Q3 2021 Carrols Restaurant Group Inc Earnings Call
Good morning, and welcome to the Carol's Restaurant Group, Inc. Third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
Along the presentation, we will conduct a question and answer session and instructions will be given at that time.
If anyone should require operator assistance during the call. Please press star zero on your telephone keypad.
I would like to remind everyone that this conference call is being recorded today Wednesday November 10th 2021 at eight a M. Eastern time and will be available for replay I'll now turn the conference over to Mr. Marotta miles controller for Carol's restaurant group. Please go ahead.
Thank you Melissa and good morning, everyone by.
By now you should have access to our earnings announcement released earlier this morning, and an earnings presentation that are both available on our website at www Dot Carol's dot com under the Investor Relations section.
Before we begin our remarks I would like to remind everyone that our discussion including answers to your questions posed to management may include forward looking statements or comments with respect to our strategy and intentions, our plan and the future direction of revenues input costs or other aspects pertaining to our businesses.
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 SEC for more detailed both with respect to forward looking statements as well as risks that could impact our business and results, including among other things the impact of COVID-19.
During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles.
A reconciliation to comparable GAAP measures is available with our earnings release.
With that I will now turn the call over to our chairman and CEO and academia, Dan Thanks, Brett and good morning, everyone.
Sure I discuss our third quarter 2021 top line, let me address the elevated labor and commodity cost headwinds that we in the restaurant industry generally are experiencing they both hit our adjusted EBITDA and margin hard in the quarter.
From a labor standpoint in the third quarter, we work to keep our restaurants open from at least six a M until 11 P. M in order to take advantage of the economy reopening.
Given the competition to recruit and retain workers, we were required to increase average hourly wages of our team members by 13, 3% and pay ship premiums in overtime in order to meet customer demand.
The adult Bavarian further challenged our ability to keep our restaurant staff during the quarter given sporadic location specific closures at least for now that challenge is abated so far this quarter.
We believe we will continue to experience labor headwinds for at least the next six to nine months.
Our supply chain was constrained on numerous levels, we use a combination of frozen beef from overseas suppliers and fresh beef from domestic suppliers.
Beef represents about a quarter of our commodity basket.
Painter ships carrying frozen beef were stranded off the coast of California, unable to unload their product in it.
Timely manner during the third quarter.
The supply constraint contributed to our beef costs, increasing 15, 5% compared to last year.
Food and paper producers and distributors supplying most of our commodity requirements face labor constraints, along with higher fuel costs and many pass those increases on to us.
The question is where I'm struggling to answer or what portion of the higher labor costs are transitory and will commodity costs, followed their traditional cyclical pattern and revert to the mean.
We don't have these answers, but we do know that the inflationary cost pressures we experienced during the third quarter were not expected to the degree that they impacted our industry.
The economic conditions stemming from the pandemic and its effect on the labor force supply chain and consumer have consumer habits continues to be challenging to navigate and difficult to predict.
Turning to our sales in the third quarter of 2021 comparable Burger King restaurants sales rose, 2.7% during the quarter with a sequential sequential.
Bunch of improvement in trends from July through September a year ago comparisons eased and we rolled out pricing increases in late July and in August we estimate that we lost about 1% same store sales growth through the COVID-19 and staffing related challenges that reduced operating hours in the quarter.
During the third quarter, the eat in and takeout channels combined contributed about 14% of total sales in our Burger King restaurants will drive through with approximately 80%.
We also benefited from a four 7% in Mexican delivery sales, which compared favorably to a two 9% mix in the third quarter of last year. The average check size for delivery held at $17.53 compared to $17 56 in the second quarter of 2021, our overall third quarter average check for Burger.
King rose to $9.23, including delivery compared to $9 in the second quarter overall, our Burger King average check increased seven 8% year over year as a result of higher menu prices and reduced promotional discounting.
To further mitigate input pressures we've taken on an additional eight tenths of a percent in pricing in early October at our Burger King restaurants.
We believe that the impact of price increases on customer demand in the current environment is small.
Based on the price actions, we have taken so far this year lower promotional discounts and possible further price action expected next year, we believe that our Burger King average check will increase in the mid to high single digit.
