Q2 2023 Carrols Restaurant Group Inc Earnings Call
Ladies and gentlemen.
Welcome to the catalyst the restaurant Group, Inc. Second quarter 'twenty to 'twenty three earnings conference call.
At this time.
Expenses 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 Thursday August 10, 23 at 830, a M eastern time.
And will be available for replay.
I will now turn the conference over to Brett Maas Catalyst controller. Please go ahead.
Okay.
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 by management may include forward looking statements or comments with respect to our strategies intentions or plans in the future direction of revenues and cut 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 details.
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.
Yes.
With that I will now turn the call over to our President and CEO Deborah Derby.
Thank you, Greg and good morning, everyone I'm delighted to be speaking with you. Following my first full quarter as Carroll, President and CEO and what a great quarter. It has been as you will soon hear my focus over the past few months has been threefold first spending time in our restaurants. This included store visits in various regions with our Chief restaurant Officer, Joe Hoffman and his steel.
Their ship team as well as with Carol's retired CEO , Dan Academia, so that I could benefit from their extensive <unk>, our experience and accelerate my own learning curve.
In addition, I had been training and working in our Burger King restaurants, which allowed me to personally interact with our customers and observe firsthand what we expect of our restaurant team members.
Second working with the senior leadership team to identify and prioritize key initiatives to drive our business in 2024 and beyond a couple of which I will elaborate on further later in our earnings call and finally, along with the rest of the Carol's team collaborating with our Burger King counterparts to ensure we are aligned on key strategic initiatives and a vision for the future.
I believe that our relationship with Burger King has never been stronger and I'm excited about where we can take this brand together.
Turning to our results in the second quarter, we had one of the best quarters in the company's 63 year history, as we achieve $485 $2 million of sales delivered adjusted EBITDA of $44 3 million generated free cash flow of $37 9 million and reduced our net leverage ratio of three and a half turn to three <unk>.
Six times as we continue to strengthen our balance sheet and pursue the organic growth opportunities we have across our portfolio.
The most significant accomplishments of the quarter is that our Burger King restaurants are well on their way to achieving the highest possible operate a rating under the chain wide evaluation system used by our franchise or this is a testament to our field management teams operating with an owner mentality and local market mindset. Despite the Carol system being more than three times bigger than the next.
Larger Burger King franchisee.
Wanted to thank our over 24000 Carol's employees for this accomplishment without there are standing work each and every day. These results would not have been possible.
In addition, during the quarter, we saw the dual benefit of driving demand through operational improvements, while also becoming more cost efficient on labor operationally, we improved our speed of service by 6% versus the same period last year more importantly, our customers are noting noticing this progress evidenced by an over 30% improvement in our guest satisfaction scores.
At our Burger King restaurants.
All in all we continue to believe that guest satisfaction is a key driver of repeat visits and incremental traffic growth.
On the efficiency front, we continue to see productivity improvements in labor with inflation decelerating to mid single digits, lower manager and hourly turnover rates approaching pre pandemic levels and enhanced operational efficiency from our team members. As a result, we were able to increase hours of operation by over 3%, while reducing labor hours by three.
0.5%. We're also encouraged by our recent performance of pop is where we have seen strong sales and traffic as well as improved margin performance, while increasing customer satisfaction. Looking ahead, we want to not only replicate but accelerate our progress while leveraging our size and scale to impact both our top and bottom lines one of our new initiatives isn't.
Enhanced labor management system, which will allow us to build upon the improvements we've already seen in labor productivity. This initiative will include an improved labor model formula as well as more sophisticated forecasting and scheduling capabilities.
Our efforts over the next several months will be focused on refining the labor model and testing it in our restaurants, we anticipate realizing the financial benefits of the project in 2024.
A second area of attention is around growing traffic and becoming even more customer obsessed.
In particular through the investments we have made in our Burger King restaurants, such as our customizable outdoor and indoor digital menu boards, we have an opportunity to leverage our size and scale to drive traffic through locally relevant offers that target distinct customer occasions, and complement the national marketing initiatives from our franchise or we are currently testing. These offers.
