Texas Roadhouse Inc (TXRH) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2005 Texas Roadhouse earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). I will now turn the presentation over to your host for today's call, Mr. Scott Colosi, Chief Financial Officer. Please proceed.

Thank you, Mia. Good afternoon, everyone. By now everyone should have access to the earnings announcement released this afternoon for the first quarter ended March 29, 2005. It may also be found on our Website at www.texasroadhouse.com under the Investor Relations sections.

Before we begin our formal remarks, I need to remind everyone that 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 as usual is G.J. Hart, our CEO. G.J. is going to provide some general comments on the business and then I will walk you through the financials, including an update to our 2005 forecast. Then we will open it up for questions.

Thank you, Scott, and good afternoon, everyone. Welcome to our first-quarter conference call. I am very pleased to report that we have had a strong quarter with income from operations and earnings per share up almost 30% versus 2004. Our comparable sales growth was particularly noteworthy in view of the tough comparisons we got from last year. Same-store sales were up 6.7% through the first 13 weeks of 2005 compared to 10.4% for the same period last year. A little over 4% of this increase was attributable to transaction growth and the balance was due to pricing and product mix.

In addition, Q2 is off to a strong start as we have achieved 7.5% comps through the first five weeks of the quarter, with over 4% of this increase due to transaction growth. In Q1, our pricing impact was about 2.5% and for Q2 it would be closer to 2%. As you may remember we took a 2% menu price increase last November which was far below the cost price pressure we had experienced on many items, particularly beef and ribs.

While our cost of sales margins were adversely affected by about 60 basis points for the quarter, our growth in transactions have more than offset the incremental costs. We were able to leverage other restaurant-level expenses and maintain flat restaurant-level profit margins versus last year's first quarter. Additionally, on the commodity front we are locked in on our major commodities for all of 2005 and are forecasting food inflation to be between 2.5 and 3%, and we don't see much relief until well into 2006.

As we have said in the past, the minimum wage increases will have little impact on us as we have only one company-owned restaurant in Florida and New York and four in Illinois. We have taken an additional 1.5% of price increase in the Florida and Illinois markets to offset this additional expense.

Despite increasing inflation, we continued to offer a great value offering predicated on our commitment to legendary food and legendary service. We think the results from our unique operating model of preparing our menu items from scratch, running low server-to-table ratios, and offering attractively-priced menu items speaks for itself and we have no plans to change this formula.

Unlike many of our national and even regional competitors who do spend a lot of dollars on advertising, we do not, and instead invest in the quality of our food, our service and the overall guest experience. We think this in turn translates into more effective word-of-mouth brand promotion. And when we do spend marketing dollars, it is very locally driven and intended to drive the hometown-favorite philosophy and ultimately continue to build our guest loyalty.

Meantime, I did take six weeks during the quarter to visit over 20 markets and visit with over 400 managers in order to formally establish our core value statement. We released this field-driven belief system to our entire managing partner and market partner family at our annual managing partner conference just a few weeks ago. It is our opportunity to continue to create focus, build energy and enthusiasm and create synergism for the year ahead. The cost of our annual conference will be reflected in our second-quarter expenses at approximately $1.5 million pre-tax, and that is similar to what it was a year ago.

On the development front, through the end of the first quarter we opened four company-owned restaurants and one franchise restaurant, bringing our total to 111 and 87, respectively, or 198 total restaurants. This represents an increase of 22 company and 11 franchise restaurants since the end of Q1 2004. Our new restaurants continue to perform very well, and taken as a whole, our 2003 and 2004 openings are still outperforming the system-wide average on an average weekly sales basis, which we think bodes very well for the future of our brand.

The average investment cost of developing a new restaurant remains a little bit higher than what it has been historically, principally driven by general inflation. However, our sales-to-investment ratios have remained consistent between 1.3 and 1.4, and we feel very good about the returns we are getting on the development front.