<unk> range in the first half of next year.
In terms of the trends in our Burger King sales by day part most remained steady.
In the evening late night day parts. However continued to recover in the third quarter of 2021 compared to the same quarter of 2020 breakfast increased 9% and contributed 12% of our sales in the quarter and evening late night improved 10% and contributed 13% of our sales in the quarter.
We once again outpaced the overall Burger King system as we have done for 'twenty, one out of the past 23 quarters, our third quarter 2021, comparable Burger King restaurants sales increase exceeded the U S. Burger King system by 430 basis points. We believe we were able to drive positive comparable sales and outperformed that.
System during the quarter through a combination of menu price actions and actively reinstating restaurant hours.
As an update in October 2021 comparable sales at our Burger King restaurants increased 5% compared to October last year, continuing the sequential improvement we have been seeing since July of 2021 pop is comparable restaurant sales in October increased nine 7%.
Only in places short time Burger King's Royal Perks loyalty program is already beginning to have a positive impact on increasing the level of one on one engagement with our customers and reducing the use of paper coupons. This platform, which is currently accessible in our restaurants only through the BK mobile App will also be available through our dining room and drive through.
Guests beginning next month.
To conclude today, we are facing our cost challenges head on with more aggressive pricing, which we believe will help alleviate the margin pressure that we are currently facing looking ahead. We believe we will be able to begin recapturing a portion of the margin erosion. We are seeing this year as the benefits from menu pricing actions and lower promotional discounts.
To improve comparable sales and cost comparisons.
Italy ease on a relative basis.
Finally, as we announced in September I will be retiring as chairman CEO and President by June 30th up next year I had been with the company for 50 years of long term 10 year by any measure I believe that now is the right time for me and for Carolyn to begin the transition to the next generation of leadership my intention over the coming months will be to work with our border.
Directors and management team to identify my successor and help that person succeed in their new role and with that let me turn the call over to Tony to review our quarterly financials. Thank.
Thank you Dan.
Total restaurant sales for the third quarter increased three 6% to $421 $7 million compared to the prior year period of $407 million, our Burger King comparable restaurant sales increased two 7% during the quarter with an average weekly sales for Burger King restaurant of $30186. This is an improvement of 3.1 person.
Sent from 'twenty 'twenty levels, and more importantly exceeded 2019 levels by four 9%.
Primary difference between overall sales growth in the quarter to comparable restaurant.
Couple of Burger King restaurants sales growth was due to the contributions from the 19 restaurants acquired during the second quarter of 2020 one.
And three newly opened Burger King restaurants, offset by the closure of 17 Burger King restaurants since the end of the third quarter of 2020.
Let me give you our Burger King performance by region as we operated 1027 restaurants as of the end of Q3.
Across 23 states.
In the North east, representing 21% of our Burger King restaurants comparable sales were up five 7%.
In the Midwest, representing 29% of our Burger King restaurants comparable sales were up three 2%.
In the South central represented 24% of our Burger King restaurants comparable sales were up one 7% and finally in our southeast region, representing 26% of our Burger King restaurants comparable sales decreased one 9%.
With respect to our popeye's restaurants, which represented less than 5% of our total revenues in the third quarter of 2021 comparable restaurant sales decreased three 2% versus a positive five 5% during the same period the previous year.
Staffing challenges during the evening hours of operation. This past quarter were particularly impactful to pop is comparable sales. However, our results still represented a three 8% increase on a two year basis, we outperformed the popeye's U S system by 140 basis points in the latest quarter.
As a result of the inflation challenges experienced in the third quarter, adjusted EBITDA decreased $15 $5 million to $18 $6 million, while adjusted EBITDA margin decreased 400 basis points to four 4% of restaurant sales cost.
Cost of food beverage and packaging as a percentage of net sales increased 130 basis points, primarily because of higher beef pork and other commodity costs commodity inflation in the quarter was nine 2%.
We called it last quarter, we stated that our food supplier forecasted beef cost would be between $2 40, and $2.45 a pound from September to December of 2021.
As far as September is concerned this did not come to pass and as it was $2 68 per pound in the quarter overall.
Although we have seen modest reduction in beef costs in the last two weeks and I believe that commodity costs will remain elevated through the remainder of the year.
