BurgerFi International, Inc. (NASDAQ:BFI) Q2 2023 Earnings Call Transcript

BurgerFi International, Inc. (NASDAQ:BFI) Q2 2023 Earnings Call Transcript August 16, 2023

BurgerFi International, Inc. misses on earnings expectations. Reported EPS is $-0.24 EPS, expectations were $-0.21.

Operator: Good morning, everyone, and thank you for participating in today's conference call to discuss BurgerFi International's financial results for the second quarter ended July 3rd, 2023. Joining us today are newly appointed Carl Bachmann, CEO; and Chris Jones, CFO. Following their remarks, we'll open the lines for your questions. Before we begin today, I want to remind everyone that this conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be related to BurgerFi's estimates of its future business outlook, liquidity, store opening plans, same-store sales and restaurant operating margin growth plans, prospects or financial results, including projected sales, restaurant EBITDA.

Forward-looking statements generally can be identified by words such as anticipates, believes, estimates, expects, intends, plans, predicts, projects, will be, will continue, will likely result in similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause the company's actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the annual report on Form 10-K for the year ended January 2nd, 2023, and those disclosed in other documents that the company files with the Securities and Exchange Commission.

All subsequent written and oral forward-looking statements attributable to BurgerFi or persons acting on BurgerFi's behalf are expressly qualified in their entirety by the cautionary statements included in this conference call. The company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these statements and uncertainties, listeners are cautioned not to place undue reliance on such forward-looking statements. Also, the following discussion may contain non-GAAP financial measures. For a discussion and reconciliation of these non-GAAP financial measures, please see the earnings release for the second quarter 2023. I would also like to remind everyone that this call will be available via telephonic replay for two weeks starting today.

A webcast replay will also be available via the link provided in today's press release as well as on the company's website at www.burgerfi.com. Now I would like to turn the call over to BurgerFi's new CEO, Carl Bachmann. Carl, please go ahead.

Carl Bachmann: Thank you for joining us today and we appreciate your interest in BurgerFi. Let me begin by thanking our entire team, franchisees and employees for their dedication and hard work in this challenging environment. I am so excited to be here on my inaugural earnings call as the new CEO. I am also joined by Chris Jones, our newly appointed CFO. My plan this afternoon to discuss why I chose to join the company, delve into my intentions at a high level to strengthen the foundation and then discuss recent developments. Following that, Chris will review the quarterly financials in greater detail and comments on our 2023 guidance. While new to the company, I've been a long-time fan of Anthony's and BurgerFi and I'm a foody at heart.

In fact, the chef-driven focus on both brands is part of what validated my decision to assume the leadership role of this exciting organization. Anthony's and BurgerFi are both high-quality brands with strong potential ahead in my opinion. I really view this opportunity as a perfect match for my career and I could not be more thrilled to be here. My industry background spans 40-plus years and I've been involved in both fast casual and casual dining concepts during that time frame as both a franchisor and franchisee. Most recently, I spent 6.5 years with a large fast casual better burger concept serving as COO before being promoted to President. Under my leadership, the brand experienced double-digit system-wide same-store sales growth over an extended period, while significantly expanding its corporate and franchise unit footprint.

The company's second quarter performance is indicative as to why I'm here today as the new CEO, providing what I believe is a significant opportunity for investors, so much so that I invested heavily into BFI equity when I started. So I'm firmly aligned with our shareholders. With only a little over a month on the job, there is no question we can do better as the challenges both brands face are not new to the industry. To say that I've seen it all before and prevailed is not a stretch. To drive our turnaround, I'm going to be using a similar proven playbook that I executed previously at other brands. Furthermore, all decisions will be made by following what we call the 3Ws. It must be a win for the guest, a win for the team members and a win for the shareholders and franchisees.

