One Group Hospitality Inc (STKS) 2017 Q1 法說會逐字稿

Greetings, and welcome to The ONE Group's First Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Sam Goldfinger, Chief Financial Officer for The ONE Group. Thank you. Mr. Goldfinger, you may now begin.

Thank you, operator, and good afternoon, everyone. Before we begin our review with the formal remarks, we need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Please also note that these forward-looking statements, including projections, reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results or any revision to these forward-looking statements in line of new information or future events. We refer all of you to our recent SEC filings for a more detailed discussions of the risks that could impact our future operating results and financial conditions.

Also during today's call, we may refer certain non-GAAP financial measures which we believe can be useful in evaluating our performance. Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures. We define adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, noncash impairment loss, deferred rent, preopening expenses, nonrecurring gains and losses, stock-based compensation, lease termination costs, transaction costs and losses from discontinued operations.

Additionally, we define adjusted net income as net income before net loss from discontinued operations, nonrecurring gains, noncash impairment losses, lease termination costs, transaction costs and stock-based compensation. We define total food and beverage sales at owned and managed units as our total revenue from our owned operations as well as the revenue reported to us with respect to sales at our managed locations where we earn management and incentive fees at these locations. For reconciliations of these measures to GAAP measures and a discussion of why we consider it useful, please see our earnings release of earlier today.

With that out of the way, I'd like to the turn the call over to Jonathan.

Thank you, Sam, and good afternoon, everyone. I would like to thank you all for joining us on the call today as well as for your continued interest in The ONE Group. I'm delighted to say that we have kicked off 2017 with a rebound in our comparable sales growth of 2.7% for our owned and managed STK units. And when adjusted for the impact of leap day in 2016, same-store sales actually increased 3.8%. Adjusted EBITDA for the quarter was up from $1 million in 2016 to $1.6 million in 2017, a year-on-year increase of over 50%.

As we noted in 2016, the restaurant industry faced several challenges that affected our business. And as a result, like others in the industry, our sales suffered too. Those challenges have not yet been mitigated, and the restaurant industry continues to face difficult times caused by the continual increase in minimum wage across the country, the increases in the cost of operations, including our rents against the continued decline in the numbers of people eating out. As a result, we continue to be much more aggressive in our approach to operations.

In early 2017, we undertook an internal strategic review of our operations and began implementing changes towards the end of February and into March. And as the year continues, we remain focused on growing same-store sales, learning how to operate in a more streamlined manner and improving margins, putting The ONE Group in the best possible position for long-term sustained growth.

This has been accomplished in a number of ways. We are driving greater awareness of our brand by embarking on a more aggressive marketing campaign. We are making changes to our menu to reduce costs, and we are implementing ways to operate with less staff at both corporate and restaurant level. We have also recentralized reservations and have altered how we handle the group and event business at each of our restaurants.

Finally, we have analyzed our operations both in the front and back of the house to become more efficient. Our priority is to increase sales and profitability within our current restaurant portfolio. The strategy is paying off as evidenced by the notable improvement in both our sales and our profits.

Next, as mentioned last year, we have brought company-owned restaurant growth, which will enable us to preserve the stocks growth capital in the company. We will, however, continue to maintain an aggressive expansion plan based around the asset-light model of license and management deals as this does not require us to invest significant capital. Underpinning this strategy will be the opening of 4 STKs with license agreements in the second half of 2017.

In light of pausing our company-owned unit growth, we have eliminated certain positions within our corporate office and are evaluating other cost savings at the G&A level. We are also undertaking evaluations at the restaurant level to try and find still more savings. We expect these initiatives to generate annual cost savings in excess of $2 million on an annualized basis. As a result of the costs that were necessary to implement these changes, we believe the savings will begin to materialize on our P&L during the second quarter of 2017.

Included in this restructuring was the temporary elimination of our Chief Operating Officer position. Following Alex Munoz' departure from the company, the Board of Directors determinated that the COO role will be temporarily eliminated as part of our increased emphasis on licensing and management growth opportunities. As a result, the company has decided to return to its original roots and have Celeste Fierro oversee the operations.

Celeste joined me in founding the company, The ONE Group, back in 2004. Over the last 13 years, Celeste has successfully managed her event management, culinary experience and promotional skills to help grow the company into a worldwide leader in the hospitality industry. Over the last several years, Celeste has focused her efforts on controlling the marketing of the company nationwide. We are very excited to have her reengage in the operational side of our business as she's an exceptional operator and an important asset to our company.

Furthermore, we are happy to announce the appointment of Linda Siluk as the interim Chief Financial Officer. Linda brings more than 30 years of corporate finance experience. Linda recently served as Chief Accounting Officer at Fairway Market and has been senior financial executive in other retail companies as well.

