Q1 2022 One Group Hospitality Inc Earnings Call
Good morning, everyone and welcome to the one group first quarter 2022 earnings Conference call.
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At this time I'd like to turn the conference call over to Tyler Loy, Chief Financial Officer.
Sir Please go ahead.
Thank you operator, and Hello, everyone.
Before we begin our formal remarks, let me remind you that part of our discussion today will include forward looking statements. These forward looking statements are not guarantee the future performance and you should not place undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.
We also note that these forward looking statements reflect our opinions only as of the date of this call. We undertake no obligation to revise or publicly release any revisions of these forward looking statements.
In light of new information or future events, we refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions.
During today's call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance.
However, the presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
For reconciliations of these measures such as adjusted EBITDA adjusted net income restaurant operating profit comparable sales at total food and beverage sales at owned and managed and licensed units to GAAP measures along with a discussion of why we consider these measures useful.
Please see our earnings release issued today with that I'd like to turn the call over to Mandy hilarious Manny. Thank you.
You Tyler and Hello, everyone, which is surely appreciate you joining us today and for your interest in the one group.
Let me begin by saying that I'm thrilled by the extremely strong start to 'twenty to 'twenty two despite the challenges affecting the industry.
He highlights for the quarter include continued strong sales performance versus 'twenty, 'twenty, one and 2019, which exceeded the high end of our revenue guidance.
We achieved $10 8 million and adjusted EBITDA of $4 3 million or 65, 5% increase versus the same quarter last year. This brings our trailing 12 month adjusted EBITDA to approximately $47 million and.
And we finished the quarter with $28 3 million in cash, which exceeds our debts and can be used to fund our rapidly expanding and robust pipeline of future developments.
And thank our entire team for these results and for providing our guests with exceptional unforgettable dining experiences each and every day.
I'm also proud of their ongoing hard work.
Our comparable sales continued to be among the best in the restaurant industry.
During the first quarter consolidated comparable sales increased 45, 1%.
This thing or an increase of $66, 5%, SDK and 21, 9% at Kona Grill.
Impressively and also among the best in the industry when compared to 2019, our pre pandemic base year.
Comparable sales decreased 45, 3% consisting of an increase of 62, 9% an SDK and at 27, 5% increase at Kona Grill.
Our first quarter U S average weekly sales were equally impressive at 311004 SDK compared to 212000 in the same period in 2019 and 101000 at Kona Grill compared to 79000 in the same period in 2019.
This sales momentum improves that interest in dining at our highly differentiated upscale and polished casual restaurants remained strong even in an uncertain environment.
Our focus on strong operational execution innovative culinary offerings and vibe dining continues to resonate with our guests as we provide exceptional and unforgettable dining experiences with opportunities for guests to enjoy themselves.
We continue to build and emphasize a occasions with available capacity such as lunch and happy hour.
We are particularly encouraged by her growing branch day parts, which has driven incremental interest in both Kona grill and SDK on Saturdays and Sundays.
Most of our branch and happy hour offerings showcase our commitment to culinary innovation and an incredible value in a fun and vibrant atmosphere.
This allowed us to expose our brand to new guests and approachable price points, where the opportunity to convert those guests into the dining room on evenings.
While we are happy with our progress so far we believe we still have lots of opportunity to grow the brunch and happy hour day parts.
In addition, we continue to focus heavily on holidays, another way in which we introduced new guests to the brands and thereby robbing the consumer base.
During the first quarter at both Essakane Kona Grill and had a very successful Valentine's day, and the Super Bowl weekend, featuring special Manny is that our guests truly enjoy it.
Also kicked off the second quarter with Activations, featuring specialty Easter dishes and beverage promotions you.
We celebrated national tax day with $10 40.
Signature cocktail all day long and look forward to celebrating mother's day, which traditionally is a strong day for both Kona Grill and Astrakhan.
Our takeout and delivery business continues to be a meaningful part of the business and we're encouraged by ourselves and this additive layer.
For the <unk> restaurants to have kick out and deliver its approximately 5% of sales and that Kona grill is approximately 13% of sales.
In addition to takeout and delivery, we are building, our catering capabilities as offices reopen and larger gatherings have resumed.
We are also seeing bookings for private dining decrease which is a tremendous opportunity as private dining and business dining has been a missing by a business over the past couple of years.
