One Group Hospitality Inc (STKS) 2017 Q2 法說會逐字稿

Greetings, and welcome to The ONE Group Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host, Ms. Linda Siluk. Thank you. You may begin.

Thank you, operator, and good afternoon. Before we begin our formal remarks, we remind you 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 any revision to these forward-looking statements in light with new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

During our call, we may refer to certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to other GAAP measures.

We define adjusted EBITDA as net income or loss before interest expense, provision for income taxes, depreciation and amortization, noncash impairment losses, deferred rent, nonrecurring gains and losses, including accruals for litigation settlement liabilities, stock-based compensation, lease termination costs, transaction costs and losses from discontinued operations. We also refer to adjusted net loss as net loss before net results from discontinued operations, nonrecurring gains and losses, 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 owned operations as well as the revenue, which is 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 these measures useful, see our earnings release of earlier today.

With that, I'd like to turn the call over to Jonathan. Jonathan?

Thank you, and welcome, Linda. 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 will begin today by recapping our second quarter performance and then discuss our current business initiatives. Following that, Linda will review the quarterly financials and 2017 guidance.

Early in the year and as reported on our Q1 conference call, the company embarked on a 4-point strategy, including reducing G&A at the corporate level, improving operational and label efficiencies in the restaurants, driving same-store sales and a growth focus on license and management deals only. Halfway through 2017, I'm delighted to report that we continue to make excellent progress, delivering on our stated objectives. This strategy is clearly working, as evidenced by another strong quarter. For the second quarter, we reported revenue growth of 15.5% and an adjusted EBITDA increase of 34.4% over the prior year.

During the first half of the year, the company has increased same-store sales by 2.2% and increased adjusted EBITDA by 42.5%.

For the second quarter of 2017, the comparable restaurant sales momentum that began at the end of 2016 continued through the second quarter with a 1.7% increase in comparable sales growth from our owned and managed STK units. This includes the impact of a decline of 4.3% from our New York STK meatpacking location, which has severe access limitations due to construction taking place outside the restaurant. As a result, we have substantially reduced visibility and it makes it challenging for our guests to enter the restaurant and even for cars to come down our street. This is still ongoing, but we are hopeful construction will be wrapped up at the end of the third quarter and for sales to rebound to a normal state.

As far as Europe is concerned, I'm also delighted to report that we have enjoyed another quarter of increased revenue, up by 3%, and a total of 7.9% for the first half of the year.

As we noted on our prior call, we continue to be much more aggressive in our approach to operations and began implementing changes at our restaurants towards the end of February and into March, changes that were necessary to combat the continual increase of minimum wage and ways to offset the declining numbers of people that are eating out compared to the past as well as the underperformance in selected markets. In particular, we are focused on our underperforming STK restaurants in Chicago, both in the front and back of house. The sales falloff post the honeymoon period was much greater than we expected.

As a result of this analysis, we found it necessary to bring in new management to operate the restaurant as well as reposition some of our local marketing efforts. As a result, we are now operating the restaurant in a more streamlined manner and believe sales and margins will begin to improve over time. This restaurant will be entering our comparable same-store sales base in the third quarter and will likely be a headwind for 2 to 4 quarters in our same-store sales analysis.

In terms of development, we remain focused on our management and licensed deals initiative as this model doesn't require us to invest significant capital. The demand for our brand is still strong, and thus, we are able to sign attractive deals. Underpinning this strategy will be the opening of 2 licensed STKs that are currently on track to open before the end of 2017 and 3 additional ones in early 2018. These include: an STK Restaurant and STK Beach in the Condado Vanderbilt Hotel in San Juan, Puerto Rico; and an STK at The Address Hotel Downtown Dubai, located in the heart of the city's dining and entertainment district, as well as the STK Beach in the Rixos Hotel located adjacent to Dubai's Marina District; finally, an STK in Doha, Qatar, in partnership with Katara Hospitality, located on the top floor of the city's newly-renovated Ritz-Carlton Hotel, which will overlook the Arabian Gulf and will feature exceptional city views.

Additionally, during the quarter, we commenced the process of converting our STK San Diego Rooftop from a management deal to a licensed deal with a hotel. As a result, it gives us a hotel rooftop to add to our portfolio of licensed deals, and most importantly, our first STK-licensed deal on the U.S. mainland.

Despite the success we have enjoyed rightsizing our GA and the ongoing savings at store level, we continue to work on becoming still more efficient and generating savings where we can. To date, we expect to generate cost savings in excess of $2.5 million in GA this year on an annualized basis.

