Q2 2020 Red Robin Gourmet Burgers Inc Earnings Call

Good afternoon, everyone and welcome to the Red Robin coordinate burgers incorporated second quarter 2020, <unk> earnings call.

Please note today's call is recorded.

During today's call management, and well be making forward looking statements about the company's business outlook.

Vacations. These forward looking statements and all other statements that are not historical facts reflect management's beliefs and prediction as of today and therefore are subject to risks and uncertainties as described in a safe Harbor discussion found in the company's FCC filings.

During today's conference call management will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but aren't cabbage illustrating alternative manager.

The company's operating performance that may be useful a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release.

The company has posted its fiscal second quarter 2020 earnings release, and supplemental financial information related to the results on its website at www Dot Red Robin Dot Com any investor Relations section.

Now I would like to turn the call operator, Red Robin CEO, Paul Murphy, Hello, and thank you for joining US let me begin by saying that I hope everyone on the call and your loved ones or safe and healthy during these tumultuous times.

With me today is when Schweinfurth, our Chief Financial Officer, who will provide a detailed update on our liquidity and then review our quarterly results, but first I would like to discuss where we are with the business and what our plans are for the remainder of the year and beyond.

Following the initial outbreak of Cove. It we set the following priorities for our business one secure the long term viability of Red Robin do increase liquidity.

To ensure the health and safety of all team members and guess.

Three leverage our off premise channel to drive sales and Opportunistically reopened our donnie rooms for reduce expenses and approved flow through on lower sales and five position red Robin for recovery and future growth.

Preserving liquidity and the long term viability of Red Robin included several immediate and in some cases difficult actions, reducing salaries, eliminating any material number of corporate positions significantly reducing spending at both the restaurant in corporate levels.

Renegotiating, our credit agreement raising approximately $30 million in capital through our aftermarket equity offering.

And within the next 12 months generating significant cash tax refunds.

As a result as of August nine we have substantially improved our liquidity since last quarter to more than $103 million between cash and cash equivalents and available borrowing capacity.

I am confident that we have to liquidity capacity to emerge from this period, a stronger more profitable enterprise.

Red Robin has not only persevered over the past several months, we have used to focus created by the pandemic to improve the quality of our operations and build trust and loyalty with our guess that will pay dividends long into the future.

Even with all the past and the recent volatility created by covert 19, our hard work and dedication to delivering best in class hospitality that include stringent health and safety standards. That's resulted in record high dine in and off premise guest satisfaction scores.

This focus on health and safety. That's also extended to our restaurant support center team members. We're now effectively working remotely to support our restaurants.

Certainly data has shown that our guests clearly see and appreciate what we're doing because they feel safe, bringing their families to red Robin versus other brands.

We are committed to this continuing to be a strength along with exceptional hospitality, which we believe will enable us to take market share as we get through this pandemic and beyond.

We are pleased that our business trajectory has exceeded our expectations.

Putting generating meaningful off premise sales of 208.7% growth in Q2 as compared to the prior year.

In March we had to pivot to an off premise only operating model and gradually opened our donnie rooms, beginning in mid may with an increasing sales trajectory. Then in early July we had to pivot again to address a resurgence or the pandemic and the requirement to close our indoor dining rooms in Cali.

Foreign Yeah, our largest state.

However, we have regained momentum in our business sense, the resurgence with sequential improvement in average weekly net sales per restaurant over the last five weeks.

Resetting our operational focus in a dynamic environment, that's been a strategic imperative.

Our second quarter off premise sales performance was driven by our focus on all off premise sales channels carry out third party and red Robin delivery or last mile.

These channels have benefited from the rollout of our simplified menu of one third fewer items and refined operating processes. This smaller menu has resulted in faster ticket times and improve consistency and quality of food, while enabling our back of house to realize greater efficiencies.

We have also enhance the process flow of off premise orders dedicated more space for order Assembly and more recently implemented improvements and accuracy a promise times.

We have made it easier for guests to enjoy our food outside of our restaurants through increased curbside and delivery options, including the implementation of Red Robin delivery across all company operated restaurants, and third party delivery across the entire system.

We believe we can further enhance the off premise experienced overtime and a complete it much of the foundational work that has greatly improved our execution.

And through focused collaboration across the company, we have seen record high off premise guest satisfaction scores.

It's tiny Rosa began to reopen we opportunistically accelerated the implementation of our new hospitality model TJX or total guest experience.

This system wide rollout had been plan pretty cove, it unless a major strategic initiative designed to holistically improve our guests experience.

Dining room Reopenings provided us the opportunity to accelerate this rollout and focus on system implementation and execution.

