Q3 2022 Carrols Restaurant Group Inc Earnings Call

Ladies and gentlemen, welcome to catalyst restaurant Group, Inc. Third quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

Following the presentation, we will conduct a question and answer 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.

Wednesday November nine 2022 at 830, a M eastern time.

And it will be available for replay.

I will now turn the conference over to Greg miles catalysts controller and assistant Treasurer.

Please go ahead.

Thank you operator, and good morning, everyone by now you should have access to our earnings announcement released earlier today and 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 input costs or other aspects pertaining to our business. These.

These statements are not guarantees of future performance and therefore undue reliance should not be placed on them.

We also refer you to our filings with the SEC for more detailed both with respect to forward looking statements as well as risks that could impact our business and results.

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 want now I'll turn the call over to our President and C E O Hello Hello.

Hello.

Thank you, Greg and good morning, everyone.

Having now spent two quarters at the helm of the Cowboys team I'm more convinced than ever of the upside potential of our company we.

We are making tangible progress on both sales growth and profitability.

But we've only just begun and we're all mindful that there is still work to be done to realize our full potential.

We're pleased without topline momentum during the third quarter.

Comparable sales grew 4.9% at our Burger King restaurants, and six 5% at our popeye's restaurants.

At the same time strengthen restaurant operations drove sequential improvement in our restaurant level profit margins.

The progression of growth drivers and easing cost headwinds fuel our optimism for the coming quarters.

Let's dig into some of the details I'll start with the restaurant operation.

In a nutshell, we I used to have the right people, providing fast and friendly service across all our restaurants.

Our improved Burger King staffing levels have enabled us to increase hours of operation by 2% relative to last year.

A vast majority of our restaurants are now operating at the optimal hours of operation.

We are continuing to increase operating hours in stores, where incremental sales volumes warrants it.

At the same time the efficiency of our team members staffing has improved.

Operational efficiencies achieved over the past three years have allowed out starting to stall to remain below 2019 levels, while still maintaining efficient customer friendly restaurant operations.

Going forward, our focus will remain on managing labor costs, and improving labor productivity through schedule optimization.

We aim to provide great customer service at maximum labor efficiency.

On service, we improved our total service time by 12 seconds versus last year and five seconds sequentially at a Burger King restaurants.

In addition, we recently launched a new initiative in setting our teams to reduce total service times still further.

This is especially important given that 75% of our Burger King customers now order through our drive throughs.

Our customer satisfaction scores improved 20% over last year.

In fact, we achieved a record high last month.

While we're pleased we achieved this milestone we intend to keep raising the bar as customer satisfaction is something we aspire to improve continuously.

Our managers and teams continue to focus on operational consistency in our restaurants to drive continuous improvement in both guest satisfaction and total service time.

This is a priority as speed of service and customer satisfaction are key drivers of sustainable traffic growth.

We made substantial progress in improving the performance of our stores across both brands and especially at our lower performing stores.

We are continuing to aggressively explore all avenues to improve returns across the <unk> system.

Yeah.

Turning now to our growth drivers, let me begin by discussing menu innovation.

We're very pleased with our recent launch of the raw crispy chicken sandwich.

It is seeing solid adoption and it's substantially less complex to prepare than its predecessor.

We view this new sandwich as a high quality product that our guests crave that can be prepaid without strain to restaurant operations all speed of service.

Next I will address pricing and value.

With almost 1100 restaurants across 23 states well one of the largest franchisee in the U S.

Given the breadth and diversity of the markets. We serve we believe it is increasingly important that we moved to a more targeted approach to pricing and value.

Our Burger King restaurants have taken price increases of approximately 10% of the past year, including 2.8% in September .

That said, we are becoming much more geographically, we're fine without pricing tiers, allowing us to better adjust to local market conditions.

Additionally, we remain focused on finding the optimal mix of promotions and discounts across channels to balance the needs of our customers and profitability.

Mato pricing and discounting practices have contributed to our profitability in recent quarters with limited impact on traffic.

In terms of value we are working to ensure that our actions are designed around the unique needs of our local markets.

We are using a disciplined approach that seeks to carefully balance sales traffic and margins in our restaurants.

