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Edited Transcript of LUB earnings conference call or presentation 15-Jul-19 3:00pm GMT

Q3 2019 Luby's Inc Earnings Call

HOUSTON Jul 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Luby's Inc earnings conference call or presentation Monday, July 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin T. Coutee

Luby's, Inc. - COO

* Christopher J. Pappas

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

* K. Scott Gray

Luby's, Inc. - Senior VP, CFO Treasurer & Controller

* Steve Goodweather

Luby's, Inc. - VP of Financial Planning & Analysis and IR

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Presentation

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Operator [1]

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Greetings, and welcome to the Luby's Fiscal 2019 Third 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, VP of Financial Planning and Analysis. Thank you, Mr. Goodweather. You may begin.

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Steve Goodweather, Luby's, Inc. - VP of Financial Planning & Analysis and IR [2]

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Thank you. And again, welcome, everyone, to Luby's 2019 Fiscal Third 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 recorded on this call speaks only as of today, July 15, 2019.

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 are forward-looking statements. The 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 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 would 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. - President, CEO & Executive Director [3]

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Steve, thanks. Good morning, everyone, and thank you for joining us on today's conference call.

I'll begin with an update on our turnaround progress and comments about the quarter. I'll then turn the call over to our COO, Todd Coutee, followed by remarks from our CFO, Scott Gray.

As I discussed with you last quarter, we're focused on our turnaround plans for the company, and we are making progress.

Our turnaround plan is twofold: one, establishing appropriate cost structures for our business. And two, growing guest traffic and sales.

First on the cost side, we continue to make progress with efficiently managing the restaurant-level expenses, resulting in store-level profit margin improvement, despite the decline in same-store sales in the third quarter.

In addition to streamlining these restaurant operational expenses throughout fiscal 2019, we have also been steadily rightsizing our corporate support structure, and we have constrained some of our capital expenditures to more of a maintenance level at times.

Second, with regard to growing guest traffic and sales, we fully recognize that our turnaround access depends on this critical aspect. Our guests are loyal to our brands, and we are marketing to capture more frequent visits and attract more of these guests especially.

From an operations and marketing perspective, we're providing and promoting menu price points that offer compelling everyday value options starting in the $7 to $9 range, while still including additional premium offerings at higher price points. The value orientation is aimed at improving guest traffic trends which can then translate into increased sales.

Our sales -- same-store sales have not yet achieved the improvement we are striving for, reducing a number of positive developments based on our recent efforts and initiatives aimed at growing guest traffic. For instance, at our Cafeteria brand, guest traffic has steadily turned it better throughout our fiscal year 2019. While we still have considerable work to do, we see that both our core brands are trending toward the right way.

As we work to serve our guests every day and increase same-store sales, the operating leverage created from a lower cost structure will generate a stronger cash flow through to the bottom line. And while this is obviously a process, our goal remains clear, turning around our company to grow and to enhance profitability and shareholder value.

In addition, our initiatives led by Todd Coutee to align team members into the right positions with our field operations is substantially complete. This has involved moving our both management within our restaurants and within the restaurant leadership teams. We have many talented individuals that help propel us forward. This parallels our efforts with office support to better align our turnaround strategy.

We are also pleased to announce the hiring of 2 new executives to lead our marketing and information technology departments. Todd will discuss our new VPs further in his section.

Let me just say, we are all very excited to have these senior industry leaders join our organization to lead in their respective areas of expertise.

Now for an update on our refinance plans in our Fuddruckers franchise system. As previously reported, during the quarter, 5 locations in the San Antonio market transitioned from company-operated restaurants to franchise-operated locations. We continue to seek additional re-franchising opportunities outside of our home market of Houston, Texas.

We also continue to actively market properties for sale in our asset sales program. Since the beginning of third quarter last year, we closed 25 underperforming stores; 6 of those were Luby's Cafeterias, 13 of them Fuddruckers and 6 of them were Cheeseburger in Paradise restaurants. Plus, we transitioned 5 stores to franchisees as I described earlier.

Through our $45 million asset sales program that began last year, we generated proceeds of $35.9 million.

Finally, I'd like to acknowledge the strong progress our team has achieved in our Culinary Contract Services business. Our Culinary Contract Services business saw a net increase of 7 locations year-over-year, which are generating incremental sales and profit.

This continues to be an excellent segment of our business growth potential, and we are actively pursuing new clients for our signature offerings. The past 2 quarters' progress and our turnaround efforts have been quite a lot of work, and we continue to work on that area to -- its turnaround efforts.

We are putting all the pieces in place so that when we turn the corner and return to sales growth, we will be better positioned for future profitabilities.

And with that, I'd like to thank our more than 6,000 talented dedicated employees for their hard work to make this a reality.

At this time, I'd like to turn the call over to Todd for a few comments. Todd?