We believe the TJX model well continue to improve our guest experience and are currently enjoying a record high dine in guest satisfaction scores.

With these successful operational enhancements now integral to our service model, we're expanding outdoor seating beyond her patios and the majority of our system, including California.

We're also piloting the implementation of partitions inside our restaurants to ensure that we are developing a holistic solution for both our guest and our operating teams that we believe will be utilized for the foreseeable future.

These initiatives will allow us to safely enhance seating capacity, while delivering it consistent great guest experience, whether dining inside or outside our restaurants.

Cost reductions at both the corporate and restaurant levels are providing immediate benefits to our piano with positive restaurant level profitability in the second quarter.

Dispositions, our business for long term sustainable cost reductions in addition to reductions in restaurant level and corporate costs, we've shifted our focus to digital marketing, which has proven to be inefficient medium for engagement with gas during the pandemic.

Also as Lynn will speak about further we're expecting significant cash tax refunds over the next 12 months and continue to make good progress restructuring our leases in partnership with our landlords.

As a result or the focus on the priorities we set for the business Red Robin is strongly positioned to emerge from the pandemic and resume our strategic plan, thereby transforming the business for future growth.

Our plan includes delivering best in class execution through our TJX hospitality model.

Going up in autos pizza continue to reduce cost and improve efficiency at both the restaurant and corporate levels redesigning our restaurant prototype and remodels to enhance the off premise experience and post pandemic reality and generate cash flow to ensure liquidity and financial security.

We're collecting learnings from our implementation of TJX and intend to continue to enhance it so that our engagement and ability to offer guess equality dining experience is continuously improving.

Before the ended the year, we expect rollout in autos to 31 restaurants into Seattle market with the majority of the equipment purchase prior to covert 19.

As we've said in the past the 48 restaurants that added denials pizza prior to the onset of the pandemic I've been consistently outperforming restaurants without an autos from a comp sales standpoint by approximately 700 basis points. We therefore look forward to resuming our denials rollout given its proven.

And compelling return on investment.

We are dedicated to further enhancing our technology and digital capabilities and 2021 and beyond.

And while enhancements are on the way, it's important to acknowledge that our digital channels, including online ordering through our Red Robin website, and third party marketplaces are already driving approximately 80% of our off premise sales.

We also plan to refine our restaurant prototype and 2021 to more effectively balance and address qualities execution for both off premise and dining channels and they post pandemic world, while providing the ability to leverage a projected favorable real estate environment.

We will also use this initiative to influence a restaurant remodels going forward in 2022 and beyond.

Finally, we are committed to generating positive cash flow before the ended the year. In addition to cost reductions cash management and tax refunds, we expect to build sales to increase seating capacity.

Expanded outdoor dining and indoor table partitions continued to deliver a great guest experience through sustained guest satisfaction across all channels and effectively drive trial in frequency through digital outreach.

Now I'll turn the call over to land and will wrap up before we take questions with some final thoughts Lynn. Thank you Paul before I review, our second quarter financials, I will discuss a few other relevant topics starting with liquidity as of August 9th we had liquidity of more than $103 million, including.

Cash and cash equivalence and available borrowing capacity under our revolving line of credit. We believe our liquidity is sufficient given expected cash tax refund seating capacity expansion currently underway improved flow through the due to reduced restaurant level in corporate costs and continued to cash management.

Effort due to these same factors I currently expect we will generate positive cash flow before the ended the year and I'm confident in our long term financial viability.

However, given the recent research efforts as a pandemic and the resulting closure of our California dining rooms. We currently estimate that we will still be losing cash in the fiscal third quarter, but the weekly cash burn rate of approximately $2 million, including the impact of increased occupancy payments compared to the SEC.

Can corridor.

During the second quarter, we made meaningful progress in restructuring many of our leases. We appreciate the long term perspective that are landlords are taking as we continue to engage in ongoing discussion.

In response to the covered 19 pandemic the company undertook several other measures to preserve liquidity and reduce costs some of which are meaningful permit that reduction to better position red Robin for recovery and long term rather.

We intend to dedicate a significant portion of our free cash flow once achieved over the next several quarters to delevering our balance sheet.

During the second quarter, we amended our credit facility, which provides covenant relief through the third quarter 2021. In addition, we filed a $40 million shelf registration statement with the FCC for the purpose of raising incremental capital as needed to satisfy a condition in our credit facility Amendment everything.

At least $25 million by November 13th 2020. This condition were satisfied within the first day of our aftermarket equity offering in June when the company raised almost $30 million.