To that end, we're currently running a number of pilot programs, you know markets focused on local value and marketing efforts.

We're excited by the potential of these programs as they capitalize on our scale to unlock sales potential, particularly in the markets in which we have a majority presence.

Preliminary results look promising.

I look forward to sharing further details with you in the future.

Now to store modernization.

As a reminder, Cal does remodeled 85% of our restaurants in the past 10 years.

This allows us to be prudent selective and disciplined in deploying capital to maximize returns.

Earlier this year, we conducted together with Burger King corporate Ah study of our entire store base.

We developed a unit level plan to prioritize modernization projects to maximize our returns.

We will remain prudent in our capital spending while continuing to ensure that our store base is on strong footing.

Before turning the call over to Tony to walk you through the financials I want to briefly touch on Burger Kings reclaimed the flame initiative.

Over the past few quarters Carriles as being part of a group of franchisees working hand in hand, with our franchise all to help develop a comprehensive plan to drive traffic and improve franchisee economics.

We think Burger King will they collaboration in this process and we believe the plant will strengthen the Burger King system for years to come.

In terms of the benefits to Carol we believe there will be many.

First the increased marketing spend and menu innovation should serve to boost brand awareness traffic and sales.

Second refocusing the brand on customer and crew experience should have a positive impact on guest satisfaction speed of service and employee retention.

Finally, we expect that a renewed focus on franchisee economics will help ensure that Burger king franchisees and our franchise all are aligned around restaurant profitability goals.

This we believe should enhance franchisee financial footing and allow the brand to grow from a position of strength.

With that I will now pass the call over to our Chief Financial Officer, Tony Hull.

Thank you Paolo and good morning, everyone.

Before I dive into the details on the quarter, let's begin with some financial highlights.

First our continued focus on revenue drivers, we control and cost management combined with moderating inflationary pressures on commodities and labor drove a 70 basis point improvement to restaurant level EBITDA margins from Q2 of this year.

Second adjusted EBITDA grew 17% sequentially and reached 95% of the prior year's third quarter. Despite.

Shneur pressures, we have faced this year.

Finally, we repaid $17 million on our revolver strengthening our capital position and liquidity.

Now to provide more details on the quarter restaurant sales increased five 3% to $444 million compared to $421 $7 million in the third quarter of 2021.

Comparable sales at our Burger King restaurants increased four 9% comprised of an 11% increase in average check partially offset by a five 5% decline in traffic.

Comparable sales at our popeye's restaurants increased six 5% comprised of a two 8% increase in average check and a three 6% increase in traffic.

Turning to some detail on expenses cost of food beverage and packaging was steady year over year at 31, 1% of restaurant sales as commodity inflation of approximately 15% was offset by pricing actions and reduced discounting.

The most meaningful contributors to food inflation or higher potato and chicken cost during the quarter relative to last year.

Beef averaged $2 71 per pound during the quarter, a 1% increase from the same period last year.

We estimate that a 10 cent decrease in beef costs would increase EBITDA by approximately $4 $5 million on an annual basis.

Else remaining equal.

Overall commodity inflation has come down they're still remains elevated from a historical perspective.

Restaurant Labor expense was steady year over year at 33, 5% of restaurant sales with labor inflation offset by continued labor efficiencies and pricing actions.

Average hourly wage rates for our team members before over time increased by seven 7% during the quarter compared to the prior year period.

Down from the low teens in the first half of the year.

We continue to expect wage inflation of mid to high single digits for the fourth quarter.

Our restaurant operating expense was flat year over year at 15, 8% of sales as inflationary pressures on utility rates and repair and maintenance costs were offset by increased restaurant sales.

Restaurant rent expense decreased 20 basis points year over year as a percentage of sales compared to the prior year period.

Adjusted restaurant level, EBITDA totaled $37 $9 million, an improvement of six 9% compared to last year.

Sequentially from the second quarter to the third quarter of 2022.

Restaurant level EBITDA margins grew 70 basis points due to leverage from cost of goods sold labor and other expense items.

Although early we think these improvements are just the beginning of a part positive margin trend that we expect will unfold over the coming quarters.

General and administrative expenses increased 50 basis points year over year as a percentage of sales driven by an increase in certain executive transition litigation and other nonrecurring professional fee costs that totaled approximately $1 $4 million.

