Ark Restaurants Corp (ARKR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Ark Restaurants fourth-quarter 2008 financial results conference call. During today's presentation, all parties will be in a listen-only mode. (Operator Instructions). I would now like to turn the conference over to Bob Towers, President and Chief Operating Officer. Please go ahead, sir.

Good afternoon and thank you for joining us on our conference call for the fourth fiscal quarter and year ended September 27, 2008. With me on the call today are Michael Weinstein, Vincent Pascal, Bob Stewart, and Michael Buck, my associates and fellow operators of the Company.

For those of you who have not obtained a copy of our press release, it was issued over the Newswire earlier today and is available on our website. To review the full text of that press release along with associated financial tables, please go to our web page, which is www.ArkRestaurants.com.

Before we begin, however, I would like to read the Safe Harbor statement. 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, undue reliance should not be placed upon them. We refer everyone 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.

Michael Weinstein, our Chairman, would now like to make some comments, and then we will open up the call to questions.

So, hi, everybody. This year and this last quarter were pretty good. Obviously, the economy around us is weakening. Topline sales are harder to achieve. The part of our business which is corporate catering has decreased as well. You are probably all aware that Las Vegas is weak in terms of visitorship, and spending in Vegas is down, I am told, by several owners of several casinos, down about 20%. So we are being challenged pretty much in every venue that we operate in.

However, we're very pleased with the year results and the September quarter results. But September quarter is sort of at an inflection point. We started to see a decline in sales in most of our venues in October. That decline accelerated somewhat in November. December, there is somewhat of an improvement in terms of comp sales from the November level, but clarity in this marketplace as to where sales are going to be is, at best, extremely difficult.

And with that in mind, the Company at a Board meeting earlier today -- tried to come up with a rational approach to our dividends. As you know, or if you have been following the Company, we are very, very conservative. We have no debt other than a small piece on a purchased money mortgage just related to the acquisition of a restaurant we made a couple of years ago.

We hold our cash and our assets to be very precious resources for this Company. When we do not see a need for our cash balances being more than a comfortable level in the past, we have increased our dividends aggressively in response to increased cash flow. When we liquidated some assets and had a large cash balance available to us, we declared a special dividend to our shareholders, in light of the fact that we did not think we could use the money at that time, as well as we thought our investors might be able to use the money.

But times have definitely changed. We are beginning to see some very strong opportunities for this Company to increase shareholders' value significantly. There are small businesses, restaurant businesses, that are in trouble. Credit lines to small restaurant businesses are nonexistent. As these sales declines ripple their way through the restaurant industry, we think that we will be up to buy businesses at values that we have not seen in over a decade. So we definitely think we have a strong reason to increase the cash on our balance sheet, and use that money to purchase assets at strong values to us.

The second thing related to the dividend is that we don't have a clear view of the future. We are amateurs, we read the newspapers, we see economic indicators all headed down. While our business is not bad -- we will be profitable in the December quarter -- we're not certain of the future. So we, at a lively Board meeting this morning, decided that the best approach, for the moment, was to suspend the cash dividend payment that would be payable on February 1st of 2009, and basically take a look at the business then and see what the dividend approach would be for the quarter thereafter.

I hope this gives you an adequate explanation as to our thinking. The suspension of the dividend is really seen as an opportunity for the Company to increase shareholders' value and bring some rationale to a very difficult economy and, not knowing how that economy will affect us, we think that we want to get some more visibility before we come up with a definitive dividend policy. So it's a quarter-by-quarter doing by us, and we will keep you apprised of, obviously, of what we see in the marketplace and how we're using our cash, and what our future thinking will be, concerning dividends.

With that all said, I think we will open up for questioning.

(Operator Instructions). Rick Teller, Pemberton Research.

I wonder if you could describe for us your idea of sort of an ideal acquisition candidate.

What we're seeing, and how are you, by the way? It's nice to speak with you. What we're seeing is -- I would say to you that six months ago or nine months ago, we were being offered good businesses. Good businesses, at eight or nine times EBITDA. We are now being shown good businesses at one to three times EBITDA. Now, that's trailing EBITDA.

We're looking at a small group of restaurants in Washington, D.C., that probably is typical of what we would be looking at. It's in an area where we already have corporate overhead. It's not unwieldy to manage. It's three restaurants. It's not a chain that spans the United States. And let me make it clear, if it was a chain that spanned the United States and there was real EBITDA and, no matter how low the multiple was, if it goes beyond our cash, there's probably today no credit line available to purchase such a chain.

