Q4 2019 Earnings Call

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Greetings and welcome to the warrant group hospitality is fourth quarter and full year 2019 earnings conference call.

At this time, all participants are in listen only mode.

After a question and answer session will follow the formal presentation.

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A reminder, this conference is being recorded.

I would now like to turn the conference over to tired of away. Thank you. Please begin.

Thank you operator and good afternoon.

Before we begin our formal remarks, we remind you that part of our discussion today will include forward looking statements. These forward looking statements are not guarantees of future performance and you should not place undue reliance on them.

These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Please also note that these forward looking statements reflect our opinions only as of the date of this call.

We undertake no obligation to revise or publicly release any revisions to these forward looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results in financial conditions.

During our call we will refer to certain non-GAAP financial measures, which we believe can be useful in evaluating our performance.

The presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP reconciliations to other GAAP measures.

Reconciliations of these measures such as adjusted EBITDA, and total food and beverage sales and Oh didn't manage and license units to GAAP measures and a discussion of why we consider these measures useful.

Our earnings release issued earlier today.

With that I'd like to turn the call over to many hilarious Manny.

Thank you Tyler and Hello, everyone. We appreciate your continued interest into one grid.

First as a career executive in hospitality business. This is absolutely the most challenging time I have ever see.

We've been forced to make very difficult, it's tough decisions that impact the team members, we care so much about and of course our guests.

The rapidly evolving corona fiber spend damage has required unprecedented actions.

In response to the uncertainties in the marketplace.

I have made the very challenging determination to the reduce our workforce significantly and operate our restaurants exclusively using takeout and delivery options.

This preserved the opportunity to continue to reach guests in markets to watch throughout the country and we are currently generating between 300 and $400000 in sales on a weekly basis.

This has only been possible to the amazing work by our frontline restaurant team and I want to publicly recognized Duncan.

Truly touched impressed by the efforts.

Our top priority during that time damages, the health safety and well being of all our employees and guests.

We are strictly falling all guidelines from the C.D.C. federal and local authorities.

Under normal circumstances I.

I would have spent much of this call highlighting our 2019 achievements.

Specifically, how we increased our topline by 41%.

Generate a comparable sales increase at STK restaurants was 8.2% and.

And delivered impressive 36% increase in adjusted EBIT down.

We would also have reviewed our expanded footprint, which included the opening of two international license as Teekays.

One domestic copy on STK.

And one after the be hospitality management deal.

And of course, we would have discussed in great detail you accretive acquisition of Kona Grill.

Which added 24 high performing domestic restaurants to our portfolio.

And what we are doing to maximize the branch potential under our ownership.

We were particularly pleased with a 3.9% comparable sales increase for the 24, Kona grill restaurants in the fourth quarter.

Instead, let me briefly share where we stand today and how we're managing our business into short term.

First as I said earlier, we have shifted operations to provide takeout and delivery service at all domestic restaurants with exception of Las Vegas, Los Angeles Orlando in Puerto Rico as these four STK locations are temporarily closed.

We continue to address each restaurant on the case by case basis and in this environment. We can expect other selects questions will be impacted.

Temporary closures or reduced hours over the coming days and weeks.

Second several of our international locations, including our restaurants in Milan, Italy in Doha are temporarily closed.

Third we watched boat ASCII radio and Kona Grill radio so our guests can bring them five dining experience home along with our delicious food.

It cannot be found on spot or fight.

Preserve our cash we have talked at all capital expenditures and any and finished restaurant you developed in on hold.

We are happy to report that the Buildout of our newest location.

Managed STK rushing in Scottsdale has been completed.

Then he has been cleared all look of all local permitting and licensing requirements.

The management staff and the R&D teams have been hired an absolutely trains.

We are waiting for the first clarity as to get the restaurant open.

Looking forward to having another STK restaurant operating in the United States.

Given the material adjustment to our business, we have been forced to make very painful changes to our cost structure.

Before taking any actions our workforce you could approximately 4000 employees. We are now operating with less than 100 employees inclusive of our very small GE an 18.

We have deferred all cash bonus payments to our staff. They start 2019 performance and our executive team have elected to take all of their 2019 cents incentive compensation in the form of equity.

Furthermore, our non employee directors have also he likes to take 100% of their 2020 compensation in the form of company equity.

I believe that this is a great show of support by onboard and executive team of the company's fundamental long term value.

With our temporary reduce cost structure, we believe we have liquidity for the foreseeable future. We currently have 9.5, no any cash and we believe we'll continue to have access to additional liquidity to our current ongoing delivery and take out business and access to our revolving credit agreement pursuant to its turns.

