The ONE Group Hospitality, Inc. (STKS) Q3 2018 Earnings Report, Transcript and Summary

Greetings and welcome to The ONE Group Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Linda Siluk, CFO. Please proceed.

Thank you, operator, and good afternoon. Manny Hilario, our President and CEO, joins me today. Before we begin our formal remarks, we must remind you that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of 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 opinion only as of the date of this call. 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 on 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 issued earlier today. With that, I'd like to turn the call over to Manny Hilario. Manny?

Thank you, Linda. And thank you all for joining us today and for your continued interest in The ONE Group. I'm pleased to report that we substantially improved our financial performance during the third quarter versus the prior year period. Specifically we generated double-digit increase of 12% in total revenue inclusive of comparable sales growth for domestic STK restaurants of 6.9%. We then leveraged this top line expansion into a 330 basis points increase in restaurant level margin and an impressive 41% increase in adjusted EBITDA. On a GAAP basis, income from operations was approximately $300,000, compared to a loss from operations of approximately $500,000 last year. These results show the continued progress towards the execution of our long-term strategy. We have focused on executing this plan over the past year and we see ourselves taking advantage of significant opportunity ahead of us to capitalize and expand our signature vibe dining experience. We remain laser focused on our four key strategic initiatives. Number one, improving operational efficiency in our restaurants; first, we are making progress, realizing operational efficiency inside the 4-walls of our restaurants. This is evident by the 330 basis point decrease in owned restaurant operating expenses during the quarter and 370 basis points decrease on a year-to-date basis. Our traction in executing cost controls is a testament to the steps we take every day to streamline operations and run more efficient restaurants. Specifically, these actions are more than offsetting the labor headwinds that the industry and we are currently facing. We're pleased that we experienced solid performance in recently opened venues. For example, STK San Diego open in the quarter and is showing that a fine dining restaurant can operate profitably in its first quarter of operations. Number two, driving comparable sales. Next we continue to focus on driving increases in comparable sales across all of our restaurants. Over the past year we have developed and implemented many sales driving tactics that grow the top line and highlight the differentiated vibe dining experience that we at STK deliver to all our guests every day. As a result, we have reported strong mid-to-high single-digit increases in domestic comparable sales for the first two quarters of 2018, and this momentum has continued into the fourth quarter. Our priority is to deliver an exceptional dining experience to each guest at each meal every day and because of this we have achieved continued growth in comparable sales primarily through higher guest counts by only taking modest price increases. We are constantly tracking references to the STK brand through our guest social media presence. Our elevated food offerings premium menu items and unique seasonal hand crafted cocktails create Instagrammable moments for our guests and we love them when they post pictures of their vibe dine experiences on social media. In fact we are now trying a portion of GM incentive compensation to higher social media scores because we know that it drives more guests into our restaurants. During the fourth quarter we are particularly focused on driving gift card sales working closely concierge desk at local hotels, as well as leveraging our private event business to drive probably party bookings. We are highly encouraged by the strength of our holiday bookings to date and look forward to our guests celebrating the season with STK. Number three, reducing G&A at the corporate level. With respect to reducing G&A at the corporate level, our third quarter and year-to-date comparisons demonstrate we have made meaningful headway right side of this line item. G&A declined 130 basis points to 11.4% of total sales in the third quarter of 2018. On an adjusted basis, G&A decreased approximately 270 basis points to 8.9% of total sales. Even more importantly over the past three quarters of 2018, G&A declined 130 basis points to 13.3% of total sales and on an adjusted basis G&A decreased to 190 basis points to 11.4% of total sales. We expect G&A to be approximately $2 million per quarter on a go-forward basis excluding stock based compensation. In addition during the third quarter we began consolidating our office space. We have been able to do so because of our reduction of corporate headcounts for this past 6 to 18 months and are now occupying half the space previously used. Additionally, we have moved several of our employees and corporate functions to our office in Denver, Colorado. This alone is projected to provide us with approximately $500,000 in additional annual cost savings both in office front and