ONE Group Hospitality Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 14, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to The ONE Group Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Tyler Loy. Please go ahead.

Speaker 1

Thank you, operator, and hello, everyone. Before we begin our formal remarks, let me remind you that part of our discussion today will include forward looking statements. These forward looking statements are not guarantees of future performance, and you should not place 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 reflect our opinion only as of the date of this call.

Speaker 1

We undertake no obligation to revise or publicly release any of these forward looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During today's call, we will discuss certain non GAAP financial measures, which we believe can be useful in evaluating our performance. However, the presentation of these measures or other information should not be considered in isolation or as a substitute for renewal prepared in accordance with GAAP. The reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales and total food and beverage sales that owned and managed and licensed units, the GAAP measure, Along with the discussion of why we consider these measures useful, please share earnings release issued today.

Speaker 1

With that, I would like to turn the call over to Manny Hilario.

Speaker 2

Thank you, Tyler, and hello, everyone. We sincerely appreciate you joining us today and for your interest in The ONE Group. To begin, I would like to express my gratitude to each of our dedicated team members. Our results would not be possible without their unwavering commitment to being the best restaurant in every market we operate by delivering exceptional and unforgettable experiences to every guest every time. Thanks to our remarkable teams, we have solidified our leadership position in Vibe Dining in both high end and polished casual.

Speaker 2

Let me begin by discussing our 4th quarter financial highlights. First, we delivered record quarterly revenue of nearly $90,000,000 and record quarterly EBITDA of $14,500,000 a 11.5% increase versus last year. Our restaurant level margin increased 40 basis points to 19.2 percent driven by 120 basis point improvement in cost of goods and other cost savings initiatives we have put in place. G and A as a percentage of revenue improved by 80 basis points driven by cost management of controllable expenses. All of this drove adjusted EBITDA expansion of 140 basis points to 16.1 percent of revenue.

Speaker 2

Also during the quarter, we opened 4 new company owned restaurants, reinforcing our ability to open restaurants every 4 to 6 weeks. In October, we opened an STK in Charlotte, North Carolina and a Kona Grill in Phoenix, Arizona, our 3rd Kona Grill in the area. In December, we opened an STK in Boston, Massachusetts and an STK in Salt Lake City, Utah. These restaurants are off to strong starts and their success bolsters our belief in the long term EBITDA and earnings power of our development pipeline as we demonstrate industry leading ROIs for our shareholders. These four restaurants along with the addition of the other venues early in the year allow us to increase our consolidated revenues 5.1% for 2023 and deliver $40,100,000 in adjusted EBITDA.

Speaker 2

In addition, they will deliver more run rate EBITDA into the future. We are also pleased with the addition of STK Washington, D. C, which just opened today. Now looking towards 2024, I would like to discuss our key priorities for the year. 1st, continue to drive sales.

Speaker 2

The 1st few months of the year have pointed to a choppy and challenging sales environment, which will require a sharp focus on value and execution. As a result, we have placed an emphasis on value with a focus in our $3 $6 $9 $9 Happy Hour and launch of Steak Night America priced at $69 per person at STK and $39 for Kona Grove, both of which are exceptional values. Our happy hour program is one of the most compelling in the industry as we offer a sampling of offerings from our main menu at attractive entry price points. The velocity of the State Park continues to accelerate and it is a key initiative for the company. In addition, we will continue to own the holidays and special occasion business.

Speaker 2

As you probably know, our guests love to celebrate with us and our venues really come to life for these occasions. During the Q1, we had a record Valentine's Day and we are looking forward to Easter, Mother's Day as well as the many birthdays, anniversaries to be celebrated with us. To emphasize these messages, we will overlay our robust digital marketing capabilities across these strategies along with fantastic guest experiences, our culinary innovation and premium product lines such as white goods from around the world and our bounties of the 7 Seas promotions. Our second key priority for the year is to improve Kona Grill margins. Remember that we purchased a brand in the Q4 of 2019 and within 6 months we were in the grips of the COVID-nineteen pandemic.

Speaker 2

2023 was the 1st year we had the opportunity to assess what we consider to be normalized operations in a more normal environment. Of the 24 restaurants we purchased, we have 18 locations with an AOV of 5,600,000 dollars and approximately 13% restaurant level margins, both of which we consider to be healthy, although we believe further revenues and margin improvement exist at those restaurants. When added to the new Kona Grill restaurants we have built in our building, we believe a 17% restaurant level margin is possible for the future. Conversely, we have 6 Kona Grills whose AOVs are $3,900,000 and generate modest restaurant level margins. These restaurants created an approximate 300 basis points impact to the overall margin profile of the brand in 2023 and we plan to address these restaurants on a case by case basis.

