Red Robin Gourmet Burgers Inc (RRGB) 2002 Q3 法說會逐字稿

Good afternoon ladies and gentlemen.

Thank you for standing by.

Welcome to the Red Robin Gourmet Burgers Third Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties hearing the conference, please press star zero for operator assistance.

I would like to advise everyone that this conference call is being recorded.

I would now like to turn the conference over to Michael Snyder, President and Chief Executive Officer.

Please go ahead.

Good afternoon, thanks to everyone for joining us on our third quarter 2002 conference call.

Three things that I would like to accomplish today.

One, a review financially and operationally of our third quarter.

Two, an update on our current business trends and earnings guidance for the fourth quarter.

Three, a summary of our longer-term strategy to create shareholder value.

Before I begin, I need to remind everyone that part of our discussion this afternoon will include forward-looking statements.

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 SEC for more detailed discussion of the risks.

I am pleased to announce that total revenues for the third quarter that ended October 2nd, 2002 increased 24.1% to $64.6m compared to last year's third quarter total revenues of $52m.

A pro forma net income for the quarter was approximately $3.3m.

Fully diluted third quarter pro forma earnings per share was $0.22.

These results taken to account our IPO since the beginning of 2002, they exclude a one-time cost associated with the early extinguishment of debts in connection with the IPO and re-financing.

They also include $150,000 charge for impairment of real estate [Inaudible] sale and Jim our CFO will talk about that in a moment.

Driving our results with the comparable restaurant sales increased 1.4% for company owned units, this was better than we expected.

When we announced our pre-announced earnings in September.

The increase resulted from the strong finish to the quarter.

Top company-owned restaurant sales were driven by a two-tenth of a percent increase in pricing.

That is two-tenths of a percent and a 1.2% improvement in guest counts.

We are very pleased with these results given that they were achieved in a very difficult retail environment.

In addition, we produced these results, despite having a third quarter comp company-owned restaurant sales decrease of 1.2% in our three largest markets;

Seattle, Portland, and Denver.

This combined represent over 45% of our comp restaurant sales for the third quarter of 2002.

I think, you have all heard this before, but those three markets are continuing to experience a difficult economic situation.

Excluding these markets, comp restaurant sales increased 3.8%.

Our company-owned restaurant as a whole performed well during the quarter with weekly sales averaging $56,884 compared to $56,088 during the same period last year.

We derived 96.8% of our revenues from our company-owned restaurants during the quarter compared to 95.7% during the same time period last year.

Development wise, we opened four new restaurants during the third quarter for a total of nine new restaurants in the first nine months of 2002 and we do expect to open one more unit in this fourth quarter.

This would give us a total of 10 new restaurants and one relocated restaurant for 2002, Burger company-owned restaurant.

The addition of these new restaurants combined with the restaurants that we acquired from two franchises during the first quarter will increase our company-owned units by 25% in 2002 and 77 at the end of 2001 to 96 Red Robins at the end of 2002.

There was one franchise unit opened during the quarter with a total of five new franchise units opened through the third quarter of 2002.

We also signed three experienced restaurant operators as new franchise partners and we expanded our area development agreement to the fourth to begin developing new markets in Texas, Kansas City, Pennsylvania, and Michigan.

At this point, I will turn the call over to our Chief Financial officer Jim McCloskey to review our financial results.

Go ahead Jim.

The $12.8m increase in restaurant sales was due to $6.3m in sales derived from 10 restaurants we acquired during the first quarter of 2002; $4.6m of sales from nine new restaurants opened during fiscal 2002; $1.7m additional sales from full quarter operations for the six restaurants we opened in 2001; and $0.7m from a comp restaurant sales increase of 1.4%.

And that's on a base of 70 units.

We saw a $109,000 or a 5.2% decline in our franchise revenues due to too fewer new unit openings this year versus last year.

That's $70,000 less franchise fee.

And then one last unit, the franchise base, as they built ten and we bought ten, ah, they built eleven, we bought ten.