table costs. Number four, focusing on growth through license and management deals. Finally, we continue to focus on our developing growth on high margin [SLI] deals. We are excited to be back in a growth mode and have assembled a very robust pipeline of management and licensed restaurants and F&B opportunity. Driving our ability to do so is a reflection of unique guest dining and hospitality experiences that we are able to create. During the third quarter we opened two international STKs and one domestic company owned STK. We are encouraged that all three newly opened restaurants are off to a strong start and are meeting or exceeding their initial targets. In July, we opened STK San Diego in historical Gaslamp Quarter at the Andaz Hotel. This restaurant is an addition to the already existing licensed STK rooftop. Also in July, we opened the license STK in downtown Dubai located at the address downtown hotel. This marks the second of four STKs incentive for the region in conjunction with our local partners, solutions, leisure group, and Qatar hospitality. Later this year we plan to open our third restaurant in the region within STK in Doha and the newly renovated Ritz Carlton Hotel. Our fourth STK in the region is slated for 2019 in Abu Dhabi. In August we entered Mexico with the first four license STKs plan for the region. The STK restaurant is located at Presidente Masaryk Avenue in the heart of Mexico City's dining and entertainment area in the historical Polanco district. Alongside some of the capital's most upscale commercial and retail tenants. Our second Mexico location STK Doha, Qatar is scheduled to open in 2019. The remaining two locations are slated for 2020 and beyond. Also during the fourth quarter we plan to take over the food and beverage at the Victory Hotel in London including this deal with the management of the Rooftop and the ground level Russian concept. Looking to 2019 we continue to see strong interest globally for the STK brand and in our hospitality program. We are therefore looking to open four to six license Russian units and one to two F&B's venues. We also tried to open one company owned STK Russian Nashville, Tennessee in the Gulf area which is between Music Row and Downtown. This will be company owned and operator location but it will still be asset life since we are taking over an existing upscale property inclusive of meaningful landlord contributions, we had minimal investments to make this into STK. In fact we estimate that we can be up and running for less than $1 million including field and expenses. In an effort to support our large growth opportunity, continue the sales momentum and further execute on our long-term strategy we recently strengthened our management team to help grow our high margin event business Celeste Fierro has transitioned from her most recent role of Senior Vice President of Operations to the newly created position of Vice President of Special Events. Celeste extensive experience of special event planning, corporate events and chair book functions make her ideal suited to take on this new position as we work to expand our special off-site events business including major sporting events. We look forward to leveraging her experience to create additional revenue streams for the company. In the third quarter, Connie Collins joined the company's Vice President of Operations and Global Training. She will be overseeing all our U.S. Russian operations and global training initiatives. Connie will use her extensive Russian operations experience to seek opportunities to drive better performance, enhance margins and increased profitability. Most recently, Connie Senior Vice President and Chief Operating Officer at Bravo Brio Russian group and previously held various roles at various Russian companies including McCormick & Schmick's Seafood Restaurants. And finally, Tyler Loy has joined the company in a newly created position as Vice President of Strategy and Measurement. Tyler will support incorporate strategy, planning analysis, marketing purchasing and information technology. He brings significant industry, financial and strategic experience to this new position. He most recently served as Vice President of Finance for Pacific Bells and was previously Vice President of Off-Premises and Catering for Einstein Noah Restaurant Group. So putting it all together, we are in the early stages of our growth story and we are laser focused on executing on our four key strategic initiatives to capitalize on significant opportunity ahead. As I said earlier we are back in growth mode and we are committed to leveraging our brand strength by expanding our presence both domestically and internationally. We will be sharing more information as we get into 2019 but as we strategize regarding how long-term growth plans, we believe there is a global addressable market opportunity for approximately 200 locations including company owned STKs, license STKs and managed F&B location. We believe this represents an excess of the $1 billion systemwide food and beverage revenue opportunity which provide us with substantial runway for growth. With that now I would like to turn the call back to Linda who will provide more detail in the financial performance for the third quarter, reiterate our 2018 annual guidance and provide some preliminary metrics for 2019. Linda?

