Texas Roadhouse Inc (TXRH) 2006 Q4 法說會逐字稿

Good day and welcome, ladies and gentlemen. Thank you for standing by. Welcome to the Texas Roadhouse Inc. fourth-quarter 2006 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would like to turn the call over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse Inc. Please go ahead.

Thank you very much, and good evening, everybody. By now, everyone should have access to our earnings announcement released this afternoon for the fourth quarter ended December 26, 2006. It may also be found on our website at TexasRoadhouse.com under the Investors 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 placed 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, and then we will open it up for questions. G.J.?

Thank you, Scott, and good evening, everyone. I am pleased to report that we had a very good fourth quarter on both the top and bottom line. Comparable restaurant sales increased 3.3% in a very challenging environment, and our reported earnings per share, which included share-based compensation expense in the current year's fourth quarter, increased by 19%. On an apples-to-apples basis, however, excluding the $1 million after-tax impact from share-based compensation from this year's fourth quarter, EPS grew a very solid 34%. Scott will provide you with more details on what we believe was an excellent quarter for us.

Prior to his discussion, however, I would like to quickly review our results for the full year 2006. First, we opened 25 Company restaurants, which was one more than our original plan. Company-owned operating weeks, excluding the franchised acquisition we completed at the beginning of the year, increased 18%, which was at the high end of our long-term range of 16% to 18%.

In addition, our franchise partners opened five restaurants, and as a group the new stores are performing very well. Our comparable sales growth in 2006 was 3.5%, which was a bit higher than our long-term growth model assumption of 2% to 3%.

We are particularly proud that a little more than half of our comp growth in 2006 was attributable to increased guest counts, which was a tall order, given the challenging macro environment with fluctuating gas prices and rising interest costs. We credit our success to our commitment to legendary food and legendary service, and ultimately driving our guests' loyalty.

Restaurant-level margins improved by about 20 basis points, despite the negative impact of share-based compensation, which hurt margins by 50 basis points. On a percentage of sales basis, lower food and other operating costs were the key drivers.

Unfortunately, the cost pressure, stemming primarily from increased minimum and tipped wages, we might give some of this margin gain back in 2007, although I'll talk more about that later. I do want to remind you that our long-term model is to maintain restaurant margins close to where they are today.

On the G&A side, we've always told you that we expect to leverage G&A and lower it as a percentage of revenue over time. In 2006, G&A increased 28 basis points. The impact of the adoption of share-based compensation and the charge related to the franchise acquisitions during the first quarter accounted for 67 basis points of increase. This was partially offset by about 40 basis points of leverage on the base business.

During 2007, we do expect G&A as a percentage of revenue to fall quite a bit.

From an earnings per share standpoint, for the full year, reported EPS increased by 6%. But when we compare our 2006 earnings per share, excluding $0.07 in share-based compensation expense, which was not there in prior-year numbers, diluted EPS grew 22%, which is higher than our long-term goal of 20%.

I'm very proud of these results and what our team members accomplished during 2006, a year in which there were some very strong headwinds, particularly during the spring and summer months. That said, it's time to move on to 2007, and as noted on our press release, we are expecting full-year 2007 diluted earnings per share growth of at least 20%, or at least $0.53 per share.

Development is by far the biggest piece of our earnings growth model. We expect to open 28 to 30 Company restaurants this year on top of the 25 opened last year. Many of these openings will occur earlier in the year, which will enable us to grow operating weeks by as much as 20% for the year, although it's still too early to tell. The good news is that we are well on our way, and as of yesterday, we have already opened six Company restaurants thus far in 2007 and have another 10 under construction. All in all, we expect to be in very good shape from a development standpoint.

Our biggest challenge for the year will likely be expense inflation, particularly on the labor line. The minimum wage rate has gone up in 15 states were we operate and is expected to increase in a few more by the end of the year. Most of the impact we experience from minimum wage increases relates to an increase in the tipped wage. About 60% or so of our hourly payroll is tied to tipped employees, so depending on the tipped wage increase, this can have a very big impact on a single restaurant, well over $100,000.

