Q4 2022 Carrols Restaurant Group Inc Earnings Call
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Speaker 1: Ladies and Gentlemen, thank you for patiently holding. The conference is expected to start in the next two minutes. Please continue to hold.
Speaker 1: Group Inc.'s fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode.
Speaker 1: Following the presentation, we will conduct a question and answer session. Instructions on how to ask a question will be given at that time.
Speaker 1: I would like to remind everyone that this conference call is being recorded today, Tuesday, February 28, 2023 at 8.30 am Eastern Time and will be available for replay.
Speaker 1: I will now turn the conference over to Jeremy Watchers, Carol's Senior Director of Finance. Please go ahead.
Speaker 2: Thank you, operator, and good morning, everyone. I know you should have access to our earnings announcements released earlier today and our earnings presentation that are both available on our website at www.carls.com under the investor relations section. Before we begin our remarks,
Speaker 2: 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 in the future direction of revenues, input costs, 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. We also refer you to our filings with SEC for more details, 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.
Speaker 2: Hala Penna. Hala will be deeply missed, but his strategic vision for carols remains ingrained in all of us and will continue to shape how we run the business going forward.
Speaker 2: Turning to our results, we're pleased with our momentum during the fourth quarter of 2022.
Speaker 2: Restaurant sales grew 7% representing our strongest quarterly growth of the year driven by sales of full margin products reduced discounting and menu price increases Adjusted EBITDA improved over 80% to 25.4 million dollars over the same period last year driven by sales leverage on both cost of good sold and labor Furthermore, we generated $14.5 million in pre cash flow
Speaker 2: sequential and year-to-year margin improvement driven by increased flow through on higher average check along with moderation and inflation and greater operating efficiency.
Speaker 2: We increased hours of operations by approximately 3% of our Burger King restaurants and 4% of our Popeyes restaurants relative to the prior year period, capturing incremental revenue, particularly in our shoulder periods. The labor environment continues to improve with team member turnover moderating and application volume above pre-COVID levels. We continue to look to strategically add operating hours.
Speaker 2: especially in the late night date part where incremental sales volumes warranted. We believe that labor as a percentage of sales will continue to moderate over the course of this year. Our guest satisfaction scores in Q4 improved approximately 25% of the same period last year at our Burger King restaurants and greater than 10% at our Popeye's restaurants. In fact, we achieved new records.
Speaker 2: during the fourth quarter and intend to keep raising the bar going forward. As we start the new year, our managers and team members were remained focused on operational consistency in our restaurants to further driving improvements. This is a priority as we believe the guest experience is the key driver of repeat visits and incremental traffic growth.
Speaker 2: Lastly, our team members were able to more effectively manage food spoilaging waste, allowing us to partially offset some of the elevated commodity inflation we continue to see. Turning now to our growth drivers, let me begin by discussing pricing and value. Our Burger King restaurants have taken price increases over approximately 9.6% over the past year. The similar increases implemented at our Popeye's restaurants.
Speaker 2: That said, we are becoming much more geographically refined with our 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 be sure we meet our customer's desire for affordable value.
Speaker 2: Reduced discounting practices have contributed to our revenue growth over the past several quarters at our burking restaurants, and this trend is expected to continue in the first half of 2023. As we look to the back half of 2023, we expect that this contributor to capital sales growth will likely dissipate as will our ability to raise menu prices at the levels we implemented in 2022. We believe, however, that our efforts on strategic pricing and discounting initiatives that are currently underway.
Speaker 2: should continue to be long-term contributors to comparable restaurant sales growth and profitability. In terms of value, we continue to work to ensure that our actions are designed around the unique needs of our local markets, including the use of a disciplined approach, that seeks to carefully balance sales, traffic, and margins in our restaurants. For example, in the fourth quarter, we increase mixed match pricing from $6 to $7 and from $10 to $12 in 20% of our Burger King restaurants. We have additional local value opportunities currently being rolled out that we look forward to discussing on future calls. Finally, I want to touch on Burger King's Reclame the Flame initiative. We are encouraged by what we've seen thus far on the marketing side.