We confirmed last quarter, we are taking advantage of the tax benefits and deferrals as allow for by the cares Act more specifically we are currently deferring payroll taxes and expect a favorable rate impact of net operating loss carry back which could generate between 14 million and $17 million.

A cash tax refunds within the next 12 months.

Now in terms of the fiscal second quarter, Q2, 2020 comparable restaurant revenues decreased 41.4% driven by 38.5% decline in guest traffic and a 2.9% decrease in average check overall pricing increased 2.2% and we also.

Realized an additional 0.6% increase from R&D decision to lower discounting.

Mix decreased by 5.7% driven by lower sales of beverages and finest burgers due to higher off premise sales and consistent with off premise sales mix, we saw pre covert 19.

[music] to total company revenues decreased 47.7% to $161.1 million down $146.9 million from a year ago, driven by operating our restaurants that are reduced capacity in response to the covert 19 pandemic and closed rest.

Uh huh.

Dine in sales were down 76.2%, partially offset by off premise sales growth. Our continued focus on or off premise service models drove meaningful growth in the channel, which as Paul mentioned rose, 280.7% in Q2, representing 63.8% of total food.

Beverage sales for the quarter. This compares to off premise sales representing 26.3 person in the first quarter 2020, and approximately 14% prior to the pandemic.

We generated restaurant level operating profit in the second quarter as a percentage of restaurant revenue restaurant level operating profit was 2% and improved through the quarter coming in better than our internal projection with higher sales and continued focus on managing costs. Other operating costs included higher third party delay.

Every cost from increased sales in this channel and sales de leverage impact on restaurants supplies utilities and technology costs offset by reduced maintenance spend.

Labour cost as a percentage of restaurant revenue increased primarily due to sales de leverage and higher hourly wage and benefit rate driven by shifting labor mix in support of our off premise operating model, partially offset by lower restaurant manager incentive compensation.

Occupancy costs as a percentage of restaurant revenues were driven by the impact of sales to leverage on rent expense and other real estate car costs of goods sold increased 30 basis points, primarily from higher ground beef prices, partially offset by lower discounts and waste.

General and administrative costs were $14.1 million decrease versus the prior year of $7.7 million, primarily driven by lower team members salaries and wages benefits and lower travel and related expenses and professional costs due to cost reduction initiatives posts.

19.

Selling expenses were $5.6 million decrease versus the prior year $7.9 million, primarily driven by pivoting from local and national media to digital marketing, which has proven to be an effective and efficient medium for interacting with our guest during the covert 19 pandemic well taking.

Advantage ever access to be over 9 million members of our royalty program as well as reduced expenses associated with our gift card program, we recognize the tax expense of $3.7 million in the second quarter and the change in the effective tax rate is due primarily to the recognition of evaluate.

Jason allowance on our tax credit, partially offset by decrease in earnings and and El Al carry backs allowed as a result of the cares that despite the valuation allowance we recognized for financial statement purposes, we expect to recognize the cash tax benefit for the $79 million.

Carry forward balance within the related 20 year period.

During the quarter, we recognized other charges a $14.5 million primarily triggered by the Covance 19 pandemic. These charges included $7.6 million related to restaurant closures and refranchising cost $5.3 million related to restaurant asset impairment.

$1 million inboard and stockholder matter car and point $7 million for cobot 19 related charges, including purchasing personal protective equipment for our restaurant team members and gas and providing emergency sick pay to our restaurant team members.

Q2, adjusted EBITDA was a loss of $15.3 million as compared to positive adjusted EBITDA of $25.5 billion. In Q2, 2019, Q2 adjusted loss per diluted share with $3.31.

As compared to adjusted earnings per diluted share of one dollar and three cents in Q2 2019.

Now turning to the balance sheet at quarter end are outstanding debt balance with $206.6 million and letters of credit outstanding were $7.5 million.

Early January we refinanced our credit agreement with our lenders securing a 300 million dollar credit facility, which provides liquidity through early 2025 as previously mentioned on May 29, we further amended our credit agreement to ease financial covenant requirements through the third quarter 2020.

One and our recent capital raise requirements hadn't been fulfilled in June.

We ended the quarter with $26 million in cash and cash equivalents and our cash burn rate was that the low end of our previously disclosed range at $1 million per week with partial occupancy payment our weighted average interest rate was 4.2%.

In response to the uncertainty related to the covert 19 pandemic, we have suspended our share repurchase program as well as annual in long term guidance as we continue to evolve our strategy to overcome the complexities of operating in a post pandemic environment before I conclude I'd like to take a moment to thank our into.