Restaurant Labor expense increased 250 basis points as a percentage of restaurant sales in the third quarter of 2021 compared to the same quarter a year ago.
The dramatic contrast between the restrained operating environment, we experienced in the third quarter of 2020 and the impact on labor cost of the economy reopening was unprecedented.
Absolute basis labor cost increased $15 million.
Or 12, 1% from $126 million to $143 million.
Imbalance between the supply and demand for workers required us to quickly increase hourly wages to remain competitive and operational with adequate staffing levels. While the base numbers of hours worked by team members were about even with the same period last year. The dollar impact of the higher average hourly wages increased our labor cost by $6 million in the quarter.
The team members' premiums to take on additional responsibilities such as opening and closing our restaurants and overtime added $4 $8 million to the overall increase in labor the need for overtime hours for our assistant managers that we're restricted last year in response to the pandemic along with salary increases for retention cost us an additional $3 $7 million in the quarter.
Other.
Operating expenses increased 90 basis points due to a number of factors, including higher recruiting spend and other employee related incentives utility rate increases and rising insurance costs.
We also installed smart safes.
Majority of our Burger King locations that provide for faster cash collection, and greater security, which also added to operating expenses.
Restaurant rent expense in the third quarter decreased 30 basis points as a percentage of sales compared to the prior year period, primarily due to sales leverage.
General and administrative expenses fell to $19 $2 million in the third quarter of 2021 from $24 million last year and declined 40 basis points to four six in restaurant sales. The decrease in dollar terms was due to lower incentive compensation accruals. This year and it was partially offset by higher regional administrative costs.
Net loss was $9 $9 million in third quarter, 'twenty, 'twenty, one or 'twenty per ship per diluted share.
On adjusted basis, excluding certain non operating items third quarter adjusted net loss was $7 8 million or 16 cents per diluted share.
In the prior year period, adjusted net income was $5 $7 million or nine cents per diluted share.
Free cash flow for the quarter with the third quarter 2021 was $13 $5 million compared to $23 8 million in the prior year period. The difference is primarily due to the reduction in adjusted EBITDA. This year.
We ended the third quarter with cash and cash equivalents of $89 $4 million in long term debt, including the current portion and finance lease liabilities of $523 $3 million.
Got $47 $1 million drawn on our $215 million revolving credit facility and had $9 million of letters of credit issued under such facility.
This left $158 $9 million of unused availability under our credit facility and when added to our cash balance provided us with $248 $3 million of liquidity at the end of the third quarter.
We funded the special dividend special cash dividend of $24 $9 million on October 5th 2021.
As a reminder, our ability to utilize our revolver capacity requires compliance with one senior secured leverage ratio and it's only in effect with more than 35% of their available capacity is being used at this point, we are below that threshold and have no maintenance covenant requirement went into effect, we need to stand at 575 times senior secured net debt.
Moving to EBITDA.
Our senior secured ratio was at 1.24 times at the end of the quarter. So we have considerable headroom to use our current available revolver capacity.
Our total net debt compared to a covenant EBITDA as defined in our senior credit facility stood at four point out three times at the end of the third quarter in line with the ratio at the end of the third quarter of 2020, we did not repurchase any shares of our common stock during the third quarter.
We now believe that our net capital expenditures will be will be below our earlier $60 million target as construction delays have pushed some new builds and remodeling projects for next year.
Our current 2021 capital expenditure expenditure forecast is $50 million and will include the remodel of 28 restaurants half of which will be completed this year and the remainder in 2022. This plan includes nine popeye's remodels that will mostly be completed next year.
We are also building eight Burger King restaurants in 2021 of which six will go online this year.
$10 million reduction in 2020, one spend will move into our 2022 capital expenditure plan.
On the M&A front, we do not currently have any multi restaurant transactions in the pipeline.
To conclude while the near term cost headwinds affecting our business are certainly clear as we move into next year. We believe that we'll be able to claw back a portion of the margin erosion you're now experiencing.
This will be achieved through menu price actions taken to date and in the future combined with potentially easing cost pressures on a year over year basis, particularly in the back half of 2022.
