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Edited Transcript of ARKR earnings conference call or presentation 13-Aug-19 3:00pm GMT

Q3 2019 Ark Restaurants Corp Earnings Call

NEW YORK Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Ark Restaurants Corp earnings conference call or presentation Tuesday, August 13, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony J. Sirica

Ark Restaurants Corp. - CFO & Director

* Michael Weinstein

Ark Restaurants Corp. - Founder, Chairman & CEO

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Conference Call Participants

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* Anthony Chiarenza

Key Equity Investors, Inc. - President and CEO

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Presentation

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Operator [1]

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Greetings, and welcome to Ark Restaurants Third Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Anthony Sirica, Chief Financial Officer. Please go ahead.

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Anthony J. Sirica, Ark Restaurants Corp. - CFO & Director [2]

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Thank you, operator. Good morning, and thank you for joining us on our conference call for the third quarter ended June 29, 2019. With me on the call today is Michael Weinstein, our Chairman and CEO; and Vinny Pascal, our Chief Operating Officer.

For those of you who have not yet obtained a copy of our press release, it was issued over the newswires yesterday and is available on our website. To review the full text of that press release along with the associated financial tables, please go to our homepage at www.arkrestaurants.com.

Before we begin, I'd like to read the safe harbor statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements and that these statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We refer everyone to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial condition.

I'll now turn over the call to Michael Weinstein.

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Michael Weinstein, Ark Restaurants Corp. - Founder, Chairman & CEO [3]

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Hi, everybody. If you're hearing some background noise, there's construction on the street outside of our office. So I apologize for that. There's not a good way for us to ask them to stop, so there might be a little buzzing in the background.

I'd like to go over how we performed in terms of parts of the country where we operate. Most of the increase in EBITDA came from our Florida, Alabama and Vegas properties. Vegas is just benefiting from increased traffic in Vegas and more utilization of the arena in the park, which is right next to New York-New York Hotel & Casino Resort, where we have most of our operations. They are utilizing that 20,000-seat arena more frequently and we benefit from that.

In Alabama, we always thought there were synergies between their corporate expenses and what we do here in New York, and we had sort of committed to ourselves we wouldn't change anything until we had a good deal of experience operating those restaurants. And about 2 years out, we decided early this year to get rid of their corporate office, reduce the number of people working on bookkeeping and maintenance and bringing a lot of that work here in New York. And there were substantial savings in that as well as the fact that the business increased at Gulf Shores. So we sort of got the double benefit of increased revenue from increased traffic in the restaurants and lower corporate expenses. So we did very well there.

Shuckers and Rustic continue to do very well. We seem to have found some sort of magic formula at Rustic. It keeps going up every quarter and it's become a major cash flow benefit to the company.

We acquired JB's restaurant in Deerfield Beach 6 weeks before the quarter ended. There was really no benefit in EBITDA from JB's. We expect the annual benefit to be roughly $1.5 million a year. We're still working through trying to use our leverage from our other restaurants in Florida, from our other restaurants in general and our buying power to see what impact we could have on their costs. So we're very early in the game there, but the restaurant does about $11.7 million a year in terms of revenues and we should benefit and we think it's a strong acquisition for the company.

Sequoia in Washington did better, but it's still disappointing in terms of where we think we should be with this restaurant. We think we have all the positions filled with the proper management and I think the menu is better, certainly the design is spectacular. We're getting good responses from people that are coming there. There's been a lot of competition. There's an area not too far away from Sequoia that opened just about the same time when renovation came onstream. That area is called The Wharf. It has 18 restaurants. So I think we'd be hurt in terms of our capacity and the amount of demand that could come into the restaurant by this new area. But little by little, the events are starting to come in. We're seeing more traffic on days when the weather is good. I think we're on the right path, but it did not perform as well as we would have liked.

New York is being challenged in several respects. Number one is labor cost. We're doing the best we can to control these. I mentioned in prior calls that essentially tipped employees, with the new minimum wage legislation, have seen their income increase 100% in 3 years. When 60% of your employees in the restaurant are tipped employees and their minimum wage salary goes from $5.50 to $10 an hour in 3 years, that's a tough thing to try to absorb. The major problem we have in that is that we don't see very much in the way of price elasticity. Selectively, we have tried to raise prices, but this is not -- we're not in an area or an economy where we feel that we could go increase prices 5% across the board. There's too much competition with delivery services and there are just too many offerings from restaurants in every area of the city. So we've been modest in our increases.

It's sort of remarkable to me, given a lot of bad weather and given the labor portion of expense, that Bryant Park and Southwest were able to keep pretty much flat in terms of EBITDA compared with last year's quarter.

