Luby’s, Inc. (NYSE:LUB) Q4 2018 Results Earnings Conference Call November 12, 2018 11:00 AM ET
Steve Goodweather - VP, Finance and IR
Chris Pappas - President and CEO
Scott Gray - CFO
Todd Coutee - COO
Greetings and welcome to the Luby’s fiscal 2018 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Steve Goodweather, Vice President, Finance and Investor Relations for Luby’s. Thank you. You may begin.
Thank you. And again, welcome, everyone, to Luby's 2018 fiscal fourth quarter earnings conference call. This call is also being webcast and can be accessed through the audio link on Luby's website, lubysinc.com. Information recorded on this call speaks only as of today, November 12, 2018.
Before we continue, I'd like to remind you that the statements in this discussion, including statements made during the question-and-answer session regarding Luby's future financial and operating results are forward-looking statements. Those statements include risks and uncertainties including, but not limited to, general business conditions, the impact of competition, success of operating initiatives, changes in commodity costs, and supply of food and labor, as well as seasonality of the Company's business, taxes, inflation, governmental regulations and availability of credit, as well as other risks and uncertainties disclosed in the Company's periodic reports on Forms 10-K and Forms 10-Q.
With that, I'd like to now turn the call over to Luby's President and CEO, Chris Pappas.
Thanks, Steve. Good morning, everyone. And thank you all for joining us on today's conference call. With me today are Scott Gray, our Chief Financial Officer, and Todd Coutee, our Chief Operating Officer.
Let me begin by saying that we’re not satisfied with our overall financial results for the year. While operationally, there are several bright spots, the decline in profitability for the whole Company is totally unacceptable. We’re taking actions to improve not only financial results but also our operating performance.
Taking a look across our Company for the fiscal year. Same-store sales decreased 0.5%. Luby's Cafeteria, our largest revenue brand, performed well with the same-store sales up 1.5% for the year. This increase represented two consecutive positive same-store sales quarters to finish the second half of the fiscal year. However, in order to improve profitability, we must significantly improve traffic and sales. Each 1% improvement in Cafeteria same-store sales assuming a 65% flow through is worth about $1 million in store level profit. With over 60% of our restaurant segment profit being generated by the Cafeteria brand, it remains our biggest opportunities in returning the Company to profitability.
At the Fuddruckers, we saw the opposite trend. Same-store sales declined in the last two quarters and it finished down 3.6% for the year. Our franchisees were also down year-over-year. Together with the franchisees, we’ve got to get Fuddruckers sales trend moving in the right direction.
Culinary Contract Services was perhaps the brightest spot in terms of growth where revenue increased $7.8 million, or approximately 44% to $25.8 million compared to fiscal 2017. Fiscal 2018 segment profit was $1.6 million. But based on our current clients, our forward 12-month run rate is about $2.3 million, representing $750,000 or over 40% improvement. We also anticipate adding locations in fiscal 2019 that will further enhance profitability of Culinary Contract Services.
Our franchise segment also remains an opportunity for our Company as we work with our franchisee network and improving the World’s Greatest Hamburger unit economics through actions taken to increase guest traffic and drive sales.
As we continue to take action to improve our operating results, including the closure of over 20 underperforming locations, we progressed on our $45 million asset sales program. As you recall, the purpose of the program is to pay down our debt significantly by selling company-owned restaurants whose property values exceeded the unit economics of continued restaurant operations at those locations. So far, we sold 10 properties in fiscal 2018, generating $14.6 million proceeds, which is approximately 25% of the value of the asset sales planned. Simultaneously, we’re also pursuing a refinancing of our debt under new credit facility. We currently have selected one of the parties from several qualified lenders, and are working through due diligence with them. Once we reach a material definitive agreement, we will announce more details.
As we move forward, we’ll continue to review our portfolio of owned and leased restaurant locations, evaluating them on profitability and taking action when necessary, as evidenced by our closure of 21 restaurants in fiscal 2019. Along with restaurant closures, asset sales program and pending refinancing, we’ve also made reductions in certain corporate support staffing in the fourth quarter. We understand that returning to profitability is the primary goal, and we continue to scrutinize all our costs while focusing on sales growth from all our business segment lines.
