Texas Roadhouse Inc (TXRH) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Texas Roadhouse, Inc. Second Quarter 2005 Earnings Conference. My name is Kara, and I will be your coordinator. (Operator Instructions)

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

Thank you very much. Good afternoon, everybody, and thanks for being on the call with us. By now, everyone should have access to the earnings announcement, released this afternoon, for the second quarter ended June 28, 2005. It may also be found on our website, at "www.texasroadhouse.com," under the "Investor Relations" section.

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 GJ Hart, our CEO. GJ 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. GJ?

Thank you, Scott, and good afternoon everyone. I'm pleased to report that we've had a strong quarter with earnings per share growth of 37%. We maintained the same-store sales growth momentum we had in the first quarter with 6.8% in the second quarter. Of the 6.8% growth in the same-store sales, discounts grew a healthy 3.6% and the price mix impact was about 3%. Of the 3% price mix, about 2% was from pricing actions and 1% from mix.

We rolled a New York strip product at the beginning of the quarter. It is doing quite well and has contributed to about 0.5 point of the 1% mix. Overall, we believe, these figures point to both the ease with which our 2% price increase was accepted last November and the appeal of our value proposition.

We know a lot of companies are talking about gas prices and other inflationary items and how it may be impacting consumer spending. But to-date, we do not have any data points that lead us to conclude that inflation is limiting the consumer spending at our restaurants.

Additionally, we've heard some companies talk about weak sales results in the Midwestern part of the US. From a regional perspective, our comp store sales for the quarter and year-to-date have been strong throughout the country, including the Midwest. Our Midwest comps have been very close to the national averages. And, finally, Q3 is off to a strong start, as we have achieved 6% comps through the first five weeks of the quarter with over 3% of this increase due to transaction growth.

On the margin front, we are pleased that restaurant margins were about 80 basis points better than last year. I want to thank our operators for doing a great job in flowing incremental sales dollars to the bottom line. Our operators have done a particularly outstanding job managing labor expenses, which were about 70 basis points below last year.

Scott will provide some details on food costs for the quarter, but I wanted to give everyone an update on our commodity cost outlook. Needless to say, we are encouraged by the news of the Canadian border reopening. This won't have much of an impact on us for the rest of the year, since we contract our major beef items on a full-year basis. Overall, we are somewhat encouraged by the general direction of the major protein markets and are becoming cautiously optimistic regarding food costs for next year.

In terms of development in the second quarter, we opened two company restaurants - one restaurant in Odessa, Texas, and one in Miranda, Arizona, bringing our year-to-date total to six. Our franchise partners opened four restaurants during the quarter with those locations being Omaha, Nebraska; Bossier City, Louisiana; Memphis, Tennessee; and Temple, Texas.

These openings bring their year-to-date total to five. In the third and fourth quarter, we expect to open an additional 14 company and 2 franchise restaurants. Since the end of the second quarter, 4 of these additional 14 company restaurants have already opened. All of the remaining company and franchise restaurants are under construction.

Our new restaurants continue to perform very well with average sales volumes exceeding the overall average. In addition, we have identified all of our potential locations for 2006 and are hard at work in managing the development process for these locations.

On the franchise acquisition front, if things go well, we do intend to close 7 to 11 transactions later this year, at which point, we will give you an update on the overall earnings impact.

Finally, I would like to say that we are pleased to have completed our secondary offering on July 5th, in which 3.2 million shares, Class-A shares, were sold, of which 350,000 were sold by the company and the balance by selling shareholders.

Net proceeds to the Company were approximately 11.2 million after deducting underwriting discounts, commissions, and other estimated offering expenses. We've already used some of the net proceeds to repay all of our outstanding borrowings under our credit facility with the balance intended to be used to fund new restaurants and general corporate purposes.

With that, I will turn it over to Scott to walk you through the second-quarter financials.

Thanks, GJ. I'll jump right into a review of the second quarter. Please note that many of the numbers I will mention are listed in the schedule supplemental financial and operating data that was included in the press release.

So starting at the top of our P&L for the second quarter of 2005 as compared to 2004, revenues increased almost 29% to just short of $116 million. Company-owned restaurant sales also grew almost 29%, to $113 million. Company-owned restaurant operating weeks increased 22%, as we have opened 18 restaurants over the past 12 months.

