Red Robin Gourmet Burgers Inc (RRGB) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Red Robin Gourmet Burgers' fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host, Mr. Michael Snyder, President and CEO. Sir, you may begin.

Hi everybody. Thanks for joining our fourth quarter and fiscal 2003 conference call. If you haven't seen our fourth quarter earnings press release, you can find it, as well as a copy of a recording of this call, on our website, redrobin.com.

Today we're going to talk about our fourth quarter of 2003. And please remember that fourth quarter 2003 was a 12 week quarter. We are also going to update you on our current business trends and projections for the first quarter and fiscal year of 2004. We are also going to give you a brief update on our longer-term strategy to drive shareholder value.

I do need to remind all of you that part of our discussions 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. Please refer -- I would like to refer all of you to our filings with the SEC for more detailed discussions of the risks that could impact our future operating results and financial conditions.

Fourth quarter results, 2003. We are very pleased to report another strong quarter. Total revenues for the 12 weeks ended December 28 of 2003 increased 23.2 percent to $80.8 million, and restaurant level operating profit increased 12.7 percent to $15 million. Our net income for the quarter was approximately 4.2 million or 27 cents per diluted share. These results were in line with our updated guidance we issued last November.

Our fourth quarter results were driven by comp restaurant sales increase of 5.2 percent for our company-owned restaurants. This was given by a 6.1 percent increase in guest count, offset by .8 of a decrease in the average guest check, ending up with 5.3 percent. Our company-owned restaurants had comp weekly average sales averaging $58,512 compared to $55,571 during the same period last year.

We are especially pleased with our strong guest count increases in the fourth quarter. Our continued momentum in guest counts is from providing I think great food, high-quality service. And I just want to take a moment to thank all of the great team members inside of our restaurants and support offices throughout the country. Without their unbridled commitment to taking care of our guests, these great results would not have happened.

We opened five new restaurants during the fourth quarter of 2003, bringing our total openings for 2003 to (inaudible). Plus we acquired one franchise restaurants during the first quarter of 2003. Four new franchise units opened during the fourth quarter, bringing the total franchise openings to 10 for the year. We currently have 116 corporate and 103 franchise restaurants in our great Red Robin family.

For the full year of 2003 our revenue increased 19.8 percent to $328.6 million. And our restaurant level operating profit increased 17.9 percent to $61.1 million. Our full year net income was approximately $15.7 million or $1.02 per diluded share. This ended up right about where we thought it would. So at this point to get into more detail into our financial results, I am going to turn the call over to our Chief Financial Officer, Jim McCloskey.

Before I get started, that old caveat. I want to inform our listeners when we make reference to some non-GAAP financial measures during this call, you'll find supplemental data on our earnings release to reconcile our non-GAAP measure to GAP.

As much as most of you already know, we successfully completed the secondary offering last November and helped us raise an additional 18 million net of offering costs. The Company issued 750,000 new shares of common stock in this offering, which represents less than 5 percent of total shares outstanding this year end. We use the proceeds from this offering to repay borrowings under our revolving credit agreement.

We had a 14.8 million increase in fourth quarter restaurant sales compared to a year ago. Overall this increase is driven by 11.5 million of sales from the 18 new restaurants we opened this year and one franchise restaurant we assumed operations of in April 2003; 3.1 million for the 5.3 percent increase in comp restaurant sales; and approximately 200,000 additional sales from the non-comp restaurants that we opened in the third and fourth quarter of 2002.

As Mike indicated average weekly sales for comp company-owned restaurants were 58,512 during the fourth quarter representing an increase of 5.3 percent. Average weekly sales for the newly opened restaurants in 2003 were 55,462 during the fourth quarter.

Franchise royalties and fees increased 25 percent, or 470,000 for the fourth quarter compared to a year ago. This increase was attributable to mostly income from new unit fees. Our franchisees opened five restaurants in Q4 '03 compared to none in Q4 '02. And the additional royalty is related to the 10 new franchise restaurants opened in 2003. Overall our comp franchise restaurants reported a 3.5 percent increase in the U.S. restaurants restaurant sales during the fourth quarter. Sales for our Canadian franchise restaurants were flat for the fourth quarter.

