Q3 2021 Burgerfi International Inc Earnings Call

November 11, 2021

Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, please stay on the line.

Okay.

[music].

Good morning, everyone and thank you for participating in today's conference call to discuss Burger.

Financial results for the third quarter ended September 32021, joining us today are <unk> CEO of Burger far International Julio Ramirez CFO, a burger five brand and micro Broadridge CFO of broker Fi International following their remarks, we will open the call for your questions.

Before we begin today I want to remind everyone. This conference call may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.

<unk> statements related to Burger price estimates of its future business outlook store opening plans same store sales and restaurant operating margin growth plans.

Prospects of financial results, including projected sales restaurant EBITDA or financial results from the company's acquisition of Anthonys coal fired pizza and wings forward looking statements generally can be identified by words, such as anticipates believes estimates expects intends plans predicts projects will be will continue.

Will likely result in similar expressions.

These forward looking statements are based on current expectations and assumptions. These are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward looking statements factors that could cause or contribute to such differences include but are not limited to those discussed in our annual report on Form 10-K for the year ended December 31, 2020 and doses.

Clothes and other documents, we file with the Securities and Exchange Commission.

All subsequent written and oral forward looking statements.

Attributable to Burger five or persons acting on Burger Fox behalf are expressly qualified in their entity by the cautionary statements included in the conference call. We undertake no obligation to revise or publicly release the results of any revision to these forward looking statements expect as required by law given.

Given these risks and uncertainties listeners are cautioned not to place undue reliance on such forward looking statements.

Also the following discussion may contain non-GAAP financial measures for a discussion and reconciliation of these non-GAAP financial measures. Please see our earnings release for the third quarter 2021.

I'd like to remind everyone. This call will be available via telephone replay for two weeks starting today a webcast replay will also be available via the link provided in the press release as well as on the company's website at https backs aspects at Www Dot Burger five dot com now I would like to turn the call over to your host.

C O a burger for Ian Baines, you may begin.

Thank you operator, good morning, everyone.

You can join us today.

My first earnings call as CEO.

Hi.

I was previously CEO of Anthonys coal fire.

And effective November eight I assumed the role of the combined company CEO.

We're excited to bring together these two fantastic brands as it were.

Reminder, in November 2021, Doug if I close on that transaction to purchase 61 company.

Premium casual dining locations operating under the name Anthonys coal fired pizza.

$456 6 million.

Anthony.

At a very attractive acquisition for us given its strong profitability potential and top tier unit economics with the average unit volumes of $2 3 million sales $2 3 million sale.

Sales per square foot nearing $700, a 19% restaurant level margins on a pre COVID-19 basis.

In addition to Anthonys call restaurants, we see additional growth opportunities through a smaller concept footprint and a new virtual brand called their real estate.

There is also a significant overlap in our geography.

<unk> brands, having a strong foothold in the Florida market.

Through this transaction, we aim to strengthen our profitability.

This will be an accretive acquisitions as opposed to five provide a solid foundation for an additional CRO.

We're also thrilled to partner with L Catterton and.

Now one of our largest shareholders.

We would call a managing partner with L. Catterton has joined our board.

We have great things install for both brands and I'm looking forward to leading the growth of the combined company moving forward.

Fortunate to be able to draw from over 40 years of experience in the restaurant and hospitality business.

All the way back from being a classically trained.

Becoming the president and CEO.

In the U K and Canada.

Also here in the U S.

In my time in the U S. I worked for two of the largest publicly traded restaurant companies Brinker International and Dod in restaurants.

Donnelley I've spent over 13 years in the private equity will focus on creating value for brands, such as Cheddar scratch kitchen, which successfully sold a dozen restaurants in 2000 $17 million to $780 million.

I'll start today with an overview of the changes in our corporate structure before handing it over to Julio.

To highlight this third quarter update.

That we will turn it over to Mike to walk through our financials. So as a reminder, following the transaction.

Micro <unk> will be the CFO of the combined company Julio Ramirez will remain CEO of the 35.

<unk> brand and Patrick will.

He will become president of the Anthonys brand.

Now I'd like to express my full confidence Julio and Patrick and their teams leading both brands.

Our long term goal is to assemble a strong multi platform cross company in the fast casual and casual dining industry.

I'm extremely excited with the progress we're making towards this.

I'd now like to turn the call over to Julio Romero, <unk>, CEO and president of the <unk> brand well. Thank.

Thank you and welcome in well.

We're very happy that all of you can join us on the call today.

I'll start with a brief history and overview of Burger Fi and then highlight some of our third quarter activities and results.

From there I'll turn it over to Mike to walk through our financials before I close later with our outlook and growth opportunities.

With that I'm going to start us off with a brief history of our business as some of our listeners may be new to our story.

The first verify restaurant opened 10 years ago, just outside of Fort Lauderdale, and the success was immediate.

People loved our food the core ambiance and the overall energy of the brand.

Our mission statement are redefining the way the world eats burgers and enriching lives through the best Burger experience is more relevant than ever.

Building on our great tasting food.

We offer the highest quality ingredients and premium Burger experience and an exceptionally clean eco friendly restaurant prepared and served by a highly energetic and motivated team.

We've grown to approximately 116 franchise locations and corporate owned restaurants in 22 states two countries and Puerto Rico I am proud to say that in our home state of Florida. We believe we are the premier better Burger chain with approximately 60 locations.

Recently, we were named the top better Burger fast casual chain in USA today's 2021.

