Ark Restaurants Corp (ARKR) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Martina and I will be your conference operator today. At this time, I would like to welcome everyone to the Ark Restaurants conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you. It is now my pleasure to turn the floor over to your host, Bob Towers, Executive Vice President and Chief Operating Officer. Sir, you may begin your conference.

Thank you. Good morning and thank you for joining us on our conference call for the fourth fiscal quarter and year ended September 30, 2006. With me on the call today is Michael Weinstein, our Chairman, President, and Chief Executive Officer; Vincent Pascal, our Senior Vice President; Bob Stewart, our Chief Financial Officer; and Michael Buck, our General Counsel.

For those of you who have not yet obtained a copy of our fourth quarter and year-end press release, it was issued over the newswire on December 20th and is available on our website. To review the full text of that press release along with the associated financial tables, please go to our home page, www.ArkRestaurants.com. If anybody does not have access to a web, which in this day and age, I think everyone does, please feel free to call our office. We will be happy to fax you that information.

Before we begin, however, I'd like to read the Safe Harbor statement, and then there will be a review of financial results, or actually what there will be is some comments from Michael Weinstein first, and then we're going to have an opening session for questions and answers.

I need to remind everyone that part of our discussion this afternoon will include forward-looking statements and that these statements are not guarantees of future performance and, therefore, undo reliance should not be placed on them. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance, and financial condition.

At this point, Michael Weinstein would like to make some comments concerning the latest quarter and year-end, and at that point we will take some questions and answers.

I thought there were some questions that I could anticipate. Number one, our dividend policy. We issued a $3 special dividend, which was directly linked to the fact that we had taken in a substantial amount of cash with the sale of our Tsunami and Lutece properties back to The Venetian, and general growth. Those two properties had a de minimis amount of EBITDA attached to them.

The big change going forward will be that we no longer have depreciation on those properties, so the depreciation numbers in the Company's financials are going to change somewhat. But in terms of operating profits, last year those two properties earned roughly $300,000 or $400,000 in operating profit. So a $14 million sale on those two properties we think was quite advantageous and, therefore, returned a significant portion of the proceeds to shareholders, as of, I think, record date 24th of January, payment date February 1st of 2007.

Also with regard to The Venetian, we do have our Vivid property still up for sale and we are somewhat confident that in this next quarter, we will be able to make that sale. The dividend policy of the Company is as follows. If we have extra cash that we don't think we can put to work given our current business plan, we are going to distribute it as a special dividend.

We are not going to go into debt to restructure the Company to provide shareholders with the benefit of our leverage. The benefit of our leverage is going to be kept in case we see a deal that we think is supported by substantial cash flow, and we will purchase cash flow, but we will only purchase it without the parent company being on the paper. We're not here to guarantee transactions that put Ark's balance sheet at risk. The quarterly dividend will reflect operating results. So as operating results become stronger, we will review our dividend policy and increase our dividends based upon current operating results.

Last year we had a very, very difficult year. The primary influence on last year was the bad weather in the June quarter and September quarter in the Northeast. We have a lot of outdoor cafe seats that were not utilized. We always had the feeling that our businesses were stronger, and I will get into that in a second, but we were just defeated by weather along the way. We did not get good utilization of those outdoor cafe seats in either New York City or Washington D.C.

As a matter-of-fact, when we look at Sequoia in Washington D.C., our comp sales were up right until we got into the warmer weather, and then it seems like we got poured on every single weekend. So the weather in Washington was probably worse than it was in New York during that period of time.

We had minimum wage increases in Washington D.C. and New York. This is the second year of the phase-in. We have another phase-in starting in January this year, and that has been difficult for us because we have not felt comfortable raising prices with food prices remaining kind of stable.

Utility charges were extremely difficult for us last year. We are seeing some easing of them now, but we had restaurants in which utilities were up 70%, 80%, and it represents a big number on our P&L.

At The Venetian prior to our sale of Lutece, The Venetian decided to build a poker room which basically blocked the visibility of Lutece to the whole casino. There were other influences at The Venetian that were difficult. As we stand today, this feeling that our businesses were really strong and once we got into either good weather or into a period of time when we were not influenced by weather, meaning our outdoor cafes have now closed and we're in the December quarter where the weather is decent; as of the 11th week of our 13-week period ending at the end of this month for the first quarter, we are up 13% in New York. Our Washington businesses are up 2%. New York, New York is up 2%. Stage Deli is up 3%. The Venetian is now up 29%. Our Hollywood, Florida properties is up 25% and our Tampa, Florida property is up 15% on comp sales last year.

