Texas Roadhouse Inc (TXRH) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Texas Roadhouse Fourth Quarter 2004 Earnings conference call. My name is Stephen and I'll be your coordinator for today.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Scott Colosi, Chief Financial Officer. Please proceed sir.

Thank you very much and good afternoon everybody. By now, everyone should have access to the earnings announcement released this afternoon for the fourth fiscal quarter ended December 28, 2004. And it may also be found at our Web site at www.texasroadhouse.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone as part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be put upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

On the call with me today is G. J. Hart, our CEO. G. J. is going to provide some general comments on the business and then I'll walk you through the financials, including an update to our 2005 forecast. Then we'll open it up for questions.

G. J.?

Thank you, Scott, and good afternoon everyone. Welcome to our fourth quarter conference call. I'm very pleased to report that we ended this year with very strong sales momentum that have carried through to the first two months of this year and to date, have been fortunate to successfully lapse (ph) some very tough comparisons.

Same store sales are up 8% through the first eight weeks of 2005, just to remind you that we're going up against 10.4% for the quarter last year, and 12.5% for January of '04. About 18 months ago, when it became apparent to us and the rest of the industry that we were going to have substantial commodity inflation, we made a conscious decision not to increase menu prices to the degree that would offset inflation.

While our margins have been adversely affected, our growth in transactions have more than offset these incremental costs. Furthermore, on average, our restaurants were more profitable in dollars that we brought to the bank in 2004 than in 2003.

(inaudible), much of this momentum we have in the sales growth relates to the values that we are providing to each and every guest, which is a total commitment to providing legendary food (inaudible) service. Those of you who know a little about us know that we do not spend a lot of - a lot on advertising and marketing, but instead, investment quality of our food and service and the guest experience.

The foundation here lies in preparing our menu items from scratch, running low server-to-table ratios, and offering attractively priced menu items. What we do spend on marketing is very locally focused on driving the hometown favorite philosophy. We believe that our results speak to our success with this philosophy and our unique operating model on building guest loyalty.

To that end, we have no plans to change this formula. In fact, we will continue to intensify our focus. In addition, we expect to have very little change in our menu and have no plans to take any price for the remainder of 2005. We are locked in on all of our major commodities for 2005, and our forecast includes inflation between 2.5 and 3% and don't see much relief until well into 2006.

The minimum wage increase, as you've heard about some of our competitors speak of, do not have much impact on us. We have only one company-owned restaurant in Florida and New York, and four in Illinois.

Certainly we will be paying attention to what is happening in those states from a competitive standpoint, but we don't see any legislative developments materially impacting our performance or guidance for 2005. On the development front, we were able to open one additional company and franchise restaurant than originally planned for 2004.

That brings our total for the year to 19 companies and 12 franchise openings. And the good news is that taken as a whole, our 2003 and 2004 openings are outperforming the system average on an average weekly sales basis. The average investment cost is a little bit more than it has been historically, principally driven by inflation, but our sales to investment ratios have remained constant between 1.3 and 1.4.

We feel very good about these returns we're getting on the development front and we see that continuing in 2005. For the year ahead, all of our restaurants in our development plan, 20 on the company side, are either under construction or under contract and the development team is well on their way to building a pipeline for 2006.

You may have noted in the release that we announced our first round of franchise acquisitions. It will take some time for us to conduct a customer due diligence, particularly since this is the first round, but if and when we close these deals, we will give you an update on the earnings impact. And we plan on targeting four-to-six stores.

Scott will get into this in more detail, but I want to provide a few comments on our current EPS guidance for 2005. We have held our forecast flat from what we presented back in November despite our current sales momentum, our announcement on franchise acquisitions, and the one additional company-owned and franchise restaurants that were opened during the fourth quarter.

We have not seen any expense surprise to date, but it's early in the year. The lease accounting change, which Scott will talk about in a few minutes, will cost us a little more than half a penny in 2005. We will be going through our first round of stocks 404 certification and it seems that many of our competitors have found it to be a tough expense line item to pin down.

In combination, and with 10 months remaining in the year, we simply want to maintain a conservative posture with regard to guidance, and if and when things materially change from what we have said, we will alert the market. Finally, I've been touring around the country meeting with the management teams from all of our company and franchise restaurants to talk about what's going on in our company.