In the meantime, our liquidity example, as is our ability to generate meaningful EBITDA.
And with that operator, let's go ahead and open the lines for questions.
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Our first question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.
Hey, guys I just wanted to follow up on sort of the margin outlook here and I understand that there's a inherent degree of unpredictability here, but when you guys are talking about calling back a portion of the margin loss in the back half of next year, how should we think about sort of the structural revisions to the margin performance of the.
The business going forward.
I think it's going to be a combination of first of all I would totally agree with it's unpredictable but.
We know the menu price increases that we've put in place today and how they'll carryover to next year, we plan on doing.
At least one early year menu price increase next year. So in terms of margins you know that'll be helpful to margins you know the traffic as you know the traffic direction is kind of one of them.
It's out of our hands, because it's really rely on them on some RBI activities, but.
We feel good about the menu price increases and that they were holding you know that we're not they're not affecting traffic at this day and then you.
I just don't you know we don't see.
Kind of hourly wage.
There will be there will likely be hourly wage increase next year and certainly in the back half, but you know we don't believe it could possibly be as strong as we you know as high as it's been this year given that it's you know.
We probably got three or four years of wage increases in one quarter.
This year. So you know our view is it's it's unlikely that it will be that.
That dramatic next year, so we'll get some sales leverage based on that so that's again, it's totally unpredictable. We don't we have no idea what the labor situation will be like a year from now but.
It just seems reasonable and then the other thing is.
So we're seeing stabilization in commodity costs and even though.
You know, even though we think that the labor production and distribution aspects of our commodities will not see a lot of relief you could see some.
Raw materials relief you know next year, so that could that could mean that the cost of sales are going up.
Less robustly than it did in the third quarter this year.
Makes sense and if we just think about the October trends that you touched on it looks like the two year trend decelerated versus what you guys did in the third quarter. So can you sort of touch on what you're seeing on the top line and when we should sort of expect that to get moving in the right direction again.
You know we saw a 5% in October and.
You know it was it was consisted of.
Average ticket was up in the low single or low.
Teens.
And traffic was down consistent with what was down in the third quarter, but you know five 6%.
So.
That's what we're seeing I think the big driver.
You know.
We probably think that the.
The price is probably a good you know the the price aspect of it is probably good through the quarter.
But you know again the traffic piece is a little bit uncertain.
Great. Thanks, guys.
Thank you. Our next question comes from the line of James Rutherford with Stephens Inc. Please proceed with your question.
Great. Thanks, very much Dan congrats on the announced retirement.
Very incredible career in the industry and we have beef for another six months or so but I will certainly Miss you on these calls once that transition happened so congratulations.
Uh huh.
100000 anyway.
[laughter] sorry, what was that I said I'll still have another call anyway.
Yeah, well, we're glad we're certainly.
Certainly glad I want to start off on the staffing levels versus 2019 levels I'm curious how those trended.
Through the quarter and as a second part to that question do you think the wage increases that you've put in place are sufficient to make your.
Stores' competitive enough or do you expect to need to increase wages again any.
Any meaningful level in the fourth quarter to get those staffing levels back to 2019 levels.
Rather the staffing levels through the quarter actually were pretty consistent.
Oh, Wow, Yeah, where we're ending up with a fair number of applications. The application flow has picked up.
In the past month.
The challenge continues to be with retention.
I think the core our average hourly rate is fine where we're seeing the biggest part of the inflation in labor is we are paying premium wages to keep the stores open past nine o'clock at night.
That's where we seem to be struggling the most is in it and that's true for the whole industry.
We really.
One of our restaurants to close prior to 11, and 12 o'clock at night, and consequently, rather than increase the base wage we pay a premium wage at 50 cents or a dollar to get employees to work beyond that period of time.
So in terms of a percent increase in wages in 2022.
My sense is it should be much more it'll be much less of an increase in what we're experiencing currently.
Okay, and Tony was that 13, 3% wage growth inclusive of the overtime and shift premiums or is that additional to that.
No. It was just the base wage okay. That's just the base wage mhm.
And then just one more question for me and I'll turn it back to the queue, but can you give a sense of.
Menu price trended throughout the quarter, unless you want to give it necessarily by month or whatever but with with the different increases put in place and overall where are you running today with the 80 bps you add then in October.
