Q1 2022 Carrols Restaurant Group Inc Earnings Call
[music].
Welcome to Charles Restaurant Group, Inc. First quarter 2022 earnings conference call at this time, all participants alright listen only mode.
Following the presentation, we will conduct a question and session.
Instructions on how to ask a question will be given at that time.
I would like to remind everyone that this conference call is being recorded today Thursday May 12, 2022 at eight o'clock am eastern time and will be available for replay.
I'll now turn the conference over to Greta miles Carnival's controller. Please go ahead.
Thank you operator, and good morning, everyone by now you should have access to our earnings announcement released earlier. This morning in our 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 questions posed to management may include forward looking statements or comments with respect to our strategies intentions or plans.
And the future direction of revenues and by class or other aspects pertaining to our business. These statements are not guarantees of future performance and therefore undue reliance should not be placed on them.
Also refer you to our filings with the SEC for more details 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 and a reconciliation to comparable GAAP measures is available with our earnings release.
With that I will now turn the call over to our new President and CEO Paulo Panna Colo.
Thanks, Greg.
Good morning, everyone.
I'm excited to be speaking with you. This morning on my first call as <unk>, New President and CEO .
I'll be leading a proud company through some challenging times and I very much appreciate the confidence the board has placed in me to lead this company.
Mike also today, a modest I want to introduce myself and I want to share with you my early impressions after five weeks on the job.
I look forward to engaging with you as well as with many of our shareholders and bondholders individually and in greater depth as I settled into my new role.
By way of background I come to cows with more than two decades of experience in the hospitality quick service restaurant and beverage industries.
Most recently I served as a C O Salina, one of the world's fastest growing hospitality brands.
Prior to that I, let operations for over 800 company owned restaurants at Mcdonalds.
Earlier in my career I oversaw a portfolio, although the 200 franchised and managed hotels in 20 countries, but Wyndham Hotel group and worked on strategic partnership and operations to Starwood hotels and resorts.
My first two roles with both international Finance position first rents and young and then at the Coca Cola Company.
Since joining kohl's in early April I think conducting a listening and learning tour.
I visited many of our restaurants and met with a broad cross section of team members at our headquarters in Syracuse and throw out at 16 regions.
I've been hearing their ideas concerns and suggestions for strengthening our company and evolving our business.
The insights they have given me will prove invaluable as we set our strategy in the weeks ahead.
It's been particularly gratifying for me to see firsthand some of the up and coming talent, we have within our organization.
For example, and this is just one of many I recently met with four of our newest general managers, all of whom started as restaurant crew members when they were in high school.
They are all highly energetic ambitious and eager to contribute as they advance in their careers.
My mission will be to harness their passion and can do attitude to drive our future success.
It's too early to lay out a detailed strategy, but a few points of coming into sharp focus probably the most urgent is the inflationary pressure, we're feeling in both commodities and labor.
Even if inflation moderates in the back half of this year, we're likely to feel its impact on our cost structure for some time to.
To deal with it we are going to need to adapt and evolve as never before.
And to do that we're going to need to look at all aspects of our operations with fresh eyes.
Pricing actions alone will not be sufficient to restore margins.
In the weeks ahead, my team and I will be diving deeply into every facet of how we operate our business. While COVID-19 has already dictated that we make a number of fundamental changes the post pandemic environment will demand its still more.
We will be challenging the status quo to drive meaningful changes and to generate profitable growth.
I look forward to sharing details with you later on this year.
I've also been engaging with our franchise ores at restaurant brands International and in particular with Tom Curtis President of Burger King U S and Canada markets.
I'll be is putting together a plan to drive traffic and improve franchisee profitability by addressing all elements of successful restaurant operations people customer service menu promotional strategy and technology.
I look forward to partnering with RBI in Flushing out and implementing these initiatives and I will keep you apprised of our progress.
My business philosophy is very simple.
Drive improved operating and financial results and create value for our stockholders employees and customers.