Our comp franchise restaurants average 52,208 in the fourth quarter versus 50,439 in the U.S. a year ago, and 36,095 versus 36,097 a year ago in Canada. Canadian results are in Canadian dollars.

Restaurant operating costs. Cost of sales as a percentage of restaurant sales for the fourth quarter was 23.9 percent, a 130 basis point increase over the fourth quarter of 2002. This is anticipated. We knew this when we talked to you in November. And we due primarily to higher meat and bread costs. Overall our cost of sales increased 40 basis points over the third quarter of 2003.

Due to the effect of these price increases -- due to the effect of our price increase in mid-January and some moderation in overall commodity costs, we are seeing improvements in cost of goods sold so far in 2004.

Labor expense as a percentage of restaurant sales for the quarter was 35.4 percent, which was 90 basis point higher than the fourth quarter of '02, but improved 20 basis points over the third quarter of '03. In general, efficiencies and controls over labor and improvements resulting from a 5.3 percent same-store sales increase were offset by increasing workmen's compensation costs and higher bonus expenses.

In addition, we had a higher proportion of NRO operating costs during the fourth quarter -- of NROs operating during the fourth quarter of 2003 than we did a year ago. And labor as a percentage of sales at our NROs, which are new restaurant openings, runs higher than our comp restaurants for the first quarter -- first few quarters after opening.

Operating expenses as a percentage of restaurant sales were 14.9 percent, a 60 basis point improvement over the fourth quarter last year. This is due in part to the discontinuance of one of our marketing funds in the first quarter of '03. In addition, we believe operating expenses as a percentage of restaurant sales benefited a bit from that 5.3 percent same-store sales increase.

Occupancy expenses as a percentage of restaurant sales were 6.7 percent, about 20 basis points higher than the fourth quarter. This was due to a onetime credit in the fourth quarter of '02 that affected that number.

Restaurant-level operating profit was up 12.7 percent for the quarter. However, new comparison to the fourth quarter of '02, restaurant-level decreased 180 basis points. This is due to the increase in certain restaurant operating costs I just described. Results are due to the fact that we have a higher proportion of NROs during the fourth quarter of '03 compared to '02.

To give you an idea of what I'm talking about, our non-comp restaurants represented less than 5 percent of our or restaurant sales in the fourth quarter of '02, but they represented 18 percent of our restaurant sales in the fourth quarter of '03. NROs typically have higher operating costs than our comp restaurants. And these higher costs have an inverse effect on restaurant-level operating profit.

Restaurant level operating profit decreased 10 basis points over the third quarter of '03 due mostly to increases in commodity prices, bonuses and higher sales and efficiencies in new restaurants. Overall we believe our team members did a great job of managing costs this quarter. Despite some higher costs, our margins continue to be among the highest in casual dining.

Depreciation and amortization expense as a percentage of total revenue improved slightly to 5.2 percent from 5.3 percent. This is primarily due to leverage of the same-store sales increases. Corporate overhead, we continue to show increased economies of scale. That improved 180 basis points over the fourth quarter of '02. It should be noted we get a little benefit from a favorable impact by a few open positions that we filled early in the fourth quarter.

Preopening costs increased 50 percent compared to last year. But our average cost per restaurant was virtually identical to a year ago. Increase is solely due to opening five restaurants in the fourth quarter of '03 versus one in the fourth quarter of '04.

Income from Ops was 6.8 million or 8.4 percent of total revenues in the fourth quarter of '03 compared to 5.7 or 8.7 percent of total revenues in the fourth quarter of '02, after excluding the 1.1 million non-cash restaurant impairment charge we recorded in the fourth quarter last year. Preopening costs from the new units are the primary reasons the income from Ops was as a percentage of total revenues decreased.