On the non-tipped side, though we generally pay well in excess of minimum wage, we do expect some pressure on these wage rates as well. Overall, labor inflation could easily be 5% to 5.5% for the year, before any changes to the federal minimum wage.

Now, we have taken some price increases to deal with the wage and other expenses inflation. Back in October, we took about 0.8% increase, which was focused on a few select menu items, and the end of December, we took another 1.6%. Just recently, we took another 0.5% in pricing related to various alcohol items. So for the latter part of February into October, we will have about 2.9% of pricing on average.

This is a bit higher in the more severely impacted minimum wage states and a bit lower in other states. We believe on average, however, that these pricing actions are at the lower end of what most of our competitors have taken and/or will end up taking, and still enables us to remain committed to our value positioning.

One final point on the labor inflation -- what we won't be asking our operators to do is cut their labor costs and sacrifice service levels in any way whatsoever, nor are we cutting back on our compensation and/or our commitment to our training programs. I have said this many times -- when times get tough, it is our opportunity to steal share from our competitors.

As noted in the press release, our 2007 forecast excludes the impact of any franchise acquisitions. Since our last earnings call, we decided to make a fairly significant shift as to how we will approach these opportunities. We have decided to move away from the formula that is in many of our franchise agreements and instead focus on a multiple of EBITDA-type formula. We believe this approach creates a balanced result for us, our franchise partners and our stockholders, as it is commensurate with returns we earn on opening new restaurants. A typical deal, then, would be in the range of 5 to 6 times EBITDA, and the currency we would use would largely be cash versus stock. We think this will work well, and we will update you if and when things develop.

I will now turn the call over to Scott to review the financials. Scott?

Thanks, G.J. During my review of the fourth quarter, 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 income statement, for the fourth quarter of 2006 as compared to the same period in 2005, total revenue increased 30% and Company-owned restaurant sales also increased 30%. Company-owned operating weeks increased 28%, with 19% coming from new restaurants and the balance from the acquired restaurants.

Comparable restaurant sales at Company-owned restaurants increased 3.3% on top of a 3.6% gain achieved last year. Of the 3.3% growth, about half was driven by transactions and half related to price and mix.

Average unit volumes increased 1.8% year over year and weekly sales averaged just over $73,000. The 20 newer restaurants that are not in the comp sales calculation, but are in the average volume calculation, averaged about $70,000 per week. And our newest 21 restaurants that opened within the last six months that are not included in the average unit volume calculation averaged about $80,000 per week during the fourth quarter.

Franchise royalties and fees were $2.8 million, up about $150,000 versus last year. Royalties lost via our franchise acquisitions in fiscal 2006 were slightly more than offset by royalties generated from new franchise restaurants, franchise fee renewals, plus the impact of positive comparable sales growth.

On the cost side, as a percentage of sales, restaurant operating costs were 72 basis points lower than last year. Lower cost of sales and other operating expenses were only partially offset by higher labor costs. Specifically, cost of sales was down 51 basis points. The benefit of the 0.8% price increase we took in October was the main driver of this change.

Restaurant labor costs were up 47 basis points. Share-based compensation expense accounted for 36 basis points, and higher workers' compensation costs accounted for 10 basis points. Rent expense was 12 basis points better than last year, primarily due to the 11 restaurants we acquired back in the first quarter of 2006.

Other restaurant operating expenses were down 56 basis points versus last year. The real driver here was utilities being down 59 basis points, as we lapped hurricane-driven high natural gas and electric markets from a year ago. Preopening expenses were $900,000 higher than a year ago. We opened 10 restaurants in the fourth quarter of 2006 versus only seven in the fourth quarter of 2005.

As we have said previously, we have more restaurants in advanced stages of the development pipeline that we had a year ago.

