One Group Hospitality Inc (STKS) 2020 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to The ONE Group First Quarter 2020 Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Tyler Loy, the Chief Financial Officer. Please go ahead.

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. Reconciliations of these measures, such as adjusted EBITDA and total food and beverage sales at owned and managed and licensed units; the GAAP measures, along with a discussion of why we consider these measures useful, please 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 in The ONE Group. I wanted to briefly discuss what we have accomplished over the past few weeks in light of COVID-19 and then provide an update on our recent restaurant reopenings as well as our near-term plans for additional reopenings as their lockdown measures are lifted. To be clear, it's our intention to reopen restaurants as soon as we are permitted to do so based upon state and local ordinance and to follow strict guidelines and protocols at our restaurants that, above all, ensure the safety of our team and guests.

As you know from our previous conference call, COVID-19 required us to make immediate and unprecedented actions over the last 2 weeks of March, including very difficult and heart-wrenching decisions to reduce our workforce significantly and operate our restaurants exclusively using takeout and delivery options where possible. Transitioning to a takeout and delivery model preserved the opportunity to continue reaching guests in markets throughout the country and keeping our operations' leadership engaged and was only possible through the amazing work by our frontline restaurant team.

We have improved our delivery model, including onboarding a service called Ordermark that aggregates all third-party delivery orders into ONE tablet and printer while simultaneously making our offerings available throughout 9 separate delivery service providers. This has enabled us to establish protocols for integrated operations.

Notably, during April, we averaged $380,000 in weekly sales for pickup and delivery service, and these grew sequentially 1.5x from the first week to the last week of the month. Our team has certainly done an incredible job, and I want to publicly recognize and thank them for their efforts.

Let me add that, as encouraged as we are to see our takeout and delivery sales growing week-over-week in the near term, we are even more excited as to what this means to us in creating a long-term additive layer to the business. In fact, by executing these incremental sales channels, we are building core competencies in operations and marketing that did not previously exist. Therefore, we should expect to keep these channels growing even as our dining rooms reopen. I will discuss this topic in more detail shortly.

During the first quarter, we took other measures to preserve cash, including halting our capital expenditures and putting on hold any unfinished restaurants in development. All of our remaining active corporate employees and executives elected to receive a salary reduction of at least 25%. We also deferred cash bonus payments to our corporate administrative staff based on our 2019 performance. Our executive team elected to take all of their 2019 incentive compensation in the form of equity, and our nonemployee directors have also elected to take 100% of their 2020 compensation in the form of company equity. These actions demonstrate great support by our employees, our executive team and our Board in The ONE Group's fundamental long-term potential and value of the company.

We have worked with our vendors and have reached agreements with the majority of them, including all mission-critical food vendors, for deferred payments over a 13-week to 26-week time frame. We have further reached out to local utilities to arrange for any and all relief available to us.

With regards to our lease arrangements, 85% of our leases are in a favorable position, and we are actively working with and communicating with landlords on additional support during these challenging times. As a reminder, we only have lease guarantees on 4 of our restaurants with only 1 exceeding 3 years, and we purchased all 24 Kona Grill restaurants without any lease guarantees. We have deferred lease payments at many of our locations in April, May and June.

From a marketing standpoint, we are utilizing STK's Friend with Benefits database of over 1.5 million subscribers to deploy multiple e-mail marketing campaigns, promoting our takeout and delivery capabilities, and have leveraged our social media presence across key platforms with targeted social media advertising creatives.

We have also placed various pieces of signage in front of our restaurants including A frames, large banners, window panes, street and billboard signs to educate people of our takeout and delivery capabilities as they pass by. Our takeout menu feature signature appetizers, entrees and sides as well as the STK@Home meal kits with dinner for 2 or dinner for 4 options that includes everything needed to bring the vibe dining steakhouse experience right to your home kitchen. Popular diner campaigns at STK include the Surf & Turf & Vine and the $9.99 Wagyu burger. We have completed our food and beverage offerings by enabling consumers to hear our STK music program on Spotify, which features 6 playlists of live sets from STK steakhouses around the globe.

We have also recently launched the STK Meat Market, an e-commerce platform that allows customers to purchase a wide array of signature, Choice, Prime and Wagyu steak cuts for home delivery nationwide. This convenience comes with -- at a great value with an average steak in the $25 to $30 range and delivery costs that are very reasonable for 2- and 3-day delivery.