This approach will ensure we are making the right decisions. Since joining the company on July 10th, my main priority has been meeting the teams and the franchisees while immersing myself in the restaurants to learn more about the food. I've been so excited to work the pizza oven and flip the burgers as I'm a hands-on leader. As we learn more, I'll be working with our talented teams on traffic driving initiatives as well as margin expansion. To that point, I've already mapped five strategic priorities and have already seen a change for the positive. Priority number one, infrastructure. It starts with employees. I believe we must have the best team on the field to play, and they need to develop and train them properly. Once they are on the field, you need to keep them engaged to keep them as tenured leadership in the stores and in the field is critical to our success.

I, therefore, plan to focus on robust manager development at the restaurant level, where we really need great field generals as the general managers drive the business every day. From a supportive perspective, we have adopted the rally cry. If you aren't serving the guest, you are serving someone that is. This direction will lead to world-class field support which creates a culture of winning and drive significant improvements in performance and turnover. This is relevant to our 2Q results where we have seen pressure from higher turnover. However, at BurgerFi, we've seen meaningful improvement in hourly and management turnover, now just hovering above industry benchmarks. At Anthony's, hourly turnover is better than industry benchmarks, and we are seeing improvements in management turnover.

We plan to build upon this during the remainder of the year and expect to see continued improvement in the labor line at BurgerFi stores and consolidated BurgerFi. We know our labor costs are an opportunity and we are already well on the way to fixing this. Priority two, taste and quality, which are paramount to everything we do and is why we're going to make sure we continue to have the best products and innovative LTOs. As you may recall, in February, BurgerFi launched its award-winning BBQ Rodeo Burger, which did so well that we extended the LTO and rolled it out a new patty melt version. Meanwhile, Andy's launched Mike's Hot Honey and Thick Cut Pepperoni Pizza and Mike's Hot Honey Wings, which have both been very successful. These are great achievements that we can build upon.

With both these brands, one thing that must remain sacrosanct is taste and quality. And while we have some wins, there are also things we need to fix. At BurgerFi, we have been focused on improving the products and customer experience with several initiatives expected to reach stores during the second half of 2023 and directly address the biggest challenges the brand faces today. Some of these include launching a much-needed new crispy chicken and grilled chicken sandwiches and improving the milk shakes. In both instances, we currently run below industry average in terms of contribution and combined should have a positive impact to top line. Perhaps the most important opportunity is fixing the French Fries, which currently accounts for a number of customer complaints and as simple as changing processes in the kitchen.

The bottom line is that we cannot accept performance like Q2 and are committed to driving better results for all of our stakeholders. We will also ensure that our teams are proud of the products that we serve. Priority three, defining our portfolio and understanding where we're successful and where we're struggling from a real estate, regional or market perspective and then, of course, evaluating the portfolio inside the four walls. Is the ambience right? Is the look, feel and value, right? Does the platform promote ease of execution? And how the company can best support the franchise community? Having spent much of my time speaking with our franchise partners, I know that we need to do better. I will touch on this later in my prepared remarks and is critical to both brands to accelerate unit growth.

Priority four, Gold Standards is a term that defines our pride in product, process and facility and creates brand promises. We will establish what defines each and then build our restaurant-level audit process to ensure we deliver consistently. This is how we hold our teams accountable on a daily basis. This alone should be transformational for the company, 40 days on the job, and we've already made great strides in changing this culture. Why is this important? This change will drive employee engagement and also drive efficiencies in everything we do from food cost to support costs. And finally, priority five, telling the world about the brand through intentional marketing efforts. We build our loyalty clubs and drive frequency through recognizing our loyal fans.

We will continue to drive our digital growth through our website and apps while maintaining our volumes through our third-party delivery partners. We will plan to address opportunities with a barbell approach, focusing on our award-winning products as well as creating value opportunities to help our guests fight inflation. We will punch above our weight, creating awareness and exude confidence in everything we do. A perfect example that we want to share is that for the third consecutive year, BurgerFi has earned a spot in the top three of USA TODAY 10Best Readers' Choice Awards for the coveted Best Fast Casual category. As the highest-ranked burger-related chain among the nominees, we're incredibly grateful to each and every one of you who voted for us.

