Chanticleer Holdings' (HOTR) CEO Michael Pruitt on Q1 2016 Results - Earnings Call Transcript

| About: Chanticleer Holdings (HOTR)

Chanticleer Holdings. (NASDAQ:HOTR)

Q1 2016 Earnings Conference Call

May 17, 2016 11:00 AM ET

Executives

John Nesbett - Investor Relations

Michael Pruitt - Chairman and Chief Executive Officer

Mark Roberson - Chief Operating Officer

Analysts

Joe Gomes - William Smith

Operator

Greetings and welcome to the Chanticleer Holdings First Quarter 2016 Earnings Call. At this time, all 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, Mr. John Nesbett. Thank you Mr. Nesbett, you may begin.

John Nesbett

Good morning and welcome to Chanticleer's first quarter 2016 conference call. On the call today we have Mike Pruitt, Chanticleer's Chairman and Chief Executive Officer; and Mark Roberson, Chanticleer's Chief Operating Officer.

There is a slide presentation that accompanies the remarks today. In order to access the slides, please go to chanticleerholdings.com. Then go to the Investor Relations section and click on the first quarter 2016 financial results conference call under the events section, if you log on to the webcast you will be able to access the slides. So again, in order to access the slides, go to chanticleer holdings website, go to the events section in the Investor Relations and you’ll be able to access the slide presentation.

Okay, I like to take a moment to read the Safe Harbor statement. During the course of this conference call, we will make certain forward-looking statements. Any statements that are not historical facts contained in this call are forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995, which statements may be identified by words such as expects, plans, projects, will, may, anticipates, belief, should, intends, estimate, and other words of similar meanings. Such forward-looking statements are based on current expectations, involve known and unknown risks, reliance on third-parties for information, transactions or orders that maybe cancelled, and other factors that may cause our actual results, performance, or achievements or developments in our industry to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements.

Factors that could cause actual results to differ materially from anticipated results include risk and uncertainties related to the fluctuation of global economic conditions, the performance of management and our employees, our ability to obtain financing and required licenses, competitions, general economic conditions, and other factors that are detailed in our periodic reports and on documents that we file from time to time with the SEC. The forward-looking statements contained in this press release -- contained in this call speak only as of the date the statements were made, and the company does not undertake any obligation to update the forward-looking statements. We intend that all forward-looking statements are subject to the Safe Harbor provisions of the PSLRA.

With that, I’d now turn the call over to Mike Pruitt. Go ahead, Mike.

Michael Pruitt

Thanks John, I appreciate it. Good morning everyone, I appreciate all of you have taken the time to join our first quarter conference call. Our company made good progress with several noteworthy developments I’d like to highlight. We achieved strong revenue growth of 34% and $11.6 million in the quarter with our revenue composition shifting to 48% Better Burger from 17% last year. Our restaurants performed well with restaurant EBITDA increasing 85% to $1 million.

We also demonstrated solid improvements in reducing expenses with cost of sales coming [Indiscernible] and SG&A improving to 15.2% as percentage of sales as compared to 21.9% in the first quarter of 2015. Additionally, adjusted EBITDA improved 22%.

Our Better Burger business which includes American Burger Company, BGR the burger joint and Little Big Burger continues to add scale, diversifying our revenue base and providing a solid platform to drive future growth and profit. During the quarter, we announced plans for several new Little Big Burger locations in Portland and Seattle markets and a multi unit franchise deals in Salt Lake City and Baltimore for BGR. I’m encouraged by the progress made this quarter as we begin to benefit from increasing scale of our business and from our aggressive efficiency initiatives. We still have plenty of work to do to get the business to a sustained EBITDA profitability, but as we discuss we have a clear strategy to get there.

Let me now turn the call over to Mark, who will walk through the financials. Mark?

Mark Roberson

Thanks, Mike. Good morning. If you’d like to refer to slide deck, we’ll start on page five as we walk through the first quarter P&L at a high level and then we’ll drill down a bit deeper in the following slides.

Total revenue increased 34% to $11.6 million for the first quarter. The growth in topline revenue was driven in large part by the strong performance in our Better Burger group. We’ll look more closely at the revenue mix in the upcoming slides.

Restaurant cost of sales continued the trend of steady improvement from 35.2% last year to 33.4% currently. As we continue to leverage the larger scale and associated purchasing volumes in that business. Restaurant operating expenses remained essentially flat at 60.3% of sales as compared to 60.2% in the prior year. We realized significant improvements in operating expenses in the Better Burger business where operating expense improved to 54.9% of sales from 65.6% in the prior year.