Fast Casuals top 100, movers and Shakers list for 2020, one as well as the 10 best Reader's Choice survey in USA today by the way on fast casual it's our eighth year in a row on the list and we hope to repeat again.

Our menu innovation pipeline remains strong and we continue to enjoy the strong performance of our swag that spicy wagyu Angus Burger first introduced in March of this year, our swag Burger features five spice ingredients, a double wide you and brisket blend Burger with chart Jalapenos Candy at Ghost Pepper.

The fact that he suite to meet a relish to add a bit of sweetness habanero pepper, Jack cheese and hot steak sauce.

<unk> ingredients, our swag Burger has doubled our premium while you sales and due to this continued success we made it a permanent menu item beginning in July a great example of our menu.

I want to take a moment and thank all of our employees for their commitment and hard work, especially during this unprecedented time that we have been facing.

Now I'd like to turn the call over to our CFO micro vintage will provide additional commentary on our performance for the third quarter Mike. Thank.

Thank you <unk> and good morning, everyone.

Our third quarter total revenue increased 25% to $11 1 million compared to $8 9 million in the year ago quarter.

New restaurant openings same store sales increases supported by our new slag Burger premium Burger introduction in March 'twenty, one and a high retention rate on digital continue to drive a strong improvement in system wide store sales for the third quarter. In fact corporate owned restaurants delivered an impressive 7% increase in same store sales.

During the third quarter our.

Our franchise locations also performed very well with same store sales, increasing 9% in the third quarter.

System wide sales in the third quarter also increased 25% to $41 4 million compared to $33 $2 million in the year ago quarter fueled by same store sales increase of 8%.

Digital channel sales comprised 37% of our system wide revenue in the third quarter of 'twenty one.

We continue to be very pleased to retain such a high digital component of our business.

While our in restaurant dining continues to recover.

Sylvia will discuss later, we will continue to invest in technology with the goal of delivering a more frictionless omnichannel experience to drive guest satisfaction and sales.

Restaurant level operating expenses for the third quarter were $7 8 million compared to $6 3 million in the year ago quarter.

Our restaurant level operating margin improved significantly to that of the year ago quarter.

The margin improvement was driven primarily by leverage from same store sales.

Improvements in the efficiency of managing the costs of our digital digital channel sales as well as controlling store operating expenses, which helped to offset the inflation inflationary cost in food and challenges within the labor market.

We reported a net loss attributable to common shareholders in the third quarter of $5 million, which compares to a net loss attributable to controlling interest of $800000 in the year ago quarter.

The increased loss, primarily resulted from the amortization of intangible assets, resulting from the purchase of verified in December 2020.

Noncash share based compensation expenses merger and acquisition costs and selective investments related to being a public company.

Opening expenses were also higher compared to the year ago period, as we accelerated our corporate owned store development. This year.

Adjusted EBITDA in the third quarter was approximately $200000 compared to a loss of $32000 a year ago quarter.

The improvement over the comparable period was driven by revenue growth and a higher operating margin largely offset by investments related to being a public company.

And the investments to drive the development of corporate owned restaurants.

Moving onto the balance sheet.

Our cash balance at September 30 was $28 $3 million compared to approximately $40 million on December 31 2020.

The difference reflects the repayment and termination of our revolving line of credit of $3 million in the first quarter of 'twenty, one as well as capital expenditures year to date of $8 2 million.

Primarily related to the construction of new corporate owned restaurant locations.

Moving onto our outlook.

We remain optimistic about our short term and long term prospects. However, similar to other restaurant companies, we are experiencing challenges with the availability of materials and labor for construction and development of new restaurants.

Therefore, we are updating our expectations for new store openings in 2021 to approximately 18 company and franchise operated Burger five restaurants down from our previous target of 25 to 30 locations.

During the third quarter, we opened 10, new restaurants, including one opening in October.

Sorry year to date through the third quarter, we opened 10, new restaurants, including one in October further we have signed 32 leases of which 14 restaurants are currently under various stages of construction and development.

Most of the new locations are in markets, we operate in and.

And as a result, we're excited about continuing to build on the strength of the brand in those areas.

In addition, we are encouraged by the performance of our ghost kitchens and through our partnership with reef and epic kitchens, we have increased our number of ghost kitchens year to date by 15 meeting our target of 15 to 20, new Ghost kitchens locations by the end of 'twenty, one with sometimes a spare.

In terms of restaurant level margins, we saw a significant year over year improvement, which was driven by leverage from higher same store sales improvements in the omni channel management and controlling store operating expenses.

This strong year over year increase also reflects the impact of the 4% price increase we took in late June.

We are pleased with the flow through that we saw in the third quarter and look forward to higher operating margins in the fourth quarter, where we have higher seasonal sales expected to produce higher operating margin sequentially.

Separately. We also note that most of our franchise locations reopened in September and October, which should continue to add momentum to our revenue recovery.

In terms of capital outlay, we are planning capital expenditures of approximately $13 million for 2021 down $2 million from our previous forecast of $15 million as some locations construction and opening have slipped from late 'twenty. One early 'twenty two due to the aforementioned chi.

<unk> related to securing equipment delays in permitting and the scarcity of labor.

We look forward to a more robust store opening planned in the first quarter as a result of these delayed locations.

Now I'd like to touch on some of the details of the Anthonys transaction.

As previously mentioned, we purchased Anthonys from L Catterton for $156 $6 million when.