We talk about all of our challenges of not only being a public company, but also about the rapid growth of our business. Well, I'm pleased to report that our folks are truly fired up. We've got a lot of momentum going and are excited about the current state of our business. Of course, solid same store sales returns certainly lifted everyone's morale, but it's the long term that we're looking at.

It's a marathon, not a 100-yard dash. To that point, we have a number of our team members listening on the call and I just truly want to thank them for their great performance in 2004 and a great start in 2005.

With that, I'll turn it over to Scott to walk you through the financials.

Thanks G. J. I'll jump right into a review of the fourth quarter and full year for 2004. Please note that many of the numbers I will mention are listed in the schedule containing supplemental, financial and operating data that was included in the press release.

So starting at the top of our P&L for the fourth quarter for 2004 versus 2003, revenues increased 29% to $97 million. Company restaurant sales grew 28% to 95 million. This increase was driven by a 20% increase in company, restaurant operating weeks and a same store sales increase of 6 and a half percent.

Of the 6 and a half percent same store sales increase, about 4 points are attributable to transaction growth and about 2 and a half points to price. Please note that a restaurant has to be open 18 months before it's included in our same store sales base. Averaging of volumes increased 7.1% for the quarter and weekly sales averaged nearly $70,000.

Franchise royalties and fees increased 30% to 2.4 million. This increase was driven by a 16% increase in store operating weeks and same store sales growth of 6 and a half percent, just like the company side. In terms of cost, restaurant operating costs, which include food and beverage, labor, rent, and other operating costs, after percentage of restaurant sales, were 240 basis points higher than last year.

Cost of sales alone was higher by 190 basis points driven by higher beef prices, which has been the case all year. Rent expense as a percent of sales was 110 basis points higher than last year. As more fully described in the press release, in the fourth quarter, we recorded a $1.3 million pre-tax charge to correct our accounting for leases similar to what you've heard from other companies.

Most of this charge will hit the rent expense line and that impacted the rent expense line by 140 basis points for the quarter. Sales leverage provided a sizeable margin benefit to the other expense line items.

Pre-opening expenses were $1 million higher than last year due to a higher number of restaurant openings as we opened seven restaurants in the fourth quarter of '04 versus only two in '03. More specifically, the additional restaurant we opened in fiscal 2004 versus our forecast, which G. J. mentioned earlier, cost us about $250,000 or half a penny per share.

G&A expenses were a bit higher than our forecast due to higher public company costs and general business growth. Our forecasting was a bit conservative on the sales side. We were a bit aggressive on the G&A side. Year-over-year, however, G&A increased 22%, a rate that was somewhat less than our 29% growth in revenue, and as a percentage of revenues, it actually decreased year-over-year by 30 basis points.

Interest expense was almost $600,000 higher than last year, as we recorded a $1 million pre-tax charge to write down loan fees associated with the replacement of $100 million credit facility with $150 million one at the IPO. Our tax provision included a $5 million charge to recognize a deferred tax liability, which we incurred on becoming a C corporation from an LOC (ph) again at the IPO.

Excluding the deferred tax charge, our tax rate for the quarter was 34.4%. We got a slight tax break from being public for only part of the year in that our federal rate was 34% versus 35. For 2005, that federal rate will go back to 35 for the year, and hence, we have not changed our 2005 tax rate forecast.

Diluted shares were almost 36.2 million, a little higher than forecast driven by the increase in our share price since the IPO. From an EPS perspective, I'll refer to our pro forma numbers as they reflect estimates of what our financials would have been had we completed our IPO in corporate reorganization as of the beginning of the period referenced.

Remember, we do not complete our IPO until 10 days into the fourth quarter. On a pro forma basis, our diluted loss per share for the fourth quarter was one penny. Excluding the lease adjustment, loan fee write off and deferred tax charge, and taking the timing of our IPO into account, our pro forma earnings per diluted share was just over 17 cents.

This is 18% over the pro forma 2003 amount, and excluding the big increase in pre-opening expenses due to a ramp up of our development, type one (ph) for 2004, earnings per share would have increased 20%. Before I provide an update to the 2005 forecast, I'd like to quickly review some key line items for the full year 2004. First, revenue increased 27% to just over 360 million.

