The ONE Group Hospitality, Inc. (STKS) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to The ONE Group Hospitality’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Tyler Loy. Thank you. Please begin.

Thank you, operator, and good afternoon. 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 opinions 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 of the risks that could impact our future operating results and financial conditions. 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, Tyler. And we appreciate everyone’s continued interest in The ONE Group. I’m pleased to report the strong momentum we experienced in 2018 continue into 2019. For the first quarter, we reported an increase in total revenues of 16.7%, including an 8.6% increase in domestic same-store sales against a challenging comparison of 7.2%. This resulted in a two-year comp of 15.9%. Most of this growth is generated through increases in traffic and mix and a modest price increase in January. We then leveraged our exceptional top line growth into a 210 basis point increase in owned restaurant level possibility and an industry-leading nearly 50% increase in adjusted EBITDA. These outstanding results continue to validate the success of our four key strategic initiatives, which we will continue to execute again throughout this year. Number one, driving same store sales. Growing same store sales across all of our restaurants is critical to the health and strength of our business. Managing inflationary cost pressures and increasing profitability. Our focus has been and remains on ensuring that each guest has an exceptional and differentiated vibe dining experience characterized by elevated food offerings, premium menu items and unique seasonal handcrafted cocktails. This way, they are able to leave our restaurants with great memories of their night out. The goodwill that will cultivate with our guests through all of our restaurants touch points not only ensures that they have frequent STK options whether for lunch, happy-hour dinner or off-peak periods but that they also share positive feedback with followers of their social networks. This last point is a critical element of our marketing efforts because we know that digital word of mouth and great Instagramable moments plays such a significant role in driving guests into our restaurants. Building off from momentum from the fourth quarter, our high-margin event business perform at a healthy pace as we leveraged a lot of the hard work that we completed in 2018 in centralizing our event sales leadership and refining the event business model. Our unique dining experiences are perfectly suited for events or group dining and we intend to continue capitalizing on this great opportunity going forward. Number two, improving operational efficiency in our restaurants. Next, we continue to identify areas within our four walls where we can drive operational efficiencies without negatively impacting our vibe dining experience. These efforts resulted in an impressive 210 basis points improvement in owned restaurant margins during the first quarter, and we are still early in the process of our margin expansion program as we will benefit from our growing economies of scale. Examples include manual optimization, better negotiating with our service contract and improved labor scheduling. Our turnover rate also remained considerably lower in the industry because of our focus on maintaining employees and also our service benefit from our restaurant side volumes, which in turn creates fantastic income opportunity for them. It also helps reduce new staff training costs and ensures a better and consistent guest experience through continuity of employment. Number three, reducing G&A at the corporate level. Reducing G&A at the corporate level represents another area of opportunity where we have, and we’ll continue to make headway through our focus on best practices and cost-saving measures. G&A declined 410 basis points to 11.6% of total revenues in the first quarter, and adjusted for stock-based compensation, G&A decreased 320 basis points to 10.8% of total revenues. We have achieved G&A leverage in part due to increase in revenues, while reducing headcount, hiring better and changing to lower-cost outside vendors and service providers. We also expect G&A to further leverage as we continue to scale. Additionally, we consolidated our New York office occupying half the space we previously used and moved several employees to our lower-cost Denver, Colorado office. Going forward, we expect G&A to be less than 10% of total GAAP revenues, excluding stock-based compensation on an annual basis, a significant decrease from our historical performance. Number four, focusing on asset-light growth. Finally, we continue to focus our development growth on high-margin asset-light deals. We have a very robust pipeline of managed and licensed STK restaurants as well as F&B opportunities ahead of us. Driving this demand is our core competency and ability of creating unique guest dining and hospitality experiences in our venues. During the first quarter of 2019, we opened one international licensed STK in Doha at the newly renovated Ritz-Carlton Hotel. And in March, we opened a company-owned STK in Nashville, Tennessee in the Gulch neighborhood between Music Row and Downtown. While still very early, we are encouraged to see initial success these restaurants are demonstrating. In the second half of 2019, we plan to open an additional two to four STK restaurants. This includes licensed STK locations in Puerto Rico and Guadalajara, Mexico and a managed STK location in Scottsdale, Arizona. We’ll also add one to two food and beverage menus, including a managed F&B location in Florence, Italy. If you look into our longer-term pipeline, we have a tremendous amount of projects that we are working on for 2020 and 2021. We continue expanding our company and our STK brand. With the right team, right-sized cost structure and strong operational performance at the restaurant level, we are continuing growth mode as we are in the early stages of capturing our global opportunities. We are committed to leverage our STK brand strength, expanding our presence both domestically and internationally. We believe there is a global addressable market for at least 200 locations across over 75 major metropolitan areas around the globe, including company-owned STKs, licensed STKs and managed F&B in STK locations. This represents an excess of $1 billion system-wide food and beverage revenue opportunity. With that, I would like to turn the call back to Tyler. Tyler?