All 16 of the Company restaurants we have remaining in our development plan for this year are either under construction or under contract. We still expect to open 20 company restaurants and we plan to open eight franchise restaurants, up from the six we had reported earlier. Importantly, we are also looking beyond the current year, with our development team already building the pipeline for 2006, which we believe to be very encouraged by.

On the franchise acquisition front, we are still conducting our due diligence. And if things go well, we intend to close these transactions later this year, at which point we will give you an update on the earnings impact. At this point we are expecting the acquisition process to have an impact of seven to 11 stores, up from the previously discussed four to six.

Finally, I'd like to thank the entire Texas Roadhouse team for making this quarter a resounding success. I know they are as excited as I am about where we can take this brand, and together we will tackle both the challenges and opportunities of our business and attracted (ph) growth. While we will always focus on the long-term, we are proud of our achievements this quarter and we look forward to another year of success in our company.

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

Thanks, G.J. I will jump right into a review of the first quarter. And please note that many of the numbers I will mention are listed in the schedule of supplemental financial and operating data that was included in the press release.

So, starting at the top of our P&L for the first quarter of 2005, as compared to 2004, revenue increased 32% to just over 111 million and company-owned restaurant sales grew nearly 33% to 109 million. Company-owned operating weeks increased almost 25% as we opened four restaurants during the quarter and have opened 22 since the first quarter of last year.

As G.J. mentioned earlier, same-store sales increased 6.7% on top of the 10.4% increase achieved last year. Of the 6.7% growth, a little over four points were attributable to transactions and about 2.5 points to price and mix.

Please note that a restaurant has to be open 18 months before it is included in our same-store sales mix. Average unit volumes increased 6.8% and average weekly sales averaged nearly $76,500. Franchise royalties and fees increased about $500,000, or 23%. This increase was driven by the opening of one new franchise restaurant this year, 11 since the end of the first quarter of last year, as well as comparable restaurant sales growth of 6.1%.

In terms of costs, I'll first talk about restaurant operating costs which include food and beverage, labor, rent and other operating costs. These costs as a percentage of restaurant sales were basically flat for the quarter versus last year. As G.J. mentioned, food costs were about 60 basis points higher than last year, but this was offset by sales leverage on labor and other operating costs. Specifically for food costs, the increase was primarily due to the higher cost of pork ribs but was partially offset by our fourth quarter 2004 menu price increase. As you may recall and as G.J. discussed earlier, we completed a staggered roll-out of a 2% menu price increase last November in response to the recent expected future increases in food and supply costs. For the remainder of the year, we expect cost of sales will be flat to 50 basis points higher than last year.

Restaurant labor expenses were about 30 basis points lower than last year as the percentage of sales benefit generated from comparable restaurant sales growth more than offset modest wage rate inflation. Wage rate inflation was about 1.5% in the first quarter. Rent expense was about 10 basis points lower than last year as sales leverage more than offset a less than 10 basis point increase related to the lease accounting change. Restaurant operating expenses were 30 basis points lower than last year. Restaurant-level bonuses which are in restaurant operating expenses were actually 20 basis points higher than last year, but this was more than offset by year-over-year favorability in a number of smaller expense items, including property taxes, gift card breakage fees, license and permit fees and equipment rent. We also booked approximately $137,000 of gift card breakage fees during the quarter.

Preopening expenses were $139,000 higher than last year as we opened more restaurants in the first quarter this year versus last, or versus two. Depreciation as a percentage of revenue increased 12 basis points versus last year. The increases driven by capital spending on new restaurants were only partially offset by sales leverage. I do see a slight increase in this expense as a percentage of revenue occurring throughout the balance of the year.

