RAVE Restaurant Group, Inc. (RAVE) Q2 2018 Earnings Report, Transcript and Summary

Good evening and welcome to the RAVE Restaurant Group’s Second Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there'll be an opportunity to ask questions. Please note that today’s event is being recorded. I would now like to turn the conference over to Tim Mullany, CFO. Please go ahead.

All right, thank you. Good afternoon and thank you for joining the RAVE Restaurant Group’s fiscal second quarter 2018 earnings conference call. Everyone should have access to our fiscal second quarter 2018 earnings release that was published yesterday. The press release can be found at www.raverg.com in the Investor Relations section. Before we begin, I would like to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Please note that today’s conference call we will discuss certain non-GAAP financial measures, which we believe to be useful evaluating our performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of comparable GAAP measures is available in our earnings release. With that, I would like to turn it over to Scott Crane, Chief Executive Officer.

Good afternoon and thanks everyone for joining the call today. I am looking forward to sharing our second quarter results. RAVE brands are continuing to make significant process as we are executing on our plan of simplifying the RAVE business and this is resulting in improved net income and adjusted EBITDA. During this last quarter, we continue – we discontinued our Norco distribution division and contracted with third party suppliers and distributors of food, equipment and supplies. And this new approach to supply chain management has provided more transparency and efficiency for our franchisees while also allowing us the opportunity to streamline our G&A costs. Here at Slide 5 we've been focused on refranchising company on locations. And during this quarter, we refranchised 11 in the Dallas, Fort Worth market. This shift in our model allows us to work on great support of our franchisees, so that they in turn can provide best-in-class guest experiences. Both initiatives create a much more predictive model and improve the stability of the business. We believe the simplification will help us to become more profitable ongoing. As you see in our last 10-Q, we’re reporting an increase in adjusted EBITDA that was primarily driven by improvements from company-owned restaurants, reductions in corporate G&A and lower bad debt expenses. On a really exciting front, Pizza Inn continues to execute at high level as we saw our four straight quarter of positive same-store sales growth, domestic comparable sales increased 2.7% for the quarter compared to the same period last year. We continue to be pleased with the excitement of the new development increased remodeling of our core Pizza Inn buffet concept. However during the second fiscal quarter, the number of Pizza Inn domestic units declined to 156 from 159, but driven by lower volume non-buffet locations. The core brand continues to be strong domestically and additionally international development is showing growth for Pizza Inn with two new locations added this quarter and a pipeline that is expanding. Pizza Inn introduced the all new buffet as we discussed on the last call this last quarter. It's been very well received by our guests and franchise feedback has been positive. Also we recently announced a new concept PIE by Pizza Inn Express that we developed in addition to the brand refresh and expansion initiatives at Pizza Inn itself. Convenience stores are a $575 billion on our industry with 70% of those revenues coming from in-store purchases. This new concept allows RAVE to diversify its footprint in the convenience store space and the great way to reach new customers in a real-time setting, while still serving the same iconic, quality pizza our guests have come to expect from our heritage routes. PIE, it’s geared toward the convenience store market, but we've realized from early interest it's a great fit for airports, malls and other entertainment venues. This new concept will allow customers to order and pay a kiosk for grab-and-go options, or they can pick up their food as it’s freshly made. The Pizza Inn brand has a strong presence in the southeastern part of the country where the convenience store segment has the nation's highest grouping of independent operators. We believe this new concept offering will be attractive to non-trad – non-traditional franchise operators because it offers a high quality pizza product at a minimal investment, which is something that convenience store segments has historically lacks. At Pie Five, we continue to test initiatives to increase guest frequency as well as provide opportunities for incremental occasions. We're taking advantage of growth in areas of such delivery, great sandwiches wings and shareable pizzas that are now – we have fourteen-inches that we’re offering with the goal of increasing incidence among our loyal guest base and adding new occasions. Also in keeping with health-based consumer trends and innovation, we’ve recently added the cauliflower crust to its dough line-up for a successful limited time offer. We’re the first in the fast-casual pizza concept to introduce the cauliflower pizza crust as gluten free with 50% less carbs and less sodium. It was such a successful LTO that we ran out of dough week early and we had to put together a new run and that we’re looking forward to the success of that as well. The new cauliflower crust along with continued testing of other product innovations are all part of enhancing the Pie Five guest experience leading to increased sales. The second quarter of fiscal 2018 two new Pie Five restaurants opened while five franchise restaurants were closed bringing the quarter end total unit count to 80 restaurants. We've opened new locations in new markets and our newest airport location in San Francisco International Airport has been a huge win for the brand. Also we've been encouraged by interest in our franchise development especially in international markets. We're looking forward to opening our first franchise international of Pie Five location in the fiscal 2018. At this time I'm going to turn the call back over to Tim to discuss the financial results. Thanks.

