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Edited Transcript of LUB earnings conference call or presentation 28-Jan-19 4:00pm GMT

Q1 2019 Luby's Inc Earnings Call

HOUSTON Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Luby's Inc earnings conference call or presentation Monday, January 28, 2019 at 4:00:00pm 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

* Steve Goodweather

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

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Conference Call Participants

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* Soraya Benitez

Cougar Capital - Analyst

* George Green

- Private Investor

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Presentation

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Operator [1]

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Greetings, and welcome to Luby's Fiscal 2019 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Goodweather, Vice President Financial Planning and Analysis. Thank you, sir. You may begin.

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

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Thank you. And again, welcome, everyone, to Luby's 2019 Fiscal First 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, January 28, 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. 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 would like to now turn the call over to Luby's President and CEO, Chris Pappas.

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

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Thanks, Steve. Good morning, everyone, and thank you all for joining us on today's conference call. I'll begin with an update on the quarter and our turnaround plan followed by a recap of our annual shareholder meeting that was held on Friday. I will then turn the call over to our COO, Todd Coutee; followed by remarks from our CFO, Scott Gray.

We continue to navigate through a challenging competitive environment during the first quarter and experienced pressure on the top line with a 3% same-store sales decline in our Cafeteria brand and a 5.5% same-store sale decline in total company sales. However, our Culinary Contract Service business remained strong and we increased sales in the first quarter by $2.6 million to $9.5 million, which represents a 10.4% of sales in the first quarter of 2018 versus 6.6% in the prior year quarter.

From an expense perspective, we reduced our food and operating cost at a greater percentage than the sales decline. In addition, we've taken substantial actions to restructure our corporate overhead that will result in more than a $3 million saving in selling, G&A and administrative costs.

We know we have a lot of work to do. While sales pressures persist, we continue to make progress on a turnaround plan to generate consistent and sustainable same-store sales growth and improve store profitability, all with the goal of increasing our shareholder value. The 4 pillars of our strategic plan include: first, raising awareness of our brands, a lot of marketing; second, strengthening our core operations; and third, optimizing the business for the future; and fourth, that we maintain strong corporate governance.

We are taking targeted actions to keep up with the evolving restaurant industry, which include raising the level of execution and the quality standards that have always been the core of Luby's, rightsizing our corporate overhead and pursuing plans to refranchise many of our company-owned Fuddruckers. Ultimately, our goal is to capitalize on what people love about the Luby's brand. We're taking food and service in a friendly environment for lunch and dinner while focusing on how to innovate the growing ways that connect with today's consumer. There's a lot of digital aspects of that.

We'll continue to further enhance the guest experience at each of our restaurants to remain relevant and appealing to keep loyal guests coming back and to draw new ones. We're taking steps to improve our financial flexibility, including a property asset sales program, which has generated proceeds of $26.8 million to date, or about 60% of our $45 million target.

We also refinanced our debt, closing on the $60 million worth of refinancing on December 13, 2018, which, at the same time, put almost $20 million in cash on the balance sheet. Scott will provide more detail later in the call.

Now I'd like to turn to a discussion of our Annual Shareholder Meeting that was held last Friday.

We'd like to thank all our shareholders who participated in voting for the directors at the Annual Meeting. We believe that there is significant value to be realized at Luby's. Based on the preliminary vote count, we are pleased that our shareholders have chosen to elect the company's slate of highly qualified directors to chart the path forward for Luby's. With this annual election now completed, our full focus returns to executing our turnaround plan. We will be working tirelessly helping Luby's reach its full potential in order to drive value for all of you, our shareholders.

As we move forward, I'd like to say a few words about where we've been and where we are going as a company. The reality is that our restaurants have adapted to a great number of changes over the decade and this leadership team has a successful track record of steering the company through previous difficult periods in the restaurant industry cycle. Through each of these shifts, Luby's has maintained its purpose, culture and vision. Today, our primary brands, Luby's Cafeteria and Fuddruckers are iconic American brands with legions of loyal guests.

The business of operating these mature brands in a highly competitive marketplace is tough. But we believe that we have the experience and dedicated people to operate our company to the highest standards and manage the business to return to profitability and ultimately more growth. We believe that our company has tremendous value both from its iconic brands and their operations as well as our company assets.

The Luby's Fuddruckers brand that feeds millions of guests each year have tremendously loyal dedicated followers as reported in recent restaurant surveys that take -- place both brands as best-in-class when raised against their peer popularity. In addition, our real estate has value and offers us flexibility that many of our competitors don't have. The real estate offers greater flexibility when the time comes to relocate or exit a location as capital can be redeployed or used to repay the debt, especially.