So we think all of these things that we've been implementing in our restaurants, some new menus, consistently good service, good maintenance of the properties are paying off, and we have a very, very strong December quarter going. So I think that is an outgrowth of what we've been doing all year-long, but I think we were matched in terms of the sales line through September by weather.

So those are my comments in terms of our last year's operations and what we're going through in the December quarter right now. The other comment would be that we are sitting between $23 million and $24 million in cash depending upon what day you look at us. And you know, we feel the paying out a little over $10 million and leaving us after taxes with The Venetian transaction which is about $1.6 million in taxes, that we will be left with about $11 million in money on our balance sheet, and that is more than sufficient to run our business.

So, at this point, I'm happy to take questions.

(OPERATOR INSTRUCTIONS) Blaine Marder, Loeb Partners.

Thanks for the dividend. You mentioned some new properties in the press release and then you have the sale. So can you give us a sense in fiscal '07 in terms of the top line what you see coming and going with both the new properties and then getting rid of The Venetian?

Well, we basically dropped some $6.5 million in sales from The Venetian. I can comfortably announce to you because we got our liquor license issued today that we have purchased Durgin Park, which is a 130-year-old brand in Boston in Faneuil Hall, which has about $5 million in sales, and we will begin operating that the first or second week in January.

Just to give you a little bit of information about that transaction, we think we made a very strong business deal. We have a 25-year 6% lease. Durgin Park is one of two buildings in Faneuil Hall which is now owned by General -- Faneuil Hall is now operated by General Growth. It is one of two buildings in the whole complex, and Durgin Park itself happens to be a spectacular location within the complex that is not owned by General Growth or operated by General Growth. It is not part of that facility, so it does not pay any CAM, and we do not pay any real estate taxes by the way. The landlord is responsible for the real estate taxes in this transaction.

We have no marketing fees, yet we get to manage all the publicity and marketing of that, so we expect we're going to do between $5 million and $6 million annually there. We think we should have substantial returns. We purchased it for $3 million, of which $2 million is cash down and $1 million is a five-year note that we can prepay without penalty. And we also have the right to sublet to any legal retail use, once the note is paid.

So we think we made a very good real estate deal and we bought a very good business that should be very profitable. So whatever we lost in terms of top-line sales from Tsunami and Lutece is going to be largely made up by Durgin Park.

We also have signed a lease for operating a Mexican restaurant in the new Planet Hollywood Hotel which replaced the Aladdin, which I'm very happy to say they're doing a spectacular job with in terms of reconfiguring the casino floor and the rooms, and I think they made it a very good, upscale property. We are at the front door with the lounge and restaurant, and I think we will do very well there. So maybe that goes on the low side at $4 million.

We are also seeing, obviously, with these comp sales growth in our normal business. I mean not that I expect 7% blended top-line growth throughout the whole year, but certainly in the fourth quarter we got that -- excuse me, the fourth quarter of the calendar year, which is our first quarter fiscal year, we're going to show 7% increase. But we expect strong -- it would be hard to have as much bad weather as we had last year, so I've just got to believe that we are going to see a better performance from all of these restaurants throughout the whole year. So we will have some top-line growth there.

We are also going to be operating more stuff in Foxwoods in all probability, because we're talking to them about it, but that will come mid calendar year, so won't influence our revenues that much. So I see some growth. You're right, we are roughly at around $115 million now. We will probably $122 million, some number like that. That does not include the growth from Florida, which we don't consolidate, and that has been spectacular, so I think that is where we are.

Okay, very good. Then the out-of-pocket costs for Planet Hollywood, anything upfront?

Yes, the deals that we are doing in Vegas are basically we want -- our lease deals are very -- first of all, as you probably know, we don't guarantee any leases for the whole company. Each is a stand-alone corporation, single purpose entity Corporation. In places like National Harbor in Maryland, where we just got our leases in and we signed a letter of intent, the landlord contributions are spectacular. They are putting up 75% of the money. We are putting up one-quarter of the money.

But in these casinos where you have the kind of locations that we are getting, and this is right at the front door, they are less inclined to put up money unless you're a famous chef, and then it is usually a management deal where they get their employees and they pay you a management fee and percentage of cash flow.

We don't want those deals, so in prime locations in Vegas, we've been putting up all the money. And I would imagine Planet Hollywood's facility for us will cost us somewhere between probably $2.5 million to build that, but quite honestly, we expect 40% to 50% returns on that money.

Okay, great. Just to remind me now, the Foxwoods properties, none of those will be consolidated. What restaurants are you running now in Foxwoods and what kind of sales levels are you expecting?