G&A expenses as a percent of revenue increased 24 basis points versus last year. All of this increase is related to public company costs. From a pure dollar standpoint, we obviously continued to invest in infrastructure additions, which includes field and operational management and support staff, both at our support center here in Louisville and various systems needed to accommodate our growth. One comment looking ahead to the second quarter, as G.J. discussed, we had our annual managing partners conference a few weeks ago in late April; hence, the cost of this conference will hit just like it did last year in the second quarter, and the P&L impact will be about $1.5 million pre-tax.

Before I get to interest expense and the rest of the P&L, I want to draw your attention to the income from operations line. This line represents a pretty good year-over-year comparison of the growth of our business without having to make a bunch of IPO-related pro forma adjustments to our reported financial statements for the 2004 year.

For the most part, the IPO impacted interest expense, minority interest and diluted shares -- items all of which are below the income from operations line. The only impact that didn't come from operations from the IPO consisted of the acquisition of one franchise restaurant. And for the quarter, income from operations grew 29%.

Net interest expense was actually interest income for the quarter and was, obviously, a substantial decrease from 2004. We expected a substantial reduction in interest expense since we paid off most of our debt with proceeds from the IPO. However, in Q1 our interest expense line benefited from two non-recurring events.

First, we earned approximately $178,000 pre-tax of interest income on approximately $31 million of IPO proceeds which were used to fund the distribution to shareholders who owned the Company prior to our IPO. This distribution was paid a few weeks ago in early April of this year. Second, we recorded about $70,000 of income related to an interest rate swap that we've had in place for more than a year. This swap was canceled in April.

Minority interest expense fell to about 27,000 from 2 million in the first quarter of last year. At the IPO, we acquired all of the entities in which we were required to expense the minority interest, primarily 31 restaurants. Since the IPO, we have opened three joint venture restaurants for which we have a majority ownership, typically 52.5 to 60%, but it could be higher. Going forward, this expense will represent the minority investor share of net income in these three restaurants and any other that we may open in the future.

Equity income from unconsolidated affiliates increased slightly to $52,000 from $44,000 last year. We now have 13 of these affiliates in which we own between 1 and 10%. Our effective tax rate for the quarter was 35.3 and we don't see this changing much going forward. You will notice that our income statement for 2004 shows pro forma income taxes. We were an LLC prior to our IPO, and as such did not pay any income taxes.

Net income for the first quarter of 2005 was about $9 million, which on a diluted share count of 36.4 million resulted in $0.25 per share. $0.25 per share is 26% higher than our 2004 pro forma earnings per share of $0.19. This pro forma reported EPS for 2004 only includes a pro forma provision for income taxes.

Now on to an update of our full year 2005 guidance. Through the first five weeks of the 13-week second fiscal quarter ending June 28, we are pleased to report that comparable restaurant sales have increased approximately 7.5%, and just over 4 points of this growth is attributable to transactions. Based on the first-quarter results, our second quarter to-date comparable restaurant sales, and other factors, we are raising our diluted EPS guidance to $0.88 to $0.89, which is a $0.03 higher range from our earlier guidance. The other factors impacting our forecast include the following. We'll open 20 company and eight franchise restaurants. As G.J. noted earlier, the 8 franchise restaurants represents an increase of two since our prior forecast.

We are currently factoring same-store sales growth of 3.5 to 4.5% for the year, up from our prior 2 to 3% estimate. Revenue growth of 24% to roughly 453 million, up 3 million from our prior guidance. Restaurant operating costs still increased 25 to 50 basis points for the year versus last year; again, driven by food costs. G&A will increase by about 4 million, reflecting general business growth in public company costs. As a percent of revenue, G&A should still decrease slightly, but SOX 404 costs are still a definite risk to our forecast.

Our effective tax rate should be around 35.3 and weighted average diluted shares remained around 36.7 million. And finally we expect to self-fund our CapEx budget of 50 to 60 million and expect our long-term debt balance to fall by a couple of million dollars throughout the year.

We did announce our intention to begin acquiring the first round of franchise restaurants which are now expected to include seven to 11 restaurants in the third quarter of this year. This is of course subject to the approval of our Board and the appropriate due diligence. We will provide more specific guidance once these acquisitions are completed.

