Fogo de Chão's (FOGO) CEO Larry Johnson on Q2 2016 Results - Earnings Call Transcript

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Fogo de Chão, Inc. (NASDAQ:FOGO)

Q2 2016 Results Earnings Conference Call

August 9, 2016 5:00 p.m. ET

Executives

Stacy Murphy - IR

Larry Johnson - Chief Executive Officer

Barry McGowan - President

Tony Laday - Chief Financial Officer

Analysts

Nicole Miller - Piper Jaffray

Andy Barish - Jefferies

Brett Levy - Deutsche Bank

Jeff Farmer - Wells Fargo

John Ivankoe - JPMorgan

Jordy Winslow - Credit Suisse

Operator

Greetings and welcome to the Fogo de Chão Second Quarter 2016 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Stacy Murphy, Investor Relations for Fogo de Chão. Thank you, Ms. Murphy. You may begin.

Stacy Murphy

Thank you. Welcome to Fogo de Chão's second quarter fiscal 2016 earnings call, which is also being broadcast live over the Internet.

Before turning the call over, let me quickly remind you that certain matters discussed, such as statements relating to the company’s strategies or guidance are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties that are described in the press release and the company's filing with the SEC. Any forward-looking statement represents our views only as of today, and we assume no obligation to update any forward-looking statements.

On the call, we may refer to certain non-GAAP financial measures. Reconciliations are provided in the tables in the press release.

On our call today, you will hear from Larry Johnson, Chief Executive Officer; Barry McGowan, President; and Tony Laday, Chief Financial Officer. Following their remarks, we will be happy to take your questions. Now I'll turn the call over to Larry.

Larry Johnson

Thank you and welcome to our second quarter earnings call. Today you will hear us discuss why we are excited about the long term growth opportunity for Fogo despite a challenging industry sales environment and why we believe the fundamentals of Fogo's business model position us for the long-term.

First, we have a distinctive value proposition, driven by our core attributes of a unique and differentiated service model, authentic Brazilian cuisine, competitive price point and customization. All of these position the brand nicely for long-term top line growth and share gain. Our operating model is efficient and generates significant cash flow and high returns on capital and our development strategy capitalizes on the significant wide space to grow domestically and through capitalized joint ventures in international markets beyond Brazil.

Today's environment has its challenges. In the U.S. industry sales have softened with sales decelerating from the first quarter to the second quarter. This softness has continued into the third quarter and has been exacerbated by external factors such as the republican and democratic conventions which had some of the highest viewership ever. In addition, unfortunate recent occurrences of social conflict and violence have also weighed on comparable sales and overall consumer sentiment.

Our U.S. comparable sales in July were not immune from these challenges and softened as well. In Brazil, although the economy is at the bottom of this cycle, the country still faces economic headwinds. As a result and as you have seen in our earnings release, we adjusted our guidance to cautiously reflect today's recent choppy sales environment. Tony will walk through these adjustments later in the call.

In this type of sales environment, guests are being more discerning with their spending and placing a greater emphasis on value, customization, authenticity, variety and speed of service, particularly on weekdays. And our current strategies are designed to deliver on these needs while further enhancing our value proposition and driving traffic through trial and frequency. These platforms include Brazilian brunch, formerly referred to as Sunday lunch. Gaucho lunch, which provides price optionality for guests at weekday lunch, and a Saturday brunch test, an extended dinner hours test aimed at driving incremental traffic and allowing us to further optimize our restaurants capacity on our highest volume day.

Barry will provide more detail on these traffic driving initiatives. The structural efficiencies in our proven business model allow us to continue to drive restaurant level margins approaching 30%, despite a choppy sales environment. This model also generates significant cash flow, allowing us to grow our unit base organically. And as company-owned unit development grows and our international CapEx led joint venture development expands, free cash flow will continue to accelerate.

Turning to top line sales. In Q2, U.S. comparable restaurant sales were down 1.1% with traffic up 60 basis points. Fogo's traffic was 350 and 110 basis points above our peer group's on the Knapp Track high-end steakhouses and Black Box Upscale/Fine Dining Group. In addition to the broader issues impacting our industry mentioned before, our U.S. comparable sales continued to be impacted by softer sales in Florida, as fewer international guests visit these locations due to the strengthening of the U.S. dollar versus Latin American currencies.

