U.S. Markets closed

Edited Transcript of STKS earnings conference call or presentation 30-Mar-17 9:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 One Group Hospitality Inc Earnings Call

Mar 30, 2017 (Thomson StreetEvents) -- Edited Transcript of One Group Hospitality Inc earnings conference call or presentation Thursday, March 30, 2017 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jonathan Segal

The ONE Group Hospitality, Inc. - CEO, President and Director

* Samuel Goldfinger

The ONE Group Hospitality, Inc. - CFO

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to The ONE Group's Fourth Quarter 2016 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Sam Goldfinger. Thank you. You may begin.

--------------------------------------------------------------------------------

Samuel Goldfinger, The ONE Group Hospitality, Inc. - CFO [2]

--------------------------------------------------------------------------------

Thank you, operator, and good afternoon, everyone. Before we begin our review with the formal remarks, we need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Please also note that these forward-looking statements, including projections, reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. We refer all of you to our recent SEC filings for more detailed discussions of the risks that could impact our future operating results and financial conditions.

Also during today's call, we may refer to certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliation to comparable GAAP measures. We define adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, noncash impairment loss, deferred rent, preopening expenses, nonrecurring gains and losses, stock-based compensation, lease termination costs, transaction costs and losses from discontinued operations. Additionally, we define adjusted net income as net income before net loss from discontinued operations, nonrecurring gains, noncash impairment losses, lease termination costs, transaction costs and stock-based compensation. We define total food and beverage sales at owned and managed units as our total revenue from our owned operations as well as the revenue reported to us with respect to sales at our managed locations, where we earn management and incentive fees at these locations. For reconciliations of these measures to GAAP measures and a discussion of why we consider it useful, please see our earnings release of earlier today.

With that out of the way, I'd like to turn the call over to Jonathan.

--------------------------------------------------------------------------------

Jonathan Segal, The ONE Group Hospitality, Inc. - CEO, President and Director [3]

--------------------------------------------------------------------------------

Thank you, Sam, and good afternoon, everyone. I would like to thank you all for joining us on this call today as well as for your continued interest in The ONE Group.

I'm going to start with a brief review of this past year, however, the majority of my remarks will detail our plans for 2017. Then Sam will walk you through the financials and introduce forward-looking guidance for 2017.

2016 was a challenging year for both The ONE Group and the restaurant industry as a whole. However, we noticed some bright spots during the second half of the year with the opening of STK Toronto in September and STK Denver in January 2017. We are exceptionally pleased with the brand performance in both markets and sales are exceeding our initial expectations.

This gives us confidence in the future of our brand within these markets for additional hospitality and license deals. Additionally, the decline in the sales that we experienced throughout 2016 began to slow towards the end of November into December, and I'm delighted to say that the rebound has continued into the first quarter of 2017.

In 2016, the restaurant industry faced several challenges that affected our business, and thus our performance fell short of our expectations. The industry as a whole is suffering from increased labor and commodity costs, rising rents and falling demand. Regretfully, sales have suffered across the board, with the industry reporting 8 out of the last 9 months with negative comparable same-store sales. Consumers are dining out less, and therefore, restaurants have little chance to compensate rising cost with increased prices.

This trend affected our business, and we continue to face sales pressure in the fourth quarter with total and managed same-store sales down 5%. Importantly, however, our sales began to recover throughout December and have continued to improve throughout the first quarter of 2017. To date, with only 2 days to go in the quarter, same-store sales are up approximately 1.5% for the quarter of 2017.

And when adjusting for the extra day related to the leap year in the prior year, our same-store sales are up 2.5%, underpinning the sequential improvements. As far as our operation in Europe is concerned, despite the political turmoil surrounding Brexit, same-store sales are up over 10% for the first quarter. Many analysts are commenting that consumers are no longer just looking for a great meal when eating out, but also a more inclusive experience. This is something that we have always talked about and sought to do with the great social and vibe atmosphere we create in all our STK restaurants. Therefore, as we march through 2017, our team continues to focus on the key unique factors that differentiate The ONE Group as we manage our business for sustainable long-term growth.

