BJ's Restaurants Inc (BJRI) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Chicago Pizza & Brewery earnings for 2003 conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure the floor over to your host Rob Curran, Vice President of Investor Relations. Sir, the floor is yours.

Thank you. Good afternoon everybody. We would like to welcome you to our fourth-quarter 2003 conference call. We are broadcasting live over the Internet today. On the call, we have Paul Motenko, our Chairman and Co-CEO; Jerry Hennessy, our President and Co-CEO, and Doug Mitchell, our Chief Financial Officer.

The Company released earnings after the close of the market today, and a copy of our results can be viewed on the main page of our Website which is located at www.bjsbrewhouse.com. If anyone would like a copy or would like to be added to our distribution list, please give my office a call at 714-848-3747, ext. 260, and we will forward a copy to you.

Our agenda for the call will be as follows. First, Paul will provide a financial and operational review covering Chicago Pizza & Brewery's results for fourth quarter ended December 28, 2003. After that, Doug is going to provide some additional financial details on the quarter, and Paul will follow that up with comments on current business trends and will discuss 2004 guidance. Lastly, all of us will be available for a Q&A session.

Before we begin, I would like to point out that certain information contained on this conference call may be considered forward-looking in nature and is subject to various risks and uncertainties. Should one or more of these risks or uncertainties materialize or underlying assumptions prove to be incorrect, actual results may vary from those anticipated. All forward-looking statements made today on this conference call speak only as of today's date. We do not undertake any obligation to update any forward-looking statements, and we refer investors and listeners to the full discussion of risks and uncertainties associated with forward-looking statements contained in our periodic filings with the SEC.

With that, I would now like to turn the call over to Paul.

Thanks, Rob. Our revenues for the fourth quarter were $27 million, an increase of nearly 29 percent over the fourth quarter of 2002. The increase was primarily driven by six new locations which have opened since October 2002, as well as a 5 percent improvement in total same-store sales. Comp store sales increases were primarily due to increased customer accounts and approximately 2.5 percent of menu price increases added during 2003.

Eight stores were in operation during the period, which had not yet entered the comp base, including three stores in Texas, which had sales which met our expectations during the period and five locations in California, which had aggregate sales above our expectations during the period. Average weekly sales for all stores during the fourth quarter were approximately $65,000 versus $56,000 in the fourth quarter of 2002. To provide additional details for financial modeling purposes, we note that our six Oregon stores, which includes three Pietro's, contributed $1.9 million to fourth quarter 2003 revenues, and our seven BJ's Pizza & Grill locations contributed $2.5 million of revenue during the fourth quarter of 2003. The remaining $22.6 million was generated from 19 full-sized Brewery and Brewhouse restaurants, including one new restaurant we opened in the fourth quarter in San Jose, California.

During 2003, average weekly sales for the Brewery and Brewhouse restaurants were approximately $91,500 in the fourth quarter of 2003 versus $91,000 in the fourth quarter of 2002. Net income was $719,000 in the fourth quarter or 3 cents per share diluted versus a loss of 393,000 or a 2 cents loss per share diluted.

At this point, I would like to turn it over to Doug to discuss our quarterly financial results in more detail.

Thanks, Paul. As noted, total revenues for Chicago Pizza & Brewery for the fourth quarter increased approximately 29 percent to $27 million from 21 million in the prior year's comparable quarter. This increase is primarily the result of the opening of six new locations, including Lewisville, Texas in November 2002; Cupertino, California in December 2002; Clear Lake, Texas in January of 2003; Addison, Texas in May 2003; Cerritos, California in July 2003, and San Jose, California in October 2003. In addition, the Company posted a same restaurant sales increase of 5 percent in the fourth quarter comprised of an increase of 5.1 percent at BJ's restaurants and 2 percent at the three Pietro's locations.

The comp store increase is primarily due to increased customer accounts and menu price increases of 1.5 percent, which rolled out to the stores during May 2003 and 2 percent taken at the end of November 2003. Quarter over quarter revenue gains were partially offset by the closure of our Pietro's Portland, Oregon restaurant on Lamburgh (ph) Street on December 31, 2002 and our BJ's Portland, Oregon restaurant on Start (ph) Street on June 15th, 2003.

