The ONE Group Hospitality, Inc. (STKS) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the ONE Group First Quarter 2020 Earnings Conference Call. As reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Tyler Loy, the Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon. Before we begin our formal remarks, we remind you that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and 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 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 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 the 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 manage and license unit to GAAP measures, along with a discussion of why we consider these measures useful, please 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 hello everyone. We appreciate your continued interest in The ONE Group. I wanted to briefly discuss what we have accomplished over the past few weeks in light of COVID-19 and then provide an update on our recent restaurant re-openings, as well as our near-term plans for additional re-openings as their lockdown measures are lifted. To be clear, it's our intention to reopen restaurants as soon as we are permitted to do so, based upon state and local ordinance and to follow strict guidelines and protocols at our restaurants that above all ensure the safety of our team and guests. As you know from our previous conference call, COVID-19 required us to make immediate and unprecedented actions over the last two weeks of March, including very difficult and heart wrenching decisions to reduce our workforce significantly and output our restaurants exclusively using takeout and delivery options where possible. Transitioning to a takeout and delivery model preserve the opportunity to continue reaching guests in markets throughout the country and keeping our operations leadership engage and was only possible through the amazing work by our front line restaurant team. We have improved our delivery model, including onboarding a service called Ordermark that aggregates our third-party delivery orders into one tablet and perma [ph] while simultaneously making our options available throughout nine suffered delivery service providers. This has enabled us to establish protocols for integrated operations. Notably, during April we averaged $380,000 in weekly sales for pickup on delivery service and each grew sequentially one and a half times from the first week to the last week of the month. Our team has certainly done an incredible job and I want to publicly recognize and thank them for their efforts. Let me add that it's encouraging we are to see our takeout and delivery sales growing week-over-week in the near-term. We are even more excited to what this means to us in creating a long term additive layer to the business. In short [ph] by executing this incremental sales channels, we are building core competencies in operations and marketing that did not previously exist. Therefore we should expect to keep these channels growing even as our dining rooms re-open. I will discuss this topic in more detail shortly. During the first quarter, we took other measures to preserve cash, including halting all capital expenditures and putting on hold any unfinished restaurants in development. All of our remaining active corporate employees and executives elected to receive a salary reduction of at least 25%. We also deferred cash bonus payments to our corporate administrative staff based on our 2019 performance. Our executive team elected to take all of their 2019 incentive compensation in the form of equity and our non-employee directors have also elected to take 100% of their 2020 compensation in the form of company equity. These actions demonstrate great support by our employees, our executive team and our board in the One Group's fundamental long term potential and value of the company. We have worked with our vendors and have reached agreements with a majority of them, including all mission-critical food vendors for deferred payments over a 13 week to 26 week timeframe. We have further reached out to local utilities to arrange for any and all relief available to us. With regards to our lease arrangements, 85% of our leases are in a favorable position and we are actively working with and communicating with landlords on additional support during these challenging times. As a reminder, we only have lease guarantees on four of our restaurants, with only one exceeding three years. And we purchased all 24 Kona Grill restaurants with that any lease guarantees. We have deferred lease payments at many of our locations in April, May and June. From a marketing standpoint, we are utilizing STKs friends with benefits database of over 1.5 million subscribers to deploy multiple email marketing campaigns promoting our takeout and delivery capabilities and have leveraged our social media presence across key platforms with targeted social media advertising creators. We have also placed various pieces of signage in front of our restaurants, including A Frame's, large banners, window clings, streets and billboard signs to educate people of our takeout and delivery capabilities as they pass by. Our Take-Out Menu that features signature appetizers, entrees and sides, as well as the STK@Home meal kit with dinner for two or dinner for four options that includes everything needed to bring the vibe dining steakhouse experience right to your home kitchen. Popular Dineout at STK include, the Surf & Turf and Wine and the 999 Wagyu Burger. We have completed our food and beverage offerings by enabling consumers to hear our SDK music program on Spotify which features six playlists of life sets from STK steakhouses around the globe. We have also recently launched the STK Meat Market, an e-commerce platform that allows customers to purchase a wide array of signature Choice, Prime, and Waygu steak cuts for home delivery nationwide. This convenience comes with a great value with an average stake in a $25 to $30 range and delivery costs that are very reasonable for two and three day delivery. Turning to Kona Grill. We employed the same operational playbook as we did with STK. This has included utilizing the Kona [ph] for loyalty program which has over 300,000 subscribers to deploy multiple email marketing campaigns, promoting takeout delivery, launching its own Kona Grill radio station on Spotify, the highlights Kona Grill music, including curated, life Fiji set [ph] on Instagram WIRED. We have also marketed curbside margaritas and take out [indiscernible] online ordering on delivery at its own Surf, Turf and Wine for Kona Grill. In terms of business continuity, as I said earlier, our intention is to reopen for in restaurant dining as soon as local jurisdictions permit. Through now, we have already reopened 11 dining rooms and we plan to open another five today, bringing the total to 16 open dining rooms by the end of the day. Everywhere we are following all health, safety and social distancing guidelines and requirements from the CDC, federal and local authorities. In fact, we have put together a very detailed manual as to how we are going to successfully resume operations and welcome guests back to our dining rooms, while ensuring that we address our number one concern, the health and safety of our employees and guests. We are so far encouraged by the dining sales being generated at our reopen restaurants and have welcomed our guests back inside with exceptional food, service and ambiance. We expect to reopen another five to 10 dining rooms in the upcoming two weeks, but beyond that cannot feasibly predict when we'll be able to reopen other closed restaurants and return to normal dining room operations. Our team has certainly proven how strong and resilient they are to these trying times and also how welcoming they can be to the guests who have already returned to our restaurants for a great meal out. Thank you all so much for standing by us and for takeout delivery and STK to meet market orders. We look forward to serving all of you in person as soon as that is feasible. Now, I will turn the call back over to Tyler.