As management, we do however believe that difficult times like these call for tough management decisions. It is not enough to rely on our differentiation to ensure success. We realize the need to be much more aggressive in our approach to operations. That said, I believe the whole restaurant industry is going through radical change. In fast casual restaurants, technology will start to replace cashiers, and in some cases, perform routine kitchen functions.

Casual and fine dining restaurants will continue to look for ways to operate with less staff, less oversight, smaller menus. In fact, anything that will help reduce operating and labor costs. And there will, of course, be the inevitable slowdown in the number of new restaurants as the industry consolidates in advance of a recovery.

With all this in mind, our priority is to increase sales and profitability within our current restaurant portfolio. To this end, we have embarked on a more aggressive marketing campaign, which is paying dividends as evidenced by the notable improvements in our sales.

We have recentralized reservations, and have altered how we handle the group and event business at each of our restaurants. And finally, we have analyzed our operating practices both in the front and back at house in order to become more efficient. In early 2017, we undertook an initial internal strategic review of our operations, and began implementing these changes towards the end of February into March.

Due to the costs that were necessary to implement the changes, we believe the savings will materialize in the second quarter. The internal review we conducted did not just focus on in-store performance and costs, but also covered SG&A, our deal pipeline and the general performances of all of our stores. Commenting first on the store review, in an effort to improve profitability, we made the decision in late December to close our underperforming STK restaurant in Washington, D.C. In doing so, we optimized our restaurant portfolio, thus enabling us to relocate valuable resources to our best-performing locations.

With regard to our deal pipeline, we continue focusing our growth solely on the asset-light side of our business. As stated throughout the last year, we have paused signing new leases for company-owned STKs as we are focusing our attention on management and licensing deals, which are very profitable for the company and eliminate the need for major capital expense.

The demand for the brand is still strong. As a result, we are able to sign attractive deals that allow our partners the unique opportunity to leverage our restaurants and hospitality experience, whilst allowing us to execute on our growth strategy with a lower capital investment producing high-margin EBITDA royalty stream. For 2017, we have reduced the number of company-owned stores we are opening to 2: STK in San Diego and the Andaz Hotel, which will accompany the food and beverage we began managing at the hotel in September 2016. STK Austin will open at the end of 2017 or in the first quarter of 2018, complete with a 4,500-square-foot roof terrace in the downtown district adjacent to the city's convention center and hotel district.

As part of our review, we are no longer moving forward with the company-owned STKs in Dallas, Boston or Edinburgh, which will dramatically reduce our need for capital. The company will still maintain an aggressive expansion plan based around its asset-light model. In line with that, we will be opening 4 STKs through licensing agreements in the second half of 2017.

These include an STK restaurant and STK Beach in the Condado Vanderbilt Hotel in San Juan, Puerto Rico, and STK at the Address Hotel downtown Dubai, located in the heart of the city's dining and entertainment district, and the STK Beach at the Rixos Hotel located adjacent to Dubai's Marina district. Finally, an STK in Doha, Qatar, in partnership with Qatar Hospitality located on the top floor of the city's newly renovated Ritz-Carlton Hotel, overlooking the Arabian Gulf and featuring exceptional city views.

The final part of our strategy review was the company's SG&A. In February, we took steps to flatten and right-size the corporate structure, aiming to better support our strategy, while reducing overall selling, general and administration expenses and enhancing our overall profitability. While it's always a difficult decision, the environment requires tough decisions, and this realignment is necessary to ensure the business run as efficient as possible, whilst we remain focused on our asset-light business and execute on our key strategies.

The realignment, which includes the elimination of certain managerial positions and other corporate personnel both in the U.S. and in Europe, is expected to generate annualized SG&A savings of approximately $2 million. Despite my opening comments about the state of the industry and belief that 2017 will also be a challenging year for the industry, I'm confident the changes that we have made in all areas of the company will set us up for success this year.

Sales have started strong. Savings are filtering through, and capital requirements have been greatly reduced. We are confident that we now have the right structure, team and strategies in place to enable us to drive our brand forward and create long-term value for all shareholders.

With that now, I would like to turn the call back to Sam, who will provide more detail on our financial performance as well as introduce guidance for 2017.

