Q3 2023 BurgerFi International Inc Earnings Call

Participants

Carl Bachmann; Chief Executive Officer; BurgerFi International Inc

Christopher Jones; Chief Financial Officer; BurgerFi International Inc

Peter Saleh; Analyst; BTIG, LLC

Mike Albanese; Analyst; EF Hutton

Presentation

Operator

Good morning, everyone, and thank you for participating in today's conference call to discuss BurgerFi International's financial results for the third quarter ended October 3, 2023. Joining us today are Carl Bachman, CEO; and Chris Jones, CFO. (Operator Instructions)
Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be related to BurgerFi's estimates of its future business outlook, liquidity, store opening plans, same-store sales and restaurant operating margin growth plans, prospects or financial results, including projected sales, restaurant EBITDA.
Forward-looking statements generally can be identified by words such as anticipates, believes, estimates, expects, intends, plans, predicts, projects, will be, will continue, will likely result in similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause the company's actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the annual report on Form 10-K the year ended January 2, 2022 and those disclosed in other documents that the company files with the Securities and Exchange Commission.
Our subsequent written and oral forward-looking statements attributable to BurgerFi or persons acting on BurgerFi's behalf are expressly qualified in their entirety by the cautionary statements included in this conference call. The company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these statements and uncertainties, listeners are cautioned not to place undue reliance on such forward-looking statements.
Also, the following discussion will contain non-GAAP financial measures. For a discussion and reconciliation of these non-GAAP financial measures, please see the earnings release for the third quarter 2023. I would also like to remind everyone that this call will be available via telephonic replay for two weeks starting today. A webcast replay will also be available via the link provided in today's press release as well as on the company's website at www.burgerfi.com.
Now I would like to turn the call over to BurgerFi's CEO, Carl Bachmann. Carl, you may go ahead.