With our continuing trend of increasing same-store sales growth over the last 2 quarters and an increase in our adjusted EBITDA of 51% in Q1 and 34% in Q2, we remain confident that we now have the right structure, team and strategies in place to drive our brand forward and to create long-term value for all our shareholders. With these strong tailwinds, we are reaffirming our previously shared expectation that our run rate adjusted EBITDA at the end of 2017 will be in the range of $9 million to $10 million.

With that now, I'd like to turn the call back to Linda who is hosting her first conference call as Interim CFO. Linda will provide more detail on our financial performance as well as discuss guidance for 2017.

Thank you, Jonathan. For the second quarter ended June 30, 2017, total GAAP revenues were $19.9 million, representing a 15.5% increase over the comparable quarter last year. Comparable sales for owned and managed STK units increased by 1.7% for the quarter. Comparable sales for only owned STK units increased 1.2%.

Included in our total revenue is our owned units' net revenue of $17.1 million, which increased approximately 12% compared to $15.3 million in the second quarter of 2016. The increase was primarily due to the opening of STK Orlando in May of 2016 and the opening of our STK Denver location in January of this year. Management and incentive fee revenue increased approximately 43% to $2.8 million in the second quarter of 2017 compared to $1.9 million in the second quarter of 2016. The increase was driven by the contribution from recently opened STKs in Ibiza and Toronto and increases in management and incentive fees from Las Vegas and our European locations due to increases in sales in these venues.

Food and beverage sales at owned and managed units increased 17.4% to $45 million in the second quarter from $38.4 million last year. The food and beverage sales at owned and managed units is not a GAAP measure.

Food and beverage costs as a percentage of owned unit net revenue was 25.6% in the second quarter of fiscal 2017 compared to 24.7% in the comparable quarter last year. As noted in our first quarter, the increase is due to the opening of our newest owned location in Denver. We typically experience higher than normal food and beverage costs during the first 6 to 9 months after a restaurant opens. Again, as we mentioned in our first quarter call, 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 $1.7 million to $11.2 million in the second quarter of 2017 from $9.5 million in the second quarter of 2016, primarily because of newly opened locations not open in the second quarter of 2016. Noncash or deferred rent of approximately $16,000 is included in unit operating expenses in the second quarter of 2017. Deferred rent of approximately $191,000 is included in unit operating expenses in the second quarter of 2016.

As a percentage of unit net revenues, unit operating expenses increased to 65.3% in the second quarter of 2017 from 62.2% in the second quarter of 2016. The increase in unit operating expenses as a percentage of unit net revenues is due primarily to the expense drag from newly opened stores along with the across-the-board impact of minimum wage increases.

Our general and administrative expenses presented on a GAAP basis include spending for categories related to the support of the operations of the business along with other overhead items. On a total reported basis, general and administrative expenses for the second quarter of 2017 were $4.1 million and included approximately $800,000 related to the settlement of 2 losses for which preliminary court approval has been received. Also in the quarter, the company recognized expenses of more than $450,000 for accounting and professional fees for work related to the company's annual audit and for fees associated with its strategic review. Also recognized in the second quarter were expenses related to the company's strategy related to headcount reductions in the United States and Europe.

General and administrative expenses net of the settlement liability accounting and auditing services and transition expenses related to the company strategy were relatively flat compared to the second quarter of 2016, when general and administrative expenses were $2.8 million.

Management has taken actions in the first part of the fiscal year to reduce headcount and other G&A expenses.

Depreciation and amortization expense for the second quarter of 2017 increased to $805,000, an increase of $257,000 over the same period in the prior fiscal year due to the assets of locations opened in the second half of 2016 and early 2017, including STK Orlando and STK Denver.

Restaurant preopening costs for the second quarter of 2017 were $931,000, a decrease of $614,000, a decrease of approximately 40% from the $1.5 million incurred in the second quarter of 2016. Costs in 2017 were related to sites not yet opened, including San Diego and Austin. Spending in the second quarter of 2016 was primarily for the STKs in Orlando and Denver.

Interest expense, net of interest income, was approximately $220,000 in the second quarter of 2017 compared to $99,000 in the second quarter of the prior year. The increase was primarily due to the interest associated with the subordinated debt incurred in 2016.

Income tax expense for the second quarter of 2017 was approximately $203,000 compared to $546,000 for the second quarter of 2016. These taxes related primarily to our overseas operation.