Tire Red Robin team for their dedication hard work and result in a dramatically difficult environment that embraces our red Robin values. It is truly a privilege to work with such an extraordinary group of people who are passionate to serve our gas and one another the features bright and we are committed to delivering value.

For all of our stakeholders team members franchise partners landlord suppliers and shareholders with that I will turn the call back over to Paul.

Thank you Alan.

Before we take your questions. Let me leave you with the following thoughts before the crisis, there were already headwinds challenging casual dining brands to evolve and raise their game from demographic and lifestyle shifts to increased pressure to innovate, while driving convenience and value.

The pandemic has created a laboratory with extreme circumstances for accelerating changes changes that are already underway at red Robin I.

I am confident we had the liquidity capacity to emerge from the crisis with a more robust business model and strong brand position that will deliver long term sustainable shareholder value creation.

While the pandemic is certainly not yet behind us our confidence is based upon the results produced by our incredible Red Robin team members prior to and during this crisis. Thank you for your time today and interest in Red Robin and we would now be happy to take your questions.

Thank you we will now be conducting a question and answer Sachin you.

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

The confirmation telling will educate your question Q.

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One moment, please what we call for your questions.

Our first questions come from the line of Alex Slagle with Jefferies. Please proceed with your question.

Hey, good afternoon. Thanks for the question.

Its why don't you guys could update us on the progress of figuring your dining rooms to handle 75% capacity levels. I believe you held your dining room capacity somewhere around 50%. So far so just curious what portion of your company restaurant base could be bumped up to 75% when you're right.

Could you expand on your end.

Alex This is Paul.

Yeah, we did hold.

To 50% capacity.

We have a a pilot tests on the partitions, it's going well, we have a 155 restaurants.

That we're taking a look at now to be able to take.

Take the partitions into that whereas a local are all jurisdictions or the state regulations would allow us to increase capacity to the 75% number so.

We're already doing the work on that we'll start with the obviously the higher volume restaurants first and then work our way through the.

That number of stores at the same time. We're also just would emphasize that we're working on expanding our patio capacity.

And all of our restaurants, so beyond just the kind of the small patio that a couple of our prototype said so we're in the process of doing that right now and see that being completed over the next two or three weeks across the system.

Okay. How much have you added in terms of incremental new patio space, thus far and other sort of dining areas frankly, we've added very few so far.

We just really launched at about 10 days ago, and Thats why we seasonal take us about two to three weeks to get the majority of the system up on that we had to.

Go out there and obviously a procure the umbrellas and.

Get that ready and then do some of the.

Licensing extensions that we had to do but we will have that rolled out we believe within the next three weeks.

Okay. Thank you that's helpful.

Great.

Thank you. Our next question is coming from the line of John Glass with Morgan Stanley. Please proceed with your question.

Thank you very thank you very much Oh can you just provide a little more color on the current cost trends and I'm, sorry, if I didnt see it in the release, but you didn't comment audit how much is California, California is causing a diet was hurt you maybe some color on outside of that in some states, where you haven't had closures, maybe but increased cases, how much dispersion is there in terms of.

The comp performance really over the last six or eight weeks.

John This is Glenn 'em, we did provide weekly sales information in the press release, which includes a comprehensive set of numbers and then the numbers associated with restaurants with open dining rooms, and you can see based on those charts that as of early July when.

California required our indoor dining rooms to close you see an adjustment there in terms of our comp store sales performance of about 4% on a comprehensive basis. However, since the dining rooms, where I'm close we have since increased our weekly average sales every way.

For the past five weeks since that occurring.

Thanks for that and then Lynn what got you what is the profitability at the restaurant lets it you said it improved through the quarter. So.

Assuming comps sort of stay where they are today, what where do you think restaurant margins would be stay in the third quarter or at this copper HCV level and you talked about finding ways to take out costs that are just temporary cost, but from an it will give some examples of where.

Where this crop cost for anything bad and made the order of magnitude that maybe get preserve please go ahead.

Well that was a pretty large question [laughter] I mean as you can see from our second quarter results. We did generate operating profit of 3.2 million at the restaurant level.

I think we'll be in the mid single to low double digit margin as we move forward and that's with an increase in terms of comp store sales as we continue to expand our seating capacity the areas, where we're expecting some savings from a permanent standpoint include.

Some areas within our labor line item that we found to some ways to be more efficient our occupancy cost as we continue to work with our landlord as it relates to restructuring our leases and then we're continuing to dive into other operating cost to see what other opportunities we may have.

Okay. Thank you.

Thank you. Our next question is comfortable either Gregory Francfort Bank of America. Please proceed with your question.

Thanks. This is actually Jon Michael on for Greg. Thanks for taking my question I want to have some labor. It's it's been a lot more variable then we would have expected.