Depreciation and amortization costs were 31 basis points higher than last year, primarily driven by new restaurants. G&A expenses as a percentage of revenue were about 55 basis points higher than last year.

Share-based compensation added about 41 basis points, and reclasses from our tax provision, which I will address in a minute, added 25 basis points, but this was partially offset by 11 basis points of G&A leverage on the base business.

Our effective tax rate for the quarter was 31.7%, which was a lot lower than last year and our prior guidance of 35.5% for the quarter. Versus our prior guidance, most of the difference relates to two items that we reclassed from our tax provision up into G&A. These items are certain franchise taxes and administrative fees associated with our Worker Opportunity Tax Credit program, otherwise known as WOTC. For the full year, our tax rate ended up being 36.3%, and we anticipate the rate to fall a little bit below 36% in 2007.

And finally, our weighted average diluted share count was about 76.7 million, a little higher than last quarter, primarily due to a higher average stock price for the quarter.

Now on the full-year 2007 guidance, as G.J. noted earlier, we provided our initial 2007 earnings per share guidance for diluted EPS growth of at least 20% or at least $0.53 per share. This forecast excludes any impacts from any potential acquisitions.

The forecast does include the following two assumptions -- first, we will open 28 to 30 Company restaurants and our franchise partners will open two to four restaurants; and second, we will generate comparable restaurant sales growth of at least 3% for the full year.

And lastly, I want to remind everyone that our annual managing partner conference will occur in the second quarter of 2007, and this is a shift from the first quarter of 2006.

Now I'd like to turn the call back over to G.J.

Thank you, Scott. Despite the minimum wage challenges we talked about earlier, I believe that we are positioned not only for another great year, but for the longer run. Our development pipeline is in very good shape and I see nothing on the horizon that will jeopardize our competitive positioning. Our same-store sales for the first six weeks of the year were up 1.3%, which is below our forecast. Weather certainly has played a significant role in this.

I can tell you that despite below sales plans, our January net income was above our internal plan. I also want to add that I just completed another round-the-country tour where I had the opportunity to meet with all of our managing and market partners. Like us, our operators are very excited and bullish about the future. We all know it's tough out there from time to time, but longer term, we have an incredible brand that resonates with our guests, and we have a sustainable culture that ultimately drives our legendary food and service.

That covers our prepared remarks, so operator, if you would please open the line for questions.

(OPERATOR INSTRUCTIONS). Destin Tompkins, Morgan Keegan.

Scott, can you help us -- was there any impact to, I guess, the bad weather to the same-store sales number you gave for early January of 1.3%?

Yes, I think our sales were absolutely very impacted by a lot of the weather in January, particularly Colorado and Oklahoma and Texas, with all ice storms and blizzards and so forth. We haven't quantified what that number is, but it absolutely had a pretty big impact on us.

As we look at your 3% comp guidance for the full year, how should we think about that in terms of timing? Should that build in the second quarter through the year, or is that more of a second half of the year kind of thing? Can you help us there?

I would say it's pretty spread evenly throughout the year. We've got easier comparisons, certainly, in the second and third quarters, but beyond that, I would say it's pretty even throughout the year.

Finally, you guys have mentioned potentially looking at recapitalizing the balance sheet. Can you comment on your current capital structure and any plans to change that in the near future?

Two things I would say -- one is we're comfortable with our current capital structure. That said, throughout the year, we will be taking a look at different things, different financial strategies and seeing if they apply to us in any way, taking a hard look at those and going from there. But I wouldn't say we are uncomfortable with our current capital strategy today.

Matthew DiFrisco, Thomas Weisel Partners.

I just had a question. I heard you talking about the tax rate and the G&A. So I guess are we now going forward at this rate of around 32% or 31.5% for the tax rate, and G&A will have this going forward, a little bit higher of an expense line, or is this a one-time thing in nature?

The reclass was really a catch-up for the whole year, all in the fourth quarter, reclassing these three franchise taxing and our WOTC fees out of the tax provision and into G&A. They will stay in G&A, so the tax provision on a full-year basis, 36.3%, it will be around that level, probably a little bit lower than 36%, actually, for 2007.