As of today, we have 10.7 million availability.

In addition to internal cost measures, we have already be see either to commitments and agreements without parkinson landlords or by local law protection I'm not happy to make base rent payments on restaurants, comprising almost probably 5%.

Are you watch revenues.

There are now actively working with other landlords when it's similar arrangements and as a reminder, we only have leased guarantees in four of our restaurants with only one exceeding three years and we purchased all 24, Kona grill restaurants without any lease guarantees.

Yeah also range with all major food then there's not to make any payments on amounts owed through March 31st 2020 until at least May 2020.

And for those old amounts to be spread over at least 10 weeks thereafter.

We have to spend at all non essential outside services until further notice.

Hello, and his team I also working with local utilities to arrange for potential payment deferrals.

We are also actively working to take advantage of any and all relief opportunities available to us, including governmentally supported programs and insurance coverage.

We are studying current federal legislation to determine how it impacts the company.

And the programs, we can take advantage of.

They are also actively working with our insurance representatives on making shrinks claims under applicable policies, including claims under business interruption policies.

This is ongoing complex and will take time.

It goes without saying, but we're looking forward to the rebound in our business. Once again circuit t. surround the Corona virus begins to subside and mandated restrictions are lifted.

We will be ready when time comes and we know our gas I'm going to be ready for a great deal out.

Yeah. That's over the last couple of weeks have reiterated how resilient and strong Martinez and I truly believe in their ability to bring as quickly back when the right 10 times.

Thank you James.

Since we cannot reasonably estimate when our business will return to normal operations, we have suspended all financial guidance for 2020.

Thank you for all joining us on the call today.

And I'm happy to answer any questions that you may have operator.

Thank you at this time, we will be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

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Our first question comes from an alignment.

Paul Miller of Piper Jaffray. Please proceed with your question.

[laughter] good afternoon, Manny I wanted to do a quick shadow care team you always have an in this case once again don't one of the tough.

We've ever seen so you know we were really thinking of you in the team right now.

And then I've two questions. If that's okay on the first is more difficult than the second how are things currently and how can we think about a cash burn a worst case scenario at this point.

Thanks for taking it calls for the great words and.

And frankly, I Echo everything sather, the king that would have in place frankly has.

Been impressive and everything they've done and Ah, So I'm I'm, nothing but thankful for it I mean, obviously this these are very difficult times, the Russian industry and we've put everything that we can in place in terms of cash as as we mentioned in our prepared.

Statements there when we do have about 9 million in cash right now and frankly, we've been very pleasantly surprised and how well the team that's been able to deploy delivery and ER and take out in a restaurant. So we actually a rather than thinking about burn at this point, we actually think of it is in terms of.

We believe we have.

You know.

Enough cash for the foreseeable future and we frankly have we have range and we organize a lot of our contracts.

Including as we mentioned in our prepared statements. We've done some work already with leases and just making sure that we are prepared to draw the side as long as possible. So it's really a game of preserving cash and frankly right now the way we've set up this business is to be around a you know in the foreseeable future. So we don't have an exam.

Act number of years or weeks or months as to what we're gonna be around and our plan is frankly to be around as long as we can and frankly the way that the business model has played out in terms of delivery as well as we've cut down a G.N. DNA or substantially I think we will be around for quite a long time. So.

So pretty bullish or I would say I'm, calling bullish we feel pretty good about.

Our cash in the short term and like I said, we will continue to tweak the business model to stay around as long as possible.

Okay. That's that's important commentary the second last question for me you know walk us through the pre opening process. I mean, we will move process and what I'm curious to see educated on and I think.

We want it says what what pieces of a preopening would be applicable taken me store under the conditions that you've outlined where you know you're going pretty darn close to like a shutdown process. If you well. So there's two shophouse walk us through the plans and what you do they get everybody back on board and how fast you can get the restaurant.

Back up and running thank you.

Yeah. That's it that's a great question. So the first thing that.

You know we contemplated than we did as we made sure.

That's where all the properties that are currently operating which is the majority of our U.S. locations the G.M.M.D. executive chef.

For all of those properties are currently working in the delivery and pick up model. So to us that wasn't consensual part of our you know coming back a model is to make sure that tulsky individuals were in place.

For multi unit managers, we do we kept our.

Dsos also supporting some of the take out the leverage so we did put some of the Dios working into restaurants, which have high volume currently on takeout and delivery supporting those teams. So we basically kept the core of our operating players in place in that smaller team. If you also the team of 100.

Individuals doesn't include all those key players.

