Q3 2020 Carrols Restaurant Group Inc Earnings Call
[music].
Good morning, welcome to the Carols restaurant group incorporated third quarter of 2020 earnings Conference call. At this time, all participants are listen only mode. Following the presentation. We will conduct a question and answer session and the instructions for registering for Q&A will be given at that time.
I would like to remind everyone that this conference call is being recorded today Thursday November 5th 2020 at 830 am Eastern time, it will be available to replace.
I would not like to turn the conference over to Tony Hall, Chief Financial Officer. Please go ahead Sir.
Thank you Jerry and good morning, everyone by now you should have access to our earnings announcement released earlier this morning, and and earnings for review presentation. There.
Both are available on our website at www Dot Carol's dot com under the Investor Relations section.
Number one we were pleased to have increased comparable restaurant sales at both Burger King and popeye's during the third quarter and improved our profitability as measured by our adjusted restaurant level EBITDA adjusted EBITDA and net income compared to the year ago period, Secondly, we generated 23.
$3 million or free cash flow during the third quarter, bringing free cash flow generation to $47 million year to date in 2020.
Our liquidity position was already ample at the end of the second quarter and over $180 million has improved since then with current available liquidity of nearly $205 million and thirdly, we are in the process of negotiating and revising our area development agreement with our franchise or Burger King Corporation at Uh Huh.
Hi level, we expect the requirements under the previous agreement relating to new restaurant development and restaurant remodeling provisions will be significantly modified after considering restaurant development and remodeling as well as other system wide upgrades and initiatives. We remain committed to what we said last quarter in terms of annual Capex.
Spending of $40 million to $50 million over the next three years.
At this level of spend we believe we should be able to continue generating positive free cash flow for the foreseeable future.
Now, let's discuss each of these points in some greater detail.
Our service model is based upon convenience given our limited to no contact channels, such as drive through at the counter takeout and.
Recently implemented delivery business, we are in aggregate, we generated approximately 99% of our sales last quarter.
We believe these attributes have positioned us well to navigate cobot since all of these channels have proven to be resilient sales platforms.
We did however increase the number of our dining rooms opened to 35% in the third quarter, which was up from 20% in the second quarter.
We have also benefited from having a geographically diverse restaurant portfolio of more than 1000 restaurants across 23 States. This is because the shifting impact of the pandemic has provided us somewhat of a cushion as short term staffing or supply issues have been thankfully limited to only a few restaurants at any one time.
From a regional perspective, we are performing relatively better in the northeast, but worse than in the south Central region, and Tony will discuss how we are faring by region in more specific terms.
For the full quarter comparable restaurant sales for our Burger King restaurants increased eight tenths of a percent against a tough 4.5% comparison from last year.
This marked an impressive turnaround from the second quarter when comp sales fell 6.4%. However, it is clear that our trend softened as we move through the third quarter and into October we attribute we attribute this to several factors.
Number one first we believe that customers exhausting their stimulus Jackson constrained in their spending due to a weakening main street economy had a negative impact on sales in the latter part of the third quarter into October.
Second we think increased competitive pressures within the fast food segment during the third quarter affected our market share, including heightened promotional activity and discounting.
Third over the past two weeks the increase in cobot cases, along with the related renewed dining restrictions in many states is likely to have at least temporarily dampened consumer demand and lastly, we lap the introduction of the impossible Whopper last year, which make comparisons more onerous beginning in August and possible orders.
We're averaging 50 per restaurant per day upon launch and are now less half less than half of that.
Delivery comprised approximately 3% of total Burger King restaurants sales during the third quarter was an average order size of $17. This was approximately twice the overall average order size during the third quarter of 2020.
We have partnered and partnered with the.
For leading service providers door to actual breach postmates and Grubhub, who are now providing fully integrated delivery services at approximately 870 of our Burger King restaurants up from 800 at the end of the second quarter. Looking ahead, we believe more of our Burger King restaurants could provide a delivery option as provide.
Utters begin servicing their markets in a meaningful way.