Moving on to development. The 2022 developed pipeline is the strongest we've ever had in our history today.
This year, we plan to open at least 90 venues, which include two company owned Sdk's, Dallas, Texas, and San Francisco, California.
And managed SDK in Stratford, London U K.
Three company on Kona Grills, Kona Grill, and Riverton, Utah are Kona Grill in Columbus, Ohio, and have Kona Grill in Paradise Valley, Arizona.
And finally, we plan to open three license units in the partnership with <unk> and will provide takeout and delivery only featuring offerings from our SDK, Kona grill and bar concepts and taxes.
As we have long stated we are early in our growth strategy with significant white space ahead. We're.
We are excited about our long term opportunity as we believe our units deliver best in class returns.
For new restaurants, we are targeting between 40, and 50% Rois from New company owned SDK and four copy on Kona grills.
We foresee a total addressable market of at least 400 restaurants, equaling 200, SDK restaurants globally and at least 200 Kona Grill's domestically.
Moving on to the current cost environment, we continue to deliver best in class restaurant operating margins. We are managing through this historically high inflation, along with supply chain challenges and yet are still delivering cost of goods and a 25% to 26% range.
We've been able to accomplish this by being flexible with our menu and supply chain and emphasizing any executing our margin and sales driving initiatives, such as stopping and side that SDK and beverage sales at Kona Grill.
This has allowed us to provide our entire breath of offerings at both SDK Kona Grill cut no corners, and still deliver world class margins.
Turning to labor being fully staffed is a competitive advantage in this environment in order to protect the brand and ensure high levels of execution in our restaurants. We are happy to report that we continue to be fully staffed and we continue to invest in hiring and retention for all levels in our restaurants.
To conclude our team is doing a fantastic job walk new guests into our restaurants for great exceptional and then forget about dining experiences.
Quickly our focus on operations and day to day execution as proved effective in translating to a strong P&L and we plan to continue on our current trajectory of industry, leading same store sales disciplined cost management and new store development.
Now I'll turn the call back to Tyler.
Thank you Manny.
Let me start by discussing our first quarter financials in greater detail.
First quarter total GAAP revenues were $74 2 million, increasing 46, 9% from $50 5 million for the same quarter last year equally.
Included in our total revenues is our owned restaurant net revenues of $70 5 million, which increased 43, 4% from $49 2 million for the same quarter last year the.
The increase in revenue was primarily attributable to strong sales momentum, resulting from the execution of our sales initiative along with the opening of new units.
Domestic consolidated comparable sales increased 45, 1% for the quarter compared to 2021 for SDK comparable sales increased 66, 5% versus 2021, and Kona grill comparable sales increased 21, 9% versus 2021.
Versus 2019 domestic consolidated comparable sales increased 45, 3%.
Teekay comparable sales increased 62, 9% and Kona grill comparable sales increased 27, 5%.
Management license and incentive fee revenues were $3 7 million, increasing 178, 9% from $1 3 million in the first quarter of 2021.
This increase is primarily the result of the sales recovery from the COVID-19 pandemic, coupled will be opening SDK, Los Cabos Airport in May and SDK Westminster with two F&B venues in May and adding river shore bargain girl in August.
Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased 130 basis points to 25, 7% in the first quarter of 2022 compared to 24, 4% in the prior year, primarily due to increased commodity prices, partially offset by operational and menu management initiatives.
Owned restaurant operating expenses as a percentage of owned restaurant net revenues decreased 100 basis points to 55, 8% in the first quarter of 2022 from 56, 8% in the first quarter of 2021 due to leverage on higher average weekly sales and actively managing operating costs rests.
Operating profit decreased 30 basis points to 18, 5% for the quarter compared to 18, 8% in the prior year first quarter.
On a total reported basis general and administrative expenses were $6 9 million compared to $5 2 million in the prior year the.
The increase was attributable to increased activity as our restaurants are generating strong average weekly sales.
When adjusting for stock based compensation adjusted General and administrative expenses were $6 million in the first quarter of 2022, and $4 2 million in the same quarter last year.
As a percentage of revenues adjusted general and administrative expenses were eight 1% of total revenue in the first quarter of 2022 and were slightly favorable compared to the first quarter of 2021.