And a decrease of franchise comp restaurant sales is 2.4%and 4.5% in the US and Canada respectively.

As Mike indicated, average weekly sales for company-owned restaurants were $56,884 during the third quarter, representing an increase of 1.4%.

Excluding the effect of one restaurant, average weekly sales for new restaurants opened since the beginning of 2001, which are not in our comp base was $61,043.

We exclude this one restaurant, because it opened in a mall before the retail anchor stores were opened.

We were all done, they were delayed.

So, we were open on time.

And once the retail anchor stores did open in late September, we started to see substantial sales growth in this unit.

We'll include it obviously in the fourth quarter.

Our franchised restaurants averaged $50,195 in the quarter versus $51,435 in the US last year and $37,369 versus $39,115 last year in Canada.

Canadian results are in Canadian Dollars.

Let's turn our attention to the cost side of business.

Cost of sales as a percentage of restaurant sales for the quarter was 22.7%, a 70 BP improvement over the third quarter of last year and a 50 basis point improvement over the second quarter of this year.

The improvement this year was due primarily to favorable trends in commodity pricing.

Labor expense as a percentage of restaurant sales for the quarter was 35.1%, a 30 basis point increase over third quarter of 2001 and in line with what we expected.

That 30 basis point increase was due to higher level of restaurant bonuses compared to last year.

Labor expense as a percentage of restaurant sales compared to the second quarter of 2002 improved 90 basis points with improvements across the board at our comp restaurants, acquired restaurants, and new restaurants.

In fact, our acquired restaurants labor as a percentage of sales in the third quarter ran very close to our comp restaurants.

Operating expense as a percentage of restaurant sales was 15.2%, a 50 basis point improvement compared to last year's third quarter.

This decrease as a percentage of restaurant sales is due primarily to utility expenses, which accounted for that 40 of the basis points.

Operating expenses as a percentage of restaurant sales compared to the second quarter of 2002 improved 20 basis points, primarily result of improved operating efficiencies from the acquired restaurants.

Occupancy expense as a percentage of restaurant sales was 6.9%, a 10 basis point increase over last year's third quarter and really the same as Q2 of this year.

Restaurant level operating profit in total was 20.2% in the quarter, a 100 basis point improvement compared to last year.

Restaurant level operating profits improved a 170 basis points over the second quarter of this year, due to improved labor, commodity pricing, and operational efficiencies at acquired restaurants as I noted above.

Depreciation and amortization expense as a percentage of total revenue increased 20 basis points to 4.6% from 4.4% in the third quarter of 2001.

The decrease is primarily due to new and acquired restaurants.

However, total depreciation and amortization for the third quarter of '02 is not directly comparable to the third quarter of '01 due to the fact that we seized amortizing goodwill at the beginning of fiscal 2002.

Excluding that 400,000 of amortization that was recorded in third quarter of '01, depreciation and amortization would have increased from 3.7% to 4.6%.

Our G&A expenses as a percentage of total revenues increased 40 basis points to 7.2% from 6.8% over the third quarter of '01.

The increase is primarily the result of higher marketing costs, primarily local store marketing compared to third quarter.

In addition, we're incurring this year higher accounting and legal and executive expenses versus last year that are attributable to our new public reporting requirements.

We experienced a 10 basis point improvement in G&A over the second quarter of this year.

Franchise development expenses as a percentage of total revenues decreased 20 basis points to 1% from 1.2% from the third quarter of '01.

Overall, there was one franchise opening in the third quarter of '02 compared to three in '01.

Pre-opening costs declined a 20 basis points compared to last year.

Overall, there were four company-owned restaurants opened in the third quarter of '02.

One restaurant opening, which is in Fenton, Missouri occurred on the first day of the quarter.

And as a result, most of this pre-opening cost or expense has incurred in the second quarter of '02.

On an average, pre-opening costs for restaurants opened this quarter were slightly higher at an average of $118,000 per restaurant, primarily due to the fact that we opened these locations in newer markets, which typically have higher pre-opening costs than our existing markets due to increased travel, labor training, and other costs.

