One Group Hospitality Inc (STKS) 2019 Q4 法說會逐字稿

Greetings and welcome to The ONE Group Hospitality's Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Tyler Loy. Thank you. Please 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 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 reflect our opinions only as of the date of this call. 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 conditions.

During our call, we will 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 issued earlier today.

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

Thank you, Tyler, and hello, everyone. We appreciate your continued interest into ONE Group. First, as a career executive in the hospitality business, this is absolutely the most challenging time I have ever seen. We've been forced to make very difficult and tough decisions that impact the team members we care so much about, and of course, our guests. The rapidly evolving coronavirus pandemic has required unprecedented actions. In response to the uncertainty in the market place, I have made a very challenging determination to reduce our workforce significantly and operate our restaurants exclusively using takeout and delivery options. This preserves the opportunity to continue to reach guests in markets throughout the country, and we are currently generating between $300,000 and $400,000 in sales on a weekly basis. This has only been possible through the amazing work by our frontline restaurant team, and I want to publicly recognize and thank them. I'm truly touched and impressed by their efforts.

Our top priority during the pandemic is the health, safety and well-being of all of our employees and guests, and we are strictly following all guidelines from the CDC, federal and local authority. Under normal circumstances, I would have spent much of this call highlighting our 2019 achievements, specifically, how we increased our top line by 41%, generated a comparable sales increase at STK Restaurants of 8.3% and delivered an impressive 36% increase in adjusted EBITDA. We would also have reviewed our expanded footprint, which included the opening of 2 international license STKs, one domestic company-owned STK and one F&B hospitality management deal. And of course, we would have discussed in great detail the accretive acquisition of Kona Grill, which added 24 high-performing domestic restaurants to our portfolio and what we are doing to maximize the brand's potential under our ownership. We were particularly pleased with the 3.9% comparable sales increase for the 24 Kona Grill restaurants in the fourth quarter.

Instead, let me briefly share where we stand today and how we are managing our business in the short term. First, as I said earlier, we have shifted operations to provide takeout and delivery service at all domestic restaurants with the exception of Las Vegas, Los Angeles, Orlando and Puerto Rico, as these 4 STK locations are temporarily closed. We continue to address each restaurant on a case-by-case basis and in this environment, we can expect other select restaurants will be impacted by temporary closures or reduced hours over the coming days and weeks.

Second, several of our international locations, including our restaurants in Milan, Italy and Doha, are temporarily closed.

Third, we launched both STK Radio and Kona Grill Radio, so our guests can bring the vibe dining experience home along with our delicious food. It can now be found on Spotify.

To preserve our cash, we have halted all capital expenditures and any unfinished restaurants in development are on hold. We are happy to report that the build-out of our newest location, a managed STK restaurant in Scottsdale, has been completed. The venue has been cleared of all local permitting and licensing requirements. The management staff and the hourly teams have been hired and are fully trained. We are waiting for the first clearance to get the restaurant open, and we are looking forward to having another STK restaurant operating in the United States.

Given the material adjustment to our business, we have been forced to make very painful changes to our cost structure. Before taking any actions, our workforce included approximately 4,000 employees. We are now operating with less than 100 employees, inclusive of our very small G&A team. We have deferred all cash bonus payments to our staff based on our 2019 performance. And our executive team have elected to take all of their 2019 incentive compensation in the form of equity. Furthermore, our nonemployee directors have also elected to take 100% of their 2020 compensation in the form of company equity. I believe that this is a great show of support by our Board and executive team of the company's fundamental long-term value.

With our temporary reduced cost structure, we believe we have liquidity for the foreseeable future. We currently have $9.5 million in cash, and we believe we'll continue to have access to additional liquidity through our current ongoing delivery and takeout business and access to our revolving credit agreement pursuant to its turn. As of today, we have $10.7 million in availability.

In addition to internal cost measures, we have already received either 2 commitments and agreements with our partners and landlords or by local law protection on not having to make base rent payments on restaurants comprising almost 45% of our U.S. revenues. We are now actively working with other landlords on similar arrangements. And as a reminder, we only have lease guarantees in 4 of our restaurants, with only one exceeding 3 years. And we purchased all 24 Kona Grill restaurants without any lease guarantees.