We incurred approximately $2 3 million of direct costs related to COVID-19. During the first quarter composed primarily of costs were regular electrostatic cleaning of our venues personal protective equipment and sanitation supplies to prevent the spread of COVID-19.
This compares to $1 6 million of similar costs last year.
We've termination expenses were 255000 during the first quarter compared to 187000 in the first quarter of last year. We have closed all of these disputes that originally originated in 2016 and before and anticipate nominal lease termination expenses going forward.
Interest expense net of interest income was 508000 in the first quarter of 2022 compared to $1 2 million in the first quarter of 2021.
The decrease was driven by lower average outstanding balance and lower interest rates driven by the refinancing of our credit facility in August of 2021.
Income tax expense was 173000 for the first quarter of 2022 compared to an income tax benefit of 329000 for the first quarter of 2021.
First quarter effective tax rate differs from our annual effective tax rate due to discrete items in the quarter.
Net income attributable to the one group Hospitality, Inc was $3 7 million or 11 net income per share compared to net income of 70000 in the first quarter of 2021.
<unk> net income per share.
When adjusting for COVID-19 related expenses adjusted net income was $5 million or <unk> 15, adjusted net income per share compared to an adjusted net income of one 6 million in the first quarter of 2021 or <unk> adjusted net income per share.
Adjusted EBITDA for the first quarter attributable to the one group Hospitality, Inc was $10 8 million compared to $6 5 million in the first quarter of 2021.
We have included a reconciliation of adjusted EBITDA in the tables in our first quarter 2022 earnings release.
Lastly, as a result of the ongoing challenges brought upon by the COVID-19 pandemic, we and our licensing partner have decided to permanently close the SDK restaurants in Mexico City Mexico.
Just on a strong pre pandemic performance, we know the SDK and drive in Mexico City, and look forward to new opportunities as they arise in that market.
Now I would like to touch on guidance as it relates to the second quarter of 2022.
For the second quarter of 2022, we expect the following.
Total GAAP revenues of approximately $76 5 million to $79 million.
Owned restaurant net revenue of $73 million to 75 million.
Management license and incentive fee revenue of $3 five to 4 million and total G&A of approximately $7 million.
I will now turn the call back to management.
Thank you Tyler and thank you all for your time today.
Let me conclude by saying I'm very excited about the strong start we have had in 2022.
Despite the challenging environment in which we're operating.
We are in the early stages of our long term growth strategy as we continue to build a portfolio of high volume high margin brands with compelling returns.
Above all I'm grateful to all of our teammates who bring our mission to life every day to be the best restaurant in every market, where we operate.
We do this by delivering exceptional and forgettable guest experiences to every guest every time.
I also would like to thank our customers that visit and continue to return to our restaurants. So they can enjoy the highly differentiated vibe dining experience they have been craving.
We appreciate everyone joining us on the call today.
Power and I are happy to answer any questions that you may have operator.
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Our first question today comes from Nicole Miller from Piper Sandler. Please go ahead with your question.
Thank you and good morning, Great update wondering just a super quick modeling one.
S T K average weekly sales total and if so do you have company owned SDK average weekly sales.
Yes, Hi, Nicole So the company one is about a 275000 for the quarter.
And as compared to like the 180 range something like that in the prior year.
Yes, we can provide you the exact.
The exact priority number.
Awesome. Thank you and then just a big picture question when you put together the pieces for QQ.
Seasonally speaking second quarter margin will get better so it should be up quarter over quarter, yet last year was like quite strong I would assume that revenues are robust enough to produce a similar margin, but is there anything you want us to think through in terms of Cogs or labor that way on that one way or another just at a high level.
Oh.
Hey, Nicole this is Matt no I think that to the ear.
Commentary about second quarter being better than first is right and then just relative to.
So last year, just remember that the cost of goods were very favorable.
For the second quarter. So you just need to take a look at.
And evaluate cogs year over year and adjust accordingly as that trend.
Okay, perfect and last just a big picture question things have been so robust in this segment and you've absolutely just really changed.
We restructured the way that businesses use today in terms of the cohort mix of social versus business in and certainly by day part so I want to pause and ask the question you know if not even a recession, but just there is a slowing.
What is going to happen the way you characterized comments today could see something like lunch and happy hour being really frankly, a value proposition. So people don't need to ease off with your brands or ease off the category, but you know what is realistic as you know we are going through the market conditions and could you also address Europe specifically.