In 2000, when we came onboard, we had to close underperforming stores and take decisive action for Luby's debt and operations. By 2006, that debt was paid off. We were profitable and growth started back with new stores. By 2009, in the financial crisis, we again had to follow a similar strategy and by 2013, our stock had doubled. Here we are today. And some of that strategy is put in place and is needed again to get operations turned around with the right people in positions, close underperforming locations, pay down our debt, rightsize our overhead costs and reestablish the foundation needed for future growth. We strongly believe that our future is bright. The story of Luby's today is one of progress, especially when it comes to delighting our guests with the unique experience and delicious comfort food that has always made Luby's Cafeteria and Fuddruckers great. We are proud to be part of this community of family and friends that enjoy making Luby's and Fuddruckers a part of their daily lives. And we look forward to serving generations to come as we work to enhance shareholder value.

Now I'd like to turn the call over to Todd Coutee for some comments. Todd?

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

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Thank you, Chris. I'm pleased to join the call today. Since I last spoke with you, I've been hard at work realigning our organization by getting the right people in the right positions, coaching our restaurant managers and inspiring our front-line employees by setting the right tone and leading by example. In just a few months, I've witnessed positive changes in all aspects of our operations, but particularly with staff engagement with our guests. As we work on repositioning our brands, our marketing team is utilizing more measurable, digital marketing campaigns in conjunction with traditional media outlets. Our intention is to highlight the differentiation with respect to our competitors.

Within our Luby's Cafeteria business, we continue to provide guests convenient, great tasting, home-style meals at an excellent value in a comfortable environment. We have an intense focus on product execution and menu innovation in order to keep our Texas comfort food up on trends. Luby's Culinary Services, our contract foodservice brand, continues to be an amenity to healthcare, senior-living communities and corporate dining facilities along with sales through our retail grocery outlets.

Fuddruckers remains a strong brand. We plan to refranchise many of our company-owned Fuddruckers, as we transition to a primarily franchise model while retaining company-owned stores in our core market of Houston.

I'm excited to be working alongside Chris with our executive team and most importantly, our dedicated team members and loyal guests. 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 [5]

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Thank you, Todd. Before I begin, I just want to give -- extend a thanks to all of our employees who we serve and who represent our team here at Luby's Inc. for their dedication, their efforts and their trust.

Just prior to the end of our first fiscal quarter, 12/19/2018, we completed our debt refinancing that Chris mentioned. This funding provides the company the necessary liquidity as we execute on our turnaround plans to enhance our operating performance. The new debt agreement with MSD Partners, which is Michael Dell Partners, is comprised of 3 elements: a $60 million 5-year term loan, a $10 million delayed draw term loan and a $10 million revolving credit facility. Now the $60 million term loan closed on December 13, which is a refinancing of our existing outstanding, just below -- around $40 million outstanding. As a result of that draw at the close, we had $19.8 million in cash on the balance sheet, subsequent to the close at the end of the quarter on December 19, 2018. Of this cash balance, $11.1 million is classified as restricted cash that is earmarked for interest expense payments as well as other cash balance commitments.

As previously discussed in our -- it is our intent and desire to reduce the debt balance as soon we can. We have our asset sale plan that we've announced back in April. And as it's listed in our press release, we're 60% complete with that plan, and we plan to utilize the sale of those property sales to lower the debt.

I'll quickly touch on the first quarter financial results next.

Adjusted EBITDA was a positive $1.2 million, down $0.8 million from first quarter last year. The decrease was primarily the result of a $1.9 million decline in restaurant level profits, partially offset by increases in franchise segment profit and culinary services segment profit as well as a decrease in SG&A expenses. It is worth noting that the SG&A costs in the first quarter did include this year approximately $1 million in onetime proxy solicitation and communication costs as well as onetime employee severance costs. Normalizing that impact, SG&A costs decreased $1.3 million and EBITDA increased modestly year-over-year about $200,000. We look forward to improved results year-over-year next quarter.

While the first quarter results are hardly an acceptable result on their own, relative to our trend, it does represent sequential improvement. In fact, food costs and operating expenses, as a percentage of restaurant sales, improved despite a 3% cafeteria same-store sales decline and an overall 5.5% same-store sales decline.

We realized a 100 basis points improvement in food costs as a percentage of restaurant sales due, in large part, to an increased average menu price. Operating costs as a percentage of restaurant sales also improved due to improved cost controls in restaurant supplies. These improvements were partially offset by higher payroll and related costs as a percentage of restaurant sales.

Our capital spend was also curtailed as planned at $1.1 million in the first quarter, down from $4.3 million last year in the first quarter. We are on track to keep our maintenance CapEx spend below $8 million which is targeted for fiscal 2019.

Our sales trends after the first quarter ended December '19, 2018 have improved. We did have a few days of easy comps last year where there was severe weather in the prior year though, but even normalizing that impact, sales trends have improved from the first quarter performance.

In our last call, we indicated that our projected EBITDA for fiscal 2019 was projected at the low end to be $5 million for the year. Based on our current outlook, including the improved sales trends, we reaffirm that that continues to be the low end at $5 million, and we look forward to it improving as this year progresses. We'll keep you updated on our calls each quarter.

