The ONE Group Hospitality, Inc. (STKS) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to The ONE Group Hospitality's First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host, Ms. Linda Siluk. Thank you. You may begin.

Thank you, operator, and good afternoon. Manny Hilario, our CEO, joins me today. Before we begin our formal remarks, we must remind you that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of our future performance, and therefore, you should not place 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. Please also note that these forward-looking statements, including projections, reflect our opinions only as of the date of this call. And we undertake no obligation to revise or publicly release any revisions to these forward-looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During our call, we will refer to certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to other GAAP measures. For reconciliations of these measures, such as adjusted EBITDA and total food and beverage sales at owned and managed and licensed units to GAAP measures and a discussion of why we consider these measures useful, see our earnings release of earlier today. With that, I'd like to turn the call over to Manny Hilario. Manny?

Thank you, Linda. I would like to thank you for joining us on the call today as well as for your continued interest in The ONE Group. I'm pleased to report that 2018 is off to a strong start, as we built upon our fourth quarter 2017 momentum in comparable sales, restaurant-level margins and adjusted EBITDA. Comparable sales grew 6.6%, including a 7.2% increase in the comparable sales from our domestic owned and managed STK units. While internationally, we saw an increase of 4.5% in comparable sales from our managed venues. We believe that the latter was impacted by unsellable weather in the U.K. during the quarter. Restaurant-level profitability increased over 400 points, despite rising beef costs and an increase in minimum wage across most jurisdictions where we operate. And adjusted EBITDA grew 11.6% to $1.8 million despite a 2017 nonrecurring Super Bowl party hosted in Houston, Texas, which impacted year-over-year growth at $700,000 or approximately 45%. Throughout this year, we plan to execute against our long-term 4-point strategy implemented in 2017 to drive sales, profitability and ultimately, shareholder value. As a reminder, these include: one, improving operational efficiencies in our restaurants; two, driving comparable sales; three, reducing G&A at corporate level; and four, focusing on growth through license and management deals only. At the restaurant level, we are identifying operational opportunities that we believe can help improve performance, enhance margins and increase profitability. Some examples include reducing waste by streamlining so many options or effectively managing labor scheduling and reevaluating service contracts at the restaurant level. The results of these efforts are ongoing. They have already resulted in reduction of cost of sales, and restaurant operation expenses as a percentage of owned restaurant revenues that we experienced in the first quarter. Next, we continue to implement many sales driving initiatives that we believe that we can build upon throughout the year. We are fully focused on improving our restaurant sales and guest counts by delivering an exceptional dining experience for each guest, at each meal, each and every day. Similar to last year, we are promoting STK gift cards and we're working on building relationships with the concierge desks at high-profile hotels near our restaurants. We recently reintroduced brunch at select restaurants, providing an energetic [vibrunch] experience. And finally, subsequent to the quarter-end, we launched Social Hour by STK the in all our restaurants to promote the Happy Hour daypart, offering limited time drinks and small plate promotions. As a reminder, we are also testing delivery at select restaurants, with several different delivery partners and are encouraged by what delivery could potentially mean long term for our company. While it's still early, we are pleased with the results we are seeing thus far through these efforts. Turning to development. We are focusing our growth on asset-light management and license deals. And believe over the long term, we can efficiently manage 3 to 5 license deals and one to 2 food and beverage hospitality projects per year. Looking at 2018, specifically, we plan to open 4 international licensed STKs, while our company-owned STK in San Diego, California is nearing completion. We're continuing to see strong interest for the STK brand and in our hospitality program globally, and I'm excited by our 5 points of asset-light license and management opportunities. Our guests certainly appreciate our unique, highly-differentiated dining and hospitality experiences, because it provides best-in-class dining, combining superior quality steak house, with an innovative menu and a vibrant launch. As a result, our guests, they stay to enjoy additional drinks once the meals are complete, listen to our DJs, and extend their evening. I expect these experiences will continue to drive opportunities for the ONE Group and our licensing partners globally. Following the opening of STK Dubai at the end of last year, we plan to open 2 licensed STKs in the Middle East during the second half of this year. These include an STK in downtown Dubai, and an STK in Doha, in the city's newly-renovated Ritz-Carlton Hotel. Additionally, during 2018, we plan to expand our footprint into Mexico. First, a full licensed STK is planned for the region, is planned to open in Mexico City during the second half of the year. The remaining 2 locations are slated for 2019 and 2020, Guadalajara, Monterrey and Cabo. Our license partner in Puerto Rico continues to work hard, recovering from the 2 major hurricanes that occurred in 2017. With the information we have at this time, we believe that at least one of the 2 planned San Juan restaurants should open by the end of 2018. We will provide further updates once we know more. Finally, after much anticipation, in early June, we plan to open our only company-owned unit in development, STK San Diego. This location is located in the historical Gaslamp quarter at the Andaz Hotel. This restaurant will be in addition to the already existing licensed and operating STK hotel rooftop. Lastly, as you may have read last month, STK was named to OpenTable's 100 Best Restaurants in America for a big night out. This accolade is a testament to the high energy and great atmosphere our restaurants offer, and a great honor for our brand. I would like to thank the entire ONE Group team, whose hard work made this achievement and all our recent successes, possible. With that, now I'd like to turn the call back to Linda, who will provide more detail on our financial performance for the first quarter, as well as discuss guidance for 2018. Linda?