Thank you, Manny. For the first quarter ended March 31, 2019, total GAAP revenues were $22.8 million, representing a 16.7% increase from the comparable quarter last year. As Manny mentioned earlier, same store sales at owned and managed STK restaurants rose 8.6%. Included in our total revenues for the first quarter of 2019 is our owned restaurant net revenue of $17.8 million, which increased approximately 18.2% compared to $15.1 million in the first quarter of 2018. The increase was primarily due to an increase of 10.4% in same store sales for domestic company-owned STK restaurants coupled with the opening of STK San Diego in July 2018. Management, license and incentive fee revenues increased approximately 10.1% to $2.7 million in the first quarter of 2019 compared to $2.4 million in the first quarter of 2018. The increase was driven by the launch of the licensed STK Dubai Downtown in July 2018, STK Mexico in August 2018 and STK Doha in January 2019, coupled with an increase in performance at existing locations. Owned food, beverage and other net revenues increased 13.4% to $2.3 million in the first quarter of 2019 from $2 million in the first quarter of 2018. The increase was primarily related to the Super Bowl event held in Atlanta in January 2019. We did not host the Super Bowl event in 2018. Owned restaurant cost of sales as a percentage of owned restaurant net revenues decreased 120 basis points to 25.6% in the first quarter of 2019 compared to 26.8% in the comparable quarter last year. The year-over-year decrease was due to cost savings initiatives put in place at the restaurant level across company-owned units coupled with selective price increases that we look at the beginning of the year. This was partially offset by the opening of STK San Diego, and to a lesser extent, STK Nashville. We typically run higher costs for the first six months to nine months of a restaurant opening. Owned restaurant operating expenses as a percentage of owned restaurant net revenues decreased approximately 90 basis points to 61.3% in the first quarter of 2019 compared to 62.2% in the first quarter of 2018. This decrease is due 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 and STK Nashville. On a total reported basis, general and administrative expenses, including stock-based compensation, for the first quarter of 2019 decreased to $2.7 million. As a percentage of total revenues, general and administrative expenses decreased 410 basis points to 11.6% of total revenue. This 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 less than 10% of GAAP revenue, excluding non-cash stock-based compensation. This is further improvement over our historical performance of 11.5% in 2018, 13.6% in 2017 and 14.2% in 2016. When adjusting for stock-based compensation, adjusted general and administrative costs decreased to $2.5 million in the first quarter. As a percentage of revenues, however, general and administrative expenses decreased 320 basis points to 10.8% of total revenues. In absolute dollars, our G&A in the first quarter tends to be higher than the average quarter because of the costs associated with our annual audit. Restaurant preopening costs for the first quarter of 2019 were $482,000, an increase of $272,000 from the $210,000 incurred in the first quarter of 2018. This increase was related to the timing of the opening of STK Nashville and includes approximately $80,000 of non-cash rent. We are pleased that Nashville is the first ever company-owned restaurant that we opened with less than $500,000 spent in preopening expenses. Interest expense net of interest income was approximately $269,000 in the first quarter of 2019 compared to $318,000 in the first quarter of the prior year, reflecting lower outstanding debt balances. Note that our total outstanding debt, current and long-term, is now approximately $9.6 million compared to total debt outstanding of $12.6 million at the end of March 2018. Income tax expense for the first quarter of 2019 was approximately $96,000 compared to an income tax expense of $25,000 for the first quarter of 2018. For the first quarter of 2019, net income attributable to The ONE Group Hospitality, Inc., was $854,000 or $0.03 income per share compared to $231,000 in 2018 or $0.01 income per share. Adjusted EBITDA attributable to The ONE Group for the first quarter was $2.7 million, an increase of 50% over the prior year adjusted EBITDA of $1.8 million. We have included, as we have in the past, a reconciliation of adjusted EBITDA to GAAP net income from continuing operations and GAAP revenue to total food and beverage sales at owned and managed properties in the tables in the first quarter earnings release. Now I would like to provide some forward-looking commentary on our business. This commentary is subject to risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We always remind our investors the actual numbers and timing of new restaurant openings for any given period is subject to a number of factors outside the company’s control, including weather conditions and factors under control of the landlord, contractors, license fees and regulatory and licensing authorities. Based on the information available now and the expectations as of today, we are reiterating the following financial targets for 2019. Beginning with top line, we project our total GAAP revenues to be between $93 million and $95 million. We estimate that total food and beverage sales at our owned and managed units will be between $190 million and $200 million. We expect same store sales for the year to grow at approximately 3% to 4%. And as a reminder, we’re lapping very strong comparison from 2018, both in the quarter just reported and for the balance of the year. We estimate total food and beverage costs to be approximately 25% to 26%. Approximately 50% of our beat is under contract and the current estimate is based on negotiations with suppliers coupled with current and expected marketing conditions concerning fresh and other commodity items that we are either unable or currently elected not to contract for longer periods of time. Total annual G&A, excluding stock-based compensation of approximately $8 million were less than 10% of GAAP revenue. We’re expecting adjusted EBITDA of $13 million, which will represent an approximate 25% growth compared to 2018. Total capital expenditures, net of allowances received from landlords of approximately $3 million to $4 million. And finally, three to five 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, Tyler. 2019 is certainly off to a strong start, and I thank our ONE Group team for their contributions to making everything that we do possible on behalf of our guests and shareholders. This is an exciting time for our company with strengthening financial results along with a tremendous opportunity for expansion of the STK brand around the world. Thank you, team, and thank you all for joining us on the call today. Tyler and myself are happy to answer any questions that you may have. Operator?