Turning to operations. We announced last month the promotion of Todd Coutee to the position of Chief Operating Officer. Todd has worked with us for many years and he has held several significant leadership roles and achieved proven results at our Company, including his most recent position as Senior Vice President of Culinary Contract Services, which has been growing significantly for the past two years. He has also held leadership positions as our SVP of Luby's Cafeteria and Fuddruckers previously. He has more than 30 years of restaurant experience. Todd knows this industry and he knows our Company, our brands and our people extremely well. I'm excited to be working closely with Todd as we guide the Company forward and overcome challenges to return to profitability.
At this time, I'd like to turn the call over to Todd for a few comments. Todd?
Thank you for that introduction, Chris, and I am pleased to join the call today.
As you mentioned, I’ve worked with this organization and these brands for many years, and I can tell you without a doubt, we have a great team. Clearly, we have challenges to overcome, but I'm encouraged about the future, based on my experience of working closely in the field with each of our brands where at one point or another, I’ve held a leadership position. So, I know eminently what it makes and what it takes each brand to tip. I'm currently working with our brand leaders now on strategies that will drive improvements and lead to better financial results.
With experience comes a deep understanding of knowing what works and what doesn't work at the restaurant level. We’re going to overcome challenges, both internal and external by leading, teaching and influencing our talented team members, which could in turn produce great results. That's my commitment and our team’s focus. We have iconic brands that are relevant in today's restaurant landscape and we have room to enhance their appeal to guests through providing remarkable experiences. Our teams in the field will represent each brand through their actions and interactions with our guests, and our fantastic menu offerings will be those that they crave. I believe that these are the keys to generate brand loyalty and repeat business.
I am excited to be working alongside Chris with our executive team, and most importantly, our dedicated team members and loyal guests.
With that, I’d like to turn the call over to our CFO, Scott Gray. Scott?
Thank you, Todd.
We ended the fourth quarter with the debt balance outstanding of $39.3 million, down from $44 million at the end of fiscal third quarter. During the fourth quarter, our capital expenditures were $1.5 million, which compares to $2.4 million in the fourth quarter last year. For the full-year, capital expenditures were $13.2 million compared to $12.5 million in the prior year. Excluding the capital required this year to rebuild a restaurant that was damaged in Hurricane Harvey, capital expenditures were down slightly this year. We expect our capital expenditures to be approximately $8 million in fiscal 2019, which is down 39% from fiscal 2018, given the closure of over 20 company-operated restaurant locations last year.
Our adjusted EBITDA for the fourth quarter was $0.5 million, down $2.5 million year-over-year in the fourth quarter 2018 compared to down $5.6 million in the third quarter of 2018. The fourth quarter decrease in EBITDA was primarily a result of $1 million reduction in segment profit from our three business segments, which are restaurants -- company-operated restaurants, Culinary Contract Services and franchise operations, and a $1.6 million increase in selling, general and administrative costs. The SG&A increase was primarily due to one-time employee separation costs, higher outside professional fees as we pursue refinancing, and increased marketing spend related to our digital marketing strategy.
Fiscal 2018’s full-year adjusted EBITDA was basically flat, $41,000 positive. If you remove stores that were closed, our continuing location EBITDA was $2.4 million for fiscal 2018, and that represents our new baseline EBITDA to measure our projected EBITDA against in fiscal 2019. Given the short-term outlook, the currently contemplated terms in the refinancing do provide the needed liquidity in fiscal 2019 and beyond. This liquidity provides time to improve our cash flow from operations. As Chris stated, we are progressing with our refinancing, currently in the due diligence phase and expect to complete it by the end of this calendar year.
And with that I’d like to turn the call back over to Chris.
Thanks, Scott. At Luby's, we believe we have the right team and the leadership in place to grow our sales and margins, improve our corporate costs, reduce our debt and enhance our returns. Each of the steps we’re taking is with the aim and the goal of returning to profitability.
Operator, we’re now ready for questions.
Thank you. [Operator Instructions] Mr. Pappas, there are no questions at this time. I’ll turn the floor back to you for any final comments.
Thank you all for joining us today, and we look forward to speaking with you again next quarter. Thank you.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.