Red Robin Gourmet Burgers Inc (RRGB) 2003 Q1 法說會逐字稿

Good afternoon and welcome to the Red Robin Gourmet Burgers first quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. At this time, it is my pleasure to introduce your host for today's call, Mr. Michael Snyder, President & CEO. Sir, you may begin.

Thank you, Stephanie (ph). Good afternoon and welcome to our first quarter 2003 conference call. If you haven't been able to see our first quarter earnings press release, you can access it at our web site: redrobin.com. And then, click on the investor page. A replay of today's call will also be available at the same location on our web site.

Today, we'd like to cover the following areas: number one, the financial and operational results of our first quarter in 2003, and which, by the way, most of you know, it was a 16 week quarter. Number two, we'd like to update you on our current business trends and projection for the second quarter and fiscal year 2003. We're also going to get into more detail about the announcements of the execution of the amended and restated credit agreement for $85 million.

Before I begin, I do 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 a more detailed discussion of the risks that could impact our future operating results and financial conditions.

That said, total revenues for the 16 weeks, our first quarter, ended April 20, 2003 increased 17.3 percent to $92.99 million. Restaurant level operating profit increased 19.5 percent to $17.1 million. And, our net income for the quarter was approximately $3.5 million or 23 cents per diluted share.

Our first quarter results were driven by a comp restaurant sales increase of 2.1 percent for our company owned units. This was a result of .5 percent increase in guest counts and a 1.6 percent increase in the average guest check.

We made a change in the calculation methodology for comp restaurant sales at the beginning of this year. Most of you know that previously, we included restaurants in our comp base once they had been open for one full fiscal year. Our new method includes restaurants as comparable restaurants after they have been open five full quarters.

I believe this is - this change will be - allow for a more meaningful comparisons with our accelerated growth, and in the short term, should be neutral as they are this quarter, or slightly positive. I believe most other restaurant companies do it the way that we just made the change to.

So, as a comparison, under the old methodology, our comp restaurant sales increase would also have been 2.1 percent for the first 16 weeks of 2003. We are also including the 10 restaurants acquired in 2/1 of '02 in our comp restaurant base.

We've provided a supplemental schedule in today's press release detailing the last five quarters of comps under both methods of company owned restaurants and franchise restaurants.

Our company owned restaurants have comp weekly sales averaging $56,991, compared to $55,810 during the same period last year. We also acquired one restaurant from a franchisee in Columbus, Ohio, and Jim will talk a little bit more about this acquisition in a few minutes.

Two new franchise units opened during the quarter, one was in San Antonio, Texas, and, also two franchise units were closed during the quarter. One in Alaska and one in Columbus, Ohio.

During the quarter, we saw steady growth driven by consistent operating results from our comp stores and our new unit growth. Our new unit growth in core and new markets for both company and franchise openings have been well received, and we continue to be on course with positive same store sales and opening new restaurants on time and on budget.

At this point, I'm going to turn the call over to our Chief Financial Officer, Jim McCloskey. Jim?

Thanks, Mike.

Before I get started, I want to inform our listeners that today's call we may make references to some non-GAAP financial measures, you know, SEC is very sensitive about these, so we have provided supplemental data in our earnings release that reconciles these measures to GAAP.

Revenues, the 13.9 million in first quarter restaurant sales over the prior year was primarily derived from 7.6 million of sales from the 10 new restaurants opened during fiscal '02. 3.2 million from the five new restaurants we opened in the quarter, and one restaurant we acquired.

1.6 million in sales from a full quarter of operating the ten restaurants we acquired during the first quarter of '02 and 1.5 from the 2.1 percent comp restaurant sales increase. We saw a decrease of 6.2 percent or 171,000 in our franchise revenues, and that's primarily due to the acquisition of 10 franchise restaurants in Q1 of '02.

Franchise comp restaurant sales increased 2.1 percent in the U.S. under the new method., compared to the 1.1 percent increase in the old method of same stores sales calculations.

Canadian franchise comp sales declined .6 percent in the first quarter, which is the same under both methods and also a significant improvement over the same stores sales in '02.