Okay, I missed that a little bit there. Do you also, as far as following on to the capital allocation here, do you have anything as far as just a plain-vanilla share repurchase authorization outstanding right now, and what stands on that?

We do not have a plain-vanilla share repurchase authorization currently outstanding.

And then lastly, where do you stand as far as on the contracts for beef? How far out do they go, and are there any renewals expected in '07?

This is G.J. We are contracted through the end of December, currently, of '07.

Paul Westra, Cowen & Co.

A couple of questions -- first, back to the guidance from taxes and G&A, just so we get our models roughly right -- first question is, the fourth quarter, this reclassification, would you say that the $0.5 million impact, maybe, between the 31.5% posted and the reported numbers and the 35%-ish you've guided, is that about the same amount that was I guess basically added into G&A for the push, or is that a little [better]?

It was pretty close.

Going forward, as we look at reported year-over-year quarterly basis for '07, should be thinking about putting about that amount into G&A before we forecast any potential G&A leverage that G.J. referred to?

I think you look at our full-year G&A for 2006, and we've said we can get some leverage on G&A, and I would tell you we could probably get 25 to 50 basis points of leverage on G&A or a reduction as a percentage of revenue in 2007.

Despite having to face at least three quarters of this additional charge for the first three quarters?

Yes, because essentially a full year's worth of those costs are now in the 2006 full-year number. So they're also going to be similar expenses in 2007. (multiple speakers)

So whatever number you put in the fourth quarter of G&A should've been spread out equally throughout the --

That's right.

And then the other question, on the conference, can give us an idea of again whether the expense was going to fall into the second quarter and not the first?

I would use about $2.5 million.

And then lastly, I guess a more general question -- on the pricing, I think you updated us -- your last update was the 2.3, and then this is an additional 0.5 point that perhaps you weren't, or at least the Street wasn't expecting, and then dive into again -- is that a geographic or a national pricing extra 0.5 there?

The 0.8% we took in October was nationwide. The 1.6 was an average, some higher, some lower, in the states that were affected, and then the 0.5%, again, was an average that we just took here in the last week or so.

Jeff Omohundro, Wachovia.

I guess it sounds like you have a little bit more front-end-loaded development schedule this year. Just roughly how many do you think you'll actually get open in the Q1 period?

We could potentially get as many as 10 open in the first quarter. And I would say that in prior years, we've opened about one-third, two-thirds -- one-third first half of the year, two-thirds second half of the year. This year it could absolutely be 50-50, 50% first half, 50% second half.

What's the preopening running?

I would use something in the neighborhood of about $450,000 a restaurant.

Have you seen much -- with these pricing moves, have you seen much shift in mix?

We haven't.

Finally, chicken costs -- just an update on where you are and what you've bought on that front?

Sure, Jeff. It's G.J. We contracted our chicken for full year '07. I believed it was in October. So we are set for all of 2007. And that reduction was around 10%.

That's awfully nice in this market.

Steven Rees, JPMorgan.

I just wanted to ask about unit volume (technical difficulty). Can you hear me now?

Yes, there you go.

Sorry about that. I wanted to ask about new unit volume performance. It sounds like overall, they're still trending pretty well. Perhaps you could provide some color in terms of how they are performing in new markets versus existing markets and then what the development schedule will look like in '07 in terms of new versus existing markets?

For the most part, we're pretty consistent. I mean, there isn't a big difference between the new markets and existing markets. And we are not opening in that many new markets. As a matter of fact, in 2007, the only market that we would consider to be new is Minnesota, and we just opened outside of Minneapolis a few weeks ago. That's the only new state. We're now in 44 states. So there aren't many places that we would consider really to be new markets kind of going forward. Generally, our development has been very consistent from a sales honeymoon perspective.

Okay, and then on the beef costs, was the contract up 3% to 5%? Is that right for this year?