The first three deals we took, one of which will be consolidated, the first two deals were fast food, one in the bingo parlor and one in the poker room. Those two deals, investors put up 100% of the money. The two deals together between $5 million and $6 million will be profitable. It will not have much income effect to us.

We have a management fee and a percentage of cash flow, but in the current year we are profitable. But by the time you pay the investors their priority return and off 5 management fee, it will be $300,000 and then there's a few hundred thousand dollars for the investors and us to split if we hit our numbers. You know, it is not going to have much of an impact. Ideally, $0.5 million comes our way out of those two deals.

We did not do those two deals because they were the most profitable deals. We did the deals because it was an opportunity for us to correct some stuff that Foxwoods was unable to correct. I think we demonstrated we can and they're showing us more stuff.

We just recently started operating a small restaurant in a off-property hotel that the tribe owns. That does about $2 million in sales and we will be marginally profitable in that, and we're not putting up very much money, but those sales would be consolidated.

The big thing is we have a letter of intent that has been executed or is about to be executed for fast food at the MGM Tower that is being built. So if we go forward with that, if that deal is consummated which is a May 2008 deal, that will be very exciting. That is a lot of volume, and so we are trying to demonstrate to Foxwoods that we can help them. The good news for us also is Foxwoods own a license in Philadelphia.

The other good news for us, quite frankly, is Jeff Gural and The Venetian -- Jeff Gural of Newmark properties in New York is one of the largest property holders here, and they just won the Bethlehem, Pennsylvania license as well. We think there's a strong opportunity that we will be doing a lot there, but that's two or three years out. So we are trying to build relationships.

Thanks a lot, guys. Sounds good.

(OPERATOR INSTRUCTIONS) Rick Teller, Pendleton Research.

First of all, I also wanted to thank you for the dividend. A lot of companies say that they are interested in the shareholders, but you folks really are, it appears. So we as shareholders really do appreciate that.

A question for you about Durgin Park. I know it must have been five or six years ago, maybe more than that, you did have some operations in Boston in that Quincy Market area, and I recall you got out of that business. One reason was just the difficulties of managing it from New York; [they weren't] the economies. Does Durgin Park mean that you're going to develop Boston and try to add more restaurants up here, or can this be handled by the same management that is handling Foxwoods, or how is that going to work?

Well, first of all, I think you are misinformed, Rick, on the difficulty of managing it. We were very profitable up there. The difficulty we had was that we managed that property for Ben Thompson, who was the original architect of Faneuil Hall. When Ben became incapacitated, Jane Thompson became involved with it. And at that time, the Rouse organization who was managing Quincy Market/Faneuil Hall -- and we were in Faneuil Hall, not in and around -- she took over Ben's role and Rouse did not think they had an obligation to Jane. They just thought they had an obligation to Ben.

So when the lease came up for renewal, they just did not want to renew the lease. They wanted a brand in there, and we have never been considered a brand, obviously. Jane was unable to persuade them that they should renew the lease. So we left because we did not have the ability to renew the lease.

We wanted to stay; we were extremely profitable, I think to the tune of almost $1 million a year. So we had no problem operating that from New York City. What we like about Durgin Park is, number one, the volume; number two, the fact that they don't operate restaurants as well as we think we do. So we think there's a huge opportunity there to increase profitability. Number three, they don't operate restaurants well not because there is not good intent to operate them well; they just don't have the systems in place to do it.

But we do like a lot of people who are currently in the operation. We've interviewed them. We've spent a good deal of time with them. They are motivated to learn and to improve, and it is not motivation to please us because we bought it. It is motivation that they feel they've been handicapped because the owners have never given them the opportunity to do things differently, and they know they should be doing things differently.

So I think it will be a good partnership. We do not have to put a lot of people up there, and it is an hour-and-a-half door-to-door from New York, and Vinnie Pascal will be spending a lot of time up there and monitoring how they are doing, and we think we've got good people. So it is a terrific opportunity.

We do not go into Boston saying to ourselves we're going to have 12 restaurants here next year. This is just a great real estate deal, a great business, a great brand name, and we think we bought it very, very cheap. We can operate it and it fits our profile with being an important location, an important brand name, and we bought it cheap. It's that simple.

Great. I'll just say I think last time I ate there was maybe 20 years ago, and the waitresses were all about 75 and they had worked there their whole life. So in January, I will go back and I suspect the same ones will be there, only they will be 95 now.

That's a lot of them, absolutely.

Thanks.

(OPERATOR INSTRUCTIONS) Sir, there appear to be no further questions at this time.

Well, thank you very much, everybody. I think we're very pleased with the December quarter here, and we look forward to speaking to you in three months. Have a very happy holiday.

Thank you. This does conclude today's teleconference. You may now disconnect.