The impact of the expansion of the San Antonio Convention Center as well as construction near our restaurant has, as expected, dissipated. We do, however, continued to see economic headwinds related to the oil sector in Houston.

Brazil comparable restaurant sales were down 4%, reflecting the macro-economic and geopolitical headwinds in that country. However, we are encouraged by many economic forecasts projecting 2016 to be the bottom of the cycle and that there is greater clarity on the political front. We are further encouraged by the improving currency exchange rate. Let's remember, we have a 36-year history in Brazil and we have been through these cycles before. Our Brazil operation is a highly profitable business for us that generates strong cash flow while providing us an authentic labor source for our U.S. and international joint ventures.

Moving to the Rio Summer Games. We continue to remain cautiously optimistic about potential upside. We have a flagship store on the beach in Botafogo Bay in Rio and last year we opened a second store in Rio in the Rio Baja area which is near the Olympic Village. So we believe both stores are well-positioned to take advantage of that opportunity. The potential trade-off is that stores in the U.S. could potentially be negatively impacted by people staying home to watch the Rio Summer Games. Regardless of the immediate impact, we are encouraged by the longer term halo of increased awareness of the Brazilian culture, people and cuisine due to the global media coverage. We also believe we will benefit from the direct brand awareness created by Fogo playing host to certain media segments.

From a development perspective, we remain encouraged by our strong pipeline of stores. We recently opened our second restaurant for the year in King of Prussia in the Philadelphia area, located at the center of King of Prussia's bustling new town center, Fogo is just minutes from the King of Prussia Mall, Valley Forge lifestyle center, and historic Main Line.

We also have five signed leases for the remainder of 2016 including one in Mexico and one in the Middle East. Currently, we have two restaurant's under construction in the U.S. as well as one in Jeddah, Saudi Arabia and one in Santa Fe, Mexico City. For 2016, we continue to be on track to open as many as five to six restaurants during 2016, including at least one international joint venture restaurant.

Looking beyond 2016, we currently have four signed leases and one letter of intent. Our development pipeline continues to be balanced to include a mix of entrants into new markets and additional sites in existing markets.

Turning to reimages. In 2016, we expect to reimage up to five locations with the majority of them in the second half of 2016. The goals of the reimage are to ensure the restaurant décor stays fresh and relevant, reposition the bar area to create a more approachable productive space and add dining room capacity where possible. In Brazil, we have already completed one reimage and anticipate one additional Brazilian reimage by the end of the year. While still early, we have seen a mid-single digit revenue lift at that location thus far.

These results are encouraging but still too early to extrapolate out to a broader group that would include U.S. restaurants were results could vary. Now I would like to turn the call over to Barry to walk you through the operational strategies in place driving the brand.

Barry McGowan

Thank you, Larry. Fogo is a distinctive brand with a compelling value proposition. Our strategies around daypart expansion, value price optionality, large group sales have been developed to drive awareness, trial and frequency over time.

On a two-year stack basis, our U.S. traffic for the quarter is up 4.9%. This is 660 basis points higher than our Knapp Track High End Steakhouses peers and 260 basis points over Blackbox Upscale/Fine Dining benchmark. We believe the investments in our various platforms over the last three years position our brand to remain competitive in this cautious consumer environment.

As Larry mentioned, we are working to optimize our highest demand weekend dayparts to understand the impacts of expanding Saturday hours and incorporating brunch over time by opening our last remaining lunch day part. Let's begin with the Sunday lunch, now called Brazilian brunch. In May, we lapped the introduction of this platform by adding traditional brunch dishes with Fogo's distinctive Brazilian twist like Pao de Queijo egg bake, braised beef hash and our Sunday roast. In addition, our guest can expand their experience and enhance it further by adding our Fogo brunch cocktails for $9 in most locations including our caipirinha, passion fruit mimosa, and our Fogo Bloody Mary.

During the quarter, we introduced a new daypart, Saturday brunch test in three U.S. restaurants. We added an extended dinner hours test at five locations. The purpose of this test is to understand the impacts of expanding capacity in one of our busiest days of the week. With Saturday brunch, we are opening a new buffet daypart for guests who use the brand. The extended Saturday hour tests were evaluating the impact of offering dinner menu starting as early as 2 p.m.