Speaker 2: and we are optimistic about the impact it can have on our business. More specifically, Burger King launched the U Rule Tag Light at October , and we have seen great reception in our restaurants, both with our customers, as well as with our employees. As part of that campaign, we've seen the Wapper Wapper jingle go viral, helping keep Burger King top of mind with customers of all ages, but specifically with younger generations. While the reclaimed the Flane plan is still at its early stages,
Speaker 2: We're excited to see the impact this campaign other elements of the plan will have on Burger King's brand equity and our traffic trends particularly in the back half of 2023.
Speaker 2: On the plan's reinvestment opportunities, we intend to keep our 2023 capital expenditure spend at $40 million, which we believe is a prudent level of spend in the current environment. Nevertheless, we plan to increase the number of remodel projects we undertake this year as a result of the financial subsidies we expect to receive from our franchise ore. We claim the flame also allows us to proactively upgrade our restaurant digital technology at many of our stores at no cost to us.
Speaker 2: as long as we continue our normal restaurant maintenance spend cadence. Before I turn the call over to Greta, I'd like to touch on some of our thoughts about the upcoming year. First, we are optimistic about the momentum we have seen and the positive impact we claim the flame can have on our traffic as we move through the year. We believe this can provide an offset to expected average check normalization in the second half. We are optimistic about the momentum we have seen and the positive impact we have seen and the positive impact we claim the flame can have on our traffic as we move through the year.
Speaker 2: Second, we are expecting to see continued moderation of both commodity and labor inflation over the course of the year relative to the elevated levels in 2022. Finally, we have a number of initiatives underway on controllable operational levers that we expect will have a positive impact on both growth, margins, and efficiency. With that, I will now pass the call over to our controller and assistant treasurer, Greta Miles.
Speaker 3: fora more detailed discussion of our financial resultsthank you Tony, and good morning everyy onerestaurant sales in the fourth quarter increased 7% to $445.1 million, compared to $416.1 million in the fourth quarter of 2020. onefor the full year, carlls generated one point 7- three billion dollars in total revenue, which was an increase of four point 7%.
Speaker 3: For the quarter, comparable restaurant sales at our Burger King restaurants increased 6.2 percent, comprised of a 13.3 percent increase in average checks, which was partially offset by a 6.2 percent decline in traffic. Our average check in the quarter benefited from lower promotional discounting, as well as the impact of pricing actions we took during the year. Comparable restaurant sales at our Popeyes restaurant increased 9.2 percent, comprised of a 6.4 percent increase in average checks and a 2.2 percent increase in average checks.
Speaker 3: potato, shortening, and bakery cost during the quarter relative to last year.
Speaker 3: Beef averaged $2.54 per pound during the quarter, a 6% decrease from the same period last year. Overall, commodity inflation has moderated from the levels we saw earlier in 2022, but still remains elevated from a historical perspective. From where we stand today.
Speaker 3: We expect commodity inflation to be in the high single digit for the first half 2023. Restaurant labor expense decreased 130 basis points to 32.7% of restaurant sales with labor inflation offset by reduced labor hours and the impact of pricing actions in lower discount.
Speaker 3: Average hourly wage rates for our team members before overtime increased by 6.3% during the quarter compared to the prior year period, representing a continuation of the sequential moderation we have seen in labor inflation this year. As we look ahead, we expect wage inflation in the mid single digit in 2023 compared to the high single digit we saw last year. Other restaurant operating expense increased by about 20 basis points to 15.7% of sales.
Speaker 3: While we saw leverage from higher sales and many components of OPEC, insurance and repair maintenance expenses outpaced our restaurant sales increases. Restaurant rent expense decreased 30 basis points year over year as a percentage of sales compared to the prior year period, primarily from the impact of higher sales on fixed rental agreement. Adjusted restaurant level EBITDA totaled $46.9 million and increased of over 37% compared to last year.