Operating expenses were negatively impacted, however, by results in Australia; where we continue to operate at lower than normal levels of revenue combined with a largely fixed operating expense structure.

G&A improved from 22% of revenue to 15.2% in the current quarter. The improvement in G&A was a direct result of increased scale and as we are rationalizing the overhead structure of our acquired businesses. As we continue to centralize back office functions and evaluate other cost throughout the system, G&A should continue to decline as a percent of revenue in future periods.

Restaurant level EBITDA improved 85% from 540,000 to $997,000 in the current period. Adjusted EBTIDA improved 22% from a loss of $821,000 to a loss of $641,000. EPS was a loss of $0.07 improving 74% from a loss of $0.27 in the prior year quarter. Excluding Australia and Hungary, where we are currently underperforming, EPS would have been negative $0.04 per share and adjusted EBITDA would have been negative $200,000 for the quarter.

Moving to slide six and slide seven, we’ll drill a bit deeper into the segment revenue comparisons with the Better Burger Group contributing substantially all of the revenue growth increasing from $1.5 million to $5.6 million of quarterly revenue and delivering same store sales growth in excess of 10%. That growth was partially offset by our Hooter's business where we declined from $5.9 million to $4.6 million in revenue. The decline in the Hooter’s business was almost entirely attributable to our international business in Australia where we are in the early phase of the turnaround following administration. In addition, we saw declines in South Africa on a U.S. dollar basis, primarily due to currency but also due to softening at certain stores due to local economic conditions.

While we can’t control the currency side of the equation, it should not react too much to currency driven fluctuations, we are however closely monitoring those locations that show under performance on a local currency basis and developing plans to remedy those situations, either increasing revenue and profitability or exiting those stores in the future.

As an example, I recently returned from a business review in South Africa a few weeks ago where our team is now implementing initiatives that will significantly improve the profitability in that region. Specifically, we implemented a price increase on beer and certain food items in May that will increase revenues and margins meaningfully going forward. We also implemented changes to the staffing structure to reduce overhead and store level operating expenses across all the South Africa stores.

We also renegotiated the rent structure and are implementing plans to downsize our four ways location to a more appropriate size. We are making vendor changes and taking actions that will reduce cost of sales. Those are just a few of the examples specifically from South Africa, but they are indicative of the broader initiatives occurring at each of our business units.

Slide eight demonstrates the changes in our revenue mix with the Better Burger Group now contributing 47.8% of revenue up from 16.8% last year. We intend to continue to emphasize growing our Better Burger Group through organic store openings and franchising both profitability and returns on capital or hire.

Our focus in the Hooter’s business will be on improving profitability and cash flow from our existing stores including exiting underperforming stores where necessary. On slide nine through twelve, we’ll drill even a bit deeper in to the segment profitability and give you a snapshot of our current performance levels and our targets.

Slide nine provides a breakdown of the cost and EBITDA margins for our Better Burger business. Clearly the Burger business is generating exceptionally strong operating results at the restaurant level with 16% EBITDA margins. While the business is delivering strong results, the acquired business offset [ph] a burden with too much G&A which is currently running at 10% of revenue and results in an adjusted EBITDA in the 5% range.

We have initiatives underway to incrementally improve cost of sales and operating expenses and are reorganizing the management structure to address the G&A. In addition to cost reduction initiatives we will be growing our Burger store count and launching Little Big Burger franchising model later this year to drive topline growth. Based on the initiatives currently underway, the achievable EBITDA level target for the Burger business is slightly north of 10% as compared with the 5% rate currently.

On slide 10, we have our Hooters target margin and initiatives, clearly not as strong as our Burger business and it’s clear from looking at the pro forma column that Hungary and Australia are having a negative impact on our margins and operating results.

In the middle column on our pro forma basis, excluding those locations, adjusted EBITDA would be positive 4% for the Hooters group compared to the negative 7% we reported for the quarter.

Clearly the core stores in the U.S., South Africa and U.K. are performing reasonably well but with substantial room for improvement as we discussed earlier with South Africa.

The Australia stores are in a turnaround period following administration and we are continuing to monitor the recovery in store revenue and related profitability. We are actively working to improve store revenue and contribution and are committed to getting them back to profitability quickly. We are exiting the stores that are not contributing to consolidated profitability.