Thank you, Manny. While Manny discussed some of the steps we have taken with respect to cost cutting and capital deferments, I thought I would begin by addressing our current cash and liquidity before we reviewing the first quarter highlights in greater detail. First, as of March 31 we had $8.2 million in cash and cash equivalents and $45.1 million in net long-term debt. Turning now to our financials, for the first quarter ended March 31 2020, total GAAP revenues were $40.7 million, representing a 78.8% increase from $22.8 million for the comparable quarter last year. Included in our total revenues for the first quarter of 2020 is our owned restaurant net revenues of $38.6 million, which increased approximately 92% compared to $20.1 million in the first quarter of 2019. The increase was due to approximately $20.7 million in sales contributions from Kona Grill. This was partially offset by temporary closures and limited operations of our restaurants beginning in March due to COVID-19. Domestic consolidated comparable sales decreased 14.1%. Through February, the increase in comparable sales was 10%, and March decreased 55.9% due to COVID-19. At STK comparable sales decreased 12.8%, through February the increase in comparable sales was 11.4%, and March decreased to 58.1%. At Kona Grill comparable sales decreased 15.5%, through February the increase in comparable sales was 8.4% and March decreased 53.7%. Management, license and incentive fee revenues decreased 19.4% to $2.2 million in the first quarter of 2020. Management, licensee fee revenue decreased primarily as a result of lower sales within our International managed locations in the United Kingdom and Italy related to temporary closures due to COVID-19 prevention measures. Owned restaurant cost of sales as a percentage of owned restaurant - net revenue increased approximately 120 basis point to 26.2% in the first quarter of 2020 compared to 25% in the comparable quarter of last year. The year over year increase was primarily due to the addition of Kona Grill restaurants which have a slightly higher cost of sale than the STK brand restaurant. Owned restaurant operating expenses as a percentage of owned restaurant net revenues increased approximately 540 basis points to 68.7% in the first quarter of 2020 compared to 63.3% in the first quarter of 2019. The increase was driven by the comparable sales decreases due to COVID-19 coupled with no decreases in fixed cost. On a total reported basis general and administrative including stock-based compensation for the first quarter of 2020 was of $3.4 million compared $2.7 million in the prior year. As a percentage of total revenue, general and administrative expenses decreased 330 basis points to 8.3% of total revenues. In March 2020 as a result of COVID-19, we implemented measures to reduce our costs, including significant reduction in employees and reduction of third-party professional services. When adjusting for stock-based compensation, adjusted general and administrative expenses were $3.1 million in the first quarter. As a percentage of revenues, adjusted general and administrative expenses decreased 330 basis points to 7.5% of total revenues. We incurred $1.1 million of integration costs during the first quarter related to our acquisition of Kona Grill for which there were no comparable expenses in the prior year. This amount reflects our final integration costs related to this transaction. We incurred approximately $1.3 million of direct costs related to COVID-19 during the first quarter. Included in this line item are primarily payments to employees for paid time-off during restaurant closures, inventory waste and rent and rent related costs were closed and limited operations restaurants from the day to the dining room closed. There were no restaurant pre-opening costs in the first quarter of 2020 and $482,000 in the first quarter of 2019 which was related to the STK Nashville opening in March 2019. Interest expense, net interest income was $1.2 million in the first quarter of 2020 compared to $269,000 in the same quarter of the prior year. Income tax benefit was $653,000 for the first quarter of 2020 compared to income tax of $96,000 for the first quarter of 2019. Net loss attributable to The ONE Group Hospitality Inc with $4.6 million or $0.16 net loss per share compared to net income of $854,000 in the first quarter of 2019 or $0.03 net income per share. Adjusted EBITDA attributable to The ONE Group for the first quarter was $1.6 million compared to the prior year adjusted EBITDA of $2.7 million, representing a year over year decrease of 41.4%. We have included as we have in the past a reconciliation of adjusted EBITDA to GAAP net income from continuing operations and GAAP revenue with the total food and beverage sale and owned and managed properties in the tables in the first quarter earnings release. As a reminder, due to this unprecedented market condition, we cannot reasonably estimate when our guidance will return fully in normal operation and therefore suspended all financial guidance for 2020 back in March. We do however intend to provide further business updates as the situation evolved and we can begin resuming dining restaurant operations in the coming weeks and months. Lastly each of our STK Restaurant Group and Kona Grill restaurant group applied and were approved for Paycheck Protection Plan loans. These loans are for a total of $18.3 million in the aggregate. We have accepted these loans because it positions us to bring back our employees in this very uncertain macro environment. Our management team and our board explored many alternative and sources of liquidity. As a microcap company, we don't have substantial market cap and have limited or no access to other sources of capital. We firmly believe that the economic uncertainty related to COVID-19 makes receiving this loan necessary to bring back our employees and frees up other funds to invest in providing the greatest level of safety in our restaurants for our team and our guests in this uncertain environment. I will now turn the call back over to Manny.