Carl Bachmann

Thank you for joining us today, and we appreciate your interest in BurgerFi. Let me begin by thanking our entire team, franchisees, and employees for their dedication and hard work in this challenging environment. Our third-quarter performance is clearly unacceptable and certainly not reflective of what we believe these brands and the people of this organization can accomplish. Having arrived with the company only 10 days into the quarter, these results are in no way indicative of the work we are doing or where we intend to take the business.
As mentioned on our last quarterly earnings call, we are implementing strategic priorities that we believe are setting the company up for long-term profitable growth. And as we embed these positive changes into our operating model, we highlight our early and ongoing wins as part of this journey, so as to gain your confidence in our vision and ability to build shareholder value from current levels.
Positive initial trends during the third quarter to come to softer performance later in the quarter as we [laugh] last year's 20th celebration at Anthony's, coupled with the impact of reduced marketing spend initiated prior to our arrival. Similar to others in the industry, we also were impacted by softer performance in South Florida, one of our key markets. We believe this was due to seasonality as the region returned to norm -- more normalized trends.
Importantly, such challenges of third quarter are behind us now with many of the initial initiatives we put in place taking hold, including the expanded menus at BurgerFi and the Anthony's. Most recently, we successfully executed the biggest advancement of the BurgerFi menu in the company's history, adding wings and salad bowls, and the response has been resounding. This is only the beginning as further menu refinement, including new chicken sandwiches, will hit company stores by the end of the month.
So it's official: BurgerFi has entered the chicken wars and we're only getting started. These are (inaudible) critical to the brand's turnaround as they eliminate the veto vote, expanding our high-quality offering to an even larger segment of the market.
BurgerFi is also accelerating the adoption of technology to drive food costs down, which are now approaching industry benchmark levels. Looking forward, with the combination of new unit growth and improving same-store sales trends, driven by our expanded offering and overall more effective marketing messages, we anticipate BurgerFi returning to positive comps in early 2024 and positive EBITDA by the second half of 2024.
Additionally, we are equally confident in the returns of positive comps at Anthony's driven by similar initiatives, including menu modification, an aggressive focus on food costs, and the benefits from an updated POS platform. Perhaps, most importantly, we are setting the stage for franchising company owned Anthony's stores, starting as early as the first quarter of 2024. But more on that later.
To give you a sense of why we are confident that we can reach these goals in 2024, I'm going to file the form from last quarter and provide a detailed update on our five strategic priorities. Step one is infrastructure. It starts with employees. I believe we must have the best team on the field to play and the need to develop and train them properly. In just a few months, we have already been able to decrease turnover at both brands and significantly reduce the training labor needed at the restaurant level.
These efforts have resulted in higher consumer satisfaction scores as well as faster throughput and ticket times. While these encouraging metrics are not reflected in our financial performance, they are leading indicators that we are on the right path towards higher sales and margins. We plan to build upon this during the remainder of the year and expect to see an improvement in the labor line at BurgerFi and Anthony's over the next year.
As noted above, we are also upgrading our POS system across both brands. Still they are on one system to allow for better inventory control. At Anthony's, we are evaluating outfitting our servers with handheld tablets that allow them to beam orders directly to the kitchen, which will help drive efficiencies.
Step two, taste and quality, which are paramount to everything we do and why are we going to make sure we continue to have a best products and most innovative LTOs. In October, Anthony's launched new classic menu items, including a chicken alfredo and artichoke pizza and two pasta dishes, spaghetti and meatballs and Italian fettuccine alfredo. Guest feedback has been encouraging so far.
At BurgerFi, when reading guest comments, we know there's a lot of crisp around the French fries with taste loss due to prior cost cutting procedures. For receiving this feedback, we need to rechange the process to prepare the fries in a crisper way. So it bounce-back in taste satisfaction.
Additionally, we also rightsized the menu at BurgerFi by removing less popular and process-intense items that slowdown throughput and ticket times. And on November 1, we launched all new menu items at BurgerFi, including three flavors of chicken wings and four types of BurgerFi's bowls. Additionally, we are launching a chicken sandwich option that will come [sweet], making it easy and efficient for our employees to prepare.
Until now, we haven't really offered a compelling crispy chicken sandwich. We spent the last few months perfecting this crispy chicken sandwich as well as the new grilled chicken sandwich to close our menu gap. Our fast-casual burger branch, it has 10% to 15% chicken mix. And until now, we had virtually none. This will allow us to open a whole new audience of chicken fans.
To add to the menu innovation, BurgerFi will also launch a seasonal white chocolate peppermint shake for a limited time only. These shake features vanilla frozen custard, mixed with white chocolate and peppermint, topped with whipped cream and crushed peppermint pieces.
Step three is gold standards. Gold standards is the term that defines our product, process, and facility, and creates brand promises. We're executing at a higher level than before. With employee and guest feedback, we're moving in the right direction to drive long-term sales growth.
As I began getting a feel for the business through my store tours at Anthony's, I realize that neither employees nor customers were happy with our AI phone answering bot named Becky. As you might recall, Anthony's has added the AI bot to its 60 corporate locations last December to handle the roughly 500,000 phone orders that come in every year.