We have also arranged with all major food vendors not to make any payments on amounts owed through March 31, 2020 until at least May 2020. And for those owed amounts to be spread over at least 10 weeks thereafter.

We have suspended all nonessential outside services until further notice. Tyler and his team are also working with local utilities to arrange for potential payment deferrals. We are also actively working to take advantage of any and all relief opportunities available to us, including governmentally supported programs and insurance coverage. We are studying current federal legislation to determine how it impacts the company and the programs we can take advantage of. We are also actively working with our insurance representatives on making insurance claims under applicable policies, including claims under business interruption policies. This is ongoing, complex and it will take time.

It goes without saying, but we are looking forward to the rebound in our business once the uncertainties surrounding the coronavirus begins to subside and mandated restrictions are lifted. We will be ready when the time comes, and we know our guests are going to be ready for a great meal out. The events over the last couple of weeks have reiterated how resilient and strong our team is, and I truly believe in their ability to bring us quickly back when the right time comes. Thank you, team.

Since we cannot reasonably estimate when our business will return to normal operations, we have suspended our financial guidance for 2020.

Thank you for all joining us on the call today. Tyler and I are happy to answer any questions that you may have. Operator.

(Operator Instructions) Our first question comes from the line of Nicole Miller of Piper Jaffray.

Manny, I wanted to do a quick shout-out to your team. You always have, and in this case, once again, built one of the best (inaudible) that we've ever seen. So we're really thinking of you and the team right now. And then I'll ask two questions, if that's okay. The first is more difficult than the second. How are things currently? And how can we think about a cash burn or a worst-case scenario at this point?

Thanks, Nicole, for the great words. And frankly, I echo everything you said that the team that we have in place, frankly, has been impressive and everything they've done. And so I'm nothing but thankful for it. I mean obviously, these are very difficult times in the restaurant industry, and we've put everything that we can in place. In terms of cash, as we mentioned in our prepared statements there, we do have about $9 million in cash right now. And frankly, we've been very pleasantly surprised in how well the team has been able to deploy delivery and takeout in our restaurants. So we actually -- rather than think about burn at this point, we actually think of it as the terms of -- we believe we have enough cash for the foreseeable future. And we frankly have rearranged and reorganized a lot of our contracts, including as we mentioned in our prepared statements, we've done some work already with leases and just making sure that we are prepared to draw this out as long as possible. So it's really a game of preserving cash. And frankly, right now the way we've set up this business is to be around in the foreseeable future. So we don't have an exact number of years or weeks or months as to what, when we're going to be around. And our plan is frankly to be around as long as we can. And frankly, the way that the business model has played out in terms of delivery as well as we've cut down G&A substantially, I think we will be around for quite a long time. So we feel pretty bullish or I would say -- I want to call it bullish, but we feel pretty good about our cash in the short term. And like I said, we will continue to tweak the business model to stay around as long as possible.

Okay. That's important commentary. The second and last question for me. Walk us through the preopening process. I mean we will move past this. And what I'm curious to be educated on and I think everyone is, is what pieces of a preopening would be applicable to like a new store under the conditions that you've outlined where you're going pretty darn close to like a shutdown process, if you will? So this too shall pass, walk us through the plans and what you do to get everybody back on board? And how fast you can get the restaurants back up and running?

Yes. That's a great question. So the first thing that we contemplated and we did is we made sure that for all the properties that are currently operating, which is the majority of our U.S. locations, the GM and the executive chef for all of those properties are currently working in the delivery and takeout models. So to us that was an essential part of our coming back model is to make sure that those key individuals were in place for multi-unit managers. We do -- we kept our -- DOs also supporting some of the takeout delivery. So we did put some of the DOs working in the restaurants, which have high volume currently on takeout and delivery, supporting those teams. So we basically kept the core of our operating players in place in that smaller team, if you also -- the team of a 100 individuals does include all those key players. And then in terms of when we brought the restaurants down and we closed down the dining rooms went to a very thorough process of ensuring that electrical systems, POS systems, everything was kept in ready mode to come back on. So literally the way that we brought down our restaurants was the -- with the intent of being able to move as fast as possible on the properties. And then obviously, we do have inventories available to do that.