And over 10 markets and initial results have demonstrated that we can drive incremental traffic and increase the average check in day parts, where we see an opportunity for increased business. We will continue to test and leverage the learnings from these early pilots to develop a more robust local marketing strategy in 2024.
Before I turn the call over to Tony I'd like to touch on some of our thoughts for the remainder of the year.
First we continue to be optimistic about the improving traffic trends, we are seeing at our restaurants, we credit this to the combined impact of our work to enhance the guest experience and increased hours of operation in particular at our Burger King restaurants. We believe traffic has also benefited from the refreshes, we have made to our restaurants as well as the equipment upgrades, we're making.
Burger King's Royal reset initiative, and the incremental advertising investment under their reclaim the flame program.
Much of this spend is still coming in the quarters ahead, and we believe should continue to be a traffic driver.
Second going forward, we intend to be cautious on our incremental pricing actions as inflationary pressures continue to abate in the direction of the economy remains uncertain, we anticipate a year over year benefit of mid single digits on average check improvements by the end of 2023 relative to the low teens average check increase we saw in the second quarter.
This more conservative approach to menu pricing is expected to allow us to maintain our positive value gap relative to peers and continue providing customers with compelling value, while offsetting inflation and protecting our margin structure.
Finally, our top priority remains fortifying our balance sheet, reducing our net debt and staying the course on organic growth that said given the improved results. We are seeing and our focus on organic growth, we will deploy some additional capital to accelerate certain high rois remodel projects that were previously slated to begin in 2024.
As a result, and with the benefit of improved clarity on our balance of the year spending and project cadence. We now expect capital expenditures for 2023 to be between 45 and $50 million a slight increase from our earlier plan.
This level of capital spending allows us to further avail ourselves of contributions from Burger King and should enhance our portfolio through high return projects, while still generating substantial free cash flow for the year.
In closing it was an outstanding quarter results wise and a pleasure working with the talented corporate field and restaurant operations team of Carroll's.
Experienced and learned during the first few months of my tenure has only reinforced my initial impressions and reasons for joining carols, which is that it is a great company with immense potential I look forward to building upon the tremendous momentum created in the first half of the year.
With that I will now pass the call over to our Chief Financial Officer, and Treasurer, Tony Hull for a more detailed discussion of our financial results.
Thank you Deb and good morning, everyone.
Our restaurant sales in the second quarter increased nine 8% to $485 $2 million compared to $441 $9 million in the second quarter of 2022.
For the quarter comparable restaurant sales at our Burger King restaurants increased 10, 4% comprised of a 12, 7% increase in average check which was partially offset by a 2% decline in traffic.
Couple of restaurants sales of our Popeyes restaurants increased 11, 6% comprised of a seven 4% increase in average check and a three 9% increase in traffic.
Turning to expenses, our cost of food beverage and packaging improved 350 basis points to 28, 2% of restaurant sales as commodity inflation of approximately three 5% was more than offset by higher average check beef.
Beef was $2 83 per pound during the quarter, which was a 1% increase from the same period last year.
From where we stand today, we expect commodity inflation to be in the low to mid single digits for the remainder of 2023.
Restaurant labor expense decreased 180 basis points to 32% of restaurant sales as labor inflation was more than offset by labor efficiencies and higher average check.
Hourly wage rates for our team members increased by four 4% during the quarter compared to the prior year period. As we look ahead, we expect wage inflation in the mid single digits for the remainder of 2023.
Other restaurant operating expenses decreased 40 basis points to 15, 2% of sales.
Rent expense decreased 50 basis points year over year as a percentage of sales compared to the prior year period, primarily from the benefit of higher sales on fixed rental agreements.
The 620 basis point improvement in our restaurant level profit margin to 14% was driven by our strong top line results and our continued focus on operational excellence as well as the moderation of inflation on our input costs.
Looking ahead, we're currently seeing and expected sequential moderation in comp sales growth due to a reduced benefit from pricing actions and lapping reductions in discounting implemented late last year, partially offset by improved traffic trends. Accordingly, we currently expect moderation in third quarter restaurant level profit margins from what we've seen.