Now I'll turn the call back over to G.J. who has a few more remarks before we take -- start taking questions. G.J?

Thanks, Scott. Very quickly -- we do intend to continue to deliver consistent earnings growth and in turn crate shareholder value by executing on our mission of legendary food and legendary service. We think Texas Roadhouse has tremendous opportunities to develop additional restaurants. Moreover, our balance sheet is solid and our growth plans are fully funded. We thank you for your interest in our company and we would be happy to answer questions that you might have at this time.

Operator, if you would open the lines, that would be great.

(OPERATOR INSTRUCTIONS). Andrew Barish, Banc of America Securities.

On the interest expense line going forward, I mean it sounds like that should be probably about 250,000 a quarter if you kind of back out the one-timers from the first quarter?

That doesn't sound too far off, Andy.

Just one other quick question. Can you refresh my memory? I know you guys do one big rib promotion a year that I think kind of bridges 2Q, 3Q, just timing-wise. Given how expensive rib costs are versus a year ago, is that -- anything changing there, or is that in your guidance for the rest of the year?

I'm sorry, Andy. The rib fest is in the late June, early July time period, as it has been in the last three years. Obviously, that is in our forecasts and we're going to continue forward as we have in the past.

Jeff Omohundro, Wachovia.

Scott, I wonder if you could run through the gift card breakage fee line. What is going on there? And just maybe going forward on that.

The gift card breakage, Jeff, reflects -- as we noted in our K, we assume 5% of the gift cards that we sell never get redeemed (indiscernible) to a particular state. And we amortize that number over three years, over a three-year time period (indiscernible) sort of close to the life of a gift card. And so, the 137,000 represents the amortizable portion of gift cards that were sold 2003, 2004 and 2005.

And I guess going forward is there any way to predict how that line item looks?

Going forward, it will probably be pretty consistent to what we just expensed in the first quarter.

I guess the new units are performing well. How is the labor in the new units tracking? Is it pretty much in line?

The labor in the new units is tracking very much consistent with our model, definitely higher for the first three or four months. And by six months it kind of settles into about 90% of where it's going to be 18 to 24 months following thereafter.

And then, is there any more color you can provide on what the thinking is behind the pickup in the number of franchise units planned to be acquired?

This is G.J. Right now we are developing a long-term strategy for the roll-up of our acquisitions of our franchise stores. We haven't finalized that. But, currently the thinking behind it is really driven by two factors. One is people, meaning management teams. And secondarily is the development opportunities for us. And that really has helped us get to this seven to 11 number at this point. And as we further develop this strategy, obviously, we would communicate that.

Paul Westra, SG Cowen.

A couple of questions. One, first on your food cost guidance, up zero to up 50 going forward, even though your contracted for most of the primary costs. Is there anything in there going forward that could be popping that up looking forward?

Yes, I mean it could be produce, cheese. Those are the two probably that fluctuate the most for us throughout the year and have historically. We have had bumps both good and bad. I expect fourth quarter last year was the big bump with the lettuce and tomato spike that a lot of people had via the hurricanes. Actually, it makes the number fluctuate, Paul, between zero and 50.

And in that guidance, I assume you are assuming no other price increases beyond the two that you will have through November?

That is correct.

Where would you be able to take a price (inaudible) -- when is your next menu roll-out?

We typically do it towards the end of the year, the November time period. And I would see us staying consistent with that.

Next question. Other companies reporting some softness, especially in the Midwest. Can you talk maybe about how your -- your latest comp numbers look and geographic strength or weakness to speak of?

Yes, our numbers -- I think we told you the five weeks we were up 7.5, which is through the first week of May for us. We have been pretty strong everywhere.

No external (ph) impact? Obviously, the guest checks seem pretty comparable from the first and second quarter numbers you already told us. So, no bumps in the road for you guys, huh?