Company restaurant sales grew 27% to just over 350 million. Company restaurant operating weeks increased 16%. We opened 19 restaurants in 2004 versus only 10 in 2003. Same store sales increased 7.6% for the year, just over 5% of this was attributable to transaction growth with about two and a half points to price.

This performance was reflected throughout our portfolio. All of our class years achieved solid same store sales increases. For example, the seven company restaurants that opened prior to 1998 achieved 8% same store sales growth. We also achieved very strong sales growth in all sales volume bands including our highest line restaurants.

Averaging of volumes increased 7.8% for the year to just short of $3.7 million. The top 25% of our company restaurants averaged over 4 and a half million in annual sales and the bottom 25 just over 3 million. We currently believe we have a lot of sales growth opportunity to be captured on our existing restaurant base. Our new restaurants continue to open very strongly.

The classes of 2003 and 2004 are averaging about 3.9 million in annual sales. Restaurant operating costs were about 120 basis points higher than last year, 90 basis points excluding the cumulative lease adjustment. As G. J. referenced earlier, we consciously did not take pricing to fully offset inflation, particularly on the food cost line, where we, like many of our competitors, experienced record commodity increases.

However, our same store sales growth more than compensated. The bottom line to dollar profit at the restaurant level increased overall and at most of our restaurants last year. Pre-opening expenses for the year were approximately $2 and a half million higher than last year due to the increased number of restaurant openings I mentioned earlier.

G&A increased 19% or at a rate that was two-thirds of revenue growth, and as a percent of revenue, fell 40 basis points to 5.8% of revenue. On a pro forma basis, earnings per share for the full year was 46 cents and excluding the non-recurring charges noted above, it was 71 cents.

Seventy-one cents is 19% higher than our 2003 pro forma earnings per share of 59 cents, and excluding the impact of pre-opening increases due to our development ((inaudible)), was 20% higher than 2003. From a balance sheet perspective, we ended the year with about $14 million in unrestricted cash, 13 million in debt, 7 million of which relates to installment notes and 6 million on our new credit facility.

Capital spending was about $15 million for the year. Now to an update to our full year 2005 guidance. As G. J. mentioned, we're off to a great start this year with an 8% increase in same store sales through the first 8 weeks of the year. In addition, we do have the benefit of having one more company restaurant than planned in 2004, that will benefit us for all of 2005.

That said, we're holding our EPS guidance to 85 to 86 cents, which is unchanged from the guidance we gave you back in November, since we don't feel comfortable extrapolating full year guidance from just 2 months.

As G. J. stated, if and when things change, we will alert the markets in a timely fashion and we are committed to updating you at our first quarter earnings release, which will occur about 9 weeks from today. So looking closer at the components of our guidance, first of all, the lease accounting change will cost us a little more than half a penny in 2005.

We believe we will at least offset this with the flow through on our above planned sales year to date and the fact that we did open one more restaurant than planned. The rest of our forecast is essentially unchanged. We'll open 20 company and fixed franchise restaurants, company operating weeks will increase 20%.

We'll grow same store sales about 2 to 3% for the remainder of the year based on very tough comparisons. Revenue will grow about 23% to roughly $450 million. Restaurant operating costs will increase 25 to 50 basis points versus last year, again, driven by food costs. G&A will increase by about 4 million or about 19% reflecting general business growth in public company costs.

As a percent of revenue, G&A should still decrease slightly. Socks 404 (ph) costs are one item that we are very aware of and one reason why we have not raised our EPS forecast this early in the year. Our effective tax rate should be around 35.3%. Weighted average diluted shares should be around 36 and a half million or about a 2% increase versus 2004.

We are still evaluating our exposure to stock option expense and we will certainly have more to report on in our first quarter earnings call. Generally speaking, we are targeting annual grants to over time average about 2% of outstanding shares. We expect to still fund our Cap Ex budget close to 50 million, and we expect our long-term debt balance to fall by a couple of million throughout the year.

And finally, as G. J. mentioned, we did announce our intention to begin acquiring franchise restaurants, subject to the approval of our board and the appropriate due diligence. If and when these deals close, we will update you with the expected earnings accretion for 2005 and beyond.

Now I'll turn the call back over to G. J., who has a few more remarks before we open the line for questions. G. J.?