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

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [6]

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Thank you, Scott. Here at Luby's, we believe the right team and leadership is in place to grow our sales and margin, improve our corporate costs, reduce our debt and enhance our returns. Each step we are taking is the goal of returning to profitability. With that, operator, we're now open for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [George Green], a private investor.

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George Green, - Private Investor [2]

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In the $80 million credit facility with MSD Partners, what was the evaluation of that MSD used of Luby's real estate?

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

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In regard to that, I'm not sure where they were showing that in the credit facility. I don't think it's -- it's not disclosed in the credit facility. And that's something that we don't disclose to the public.

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George Green, - Private Investor [4]

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In what way would it harm Luby's or Luby's shareholders if the estimate of Luby's real estate evaluation, either by Luby's or by MSD Partners, was made available to Luby's shareholders?

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [5]

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The -- it's just a practice that we've chosen over the years. We're running the business as a operating company and such, and we believe the value is driven and looked at oftentimes that the value [you're] looking at is how we're operating as a company.

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Operator [6]

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Our next question comes from the line of Soraya Benitez with Cougar Capital.

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Soraya Benitez, Cougar Capital - Analyst [7]

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Just 2 quick ones from me. One on the maintenance CapEx that you say you plan to leave at sort of the $8 million low. I'm just curious how many of the Luby's Cafeteria or any of the other brands need remodeling? How old is that sort of remodel life? And at what point might you need to sort of raise it from that level? How much flexibility do you have is the first question?

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [8]

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Thanks for being on the call today. The maintenance CapEx is -- that we show of, I believe it's...

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Benjamin T. Coutee, Luby's, Inc. - COO [9]

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It's $1.1 million a quarter.

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [10]

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$1.1 million. And we have an amount for the -- estimate for the year.

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K. Scott Gray, Luby's, Inc. - Senior VP, CFO & Treasurer [11]

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We've estimated that $8 million -- that it'd be less than $8 million -- the high side.

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [12]

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And that would be going toward just the normal repairs that are capitalized and such, air conditioners and things that are a multiyear write-off that have to be capitalized. Over and above that, we have the right to go ahead and do some remodeling and such like that if we need to. And those -- that's what would raise that number up above...

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K. Scott Gray, Luby's, Inc. - Senior VP, CFO & Treasurer [13]

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Yes, we're primarily focused on trying to increase the operating -- cash flows from operations, then we can start remodeling.

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [14]

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Right. Right. And we -- and over the years, we've attended to a lot of that updating as well that we felt like was just purely necessary to being over and above the normal run rate of things that needed to get repaired that were capitalized. So we've done a lot of that over the years. And it would be nice to do some more of it. But at this time, the current situation, we're going to focus on maintaining a little more level that would just take care of most of the day-to-day capital, the normal capital expenditures that fall in this range that we've described.

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Soraya Benitez, Cougar Capital - Analyst [15]

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And then just on the marketing, I think you said it in your comments a little bit earlier as you were talking about these pretty mature brands in a pretty competitive environment, I'm just curious to know what specifically are you doing in marketing? I mean, it sounds to me you're doing a lot of -- controlling a lot of the controllables within your P&L. My question would be, just to, sort of, stem the hemorrhaging and the decreases in traffic, what exactly -- how do you exactly plan to stop that hemorrhaging?

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [16]

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Thank you. Todd, you want to speak to our marketing side?

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Benjamin T. Coutee, Luby's, Inc. - COO [17]

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Yes. In respect to Luby's, we're going to work on connecting the brand back to Texans. We're going to talk about our food in terms of being Texas comfort food. We're going to talk about all of our local partners in Texas. We're going to look at towns we've been in in the past, of course, as a brand, and use the normal mediums of advertising, billboards, potentially some television. We're also looking heavy at digital campaigns to talk about Luby's.

In Fuddruckers, in regards to how we differentiate ourselves with the guests' ability to build their own special burger as well as we're working on some more market trend burgers in different varieties.

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Soraya Benitez, Cougar Capital - Analyst [18]

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Okay. One last one from me. So you have this one outlying Cheeseburger in Paradise sort of chain. Is this a drag on the P&L? What do you plan to do with that sort of standalone? I mean, you've been negative comping there for quite some time?

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [19]

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We've gotten it down to just 1 location that is profitable, and so we've taken the actions this last year to go ahead and get down to this level and -- where it's not going to be a drag on us. So thank you, that's very good.

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Operator [20]

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Our next question comes from the line of Sandra McDaniel, a private investor. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

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Christopher J. Pappas, Luby's, Inc. - President, CEO & Executive Director [21]

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Thank you all for joining us today, and we look forward to speaking with you again next quarter. We're going to be working hard to maintain your confidence in us, and we look forward to visiting with you again next quarter in regard to our Luby brands. Thank you.

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Operator [22]

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