Thank you, Manny. For the quarter ended September 30, 2018 total GAAP revenues were $20 million representing a 12.1% increase from a comparable quarter last year. As Manny mentioned earlier, domestic comparable sales at owned and managed STK restaurant rose 6.9% consisting of a 7.7% increase in domestic owned restaurant and a 5.4% increase in domestic managed restaurant. On an adjusted basis excluding the positive impact from lapping Hurricane Irma, domestic comparable store sales at owned and managed STK restaurants still increased 5.6%. Both these results were obviously very strong outcomes and reflect the strength of our STK brand. Included in our total revenues for the third quarter 2018 is our owned restaurant net revenues of $15.3 million which increased approximately 16.1% compared to $13.2 million in the third quarter of 2017. The increase was primarily due to an increase of 7.7 comparable store sales for domestic company owned STK restaurant coupled with the opening of STK San Diego in July 2018. Managed and licensed and incentive fee revenues increased approximately 8.4% to $2.7 million in the third quarter of 2018 compared to $2.5 million in the third quarter of 2017. The increase was driven by the launch of the license STK in Dubai in December 2017 and to lesser extent the two license restaurants that opened during the third quarter STK Dubai downtown in July 2018 and STK Mexico in August 2018. Owned food beverage and other net revenues decreased to $2 million in the third quarter of 2018 from $2.1 million in the third quarter of 2017. This decrease was the result of fewer movie premiers at STK at the W Hotel in Los Angeles. Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased to 26.4% in the third quarter of 2018 compared to 26.1% in the comparable quarter last year. This year-over-year increase was due to the opening of STK San Diego. We typically run higher cost in the first six to nine months of the restaurant opening. This was partially offset by the cost savings initiatives put in place at the restaurant level across all other company owned unit. Owned restaurant operating expenses as a percentage of owned restaurant net revenues decreased approximately 370 basis points to 63.9% in the third quarter of 2018 compared to 67.6% in the third quarter of 2017. The decrease is due primarily to the cost savings initiatives put in place at the restaurant level primarily in labor management along with the leverage provided by our sales increase. These however were partially offset by the impact of minimum wage increases and the opening of STK San Diego. On a total reported basis, general and administrative expense including stock-based compensation for the third quarter of 2018 remained flat at $2.3 million. As a percentage of revenues, general and administrative expenses decreased 130 basis points to 11.4% of total revenues. The decrease in the G&A rate is a result of reductions in the overhead structure over the last year and additional leverage as a result of an increase in revenue. On a go forward basis we would expect annual G&A to run about $8 million or $2 million per quarter excluding non-cash stock-based compensation. When adjusting for items we find one-time in nature adjusted general and administrative costs decreased $283,000 to $1.8 million for the third quarter of 2018. As a percentage of revenues, general and administrative expenses decreased 270 basis points to 8.9% of total revenues. Restaurant preopening costs for the third quarter of 2018 were $449,000, an increase of $355,000 from the $94,000 incurred in the third quarter of 2017. The increase was related to the timing of the opening of STK San Diego and STK National. The amount of preopening expenses is typically related to the length and complexity of opening the venue. Interest expense net of interest income was approximately $294,000 in the third quarter of 2018 compared to $325,000 in the third quarter of the prior year reflecting lower outstanding debt balances. Note that our total outstanding debt current and long-term is now approximately $11.1 million compared to total debt outstanding of $13.4 million at the end of December 2017. Income tax expense for the third quarter of 2018 was approximately $250,000 compared to an income tax expense of $179,000 for the third quarter of 2017. For the third quarter of 2018 net loss attributable to The ONE Group Hospitality, Inc. was $305,000, a $0.01 loss per share compared to the net loss of $1.2 million in 2017 or $0.05 loss per share Adjusted EBITDA attributable to The ONE Group for the third quarter was $2 million, an increase of 41.1% over the prior year adjusted EBITDA of $1.4 million. 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 table in the third quarter earnings release. I'd like to provide some forward-looking commentary on our business. This commentary is subject to risk and uncertainties associated with forward-looking statements as discussed in our SEC filings. We as always remind our investors the actual numbers and timing of new restaurant openings for any given period that's 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 authorities. Based on information available now and expectations as of today, we are providing the following financial targets for 2018. Beginning with the top line we continue to project our total GAAP revenues to be between $80 million and $85 million. We estimate that total food and beverage sales at our owned and managed units will be between $170 million and $180 million. We now expect comparable store sales for the year to grow at approximately 7%, this is up from the 3% to 4% we've previously guided. We estimate total food and beverage costs to be approximately 25% to 26% for 2018, as approximately 75% of our base is under contract and the current estimate is based on negotiations with the buyers coupled with current and expected market conditions concerning fresh and other commodity items that we are either unable or have currently elected not to contract for longer periods of time. We are expecting our adjusted EBITDA to be between $10 million and $10.5 million in 2018. Putting all this together and if these targets can be achieved we expect to generate growth in adjusted EBITDA of 40% to 50% in 2018. We expect total capital expenditures net of $600,000 of landlord allowances to be approximately $3 million including one company owned restaurants in San Diego. At this time, I would like to provide you with some preliminary 2019 financial targets for the business. Comparable store sales growth of about 2% to 3%, which is consistent with our long term target, however, as a reminder in 2019 we are lapping very strong same store sales. Adjusted EBITDA of approximately $13 million, representing approximately 30% growth compared to our 2018 adjusted EBITDA guidance. Total G&A was approximately $8 million or $2 million per quarter. Total capital expenditures net of allowances received from landlords of approximately $3 million to $4 million, and four to six licensed restaurant units, one company owned STK and one to two food and beverage hospitality venues. With that I'll now turn the call back to Manny for closing remarks.