In our other regions, the Hooters brand continues to perform well but could do better. We have the initiatives underway in South Africa, as well as in the U.S., the modified menu selections, pricing to drive revenue growth, implementing supplier and overhead initiatives to further improve their contribution. Based on those initiatives, we see target EBITDA margins for the Hooters business improving to positive 8% from the negative 7% reported in the fourth -- in the first quarter.

On slide 11, we also plan to further rationalize corporate overhead and streamline our back office functions. We are currently consolidating accounting systems and working to standardize day-to-day back office functions. These are fairly typical integration activities and low-hanging fruit that you would see in any organization shortly after acquiring multiple businesses. Though not terribly sexy or exciting, those activities will generate meaningful overhead reductions and enhanced efficiencies throughout the organization, further reducing consolidated G&A.

Slide 12 shows where we are now on a consolidated basis as of Q1 and where the business can realistically get to in the near future. We are confident that the combination of measured growth coupled with targeted cost-cutting measures we are implementing now, will drive the business to these targets as we move through the year.

On slide 13, we have a snapshot of our balance sheet as of March as compared to December. Very little has changed from a balance sheet perspective since December. We recognized the need to strengthen the balance sheet, however, and restructure our existing debt in order to provide a firmer foundation on which to execute our business plans. We're actively pursuing initiatives to refinance our existing debt and secure additional working capital as discussed in more detail on slide 14.

We have four separate initiatives currently underway to strengthen the balance sheet and provide additional financing for growth. First, we signed a letter of intent with the U.S. investment bank for up to $10 million in capital under the U.S. government’s EB-5 program, which we'll use to expand our domestic footprint by opening new restaurants and we currently have three sites approved in Portland. This program is progressing well and we expect to be closing on our first $1 million tranche soon.

Second, we signed a letter of intent with the U.S. financial partner who will provide the capital to open up to 10 new Little Big Burger stores in the Seattle area. This arrangement will enable us to grow Little Big Burger in the Seattle market while conserving capital. Third, we retained an investment bank to place up to GBP10 million and 7.5% interest only bonds in the U.K. This deal is currently being marketed. Should it be successful, the anticipated proceeds will be used to refinance our current debt and to provide additional working capital.

We are also exploring additional opportunities to bring LBB to other markets. These transactions if successful will significantly strengthen the balance sheet and allow for additional growth. However, as with all transactions, we cannot provide assurance as to the likelihood of success until they are actually closed-end funded.

With that, I’d like to hand the call back over to Mike to discuss operational developments.

Michael Pruitt

Thanks Mark. Turning to slide 16, as you know, the last two years we've been focused on executing our acquisition strategy to achieve scaling cash flow to support at being a public company. We have successfully diversified our revenue base with very attractive regional brands in the Better Burger space. The goal now is to focus on driving organic growth while also driving enhanced margins and improving profitability.

We continue to make progress on that strategy in the first quarter. As Mark outlined, we have very specific actions that are taking -- that we are taking to remove costs from the business and these initiatives will continue to bear fruit as we move through the year. However, this is not all about cutting our way to profitability, what has become very clear to us that our regional brands strategy is working.

The stores are performing well. We see significant opportunity to continue to scale that business, which will drive additional public company efficiency. Our top priority right now is to ensure that our platform is solid and that we are moving the business to EBITDA profitability but our longer-term acquisition and strategy is to substantially grow this business and its earning power.

Turning to slide 17. We are very excited about the opportunities we are seeing in our new store pipeline. A hallmark of our Better Burger business is the strong regional presence and customer following that each of our burger concepts contribute. We currently have multi-unit BGR franchise deals in both the Salt Lake City and the Washington D.C. market, with a strong pipeline of additional BGR franchises deals in the works.

BGR already has a strong presence in the Washington D.C. market and will further build upon that with the addition of our 11th corporate owned location in Fairfax, Virginia later this year. Additionally, Little Big Burger will expand its presence with the opening of its ninth, tenth and eleventh Little Big Burger locations in the Portland market in the second half of 2016, further strengthening our presence in the Pacific Northwest.

We are also deep in the process of preparing legal documents and obtaining approvals to launch the Little Big Burger franchising program. Given the exceptional unit economics and return on capital, we are very excited about the growth potential of Little Big Burger and expect to be able to begin offering franchise opportunities in the second half of this year. Just Fresh is also seeing growth opportunities and in February, we announced the opening of our eight Just Fresh location in Charlotte.

On slide 18, as we announced last quarter, we recognized the Australia operations under -- we recognized the Australian operation under the Australian administrative process. As a result, we increased our ownership stake from 60% to 80% in Hooters Australia locations and fourth quarter marked the beginning of that turnaround phase.

