One Group Hospitality Inc (STKS) 2017 Q4 法說會逐字稿

Greetings, and welcome to The ONE Group Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Linda Siluk, interim Chief Financial Officer.

Thank you, operator, and good afternoon. I am joined today by Manny Hilario, our CEO; and Jonathan Segal, our Chairman. Before we begin our formal remarks, we must 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 place 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 revisions to these forward-looking statements in light of 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.

For reconciliations of these measures, such as adjusted EBITDA and total food and beverage sales at owned and managed and licensed units 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 Manny. Manny?

Thank you, Linda. I would like to thank you for joining us on the call today as well as for your continued interest in The ONE Group. 2017 was an outstanding and incredibly productive year, one that we intend to build upon in 2018. We generated a 10% increase in total GAAP revenue, returned to positive trends in comparable store sales from owned and managed units and achieved an impressive 54% growth in adjusted EBITDA on the strength of our top line, coupled with aggressive cost management.

Turning to the fourth quarter. We reported total GAAP revenue growth of 6%, which included a 6% increase in comparable store sales from our owned and managed STK units, and similar to our full year results, leveraged our costs into a 58% increase in adjusted EBITDA. We are particularly pleased with our improvements in restaurant-level profitability, which increased over 500 basis points in the quarter.

Our international business continues to perform well. During the fourth quarter, comparable sales at our international managed venues increased by 15.5%, and our profits increased as well as a result of our top line strength, coupled with G&A cuts implemented throughout 2017.

We are obviously very pleased with our performance, which we can attribute to the effectiveness of our strategic initiatives, coupled with the dedication of our employees who work hard every day, delighting our guests. We're also encouraged that our sales momentum has continued so far into 2018 as we continue executing against the 4 main business drivers first outlined in 2017.

These include: one, improving operational efficiencies in our restaurants; two, driving comparable store sales; three, reducing G&A at the corporate level; and four, focusing on growth to license and management deals only.

During my early months as CEO, I have had the pleasure of visiting nearly all of our venues and meeting with many of our team members and guests. I'm continually impressed with the strength of the brand, unique in how differentiating dining and hospitality experience in our restaurants and most importantly, the quality of our team.

While we have made great strides, there's so much more we plan to do. This is an exciting time for the company and I'm thrilled to see that so many of our employees share in this excitement. During my travels and given my background in the dining and hospitality business, I was able to identify corporate and restaurant-level operational opportunities that can help improve performance, enhance margins and increase profitability.

I'm also working with the management team and general managers to develop and implement many sales-driving initiatives that we can build upon throughout the year. For example, during the fourth quarter, we embarked on a sales initiative promoting gift cards, and as a result, gift card sales increased significantly over the prior year. Gift card sales are an effective means to extend our brand reach when they are shared by our loyal guests with their friends, family and business associates, and should help drive incremental business to our restaurants.

We also implemented initiatives to further deepen our relationships with concierge programs at high-profile hotels in the proximity of our restaurants. We believe this is another smart tactic to build guest traffic.

Additionally, at the end of 2017, we began a delivery test program through a partnership with Caviar in New York. While it's still in the very early testing stages, I'm encouraged by what delivery could potentially mean long term for our brand. We will therefore approach this opportunity thoughtfully and strategically and we'll update you as our plans evolve.

Turning to development. We continue to focus on asset-light management and license deals. In December, we expanded our footprint in the Middle East with a licensed STK at the Rixos Dubai at the Jumeirah Beach Residence, located close to the city's Marina District. This marks the first of our 4 licensed STK planned for the region.

Throughout 2018, we plan to open 2 STK restaurants in the region. These include an STK at the Address Hotel in downtown Dubai and STK Doha in the city's newly renovated Ritz-Carlton Hotel. We plan to open the fourth one either in 2019 or 2020.

We also plan to expand our footprint into Mexico during 2018 with our licensing partner there. The agreements will allow our partner to open 4 locations in Mexico, 2 of which are slated to open in 2018. The first STK is expected to open in Mexico City in the heart of the city's dining and entertainment district, alongside some of the best commercial and retail tenants in Mexico City.

The second location is planned in Guadalajara at the Andares Lifestyle Center. The third and fourth restaurants are anticipated to open in Monterey and Cabo either late 2019 or 2020.

As a result of the 2 major hurricanes that hit island of Puerto Rico during 2017, our STK and STK Beach restaurants in the Condado Vanderbilt Hotel in San Juan will be slightly delayed in opening. Our partner continues to work hard at getting these restaurants open. And with the information we have at this present time, we believe that at least 1 of these restaurants should be opened by the end of 2018. We will provide further updates once we know more.

From a company-owned restaurant perspective, we only have 1 location in development, STK San Diego, which will open in the second quarter of 2018. STK San Diego is located in the historical Gaslamp Quarter at the Andaz Hotel. This restaurant will be in addition to the already existent licensed STK Hotel rooftop.

We continue to see strong interest for the STK brand and in our hospitality program globally. Our worldwide development pipeline for 2018 and beyond remains strong as we continue to focus on asset-light projects.