To further strengthen our finance department, I'm delighted to announce that David Garretson is returning to our company as Senior Vice President of Finance. David had been with us for nearly 10 years and has a detailed understanding of the operational finances of the company.

During the first quarter, we also strengthened our current Board of Directors with the appointment of Manny Hilario as independent member. Manny bolsters our current board by adding 30 years of significant restaurant industry experience, including deep knowledge of licensing and franchising, complemented by his years working at fine dining concepts that also managed food and beverage in hospitality locations. His vast experience is a strong complement to our board as we undergo a strategic review of our company.

Finally, we are continuing to pay down our debt for the rate of over $300,000 per month, adding new strength to our balance sheet. While there's still work to be done, we are confident that we now have the right structure, team and strategies in place to enable us to drive our brand forward and create long-term value for all our shareholders.

With that now, we'd like to turn the call back to Sam who will provide more detail on our financial performance as well as discuss guidance for 2017.

Thank you, Jonathan. For the first quarter ended March 31, 2017, total GAAP revenues were $20.4 million, representing a 24.6% increase compared to $16.4 million in the first quarter of 2016. Comparable sales for owned and managed STK units increased by 2.7% for the quarter, and when excluding the estimated impact of leap day in 2016, same-store sales increased 3.8%. Comparable sales for only owned STK units decreased 1.8%, and when excluding the estimated impact of leap day in 2016, same-store sales decreased 1%. The decrease in same-store sales at owned STK units was driven by a decline in tourism in our core markets and business dining.

Included in our total revenues are owned unit net revenues at $18.1 million, which increased 26% versus $14.4 million in the first quarter of 2016. The increase was primarily due to the STK at Orlando and STK in Denver, which was partially offset by a decline in comparable sales.

Management and incentive fee revenues increased 14.9% to $2.3 million in the first quarter of 2017 compared to $2 million in the first quarter of 2016. The increase was driven by an increase in management and incentive fees at the STK in Las Vegas and the ME Hotel in Milan as well as management fees at the STK in Toronto, which opened at the end of September 2016.

Food and beverage sales at owned and managed units increased 18% to $41.6 million in the first quarter of 2017 compared to $35.2 million in the first quarter of 2016. It should be noted that food and beverage sales at owned and managed units are not GAAP figures.

Switching to expenses. Food and beverage costs as a percentage of owned unit net revenue increased approximately 127 basis points to 25.8% in the first quarter of 2017 from 24.5% in 2016. The year-over-year increase was driven by the opening of the new STK unit in Denver.

As mentioned before, we typically run higher-than-normal food and beverage costs during the first 6 to 9 months of a restaurant. Today, we have locked in approximately 50% of our 2017 beef purchases and expect our food and beverage costs to be relatively flat for 2017 as compared to 2016.

Unit operating expenses increased approximately $2.3 million to $11.5 million in the first quarter of 2017 from $9.2 million in the first quarter of 2016. Included in unit operating expenses are approximately $38,000 of deferred rent income in Q1 of '17 and approximately $60,000 of deferred rent expense in the first quarter of '16.

As a percent of owned unit net revenues, unit operating expenses decreased approximately 80 basis points to 63.5% in the first quarter of 2017 from 64.3% in the first quarter of 2016. The year-over-year decrease was the result of the closure of our Washington, D.C. STK, which was also partially offset by the opening of our STK in Denver.

General and administrative expenses increased 8.8% to $2.9 million in the first quarter of 2017 from $2.7 million in the first quarter of 2016. As a percentage of total revenues, G&A decreased approximately 210 basis points to 14.3% in the first quarter of 2017 from 16.4% in 2016. The year-over-year decrease in the percentage was largely attributable to the leveraging of fixed costs over our sales increase as a result of the opening of the new STK units in 2016 and 2017. As previously mentioned, on a go-forward basis, we believe the annualized impact of cost-saving initiatives that will impact G&A to be approximately $2 million.

Depreciation and amortization expense increased $343,000 to $866,000 in the first quarter of 2017 from $523,000 in the first quarter of 2016.

Restaurant preopening costs for the first quarter of 2017 decreased $186,000 to $714,000 from $900,000 last year. 2017 preopening costs includes the cost for the STKs in Denver and San Diego. 2016 primarily included the preopening costs for the STKs in Orlando, Denver, Toronto and the ME Hotel in Miami.

Interest expense net of interest income was approximately $259,000 in the first quarter of 2017 compared to $98,000 in the first quarter of 2016. The increase was due primarily to the interest associated with the subordinated debt that was entered into in 2016. Income tax benefit was $16,000 in the first quarter us 2017 compared to an income tax benefit of $66,000 for the first quarter of 2016.

