Q2 2019 Earnings Call
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Good morning, I would like to join to Carlos reference group earnings call.
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And May I have your nameless spelling please.
First name are a C H E L. Rachel.
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A place your line into the earnings conference.
Inc.
The new products being launched at Burger King This week with the impossible Walker, which we believe will attract many new guests to our restaurants and drive incremental sales.
And overall, we are confident that the marketing calendar, including the impossible Whopper and more effective promotions will help us generate stronger sales performance and better restaurant level margins through the remainder of the year.
Paul will now go into greater detail with our second quarter financial review and updated annual guidance.
Thanks, Dan.
As I think did his is made clear we were disappointed by our second quarter results.
You say will drill down a little bit a little bit more in a second however, there is much for us to be positive about as we look at how we have positioned the company for growth with attractive alternatives to employ capital in effective ways to build value for investors longer term.
We operate two strong brands that we believe we are well positioned to be beyond these near term challenges.
Restaurant sales for the second quarter increased 21.6% over the prior year period to $368.6 million, including 50.7 million in sales from the Cambridge acquisition, which closed on April Thirtyth, along with sales from 56 additional restaurants acquired over the past year.
Comparable restaurant sales for our core Burger, King restaurants, which exclude Cambridge and the other restaurants operated less than one year.
Increased a modest 0.1% consisting of 0.4% increase in average check and as 0.3% decrease in customer traffic.
Our average check increase reflected 0.9% and menu pricing.
Offset by higher promotions and mix changes compared to the second quarter of 2018.
The Cambridge restaurants will not be included in our comparable restaurant sales base for the first 12 months.
Directionally, However, I will say that the Cambridge, Burger King's where mid single digit negative in the quarter of popeye's restaurants perform better with moderately positive sales.
Adjusted EBITDA declined $9 million in the quarter to $23.8 million from $32.8 million in the second quarter last year.
In restaurant level EBITDA decreased to $41 million from 47.4 million.
So to reiterate some of what Dan said flat comparable restaurant sales for the quarter challenged us to offset the cost increases that we experienced in our key input cost and resulted in deleveraging across a number of expenses.
While promotional activity was higher compared to the second quarter of 2018, it was simply not sufficiently effective in driving sales.
Cost of sales increased 259 basis points as a percentage of restaurant sales compared to the prior year period, reflecting higher promotional levels and higher commodity costs.
Ground beef was $2.16 a pound increased 4.3%.
From $2, an eight cents per pound in the second quarter last year.
Restaurant labor expense increased 88 basis points as a percentage of sales.
Compared to the prior year quarter and included a 5.2% increase in the hourly wage rate in our core Carrols restaurant, which I know was a little lower than the prior year.
In addition, we were impacted by the lower margin profile profile of the Cambridge restaurants, just recently acquired and they're relatively low EBITDA contribution given the short period included in our results.
We are still very early in the integration of these restaurants and our results do not yet reflect the improvement in sales operations and margin efficiencies that we are confident that we will make as we move forward.
Our net loss was $3.7 million in the second quarter of 2019 or nine cents per diluted share compared to net income of $7.8 million or 17 cents per diluted share in the prior year.
The net loss included a 7.4 million loss on extinguishment extinguishment of debt due to the write off of pre previously deferred financing costs in conjunction with our refinancing in the second quarter.
Adjusted net income was $4.3 million or seven cents per diluted share compared to adjusted net income of $10 million or 22 cents per diluted share in the prior year quarter.
Summary of the adjustments in arriving at adjusted net income, including loss on debt extinguishment acquisition and integration costs and other items are detailed in the tables accompanying this morning's release.
Total capital expenditures were $24.9 million in the second quarter of 19 and $43.1 million for the first six months.
At the end of the second quarter, our cash balances were 3.4 million total outstanding debt was 400.
54.9 million.
Now, let me turn to our allow outlook for 2018, which we have updated view of our performance to date.
In our projections for the balance of the year.