<unk>, albeit you know that has an MRI <unk>.
At large.
Yes, I mean, I think I think you said.
While there are focus on the value layers.
The important in any kind of a tougher environment. So we will just continue emphasizing our marketing and our sales building resources around those layers, which has been our strategy to date and then.
We also.
Recently, we have built a very robust social occasion business for birthdays and anniversaries and date night. So I think even in a tough environment a lot of those will continue.
As well as the holiday so I think our strategy.
And even if the environment is a bit different.
We'll still be intact, clearly with total emphasis on valley layers, which we already have been working on so I think it's just a continuation of that and obviously as you know we're very flexible on the operating side of the business so well.
We'll pivot and we'll be flexible in that kind of an environment.
Thank you.
Our next question comes from Nick <unk> from Wedbush Securities. Please go ahead with your question.
Thank you congrats on a great quarter.
Just given sort of the inflationary.
Headwinds out there it would be really helpful to understand.
What are your average check growth was in the quarter for each brand maybe menu pricing. How you are thinking about menu pricing now and going forward.
Yes, I mean, I think looking at the quarter. Many pricing is in the 3% to 5% range and we do have.
So tremendous amount of pricing power in SDK. Please wanted to so we feel very good about that and.
But the majority of our growth has been traffic.
And significantly for SDK brand.
We've seen.
Three a strong recovery on the event business and banquet business that we're now starting to see that layer coming back not to full recovery as it was before the pandemic, but we definitely have seen that our business in big cities coming back. So we are pleased with that.
Business coming back and so.
But the growth has really been on the traffic and on the number of checks that were getting and rational.
And what about for Kona.
Same thing in majority of our traffic.
I would say that the pricing there is around plus five so same of.
Modest price increases in that brand as well.
Got it.
And just in terms of the margins going forward. Obviously, the Q2 revenue guidance is well above I think what we were all expecting.
But <unk>.
Cost of sales still think 25% to 26% ranges.
It was realistic for the for the rest of the year and then how should we think about the.
Other Opex line.
Yes, I mean, I think our comps.
Guidance stays in the same range.
As you point out there is still.
Lots of challenges in there and I think as you've seen from the other operating expenses, we've done a very.
Good job of controlling labor and the other operating cost so I don't expect any significant.
Impact to our operating cost for the remaining of the year again, I'm not saying that it's super.
There's a lot of headwinds in.
In both labor cost as well as in on the operating lines, but I think the team is doing a very good job of staying ahead of that so I don't see any material impact to any of those operating cost lines.
Not anything different from what we saw in the first quarter.
The S. T. K openings are we still expecting those to be in Q2 or maybe.
Maybe in Q3.
Yes, I mean right now, we're very close in Dallas, and San Francisco and.
And as well as the Kona grill and represent so end of the second quarter right beginning of the third so where we're coming to the final steps on vehicles restaurants open right now.
And then just last question you know all the kind of think about 'twenty three what are the growth rates, we're thinking about that.
Units, sometimes the best T K could have before.
How do we wrap up two five for Kona I mean, just the environment out there how are you thinking about 2023.
Yes, so SDK will definitely be more than three next year.
Wow.
On the four to five range and Kona Grill will also be you know more than three.
Our pipeline is very robust right now so it's just a matter of.
Having them out so we will have.
Again, another record year in development relative to SD can grow but it will definitely be more than we've done this year.
And for the SDK as our company owned that'll be four to five.
Yes, right now I would say for a company owns and a couple of maybe one or two management sites, but it would be majority of company owned next year, perhaps you can.
We have a tremendous amount of great new markets that we.
We'd like to be in Washington D C. Boston.
A couple of Florida opportunities, so we do want to be.
Be able to open in these big markets as soon as we can.
Great. Thank you very much.
Thanks, Nick.
And our next question comes from Mark Smith from Lake Street Capital. Please go ahead with your question.
Hey, guys.
Wanted to follow up on some of the inflationary pressure can you just go through a number of any contracts that roll off.
Tracks.
Yeah, Mark So right now just due to the volatility we are locking things in on kind of a shorter timeframes.
30 60 days.
<unk>.
And so but we're I think we're seeing relatively stable.
Protein prices.
Some off from some of the peaks from last year.