Net income, we earned 4.2 million during the fourth quarter of '03 compared to pro forma net income of 3.06 last year. This represents an increase of over 16 percent. Diluted earnings per share for the quarter was 27 percent this year compared to pro forma diluted earnings per share of 24 percent last year.

Capital expenditures for the quarter were just over 11.5 million, including 8.2 million in new restaurants, and 8.3 million from models, replacements and FFE computer equipment. We're pleased to say that our cash flow from Ops during fiscal '03, combined with the 18 million in proceeds, enabled us to finish '03 with approximately 2 million less in borrowings than we had in '02. We view this as a tremendous accomplishment after building 18 restaurants in '03. At this point I will turn it back to Mike.

Let's talk about our first quarter '04 and full year '04 guidance. Based on what is happening now and what is happening the first part of first quarter and for the full year of 2004, we expect to open 20 to 22 new company-owned restaurants, and we expect our franchise partners to open about 15 new restaurants. We're looking at opening about 7 company-owned restaurants in the first quarter. So far we have opened 1 restaurant in Broken Arrow, Oklahoma. And our development schedule for the balance of 2004 is expected to be 3 or 4 openings in the second quarter, 6 or 7 new NROs in the third quarter, with the balance of the openings in the fourth quarter.

We expect our franchisees to open 6 to 7 restaurants in the first quarter, three of which are already opened including Clifton, New Jersey, Cherryville, Indiana, and Lansing, Michigan. So for the first quarter of 2004, which is a 16 week quarter, we expect total revenues of 112 to $115 million. And we're looking for a net income of about 27 to 28 cents per diluted share. These projected results are based on an expected comp restaurant sales increase of around 5 to 7 percent. We did take a small price increase early in 2004 of approximately 1.3 percent.

So a couple of items that I would like to talk about in the first quarter. In addition to it being a 16 week quarter, like I mentioned, and the front loading of some restaurant openings in 2004, combine this with the annual Red Robin franchise leadership conference that occurs in January, we anticipate that corporate overhead, G&A, with franchise development costs for the first quarter will range from 9 to 9.5 percent. This is a slight increase over first quarter of 2003, but we expect corporate overhead for the remainder of 2004 to decrease as a percentage of sales.

For the full year of 2004 we expect total revenues of 395 to $400 million and comp restaurant sales of 3.5 to 4.5 percent. That is for the full year. And I want to remind you that our comp restaurant sales comparisons will be a little bit more difficult during the second half of 2004 than they are in the first half of the year.

So based on those assumptions, our 2004 earnings guidance is increased to $1.17 to $1.19 per diluted share. That also includes about 3 cents dilution attributable to the issuance of the secondary additional shares that Jim mentioned earlier. And we also have raised our expected tax rate for 2004 to 34 percent. One final note on that, some of the math, capital spending for the year is expected to be about $63 million.

So before I turn it over to Q&A, I want to remind you of a couple of points that I think are important when thinking about Red Robin. This brand is currently -- our brand is so strong in our current markets, and our NROs continue to be successful. So this concept works darned near everywhere in this country. And we're so keenly positioned for growth. We're focused on an attractive market segment.

Remember, we talk about the women, teens and tweens of America. We talk about the demographics that we appeal to. Not only do we believe that this is a loyal customer base, guest base, but we believe this demographic continues to be a compelling driver for real estate developers. Keen astute real estate developers understand the synergy between their customers and our guests.

That said, we have been through some interesting times last year, 2003 and going into 2004. We've got some nutritional and dietary elements that are hitting -- that are coming to light with all of us. We had some health issues globally and in the United States. But as Red Robin goes through all of those and continues strong same-store sales increases, I think that it proves that Red Robin has developed this mutual trust and respect between our restaurants in the communities and the guests we serve.

So lastly, our restaurant fundamentals remain solid. Red Robin's cash on cash returns on our new units average about 35 percent. And we continue to generate $3 million average unit sales per unit. So those numbers, the strong guest counts increases during the so-called interesting times, just makes us so excited about our growth.