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Benjamin T. Coutee, Luby's, Inc. - COO [4]

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Thank you, Chris, and good morning. I'm pleased to join the call today. As Chris mentioned, we are excited to welcome 2 new highly qualified and deeply experienced leaders to our team.

We've hired David Greenberg, Vice President of Marketing; and John Holzem, Vice President of Information Technology.

David Greenberg, Vice President of Marketing, brings more than 30 years of restaurant and consumer product marketing, including product innovation, brand management and sales campaign experience to Luby's. David has a demonstrated record of successful restaurant marketing campaigns across numerous national brands throughout the fast food and casual dining categories. Over the span of his impressive marketing career, he has worked with notable national brands such as Bob Evans restaurants, Jack in the Box, Wendy's, TGI Friday's and Burger King to name a few.

John Holzem is our new Vice President of Information Technology. He is an experienced IT food service executive who specializes in leveraging technology and driving operational efficiencies with process improvements. John comes with a long tenure of over 30 years of experience at Sysco Corporation, where he most recently -- where he was most recently Vice President of Business Technology.

David and John are both seasoned industry leaders in their respective areas of expertise and are uniquely qualified to add value to our iconic Luby's and Fuddruckers brands.

Now for an update on our right people and the right positions initiative as Chris mentioned. By realigning our organization and providing team members with the tools and coaching they need to be successful, we are better positioned to succeed with the new sales, marketing and operational initiatives put in place in each brand to enhance sales.

Our teams are focused on growing guest traffic through our value orientation, where we are offering everyday value choices. We're also focusing on the dinner meal part, and specifically how the convenience factor plays an important role in off-premise dining.

As I mentioned last quarter, we've introduced weekend breakfasts as an option at Luby's, which is a natural extension of our cafeterias. As of the end of the quarter, we are now offering breakfast on the weekends at 33 locations. Within our Luby's Cafeteria business, we continue to provide guests with convenient, great-tasting, home style meals at an excellent value in a comfortable environment.

QR approach in the third quarter was the removal of substantially all discounts. Our goal was to have a consistent pricing structure that provides everyday value. We believe this is what our most loyal and frequent guests appreciate and expect. We see that this is the right approach because on those days when we are comparing a prior day that was not heavily discounted, which I'd call a normal day, our guest counts are generally higher this year. Our cafeterias are Texas-born brand, and we are speaking to that proud heritage with our local marketing in a way that speaks directly to the demographics within our various Texas markets.

Fuddruckers remains a strong brand that is widely known and well-regarded. Similar to the value orientation at our cafeteria restaurants, we're promoting our $7, $8 and $9 burger Combo options along with higher price, especially shipments-start premium offerings, such as our Angus truffle-infused burger and our amazing Nashville hot chicken sandwich. What we strive to distinguish ourselves in the crowded, hyper-competitive burger segment is with offering that are imaginative and craveable and with differentiation using our you-top-it fresh produce bar and complimentary melted cheese. No one else does it that way.

Luby's Culinary Services, our contract foodservice brand, continues to be an amenity to the healthcare, senior living communities and corporate dining facilities along with stadium venues and sales through retail grocery outlets. The Luby's brand is a huge asset to growing this business with new account opportunities that know and appreciate the quality and variety of food our brand represents. We custom-tailor solutions that meet the unique requirements and preferences of our valued -- varied clients. This provides us with a competitive advantage in this business segment.

We have net increase of 7 facilities when compared to this time last year. In addition, within our Culinary Services business segment, our package growth offerings have expanded with the addition of chicken tetrazzini in the freezer section of HEB supermarkets in Texas. This complements our existing offerings of the 2 varieties of Macaroni and Cheese and Luby's Famous Fried Fish that we've been selling for about 2 years now. So the packaged good line continues be a nice area of opportunity for us to extend our offerings beyond the restaurant.

Lastly, from a marketing perspective, we have ramped up our advertising efforts in the digital space. The responses confirm the value we offer and the comfortable familiarity of our brands that our guests cherish. We are unique in this, and we'll use it to our advantage.

What Luby's has in Texas, the nostalgic bond people have with fudge, we're a culturally ingrained favorite that inspires community with friend and family, while producing memories that go back for generations. Everyone has a Luby's or a Fudds story. That emotional connection with each of our guests is powerful. We've discovered it, and now we are going to reinforce that connection through our digital channels. This includes paid social, directories such as Yelp, in-app and banner ads and much more. We will no longer be out of sight, out of mind. We are intelligently bringing our brands to the forefront.

We are making our brands relevant again, and the growing response has shown we really do have loyal and passionate guests. We are going to engage with them, get them in and then coming back with our superior product and our outstanding team members that are mastering the art of hospitality. And this is just the beginning. We still have a lot to learn about the diversity of our guests.

