One Group Hospitality Inc (STKS) 2017 Q3 法說會逐字稿

Greetings, and welcome to The ONE Group Third 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 discussion 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 line 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 conditions.

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. 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, 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. Here with us this afternoon is Manny Hilario, our new Chief Executive Officer. It's my pleasure to introduce you to Manny, although I realize many of you may know him already.

Manny comes to us with over 30 years of significant restaurant operations experience, including deep knowledge of licensing and franchising, complemented by his years working at fine dining concepts. After working with Manny over the past several months on the board, we have determined his vast experience made him ideally suited to lead our company as we pursue our next phase of growth. The board and I determined as we continued our shift to an asset-light business model, we believe it was the ideal time to transition to a CEO with extensive experience in restaurant and hospitality services, including owned, licensed and franchised operations, and Manny's experience fit that requirement perfectly. Under his leadership, we believe we will continue to further improve operations and financial performance of the company. Throughout his time on the board, Manny has contributed to the development of the 4-point strategy we began implementing at the start of this year, which includes a reduction in G&A at corporate level, improving operational efficiencies in our restaurants, driving same-store sales at restaurant level and growth with a focus on license and management deals only. I believe Manny is an excellent addition to the team, and I look forward to working with him as I turn my focus on business development and completing the many global licensing opportunities available to the company.

Before I provide an update on our business and Linda walks you through the financial results, I'll let Manny share some early thoughts on his first few weeks as CEO at The ONE Group.

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

Thank you, Jonathan, and good afternoon, everyone. I'm happy to be here, and look forward to working with The ONE Group's management team, Board of Directors and our shareholders as we continue improving operating performance, enhancing margins and driving global brand growth.

In my time here at The ONE Group on the Board of Directors, I've been impressed with the inherent strength of the brand, unique and highly differentiated dining and hospitality experience in our restaurants and, most importantly, the high quality of our team. While there are certainly work to be done, I've always believed that ONE Group is a unique and a differentiated brand that resonates with today's consumers and has tremendous white space globally. Having worked as a board member with Jonathan and his team in making changes this year that have already resulted in significant operating improvements, I'm confident that there is still substantial room for further progress and profitable growth, and I look forward to reporting on our progress in future calls.

I will now turn the call back to Jonathan to provide an update on the business results for the third quarter.

Thank you, Manny. The third quarter marked our third consecutive quarter of significantly improved results for our company. When adjusting for the hurricane and the D.C. store closure, we experienced overall revenue growth. This increase in our top line translated into a 75% increase in adjusted EBITDA despite a challenging time for our industry, which continues to suffer, falling same-store sales and profits. In general, we are seeing healthier sales trends across all of our restaurants versus the prior year. These results are continued proof that the strategic initiatives that we embarked on early this year are paying off.

Our comparable restaurant sales during the quarter were essentially flat from our owned and managed STK units during the quarter. This includes a negative impact due to the Hurricane Irma in Florida during September. As a result of the hurricane, our 2 Miami STKs were impacted. The Orlando store was impacted for a week, and the South Beach store lost a month of sales. When adjusting for the hurricane, comparable restaurant sales were up 1.9% for the quarter, performing better than the general competition. Our Miami restaurants have reopened, businesses started to build back, and most importantly, all of our staff were unharmed.

As mentioned on our prior call, STK Chicago entered the comparable restaurant sales base in the third quarter and was underperforming relative to its strong honeymoon period. Despite this, we still showed healthy increase in same-store sales, and Chicago continues to improve. We have brought on new leadership, and we are focused on improving execution, and we have repositioned local marketing efforts to drive better sales trends. Whilst we believe sales and margins will continue to improve over time, this restaurant will require some time to allow for all of our plans to take hold. The construction directly outside our New York STK, the meatpacking location, has finally wrapped up, and sales are beginning to rebound to a more normal level. This is a little slower than we had hoped as construction activity has now moved to other adjacent streets that are either impacted or closed, affecting the flow of traffic around the entire neighborhood. However, we remain encouraged as we enter the holiday season that sales will continue their improvement.

