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Edited Transcript of LUB earnings conference call or presentation 19-Apr-17 9:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Luby's Inc Earnings Call

HOUSTON Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Luby's Inc earnings conference call or presentation Wednesday, April 19, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Pappas

Luby's, Inc. - CEO, President and Executive Director

* K. Scott Gray

Luby's, Inc. - CFO, SVP and Treasurer

* Peter Tropoli

Luby's, Inc. - COO

* Steve Goodweather

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Presentation

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Operator [1]

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Greetings, and welcome to Luby's Fiscal 2017 Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Goodweather. Thank you. Mr. Goodweather, you may begin.

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Steve Goodweather, [2]

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Thank you. And again, welcome, everyone, to Luby's 2017 fiscal second quarter earnings conference call. This call is also being webcast and can be accessed through the audio link on Luby's website, lubysinc.com. Information reported on this call speaks only as of today, April 19, 2017.

Before we continue, I'd like to remind you that the statements in this discussion, including statements made during the question-and-answer session, regarding Luby's future financial and operating results as well as plans for expansion of the company's business, including the expected financial performance of the company's prototype restaurants and future openings, are forward-looking statements. Those statements include risks and uncertainties, including, but not limited to, general business conditions; the impact of competition; success of operating initiatives; changes in commodity costs and supply of food and labor; as well as seasonality of the company's business, taxes, inflation, governmental regulations and availability of credit; as well as other risks and uncertainties disclosed in the company's periodic reports on Forms 10-K and Forms 10-Q.

With that, I'd like to now turn the call over to Luby's President and CEO, Chris Pappas. Chris?

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Christopher J. Pappas, Luby's, Inc. - CEO, President and Executive Director [3]

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Thanks, Steve. Good morning, everyone, and afternoon, and thank you all for joining us on today's conference call. With me today are Scott Gray, our Chief Financial Officer; and Peter Tropoli, our Chief Operating Officer.

Our second quarter same-store sales represented a decline of 3.8% compared to an increase of 2.2% in the same quarter last year. During the quarter, we improved cost controls in several areas of our operations, including corporate overhead. We also reduced our level of capital spending. However, the gains achieved on the cost side did not outpace the decline in sales for the quarter. Moving forward, we'll remain committed to effectively managing expenses downwards while focusing on enhancing our customers' experience to improve restaurant sales across all our brands. We remain optimistic in our ability to demonstrate improvement and to strengthen our brands over the long term.

During the quarter, we opened 3 Fuddruckers franchise restaurants, 1 domestic and 2 international locations. In addition, we opened 1 new company-owned location earlier this month in our third quarter fiscal 2017. In December, we announced a new and exclusive partnership with H-E-B Grocery stores in the state of Texas to sell Luby's famed macaroni and cheese. Then in February, we expanded our retail product line to include Luby's famous Fried Fish. We remain encouraged by the sales of these dishes and for the opportunity this additional branding of our products establishes for our company.

The restaurant segments in which we operate remain highly competitive, and a broader economic landscape for consumer spending is relatively tough. But we operate iconic brands in diversified markets throughout the country that offer unique dining experiences with excellent food selections that our customers have loved and trusted for decades. Each of our brand teams and restaurant associates are focused on providing the best possible guest service every time guests visit our restaurants. We continue to firmly believe that our brand's reputation, high quality, food offerings and exceptional service are the recipe for long-term sustainability and growth.

I'd now like to turn the call over to our CFO, Scott Gray, to review our key financial metrics from the second quarter. Scott?

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K. Scott Gray, Luby's, Inc. - CFO, SVP and Treasurer [4]

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Thank you, Chris, and good afternoon, everybody. Before I get started, please note that we posted our investor presentation on our website at lubysinc.com, under the Investor Relations Events section. The presentation contains some information that we believe will be helpful to our investors.

Now beginning with our company-operated restaurant business segment. Throughout much of calendar 2016, we maintained -- or managed to maintain a relatively level year-over-year sales despite a growing recessionary trend in the restaurant industry. However, this downward pressure on sales that began at the end of calendar 2016 persisted through our second fiscal quarter, which ended in the middle of March. Overall same-store sales, as Chris stated, were down 3.8% in our second quarter. Our total restaurant sales, which were combined with the closure of 6 underperforming restaurants over the prior year, declined by 6.1%.

Luby's Cafeteria same-store sales in the quarter decreased 4.4% from the prior year. The decrease was a result of a 6.6% decrease in guest traffic, partially offset by a 2.2% increase in average spend per guest primarily due to modest price increases and less discounting. Luby's Cafeterias average weekly sales per unit in the quarter were $48,000 per unit per week.

Fuddruckers restaurants same-store sales decreased 1.1% in the second quarter. This 1.1% decrease was a result of a 3% decrease in guest traffic, offset by a 4.1% increase in average spend per guest. Interesting to note that Fuddruckers same-store sales were positive during the last 8 weeks of the 12-week quarter. Fuddruckers average weekly sales per unit were $32,000 in the quarter.

