Q4 2019 Earnings Call
Greetings welcome to the Carrols restaurant group fourth quarter full year 2019 earnings conference call.
At this time, all participants are in listen only mode.
Following the presentation will conduct a question answer session and instructions will be given at that time.
I would like to remind everyone that this conference call is being recorded today Tuesday February 20, Fiveth 2020 at 830 am eastern time and will be available for replay.
I'll now turn the conference over to Tony Hill, Chief Financial Officer. Please go ahead Sir.
Thank you, Rob and good morning, everyone.
I know you should have access to our earnings announcement released earlier. This morning, which is available on our website at www Dot girls Dot com under the Investor Relations section.
Before we begin to remarks I would like to remind everyone that are discussion will include forward looking statements, which make it system comments regarding our strategies intentions guidance or plans.
These statements are not guarantees of future performance and therefore undue reliance should not be placed on them.
We also refer you to our filings with the FCC for more details, especially the risks that could impact our business and result.
During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance.
Presentation to this additional information should not be considered an isolation, whereas a substitute results prepared in accordance with generally accepted accounting principles reconciliation to comparable GAAP measures its available with our earnings release.
With that I will now turn the call over to our chairman and CEO, Dan Ackroyd Dino Dan.
Hi, Thanks, Tony and good morning, everyone.
Let me briefly recap 2019 and discuss our strategy for 2020 before I turn the call to over to Tony to review, our quarterly financial results and provide 2020 guidance.
Thousand 19 was a busy and productive year Adcare old where we put in place growth catalyst for which we intend to reap benefits for years to come.
We increased our total revenue by 24% to 1.46 billion and substantially expanded our portfolio size by over 30% to 1100, one restaurants in 23 states primarily through our transformational transaction with Cambridge that we completed on April Thirtyth.
In addition over the course for the year, we successfully built 31, new restaurants, including 21, Burger King and 10, Popeye's restaurants, and remodeled 74 Burger King restaurants importantly, as you know the Cambridge acquisition brought to US a strong growing and strong second brand and Popeye's, we were very excited about the tremendous potential.
This brand has within our portfolio as part of the transaction, but even more so now given the success of the chicken sandwich platform since its launch last August and relaunch in November.
Specifically, we think the sandwiches changing the demographic profile, the popeye's customer because as a handheld item that is more lunch friendly and more female friendly overtime and supported by further product extensions. We believe it can have significantly.
Positive implications for Popeye's financial performance and future development.
Nevertheless, we also faced some real challenges last year, well, we posted 2.2% growth and Burger King comparable restaurant sales for our solid two year trend of 6%. This annual result was at the lower end of our expectations due to a deceleration during the last two months of the year.
Fourth quarter itself comparable restaurant sales rose, 2% October started out strong and we had anticipated that momentum would continue however, unfortunately trend softened in November and December despite the success of the impossible whopper in our lapping the highest levels of discounting during those two months during the fourth quarter promotions and discounts.
I think fell 19% that comparable Burger king restaurants, as a percentage of restaurant sales compared to 26.6% and a year ago fourth quarter.
Recapping Burger King fourth quarter marketing and promotions the brand feature the two for six mix and match the impossible Whopper. The dollar 49, 10 piece chicken Nuggets, four or five and six whopper meal deal. The crispy talk all the pretzel Bacon King Chicken Caesar sandwiches, and a rodeo stacker King.
Notably in a year ago fourth quarter, Tempe Chicken Nuggets, one dollar.
Although adjusted restaurant level EBITDA on a per restaurant basis at carols has historically been relatively consistent over long periods of time, our full year 2019, adjusted restaurant level margins declined by 300 basis points and our adjusted EBITDA margin declined by 280 basis points compared to 2000.
As an 18 adjusted EBITDA for 2019 was 86.1 million.
These 2019 results were impacted by labor cost pressure and commodity inflation at our leg legacy Burger King restaurants.
Investments in restaurant staffing staff training and management oversight as part of the Cambridge integration and the excess sales discounts to certain customers over a 10 week period last summer as we previously disclosed.