Our update updated guidance as detailed in this morning's release, we will try to limit my comments here to the more relevant changes.
Our overall sales guidance has not changed significantly, but we have tightened our comparable restaurant sales estimates somewhat to 2% to 3% for the year.
We were we are increasingly confident in the Burger King marketing calendar, including the impossible Whopper launch this week to generate improved sales performance and better margins through through the remainder of the year.
Our outlook on commodity cost reflects our expectation that commodity inflation will be higher than anticipated due to higher beef cost in the second half of the year.
Commodity costs are now expected to increase 3% to 4% with beef costs up 7% to 9% versus our prior guidance of a 2.32% to 3% overall increase in costs.
Adjusted EBITDA is now expected to be $100 million to $105 million for the year, including 10 to 12 million from the Cambridge acquisition for approximately eight months.
Our revised guidance does not include a full year contribution from either the Cambridge for the Baltimore acquisitions.
On a full year basis. These we add another $7 million to $8 million of EBITDA before any operating improvements that are likely as we move forward with our integration, making our run rate EBITDA approximately $110 million for the year at the midpoint of our guidance.
And that concludes our prepared remarks and with that operator, let's go ahead and open the lines.
Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please press star followed by the question. One if you are you from a speaker phone. Please make sure. Your mute function is turned out to allow your signal to reach our equipment.
Once again star one and we'll pause for just a moment to assemble the queue.
And our first question, we'll hear from coal.
Bartlett with Suntrust.
Great. Thanks, Thanks for taking the question.
Paul I'm wondering on the your same store sales guidance for the year implies about a 2.8 to 4.8 for the back half of the year can you give us some some help in figure out whether we should be towards the high end or the lower end of that range kind of a wide range.
And also maybe in that context, how your sales have trended so far in the third quarter.
Yes, I think that is we.
If we look at the guidance.
I think the view that I think we're obviously thinking.
The back half of the year should should be around where the midpoint implies.
In the guidance.
And.
Our comparisons.
Ease up a little bit in the back half compared to the first half of the year.
So.
We're optimistic as we look for.
In terms of where we so far quarter to date.
July's, obviously in the book at this point, we were up about 1.5% July .
Got it and then and then we when we think about the impact of promotions and discounting.
It's been it's been a headwind in the first half of the year here do you expect to actually clip and become a positive.
Tailwind on towards the back half.
Jamie This is Dan.
With the impossible offer.
Our assumption is number one that our same store sales in the second half are going to be a much more robust than.
Then what what they were in the first half certainly and that there will be a lower level of discounting by virtue of the fact that much of the promotional activity is going to be behind the impossible whopper.
The discount I'm not as concerned about the discounting as I am about the fact that if you have discounting it needs to drive same store sales and that's really what the challenge in the first half I think the focus on discounting really isn't the issue. The issue is if you're going to discount you better Gen generate positive same store sales and that didn't happen in the first half.
In the second half again with the launch of the impossible operate today, we're very optimistic about.
Our sales performance and our margin improvement in the second half.
Got it and then lastly, just on the on the stores that you acquired from from Cambridge, I wish them the impression that the restaurant level margin profile was similar to your core.
Stores and it sounds like they are actually much worse, and then I'm looking up a negative mid single digit same store sales do you attribute that to kind of transition just kind of.
No issues as you as you transition from kind of change up operations or what's happening there in terms of the margins and the same store sales and how confident are you that that both of those can can start to improve.
This is Dan again they were.
The Cambridge same store sales were negative when we did the acquisition. So we expected that over time they would be.
Generate some some positive same store sales.
At least to result in a in a.
By the end of the year to be flat to slightly positive. So thats not a surprise and know their margins were never anywhere near where carols margins are we always said that there was a 250 basis point Delta.
That we would improve upon.
We still expect we will we also said however that we wouldn't have our our Pos devices in our back office and all of that installed until the fourth quarter. So we're still on track with that.
And everything that we thought we would do.
Accomplish with Cambridge, we still are confident we will.