As Mike indicated, average weekly sales for comp company - comp owned restaurants, were 56,991 during the first quarter, representing an increase of 2.1 pct. Average weekly sales for new restaurants open the last five quarters was 59,634.

Our comp franchise averaged 50,439 in the quarter, versus 49,405 in the U.S. last year, and 36,149 versus 36,365 last year in Canada. Canadian results are in Canadian dollars. We acquired, as Mike said, one restaurant in Columbus, Ohio, during the first quarter by assuming it's lease.

This unit was a two-unit franchisee - was one of a two-unit franchisee that was having financial difficulties, primarily due to the severe deterioration of the immediate trade area around their other unit in the Columbus market.

The trade area has been devastated by the opening of a major regional mall three miles away. The poorly performing Red Robin unit was closed during the quarter. The acquired restaurant is a freestanding unit in Eastern Town Center (ph) which is the premier mall in both Columbus and in many people's eyes, in all of Ohio.

Our investment cost in this new unit is about $225,000. Restaurant level operating profits; they were up - they were 18.9 percent for the quarter. In comparison to the first quarter of '02, restaurant level operating profits improved 20 basis points, despite the as-expected impact on margins from the five new restaurants.

Restaurant level operating profits declined for the fourth quarter by 200 basis points due to the impact of the five openings in the quarter compared to one in the fourth quarter, and due to seasonality. As most of you are aware, the first quarter is our lowest in terms of average weekly volumes and margins.

Cost of sales as a percent of restaurant sales for the first quarter was 23.3 percent or a 70 basis point increase over the fourth quarter. The new restaurants increased cost of sales by over 40 basis points in the first quarter over the fourth.

In the first quarter, chicken and salmon burger promotion and seasonal produce prices raised costs about 30 basis points. Labor expense as a percentage of restaurant sales for the quarter was 35.3 compared to 34.5 in the fourth quarter.

This increase was predominantly contributed by the five new restaurants due to their inefficiencies, as we expected. Operating expenses, as a percentage of restaurant sales were 15.5 percent, 20 points higher than the last quarter.

Operating expenses as a percentage of restaurant sales was 6.9 percent or 40 basis points higher than the fourth quarter of '02. The increase in operating expenses were due to seasonally higher redemptions of bonus gift certificates, while the increase in occupancy is due primarily to higher property taxes and insurance costs.

The appreciation and amortization expense as a percent of total revenue increased 30 basis points to 4.8 percent from 4.5 percent in the first quarter of '02. This increase is primarily due to higher depreciation on a larger group of new restaurants.

G&A expenses as a percent of total revenue increased 30 basis points to 7.5 percent from 7.2 percent for the first quarter of '02. The increase was primarily a result of higher costs in the quarter, for public company expenses, and new restaurant management training costs.

We are incurring higher accounting, legal and D&O insurance expenses this year versus last year due to our reporting and compliance requirements as a public company. Pre-opening costs increased 269,000 or 52 percent compared to last year.

We opened five restaurants in the first quarter while we opened just two restaurants in the first quarter of '02. Pre-opening costs averaged approximately 174,000 per restaurant for the quarter, slightly under budget.

Income from operations was 6.2 million or 6.6 percent of revenues compared to six million or 7.6 percent of revenue in the first quarter of last year. This is primarily due to the result of higher pre-opening restaurant management G&A and depreciation.

Net income for the quarter was 3.5 million compared to 2.5 million in 2002, a 42 percent increase as a result of both factors, primarily, and also lower interest expense of 1.3 million.

Diluted earnings per share for the quarter was 23 cents, the same as first quarter '02, although the shares using the calculation increased by 4.5 million due to the IPO last July.

Capital expenditures for the quarter totaled 313.6 million including 11.3 million for new restaurants and 2.3 million for remodels and replacement work in the restaurants.

Just this week, we signed a new credit agreement with our bank group that expanded our revolving line of credit from 40 million to 85 million and extended the term until the spring of 2006.

This agreement will give us the capability of continuing our growth plans of 17 to 20 percent unit growth per year without being dependent on the equity markets.