Speaker 3: Sequentially from the third quarter to the fourth quarter of 2022, adjusted restaurant level EBITAM margins improve 200 basis points due to the improvements I just mentioned. General administrative expenses as the percentage of sales improves 30 basis points year over year as we saw leverage on higher sales compared to the prior year period.
Speaker 3: Excluding non-recurring costs as well as stack compensation expense, GNA as a percentage of revenue was 4.9%. We anticipate 2023 GNA expense, excluding stack compensation expense, and any non-recurring cost of approximately $22 million per quarter. Adjusted EBITDA was $25.4 million in the fourth quarter and represents the sequential improvement of over 43% compared to our third quarter's result, which given the impact of holidays in our fourth quarter would normally be a seasonally stronger quarter. For the fourth quarter, our net loss was $19.1 million or $38 cents per diluted share compared to...
Speaker 3: In that loss of $16.4 million or $33 cents per diluted share in the prior year period. On an adjusted basis, fourth quarter net loss was $2.5 million or $5 cents per diluted share compared to an adjusted net loss of $7.5 million or $15 cents per diluted share in the prior year period. Recash low for the fourth quarter was $14.5 million and improvement compared to $8.8 million in the same period last year. Improved year over your EBITDA as well as timing of capital spend from contributed to the strong cash generation in the quarter.
Speaker 3: In the fourth quarter of 2022, we used free cash flow generated along with cash to reduce our net debt balances by $14.4 million. Cash and cash equivalents was $18.4 million at the end of the quarter, and long-term debt, including the current portion and financial east liabilities, was $493 million. Our overall interest rate on our debt this past quarter was 5.6 percent, as approximately 90 percent of our debt was fixed at the end of the quarter. In the first quarter of 2023, we made our final free payment of the deferred bica obiscus.
Speaker 3: there were only $12.5 million in revolver borrowings being used in $9.6 million about standing letters of credit, leaving us with $211.2 million of total liquidity at the end of the year.
Speaker 3: As of January 1st, our senior secured net set leverage ratio stood at 2.63 times compared to its limit when applicable of 5.75 times. We continue to forecast that net capital expenditures for 2023 will be approximately $40 million, which includes approximately $20 million for restaurant maintenance, new restaurant equipment purchases, and corporate information systems. The remainder primarily relates to new Burger King restaurants we expect to open this year as well as restaurant remodel.
Speaker 3: We expect the first year returns on these activities to be in the mid to high teens after accounting for franchise or subsidies. Following our reinvestment in our businesses, our remaining capital priorities for the foreseeable future include making that amortization payment of approximately $2 million per quarter, reducing our revolver balance, and building on our cash balances. And with that, this concludes our prepared remarks. We'd like to thank you again for your interest in Carol, and we are now happy to answer any questions that you may have.
Speaker 3: In addition to Tony and myself, Joe Hoffman, our Chief Restaurant Officer, is also available during the Q&A session. Operator, please open the line for questions. We will now be conducting a question and answer session.
Speaker 1: If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
Speaker 1: You may press start 2 if you would like to remove your question from the cube. For 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. Our first question is from the line.
Speaker 4: here in your early 23 on the top lines.
Speaker 2: Sure, we, you know, in January and February so far, we've seen some very strong results, part of it's because we're laughing, especially in January , we've laughed some big storms last year, but in February , even when we haven't laughed storms, you know, we think we're going to, you know, come out at the high end of mid-sigual digit on comp growth.
Speaker 2: We, um, you know, in January and February so far, we've seen some very strong results, um, heart of it's because we're laughing, especially in January . We laughed some big storms last year, but in February , even when we haven't laughed storms, you know, we think we're going to, you know, come out at the high end of mid-sigil digit on comp growth, um, you know, in the first quarter. So...