Thank you, Manny. For the first quarter ended March 31, 2018, total GAAP revenues were $19.5 million, representing a 4.5% decrease for the comparable quarter last year. As Manny mentioned, comparable store sales for owned and managed domestic STK units increased by 7.3% for the quarter. As a reminder, during the first quarter of 2017, we participated in an opportunistic nonrecurring Super Bowl event, which we did not have in 2018. This event generated $1.7 million in sales. When adjusting for this event, total GAAP revenues would have increased approximately 4%. Included in our total revenues for the first quarter of 2018 is our owned restaurant net revenues of $15.1 million, which increased approximately 6% compared to $14.2 million in the first quarter of 2017. The increase was primarily due to an increase of 8.7% in domestic comparable store sales for company-owned STK restaurants. Management's license and incentive fee revenues increased approximately 5.3% to $2.4 million in the first quarter of 2018 compared to $2.3 million in the first quarter of 2017. The increase was driven by strong performance at our European locations for which we earned management fees based on revenues and incentive fees based on venue profitability. Owned restaurant cost of sales as a percentage of owned restaurant net revenues decreased to 26.8% in the first quarter of 2018 compared to 27.2% in the comparable quarter last year. The year-over-year decrease was driven primarily by the cost-savings initiatives put in place at the restaurant level, partially offset by an increased cost for commodity items, particularly beef prices. Owned restaurant operating expenses held flat at $9.4 million in both the first quarter of 2018 and the first quarter of 2017. As a percentage of owned restaurant net revenues, operating expenses decreased approximately 360 basis points to 62.2% in the first quarter of 2018 compared to 65.8% in the first quarter of 2017. The decrease in owned restaurant operating expenses as a percentage of owned restaurant net revenue is due primarily to the maturing of several of our owned restaurants, and the cost-savings initiatives put in place at the restaurant level, partially offset by the impact of minimum wage increases. On a total reported basis, general and administrative expenses for the first quarter of 2018 increased $134,000 to $3.1 million compared to $2.9 million in the first quarter of 2017. As a percentage of revenues, general and administrative expenses increased 140 basis points towards 15.7% of total revenues. The increase in the G&A rate is a result of $200,000 additional stock-based compensation expense, $500,000 additional accounting fees, offset by reductions in the overhead structure over the last year, additional leverage was due to the increase in revenues. On a go-forward basis, we expect annual G&A to be about $9 million, excluding noncash stock-based compensation. Depreciation and amortization expense for the first quarter 2018 decreased $88,000 to $778,000 in the first quarter of 2017 versus $856,000 for the same period in the prior year. Restaurant preopening costs for the first quarter of 2018 were $210,000, a decrease of $260,000 from the $470,000 incurred in the first quarter of 2017 as a result of the timing of opening a restaurant. Interest expense, net of interest income, was approximately $318,000 in the first quarter of 2018 compared to $259,000 in the first quarter of the prior year. Income tax expense for the first quarter of 2018 was approximately $25,000 compared to an income tax benefit of $17,000 for the first quarter of 2017. For the first quarter of 2018, net income attributable for the ONE Group Hospitality, Inc. was $231,000 or $0.01 per share compared to the net loss of $402,000 in 2017 or $0.02 loss per share. Adjusted EBITDA attributable to The ONE Group for the first quarter was $1.8 million, an increase of 11.6% over the prior year adjusted EBITDA of $1.6 million. As a reminder, the Super Bowl event held in Q1 of 2017 was not repeated in the first quarter of 2018. We have included, as we have in the past, a reconciliation of adjusted EBITDA to GAAP net income from continuing operations and GAAP revenues to total food and beverage sales at owned and managed properties in the tables in the first quarter earnings release. I'd like to provide some forward-looking commentary on our business. This commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We, as always, remind our investors the actual numbers in planning of new restaurant openings for any given period is subject to a number of factors outside of the company's control, including weather conditions and factors under control of landlords, contractors, licensees and regulatory and licensing authority. With respect to our 2018 outlook based on information available now and expectations as of today, beginning with the top line, we project our total GAAP revenues to be between $80 million and $85 million in 2018. We estimate total food and beverage costs to be approximately 25% to 26% for 2018. As approximately 75% of our beef is under contract, the current estimate is based on negotiations with suppliers, coupled with current and expected market conditions concerning fresh and other commodity items that the company is either unable or has currently elected not to contract for longer periods of time. We believe our total food and beverage sales at our owned and managed units to be between $170 million and $180 million in 2018. We model our adjusted EBITDA to be between $9 million and $10 million for 2018. We also now expect comparable store sales to grow at about 2% to 3%. Putting all this together, and if these targets can be achieved, we expect to generate growth in adjusted EBITDA of 30% to 40% in 2018. We are planning total capital expenditures of approximately $3 million in 2018, which is related to one company-owned restaurant in San Diego and maintenance capital expenditures at existing venues. This is significantly less than prior year's and reflective of our capital-light strategy. I will now turn the call back to Manny for closing remarks.