While we do want to continue to de-leverage the company, we want to add the flexibility to do so in the right market conditions.

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

Thanks, Jim.

I'd like to thank all of our wonderful team members at Red Robin for a - for a good first quarter.

2003. Based on our (the remainder of it - based on our current outlook for the rest of this year, we are offering the following projection: we will open 13 new company owned restaurants for a total of 18 new units and one acquired unit in 2003.

And, we also expect our franchisees to continue their openings with about nine to 11 more Red Robins in 2003 predominantly later in the year as the new - as the new franchisees ramp up their development.

We remain comfortable to project that restaurant comp sales will increase (ph) approximately 1.5 to 2.5 percent for the second quarter and for the full year.

We expect our second quarter 2003 revenues to be about $71 to $73 million and we expect full year revenues to be in the 315 to $320 million range.

Capital spending for the second quarter is expected to be between 15 and $16 million.

For the full year, cap ex is expected to be between 50 and $53 million as we have recently refined our 2004 opening schedule and more of those expenditures will fall late into 2003.

So, with all that said, based on all the assumptions, we are increasing our projections for quarter two and for the full year of 2003.

For the second quarter of 2003, we are projecting 22 to 23 cents earnings per share. And, for the full year of 2003, we are increasing our projection to the range of 95 to 98 cents. Well, that about wraps up the quarter.

I believe our consistent operating performance from current restaurants combined with new - units opening well, created a good quarter. And, we expect more of the same in the quarters to come.

I think the Red Robin average unit volume and demographic story continues to be a compelling driver for real estate developers to want Red Robin as part of their tenant mix.

We are being offered better sites today than we were being offered three or four years ago.

You know, I think our family appeal, with our adult beverages continues to separate us from the baby boomer bar - bar and grilles on one side, and the toddler-friendly non-adult beverage restaurants on the other side.

With that said, Stephanie (ph), our operator, would you please open the call up to questions.

Thank you. The floor is now open for questions. If you do have a question, or a comment, please press the numbers one, followed by four on your touch-tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. And we do ask, that while posing your question, you please pick up your handset to ensure proper sound quality.

Please hold the line while we poll for questions. The first question is coming from Matthew Difrisco of GKM. Sir please pose your question.

Hi. The question is concerning, I guess, the comp. You know how you guys break that down typically by backing out your three markets?

If you could do that for us, and I'm just curious, as you came in better than your guidance and better than I think that most of what we were expecting.

Was that driven by better performance from Denver - has it turned positive yet?

Denver in the first quarter has not turned positive Matt. It continues to get better.

We are seeing some favorable trends.

The - so - you know, what we've said in the past, I think in the fourth quarter, the big three you know, was - you know, was just slightly negative 0.4. That big three is now 0.3.

So, there is, you know, some slight improvement and so we think that trend will continue.

OK, and I guess in your Canadian franchises, and the - I guess although it's only two days, but since the outbreak of Mad Cow, have you seen any meaningful change in your Canadian franchises in demand for burgers?

Matt, we knew this question would be popping up so we made a call to our Canadian partners just a few hours ago to get an update. And, they can't ascertain any material effect of that kind of news in Canada at this time. And, that's what we're experiencing on the lower 48 as well.

So, currently, we're not - we can't attribute that - the recent news to any material affect on our business.

OK. And then lastly, just one last question on the franchise and growth. Can you tell us the markets where we will see the biggest growth over the next 18 months, both franchise and company owned?

Well, you know, we're going to have two openings in San Antonio this year. We may have two openings in Kansas City.

We will have our first openings in New Jersey, New York area by the end of this year and the first quarter of last year, because we have signed three different - three different franchisees in that group.

And, so I think that's probably the, you know, I've got a group here. Anybody else? I think that's the largest group.

How about corporate?

Yes, corporate also.

Oh, in corporate we've go St. Louis and Cleveland.

We've got I think three units in Ohio, one in Cincinnati, one in Columbus, two in Cleveland area, so that's four in Ohio. I've got - we've got - we've got one in St. Louis. I've got three in California.