Along with the reversal of bonus accruals in the same period last year that reduced reported G&A expense.

Excluding the nonrecurring costs as well as stock compensation expense G&A as a percentage of revenue was four 5%, which we expect to be marginally lower than in the fourth quarter.

Adjusted EBITDA was $17 $7 million or a 17% sequential improvement over the second quarter and within 5% of the third quarter 2021 of Mt.

For the quarter, our net loss was $8 7 million or 17 cents per diluted share compared to net loss of $9 $9 million or <unk> 20 per diluted share in the prior year period.

On an adjusted basis third quarter net loss was $7 3 million or 14 cents per diluted share.

In the prior year period, adjusted net loss was $7 $8 million or 16 cents per diluted share.

Free cash flow for the third quarter was $14 million similar to the amount generated in the priority year period, and an improvement compared to a cash use of $5 $7 million in Q2 of this year.

The absence of a bond interest payment.

Certain seasonally strong working capital attributes and timing of capital spend all contributed to the strong cash flow generation in the quarter.

Using our free cash flow generated along with cash we repaid $17 million on our revolver during the third quarter of 2022, reducing the balance by approximately 60%.

Cash and cash equivalents was $3 $3 million at the end of the quarter and long term debt, including the current portion and finance lease liabilities was $492 $3 million.

The overall interest rate on our debt. This past quarter was five 4% as approximately 90% was fixed at the end of the quarter.

Our $215 million credit facility provides us with significant ongoing liquidity.

At the end of the quarter, there were only $10 million in revolver borrowings being used at $9 $6 million of outstanding letters of credit.

Other than that our entire credit facility remains available to us and we do not anticipate any changes to this in the foreseeable future.

As of October 2nd our senior secured net debt leverage ratio stood at 335 times compared to its limit when applicable of 575 times.

We continue to forecast that net capital expenditures for 2022 will be approximately $40 million, which includes approximately $20 million for restaurant maintenance and new restaurant equipment purchases.

The remainder primarily relates to Newbury restaurants, we've opened or expect to open this year as well as the completion of remodels across both of our brands.

Our total Tony 22 capital spend has been first half weighted with Q3 down to $7 million.

Despite our overall fourth quarter capital spend to be marginally higher than Q3's.

As we enter 2023, we continue to evaluate the recently announced remodeling subsidies made available from our franchise or and will finalize our plans over the next several months focusing on projects that we believe can achieve a return in the high teens.

We're all we expect to leverage our franchisor subsidies next year without a significant change to our overall spending level.

Following our reinvestment in the business our remaining capital priorities for the foreseeable future include making debt amortization payments of approximately $2 million per quarter, reducing our revolver balance and building on our cash balances until we obtain a clearer view of the economic environment.

This concludes our prepared remarks, we'd like to thank you again for your interest in carols and we are now happy to answer any questions that you may have.

<unk>. Please open the line for questions.

Okay.

Thank you.

Ladies and gentlemen at this time, we will 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.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Okay.

Our first question comes from the line of Jake Bartlett from <unk> Securities. Please go ahead.

Great and thanks for taking the question.

My first was on the new marketing campaign that bernstein's rolled out the new rule.

The tagline.

Wondering if.

If you could comment on what it's done to the business, whether it's proving too to drive some frequency of some some awareness and interest in the brand and in that context. If you could share how same store sales have started the fourth quarter I think it's something do you typically have done in the past so that would be helpful. As we gauge what.

You know what impact it might be having.

Hi, Jacob pallet, thanks for the question.

You've seen obviously the the campaign go live in early October we've been pleased with the with its reception both in the restaurants and with customers.

It's resonated very well without without team members.

As well as with customers and I think importantly, it's created an engagement opportunity between the two and.

And so you know as I've been out in the field.

Visiting restaurants.

There's a lot of enthusiasm around it and it's it's created an opportunity.

The two to engage them and I think in general times, the the new positioning without teammates.

<unk> has resonated well.

And.

We said in our prepared remarks, we were happy with the momentum that we.

We have.

We had in Q3 and that's continued as we've come out out of Q3 into Q4.

Got it okay.