Thank you, Linda. Before we look to Q&A, I would like to reiterate the tremendous market opportunity that we see for the company. As you know, STK is globally recognized for artfully blending the modern steak house and she crowned our brand is highly regarded for contemporary take on classic American cuisine with an emphasis on an energetic vibe dining. The STK difference of vibe dining is defining competitive advantage setting us apart from my peers and leads to strong demand for STK brand and mobile hospitality program from top rated hotels and upscale developers. We believe we are a global leader in that category and as I said earlier there's a large addressable market opportunity for approximately 200 locations including company owned STKs, licensed STKs and Management F&B hospitality venues. So to conclude, we had a great quarter, we expect strong finish to the year and we are very excited about 2019. Of course none of this would be possible if not for the great efforts of our entire The One Group team, a truly exceptional group of people who are as committed to our plan as they are to providing the world class hospitality to our guest. Thank you, team and thank you all for joining us on the call today. Linda and myself are happy to answer any questions they may have. Operator?

I think you indicated on the - in your comments that the current quarter trends have seen the momentum continue that you've seen all year. With that are there any new kind of holiday party initiatives or corporate party kind of stuff? I know you mentioned a little bit but…

I think for the fourth quarter we do have a great amount of emphasis on the corporate events businesses as you know that's been a very important component of our fourth quarter sales. We're putting a lot of emphasis on that event. This year we will have all our venues open for Thanksgiving, so that's a new initiative for us. In the past I think about 50% of the units were open. So we put more added emphasis on that. And then as always in the fourth quarter we put a lot of emphasis on gift card which we believe is a great way of driving our business for the first quarter. So we will have a lot of activity and promotion within our restaurants, as well as the social media highlighting the gifting opportunity of utilizing STK gift cards to give our brand to your friends and family.

Then on new units you expect to open in the fourth quarter, little confused because in the press release you mentioned three different units but on the table on Page 3 it only shows two additions for the fourth quarter. Just want to make sure I understand what the real number is.

Yes, so we have STK Doha and then the F&B deal includes - it's actually it's a deal with the one operator for two venues. One is the Victory House Hotel, the other one is Indigo Hotel. So we'll be having three venues with two different - one F&B agreement and one new STK license deal.

And then I didn't quite hear what you said about Nashville, what's the timing on that one opening?

Yes, so Nashville, when we talked about Nashville last quarter, we were either shooting for late in the fourth quarter or if we can hit the window before the last two weeks in December we're going to push it out. So we decided to do it in the first quarter just to make sure that we open up and have an opportunity not to launch during this full season of January and February. So it was more of a strategic in-call to make sure that we open at the right time.

And how many STKs are in operation right now?

We have right now 21 STK venues in operations.

Last, I ask this every time but you guys still intend to pay down debt by about $300,000 per month going forward?

Yes, Chris.

[Operator Instructions] Our next question comes from the line of Dave Cannon with Cannon Wealth Management. Please proceed with your question.

First question is, I see you're finding ways to reduce G&A moving New York some of your operations over to Denver. How about on the restaurant level side, are there any opportunities I mean with your new COO, Connie Collins, are you identifying opportunities to reduce restaurant level G&A where we can expect some higher margins there going forward?

So at the restaurant level our number one initiative still remains around managing labor and the labor side we were looking at some ideas for instance looking at our sauce productions and maybe centralizing production of those. And then from a G&A perspective on the operating expenses we’re reducing some costs in areas like IT costs and we will be doing some of our fixed contracts with vendors so the answer is yes Connie in conjunction with Tyler who was also taking over the leadership of the supply chain group, I think there is still tremendous amount of initiatives to continue driving to level margin going forward by reducing some of those fixed G&A costs in the Russian P&Ls.

And then in the first quarter last year I remember we had a difficult comp because we did not do an event last year for the Super Bowl. How was it looking this year for Q1, will we be I know it's in Atlanta we have a store there do we have an event booked this year to kind of help the comp on that one item?