[Operator Instructions] And we will take our first question from Chris Krueger. Your line is open.

Good afternoon, and congratulations on another good quarter.

Thanks, Chris.

Yes, I think you’re there. You talked about the national location hosting NFL draft-related events. I think I asked this on the last call. But are there any other upcoming events at any of your locations with the big crowds expected like that?

So the answer is, yes. I mean, as you know, we’re very active in the event business. So coming up soon, we’re doing some big events related with the ESPYs, which is the ESPN awards and then we have some additional activities going on in our L.A. restaurant, lot of movie premieres that will be utilizing the facility for events. So the answer is yes. We always have a very active pipeline of big events happening in the system. So those are the two ones that come to my mind right now.

Okay. Maybe you guys get favorable comments on new restaurants. If you’re looking at some of these foreign – international ones, like Mexico, Dubai and Doha, how are they performing, like, relative to initial expectations? Or how should we think about that?

So I’m – we’re pleased with the performance of all of them. We’re super-thrilled with Doha. Doha has actually been pleasantly surprise to us that’s a license deal with a very strong operator. And it’s at the remodeled Ritz-Carlton Hotel. So we really appreciate the strong performance that can really parlay into future deals with Ritz-Carlton because of the reputation effect that is doing really well. So we couldn’t be more happy with that one. And then as you mentioned earlier, both San Diego – between the restaurant and the rooftop and Nashville, have been incredible restaurants for us so far. So I would knock on the wood and say that track record on the new restaurants has been fantastic. And also, I think Tyler mentioned this in his prepared comments. We opened Nashville for less than $500,000 in preopening expenses. So we not are we getting success on high-quality sites, we’re also managing the preopening cycle and just bringing the restaurants up. And we said we’re going to open Nashville March 15. We opened Nashville on March 15. So everything is going well, both the selection of the sites. I think the budget and cost is going very well. And just in general, our ability to now deliver on sites on time.

Okay. You talked about potentially opening one or two food and beverage locations. Do you have specific targets that are signed under contract that you’re opening? Or it’s kind of a pipeline you’ve got to get to the stage yet?

Yes. So the lead time on F&B relative to contract to actual open is a little different than from a typical restaurant. So it’s not as important that a deal be signed a year earlier because of the – a lot of times, these things are really under construction. So the F&Bs that we are guiding to, these are all deals that we feel very comfortable will come to light this year. So I think the one that we speak the most of it is Florence, Italy. I think we just made a strong progress on that one the last couple of days. It’s under construction. So I feel pretty good that we will get that one in there. And we’re also working actively in some UK opportunities. So I would say that we will get one deal in F&B for sure. And as we guided, maybe two.

Great. Sounds good. Just last question. In general, would you say your management team is in place, you got all the key people you need?

I mean, I’m going to give you a very biased answer. I think I have one of the best teams in the industry today. All the way from – I mean, my operating team is just unbelievable from the senior VP position all the way through every single team member in the restaurants. I think we really put some strength there. We’ve also done a lot of work around building up our training capabilities. And so I’d say that from a human capital perspective, the team is – has come together. And I look forward to continue to have some great results for team I have in place right now.

All right. That’s all I got. Again, congratulations on the quarter.

Thank you, Chris [Indiscernible]

Yes.

[Operator Instructions] We will go next to David Cannon.

Hi. Manny, congratulations to you and your team, excellent job. So couple of questions. First one is the preopening expenses for Nashville. Were they excluded from the EBITDA number? Or is that inclusive of it?