My impression or my.

What I believe is supposed to be happening is it's kind of more of a brand relaunch in early 'twenty. Three so that so you know October we kind of got the first stage is that the right way to think about it that there's.

There's kind of more change coming on on the marketing side in early 'twenty three and if that's the case, maybe just if you could give us what what kind of flavor that might look like whether it's menu innovation I'm just trying to I'm trying to think about what what might be coming down the pike just really in broad terms.

I think.

The important thing to note about refueled in flight is that it's a long term plan, you're starting to see the the early components of it now and certainly one of those is the new the new campaign and the new positioning that's now alive.

But the overall program has several elements that will build over time and as it relates to the marketing I do think as we.

We continue through the next months. The next few months it will continue to build.

And and there'll be elements of that that will be consumer facing other elements that.

Our internally facing them for example, we will have.

Rallies about restaurant managers.

In Q1, which is something that we havent done for a while which will I think really energize.

The restaurants are the restaurants and our restaurant leaders.

<unk> the momentum the brand is building.

Okay, and then last question and then I'll jump back in the queue, but.

It's around.

Inflation expectations, you know both on our labor and food costs.

We've heard from some others seem like expectation for.

Significant labor inflation into 'twenty, three so one of them I'm seeing a deceleration, which was nice but moving in the right direction, but any any broad perspective of what you expect in 'twenty three for labor inflation and then if you could.

No help on the food cost side, we're seeing you know beef I think you know if you could just kind of tell us what your expectations in the fourth quarter I mean on the spot markets are down year over year chicken breast or places are down really significantly year over year. So you know if you could help us on expectations for the fourth quarter and any thoughts into 'twenty three on on.

On commodity costs as well it would be helpful.

Sure.

Take that one Jack.

So on on labor.

Expect.

Yeah.

Labor cost inflation has been coming down every quarter. This year it was in.

It was in the low.

<unk>.

Mid teens in the first half of the year.

It came down to the high single digits in the third quarter.

And we're expecting that to be sort of a mid to high single digits for labor wage rates by the way because there are some savings we have on efficiencies, but in terms of the inflation question that you asked we expect that.

That will continue to come down and we still expect for next year that.

Labor inflation will be north of sort of the historical.

Pre COVID-19 too.

2% to 3% type level that we were living with so.

That's where we are on labor in terms of average average hourly wage rates.

I think to your point.

There's.

Just to start with the.

Our inflation in Q3 under our commodity basket was about <unk>.

15%.

You know low to mid teens type level.

And.

Beef, which is about 20% of our basket was actually only up 1% where are we where we saw increases.

You look at another the next sort of 35 points of our basket. They they were up like 20%, 20%, 30% in the third quarter. So a lot of pressure on things like you know.

Potatoes chicken for the chicken Nuggets bonds.

Tomatoes produce oh that sort of thing they were up pretty significantly in the third quarter and many of those we see continuing beef.

Beef is definitely.

Coming down a bit it's sort of.

Its down like 6% so far this quarter from the last quarter number of 271, so it's coming down.

For the foreseeable future, we expect an opportunity now for at least for the next quarter I think.

The important thing for next year.

Is that.

We do we do think for the overall year.

Commodity inflation will moderate but.

That's not going to happen until the back half of the year, we still are food co op still believes that.

There's going to be sort of low teens.

Type inflation, even to the first half of next year. So.

Not it's not it's still elevated it hasn't really come down.

Two pre COVID-19 type levels.

That's so we don't think it's going to be sort of a lights on lights off you know on January one next year that commodity costs are going to.

All of a sudden be more be more in line, if theyre still going be elevated for a good chunk of next year.

Great. Thank you so much.

Okay.

Thank you.

Our next question comes from the line of Jeremy Hamblin from Craig Hallum Group.

Please go ahead.

Oh, thanks, and congrats on some impressive execution in a pretty tough environment.

So I just wanted to make sure I understand where menu pricing stands.

For Q4, and then in terms of thinking about.

You know the pilot testing that you have going on.

You know the new campaign, how you're thinking about carrying menu pricing into.

Into 2023.

You know given that you know as you said that you expect low teens inflation into at least the first half of next year.