In the short time I've been at Carol's I've become convinced that if we can quickly improve a few areas that we control we will be headed in the right direction.
My leadership team and I will focus over the next several months on one raising the bar on operational excellence at our restaurants.
Two improving productivity and stemming turnover by motivating and engaging our restaurant team members.
And three moving quickly to turn around our most challenged locations using proven best practices that are already in place at the majority of allocations.
Let me conclude by saying that I am very optimistic about the future of carols and what we can accomplish as a team.
I'm excited to be embarking on this journey.
Biggest opportunity ahead of us is to meaningfully improve the margins and earnings we can generate from our current portfolio of restaurants through our new and improved version of basic blocking and tackling.
Our strong liquidity position affords us the space to operate.
I am confident that we can meet the many challenges, we face and generate meaningful long term value for our shareholders.
With that let me turn the call over to Tony to review the first quarter.
Thank you Paolo I know that I speak for everyone. When I say that we're pleased to have you on board and look forward to working with you to drive improvements in our business and create value for all of our stakeholders.
Turning to the quarter I will start by addressing our two greatest cost headwinds labor and commodities, both of which had significant impacts on our adjusted EBITDA margins compared to the prior year quarter.
These inflationary challenges impacted our results in the latest quarter in a similar manner to what we experienced in the fourth quarter of 2021.
To be sure we are attempting to partially offset these inflationary pressures through pricing actions menu innovation and lower promotional discounts, which are helping to alleviate the margin pressure to some degree.
But there's more that can be done. This is why as Paul indicated we need to rethink our operations more broadly and examine other ways to manage our cost structure as we adapt to this new inflationary reality.
Pricing for a Burger restaurants was increased approximately seven 7% during the first quarter inclusive of actions taken late in 2021 and earlier this year there.
The promotional and pricing initiatives Burger King has implemented over the past nine months have contributed to a meaningful reduction in our discount levels against gross revenue and AR have aided our profitability.
On the labor front, given the continuation of wage pressures that emerged last year.
Average hourly wages of our team members increased by 13, 6% in the first quarter compared to the prior year period before over time. However, the sequentially improved from the 14, 2% increase we incurred during the fourth quarter last year.
As we said back in February and are reiterating today hiring pressures are stabilizing as we are seeing an increase in application flow, while our turnover stats are starting to retreat from the peaks. We saw in the back half of last year more importantly, the average hourly rate we pay on the increased about 1.5% from January through April of this year.
In terms of cost of sales, we are still feeling the inflationary impacts of higher commodity prices as we have since the third quarter of 2021.
Beef represents about a quarter of our commodity basket and its costs increased 31, 9% in the quarter compared to the prior year period, although it held steady on a sequential basis domestic food and paper producers and distributors supply in most of our commodities are dealing with labor constraints and higher fuel costs themselves, which they are in turn.
Passing on to us.
As a result commodity inflation overall was approximately 17% this past quarter compared to the prior year quarter, including the impact of higher beef costs.
This was up from 16, 2% in the fourth quarter, we believe that commodity inflation will remain elevated until the fourth quarter of this year.
Turning to the topline total restaurant sales for the first quarter increased two 4% to $399 $5 million compared to $390 million in the prior year comparable Burger King restaurants sales rose one 6% during the quarter.
Average check growth came in at about 9.9%, which reflects menu price increases and lower promotional activity, partially offset by a traffic decline of seven 5%.
Contributing to this change in traffic or fewer operating hours, which declined 2% from the year earlier due to lingering staffing shortages.
Our monthly results fluctuated dramatically over the three month period as discussed on our last call January was down about 1.4% due to lower traffic given headwinds from three major snow storms that hit most of our larger markets and staffing issues caused by the spread of the omicron variant.
We were up in February in the low double digits due to favorable traffic comparisons relative to the impact of severe storms in 2020 one.
March was down in the low to mid single digits as we lap the stimulus checks from last year.