The goal this rollout was to drive labor savings and higher check averages. However, Becky wasn't doing a very good job. The system had too many prompts and too many steps which frustrated customers. Team members also expressed that they missed interacting with guests. As a result, one of my first act as CEO was to go back having employees answer the phone.
Removing Becky now allows employees to put a human touch back into their many hundreds of thousands of annual phone transactions. Every interaction with the guests is a moment of truth and hospitality can start first on the phone. Additionally, we expect to see some savings from dropping this costly system and have already started seeing a boost in call orders and check average as alienated customers have returned.
Step four is telling the world about our brands through intentional marketing efforts. In September, we launched the Kids Eat Free program at BurgerFi. Every Monday, kind 12 and under can enjoy a free kids meal with a purchase for an adult meal. This is for our dining customers only.
We continue to have some fun around holidays. On National Cheeseburger Day, we celebrated with a $3 cheeseburger with the purchase of a beverage. On National Cheese Pizza Day, we offered $10 16-inch cheese pizza. We're also focusing our efforts on driving digital engagement and our rewards program.
Finally, I will end with step five to finding a portfolio, which is about both store development and optimization. It's not lost on us that while we make positive headway in products, labor and marketing, the most important part of driving profitability and cash flow is cycling out underperforming ones and opening new stores. Over the last three months, we've been closely reviewing our existing portfolio in addition to our pipeline.
The DMAs our restaurants are located in have the demographics to support our brands. We need to understand where we're successful and where we're struggling from a real estate regional or market perspectives. We're currently working on rightsizing our portfolio and closing underperforming restaurants.
Our growth going forward will be focused on infilling the eastern seaboard within existing markets, where we already have a strong brand awareness from corporate and franchise locations and spot risk around those core markets.
We will also grow what we view as promising markets. As of October 2, our portfolio consisted of 110 BurgerFi restaurants, 26 corporate owned, and 84 franchised, and 59 corporate-owned Anthony's. During the third quarter, we closed one underperforming company owned and three franchised BurgerFi restaurants as we continued to right-size our portfolio. Additionally, we closed one underperforming company-owned Anthony's. For the full year, we now expect new store openings coming in at 12 to 15 new restaurants, all of which will be franchised with the exception of our flagship New York City location.
Turning to the fourth quarter, we acquired two franchised BurgerFi in South Florida to solidify our presence and help accelerate growth in this core market. These restaurants are located in Hallandale Beach and Miami Beach, two high-traffic popular spots and represented in the brand's evolution a commitment to continue development in primary markets across the country. We believe these restaurants to be high volume and margin accretive as we fortress South Florida.
In December, BurgerFi will be returning to New York City with the grand reopening of our flagship company owned BurgerFi restaurant and Better Burger Lab on the Upper East Side of Manhattan. Being a born-and-raised New Yorker, reopening our Manhattan location is a passion point for me. There's no better market for us than New York City. It's the epicenter of food, entertainment, fashion, and culture. And having a flagship restaurant there is excellent for brand awareness beyond the immediate geographies.
In addition to our standard menu, this location will offer an exclusive line of limited edition offerings, not available at other locations and a late-night menu with a variety of alcoholic beverages. This restaurant will also serve as a venue for special events.
South Florida, our home market, is a top destination for New Yorkers. And now, our guest can discover BurgerFi in South Florida and go back and enjoy year-round in Manhattan. This is a win-win for both guests and the brand.
We are also still on track to open our first-ever co-branded BurgerFi and Anthony's location in December with our franchisee NDM Hospitality Services. As a reminder, our agreement with them calls for three franchise Anthony's location in Florida over the next two years.
The second and third Anthony's locations through the NDN agreement are expected to be of the smaller Anthony's prototype. The first of these smaller restaurants are supposed to open in the Miami Worldcenter development near the Miami Brightline Station.
We're also expanding our footprint through nontraditional spaces. We entered into a binding license agreement with Apple Cinemas to operate at BurgerFi franchise location within its Pittsford Plaza Apple Cinema in Rochester, New York.
(inaudible) fly tick up in third party delivery service capabilities for non-theater customers. This location marks to new and exciting venture for BurgerFi. Nontraditional venues provide opportunities that would normally be available for restaurants and greatly increase our awareness and visibility of our brands.
In my experience, the best way to accelerate growth and evolution is through these non-traditional avenues. We are aggressively seeking new development opportunities, and our pipeline is growing. We continue to seek unique ways to connect our brand-new customers where they are in line.
And finally, one of my main priorities is buying well-capitalized franchisees with restaurant, retail, and hospitality experience. Bringing these operators into our system results in more disciplined and profitable growth over the long term.
We have already begun negotiations with several interested parties for multi-unit Anthony's franchise deals, including the sale of a handful of Anthony's locations. I look forward to sharing more in the coming quarters.
In closing, my first 90 days on job has been very productive. I'm more confident than ever that I made the right decision to join the company. Sales and margin improvement will not happen overnight, but we are laying the foundation to grow upon. We believe they will come, and these improvements will begin to become evident to you, our stakeholders.
We're making very educated, smart decisions using a very simple formula. We must win for our guests, win for the team members, and win for the shareholders and franchisees.
With that, I will now turn the call over to our CFO, Chris Jones, who will provide commentary on our third quarter 2023 performance and update our guidance. Go ahead, Chris.