Does that mean, you're going to likely sustain that kind of high single digit menu pricing or you know how should we be thinking about that.

Yeah.

Thanks, Jeremy.

So in general terms.

As it relates to pricing.

We think about pricing is that we were very closely monitoring differ.

Different data points.

Obviously, we're tracking inflation, obviously, we're looking at what competitors are doing in local market.

And we're looking at.

No other dynamics.

At a local level.

I don't think so.

I understand in the way that we've.

We've evolved our pricing and we will continue to do so is that we've we're getting more and more refined in terms of our ability to execute pricing at a local market level and so that that's certainly something that we'll continue to do as we go into 2023.

You know as I mentioned we.

We.

We took a 2.8% price increase in September in.

In the coming year.

And months, we will continue to look at whats happening with the factors that I just mentioned and we will.

We will look to whether there's a need for additional pricing as we head into head to.

Head into later in the quarter and into Q1.

It's like it's largely driven by what we consider to be those those dynamics.

That I mentioned in terms of pilot testing the question around pilot testing.

We're doing several pilots.

Again that are much more local in nature, given the breadth of all of the markets that we operate in.

We think it makes sense to tailor, our pricing our value and our marketing to the local market dynamics.

And we're working with.

Both the Burger King and popeye's teams to do that and as we do that.

We are we are saying well you know what I categorized as promising results.

That's something that I think we'll continue to do yes going into going into 2023.

Okay Jeremy.

Yeah go ahead Tony.

It's just going to say I, just wanted to make sure that.

The pricing.

The pricing the menu pricing we've taken so.

So far this year I mean in the third quarter at a 10% to the to the average check but you notice the average check was up 11%. So the reason for that difference is that.

Our promos and discounts have come down significantly I E. The difference between gross sales and net sales has come down.

500 basis points or so.

Versus last year.

And.

That's due to the effort from our franchise or in terms of sort of revaluing, our sort of gross profit or are you know what the discount we offer customers.

Sort of trimming that back a bit.

Coupons, all because there is still an important part of our business, but still the promos and discounts.

Between the gross and the net sales have come down.

You know in a pretty meaningful way, which caused that extra sort of a 100 basis points.

You know increase in average check versus the menu price increases we've taken over the last 12 months the.

The other point I want to make is that those are.

That is a cumulative the 10% was accumulative over the last 12 months of price increases we took on the menu and in Q4, we expect sort of a high single digit.

Rollover of those price increases to continue and that should continue into next year as well you know we don't really see you know we have until basically March to evaluate you know.

Other price increases we may take because thats sort of a fairly large price increase we took this year rolls off so.

You know I think we have we have good sort of a timeline to be able to.

Recalibrate, what we you know what kind of pricing versus wanting to take next year based on the factors follow you.

Mentioned, but the point is that a ton of those are carrying into at least with first quarter of next year.

The ones we've done in the last 12 months.

Thanks, that's helpful Tony.

You guys are lapping some pretty tough compares actually here in Q4 and I. Just you know I think that's when you really got more aggressive on menu pricing.

Last year, but in terms of thinking about you know it sounds like a promising start here in Q4.

Just wanted to see if we could get a little more clarity on you know whether or not you think that momentum continues.

You know you guys have also been.

Solidly outperforming corporate.

Performance for the system in the U S.

And so I just wanted to see if you could get a sense on on how.

Ah you're expecting performance.

Carrying kind of that high single digit.

You know menu pricing, if you've seen improvement at all on traffic.

So.

Your observations are correct on all fronts.

You know I think we saw continued momentum into October .

As Paulo alluded to earlier.

But we do have very challenging comps.

And mostly on traffic in.

November and December because you know we.

We believe that sort of the reemergence of omicron or whatever it's called.

Last year.

Cause sort of a reversion to our drive through a little bit. So in November December . So we do have some tough traffic comps.

Coming up.

But we're still cautiously optimistic.

Know that we should see some some modest.

Modest momentum ahead of where we were in and in.

In Q3, but you know and we also have the wind at our backs on everything that.

VK is doing.

On the reclaim the flame effort on marketing in.

Store improve store.

Our improvement in that sort of thing that theyre working on along with us.

Many of those topics so.

Feel cautiously optimistic but not <unk>.