So its - you know, Matt, it's a mixture - mostly it's a coming from our current markets we're already in. You know, we're already in Cleveland. You know, we're just expanding down into - we're already in Columbus, we're expanding in there, and we're expanding to Cincinnati.

We did open two this year in Omaha. That's - and we will open one in Tulsa.

That's the only - those are the only other new units - new areas where we're opening units.

OK. Thank you.

Yes.

The next question is coming from Jeff Omohundro of Wachovia Securities. Sir, please pose your question.

Thanks. I wonder if we could maybe dig a little deeper into this pipeline and if you could comment a bit on just how far out you are in terms of your real estate control?

And, if you look at average quality of sites, say this year from last year you're seeing much of a shift in terms of A versus B type sites, and also in terms of costs to these sites.

And then, if you could maybe give us an update on your thinking on commodities as we look out to the end of this year and into next year I'd appreciate that.

You know, I'll handle the real estate questions and Mike can address the commodities costs.

On the real estate, you know, Jeff, I just got back from the ICSC (ph) convention in Vegas, which is the major real estate convention. And we're really looking at sites now in late '04 in '05 and maybe even early '06.

The quality of sites is significantly better than the kinds of sites we were seeing in, you know, '97, '98, and '99. These were the sites that we were building in 2000, 2001. These are much better sites.

The pricing is about the same. You know, quite frankly, you know, when you - when you are a second or third tier restaurant company, you end up either having to get a bad site or pay more for it.

And so the better sites that you get the first call, which we are getting now, or feel we're getting, you know, we're getting that great site on the corner with a light and access in front of that activity generator, and so I think that generates better openings for us, and that's a very strong, leading indicator for Red Robin.

Jeff, on the commodities side, we - as you know we did take a one percent price increase in January of this year. We still remain confident that that will absorb any and all upward pressures that we will experience throughout the course of this year.

You know, we probably all expect beef prices to take a short-term spike going in to the summer months it tends to go up historically, cyclically as well.

We're getting a little bit of help on produce. Produce costs are going down a bit. And as you know, we contract out our chicken and our cheese annually, so that's no real threat. So, we remain comfortable, Jeff, that that one percent price increase will handle all and any anticipated upper pressure throughout the course of 2003.

Very good. Thank you.

Yes.

The next question is coming from Allan Hickok of Piper Jaffray. Sir, please pose your question.

First, thanks, Mike and Jim for a thorough but abbreviated prepared comment that's always helpful.

Secondly, could you remind us just on your sourcing on your red meat products, and then the total percent in sales that comes from red meat, because my recollection is that you have about 11 domestic suppliers and that you sell more chicken than meat - than red meat.

I sure will, Mr. Hickle (ph). The - Mr. Hickok.

I will state that no Red Robin in existence gets any of the product from the - source that's made recent headlines. And as you know, we do - we do sell quite a bit more poultry as a percentage of food sales.

Poultry comprises 4.7 percent of our - of our food sales. Hamburger is two percent., and other meats is 1.8 percent. So, the hamburger is a - is a small percentage of our total percent of food sales.

So that's why I've maintained historically, and all throughout the last decade that even when they're - even if there is a spike in hamburger costs, since it's only two percent of our food sales, the ramifications are somewhat diluted.

So we, that's why we still remain confident that our one percent price increase that we took earlier this year will more than make up any of the potential spike as a result of seasonality, any cycles and any news in the media.

Now those percentages you just quoted Mike, those are total - percent of total cost of sales, isn't it? Not a percent of food sales?

Correct.

OK. And then, and then, secondly, just from the franchise side, can you just give us sort of the big picture of the number of franchisees you have sort of number of new franchisees you've singed up next - during the last 12 months? And what is the total size of the committed growth from multi unit developers?

If the - you know, I can give you the total number of franchise developers, but I want to - I want to put in context. Basically what we had in the prior years, we had four to five developers. We actually had - we had a lot more developers out there, but they were onesie, twosies.

So we only had four or five developers and then last year they developed five units. Now we have 14 to 15 developers. You know, in grand total, there's about 25 total developers, but we've tripled the number of real franchise developers in the last eight months.