During the third quarter, we recognized a $150,000 impairment related to real estate [Inaudible] per sale.

We sold the pizza property in 2000 and we took back it now.

But the buyer had defaulted in this quarter and we took back the property.

When we took back the property, we adjusted the accounting value to reflect the local market conditions on that piece of property.

We had excluded this charge from our calculation of pro forma net income and pro forma net income per share.

Income from operations was up about 27 - was up 27.2% to $5.7m compared to $4.5m in the third quarter of last year.

Excluding $150,000 impairment charge for real estate held for sale in the third quarter of '02 and the $945,000 gain [Inaudible] to a lease buyout in the second quarter of '02.

Income from operations increased from 7.5% of total revenues to 9% of total revenues or a gain of 150 basis points in operating income.

During the quarter, we recognized a $4.3m charge for loss on early extinguishment of debt.

This charge resulted because we used proceeds in IPO, together with borrowings under our new revolving credit facilities to repay our $48m loan from Finova, our outstanding revolver from US Bank, one real estate loan of $1.6m and a few minor equipment loans.

The $4.3m charge includes $1.9m of prepayment penalties and a $2.4m non-cash charge related to write-off of un-amortized debt issuance cost on our Finova and US Bank facilities; that would un-amortized over the last of the relevant credit agreements.

The loss and early extinguishment of debt was not recorded as an extraordinary item, because we adopted SFAS number 145 in the second quarter of '02.

Net income for the third quarter of '02 was $389,000 compared to 2001's $1.8m.

Pro forma net income was $3.3m.

This was calculated by taking pre-tax income of $599,000, adding back the prepayment penalties and capitalized debt costs of $4.3m, reducing the interest expense by $121,000 [Inaudible] repayment of debt current with our IPO, and adding back the $150,000 charge for impairment related to real estate held for sale, to get to a $5m of pre-tax income or $3.3m after tax.

Our effective tax rate is expected to be 35% for 2002.

Diluted earnings per share for the quarter was $0.03 compared to diluted earnings per share of $0.18 in 2001.

Pro forma earnings per share, assuming 15.2m shares outstanding and the adjustments I just covered, is $0.22.

At this point, I'll turn it back to Mike.

Thanks Jim.

To give you a little idea of what we are looking at, going forward.

Based on our actual third quarter results and our outlook for the fourth quarter, we are increasing our full year 2002 pro forma net income estimate from a range of $0.81 to $0.83 to a range of $0.85 to $0.87 per share.

Fourth quarter pro forma net income per share projections assumes an increase in comp restaurant sales of around 2%.

Our fourth quarter comps are currently tracking in that area.

Full year pro forma net income is calculated as presented in Table A of our press release.

In addition, we will exclude the one-time gain on lease buyout reported in the second quarter.

Since we are still finalizing our 2003 budget, we are not releasing our 2003 guidance at this time.

But we do continue to expect to open 16 new company-owned restaurants in 2003, resulting in a 17% unit growth over the prior year.

On the franchise front, we expect our franchisees to open 10 to 13 new restaurants in 2003.

Before we go to Q&A, let me give you a -- let me cover a few points that I think are important to know about Red Robin.

The first is our brand and market position.

We believe that we have achieved substantial brand equity with our guests by creating a distinctive [charming] experience offering high quality, unique recipes combined in an exceptional -- with exceptional value, with a check average of around $10.

I am [offering] now is what concepts were most likened in the -- out of the fast foods industry's burger pricing and promotional efforts that affect Red Robin's business.

Our response is, we are in a different business.

It is important that you realize we are not in the fast food business.

We are casual dining.

I have said as before and I am going to repeat myself that I am proud to say that our concept is to burger is what California Pizza Kitchen is to pizza and what PF Chang is to Asian food.

Those two concepts have done a great job with defining their segment.

And I believe Red Robin has identified a very attractive market segment and we are defining it as well.