As of today we only have 202 company-owned and franchise restaurants in the United States. And I continue to believe that the ultimate penetration of Red Robin restaurants can be in excess of 1,000 restaurants over time. That's all we have for so our so-called prepared remarks. Elsa, if you would open up the call to Q&A, please.

(OPERATOR INSTRUCTIONS). Jeff Omohundro with Wachovia Securities.

Run through with a little more detail some of these labor efficiency metrics on the NROs? How is that trending and where your thoughts are ongoing forward? And then the second question would be, if you could give us a little color on what your sense is on franchise development funding and how that market looks supporting their growth efforts?

You were cut off, Jeff, on the first part of your question, but I believe it was regarding labor efficiencies on NROs?

That's right.

I guess we're just getting better. There is really no magic in all this. We have had some help with new stores' computerized labor scheduling program that we implemented, I guess it was about two or three quarters ago. Now we're just really starting to learn how to utilize it.

So I think combining just getting better at NROs with a little bit of technological help, we should be in pretty good shape with NRO labor as we go forward. The second part of your question was franchise funding. Jim, you want to give clarity it on what that is?

Jeff, the funding seems available for good operators. As our success is being better understood around the country, and we're getting some ancillary benefit benefits I think from our own restaurants -- from a recruiting standpoint we're getting a better class of experienced restaurant operator who would like to join the team.

We're getting a better brand of franchisees that like to become a franchisee at Red Robin. The franchisees that we're looking -- that we're discussing doing business with today have substantially more net worth than the franchisees we were looking at just three years ago.

It seems like you have signed a fair number of development agreements, but we really haven't seen an acceleration yet in the targets for franchise development.

I do think that is an area that we should expect in '05, '06 to start seeing some acceleration. Now we are -- I think last year we did 10 and this year we're seeing 15, so percentage-wise that is a good growth. But these people do take a while and we're careful. We're trying to make sure that every unit that they select is a unit that will some day -- the way we look at it here, some day we would like to own. And so we're careful with approving every new site. And we would rather, as Mike says, grow with dignity than just try to grow on a rapid pell mell pace.

Andrew Barish of Banc of America Securities.

Two questions, one on commodities and then one on openings. You mentioned the commodity cost situation with your price increases were looking a little did better. But do you expect pricing to be able to offset all of that, or do you expect a little bit of an increase on a percentage of sales basis in commodity cost? And then for your geographic mix of locations, can you just give us a rough estimate of existing markets versus new markets?

Sure, Andy, it's Mike. Our crystal ball probably isn't any better than anyone else's regarding commodities for the rest of year. Our recent price increase the first part of year should take care of everything that we can see today. If commodities start to go south again in a dramatic way through the remainder of year, we're not afraid to take another adjustment in prices. We feel we have plenty of room with our guests and our price value relationship to do so. Right now we are in relatively good shape. And it is all crystal ball from here, but we will be proactive and remain nimble, if you will, in reacting to whatever commodity issues are raised.

I think it is really good to see any kind of effect on that (inaudible).

From our guests, no, none. But 1.3 just doesn't show up with our guests hardly at all. You might have one person asking about their favorite menu items or something. So we have plenty of room on that. Geographically, Jim, where are we?

We're opening two new markets in Arkansas and North Carolina. We're going to be open in Wilmington, North Carolina and around Bentonville, Rogers in Arkansas. That doesn't mean that we have a mature brand in every single one of the other marketplaces. But we will continue to develop those units. About half will be in the west and about half will be in the midwest, East.

Jonathan Waite of McDonald Investments.

I have a question for you on the performance in the quarter as well as your strong showing in the quarter to date. If you could talk about your different regions West, Seattle, Portland, California?

In the Denver, Seattle, Portland they are showing good positive same-store sales increases. We're seeing very strong business in California, very strong business in the East Coast, very strong business in the Midwest. It gives us a lot of confidence to have that 5 to 7 percent same-store sales tax.