And so, we are - we are optimistic as moving forward, that this is an area of growth for us. And, you know, for the total for the year, I think we're saying it's 10 to 13. I think our long-term earnings model 20 percent plus assumes a 10 to 15 percent growth in this area, so we think this is a - we continue to feel stronger about this area.

OK.

Does that answer your questions Allan?

Yes, it does.

And then last, in my own editorial comment, is that your comp changed - the way that you calculate it right now by far puts you in - more in line within industry conventions and makes it more - makes Red Robin's numbers more comparable to your peer group.

OK. Thank you.

The next question is coming from Andrew Barish of Bank of America. Sir, please pose your question.

A couple questions, first can you kind of give us the update as to where you guys stand sort of marketing-wise?

And have you made a higher to fill that slot, any sort of strategic changes you're looking at in your marketing programs that you can tell are having an impact yet?

And then, secondly, on the margins, I think you may have mentioned in passing Jim, but do you expect just with seasonality that the first quarter margins are probably the lowest of the year as you move into a stronger average unit volume period?

Yes. OK. Andy, let me answer that - the latter part of the question first, then Mike will take the marketing one.

Yes, the margins in the first quarter are lower, and we do expect the margins to improve.

Really, they've got quarters two, three and four. There's not significant differences between those margins on a per quarter basis. There has been a lot of junk you know, with acquired restaurants and openings that, you know, that, you know, that junk it up.

But on a comp score basis, quarters two, three and four are pretty close to the same. But quarter one is generally the lowest of the year.

And Andy, on marketing, we are delighted and very pleased to re-announce that we have a new VP of marketing. His name is Dwayne Chambers (ph). He was the Vice President of marketing for about seven years at Sonic, so Dwayne (ph) comes from a great organization with great values and very tremendous success.

We're just delighted to have Dwayne (ph) join us to help us fine-tune how we communicate this strong brand. That said, Andy, we don't - we don't anticipate any significant change in how we market our concept.

We're asking Dwayne (ph) to help us fine-tune how we're doing it currently. As you know, we probably - we only spend about 3.2 to 3.3 percent of our total gross sales on marketing, don't anticipate that changing going forward.

Thanks.

The next question is coming from Dan Geiman of McAdam Wright Ragen. Sir, please pose your question.

Good afternoon. A couple questions.

Any noticeable sales trends within the quarter, and specifically did the military conflict have any impact on traffic? Also, what was the impact from the weather?

It also looks like your second quarter revenues that you're guiding towards are a little bit more conservative in terms of growth versus the first quarter. What's the reason for that?

Dan, we seldom take any - use weather as a - an excuse for sales.

We did have to close some restaurants because of some of the east coast storms - the east coast storm, and a very large storm in Colorado.

That said, we still ended the quarter 2.1 percent up and we're proud of that. Militarily, perhaps in Colorado Springs, we saw a little bit of an impact. But that's coming back as our - as our wonderful troops are coming back home.

And, so that's a very small percent or part of our business so, I can't say that there was any material impact there as well. First quarter - second quarter conservativism over first quarter; well, I think at the beginning of the year, we maintained that we would do one and a half to two and a half percent comp store sales guidance for the year, and, I believe that we're saying the same thing today. So I don't see a change in that.

With respect to how we're doing in the first part of quarter two, well, it just gives us more comfort or additional comfort to re-iterate one and a half to two and a half percent same store sales increase.

OK. Great, thanks very much.

You're welcome.

The next question is a follow up question coming from Matthew Difrisco, of GKM. Sir, please pose your question.

Thank you. Two questions actually. On the pre-opening side, you've been warning us I guess, for a couple of quarters now about this slowly ramping up, especially year over year since you're growing faster.

Can you give us some insight into what to expect for 2Q? Should it be at a similar pace of roughly the 800,000 you just booked?

Or, is it going to be higher in that basically, if you have nine less stores, is the majority - are the majority of those going to fall in 3Qs, so therefore you're going to have some expenses in addition to the four openings in 2Q - falling in into 2Q?

Hold on. Hey, Matt, you're only allowed, you know, one question here.