--------------------------------------------------------------------------------

Samuel Goldfinger, The ONE Group Hospitality, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Jonathan. For the fourth quarter ended December 31, 2016, total GAAP revenues were $20.4 million representing a 9.7% increase compared to $18.6 million in the fourth quarter of 2015. Comparable sales for owned and managed STK units decreased by 6% for the quarter. Comparable sales from only owned STK units decreased 7%. The decrease in same-store sales was driven by a decline in tourism in our core markets, reduction in event and business dining, as well as the uncertainties surrounding the presidential election in November.

As Jonathan noted, for the first quarter 2017, comparable store sales have returned positive. Including in our total revenues are owned unit net revenues of $18 million, which increased 7% versus $16.8 million in the fourth quarter of 2016. The increase was primarily due to the STK at Orlando and was partially offset by the decline in comparable sales. Management and incentive fee revenues increased 35.2% to $2.4 million in the fourth quarter of 2016 compared to $1.8 million in the fourth quarter of 2015.

The increase was driven by an increase in management and incentive fees at the ME Hotel London and Milan as well as the STK in Toronto, which opened at the end of September 2016. This was partially offset by a slight decrease in management and incentive fees at our STK in Las Vegas. Food and beverage sales at owned and managed units increased 5.6% to $44 million in the fourth quarter of 2016 compared to $41.7 million in the fourth quarter of 2015.

It should be noted that food and beverage sales at owned and managed units are not a GAAP figure. Switching to expenses, food and beverage costs as a percentage of owned unit net revenue increased approximately 21 basis points to 25% in the fourth quarter of 2016 from 24.7% in 2015. The slight year-over-year increase was driven by the opening of the new STK unit in Orlando. As mentioned before, we typically run higher than normal when -- for food and beverage costs during the first 6 to 9 months of a restaurant. Today we have locked in approximately 50% of our 2017 beef purchases and expect our food and beverage cost to be relatively flat for 2017 as compared to 2016.

Unit operating expenses increased approximately $1.1 million to $11.5 million in the fourth quarter of 2016 from $10.4 million in the fourth quarter of 2015. Included in unit operating expenses are approximately $250,000 of deferred rent income in Q4 of 2016 and approximately $650,000 deferred rent expense in the fourth quarter of 2015. As a percent of owned unit net revenues, unit operating expenses increased approximately 248 basis points to 64.3% in the fourth quarter of 2016 from 61.8% in the fourth quarter of 2015. The year-over-year increase was a result of the opening of our STK in Orlando. Please note that we typically do run higher cost associated with restaurant openings to ensure a successful execution.

In addition, the impact from fixed costs over the decline in same-store sales also cause the increase in the percentage. General and administrative cost decreased $70,000 to $3 million in the fourth quarter of 2016 from $3.1 million in the fourth quarter of 2015. As a percentage of total revenues, G&A decreased approximately 180 basis points to 14.7% in the fourth quarter of 2016. The year-over-year decrease in the percentage was largely attributable to the leveraging of fixed costs over our sales increase as a result of the opening of the new STK units in 2016.

As Jonathan mentioned, on a go-forward basis, we believe the annualized impact from cost-saving initiatives that will impact G&A to be approximately $2 million. Depreciation and amortization expense increased $248,000 to $819,000 in the fourth quarter of 2016 from $571,000 in the fourth quarter of 2015. Restaurant preopening costs for the fourth quarter of 2016 increased $646,000 to $1.5 million from $866,000 last year. And this was primarily due to the 2016 preopening cost, which included the cost for the STKs in Denver, Toronto and San Diego, as well as the preopening expenses relating to the ME Hotel in Miami. 2015 primarily included the preopening cost for the STK in Chicago. Interest expense net of interest income was approximately $187,000 in the fourth quarter of 2016 compared to $34,000 in the fourth quarter of 2015, due primarily to the interest associated with the subordinated debt that was entered into in 2016.

Income tax expense was $13.9 million in the fourth quarter of 2016 compared to an income tax benefit of $3.7 million for the fourth quarter of 2015. In the fourth quarter of 2016, we had to record a noncash full valuation allowance to get to our deferred tax asset, which amounted to approximately $12.7 million. The fourth quarter of 2015 included a noncash tax benefit of approximately $3.6 million. Fourth quarter 2016 reported net loss attributable to The ONE Group was $16.1 million as compared to a net income of $1.6 million in the fourth quarter of 2015.

