Ark Restaurants Corp (ARKR) 2007 Q3 法說會逐字稿

Good morning. My name is Sandra, and I will be your conference operator today. At this time I would like to welcome to the Ark Restaurants third quarter financial results 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 period. (OPERATOR INSTRUCTIONS). Thank you. It is now my pleasure to turn the floor over to your host, Mr. 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 third fiscal quarter and nine months ended June 30, 2007. With me on the call today is Michael Weinstein, our Chairman, President and Chief Executive Officer; Bob Stewart, our Chief Financial Officer; and Michael Buck, our general counsel all available if anyone has any questions after we read the legal stuff. For those of you who have not obtained a copy of our press release it was issued over the newswire yesterday and is available on our website. To review the full text of that press release along with associated financial tables, please go to our homepage, www.ArkRestaurants.com.

Before we begin I would like to read the Safe Harbor statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements, and these statements are not guarantees of future performance, and therefore undue 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.

We will now open the floor, and Michael Weinstein will have some comments before anyone asks questions.

Hi, everybody. So this is a good quarter. Obviously our topline growth and comp sales were excellent. We think we got it right for the moment. The topline growth in comp sales continued through July and early August. Our problems are manageable ones, and our growth is very manageable. So we are in a good spot right now. Our cash balance sheet is strong. If you go by sector, we were basically up in every venue that we operate. We are very pleased with the results in Washington this year, which is running up at a better rate comp sales than everywhere else. So the improvements we sought to make seem to be taking hold.

Customers are reacting to them. So there are no really weak spots in our business right now. What we would like to mention just to give you an idea of how strong the quarter really was, certainly we have influences with weather and weather cooperated in the northeast. But the things that we look at are the restaurants that don't have outdoor cafes, which also performed very well in New York and in Washington. Thunder Grill, for instance and America in Washington don't have the advantage of outdoor cafe seats; they are not influenced by weather. And we had very good topline growth there.

In New York some of our restaurants, like Canyon Road, The Grill Room, Gonzalez y Gonzalez, do not have outdoor seats, and they performed very well in terms of comp sales. Las Vegas, which is a mature market, was up 7 or 8%. And what is interesting at New York-New York which I believe is up 7% as well, we were shut down in our catering operations as the hotel redoes all the meeting rooms. And there is a big refurbishment and doubling the size there. Those come back on-stream sometime in October.

So basically during this quarter we comped badly on catering, but despite that and despite the fact that the hotel is refurbishing rooms and 200 rooms are closed at any given time, with 10% of their room stock, which affects our room service sales. So in those two areas we were weaker, but the rest of the business was very, very strong. So New York-New York was up 7%. So we have for the new fiscal year coming up, we will have a doubling number of meeting rooms and banquet rooms. We'll have newly refurbished hotel rooms. So I think sales will benefit in those two departments, as well. So it was just a great quarter. I will let you take some questions.

(OPERATOR INSTRUCTIONS) Dean Haskell, Morgan Joseph.

Good morning, gentlemen. Congratulations on a great quarter. My question goes to the heart of the food cost in the quarter; while everyone else seems to have been struggling with food cost you had a very good comparison. Tell me what is going on there, please.

Well we are struggling. I think we just really focused on it. We are small enough, perhaps, that we can react quickly. We have a very unique system here. I don't know of anybody else in the country that is doing what we're doing, which is that our buying department is hooked in by computer to every single chef. And as chefs place orders they immediately see on the screen what it is going to cost them. So to some degree they have flexibility in switching our product. So if salmon is very high one day they go to cod as the special. Obviously there are fixed item menus where we don't have that flexibility, but in terms of sides and some garnishes, some specials and fresh fish products we can make those changes immediately.

We also have this reputation in the markets that we are in, where we are great payers. Every bill in this company is paid within 10 days to every conveyor. So if there is an opportunity for us to exert any pressure or influence on a marketplace where prices are increasing, they tend to want to cooperate with us to the extent they can. But all that being said, is it still is a situation where prices are increased. It is harder and harder to get the kind of costs that we are used to as a percentage of sales.

We are very fortunate in our comp sales being as strong as they are because to a certain extent it is masking the reality of higher food cost. We are selectively -- not now, but in the last few months, I guess in the spring -- we selectively raised some prices. We sort of saw this coming, but we did not raise prices across the board. We did so at the edges. So for instance where we used to pour a second free soda we might not do that anymore. Some of our appetizers have gone up, but the keystone products on our menu we are holding the line. We are doing very, very well.