Combo locations, which is a Luby's and a Fuddruckers at one location, declined 6.5% in the second quarter. Half of this decline can be attributable to a single location. We did have 2 locations that grew sales in the 2% to 3% range. Combo average weekly sales per unit were $83,000 in the quarter.

Cheeseburger in Paradise, representing all 8 Cheeseburger in Paradise locations, decreased 7.3% in the second quarter. This compares against the prior year when we grew sales 4.2%. Cheeseburger average weekly sales per unit were $34,000 in the quarter.

Our store-level profit, which is defined as restaurant sales plus vending revenue less cost of food, payroll-related cost and other operating expenses and occupancy cost, was $10.2 million or 12.6% of restaurant sales in the second quarter compared to $12.7 million or 14.8% of restaurant sales during the second quarter fiscal 2016. We benefited from food commodity cost decreases of roughly 3% for the key ingredients we purchased. This positive impact, combined with modest price increases and continued careful food cost management as guest traffic declined, resulted in a decrease in food cost as a percentage of restaurant sales to 27.9% compared to 28.5% in the second quarter last year.

Payroll and related cost as a percentage of restaurant sales increased 1.5% to 36.1% this year in the second quarter. This increase, as a percentage of restaurant sales, was a result of a decline in sales -- same-store sales and hourly labor rates, which continue to rise in our industry. As we move forward, we continue to focus on labor deployment training and scheduling software utilization and menu price increases to offset these inflationary cost pressures.

Our other operating expense line remained flat compared to the same period last year at $13.7 million in the second quarter but increased 1.1% as a percentage of restaurant sales. This increase, as a percentage of sales -- restaurant sales, was the direct result of a decline in same-store sales in the quarter and higher repair and maintenance cost, food delivery cost and other operating expenses. It is noteworthy that stores that we closed over the prior 12 months reduced sales by $2 million during the quarter and had a negative impact on our store-level profit of $0.3 million due to carrying cost and closure cost.

And moving on to our other business segment, Culinary Contract Services. Revenues in Culinary Contract Services decreased to $3.3 million with 23 operating locations at the end of the quarter compared to $3.9 million with 28 operating locations at the end of the second quarter fiscal 2016. Despite this decline, culinary segment profit was 10.5% of culinary sales in the quarter compared to 10.2% in the second quarter last year. We continue to exceed our profit target of 8% to 10% for this business segment. In addition, our sales pipeline continues to strengthen, and we anticipate opening 2 or more locations before the end of this fiscal year.

Turning to our Fuddruckers franchise business segment. Revenues increased 7% or approximately $119,000 compared to the second quarter last year. We ended the second quarter with 114 franchise restaurants, up from 110 at the end of the second quarter last year. The increase in revenue was due to a $0.3 million increase in realized franchise development fees partially offset by a $200,000 decline in franchise royalties due to the year-over-year franchise [ V ] sales declines and a change in the mix of the franchise locations, where over the prior 1-year period, we had 12 franchise location openings offset by 8 franchise location closings.

Overall, adjusted EBITDA decreased by $1.6 million to $3.3 million in the second quarter compared to $4.9 million in the second quarter fiscal 2016. The decline in EBITDA was the result of the lower store-level profit, driven primarily by the decline in same-store sales, offset by $800,000 decrease in selling and general and administrative expenses.

Also, due to the continued headwinds on our industry and our cumulative 3-year book loss which (inaudible), we have reflected an increase in our deferred tax valuation allowance of $6.6 million in the quarter. Additionally, management has recorded asset impairments of approximately $5.9 million on 13 locations. Excluding these non-cash charges and other asset gains and losses on disposal in the comparative quarters, our results from continuing operations, excluding this special noncash item, fell by approximately $1.2 million year-over-year on a decline in total revenues for the company of $5.7 million in the quarter.

Now moving on to the balance sheet. We ended the second quarter with a debt balance outstanding of $37.4 million. It's up slightly from $37 million at the end of the last fiscal year. During the second quarter, our capital expenditures were $3 million compared to $5.2 million in the second quarter of fiscal 2016, as we began curtailing our capital investments.

It is important to note that our EBITDA, which impacts our debt leverage and coverage ratios, is highly sensitive to sales trends. A 1% change in our cafeteria sales base of approximately $220 million results in about a $1.4 million change in store-level profit. Similarly, a 1% change in our Fuddruckers units base of approximately $100 million results in a $0.7 million change in store-level profit. On a combined basis for these 2 core brands, that is Luby's and Fuddruckers together, we see about a $2 million swing in store-level profit and EBITDA for a 1% change in sales up or down. This $2 million is approximately 12% of our current trailing EBITDA.

EBITDA as measured in our bank covenants on a trailing 4-quarter basis was $16.9 million as of the end of this quarter. This includes removal of losses of approximately $0.7 million related to underperforming stores that had closed. On this basis, our debt-to-EBITDA ratio was 2.2x. Our team is focused on achieving and maintaining acceptable debt levels, and we have taken action to reduce our CapEx given our year-to-date decline in EBITDA. We have invested $8 million in CapEx so far this year, and we expect our capital expenditures to be less than $6 million over the balance of this fiscal year for a total annual CapEx for FY '17 of less than $14 million, which compares to $18.3 million in fiscal year '16, which is a 23% reduction in CapEx.