It went up during the quarter because the first increase was at the end of July.
And that was on the backs of the March late March increase of 2%.
And then we did one in a pretty sizeable one in August.
So I think it is.
Ended up for the quarter being about five plus or minus percent.
The check increase was due to.
Menu price increases and right now we're sitting at about seven 5% for.
Our menu price increases.
Okay and then there's also I think a little bit less discounting in there as well, which is not included in the seven and a half is that a fair way to think about total sort of net check okay, it's pretty significant.
It's not it's not a small I mean, we're our discounting was like 300 base, three or 400 basis points.
Less this year.
This quarter than it was a year ago period. So it's just an interesting trend that we're seeing that.
You know that.
We're raising the prices on some of the promotional items and it's sticking and there are fewer guests who are spending very few doors in the restaurants. The more the guests are spending more which helped drive the average ticket price up and reduce the promos and discounts.
Certainly it's a very interesting dynamic okay. Thanks for the help.
Thank you. Our next question comes from the line of Jake Bartlett with true Securities. Please proceed with your question.
Great. Thank you very much thanks for the question and Dan Congratulations on a on a long and and fruitful career.
Great.
Working with you over these years.
I am Mike My first question was just on the on this understand.
Trajectory in.
I know that RBI.
RBI has communicated a plan to really take a look at the at the strategy work with franchisees communicate that strategy and then put it into place in 2022 to try to regain market share, but the question is what in the meantime.
How confident are you that you know there.
There's some measures in place or strategies in place to to really start to move the needle.
In the near term so rather than waiting for the long term strategy shift or approach. How confident are you that that in the near term that Burger King can regain some market share there.
I think it's gonna be a challenge for the next six months.
The marketing plan for the balance of this year, we know what it is and it was pretty much put in place a while ago.
The new plan and the new strategy will be.
Provided to the franchise community up there at the convention in December.
But it'll take a while for that to take effect and ethical manner. So I think the market share.
Challenges will continue for at least the.
Until the mid part of 2022 gig.
Got it.
That's helpful and then maybe.
But less discounting and I believe made me through with no paper couponing.
Seems like a good support for margins, probably impacting sales a bit but.
As you shift over to the digital channel is there is this interim period, where you you have we have less of the paper.
Coupons, but don't have the digital channel quite up to speed because it hasnt been loyalty hasn't been launched in store yet so.
Question is once that does happen would be just expected discounting to kind of go back to a more normal level in the form of a digital channel or do you think that there's some kind of a real permanent shift hearing less discounting for the brand.
Well, it's not just the couponing and the digital there's been changes in the menu.
We had a the dollar menu on the value items. Most cats were all lifted we're charging more now for.
Those items on a regular basis.
And you know a year ago, we had a tool for five or as opposed to currently we're running at 246 am to prevent the kinds of things. So I think those those changes are are are probably more relevant than whatever is going on with the couponing.
And more sustainable.
Got it great and then the last question is is it really on free cash flow.
Tony maybe if you can just remind us if theres anything lumpy in terms of no.
You know ins and outs in working capital just so we can kind of make sure we understand that and then you know as we.
We look to 2022 in for Capex, there's some of the some of the Capex has been you mentioned pushed into 'twenty two.
Any indication on whether you'd expect to maybe open fewer stores than previously planned.
Even given the environment and the cost pressures or you also whether theres you know how how likely it is that theres going to be a a.
Capital kind of requirement from whatever measure Berger can put in place to try to.
Turn sales around any indication on what 2022 Capex could be and then and then just making sure we know that ins and outs on working capital for free cash flow.
I'll deal with the Capex and Tony can deal with the.
Working capital.
In terms of opening restaurants in 2022.
My sense is that we've got some that are already in the works and they'll open in the first part of next year beyond that my guess is it's probably going to be later in the year simply because we're having problems getting the equipment and so forth there's about a.
Oh, three and a half four month lead time now to get kitchen equipment.
So even.
Even if we wanted to open the restaurants, they would be it's going to occur later in the year. So I think new store development.
Could be less next year than what we had originally planned.