First quarter 2017 reported net loss attributable to The ONE Group was $402,000 as compared to a net loss of $456,000 in the first quarter of 2016. This number is net of minority interest holders, which correlates primarily to our STK unit in the Meatpacking District of New York City. Excluding discontinued operations and onetime expenses, adjusted net loss for the quarter was $114,000 or $0.00 per share compared to adjusted net loss of $415,000 or $0.02 per share in the first quarter of '16.

Adjusted EBITDA attributable to The ONE Group was $1.6 million in the first quarter of 2017 as compared to $1.1 million in the first quarter of 2016. We had included a reconciliation of the adjusted EBITDA to GAAP, net income from continuing operations, adjusted net income to GAAP net income from continued operations and a reconciliation of GAAP revenue to total food and beverage sales at owned and managed properties in the tables in our first quarter release.

In regards to our liquidity, we ended the first quarter of 2017 with approximately $1.8 million of cash and cash equivalents. At March 31, we had approximately $16.5 million outstanding under our debt facilities. We project that our remaining capital expenditures for 2017 will be approximately $2 million, which is net of landlord allowances.

Before we open the call up for questions, I'd like to provide some forward-looking commentary to help you model our business. Once again, all this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We, as always, remind our investors that the actual number and timing of new restaurant openings for any given period is subject to a number of factors outside of the company's control, including weather conditions and factors under the control of landlords, contractors, licensee and regulatory and licensing authorities.

With regards to our food and beverage costs for 2017, based on information available now and expectations as of today, we estimate that total food and beverage cost to be approximately 25% to 25.5% for 2017. Current estimate is based on negotiations with suppliers, coupled with current and expected market conditions concerning fresh and other commodity items that the company is either unable to or has currently elected not to contract for longer periods of time. As of today, we've locked in approximately 50% of our beef price commitments for the full year. Beef currently represents approximately 30% of our total food and beverage costs.

In addition, we'd like to provide commentary to help you with projecting 2017. As Jonathan mentioned earlier, we've put in place several initiatives that have reduced general and administrative costs at the end of 2016 and into early 2017. We project these savings to be approximately $2 million on an annualized basis, and the impact for 2017 is projected to equal approximately $1.5 million.

Secondly, please note that closing our STK unit in Washington, D.C., closing our Cucina Asellina in London as well as terminating the lease for the old STK in West Hollywood will benefit us approximately $800,000 in 2017 by not having those losses in our results.

Lastly, we had several new venues open over the last year, including our owned STK in Orlando, which opened in May; our STK in the Ibiza, which is a license deal and opened in July; the STK in Miami at the ME Hotel, which is a management deal and opened in August; the STK Rooftop in San Diego, which is a management deal; and the STK in Toronto, which also a management deal, both of which opened in September; and finally, the STK in Denver, which opened in January of this year.

When you factor in the G&A savings, the rule of losses from closed venues and the full year run rate for the venues that opened in the past year, we estimate that our run rate food and beverage sales at owned and managed units to be in the range of $170 million to $180 million, and our run rate GAAP revenue to be in a range of $70 million to $80 million. We also estimate that our run rate adjusted EBITDA, once again, when factoring full year of operations for units described above as well as the G&A savings and the removal of the losses from the closed venues, will range between $9 million and $10 million.

With that being said, I would now like to open the call for questions. Operator, please open the lines.

(Operator Instructions) Our first question is from Chris Krueger of Lake Street Capital Markets.

A few questions. I know, last quarter, you pretty much were up to the final couple of days of the first quarter when you reported the fourth and you were able to give us an idea on same-store sales. And right now, it looks like you're at the halfway point of the second quarter. Can you give us any indication on those trends?

We're kind of on track on where we'd hope to be. April was tough, a tough month because of Easter again. That kind of hit us. In May, we've kind of clawed that back. So I'm fairly confident that we should get it, again, a positive quarter on our same-store sales, which maybe is similar with our last quarter ahead of the industry. So the industry was down 1.5% in the last quarter and we were up 2.5% -- up 2.8%. So I'm fairly confident that if we can carry on the way we go, we should be okay. There are certain nuances that are kind of hitting us. We just learned 2 days ago that they're shutting the street where STK mid -- STK Downtown is, which is our third -- our second biggest -- our third biggest STK. So that's going to create challenges for us. And the other thing that's created challenges is being the New York weather. So we haven't really had the strong patios and the rooftop that we had it in the early -- kind of May of last year. But everybody tells me summer's starting tomorrow, and I'm fairly confident that we'll be able to make up there and hopefully, yet, should end up on a positive quarter again.

Yes. And Chris, just as -- obviously, because our earnings release was towards the -- it was almost at the end of the quarter, we felt it appropriate at that time since we had pretty much the entire quarter results. We're halfway through the quarter. And obviously, as Jonathan mentioned, we had some -- the weather has been a little bit of a challenge, but we're still optimistic and confident that for the quarter, we should be pretty good.