<unk> Anthonys pre COVID-19 revenue and operating margin per store for the 61.

Stores, we acquired.

We believe that Anthony is will produce strong operating performance.

As the Covid environment stabilizes.

On a revenue multiple basis, we paid approximately one times revenue.

In the transaction, we assumed $71 3 million in debt comprised of $61 $1 million of bank debt carrying an interest rate of four and three quarters percent.

And $10 $2 million of other notes payable bearing no interest.

The bank debt will mature in June of 2024.

Now I'll send it back to Julio to discuss our growth plan and strategic initiatives going forward Julio Thank you Mike.

To talk about our strategic vision and reiterate our growth plans.

Our top priority remains the guest experience as dining rooms have reopened we remain laser focused on providing the guests with a seamless experience with fantastic tasting food.

Further we remain very focused on off premise and digital dining as we have optimized our digital and ordering solutions. So that our guests can choose where and when they want to have their burger meal guests.

Guests can order pickup and delivery through our Burger <unk> mobile app.

Orders through our web site order from the largest third party delivery providers in the market.

Additionally to grow our brands can and outside of our existing markets and as Mike mentioned, we have developed ecosystems in the form of delivery only ghost kitchens in various markets across the U S.

We are using these kitchens to both gain entrance into certain markets, where we don't have a physical presence.

As well as providing added visibility and awareness in markets, where we're currently are growing there.

Allows us to test new growth opportunities, while building brand recognition and integrity without the large upfront fixed cost of opening of new restaurants.

We currently have approximately 24 ghost kitchens operating across the U S. All of which are helping us understand how we can build our brand and unique ways outside of our core strategy of company owned and franchise restaurants.

Another way, we are looking to improve our guest experience through continued refinement of our omnichannel experience with Henry Gonzales, as our new Chief marketing Officer, and Karl Good U as our new Chief Technology Officer, we've been working on a more consumer focused and data driven approach to drive engagement, among our consumers and ultimately increase sales.

And profitability Carla.

Call is focus on building out our loyalty mobile application delivery features as well as our payment capabilities.

By leveraging upgraded technology and innovative multichannel services, we're very excited to provide our customers with the experience of choosing when and where they want their order.

<unk> upgraded technology with a refined consumer focused marketing, we're confident that we will increase our brand recognition and further improve our customer experience as we enter 2022.

Our development strategy is focused on building clusters of company owned restaurants in key cities, such as Jacksonville, and Tampa, Florida, Atlanta, and Nashville, along with franchise restaurant expansion as well from the southeast we want to work our way up the eastern Seaboard, we already operate in the Carolinas.

Suburbs of Washington, D C in Virginia, and Maryland, Philadelphia, and New York, So by moving North we're creating a prominent brand presence along the east coast.

Looking to other U S opportunities, we intend to pursue multi unit franchise deals in markets like the southwest and Midwest, but only if they meet our rigorous criteria we require our potential franchise partners in these markets to be well capitalized have restaurant and retail experience a deep knowledge of the geography, they do business in and last.

We'd be a good cultural fit for our company.

To address our international opportunities, we already have strong performing restaurants in Puerto Rico with plans to open additional locations in that market.

We also continue to have conversations with potential franchise partners in Latin America, we're having many years of experience I believe there's huge potential for growth.

Earlier this year, we signed a multi unit deal to open six restaurants in the Eastern Province of Kingdom of Saudi Arabia, We expect the first restaurant to open before the end of the fourth quarter of 2021, we will certainly keep you posted on the development in that region and our year end call.

This is a very exciting time at Burger Fries, our brand is on trend with the consumer and we see significant growth opportunities across the globe with that operator, please open up the call for questions.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.

And our first question will come from Peter Sally from BTG. Please proceed.

Great. Thank you and thanks for taking my question and congrats on closing the acquisition.

Just a little bit of housekeeping.

The I think the deal and the deal was announced I think that the purchase price all in was.

About 161.3, I know the numbers came in a little bit below that about $4 million can you just help us reconcile what was that all just lower debt that was assumed or was there something else there.

Yeah, Peter it's a good question the way that the acquisition agreement.

It was structured is it had two mechanisms that would result in purchase price changes. The first one was the purchase price would be reduced by any transaction costs that Anthony is incurred as a part of the transaction.

And they reduce the number of common shares that were issued not not the cash or the.

The debt assumed as excuse me.

And then the second one is a pay net a net debt.

Calculation at closing, which really is fixed on the debt side, but the cash balance fluctuates and so those two adjustments gave rise to a reduction in purchase price that came out of the common.

Got it okay.

Alright.

Great Alright, so just on the menu pricing that you guys are operating with.

You mentioned, a 4% price increase in late June can you just give us a sense of what is the effective price in the comp now.

And.

How many windows of opportunities do you see an annual on a in a year or two to raise prices is it two times as at four times, how do you guys think about pricing that Burger fine.

Okay. So I'll take the question into parts, it's Mike.

The effective rate in comp for the third quarter on company owned locations corporate owned locations would be the full effective rate of around 4%.

Because we did take that price increase before the third quarter began around the second to third week of June Okay. So on our third quarter versus third quarter last year on company owned stores. That's in there now on the franchise side.

Franchises control, the timing and the magnitude of their own price changes and they tended to lag a little bit by weeks and so they would creep into July and August. So you would probably have something south of that 4%, let's call. It two and a half to three and a half impact within their numbers on the third quarter versus third quarter.

That should answer your first question.