Cost of sales, which includes food, beverages and paper, increased to 7.1 million from 5.4 million during the comparable quarter of 2002. As a percentage of revenues, cost of sales increased to 26.4 percent for the current quarter from 25.8 percent for the comparable prior year quarter, an increase of 60 basis points. Sequentially from the third quarter of 2003, cost of sales decreased 20 basis points. The increase that we have seen in cost of sales year-over-year is primarily a result of an increase in selected commodity costs, primarily cheese and beef, although price increases taken in November 2003 helped to mitigate cost pressures.

Additionally, we continue to expand entire per unit purchase cost in new markets, notably Texas and Northern California. In these markets, we have not yet achieved critical mass necessary to get food costs at rates similar to those we experienced in Southern California where we have a solid base of stores with improved economies of scale and purchasing power.

Labor and benefit costs were $9.8 million in the quarter versus 8.2 million in the fourth quarter 2002, a 270 basis point improvement as a percentage of sales at 36.4 percent versus 39.1 percent year-over-year. The decrease in labor in 2003 is partially the result of management directed productivity improvements at the restaurant level, as well as the presence of more restaurants in tip credit states.

Occupancy costs increased to approximately 2.2 million during the fourth quarter from $1.7 million during the comparable quarter of 2002. As a percentage of sales, occupancy costs increased 10 basis points to 8.3 percent from 8.2 percent quarter over quarter. While the increase in absolute dollars reflects six additional restaurants opened year-over-year offset by the closure of two lower volume restaurants, occupancy costs as a percentage of sales were relatively stable.

Operating expenses increased to $3.1 million during the quarter versus $2.3 million in the year ago quarter. As a percentage of sales, operating expenses increased 40 basis points to 11.3 percent for the current quarter from 10.9 percent for the comparable prior year quarter, primarily due to increased utility and supplies costs. Operating expenses decreased 15 basis points sequentially from the third quarter of 2003 due to a seasonal decrease in utility expense and a decrease in credit card processing costs related to a new vendor contract.

General and administrative expenses decreased to $2 million during the quarter from $2.4 million during the comparable quarter of 2002. As a percentage of revenues, G&A expenses decreased 440 basis points to 7.3 percent for the current quarter from 11.7 percent for the comparable prior year quarter and declined 50 basis points sequentially from the third quarter. This decrease is primarily due to sales leverage.

Depreciation and amortization increased to approximately $1.1 million during the quarter from $900,000 during the comparable quarter of 2002 due to our investment in six new restaurants since October 2002. Restaurant opening expenses decreased to $238,000 during the quarter from $896,000 during the comparable quarter of 2002. The Company opened one restaurant in the fourth quarter of 2003 versus two restaurants in the comparable quarter of 2002, although the Company incurred preopening costs during the fourth quarter in both years for restaurants which opened early in the subsequent quarter. Our opening costs will fluctuate from quarter to quarter depending on the number of restaurant openings, the size and concept of the restaurants being opened, and the complexity of the staff hiring and training process.

We were pleased with the improvements made in 2003 to streamline our store opening process and the resulting improvement in opening expenses. We budget preopening expenses between 300,000 and 400,000 per unit, with units opening in Southern California typically experiencing lower preopening costs due to less travel and lodging costs, as well as the potential for a portion of managers and staff to transfer from existing Company restaurants in the same market.

Net interest income decreased slightly to $99,000 during the quarter from $103,000 during the comparable quarter of 2002. Other income and expense includes income of $250,000, which is the Company's share of the settlement proceeds of the Aussie (ph) action, which is more than offset by litigation expense in G&A.

Additionally, as previously disclosed in our 8-K filing dated January 12th, other income and expense includes an accrual of $950,000 to record the Company's liability in connection with a tentative proposal to settle a meal and rest class-action case pending in California.

The tax rate was 29.5 percent for the quarter versus a 35.3 percent rate in the fourth quarter of 2002. The tax rate for the year 2003 was 33.9 percent. We currently estimate our effective tax rate for 2004 to be 33 percent. The rate decline from 35 percent due to higher utilization of FICA tax credit related to tipped employees. Utilization of FICA tip credits will fluctuate from year-to-year due to application of limitation, included in the income tax laws. We expect our effective tax rate to be between 32 percent and 34 percent in future years.

Turning to the balance sheet, we ended the year with approximately $26.9 million in cash and short-term investments or approximately $1.30 per diluted share and no funded debt. Shareholder's equity was $71.1 million at December 28, 2003 or $3.44 per diluted share.