But I still think your point is important that November December can be tough comps.

And just to add that.

Just a monocline and related to that is that we're also.

As we have.

Come out of it yet.

The prior year and particularly on the on our labor challenges.

We continue to focus on executing operations.

At a high level that that will help.

We think our traffic and sales as well.

Got it that's helpful and so.

Last one here for me is is a little bit forward looking in terms of you know thinking about next year right. You guys are still you know.

Seen some pretty difficult headwinds right. It sounds like you know, they're not going to get tons of relief on commodity cost pressures.

You know labor is improving but you know you're still looking at hourly wages up you know at least mid single digits, maybe close to high single digits.

You know in terms of thinking about restaurant level margins.

And into next year.

Outside of kind of getting that maybe explosive growth.

And same store sales that would be.

Or better.

You know you guys have done a remarkable job here actually to just have you know restaurant level margins up 10 basis points here in Q3, but in terms of thinking about the opportunity for restaurant level margins to expand.

Meaningfully next year, you know what type of opportunity do you see in that you know again outside of.

You know comps really accelerating because that that new campaign works I mean.

Let me ask it a different way if you were to see comps up let's say four 5% you know how.

How much realistically could you drive restaurant level margins on comps at that level for next year.

I think if you if you look at the momentum we began to build.

In Q3, I do think we see that continuing and if you if you pull together the various elements that we've been discussing.

We think that momentum will continue and benefit our EBITDA margins next year.

About the top line the brand initiatives.

Have begun and will continue into into 2023 and <unk>.

I think over time accelerate and so thats going to help the top line and traffic.

Combined with that like as I mentioned, we're executing.

We continue to improve our operating and execution at the restaurant level that helps to drive them.

Our customer satisfaction stayed as the.

Key drivers of traffic at the restaurant level.

And I'll I'll point back to.

My prepared remarks, where we had a record month in our customer satisfaction scores. So that you know that's a focus that we will continue to have.

That we think will help drive the.

The top line.

Then on as it relates to cost.

Inflation is not going away anytime soon but it has moderated as well as both as it relates to commodities.

And labor.

And again the work we're doing around operations will help ensure that we maintain disciplined cost control at the restaurant level.

And so when you combine those things.

We think heading into 2023, we.

We will see some benefit from.

EBITDA and EBITDA margins.

I think Jeremy the point is it's not going to be you know as I said earlier, it's not going to be light, so I might as well off on Gen. One it's going to.

I think there are a lot of headwinds in the first half inflation seem to be the biggest one on the on the cost side. So I don't think we're going to see.

You know I think well see some improvement next year on.

On those metrics that you took on labor cost of sales.

Labor as a percent of revenue in.

Cognizant as a percent of revenue, but I don't think it's going to be.

Unless we have a complete.

Grand Slam home run on the traffic side, it's going to be pretty mild improvement.

Overtime and gradual it's not just going to take some time, but it's we're on that part of the we're on that side of the pendulum. So.

That's what we're kind of waiting to see and I think to your point the Q2 to Q3 kind of sequential stuff.

<unk> to us that we're on a good track on those things.

Yeah, no doubt its it looks like there maybe some expectations for like.

250 basis points.

<unk> and restaurant level margins.

Seems like it might be a challenge given you know the labor and commodity.

Headwinds still but no no question that you're you're doing a nice job on improving the operations and I'm starting to see once we get some relief there that there's some pretty good opportunity for improvement.

That's it for me.

Thanks, guys. So much for taking all those questions.

Okay sure. Thank you.

Thank you our next.

Question comes from the line of Mehdi <unk> from Bank of America. Please go ahead.

Hi, Thanks for taking my questions. So first can you just touch on how sales and traffic trended throughout the quarter.

Okay.

Sure It was.

I mean for US. It was it was slightly September September was probably the best of the three months.

But it was kind of flat and.

August .

On July one.

During the quarter.

But definitely September was where are we with the strongest of the three months.

Got it and can I just confirm that your leverage target is still four times and if so any sense for when you may be able to get there.

It is our it is continues to be our total leverage cover it.

Target.

You know I think you know.

Mathematically I don't know when this will happen, but I think it will happen.

On a long term basis that.