Cambridge integration is on track in terms of our integration playbook, we completed the Pos system implementation in November.
We're now working with the upstream to increase customer satisfaction scores, which will lead to higher sales and optimize food and labor costs among other items.
We began 2020 with renewed optimism regarding what we can accomplish with respect to our restaurant sales and EBITDA growth trajectory I had been in this business for a long while and I'm confident that we will return to normalized cycle average restaurant level profitability over the longer term.
In addition, as I will explain in more detail in a moment, we have reset our priorities for 2020 in terms of capital allocation, taking a more disciplined approach to expenditures that we believe will lead to free cash flow generation. This year.
Based upon Burger King's marketing initiatives and product rollout schedule, including adding a delivery option for customers beginning late in the second quarter, we projected 2% to 3% improvement when comparable restaurant sales were 20 point.
Our topline will also reflect a full years benefit of revenue in the 349 restaurants, we acquired remodel and built during 2019 in early 2020.
Additionally, with all of our IP systems now in place for inventory management and scheduling the labor investments and training on these systems already completed we expect to improved cost of sales margins that are Cambridge Burger King restaurants.
By approximately 100 basis points in each of the first three quarters of 2020.
We are also confident that we can close the sales gap between our Cambridge and legacy Burger King restaurants, as we narrowed the differential in guest satisfaction scores and eliminate remaining cash on food loss issues at the Cambridge restaurants.
In terms of Popeye's, we expect to improve cost and sales and labor restaurant labor costs in 2020 by 200 basis points in 300 basis points, respectively as a percent of sales in 2020.
Finally, we expect reduced head winds at our legacy Burger King restaurants on the cost of goods sold and labor Brunson 2020, compared to the steep headwinds faced in 2019.
Now, let us discuss our 2020 strategy.
Given the work remaining to be done in improving the restaurants that we acquired last year, we give consulting with our board and have decided to reset our growth and capital allocation strategy in 2020 to prioritize organic sales and margin improvement within our current restaurant portfolio and too aggressively reduced our capital spending in order to generate free cash flow.
And Delever our balance sheet.
As we stated in our January investor presentation, or non discretionary capex will naturally declining after 2020 now that approximately 85% of our restaurants have been remodeled and the average tenure of our franchise agreements is 12.8 years. Nonetheless, we saw an opportunity to more aggressively reduced our capital commitments even.
Sooner, which will set the stage for us to generate free cash flow in 2020.
The company will be uncompromising unemotional and its commitment to only the highest ROI projects not all capex projects have equal returns for example, new restaurant development and markets with advantageous real estate and labor costs will be prioritized among others.
The ROI is an associated payback periods on restaurants that we can develop ourselves are significantly more attractive than where larger portfolios can be purchased today. This is especially true and our southern markets, where land and development costs are lower than other markets.
The history of this company was owning and buying stores in the northeast region. That's a fantastic high barrier market. If you already owned stores there as we do.
Focusing on our new development in the South is simply a better proposition and you're going to see that over the coming years as our store mix increasingly skew south.
In summary for 2020, we are laser focused on capital allocation.
Priorities are expediting free cash flow generation and using that free cash flow for de leveraging.
We will accomplish this objective to the following strategic steps.
First slowing down the pace of acquisition activity.
Second limiting limiting new restaurant development in 2026, new Burger King restaurants with attractive expected returns on capital.
We also are completing the new build of six Burger King restaurants. This quarter that we started in late 2019 in total we plan to open 12 Burger King restaurants. This year by comparison, we opened 21 Burger King restaurants last year and 10 Popeyes restaurants left here.
Third reducing our remodeling activity. This year can just 12 Burger King restaurants that high returns on capital by comparison, we remodeled 74, Burger King restaurants and for Popeye's restaurant last year.
For taking a renewed look at operating expenses across the expanded business with a goal of creating greater efficiencies and improve margins over time.
Well, we still firmly believe that carols is better positioned than most operators to pursue acquisitions within both the Burger King and Popeyes system. We also appreciate the need to pause our pace. So that in the near term, we can demonstrate organic growth within our existing business and delever our balance sheet.