In the first half of this year.
General and administrative expenses as a percentage of sales increased 40 basis points year over year due to incentive compensation accruals that were absent in the prior year period.
Excluding nonrecurring costs as well as stock compensation expense and including the impact of higher incentive compensation accruals relative to last year, we anticipate 2023, G&A expense of approximately $23 million to $24 million per quarter.
For the second quarter, our net income was $15 million or 23 per diluted share compared with a net loss of $26 $5 million or <unk> 52 cents per diluted share in the prior year period.
On an adjusted basis second quarter net income of $17 million or 27 cents per diluted share compared to an adjusted net loss of $8 $9 million or <unk> 18 cents per diluted share in the prior year period.
Free cash flow generated in the second quarter was $37 $9 million, a significant improvement compared to the negative free cash flow of $5 $7 million in the same period last year.
At the end of the second quarter cash and cash equivalents totaled $49 million in long term debt, including the current portion in finance lease liabilities was $476 $8 million or overall interest rate on our debt. This past quarter was five 7% as approximately 90% of our debt is fixed.
As of quarter end, there were no revolver borrowings and $10 5 million of outstanding letters of credit.
Leaving us with $204 $5 million of availability under our revolver.
In addition, we have no covenants applicable on our senior credit facilities at this time.
This concludes our prepared remarks, we'd like to thank you for your interest in carols.
Greta and I are now happy to answer any questions that you may have operator, please open the line for questions.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question. Please press star and one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Ladies and gentlemen, and wait for a moment, while we poll for questions.
Our first question comes from the line of Jeremy Hamblin with Craig Hallum. Please go ahead.
Thanks, and congrats on the strong results I wanted to ask about the menu pricing that you're carried here too.
For Q3, the expected menu pricing and also just to see if you could provide some color on on quarter to date trends compares get a little bit tougher here in the back half of the year and as you noted the menu pricing are going to fall. Some so wanted to see if you could provide a little color on what.
<unk> seen thus far.
Sure on the excuse me on the menu pricing.
We were about 9%.
Menu price increase in Q2.
And that those numbers are expected to come down to the mid.
Single digit percent increases for the back half of the year, a little bit stronger in Q3 than Q4, but we are lapping some.
Some pretty sizeable.
Menu price increases that we took.
In September but just on the other on the other side of that equation. We just took a one 4% increase last week at Burger King and we're taking.
About the same amount for popeyes.
This week so.
You know that the price increasing ability has become really surgical and as inflation comes down you know, we're being more cautious and conservative with it with that menu price increases so.
You know at this point.
That's kind of where we are for the year on price increases for menu price increases and we'll see how the year will obviously be agile and change if we see a change in inflation, but that's sort of where we are in terms of quarter to date trends.
I think.
You know I think that the dialogue.
What we said in the call was was really.
Where we expect.
We expect a decline, but still very solid comps in the back half of the year with a little.
The mid single digit range, but.
You know, we're very encouraged with what we're seeing in traffic and obviously, we know that there's going to be some.
Softening on price, but.
The question really is how much of those two things offset each other we don't we don't have that but we still think the back half is going to be solid.
Mid single digits with again, a little more strength.
And in Q3 versus Q4, but again that could all change.
We will update you on the next call obviously, when we have the Q3 under our belt.
More specifically what you know were you able to see you noted that your relative you know value and pricing is improving.
Has that resulted in getting that traffic to you know to keep.
Turn positive yet.
I'll take that one yeah.
Obviously traffic continues to be a primary primary area of focus since it's essential to the long term health of the brand and we.
We were still marginally negative this quarter, but.
But we saw continued stabilization from the trends that we experienced last year.
And I'd say that that is obviously an area of continuing focus and it's you know we're looking at the things that we can impact such as guest service operational excellence and local value initiatives, which we believe will continue to move the needle in the right direction. We're also benefiting from the fuel the flame and Royal reset initiatives that they have at Burger King and we think that with that additional advertising.