Based on the solid results and feedback today, we are planning to expand both tests by the end of this quarter. We are closely monitoring these shifts to clearly understand how we optimize our weekend demand.

Turning to our lunch value initiative. In Q2, we implemented a U.S. system-wide rollout of the new Fogo lunch menu, which we call gaucho lunch. This program delivers real value by giving our guests price options instead of one fixed price. For example, a guest can enjoy the market table which also includes our seasonal hot soup and Feijoada Bar, starting at just $15 with an option to add their favorite cut of fire roasted meat carb tableside for an additional price of $8 to $10. This optionality provides guests another way to customize the experience, perfect for the time pressure, professional, and the guest seeking great value for weekday lunch.

We are confident, the price optionality menu will help us build trial of aware non-users, as well as building frequency of our core users over time. Our U.S. lunch traffic relative to our peers, improved from Q1 to Q2 and outperformed our peers in Q2. Additionally, we also now have three locations in Brazil testing value through price optionality at both lunch and dinner to understand the financial and business aspects of an all-day value offering. Due to the success of the large group program in the U.S., we had started to extend the program to Brazil and are thrilled to have sales managers in place in the Rio market in time for the games.

For the quarter, group sales increased 6% and 18.5% for the quarter on a two-year stack basis. Coupled with [peer] [ph] pricing to accommodate value at all levels, we see strong opportunities for continued growth in package group sales.

Turning to marketing. Over the last three years we have focused our marketing efforts around developing our social media strategy. While growing our databases we have tested messages and offers to learn what resonates with guests and through which channel, resulting in web traffic up over 50%, and Facebook fan growth by over 45% since last year.

We will continue to strive innovative ways to communicated with our guests through social media and engaging creative content to build our growing digital media foundation. Today, we believe we are in a position to explore additional ways to reach new and existing customers. As such, we are examining, cost effective ways to layer media, such as radio, out of home and TV over the next few years to further increase brand awareness, trial and frequency.

And as the world's eye turns to Brazil, we have created, The Fogo Guide to Brazilian Cuisine. This is an online platform with curated content and insiders tips on Brazil to give media and guests an authentic look into the food and culture of Brazil, the birthplace of our brand. We are encouraged by the media coverage in Brazil and U.S. that will continue to elevate the awareness of the culture, the people and our authentic Brazilian dining experience. While not everyone can attend the Rio Summer Games, many can chose to experience the distinctive fire roasted meats through Fogo's authentic Churrasco experience at a location close to home.

Turning to the business model. Our operation team continues to preserve four wall restaurant margins. The major catalyst of cost to sales improvement is attributed to the positive mix shift with current seasonal initiates, minimizing waste and continuing benefit of commodity inflation. Looking forward, we are rolling out the butcher's standard of excellence training platform focused on optimizing the front-end kitchen process to improve quality and continue to reduce waste.

In labor, we continue to see productivity improvements in both the U.S. and Brazil in our comparable restaurant base. However, new restaurant ramp and minimum wage inflation continue to offset the improvements to productivity. Our operations team is focused on working to improve the new restaurant ramp to shorten the time from open to efficient operating levels to offset margin drag of newly opened locations. We will continue to seek incremental opportunities to refine our business model while maintaining our guest experience, preserving our strong restaurant level margins.

So with that, I would like to turn the call over to Tony to take us through the financials.

Tony Laday

Thanks, Barry. Revenue for the quarter increased 2% to $69.6 million. On a constant currency basis, total company revenues increased $2.8 million or 4.2%. The revenue growth is attributable to a 14% increase in operating weeks from new units, which are generally at an average weekly sales rate below the system norm as they typically ramp over three years.

A consolidated comparable restaurant sales decrease of 1.6%, as well as $1.4 million in foreign exchange headwinds, further offset the increase in capacity. Specifically from a U.S. perspective, comparable restaurant sales decreased 1.1% on a 0.6% increase in traffic offset by 1.7% decrease in check. As Larry mentioned, U.S. comparable sales were impacted by challenging industry environment and softer sales in Florida as fewer international guests visit these locations.