Going forward, we will leverage technology and market intelligence to specifically identify our guests and tailor relevant messages and offers that speak directly to them.

I'm excited about the good work that we're seeing throughout our operations teams. I'm thankful to work alongside so many dedicated colleagues as we all focus on the goal of delighting our guests every day, which we know will result in positive outcomes for our company.

With that, I'd like to turn the call over to our CFO, Scott Gray. Scott?

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K. Scott Gray, Luby's, Inc. - Senior VP, CFO Treasurer & Controller [5]

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Thank you, Todd. I'll quickly touch upon the third quarter financial results.

This quarter, we cut our reported loss from continuing operations before income taxes to $5.2 million compared to a loss of $10 million in the third quarter last year. However, if you remove the asset impairment and gains and losses on property sales, the comparison is a slight improvement year-over-year, a pretax loss of $4.9 million this year, compared to a pretax loss of $5.4 million last year.

Adjusted EBITDA decreased $300,000 from essentially $0 in the third quarter last year on total company sales decline -- on a total company sales decline of $11.2 million.

Our restaurant business segment same-store sales decreased 4% in the quarter. However, as Chris mentioned, due to the improved cost management, restaurants store-level profit was up to 10.2%, up from 8.5%. That's a 170 basis point improvement.

So while top line restaurant sales were down $12.2 million year-over-year, store-level profit on the restaurants increased by $0.1 million to $6.7 million in the quarter. The important takeaway here is that we are pruning our investment portfolio of underperforming units and are aggressively managing cost despite declines and general inflation.

The improvement in restaurant store-level profit despite a decline in same-store sales was the result of cost management in certain areas. Food cost as a percentage of restaurant sales decreased as we focused on and returned to classic favorites with favorable food costs. We also continue to manage our hourly labor cost on a per store basis through a focus on restaurant team member staffing. Our restaurant supplies expense and repairs and maintenance expense continued to experience significant reductions in expense over the prior year as these areas remained areas of opportunities for cost management.

Both the Culinary Contract Service and franchise business segments increased segment-level profit in the quarter by $0.3 million combined year-over-year, driven by increases in revenues.

Selling and general administrative expenses increased $0.9 million or $900,000. Included in this net increase is the additional marketing and advertising spending of $600,000 or $0.6 million, as we commit to investments in our digital media efforts, as outlined by Todd.

Also included in the net increase is the $1.2 million increase in restructuring and professional fees related to IT, accounting and other functions due to terminations. Of the $1.2 million increase, $700,000 relates to onetime restructuring-related consulting fees surrounding software upgrades and third-party evaluations of our cost structure and revenue enhancing priorities. Partially offsetting these expenses was a $0.8 million decrease in corporate salaries and other G&A expenses in the quarter.

During the third quarter, our capital expenditures also decreased to $1.1 million compared to $3.7 million in the same quarter last year. While we previously estimated to spend up to $6 million in primarily recurring capital expense in fiscal 2019, we now project CapEx spend for 2019 at approximately $4.5 million.

Based on current year-to-date EBITDA results, the pace of our turnaround and considering past and expected restructuring costs and onetime items, we now expect our adjusted EBITDA to be below the $5 million that we previously were targeting. This estimate remains sensitive to our restaurant sales levels.

Now turning to our balance sheet. We ended the third quarter with a net debt of $32.6 million. That is to say total debt, term and revolving -- revolver less cash on the balance sheet. This is a decrease from $35.8 million in net debt at the end of the last fiscal year, fiscal 2018. The $32.6 million in debt at the end of the third quarter breaks out as $45.4 million in credit agreement debt, which is $43.4 million term debt and $2 million on the revolver, less the $12.8 million in cash, which includes our cash and cash equivalents and restricted cash.

The property held for sale locations with a book value of $16.8 million and an appraised value of over $30 million will provide for future amortization and reduction of our outstanding debt along with a corresponding reduction in our debt service cash interest requirements. The asset sales plan has already resulted in a significant 27% reduction in the $60 million funded debt at the closing of our 2019 credit agreement in December of 2018. In addition, the company has already met the $10 million debt amortization requirement for the current fiscal year 2019 as well as $6.6 million of the $10 million required principal amortization next year in fiscal 2020. Management continues to evaluate its portfolio for improvements in the allocation of capital.

And with that, I'd like to turn the call back over to the operator.

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Operator [6]

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(Operator Instructions) There are no questions at this time. I would like to turn the call back over to Mr. Pappas for any closing remarks.

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [7]

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Thank you, operator. At Luby's and Fuddruckers and our Culinary Contract Service business, we believe we have the right team and members in place and leadership to continue to make progress on our turnaround plans to improve our results. And we look forward to speaking with all our investors again during the next quarter. Thank you and have a very good summer, the rest of the summer. Thank you.

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Operator [8]

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