Got it thank you very much.
And next summer to will Slabaugh with Stephens.
Thanks, guys.
Can you talk a little bit more around your confidence in the Burger King marketing calendar that you mentioned and what you're most excited about I realize it's extremely early given the nationwide and thoughtful launch.
Was just this week, but can you help us out there and how you're thinking about the potential impact of the impossible itself, just given what you've heard or seen from tasks are any of your stores as well.
Again this is Dan.
Well we have been.
Were forecasting for the second half as Paul said.
Same store sales that are in on that.
In the 4% kind of numbers.
We think that Thats conservative relative to what we've seen in the test markets for the impossible Whopper.
So we are very optimistic about the impossible offer for the entire balance of this year.
And because of that we are confident in the in the marketing calendar as well there's really a couple of things is Jose sales said on his call that you got to have a balanced approach and the sense was that there was a value component. It was Michigan missing in the first half then don't don't confuse value with discounting the Taco, which was introduced about three weeks ago is a very compelling value component and actually is doing quite nicely in terms of number of units sold and incremental traffic. So between the launch of the impossible Whopper and the increased.
Focus on a value component as well as increased marketing against breakfast, we're very confident in the calendar in the second half forecast.
That's helpful.
And on the margin front.
Twoq attrition, a little bit better on the margin side in the back half of the year. There are some of the Cambridge noise and the things you walk through Dan.
That through that off a little bit your guide implies an acceleration in margins in the back half I realize some of that is tied to same store sales improvements I didn't know if there was any other.
Anything else that we should be thinking about from a cost perspective in the back half of them I get a little bit better as well to help out.
No I think that that.
That's accurate.
We do anticipate margins improve so it is somewhat certainly from where we were in second quarter I think the only thing I would call out in the in the second half is the commodity cost beef.
Beef cost.
Our as I said, we anticipate to be fair amount higher than we originally anticipated.
Our guidance.
Implies.
But a 15% return on beef costs versus.
Versus last year, where we were at.
Pretty attractive price levels below $2 a pound.
Got it.
And can you give us the more recent update on what you've been seeing with beef is that about the.
The inflation rate that you're seeing right now.
Yes, I think.
In the quarter, there I think weve averaged about $2.20 a pound.
So far it's come down in the last couple of three weeks.
We're actually running up to 17, a pound right now.
Okay.
And then the last thing is just on Cambridge in general or the Cambridge stores performing worse than you would have expected at this point or is it just early and we're simply going to going to see some noise in the numbers until we get further along and its integration and really everything still on track in your mind.
Yeah, well this is Dan again.
Yes, listen and we bought 620 restaurants I think in the past.
Seven years.
And what we've always said we would do in terms of margin improvement in sales increases, we've always done and I am absolutely confident that we'll do the same with Cambridge. So I wouldn't say that they are any worse than what we had expected.
And again until we get all of our systems in place.
We're really not going to see a lot of improvement in terms of the margin enhancement.
However, we have put an infrastructure in place with region directors and.
District managers.
Some of whom have come from the carols portfolio. So that we can be ready to move this thing along at a more rapid rate and I'm, absolutely confident that we will realize the.
Objectives that we established for Cambridge.
Good to hear thanks, guys.
And as a reminder, its star one to ask a question next summit took them Daugherty with Raymond James.
Hi, guys its Dan Daugherty on for Brian Mccarren. This morning.
I had a question into Q store margin performance you guys disclose the one timer in them, but the integration seems have been quite a bit more disruptive to the piano.
As you integrated Cambridge. Besides the couple of million you stripped out of DNA could you, perhaps provide store level EBITDA for.
Legacy carols versus Cambridge into Q.
And then one follow up.
Yes, we do we didnt break that out, but what I can.
See I think.
Directionally is it Cambridge.
Contributed.
About $4 million restaurant level EBITDA.
Plus as you as you alluded to there is about four or $500000.
Of integration cost.
So included in there that so call four and a half million adjusted.
In those integration costs were primarily.