For April comparable sales trends turned positive in the last two weeks of the month and that has continued into May looking ahead Burger King commenced an aggressive promotion to officially launch the raw perks mobile App. This promotion offers a free order of fries to members on a weekly basis for the remainder of 2022 and it's designed to drive digital sales.
In addition, we increased menu prices, 3% last week, which should also improve comparable sales levels in the upcoming quarters.
This increase was tied to inflation and we've been careful not to get ahead of the competition in making these changes.
Delivery contributed six 1% to a burger King sales mix this past quarter up from 5% in the fourth quarter of last year.
The average check for delivery rose to $18 seven from $17 58 between those two periods, while the average check overall, including delivery rose to $9.69. This past quarter compared to $9 57 in the fourth quarter of last year.
In terms of sales trends at Burger King by day part the dinner and evening periods gains momentum, while our two smallest day parts late night and breakfast modestly declined.
This past quarter, we once again outpaced the U S Burger King system and comparable restaurant sales on a calendar comparison basis, our comparable Burger King restaurants sales for the first quarter exceeded the U S. Burger King system by approximately 160 basis points.
We believe that the delta between our performance and out of the system narrowed in the latest quarter given the earlier timing of our actions to take price and returned to normal restaurant operating hours.
Turning to our popeye's restaurants, which represented five 4% of total revenues in the first quarter comparable restaurant sales increased two 2% versus an increase of <unk>, 5% during the same period in the previous year.
Outperformed the Popeye's U S system by 610 basis points in the first quarter due to our geographic concentration in areas that were hard hit by storms last year.
As a.
Most of the inflation challenges experienced in the first quarter adjusted EBITDA decreased $15 $6 million to $4 $3 million, while our adjusted EBITDA margin decreased 400 basis points to one 1% of restaurant sales.
Note that our first quarter has historically been and remains the weakest of the year due to business seasonality. This in turn results in reduced revenue levels against fixed and semi variable costs during the period, while not providing guidance. We believe that this year's first quarter is not representative of our expectations for our full year 2022 results.
Cost of food beverage and packaging, which was 38% as a percentage of net sales increased 160 basis points, primarily because of higher beef chicken and other commodity costs, partially offset by higher menu prices.
The cost of beef is a major driver of our profitability in March beef was at $2.75 per pound compared to $2.44 per pound on average for the full year in 2021.
Looking ahead, our food cooperative expects beef prices will moderate beginning later this summer.
While we can't predict the future we would expect a 30 cent decrease in beef cost to increase EBITDA by about $15 million on an annual basis or about $5 million per 10 cents decrease in the price per pound, we pay for beef all else remaining equal.
Restaurant Labor expense rose 220 basis points as a percentage of restaurant sales in the first quarter compared to the same quarter a year ago.
Productive labor costs increased $7 $8 million, primarily due to higher hourly wage levels relative to last year.
The remainder of the labor cost increase was due to the necessity of paying team members' premiums to take on additional responsibilities such as opening and closing our restaurants and higher management labor expense due to salary increases for assistant managers to improve retention, which was implemented last year.
We did see a sequential deleveraging of labor cost of sales was about 150 basis points. This past quarter relative to the fourth quarter of last year, mainly due to seasonality, causing lower first quarter revenue levels.
Restaurant rent expense as a percentage of sales compared to the prior year period.
Other restaurant operating expenses increased 70 basis points due to a number of factors, including utility rate increases along with higher insurance and repair and maintenance expenses. We also now have smart safes in the majority of our restaurants that provided for labor efficiencies faster cash collection and greater security, but this initiative has added to operating expenses.
General and administrative expenses held constant as a percentage of sales compared to the prior year period.
Our net loss was $21 $3 million in the first quarter or 42 cents per diluted share compared to a net loss of $7 $2 million or 14 cents per diluted share in the prior year period.
On an adjusted basis, excluding certain non operating items first quarter adjusted net loss was $17 $1 million or 34 cents per diluted share in the prior year period, adjusted net loss was $6 $5 million or <unk> 13 per diluted share.