Our contract was up around 4.5% to 5%.

Just finally on G&A leverage, is there anything that you are specifically doing to reduce that this year, or is it just mainly sales leverage?

No, it's sales leverage. We're committed to supporting our operators and providing great service, and we're going to make the right decisions for the long term.

David Tarantino, Robert W. Baird.

G.J., I just wanted to reconcile some comments you made on trends to date in Q1. I think you said comps have been running below internal plan, but net income was above expectations in January?

That's right. We typically talk 2% to 3% comps, and for the first six weeks, we're at 1.3%, and largely impacted by weather. We don't necessarily quantify weather, but we feel good about where we're going for the balance of the year.

Did I hear correctly that net income was above expectations in January, and if so, what would be driving that if comps were below your expectations?

David, this is Scott. Really, our margins were better than planned. So keep in mind, we're making assumptions on a lot of food costs that we don't have contracts on, and we've made a lot of assumptions on the impact of minimum wage, both on tipped employees and non-tipped employees. And we've made assumptions on utilities and gas and so forth. So there's a lot of things that we've made some assumptions on, and in January we just came out a little bit better.

That's helpful. If you factor out the impact of weather that you have seen, have you seen any fundamental changes in consumer behavior in the markets with the highest price increases?

No, we really haven't. And in fairness, it's too early, I think, in some respects, but we really haven't seen any shift in P mix and/or the profile of our guests.

Last question -- I think in the past you've mentioned plans to roll out a new labor management system. Can you provide an update on this?

Sure. It is still in test, and we're going to roll it out to more stores here over the course of the year and keep developing the system.

I think it's real important to note here that this is a system that we're going to provide our operators to help them run their businesses more efficiently and better if they choose to. Probably the most significant thing here on this labor program is the fact it's going to be able to manage in-and-out times better. But it's not about trying to reduce the amount of people we have on a particular shift, as we stay committed to our service sequence.

Have you assumed any benefit from that system in your guidance?

Zero.

(OPERATOR INSTRUCTIONS). Larry Miller, RBC Capital Markets.

I just had a couple of quick questions. You had talked about acquiring two to six stores. What is the current thought process on that, given what you've talked about with multiples?

As we said, we have changed our philosophy, and so we have changed the whole approach, and we certainly are in some discussions, but it's too early to comment on it.

Okay, that would presumably be incremental to your current plan. Is that correct?

That is correct.

And then just so I can tie the loop up on labor inflation, what would be your thoughts on pricing should the minimum wage deal go through? How would that affect you guys and what's your thought on pricing?

Well, you talking about the federal minimum wage?

For the federal minimum wage that hasn't passed yet.

I think it's too early to tell, and we will certainly evaluate it if it's significantly higher than what we've currently put in our plan.

And then maybe, Scott, maybe you can give us a little color on what kind of leverage if any you're currently getting in labor in the model with the pricing you are taking in 2007?

Actually, our expectation would be we wouldn't get any leverage on labor with the pricing. Our labor costs would go up as a percent of sales. We would get some leverage on food and other expenses.

Do you have any parameters you can put around that?

Well, we have said labor inflation could be 5% to 5.5% on a dollar basis. So literally, our labor margins could go up 70, 80, 60 basis points, something like that, if we have 5% to 5.5% labor inflation. So we could literally see labor go up that much, but we would see some decrease in food costs, some decrease in other expenses, but more likely than not, we would be planning for margins to be going down a little bit this year.

And if I could just tie up one thought, I think, G.J., you might have said that you would not expect margins to go up in '07. Is that correct? I guess you're talking about restaurant-level margins, G&A leverage will get you to operating profit margins in excess -- to get that expansion on the earnings growth ahead of sales growth. Is that correct?

Yes, that's right.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

Okay, well, think you guys very much, and we appreciate you listening in, and we will talk to you next quarter.

Thank you, everyone. That does conclude today's conference. You may now disconnect.