Brazil comparable restaurant sales posted a decline of 4%. The decline was the result of continued macroeconomic headwinds in Brazil, coupled with heightened political uncertainty in the second quarter resulting from the impeachment proceedings of Dilma Rousseff, Brazil's President. As Larry mentioned, we are encouraged by the improving currency exchange rate, relative clarity on the political front, and the potential positive impact of the Rio summer games.

Cost of sales decreased to 120 basis points to 29.1% due primarily to mix shift, waste initiatives and to a lesser extent, commodity deflation of approximately 20 basis points. Our team uses seasonal innovation to drive favorable mix shift while maintaining the integrity of the experience. This accounted for approximately 55 basis points of the change. The remainder of the change is generally attributable to our waste initiatives in both the U.S. and Brazil.

On a quarter-over-quarter basis, labor was nearly flat in terms of dollars at $15.8 million. However, the prior year quarter included $1.5 million of share-based compensation expense, as compared to $74,000 this quarter. Excluding share-based compensation, normalized labor increased to 150 basis points. New restaurants accounted for nearly 125 basis points as they continue to ramp. Also the addition of a third manager to support growth represented about 40 basis points. Minimum wage inflation was approximately 20 basis points. These collective headwinds were partially offset by improvements in workers compensation and lower manager payroll items.

Occupancy and other operating cost increased $1.6 million to $13 million. As a percentage of revenue, this is a 190 basis point increase to 18.6%, primarily driven by higher cost of rent as a percentage of sales in our non-comparable restaurant base, given these stores are early on the maturity curve.

General and administrative expense was $4.8 million as compared to $17.2 million in the prior year quarter on a GAAP basis. After removing the $7.9 million impact of onetime items related to the IPO and adjusting for share-based compensation, G&A increased $246,000 and 40 basis points to 6.6%. The increase is primarily attributable to headcount cost as we build infrastructure to accommodate the needs of a growing public company. This was partially offset by lower performance bonuses. As we have discussed in previous calls, we believe we have acquired the right talent and resources necessary to drive growth and evolution of the brand.

Our G&A cost as a percentage of sales are expected to continue to flatten out and will begin to deleverage over the next two years. Depreciation expense increased $749,000 to $3.9 million due to the five restaurants opened in the last 12 months. Reported other income and expense in the quarter declined approximately $3.1 million to $606,000. The decrease relates to a reduction in the average outstanding principal balance owed and a reduction in interest rates after using the proceeds of the IPO to pay down the senior credit facility.

The effective tax rate for the quarter was 33.5%, slightly above our anticipated normalized rate between 32% and 33. Our GAAP net income for the quarter increased to 152% to $6.2 million. Diluted EPS improved $0.11 to $0.21. On an adjusted constant currency basis net income decrease $869,000 to $6.3 million. Adjusted diluted EPS decrease $0.03 to $0.22. Our efficient business model generates significant cash flow for purposes of reinvesting back into the business and growing shareholder value over the long-term.

During the first half of 2016, we generated $25.4 million of operating cash flow and completed a $5 million and $3 million pay down of debt in Q1 and Q2 respectively. We had $89.7 million available on our $250 million line of credit, the company's only debt. At the end of the quarter, the company had cash on the balance sheet of $27.5 million. As Larry discussed, today's environment has it's challenges. In the U.S., industry sales have softened as sales are decelerating from the first quarter to the second quarter. This softness has continued into the third quarter and is being exacerbated by the external factors such as republican and democratic conventions and overall dampening of consumer sentiment stemming from the unfortunate acts of violence taking place. And Brazil is still facing economic headwind which the summer games will only temporarily mask.

Given the external volatility and the effect it can have on our small comp base, we are adjusting our guidance to cautiously reflect to this recent choppy sales environment. We are updating our annual diluted net income per share guidance to $0.85 to $0.89, versus our previous range of $0.93 to $0.96. This compares to adjusted diluted net income per share of $0.82 in fiscal 2015.

The company's 2015 results were positively impacted by $0.06 as a result of the extra week in the fiscal year and an additional $0.05 for the continued increase in the exchange rate of the Brazilian real to 4.11 real to US$1. As we have previously shared, our third quarter has historically been the lowest seasonal quarter in both terms of total revenue and EPS contribution. As a result, the sales deleverage stemming from changes to our guidance is expected to have a greater impact on our Q3 results as compared to Q4.