Speaker 4: That's a continuation of momentum we saw in Q4 and really the same kind of factors on the average checker still in play, which is we're still getting the benefit of the price increases we took last year and we're getting the benefit of lower discounting as well. So those things, that's the momentum we're seeing. Great, great, I appreciate it. And there's a number of sales drivers that you have. I'm hoping that you can maybe give some little more detail on each. One is hours of operation. So you mentioned kind of looking at late night, maybe kind of bringing some of that back. You got anything 3% higher hours for Burger King in the fourth quarter. What kind of opportunity is there in 23 versus the average in 22 just on the hours expansion? The second is on discounting level discounting is down significantly. Maybe if you could tell us what it was, typically that comes out in the filings, but you could help us out now just in terms of promotions from discounting in the fourth quarter. And whether you think that absolute level, you know, home. And then I think that the third driver is the reclaimed the flame and the you roll.
Speaker 2: I would say the franchise E profitability focus of BKC. So I think that which is part of reclaim the flame. So I think that's kind of the first part that we're definitely getting benefit from. In terms of how long and last, I mean, we will see this benefit.
Speaker 2: on discounting at least until we start lapping it in the late third quarter, fourth quarter of this coming year. But I think until then we're going to see that benefit continue in terms of our average check increase. So that was one thing on the Reclaim the Flame. I mean, the thing that excites me most about Reclaim the Flame is, you know, the process and the sequencing of events that they're doing, they're holding rallies now with employees with managers of our stores and our managers are participating to a high degree. You know, the increase in advertising, which they talked about in Q4, that's really going to be much more present in Q2 and Q3. So I think that's going to help with traffic in those periods. So, you know, I think plus the, you know, the reinvestment part of Reclaim the Flame, which we're taking full advantage of.
Speaker 5: So we're going to pay special attention to those last few hours of the day and where it's strong. We will continue to extend our hours. We've seen a big momentum in the ability to go to late night hours. So I think.
Speaker 5: I think there's plenty of opportunity out there and we'll remain focused on being able to be a late night player. Great. I really appreciate it. Thanks, Jay. Thank you. Our next question is from the line of Joshua Along, which Stephen think. Please go ahead. Great. Thank you for taking the question first. My condolences to you and the team for your loss. Our thoughts continue to be with you. I'd appreciate the time to be able to talk about the four key results today.
Speaker 5: When we think about just a lot of the momentum that you talked about here, in particular, you noted the opportunity for geographic pricing and how that had worked out favorably, and there was some excitement there. Where are you at in the terms of the opportunity to see the full expression of that? Just any sort of context there would be helpful, and then I had to follow up. But I think we've seen a lot of it. We're looking, the team is working on now.
Speaker 2: really pushing hard on that for an anticipated March price increase. We want to do it strategically and make sure we do it with a minimal impact on traffic. So I think we'll be able to talk about those things in the future, but it's definitely much more scientific and pinpointed than it's been the past. We've gotten, we've really sharpened up our skills on pricing in this environment because that really wasn't the thing before, you know, it was a pretty routine thing before last year. So I just think we continue to make strides and our franchise or is also investing a lot in that area too. So we're looking forward to getting their insights. So we think we have ways to go in terms of
Speaker 5: you know, doing that without doing it strategically so we don't, you know, we don't hurt traffic with what we do it. So, don't you want to add anything to that? No, I think you're right. I think I would just add that, you know, as far as geographically, we need to look at each one of our areas and make sure that the pricing makes sense for that particular location. Thank you. That's helpful. When we think about the labor environment, you mentioned a couple times that your kind of human capital focus and your team structure wasn't a good place. You guys a little bit more context there in terms of either just pure staffing levels retention turnover. However, you think about kind of contextualizing.
Speaker 5: the improving labor environments. Yeah, this is Joe again. Our applicant flow remains strong and we're able to hire where needed. I think the labor market as a whole is seemingly rationalizing itself. But the biggest benefit to us has been the reduced turnover, which I think helps us become more efficient. Once we can begin to retain the employee long enough to continue to do cross-training and then we find where their strengths are the better we can create for the guest experience. That makes sense. Thank you. And then last one for me when we think about the COGS.