We don't know how robust the market is going to be if there is economic displacement, especially in New York and Washington. And we like where we are. We are generally not as expensive as our competitors despite the fact that we have these landmark locations. And we've always been careful not to price the end of the line. We know the line is there for a reason, and we don't want to take away the reason for the line. So being there are pressure, price pressure increases and we are not responding to them right now other than trying to be more efficient and give people more reasons to come to our restaurants.

Would you take pricing by geography or market perhaps rather than across the board?

Across the board.

Okay. Thank you.

[Rick Teller, Pemburken Research]

Excellent quarter. Just one sort of general question. I don't know if you can find this information out through credit card receipts or surveys or if you even bothered, but I'm curious what percentage of your meals do you think get served to tourists versus locals? And within the tourist world if you could guess how many of them would you say are from outside the US versus people taking trips within the US?

I am reminded of the Stanley Zabar when he was asked to give a speech at the Harvard Business School. Zabar's is a delicacy store in Europe. They asked him what kind of market research, said he looked at the floor, and they said, what do you mean you looked at the floor? He says if I see feet I know I'm doing a good job. And that is -- we're not so sophisticated here. We look at feet. There are a lot of feet in our restaurants right now. There is no question if you talk to my managers that there is a lot of foreign business in New York City.

There is a big tourist business in Washington, D.C., but Vegas is -- I'm taking a guess the same mix that it has always been. And Florida where we have these food courts in the Seminole Indian reservations, that is just local business. It is no tourist business and that is a local business gone wild or comp sales are just -- we're in our fourth year there, and so it is double-digit growth every single year. So I would tell you that New York and Washington markets are influenced by foreign tourism, but that is just an eyeball. We don't look at credit cards in that way. We can run a report for you. I would be delighted to do so; American Express would gladly give us that report. I am just concerned that people are sitting in the seats.

I am just thinking about it at a macro level but maybe you get -- if the financial markets keep going down that would be bad for your business in New York from the locals, but we are getting more foreign tourists because the dollar is weak.

I would tell you this, we've seen some downturns. I've been at this thirty years, and we saw three downturns that I remember that were kind of severe in the New York economy at various points. And this is a resilient market for restaurants. They keep building more than the supply of restaurant keeps going up; the bar in terms of design and food quality keeps rising. But we've always managed to keep our prices and our offerings at something that customers feel very comfortable with.

And regardless of declines that have taken place in the economy or the crisis of September 11th, our businesses never really got affected that much for that long. But there's no question in the New York market, probably the Washington market a little bit of the bloom with these comp sales has to do with tourism.

Thanks and again, great work.

(OPERATOR INSTRUCTIONS) Blaine Marder, Loeb Partners.

Nice quarter. Can you just give us an update, Michael on your development pipeline looking into '08; talk about National Harbor and also about Yolo's in Las Vegas.

We have two signed deals. One is to do a fast food court where we are the sole fast food provider at Foxwoods. It is a new MGM Grand Tower. So that is about an 8000 square foot space, and you could put a fairly optimistic number on what we should do there. It is a very upscale property that they are building, and we are very comfortable with the lease arrangement we've made. We haven't got working drawings out there to bid yet. We think that our entry price will be very reasonable with respect to revenue potential. So we are excited about that, and that is a done deal.

We are in the process -- we signed a lease and we are now in construction at Yolo's at Planet Hollywood in Las Vegas. That is an interesting situation. My bet is Planet Hollywood is going to be successful even though at first I said what are they resurrecting this brand for, but they've done a wonderful job on the casino. I think it hits the market just right. We are at the front door with a Mexican restaurant lounge, which we are excited about in terms of the design and we think we got it right. So that is the first thing that will come on stream in terms of new product. That opens up sometime in October. I think the hotel will be open, officially opened late in September. They've been operating through this whole reconstruction process at 90 plus occupancy. So that bodes well.

And Robert Earl who is one of the principles, is certainly a great promoter of product. So we are feeling very good about that. We had been in lease negotiations with National Harbor in some spots and those lease negotiations continue. There is still some points to be resolved, but if we can resolve those, we will be open with at least two restaurants in May of next year. So those are the immediate things that were discussed. We've had some proposals on the table that are also interesting. The big stuff that takes 2, 2.5 years to develop. But we are in a very, very good spot. We are not taking on business that would require us to borrow money. We like our philosophical bent toward developing cash balances that gives us opportunity to distribute that cash to our shareholders. We like the fact that we are requiring developers or investors to put up big hunk of money in all of these projects. So there is not a lot of stuff that comes our way, but the reputation we have is we do big better than anybody else. And or at least as good as anybody else.

So if you have something that is big and complex, technically difficult, they come to us. And we have our business terms, and we stick to them, and we don't amend those business terms just because we get excited about a project. We learned a long time ago that getting excited about a project does us no good. Just deliver us our business terms, and we are prepared to go forward.

