Red Robin Gourmet Burgers Inc (RRGB) 2003 Q2 法說會逐字稿

Welcome to the Red Robin Gourmet Burgers second quarter 2003 earnings results conference call. (CALLER INSTRUCTIONS ). It is now my pleasure to turn the floor over to your host, Michael Snyder. Sir, the floor is yours.

Thank you Ashley. Good afternoon and welcome to our second quarter 2003 conference call. If you haven't seen our second quarter earnings press release and you have power, it can be accessed on our website at redrobin.com by clicking on the investor page.

During today's call, we're going to cover the following areas -- the financial and operational results of the second quarter of 2003 which by the way was a 12 week quarter. We're also going to update you on our current business trends and projections for the third quarter and fiscal year of 2003. Additionally we are going to provide some initial estimates for the year 2004.

I need to remind everyone that part of our discussion 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 you to our filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Now to the fun part. Total revenues for the 12 weeks ended July 13, 2003 increased 16.2 percent to $75.6 million. Restaurant level operating profit increased 23.1 percent to $14.3 million. And our net income for the quarter was about $4 million or 26 cents per diluted share. Our second quarter results were driven by comparable restaurant sales increase of 3.6 percent for our company-owned units. This was a result of a 3.8 percent increase in guest counts offset by a 2/10 of a percent decrease in the average guest check. We will get into that a little bit later in Q&A if you would like.

Comp restaurant sales in Seattle, Portland and Denver, which now represent about 40 percent of our restaurant sales, were a positive 3/10 of a percent for the second quarter 2003. The remaining markets, particularly Los Angeles, northern California and the East Coast had a strong quarter. If you exclude Denver, Portland and Seattle, the remaining comps were up 5.8 percent. Some examples, Los Angeles area up 9.8 percent; northern California up about 5.5 percent; northern California outside the Bay area up about 10 percent and places like Maryland, Virginia, Washington D.C. and St. Louis, those are all up about 10 percent or more. Our company-owned restaurants had comp weekly sales averaging $59,827 compared to $57,776 during the same period last year.

We opened two new restaurants during the second quarter and we moved two restaurants from Q2 to the third quarter. The two restaurants we moved to Q3 by the way are now open. Two new franchise units opened during the quarter including our first franchise unit in Kansas City. Our new restaurants are receiving more and more local public relations buzz surrounding the openings through free TV and three radio news clips and other media coverage surrounding our charitable events. All of this helps to contribute to our successful new restaurant openings.

During the quarter, we saw a strong performance from our comparable restaurants as they enjoyed higher sales and overcame cost pressures to improve their profitability and our new units continue to be well-received enjoying strong sales.

In addition, the second quarter marked our first full year as a public company. I want to thank all of our team members, shareholders and business partners for their contributions to our successful first year as a public company.

So that said, at this point, I will turn the call over to our Chief Financial Officer, Jim McCloskey. Jim?

Thanks Mike. Before it started I want to inform our listeners on today's call we may make references to some non GAAP financial measures. We've provided supplemental data in our earnings release to reconcile those measures to GAAP.

Revenues, the $10.3 million increase in second quarter restaurant sales over the prior year was primarily derived from 4.6 million from the 7 new restaurants opened and one restaurant acquired year to date in '03, 3.7 million of sales from the 10 new restaurants opened during fiscal '02 and 2 million from the $3.6 million -- the 3.6 percent comp restaurant sales increase. We saw an increase of 10.8 percent in our franchise revenues primarily due to a 3.7 percent increase in U.S. franchise comp restaurant sales and an increase in royalties and fees from our new 2002 and 2003 franchise restaurants. Canadian franchise comp sales turned positive in the second quarter and increased 0.6 percent.

As Mike indicated, average weekly sales for comp company-owned restaurants were 59,827 during the second quarter representing an increase of 3.6 percent. Average weekly sales for NROs (ph) opened the last six quarters were 58,704. Our comp franchise restaurants averaged -- comp franchise restaurants averaged 52,856 in the quarter versus 50,952 U.S. and 38,424 versus 38,195 last year in Canada. Canadian results are in Canadian Dollars.

Restaurant level operating profits -- restaurant level operating profits were 19.6 percent for the quarter. In comparison to the first quarter of '03, restaurant level operating profit improved 60 basis points while it improved 110 basis points over the second quarter of '02. This improvement is due in part to the strong performance of the '02 and '03 new restaurant openings. The stronger than expected same store sales increase also helped but was tempered by higher food costs and an increase in our workmen's compensation reserve.