I think the other part that is very important is that we've initiated communications with our vendors and now our major business partners very early on. And we prepared ourselves in terms of making sure that we have made arrangements with them. So that the relationships stay positive so that when we need to bring in product and services, that everybody understands that it is a partnership, and we kept the relationships all in positive notes. And like I said, we do have utilized whatever resources we have now in terms of cash and so forth to make sure that we keep all those relationships positive. So it's a combination of relationships. It's a combination of having the systems in place ready to go, and then the core group that is on payroll right now have been picked because of their ability to bring the business back. Last thing I would say is that all individuals that are currently in the payroll, we make sure they are very multi-talented and they can do multiple functions, for instance, our marketing guys, our ex operations guys and vice versa. So we have a lot of cross-functional ability on the team that we left behind. So that basically all hands on deck and lots of people can do different responsibilities. So that's kind of a long answer to a short question, but I thought I would take you through all that.

Our next questions come from the line of [Dave Cannon of Cannon Wealth Management].

Manny, first of all, thank you for your efforts and strong leadership during such a trying time and responding so quickly. I know it's extremely difficult, and I applaud you for operating well during a crisis. Today, everybody saw the news that Cheesecake Factory is not paying rent. It sounded like you're pursuing that same path. Could you just confirm that? And then assuming you're not paying rent and with the 100 employee headcount that you've shrunk down to, can you give us a sense on a monthly basis what your burn rate is? Also assuming you continue to sell about $300,000 a week in to-go.

Thanks, David, thanks for the nice words. And again, as I said earlier, it's tough times, and frankly, only possible to do what we're doing because of the incredible talent of the individuals that we have on board. And frankly, some of the talent that is not here with us today, but they will be back with us as soon as possible and as soon as we can get back on track. In terms of the burn question, the way I look at this is, right now, we're doing, call it, $300,000-plus a week in delivery, takeout business. Our payrolls, including the G&A, is modest, it's somewhere between, call it, $100,000 to $150,000 in any one of the week so. After you cover for payroll, there's plenty of cash available for other needs, including some nominal purchasing that we're doing. So we're being very disciplined in just buying things like produce and only really fresh stuff that we need to replace in the store. So if you do the math on that, there's still a substantial amount of cash that is above and beyond the payroll that we plan to spend during this time period. So that will keep us going quite frankly, for the foreseeable future.

Obviously, the rent is a big item that we need to take care of, as you mentioned there. In our prepared statements, we already have for 43% -- 45% of our -- I think it's actually around 45% of our U.S. sales. We already have made arrangements with landlords. So we already have percentage rent agreements in place or we are in jurisdictions where the landlords can't do much for the next 90 days or so. So we'd have 42% of that -- 43% to 45% of that protected. And now Tyler and some of the other team members are currently reaching out to the remaining landlords and making sure that we can do and work out with them some form of arrangement. Obviously, it can take lots of different forms. For instance, in locations where we do have takeout and delivery sales, we're offering percentage rent for some of the landlords. So our preference right now is to amicably work out some kind of a deal with the landlords. And then again, before we get to the point where we blindly say we're just not going to pay everyone else, we try to do other arrangements that make more sense for the long term of the business. So then we'll figure out what to do next with the understanding that ultimately we have to preserve cash.

So that's our strategy there. We've already done some work with some of our partners. There's some more work to be done with some of the other landlords. And then whatever is left at the end, then Tyler and I will sit down and figure out what we do with those landlords or partners at the end of the day. So the key headline here is partnership, the key headline is amicable, and then we'll see how far that will get us in the process.

Okay. And then as far as your existing credit lines, credit line rather, it sounded like you had about $10 million of availability. Do you expect to draw down on that? Many other restaurant companies have done that maybe preemptively, what's your view on that? And how quickly could you draw down? Is there like a no hoarding provision or anything like that, that would potentially prevent you from doing it?