And then in terms of a one we brought the restaurants down it would close down the dining rooms, but to a very.

Thorough process of ensuring that you know electrical systems.

POS systems everything was captain in ready mode to come back on so Oh, you know we literally the way that we brought down our restaurants was the with the intent of being able to move as fast as possible.

On the properties and then obviously, we do have inventories available to do that I think the other part that is very important is that.

We've initiated communications with our vendors.

Now a major business sparkman very early on and we prepared ourselves in terms of.

Making sure that we have made arrangements with them. So that the relationship star stayed positive so that when we need to bring in proud that constrained assumes.

The everybody you know understands that it is a partnership and we kept the relationships our positive notes and like I said, we do have a you know a utilize whatever resources. We have now in terms of cash and so forth to make sure that we keep all those relationships positive. So it's a combination of relationships, it's a combination of having to.

Systems in place ready to go and Dan the core group.

That is on payroll right now have been picked up because of their ability to bring the business back last thing I would say is that all individuals that are currently in the payroll or we made sure that are very multi talented and they can do.

Multiple functions for instance, our marketing guys are ex operations, guys and vice versa. So have a lot of cross functional.

Building on the team that we left behind so that it's basically all hands on DAC and lots of people can do different responsibility. So that's kind of a long answer to a short question, but I thought I would take you through all that.

Well. Thank you we wish you and the team the best block and will stay in touch. Thank you.

Thanks, and so.

Our next question's covering a line of Dave Canada, Canada wealth management. Please proceed with your question.

Hi, Manny first of all thank you for your efforts and strong leadership during such a trying time in responding so quickly I know, it's extremely difficult and.

I applaud you for operating well during the crisis.

Hey, good today, everybody saw the news that Cheesecake factory is not paying rat.

It sounded like you're pursuing that same path could you just confirm that and then assuming a you're not paying rent and and with the hundred employee head count that you have shrunk down too can you give us a sense on a monthly basis or what's your burn rate.

It is.

Also assuming you continue to sell about 300000, a week into though.

Thanks, David Thanks for the nice warrants and ER and again I'm you know as I said earlier, it's it's tough times and frankly only possible to do what we're doing because of the incredible killing of the individuals that are we could we have on board and frankly some of the.

The talent that is not here with us today, but there will be back with as soon as possible and as soon as we can get back on track.

In terms of the burn question, though the way I look at this is right now we're doing call. It 300, plus a week and delivery takeout business, our payroll, including the DNA is modest at somewhere between call. It a Honda to 150 in any one of the week, so ASCII tougher for payroll there.

Plenty of cash available for other needs, including a you know some nominal purchasing that we're doing so we're being very very.

Very disappointing just buying things like produce.

And only really fresh stuff that we need to replacement store. So so as you do the math on that.

There's still a substantial amount of cash.

That is above and beyond the table that Ah we plan to spend doing this this time period.

So so that would that that will keep us going quite frankly for the foreseeable future.

Obviously, the ranch is a big items that we need to take care of as you mentioned there I'm not prepared statements. We already have a for 43% 45% of a I think it's actually around 45% of a U.S. sales. We already have made arrangements with landlords are we ready half percentage rent the green.

In place or we are in jurisdictions, where the landlords can't do much for the next 90 days or so so we have 40% of that 40 43 to 540% to 45% of that.

Protected it now Tyler on some of the other T. A team members are currently reaching out to the remaining landlords and making sure that we can do and work out with them. Some some.

Form of arrangement, obviously, you can take lots of different forms for instance in locations, where we do have takeout and delivery sales. We were were offering percentage rents oh for some of those landlords. So our preference right now is to amicably a workout some kind of the deal with the landlords.

And then again before we get to the point, where we blindly say, we're just not going to pay everyone else, we try to do other arrangements.

That make more sense for the long term of the business and then we'll figure out what to do next would you understand the ultimately we have to preserve cash. So so that's our strategy that we've already done some work.

But some of our partners there similar work to be done with some of the other landlords.

And then whatever is left at the end, then Tyler and I will sit down and figure out what we do with those landlords are partners at the end of the day. So like you have I noticed partnership the <unk> headliners amicable and then we'll see I'll try that will get us and the process.

Okay, and then it as far as your existing credit lines or credit line, rather it sounded like you had about $10 million of availability do you expect to draw down down on that many other restaurant companies have done that maybe preemptively.

What's your view on that and how quickly could you draw. It down is there is there like a no hoarding provision or anything like that that would potentially preventing you from doing that.

So thanks for that question, so our credit facility.

Pursuant to its terms there has a 4 million dollar a cash.