The second question is how often do we look at price Wilberger Fi.

Prior to going public hadn't really aggressively evaluated its competitive set for price, but I think during the high inflationary periods on food and labor during Covid.

It was forced to and there's a there's a delicate balance that we play with with all market participants of the guest experience with with the operating margin.

We continue to face cost inflation on the food side, even after taking the price increase we're going to have to be compelled to continue to look at our pricing.

But being sensitive to the overall guest experience and being sensitive to the average ticket. So we will we do price review on menu at least annually we will.

Great Mike.

Do you feel like you have other operational.

I guess low hanging fruit that you can pull or pik.

Kind of offset some of the margin pressure youre seeing from.

Commodity and labor inflation or is it really priced just the biggest and most meaningful lever that you have going forward.

I think prices one of the levers.

There's a good side of price there is the downside of taking price.

In that you don't want it to affect your guest experience and frequency and the robustness of your business, but we think that there continues to be opportunity.

Some of which we've harvested in the quarter I mentioned that we've we've gone after the efficiency of managing our digital channel and what that really means is it's the management of who delivers who which ordering platforms. We use the third party providers like Uber eats and <unk> and door dash and the like how much we do through our.

One app, how we incentivize customers between them and they have different costs, and then renegotiating those contracts as well.

So we've made some headway in the quarter on those operating expenses and we believe there's more to come.

Excuse me and then within the off the rest of the operating costs within the restaurants, we think that there's additional opportunity we think that.

The labor market has been very challenging the cost of labor has impacted us, but the real impact has been the productivity of our labor with the high turnover rates that we're experiencing the number of hours and team members. It takes to deliver the experience is not as efficient as it as it has so we look forward.

She was in the short term continuing to go after some of that low hanging fruit and on a post COVID-19 basis, we hope for a more stable environment, where we would be able to.

Where we would be able to.

Get a better labor rate.

And then we're going to we're going to embark on another journey now that we're <unk>.

Part of a larger company, where we source and procure direct and indirect materials food and services.

The scale of our company one of the rationale of the transaction was to gain scale. So now we have a business that essentially has three times the volume.

And so we're going to be revisiting, our entire procurement cycle, whether they be direct or indirect and seeing what kind of gravy, we can get from that.

Great very helpful. My last question is on the development delays can you guys elaborate a little bit on whats.

Driving that and do you feel like that persist into.

2022 or is that something that's just more confined to the backend of this year. Thank you.

Yeah, I think we're well aware, you're well aware of the challenging environment. That's out there I think that the delays have been equipment availability labor shortages, even our subcontractors had been dealing with COVID-19 as we have ourselves.

So it continues I am proud to say that the delays those are all real stores that have leases signed and it's it's been slipping it sounds like they've gone away. So we remain focused to do the best we can but it's a very challenging environment I'm very proud of the fact that will probably double we will double the number of stores that we opened a year ago and this <unk>.

Environment I think that's a huge achievement. So we continue to plod forward in and again. These are things that are happening in the marketplace across equipment across services and a lack of people et cetera, and we continue to work very closely I think we're doing we have a little bit more control on the company side, because we're using outside regional contractors. That's helped US a lot I think that is.

Why you've been able to open the ones. We have those contractors for example, goodbye equipment in advance. So I think thats helped a lot little tougher for franchisees, but we're working with them very closely as well to deal with it.

Peter Let me address the second part of your question is do we expect that to persist I think the broad markets supply challenges will persist into the first quarter, but to add some clarity.

The number that we put out there for openings by the end of the year is 18 is the number that we felt most confident that we would come in at least at right I just want to point out that there are four other locations that have the possibility of opening in the last 10 days of December or they would roll into the next two years.

The four weeks of January but we did we wanted to be responsible and set the the expectations appropriately because some of these factors of equipment and getting Ceos are outside of our control. So what's going to end up happening if if those three to four locations that are in play for the last couple of weeks of December if they roll into.

The first quarter January.

For February is we will end up having a very robust first quarter opening.

In addition to the ones that were already slated to be developed and opened in the first quarter. So it's merely a timing of the calendar.

Got it thank you very much I'll pass it along.

Okay.

Thank you.

As a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.

Please stand by while we compile the Q&A roster.

I show. Our next question comes from the line of Roger Lipton from lifting financial Please proceed.

Yes, good morning, gentlemen.

Oh It was nice to meet you in Las Vegas.

Nice to meet you could you describe how how the on premise versus off premise.

Sales mix has sort of moved over the last couple of years you'd bring a pre COVID-19.

Through where.

Where we are today.

Yes, I think I joined the company.

Just over a year ago.

When COVID-19 was going and I think that from the numbers. We saw at the beginning before Covid. We were in the mid Twenty's in terms of the digital experience and at the peak of Covid I think we cleared 40 and I've had some strong months there.

And I'll be honest with you just like I always like to say just like 911 changed air travel I think that Covid has perhaps changed a little bit the restaurant business and that I think we may not we may not ever go back to what it used to be before I think we're going to continue to have a very strong.

Digital.

Business and I think the companies that do a better job of dealing with that and meeting our guests where they need to be met which I'd like to say, we're one of those that will be there will be able to operate at a higher level of digital going forward, but with time, we'll see where it goes.

So to say.

At the current time, it sounds like it's sort of in the middle of it.

Maybe.

We made it back to the 30, 30% area, but.

Down from the peak of 40%.