And with that, I will now turn the call over to Peter Tropoli, our Chief Operating Officer, for an update on operations and marketing.

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Peter Tropoli, Luby's, Inc. - COO [5]

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Thank you, Scott. Operationally, this was a difficult quarter. Guest traffic and sales report -- results were challenging especially in December and January. This has been reported on a wide-spread basis in our industry. Industry issues include too many seats, competition from grocery stores, the Uber and Amazon affect, government regulations and labor issues, expenses and -- as well as low unemployment.

Despite these challenges to our industry and to our business, we are working tirelessly to make the necessary adjustments to make our company even stronger going forward to maintain operational excellence, grow profitability and enhance shareholder value. From an operating standpoint, we support this goal first through the following long-term efforts: consistently successful execution, hot delicious food helpfully served with a smile everyday to every guest and every restaurant we operate; growing our human capital. Our focus must be on training, equipping, inspiring and developing our team members to delight our guest; raising awareness of our brands. We must share our unique story with our community as well as in our restaurants and continue to develop ways to connect and build our brands; improving restaurant appearances. We recognize the importance of cleanliness, maintenance and appearance of our legacy restaurants to remain competitive and appealing.

In addition to these, we are focused on 3 areas of improvement that are underway: number one, menu innovation and variety especially at the Luby's brand; enhanced digital branding and marketing efforts. This includes development of digital loyalty and recognition, digital outreach, online and/or mobile ordering, third-party delivery aggregators, self-order streams and -- as well as touchless pay; finally, leveraging the use of technology in our restaurants. This includes labor deployment tools, training, business intelligence and analytics and kitchen display systems for building orders.

We have taken prudent and necessary actions to preserve capital by pausing the discretionary capital expenditures. We finished projects already underway, such as our opening last week of a new Fuddruckers north of Houston. But in all other areas, we have halted capital spending other than what is necessary to maintain our restaurants and equipment in top shape. With regard to discretionary spending, we put an elevated overhead and expense control program in place at the onset after the first quarter.

On a store basis, we continue to evaluate and close underperforming locations. We continue to market and sell excess property, thereby releasing that value with proceeds currently earmarked for debt reduction. At March 15, 2017, we had $6 million in excess assets on our balance sheet. We also continue to pursue opportunities to refranchise company owned Fuddruckers locations as part of our strategy to grow franchise revenues, as we have done in certain circumstances over the prior several years. We also continue to negotiate new Culinary Contract Service agreement. Both the franchise and culinary business segments require limited capital requirement so that capital resources can be focused on higher-return opportunities in the future.

Moving to a brand-level discussion. At Fuddruckers company units, last week, as I said, we opened a new unit north of Houston in The Woodlands. This is an exciting new location for us, and it showcases our vision for the future at Fuddruckers. The interior -- approximately 4,000-square-foot interior offers seating for 147 guests, including a private dining room for up to 36, where teams and families can celebrate. There are also 9 bar counter seats overlooking an open kitchen. Five televisions ensure guests always have a clear view of the big game. And outside, we have a spacious patio with additional seating as well for overflow. The restaurant features 3 self-order stations in addition to the traditional cashier-led point of sale.

Moving to the Fuddruckers franchise segment of our business. We continue to keep pace with the opening of 3 new locations during the quarter, 1 domestic location in Nevada and 2 international locations, 1 in Canada and 1 in Panama. Over the last 12 months, that brings the total franchise openings to 12, similar to the 13 openings from the 12 months prior.

At our Luby's Cafeteria brand restaurants, we are engaged in efforts, as I said, to continue to evolve our namesake iconic brand. We just finished our Lent season, where we offered an array of seafood options and combos to our guests who come back time and time again in that time of the year. On a year-over-year basis, Lent was much later in the quarter this year versus the prior year. Despite the seasonally low second quarter sales period and a year-over-year sales decline, 89 of our 90 Luby's Cafeterias remain profitable at the store level.

Our partnership with 270 H-E-B Grocery stores all over Texas to sell our famous macaroni and cheese and famous Fried Fish has exceeded both our expectations and our partner H-E-B's expectations. We're pleased with the opportunity that this additional branding of our products establishes for our company.

Before turning the call over for questions, I would like to thank our restaurant leaders and to thank our team members for their tireless efforts to delight our guests and improve our financial results during the quarter. Together, we will successfully navigate the changing terrain going forward.

Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) If there are no questions at this time, I'd like to turn the floor back over to Mr. Chris Pappas for closing comments.

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Christopher J. Pappas, Luby's, Inc. - CEO, President and Executive Director [2]

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Thank you all for joining us today. We've got a lot on of our plate. We're in the restaurant business, and we look forward to visiting with you again and talking about our favorite subject, Luby's Cafeteria and their related restaurant company stores. Thank you very much, and we'll visit with you again this summer and on our third quarter call.

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Operator [3]

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Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.