Thank you, Tyler. Let me conclude by expressing again how appreciative we are to our team for their dedication and resourcefulness in evolving our business in the near term to take out delivery in e-commerce. And for all their hard work and most importantly in preparing our restaurants to reopen. And to our valued guests who have enjoyed STK and Kona Grill at home these past few weeks, we look forward to serving you again in person soon. Above all, I think we have made clear how we intend to get through these unusual and difficult times and will ultimately be stronger for it. Thank you all for joining us on the call today. Tyler and I are happy to answer any questions that you may have. Operator?

[Operator Instructions] Our first question comes from Nicole Miller with Piper Sandler. Please go ahead.

Thank you and good morning. We appreciate the update. I want to drill down on the two concepts. So of the stores that are opened are any STKs. And what are the capacity plans so far. Like, how many tables do you put down and what's the service model, maybe in terms of the menu? And then how do we compare and contrast that to demand expectations where STK might be a little bit more tied to [ph] corporate versus leisure? Thanks.

Thanks, Nicole. And relative to the mix of restaurants, right now we do have STK Atlanta that is opened and we're opening STK Nashville today, so there'll be two STKs operating as of the end of day today and then we will have 14 Kona Grills operating, obviously because of our footprint now includes Kona Grills which is a more suburban concepts, a lot of the openings have been in those particular type of markets. In capacity we have everything from you know, Texas with a 25% capacity available now to Atlanta where you can put 10 people per 500 square feet. So and - we have some places where we can do 50% capacity. So what we've done is in particular for STKs we can't use the bar for aggregation purposes, so we've kind of shifted the shape of our dining rooms for that and we've moved tables against the bar area to create additional space and provide spacing in the restaurants. All of the properties we're following social distancing. So everything is six feet apart. So there has been some changes you know, obviously to the seating configuration of the spaces. Some jurisdictions were allowed to have only six people on tables. So we've taken all that into consideration and basically has – have reshaped all of our dining rooms. We've already planned that out based on early guidance for all restaurants, but as we get closer to the actual openings we will continue, reconfigure. In terms of operations, I'm pretty sure as you've been hearing out there, it's a new dining world. So employees have to wear masks. We're not letting people coming to the posts and we're actually stacking the guests outside of the restaurant and inviting them in so that we don't have an obligation in the front of the restaurant. We have full time sanitation and cleaning positions in the restaurants. In terms of menus, they're all disposable, so we don't have the heart packed [ph] menus as you typically would see on STK. And then the menus are limited. We give the restaurants about a week or two weeks with a limited menu. And then as we get more experience in the new operating model, we bring the full menu back into play. So it's a very comprehensive new operating plan. Every one of our restaurants has a 12 to 14 page operating manual with all these new procedures and we've been retraining our managers and our staff to go through it. The good news is because we decided to do get out and delivery everywhere we left the GM and the executive chef in place and every one of our facilities, so coming back up is a pretty quick turnaround because we have the key individuals in each one of our restaurants I'll leave it at that, I could go on for about another half an hour describing the new offering model…