Free cash flow for the first quarter was a use of $39 $1 million compared to a use of $3 $6 million in the prior year period, the greater outflow in this year's first quarter was due to reduced earnings relative to the same period last year, along with repayment of one half of the FICA deferral of $10 $8 million, we benefited from in 2002.
<unk>.
And the first six months interest payment on our senior notes, we issued in June 2021.
We expect the absence of these clustered payments will be beneficial to free cash flow generation in the back half of this year.
We ended the first quarter with cash and cash equivalents of $8 $5 million in long term debt, including the current portion of finance lease liabilities of $499 $7 million.
$20 million of borrowings drawn and 9 million of letters of credits issued under our $215 million revolving credit facility at the end of the quarter and remains at about that level today.
This left $186 million of unused availability and when added to our cash balance provided us with $194 million of liquidity at the end of the first quarter of 2022.
We expect to repay what we've drawn on our revolver in the back half of 2022.
As a reminder, our ability to utilize the available balance of $186 million under our $215 million revolver at quarter end is not currently restricted due to any covenants in our senior credit agreement.
Only one more than 35% of the available capacity or $75 million is being used or we were required to be in compliance with one senior secured leverage ratio in order to borrow under our revolver.
We were $55 million below that threshold at the end of the quarter and consequently had no covenant requirement or limitation tomorrow, we expect that our revolver borrowings. This year will increase modestly in Q2 before declining as the year progresses, and we believe that borrowings under our credit facility will not rise to levels that would require a measurement of our senior.
Our secured leverage ratio.
Our senior secured leverage ratio was at two six times at the end of the first quarter. So we were not limited from using our current available revolver capacity, even if the 575 times covenant limitation had been in effect.
Capital allocation for the time being as focused on repaying revolver borrowings, making mandatory amortization payments on our term loan b and building our cash balances until we get past this current challenging business environment.
Net capital expenditures for this year are expected to be under $50 million similar to the last two years, we expect to deploy capital for critical maintenance needs and required equipment purchases for our restaurants, along with completing remodeling projects that we had already begun in late 2021.
The Capex plan includes six new Burger King restaurants openings that have or will open during the year four of which began construction in 2021.
To conclude we are working hard on a number of initiatives some independently and some with the support of our franchise or to significantly improve our profitability prospects. This will not happen overnight, but we believe that beginning later in 2022 and in 2023, we will see improvement in the meantime, we believe we have the balance sheet and capital structure to weather. This.
Challenging period, given our full access to our existing ample level of untapped liquidity.
And with that operator, let's go ahead and open the lines for questions.
Okay.
And at this time, we'll be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
Press Star two if he would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question comes from the line of Jake Bartlett with choice with Securities.
See what's your question.
Hey, guys. This is actually Jack on for Jade, Thanks for taking the questions.
I'm wondering first I wanted to ask about our staffing levels and operating hours as compared to pre COVID-19 and in 2019.
How did those trend through the first quarter and where do they stand currently I'm just trying to understand how much of a tailwind that could be the sales from here.
Thanks Jack.
Yes.
Staffing has become a lot less challenging than it was a year ago and turnover has come down as well.
And that definitely improved.
Every month during the quarter and sitting here today, we're actually operating at more hours than we did in 2019 I think in the in the first quarter.
So I think the operating hours are back and it did take a little bit we mentioned in the script that we lost about 2% of our traffic.
Traffic due to due to hours limitations based on omicron and storms in and that sort of thing and staffing staffing stresses that were there earlier in the quarter, but we're seeing application flow like triple from where it was late last year. So that part of the businesses is improving and yes should be.
Helpful to the quarters ahead.
Great. That's helpful and then just quickly.
Do you have all of your dining room open dining rooms open as well.
Yes, yes, all the items are over okay.
Great.
And then just a clarification.
On the pricing actions you've taken you took 3% at the end of the quarter can you can you give what.