I think a lot of you have heard about our very loyal guest base and put all this together, we believe we have a very strong competitive advantage in the casual dining market.

The second point I want to cover is our restaurant economics or unit level economies.

Our cash and bond, cash returns on lean units is 35% on the average.

We are delighted with our new restaurant openings, especially in the Eastern part of the United States, where we don't have a lot of restaurants and our brand is relatively new.

Lastly, our brand is significantly under penetrated and we have substantial untapped geographic territory.

Today, we only have a 194 company-owned franchise and restaurants in the United States and Canada and relatively few markets.

As we ramp up our corporate growth [comp], we are also signing up franchise partners to develop additional geographic territories.

I have said it before and I am going to say it again, I believe Red Robin has the potential of over 1000 units in North America.

To conclude, we are excited about our financial results, we are excited about our current position in the casual dining markets and our outlook.

That concludes our prepared remarks.

Tracey would you please open up the call for Q&A.

Thank you.

One moment please.

Ladies and Gentlemen, we will now conduct the question and answer session.

If you have a question please press the star followed by the one on your touch-tone phone.

You will hear a three tone prompt acknowledging your request.

Your questions will be polled in the order they are received.

If you guys decline from the polling process, please press star followed by the two.

Please ensure you lift the handset if you are using a speakerphone before pressing any keys.

One moment please for your first question.

Your first question is from Allan Hickok from Piper Jaffray, please go ahead.

Hi, this is [Inaudible] asking some questions of Alan Hickock at Piper.

First question is if you could give us a little bit of color on your comp store sales decline in the franchise area in the US and Canada based on traffic and pricing components?

Yeah, this is Mike Snyder.

You know, there are always going to be differences in performance between and among franchise orders and franchisee.

I'm delighted to say that our comp restaurant sales improvement at a corporate level enables us to share that now with our franchisee.

Beyond that, I think we are one of the few concepts in the territory, maybe there are more of them, there used to be, where the franchise will all have same store sales growth and in every sales volumes higher than the rest of the system.

I think, there are always going to be differences.

And in terms of, do you have a break out in terms of, for example the decline in Canada, what that is based on in terms of traffic and pricing in that 4.5%?

You know, I don't have that information with that respective franchisee in Canada.

We do know that Canada has experienced some difficult economic conditions.

Most of the, all of their restaurants out there are in two provinces, Alberta and in British Columbia.

Alberta has been significantly impacted by the economic climate up there.

The good news though is that it's turning around a bit.

We're encouraged with the recent improvements.

Okay Great.

And then I have two more questions related to costs.

Your cost of sales with the commodity pricing has helped, what does it look like going into the first quarter.

Do you expect similar favorable pricing?

You know, we, our crystal ball probably isn't any better than the rest of the world.

But we are anticipating a slight increase in commodity prices.

We think it will affect total cost of goods as a potential to affect the total cost of goods, maybe seven tenth of a percent.

That keeps changing as our crystal ball changes a little bit.

Okay, great.

And then the last question in terms of the operating expenses and the efficiencies you start seeing through your acquisitions.

Do you expect to squeeze out any more efficiencies or are you sort of, at the end of that?

Question pertains to the acquisition?

Well, right.

It looks like, you said your operating expenses are down and as a result, tracking down as a result of those increased efficiencies.

Do you expect any more improvement increasing efficiencies from that acquisition?

You know, I expect improvement from everything, all the title.

So [Laughter] my answer, I guess has to be yes.

Okay.

So there's room to go in terms of lowering the operating expenses.

I believe that's correct.

Okay, good.

That's great.

Thanks.

The next question is from Jeffrey Omohundro from Wachovia Securities, please go ahead.

Hi good afternoon.

A couple of questions.

I think first, I'd like to understand little bit better what happened subsequent to your guidance that was given, I think the half percent number that was presented was through mid-September.

Certainly you saw an improvement at the end of the quarter.