Speaker 5: Outlook and the opportunity for moderating inflation over the course of the year. Can you remind us Particularly on the beef sourcing or where you source your beef it seems like there's some Pushes and pulls there in the overall environment which could lead to some Increases in price at whether it's on the exporting or You know side of the the table, but just curious if we could get a little recap in terms of how you go about your sourcing Thank you Sure our sourcing is through our food co-op and they they source it for the entire US birken system You know they're really two elements we we use internationally sourced beef You know to sort of
Speaker 2: depending on, you know, depending on pricing can be about a third, I'd say, of our beef. Those contracts, we have good visibility into for several quarters because we put the, you know, the RSI puts those contracts in place at a time. On the US part of the equation, it's more spot market. It's not really viable to hedge. So we are, you know, we are looking carefully at what's going on with the calling of the herd that has been talked about for several quarters. It's supposed, you know, it's taking place now. So that could reduce the, you know, supply right at the time when the demand goes up as we get into the summer months. So, you know, we think beef is one of the areas that could show an increase this year, but a pretty modest increase, you know, we think we think it'll be pretty much on par for the full year versus last year, maybe up a couple of percentage points, but obviously we use the amount of beef we use. That's a very important, you know, that's a big increase in cost. You know, I'd say the other, the other, you know, view on commodities right now is, is at least in the first half of the year.
Speaker 2: We still think that we're going to be in the high single digit kind of range. I mean, inflation for us in Q4 was at about 12% so low teens. And it was mid teens for the full year. So obviously moving in the right direction. And we think it's going to be, you know, come below kind of the 10% level in the first half of this year. So and then the outlook for the back half of the year is really is a bit harder to pin down. But you know, given the increase we've seen, we should see some relief on a lot of commodities in the back half of the year. That's helpful. Thank you. On the third of the sourced internationally, what regions that typically come from. It's mostly Australia and New Zealand.
Speaker 2: where they have a very, they're at a favorable place in terms of their supply demand because you know they went through they're calling like three years ago so they've built up the herd and obviously we have a stronger dollar so those things are creating an opportunity for good pricing on that piece of the equation but thank you for following up on that I should have mentioned that.
Speaker 2: Thank you. An expression is from the line of Mary Ressla with Bank of America. So first, you've been a generation that's very strong in the quarter. Do you expect this to continue and think it's possible that you could reach your 100 million annual U.D. target sooner than expected? You know, it's really, you know, the first half of this year we feel good about. Again, the back half is a little more difficult to predict. So I would view it as pretty unlikely that we'll hit that, you know, this year, but you know, we're looking maybe a couple of years.
Speaker 2: Beyond we could reach that it really depends on on the success of the traffic driving of forces from reclaim the flame and the investment they're making in the brand equity there. So I think it could. We're on a good we're on a good trajectory to get there, but you know this year would be that would be a happy stretch. Okay, and then is there any change in your openness to acquiring units from other operators that may be struggling or are you sort of fully focused on organic growth in the near term. That's from us not hitting some of our operational efficiency goals and our leveraging goals for cogs and labor. So.
Speaker 2: And then other operating expenses were working on a number of those as well to rationalize those and to improve the You know the compare to sales on those costs. So you know, I think until we get to four times leverage on a total debt basis I think we're we're going to stay focused on organic growth Got it. Thank you very much Thank you before we take the next question a reminder to all participants that you may press star one to ask a question. Our next question is from the line of Fred Whitman with Wolf Research please go ahead. Hey guys good morning. I was hoping that you could just give us a little bit of context.
Speaker 2: and what we've spoken to those folks about in our meetings with them. And then, you know, for our investors, it's going to be a huge positive, we think, you know, because we're going to obviously participate in that in a big way and that improvement. So I think the most important thing is they-
Speaker 2: they're just not talking, they're actually doing on these things. So I think the discounting was huge in 22 because they were clearly a high discounter during COVID and before. And the fact they've gotten that down, you know, 500 basis points and the fourth quarter is tremendous for our bottom line. So, and the fact that they've hit, you know, they've talked about targets that, you know, obviously our investors will be very happy. We'll be very happy when we have 175,000, you know, target they put out for us next year.