Turning to Kona Grill. We employed the same operational playbook as we did with STK. This has included utilizing the Kona Grill loyalty program, which has over 300,000 subscribers to deploy multiple e-mail marketing campaigns promoting takeout delivery, launching its own Kona Grill Radio station on Spotify that highlights Kona Grill music, including created live DJ sets on Instagram Live. We have also marketed curbside margaritas and take out sake bomber kits for sale via online ordering and delivery at its own Surf, Turf & Vine for Kona Grill.

In terms of business continuity, as I said earlier, our intention is to be open for in-restaurant dining as soon as local jurisdictions permit. Through now, we have already reopened 11 dining rooms, and we plan to open another 5 today, bringing the total to 16 open dining rooms by the end of the day. Everywhere, we are following all health, safety and social distancing guidelines and requirements from the CDC, federal and local authorities. In fact, we have put together a very detailed manual as to how we are going to successfully resume operations and welcome guests back to our dining rooms while ensuring that we address our #1 concern: the health and safety of our employees and guests.

We are so far encouraged by the dining sales being generated at our reopened restaurants and have welcomed our guests back inside with exceptional food, service and ambience. We expect to reopen another 5 to 10 dining rooms in the upcoming 2 weeks, but beyond that, cannot reasonably predict when we'll be able to reopen other closed restaurants and return to normal dining room operations.

Our team has certainly proven how strong and resilient they are to these trying times and also how welcoming they can be to the guests who have already returned to our restaurants for a great meal out.

Thank you all so much for standing by us and for takeout delivery and STK Meat Market orders. We look forward to serving all of you in person as soon as that is feasible.

Now I will turn the call back over to Tyler.

Thank you, Manny. While Manny discussed some of the steps we have taken with respect to cost cutting and capital deferments, I thought I would begin by addressing our current cash and liquidity before reviewing the first quarter highlights in greater detail.

First, as of March 31, we had $8.2 million in cash and cash equivalents and $45.1 million in net long-term debt.

Turning now to our financials. For the first quarter ended March 31, 2020, total GAAP revenues were $40.7 million, representing a 78.8% increase from $22.8 million for the comparable quarter last year. Included in our total revenues for the first quarter of 2020 is our owned restaurant net revenues of $38.6 million, which increased approximately 92% compared to $20.1 million in the first quarter of 2019. The increase was due to approximately $20.7 million in sales contributions from Kona Grill. This was partially offset by temporary closures and limited operations of our restaurants beginning in March due to COVID-19.

Domestic consolidated comparable sales decreased 14.1%. Through February, the increase in comparable sales was 10%, and March decreased 55.9% due to COVID-19. At STK, comparable sales decreased 12.8%. Through February, the increase in comparable sales was 11.4%, and March decreased to 58.1%. At Kona Grill, comparable sales decreased 15.5%. Through February, the increase in comparable sales was 8.4%, and March decreased 53.7%.

Management, license and incentive fee revenues decreased 19.4% to $2.2 million in the first quarter of 2020. The management license fee revenue decreased primarily as a result of lower sales within our international managed locations in the United Kingdom and Italy related to temporary closures due to COVID-19 prevention measures.

Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased approximately 120 basis points to 26.2% in the first quarter of 2020 compared to 25% in the comparable quarter last year. The year-over-year increase was primarily due to the addition of Kona Grill restaurants, which have a slightly higher cost of sales than the STK brand restaurants. Owned restaurant operating expenses as a percentage of owned restaurant net revenues increased approximately 540 basis points to 68.7% in the first quarter of 2020 compared to 63.3% in the first quarter of 2019. The increase was driven by the comparable sales decreases due to COVID-19 coupled with no decreases in fixed costs.

On a total reported basis, general and administrative expenses, including stock-based compensation for the first quarter of 2020 was $3.4 million compared to $2.7 million in the prior year. As a percentage of total revenues, general and administrative expenses decreased 330 basis points to 8.3% of total revenues. In March 2020, as a result of COVID-19, we implemented measures to reduce our costs, including significant reductions in employees and reduction of third-party professional services.