This will be accomplished by strengthening the performance of our entire restaurant portfolio and ensuring that our acquired restaurants are contributing to this overall growth. Therefore, we are placing on hold the popeye's transaction that I referenced on our third quarter conference call among other acquisition opportunities.
As mentioned earlier, we have already remodel approximately 85% of our Burger King restaurants, making the Carol fleet, one of the freshest freshest and newest among all Burger King franchise, operator, we will be maniacal refocused on returns on capital for the remaining restaurants that need to be remodel.
In total we expect to reduce our net capital expenditures in 2022, approximately 55 to 65 million. This compares favorably to our net capital expenditures of about 100 million in 2019.
Based upon our outlook that Tony will detail shortly we expect to generate up to 25 million in free cash flow. This year, assuming neutral worker working capital changes our free cash flow will be deployed to reduce our debt in absolute dollars as well as our debt leverage ratios as defined by our covenants with that let me turn the call over to tell.
I need to review our financials in further detail and discuss our 2020 guidance.
Thanks, Dan.
As this is my inaugural conference call as CFO.
I wanted to express how excited I am about the opportunities. We have ahead of us and look forward to working with them. The team as we strengthened carols Foundation for operating two world class brands.
Now, let's delve into the fourth quarter results revenue increased 30.3% over the prior year period to $401.1 million, including $73.6 million in restaurant sales and $3.4 million of convenience store sales from the Cambridge acquisition.
The convenience stores were closed and sub led to a third party in January and we will no longer have operating results to report.
Burger King comparable restaurant sales during the quarter outpaced the U.S. Burger King system by about 140 basis points, increasing 2%.
Comp sales gain consisted of an 8% increase in average check including menu pricing of 2% and a 6% decrease in traffic.
The sharp increase in average check was due to substantially lower promotions and discounts as a percentage of restaurant sales, which felt to 19% compared to 26.6% during the same period last year.
Which also had of course running this also had a corresponding negative impact on traffic.
On a two year stack basis comparable restaurant sales rose 4.7%.
Results at the Cambridge, Burger King restaurants were impacted by our integration playbook, as we added labor and repair and maintenance costs to improve operations with Carol systems down, placing our best practices being embedded operationally, we expect to see meaningful improvement in both topline and restaurant level operating margins.
As Dan mentioned earlier in 2020, we believe we're on track to improve cost of sales margin or Cambridge restaurants, and we are optimistic about closing the sales gap between our Cambridge legacy Burger King restaurants this year.
Adjusted EBITDA declined $1.8 million during the quarter to $22.7 million from $24.5 million in the fourth quarter of last year.
Adjusted EBITDA margin decreased 220 basis points to 5.7% of restaurant sales.
Adjusted restaurant level, EBITDA increased $3.4 million to $42.9 million in the quarter from $39.5 million in the fourth quarter last year restaurant level. Adjusted EBITDA margin was 10.8% of restaurant sales and decreased 200 basis points.
Turning to our expense line items Q4 cost of sales increased approximately 65 basis points in aggregate. If you adjust out convenience store revenue and related cost of sales restaurant only cost of sales increased 10 basis points as a percentage of restaurant sales compared to the prior year.
Ground beef average 2026 cents per pound in the fourth quarter 2020, an increased 21% from about $1.87 per pound in the fourth quarter of last year.
These costs to stabilize since December and for 2020, we are forecasting year over year beef inflation of approximately 9% compared to the annual average of 216 in 2019.
Restaurant labor expense increased 85 basis points as a percentage of sales compared to the prior year quarter.
Inclusive of a 5.7% increase in the hourly wage rate in our legacy bird in restaurants, and the dilution due to the inclusion of Cambridge restaurants.
Restaurant rent expense increased 40 basis points as a percentage of sales compared to the prior year, primarily due to the higher rents as a percentage of sales in restaurants, we acquired in 2019 and the elimination of deferred of deferred gain amortization on sale leaseback transactions as a result of the new lease accounting standard.