All right, thanks, Scott. Total consolidated revenue decreased 38.1% to $4.2 million compared to $6.8 million in the second quarter of fiscal 2017. Year-to-date total consolidated revenues decreased 32.4% to $9.6 million compared to $14.2 million for the first half of fiscal 2017. Pizza Inn domestic retail sales decreased 3.3% and $2.1 million respectively for the three and six month periods ended December 24, 2017 compared to the same periods of the prior year. Pizza Inn domestic comparable store retail sales increased 2.7% and 2.2% respectively for the three and six month periods ended December 24, 2017 compared to the same periods of the prior year. Pie Five system-wide retail sales decreased 18.8% for the second quarter of fiscal 2018 when compared to the same period in the prior year primarily driven by a 15.5% decrease in average units open. Comparable store retail sales decreased by 13.7% for the most recent fiscal quarter compared to the same period in the prior year. Year-to-date, Pie Five system-wide retail sales decreased 18% compared to the same period in the prior year, primarily driven by a 10.8% decrease in average units open. Comparable store retail sales decreased by 15.5% during the first six months of fiscal 2018 compared to the same period of the prior year. For the three and six month periods ended December 24, 2017, the company reported a net loss of $0.6 million and $0.9 million respectively compared to a loss of $7.9 million and $9.4 million for the same periods of the prior year primarily due to closures of underperforming Company Pie Five units, lower closed store expenses, increased gains from sale of assets, lower impairment expenses, lower lease termination expenses, and reductions to G&A expenses. On a fully diluted basis, the loss was $0.04 per share and $0.07 per share respectively for the second quarter and year-to-date fiscal 2018 compared to a loss of $0.74 per share and $0.89 per share for the same periods of the prior year. Adjusted EBITDA improved $0.9 million and $1.4 million for the three and six month periods ended December 24, 2017 to negative $0.2 million and positive $0.5 million respectively. The improvement in adjusted EBITDA was driven by improvements from company-owned stores, reductions in corporate G&A and lower bad debt expense. Company owned Pie Five operating cash flow decreased to $0.1 million during the second quarter of fiscal 2018 compared to the same period of the prior year. For the first six months of 2018, the company-owned Pie Five operating cash flow decreased $0.2 million compared to the same period of the prior year. During the fiscal quarter ended December 24, 2017, the company discontinued its Norco distribution division and outsourced such functions to third party suppliers and distributors of food, equipment and supplies. As such the company no bears the credit risk associated with food and equipment sales or performs the associated invoicing and collection duties. As a result, sale of food, equipment and supplies is no longer recognized as revenue and the cost of such items is no longer included in cost of sales. The Company now recognizes incentive revenues received from third party suppliers and distributors on a net basis within franchise revenues. Furthermore, we changed our P&L presentation within the financial result section of the quarterly filing to provide added transparency within continuing operations. Pizza Inn Franchising and Pie Five Franchising along with company-owned locations are broken out to better detail operating results. In addition to materially reducing credit risk through outsourcing distribution, we have also mitigated risk by negotiating exists of new store leases that were deemed unfavorable for development and thus lower the associated balance sheet liabilities. Finally, as Scott mentioned, we are in the process of refranchising company-owned units. This strategy if successfully completed will allow for greater predictability of company-wide cash flows as well as a faster means to net income profitability. As a reminder, we disclosed a great deal of brand-specific financial and operating performance in our quarterly earnings release tables and in our SEC filings. This information includes brand-specific comp and non-comp restaurant average unit volumes and income statement line item details and various explanations. Our Form 10-Q was filed with the SEC earlier yesterday. In closing, we are gaining traction. Our success in reducing G&A expenses along with shifting our strategy towards a franchisee model is making methodical improvements performance within continuing operations. We intend for this strategy to continue in the coming quarters. With that I'll turn it over to the operator for questions.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.