With that now, I'd like to turn the call back to Linda who will provide more detail on our financial performance as well as discuss guidance for 2018.

Thank you, Manny. For the fourth quarter ended December 31, 2017, total GAAP revenues were $21.7 million, representing a 6.1% increase to the comparable quarter last year. As Manny mentioned, comparable store sales for owned and managed domestic STK units increased by 6% for the quarter.

Included in our total revenue for the fourth quarter of 2017 is our owned net revenue of $18.3 million, which increased approximately 2% compared to $18 million in the fourth quarter of 2016.

The increase was primarily due to the opening of the STK Denver in January 2017, combined with an increase of 6% in domestic comparable store sales for company-owned STK units, partially offset by the closure of the STK in Washington, D.C. in December of 2016.

Management and incentive fee revenue increased approximately 36.5% to $3.3 million in the fourth quarter of 2017 compared to $2.4 million in the fourth quarter of 2016. The increase was driven by strong performance at our European locations, for which we earned management fees based on revenue and incentive fees based on venue profitability.

Total food and beverage sales at owned and managed units increased 1.4% to $44.3 million in the fourth quarter from $44 million last year. Please remember that food and beverage sales at owned and managed units is not a GAAP measure. Food and beverage cost as a percentage of owned restaurant net revenue was 26.5% in the fourth quarter of fiscal year 2017 compared to 25.7% in the comparable quarter last year. The year-over-year increase was driven by increased cost for commodity items, particularly beef prices.

Owned restaurant operating expenses decreased approximately $472,000 to $9.3 million in the fourth quarter of 2017 from $9.8 million in the fourth quarter of 2016. As a percentage of owned restaurant net revenues, operating expenses decreased approximately 630 basis points to 56.5% in the fourth quarter of 2017 compared to 62.8% in the fourth quarter of 2016. The decrease in owned restaurant operating expenses as a percentage of owned restaurant net revenue is due primarily to the maturing of several of our owned restaurants and the cost savings initiatives put in place at the restaurant level, partially offset by the impact of minimum wage increases.

On a total reported basis, general and administrative expenses for the fourth quarter of 2017 increased $108,000 to $3.1 million compared to $3 million in the fourth quarter of 2016. As a percentage of revenue, general and administrative expenses decreased 40 basis points to 14.3% of total revenue. The decrease in the G&A rate is a result of reductions in the overhead structure over the last year, offset by increased stock-based compensation expense due to executive onboarding and payroll-related expenses like bonuses. Additional leverage is due to the increase in revenue. On a go-forward basis, we expect annual G&A to be about $9 million.

Depreciation and amortization expense for the fourth quarter of 2017 decreased $389,000 to $430,000 in the fourth quarter of 2016 versus $819,000 for the same period in the prior year. Restaurant preopening costs for the fourth quarter of 2017 were $377,000, a decrease of $1.1 million from the $1.5 million incurred in the fourth quarter of 2016 as a result of opening fewer company-owned restaurants.

Interest expense, net of interest income, was approximately $363,000 in the fourth quarter of 2017 compared to $187,000 in the fourth quarter of the prior year. The increase was primarily due to the interest associated with the subordinated debt incurred during the second part of 2016.

Income tax expense for the fourth quarter of 2017 was approximately $285,000 compared to an income tax expense of $13.9 million for the fourth quarter of 2016. We recorded a deferred tax asset valuation allowance of more than $12 million in 2016.

For the fourth quarter of 2017, net loss attributable to The ONE Group Hospitality, Inc. was $331,000 or $0.01 loss per share compared to the net loss of $16.1 million in 2016 or $0.64 of loss per share. Adjusted EBITDA attributable for The ONE Group for the fourth quarter was $2.4 million, an increase of 58% over the prior year adjusted EBITDA of $1.5 million.

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 fourth quarter earnings release.

In terms of our liquidity, we ended the fourth quarter with cash of approximately $1.6 million. At the end of the fourth quarter, we had approximately $14.1 million of gross debt outstanding, which includes $6.7 million in term loans, $6.3 million in promissory notes outstanding and $1.2 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.

Before I review our guidance, as we described in our earnings release issued today, we have slightly revised our segment and information is provided for the following segments: owned restaurants, owned food and beverage and other operations, and management and licensed operations.

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 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 respect to our 2018 outlook, based on information available now and expectations as of today, beginning with the top line, we project our total GAAP revenue to be between $80 million and $85 million. As a reminder, we did not participate on-site at the Super Bowl in 2018 as we had in 2017, and we generated approximately $2 million for events related to the 2017 Super Bowl.

We estimate total food and beverage costs to be approximately 25% to 26% for 2018. As approximately 75% of our beef 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.

We believe our total food and beverage sales at all our owned and managed units to be between $170 million and $180 million. We model our adjusted EBITDA to be between $9 million and $10 million.

Finally, we are planning total capital expenditures of approximately $3 million, which is related to 1 company-owned restaurant in San Diego and maintenance CapEx at existing venues. This is significantly less than prior years and reflective of our asset-light strategy.

I'll now turn the call back to Manny for closing remarks.