When adjusting for stock-based compensation, adjusted general and administrative expenses were $3.1 million in the first quarter. As a percentage of revenues, adjusted general and administrative expenses decreased 330 basis points to 7.5% of total revenues. We incurred $1.1 million of integration costs during the first quarter related to our acquisition of Kona Grill, for which there were no comparable expenses in the prior year. This amount reflects our final integration costs related to this transaction. We incurred approximately $1.3 million of direct costs related to COVID-19 during the first quarter. Included in this line item are primarily payments to employees for the paid time off during restaurant closures, inventory waste and rent and rent-related costs for closed and limited operations restaurants from the date of the dining room close. There were no restaurant preopening costs in the first quarter of 2020 and $482,000 in the first quarter of 2019, which was related to the STK national opening in March 2019.

Interest expense, net of interest income, was $1.2 million in the first quarter of 2020 compared to $269,000 in the same quarter of the prior year. Income tax benefit was $653,000 for the first quarter of 2020 compared to income tax of $96,000 for the first quarter of 2019. Net loss attributable to The ONE Group Hospitality, Inc. was $4.6 million or $0.16 net loss per share compared to net income of $854,000 in the first quarter of 2019 or $0.03 net income per share.

Adjusted EBITDA attributable to The ONE Group for the first quarter was $1.6 million compared to the prior year adjusted EBITDA of $2.7 million, representing a year-over-year decrease of 41.4%. We have included, as we have in the past, a reconciliation of adjusted EBITDA to GAAP net income from continuing operations and GAAP revenue to total food and beverage sales at owned and managed properties in the tables in the first quarter earnings release.

As a reminder, due to these unprecedented market conditions, we cannot reasonably estimate when our guidance will return fully in normal operations, and therefore, suspended all financial guidance for 2020 back in March. We do, however, intend to provide further business updates as the situation evolves and we can begin resuming dine-in restaurant operations in the coming weeks and months.

Lastly, each of our STK restaurant group and our Kona Grill restaurant group applied and were approved for Paycheck Protection Plan loans. These loans are for a total of $18.3 million in the aggregate. We have accepted these loans because it positions us to bring back our employees in this very uncertain macro environment. Our management team and our Board explored many alternatives and sources of liquidity. As a micro cap company, we don't have substantial market cap and have limited or no access to other sources of capital, we firmly believe that the economic uncertainty related to COVID-19 makes receiving this loan necessary to bring back our employees and frees up other funds to invest in providing the greatest level of safety in our restaurants for our team and our guests in this uncertain environment.

I will now turn the call back over to Manny.

Thank you, Tyler. Let me conclude by expressing again how appreciative we are to our team for their dedication and resourcefulness in evolving our business in the near term to takeout, delivery and e-commerce and for all their hard work and most importantly, in preparing our restaurants to reopen. And to our valued guests who have enjoyed STK and Kona Grill at home these past few weeks, we look forward to serving you again in person soon.

Above all, I think we have made clear how we intend to get through these unusual and difficult times and will ultimately be stronger for it. Thank you all for 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 Nicole Miller with Piper Sandler.

We appreciate the update. I want to drill down on the 2 concepts. So of the stores that are opened, are any STKs? And what are the capacity planned so far? Like how many tables do you put down? And what's the service model maybe in terms of the menu? And then how do we compare and contrast that to demand expectations where STK might be a little bit more tied to corporate versus leisure?

Thanks, Nicole. And relative to the mix of restaurants, right now, we do have STK Atlanta that is opened, and we're opening STK Nashville today. So there will be 2 STKs operating as of the end of the day today, and then we will have 14 Kona Grills operating. Obviously because of our footprint now includes Kona Grill, which is a more suburban concept, a lot of the openings have been in those particular type of markets.

In capacity, we have everything from Texas with a 25% capacity available now to Atlanta, where you can put 10 people per 500 square feet. So -- and we have some places where we can do 50% capacity. So what we've done is -- particularly for STKs is we can't use the bar for aggregation purposes, so we've kind of shifted the shape of our dining rooms for that, and we've moved tables against the bar area to create additional space and provide spacing in the restaurants. All the properties were following social distancing. So everything is 6 feet apart. So there has been some changes, obviously, to the seating configuration of the spaces. Some jurisdictions were allowed to have only 6 people in tables. So we've taken all that into consideration and basically have reshaped all of our dining rooms. We've already planned that out based on early guidance for all restaurants. But as we get closer to the actual openings, we will continue reconfiguring.