You would expect pricing to be in the second quarter and then also in the third and fourth quarter are.
As pricing rolls off from from the prior year.
Well I can give you a second quarter, we expect.
Menu pricing to be up.
About 9% for the quarter, because we just took that 3%.
Last week.
Last Monday or Tuesday, we didn't see any.
Discernible.
Adverse impact on traffic, so we're pretty happy about that.
But in terms of the next two quarters.
We do expect to have more price increases in over the summer, we'll obviously be evaluating.
The market and what the competition is doing in terms of price increases.
But I think.
We're in pretty good shape in terms of rolling over some of those price increases we made last year and in Q3 and Q4 and obviously the average check is going up it's not like the average check is going to go down when we don't do a price increase the average check is going to stay at elevated levels from the actions we've taken over the last 18 months or so so.
But I don't have specific numbers for you for Q3 and Q4.
Okay, that's fair.
And then just lastly, you talked about evaluating.
Operations and to find efficiencies to offset these cost pressures that you're seeing.
First or are you solely looking at restaurants are you looking at G&A savings as well.
And then my impression is you guys run a pretty tight ship in your restaurants. So can you give us some idea.
What types of operational changes you might be looking at them. You also mentioned that you know.
There are a number of restaurants in the system that you classified as challenged would you be able to give you know what percent of your system you would classify as challenged currently that you really need to take a deeper look at.
It's Paolo Thanks for the question so yeah.
As I've come into the company.
Carol has a legacy of strong operations and I've certainly found that to be the case.
And so what we'll be doing in the coming months is focusing on the key leaders on operations.
Around.
Speed of service and guest satisfaction.
We will be working to continue to improve turnover and so these aren't new things. These are the things the company has done well over time.
We will be very focused on those on those specifically and as the environment has changed quickly over the last few months there are.
A portion of the stores.
Relatively small portion of the stores that haven't kept up with the environment and so we'll be focused on though is to bring them up to the standard we expect that <unk> and that we certainly see in other parts of the.
The portfolio.
And so that that's going to be the primary focus really working through the performance of the restaurants and ensuring that we're getting the most out of the operating <unk>.
<unk> ability and profitability.
Jack.
But I just wanted to ask a question on G&A I don't see any you know we're not talking about efficiencies. There I think it's you know most of the Bang for a buck can come from.
Even modestly improving efficiencies at our restaurants, and I think we need to support of the regional staff to really make those things work. So I don't see I don't know.
He is taking any share.
Actions on the G&A line at this point I think it's pretty critical to keep those keep those folks totally engaged in you know in improving the operations of those of that some of the restaurants that aren't quite up to snuff.
Great makes sense I'll pass it along.
Thanks, Jeff.
Our next question comes from the line.
William Reuter with Bank of America. Please proceed with your question.
Good morning.
My first question about the performance of different markets.
Certain challenged stores are there certain attributes or certain regions that are experiencing more difficulty across the portfolio than others and I guess, what would those attributes via those stores, whether they're more urban more suburban et cetera.
Well when we when we see high performing restaurants. The common attribute is typically the team we have on the local team we have on the ground both at a district level and at a restaurant manager level and so when we find restaurants that aren't performing at that level, that's typically where we focus first insurer.
The team is well trained the team is his understanding of the routines we expect.
And that's and we have you know one of the things that I found is that as I've traveled around too. Many restaurants. At this point is that we have a very strong team at <unk> with a legacy of.
Of training strong training programs in place and strong operating procedures in place and so it's ensuring that the restaurants that perhaps.
We were impacted during this.
Challenging cycle that we that we had those teams well supported well trained.
Operating to the stand you know to the processes and procedures, we have defined.
Okay, and then clearly across the industry with so much turnover over the last handful of years I'm sure productivity in stores with regard to labor hours has been a little bit under pressure I guess, what type of a tailwind do you think we could see a turnover rates decline in terms of labor cost per location.
Is this a meaningful potential opportunity over the next year or two.