While most of my comments today have been focused on the overall strategic level, I did want to spend a little more time on our development pipeline. As of July 3rd, our portfolio consisted of 174 BurgerFi restaurants, 27 corporate-owned and 87 franchised and 60 corporate-owned Anthony's. During the second quarter, we opened three new franchise BurgerFi restaurants, bringing our year-to-date openings to five. Similar to others in the restaurant industry, permitting and construction delays have affected our franchise partners' ability to open their restaurants on the original time lines. As a result, for the full year, we now expect new store openings to come in at the bottom end of our guidance of 15 to 20 new restaurants, all of which will be franchised.

Of these, four planned to open in the third quarter including in this number is the first new franchise Anthony's location. As I just noted, our first-ever co-branded BurgerFi and Anthony's location with our franchisee NDM Hospitality Services is still on track to open in the second half of the year. As a reminder, our agreement with them calls for three franchise Anthony's locations in Florida over the next two years. The second and third Anthony's locations through the NDM agreement are expected to both be smaller Anthony's prototypes, one of which is slated to open the Miami World Center development near the Miami Brightline Station. As I stated earlier, I plan to use my background in running successful franchises to help further develop the BurgerFi franchise business and establish the Anthony's franchise business.

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To that point, one of my priorities this year will be finding well-capitalized franchisees with restaurant, retail and hospitality experience. Bringing these operators into our system result in more disciplined and profitable growth over the long-term. I have already begun negotiations with several interested parties for multi-unit Anthony's franchise deals. I look forward to sharing more in the coming quarters. In closing, and before I hand the mic to Chris Jones, I will say that having been at the company for roughly a month, I am more confident than ever, that I made the right decision to join the company for two reasons. The first is that we have two very high-quality brands that are on trend with the consumer. The second is that the challenges both brands face are not new to the industry.

Fixing won't happen overnight, but believe it will happen, and these improvements will begin to become evident to you, our stakeholders. I will now turn the call over to our new CFO, Chris Jones, who will provide commentary on our second quarter 2023 performance. Go ahead, Chris.

Chris Jones: Thank you, Carl, and good morning, everybody. I'm so glad to be here and look forward to working with you. Like Carl, I was drawn to BurgerFi by the strong brands and established financial sponsors that believe in the brands and the opportunity ahead. I also came knowing that there are challenges ahead. I see great potential for the business and have confidence in Carl and the BurgerFi team leading the company to increase profitability and investor returns. I firmly believe that my prior experiences have uniquely prepared me for what lies ahead. Having spent over a decade as a coverage analyst, I know performance, like what we are delivering today isn't going to cut it. Additionally, my time in the industry should allow me the ability to effectively drive and direct change that we can that can deliver the sort of results that are needed.

The path to improved profitability is not a complex one. It will require improved execution at the stores and for management along with improvements on cost controls. Rewarding success when it's earned while also demanding accountability from all members of the team will be central to this effort. 40 days into the job, and there are themes already starting to emerge. One example is to further yield operational efficiencies from the merged operations between BurgerFi and Anthony's. At the same time, existing operations, including supply chain have not fully embraced technology and analytics that could help drive meaningful improvements in productivity. Of course, Carl has already touched on improved labor productivity. I'm not in a position to quantify these opportunities today, but I would fully expect to discuss them on our next call or potentially even sooner.

Now briefly looking at key highlights of the second quarter. Second quarter total revenues were $43.4 million, decreasing 4% from $45.3 million for the same quarter last year. Anthony's contributed $31.9 million to revenues in the current period. The decrease in revenues is the result of a decrease of 15% in same-store sales at the BurgerFi company stores and a 1% increase in same-store sales at Anthony's restaurants. Restaurant level profit margin came in at 13.8% or down 50 basis points year-over-year. During the quarter, the company saw a positive improvement in food, beverage and paper cost, a trend that we believe will continue with the possibility for further improvement. As you've heard from others in the industry, inflation is weighing on all commodities, except for beef and new contracts are yielding lower forward pricing.