So our adjusted EBITDA, we – as a matter of fact, we reduced – I wish to exclude it out. So it’s a add back to EBITDA. So it’s excluding that expense from.

Okay. And then can you speak to, like, some of the license deals over the last year, for example, Doha, Dubai, Mexico City. What kind of AUVs will these locations do? Or what’s your expectation?

I mean, I think, generally, as we – I mean, we’ve spoken about this several times relative to license sites. Obviously, our starting point is $5 million in revenues, that’s kind of entry level of what we think we can do. But again, some of them could be $4 million, some of them maybe $6 million. I think overall, the aggregate is that our expectation of bringing in a $5 million top line and with the 5% license fee that brings in a minimum of $250,000 in profit to the company. So that’s our initial target. Some of the locations we’ve done have been way over $5 million. Some other ones have been around $4 million to $5 million range. So in general, that’s how we measure when – and I say when we’re satisfied with the performance of those sites, that’s what we’re talking about. That $5 million – either slightly above or slightly below that $5 million range.

Okay. And then as far as your – some of the commentary on driving down corporate G&A to 10%. So do you expect – is that mostly from the growth of the business that as a percentage it’s going to come down? Or will it actually come down in dollars? Or are we at the dollar level right now that we need to be at?

Yes. I think historically, we’ve talked about dollars, and we continue to manage it internally as dollars. But I just also want to put it in perspective that the productivity of our G&A is at an all-time high. So although we keep talking about dollars and how much dollars we’ve taken out, which is absolutely true, I think the bigger headline is that if you look at our history of G&A, and I think Tyler went through it on his prepared comments, is we substantially have deleveraged and getting a lot more productive on G&A. So I’m super pleased with the fact that we’ve been able to take tremendous amount of head counts out of the business model as well as get out structural costs, like rents and shift to lower-cost vendors. So we’ve done a lot of rework around the G&A structure. So I think we’re doing very well in managing the dollars. And I also think if you look at from a productivity relative to what you’re actually getting from revenues and number of sites, we are at an all-time productive level in our G&A, and I’m super pleased with that. As I mentioned, everyone, I want to talk about G&A, our strategy is to go on quantity versus quality of resourcing. So you’ll see us really talking about how we have great people on board who are super-talented in terms of being able to multitask and do multiple types of responsibilities. So it’s really about the productivity of G&A, that’s how – why we added the percentage metric to our guided number.

Okay. Well, I mean, clearly, you’ve done a great job of creating leverage in your financial model and driving down restaurant level and corporate G&A. So at the levels we’re at now, roughly, let’s call it $8 million-ish run rate, excluding non-cash. How many – we have approximately 20 locations, correct? So how many – how much capacity do you have right now with your team? What – before you start growing G&A again, how many locations do you think you can sale to from looking out two, three years?

I mean, the way we model internally, we look at four or five restaurants per head count add. So consider we have around mid-30 people right now, call it, 35 G&A, head counts on board for every new five restaurants that we bring on board, we’ll probably add one head count to it. And that’s just a head count to support the operational side of it in terms of going out for site visits. And again – and also support the developer side of it, making sure that we have people helping our license fees, on site selection, other matters. So I think 5:1 is probably the right ratio.

Okay. I’m going to jump back into queue, but just one final question. On the F&B deals, you’ve alluded to the UK and Florence. Can you sketch out for me what kind of financial impact they have in comparison to these license deals? Like the $5 million license deal, you said it’s about $0.25 million a year in royalty. How much impact do you expect those deals to contribute? And what’s sort of the average, if you will?

Yes. So I think on the F&B-managed sites, we’ll get to the 5% standard management fee and then we will get a share of the profitability of the site. So, let’s call it, $6 million F&B deal, we can get to $300,000 from the percentage management fees. We’ll probably can get another $300,000 to $0.5 million in profit share with that property. So the F&B-managed deals, if we get them right property with the right volumes, we can do lots of profit out of one single deal there.

Wow. Okay, well. Congratulations, thank you for your hard work and I look forward to the next earnings report.

Thank you.

[Operator Instructions] At this time, there are no additional questions. I’d like to turn the program back to Manny Hilario for any closing remarks.

Thank you. I’d like to thank everyone for their interest on The ONE Group, and I also would like to recognize the teammates in the company who’ve done an incredible job of driving performance for the company. So as I mentioned earlier, we’re super-proud and happy of what the team has achieved. And we look forward to continue our journey here. So we appreciate everyone’s interest, and see you all in our restaurants. Thank you.

Thank you for your participation. This does conclude today’s program. You may disconnect at any time.