For the second quarter of 2017, net loss attributable to The ONE Group was $2.3 million compared to $1.6 million in 2016. Adjusted EBITDA attributable to The ONE Group for the second quarter was $1.5 million, an increase of 34.4% over the prior year adjusted EBITDA of $1.1 million. We have included, as we have in the past, a reconciliation of adjusted EBITDA -- GAAP net loss from continuing operations, adjusted net loss to GAAP net loss and GAAP revenue to total food and beverage sales at owned and managed properties in the tables in the second quarter earnings release.

With respect to our liquidity, we ended the second quarter with cash and cash equivalents of approximately $1.5 million. At the end of the second quarter, we had approximately $14.3 million of bank debt with an additional $1.8 million of equipment and short-term borrowings outstanding. We have continued to pay down our debt at a pace of approximately $300,000 per month.

The increase in our current liabilities reflects the recognition of litigation settlement liabilities and professional and accounting fees in the second quarter. We project that our remaining capital expenditures for 2017 will be approximately less than $1 million, which is net of landlord allowances.

Before we open the call up for questions, I'd like to provide some forward-looking commentary on our business. 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, licensees and regulatory and licensing authorities.

With regards to our food and beverage cost for 2017, based on information available now and expectations as of today, we estimate that total food and beverage costs to be approximately 25% for 2017. The 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 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.

As Jonathan mentioned earlier, we implemented several initiatives late in 2016 and through 2017 that will reduce general and administrative costs. We project these savings to be approximately $2.5 million on an annualized basis. We'll see a reduction in our G&A in the latter part of 2017 as we continue to identify and take action on aggressive cost-saving measures.

Locations opened over the last year are generally providing incremental contribution. These newly opened locations include Orlando in May; Ibiza, which is a licensed location, opened in July of '16; 3 managed locations that opened in the August, September time frame of last year in Miami, San Diego Rooftop and Toronto; and an owned unit of Denver, which opened in January of this year.

When you consider the value of the G&A savings and the full year run rate for the newly opened venues, 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 the range of $70 million to $80 million. We also estimate that our adjusted EBITDA on a run rate basis will range between $9 million and $10 million.

That concludes our prepared remarks. Now Jonathan and I would like to open the call for questions. Operator?

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

Just a couple of questions. I know your same-store sales were up 1.7% for the quarter. Was there any kind of variation month-to-month? Did the Easter holiday shift impact things? Just kind of curious about the kind of the trend from the beginning to the end of the quarter.

Listen, there's always impact from different changing up. The biggest, and it always impacts us oddly enough, apart from the huge impact that we had in the first quarter, along with everybody else because of the leap year, is really weather. If we're really lucky, it's going to rain on a Sunday, Monday; and if we're not lucky, it rains on a Friday, Saturday. And if you look at the -- which we do, we do the analysis and I did the analysis for the quarter, and we actually had more rain days this year on the weekend, which obviously impacts our patios, outdoor space and rooftop here in New York. So that kind of was a big impact.

We also had a huge impact from STK downtown here where we're down about 4.3% because the street is virtually shut. But yet, despite all of that, we've been working really, really hard on our sales programs and our sales initiative. And for the second quarter in a row, we bucked the industry trend with this quarter being still up 1.7%, even taking those points into consideration.

Yes, most of the restaurants I see are negatives still.

Yes, absolutely. I've been following everybody else's and they're all trading negative. They were trading negative in the first quarter as well and we were, I think, up 2.8% in the first quarter, up 1.7% this quarter. And so I feel pretty good about the fact that the initiatives and the sales drive that we're putting in place are really paying off.

And of course, the other great thing for us is none of this is down to pricing. We're not really in a position really to play with pricing much because America is eating out 30% less. We've had 7 of 8 quarters of negative same-store sales. So whilst we seem to have a formula that's bucking the trend and delivering on every level, I don't want to tinker with anything.

The only other thing -- comment that I'd make about our same-store sales is this. If you read a lot of the analyst reports that are out there and have been out there for about the last 2 to 3 quarters, because of the advent of Amazon meal kits and Blue Apron and Seamless delivery and UberEATS, everybody's really talking about the fact that people want more for their dining out experience. And of course, for the last 10 years, they've had more with STK's concept. It's been a great bar scene, a nightlife scene, a restaurant scene. And so I think it's in times of difficulty that our concept really starts to pay off, because people come for the bigger experience rather than just the meal.