So the focus we have right now is are there chains that are small, in a corporate area, where we have -- in an area where we have corporate overhead, or are easily accessible for us to be able to manage. Or are there other types of businesses -- again, restaurant businesses, that are profitable, but are a workout because of their debt structure, where we could slip in, because we have good management and people do talk to us about these things, where we could slip in and not need very much cash, maybe just working capital, and straighten out the problems.

So that's what we're looking at. There is not going to be some $100 million purchase, which we're going to leverage up on. It's going to be these small little packages, which are being sold because the probability is the owner has problems elsewhere and needs to raise money, or there is a bank debt that cannot be paid and we're getting it through a liquidation by a debt holder.

But we're seeing these deals. And quite honestly, they're quite exciting. We have not been able to easily buy anything for several years.

The other thing that is happening is a lot of these businesses will be stuck with -- rents that, you know -- they're good businesses with unrealistic rents. And for one reason or the other, the owner will not be able to reduce those rents but we will be able to reduce the rents. We're a better tenant. The landlord will see that, and want stability, and will be able to make a deal with us that is sufficient for us, to get the stability of our presence. We've never missed a rent payment in 32 years. That's a track record that I think is enviable for a landlord.

Presumably, these would be restaurants that are physically large, in other words, lots of seats, and located in, I guess, tourist areas or something where you don't have to advertise to (multiple speakers)

We're looking at EBITDA. And if we can buy a business -- we're not looking at something that earns $50,000. We want to -- we have a criteria -- it has to be a large enough earner to make it interesting for us, and we do have 3.5 million shares outstanding, or 3.4 million, or whatever it is, to make it worthwhile for our shareholders and increase value.

But we're basically looking at EBITDA. You send me a 100-seat restaurant making $1.5 million a year or a 1,000-seat restaurant making $400,000 a year, I'd rather have the smaller one. So EBITDA is the criteria, and the safety and reliability of that EBITDA is also the criteria. There are a lot of wonderful, mundane restaurants that aren't in the press and don't have a famous chef that knock out consistent earnings every year with good leases. Those are what we want.

Good. Thank you.

(Operator Instructions). Thomas Duffy, private investor.

Thanks for taking the call. Can you tell me if there is an update on your share buyback program? Where that stands?

We sort of goofed along the way. We bought stock at $19 and then we bought stock at $11.90. At each of those times, the business was performing much better than the price of the stock, we thought. And that didn't prevent us from being wrong.

I would tell you, in light of the conversations we have had over the last couple of weeks, unless the stock got much, much lower than it is at this moment, we think the opportunity is not in buying back the stock, but the opportunity is buying assets that are positive assets to this Company.

When you buy back the price of the stock, you buy back the stock, you're shrinking capitalization, but you're not adding good businesses. You're just putting yourself in a position where the math is right. But in the end, what you really want to own, we believe, is good businesses. And we think we can find those businesses. We're very comfortable that this strategy is the better strategy and we're going to add to our portfolio restaurants with good leases, with good -- good long history of solid sales and solid productivity, and maybe that productivity for the next year or so might be somewhat diminished.

But in the end, these are going to be good assets and they're going to come back and do very well for us. So, I would say the share buyback program has been pretty much terminated. Not formally, but intellectually.

Okay, thanks.

John Szabo, Flintridge Capital.

Thanks for taking the question. I am somewhat new to the story here, but I'm trying to understand what flexibility you may have to manage through this difficult environment. If you go back to, say, the 2001/2002 period, you're still able to maintain a pretty decent level of operating earnings and cash flow. Is this a materially different situation in terms of where your business is today? And maybe, if you could just try to give me an idea of what you can do to maintain earnings and cash flow in the difficult environment.

That's a great question. Thank you. If you go back to 9-11, and the year that followed, they're -- it was an emotional crisis, in many respects, because we were in New York and we were in Washington and Las Vegas. Nobody was going to Las Vegas for about four or five weeks. But from the point of view -- our point of view, and again, this is an amateur thesis, but what we have been stating to ourselves here -- the consumer still has money to spend. They just chose not to spend it at that time.

Four weeks later, Las Vegas -- I mean, I would have to check with Paul Gordon, who runs Las Vegas or Vinny, Bob, here, but my recollection is that the week of 9-11, Vegas -- we were going at about a $750,000 a week sales rate in New York New York at that time. We now do maybe $925,000 a week today, in a normal week. But at that time, it was about $750,000, and the second -- the week after 9-11, we did close to the same because nobody could leave. There were no planes out.