These positive trends were more than offset by higher labor and other expenses, unfortunately, largely due to lower sales volume in the period. Shifting to our individual brand results. The BurgerFi corporate-owned restaurant sales decreased 12% to $8.9 million, reflecting a decrease in same-store sales. System-wide sales for BurgerFi in the second quarter decreased 9% to $38.8 million compared to $42.5 million in the year ago quarter, primarily due to a decline in same-store sales, coupled with the transfer of unperforming company stores. BurgerFi system-wide same-store sales decreased 10% for the second quarter compared to the same period in 2022. For corporate-owned, BurgerFi same-store sales decreased 15% and franchise restaurant same-store sales decreased 8%.

BurgerFi restaurant level operating experiences increased 500 basis points to 94.7% for the quarter compared to 89.7% in the prior year second quarter due to loss of leverage on fixed costs due to same-store sales declines. As mentioned earlier, food and paper margins continue to be a positive story, a trend we expect to continue despite the continued pressure on beef prices. While we are not immune to these price increases, we don't expect to see the same level of increases that others have seen largely as we recently diversified at our beef distributors as we look to drive higher utilization with local and regional providers affording freight efficiencies. I would also echo Carl's earlier comments about labor starting to move in the right direction.

There are also additional opportunities as previously noted by Carl, where we expect that a handful of menu updates and additions, this should be a positive for the top line, while also addressing some of the most reviewed issues within our restaurants, namely the fries. Turning to Anthony's. Restaurant sales were $31.9 million in the second quarter compared to $31.8 million in the prior year. The increase was driven by a 1% increase in same-store sales when compared to the second quarter of 2022. Staying with Anthony's restaurant profitability, Anthony's restaurant-level operating expenses improved 60 basis points to 83.8% for the quarter compared to the prior year second quarter. We continue to benefit from positive trends in fresh chicken wing prices, a trend we expect to continue through third quarter and into early fourth quarter.

Additionally, we continue to see better pricing in Mozzarella imported can tomatoes, flour, oil, onions all key ingredients for a company that makes premium Italian food. We do expect to see some modest offset from higher anthracite coal prices collectively this should be a positive trend for the third quarter and potentially the fourth quarter. Labor was flat on rate and down on dollars relative to the first quarter '23, we expect these trends to improve in the back half of the year. Assuming trends stay consistent in the north, and we see this typical seasonal uplift in the South in the coming weeks, we expect restaurant operating profit margins to improve in the back half of the year at Anthony's. Back to consolidated results. We reported a net loss of $6 million in the second quarter compared to a net loss of $60.4 million in the year ago quarter.

This year's net loss included $0.5 million of share-based compensation expense, $3.3 million of depreciation and amortization, $2.2 million of interest expense, $1.1 million of restructuring costs, $0.3 million of merger integration costs and $0.2 million of legal settlements, with the latter two, all inclusive within general and administration expenses. Adjusted EBITDA was $2 million in the second quarter compared to $2.6 million in the prior year second quarter. Moving onto the balance sheet. Our cash balance on July 3rd, 2023, was $10.7 million compared to $11.9 million in January 2nd, 2023. When considering our available but undrawn $4 million line of credit, we had $14.7 million of liquidity at the end of the quarter. The decrease in cash was the result of term loan in line, line of credit repayments and capital expenditures and by cash used in operations due to payments for legal settlements, professional services, primarily in connection with expenses for obtaining financing under the credit agreement.

We are also in compliance with all of our covenants at the end of the quarter. Now turning to our fiscal 2023 outlook. We are maintaining our 2023 guidance. However, we are guiding to the low end of the previously provided range and those ranges are as follows. Total revenue of $175 million to $180 million, which assumes a low single-digit increase in same-store sales and the addition of 15 to 20 new franchise restaurants, including one new Anthony's, adjusted EBITDA of $10 million to $12 million and approximately $2 million in CapEx for the year. With that, operator, please open up the call for questions.

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