Cost of sales as a percentage of restaurant sales for the second quarter was 23.6 percent or 30 basis points increase over the first quarter. The new restaurants experienced a 10 basis points improvement in cost of sales as the first quarter units became more normalized but this was offset by a 40 point increase in cost of sales at the comp restaurants, resulting primarily from high produce prices from increased lettuce demand, somehow McDonald's did not warn us of their salad promotion, and a mix change favoring chicken. In part due to Hula (ph) salad promotion along with increased bread costs as we very successfully promoted a couple of items with higher costs, namely the butter croissant and the cracked pepper crusted Parmesan cheese bun, and yes I did have to practice that, that we sold a lot of in the second quarter.

Labor expense as a percentage of restaurant sales for the quarter was 35.3 percent which is unchanged from the first quarter. While we experienced improved controllable and administrative labor both at our comp and new units we also experienced increased workmen's compensation across and a slightly higher bonus expense which offset the savings. As expected labor expense improved 70 basis points over the second quarter of '02. Last year, we were experiencing high labor due to turn over at the acquired restaurants and an initiative we had in place to use more front house labor to boost our same store sales.

Operating expenses as a percentage of restaurant sales were 14.8 percent, a 70 basis point improvement over the first quarter. 40 basis points of this improvement was due to the ending of one of our joint franchise corporate marketing funds and the rest was to some seasonally high promotion expenses in the first quarter. We also experienced a 20 basis point improvement in repairs and maintenance expense during the quarter due to our influx of new restaurants and our more aggressive refurbishments over the past three years which is resulting in lower repairs and maintenance and then we also had a slightly lower seasonal utility cost in the second quarter.

Occupancy expenses as a percentage of restaurant sales were 6.8 percent, almost 20 basis points better than the first quarter of '03. The improvement in occupancy is due primarily to the fixed portion of those costs being absorbed by higher sales.

Depreciation and amortization expense as a percentage of total revenue increased 20 basis points to 4.6 percent from 4.4 in the second quarter of '02. This increase is primarily due to higher depreciation on the larger group of new restaurants.

As expected, corporate overhead which included G&A and franchise development expenses, improved 70 basis points over the second quarter of '02 and had 140 basis point improvement over the first quarter of this year. The improvement over the prior year was due to improved economies of scale. The improvement over the prior quarter was due to the substantial public company costs and franchise conference costs that we incurred in the first quarter.

Preopening costs increased 61,000 or 12 percent compared to last year. While we opened two restaurants in both the second quarter of this year and the second quarter of last year, we had more costs for early third quarter openings in the second quarter of this year. Preopening costs averaged approximately 162,000 per restaurant for the quarter as both of the openings were in existing markets.

Income from operations was 6.8 million or 9 percent of revenues compared to 4.9 million or 7.6 percent of revenue for the second quarter of '02 after excluding the one time gain on a lease buyout we had last year. This improvement is a result of both higher restaurant level operating profit and our economies of scale in G&A and franchise development costs.

Net income in the second quarter was 4 million compared to pro forma net income of 3 million in the second quarter of '02, a 36 percent improvement. There is some rounding in that 4 million and those other numbers. Diluted earnings per share for the quarter was 26 cents compared to pro forma diluted earnings per share of 19 cents in the second quarter of '02. Capital expenditures for the quarter totaled 14.8 million, including 12.9 million for new restaurants and 1.9 million for remodels, replacements, FF&E (ph) and computer equipment.

At this point, I will turn it back to Mike.

Thanks Jim. Based on our current outlook for the remainder of 2003, we are offering the following update. We expect to open 7 new company-owned restaurants in the third quarter, 4 new restaurants in the fourth quarter, for a total of 18 new restaurants in 2003. 4 of those third quarter openings or units are already opened. We expect our franchisees to open 6 to 8 more restaurants in the second half of 2003 for a total of about 10 to 12 for the year.

We are increasing our restaurant comp sales expectations to approximately 2 to 3 percent for the second half of 2003. We expect third quarter 2003 revenues to be between 74 and $76 million and the full year revenues to be between 319 and $324 million. Capital spending for the balance of the year is expected to be around 24 to $26 million. That would bring our total CAPEX for 2003 to approximately 52 to $55 million.