This number is net of minority interest holders, which correlates primarily to our STK unit in the Meatpacking District of New York City. Excluding discontinued operations and previously mentioned onetime expenses, adjusted net loss for the quarter was $2 million or $0.08 per share compared to adjusted net income of $4.4 million or $0.18 per share in the fourth quarter of 2015.

The primary reason for the year-over-year increase in adjusted net loss was driven by the year-over-year swing in the noncash income tax provision of approximately $4.8 million and to a lesser extent, the reduction in unit level profitability from the decline in comparable sales.

Adjusted EBITDA attributable to The ONE Group was $1.5 million in the fourth quarter of 2016 as compared to $2 million in the fourth quarter of 2015. We had included a reconciliation of the adjusted EBITDA to GAAP net income from continuing operations, adjusted net income to GAAP net income from continued operations and a reconciliation of GAAP revenue to total food and beverage sales at owned and managed properties in the tables in our fourth quarter release.

In regards to our liquidity, we ended the fourth quarter of 2016 with approximately $1.6 million of cash and cash equivalents. At December 31, we had approximately $16.3 million outstanding under our debt facilities.

We project that our total capital expenditures for 2017 will be approximately $3.3 million, which is net of landlord allowances. Before we open the call up for questions, I'd like to provide some forward-looking commentary to help you model our business.

Once again, all this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We, as always, remind our investors that the actual number and timing of new restaurant openings for any given period is subject to a number of factors outside of the company's control, including weather conditions and factors under the control of landlords, contractors, licensee and regulatory and licensing authorities.

With regards to our food and beverage costs for 2017, based on information available now and expectations as of today, we estimate that total food and beverage cost to be approximately 25% for 2017. Current estimate is based on negotiations with suppliers, coupled with current and expected market conditions concerning fresh and other commodity items that the company is either unable to or has currently elected not to contract for longer periods of time. As of today, we've locked in approximately 50% of our beef price commitments for the full year. Beef currently represents approximately 30% of our total food and beverage costs.

In addition, we'd like to provide commentary to help you bridge 2016 actual results with projecting 2017. As Jonathan mentioned earlier, we have put in place several initiatives that have reduced general and administrative costs at the end of 2016 and into early 2017. We project these savings to be approximately $2 million on an annualized basis, and the impact for 2017 is projected equal approximately $1.5 million.

Secondly, please note that closing our STK unit in Washington, D.C., closing our Cucina Asellina in London, as well as terminating the lease for the old STK in West Hollywood will benefit us by approximately $800,000 in 2017 by not having those losses in our results.

Lastly, we had several new venues open over the last year, including our owned STK in Orlando, which opened in May, our STK in Ibiza which is a license deal and opened in July, the STK in Miami at the ME Hotel, which is a management deal which opened in August, the STK Rooftop in San Diego, which is a management deal; and the STK in Toronto, which is also a management deal, both of which opened in September. If we factor in the G&A savings, the removal of losses from closed venues and the full year run rate for the venues that opened in 2016, we estimate that our run rate food and beverage sales at owned and managed units to be in the range of $170 million to $180 million, and our run rate GAAP revenue to be in a range of $70 million to $80 million.

We also estimate that our run rate adjusted EBITDA once again when factoring full year for operations for units described above as well as the G&A savings and the removal of the losses from the closed venues will range between $9 million and $10 million. With that said, I would now like to open the call for questions. Operator, please open the lines.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) There are no questions. I'd to turn the call back over to Mr. Jonathan Segal for closing remarks.

--------------------------------------------------------------------------------

Jonathan Segal, The ONE Group Hospitality, Inc. - CEO, President and Director [2]

--------------------------------------------------------------------------------

I just like to thank everybody for taking the time to join us today, just to hear information on the company. As I mentioned in my statements, that although 2016 was tough and 2017, I think, is going to be challenging, I'm very, very excited about where we are as a company. We certainly are seeing a change in attitude from our team members with regard to the changes that we put in place that will set us up for success. And so with everything that we have in place today, I feel confident that 2017 will be a marquee year for us and that will change for the future success of the company. So on that note, I just like to thank everyone for joining us.

--------------------------------------------------------------------------------

Samuel Goldfinger, The ONE Group Hospitality, Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, everyone.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.