Looking forward to our international business in Europe, I'm delighted to report that we have enjoyed another quarter of increased revenue, up 9% in the third quarter. This follows an 8% increase in the first half of the year. Profits have also increased due to the sales increases and the G&A savings put in place in line with our planned strategy. 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 and produces high-end margin EBITDA. We are encouraged by the amount of interest that continues to exist for our brands, both domestically and internationally. Our pipeline of new business development remains strong, especially for our Rooftops, but we will continue to remain selective with the locations we choose as we build out our licensed brand for the long term.

Some of the international deals we have spoken on in the past are now very close to opening, which will have a big impact on the company's future performance. In Dubai, STK Beach in the Rixos Hotel is slated to open at the beginning of December. And STK in The Address Hotel Downtown Dubai will open early Q1 in 2018. In Doha, our partnership with Katara Hospitality, a licensed STK located on the top floor of the city's newly renovated Ritz-Carlton hotel, should open in Q2 2018, slightly delayed due to issues outside of our control.

Due to the devastating hurricanes in Puerto Rico, our 2 planned licensing restaurants are obviously delayed, but our partners currently believe that they may open in late 2018. These include STK Restaurant and STK Beach in the Condado Vanderbilt Hotel in San Juan, Puerto Rico. We will, of course, provide further updates once we have more information.

Demand for our restaurants and hospitality services remained strong, and we look forward to sharing additional exciting license and management deals we are currently working on during future calls. Overall, we are extremely pleased with our performance through the first 3 quarters of 2017 and continue to work on becoming more efficient, driving increased sales and generating further savings where we can. At the start of the year, we identified a strategy and are focused 100% on delivering it. We have not been swayed or distracted from the plan and, as a result, have substantially increased our profits to date. 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. And under Manny's leadership, the future looks very bright.

With that now, I'd like to turn the call back to Linda. Linda will provide more detail in our financial performance as well as discuss guidance for 2017.

Thank you, Jonathan. For the third quarter ended September 30, 2017, total GAAP revenues were $17.8 million, representing a 3.1% decrease to the comparable quarter last year. Comparable sales for owned and managed STK units increased by 1.9% for the quarter. Comparable sales for only owned STK units decreased 0.9%. These comparable sales are presented without the hurricane impacted venue for the month of September for both periods. Our Miami venue, as Jonathan mentioned, was closed for most of the month of September. Including the hurricane-closed store, comparable store sales would be down 0.2%. By the way, our Orlando location was closed for about a week, but it is not yet included as a comparable store.

Included in our total revenue is our owned unit net revenue of $15.3 million, which decreased approximately 6.0% compared to $16.3 million in the third quarter of 2016. The decrease was primarily due to the closure of the Washington, D.C. location in 2016 as well as the loss of sales in the storm-impacted stores in Florida. The decreases were offset by the opening of the STK Denver location in January of this year.

Management and incentive fee revenue increased approximately 20% to $2.5 million in the third quarter of 2017 compared to $2.1 million in the third quarter of 2016. The increase was driven by strong performance in our Las Vegas and European locations, in which we learn -- earn management fees based on revenue and incentive fees based on venue profitability. Food and beverage sales at owned and managed units increased 8.9% to $43.1 million in the third quarter from $39.6 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 25.3% in the third quarter of fiscal 2017 compared to 25.2% in the comparable quarter last year.

As noted in our first and second quarter, the pressure on costs can come from opening of new owned locations like Denver. We typically experience higher-than-normal food and beverage costs during the first 6 to 9 months after a restaurant opens. Unit operating expenses decreased approximately $283,000 to $10.5 million in the third quarter of 2017 from $10.8 million in the third quarter of 2016, primarily because of the closure of our Washington, D.C. venue in 2016 and the continued attention on cost savings. Noncash or deferred rent of approximately $14,000 is included in unit operating expenses in the third quarter of 2017. Deferred rent income of approximately $276,000 is included in unit operating expenses in the third quarter of 2016.