<unk> spend layer on top of our restaurant level efforts that will continue to improve on traffic and that yeah.
We will move into positive territory.
Yeah.
Great. Thanks for the color and then just you you noted a new major Oh.
Labor management system, and one that is in test and that you believe will be ready to rollout and full for 2024 is there any more color that you can share on that and what you think the potential because you you noted a you know that you'd see.
Financial benefit you thought in 2024, you know any sense on kind of magnitude of benefit you know from that initiative and just a little bit too early.
Sorry, Jeremy I didn't mean to cut you off and it's too early to comment on the financial benefits that we're expecting to see because this is really in the preliminary stages, but I will say that the new labour formula is going to incorporate traffic trends in addition to sales.
To better forecast, our labor needs and it's going to use a much more robust historical dataset, which will incorporate seasonality and holidays and we believe that this enhancement of the methodology will ensure more predictability and staffing for both our restaurant crew and managers and that this greater efficiency will lead to a better guest and employee.
<unk> in addition to the labor savings, but as I mentioned, we are just refining the labor model at this point in time of the labor Formula. So it's just premature for me to comment on what we anticipate the benefits to say, but that is certainly something we will provide an update on in future quarters.
Got it last one really quick here free cash flow was super impressive in the quarter at 38 million.
You know more than 10 free 10% free cash flow yield just in the quarter.
And you noted that.
You're you're going to increase your Capex I think prior guide with 40 million or so picking that up a little bit but in terms of you know it seems like you would project to generate you know pretty nice free cash flow again here in Q3.
Priorities in use of that free cash flow generation is it on continuing to pay down a bit more debt or are there other projects that you would earmark that for.
So I think we're going to be very.
Selective in what we do as Tony mentioned, our priority is going to be focused on stabilizing and kind of the balance sheet and like you said focusing on the net debt leverage but we're also going to be you know where theres an opportunity for high return projects, we're going to be very interested in investing in those and as we made in the comment in our remark.
We are going to move forward certain projects that we had slated for 2024 that are high return projects and now that we have the flexibility with the additional cash flow to start that earlier, we will take advantage of that in some cases. It also allows us to avail ourselves of additional contributions from Burger King, which then of course, the only further enhances the return.
Jeremy I'll, just add a couple of timing things to note for the second quarter $38 million, we have our second quarter interest payment on our bonds of close.
Close to $99 that all hit in Q3 and hit in Q2 last year and then we also have a really.
Backloaded Capex for the for 2023 of our projects have delayed into into the back half of this year for 'twenty. Three so those are a couple of other things that will that will impact your free cash flow number.
Yeah.
Great.
Congratulations and best wishes for continued success.
Thanks, Jeremy.
Thank you.
Our next question comes from the line of Joshua Long with Stephens Inc. Please go ahead.
Great. Thanks for taking my question I was curious if you could talk a little bit more about the store level operational execution has been very strong here in the first half of the year.
Maybe any update you have on labor your labor pipeline turnover at the restaurant level, especially if you just dial in operational focus here as we think back to the second half of the year.
Yes, absolutely Josh.
I would say the improvements that we've seen in operations are one of the things that our team is most proud of during this.
This first half of the year, because it's been a significant movement I think what's really exciting is that we've actually seen improvement in every component of the score.
You know that we get from our from our franchisor, so whether its guest satisfaction window time training retention brand standards all of them moved in a positive direction. So it's really across all all all brands, which I think is paying off in terms of the yeah.
Reaction that we're getting from our guests.
In terms of the turnover you know all these things generally move together, it's kind of a synergy you get and I think from.
The operational improvements we've been able to to me we've been able to spend more time with the training of new associates being able to staff up as I mentioned in my remarks, the turnover levels are actually approaching closer to what they were.
Pre COVID-19 and I think that the quality of the candidates that we're seeing in the pipeline has also improved so thats kind of all come together to to stabilize the staffing levels at the store and to yield like I said improve guest satisfaction results from it.