Speaker 2

For both brands, we have implemented several initiatives to improve restaurant operating profit and overall profitability for our company. These initiatives are focused on purchasing efficiencies for both food and operating supplies, maximizing productivity through smart scheduling and evaluating 3rd party vendor relationships and reducing travel costs. As you can see from the 4th quarter performance, these initiatives have started to positively impact the margins. We believe the momentum will continue into 2024. Our third key priority for the year is to rely on self funded growth for comping owned restaurants and renew our asset light development focus.

Speaker 2

Coming to 2024, we believe we can sustain all of our development and investment activities through only cash flow generated from operations. This year, we expect to open 6 to 8 new venues with 1 or 2 of them being managed or licensed. This is inclusive of the STK in Washington, D. C. Located at the Marriott Grand Marquis that opened today.

Speaker 2

There are currently 3 additional company owned restaurants under construction in the following cities which we anticipate will open in the near future. An STK restaurant in Aventura, Florida at the Aventura Mall, a Kona Grill restaurant in Tigard, Oregon at the Bridgeport Village and a Saltwater Social restaurant, a seafood high end vibe restaurant in Denver, Colorado in the Cherry Creek neighborhood. Circling back to our managed and licensed business, we are seeing increased growth in opportunities in the managed and licensed side of the business and we will be spending more time developing our asset light pipeline. One thing that might be difficult to understand is how the COVID-nineteen pandemic impacted the F and B model for hotels. Hotel guests were trying to use delivery service providers to provide their hotel F and D needs and it has taken some time for hotels to revert back to their previous models.

Speaker 2

That said, we are seeing increasing inbound interest from brands that cater as the net attractive for hotels, which both STK and Kona Grill are. In addition, like our award winning restaurant in Los Cabos Airport, we are seeing increased interest in both brands for airport locations. Lastly, our 4th key priority for the year is to continue to return value to our shareholders through share repurchases. As previously mentioned, we generate significant cash flow from operations and we believe there's an opportunity to leverage that to create balance between growth and shareholder value via share count reduction. To this end, the company's Board has authorized an additional $5,000,000 in share repurchases to be added to the $15,000,000 in repurchases which we concluded during the Q4 of 2023.

Speaker 2

To conclude, I'm pleased with our 2023 results despite a particularly challenging restaurant environment, managed well by our team, which continues doing a fantastic job, successfully dealing with challenges every day. Now, I'll turn the call back to Tyler.

Speaker 1

Thank you, Manny. Let me start by discussing our 4th quarter financials in greater detail. Total GAAP revenues were $89,900,000 increasing 1.8% from $80,300,000 for the same quarter last year. Included in our total revenues is our owned restaurant net revenues of $85,200,000 which increased 1.5 percent from $83,900,000 for the same quarter last year. The increase in revenue is primarily attributable to the opening of 6 owned venues in 2023.

Speaker 1

This was partially offset by a 4.3% decrease in comparable sales. Consolidated comparable sales increased 40.1% compared to 2019, our pre pandemic sales year. Management license incentive fee revenues were $4,800,000 increasing 7.6% from $4,400,000 in the Q4 of 2020. Owned restaurant coffee sales as a percentage of owned restaurant net revenue grew 120 basis points to 22.8% in the Q4 of 2023 compared to 24% in the prior year, primarily due to menu mix management, operational cost reduction initiatives, pricing and partially offset by increased commodity pricing. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 70 basis points to 57.8% in the Q4 of 2023 from 57.1% in the Q4 of 2022 due to wage and general operating cost inflation.

Speaker 1

Operating profit was 19.3% for the Q4 of 2023 compared to 18.9% in the Q4 of 2022. On a total reported basis, general and administrative expenses decreased 6.5 percent to $7,900,000 compared to $8,500,000 in prior year, reflecting the impact of the many initiatives we have already had in place. When adjusting for stock based compensation, adjusted general and administrative expenses were $6,700,000 in the Q4 of 2023 compared to $7,300,000 in the same quarter of last year. Reopening expenses were $2,900,000 compared to $1,700,000 in the prior year. The increase is related to payroll, training and non cash pre open rent for STK Charlotte, Centreville Phoenix, which both opened in October 2023 and for STK Boston and STK Salt Lake City, which opened in December of 2023.