As a percentage of unit net revenues, unit operating expenses were 68.6% in the third quarter of 2017 and 66.2% in the third 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. Also the closure of our Miami location in September caused an approximate 1 percentage point drag in the period.

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 third quarter of 2017 were $2.8 million and $2.6 million in the third quarter of 2016. The company recorded a charge for an estimated amount due to resolve disputes related to fee calculations of $500,000 in the quarter ended September 30, 2017.

General and administrative expenses net of that charge were $2.3 million, a decrease of approximately $300,000 from the third quarter in 2016. Changes to the overhead expense structure over the past several quarters are responsible for the achievement of this level of general and administrative expenses. Management took actions in the first part of the fiscal year to reduce headcount and other G&A expenses. On a go-forward basis, annual G&A is expected to level off at about the $8.5 million level.

Depreciation and amortization expense for the third quarter of 2017 increased to approximately $1 million, an increase of $192,000 over the same period in the prior fiscal year due to the depreciation on 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 third quarter of 2017 were $496,000, a decrease of $1.5 million or 76% from the $2 million incurred in the third quarter of 2016. Costs in 2017 were related to sites not yet opened, including San Diego and Austin. Spending in the 2016 period was primarily for the STKs in Orlando and Denver.

Interest expense net of interest income was approximately $325,000 in the third quarter of 2017 compared to $80,000 in the third 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 third quarter of 2017 was approximately $178,000 compared to an income tax benefit of $4 million for the third quarter of 2016. The taxes on the current period were related primarily to our overseas operations. The benefit reported in 2016 was related to the release of deferred tax asset valuation allowances.

For the third quarter of 2017, net loss attributable to The ONE Group Hospitality, Inc. was $1.2 million compared to net income of $1.5 million in 2016. The net income reported last year was due primarily to the tax benefit mentioned earlier.

Adjusted EBITDA attributable to The ONE Group for the third quarter was $1.4 million, an increase of 75.2% over the prior year adjusted EBITDA of $823,000. For the 9 months ended September 30, 2017, our adjusted EBITDA was approximately $4.3 million, an increase of 51.5% over last year.

We have included, as we have in the past, a reconciliation of adjusted EBITDA to GAAP net loss from continuing operations and GAAP revenue to total food and beverage sales at owned and managed properties in the tables in the third quarter earnings release.

With respect to our liquidity, we ended the third quarter with cash and cash equivalents of approximately $1.8 million. At the end of the third quarter, we had approximately $13.6 million of borrowings with an additional $1.5 million of equipment and short-term borrowings outstanding. We have continued to pay down our debt at the pace of approximately $300,000 per month. The increase in our current liabilities reflects the accrual of rent for unopened locations for which we are in negotiations with landlords as well as the period end cutoff for us is Saturday impacting on our -- impact on our liabilities. We project that our remaining capital expenditures for 2017 will be less than $500,000.

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 numbers 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 costs for 2017, based on information available now and expectations as of today, we estimate that total food and beverage costs to be approximately 25% to 25.5% for 2017. Approximately 50% of our fees is under contract. 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 Jonathan and Manny both mentioned earlier, we implemented several initiatives late in 2016 and through 2017 that have reduced general and administrative costs. We project these savings to be approximately $2.5 million on an annualized basis. We've seen the reduction in our G&A in this quarter, and continue to identify and take actions on aggressive cost-saving measures.

When you consider the value of the G&A savings and the full year run rate from 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.

Now I'd like to turn the call over to Manny.