Now is Denver, Portland, Seattle are they in the mid single digits or are they low single digits?

Low single digits. That means the other parts of the country (indiscernible) strong.

Restaurant-level margin, so what is your outlook for that in '04? And has that changed any, or what are you thinking there?

I think what we said in the fourth quarter when we talked in November both on the roadshow and the update of our guidance is that we would protect our margins in '04. The price increase will do that. I think Mike's remarks -- we will continue to do that. If we're going to be in a period of high commodity cost increases, we will not hesitate to do a second price increase. But right now we don't need to.

Your view since November has not changed?

No. we're actually right where we thought we would be.

Dennis Gill (ph) of Sidoti & Co.

Which menu items did the price increase effect? When are you going to re-sign your poultry contract?

Most of the increase was on pop, believe it or not. We sell a ton of pop, and a modest increase in that item generates huge returns when you do make an adjustment. We didn't really break any price point barriers, if you will, or emotional barriers. It was just a modest adjustment in pop.

We have chicken and cheese locked in through the remainder of 2004. We're in good shape at least with the short term throughout 2004 -- I will call that short term -- with chicken and cheese. Our produce is remaining somewhat stable. Our meat in our hamburger is actually coming down a little bit. We are experiencing a little bit increase in our oils, our fry oils.

And with that said, we're very careful to choose what menu items that we do want to promote or feature each quarter. I think we're getting a little bit better at that as well. Put all the things together, what Jim just said on the earlier question, we're relatively comfortable with our price value relationship and our cost of goods forecast for 2004.

Could you also discuss the performance at some of the newer stores? How they have been doing?

Yes, Dennis. They're doing well. In comparison to -- our prototype stores are right there where we thought they would be. We expect them to be doing an average of $3 million over that full four quarter. We did get a couple of non prototype stores, smaller than our prototypes that we decided to build because it has both a good return on investment, and it was a difficult trade area to get into. We didn't feel we can get a freestanding store. But we have a pretty flexible prototype that we can fit in different situations.

We have -- a little anomaly. We have a couple of stores that I would say are early stores, one in Avon, Ohio and one in Western Springs, Nebraska, that I will call maybe even a little more green than we generally have built. We love the stores. They are in brand new areas. Great rooftops. Western Springs, for example, in front of a Target, Lowe's. Short Pump, Virginia -- it is a brand-new regional mall. Not all the restaurants and retailers are open yet. But it is opening soon. So we're seeing improvements as that becomes more of a draw.

It really is -- to a comparison of two or three years ago, now we're getting the first call on some of these sites. And so we have opportunity to get out there and get that A site on the corner. Now the offset to that is we may be building it a little earlier than the rest of the retail and the commercial is out there in that community.

In general that has done pretty well for us, because generally just in these high-growth areas there is enough business from construction workers and developers and etc., etc., to keep that going until we get to our traditional suburban housewife and kids marketplace. So there is just a slight anomaly. So I think our average in the fourth quarter a little over 55,000, that is 95 percent of what our comp was. We're totally comfortable with that number.

Howard Penney with SunTrust.

Jim, I was wondering if you could update us on your cash flow needs? And I did not hear if you said where your debt was at the end of the fiscal year? And given the successes of last year, the basic corporate philosophy on debt and that whole discussion.

I was thinking it should be used for executive apartments.

I did see you bought a G5 too.

That is not true to any other listeners. Our cash flow from Ops will generate about 70, 72 percent this year of what we're going to need in our investing activities to build our new stores. And that will go up -- that actually will jump up quite a bit we estimate, maybe not even into the high 70s next year in '05. I think as we move out we will continue to need less and less as a percentage. I think the total dollars will go up. I don't see us -- I think we are in a pretty conservative debt situation now. I don't see anyone at the Board level suggesting that we go back to any kind of equity markets. The Board is quite concerned about dilution. So I don't think we're going to see any more equity offerings in the near time future.

Is there an upper end of the limit that you feel comfortable with as far as -- I mean, you do have cash needs. So it has got to come from somewhere if it's not equity it's --.