Speaker 1

Interest expense was $1,900,000 in Q4 of 2023 compared to $700,000 in the Q4 of 2022. Income tax benefit was $1,500,000 in quarter of 2020 compared to income tax expense of $200,000 in the Q4 of 2022. Net income attributable to The ONE Group Hospitality was $4,600,000 or $0.15 per share compared to net income of $5,100,000 in the Q4 of 2022 or $0.15 net income per share. Adjusted net income was $5,300,000 or $0.17 adjusted net income per share compared to an adjusted net income of $6,500,000 in the 4th quarter 2022 or $0.19 net income per share. Adjusted EBITDA for the 4th quarter attributable to The ONE Group Hospitality Inc was $14,500,000 compared to $13,000,000 in the Q4 of 2022.

Speaker 1

Adjusted EBITDA margin for the 4th quarter improved 140 basis points to 16.1% compared to 14.7% in the prior year period. We have included a reconciliation of adjusted EBITDA and adjusted net income in the tables in our Q4 fiscal year 2023 earnings release. Since September 2022, we have purchased 2,300,000 shares or approximately 7% of our outstanding shares under our buyback program. Purchases pursuant to this program were completed in October of 2023. Turning to liquidity, we finished the quarter with $21,000,000 in cash and $10,600,000 available under our revolving credit facility subject to certain conditions.

Speaker 1

As Manny previously mentioned, we plan to fund all our development and investing activities with internally generated cash. Now I would like to provide some forward looking commentary regarding our business. This commentary the risks and uncertainties associated with forward looking statements as discussed in our SEC filings. We as always remind our investors the actual number and timing of new restaurant openings for any given period is subject to a number of factors outside the company's control, including macroeconomic conditions, weather and factors under the control of landlords, contractors, licensees and regulatory and licensing authorities. Based on the information available now and the expectations as of today, we are issuing the following financial targets for 2024.

Speaker 1

Beginning with revenues, we project our total GAAP revenues of between $360,000,000 $380,000,000 Managed license and Genesee revenues are expected to be between $15,000,000 $16,000,000 Total owned operating expenses as a percentage of owned restaurant net revenues of approximately 83%, total G and A excluding stock based compensation of approximately $30,000,000 adjusted EBITDA of approximately 45,000,000 dollars restaurant preopening expenses between $4,000,000 to $5,000,000 operating income between $13,000,000 to 15,000,000 dollars effective income tax rate of between 5% 10%. Total capital expenditure net of allowances received from landlords of between $30,000,000 $35,000,000 and finally, we plan to add 6 to 8 new venues in 2024. I will now turn the call back to Manny.

Speaker 2

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying we are in the early stages of our long term growth strategy as we continue to build a portfolio of high volume brands with compelling returns for our shareholders. Thank you all for your interest in the ONE Group. As I always say, none of this would be possible without the fantastic support of our teammates who bring our mission of great execution to life every day. We have some exciting times ahead and I look forward to seeing you all out there.

Speaker 2

We appreciate everyone joining us on the call today. Tyler and I are happy to answer any questions that you may have. Operator?

Operator

We will now begin the question and answer The first question comes from Nick Setyan with Wedbush Securities. Please go ahead.

Speaker 3

Thank you. Just given your revenue guidance for 24, I would love to maybe get some more insight on the choppiness comment around Q1 and quarter to date. Obviously, we see the industry data. We know it hasn't been great. But it would just be very helpful if you guys could actually give us some

Speaker 1

numbers just so

Speaker 3

we can bridge the gap between Q1 and to what extent Q1 is impacting the 24 percent revenue

Speaker 2

guide? Yes, Nick, this is Manny. I think just clarifying a little bit on the comments, as you pointed out, January pretty much for everyone was a challenging month just because of the high comps everyone was going up again. So we do think that the beginning of this year was probably our toughest part of the lap for the year. So that's probably how I would characterize that.

Speaker 2

So I don't think we're particularly in any different situation relative to the industry about the tough lap on the beginning of the year. Tyler, anything else?

Speaker 1

Yes, Nick. I think as you alluded to on the guidance and how you think about our same store sales for the full year guidance, the Q1 results are reflective of kind of where we feel like the full year number is going to come in.