Ah Ah amount so we cannot draw on the facility unless we were below $4 million in cash so at this point where way above that.

Number, but if we were to be below all around the 4 million. Obviously, we would draw on facility. Since we do have plenty of availability there, but for now and for at least the foreseeable future. We don't see being at the 4 million dollar level. So we don't we don't draw on until we get there. So so I guess that that's what you would call hoarding.

Clause on the facility. So it's a it's a $4 million number for us.

Okay. Thanks, guys. Good luck and I'll be brand for Yeah, and I'm sure you will lead us through this thing.

Thank you for your leadership.

Thank you David Thanks for all your support.

And your players as well.

Our next question's comes with a line of Ryan Meyers of Lake Street Capital markets. Please proceed with your question.

Hi, guys. Thanks for taking my questions first one for me I just wanted to make sure I heard this right you guys said weekly sales have been around three to $400000 correct.

That's correct, that's on takeout and delivery sales.

Okay. That's helpful. And then when we think about your expenses how much of them are fixed and then how much of Dom you think are going to change going forward here.

I think as I mentioned, one of my previous responses, what we're trying to keep the that payroll around the 100 250000 level, a wish which leaves a substantial amount of.

Cash you know a after that I think that's going to be a primary fixed cost analysis. The majority of that stack that would have as a fixed costs I would consider that could be the primary fixed cost and the business and then again, depending on where we end up with Oh landlords, which I believe we will be successful in a lot of the negotiate.

Getting whether.

Then there will be very little other fixed cost in the motto other than perhaps utilities, and obviously insurance cost because we want to keep the insurance policies Oh parents, So utilities insurance and a labor are the primary ones that we will make sure we Ah we stay on.

Everything else that is discretionary from an outside services.

Or vendors are supports which kind of cut that off and as we said I'm not prepared statements we have a range pretty.

Good arrangements with our major food vendors.

To stretch out you know pass balances and actually future purchases, but then so we've already arrange for what I consider to be pretty and official arrangements for us so for all intents and purposes then.

The only other costs, we have to worry about is any short term.

Buying cost that we have four product for the take out delivery business sense, and Frank will probably will work on the 22% to 25% cost range on that based on existing price and then obviously depends on the mix of takeout to deliver because obviously will be subject to some delivery fees on some of the the delivery.

Side. So so again, we do think that even after our cost structure there'll be some leftover cash.

From that delivery takeout business into short time, remembering that our staffing is very nominal were only running two people maybe treat people in some of the units at any one time and our Gionee structure has bear.

Really cut down substantially so we're in about as good cost structures, we can be right now and we plan to run this as long as you can.

Okay. That's good to hear and the last one for me how much of your sales in the fourth quarter were actually delivery and to go order.

So if you look at the I ourselves on the to go and delivering to look at a Kona grill, we it's between 3% to 6% Oh already we're in take out the lever so where would it did have a good base business.

Some of the projects that we have are in lifestyle centers, which tend to have built in residential around it. So we do have a built in.

Takeout business and some of those sites and again I'm only be cautious because obviously with these very unprecedented times.

Consumer thinking patterns have changed so you just have to be careful.

Overestimate them and obviously, we're monitoring what people are doing so although we ran a history of acts in the fourth quarter right. Now I think all bets are off and it's really kind of figuring out the new reality and how to manage.

The marketing. These days are obviously, we do have a supercalendered good.

Marketing team that is still in place we did keep.

The core of our marketing team and he could follow us on Instagram.

You know digital you would have noticed that we've switched a lot of our well all of our marketing to be a real time pursuing that so I think we've done a lot of switching and actually very good thinking from the market team in terms of going aggressively. After this channel so I feel pretty pretty confident that the team that we have any place we'll make sure that we maximize.

As that business in the foreseeable future.

Awesome. Thank you and that's a lucky guys going forward.

Thank you thanks for your questions and sport.

We have reached standard of the question and answer session I will now turn the call back of the management for any closing remarks.

Oh. Thank you everyone for your continued interest into one group a these are clearly unprecedented times in the industry and frankly in the world and Oh right now I want to close the call by.

Thing or a very warm. Thank you for all the team members working with us today, and how so sending out a a message that to our teammates who will be back with us soon again and continue to making the one group the leader in five dining so a we'll look forward having our team.

Back together soon again.

And to get back on track with our long term plan. So I appreciate everyone's support and I wish everyone, a very safe and Ah and us stay in touch and we will continue to well do our best where the business. Thank everyone for interest and talk to you since.

Yeah.

This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great. Okay.