Remodeling again, we've got some carryover John remodel, we've got something that we hope to get completed by the first part of next year and then we'll see you know again, what their supply chain looks like in terms of our ability to get the equipment in.
In terms of both our equipment mandates for both Burger King and Popeye's. There are the digital menu board rollout will be completed by our second quarter of 2022 and both brands.
And the.
Required kitchen equipment for our Burger King will be in place by the end of Q1.
It's already been ordered and the required kitchen equipment for pop is will be in the second half of 2022 again because of our supply constraints.
Got it and then Tony I was just the question on the working capital but.
Dan in terms of the equipment for the Burger King in the pub biases that a significant investment to boost up should we expect that too to boost the 22 capex significantly.
I don't think it's got a boost that to 'twenty to 'twenty, two capex a difficult lately because when the major capex dollars are our remodels and whatever new construction. We may do so that will be as I said that that that's gonna be somewhat fluid based upon.
The our ability to get the supplies to open a remodel a restaurant.
The the Capex requirements for both pop is in Burger King or.
Quite a relatively small percentage of our overall capex budget and they're lapping what we did this year so it shouldn't change that much.
Hmm.
You know I'd say the the.
Couple of things that are impacting working capital this year.
Our.
First of all we have to repay.
10 million plus of the FICA determined that we received in 2020, so that's half of the total.
So that'll hit on December 31st and then and then so that's a that's a bad guy to working capital a good guy, but the biggest good guy to working capital as our interest on our.
Our interest expense our cash outflow for interest expense is gonna be a lot less than last year because.
The interest on the bonds.
Actually is payable in.
The first couple of days of next year.
First actually the first day of you know.
Our our calendar.
Our fiscal 2022, so it'll be a benefit to cash flow this year.
And then the payment we have in 'twenty.
You know the second payment we have in 'twenty to 'twenty two will actually also be paid in the first day or so of 2023. So.
Just sort of a new a new thing that we have the bonds outstanding.
Great. Thanks, a lot appreciate it.
Thank you. Our next question comes from the line of Jeremy Hamblin with Craig Hallum Capital Group. Please proceed with your question.
Thanks, and I'll add my congratulations to you Dan it's been a pleasure working with you and again youre demonstrating some pretty impressive execution in a really tough environment.
I wanted to Tony just start actually with the commodity cost beef price I think that the math on that is what $2.67 a pound in Q3 I wanted to.
Get an update on where things have kind of trended here to start Q4, and also I know some of the other commodity costs.
Of course weather, you know protein costs, whether it's chicken or pork have also remained elevated.
How would you know how has that trended here in Q4 and kind of your expectations over the next several months.
I would say that the.
The general view on commodities right now is that they have.
Stabilized.
And we're seeing a little bit of.
Recovery, there a little bit of a decline not huge declines but.
The the current price for beef is a little bit above the average for.
The third quarter.
And it's heading in a good direction, but really slowly.
And I'd say the same with all the other you know I'd say, it's the same with all the other commodities that they seem to have.
Plateaued in there you know slowly pork slowly coming down chip.
Chicken is slowly coming down.
You know so.
Some of the you know French fries are steady, but seem to be coming down we have hedges in for some bakery items in from some other items. So we don't have it but rsi our food distributor does so.
I'd say holding steady and maybe starting to you know definitely stabilized, but maybe some starting to see some light at the end of the tunnel on that coming down a little bit but not a lot.
The inflation.
Inflation in the in the fourth quarter, just because of the comparison to really low commodity cost in the fourth quarter of last year is going to probably be in the low to mid single.
<unk>.
So it's still you know.
It's still a headwind versus last year as it's gonna and it's probably going to be the biggest headwind in the fourth quarter that we've seen all year.
Mostly because the base was so low last year.
So so cost of sales probably trends up slightly from the run rate that you saw in Q3 is that a fair assumption.
I think it might be a little bit yeah, I think it might be steady because of leverage sales leverage and lower promotion and stuff like that.
Lot more pricing and you know we got on with pricing.
Okay.
Actually I think the net of it is it may be.
You know it maybe a little bit favorable to Q3, just because of the leverage.
Okay got it and then you know again kind of extraordinary environment here on labor you know as we look out you know typically you have.