Speaker 3

Okay. All right. Fair enough. And then in terms of the actual unit guidance 6 to 8, you said 1 to 2 is licensed. Would you mind just breaking down what you think sort of STK versus Kona will be?

Speaker 2

Yes. So I think in that guidance, we have 2 Kona grows in that guidance right now.

Speaker 3

Got it. And then the saltwater social, is this like a new concept?

Speaker 2

Yes. It's a seafood version of STK. So that will be our 3rd restaurant in the Denver market. So we'll have our STK downtown. We already have a Kona Grill in Cherry Creek, and this will be our 2nd restaurant in Cherry Creek.

Speaker 2

Cherry Creek is a very active neighborhood, and we think that there is a void in the VIBED dining category in that neighborhood. So we think that this will be a great way of introducing VIBED dining to the neighborhood.

Speaker 3

Okay. Thanks very much.

Operator

The next question comes from Mark Smith with Lake Street Capital. Please go ahead.

Speaker 1

Hi, guys. First question for me, just wanted

Speaker 4

to dig into kind of average weekly sales at STK and in particular, can you guys talk about kind of new restaurants and what kind of volume they're opening up?

Speaker 2

I mean, the new restaurants are opening up greater than 200,000 per week volume. So I think our model is about 8,000,000 and the new units are settling in between $10,000,000 $12,000,000 a year, so very significant high volumes.

Speaker 4

Okay. And then looking back at Q4, any commentary just around I know you said you're excited about Valentine's Day was positive, but any commentary on the holiday period within Q4 and kind of how that comped year over year?

Speaker 2

I mean, as I think we pointed out on our prepared statements, the holidays themselves, we have fantastic days. So I think the Christmas Day, Christmas Eve, New Year's Eve was fantastic. So I would say that and Thanksgiving was also fantastic. So I think the actual performance on the holidays was very, very good. And then I would say that in terms of things like the event business, we have very good books in terms of bookings.

Speaker 2

But we did see a little bit less of last minute bookings on events, which we typically see right in the beginning of December, a pretty big rush for last minute events. We didn't see that this trend last year. But overall, I would say that the holiday business was very good for the business or for the company.

Speaker 4

Okay. And then you talked about emphasizing value in kind of what you call the choppy market here. You gave your guidance for restaurant level margins. How can we kind of think about and how are you guys balancing, emphasizing some value proposition while at the same time driving what looks like improvements in restaurant level margin?

Speaker 2

Well, I mean, we did that in the Q4. So I mean, we did feature 3.6 69 and other value layers in there. But also remember that we balance that with premium price promotions in the restaurants. So we will balance that with things like the Y Good promotion at FCK or we would do the bounty of the 7 Seas promotion. So we're barbelling the value with the premium products.

Speaker 2

And obviously, the higher end consumer still is actively participating on trading up to premium products. So that's how we balance a big part of that and just keeping the higher end promotions really strong. And then the second thing that we do to balance that out is we put a lot of attention into our cocktail program. So if you were in the restaurants during the holidays, you probably noticed our emphasis on holiday cocktails and as well as brunch daypart cocktails. So we balance the value introductions to that make the brand accessible with some premium cocktail and product offerings in restaurants.

Speaker 4

Okay. Then the last one for me. Just as we think about these next three that are currently under construction, I know that things can always shift a little bit, but any insight into kind of the timing of the next three openings?

Speaker 2

Yes. I mean, the next restaurant that we will be opening is Aventura Mall in Florida. That restaurant has been in construction now for about 2 months, maybe even a little longer than that. So it's in good progress. And again, the $1,000,000 question these days about these openings is how you clear out the permits at the end.

Speaker 2

Some of the times, it takes 2 to 3 weeks to get all the inspections, and it seems like it takes a little bit of a longer time to clear that out. But I would say towards the middle to the end of the second quarter for that Aventura Mal's restaurant to open. And then immediately thereafter, we will open the Southwater Social. And then early mid third quarter or mid third quarter, we'll open the Kona Grill in Tigard, Oregon. And then the rest of the development is towards the end of the third, beginning of Q4.

Speaker 2

We will have a licensed restaurant in there in the middle of the Q2 this year.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Manny Hilario for any closing remarks.

Speaker 2

Thank you. As always, I'd like to recognize the team for its commitment to our mission and executing at a very high level. So I appreciate everyone's contributions for that. And then also thank you for your time today to be on the call here, and I look forward to seeing you all in our restaurants. Everybody, have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
ONE Group Hospitality Q4 2023
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