As GJ mentioned earlier, comparable restaurant sales increased 6.8% on top of the 7.8% gain achieved last year. Of the 6.8% growth, about 4 points were attributable to transactions and about 3 points to price and mix. Average unit volumes increased 7.5% for the quarter, and weekly sales averaged nearly $77,500.

Franchise royalties and fees increased about $0.5 million, or 24%, to $2.7 million. This increase was driven by about a 15% increase in the number of franchise restaurants opened year-over-year as well as comparable restaurant sales growth in the franchise side of 6.6%.

In terms of costs, as a percentage of sales, restaurant operating costs were about 80 basis points lower than last year. The basic storyline here is that food costs were slightly higher than last year, but this was more than offset by sales leverage on labor. Cost of sales was about 20 basis points higher than last year. This increase was primarily due to the higher cost of ribs, but was partially offset by the menu price increase we took in the fourth quarter of last year, and lower dairy costs, which for us, is principally cheese.

Restaurant labor expenses were a little more than 70 basis points below last year, as the percentage of sales benefit generated from comparable restaurant sales growth more than offset modest wage rate inflation of about 1.5%.

Rent expense was about 10 basis points better than last year, as sales leverage more than offset a less than 10-basis-point increase related to the lease accounting change. The restaurants' other operating expenses fell about 10 basis points quarter over quarter. We were able to take a $300,000 credit to the insurance line, based on our latest actuarial report, which we now are get and adjust for on a quarterly basis. This was worth about 20 basis points.

In addition, we did have some leverage from our sales growth on a number of other line items, notably equipment rent, but this was more than offset by higher restaurant level bonuses. Pre-opening expenses were down about $115,000 for the quarter -- quarter-over-quarter due to the timing of the development of new restaurants.

Depreciation expense increased 15 basis points versus the prior year. The increase is driven by capital spending on new restaurants were only partially offset by sales leverage. General and administrative expenses as a percentage of revenue increased 30 basis points from last year.

From a pure dollar standpoint, we continue to invest in infrastructure additions to support the general growth of our business. We also had to increase our bonus accrual, since we are forecasting to finish the year a good bit ahead of our plan.

We had our annual managing partners conference a few months ago, in late April, with a P&L impact on the quarter of about 1.7 million, a little bit higher than the 1.5 million we told you about last quarter.

And finally, as we have mentioned many times before, we are incurring various public company costs for the first time, including D&O insurance, SOX 404 and other audit-related fees, and director fees and expenses.

This gets us to the income from operations line. Income from operations increased 37% for the quarter. Because of our IPO and transactions associated with our corporate reorganization, income from operations is probably the most comparable bottom line growth number that someone could analyze us on a historical basis.

Interest expense was significantly lower than last year, due to the elimination of most of our debt with proceeds from the IPO. We are now down to about $7 million of debt and expect to pay some of this off next year.

Minority interest fell to about $200,000 from 1.9 million in the second quarter of last year. This decrease was due to the acquisition of 31 restaurants in connection with the closing of our corporate reorganization and IPO last October. Minority interest now includes only three majority-owned restaurants. Typically, our ownership is 52.5% to 60% but could be higher. Going forward, this expense will represent the minority investors' share of net income in these three restaurants and others that we may open in the future.

Equity income from unconsolidated affiliates was a $30,000 loss in Q2 2005 versus $26,000 of income in Q2 2004. We now have 17 of these affiliates in which we own between a 1 and 10% interest. Five have opened in the past three and a half months. Including pre-opening expenses, new restaurants take about three to six months to become profitable. So the loss we saw in Q2 relates to the pre-opening expenses incurred by the most recent group of openings. Going forward, we expect to report a small amount of income from these restaurants.

Our effective tax rate for the quarter was 35.3%. We do not see this changing much in the near term. You might recall that we were an LLC prior to our IPO last year and, as such, did not pay income taxes.

Our weighted average diluted share count decreased slightly from what we reported in Q1. This is obviously lower than one would expect. At the end of Q2, we had to make a correction to the calculation of the diluted impact of stock options. This correction resulted in a lowering of the diluted impact of stock options by about 260,000 shares for Q2 and year-to-date. The associated earnings impact was immaterial. The benefit on the second-quarter EPS was about two-tenths of $0.01.

The 350,000 shares that we issued and sold on our recent follow-on offering did not have an impact on our Q2 share count but will impact our share count for the remainder of the year.

The bottom line for the second quarter of 2005 was $8 million of net income, which on a diluted share count of 36.3 million resulted in $0.22 a share, which is about 37% growth over last year, as GJ mentioned earlier.