We get our EBITDA back to 100 plus million dollars and our debt long term debt to sort of 400 ish.

It's not going to happen next year, but I think it could happen over several years and it really depends on how some of these top line drivers play out.

How fast it goes but it's definitely still the board's objective to get to that number but you know clearly the inflation headwinds that we saw this year kind of set us back a few years on that.

On that score.

But it's still it's still within our grasp and we have a very.

We have a very long dated cap structure.

So.

Luckily we're in a position, where we can just sort of be patient for that to occur.

Over the long term.

Got it that's all for me thank you.

Okay.

Thank you.

Our next question comes from the line of Joseph <unk> from Cantor Fitzgerald. Please go ahead.

Good morning, Thanks for the question given your.

<unk> footprint is 85% remodeled and the new BK.

BK assistance program could you tell us what it is you're looking to do with the balance.

That 15% and what other remodeling as you need that.

Franchise or is assisting with.

Okay.

Hi, Joseph.

So yes as you correctly stated.

85% of our portfolio.

Remodeled in the last 10 years, though where we are in a good position to be selective and disciplined in terms of.

How we approach remodeling.

We're continuing to we continuously work on our plans and ensuring that we're spending our capital.

We have the best returns.

We will continue to do that in the coming months together with the with the Burger King team in determining the projects that will make sense for us in 2023 and.

And we'll be working within.

Within carols.

Capital plans and capacity for 2023.

And combine that with the funds and subsidies that will be made.

Being made available by the Burger King plant.

Yes.

We will.

Finalized our 2023 capital plan.

A structure that will make sense for catalyst that.

Obviously, working together with the Burger King team.

To ensure that we're aligned.

With the with the plan.

Okay. Thank you.

But would that be to target the balance of the 15% or is there anything that the 85% that you need to go back on because 10 years as you know.

Obviously 10 years as an average so yeah sure shorter but summer probably long in the tooth is that what you would look to target.

The way that we look at it so we built earlier in the year.

We did an extensive.

A review of our entire portfolio.

And we prioritized based on returns the projects that we think will generate generate the highest returns.

Within our portfolio and that's the way that we're looking at it and that was regardless of how long you know.

Just looking at the best opportunities on our whole portfolio, that's right, even if they didnt, even if they've been remodeled six years ago right. Some opportunity that we can really move the needle.

Yes.

So al approaches is that we've categorized our portfolio based on on the highest returns for the capital we deploy.

And that and that that's how we that is how we will.

<unk> prioritized that project. That's a project we did together with the Burger King brand name. So we are aligned in terms of which projects to generate the highest returns.

Okay, great. Thank you good luck.

Thank you.

Thank you <unk>.

Question is from the line of Jake Bartlett from <unk> Securities.

Please go ahead.

Great. Thanks for taking this follow up question.

I actually wanted to just build on that last question around about remodels and investing into the brand.

I think with the message that you're doing.

You are saying is that the 2023 capex should be similar to the 40 million that youre expecting in 'twenty. Two so just want to make sure I heard that right and I'm just trying to understand.

What that means I know, you're not kind of giving us how many remodels you expect but it doesn't sound like very many if any if the overall spending is the same and then I also think about that the refresh program.

If you do all your stores when get somewhere in the range of call. It 16 $17 million of that would cost. So so if you could just give us any more.

A better understanding of.

Kind of how you're keeping the capex flat with what looks like some.

Investments in co investments into.

Into the system in 'twenty three.

So so yeah, yeah, yeah, you're right in saying that we were looking at at similar levels.

2023, as we have in 'twenty in 2022 from a from a planning standpoint.

As it relates to the refresh program. It is important to note that we do.

Diligently maintain our restaurants on an ongoing basis, so that that's something that that that isn't new to Carol So we continually.

To ensure that our restaurants.

From a repairs and maintenance standpoint.

Or at the level that they need today, and that's not going to change in that.

We'll be working with the Burger King plan in terms of the refresh program and making sure that we're utilizing any any available funds as it relates to that.

Program, and that's something that we're working with them actively at the moment.

And then just to go back to.

The refresh.

Well within the total capital plan that we're looking at.

We will.

Like as I mentioned prioritize the projects that we think will have.