Yeah.
Yeah, I think the opportunity is you know a lot of our labor increases have come from.
Paying premium pay to some team members for acting as managers to open and close the restaurant I think is the turnover on the manager side, you know retreat a little bit.
I think that's where we're going to save those we're going to save those costs that we pay to team members to open and close I think it will be I think it'll definitely help our labor costs.
As staffing sort of normalizes over the next you know it continues to normalize over the next several quarters. So I think I think it'll be a positive on labor as a percentage of revenue type stats.
Got it and then just lastly for me it seems like you feel comfortable enough liquidity in that 70, maintaining our.
Ample liquidity and availability on your ABL this year.
In terms of over the next couple of years, you do have some openings requirements with regard to stores is there any ability to delay those in the event that your capital constraints and kind of free cash flow required you to be a little more conservative.
Yeah, we're in constant communication with V. Casey on our development plans I mean, its an ongoing dialogue and we're traveling with them a lot.
During the quarter were just you know, it's a very productive relationship we have with them and they know where we are and where we're focusing and we're totally in sync in terms of you know theyre focusing on maximizing ROI for their franchisees and that's where.
That's where we're looking and in there.
They understand the current headwind and they're very focused on franchisee profitability right now so.
You know I don't I don't see it as you know I don't see it as an issue at all for us to be able to have a dialogue with them about.
Delaying some of the delaying some of the.
The numbers, we have and the Ada in terms of deadlines for building stores. So I think it should be a non event.
Cool Alright, I'll pass to others. Thank you. Thanks Lou.
Yeah.
Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, and welcome to the team Paulo, a nice to have you.
So I wanted to just.
Start by asking or getting a clarifying question about the same store sales trends.
I think Tony you said that.
April was positive for the month.
And that it had turned positive in the last couple of weeks of the month and then that's continued in May can you just clarify that for me.
Sure.
You know March was.
You know obviously, there was a lot going on.
On the macro side of the world.
But specifically for us, though the one thing that was apparent was that the stimulus last year and the <unk>.
Pretty much from the beginning of March through the second week of April , which when the checks went out.
You know had an artificial positive impact on our numbers or at least not a sustainable one I guess is a better way to say it so.
That was you know that was something that was concerning to US you know the average check up going up but the traffic was definitely.
Coming down.
And then literally like lights on lights off I don't know what you know.
You know I guess, because we lap those last day, most checks coming out.
Starting in the second week of April we've seen.
We've seen.
<unk>.
Proven and comps overall I mean, it is just going from sort of flattish and kind of dull to.
Solid low to mid single digit type numbers, so and it's just it's been everyday honestly since since mid April and.
So we're feeling we're feeling really good about that and.
There was a coupon drop last week.
You can immediately see another sort of step.
Step up in dining you know the dinnertime hour and folks using those coupons. So the consumers clearly value conscious, but it seems like.
We didn't see that trade down occur in March because we were there was a lot of noise, but I think we're seeing some some opportunity for us.
For the trade down market. So I'm really we're really encouraged by that and even with a coupon drop prices is going.
It's continuing to be strong and.
We saw no blip on the screen at all from the 3% increase we saw that we did last week in terms of.
Changes to traffic patterns and stuff like that so really feeling good about you know.
Sort of mid April and forward at this point.
Great. That's encouraging just wanted to clarify too and in the Q1 ground beef cost per pound.
Did you give a number on that was at 272.
275.
75, and what is your expectation I know you said that you think in the second half of the year. The coop believes it's going to come down.
Hopefully 2030 40 cents a pound.
What what type of number you're looking at in Q2, probably at.
A similar number.
Yeah.
It's a moving target Jeremy because.
We actually.
In the last couple of I think three weeks, maybe we've seen it come down below where our food co ops.
We forecasted it to be so it seems to be coming down.
And you know.
And it's for a couple of weeks is a penny or two and then it was like a nickel last week. So.
It seems to be.
It seems to be coming down at a good at.