Thanks Scott. Very quickly, we are very proud of where we are to date in our results. We are independent traded nationally and believe we've got a long runway of new company-owned openings as well as built-in growth through partner acquisitions. Our balance sheet is solid and our growth plans are fully funded.

Finally, our team has clearly defined goals. We are excited by the opportunity and we're confident that we can continue to position ourselves for shareholder growth and benefit as we move forward. Thanks for listening, and at this point, we'll open it up for questions.

Ladies and gentlemen, if you wish to ask a question, please press star, followed by one, on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press star, followed by two. Once again, please press star, one, to ask a question.

And our first question comes from Andrew Barish of Banc of America Securities.

Hey guys, can you hear me?

We can.

Hey Andy.

How you doing Andy?

Doing well, thanks. A couple of questions on just one line item. That minority interest line was a loss in the fourth quarter it looked like. Is that just kind of one-time adjustments?

And then, on the unit growth, can you give us a rough sense of how you see 2005 shaping up by quarter and sort of geographic breakdown, existing markets versus some new market partners that you may be bringing on?

Andy, this is Scott. Most of the minority interest relates to the lease adjustment, so there's more of a one-time adjustment. However, minority interest will increase somewhat going forward throughout '05. We opened two joint ventures in December and we have at least one opening in 2005, so we will have some minority interest expense from those restaurants.

From a development timing perspective, generally about one-third of our stores open the first half of the year and about two-thirds the second half of the year.

Also Andy, in answer to your other question, 75 percent of our store growth in 2005 will be existing market partners.

Thank you.

Our next question comes from Jeff Omohundro of Wachovia Securities.

Thanks. I guess first maybe you could flush out for us a little more about some of the drivers behind the rather strong Q1 sales trends in a relatively tough environment. Is there anything more at the local level that you've been doing? Maybe you can expand on that.

And then, Scott, to follow up on that minority interest, the 1.3 million, how does that split I guess? I thought it was mostly in the rent expense. Maybe I missed that.

I'll take the lead question first. It's about (inaudible) 1.2 million rent and I believe it's another 300,000 in depreciation and that's offset by 200, it's over 200,000 in minority interests. So the net of those add up to a $1.3 million investment.

Oh, OK.

Hey Jeff, how you doing? This is G. J.

Great.

To tackle your question in terms of our continued strong same store sales, I think let's start off by the fact that we continue stay very, very focused on our value propositions, number one. Number two, we continue to really focus on our operational goals internally in our execution in the fundamentals. We're very, very strong.

Number three is our local store marketing effort and the identification of having a local store marketing person in every restaurant. That's clearly started to penetrate those individual markets as becoming the local hometown favorite, and giving back to the community and part of the community.

So all those things said, on top of the fact that clearly, we had a great gift card season and we're seeing the benefit of those redemptions with 50% of those redemptions in the first 6 weeks of the year.

Okay. And then one more if I could. Scott, I think you said that the pro forma tax rate net of everything was 34.4. The 5 million after tax adjustment related to the C corp., how does that net out?

How does it net out to total tax rate?

Yes, I guess. Is there a before tax number there?

No, that's just a deferred tax adjustment, a one-time recognition of the timing difference between the book and tax accounts. So there is no pre-tax number for that. That's establishing the liability in our balance sheet.

Yes, because that doesn't really get you to 34.4. I'll talk with you later on that.

Yes, Okay.

Thanks.

You're welcome.

Our next question comes from Paul Westra of SG Cowen.

Hey, good afternoon everyone.

Hi, how are you?

Doing pretty well. I have some questions (inaudible) a little bit on your guidance here for 85, 86 cents. Does that include any impact from the franchise acquisitions because you referred to them, but then said you'd update us later on it? And so from our understanding, 85, 86 assumes no impact on franchise acquisitions?

Yes. Hey Paul, it's Scott. Yes, the 85, 86, no impact has been modeled (ph), forecasted for these green (ph) sized acquisitions.

Okay. Relating to the franchise acquisitions, do you know how you will pay for them yet?

We issue shares. Yes. I mean, in two-thirds of our franchise stores, we have acquisition return (ph) in formulas that call for the issuance of shares for their businesses.

So you have no option to pay cash if you wanted to?

No.

Okay. And ...

And on the non rollup stores, we do not have those acquisition rights on. Really, that's something we could talk about.