The highest returns.

In the meantime.

And and.

With those projects take advantage of any subsidies that are available out from Burger King.

Okay.

Yeah, I just wanted to I just wanted to be make sure.

In terms of the restaurant refresh technology that they are willing to.

Subsidize effectively.

That really doesn't require any different spending pattern than we've had in the past because we're just getting credit for repairs and maintenance work, we're doing in the stores and that sort of <unk> to what we can.

Well, we can take advantage of from them. So that doesn't change the $40 million at all so we're within that $40 million bucket on the repairs and maintenance side as you know as I said on the calls.

$20 million of 40, as sort of repairs and maintenance and restaurant equipment.

So that doesn't we still get it.

We still hope, we will be able to take advantage of the.

The one for one match on that spending.

And then I just want to make sure.

We're still being disciplined on.

Our remodeling.

Hurdle rates and obviously, if we take subsidies from the.

The franchise or it results in higher royalties for that restaurant for the term of the franchise agreement. So it's not free money.

So we're looking at it.

On a hurdle rate post those extra costs in.

Taking into account how much they're subsidizing versus the higher royalty rate that theyre charging so.

It's just it's something we're working with them to.

Two we want to maximize what we do I think having them out there is going to be able to increase the number of projects. We can do for the same dollar amount.

And still get a good high teens type of return on those investments even after the higher royalty rate on those restaurants, and that's an important point that the programs will allow us to do more with the same net spend on outside.

Great Great. That's helpful and then another.

My last question is on portfolio management, and what are the effects I think that that's that's the plan from Burger King corporate is it's likely going to be some turnover within the franchise base the franchisees, who don't want to make these investments.

You might be looking to sell so in.

In years past I wouldn't view this as an opportunity for carols because of your your your history as a successful consolidator of the system. It doesn't sound like Youre, certainly not yet in a position now, but I'm wondering whether there is this opportunity to kind of optimize your portfolio, whether that's selling stores that maybe are a little.

Far field noticed sufficient from a G&A perspective, or something like that maybe there is no opportunity just to optimize the portfolio you have and then also youre not.

And in a position now to kind of aggressively grow the popeye's brand, which was kind of one reason for getting involved in the brand and you haven't you added stores in a number of years. So is there any thought to selling that brand and maybe just kind of helping to optimize the company around just focusing on Burger King.

So in terms of how we're thinking about that.

As we've said in the near term and our focus is is growing growing to EBITDAR of the existing portfolio, reducing debt and as we mentioned we continue to have a target of four times leverage and that.

That will be something that we stay focused on and we will.

I'm confident we'll make progress on.

Having said that.

We we will look at any opportunistic opportunities its not something that we're actively working on today, but that is that's something that we will.

Always look at any opportunities that come that come by.

That makes sense for us.

And Opportunistically.

What would make sense for us to pursue that's something clearly that we would look at.

In terms of portfolio management. This is something that we actively do so yeah, we look at.

Very carefully.

<unk> of that pool.

Our portfolio across geographies.

Across our performance.

Levels and we are consistently looking at.

Restaurants, we need to either.

<unk> or potentially.

Potentially close if that makes sense.

So that that that is something that we that we do and we will continue to do.

And as you know again as opportunities come by in markets that we already operate where there's a team in place that's operating at a high level.

We'll take a look at any opportunities that come by as it relates to the Popeye's brand. We've we've been very focused on the popeye's brand and improving its performance and we have we are having success with that we have a new leader in place that's always seeing that portfolio.

And a strong renewed energy.

And improved execution in operations on that brand.

And we're seeing we're seeing success.

That's our focus right now is to is to improve.

Improve the performance of the existing restaurants, we have and we're pleased with the progress we're making there.

Great. Thanks, a lot I appreciate it.

Thank you ladies.

Ladies and gentlemen, we have reached the end of the question and answer session.

Now I would like to turn the conference silver.

Paulo, <unk>, President and CEO for closing comments.

Well. Thank you again for joining us this morning.

As always your interest in Carol's. We appreciate your time and we look forward to speaking with you next quarter.

Thank you.

The conference of <unk> restaurant Group has now concluded. Thank you for your participation you may now disconnect your lines.

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