But the following week, the second week, the business went down to $450,000. So there was a dramatic down, but then, it was like a V, straight up again. Because once the -- business continued as usual. There was no structural change in consumer spending. And part of our ability to have a good year that year was that Vegas came back very, very strong. New York and Washington were slower to come back. New York came back about six months later. Washington never came back that year, or the year after.

What we did then is what we're doing now, but the emotional grief was so -- evident that we had managers and employees coming to us and saying, how much of my salary do you want me to give back? That was essentially what was going on. We didn't even have to ask. We cut $10 million in overhead. I think our -- we had a $40 million payroll, and within 1.5 weeks, we had cut it by $10 million annualized, basically on voluntary deductions that people were willing to take. Every executive, every manager, every chef, I mean, it was extraordinary here in terms of the goodwill and loyalty felt by our people working with us in this endeavour.

So -- but by the end of October, we were profitable again.

This is a much different situation. Here we have a structural change in what's going on. The consumer does not have the same amount of money. There is a sense of -- I would think hopelessness about whether this economy comes back or not, regardless of how much money Washington is throwing at it. So -- and our businesses in Vegas or in New York isn't going from $750,000 a week to $450,000 a week. The declinations are much, much less severe than that. (multiple speakers) It doesn't even begin to approach that.

But what we have done is, I think, on an annualized basis, we've already cut $3 million off the payrolls. We're not giving raises. There are no bonuses. We're just being prudent. We're not going to -- in 2001, we were prepared to destroy payroll because there was no business. And we said we owe $27 million to a bank, we're in big trouble, we can't even make payroll unless the bank allows us to overdraw, which they basically did. There wasn't time to do a new credit agreement.

Here, what we're saying, basically, is yes, we've got a declination in our business, at the sales line. We can manage payroll to an extent without -- without cutting services to customers. We could play around with menus a little bit, in terms of values. We could do some promotions, which we're doing, to try to drive business in January, February, and March. We're a little bit lucky that Washington will have a good January because of the inauguration. There are some other things going on which will benefit the Company.

There's no attitude here that we're in trouble in any respect. We're going to make money this year, and we're going to make a decent amount of money. What the theory here is how to take advantage -- I mean, I -- I loved when I hear these great corporate executives at times say I love it when things are bad. It's a trite expression. We love it when things are bad. We're good at what we do. We've got everybody saying, here is the time when we can really shine and show our shareholders, and this is an honest statement, how good we can be for them when times are rough.

But how do we take advantage of it? Because there are other people who don't do the job we do, and their restaurants are going to be for sale. So our whole approach here is how do we get an even better balance sheet for the size of this company to take advantage of that. And that's the thinking.

But the difference between 2001 and '02 and now is that we're not prepared to destroy the fabric of our business. We don't have to. We have no debt to worry about. Our sales aren't falling to levels that are dangerously low. We're just being prudent. We're trying to be prudent in every area of our business. I hope that answers your question.

That was very helpful, thanks. I guess, maybe to the point about -- the balance sheet. I don't think you have a credit facility now, at least I thought I read that in either (multiple speakers) --

We don't have one. We don't want one.

Right. So, okay, so then, you are somewhat limited in your opportunities by the existing cash on hand and any cash flow you may be able to generate, unless you were to go out and raise some kind of equity.

We have partnerships in several locations. Our Hollywood and Tampa food operations, which are stellar, by the way, have a group of investors who have followed us up to Foxwoods and MGM Grand at Foxwoods. We think if we had a deal which gave them great returns in this type of economy that they would follow us into another deal. So, anything we do is going to be equity-based.

So you could effectively leverage your existing relationships and minimize sort of the capital intensity of whatever you want to do from (multiple speakers)

Absolutely.

The other sort of difficult question to answer, and I think everyone is kind of struggling with this, is, if you do have a limited amount of financial resources, when do you pull the trigger, and how much, and what kind of assumptions are you going to make about the economy going forward?

Do you get the sense that there are so many opportunities that you could spend a lot of the money right away, or are you going to take a more measured approach and see how the economy unfolds, or --

It's a measured approach. When we see something that's overwhelmingly compelling, and we have one such deal that we're drafting contracts for, we will pull the trigger. But we're not spending anywhere near a significant percentage of our capital to do so on this first deal. And I think we will just take a very measured approach.

And from my point of view, I don't want to talk about Warren Buffet's big fat softball coming across the plate, and use his words, but everything has to be going in our direction. There is no negotiation with us right now. We're prepared to negotiate. We see EBITDA and we give a price. If the leases are correct, if the locations are correct, if the history of the business is correct, and if there are any flaws in any of that, we're not going to budge because we think perfect deals will come our way. So it is a very measured approach.