Now, onto an update to our full-year 2005 guidance. Through the first five weeks of the 13-week fiscal quarter ending September 27, 2005, we're pleased to report the comparable restaurant sales have increased approximately 6%.

Based on our first-half results, the third quarter to-date comparable restaurant sales, and other factors, we are raising our diluted EPS guidance by $0.01 to $0.89 to $0.90 from our earlier guidance of $0.88 to $0.89. Some of the key assumptions in this guidance include. We'll open 20 company and our franchisees will open 8 restaurants. We're expecting same-store sales growth of 4.5 to 5% for the year, up from our previous guidance of 3.5 to 4.5%.

Revenues will grow roughly 26%, or close to $460 million, in total. Restaurant operating costs as a percentage of restaurant sales should decrease 0 to 10 basis points versus last year, again lower labor costs offsetting increases in food costs. G&A as a percent of revenue will be roughly flat to last year, at approximately 5.8%. This is bit higher than our previous guidance and primarily reflects higher bonuses. We do, however, feel better about SOX 404 costs and view them as less of a risk to our forecast than we did, three months ago.

Our effective tax rate should be around 35.3%. Weighted average diluted shares should be around 36.7 million, unchanged from our previous guidance, due to the impact of the secondary offering being somewhat offset by the share count corrections I discussed earlier. We expect capital spending to be between $50 million and $60 million, and we have good shot at self-funding all of this this year.

As GJ mentioned earlier, we continue to conduct due diligence on acquiring what would be 7 to11 franchise restaurants later this year. This is the subject to the approval of our board and the completion of our due diligence process. We will provide more specific guidance, once these acquisitions are completed. Our earnings guidance for 2005 excludes the potential impact of any of these franchise acquisitions. Now, I'll turn the call back over to GJ, who has a few more remarks, before we open the lines for questions.

Thanks, Scott. In our first two full quarters as a public company, we have delivered solid earnings growth by executing on our proven concept of "Legendary Food and Legendary Service." That said, we still believe that we have a lot of opportunity to better execute our food and service operational goals, and we'll continue to stay intensely focused on providing every guest with a legendary experience.

From a development perspective, in our view, the Texas Roadhouse brand still has a long runway of untapped opportunity in the national market as well as through selective acquisition of franchise restaurants.

We thank you for your interest in our company, and we'd be happy to answer any questions that you might have. Operator, if you'd open the line?

(Operator Instructions) And our first question comes from the line of Jeff Omohundro with Wachovia. Please proceed.

Yes. Thanks. You mentioned you didn't see any much in the way of regional trends with regard to your sales progression in the quarter. I am wondering if you're seeing any shift in early week versus late week? And then, if you could maybe address any other new product initiatives? It sounds like your New York strips started well. Is there anything else that we should expect on that front? Thank you.

This is Scott. I'll talk about the sales trend, and GJ will talk about the new products. On the sales trend side, we've seen no change at all between days of the week or regions of the country. No change at all.

Yes, Jeff. And on the food front, we are currently testing several new pork items, and we are also testing some shrimp items. Yet too early to tell whether or not they'll make the menu.

Okay. Very good. Thank you.

And our next question comes from the line of Andrew Barish with Banc of America Securities. Please proceed.

Mr. Barish, your line is open.

And our next question comes from the line of David Geraty. Please proceed.

Yes. Scott, a couple of follow-up questions on comps. If you could talk a little bit about pricing thoughts for the second half of this year, whether we are going to need to do any thing? And then, maybe, a little bit more color on -- I think, GJ mentioned continuing need to focus on execution. You know, what's some of the key operating initiatives for currently the focus of the Company here for the remainder of this year?

And then, maybe, a little bit more just about development activity. GJ, we had a number of companies talk about delays, the expenses, the rise in expenses, and the slowdown or the delays and the development process. Just how you see things there on that side of your business?

Well, Dave, this is Scott. On the pricing, we haven't made any definite plans one way or the other. As of right now, there is no price increase in any of our forecast numbers, going forward. And as we learn more about what we think inflation might be next year, then we'll, you know, look at the pricing structure in our menu.

David, how are you? On the operational front, our focus continues to be the same, six operational goals we've continued to stay focused on, and probably one additional one is just making sure that we implement "call ahead" nationwide, which we are not quite nationwide at this point. So it's really the same old story, staying focused on the basic fundamentals, daily execution of our business.