So there is no -- we don't see a lot of organic growth in EBITDA in the New York restaurants. The only thing that could change it, quite honestly, is -- in terms of increased revenues, is we've had another very bad weather year. Utilization in Washington and New York of our outdoor cafe seats has been really impacted by a lot of bad weather. But we said that last year and I think we said it the year before. And maybe this is what the new expectation is, that there's a lot of rain, and the rain always seems to happen at 6:00 at night just as everybody is leaving work and they bypass us -- our outdoor seats because they can't be utilized.

We are in a good position on our balance sheet. The business has benefited dramatically and there may be some luck involved in this. The business has benefited from the fact that the last 4 restaurants of the 5 that we've done, Shuckers, Rustic Inn, the 2 in Alabama, those 4 restaurants are properties that we own. We own the land underneath them, we own the buildings as well as the operations. We bought those at a very reasonable price. Roughly on average when we bought them, it was about 5.5x operating profit. Obviously, with Rustic having gone from the $1.5 million to $3.5 million in operating profits, we wound up with something that we bought for 2x current operating profits.

JB's, we do not own the land or the building. We have a 25-year lease. We do have a right of first refusal on that property. We think we are the likely owner of it at some point, and we think we can do that at a reasonable price. Our goal is to find more of these and our portfolio should be more representative of that type of deal as we go forward.

We -- just recently, in Florida, we moved Hard Rock Cafe and Casino in Hollywood. Our fast-food operation was moved by the casino to a new location. We opened a couple of weeks ago. We're actually doing more business than we were doing in the old location and the hotel is still under construction from a major expansion.

In Tampa, we have a situation where we're going to be closed for 3 months as they redo the area in which we're in. That property is also being expanded.

El Rio Grande in New York, the building has a lot of construction interrupting our business. So all this was taking effect during the June quarter. So I think if we had normalized those things, our EBITDA would have been better by a few hundred thousand dollars. So what we have is a business that's in very good shape at this point, starting to hit where we think we should be with the properties that we have. We still have a long way to go with Sequoia. I think we'll benefit greatly as time goes on from additional operating profits from Sequoia. And we're looking, we're out there looking for properties to buy.

I hope this gives you a pretty good understanding of where we are and I'm welcoming questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Anthony Chiarenza with Key Equity Investors.

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Anthony Chiarenza, Key Equity Investors, Inc. - President and CEO [2]

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Can you give us an update on the Meadowlands and how it's progressing at this point?

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Michael Weinstein, Ark Restaurants Corp. - Founder, Chairman & CEO [3]

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I'd be delighted. So in terms of operations at the Meadowlands and the balance sheet at the Meadowlands. The balance sheet has improved dramatically there because we got some $15 million in -- $7.5 million for the rights of FanDuel for sports betting on-premise, and $7.5 million advanced against profits. So $15 million immediately went to pay off debt. There is an online deal that's being done where we get a $5 million buy-in for the rights, which will also help with the balance sheet.

Horse racing is not a money earner, but sports betting has been terrific. We're doing -- we'll do over $50 million this year in sports betting. We think there's a 5% hold, meaning that we'll get about a $25 million profit off of that. That is split with FanDuel. Our expectation on a fully diluted basis of what our share of that will be is some $800,000 a year at that rate. We don't recognize that until it's distributed. We think there will be a distribution in the fourth quarter of this year, although we're not in control of how much of the $800,000 we think we deserve will be distributed. So from a sports betting point of view, it's turned the venue around dramatically. The food and beverage has obviously been benefited by sports betting. Our food service business is highly profitable now. We -- Ark doesn't get very much from the food service business because when this whole thing was starting, we basically said we'll manage it. We don't want to take losses, we don't want take profits, we didn't want to -- we knew there would heavy losses at the beginning, and until we get a casino -- if we get a casino, we'll sort of do that pro bono. I think there's a 5% management fee...

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Anthony J. Sirica, Ark Restaurants Corp. - CFO & Director [4]

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A percent of profits.

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Michael Weinstein, Ark Restaurants Corp. - Founder, Chairman & CEO [5]

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And 1% of profit -- 5% of profits and some management fee. So we'll get some small amounts on that.

In terms of a license for casino gaming, as you know, not only do we own a part of the LLC, but we also have the exclusive rights to all food and beverage with the exception of the carve-out for the Hard Rock Casino -- Hard Rock Cafe. Other than that, we have all beverage and all food rights if the casino was there. I don't see very much activity in terms of movement in Jersey for a casino in the north right now. There -- I think what the lynchpin will be, and I think then there'll be a rush, is when New York City gets downstate casinos. Cuomo, when he made the deal for 7 casino licenses, initially said he wouldn't put anything downstate, meaning Yonkers or Queens primarily, or Nassau County, until a 7-year grace period had gone by to help the upstate casinos. We're 2 years away from that. So I think that will be the key to getting Jersey to move on a license. But our position in terms of balance sheet, we made roughly a $5.6 million investment. We loaned somewhere along the line of about $1.7 million. We're getting the interest on that $1.7 million now, which will start to show up next quarter. We're going to be benefited by distribution of the sports betting profits. We are in good shape while we're in a holding pattern. That's the best I could [try].