Our revised net income per share guidance for 2016, includes the following assumptions. We now anticipate total revenue of $281 million to $285 million. Previously $290 million to $294 million. Assuming exchange rate of 3.66 Brazilian real to US$1, previously 3.84. We expect company comparable restaurant sales to decrease to 1.5% to 2.5%, previously flat to 1%. At the end we would expect the volatility of the current environment to have a greater impact on our 3Q results compared to the fourth quarter.

We now expect the restaurant contribution margin of 30% to 31%, previously 31% to 31.5%. We continue to expect to open five to six restaurants including one joint venture restaurant this year. Pre-opening cost guidance remains at $3.4 million to $4 million. General and administrative expense guidance remained at $20 million to $21 million. Depreciation expense guidance remains at $14.7 million to $15.2 million. Our capital expenditures, net of tenant improvements, guidance remains at $28 million to $32 million. Tax rate guidance remains between 32% and 33%. Our full year diluted share count guidance remains at approximately 29 million shares.

Now I would like to turn the call back over to Larry for closing comments.

Larry Johnson

Thank you, Tony. In closing, I believe Fogo delivered a solid quarter in a volatile consumer environment. We outpaced our U.S. peer group in traffic growth, navigated a tough economic environment in Brazil, saw improvements in productivity and margins through our operational initiatives, and leveraged our G&A infrastructure.

I believe in Fogo. I believe we are not just a growth company but we are a growth company that generates a tremendous amount of excess cash. It's exciting when we think about the level of flexibility that gives us in terms of what we can do, to drive shareholder value.

Now, I would like to turn the call over to the operator to open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Nicole Miller of Piper Jaffray.

Nicole Miller

Appreciate the update. Can I ask specifically what the traffic was in Brazil in 2Q? I believe you gave us the U.S. positive traffic of 0.6 and I don't want to overlook what it was in Brazil. And then how should we look at that with the Olympics performance ongoing right now? Thanks.

Barry McGowan

Yes. So the traffic in Brazil was down just about 9.9% for the quarter, on price of 6.6. Then the remainder was the mix shift. And so, as Larry discussed regarding the Olympics, we are cautiously optimistic in thinking about what that’s going to impact -- the impact that’s going to have on Q3, as we talked about too. So we are just getting started, this is our first week, so very early to tell what kind of impact we are going to have. The second part of that though is, we are also cautious in the U.S. because this is one of the first Olympics, I think, in two Olympics where we are in very similar time zones. And so there is the potential impact of people watching at home and not necessarily going out to dinner.

Nicole Miller

Okay. And then is there a way for you to tease out, like any big party or private party performance, and how those areas are doing and if there is anything notable in terms of alcohol trends?

Barry McGowan

Nicole, just for large group sales?

Nicole Miller

Yes.

Barry McGowan

Yes. Okay. So what we see and check is there is about a 6% differential in alcohol mix, so our checks average 70 with large group. So you can take that, you just see more alcohol. So it's more profitable check. So we would say, I guess, it's about 5% differential on our average PPA. Does that answer the question?

Nicole Miller

I mean when you look at large groups, are you seeing more of those large groups come in, are you seeing less? Are you seeing them spend more, spend less? Just a little color on what they are doing.

Barry McGowan

Well, overall, large groups for the U.S., large group sales are up. Obviously, 6% for the quarter. So on a two-year basis, 18.5%. Check has continued to grow there. So we have added more options on our check and what we are seeing is, remember this is our third year of this program, so we finally at the beginning of this year staffed it. But what we are seeing is their check moved from about, I would say, I think it was about 64, all the way to about 70. So we are seeing them going from the, what I call our first tier package and we are seeing the migration going up, which is nice. So that just gets back into the ramp, more effective selling. So we are seeing growth in packaging and if you would, growth in the premium package with more premium check. So, Nicole just to note, just got the pencil here, it's 2.2% lift in check, so it's not 71, $71 in check. So that begins to shift in packaging on the sales which is great to see.

Operator

Our next question comes from Andy Barish of Jefferies.

Andy Barish

The new restaurant opening inefficiencies in that, and I think you mentioned kind of 125 basis points on the labor line. Is that being exacerbated by the couple of softer openings, Puerto Rico and Woodlands, Houston, or is that kind of in the range of what you would expect on an ongoing basis?

