening. Hi, Adam. I just wanted to kind of see if you could provide a little more color in terms of down at 4.1% comp, didn't know if you could breakout any of that in terms of price mix or traffic?

Adam Zhao

Yes, okay. As I said in earnings release the drop of our same stores sales was primarily from Chongqing area specifically, if we looking to the two main factors impacting the same store sales which is one is traffic and the other one is price, our average customer spending size is pretty much the same, but the traffic dropped somehow significantly specially in Chongqing area. In June, we had long raining days which is rare in the past decade. Our local business is highly related to the weather especially in summer season when the weather goes high I mean temperature goes high, people tended to dine out but when weather turns down people tended to stay home due to weather. So the drop in Chongqing area conflect 8% to 9% and most of our portfolio stores are located in Chongqing. I think that's the primary cause or reason -- causing same store sales dropping.

Michael Vieten - Stifel

Sure. I appreciate that. Do you have any I mean I am not sure if you guys have information but how did that -- how was cadence throughout the quarter, was that pretty much isolated in June or is that -- do you guys experience positive traffic heading into May and then heading into June?

Adam Zhao

Yes. As we said the weather was lingering a few days in early July but it's getting slightly better. When looking to the July one single month operating metrics or data, we found that the traffic recovered a little bit. And the average customer spending size remains pretty much the same. So we wanted to say that July is good but again unfortunately in October this month we are having more rainy days than usual. So in quarter three, we are expecting sort of still challenging and fluctuating operating situation. But the overall business was in traffic is gradually recovering from our daily data.

Michael Vieten - Stifel

Okay, appreciate that. And I really appreciate the commentary about the Shanghai OSI affiliate with the meat handling scandal earlier in July. I was just wondering if maybe you could provide just a little bit more color in terms of -- have you experiencing any incremental less heading out of July into August? I know it's only 20 days in or 15 days into the month but do you see anything different, is there general sentiment against western brands, I mean is there any color that you can provide that may sinuate positive traffic momentum heading into the third quarter.

Adam Zhao

Well, the scandal the first kind of Husi Company impacted the entire industry. The news itself has been remaining very high profile, high exposure under the media's interest. But then now the topic is getting down I mean the heat is off but I think the impact on this industry won't leave that quick. And so I believe there is -- the whole impact will be lingering for another few months especially for those direct victims like McDonald. For us I think it maybe a compounded effect. On a one hand as we said it hurts the industry overall. On other hand customers may shift to local restaurants. That's like because we are somehow mutually substituted in terms of dining out choice. But I think the overall industry performance can be little lower than our expectations including our peers like KFC or McDonald or other peers. That's sort of macro industry wise observation from my point of view, yes.

Michael Vieten - Stifel

Sure, thank you. And I guess my final question. I had noticed that there was a pretty big same store sales gap to AUV growth gap in the second quarter. I was just wondering if you could provide any color in terms of any new stores that we are opening if they may experiencing difficulties with the open -- maybe towards the end of the quarter and then quite get the full effect. Any help there would be helpful.

Adam Zhao

Well, this year as you know that we've entered middle China part market. I am talking about Hunan and Hubei. So most of us our stores, new stores to support on were given to these new territories. I think our new stores performance in those new markets was quite encouraging. So on one hand our home market at Chongqing, Sichuan and Southwest of China was impacted a bad raining days, bad weather but in the new market or new stores, so their performance are so far so good and we plan to allocate more resources to this new emerging market. So that we can diversify our risk and promote our business into middle of China region. We think middle China including Hunan and Hubei province will be a new growth engine for this company.

Operator

(Operator Instructions) And our next question is from the Livian Mau of Portberry [ph]. Please go ahead.

Unidentified Analyst

Hi, good evening, management. I have three questions. The first one to ask for Ms Li, so I probably ask in Chinese and then translate it myself. So I will translate for myself. The first question is regarding the CEO transition. So I would like to get more color regarding Mr. Zhang, what's his current responsibility in Country Style Cooking? And after he takes CEO position what additional responsibilities will he take? And for Ms Li like what will be the kind of area -- and what will be change of area and the area of focus for Ms Li? And then second question is that regarding this second half operation, what will be the priorities for Country Style Cooking? I probably ask these two questions first.

Hong Li

Yes. I would like to answer the first question regarding to Mr. Zhang's background. Mr. Zhang is our co-founder of the company. He has been with the company for years, he has been in-charge of mainly -- in-charge of strategy or some strategic thinking and our collaboration as well as -- he also involving in daily execution mission with executive team. At this time, we sort of go through the transition is to clarify his responsibility and he will take the overall managerial role in the executive and I'll be back in board, connecting the board members and try to communicate or collaborate those strategic resource and try to be helpful to Mr. Zhang's role in the management team. That's my answer to first question. The second question, I would like to talk about the second quarter -- second half of this year's implementation. Basically we are going to just maintain our initial strategy of the full year operating unchanged. While we continuing implementing our initial plan including the new store opening and other operations and try to achieve the goal we set up in the beginning of this year. I believe Mr. Zhang's strategy will be in line with our initial plans. And I think he will also leverage his techniques and expertise in some of our mission implementations. I think that would be more helpful for our full year achievement. That's it.

Unidentified Analyst

Yes. Thank you. I have a final question for Adam. So I just would like to clarify, like back in May when you recorded the first quarter numbers. I think the same store expectations like for second quarter back then were flattish. So now with this like negative 4% same store for second quarter it seems to be implying that the same store in June was down something like more than 10%. So then I just like to clarify whether my guess is correct?

Adam Zhao

Well, I say yes. At the very beginning of this year, we were targeting our same store sales for the full year like low to middle positive one single digit number and now we are encountering such a negative same store sales. People would have concerns on the second half performance. I understand these concerns, frankly speaking July was not that bad, not as bad as you mentioned like 10%, no. It is recovering from June's number but on the other hand I would admit the overall industry wise environment is challenging. So it may -- of course it can be challenging for us too to deliver positive same store sales. But the management has been aware of such challenges and we are doing something, leveraging and the market and sales campaign in certain region and try to allocate more resource to the new emerging market in Hunan and Hubei even though our stores in that region are relatively smaller than Chongqing and Sichuan. So by putting all these efforts into our operation, we are striving to deliver satisfactory result. But at this moment, I mean I just can't say the exact number for such a forecast. But believe that the management is trying positive to be in line with our initial plan, Livian.

Operator

I am showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Adam Zhao

Well, this concludes the second quarter 2014 earnings conference call. Thank you for your participation and ongoing support. And have a nice day. Thank you. Thank you all.

Operator

The conference is now concluded. Thank you for attending today's presentation. 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!