Well do you have you know some days you know in Q4 around the holiday period that your staff in our kind of lower volume you know labor, presumably it sounds like you're getting people you know in you know.
There's an improvement in terms of having.
Staff there.
Is he is the near term expectation that you know labor costs are going to continue to be.
A challenge you know despite the kind of menu pricing offsetting.
You know some of that impact.
Again, I think for the balance of this year I think we're pretty good shape, Jeremy because you know things have stabilized.
Recently.
Starting with next year, there's a few states that have some minimum wage.
Movement, but.
Generally the minimum wage it doesn't have much effect on us at all because were paying more than that currently.
So I really I think again, there may be some movement next year, but it's not going to be anywhere near the magnitude of what we're currently experiencing.
I think the one other thing we're starting to take a really hard look at that because just because it's we just were able to catch our breath after what happened in the third quarter.
As we're really looking restaurant by restaurant at.
Is staying open until 11 o'clock profitable.
And if we find because of the labor costs are where they are in.
You know a year ago and two years ago. It was kind of a no brainer on that but now we're doing analytics too and it's not really you know it's not any like AI special.
Yeah.
His bang stuff, but you know we're starting to look at.
It doesn't make sense to close a 10 instead of 11, because the traffic we saw over the last six weeks in that last hour was not worth staying over given you know staying up and given the labor cost. So I think that's something.
If we don't get it going in the fourth quarter, we will definitely start to be a little you know much more diligent about that and in.
In the first quarter and the same goes for the you know it doesn't make sense to opening six versus seven a M. In the morning. So we're just taking a lot harder to look at that and then I think it's been done in the past the medicine, one, but you don't know him, but I. It seems like it's a it's just that it's it's a given where wages are gone. It's it's kind of front and center for us to be you know optimize things a little.
More than that we've had to do in the past.
On the on that front, just because it's more of a question than it was in the past before it was kind of a no brainer stay open so.
I think that'll have the other point I would make Jeremy is that.
We're going to start lapping the only the only two quarters left where the labor is probably going to be.
You know a big increase versus the prior year as the fourth quarter and the first quarter of next year, when we get to that we started to see the labor issues in the second quarter of this year. So we're going to start lapping that next year. So it should be less of a headwind there still will be a headwind, but less of a headwind than we certainly saw.
In the several quarters this year.
Understood last one for me is you continue to see.
Underperformance in that South Central region, I know the southeast also did not perform as strongly.
Is there anything that you know you're seeing I don't know how that necessarily compares.
You know versus the industry.
I know that you know its been a frustration here for a couple of years now cause it.
It's been stubborn in terms of performance. Although you guys have really improved the four wall margins.
You know is there any thought you know to the you know.
Have you ever.
Thought about maybe monetizing those assets moving out of.
All of that region.
You know or are there other things you think that can be done to kind of stimulate.
Productivity of those those underperforming areas.
The south central is it primarily the Cambridge.
Restaurants, and actually they've turned around were actually positive now in Cambridge, and we're positive on a two year basis. So we did what we said we would do we said that it would take US two years to get this from.
From a sales standpoint, the margins, we got much more quickly than that so we're making progress there and with those restaurants and because we have a lower labor rate. There are I think will be.
I think we're making we're heading the right direction right now the struggle is in the Carolinas.
We are negative all across north and South Carolina, and we had a call yesterday with Burger King and they say that's true for the balance of their restaurants in those markets and we're trying to drill down specifically Jeremy to see if there's a particular reason why it's every aspect of the Carolinas where were negative and J S.
They were negative in and Charlotte were negative in Greensboro.
And I don't really happened that those are legacy stores, those aren't new restaurants, and they operate well and we're trying to determine where the market share is growing and Burger King did not have an answer for us.
When we asked that question, but we're doing some more analytics on that to see if we can determine specifically if there's a.
Day part across the region, that's creating the challenge.
But that that's really where I'm most concerned about that right now.
Well hopefully the parents cannot that can help.
Contribute positively to cause here in coming months. Thanks for taking my questions guys best wishes.
Hey, Jeremy.
Thank you. Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.
Good morning.