That's very helpful. Thank you and when we think about.
Comps moderating in the second half of the year. It definitely makes sense as maybe you have some pricing that.
Normalizes in.
Maybe offset or supported by some improving traffic from the initiatives that you discussed can you talked about the restaurant level margin and the outlook. There I mean, just despite ongoing inflation at the particularly on the food cost line, you've done an admirable job maintaining margins there.
On the labor side, just as you think about comps moderating and.
Maybe tie that together with our restaurant level margins for the second half.
How are you feeling what are you looking at and kind of where do you think the major pivot points are.
Well the major pivot point is going to be how you know how traffic moves so I think.
But you know we're really encouraged by what we're seeing.
On that front.
But again, it's it's you know.
No.
No matter how the level of success is going to be it's going to be a high mountain to climb to offset the some of the menu price.
Lapping in and certainly the discount reduction lapping that we're going to see in the third and fourth quarter, but.
Having said that we think margins in the back half we're going to approach what we saw in the first quarter.
You know less than less than what we saw in the second quarter that was obviously exceptional.
But we think they'll approach sort of where they were in the first quarter of this year because you just have slowing revenue growth against.
As you said continue theres still some residual inflation that's.
Raising our labor costs in our cost of sales.
That's helpful. Thank you and maybe one last one for me when we think about just the.
What tends to be some pretty encouraging performance with some of the locally relevant offers utilizing the digital menu boards can you talk about what percent of that system has those right now and I think you mentioned, maybe more comprehensive or more complete picture as we get into 2024, but any additional information or outlook you can provide there would be helpful.
Sure. So as I mentioned in my remarks, we havent going on in about 10 markets.
We're currently doing is really using price pointed offers that we're focusing on beverages and breakfast.
They've been running for about 12 weeks and in those markets and the goal is to expand the reach throughout the balance of the year to additional markets.
Pretty encouraged by the initial results, we're seeing both an increase in traffic as well as in the average check in the areas, where those promotions are running them and that's why we're kind of planning on having an even more robust local marketing plan in 2024.
Thank you.
Okay. Thanks for the question.
Thank you.
Ladies and gentlemen, if you wish to ask a question Please press star and one.
Our next question comes from the line of Jake Bartlett with <unk> Securities. Please go ahead.
Hi, Thank you so much for taking the question.
Mine is on the traffic.
I think in the end.
It's still being negative and I think if I got this right a little bit more negative in the second quarter than the first.
And so the question is.
Ours have been increasing due to increasing operating hours when they kind of.
Understand better the impact of that those might be just low volume hours, so maybe not a huge impact but.
When youre seeing traffic still negative what is your confidence that that will move positive.
And then within the negative traffic are you seeing that from specific consumers or or day parts or just understanding kind of where you're you know.
You're still kind of losing customers.
I'll make I guess, a couple of comments on that one yes. The traffic is one that is a sustained effort over time and I think that Oh yeah.
The efforts that we're putting in at an operational level as well as that Burger King is putting in at an advertising level, yes. It will take time to yes to.
To take hold I think Directionally, obviously, we're pleased with where it's going but we know that theres a lot more work to be done.
Get us where we need to go.
We continue to see we think we have opportunities in the business on the value side, but we're very encouraged on what we're seeing kind of at the higher end purchases as well from the consumers. So one of the areas that was up the most for us where for transactions over $20. Some of which include some of the more discretionary occasions like delivery in late night in those.
Are the areas that we're putting a lot of effort into so we're encouraged that over time as those take traction will continue along with the increased advertising spend which I think on the Rbi's call. They mentioned that a lot more of the spend has yet to come in future quarters. So I think those combined things are what are encouraging us to say that we believe that the traffic will.
Ultimately get into the positive territory.
Jack I would just add one thing as Q1 had severe weather.
So it was very easy comps, especially in January .
And the weather was pretty eventful in Q2 of 'twenty, two and in Q2 of.
2023 so.
That's why we had slight.
The decline in traffic sequentially from Q1, Q2, but I think going forward Debs you know I think <unk> captured sort of the forward look that we're that gives us confidence.