Christopher Jones

Thank you, Carl, and good morning, everyone. Well, not evident yet in our financial, please know that this new management team is working hard every day executing a sound strategy that will increase sales and improved margins over time. While top line sales offer pressured margins, that didn't stop the company from continuing to drive labor and cost efficiencies as evidenced by the continued declines in payroll and corporate expense dollars. So bottom line is that the more work we do, log in efficiency today with greater margin expansion opportunity as we come out of the recovery.
Now briefly looking at key highlights for the third quarter. Third quarter total revenues were $39.5 million, decreasing 9% from $43.3 million from the same quarter last year. Revenues contributed $29.5 million to revenues in the current period. The decrease in revenues is a result of a decrease of 15% same-store sales of BurgerFi company stores and a 5% decrease in same-store sales at Anthony's.
As Karl noted earlier, Anthony's face an especially challenging comparison versus prior year due to aggressive promotional activity in the third quarter last year as part of the company's 20th anniversary. This was compounded by sequentially lower marketing spend in the quarter at the end of prior management. All of this was compounded by the fact that 3Q is Anthony's slowest quarter, unlike some of our peers' trends in sales, specifically in the Miami Fort Lauderdale region, are returning to more pre-COVID trends.
Importantly, the company has returned to more normalized marketing program with an increased focus on driving awareness and ultimately traffic, which is already driving improved results. Restaurant level profit margin came in at 11.8%, down 100 basis points year over year.
Similar to last quarter, during the quarter, we saw a positive improvement in food, beverage, and paper, a trend that should continue. As you've probably heard from others in the industry, inflation is weighing on all commodities, except for beef. The new contracts are yielding lower forward pricing. These positive trends were more than offset by higher labor and other expenses largely due to lower sales volume in the period.
Shifting to our individual brand results, for BurgerFi corporate owned restaurant, sales decreased 12% to $7.8 million, reflecting a decrease in same-store sales. System-wide sales of BurgerFi in third quarter decreased 9% to $35.7 million compared to $39.1 million in the year-ago quarter, primarily due to declines in same-store sales coupled with the closure of underperforming company stores.
BurgerFi system-wide same-store sales decreased by 11% for the third quarter compared to the same period in 2022. For corporate-owned BurgerFi same-store sales increased 15% and franchise restaurants same-store sales decreased 9%.
BurgerFi's restaurant-level operating margin increased 440 basis points to 2.2% for the quarter compared to 6.6% in the prior-year third quarter due to loss of leverage on fixed costs due to same-store sales declines. As mentioned earlier, food and paper margins continue to be a positive story, a trend we expect to continue despite the continued pressure on beef prices.
While we are not immune to these increases, we don't expect to see the same level increases that others have seen. Additionally, we are well under discussion with a secondary supplier that should allow us to insulate ourselves from any volatility in beef prices in 2024 and beyond.
We are confident that we will continue to see improvements in food and paper margins due to these benefits and the positive impact in inventory management and procurement system that continue to yield improvements.
Looking into 2024, we believe the combination of menu enhancements, improved marketing and the contribution of new stores will return the positive total growth at BurgerFi, at which point we believe operating leverage of the BurgerFi business will start to emerge in a very compelling way.