Thank you, Linda. Before we go to Q&A, I would like to reiterate the market opportunity that I see for the company. We have 2 strong operating platforms: F&B hospitality and restaurants. The latter anchored by our STK brand that is unique and highly differentiated. For those of you who have been to our restaurants, you certainly know firsthand that it provides so much more than just a great meal. Our guests also appreciate the vibe and ambience that keeps them with us longer and also brings them back. This is important because our guests are looking for full dining experiences, and then, often, want to post those experiences all over social media. They also want those experiences to last longer, so they can hang around after dinner for more drinks, listen to our DJs and to extend the evening. I see this as a defining, competitive advantage, because this is what hotels and developers are looking for across all of their properties. I expect the experience we can create will absolutely drive more opportunities for The ONE Group and our licensing partners, globally. Over the long term, we will continue to focus on asset by deals. Our job as a team is to pick the best opportunities and prioritize them in a way that we can efficiently manage between 3 to 5 licensed deals and one to 2 food and beverage hospitality projects per year. We also expect comparable store sales to grow at about 1% to 2% annually. With respect to cost, we intend to maintain strong restaurant level EBITDA margins, benefiting from the economies of scale and operating efficiencies, while remaining disciplined in our G&A management. Putting all this together and if these targets can be achieved, we should be able to generate consistent growth in adjusted EBITDA of 20%-plus over the long term. To conclude, we believe that we have a sound strategy in place to drive sales, enhance margins and grow our business through asset-light restaurant development. We are deleveraging under this strategy and moving to a more capital-efficient business model. Most importantly, we believe and are confident that successful execution of the strategy will drive long-term shareholder value. Finally, I would like to thank the entire The ONE Group team, who's hard work has made all our recent successes possible. They are truly an exceptional team. We'd like to thank you, again, for your support, and joining us on the call today. Linda, and myself are happy to answer any questions that you may have. Operator?

[Operator Instructions] Our first question comes from Chris Krueger, Lake Street Capital Markets.

You had a nice strong same-store sales in the quarter. Can you indicate, did that trend consistently throughout the quarter? Did it start off strong, and then, kind of settle down? Or vice versa?

I mean, I think -- this is Manny, by the way. I think, throughout the whole quarter, we had strong sales. I would say that the beginning of the quarter, just like everyone else, there was -- weather was an issue, in the Northeast. So the New York restaurants certainly start a little slower than what we wanted to. But overall, by week 3 or 4 of the quarter, they were already back on track. So I would say, generally, we had a very strong quarter in all geographies, and it was consistent every month.

If you look at second quarter, the first here about -- well, at the halfway point? Have those trends remained fairly similar?

I mean, I think, we don't provide -- we don't provide month-to-month comps, but I would say that in the U.S., our comps sales stayed on track to what we saw on the first quarter so we didn't see any material change either way. So we're -- I think we're still on track. And then, of course, Europe, in the first quarter, as we said on our prepared statements there, had tough weather. But I think the weather is clearing up more recently in Europe. So I think that's a little bit better for us this quarter.

Good. You talk about the Super Bowl having a positive impact last year. That was not repeated this year. If you look ahead to 2019, do you intend to have any Super Bowl-related activity?