Yes, so Roger it's Mike So currently for the third quarter and I just wanted to add a definitional clarification, you're using the term of on Prem and off Prem and we use the term digital there's a slight nuance.

We look at digital as how the order was procured whether it was through our app or one of the third party delivery providers or call center or our web site. So we look at it as how things are being ordered now to address your your definition of on Prem off Prem somebody could.

Drive into the restaurant order at the counter and get it to go.

That would not be included in what we call digital.

So I just wanted to clarify that first and then on digital for the third quarter. We were at 37% we did peak at 40%.

And we're happy for a stabilization because.

When we have restaurants enjoying our our restaurant they have the opportunity to.

Joyce and beverages, and some beer and some wine and maybe some of the delicious concretes and shakes and custard debt that they may not order through delivery.

So we're okay with a little bit of rebalancing, we're thrilled with the retention rate that we're getting the on Prem back.

And we're still continuing to hold on to a whole new customer class through digital.

And then the digital order and create a higher average ticket.

It generally does.

Alright, thanks very much.

Thank you.

At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. <unk> for closing remarks.

Thank you Kevin.

Truly excited to bring together.

Strong brands.

<unk>, which have.

Both have an incredible loyal customer base and we look forward to providing you more updates on our business for our year end results call.

To thank everyone for listening to today's call and we look forward to speaking with you when we report our fourth quarter results in the new year. Thanks again for joining.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

[music].

Okay.

[music].

Good morning, everyone and thank you for participating in today's conference call to discuss Virtu.

Financial results for the third quarter ended September 32021.

Joining us today are Ian Baines CEO of Burger for international wholesale Ramirez CFO, a burger five brand and Michael Brown CFO broker fire International following their remarks, we will open the call for your questions.

Before we begin today I want to remind everyone. This conference call may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995, including statements relating to Burger size estimates of its future business outlook store opening plans same store sales and restaurant operating margin growth plans.

The financial results, including projected sales restaurant EBITDA or financial results from the company's acquisition of Anthonys coal fired pizza and wings forward looking statements generally can be identified by words, such as anticipates believes estimates expects intends plans predicts projects will be will continue will likely.

Results and similar expressions.

Clothes and other documents, we file with the Securities and Exchange Commission all subsequent written and oral forward looking statements.

Attributable to Burger spot or persons acting on Burger Fox behalf are expressly qualified in their entity by the cautionary statements included in the conference call. We undertake no obligation to revise or publicly release the results of any revision to these forward looking statements expect as required by law given these risks and uncertainties listeners are cautioned not to place.

Undue reliance on such forward looking statements.

I would like to remind everyone. This call will be available via telephone replay for two weeks starting today a webcast replay will also be available via the link provided in the press release as well as on the company's website at https backs aspects at Www Dot Burger five dot com now I would like to turn the call over to your host.

C O a burger for Ian Baines, you may begin.

Thank you operator, good morning, everyone. We're happy you can join us today.

And here My first earnings call as CEO of <unk>.

Bye.

I was previously CEO of Anthonys coal fire.

And effective November eight I assumed the role of the combined company as CEO.

We're excited to bring together these two fantastic brands as it were.

Reminder, in November 2021, Doug if I close on the transaction to purchase 61 company on premium casual dining locations operating under the name Anthonys coal fired pizza and wings.

Our $156 6 million.

Anthony.

Very attractive acquisition for <unk>, given its strong profitability potential and top tier unit economics with the average unit volumes of $2 3 million sales $2 3 million sale.

Sales per square foot nearing $700, a 19% restaurant level margins on a pre COVID-19 basis.

In addition to Anthonys call restaurants, we see additional growth opportunities through a smaller concept footprint and a new virtual brand called their real estate.

There is also a significant overlap in our geography with both brands, having a strong foothold in the Florida market.

Through this transaction, we aim to strengthen our profitability.

This will be an accretive acquisition with the <unk> provide a solid foundation for additional growth.

We're also thrilled to partner with L. Catterton.

Now one of our largest shareholders.

Tal a managing partner with L. Catterton has joined our board.

We have great things installed for both brands and are looking forward to leading the growth of the combined company moving forward.

I am fortunate to be able to draw from over 40 years of experience in the restaurant and hospitality business going all the way back from being a classically trained.

Becoming the president and CEO.

In the U K and Canada.

So here in the U S.

In my time in the U S. I work with two of the largest publicly traded restaurant companies Brinker International and Darden restaurants. Additionally, I've spent over 13 years in the private equity will focus on creating value for brands, such as <unk> scratch kitchen, which successfully sold a dozen restaurants.

2017, the $780 million.

Yes.

I'll start today with an overview of the changes in our corporate structure before handing off handing it over to Julio.

To highlight the.

Third quarter update.

From there we.

I will turn it over to Mike to walk through our financials. So as a reminder, following the transaction.

Micro <unk> will be the CFO of the combined company Julio Ramirez will remain CEO of the Vodafone.

<unk> brand impact the Granta will become president of the <unk> brand.

Now I'd like to express my full confidence Julio on Patrick and their teams leading both brands.

Our long term goal is to assemble a strong multi platform growth company in the fast casual and casual dining industry.

We're extremely excited with the progress we're making towards this end.

I'd now like to turn the call over to Julio Romero, <unk>, CEO and president of the <unk> brand.

And welcome in.

We're very happy that all of you can join us on the call today I will start with a brief history and overview of Burger Fi and then highlight some of our third quarter activities and results.