You know, we think right now the pre-opening in Q2 will be slightly ahead of the pre-opening in Q1, as we have - we won't be expending some pre-opening on some early Q3. Oh, actually, I have a couple of units that are right on the cusp of either Q2 - end of Q2, beginning of Q3, and so, you know, that's - we're sitting here right now, is about as exact as we can be within a week or two.

So we - so right now we're expecting to be able to - have to expend some of those Q3 opening dollars in Q2.

OK.

And then, on your average weekly sales, you broke it out and gave us some nice information there on the last five - the ones that were open the last five Qs being substantially higher.

I guess, what I remember is you guys do not do that much pre-opening advertising or - so you don't get as great of a honeymoon.

So, should we read into this that 59,600-ish number is a little bit more sustainable than some others that might be living off honeymoons in that first five quarters?

You know, we do get - we do get honeymoons, Matt.

I don't want to - because we don't advertise does not mean that we don't have a quite sophisticated pre-opening program. We do - our pre-opening teams do a fabulous job of reaching out to schools and communities that quite frankly, other people can't reach out to.

And so, you know, because Red Robin's a place where you can - sincerely invite them to bring in their family of all ages, and you know, that's very, very popular, because we're all so busy, and we don't want to get torn away from our family.

Well, when you finally get an invitation as a business or community or church leader to be invited in with your family, that 's a big you know, it's very, very popular.

And so, we've gotten very strong openings. You know, you're talking to a bunch of optimists. So you're - you know, do we think they'll be better than the ones in the past? Oh, of course, we do.

I would never - I would never be pessimistic, but I don't want to say that we are - that we don't have strong openings, because we do.

I got it. OK. Thank you.

The next question is also a follow up coming from Jeff Omohundro of Wachovia Securities. Sir, please pose your question.

Yes, I - my follow up relates to the guidance that's been given, specifically on revenue.

The wording in the press release - I just want to make sure that we're clear here.

You're indicating in Q2, at least language in the press release, indicates total revenues of approximately 71 to 73 million.

And I just want to make sure that you mean total revenues and not company restaurant sales.

Jeff, it's total revenues.

OK. So that's company restaurant sales plus your ...

Franchise

... franchise royalties. So, the growth rate in Q2 will be a bit slower than Q1, I think which was asked earlier.

Well, we have a 16-week versus a 12-week.

I'm talking about the year over year growth rate on that basis would be a fairly substantially lower.

I'll have to think about that Jeff. I'm going to get back to you. I can't think of a particular reason why it would be lower.

OK. I'll follow up with you later.

OK.

The next question is coming from Mike Smith (ph) of Fahnestock. Sir, please pose your question.

Well, I think I have same questions, so I'll just pass and I'll give you a call later.

OK.

The next question is another follow up coming from Andrew Barish of Bank of America. Sir, please pose your question.

Let me answer the question, because you're lapping the acquisition of 10 franchise stores.

That's probably it.

Thank you Andy.

You're welcome. On my question, as I recall, I think you had some costs that you were rolling out to new programs this year, actually.

Can you kind of give us an update which, you know, from my perspective, I mean, makes the numbers continue to look even more impressive.

I thought you were - you were going to do a program with the hamburger bun upgrades that may have been costing you a little bit of money as well as the new General Manager compensation plan that I thought was rolling out for the beginning part of the year.

Is that correct?

That's correct Andy. I guess in our conservativism, we just haven't been seeing the dramatic increases as a result of those initiatives. Yes, there is a slighted increase because of our enhanced quality movement.

But it's not material, and the enhanced bonus program for management, well, it's appearing to be a win-win situation for not only the team members, but the company as well. So that's again, why we're not seeing any material difference there.

Thank you.

If there will be any further questions or comments at this time, please press the numbers one, followed by four, on your touch-tone telephone. Gentlemen, there appear to be no further questions at this time. Do you have any closing comments?

Thank you all very much for your support, and we look forward to speaking to you with good news again next time we speak. Thank you very much.

Thank you for your participation. That does conclude this afternoon's teleconference. You may disconnect your lines at this time. Have a great night. Thank you.

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