Barry McGowan

No, you are right. That is being exacerbated by the lower revenue in those restaurants. I mean as you are aware, as you ramp you have the curve to begin with. But then on top of that, if you got lower than expected sales, that’s a negative impact from that perspective as well.

Andy Barish

Okay. And then any quantification? I know last quarter you talked about San Antonio was kind of, may be 100 basis point impact on comps. Any sense in the 2Q on how that wound up shaking out?

Barry McGowan

No, actually, it, San Antonio did bounce back and so not an impact this quarter from a negative perspective. What we did see and in our comments we talked about what's in Florida, and so we are still seeing that continued kind of softness in Miami and Orlando, and if you take a look at that impact, that was about 70 basis points for us.

Operator

Our next question comes from Brett Levy of Deutsche Bank.

Brett Levy

Would you be willing to offer any additional input into what you think is a proper way to think about the 3Q and 4Q cadence? And also when you talk about the slowdown, any thoughts, would you be willing to share where you ended domestic comps in 2Q and if we're thinking about this correctly, if you're talking about a down 1.5% to 2.5% full year same store sales, that's kind of a mid single digit decline in the back half. Is that where July is trending right now?

Barry McGowan

Well, as we have discussed in past, we don’t necessarily discuss inter-quarter sales. But as we talked about in our comments, one of the things we did see was the continued deceleration from Q2, just like the industry. And you are absolutely right, the guidance we gave obviously reflects that impact and is reflected in our Q2 and Q3 assumption from a same store sales perspective. So you are right in mid to single digits. But I think the other key point though is that, in Q3, just from an absolute revenue perspective, it's a much lower number than our total revenue in Q4 and so the deleverage in Q3 is a much greater impact on EPS than fourth quarter. Does that help?

Brett Levy

That does. And also, would you be willing to share any additional thoughts on commodity and labor outlook for the back half of the year? I know you are breaking down your restaurant level margins by about 100 basis points. How should we be thinking about the mix between other commodities and labor? Thank you.

Barry McGowan

You bet. Just overall commodity we see, as you know, last year we are cutting through kind of all the favorability and how we procure versus other concepts. We buy box meats, so we buy by quarter opportunistically. So we are cutting through some pretty low cost. We see the deflation impact kind of, if you would, minimizing going into the latter half of the year. We feel like we can maintain and I think as pointed out in the script, deflation benefit is about 20 basis points this quarter. So we are still focusing on quality butchering and minimizing waste. And I would say this, we were also looking in the last half of the year towards the end to continue to invest in more innovation and some of that cost is going to be, I guess, help offset. So I think if you think about commodities, going into the second half, we feel like it's going to be flat to slightly deflationary. So we call it flat to negative one. And then if you look at labor, we still have the headwinds and I would say we are cutting through that. We have productivity measures in place and what we are really focusing on was large group sales. Again, we are leveraging that to help drive, obviously the efficiency of those checks.

And again, as we stated in the comments, really focusing our new restaurants, just making sure they are ramping and getting up to what we think, operating efficiency they need to be at those current levels of revenue.

Tony Laday

And we would expect to continue to see about a 3% increase from an inflationary perspective on wage rates.

Barry McGowan

Exactly.

Operator

Our next question comes from Jeff Farmer of Wells Fargo.

Jeff Farmer

Just following up on the COGS question. I just heard what you said about the commodity component of the cost of goods sold make up but I think you also pointed to something like 55 basis points of both mix and waste benefit in the Q2. So I'm just curious how much of that, let's call it 110 basis points benefit, do you carry into Q3 and Q4?

Barry McGowan

You bet. I would say this, what's exciting is, that’s makes us coming from our lunch rollout. We are seeing some of that benefit of those cuts that are coming through. So that’s benefitting. However, as we go into the fall season, we are also going to be doing innovation around some other cuts that may offset that. So we are being cautious and again, as you look at our COGS from last year, we are cutting through pretty strong procurements that we feel like that’s probably going to dissipate into Q3 and Q4.

Tony Laday

Yes. So we started a lot of that mix shift initiatives in the fourth quarter of last year and so as we begin to lap it, obviously that will dissipate in the fourth quarter. Yes.