Yes. So thanks for that question. So our credit facility pursuant to its terms, it has a $4 million cash amount. So we cannot draw on the facility unless we were below $4 million in cash. So at this point, we're way above that number. But if we were to be below or around the $4 million, obviously, we would draw on the facility since we do have plenty of availability there. But for now and for at least the foreseeable future, we don't see being at the $4 million level. So we don't draw on it until we get there. So I guess that's what you call hoarding clause on the facility. So it's a $4 million number for us.

Okay. Thanks, guys. Good luck, and I'll be praying for you, and I'm sure you'll lead us through this thing. Thank you for your leadership.

Thank you, David, and thanks for all your support and your prayers as well.

Our next questions come from the line of Ryan Meyers of Lake Street Capital Markets.

First one for me. I just want to make sure I heard this right. You guys said weekly sales have been around $300,000 to $400,000, correct?

That's correct. That's on takeout and delivery sales.

Okay. That's helpful. And then when we think about your expenses, how much of them are fixed? And then how much of them do you think are going to change going forward here?

I think as I mentioned in one of my previous responses, we're trying to keep the payroll around $100,000 to $150,000 level, which leaves us substantial amount of cash after that. I see that's going to be our primary fixed cost now since the majority of that -- staff that we have is a fixed cost, I would consider that to be the primary fixed cost in the business. And then again, depending on where we end up with our landlords, which I believe we will be successful in a lot of the negotiating with them, then there'll be very little other fixed cost in the model other than perhaps utilities. And obviously, insurance costs because we want to keep the insurance policies all current. So utilities, insurance and labor are the primary ones that we will make sure we stay on. Everything else that is discretionary from an outside services or vendors support, we've kind of cut that off. And as we said in our prepared statements, we have arranged pretty good arrangements with our major food vendors to stretch out past balances and actually future purchases with them. So we've already arranged for what I consider to be pretty beneficial arrangements for us.

So for all intents and purposes then, the only other costs we have to worry about is any short-term buying costs that we have for product for the takeout delivery business. And frankly, we will probably work on the 20% to 25% cost range on that based on existing prices. Then obviously, depends on the mix of takeout to delivery because obviously, will be subject to some delivery fees on some of the delivery sites. So again, we do think that even after our cost structure, there'll be some leftover cash from that delivery takeout business in the short term, remembering that our staffing is very nominal. We're only running 2 people, maybe 3 people in some of the units at any one time. And our G&A structure has been really cut down substantially. So we're in about as good cost structure as we can be right now, and we plan to run this as long as we can.

Okay. That's good to hear. And then last one for me. How much of your sales in the fourth quarter were actually delivery and to-go orders?

So if you look at the -- our sales on the to-go and delivery, if you look at our Kona Grill, it's between 3% to 6%, already were in takeout delivery. So we did have a good base business. Some of the projects that we have are in lifestyle centers, which tend to have built-in residential around it. So we do have a built-in takeout business in some of those sites. And again, I'll only be cautious because obviously, with these very unprecedented times, consumer thinking patterns have changed. So you just have to be careful to overestimate them. And obviously, we're monitoring what people are doing. So although we ran a history of x in the fourth quarter, right now, I think all bets are off and it's really kind of figuring out the new reality and how to manage the marketing these days. Obviously, we do have a super talented marketing team that is still in place. We did keep the core of our marketing team. And if you follow us on Instagram and on digital, you would have noted that we've switched a lot of our -- all of our marketing to be real-time pursuing that. So I think we've done a lot of switching and actually very good thinking from the marketing team in terms of going aggressively after those channels. So I feel pretty confident that the team that we have in place will make sure that we maximize that business in the foreseeable future.

We have reached the end of the question-and-answer session. I will now turn the call back to the management for any closing remarks.

Thank you, everyone, for your continued interest in The ONE Group. These are clearly unprecedented times in the industry and frankly, in the world. And right now, I want to close the call by saying a very warm thank you for all the team members working with us today and also sending out a message that -- to our teammates, who will be back with us soon again and continue to making The ONE Group the leader in vibe dining. So we look forward to having our team back together soon again and to get back on track with our long-term plan. So I appreciate everyone's support, and I wish everyone a very safe and stay in touch, and we'll continue to do our best with the business. Thank you, everyone, for your interest, and talk to you soon.

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