We also took greater control over the day-to-day operations of the business and brought a new local management team and a new local partner. Nonetheless, Australia had a $400k negative impact on EBITDA for the quarter and we are very focused on this region not being a protracted drag on our performance. For example, one of the stores continues to substantially underperform and we plan to fix that location or exit it in the very near future.

Slide 19, to conclude our strategy, entering 2016 centers on one, driving the business to sustain EBITDA profitability. We have a clear strategy to get there. Two, grow our Better Burger business. These are excellent regional brands with strong store level economics. Three, improve the performance of our Hooters segment. Our core regions are performing well. There are some stories that we are monitoring closely. We will do what makes sense for our shareholders, either fixing these stores or quickly exiting them.

Four, our regional brand strategy is working. The unit economics are good and we look forward to -- we look forward. We have a long-term strategy in having more regional brands to drive the scale, efficiencies and profits for shareholders.

Thank you. And with that, I'll now turn over for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Joe Gomes of William Smith. Please proceed with your question.

Joe Gomes

Good morning, Mike and Mark.

Michael Pruitt

Good morning.

Joe Gomes

Hey. Just want to delve a little bit more here into the revenues. They came in a little light of what I was anticipating and I understand the Australia part and the currency impacts. I’m looking at the Better Burger segment on a sequential basis, not year-over-year, on a sequential. And on the restaurant revenues, you guide that you did $5.4 million in the first quarter of 2016 but we also did $5.4 million in the fourth quarter 2015, so flat sequentially, which I would've anticipated it being some growth there. Just wondering maybe you can give a little more detail of what was going on in that segment that sequentially we saw flat revenues?

Michael Pruitt

Joe, I mean there is couple of things that were going on that contribute to the sequential trend. Some of it is weather. I hate to use weather but we did have, particularly in the D.C. market, we had somewhere around four, either three or four full days and they hit on the weekend where our stores were completely closed in the first quarter that obviously didn't occur in the fourth quarter.

During the fourth quarter, we also in our Charlotte market, we see strengths around the football schedule. We drive lot of promotions around the Panthers in the Charlotte market and obviously their drive through the playoffs in the fall and into the winter and into the early part of the first quarter and the local games schedule here helps sales there. So, nothing too dramatic that you could point to but those are a couple of the specific details that did impact the Q4 to Q1 trends that you are seeing here.

Joe Gomes

Okay. And thinking with the revenue trends here, pardon me. And I think it was in the December presentation you talked about entering 2016 at a $55 million run rate, annualized revenue run. Obviously, what we did here in the first quarter that’s more like a $48 million annualized revenue run rate, and just trying to get some detail as to what’s the moving parts there that it’s a pretty substantial difference on a year-over-year basis?

Michael Pruitt

Yes. Couple of key factors, one, when we were -- I think we go back to Q3 when we were talking about $55 million, that contemplated a couple of things that included the acquisition of the Margarita villa location in Australia, which we ended up not acquiring.

I think when we got to Q4 we were looking more like low 50s in terms of revenue run rate 50 to 52, and we're just shy of that, but we are shy of that. Again the Australia stores have not return to normalized revenue level quite as quickly as we would like. We were expecting Australia to get back to normalized levels in the spring of this year, probably by April/May.

We're really looking at -- I think it’s going to take probably several months longer. We're seeing continued progress particularly in four to five stores there where revenues are ticking up. But the turnaround process there probably takes a little bit longer than what we're contemplating when we gave you those numbers at the end of last year.

And again, those numbers contemplated if fully normalized back to pre-administration level run rate for Australia. Not necessarily that we were going to get there in Q4, Q1. But once we get there that's what the normalized revenue base would be for the business including the contribution from Australia at those levels.

Joe Gomes

Got it. Thanks for that. And on the Just Fresh business that I believe went from generating operating profit to an operating loss. I'm wondering if you might talk a little bit more what was going on there. We just had 2% same store sales growth in that. Was that what you guys were anticipating? You were thinking maybe revenue growth would be little bit stronger? And then, finally just to wrap-up on the Just Fresh, we’ve talked about the potential franchising there for a while. Just wondering what the status is there?

Michael Pruitt

On Just Fresh, a couple of things, one, again, to Mark's point and I have to bring up whether, but we did it in Charlotte, had a nice term and they loss three days of revenue. Secondly, they are most – second most profitable location, we closed for four days and did a major remodel and we're certainly seeing the stores enhanced sensory model we did that right in a quarter.