Okay, and what is the upfront investment on the MGM? And remind me what it is again on Planet Hollywood.

Planet Hollywood we are putting up all the money. That is $3 million, but we have -- while we don't have landlord/tenant improvement money there, we have a lease that is way, way below market. Which is their way of giving us the kind of support we needed to enter a project. So we are well below market rents in Las Vegas. In MGM Grand, we have both tenant improvement money from landlord and the investor group that we (inaudible) the Seminole Indian Reservations and the Foxwoods fast food coming up with all the money. So that requires no money, and there we are on a management agreement for 5% of the gross and 50% of the cash flow. So the only money we need right now, immediate money, the deal is signed, it is $3 million. We've got about $14.5 million in the bank today.

Okay, so you have $14.5 million and when is your next Board meeting in terms of the dividend and all that?

We just raised the dividend.

I know. Thank you very much.

So don't get us to put ourselves ahead of ourselves. We will need some de minimus amount of money in relation to the size of the project to National Harbor if we go through with it. There is a potential that we could be building another project in a casino before the end of fiscal 2008, which would be something that we would probably put up all the money for, and that would be 4.5, $5 million. So maybe we have capital outlays if everything were to come together and we did all of these projects, maybe we would need $8.5 million over these next 12 months.

And the good news about that is if you look at our cash flow projections and even with the additional dividend expense, we would have more money at the end of fiscal 2008 as we did at than we project to have at the end of this fiscal year. And that is the way we are trying to keep it. We are trying to balance our projects, manage our growth to our balance sheet. That is the story here.

All right, sorry, may I ask a couple more here?

Please.

Okay, I was reading something about the new Yankee Stadium mentioned that maybe the Yankees would take on their own concessions and kick out Centerplate. Have you had any discussions, or would you talk to anyone in the Yankees organization about the new stadium?

We've had discussions and meetings as part of a group with Delaware North, but that is about all I can say, because beyond that we are under a confidentiality agreement.

Fair enough. And then Durgin Park; how are those sales coming in versus your expectations?

It is interesting. The sales at Durgin Park are about at our expectations. We are probably doing better on the payroll side than I thought we would do this early in the game, because it is a highly seasonable business, and we went from winter to spring/summer where we really do a lot of business there, and that went really smoothly. What is not really smoothly there are the cost of goods sold, which that had no disciplines at all when we went in there. And it is taking us a big effort to reduce the cost of goods sold. We've managed to reduce it by 7 percentage points so far, but it is not good enough. We are profitable. We will probably meet the profit goals for the current year that we had. But if we are really going to be able to do what we thought we could do in the second year, and I want to emphasize we are beating our profit goals for the first year.

But in our second year we thought once this thing was moving efficiently, we could really have essentially bought this thing at three times EBITDA or 3.5 times EBITDA. And, or operate costs to be more accurate. But food costs standing in the way of that, and we are working very, very hard on it. And I think we have to restructure their menu a little, maybe more than a little bit as well as get a better discipline in place on how they order. quarter. They still are not on our system yet. But it is going -- basically it is going well.

And Bob, what is the unit volume there, the annual unit volume there roughly?

5 million.

Yes, about 5.

It's running about that level now?

Yes, it is running -- in the summer it runs higher. In the winter it runs lower. So I would tell you it looks like 5 million right now.

And lastly, in your press release you have your disclosure on EBITDA, which is about $11 million through three years, we are almost through the year. Do you have any sense of an annual EBITDA number? Do you care to share that with us or no?

You know if you just take the fourth quarter last year and add it on we are at $15 million, roughly. So we expect to do around $15 million.

Okay, that's fair. I noted in an analyst report that came out this morning that said your stock was about ten times EBITDA and I just can't get there. I take a market cap minus 10 to $15 million of cash and divide it by 15 or there about, it comes up to about eight times. Am I missing something?

No, you got it right.

All right. Thank you, gentlemen.

(OPERATOR INSTRUCTIONS) [Michael Margolis], A. G. Edwards.

Mike, regarding the Foxwoods addition, can you tell us are they at a high room occupancy now? Is that addition a large expansion of their operation?

They are adding 800 rooms. They are using the MGM Grand. It's not open yet. It will be opened in May. I am not sure what the occupancy is at Foxwoods as a whole property, but it's got to be way up in the 90 percentiles at this time of the year. They presently have 800 rooms on property and a couple hundred rooms on property which they control. I think their occupancy is very strong.

Thanks.

At this time there appear to be no further questions. I would like to turn the floor back to management for any closing comments.

Thank you for being shareholders and for attending the call. We'll see you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.