In terms of operations, I'm pretty sure, as you've been hearing out there, it's a new dining world. So employees have to wear masks. We're now letting people come in to the post spin. We're actually stacking the guests outside of the restaurant and inviting them in so that we don't have congregation in the front of the restaurants. We have full-time sanitation and cleaning positions in the restaurants.

In terms of menus, they're all disposables. So we don't have the hard-backed menus as you typically would see on STK. And then the menus are limited. We give the restaurants about a week to 2 weeks with a limited menu. And then as we get more experience in the new operating model, we bring the full menu back into play.

So it's a very comprehensive new operating plan. Every one of our restaurants has a 12- to 14-page operating manual with all these new procedures, and we've been retraining our managers and our staff to go through it. The good news is because we decided to do takeout and delivery everywhere, we left the GM and the executive chef in place in every one of our facilities. So coming back up is a pretty quick turnaround because we have the key individuals in each one of our restaurants. I'll leave it at that. I could go on for about another half an hour describing the new operating model system.

It is very -- yes, very intense and very dynamic, but those are helpful points and clearly are aligned with most of the peers in the industry. I'm thinking about STK and Kona in terms of, okay, we can open the doors, but what kind of consumer demand could be expected. And so when I think about the STK, maybe that's a little bit more corporate. Would that be slower for any reason? And Kona, I mean you have more of them open. And clearly understandably, it's only days, so I don't want to call it a trend or a pattern, but I'm assuming that's more like leisure-led. And that whatever capacity you're opening to, you're probably seeing demand at those capacity levels. Could you just walk through that side of the equation a little bit, please?

Sure. So we're obviously early. We don't have volumes of data because we've just started operations recently, but here's what we've seen. I mean, obviously, as I mentioned earlier, the suburban restaurants -- we've opened up Summerlin in Nevada. And frankly, we had challenges taking all the customers who wanted to come in. So the demand was very strong in that market. For a lot of reasons, but we saw lots of demand on suburban and -- on social occasions.

In the urban markets, we have, obviously, Atlanta is our first restaurant that opened up. And we also have noticed that Friday, Saturday and Sunday, the demand has been very strong on those properties. So we've certainly seen that. Obviously, Monday, Tuesday, and Wednesday has been a little bit slower just because, as you mentioned there, there is no business travel happening right now. So our expectation is that in markets where there is more exposure to business travel, we'll see a much longer-term recovery. So the time frame to recover in those markets, we're expecting to be much further into the future until travelers start traveling again.

The reality though, as you may recall, part of our strategy over the last 2 years, and you probably heard us talk about this a lot, is that we went out of our way to diversify from being a business-only type of restaurants. So we really focused on special occasions. We focused on holidays. So we really went out of our way to have a lot more than just exposure to the business traveler.

So obviously, we'll be impacted, but I think over time, having had strategies that invested our portfolio from business travel to more social occasions, I think we'll benefit from it now on the new, if you will, on the new world and new business model. So that's kind of been our strategy.

And again, we've also introduced a lot of price points that are value-oriented. We've always had, obviously, our happy hour, which was also intended to bring in value. We also have introduced some lower price point items to support the delivery business. So I do think that we are about as well positioned today as we can be for bringing as many customers as possible into the STKs.

Our next question comes from Mark Smith with Lake Street Capital Markets.

First off, just a kind of housekeeping item. Tyler, the lease termination expense that you guys took, was that on a potentially future open restaurant? Or did we have any changes on anything that was permanently closed?

Yes, Mark, this is not from future restaurants. This is from previous leases that were just still having to do some work on.

Okay. Perfect. And then as we look at the PPP loan and bringing employees back, can you guys talk about -- and I know that it's still early, but any constraints or issues in willingness of employees to come back to work at this point?

I mean -- so Mark, this is Manny. I would say that we are facing a very interesting economic environment now because many of the employees that are furloughed now are making more money with the unemployment program, particularly with the additional $600 federal program. So the challenge has been that for some hourly positions like hostesses and other places where people might be getting some unemployment now, it's obviously a decision that the employees have to make.