Comparable restaurant sales at Popeye's increased 5.5% versus a 5.8% increase last year. We view this outcome positively as we had not expected to see this level of resiliency given that we lapped the chicken sandwich launch from last August turns.
Turning now to restaurant level and corporate expense management, we certainly made great progress.
This year, while improving our training process.
In total we increased our adjusted restaurant level EBITDA margin by 225 basis points and adjusted EBITDA margin by 200 basis points during the third quarter compared to the prior year period.
These are both positive outcomes and in line with what we said during our second quarter call as we had not expected the more substantial margin gains that we had realized in the second quarter to repeat.
Surpassed that amount considerably.
Lastly, we are in the process of negotiating a revision to our area development agreement with Burger King Corporation as it relates to a new restaurant in remodeling requirements. We.
We anticipate that are proposed revised agreement will reduce the minimum new restaurant develop them requirement down to a total of 50 you when it's over the next five years and removes annual remodel commitments that were part of the current agreement.
We expect that we would also give up our right of first refusal that we believe has diminished in value in the current kulish our business environment.
We believe that this new arrangement when I entered into with all out carols to ramp up it's organic grows on on a balanced basis. It should be noted that while we expect to enter into this new agreement at this stage. The parties have agreed to a term sheet and there's no assurance. The sectional arrangement will be entered into search terms or at all.
As we committed to last quarter, we intend to spend $40 million to $50 million per year for capital expenditures over the next three years within that total amount, we intend to build eight to 12, new restaurants per year, beginning in 2021 with fewer being completed next year before accelerating thereafter, given the time needed to identify real estate shaquira permits and.
And commenced construction a large portion of our newly constructed restaurants will be built using third party capital to finance, all but the equipment costs related to those new restaurants.
We've enhanced our liquidity, we are generating more free cash flow than we originally anticipated this year, even under pre cobrand conditions, and we are reaffirming our intention with respect to our capex spend outlook. This expected annual expenditure level of 40 to 50 million will be sufficient to maintain the quality of our current pool.
Folio of restaurants and grow our footprint longer term.
And finally in our southeast region, representing 26% of our Burger King restaurants comparable sales were up just over 1%.
Turning now to popeye's, which represents less than 5% of our total revenues comparable restaurant sales increased 5.5% against a 5.8% year ago comparison.
We underperformed the overall system average and late this quarter due to the availability of the chicken sandwich in many of our restaurants for most of the month of September of 2019, whereas the rest of the system lacked availability condition. Our popeye's restaurants are located in the brand's weakest region.
The south central.
Adjusted EBITDA increased $8.4 million in the quarter to $34.1 million from $25.7 million in the third quarter last year.
Adjusted EBITDA margins increased 200 basis points to 8.4% of restaurant sales adjusted restaurant level, EBITDA increased $9.8 million to $52.8 million in the quarter from $43 million in the third quarter last year.
Start level adjusted EBITDA margin was 13% of restaurant sales increased 225 basis points compared to the prior year period.
The improvement in margins was mainly due to lower labor costs and reduced operating expenses as a percentage of revenue cost of sales was essentially flat as a percentage of net revenue compared to the year ago period. This.
This was due primarily to less food waste offset by higher ground beef prices, which averaged $2.32 to 32032 cents per pound during the third quarter and an increase of 5.5% from the year ago period.
Notably cost of sales trends have continued into Q4 at approximately the same rate as Q3.
Restaurant labor expense decreased a 160 basis points as a percentage of restaurant sales compared to the prior year period. Despite a 5.2% increase in the hourly wage rate in our legacy restaurants. The improvement is a reflection of the adjustments we have made to our labor requirements at hours based upon operating day part sales trends along with reduced.
Along with having reduced our costs across most restaurants that are not operating data rooms.
Expect these savings will carry over into 2021.
Net income was $3.5 million in the third quarter of 2020 or six cents per diluted share on it adjusted basis, excluding certain non-operating items quarter. Adjusted an income was $5.7 million or nine cents per diluted chair and a year ago period are we had a net loss of six $8 million or 15 cents.
<unk> diluted chair.
As Dan said free Cashflow generation has been very strong over the past two quarters as the results are adjusted leverage ratio under a credit agreement stood at 4.06 times in September 27, compared to 418 times at the end of June of this year.