Great Great that all makes a lot of sense.
Just that point on the forward look and kind of what the.
The approaches here do you anticipate any kind of change in focus just just broadly from the marketing campaign or another.
You know hamburgers.
Food company yesterday talked about a shift maybe more a little more towards value and their marketing approach could you do you see any kind of need four or reason just to kind of change or a refocus on.
The marketing message or do you anticipate that.
It can happen in the back half of the year.
Well I think again a lot of the marketing obviously is driven by by Burger King. So they can provide a lot more detail in terms of you know what.
Where do they see it going but I know a key part of it is to continue to focus on the core business on the Whopper, which is which is our strength while also taking advantage.
Advantage of certain other opportunities so the most recent.
Promotion that they had I think launched just this Monday, which is under wraps the Christie Kelly Monday, This coming Monday chicken right 14 B, yes.
That's going to be focused on kind of that value and the customer or kind of the more occasional snacking.
<unk>.
Type of customers, but I think it's going to be a very balanced yeah.
Core as well as Opportunistically, where they think that we can grow the business in other areas and then our plan obviously is to complement the national advertising campaign with local marketing initiatives that we can execute at restaurant level to create a holistic yeah, something that appeals to any of the customers that want to come in.
Great and then my last question is on you know.
With the balance sheet with leverage coming down very quickly.
It seems like its like we could you could start to look again at.
That's fine.
Stores, you'll acquiring stores like had been so she didn't go part of the model in the past or are we nearing a point, where you're considering kind of getting back into that.
Into that that cadence, where you kind of a regular grower kind of low risk.
Way to grow.
Can you just remind us what your kind of what were you willing to be.
Before that begins and whether that's becoming more of a part of the conversation the other results price so much.
So I would say to Jake that's still the short term our focus is really on the organic growth. We continue to see ways that we can continue to improve the operation and the appearance of our existing portfolio. So that's kind of I think the initial focus short term, yes, certainly if there's opportunistic things that would come along that.
It makes sense for us, particularly smaller acquisitions, we would certainly take a look at those but that isn't our primary focus right now that said, we need the senior leadership team and the board are working on a three year strategy and I believe that obviously youll see acquisitions as a component of that going forward, but we're not at a point where we can.
We can really share the details of that at this time, that's something that we'll be sharing in future quarters with you.
Got it could you could you just remind me what your kind of target leverage whats I know you've mentioned the passengers just don't recall it right now just what what kind of you were comfortable leverage ratio is.
Well those are two different questions.
Okay.
Historical was.
You know we were looking at four times, a total net debt leverage I think the.
You know sort of the going forward number as part of the discussion with the board that Deb just alluded to and so we'll report on that as we get feedback from that.
You know I think the important thing in terms of what we're.
Our sort of near term medium term focus is really fortifying the balance sheet because you know.
We have some debt coming up.
Two two plus years that we have we're starting to think about it we want to be very careful we want to be very opportunistic I guess is the best word.
And when we you know when we when we capture you know when we do do that refinancing. So we have obviously a huge runway, but the important thing is we have to balance sort of reinvestment in the business, which we're keeping pretty modest and generating free cash flow. So we can show the credit side of our Investor base that we can you know we can improve our <unk>.
Credit ratings and do everything we can to really minimize our interest cost on the on the on the.
Next part of you know when we did the refinancing so I think that's so I think that's going to that's going to weigh in pretty big on on what that new number is going to be that new leverage number is going to be.
Or if it changes at all.
Again, all TBD.
Got it got it okay. Thank you so much I appreciate it.
Great. Thanks for the questions Jack.
Yeah.
Yeah.
Thank you.
I'd say there are no further questions I would now have the conference over to Deborah Toby for closing comments.
Thank you everyone again for joining us this morning entry interest and Carol we appreciate your time and we look forward to speaking with you next quarter.
Thank you the conference of cattle restaurants group has now concluded. Thank you for your participation you may now disconnect your lines.
Yeah.
Okay.
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