Jeff Farmer

Okay. And then, again you touched on this, but I think last quarter or maybe it was off line, you guys talked about the fact that, what is now called Brazilian brunch, had 180, I believe it was customers per unit per day which was almost double the 100 guests per unit you had when you first rolled this out in May of '15. I am just curious, you went from 100 to 180 a year later, did it continue to improve in the Q2 and would you expect it to further improve?

Barry McGowan

Well, as we ramp through again, so we are lapping through, we are still seeing strong traffic and we are maintaining that. So I would say, it was about 170. We went from about 140 to about 173 guests on average kind of the first 13 to second 13 weeks, and we are modeling about 170 going out. So we feel like we are cutting through or maintaining. So I would say, we see that continually to ramp as we go through slightly, but again, just being cautious in the current environment too.

Operator

[Operator Instructions] Our next question comes from John Ivankoe with JPMorgan.

John Ivankoe

Larry, in the closing part of your prepared remarks you mentioned the cash that the business was generating and to put words in your mouth, some things that you could potentially do with that cash to add shareholder value. So I just want you to elaborate what that may mean and I just want to go a couple of different places with that. One, your current cash and equivalents at the end of the second quarter was $27.5 million, so how low could that go? And then secondly, if we are even alluding to dividends or stock buyback, what do the credit agreements allow you to do at this point, what would those thresholds be if you wanted to start returning cash to equity holders as opposed to debt holders?

Larry Johnson

Good question, John. Tony, you want to walk through what the scenarios are?

Tony Laday

Yes. So let me start with where I think you are going from a cash balance perspective. We got $27.5 million and when we think about it just from a working capital requirements perspective, we need about $8 million in terms of just being cautious in making sure we have got enough capital there. So that number could go lower. And one of the things to think about too though is, as we think about growth internationally not just the Middle East and not the JVs but potentially and kind of those things, we may use that cash flow, that cash that’s in Brazil, just on that. But to answer your question specifically, that could be about $8 million.

John Ivankoe

Tony, what about -- so that's from a working capital perspective. What about, assuming that you guys are getting, you have every intention to continue to grow new units, what about from a CapEx perspective? Like what would be the right minimum cash balance for the company at this point, assuming that you continue to grow in units, which I think is your plan?

Tony Laday

Well, as you know, we continue to drive cash flow every quarter. So when we think about our growth going forward, we don’t really see a pull down, a significant pull down in that $27 million as a result of that. Because every quarter we continue to drive cash flow. So that’s going to be one of the things we talked about before, is that we continue to build up that cash from a $27 million perspective and over time although there will be some choppiness in the quarter, but if you think about if from a full year perspective, that number would continue to grow. And then that would give us the ability with the excess cash flow coupled with the liquidity we have from a debt perspective. So we have $87 million left on your $250 million line of credit. We could technically increase that to $250 million. Right now, when we look at our credit, our covenant, we are way in balancing those covenants.

So thinking through that number, we could be at 250 and still be within our covenants from a bank perspective. And so adding those up you got $100 million over $100 million.

John Ivankoe

That's very interesting. But in terms of the revolver, like your credit agreement, it doesn't matter whether the money goes to the equity holder or whether it goes for new unit expansion for example. I mean is the credit agreement indifferent in terms of where -- if you were to fully draw the revolver, is it indifferent in terms of where that draw would go?

Tony Laday

It's indifferent.

Larry Johnson

John, and the other thing that’s interesting as we go forward on growth, you know the two joint ventures that we have got now and our model on that is, is that essentially we don’t put any CapEx into those deals. So as that ramps up, we had estimated that in the Middle East, for example, it would be six to eight stores. In Mexico, it would be six to eight stores. So we are now into our second store in Mexico, we will be opening, are projecting to open our first store in the Middle East this year. So those should pick up pace and that essentially is not absorbing any of that excess cash. The exception to that maybe something like Canada where we likely would do that investment as a whole unit company investment. But as we look to Asia and Australia, those likely would be joint ventures, Europe would be joint ventures. And the rest of South America would probably be joint ventures and we would target those as being in the net same CapEx light mode. And we have had very good reception to that given the AUVs and the margins that we are dealing with on the stores.

John Ivankoe

Let me ask you, if we have the time, in terms of how the accounting for the first Mexico store has been done. Now that unit is actually consolidated in company revenue and then the income is backed out, is that how that works?

Larry Johnson

That’s right.