Good pace. So I think it's going to be you know whatever we thought it was going to be I think it is going to be a little better than in Q2.
Great.
And then I wanted to ask just a you know a thought on the operating hours and.
You know where wage prices are today.
Has there been any thought about the operating hours that you have restaurants opened I know you know everything's reopen at this point.
But the wage rates are really high on an absolute basis.
You know.
Has there been any consideration on whether or not you know to taper those.
You know those endpoint hours.
Just to make the restaurants more efficient.
Ward or possibly to go the other way that youre doing enough business on those off peak hours to increase the hours.
Yeah, we look at that on a store by store basis, and provide district managers with all the information they need all the tools they need to make that data driven decision, but obviously, it's the regional.
Manager, who makes those determinations at the end of the day.
We have a consistent you know we have a consistent process throughout the company to do that and.
You know actually.
And then in the model, we use is sort of a <unk>.
The run rate. So it has all the higher labor costs and commodity costs in there.
<unk> has sort of fresh.
Sales numbers in there so.
So it's a data driven decision and.
At the late night, we're looking to open it's mostly where we think we can afford and it's profitable to open for more hours at night and go back to almost some pre COVID-19 type numbers.
And we're actually running a test in Rochester, right now too.
To do the opposite and there is a spectrum as you know.
Maybe we don't need to open at six am we could open at 630. So we're running tests to see if that if the restaurants still operates efficiently. If the crew members come in a half hour later.
So I think it's something we're experimenting with.
All the time and it's top of mind for all of the folks who run our restaurants.
Great. Thanks for that color last one for me so.
In terms of trade down that typically happens when you have a you know a weaker economic environment.
$9.69 or almost $10.
Average ticket do you still feel like the relative value offered you know with the brand is where it needs to be to see that happen and kind of take advantage of the opportunity that that comes when you have a softer economic environment.
Oh, Hi, it's Palo.
It's difficult to predict how consumers respond and obviously.
Have you been impacted across the full spectrum is the economy.
As you said, it's the relative value to other options, we do think.
Based on the traffic patterns that we've seen particularly over as Tony mentioned since the middle of April that customers do continue.
To find value in our products.
And even though the average check.
It's higher than it's been that its good relative value and of course, we continue to run promotions and have value options on the menu and and particularly through digital and and giving a robust mendes options.
And particularly.
Limited time offers.
That appear to be working.
Great. Thanks for that color guys best wishes this year.
Thanks, Jerry Thank you.
And our next question comes from the line of Oliver Goldsmith with Jefferies. Please proceed with your question.
Good morning in terms of the revolver and how you mentioned, how you want to pay it back in the second half of the year.
Free cash flow isn't there would you consider raising some secured debt to fulfill that and I guess, just how much secured debt capacity do you think you have today.
Yeah.
I don't I don't think we're in a needs positioned to raise any debt.
We're only using $20 million of revolver it's.
We have $185 million or so available.
So I don't see a scenario where.
If we had 20% 30% down to zero on the revolver, we'd need to ever where even if we kept having $30 million on the revolver, we'd have to raise more secured debt. So I don't think that raising is not something that we need to do given our capital structure. The way it is.
Just have a lot of liquidity and our current.
Bank line and obviously have.
Great relationships with those banks, so that money is available to us and we're going to if we need it we'll use it but you know we're you know it's only I don't think we'll need it and that's not what our our forecast shows.
Got it makes sense and in terms of Capex, I guess compared to what you're run rating for this year versus what you would ideally want to do in a more normalized environment.
Help us reconcile that so that you get a better sense for what future Capex looks like.
Yes.
Yeah.
<unk>.
I think it depends largely on how fast are.
Our EBITDA recovers overtime.
But I know that the bookend that we the booking of the high end was two 2019 I know, we're never going near that number again I can never something I know <unk> is a big word, but as long as I'm here with that number anyway.
So I think you know I think the current level as you know maybe at most we go 20 or 30 more things.