But I would say that, though, generally, our hourly people in the kitchen as well as our managers and some of our senior servers, as soon as we have made the call, they do make themselves available. But there is the new challenge and the new economics of having to compete with the unemployment insurance funds.

Okay. And then I think the last one for me. As you -- as we look at the $380,000 in kind of weekly sales, I just want to confirm if that is all takeout and delivery? Or if you had any dining rooms that opened that last week that maybe helped bump that number a little bit higher?

I think April was all takeout and delivery for us.

Okay. And then maybe just one more on that. Was that really driven by purely consumer demand? Or was some of that driven by you guys not giving more offerings as we look at food to ship to home or opening up more to go and dining options? Or was that purely just driven by demand from consumers?

I mean it's been demand by consumers. As a matter of fact, I think as we mentioned in our prepared demands, we saw a 1.5x increase from week 1 to the last week of April in there. And as a matter of fact, that continues to grow. And we have some brushmen doing some very interesting numbers with only delivery and takeout. So we'll continue building that layer. I think, obviously, in the new world, group dining is going to take a while to recover. So the way we look at takeout and delivery is that we've learned a lot of very interesting and good techniques the last couple of months in that business, and our plan is to fully maximize delivery and takeout because that will be an important component of our business model going forward.

Our next question comes from David Kanen with Kanen Wealth Management.

Thank you for your hard work. Congratulations to your team for pulling together during such a challenging time. I missed early on. I believe Tyler gave a summary of same-store sales by brand. I thought I heard that Kona accelerated in January, February. Could you just reiterate that for me? And then in terms of January, February, the bump was -- was there any price there? Or was it primarily just traffic?

So David...

Sure, David, so -- oh, go ahead. Yes. So yes, so Kona Grill for the first 2 months, David, was positive 8.4% in same-store sales. And STK was positive 11.4% in same-store sales for the first 2 months. Obviously, March came in significantly lower. But that's -- in terms of the pacing of the quarter, that's other quarter paced.

Okay. And then I think in Q4, Kona was up 3.9%, and I'm surprised by the 8% increase for January, February, which we could retain that at this point. But out of -- just out of curiosity, what were some of the drivers there? Was it traffic? Was it price, combination of both? Any initiatives that you put in place that accelerated the same-store sales at Kona in particular?

Yes. Yes. I mean we -- as a matter of fact, we have a lot of initiatives that we start off at Kona Grill. And as a matter of fact, we're going to continue those initiatives. I think the biggest initiative that we did is we reconfigured the happy hour menu to be the way to position -- not to be a discount center and to really be an enabler of bringing people to the brand to try it. So we redid our happy hour menu. We also launched in the fourth quarter, as you may recall, our Margarita Heaven strategy to really promote the happy hour as well. And then on the dinner side, we brought in a lot of special menu items and options such as -- we start using a lot more the Surf & Turf featuring more of steak with lobster balls and stuff like that. So if you followed our marketing during that first quarter, we were also very intense. We really start getting organized on social media. And frankly, just the whole vibe of the business was elevated. We have -- we launched a new music program. We changed the uniforms. And I think that we did a lot of a very good work with the brand.

Coming out of this time frame, we're going to continue that. We're launching in conjunction with the reopenings, our new patio menus and really putting emphasis on the next-generation of menu for Kona Grill and really emphasizing the items that are really good with the brand, and we're also adding some new stuff. We are going with 3 steak offerings instead of just one. We added some interesting new side dishes. We've added some interesting soups and salads that go with the brand. And so we've really been reorganizing the brand and really positioning it as a great American grill that offer sushi and has an incredible block program with super activity and very energetic in the bar. So really lots of that started last year in the fourth quarter. We start seeing the payoff of that in January and February. As a matter of fact, we were thrilled with our February performance, lots of momentum. And in particular, the marketing was really taken out of brand to the next level, and we plan to continue that evolution as we come out of this time period.

This concludes the question-and-answer session. I would like to turn the conference back over to Manny Hilario for any closing remarks.

Thank you all for your interest on The ONE Group and being here with us this morning. I want to send out a very special thanks to The ONE Group teammates and everyone who, frankly, have made us to continue operating in world-class matters to a very challenging time and particularly a very unprecedented time. So a very special thank you, again, for our team. And I want everyone to stay safe, and see you soon. Thank you, everyone.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.