Okay, thanks. That's helpful. And just one last thing, then. I think you'd said earlier that you think this is more of a permanent change or semi-permanent change. Has that affected your view of the business over the intermediate term, and in terms of what type of businesses you want to own, what locations you want to be in, has there been any change in the strategic thinking as a result of what you perceive to be a more significant change in the economy?

What we think, even though we're building a restaurant at the Museum of Art and Design in New York, we think -- right now, it's cheaper to buy existing restaurants and renegotiating leases as it is to get new leases and build restaurants. Because you're going to be [able] to validate sales and cash flow, where, when you build a new restaurant, you can't necessarily do that very well.

So we think purchasing assets is probably the primary thing we will be doing. I don't even want to use probably, is the primary thing we will be doing as opposed to constructing more development. So, from that point of view, yes. We're thinking about the business somewhat differently. Most of the locations we have today, we built, and while we've done some purchasing in the past, the majority of our operations were built by us.

So I don't -- I don't believe that, when you look two years down the road, that you'll see a business that is very much different from what it was 1.5, two years ago. I don't think there is a structural difference in the restaurant industry, especially in urban areas. I think Las Vegas will come back. Our locations in Vegas are just spectacular locations.

I think -- what we tried to do, three or four or five years ago, I forget what the pivotal point was, is we said we wanted to be a business of landmark locations. And we wanted from our Las Vegas history and from our Bryant Part history, and Sequoia in Washington, D.C., what we really understood, we thought as well as anybody else, was high-volume restaurants where we could push out a quality that was superior to -- most other restauranteurs.

We proved that at New York New York, we proved it at Bryant Park, we proved it at Sequoia in Washington, D.C., going backwards in time. And these landmark locations, historically, were more immune to downturns than -- than other businesses. Other restaurant businesses. They were big enough to not only deal with our a la carte customer, they were also capable of dealing with large private parties, tour and travel business. There were more sources of revenue available through larger businesses. And we said, hey, that's a great idea.

I guess that all becomes -- not a provable point anymore when you see Las Vegas sales down at the hotels, and casino spending down, and retail spending down in Las Vegas. Well, that's being mirrored everywhere. But we really do believe that the locations we have are very, very important locations in our industry, that the leases are strong leases, that they are well-run, that because we're not leveraged and because we have sufficient working capital and because we're efficient, that we can run these things profitably even through a bad downturn.

And therefore, we don't have to destroy the fabric of the business, meaning that we bring payroll so low that people aren't getting good service. We don't have to cut costs with what we're offering on the plate. We don't have to do stupid marketing things where -- two for one -- when the business comes back, you can't necessarily abandon that and lose some margin by putting these marketing strategies into play which, may could be good in the short term but may not necessarily be the best thing for you in the long term.

So, basically, I would tell you, some time out, not this year, maybe next year, but certainly a couple years out, this business will return to be as strong as it ever was. The strategy is to buy into that theory, and buy these businesses that may not be doing as well as they were doing, but we're confident are going to do well as the rest of our businesses are going to do well. And have a much stronger asset base and cash flow base when we come out of this thing. And that's what we think. So I don't think there's a structural difference.

So you're not going to change your geographies, necessarily, and then, I guess --I'm sure there were landmark restaurants in Detroit 50 years ago when they were the center of the universe, and I certainly hope New York doesn't turn into Detroit, given what's happening in the financial services business. Okay. So you're not going to move up or down a price point or change the geographies. You're just going to look to add locations.

We are very fortunate. If Paul Gordon were on this call, this is the guy that runs Vegas for us, he would recite to you how many restaurants at the high end in Vegas are closed in the month of December until New Year's Eve, because there is not enough bodies walking into them. We think high-end steakhouses are going to suffer, but Gallagher's is not a high-end steakhouse at New York New York. We're $10, $15 below everybody else. All of our other restaurants, by the way, are very moderately priced, $23, $24 check averages at dinner, $21 to $18 check averages at lunch. We're not playing in that other game.

Thank you. That's very helpful, and good luck.

Michael Margolis, Wachovia.

Hi, Mike. In terms of flexibility on your balance sheet, do you feel strongly about even having a small amount of debit financing, say, $3 million, $4 million? And secondly, what about capital expenditures on your current properties? Do you have a lot of those coming up or are you going to be able to conserve dollars by not having to do that?