On the development front, yes, we too have heard some of our other competitors talk about delays. Clearly, it does seem to be that some of these municipalities are somewhat bogged down, to-date that has not affected us. Quite frankly, on our overall development process, we think we continue to make improvements and we really lessen the time in the overall. So we feel very good about where we are from the development perspective.

And from an expense standpoint, as I've mentioned earlier, we've looked -- we've certainly identified all of our locations in 2006, and we clearly have continued to stay very, very strong, even in an increased cost in terms of our sales to investment ratios at 1.3 to 1.4.

GJ, can you comment on how you're going to spread those 14, I think, company stores in the back half of the year? I think you said, four are already open.

Yes. Four of those fourteen, we've already opened. And, you know, we are in 38 states now, David. So really we're not specifically going in any brand new uncharted territory with the exception of Maine.

David, if you're talking about the timing of the openings. This is, I would say, probably half -- a little bit more than half in the fourth quarter, a little bit less than half in the third quarter.

All right. Thanks a lot, guys. Good quarter.

Thank you.

And our next question comes from the line of Destin Tompkins with Morgan Keegan. Please proceed.

Good afternoon, gentleman. On the development, you know, should we expect any kind of lumpiness in pre-opening or any impact on margins, as the development is a little bit heavier in the back half of the year?

Yes. Destin, this is Scott. Mostly, our pre-opening, I'd say, about 50% occurs the same month the restaurant opens, 25% or so the month before, and about 25% the month after. That's kind of the way we forecast it out, and that seems to be the way it's been running.

Okay. And then can you give us what we are lapping in the first five weeks of Q3 and what we're lapping from last year on sales?

Yes, I can. Let's see. It looks like we're lapping about 8, somewhere around 8%.

Okay. Great. Thanks.

(Operator Instructions) Our next question comes from the line of David Goldberger with Fortress. Please proceed.

Hi, guys. Congrats on another great quarter. I just wanted to get some more color on what you're seeing out there in terms of beef costs with the opening of the Canadian border and some of the other news flow we've seen out there in the commodity cost environment?

I think it's a little bit early. I mean, clearly, we've seen some reduction in the live cattle markets, as they open the markets, I think it's a little too early. If you look in the futures markets, they're down in the first quarter of next year, they're higher in the back half of the year. I think those things are going to continue to move. Again, I am cautiously optimistic that we'll see lower beef prices in '06. Now, say, having said that, clearly, on the spot markets today, they are year-over-year lower. So I think, at the end of the day, you can argue the Canadian market probably represents 6 to 8 to 9% of the total market or will of he total market in the US. And I think it's yet to be seeing the total effect of it. Then, it's also related to the US dollars and related to what's going on in the Far East and what's going to happen with exports.

What about in terms of rib costs?

Again, I am cautiously optimistic in terms of the overall rib supply. Some initial conversations we've had would indicate that they'd be slightly lower.

Great. Thanks, guys.

And our next question comes from the line of Andrew Barish with Banc of America Securities. Please proceed, sir.

Still trying to figure out the telephone. Can you hear me?

Yes.

Yes.

Then, I guess, I have some telephony issues, I guess, you could say. Just on the contracting process, you still expect, sort of, in the fall, the October-November timeframe, to wrap up your beef and pork contracts for '06?

You know, Andy, we're already started -- have already started the negotiations. You know, depending on what happens with these markets, we'll pick our spots. And I think it could happen anywhere from now till early December. It's yet to be determined.

Okay. Are you guys doing any thing new on the new unit openings, promotionally, or just, kind of, continuing to the find your groove on the site selection and the awareness of the brand that's leading to these strong opening volumes?

You know, I would tell you that we believe that the strong opening volumes that we're experiencing now are direct results of a couple of things that we've done. The first one is that we made a conscious decision to keep our managers in training longer, upwards to a year. We send them out after their 16-week training period to go through high volume openings, high volume shifts, to really understand what it takes to run a Texas Roadhouse with these high volumes. And I think we're seeing a real success from that. And number two is we continue to make improvements in terms of our site selections. And number three, quite frankly, the brand continues to be more recognized, and I think that's helping us.

Thanks, guys.

(Operator Instructions).

Gentlemen, we have no further questions. I'd like to turn the call back over to you for any closing remarks.

Well, thank you very much, everybody, for joining the call. We'll see you next quarter.

All right. Thank you very much.

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