Total capital expenditures for the quarter ended December 28, 2003 were approximately $3 million and were primarily related to the development of our San Jose, California and Willowbrook, Texas restaurants. Capital expenditures for all of fiscal 2003 were approximately $14.1 million.

I would now like to turn the call back over to Paul.

I would like to address our current business trends and expectations for 2004. The Company opened our fourth Texas restaurant in Willowbrook, a suburb of Houston, on January 26th. And although it has only been open a few weeks, we have been very pleased with the results to date as initial revenues have been in line with our expectations.

In terms of current business trends, during the first and second periods of 2004, our year-over-year comparable store sales results have increased over 8 percent versus the comparable period of 2002.

On the new restaurant development front, our Chief Development Officer Greg Lynds has signed a number of leases for 2004 and 2005. We are very pleased with what he has accomplished in a fairly short period of time. We now have a development pipeline that will carry us into 2005 and a well thought-out multiunit multiyear plan. We are currently projecting opening six to seven units in 2004, including Willowbrook, Texas, which we opened in late January. In addition, we have signed leases for locations in Summerlin, Nevada; Rancho Cucamonga, San Bernardino, Fresno, Roseville and Folsom, California.

We recently announced an agreement for the sale of our three Pietro's restaurants and related trademarks for the Pietro's brand for approximately $2.2 million. The sale will yield a pre-tax gain of approximately $1.7 million during the first quarter of 2004. Concurrently we announced an asset purchase agreement for a leasehold interest of an existing restaurant and brewery located in Laguna Hills, California. We anticipate converting this 10,000 square foot restaurant into a BJ's restaurant and brewery, which we estimate will be open by this summer.

We are issuing 2004 projections with this release today and anticipate 2004 revenues will be between 124 million and 128 million with 2004 diluted earnings per share between 30 cents and 33 cents, which includes an approximate 5 cent after-tax onetime gain from the sale of Pietro's. Our expectations are based on opening six to seven new BJ's Restaurants and same-store revenue growth of 3 to 4 percent. Chicago Pizza & Brewery will have one additional week in fiscal 2004, a 53-week year versus the standard 52-week year which we reflect in the guidance issued above.

This concludes our formal remarks. So at this time, we will open up the call for questions.

(OPERATOR INSTRUCTIONS). Mike Smith, Oppenheimer.

Good afternoon, Paul. All those leases are signed are they not,for the six units that you expect to get opened this year?

That is correct.

And what is your CapEx budget for the year?

CapEx is about 18 million.

Are there any Pietro's left?

We are selling the three remaining Pietro's restaurants, so we will not be operating any Pietro's restaurants.

And that is going to close in the first quarter?

Correct.

Mike, we will have about two months of Pietro's revenue and income in the first quarter.

Thank you very much.

Tony Brenner, Roth Capital Partners.

Maybe I am double counting, but as you listed the number of stores to be opened this year, I think you cited seven where the leases are already signed, and you are talking about six to seven openings. It sounds like there is at least seven with a possibility -- this being only February -- of an additional one or two. Is that reasonable?

Yes. Actually we have announced eight if you include Willowbrook, which is the unit we have already opened this year, and we are still providing guidance of six to seven because there is the possibility that one or two of those units might slip into 2005. But we are confident of absolutely six, with the potential of seven. Unlikely that one of those units won't slip into 2005 though.

It is unlikely that one will or won't?

It appears that at least one of them should slide to 2005, but there is a potential that two of them would. But it is very likely that at least one of them would, which would bring us to seven and two slides into 2005, that would bring it to six.

Leases to be signed subsequent to this point are likely to be opened in 2005, not this year, is that it?

I would say that is a very good assumption. We are pretty excited about the fact that not only do we have all these leases signed for 2004, but if things go as we anticipate, we already have a pretty good headstart on 2005.

Okay. Thank you.

Eric Wold, Merriman Curran Ford.

Good afternoon. A couple of questions. One, can you maybe talk, if you do not want to get specific, maybe talk in aggregate about the restaurants that are expected to roll into the comp base over the next couple of quarters and how they have been performing year-over-year versus those in the comp base? And secondly, maybe a little more specific on expectations for a certain commodity cost that you see you are rolling through '04?

Okay. As you know, we bring restaurants into the comp base after 18 months. And the ones that we will be entering this year, we believe based upon current trends that they will not have a negative impact on comps as to how much positive impact if any -- it is a little too early to tell. So we are comfortable at this point that it's not going to be a negative situation.