From there I'll turn it over to Mike to walk through our financials before I close later with our outlook and growth opportunities.

With that I'm going to start us off with a brief history of our business as some of our listeners may be new to our story.

The first verify restaurant opened 10 years ago, just outside of Fort Lauderdale, and the success was immediate.

People loved our food decor ambience and the overall energy of the brand.

I mentioned statement are redefining the way the world needs burgers and enriching lives through the best Burger experience is more relevant than ever building on our great tasting food.

We offer the highest quality ingredients and premium Burger experience and an exceptionally clean eco friendly restaurant prepared and served by a highly energetic and motivated team.

Recently, we were named the top better Burger fast casual chain in USA today's 2021.

Fast casual top 100, movers and Shakers list for 2020, one as well as a 10 best Reader's choice survey in USA today by the way on fast casual it's our eighth year in a row on the list and we hope to repeat again.

Our menu innovation pipeline remains strong and we continue to enjoy the strong performance of our swag that spicy wagyu Angus Burger first introduced in March of this year, our swag Burger features five spicy ingredients, a double wide you and brisket blend Burger with chart Jalapenos Candy at Ghost Pepper.

We're based in the pack the heat shrink to meet a relish to add a bit of sweetness.

Harrow Pepper, Jack cheese, and hard steak sauce, five ingredients, our swag Burger has doubled our premium wagyu sales and due to this continued success we made it a permanent menu item beginning in July a great example of our menu.

I want to take a moment and thank all of our employees for their commitment and hard work, especially during this unprecedented time that we had been facing.

I'd now like to turn the call over to our CFO, Mike <unk>, who will provide additional commentary on our performance for the third quarter, Mike. Thank you <unk> and good morning, everyone. Our third quarter total revenue increased 25% to $11 1 million compared to $8 9 million in the year ago quarter, New restaurant openings same store sales.

<unk> supported by our new slag Burger premium Burger introduction in March 'twenty, one and a high retention rate on digital continue to drive a strong improvement in system wide store sales for the third quarter. In fact corporate owned restaurants delivered an impressive 7% increase in same store sales during the third quarter.

Our franchise locations also performed very well with same store sales, increasing 9% in the third quarter.

System wide sales in the third quarter also increased 25% to $41 4 million compared to $33 2 million in the year ago quarter fueled by same store sales increase of 8%.

Digital channel sales comprised 37% of our system wide revenue in the third quarter of 'twenty one.

We continue to be very pleased to retain such a high digital component of our business.

While our in restaurant dining continues to recover as Julio will discuss later, we will continue to invest in technology with the goal of delivering a more frictionless omnichannel experience to drive guest satisfaction and sale.

Restaurant level operating expenses for the third quarter were $7 8 million compared to $6 3 million in the year ago quarter our.

Our restaurant level operating margin improved significantly to that of the year ago quarter.

The margin improvement was driven primarily by leverage from same store sales.

We reported a net loss attributable to common shareholders in the third quarter of $5 million, which compares to a net loss attributable to controlling interest of $800000 in the year ago quarter.

The increased loss, primarily resulted from the amortization of intangible assets, resulting from the purchase of <unk> in December 2020.

Noncash share based compensation expenses merger and acquisition costs and selected investments related to being a public company.

Preopening expenses were also higher compared to the year ago period, as we accelerated our corporate owned store development. This year.

Adjusted EBITDA in the third quarter was approximately $200000 compared to a loss of $32000 a year ago quarter.

The improvement over the comparable period was driven by revenue growth and a higher operating margin largely offset by investments related to being a public company.

And the investments to drive the development of corporate owned restaurants.

Moving onto the balance sheet.

Our cash balance at September 30 was $28 $3 million compared to approximately $40 million on December 31 2020.

The difference reflects the repayment and termination of our revolving line of credit of $3 million in the first quarter of 'twenty, one as well as capital expenditures year to date of $8 2 million.

Primarily related to the construction of new corporate owned restaurant locations.

Moving on to our outlook.

Therefore, we are updating our expectations for new store openings in 2021 to approximately 18 company and franchise operated <unk> restaurants down from our previous target of 25% to 30 locations.

During the third quarter, we opened 10, new restaurants, including one opening in October.

Most of the new locations are in markets, we operate in and.

And as a result, we're excited about continuing to build on the strength of the brand in those areas.

In addition, we are encouraged by the performance of our ghost kitchens and through our partnership with reef and epic kitchens, we have increased our number of ghost kitchens year to date by 15 meeting our target of 15% to 20, new ghost kitchens locations by the end of 'twenty, one with sometimes a spare.

In terms of restaurant level margins, we saw a significant year over year improvement, which was driven by leverage from higher same store sales improvements in the Omnichannel management and controlling store operating expenses.

This strong year over year increase also reflects the impact of the 4% price increase we took in late June.

Separately. We also note that most of our franchise locations reopened in September and October, which should continue to add momentum to our revenue recovery.

Yes.

In terms of capital outlay, we are planning capital expenditures of approximately $13 million for 2021 down $2 million from our previous forecast of $15 million as some locations construction and opening have slipped from late 'twenty one to early 'twenty two due to the aforementioned challenges related to.

Securing equipment delays in permitting and the scarcity of labor.

We look forward to a more robust store opening planned in the first quarter as a result of these delayed locations.

Now I'd like to touch on some of the details of the Anthonys transaction.

As previously mentioned, we purchased Anthonys from L Catterton for $156 $6 million.