And you mentioned the a shifting labor mix in support of off premise I was wondering if you could just address I'm you know, what's changing on that front and how much is needed due to the new operating model versus something we might not be aware of.

I think thats, a majority of the variability that you've seen.

Is really the move from.

Increase on the off premise sales and so especially with the.

A number of restaurants that the dining room, a is still closed in the.

The number of tipped employees, who are obviously are are they lower wage rate that has shifted to a higher average hourly wage rates not only in the restaurants that have no dine in right now, but also in the restaurants.

I do have died and just because we continue to have strong off premise sales as the dining rooms every opened up the 50% capacity. So it's really just a shift and from a tip to non tip or labor inside of the restaurants and.

You know the percentage of business that's associated with that.

Got it. Thank you and then I'm assuming out it's just wondering what are the biggest changes that you've made as a result was coded that you expect will stick Oh, you know even as we come out on the other side and consumer dying confidence and sort of normalizes.

I think some of the biggest changes I mean as Lynn mentioned, we have made some changes in terms of the labor line in terms of the up.

The management structure.

A restaurant level and.

How we see that moving forward also with the new TJX model, we're seeing some efficiencies as the Donnie rooms reopened in terms of Ah Ah the front in the house Labor and then frankly as in the menu reduction that we did at the Uh Huh.

Taking 33% of the menu out I know, we've seen efficiencies also and the in the back of the house and.

No the.

The menu reductions that we've had as really been able to drive both quality and.

You know ticket times and things like that so we feel good about it we are no. There may be some items brought back to the menu overtime, but we see that being a a more of a permit structure. So you know whether to the management structure in front of house one of the back to house, we see ongoing savings.

Really in all three areas.

Got it thank you very much.

Thank you.

As a reminder, if you would like asking question. Please press star one on your telephone keypad.

Our next question suffered in the liner Reiner Carol Raymond James. Please proceed with your question.

Hi, Thanks, and good evening I wanted to circle back to the sales mix and looking at the 360 or so company units with reopened dining rooms curious where the off premise sales mix of settled out in recent weeks cws in that kind of 38 39000, a week range how much is all.

I Miss and they could you break that down further between a takeout versus delivery.

Sure I think we're running about 40% off premise with the number of restaurants. We currently have open.

And carry out has actually on outpaced our delivery a percentage of those off premise dollars.

And I'm, just trying to get a more specific number here for you right.

[noise], Okay, and I guess, Paul one for you maybe as a as were looking that up I wanted to ask about the expanded outdoor dining and I guess on your based on your current plan, how many seats or total capacity could that.

Add in the average unit.

Well I mean, obviously, that's you know okay. I guess the average unit, we think that that could be somewhere between.

16 to 24 seats.

And the expanded outdoor dining rooms and.

Firstly I.

I mean, you're seeing is across the industry, but in our own research.

We're seeing that our guess certainly that the research we're doing have said that there.

Even if they're not quite willing to come into way.

Dining room right now they are willing to engage with no red Robin in a outdoor patio situation. So we're a were as mentioned earlier rolling that out right now and.

We're very pleased with the you know what's the early results from the few restaurants that we have open that up so far.

Okay, great great and similar type question, but on the plastic partitions I think he said it could help in about a 150 company unit.

Could you frame, what kind of well no.

[music].

Well it can help in more than that overtime right. Now we have 155 restaurants that you know by regulation they could get to a capacity of you know that 75% range.

And those so obviously the first restaurants that were putting them in.

Okay, and what percentage of the seats in an average red Robin our boots versus tables.

That's oh good question.

No.

I'll be honest I I'll take a guess, but I can get back to you at the more specific answer in the future, but okay I would say about.

Yeah, I'd say about 30%.

30% to 40%.

Okay. Okay, Great and then last one for me the weekly burn rate of $2 million, a week could you decompose that a bit and remind us sort of what the weekly DNA run rate you expect in Q3, and then the interest cost or any other cost assumptions that are embedded into that 2 million dollar weekly burn.

Great for Q3.

Sure, Brian and let me circle back to your first question. That's our current off premise sales when dining rooms open about 40% our carry out and 20% or a third party and then in terms of our ongoing GNS assumption in our cash burn calculation and the DNA assumption is about one in a quarter.

For a million dollars per week.

And the interest expense expected, it's roughly a $2 million a corridor.

[noise], okay. Okay [noise].

Okay. Thank you I'll pass it along.

There are no further questions in the Q.

With that I would like to conclude the call. Thank you for joining Red Robins conference call today.

You may disconnect your lines at this time and have a breakeven.