And finally, when you are entertaining the purchase of another property, is there an opportunity for -- and it would be a desirable for the owner of that to become an investor, just as you have outside investors down in Florida? What about the selling owner? Could he or she still remain involved as an investor?

Let me answer your last question first, which sort of ties into debit financing. Most times, when we've purchased restaurants in the past, we either get a bargain price because we're prepared to pay all cash, or we get another price which is a little bit above a bargain price because the owner takes back a purchased money mortgage. So, in a sense, they are an investor but they are on the debt side, and that's a non-recourse purchased money mortgage, so that we're not exposed in case things go wrong. They just get the asset back. So that's a very traditional deal structure in the restaurant industry, for individual restaurants or small groups of restaurants.

We're not going to borrow to buy things. We will take in equity partners, as I said. The -- we just think the opportunities are very, very strong and we're going to -- that's our story and we're sort of just going to stick with it.

How about at capital expenditures? Do you expect to have a big outlay on your current properties?

No. There is no reason for us to delay capital expenditures in any of these properties. We want them to look great. We do spend money as needed, and in terms of maintenance and capital expenditures, it's not something you budget here. You've got to spend the money. The customer's got to be happy. You've got to make the place look great so that the customer is happy. If it requires a new floor or whatever, you do it. We're so far from the situation where you're looking to delay capital expenditures that it's not even a consideration here.

Your EBITDA for the last 12 months was about how much? Yearly?

13.5, I believe.

So even if you did take a reduction in that area of 30%, 40%, you should have a fair amount of cash flow to augment your current cash position.

Unless we buy something.

Right, right, I mean, for the purchase. That gives you added flexibility. That's the whole idea about cutting the dividend.

Absolutely.

Thank you.

(Operator Instructions). Chris [Gassen], Faircourt Valuation.

Good afternoon. I apologize if this question was asked already because I just joined the call. But have you -- are we considering share buybacks at these price levels?

The question was asked. I'm happy to repeat it. The answer is no. We are not. We purchased back some shares at higher prices over the last three or four months. We did so because our business was strong and we thought, in our own calculation, that the share price was a bargain to us at those times.

We still think the share price is a bargain, but what we think is a better bargain for us is to buy cash-producing assets that we can buy presently at very low multiples, multiples that we haven't seen in a good 10 years. So that is the specific direction we are taking.

Thanks. Good luck.

Thomas Duffy, private investor.

This is just a follow-up. I was wondering if you could kind of comment on more recent trends, maybe if you could talk about October compared to November, and maybe what you're seeing so far this month.

October, we were down about 7%. November was a disaster for the restaurant industry, everybody I speak to. We were overall -- not including Florida, but we were down about 15%. Florida was up. It seems to always be up. But away from Florida, we were down about 15%.

December is a very tricky month and let me tell you why. It's complicated. We -- we have deposits on a lot of parties, and a significant six-figure number, on a lot of parties that are not taking place because they were canceled. And the story is the same with everybody that's canceled the party -- we know we have a deposit with you; we are prepared to forego it; we just don't think, given that we're laying off people, that it's appropriate for our company to be having a Christmas party. There's nothing really to celebrate when you're laying off people.

What we say to them is we're sorry you are not having the party. We will give you credits for future parties, but right now, we're sitting with a lot of dates that have been canceled. Obviously, this is the last week that Christmas parties take place, by the way. So we have the deposits and we have the earnings that are being credited with those deposits, but we don't have the sales.

So, it's a little tricky, but December is markedly better for us than November. And that's before throwing in the number for these canceled parties that we would have had the sales if they took place. So we have the profitability of those parties, we just don't have the sales. So, December seems to be better. And we just don't know about -- Washington will be good in January because of the inauguration and the events surrounding the inauguration. But we just have no sense of what January is going to bring here.

Just leave you with one last thing. I know we talked about the share buyback program, but that doesn't prevent you personally and some of the other executives to buy stock for yourselves. And I've seen that one of the directors has been doing that recently. I think it would just be encouraging if we saw more of the insiders stepping up and buying the stock at the current level.

You're assuming that the rest of us have money. The director who is buying stock has real money.

Thank you, and best of luck.

There are no further questions at this time.

So can I speak to them, or am I on? Thank you, everybody. We will hopefully progress well with this plan and we'll speak to you at the next conference call. Happy holidays.

Thank you, ladies and gentlemen. This concludes the Ark Restaurants' fourth-quarter 2008 financial results conference call. Thank you for your participation. You may now disconnect.