Turning to Anthony's, restaurant sales were $29.5 million in the third quarter compared to $31.5 million in the prior year. The decrease was driven by a 5% decrease in same-store sales when compared to the third quarter of 2022. Staying with Anthony's on the restaurant profitability, restaurant level operating margins decreased 20 basis points to 14.3% for the quarter compared to 14.5% for the prior-year third quarter. This was due to loss -- leverage on fixed costs because the same-store sales decline.
Food and paper margins declined modestly in the quarter, despite dramatically higher coal costs and somewhat higher wind prices. Importantly, we expect to see improvements in Anthony's fourth quarter of '23 and a meaningful improvement in 2024 as inventory management and procurement systems is currently positively impacting BurgerFi today, start to take hold of Anthony's.
Additionally, we expect to start rolling out a new POS platform at Anthony's. We expect all 59 stores to be converted by the second half of 2024. The system is a significant upgrade to the 20-year-old-plus platform in stores today, employing handheld devices and advanced KDS technology to drive greater efficiency and customer engagement in the stores. Growth in Anthony's was also [see] as first franchise location opened this quarter, with expectation for more in 2024.
Back to consolidated results, we reported a net loss of $5 million in the third quarter compared to a net loss of $3.3 million a year ago quarter. This year's net loss is primarily due to decrease in same-store sales and reduced gains on employment retention credits compared to the prior-year period, partially offset by lower depreciation and amortization expenses, lower share-based compensation expense, and gain on change in value of warranty liability.
Adjusted EBITDA was $813,000 in third quarter compared to $1.6 million in the prior-year third quarter. The decline in EBITDA was especially evident in BurgerFi business. The company saw lower royalty income in the quarter due to lower franchise sales volumes compounded by a challenging year-over-year comparison that include benefit of significant franchise termination fees in the prior-year quarter. Looking forward, as we look to top-line sales volume, we expect to see royalties to do the same and expect to benefit from new restaurant openings over the next several quarters.
Moving onto the balance sheet, our cash balance on October 3, 2023, was $9.7 million compared to $11.9 on January 2, 2023. When considering our available but undrawn $4 million line of credit, we had $13.7 million of liquidity at the end of the quarter. The decrease in cash of $2.2 million was primarily due to decrease in cash from operating activities of $3.2 million and investing activities of $4.5 million, partially offset by cash provided by financing activities of $1.5 million.
Cash used in operating activities included severance payments due to restructuring professional services related to the continuing financing under the credit agreement, legal settlements, integration costs, and a decline in EBITDA, partially offset by proceeds to the employee retention credits. Cash outflows from investing activities was $500,000 due to capital expenditures, offset by proceeds from the sale of an asset.
Cash provided by financing activities $1 million due to proceeds from issuance of common stock from proceeds from related party note payable partially offset by term loans and lines of credit repayments. Looking forward, as we stabilize top line volumes and resolve nonrecurring cash events, we continue to refocus on use of cash for EBITDA growth.
Now turning to our fiscal 2023 outlook, as a result of our year-to-date performance, we are updating our 2023 guidance. We now expect total revenues of $160 million to $170 million, which assumes a low-single digit decline in same-store sales for corporate owned locations and addition of 12 to 15 new franchise restaurants, including one new Anthony's and our BurgerFi flagship in New York. Adjusted EBITDA of $6 million to $8 million, and we're expecting capital expenditures to be approximately $2 million for the full year.
With that, operator, please open up the call for questions. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Peter Saleh, BTIG.