Based on these assumptions for the third quarter of 2003, we are projecting 19 to 21 cents in earnings per share. While we expect another strong quarter from comp restaurant operations and continued G&A leverage, opening 7 units in the third quarter will result in higher preopening expenses along with the expected impact in the margins from our new units. So for the full year of 2003, we are increasing our earnings per share projections to the range of 96 to 99 cents. Additionally, we are introducing 2004 earnings guidance of $1.16 to $1.18 per share. This assumption assumes revenues of 375 to $385 million and comp restaurant sales growth of 2 to 3 percent. We also anticipate to open about 20 to 22 new corporate restaurants and 14 to 16 new franchise restaurants in 2004.

I believe that the consistent operating performance from current restaurants combined with our strong new unit openings led to another good quarter and gives us increased confidence in our outlook for the remainder of the year, hence we are raising our expectation and guidance.

I also think that Red Robin's strong average unit volumes and attractive guest demographics continue to be a compelling driver for real estate developers when they are selecting Red Robin as part of their tenant mix. The sites we are seeing today and developing today continue to be in our opinion, better sites than we were being offered three or four years ago. So thanks again to our over 10,000 team members for being with us and creating a successful first year as a public company.

So I understand there has been a significant power outage around the country so thanks to you who have joined us. That concludes our prepared remarks and Ashley, could you please open up the call for Q&A?

(CALLER INSTRUCTIONS). Howard Kenney (ph) of Sun Trust.

Thank you very much. From an EPS standpoint quarter to quarter sequentially, is the difference in the EPS and the flowthrough in the numbers because you are essentially looking at very similar revenue, but lower earnings, is that all due to the preopening costs? And I have another question, as well.

Is the -- Howard, let me -- I'm not sure I completely understand the question, is the EPS from quarter to quarter?

I guess sequentially when you look at your earnings you did 26 cents on 76 million in revenue and you're talking basically about 76 million in revenue for the next quarter yet you are 19 to 21 cents in earnings.

Right. It is primarily related to the new stores, preopening and lower margins on the opening of the new units.

Because you will have more open this year because I thought in your commentary, one of the reasons why you talked to stronger margins was better performance at some of the new stores.

We did have better performance Howard than we expected. We have not changed dramatically our expectations in our model in terms of that profitability. Primarily it is related to the seven new units versus in the second quarter, we had two new units.

Okay. And this is more semantic than it is anything else but Mike in your commentary, you mentioned 96 cents as the low end of the range yet your press release mentions 97 cents and I know that's kind of semantic but -- Is your range 96 to 99 or 97 to 99?

Its 97 to 99.

Thanks very much.

Sure.

Is there a caller on the line?

Ashley, can you hear us?

Yes I can sir.

We can barely hear you.

Can you hear me now sir?

Yes, we can.

Okay. Jonathon Weave (ph) of McDonald Investments.

Good afternoon guys. I'm wondering on your recently signed up franchisees, where they stand in their development process? Then I've got some other questions.

Okay. We've opened in two new -- two of the opened, one in San Antonio and one in Kansas City. Of the new ones we have 9 that are in development right now and so of the -- so we still have some questions of whether they will get open by the end of the year and that's why we're still giving that range of 10 to 12.

These are the recently signed up franchisees?

That's correct.

That you were talking about?

That's correct.

Any visible differences in how they are operating versus your other franchisee stores or company-owned stores?

Certainly, the San Antonio appears to be a home run so we would like to be able to say they are all going to be like that. The one in Kansas City is also doing very very well. These are two excellent operators and of course, we expect all these new ones -- we are going in to it with an expectation that they will be excellent operators.

Okay great. Any comment on the trend in the quarter to date?

We're experiencing positive comps and that gives us our increased comfort to increase our guidance to the two to three percent range for the remainder of the year.

Are you within that range right now?

(laughter) We're very comfortable with our performance to date.

Okay. Any thoughts on the child credit tax checks? If that's going to impact any?

We haven't given that a lot of thought. We don't have a comment.

Okay, thank you.

Jeff Omahonso (ph) of Wachovia Securities.

Yes thanks, just a couple questions. I guess first maybe you could share with us some of the details about exactly why openings were pushed from Q2 to Q3. Second question is maybe you can detail a little bit what your thoughts are about the upcoming marketing and promo calendar, what is going to go after the Hula promo. And finally, what was the other expense item that was up a bit in the quarter?