Thank you, Linda. Before we go to Q&A, I just want to provide a brief assessment of the market opportunity I see for the company, now that I have had some time to spend in the field and with many of our partners. We have a strong brand supported by unique and highly differentiated dining and hospitality experience.

For those of you who have been to our restaurants, you certainly know firsthand that it provides so much more than just a great meal. Our guests also appreciate the vibe and ambience which keeps them with us longer and also brings them back. This is important because our guests are looking for full dining experiences and then often want to post those experiences all over social media.

They also want those experiences to last longer so they hang around after dinner for more drinks, to listen to our DJs and to extend the evening. I see this as a defining competitive advantage because this is what hotels and developers are looking for across all of their properties. I expect the experience we can create will absolutely drive more opportunities for The ONE Group and our licensing partners globally.

As a result, at this time, I'd like to provide greater transparency and articulate our long-term growth targets. Over the long term, we will continue to focus on asset-light deals. Our job as a team is to pick the best opportunities and prioritize them in a way that we can efficiently manage between 3 to 5 licensed deals and 1 to 2 food and beverage hospitality projects per year. We also expect comparable store sales to grow at about 1% to 2% annually.

With respect to cost, we intend to maintain strong restaurant-level EBITDA margins, benefiting from the economies of scale and operating efficiencies while remaining disciplined in our G&A management.

Putting all of this together, and if these targets can be achieved, we should be able to generate consistent growth in adjusted EBITDA of 20%-plus over the long term.

To conclude, we have a sound strategy in place to drive sales, enhance margins and grow our business to asset-light restaurant development. We are deleveraging under this strategy and moving to a more capital-efficient business model. And most importantly, we are confident that successful execution of the strategy will drive long-term shareholder value.

We'd like to thank you again for your support and joining us on the call today. Linda, Jonathan and myself are happy to answer any questions that you may have. Operator?

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

You guys had some pretty strong same-store sales in the quarter. Was there anything in particular driving that? Was the holiday business stronger than normal or was it more steady throughout?

Yes, I mean, the business was strong throughout the whole quarter. We didn't have tremendous positive event sales so I we had a lot of programs going on from an outreach perspective. So I think our event business, just combined with great execution in the restaurant throughput, making sure that we were executing properly during the peak periods, I think the combination of those 2 items. And to a certain degree, our outreach program with the hotels, working with the concierge really helped drive those sales in the quarter. I also would say from a marketing perspective, our primary focus was on social media, so we had a lot of active initiatives in the restaurants to make sure that there was active posting, lots of Instagram, lots of Facebook, lots of just activity online. I think those things really helped drive sales.

You guys have mentioned the hotel concierge program a couple of times. How long have you guys been focused on that idea? Has it just been in the last quarter or 2 or has it been building longer than that?

I think generally, over time, we have focused on hotels. Hotels has always been important to the business model. I think in the fourth quarter, we added a layer of focus behind measuring if the program was being effective, so we had a lot of more a follow-up with the hotels, making sure that people have been up on the visits. And more importantly, we were very aggressively tracking the source of where the -- and the origination of the reservations. I mean, we were very active not only on the outreach, but really closing the loop with active measurements and making sure that we're following up on that outreach.

Okay. I know last quarter, the third quarter, you guys -- everybody was affected by the hurricane activity. Was there any impact in the fourth quarter from that?

No, we had -- all our restaurants in Florida had a fantastic fourth quarter. Orlando was very strong and South Beach was also very strong. So the answer is no to any residual hurricane impact.

Okay. A couple of number questions. I didn't quite check what your outlook is for CapEx. I know you guys stated it on the call but I missed it. What was that for 2018?

It's a $3 million number and it's reduced from what we've seen in the past because we have on deck right now, just the San Diego location and maintenance CapEx in our stores.

I think the split on that is 50-50. I mean, between the new restaurants and 50% on existing restaurants.

Okay. And then you mentioned that you're still paying down your debt by about $300,000 per month. Is that a number to look at going forward for the next year?

Yes.

Okay. A couple more quick ones. I know over a year ago, you closed the Washington, D.C. location. Are there any other locations that are underperforming in the group that you might have to take a look at or are things more stable than that?

Well, as we stand today and based on the performance that I've seen so far, we have a very healthy portfolio. I think our bigger challenge restaurant had been Chicago. We actually had a fantastic closing for the year in Chicago, and we've actually seen momentum continue in the first quarter in the units. I would say that if nothing else, the 1 unit and that had been bit of a straggler, I think we have made tremendous progress in there. We have a great general manager in that property. We brought in a new area supervisor or director to oversee that store. We've done a couple of things in the local community as it comes to marketing and outreach. I think that restaurant is on a great path now. And as you know, Chicago is a reputational city, and you really have to earn the right to be successful in there. And I think we now have the team in place that will make that restaurant very successful.

(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Manny Hilario, for closing remarks.

I'd like to thank everyone for joining us today and your continued support for The ONE Group. And I look forward to seeing you all in the venues the next couple of months. And I'd like to thank our team for a great quarter and great dedication and continued hard work into this year. So we appreciate that and we look forward to a great 2018 for the company. Thank you, and see you in the restaurants.

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