Peter Saleh

Great, thanks, and thanks for taking the question. I did want to ask maybe just on BurgerFi, about a 600 basis point gap between corporate performance and franchise performance, can you just guys talk a little bit about why that gap and why so wide is their pricing differential as a more regional? I guess that's my first question on the counter.

Carl Bachmann

Yes, Peter, it's Carl. I think you answered your question. So I think it is a combination of both, different pricing strategies. Also, the franchise business is highly leveraged, I guess, in a positive way through the non-traditional space. So they do much higher volumes, obviously, so your airports, et cetera. I think that's the biggest difference.
And then there's some regional performance too. We saw a back to pre-COVID normalcy of trends that we haven't seen in Florida in last few years. And the corporate restaurants are heavily -- may affect all, but one are in Florida, but I think that's the difference.

Peter Saleh

Great. And then just on -- I think you guys mentioned you're assessing the system and closing some underperforming units. Any thoughts on when this assessment will be complete? How many units you plan to close? And just regionality, if you can offer that?

Carl Bachmann

Sure. So we've already start, and we'll continue to do that through the end of the year. We're probably in the low single digits of looking at what's left in our portfolio. So we've already made some closures both on corporate and franchise side. So we're in a much better place today. So I think by the end of the year, we'll have a very good idea -- a full good amount of time to us.

Peter Saleh

And then just, Carl, you mentioned in healthy fast-casual branch, it have 10% to 15% chicken mix because of launching the new chicken sandwich. You're not really involved in that category right now. How do you plan to get the word out on this -- kind of drive that mix higher, which in essence really should be incremental?

Carl Bachmann

Absolutely. Well, first of all, November 1, we launched the first leg of that with our new chicken wings. And it's been extremely successful. We love via the fall, football wings, comfort food, and we have a great product there. We've had great results.
As a matter of fact, the chicken wings were the highest reviewed new LTO in over four years at BurgerFi, of highest reviews we've gotten on any product line.
So that was step one. So that's already started. And really, being able to share that digitally and social media, tying it into the seasonality of football and wings, so we really think that was the starting point. And then when you think about comfort foods and chicken sandwiches and playing in the chicken wars, that's kind of our next step. And we're getting right ready to launch our new improved crispy chicken and our grilled chicken offerings. We'll be testing in our corporate restaurants at the end of this month. So that's really where we're starting with our launch.

Peter Saleh

Great. Thanks. I'll pass it along.

Operator

(Operator Instructions) Mike Albanese, EF Hutton.

Mike Albanese

Yeah, hi. Good morning, guy. Thanks for taking my question. Just one regarding kind of the store optimization and what you're seeing regarding comp sales, maybe the divergence between your highest performing stores than your lowest performing stores, probably excluding the non-traditional mix? Any insight into kind of that divergence would be helpful.

Christopher Jones

I mean, I think for our perspective, I think, we're talked about -- hey, this is Chris, Mike -- is originally, I've seen better trends -- there's really -- soon more recently post this launch. Trends will certainly within the BurgerFi business has really picked up from a traffic perspective. We feel certainly good about that.
As you mentioned in terms of overall location, we are returning to a more seasonalized routines. So we have seen that in Miami Fort Lauderdale area. We will have -- we had challenging September than we were expecting. But as trends tick up late, in October, November, we should be seeing improving trends there as well.
I don't think we're alone since looking at some of our competitors out there, similar data trends there as well. So I'm not sure you can -- when we say there's annual regionality other than that and on the high gap, sort of high low performance, with specific to one area.

Mike Albanese

Got it. That's helpful. I guess just maybe to be more direct, I mean, are you seeing stores at some of your locations that are seeing positive comps versus you have underperforming stores, those things, very negative comp sales, right, because the number that we see is just kind of a mix of everything. I'm just curious what kind of the spread between the two are.

Christopher Jones

Yeah, we have -- I think the thing we did when we first started here is we realigned our operational team and the corporate side is broken into three regions. And those three regions, there's some diversion between the three, but the first leader that we put in place has had the most time in place and you're seeing positive comps in his region. So I think that's a big part of that securing operations.
The other is, for sure, this bifurcation, if you will, of stores that are high performers as well as stores that are not. But I think a lot of it was about solidifying our operational leadership team. Hence, as we've done that, well, a couple of things have happened. Our throughput has gotten better. Our ticket times have gotten better. Our turnovers significantly better, both hourly and management. Thus, really that piece of operational focus has helped us, and that's really kind of created that bifurcation. And early into the third quarter, we then added some more strength to our operational team. And now we're starting to see positive green shoots, if you will, in those two markets as well. So I think that's probably the separation as opposed to a regional separation, if that makes sense.

Mike Albanese

Yes, it does. Thank you very much. That's helpful.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Carl Bachmann for any closing remarks.

Carl Bachmann

Thank you. I just want to say thank you for your time and questions. Chris and myself and the entire team are really excited about our new direction and our recent momentum. I look forward to share our continued improvements on our next call as we progress on this journey. Have a great day. Thank you.

Operator

Ladies and gentlemen, with that. we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.