Jeff, this is Jim. I will take the first one then Mike can handle that marketing question. The rains in the Midwest caused us some delay. In addition, we had subcontractor problems. We actually had a subcontractor in our Las Vegas site that drilled into our trusses and we had to go get the trusses re-engineered to make sure it could withhold the load (ph) and it delayed us three weeks. We didn't have a clause in the contract for stupidity, but it happened. The financial effect of that was we had seven weeks of delays and the net effect of that was a 3 point basis point difference. So it was virtually no change at all.

Then that item on the other expense, we had taken some advantages of the lower interest rates and as some of our higher priced debt is available to be extinguished early, we did that and so we have that $100,000 charge in prepayment penalties, as we retired some of the debt and put it on our line of credit for a substantial savings.

Okay.

On the marketing front Jeff, our fall promotion is going to consist of a steak burger, a barbecued chicken burger and Carnitas (ph) fajitas, which I can almost taste right now. (laughter) I would like to mention that I did read an article in the Journal awhile ago when some reporter commented that casual dining same store sales increases were largely due or could be contributed to increased marketing. I want to point out that we spent fewer dollars in Q2 of '03 than we did in Q2 of '02 so we didn't increase -- we actually decreased our marketing dollars slightly so that wasn't part of our guest count of 3.8 percent increase for the quarter.

Very impressive, thank you.

Thank you.

Andy Bares (ph) of Bank of America.

Hi this is actually Liz (indiscernible) for Andy. I was wondering if you could give an update on your cost outlook for the second half of the year in terms of commodities and in particular for beef and chicken?

I'd be happy to. We feel our food costs have turned the corner a little bit and is starting to come down ever so slightly. Our hamburger cost is expected to remain level. (indiscernible) meat costs are expected to decrease. That's largely because of the drop in pork or bacon prices over the next few periods. Produce is kind of a wild-card, but we feel comfortable that after produce does typically spike during this time of year, it's going to do what it has the past decade and drop back down to the normal level. I can keep going, cheese costs we expect to remain level. Other than that, we don't see any real threats out there to our total cost of goods.

Okay, thanks.

Yes.

(CALLER INSTRUCTIONS). Dan Garman of MC Adams Reit Reids (ph).

Good afternoon guys. Any comments on your comp trends within the quarter, any variation in trends from the front end of the order to the back end? Also I noticed McDonald's has been doing some pretty innovative things to capture market share recently, many of them aimed at women and kids. Obviously, they are in a different segment but are there any signs that some of the things they're doing are having an impact on Red Robin competitively and any worries on that front going forward?

With respect to the sales trends within the quarter, all these components add up to our increasing our expectations and our guidance so we feel some momentum on the upside.

With respect to McDonald's focusing on women and kids, we don't see an effect on us. As you know we have been -- that's our mantra for a decade now is catering to high income women, teens and tweens and going after America's families. We are proud of how we take care of America's families and we think we cornered that market a little bit better than others, so no, no effect as a result of McDonald's recent efforts.

Great, thanks guys.

Scott Shuman (ph) of BB&T.

Thank you, good afternoon. I was wondering if you had a CAPEX number for '04?

Let's look that up for you.

All right. While waiting for that another question I have is what was that hourly wage rates during the quarter, where they flat, moved up?

Our experience has been somewhat flat.

Last question I had, can you add some color to the decline in franchise development costs?

I don't -- yes, I can. Primarily, we really look at those two items in conjunction with G&A, we look at them together. The drop in franchise development costs is primarily related to an accounting allocation of how we handle -- we use to allocate some of our regional directors over franchise development. In '02 we did that. The beginning of '03 we switched, as we are going to move to a dedicated franchise consultant. We've already started that process and we'll start building in that area in the second half of this year, '04.

Okay great, thanks.

And then the CAPEX for '04 will be approximately -- total CAPEX will be approximately 64 million.

Thank you very much.

You are welcome.

Ladies and gentlemen, there appear to be no further questions in the queue at this time. I would like to turn the call back to the presenter for any closing remarks.

Mike Snyder again, CEO of Red Robin. Thanks to all of you for contributing to a very delightful and successful first year as a public company. We're proud to be a part of the casual restaurant, casual dining restaurant industry and we look forward to our next call. Thank you very much. Goodbye.

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