Our restaurant operating expenses increased 75 basis points as a percentage of sales compared to the prior year period due to proportionately more credit card usage and related fees higher general liability accruals, an increased levels of operating expense from restaurants, we acquired in 2019.
General and administrative expenses were $23 million in the fourth quarter.
Of 2019, including $1.5 million in Cambridge acquisition costs, and cost and integration costs compared to $16.8 million in the prior year period.
That those expenses included in that period were point $4 million and acquisition and integration costs.
Excluding acquisition integration costs in both periods General administration administrative expenses increased slightly to 5.4% as percentage of total revenues from 5.3% last year.
This reflects the larger initial scope of required oversight through to the expanded restaurant base.
Our net loss was $9.9 million in the fourth quarter 2019, or 20 cents per diluted share compared to net income of $1.8 million or four cents per diluted share in the prior year.
The net loss for the fourth quarter of 2019 included $1.8 million of impairment and other lease charges and $1.5 million of integration acquisition expenses.
Net income for the prior year quarter included point 3 million of impairment and other these charges as well as point 4 million of acquisition expenses.
Excluding these charges adjusted net loss in the fourth quarter of 2019 was $6.2 million or 12 cents per diluted share compared to adjusted net income of $2.5 million or five cents per diluted share in the prior year quarter.
As a reminder, a summary of the adjustments in arriving at adjusted net income or loss, including impairment acquisition and integration costs and other items are detailed in the tables accompanying this mornings release.
Total capital expenditures were $49 million in the fourth quarter, 2019, and $146 million for the full year, however, with $48.4 million or sale leasebacks last year net capital expenditures for 2019 $98 million.
At the ended the fourth quarter, our cash balances were $3 million and total outstanding debt finance lease liabilities was $472.3 million.
At December 29, their first lien leverage ratio as defined in our senior credit facility was approximately 4.11 times compared to a maximum permitted a 5.75 times.
As of February 24th we had $70.8 million of borrowings drawn on our revolver. This represents an elevated level of borrowing for us as during the first two months of the year, we funded carryover capital expenditure payments and working capital payables from 2019 during the lowest revenue and earnings generation period of the year as we move into the stronger revenue and earnings period.
In the second and third quarters, we expect to see the revolver balance decline accordingly.
Lastly, we repurchased 270043 shares of our common stock during the fourth quarter at a cost of approximately $2 million and an average purchase price of $7.44.
Per share since our board of directors approved or $25 million stock repurchase program. In August 2019, we have purchased 553112 shares for a total cost of approximately $4 million at an average cost of $7 and 26 per share.
As a reminder, we have no obligation to repurchase stock under this program and the timing actual number and value of shares purchased will depend on the stock price trading volume general market and economic conditions and other factors.
With that let me provide you with the firing guidance for 2020, which has an extra week compared to 2019.
We expect total restaurant sales of $1.64 billion to $1.69 billion comparable restaurant sales for our Burger King restaurants that have been owned for more than 12 months as the end of 2019 is expected to be 2% to 3%.
Note that the Cambridge Burger King restaurants will enter the comparable restaurant base on May Onest.
Commodity costs are expected to increase 2% to 3% with the beef cost as I mentioned earlier expected to rise 9%.
General and administrative expenses are expected to be $80 million to $85 million, excluding stock comp expense, reflecting the full year impact of overhead cost required to oversee and support our large restaurant base. Adjusted EBITDA is expected to be 102 $110 million.
Interest expense is expected to be approximately $30 million based on our debt terms and stable LIBOR levels.
Gross capital expenditures are expected to be 70, $75 million, including approximately 35% for maintenance maintenance, 15% from a modeling and 40% for construction of new restaurants.
Of the total approximately $25 million will be extended in the first quarter 2020, primarily relating to the completion of new restaurants, and Remodels that commenced in 2019.
Proceeds from the sale leasebacks in 2020 are expected to be approximately $10 million to $15 million, resulting in net capital expenditures of $55 million to $65 million.
To reiterate the substantial reduction in our net capital expenditures in 2020 compared to 2019, coupled with improved margins and operations at our restaurants should provide us with the means to generate positive free cash flow this year.