Things were looking really really.
Positive in our EBITDA leveraged up because of some of the turnarounds were seeing but.
But I think we're a ways away from having to.
That's a high class problem and clearly another you know another thing we're talking to RBI in the Burger King folks about all the time, so they're very they're very sensitive to that and working with us to make sure that we're not extending ourselves.
We're not making us extend ourselves at anytime.
Yes.
Got you makes sense and then just lastly in terms of commodity and labor.
It seems like you're a little hopeful that commodity pressures will come down in the back half of the year, but by and large is.
Margin wise should we expect kind of a similar margin headwind for the rest of this year.
No.
I don't know I think.
You know our view is that we should start to see.
Maybe some leveraging in the back half of the year.
Mainly in the fourth quarter.
But.
You know I don't think the comparisons in the third quarter Youre going to start to get a lot.
Less challenging because we started seeing these headwinds in the third and fourth quarter of last year. So.
You know I'm pretty you know this business can move pretty as you've seen the leverage down and the leverage works. The other way when traffic starts to build in commodity.
Prices retreat, a little bit and labor gets to be a normalized kind of 2% to 3% growth thing.
You can see you can see a good margin improvement.
Pretty quick.
Coming to for us are coming to us.
If everything aligns well.
Got it thank you.
And as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of Carla Casella with Jpmorgan. Please proceed with your question.
Hi can you talk about your performance at your Burger King being better than the system wide average can you just talk about what that attributed to and are you selling are featuring different menu items or have you taken a different tact to store hours than that.
The average chain.
Yes.
They are catching up to us because in the fourth quarter or in the fourth quarter of last year, we were like four or 500 basis points ahead of the system and this past quarter, where a couple of hundred basis points.
So I think the rest of the system is kind of catching up to us, but the reason for them. So the big disconnect back in the fourth quarter and a big.
Separation that we did a lot more than they did in the back in the fourth quarter was.
We were pretty quick to open the restaurants to flow six am to 11 PM operating hours and put menu pricing through in the fourth late third quarter fourth quarter. So that helped us outperform but the rest of the system kind of caught up to us.
In the first quarter of this year. So that's why the outperformance narrowed.
A bit in the latest quarter, but I think it's just we're not you know I just think we're operating with more discipline.
Yeah.
So I think that helps us outperformance, it's kind of basic.
Blocking and tackling type stuff.
And I'm wondering is just the relationship between restaurant brands are they kind of leaning on you having more more I guess focus groups of franchisees to kind of figure out. The market are you hearing a lot of the same thing from the other franchisees are I E. How much collaborations there right now has it stepped up given that turbulence.
Hi, Hi Palace.
Yes.
I've been here over the last few weeks I've been speaking of needing quite regularly with with Tom and the leadership team at Burger King and so I can tell you that there is ongoing dialogue and there is.
Dialogue is productive.
And we are working together to.
Build a plan that's going to drive traffic and.
And Peru, franchisee profitability and I'm encouraged with what they're working on and the team that Tommy's building.
Okay, Great and then just where I may have missed it but did you give what maintenance Capex is I know you've cut it back if you kind of back all the way to the maintenance level or could you go further.
I mean, it's about $15 million a year.
And we haven't we haven't got that back.
It is important to keep the stores obviously operating.
You know from the stuff that goes on the Capex is really roofing and HVAC in.
Driveways and stuff like that so we worked pretty hard to we keep that we keep up on that spending.
Okay, great. Thank you.
Okay.
And a question and answer session I'll now turn the call back over to CEO Carlos <unk> for closing remarks.
Great. Thank you operator, and thank you again for joining us this morning and for all of your questions. While the first quarter was a challenging one we are now looking ahead. We are acutely focused on driving improved operating and financial performance, we intend to be very disciplined when it comes to capital allocation and we feel good about the future of our business and strong liquidity.
Physician, we appreciate your time and look forward to speaking with you all again next quarter. Thanks very much.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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