John Ivankoe

Okay. So Is that, just because I can't really see that in the income statement, is that unit -- are the sales achieving what you expected, table turns, alcohol mix and overall profitability in the unit? I know it's only one unit, but just give us a sense of, as you guys start the international joint venture program, maybe how that unit in particular is trending.

Larry Johnson

That unit, we are still learning from that one, John. That one, if you remember, is in Polanco. It's a three floor unit and that is on the smaller side. So for example, if you would compare it to the unit that we are constructing now and in the Santa Fe neighborhood, that store is probably about 30% larger. And then we want to -- the additional issues that we are dealing with in the first store is, we have one bar area on the third floor that we are still working to get the permit to be able to operate that. So that one is still note where we would consider full capacity. But we will get it there, and again, the store in Santa Fe does not have that issue.

John Ivankoe

Okay. Understood, thank you for that color. And then the final question for me, and referencing Andy's question about new unit volumes, I think the question there was about Puerto Rico and Houston, but I'd even kind of extend it, or Woodlands I should say, extend it further to markets like Summerland, maybe Naperville, some other units that you have around the U.S. How are you feeling about like more midsize markets in terms of future Fogo development? How are you feeling about fill-in as you are starting to have some experience in fill-in in markets like Houston, Chicago and soon to be Dallas?

Larry Johnson

We approach these really on, each one is a unique situation. And if you put it in a context, the 2015 openings were clustered in Q4 for the most part. Naperville was in Q1 of this year and what you get in that is what we think is not a normal opening and ramping. Remember the model assumes, we typically look at our ramping as taking up to three years in our new stores. So you had stores in Q4 that we don’t think are the optimal time to open, but again you have to work with when the properties are delivered and the development is working through. The other one that we think has impacted these stores is that because of the softening that took place towards the end of Q1 and then into Q2, we think that that actually has had a bit more of an impact on the new store openings then on the existing stores.

So this is one that, as we are working through that, we are learning and we certainly are encouraged that, for example, multi-units, our experience in Chicago with Rosemont. Rosemont, we are very happy what that store is doing. And that was not a store that in the first three months was at full ramp. So these stores, they do have different ramp period. And the way that we budget them is we look at that as, it can be as much as a three year ramp period on them.

Operator

Our next question comes from Jordy Winslow of Credit Suisse.

Jordy Winslow

Hi, it's Jordy on for Jason. I was just hoping, one, you could clarify your comments on your view of the state of the industry and the consumer. Some of the things you were referencing in terms of internal factors, it sounds like you think this is more of a short term dip. Is that the case?

Larry Johnson

We think it is but, again, it's something that we are analyzing this daily and weekly as everybody in the industry is and looking, drilling down in a granular fashion in each store to understand what is going on. But we certainly, as we indicated in our release and our script, we feel the consumer sentiment that is out there now and we see it.

Barry McGowan

Yes. Because when you think about the underlying economic factors, there is nothing systemic there that would lead you to believe that there is something long-term from an economic perspective. And so then when you think about the other different factors that are impacting that, you can go from, yes, there is a bigger gap between price and inflation between grocery store and restaurant, what we have seen, our correlation between same-store sales and that's typically cyclical as well. But you don’t see the same kind of recessionary trends that you would see from an economic perspective that’s in this quarter or that we foresee. And so therefore, when we think about it, a lot of it appears to be sentiment and point your finger at it exactly is just tough to do, I think.

Larry Johnson

Yes. When we started to see this, we went back, again, we have been doing this now for 36-37 years and when you go back and you look at it, in 2008, the summer of 2008, it was a very very different sentiment and you could see that there were real fundamental issues in the economy. And that’s not what we are seeing at this time. Same thing in Brazil, there are factors that work there that are just different. So we are hopeful that this is short term. And, again, when you look at the consumers today, consumer balance sheets are, they are healthy. Yes.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Larry Johnson

Very good. We appreciate everybody's time and questions. Again, we reiterate that we are confident in the future going forward. We have a strong model. We have a company that has the opportunity to grow, grow profitably and continue to generate substantial excess cash. Thank you and enjoy the Rio summer games as we go through the month of August.

Barry McGowan

Going into the Fogo though.

Larry Johnson

Yes. Fogo was prominently featured as you watch the media.

Operator

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

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