Unusually high in excess of repairs maintenance that we need to spend we first got it in the restaurants.
Okay got you and then your 2019 guidance seems to imply pretty market improvement.
And much more normal that margin dynamics in the second half compared to the second quarter could you provide a little more color on what you expect to improve.
Well. This is Dan again, the margin improvement did to a large degree is a function of generating for four plus percent same store sales in the second half.
When you get sales obviously, we can leverage these other costs, which we couldn't do in the first half so with the impossible Whopper, which is a good margin product.
And.
The the value offerings as well as positive same store sales and positive traffic.
So historically, we've always generated significant leverage office sales increase.
This isn't complicated really that this business needs a threed with 3% to 4% same store sales increase year over year in order to leverage your operating expenses and we didn't get that in the first half.
Okay, Great and then just one last question on discounting.
I think it was down sequentially, but could you disclose the percentage of sales on discount into Q and how that compared to the first quarter.
Yes, we were.
I guess the way I would characterize it.
As a percentage of sales discounts were about 200 basis points better.
Sequentially from the first quarter.
The issue with the greatest got more a function of of the you are still.
Up against lower levels from the prior year.
Okay, great. Thank you.
[laughter] NEXMET to Jake Bartlett with Suntrust.
Thanks, I just had a follow up on the on the margins at the acquired stores I'm just looking at the fourth quarter earnings call and I think Paul you indicated that the restaurant level margins were similar.
For the acquired stores in your stores is that not true and maybe just from the last question was it that you insert as some costs that you typically do kind of in the earlier stages of acquisitions is that what's driven the cambridge level margins down much lower.
Well I wouldnt make too much of where we are in the second quarter.
Because the only nine weeks and we're.
I think the.
The difference you're referring to is our comments feeling for where we see the margins.
Ending up for the full year this year.
Obviously, Cambridge restaurants, as we said the Burger chains have been negative.
In terms of same store sales so so they've leveraged.
And so.
You are comparing where we think they're going to be at the end of this year.
Versus perhaps what you're referring to is.
LTM.
June .
Six or nine months ago.
Got it got it so so so that was true at the time, but its diverse because the the sales have fallen at the at those stores.
Yes, and as well as I mean, you see what what's happened to the core heralds margins I mean with Cambridge is impacted by the same factors that are impacting our results.
Carol Okay.
Got it and then and just to.
If you could give us what the overall commodity inflation was in the second quarter as well as the first quarter. Just so we can see what what that implies for the back half.
I don't have the overall here handy I mean, the biggest item.
It's driven commodities this year's been beef and pork and beef is obviously the primary driver.
Of our inflationary we're up about 4.5% on beef and the overall inflation will be a little bit lower than im just guessing maybe two or 3%.
Okay. Thank you very much.
And we'll take a follow up question from Dan Daugherty with Raymond James.
Hi, guys. Just a question on delivery I believe dk is up to about 3500 units in the U.S. offering third party delivery has that reached any of your units at this point and if so could you discuss what you're seeing from a sales and profitability perspective.
Yes, Dan this is Dan again.
No we have not we don't have delivery in any of our Burger King restaurants, yet we do deliver in our API is a portfolio.
But we are looking at.
[laughter] delivery and we're looking at the various Aggregators and we're looking at how delivery will impact.
Our restaurants.
Certain restaurants from a geographic standpoint, it looks like they will make it will make some sense and other restaurants, so we probably wouldn't be doing it.
But I would expect that given the Pos integration and everything else that we're working on we probably will have some restaurants in a delivery mode by the fourth quarter.
Okay, great. Thanks, guys.
And that will conclude the question and answer session. At this time I'd like to turn the call back over to Mr. plans for any additional or closing remarks.
Thank you, we don't really have anything else to add today, but.
Certainly as you can tell was challenging quarter, we're looking forward to.
Reporting.
Better news as we move through the year and.
Appreciate your time this morning. Thanks.
Oh.
And that will conclude today's call. We thank you for your participation.