It is very intense and very dynamic. But those are helpful points and clearly are aligned with most of the peers in the industry. I'm thinking about STKs and Kona in terms of okay, we can open the door doors, but what kind of consumer demand could be expected. And so when I think about STK, maybe that's a little bit more corporate. Would that be slower for any reason in Kona, I mean you have more of them open and clearly understandably it's on the days. So I don't want to call it a you know, a trend or a pattern, but I'm assuming that's more like leisure led and that whatever capacity you're opening to you're probably seeing demand at those capacity levels. Could you just walk through that side of the equation a little bit please?

Sure. So we're obviously early. We don't have you know volumes of data because we've just started operations recently. But it is what we've seen. I mean, obviously as I mentioned earlier the suburban restaurants, we've opened up Summerlin in Nevada. And frankly we had challenges taking all the customers who wanted to comment. So the demand was very strong in the markets for a lot of reasons. But we saw lots of demand on suburban and other social occasions. In the urban markets we have obviously Atlanta is our first restaurant that opened up and we also have noticed that you know, Friday, Saturday and Sunday the demand is very strong on those properties. So we've certainly seen that. Obviously Monday, Tuesday and Wednesday and the plant has been a little bit slower just because as you mentioned there - there is no business travel happening right now. So our expectation is that in markets where there is more exposure to business travel, we'll see a much longer term recovery of the time since we're covering those markets, we're expecting it to be much far into the future until travelers start traveling again. The reality though as you may recall part of our strategy over the last two years and you've probably heard us talk about this a lot is that, we went out of our way to diversify from being a business only type of restaurant. So you know, we really focused on special occasions. We spent at least - we focused on holidays, so we really went out of our way to have a lot more than just exposure to the business traveler. So obviously we'll be impacted, but I think over time having had strategy that invested our portfolio from business travel to more social occasions, I think we'll benefit from it now on the on the new - if you will, on the new world and new business model. So that's kind of been our strategy. And again we've also introduced a lot of price points that are value oriented. We've always had obviously our happy hour, which is also intended to bring in value. We also have introduced some lower price point items to support the delivered business. So I do think that we are about as well-positioned today as we can be for bringing as many customers as possible into the STKs.

Thank you.

Our next question comes from Mark Smith with Lake Street Capital Markets. Please go ahead.

Hi, guys. First off, just kind of housekeeping item. Tyler, the lease termination expense that you guys took was that on a potentially future open restaurant or did we have any changes on anything that was permanently closed?

Yeah, Mark. This is not some future restaurant. This is from you know, previous leases that were just you know, still having to do some work on.

Okay. Perfect. And then as we look at the PPP loan and bringing employees back, can you guys talk about, and I know that it's still early, but any constraints or issues and willingness of employees to come back to work at this point?

I mean, so Mark, this is Manny. I would say that we are facing a very interesting economic environment now because many of the employees that are furloughed now are making more money with the unemployment program, particularly with the additional $600 federal program so. So the challenge has been that for some you know, hourly positions like hostesses and other places where people might be getting some unemployment now it's you know, it's obviously a decision that the employees have to make. But I would say that though generally our hourly people in the kitchen, as well as our managers and some of our senior services as soon as we have made the call, they do make themselves available. But there is the new challenge and the new economics of having to compete with the unemployment insurance firms.