Speaker 2: And, you know, we're excited that their actions are aligned with ours because they've made that public commitment and the actions they're taking are to support that our ability to get to that number. So, whether it's them paying for, you know, the incremental marketing over the next couple of years to them, you know, helping us with remodels on subsidies basis to, you know, they're not going to do something to drive traffic that reverses some of the progress they've made because if they do that, that could...
Speaker 2: you know, for instance, they went back to, you know, they increased discounting that would obviously make them more challenging for us to, or for the system to hit that 175,000 per store. So we're very aligned on how we, you know, what the target is and what the good guys and the bad guys are hard to get to that target. So they know to stay away from the bad guys on that and to focus on the good guys. Make sense. And I guess just following up on the customer satisfaction metrics that you guys gave across the two brands, and I see them both positive, but also sort of a big disconnect between Burger King and Popeye's. I'm wondering when you look at that Popeye's number, what the biggest lagger it is, is it speed of service, is it something else, anything else that you guys sort of think could be corrected and maybe close that gap.
Speaker 2: I mean, the improvement was better for Burger King than for Popeyes. That's the number we talked about. But having said that, we are, you know, the team, the Popeyes team is working really hard to improve their customer satisfaction scores. They had some labor challenges that were probably more dramatic during, you know, post-COVID, you know, 21. So they're operating hours, are growing faster as you saw in the numbers that we gave in the script. So I don't know if there's anything else, but it's a huge focus for them to get.
Speaker 5: to get you know neck a neck with with harbourking numbers, yeah there's no doubt there's a real focus on that and I think that as we continue to drive it where we saw the most improvement was with accuracy so we'll continue to drive that as we move forward. Perfect thanks so much. Thanks, May. Thank you. Our next question is from the line of Joseph Farsielli.
Speaker 4: with the Cantophid Zell. Please go ahead. Good morning, two questions. Can you give us some guidance on the cadence of CatBax over the course of the year? And then my second question will be on the pricing. We could discuss the catabase. Sure. So the 40 million catabase is going to be...
Speaker 2: You know, back half weighted just because, you know, we're just gearing up on the other remodeling effort. I mean, obviously the maintenance piece of it is pretty constant throughout the year, but the growth piece of cat-backs, the remodeling piece of cat-backs will, you know, will increase as the year progresses. So it'll start out slow and then get some higher numbers in the back half of the year. So you know, back half of the year, but the growth piece of cat-back will, you know, will increase as the year progresses.
Speaker 4: And is that the gross or the net number because at least as it relates to Burger King, they do subsidize a portion. So that's a net number. Okay. How do we see that roll through your cash flow statement? Do you spend it and then get reimbursed a quarter later? How do we think of it from a cash flow perspective? I would say that that is not completely locked down yet, but you know, worst case scenario, it would be...
Speaker 4: you know, a month or so after the remodel is completed. But our goal is to make sure, our goal is to make sure we get all the subsidy money and you know, against the spend in 2023 to get to that $40 million net number. And it is a reimbursement not an offset to another fee or something. I guess maybe that's what I was trying to. Now they're reimbursements. Yeah, okay, okay. And then the next question, during your prepared remarks, I'm trying to go through my notes, you made a comment about, I think it was 20% of the burger kings. You're changing your pricing or doing less discounting. How do you do that geographically without having the customer pick up that, you know, if I go, if I go to the one on the east side of town versus the west side of town or vice versa, like how do you keep them from picking up on the east side of town? These price changes. I'm not sure the...
Speaker 6: Thank you for the time.
Speaker 7: Thanks.
Speaker 1: Thank you. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn the call back over to Mr. Tony Hal for closing remarks. Thank you again for joining us this morning and for your interest in carols. We appreciate your time and we look forward to speaking with you next quarter. Thank you. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker 8: itation.