Okay. You guys talked a lot about your marketing efforts to drive awareness. Can you give us a few details? Like what exactly are you doing?

We're looking at various ways to improving our loyalty program. I was just actually talking about it this morning with a colleague to -- we're not into the discounting loyalty program, so we're looking at more sophisticated ways of opening up availability. Other areas where we're fairly active is going back to realigning the -- which is -- well, it comes under marketing, but it's more reservation management or yield control. We've actually changed them and found some better ways of handling the open table reservation slots, which have resulted in some really, really big increases in the number of covers that we're able to do. In fact, in the last 2 weekends in a row, on Friday and Saturday night, we've ended up 20% up on our covers here in our 2 New York stores, which are the first 2 stores that we really focused on realigning our reservation slots. The other thing is where we slimmed down our cost of marketing, and we're now putting more marked sales in marketing linked with the event business into the stores. And you probably heard us last time, and again, on my -- what I mentioned a moment ago is how we've realigned the -- how we're managing the event business. And part and parcel of that is by putting marketing more into the store. We -- essential marketing has been good for us, but when you need to get more [guerrilla] and more aggressive, it's way better to have local people on the spot that have a better and a deeper understanding of the local market and trends and themes that are happening at that time. And these are all part of the changes that we've made that both have the impacts of improved or reducing our GA whilst at the same time, adding additional services to an existing service that we're offering in the store to help drive business.

All right. Next question, I think, is more for Sam. But if we look at the preopening expense line, I mean, should I go essentially to 0 in the second half of the year?

So certainly, yes. So you understand what gets there. So we certainly -- because we opened up Denver, the lion's share of that was Denver. But we also -- we're still accruing rents in a couple of our properties, one being Austin, another being Dallas. As we've discussed on previous calls, those properties are -- we're currently in discussions with the landlords and with both of those properties in terms of how that's going to play out. There's no real update. We saw the same issues. But we're definitely still in discussions for those 2 properties. As we continue those discussions, we are required under GAAP to continue to accrue the rent. So there is a portion of preopening expense that is noncash at this point. So you could say that there will be approximately $225,000 to $250,000 a quarter accrued rent that's going to be accumulating in that specific category until those 2 leases are resolved.

Got it. All right. Last question. I know your location at Disney World opened last, I believe, it was May. And I know, in the early months, there's some issues with the reservation system and just getting the bugs worked out essentially. Now that you've gone through most of the spring break season. I was there on an April Thursday night, it was just packed. I'm just wondering how -- now that you've gone through about a year, how is that location going? And are things tracking to where you want them to be this year?

It's kind of exactly where we expected it to be on the dinner business and it continues to grow. The one area which was kind of a disappointment to us, which really shouldn't have come as a surprise, was the lunch business. We -- people just will not go into an STK in Disney Springs for lunch. There's too many restaurants there that are almost completely outdoors or open air and that were built on an earlier stage when energy laws were different and you can put more air conditioning in your facility. So the lunch business, we stopped Monday through Thursday. We run a Saturday, Sunday brunch now. So that's probably the only area that kind of was a disappointment to us. Outside that, everything continues to grow. Our event business is growing exactly as I thought it would be, coming up to like a good few months after because everything booked heavily in advance. Disney reservations provide us with a lot of bookings, a lot of reservations and we're kind of more or less where we are. The one thing that is a little different for us is we've had to introduce items on the menu that we probably would not put on in a normal STK, which really caters to the fact that the early evening, from 5:00 until 8:00, we can have 25, 30 kids in the place. And so we really needed to have menu items on there that cater to that market. And then as we get later in the night, the couple market and the family market dies off. We're still running the same menu, and so some people are picking up those slightly cheaper items. But outside of that, it's kind of where we expected it to be. But we still believe there's room to grow. I think we can pull back at least 50% of the revenue that we anticipated from lunch in more profitable dinner reservations, which we're working on now.

And with that, I would like to turn the conference back over to the management for their closing remarks.

I'd just like to thank everybody for joining us on the call today. I was really pleased with the performance in the first quarter and to be up 50% on profit and to be up 2.8% or 3.5% when you factor in the leap year for last year. I think my team did a terrific job with that, particularly against the backdrop of continuing decline in quarter-on-quarter same-store sales within the industry. I think we're now clocking 6 quarters of decline.

I'm confident about the future. I think our strategy to go with the asset-light model is going to pay dividends. And of course, it was really founded on the fact that we built some very good lease-based stores, which created global attention to our brand, which enables us to leverage that popularity into these licensed and management deals.

We continue to pay down our debt. We continue to preserve our capital. And I think, all in all, we're setting ourselves in a good place for what should hopefully be a record year for The ONE Group in 2017.

So with that, I'd like to thank everyone for joining us, and good afternoon.

Thank you, everyone.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.