When considering the Anthonys pre COVID-19 revenue and operating margin per store for the 61.

Stores, we acquired.

We believe that Anthony is will produce strong operating performance.

As the Covid environment stabilizes.

On a revenue multiple basis, we paid approximately one times revenue.

In the transaction, we assumed $71 3 million in debt comprised of $61 $1 million of bank debt carrying an interest rate of four and three quarters percent.

And $10 $2 million of other notes payable bearing no interest the.

The bank debt will mature in June of 2024.

Now ill send it back to Julio to discuss our growth plan and strategic initiatives going forward Julio. Thank you, Mike now I'd like to talk about our strategic vision and reiterate our growth plans our top priority remains the guest experience as dining rooms have reopened we remain laser focused on providing the guest.

The seamless experience with fantastic tasting food.

Guests can order pickup and delivery through our Burger five mobile app.

Orders through our web site order from the largest third party delivery providers in the market.

Additionally to grow our brand can and outside of our existing markets and as Mike mentioned, we have developed ecosystems as a form of delivery only ghost kitchens in various markets across the U S.

We are using these kitchens to both gain entrance into certain markets, where we don't have a physical presence as.

As well as providing added visibility and awareness in markets, where we're currently are growing.

This allows us to test new growth opportunities, while building brand recognition and integrity without the large upfront fixed cost of opening of new restaurants.

Another way, we are looking to improve our guest experience through continued refinement of our omni channel experience with Henry Gonzales, as our new Chief marketing Officer, and Karl Good U as our new Chief Technology Officer, we've been working on a more consumer focused and data driven approach to drive engagement, among our consumers and ultimately increase.

Sales and profitability.

<unk> is focused on building out our loyalty mobile application and delivery features as well as our payment capabilities by.

By leveraging upgraded technology and innovative multichannel services, we're very excited to provide our customers with the experience of choosing when and where they want their order.

Ranking upgraded technology with our refined consumer focused marketing, we're confident that we will increase our brand recognition and further improve our customer experience as we enter 2022.

Suburbs of Washington, DC, and Virginia, and Maryland, Philadelphia, and New York, So by moving North we're creating a prominent brand presence along the east coast.

Looking to other U S opportunities, we intend to pursue multi unit franchise deals in markets like the southwest and Midwest, but only if they meet our rigorous criteria, we require our potential franchise partners in these markets to be well capitalized.

Restaurant and retail experience a deep knowledge of the geography, they do business and and lastly would be a good cultural fit for our company.

To address our international opportunities, we already have strong performing restaurants in Puerto Rico with plans to open additional locations in that market.

We also continue to have conversations with potential franchise partners in Latin America, where our many years of experience and believe there is huge potential for growth.

Earlier this year, we signed a multiunit deal to open six restaurants in the Eastern Province of Kingdom of Saudi Arabia, We expect the first restaurant to open before the end of the fourth quarter of 2021, we will certainly keep you posted on the development in that region and our year end call.

This is a very exciting time at Burger Fries, our brand is on trend with the consumer and we see significant growth opportunities across the globe with that.

<unk>. Please open up the call for questions.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.

And our first question will come from Peter Sally from BTG. Please proceed.

Great. Thank you and thanks for taking my question and congrats on closing the acquisition.

Just a little bit of housekeeping.

I think the deal and the deal was announced I think that the purchase price.

<unk> was.

About 161, three I know the numbers came in a little bit below that about $4 million can you just help us reconcile what was that.

At all just lower debt that was assumed or was there something else there.

Yes, Peter it's a good question the way that the acquisition agreement was structured is it had two mechanisms that would result in purchase price changes. The first one was the purchase price would be reduced by any transaction costs that anthonys incurred as part of the transaction.

And they reduce the number of common shares that were issued not not.

The cash or the.

The debt assumed as excuse me.

And then the second one is a a net a net debt.

Calculation at closing, which really is fixed on the debt side, but the cash balance fluctuates and so those two adjustments gave rise to a reduction in purchase price that came out of the common.

Got it okay.

Alright.

Great all right. So just on the menu pricing that you guys are operating with.

You mentioned, a 4% price increase in late June can you just give us a sense of what is the effective price in the comp now.

And.

How many windows or opportunities do you see on an annual on a.

In a year or two to raise prices is it two times as at four times, how do you guys think about pricing that Burger fine.

Okay. So I'll take the question into parts, it's Mike.

The effective rate in comp for the third quarter on company owned locations corporate owned locations would be the full effective rate of around 4% because we did take that price increase before the third quarter began around the second to third week of June Okay. So on our third quarter versus third.

Third quarter last year on the company owned stores its in there now on the franchise side.

The franchise is control the timing and the magnitude of their own price changes and they tended to lag a little bit by weeks and so they would creep into July and August. So you would probably have something south of that 4%, let's call. It two and a half to three five impact within their numbers on the third quarter versus third quarter.

So that that should answer your first question.

The second question is how often do we look at price Wilberger Fi prior.

Prior to going public hadn't really aggressively evaluated its competitive set for price, but I think during the high inflationary periods on food and labor during Covid.

It was forced to and there is a delicate balance that we play with with all market participants of the guest experience with with the operating margin. We continue to face cost inflation on the food side, even after taking the price increase we are going to have to be compelled to continue to look at.

At our pricing.

But being sensitive to the overall guest experience and being sensitive to the average ticket. So we will we do price review on menu at least annually we will.

Great Mike.

Do you feel like you have other operational.