In terms of commodity costs, prices are still very high. Cheese prices actually had declined for a while. They are coming back up a bit, which is discouraging. Beef prices remain very high despite the mad cow situation where other countries are not accepting our beef. Any expected significant decrease in beef prices certainly has not materialized.

Chicken prices have gone up significantly. The good news for us in chicken is that we are protected for the year on chicken breasts and for half a year on wings. So that is not a big impact on us at this point. But 2004 is not looking to be a great year in terms of commodity prices, as was the end of 2003.

So if you were to take that into consideration combined with the price increase taken in November, there are still a couple of months this year -- four or five months this year of the price increase taken in May last year, where do you see cost of goods shaking out this year versus last year?

I think we can look at a number similar to the latter part of this year. There are a couple of things that we are doing to mitigate the impact of the commodity price increases, and one of them you mentioned that we have -- we did a 2 percent price increase in November, which was on top of a 1.5 price increase in May. Although we don't have any current plans for price increases in 2004, we are monitoring the situation. But we have been pressing very hard on our suppliers to help us out during this time, and with the increased purchasing power that we have overall as a company, we have been making some significant strides in terms of reducing the markups and reducing the cost of the products that we get in.

In addition, as we do more units especially in Northern California this year, with Fresno, Roseville, Folsom, it increases our purchasing power in Northern California, and with the opening of Willowbrook bringing our fourth unit to Texas, we are starting to see some benefit there. So there are some positive things going on with food costs for 2004, but we are not been helped out by the commodity prices.

Okay. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS). Alan Kim, McDonald Investments.

Good afternoon. How much is the extra week in 2004 worth in terms of EPS?

You are talking about -- there is not much accretive out of the extra week, so it is about 2 percent of the total.

You mean 2 percent of your EPS guidance for the year you mean?

Correct. One divided by 52, it is about 2 percent.

I see what you're saying. Okay. Looking at occupancy costs for the fourth quarter, why did you not get more leverage from the 5 percent comps? I thought that cost as a percentage of sales would be lower. Could you give a little color on that?

Historically the fourth quarter is not our high (inaudible) and our best two quarters are the second quarter and the third quarter. So normally occupancy costs would be a little higher in the fourth quarter. San Jose, which is our newest restaurant, has fairly high occupancy costs. We are thrilled with the revenue that it is producing, but the occupancy costs are a little higher than our average. So that probably had an impact also. But if you look at the year, you will see that there is some seasonality involved with occupancy costs.

Going to my second question, why is the fourth quarter higher?

Typically our strongest sales are in the second and third quarter. So even though it is 5.1 comp in terms of average weekly sales, we are higher in the summer months.

You mentioned that you are contracted out for your chicken. Do have any contracts on beef or anything else?

Not on beef or cheese. We have contracts on other items, but not the main items of beef and cheese are not contracted.

All right. Thank you very much.

Kevin Wading (ph), Polyness Capital Management.

I wanted to clarify your comments on the 2004 guidance because without the 5 cents from the gain from the sale of Pietro's, you are suggesting a range of 25 to 28 cents. Is that what you are intending with the language?

I think that is fair, Kevin.

The sum of the analyst estimates have been above that. I think the consensus on average is above that range. So on one hand it sounds like you feel pretty positive about the business, and maybe you could give us a little bit more color as to why you feel like you may be below where the analysts are at this point? What parts of the business will affect that the most, whether it is costs or preopening or whatever?

Well, one of the issues is that the openings of our restaurants -- we are going to open six to seven. The openings are skewed more towards the back half of the year, which certainly has a significant impact on profitability, because, frankly, if you do not open a restaurant by sometime in April, it is unlikely that that restaurant will be a positive in terms of earnings for that year.

And then with the announcement of the Laguna Hills restaurant, that is another recent announcement, another unit that is unlikely to have a positive impact on 2004 earnings. And then several of the restaurants we anticipate would open towards the end of the year with three of them opening in the first half, but two of those three opening in June and then having probably four restaurants in the second half of the year, more towards the end of that time period. So that is certainly one reason.

That is one reason, Kevin. We have not changed the opening schedule for any of the restaurants in 2004. I think we're just providing a little additional clarity on what the preopening expenses are going to be. In addition, we typically will budget our new units anywhere from 3.8 to 4.2 million on a first-year run-rate. Our history has been specifically in Southern California that we have opened restaurants at higher rates than that, and some analysts may build that into their projections, but we don't internally.