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Anthony Chiarenza, Key Equity Investors, Inc. - President and CEO [6]

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That sounds good. That's very helpful. Now in terms of New York City, what are your thoughts at this point? Is it just to maintain stable? And I know you're looking for acquisitions, and I think New York is probably not one of your prime spots to look for opportunity.

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Michael Weinstein, Ark Restaurants Corp. - Founder, Chairman & CEO [7]

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So we're not looking to do anything further in New York. The main danger to the restaurant business nationally is the $15 minimum wage. Now there's no one working for us that's a nontipped employee. So all back-of-the-house people, dishwashers, cooks, managers, assistant managers, nobody makes less than $15 an hour in any venue. Alabama has a $2.17 minimum wage, there's nobody working for $2.17. We can't find people with $17, $18 an hour in Alabama right now. So -- but this is a big push for a $15 universal minimum wage. Now that would -- the way the legislation was just written and passed in the Democratic House -- which the Senate obviously is not, I think, paying any attention to, but it's a Republican Senate. That legislation doesn't allow for tip credits. Well, I have people on average in New York making $40, $50 an hour. And their minimum wage right now is $10. That's the minimum wage for a tipped employee. And if they were to go to $15 an hour, that's 60% of my workforce getting a $5 raise above the $10, and they're making $40, $50 an hour and we don't -- we disagree strongly with that in terms of economic preservation. But that would be everywhere nationally if that came to pass. So the 2020 election becomes sort of important to the restaurant industry in that if the federal government doesn't allow for tip credits, restaurants are going to be under tremendous expense pressure.

The difference in New York right now as opposed to Washington, D.C. or other venues, New York legislatures, which is a Democratic legislature right now, is pushing for the elimination of the tip credit. We don't think Cuomo is going to sign that. We think there has been strong evidence that this would further harm the restaurant business, full-service restaurant business. So for the moment, we think things are fine. But in the long run, it's questionable about the viability of maintaining our current expense structure and our ability to figure out how to deal with it if it comes to pass where they eliminate the tip credit. That's the biggest question. New York is sort of the center of gravity for all of that right now.

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Operator [8]

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There are no further questions at this time. And I would like to turn the call back to Michael Weinstein for closing remarks.

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Michael Weinstein, Ark Restaurants Corp. - Founder, Chairman & CEO [9]

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I would like to mention one other thing. We are embarking on a venture in -- outside of Columbus, Ohio, in a town called Easton, Ohio, which is -- gets 30 million visitors a year. It was started by Leslie Wexner, and Georgetown development in New York is the partner. And over the course of the years, we've always been asked to give advice on what they should be doing in terms of restaurants. They see 30 million people a year that come to that town, which was still 20 years ago because of the upscale in retailing. They have been pretty edgy in their retailing and people go there to shop and be entertained and to eat out. Their feeling the last few years is that these leases they signed 20 years ago when the project was starting were all, for the most part, either local Columbus restaurants or with some national chains like P.F. Chang's and others, Smith & Wollensky and other names you will probably recognize. And they want their restaurants to be more idiosyncratic and bring in people from all over the country who are doing interesting restaurants and presenting edgier products. So we've sort of been asked to get involved in that mix. And we've made a proposal to them and they are excited about the proposal. And this would probably encompass, over the next 5 years, some 20 to 25 restaurants. The town presently has 49 restaurants and is expanding. So we're at the very beginning of this, but if it were to be successful, we think this is a pretty significant opportunity for the company.

The first stage of it, if it takes place and we think it does take place, will be over the next 18 months to build 6 restaurants, either with -- either our own restaurants or in partnership with other restaurants who see the same opportunities as we do but don't have the capability of traveling to Easton, Ohio, and would want us to manage it for them or be a joint venture partner. So it's an interesting opportunity. It does not require a lot of money from our balance sheet, and that's why we're looking at it. What we are able to generate in terms of cash flow to invest, we're sort of holding that for potential acquisitions where we either -- where we own the property, the land, the building as well as the operation. So this is something that is financeable by the developer as opposed to us. We'll keep you up-to-date on this as it goes along, but we're just at the very beginning and I think it's kind of exciting.

With that, thank you for joining us. And we'll see you next quarter.

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Operator [10]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.