We intend to use that free cash flow to reduce our outstanding debt and the debt leverage ratio.
We are fortunate to have a supportive franchiser and RB <unk>, who is fully in lockstep with us adjusting our capital priorities for 2020.
Our intention is to balance the goals of solid organic growth by realizing the full potential our current restaurant portfolio, while maintaining a strong balance sheet and we're confident in our ability to do just that.
That concludes our prepared remarks, so with that operator, let's go ahead and open the lines for questions.
Thank you.
This time lumpy connecting the question and answer session.
If you like to ask a question today. Please press star one from your telephone keypad and the confirmation don't indicate your line is in the question Q.
You mean press star to feel like to move your question from the Q.
Participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
One moment, please let me pull for questions.
Thank you My first question comes from the line of Jake Bartlett with Suntrust. Please proceed with your question.
Great. Thanks for taking the questions.
Dan you mentioned in the press release that you're entering 2020 with with great optimism about the sales trajectory I'm, hoping you can provide us maybe with some detail about current trends or any other sources of that optimism.
Well the Burger King marketing calendar I think is similar to what we had expected and we would consider we would expect and continue to see a product improvements.
New product launches.
And.
A competitive.
Value.
Component to the marketing calendar as we've said earlier there will be an expansion of the plant based product line.
So I think that.
Burger King has a pretty compelling marketing calendar.
Okay any comments on current trends I decided note that through I think about now last year, you're still going up against a one dollar or for 10 Nuggets did that produce kind of the same trend that we saw in the into fourth quarter, maybe even a you know what you size a deceleration in November in December.
Yeah that trend in the first quarter to pretty similar to what you saw at the end of the fourth quarter a big yes.
Well, we lapped the dollar Nuggets on February 14.
Got it and then and just turning to margins on can you break out what the margins were in the fourth quarter restaurant level margins for the legacy stores versus the Cambridge stores.
Yes, we don't break that out.
But.
You know they definitely.
Were low are lower and that's where I think a lot of the optimism for 2020 comes from.
Being able to have plans in place to get those margins improved and to improve the overall margins for the company.
Got it I can dig into yeah, sorry.
Yeah, Jake so far we've improved the Burger King, Cambridge cost to sales margins by over 100 basis points already.
From where they were in September.
And bulk buys and Burger King the labor margins have improved by over 200 basis points from where they were in September. So we're on track to making improvements that we expected to make.
What's going to take a bit longer it that Cambridge Burger King's is increasing the having this hitting the sales to the level that they should be.
Some of that's due to operational improvement than somebody just due to the geography, where they're located.
The overall Burger King trend in the South Central is this off this part of the country right now because it's a very value oriented.
Part of the.
Store base.
Got it and then last question I'm, just thinking about the legacy stores into aside from the impact of the Cambridge tours margins improving do you think that margins could improve those legacy stores in 2020 on their own it in the in vitro that being a function of some of the initiatives that you're actually focusing on.
Costs as well as maybe the pricing level that you expect to be flowing through.
The the legacy margins it from an efficiency standpoint, they're not going to be any more efficient in terms of their controls. So the legacy margins will be a function of primarily where where the where commodity costs are.
If commodity costs are in the 2% to 3% range than the and given the anticipated pricing at the legacy restaurants, the margins will be similar to what they were in 2019.
Great. Thank you very much.
Okay.
Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, and I wanted to follow up on.
As a acquired locations in the south.
I think you had mentioned that.
They were comping down mid single digits.
The last couple of quarters and.
I think you had indicated it's going to take a little bit more time really to improve those but you are starting to see the improvements on the margin side, we assume that mean.
General operations are improving and hopefully the guest satisfaction and experience.
Can you give any sense directionally on whether or not same store sales, even though it's taken a step back.
You know nationally is that are you starting to see improvements take hold at those acquired locations on same store sales that movie and maybe two down low single digits or.
No it's still mid single digits.
A negative which is about where it was in the fourth quarter, Jeremy we really haven't seen a very much improvement at all but again those restaurants that responded very favorably a year ago to the dollar Nuggets and we just laughed that.