So after the eight tenths of a percent price increase in October I think that we have nothing for the remainder of this year and that you're planning one in early fiscal year 'twenty. Two do you have a sense of the magnitude of the fiscal year 'twenty two price increase shall implement.
The one that we will be implementing will be in two and two 5% kind of number which will essentially.
Essentially mirror the increase that we had in March of 2021.
Okay.
Okay and that's that's helpful. And then with regards to your increased labor cost is there a component of this is being driven by overtime I guess I'm trying to figure out if there's some way to adjust the increase in labor in and try and figure out if you're not paying some of that how much you know your your actual wages would be it would be <unk>.
Creasing.
Yes, the overtime piece for the team players was not that significant.
And.
So you know we think of it.
If the world goes.
You know it could stay that way for next year could we still could be required to pay overtime next year, because we can't get the staffing up.
Alternatively, you can get the staffing up pay less overtime, but we're paying for more bodies. So.
He thought it would be a wash either way.
I think that's.
You know I think that's.
You know that cost base is going to be with us for a while regardless of whether it's coming through overtime or more you know more team members.
If that if the world lets us hire more team members right now it doesn't seem like we're going to be able to go over the 20 team members per store and anytime in the near future. So it'll probably look the same a year from now on that front and then the overtime for managers was just a reinstatement of overtime they had pre COVID-19.
So there may be some you know there may be some ability to cut that back in the future, but generally speaking its.
Kind of getting back to pre Covid levels are our assistant managers are paid hourly.
And they have a 50 hour work week.
During COVID-19 because of all the challenges in our restricted hours and all the rest of that we moved all of our assistant managers back to a 40 hour work week.
Consequently, they received less income and they didn't obviously, we didn't have any management overtime. So that was reinstated in the third quarter two.
2020.
And we just lapped that so.
Okay and then just finally for me you mentioned that you know most of your wages are a lot of your wages are up upstate minimums. So it's not going to the impacts of rising minimums won't hurt you that much.
I guess looking back at history, if we were to see a dramatic change in terms of the labor environment, where the pool grew is there any precedent for wages going down or do you think that wages can only go up.
I think it depends geographically I think there may be some markets where in fact, we we we will be hiring newer employees at a lower rate than what we're currently paying and there are other places like in New York State, where I mean, the minimum for fast food workers is $15 and that's the way it's going to be.
So I think in the south central market.
Tennessee, Alabama.
Kentucky.
South Carolina, I think there may be an opportunity in the future to actually.
Have a a new employees come in at a lower rate.
It's the only benefit of high turnover.
So when I turn it over to Scott.
You can potentially roll back some of the stuff with kind of turnover, we see at the team level.
Great good to hear Alright, that's all for me. Thank you.
Thank you. Our next question comes from the line of Michael couple that with J P. Morgan. Please proceed with your question.
Hi, Good morning, and thank you for taking our question. We saw that you guys were planning to use free cash flow to reduce that debt.
News that.
I'm curious if there's any sort of magnitude or goal that you had in mind for that outside of that working capital and free cash flow priorities you've mentioned earlier.
I mean, two things too.
Just to clarify at this point, we have a $220 million swap.
So our senior secured debt.
Until we.
Until and if we change that swap is required to stay up to 'twenty and then we have $300 million of notes, obviously, so we sort of had $520 million.
Debt and.
It's not really repayable at this time, we were saying that you know we said in our comments that we reduced net.
Indebtedness, which means we'll build cash.
To reduce our net debt so yeah to the extent, we generate free cash flow.
And don't have other extraordinary uses of.
Below free cash flow, which we did have this year, we use that money to reduce our net indebtedness, but again, our target is to stay at four times leverage or less.
And obviously, we're right at the four times at this quarter end and it's not because of the the numerator. It's because of the denominator you know just because EBITDA was down versus last year on a trailing 12 month basis. So that's really what's what drove us back to four times.
Great. Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to management for any final comments.
Thank you all for joining us on this call and we look forward to speaking further with those who would like to speak to US we have a number of conferences where attend.
Attending either in person or virtually over the next month and a half or so and.
Hopefully, we'll meet a lot of you in person.
Virtually thanks, very much and we'll talk to you in the next conference call in early next year. Thank you Bye bye.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.