Going forward.
Yes, James this is Dan.
We expect that the.
Soon in the next couple of months some.
Of the fourth quarter.
Given the current marketing calendar with Burger King and the comparable sales from last year.
We will be.
More favorable than the October trend Thats for sure.
Got it so would you describe your the without kind of any details, but but your confidence in the promotional calendar kind of.
Accelerating versus what we've what we've been seeing less dumb let them too.
Burnt orange in terms of organic growth in 2021, because we really shut down our our development in 2020, we've got to ramp that up again, so restaurants that will be we will be building and either brand will be in the latter part of 2021.
Great. Thanks for taking the questions I appreciate it thanks.
Thanks Jake.
The next question.
<unk> some James Rutherford Stevens incorporated go ahead. Please.
Yeah, Hey, guys. Good morning, I wanted to follow up on Jake's question on a D cell in October and I guess another way to slice. This is just asking how much of that deceleration do you think is the macro things you called out the Covid cases, or the the main street economy compared to the <unk> competitive dynamics that you also called out and then have a follow up to that question.
Please.
That's S U ever call to determine how how much the main street economy affected I'll certainly we got a bit of an uptick wasn't a stimulus checks happened and you know obviously as time went on they ran out but as you well know from your reporting James <unk>.
Let mcdonalds and Wendy's both had pretty good October.
[noise].
Yeah, certainly and on on the discounting in particular, you you mentioned some you know the the <unk> the calendar for the <unk> for BK in in the back in the last couple of months here of the year. It does look like it looked like you guys reintroduced the two for five promotion here in October and you know <unk>.
It seems like promotional activities and pretty aggressive at B K already so I'm, just curious if you're referring to incremental promotional activity or if it's more just getting the full benefit of that too for five to take came in mid October.
Both I think that we will see for the <unk> in the fourth quarter continuation of the two for five in marketing tactics of that Ilk, and then I think that there there'll be some modification to the value of positioning in 2021.
Okay.
That's helpful and my final question is on the right of first refusal and it does seem to in the immediate environment. There's like the little use for that but what is your comment that the right of first refusal has diminished in value was that given your own position desire to focus on organic development in the near term or is that comment driven more around your <unk>.
You about growth prospects within the B K system more broadly.
The second James we haven't done a writer first refusal acquisition and.
Some while you know fifth 18 24 months.
Deals that we have done have been deals that either of the cellar came to us or Burger King came to us and asked us to look into the opportunity that existed. So that we haven't really relied on a right. At first Street you is all I'm gonna say for probably be 24 to 36 months.
Got it Okay I'll hop back in the queue. Thank you.
The next question is from your Jeremy Hamlin Craig Hallum. Please go ahead Sir.
Oh, Thanks, I wanted to come back to the the store development here and and just ask about the eighth 12 units that you mentioned in here for 2021, you know kind of slated more in the second half of the year would those be situations, where you would look for.
Or you know sale leaseback opportunities you know what are the type of capital outlays that you would expect at this point in time, you know given where the the you know the Burke in concept is in in the parent company plane with some you know redesigns of the kind of Burger King in the future.
The organic growth Jeremy will come from a combination of a sale lease back opportunities of which we've already identified several and some built to suit opportunities. There may be a couple that we do out of pocket, but for the most part that's what they will be in there.
Before the only cash outlay as he equipment.
Okay, and then just thinking about you know the uses of capital moving forward, you're suspended yours share repurchase plan, but you know it kind of 50 to 60 million dollar free cash flow run right mm mm.
Kind of improved a balance sheet.
You know are you is that something where you the and the board would consider restarting that I mean from a free cashflow, you'll perspective, you're looking at like a mid teens level with the stock at the current prices.
S. As 2000 as we go through 2021 year I mean, those are the kinds of things that we are continuing to evaluate right now given what we consider debating a high level of Covid uncertainty.
And where I'm really not sure where the business is gonna be from reopening standpoint, and that sort of thing we're maintaining some dry powder. If you will but from a cash that's on the cap of allocation standpoint, all things around the table as we go through.