We haven't seen it so far.

Last question. The acquisitions I assume just confirmed them out in your forward-looking guidance?

That's correct. Right.

And again, do you stock -- is that (multiple speakers)

That's right.

Destin Tompkins, Morgan Keegan.

Congrats. It was an impressive quarter. Quickly, I just wanted to ask about the April comp trend. Can you tell us what we are lapping?

Yes. Our 7.5 lapped what was nearly a 10.

Wow. Was there any calendar mismatch? Was there any Easter benefit or anything there that may have hurt march that maybe helped April?

There's a little bit of Easter shift which hurt us a little bit in March and helped us a little bit in April. We haven't quantified -- really don't know how much it is, though.

Hil Davis, SunTrust.

I noticed when you kind of look at the same-store sales trend from the first eight weeks of the year into the back half of the quarter it goes from 8 to like 4.5 and then increases 7.5%. I know there's been some weakness as someone cited. But, when you look at Logan's roadhouse numbers, who had been running negative traffic -- actually got flat traffic in the last period -- I'm just kind of curious what your customer base looks like, and maybe who they trade in and around of? Because it might suggest that some people traded down into Texas Roadhouse and/or a Logan's occasion. And is it out of a Red Lobster? Is it out of an Olive Garden? Is it out of a, perhaps, an Outback Steakhouse or a Longhorn. Or is there other companies that we're not thinking about?

It's G.J. To best answer that question I would stay consistent with what we have said all along. 50% of our traffic, our competition is really the Applebee’s, Chiles and Fridays, 25% coming down from the higher-end Outback and even the fine dining establishment and 25% coming up from the dinner houses, the Ryan's and Golden Corral. We believe that is still to be consistent.

David Geraty, RBC Capital Markets.

A couple of questions. On the cost side, if maybe, G.J., you could talk or comment on investment costs. We're hearing that there is certainly a definite inflationary period that has probably been going on 18 months plus now. Maybe just review where those numbers are coming in for you. And then secondly if you could maybe recap a couple of those significant highlights issues that you're trying to focus on at your partners conference and takeaways that we can look at here having impact in '05?

David, I will take the first question and G.J. will take the second part. Did you hear me there Dave? I'm not sure what that noise is. It isn’t going away. On the construction side, we're definitely higher. Our construction cost has grown by about 4% to a little more than $100,000, mostly through lumber and steel and so forth like a lot of our competitors have talked about. On the other hand, our sales have grown as well. And because our most recent class years have performed so well above average, our sales-to-investment ratios have held firm between 1.3 and 1.4.

We're hearing a lot of people are double-digit annually for the last 18, 24 months.

We haven't seen double-digit annually; we have seen more mid single digits.

David, to answer the second part or question, I think as you know, our annual conference is something very near and dear to us to really take the opportunity to bring all of our partners from the folks inside the restaurants as well as our vendor partners as well as spouses, and we take it as an opportunity to really talk about our plans and leverage the energy for the balance of the year.

This year we were very pleased, as I mentioned earlier in my comments, to launch our core values. While we've always had them, we really got centered around those core values that will really be the wings that continue to drive this brand well and beyond 200 restaurants, where we are today. And I have got to say -- I'm real proud to say it's just a phenomenal experience, and had almost 1000 people and the takeaway was sort of phenomenal and the energy, it was just phenomenal. And we're just excited about where it is going to take us.

David Goldberger, Fortress.

I just wanted to get some detail as to your restaurant opening calendar for the rest of this year.

This is Scott, David. We -- this is as much guidance as we will provide, which is we will open about 1/3 of our restaurants in the first half of the year and then the other 2/3 the second half of the year.

And that's both on the Company and franchise side?

That's really on the Company side. The franchise side will probably fall on about the same path.

(OPERATOR INSTRUCTIONS). You have no further questions at this time.

Well, thank you very much.

This concludes your conference. You may now disconnect.