Last week, so we're expecting that in March.
That sales trend relative to last year should be less negative.
Okay. So on a relative basis is actually starting to improve and that should move forward, even more as we get into a.
In March.
That is our expectation.
Okay.
And then I wanted to see that the six convenient stores that came along with the.
The transaction last year, you know that that seems to be a one off and given the you know the pivot in strategy to.
Focused on free cash flow is that Oh are you looking to potentially sell those and just they're already done Jeremy we got rid of them before the end of 2019, they're gone.
Okay, great I'm not maliki business.
[laughter], Okay, and then I wanted to just I think than in the release, you talked about delivery coming onboard in Q2.
In terms of thinking about expectations based on what other BK locations have seen thus far what type of impact might that have on both the sale side of things, but but also on margin.
Yeah, I I'm not certain.
Jeremy we were not a big fan of delivery until the model change so that there will be a more restrictive menu in terms of what's going to be delivered and we have the opportunity to increase prices on delivery by 10%.
That's what essentially we were waiting for.
In May we will have the opportunity to have our pls devices program. So that we have dual pricing capabilities. So that we can charge that premium and at that point, well test delivery and see what the margin impact will be.
Okay Fair enough and then also a you know again as you pivot strategy and focus on reducing debt and an improving leverage ratios.
In terms of looking at the portfolio you know Tony as you've had a chance to look at you know profitability in store by store.
You know location profitability is there any meaningful change in terms of closure rate expected to have in 2020.
Or potentially beyond that or no. It's about the same as last year, but eight to 12 restaurants are expected.
To close based on various factors, obviously, the biggest one being lack of profitability and lease expiration.
Understood. Okay, and then last thing you know in terms of.
No.
In the release a year you talk about you know Burger king openings, and even though you're slowing that after the first half the year no mention of of you know popeye's, New Popeye's being opened can you just provide a little color on that and it's obviously a brand that on fire right now and you know that.
That was a little bit of prize that you wouldn't look at new openings and that can you provide any color I'm not sure.
Well there there may be some popeye's openings.
Where because of the introduction of the sandwich the demographic profile of Popeye's is changing and constant we're meeting with the ice folks as a matter of fact this week.
To look at where might be the better opportunities to develop popeye's. So we're just slowing this down at this point.
Generating free cash flow and reducing our debt and at the same time evaluating where the opportunities might be to better leverage yet new popeye's development.
Great that's great to see the discipline. Thanks, guys. Good luck.
Thank you.
Thank you as a reminder, you May press star one to ask a question. Our next question comes from the line of Brian Mullen with Deutsche Bank. Please proceed with your question.
Hey, guys think saying the question, they're really says there's a near term plan to drive efficiencies in the business, which sent separate maybe from the operational improvements expected from the integration of the Cambridge stores. Just wonder if you could elaborate on that is that a DNA opportunity or maybe something more for wide reaching.
It's more wide ranging in that the Brian and you know where we're in the process of looking at our technology transformation and which items processes weekend.
More quickly.
Put on a a systems base.
With improved technology as opposed to dealing with dealing with these functions manually.
We're also evaluating all of the costs in the restaurant CNL outside of cost to sales and labor and we think now that with our critical mass. There's some things there that we can better streamline.
[music].
Okay, great and just as a follow up with.
With the strategy reset comes across very clearly the objective for the year free cash flow and reduce debt leverage just wondering is there an actual from target for net leverage at the end of this year and then if not bringing bigger picture.
303 handle a three hands by the end to end to 2020 understood. Okay. Thank you very much.
Yeah that would be to go but there's lot of.
Stuff that can happen between now and then but clearly we're we're going to limit Capex you know our EBITDA targets would allow us to.
Yes, the leverage down and our goal overtime is to get to a high three type of handle.
Okay understood. Thanks, a lot.
Thank you at this time Weve reached the end of our allotted time for question and answer session or turn the floor back to management for closing remark.
Thank you all in Oh, we will speak to you again in a few months Ah. Thank you. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.