2021, and certainly <unk> share repurchase would be one of the things that is on the table.
Jeremy I mean drive throughs are obviously.
Where most of the business almost all the business is coming from so if I look at putting in digital menu boards compared to non digital menu boards.
It's difficult at this point to determine I will tell you there a heck of a lot nicer to look at.
You can see them at night.
They do a much better job in terms of marketing.
But.
I don't know.
What the sales lift would be at this point.
Okay, and then last thing I think Tony you mentioned.
You know the the the northeast was you know flat to slightly positive in October. So it's it's definitely you know carrying over the same you know where we see covid spikes there's.
There's a bit of a a deaf and then.
Sort of what we saw in miniature [laughter], you know back in and.
In in March and April you see a bit of a dip and then recovery.
Once.
<unk> guest.
Adjusted to the to the environment, what everything thrown at them. So I think it's a bit of you know, we're seeing sort of a <unk> a miniature version of what we saw back in in March and April but uhm.
They were.
That yeah. There that's the I don't have that the individual months with me, but yeah, that's about right Tony.
Okay. Okay. We can circle back up on that in terms are reopening dining rooms can you talk about how that impacts sales and EBITDA in those units how many dining rooms, you might plan on re opening in the fourth quarter.
[noise], Yeah dining room Reopenings is a misnomer yes.
All of our dining rooms are open for takeout.
One or something.
Okay. So it's a nice improvement versus Q3, and what was your comments on fourth quarter Cogs.
Probably 10% to 15% of the overall cost to build in those that's what we have to invest in verses a third party capital provider.
So obviously, we're looking you know we're being very selective and offer you know opportunistic on what we build and what you know and and it's going to we're going to go forward based on you know the overall returns being you know in the low teens or higher you know for those restaurants on a cash on cash basis.
Eight to answer your question, Brian November was last year with negative eight tenths of a percent in December was flat. So as we said Tony's comment was that right on the money.
Great. Thank you for that I'll pass it along yeah.
Alright.
Well a follow on from James Rothenburg Stevens incorporated. Please go ahead, Sir Hey, Thanks for letting me hop back in I I just wanted to put together some of these comments around restaurant level margins going into the fourth quarter, you're you're slowly adding back head count to the box your opening more dining rooms progressively and it sounds.
Promotional activity will remain.
Fairly heightened so you know I clearly part of this depends on where you land in terms of your car, but if we assume things stay maybe steady ish compared to October.
Or maybe slightly improved kind of where do you think Tony those restaurant level margins might land relative to the 13% you just did here in the in the third quarter.
I think.
You know I think where they'll be I think labour will be a little bit worse, because we're adding.
Attempting to add headcount.
From that we went from 19 employees per store <unk> day to 20, and and and you know that'll probably end up at 21 I'd say, that's our goal you know we just it's not sustainable to have 20 folks for restaurant per day, it's it's a big stress on the system. So I mean that should that in terms of sort of <unk>.
<unk>.
Costs from 2324, I think that's where we're gonna see a little bit of headwind, but the rest of the rest of the <unk> you know the cost will be <unk> as we said we think and.
The the other operating costs are.
Argentina will be more favorable than they were in 2019.
I am not suggesting that we're going to maintain the same margins. We had in Q2 of 2020, but yes.
Yes, I think that.
Assuming that we can generate.
Continual sales increase that we forecast I think our margins will be healthy.
Great. Thanks, a lot I appreciate it.
We have another follow on from Jeremy Hamblin, Craig Hallum. Please go ahead Sir.
Sorry, we all got follow ups today.
I wanted to just revisit the cost of sales for a second there was about 140 basis point sequential.
Fourth quarter.
Okay, and and I just wanted to clarify on labor as well. So you know last year your queue for labor as a percent of sales was higher than in Q3 are you, suggesting that the your labor in queue for is going to be.
Have a similar improvement on a year over year basis versus Q3, or maybe slightly less because you are likely to add maybe one person per store can you just help yeah sure I'm sorry, the testing.
So I think that'll be.
It'll be an improvement.
Year over year.