But can we get little details with the improvement in the big three markets or was there improvement in the rest of the US that allowed you to drop comps a little bit about that earlier target.

Hi Jeff, this is Jim McCloskey.

You know, we gave in actual number on that pre-release.

I think it was on September 23rd.

And that was accurate for, I think eight days earlier.

As soon as we gave the release, sales shot up.

And so, there was three weeks left in the quarter then.

They went up 2.8, then 4.8, and then 5.6.

So, we were quite pleased.

We had not anticipated this strong increases.

We were being compared to some very favorable sales increases for the prior year.

And so that helps.

In terms of your second part of your question of where that was experienced, it really was experienced in all parts of the country.

The, in different periods, different periods had different experiences in the Northwest, East Southwest and Midwest.

But overall I would say, it was enjoyed probably all areas.

Okay, very good.

Also a couple of cost questions.

I guess the cost on the commodity side, are you reactive in forward buying now for 2003?

And then a follow up on the labor question after that.

This is Mike Snyder Jeff.

As a lot of you know, the only forward contract buying is in poultry, and I do not know if our purchasing guy has left that in at this time or not.

And it, our Jim Mcloskey is just shaking his head.

Yes he has.

As they say your poultry is in Belford?

That is correct.

Okay.

And then on the labor side, we saw a nice sequential improvement there.

I wonder if you could let us know a little bit about where you are in terms of staffing level.

Are you fully staffed and how is turnover being tracking?

Great.

I love this question Jeff.

I'm proud of the fact that I think during peak hours, Red Robin will have more servers on the floor than any other concept on work out there.

We go over board when we staff towards the peak.

You will see three [Inaudible] section during peak.

That is no change, and that has not changed for a little past 15 years or longer.

Where we make up the efficiencies is the facing in and out of team members.

Each quarter of an hour can add up dramatically.

So, our ability to face servers in and out properly staffed the back of the house, properly scheduled trip, cost train or back of the house team members to crib and then when we open go, right before we open a great line checks and then get ready for the peak hours.

So, just to answer your question service will never, never be sacrificed at Red Robin for the sake of labor.

Thanks.

Congratulations on the quarter.

Hey, thanks Jeff.

Your next question is from Andy Barish from Banc of America Securities.

Please go ahead.

Hey guys, one clarification and then a question on the commodities.

I guess, you were talking about 70 BP increase, I assume that is a worse case scenario without any pricing on your part as a lot of other competitors in the market are now talking about flat-to-paper book commodity prices or is that an increase from the 22.70 that you showed in the third quarter.

I wasn't sure what you were talking about with that 7/10th of a percent.

And then on the real estate pipeline for next year, do you expect 16 openings to be pretty evenly spaced as you are looking at things right now?

Ok.

This is Mike Snyder Andy, I will take the first part of your question.

Yes, worst-case scenario Crystal ball looking into 2003 and yes with no price increases in our pro forma.

So what we try to do when we anticipate any fluctuation like this is try to figure out how we can get more productive, of course without sacrificing the value equation for and with or get (ph) .

That's a ballpark commodity guess.

The way I like to do it is [Inaudible] force our management team to get more productive and not rely on price increases and/or fluctuating commodity prices to meet the uni-level expectation.

And that would have been from the 22.7 you just showed?

Is that sort of what, since that's your latest data that's what you would face that off of (ph)?

Yes.

OK.

Jim, will you take the real estate openings?

You bet.

The real estate openings, obviously we will tell you what we are estimating Andy at this time.

We will do 5 in the first quarter, 3 in the second, 5 in the third, and 3 in the fourth, that is a total of 16.

Thank you.

Your next question is from Matthew Difrisco from GKM.

Please go ahead.

Hi guys.

Just a couple of questions on the comps here.

You said you are forecasting for the fourth quarter 2%.

Can you just give me the breakdown of that, what you expect, is that all traffic or has there been a price increase anywhere or you are still looking for that modest 2/10th of a percent?

And then also, I guess you made some comments, how I guess you were trending the last couple of weeks on those comps of 2.8, 4.8, 5.6.