Okay. A capital structure question. With the CapEx plan and then likely depreciation for the new year, my own guess of cash and short-term investments at year-end 2004 would be in the 11 to 14 million range. How do you feel about that for long-term planning purposes? And at some point, would you want to add debt to the capital structure given your unleveraged position currently?

Well, we believe from our projections that cash would be a bit higher than that. But we believe that the current situation of doing primarily ground leases, which is primarily what we are going to be doing for 2004, if that continues, which adds about $800,000 to $1 million of additional investment per unit, that we will need additional money, probably in 2006 or so, and we will deal with the situation as it progresses. But, as you mentioned, we're basically a debt-free company at this point, so we do have several alternatives as to how to fund that deficit.

There is a number of things. It just depends on how quickly we grow in the out years and how much cash we are contributing to our restaurants. I think having Greg on board and negotiating some of these deals, historically it has cost us upwards of 2 million. We are getting to the point now where we may get more tenant allowances and bring that cash cost down on future developments.

But even with the currently low interest rates, you would not be tempted to consider some type of convert deal or something like that where you could lock in some money at probably a couple percent?

Well, I do not want to comment on what we would add to the capital structure, but let's just say we are open to a number of different things depending on how the capital markets are at any point in time.

One last question. What kind of volume -- you sound like you are really happy about San Jose. What sort of weekly volumes are you seeing there at this point?

We don't typically talk about specific restaurants individually. I will just say that our California restaurants tend as a group to be above our average weekly sales. If you look at San Jose, I think out of our 20 full-size restaurants now, it is number 18 I think in terms of size. It is one of our smaller units, but in terms of sales per square foot, it is doing pretty well for us.

Great. Thanks for your help.

(OPERATOR INSTRUCTIONS). Mike Smith, Oppenheimer.

Of course, I have concerns your corporate G&A, it seems to have dropped off in the fourth quarter. Could you go into that a little bit and maybe explain that or maybe I missed it, and then also what kind of G&A leverage are you forecasting for next year in terms of the year-over-year basis for improvement we might expect?

Well, G&A in our Company from quarter to quarter may not be as consistent because especially last year with the legal issues that we had, there were quarters that we had more in legal fees than others. The fourth quarter was one where we were relatively light on legal fees, and that certainly impacted it. We are pleased with -- it was 7 percent in terms of G&A, but I would not count on that as a run-rate for at least the beginning of 2004.

Did I answer your whole question?

Well, I was kind of wondering if the guidance you gave us -- the 30 to 33 cents -- G&A dropped 2 percent this year; I believe it dropped even more than that last year. I am wondering what kind of drop we should expect just because of your book in 2004?

Well, it is going to depend on where your revenue estimates are, Mike. But look for G&A to be somewhere in the mid to upper 9 million range depending on how things go.

Okay. Thanks.

Nicole Miller, Stern McGee (ph).

I just have a quick question. Given the same-store sales running, what, 8 percent at the beginning of the quarter, but then offset by a back-end loaded development schedule, can you give some guidance on how the quarters might shakeout and what we can expect in terms of revenues and earnings in the first quarter at least, if not all four?

You know we are not giving first-quarter guidance at this point in time. If any analysts, buy-side investors, etc. want to call me, I can help them with some -- try and box it in a little bit. But I just don't think we are comfortable with five weeks to go in the quarter and February not reconciled yet to really give any kind of guidance.

Just in terms of revenue, I think you have to think where our comps are going. We have got 3.5 percent of pricing in until May, and then we carry 2 percent of pricing through November. If you look at our 2003 comps, they get more difficult overlapping as the year goes on, with a 5 1 comp in the December quarter and pricing rolling off.

So when we are looking at our projections, I think as we move into the year, obviously we're going to be opening new restaurants. We are a little conservative there, but in terms of comp guidance, I think clearly we are not looking for 8 percent comps for the year. At 3 to 4, we would be on the lower end of that range in the fourth quarter. Does that help?

Sure. Thanks.

At this time, there are no further questions in the queue. I would like to turn the floor back over to the presenters for any closing remarks.

Well, thank you for participating in the call. We will have a replay available shortly, which will last for 30 days on the Internet and for three days on the telephone. Details can be found on our Website at www.bjsbrewhouse.com. If you have any further questions, please call us in our offices at 714-848-3747.

This concludes our conference call. Thank you very much.

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