Okay. And then I think the last one for me, as we look at the 380,000 and kind of weekly sales. I just want to confirm if that is all takeout and delivery or if you had any dining rooms that opened that last week, that maybe helped bump that number a little bit higher?

I think I think April was all takeout and delivery for us.

Okay. And then maybe just one more on that, you know, was that really driven by purely consumer demand or was some of that driven by you guys, not giving more offerings as we look at food to ship to home or you know, opening up more to go and dining options or perceptually [ph] just driven by demand from consumers?

I mean, it's been demand by consumers, as a matter of fact, I think as we mentioned in our prepared demands, we saw 1.5 time increase from week one to the last week of April [indiscernible] that continues to grow. And you know, and we have some Russians doing some very interesting numbers with only delivery and takeout. So we'll continue building that layer. I think obviously in the new world group dining is going to take a while to recover. So the way we look at takeout and delivery is that we've learned a lot of very interesting and good techniques the last couple of months in that business and our plan is to fully maximize delivery and takeout because that will be an important component of our business model going forward.

Excellent. Thank you, guys, very much. Good luck.

Thank you, sir.

Our next question comes from David Cannon with Cannon Wealth Management. Please go ahead.

Good morning, guys. Thank you for your hard work. Congratulations to your team for pulling together during such challenging time. I guess, early on I believe Tyler gave a summary of same store sales by brand. I thought I heard that Kona accelerated in January, February. Could you just reiterate that for me? And then in terms of January, February the bomb was there any price there or was it primarily just traffic? A - Manny Hilario Sure. David. So yeah, so Kona Grill for the first two months David was positive 8.4% in same store sales and STK was positive 11.4% in same store sales for the first two months, obviously March, you know, March came in significantly lower, but that's you know, in terms of the pacing of the quarter that's how the quarter paced.

Okay. And then I think in Q4 Kona was up 3.9 and I'm surprised by the 8% increase for January, February, which we could retain that at this point. But I would - just out of curiosity, what were some of the drivers there, was it traffic, was it price, combination of both, any initiatives that you put in place that accelerated the same store sales at Kona in particular?

Yes. I mean, we – as a matter of fact, we have a lot of initiatives that we start off at Kona Grill. And as a matter of fact we're going to continue those initiatives. I think that the biggest initiative that we did is we reconfigure the happy hour menu to be on - the way to a position, not to be a discount center and to really be an enabler, bring people to the branch to try it. So we read at [ph] our happy hour menus. We also launched in the fourth quarter as you may recall our Margarita Heaven strategy to really promote the happy hours, well, and then on the dinner side we brought in a lot of special menu items and often such as you know, we start using a lot more the Surf and Turf featuring lots, more of steak with lobster rolls and stuff like that. So if you followed our marketing during that first quarter, we were also very intense. We really start getting organized on social media and frankly just the whole vibe of the business was elevated. We have - we launched new music program. We changed the uniforms and I think that would get a lot of very good work with the brand coming out of this timeframe. We're going to continue that. We're launching in conjunction with the reopenings our new audio menus and really putting emphasis on the next-generation of menu for Kona Grill and really emphasizing the items that are really good with the brand and we're also adding some new stuff. We are going with three steak offerings instead of just one. We added some interesting new side dishes. We've added some interesting soups and salads that go with the brand. And so we've really been reorganizing the brand and really positioning it as a great American Grill that offers sushi and has an incredible bar program with super activity and very energetic in the bar. So really lots of that started last year in the fourth quarter, we started seeing the payoff of that. In January and February, as a matter of fact we were thrilled with our February performance, lots of momentum and in particular the marketing was really thinking about branch to the next level and we plan to continue that evolution as we come out of this time period.

Great. Congratulations. Thank you.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Manny Hilario for any closing remarks.

Thank you all for your interest on The ONE Group and being here with us this morning. I want to send out a very special thanks to The ONE Group teammates and everyone who frankly have made us to continue operating in world-class matters through a very challenging time and particularly its very impressive in a time, so very special thank you again for our team. And I want everyone to stay safe and see you soon. Thank you, everyone.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.