We have cash needs, Howard. But from a percentage -- in covering debt service it is getting more conservative, not less. That is because the restaurants are quite profitable. Yes, the numbers get larger but the percentages get better. So from a commercial banking standpoint, if you look at it from a commercial banking, they are seeing it being less leverage than more.

Your assumptions for being less onerous assume a rate of 20 to 25 units, or is that going to continue to grow in terms of the number of units in the percentage growth? I take that back, is that going to be -- the number of units going to continue to grow to keep the percentage growth rate the same?

Yes. What you said. 17 to 20 percent unit growth.

Scott Schuman of BB&T Capital Markets.

I might have missed this. Did you give out the U.S. systemwide same-store sales for the fourth quarter?

No, we didn't. The SEC has told us to stay away from it. They called -- informally called a number of the restaurant companies around. At least that is what they told us. And said hey don't talk about systemwide same-store sales increases, because that is -- you can talk about the Company and you can talk separately about the franchisees. You're going to have to add them together.

Another question. Was there anything unusual in last year's forth quarter' G&A to make for an easier comparison this year?

Fourth quarter '03 versus '04?

'04 of last year.

'04 of '03 in comparison to which quarter?

I'm sorry. For the fourth quarter 2002 versus this past fourth quarter.

I don't think so. The dollars are higher, percentages are lower.

Right.

The biggest difference is the economies of scale. We're not counting preopening there. Franchise support and development it has probably gone up a little bit as we had more franchisees coming on board. But again, all of that gets buried in economies of scale.

Dan Geiman of McAdams Wright.

Going back to the growth plans, as you expand over the mid to longer-term, are there any regions that you're probably going to favor over others? And also, are there any key geographic areas in which you haven't signed franchise agreements? And what at this point are your plans to fill them in?

Let me take that in reverse order. We're talking to people in Boston and Florida and the South, Indiana. We only have one section of New York left. I think we have sold out of New Jersey. There is plenty of territory left but we are talking to -- we are talking to people in all the larger areas.

We grow in certain areas -- do we have preferences to certain areas over others? Some of them are just better economic areas, and therefore they have more development going on. And because they had more development they have more A sites coming online. And so the areas of let's say Jacksonville, Florida in comparison with let's say maybe upstate New York, Jacksonville, Florida is booming. That is going to be an area that we have chosen as a Company market so that we can be close to the booming areas of Orlando and East Coast of Florida, Panhandle of Florida which are also booming. We think there is plenty of growth pretty much in all the good economic areas around the country.

How about the Northeast at this point specifically?

We're talking to a really strong franchise group up there. I wish I could tell you about it, but all I can say is, a really strong group. We will probably codevelop the Northeast, Boston and that area. We think Red Robin will be well accepted there.

Finally, any impact on chicken sales as a result of the bird flu?

We haven't noticed any other than our total overall sales and guest counts up. That is all I can tell you right now.

(OPERATOR INSTRUCTIONS) Dean Haskell of JMP.

Good results, gentlemen. I note in your third quarter 10-Q that there were 101 franchise stores. Four opened in the fourth quarter, but your release states there are 103 franchised Red Robin restaurants open at the end of year. Is it a typo or what is the differential?

We did have a closing in Alerea (ph). It is called Alerea. It is one of the units that was offered for us to purchase back in '02. We decided not to purchase it because we thought it was a lousy location. And then we also took over a unit in Columbus, Ohio. It is called Easton Town center.

Were those in the first quarter or were those also in the fourth quarter?

Do we have --? I'm looking at my panel of experts. I need a lifeline on that question. So hold on, let me ask you one question. Dean, we have one closure in Canada.

One closure in Canada? One closure in the U.S.?

Right.

So that takes care of that.

I would now like to turn the floor back over to you for any further remarks.

Thanks everybody for joining us. If we seemed a little lighthearted, we are. We're having a good time doing this. And we appreciate all of your support. So thank you very much. Talk to you later.

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