I guess low hanging fruit that you can pull or pik.

Kind of offset some of the margin pressure youre seeing from.

Commodity and labor inflation or is it really priced just the biggest and most meaningful lever that you have going forward.

I think prices one of the levers.

There's a good side of price there is the downside of taking price.

In that you don't want it to affect your guest experience and frequency and the robustness of your business, but we think that there continues to be opportunity.

And door dash and the like how much we do through our own app, how we incentivize customers between them and they have different costs, and then renegotiating those contracts as well.

So we've made some headway in the quarter on those operating expenses and we believe theres more to come.

Excuse me and then within the off the rest of the operating costs within the restaurants, we think that there is additional opportunity we think that.

In the short term continuing to go after some of that low hanging fruit and on a post COVID-19 basis, we hope for a more stable environment, where we would be able to.

Where we would be able to.

To get a better labor rate.

And then we're going to we're going to embark on another journey now that were part of a larger company, where we source and procure direct and indirect materials food and services.

The scale of our company one of the rationale of the transaction was to gain scale. So now we have a business that essentially has three times the volume.

And so we're going to be revisiting, our entire procurement cycle, whether they be direct or indirect and seeing what kind of gravy, we can get from that.

Great very helpful. My last question is on the development delays can you guys elaborate a little bit on what's driving that and do you feel like that persists into 'twenty.

<unk> 2022 or is that something thats, just more confined to the backend of this year. Thank you.

Yes, I think we are well aware you are well aware of the challenging environment. That's out there I think that the delays have been equipment availability labor shortages, even our sub contractors have been dealing with COVID-19 and as we have ourselves.

So it continues I am proud to say that the delays those are all real stores that have leases signed and it's it's been slipping it sounds like they've gone away. So we remain focused to do the best we can but it's a very challenging environment I'm very proud of the fact that we'll probably double we will double the number of stores that we opened a year ago and this <unk>.

Environment I think that's a huge achievement. So we continue to plod forward in and again. These are things that are happening in the marketplace across equipment across services and a lack of people et cetera. We continue to work very closely I think we are doing we are a little bit more control on the company side, because we are using outside regional contractors. That's helped US a lot I think that is.

<unk> been able to open the ones we have those contractors for example, goodbye equipment in advance. So I think thats helped a lot little tougher for franchisees, but we're working with them very closely as well to deal with it.

Peter Let me address the second part of your question is do we expect that to persist I think the broad markets supply challenges will persist into the first quarter, but to add some clarity.

Four weeks in January but we did we wanted to be responsible and set the the expectations appropriately because some of these factors of equipment and getting Ceos are outside of our control. So what's going to end up happening if if those three to four locations that are in play for the last couple of weeks of December if they roll into.

The first quarter January.

Or for or February is we will end up having a very robust first quarter openings.

In addition to the ones that were already slated to be developed and opened in the first quarter. So it's merely a timing of the calendar.

Got it thank you very much I'll pass it along.

Okay.

Thank you.

As a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.

Please stand by while we compile the Q&A roster.

I show. Our next question comes from the line of Roger Lipton from Lyft and financial Please proceed.

Yes, good morning, gentlemen.

Julio is nice to meet you in Las Vegas.

Nice to meet you could you describe how how the on premise versus off premise sale.

Sales mix has sort of moved over the last couple of years you'd bring a pre COVID-19.

Through.

We are today.

Yes, I think I joined the company.

Just over a year ago.

When COVID-19 was going and I think that from the numbers. We saw at the beginning before Covid. We were in the mid <unk> in terms of the digital experience and at the peak of Covid I think we cleared 40 and <unk> had some strong months there.

And I'll be honest with you just like I always like to say just like 911 changed air travel I think that Covid has perhaps.

Changed a little bit the restaurant business and that I think we may not we may not ever go back to what it used to be before I think we're going to continue to have a very strong.

<unk>.

We'll see where it goes.

So to say.

At current time, it sounds like it's sort of in the middle of May.

Maybe.

Dated back to the 30% 30% area.

But.

Down from the peak of 40%.

Yes, so Roger it's Mike So currently for the third quarter and I just wanted to add a definitional clarification you are using the term of on Prem and off Prem and we use the term digital there is a slight nuance.

We look at digital as how the order was procured whether it was through our app or one of the third party delivery providers or call center or our website. So we look at it as how things are being ordered now to address your your definition of on Prem off Prem somebody could.

Drive into the restaurant order at the counter and get it to go.

That would not be included in what we call digital.

So I just wanted to clarify that first and then on digital.

The third quarter, we were at 37% we did peak at 40%.

And we're happy for a stabilization because.

When we have restaurants enjoying our our restaurant they have the opportunity to.

Enjoy some beverages and some beer and some line and maybe some of the delicious concretes and shakes and custard step that they may not order through delivery.

So we're okay with a little bit of rebalancing, we're thrilled with the retention rate that we're getting the on Prem back.

And we're still continuing to hold onto a whole new customer class through digital.

And the digital order and create a higher average ticket.

It generally does.

Alright, thanks very much.

Thank you.

At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. <unk> for closing remarks.

Thank you Kevin.

So we are truly excited to bring together two strong brands.

Which have.

Both have an incredible loyal customer base and we look forward to providing you more updates on our business for our year end results call I'd like to thank everyone for listening to today's call and we look forward to speaking with you. When we report our fourth quarter results in the new year. Thanks again for joining.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Q3 2021 Burgerfi International Inc Earnings Call

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