So is that to say then your last week you were [comping] at 5.6 and then, is that a 2% across your forecast?

Are you looking for a 2% across the entire store base including the three large markets turning positive as well and in fact are they positive now?

I am Mike Snyder.

We are looking at that modest 2/10th of a percent increase coming from a price increase that was done on October of '01.

We have not taken any price increases since then and I think I mentioned to, I think it was Andy that we have no price increases in our pro forma going forward.

Jim, you want to take the other part of the question?

Matt, I think, I want to make sure that we are clear here.

Yes, I was talking about the sales increases at the end of the third quarter.

And then just to reiterate what Mike was saying, our sales increases in the fourth quarter, in the first four weeks of the fourth quarter have been averaging around 2%.

And that's across, are you positive in the three big markets?

No, we are still slightly negative offset by higher in other areas.

Okay and then, just a couple of - - two last questions.

Can you just give us what your average ticket was this quarter, what it was a year-ago?

And then also the trend in G&A.

You had a big bump up in the fourth quarter a year-ago.

Can you give us some guidance on what to expect in terms of percent of sales for the G&A side?

Matt, Mike Snyder.

This last quarter's guest check was $10.10.

Same quarter last year was $10.08.

So, it is virtually flat.

Jim, you want to take the second part?

You know, Matt, we are expecting some slight improvements sequentially over the third quarter in our G&A.

The comparisons in the fourth quarter, we had some one-time clean up that we put I think in the G&A line.

I know it's a one-time stuff but it came [Inaudible] work.

But sequentially what I am estimating is slight improvement.

Okay.

And then just if you can just give us some balance sheet stuff you have in front of you, the long-term debt and current cash position and if you have any number for CAPEX for '02, what are you planning at?

I do.

We are going to be, our debt at the end of '02, we are estimating it to be about $36m, 36.4 (ph) .

That will give us a better, 34.3% of debt-to-equity.

Cash and CAPEX for '02?

CAPEX, for a total -- total CAPEX would be $43.6m in '02.

Now, that's -- there are the acquisitions of the two franchise units in there.

I don't have that broken out, but it would be more than 20 -- around $20m of that would be coming from two units.

I will get back to you on the break up.

Okay and did you have the cash position also?

The third quarter or are you talking about estimated --?

Current cash.

Yes.

It's about $4m.

Thank you very much.

Your next question is from Dan Geiman from McAdams Wright Ragen.

Good afternoon guys.

Couple of questions for you.

First of all, with regard to the sales trends, how were sales trending at your mall locations during the quarter?

Also, as you look at your new unit openings in '03 and beyond, how many of these are going to be located in existing markets versus new markets on your company-owned locations and if there are more existing, is this an ongoing trend?

Hey Dan, Mike Snyder.

We have experienced an increase at our mall locations.

And I know that it's probably not what other core companies are experiencing, but we are fortunate to be able to say that.

Going forward and going forward, I would say 99.9% of our new restaurants will be free-standing units or non-mall locations.

We like to, we like freestanding units sitting outside on a pad in front of the mall or a large traffic generator.

We don't necessarily have to rely on a mall for good restaurant site.

So, positive sales in the malls, current mall restaurants we have and going forward virtually all are going to be freestanding units.

Okay.

How about units in the existing markets versus new markets; what's that mix is going to be?

One restaurant, company-owned restaurant in the year 2003 will be a in a new market, it's in Omaha.

Quite frankly we don't really call that a new market and since it is so close to Colorado, we are say it is in our own backyard.

All the rest are in the existing markets.

Okay, great, thank you.

Ladies and gentleman, if there are any additional questions at this time, please press the star followed by the one.

As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys.

So, that was Mike Synder again.

Thank you all very much for joining us.

We look forward to speaking with you on Red Robin Gourmet Burgers' next conference call.

Thank you very much.

Ladies and gentleman, this concludes your conference call for today.

Thank you for participating and please disconnect your line.