But right now we feel comfortable in kind of that 30 to 60 day lockdown.
Okay.
And then.
Maybe Manny if you can talk just big picture, you've got a really solid customer base, but any impact unless we saw gas prices spike during the quarter, primarily on that cone customer did you see any pull back on check or traffic as we saw gas prices move higher.
No.
And again it's.
Kona Grill, our emphasis has been.
Experiential so we have not seen any.
In fact, even as gas prices have a tremendously increased and some of these markets. So we definitely.
<unk>.
Are very aware of that but again also remember that our emphasis on growth has been the valley layers. So we have put a lot of emphasis on.
On branch as well as returning to our happy hour. So we've seen a lot of success on those day parts. So.
To a certain degree I would say that any.
Difference in check has been driven by our emphasis on strategy rather than a broad economic in our research as we track People's comments.
It has not been.
We haven't seen a lot of comments on pricing if any at all and value has not significantly changed as we do our.
Research evaluate.
Customer so I would say to date, we haven't really seen anything that is describable in terms of people either trading down on P mix or.
Or just not coming to the restaurants. So so so far we haven't seen it but again the environment is super dynamic. These days I mean, theres a lot of news lots of macro issues. So.
Again, we're just prepared.
Speak with the team Charlie you just have to be flexible and ready to pivot because theres a lot of.
Just the moving parts in the overall environment right now.
And then last one for me just as we think about development you've got a good pipeline just spoke about you know next year potential pipeline.
Are you seen any delays as we think about permitting.
That's kind of getting in the way of maybe slowing down things a little bit and then maybe just talk about kind of what youre seeing and kind of real estate and opportunities for expansion is at pretty attractive market or things tighten up at all out there as far as opportunities for growth.
Yeah.
Yes, I mean, the development environment now is.
Bit more dynamic the permitting does require.
For us to really stay on top of that there's a lot more.
It feels as if people came back from pandemic and changed some of the process flows.
Requires.
I know that you are more aggressive and more preplanning on permitting.
So I've noticed that up a little bit of a difference there, but nothing significant that impacts the timing of our of our rationale openings relative to opening restaurants, yes. I mean do you have to offer the future restaurants are in our in terms of equipment. If you don't plan out longer lead times, you can't buy stuff.
Last minute. So it does require that for the new restaurants, whereas maybe we timed and equipment and the six month period now we're looking at a nine to 12 months.
Timing for the equipment. So you do have to change your project management Timeframes on timing some of those things outs and so.
I would do it so it has we just have we.
We have adjusted to those fuel new notices of doing business in this kind of environment.
But it is different there is different from the past it could go to <unk>.
Weapon distributors and pick up four five.
Pieces relatively quick now there's things such as not enough chips. So you get a lot of people pushing back on equipment that would have to be flexible on some.
Specs relative to kitchen.
Equipment, so, but again, it's all about project management and being sure that you get.
Ahead of the planning there in terms of real estate.
I think what I've seen in.
In the last 12 months is theres a lot of availability lots of you know.
Malls that they have great real estate that is available in the big markets. There is.
Spaces that people that had vacated so we do have.
And Ah.
An opportunity right now where we can go where we want to be with the brands.
And there's a lot of flexibility in picking the real estate that you really weren't so from a real estate selection is probably the one of the better markets.
<unk>.
Relative to costs I think we're getting fantastic deals.
From landlords, but again I think thats, just a testimony to the success of the brand so people like to get.
Sdk's and on the growth and want to get them into projects because of the average volume and the fact that we have exciting programs like our happy hour programs and our brunch program. So I would say that.
Very excited about the go forward.
Development plans with the only caveat is that we have to be more proactive and we have to have more lead time.
And adjust our project time lines for that.
Okay, great. Thank you.
Thank you gentlemen.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to Manny hilarious for closing remarks.
Thank you and as I always do I'd like to thank the one group.
Team for a fantastic execution in the first quarter.
And their continued execution to the second quarter. So again, none of our results are possible what would that incredible commitment.
Our team and I'm very pleased and very proud.
The achievements of everyone and that team and we look forward to continue providing.
And forgettable exceptional.
Experience to every guest every time and every one of our Russian so we appreciate everybody's interest.
And see you out in our restaurants. Thank you.
Okay.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining us.
You may now disconnect your lines.