Thank you, Linda. I'd like to reiterate that I'm confident there's still substantial room for further operational progress and profitable growth at The ONE Group. We plan to continue making significant progress on the 4-point strategy we began at the start of this year, including: number one, a reduction in G&A at the corporate level; number two, improving operational efficiencies in our restaurants; number three, driving same-store restaurant sales; and number four, growth focus on license and management deals only. While we still have a lot of work to do, the combination of our robust pipeline of license development opportunities, tremendous amount of global white space and improved restaurant performance underscores my confidence that the business will continue to improve and produce sustainable growth and profitability. I look forward to the journey ahead and to updating you on our progress on future calls.

Operator, please open the line for questions.

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

Linda, when you're just stating your outlook for the food and beverage costs, you seem to have cut out right when you said the number. So I wasn't sure if you can give me the annual number there, or can you repeat that part?

Yes, it was 25% to 25.5% for the year.

Okay. And as far as the trends you gave for your Florida restaurants at close, can you repeat how long the 2 Miami ones are closed? And how long the Orlando one is closed?

Chris, it's Jonathan. We lost about -- with the buildup of the drop off about 5 to 6 days in Orlando, and in Miami, we actually lost the best part of the month. We had issues before and then we got hit badly with the hurricanes, to do with backflow problems, and it took us till the end of September to get over it, so effectively, we lost the entire month.

Okay. And your partner in Puerto Rico, have they even begun any construction yet prior to the activity there?

No, they haven't. They were still just -- we were still -- we need to finalize the plans. I did have a call -- I didn't call too soon obviously, but I had a follow-up call recently, and they indicated that they were probably going to try and be open around about the end of 2018. I think there's a balance out there between focusing on regenerating the Puerto Rico as a whole and getting it back to a self-sufficient position. Which infrastructure to help drive tourism and all that is going to be key to helping.

Okay. You indicated that you're trying to make improvements at Chicago. Would you say that it's underperforming your internal plan? Or is it more like it's going up against very tough comparisons from a year ago?

So we opened really, really strong in Chicago, Chris. I have to say probably alarmingly strong. And we learned a lot from that because we really -- we allowed the market to dictate the demand rather than us dictating it. And as a result, we disappointed people. It wasn't the best STK experience, and we kind of learned from that. As a result, from subsequent openings, we'll be much more disciplined in the number of people and over the period of time that we allow at the restaurant. We then -- we opened in the buildup to the holiday period, and then of course, we hit the Chicago winter, which was like hitting a wall for us. And that linked with the problems that we had with the management kind of created a perfect storm, which hit us fairly badly. As Manny mentioned, we've now kind of gone out of our way to improve the management there, to create a much more locally based focus. And as a result, every single week, we see an improvement in the store. So we still believe strongly in the store, but we just need to build it back up, which we are gradually doing now with better marketing, more local emphasis and a really strong management team.

Yes. I would just add to that. We have an impressive general manager in that property that is Chicago-based and really understands the Chicago market. So as you look at the outlook for that store, I think that the strong leadership there, as Jonathan mentioned, will really help us deliver strong performance out of there.

All right. Looking ahead to the next couple of months, with the holiday season upon us, any special efforts to drive higher party business or catering business?

Yes. I think for the fourth quarter, we have stated a few of our priorities are, number one, drive gift card sales in the restaurants, and we have some strategies and some things that we put in place to drive that. And then the second thing is focus on the event business. As you pointed out there, that's a very critical element of driving sales and profitability in the quarter. And then the third initiative that we're going after heavily in the quarter is going after the concierge program with the hotels. We have a lot of restaurants very close to high-profile hotels, and we really want to win that business. So I think the combination of those 3 things will be critical for driving transactions. And then from a check perspective, I think with the holiday season here, we'll be very active in making sure that we upsell on the average check where appropriate because obviously we don't want to be overly aggressive with the guest but we will really work with our restaurant level staff and train them on the right practices, driving some incremental upsell transactions in stores.

Okay. Last question. I think you said it on the call, but is your debt pay down rate still about $300,000 a month?

Yes.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back to Mr. Manny Hilario for closing comments.

Thank you. I appreciate everyone's interest on The ONE Group, and look forward to seeing you all in our restaurants. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.