Right. Okay. And second, on the - for your guidance, it's 2 to 3% comps for the year, right? (inaudible), Scott, you said 2 or 3 ...

Correct.

That's right.

Okay. So arguably, if you can do better, you might do a little bit better on the comps, you can do better on the earnings or vice versa?

Certainly you'd hope so if we started off 8% for the first 8 weeks of the year. You know, we feel like we can do 2 to 3 the rest of the year.

Paul, you know, don't forget. It's early in the year. We've got 10 months to go. And clearly, we've got our first quarter earnings call coming up in 9 weeks and we'll know a whole lot more about where we are.

Okay. And then - great. And then, the last question, perhaps (inaudible) someone else go. The price increase, you said no more for the rest of the year. What does that mean effectively for the year? You just let something roll off or what are you running now?

Yes. We've got 2 and a half right now or just a little bit shy of 2 and a half, and that falls off the end of February. So we'll be at 2 all the way through November 1.

So 2% from February to November?

From like March 1 to November 1, phase 2.

Okay. Okay. Thank you.

Thanks Paul.

As a reminder, please press star, one, to ask a question. And our next question comes from David Goldburger (ph) of Fortress.

Hi guys. Congratulations on a great quarter.

Thank you.

I just want to get a sense how we can look at square footage growth kind of ongoing. I know obviously the 20 stores will be open in '05, but how many should we think about when we're modeling kind of '06 and beyond?

We've told people generally to expect 16 to 18% growth in company restaurants annually.

Okay. And then how about if we're thinking about the kind of cost of commodities and the other cost of sales line items? Should we assume that it's a commodity price environment base, that you'll be able to recoup some of that 25 to 50 basis points loss in costs in '05 and kind of coming on in '06?

This is G. J. At this point, we don't see a lot of relief on the commodity front until the back end of '06, so I wouldn't be assuming any relief until the back end of '06.

Okay. Great. Thanks guys. Keep up the good work.

Thank you.

Once again, please press star, one, if you wish to ask a question.

Our next question comes from Larry Beser (ph) of Barren Capital (ph).

Yes, hi guys. How are you?

Good. How you doing Larry?

Good. Quick question for you. Can you just remind me, in the contracts with the franchisees, was it at about 4 and a half times EBITDA with the price that you pay for these buybacks?

It really depends on what the share price is, influences the price Larry, because it's a set number of shares that are given out.

Okay.

We don't - the formulas don't say that the stores were a certain amount of dollars. It just says they're worth a certain number of shares and the value of those shares depend upon whatever the share price is.

If it were around the price where it is today, is it approximately there?

It would be higher than that I think. At the time of the IPO, at the IPO price, it would have been probably not too far off from that level of local (inaudible) EBITDA.

Okay. But it's the higher price that actually turns into the higher multiple?

Right.

Okay. Got it. Thanks a lot.

Okay.

And we have a follow-up from Andrew Barish. Please go ahead.

Can you guys give us a couple of updates? I know you didn't say, G. J., no major items going on in terms of menu or on the operating side, but can you give us an update in terms of kind of the bar program?

I know you've been working on some stuff there as well as maybe just a few of the minor tweaks that you guys do every year in terms of product upgrades on some of the existing stuff. Are there costs or training associated with any of that or do you think you get payback pretty quickly on some of those?

Andy, in terms of the bar program that we've got going, we took our first (inaudible) to that whole area this past year, 2004. And clearly, we've seen some tremendous success around it and first and foremost, the success that we're seeing is really we're elevating our bartenders to the same kind of status we've done with our meat cutters.

Really, that's our strategy and our philosophy to take care of our people first. And ultimately, they'll take care of the guests, and we think that that will drive a better bar scene for us. Now in terms of what that means for us, I think it's way too early to tell. In terms of other initiatives, we clearly have a few initiatives around our menu and they're real fundamentally based.

For example, we're going to take a look at our salads and really, how do we energize our salads in terms of going back to basics. And those are the kinds of things that we're doing and we've done over the last couple of menu implementations, we've been very successful at it.

And one last initiative, (inaudible), but as people (inaudible) quality statement because they were going after hot plates (ph) meaning they want every single plate to go out at 140 degrees.

Thanks.

We have no further questions sir.

Okay. That's it and we'll end this call. I appreciate you guys very, very much for listening today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.