Yes, so great question. So we in 2017 we had Super Bowl event that added about $1.9 million in revenues and about $700,000 in EBITDA. In 2018 in the first quarter we did not but for 2019 in conjunction with Celeste going to her new role, we've already secured a couple of events in conjunction with the Super Bowl. They won't be as big as the $1.9 million that we had in 2017 but we’ll probably recover about 25% to 30% of that business in 2019, and as we go forward we will continue to build off that base and hopefully continue to build that Super Bowl time of the year business. The other good stuff about the Super Bowl this year it’s in Atlanta where we do have a restaurant with a great catering or I should say with great event facility. So we should be able to take advantage of the Super Bowl event because it's in one of our core market. So we’re super excited about that and then with Celeste in her new role in addition to the Super Bowl there will be opportunities to grow a lot of other sporting events and she is out there currently already heavily marketing the addition of those events. So we’re super excited about her taking that role and all the potential that we can see in that type of business for us.

And then as far as the numerous license deals that we've added and will be having for example in the Middle East and then Mexico City for example let's say the two stores in Dubai and then Mexico City. What type of stores are they, are they in the $5 million range or are these significantly higher pushing 10 million and I know each one is different you can give me some color there, so I can model out what type of a royalty we would perceive that would be helpful?

So right now in our plan for next year, we have restaurant from [Polanco], Mexico City. We have Puerto Rico, we have Abu Dhabi in that class and those are all license units. We expect those to be probably in the $5 million to $6 million range in addition to that we got one management deal restaurant maybe two which is Dallas and maybe one in Vancouver, Canada. We expect those management deal restaurants to be around probably the $6 million to $8 million revenue range. And then we have our STK, Nashville which we think will be in that $5 million to $6 million range and that’s going to be company owned store. So hope that helps you kind of the ranges of and again the license deal we always tend to get at least $5 million to $6 million on the revenue side. And then the management deals because a lot of them will be in hotels and we tend to get a much higher volumes than we would get some of the license deals.

But what category does Mexico City I mean it’s a huge city but then again I guess the demographics are not like New York City what kind of bracket do you think Mexico City is in?

I think Mexico City is in a $5 million range for revenue store and our licensor.

Here is my last question Manny, it were adding these nice deals nice pipeline but when I look at a managed deal obviously there is only one Las Vegas but it’s almost like 12 license deals is the equivalent of one really good managed deal perhaps it might even be up to 15 or 20. Are there opportunities out there globally for larger managed deals that could really move the needle, I mean at the high level can you speak to that?

I do think as I mentioned even on the 2019 plan if you look at that particular year, we’re looking about two out of the deals that we have already being management deals. So to your point as we will try to skew as not as many of those management deals as possible as you know those are also asset live so they definitely within our asset live strategy of license only. So to the degree that they are available and people are interested in doing the management deals, we obviously prefer those because we get to get the royalty stream out of those if you will on the license side and we also get control of the brand because we actually managing the property and we feel lot more comfortable with those type of deals. Keeping in mind that you know license deals are really only available for people who have deep experience in restaurants. So we're looking for people who have 14, 15 other type of restaurants and fine dining. So either way I think we protect the brand that way by having really expert operators on the license side, but then on the other side where people may want to have only or two STKs and they won’t other Russian experience would probably would like to do those with a management deal. So yes there is tremendous amount of opportunity and as we work deals out today we tend to be prefer to try to skew towards the management deal.

Okay. You know what, I'm sorry because I said that was my last question. I have got a couple of like housekeeping questions for Linda. During the quarter - could you tell me what was cash flow from operations for the quarter and CapEx I am trying to come up with a free cash flow number because the Q wasn’t filed yet?

That going to be filed - operating cash in the quarter is $1.1 million and our CapEx for the period is $1.3 million.

So we paid down debt so that was really from working capital that we’re able to reduce debt?

Yes, it is correct keeping in mind our third quarters is our slowest cash quarter, the fourth quarter as you know will be our real cash making quarter as well as the first and second quarter.

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to Manny Hilario for closing remarks.

Thank you all for participating in our conference call today. It was exciting to talk to you about our third quarter and to update our 2018 guidance as well as long-term preliminary 2019 guidance. We always appreciate your interest in The ONE Group and Linda and I are really excited to see you all in our venue. So thank you very much and I’ll turn it back over to you operator.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.