And then lastly, there was a little noise in this quarter because we purchased the existing location, in the middle of the quarter and spent some money to do at least a preliminary small renovation to kind of get it prepared for what we're going to do for the larger renovation in the summer when it slows down more. But we've looked at April's numbers; it's bounced back to a more normalized with our expectations.

And then the last piece, on the franchising part as we said back in the fall, we had a consultant. He came and he made a very clear things he thought we needed to implement that franchising program, some are which would be menu changes, some are which we had to include physical store changes and we've tried to in both the last two locations that we've opened, the Valentine location and the latest in the mall to implement those – some of those ideas to come up with some prototypes without the ability to franchise going forward.

Joe Gomes

Okay. Thanks for that. And then finally, if we can go a little bit back here on some of the financing, specifically the 10 million pound deal that's currently being marketed. I think on at least my note say in the last call, you guys had expected that to be closed by mid April. And it’s now mid May, and it’s not – can you provide us a little more color update as to where that is? And if it’s does not close, what are your thought as to what you'll be looking to do in terms of raising capital to pay off some of the debt that is due here in the next six months or so?

Michael Pruitt

Well first of all, we did say that, we thought it would be close by mid-April but unfortunately as it turns out they actually didn't even start marketing it until after the Easter Holidays which was early April. And so, it's currently still ongoing. I've done calls with investors into the last three weeks. We still remain optimistic, but the success of the company is not hindering on that deal in terms of our strategy.

As Mark pointed out in the call, we have two transactions, one the EB-5 money which we're pretty close to as Mark said to breaking actually on the first $1 million, which was open three locations up in Portland. And behind it we have at least another six to eight locations that's currently in the process of being approved under the program that would allow us to open locations under that program.

And then the other is we fairly close. We have three LOIs out on location in Seattle. And we made great progress yesterday on one of those where we're pretty close to being in a position to have at least to fund that. As for the existing debt we have great relationships with them as now with the commercial bank. One is with significant equity holders of us and second is with a group that's coming in here in June to figure out how to restructure an event that it needs to be restructured to go forward and they are a big supporter and believer in what we're doing as a business.

And then lastly so it is we've had now since we put out the press release regarding the debt we've had a number of people approach us including some that are very close to the company as to potentially an alternative debt arrangement in similar size and similar interest rates and so, we're exploring that as a potential Plan B as well.

Joe Gomes

Okay, great. Thanks for the update Mike. Really appreciate it. Look forward to see what results bring going forward.

Michael Pruitt

Thanks Joe.

Operator

[Operator Instructions] Our next question comes from the line of KD [Indiscernible] of Northwest management. Please proceed with your question.

Unidentified Analyst

Hi. Just have a couple of questions here. Would you be able to give us more insight into the store economic for Little Big Burger and in particular could you give us a sense as to what the cash on cash returns are for a store? And then lastly, can you give us an update on how the new BGR location and Springfield, Virginia is performing?

Michael Pruitt

Yes. K.D. [ph] on the Little Big Burger question, first, those stores since we acquired them, have been performing exceptionally well in terms of EBITDA profitability and really all other measures to speak up. We're seeing EBITDA returns in excess of 20% on those stores.

From a cash-on-cash return standpoint, again the beauty of the Little Big Burger model really is in some way is its simplicity. It’s a very small footprint, 1400, 1500 square foot model, low employee requirement from an employee headcount base, simplified menu. Given the combination of EBITDA returns in excess of 20% that we're realizing and those factors results in a very low cost to build a store as compared to Full Service restaurants or traditional Fast Casual.

We're seeing cash on cash returns expected on these stores well on excess of 50% and you're really modeling out closer to 70%. With regards to the BGR, Springfield store, that store is really knocked it out of the park out of the gate, it opened right before the Holiday Season in a location in the food court in the mall there in Springfield. It has exceeded budget since that opened. Pretty much every week in terms of sales volume, and it’s generating profitability margins that are very close to what we’re seeing at Little Big Burger, so we're definitely please with that.

Unidentified Analyst

Okay, great. Thank you.

Operator

There are no further questions at this time. I would like to turn the conference back over to management for closing remarks.

Michael Pruitt

All right. Thank you everyone. And I look forward to speaking to you again after Q2. And we anticipate some good things happening in Q2 that we look forward to sharing with you with our results when we post them in at the end of the quarter.

Operator

This concludes today's conference. Thank you for participation. You may disconnect your lines at this time.

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!