Got it. I think, you indicated on the call that you have been paying down your debt by roughly $300,000 a month. Is that sort of a rate you think will continue if you look out the next 12 months or so?

Yes.

Yes.

Yes, absolutely. We like -- that will absolutely continue. And the $300,000 is obviously a big chunk of capital and some interest. But I've always been keen to maintain debt repayments on a consistent basis and we absolutely intend to continue with that.

Okay. Your upcoming San Diego unit, can you remind me what the time frame is on when you expect that to open?

So I probably have it down sometime in the fourth quarter, which is where I'm hopeful it will be. The rooftop is currently open at the moment, but we've taken advantage of circumstances to flip that into a licensing deal. It virtually has 0 impacts on our estimate or maybe to the tune of like 1/2 point of management fee, but it's definitely no interest to do for, what I said in our report, that one, it gives me a licensed deal that I can point out here in America; two, it gives me a licensed rooftop.

So the marketing advantages for us in positioning the brand in this management and licensed model for low capital expansion gives us something to point to here in the USA. The store will recommence buildout probably sometime in the next probably 4 to 6 weeks and then it will probably be about a 20-week buildout period there. So it should put us somewhere towards the end of Q4.

Okay. Last question is on your Disney location in Orlando, now that you've owned it for -- or it's been open for about, I think, at least 15 months, can you just kind of tell us how things are going there? Or maybe versus a year ago or just in general, how things are at that location?

So our actual total sales will be slightly down on our prediction because we're not doing lunch there any longer. STK is a great lunch venue in a capital city where there's people go to lunch like Midtown New York. But in these other areas, it's not really the best of lunch locations. And so we stopped a while ago doing lunch there because, a, it wasn't profitable; and b, we overestimated the revenue that we would do there.

So kind of when you take those numbers out, we're maybe a little bit down on where we had hoped to be, but we think, part of the reason why is if you actually -- there's been some issues with the Disney search tools and with the Disney scoring system, which have impacted our ability to generate Disney reservations. Although the Disney reservations are good, they're not as good as they could have been. One of the problems that we had is that we're one of the few restaurants in the Disney Springs Park. In fact, we're the only restaurant in Disney Springs Park that has a $3 side. Everybody else here is $1 or $2. So we've actually literally just these last few weeks have been working with Disney on restructuring parts of the menu, so that we can be at the $2 side. So that's a big change that's happening.

Another change that we discovered quite by accident, for some reason, somebody had flicked a switch in Disney, which didn't give us reservations on the day. If you went to the Disney reservation system to make a reservation on the day, it would always come back as not available. So that's now been changed. So I'm pretty confident about the Disney store. We dropped on our estimates some revenue because of not doing lunch, but we're now kind of well into it now and learning how it operates there and the highs and lows based on the seasonality of the school year, the weather, et cetera.

The other issue that we have had there was a problem with the air-conditioning, which has been ongoing. And so now we've been working with Disney in order to fix that issue, so that we can kind of get to cool the restaurant down. So Disney is an ongoing thing. Out of the gate, the sales are good. I want them to be stellar and we have to work on the changes that we mentioned here in order to get them stellar, and I'm confident that we're going to achieve that.

(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.

Thank you so much, operator. So I'd just like to thank everybody for participating today. And I'm very excited about where the company is at the moment. In the beginning of the year, we made a commitment on our conference call and to our investors that we were going to make fundamental changes to the way this company operates, not least of all due to the changing economic environment that we're operating in within the restaurant business. And we came up with this 4-point strategy, which we have rigorously adhered to.

And I'm really proud of the fact that we must be one of the few restaurant companies in America today that can show outstanding profit growth for the first 2 quarters of this year, along with a strong growth in our same-store sales. And if you look at it on a half-yearly basis, we're actually up half year way through the year, 2.2% on our same-store sales and a huge 42.5% on our EBITDA, adjusted EBITDA.

So this kind of really gives me confidence in the changes that we've made. It also helps me to have encouragement to reinforce our guidance of run-rate-adjusted EBITDA for 2017 of between $9 million and $10 million. And I think so long as we can continue with the additional savings that we're looking to make through the company, more creative ways of marketing and combating the competition that we face from external restaurant sources to drive our same-store sales, I feel really good about where the company is today and where it's heading.

So that's my summary on the call. With that, I just like to thank Linda for participating in her first earnings call with us and the team that helped her and thus get to where we are now. And I thank you all very much. Goodbye now.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.