Yes. So 2018 Super Bowl was in Houston. We don't have a presence Houston in '18. In '19, the Super Bowl is in Atlanta, which...

2017 is Houston. 2018 was Minneapolis right here...

Yes. That's correct. Minneapolis. So we don't have store in Minneapolis. So in '19, we have a store in Atlanta. So that's going to be a much better setup for us. We have a great restaurant there with a nice banquet facility. So we will pick up additional business going into next year's Super Bowl. But just keeping in mind that, that Super Bowl event was a discrete event that we had scheduled and in 2018, that was not available to us. So it was something that just was a big event that we used to do off facility catering it was a very specific event. And we're now looking at other ways of adding to it, but I can't make any promises that we will get equal or some type of events for the Super Bowl. But we do know because it's in Atlanta, it will be much better from a sales perspective because we actually have a restaurant in that market.

Okay. Can you -- I didn't quite catch it as far as the timing for the opening in San Diego. Did you say that's going to be in early June?

Yes. So I mean, we're under full construction there. And we're putting together the final touches on that store. As a matter of fact, our training teams are starting to get fully deployed. So we are very excited about that location. It's a great piece of real estate. And we think that's going to be a strong add to our company-owned portfolio.

Great. And then, your press release did not show your balance sheet. I was wondering what your total debt and total cash was at the end of the quarter?

Yes. So we filed it with the -- we just filed a 10-Q. So you have it out on the 10-Q. Or Linda...

Our total debt is about $13 million. And what was the other question?

Cash.

Oh, cash? Our cash balance is at $1.1 million.

I'm sorry, you're saying cash was what?

$1.1 million.

$1.1 million.

All right. And then, as far as paying down debt, I assume it's still $300,000 a month. And that should likely continue. Is that correct?

That's correct.

Our next question comes from [ Dave Cannon ], [ Cannon Wealth Management ].

It's [ Jason ] standing in for [ Dave ]. I just have 2 questions. I know you talked about this a little bit, Manny, but can you give us a sense of opportunity to reduce the restaurant level G&A as well as the corporate G&A? And where you see those costs are coming out at the restaurant level and corporate? And then, if you could quantify it possible?

Yes. So thanks, [ Jason ]. Thanks for being on the call. So I think, as you saw in the fourth quarter, now in the first quarter of this year, we're doing a nice job of going back to our operating lines in the store level. And we're really looking at anything to do with contracts, anything to do with services in the units, and we've been reevaluating all of this. So whatever trends you've seen in store, store-level G&A, really reducing some of that. I think you will continue to see us doing that going to the future quarter. So we feel that we have an aggressive cost-reduction program in mind for the restaurants. I think you will continue to see that going out. From a corporate G&A perspective, the only costs year-over-year that was a little higher than what we anticipated it was the accounting fees, which was about $0.5 million more year-over-year. So if we had actually adjusted for those accounting fees, which has predominantly accrued for in the first quarter, our G&A actually would've been more around the $2.5 million, $2.6 million range, compared to $2.9 million last year. So we already have a nice reduction on G&A going into this year. Of course, we will continue to look for opportunities in the corporate side. And if there is more available opportunities to take cost out, we will. I mean, we're looking at everything from, maybe, potentially outsourcing some functions, renegotiating contracts with our -- all our vendors for things like payroll, check costs, everything from credit card processing fees, information technology, support cost from upside vendors. So we're looking at everything and anything that has a contract or a cost to the company. We're making sure that we're evaluating and getting the best cost position in that.

The cost that [indiscernible] value.

Okay. Great. And then, I know you talked about the opportunities for the licensing deals in 2018. Can you share the pipeline of opportunities for 2019 as well as the food and beverage deals in 2019? Because I know there were some in your presentation, and I wasn't sure if those were all for 2018 or for 2019?

Yes. So I mean, the '18 pipeline is done. So I mean, as a matter of fact, 4 of the 5 restaurants are under construction right now. The only one that is not actively constructing right now is Puerto Rico and just because -- and even there, the licensee has been active in pursuing all the permits and everything else. So we should be just fine for '18. For '19, we do have the one of the Mexico stores will be coming out of the existing Mexico agreement. We also have Middle East that will come out of the existing contracts. And we also have another Puerto Rico. So we already have 3 of the 5, if you will, on the hopper. And then we also have Abu Dhabi as the other potential for '19. So 4 of the 5 slots are filled in. And then, we currently have 2 or 3 deals in very close to a signature form now, with additional units. So I would say that our '19 and even '20 pipeline are looking very good for us.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.