Q1 2024 One Group Hospitality Inc Earnings Call

Participants

Tyler Loy; Chief Financial Officer; One Group Hospitality Inc

Emanuel Hilario; President, Chief Executive Officer, Director; One Group Hospitality Inc

Jim Salera; Analyst; Stephens, Inc.

Mark Smith; Analyst; Lake Street Capital Markets

Michael Symington; Analyst; Wedbush Securities Inc.

Roger Lipton; Analyst; Lipton Financial Services

Presentation

Operator

Greetings and welcome to The ONE Group First Quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference call over to Tyler Loy, please go ahead.

Tyler Loy

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. 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 opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revisions of these forward-looking statements in light of new information or future events. And 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 results prepared in accordance with GAAP.
For reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales and total food and beverage sales at owned and managed and licensed units to GAAP measures. Along with the discussion of why we consider these measures useful, please see our earnings release issued today.
For that, I'd like to turn the call over to Manny Hilario.

Emanuel Hilario

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, including the nearly 6,500 new teammates who joined The ONE Group last week with the closing of the acquisition of SFR and Holdings Corp., the parent company of the Bene, Hannah and Ross sushi restaurant brands.
For the remainder of this call, we will be referring to sapphire holdings and spending Hana thanks to our remarkable teams. We have solidified our leadership position in the high end and polished casual dining. Let's discuss highlights from this first quarter 2024 and provide an update on the strategic initiatives that shaped the quarter.
First, despite a challenging sales environment, we grew sales 3% to $85 million, driven by the strength of our company owned new restaurants, which contributed significant revenues at margins above the rest of the system.
Second, and with only moderate pricing and stickier than expected inflation, we kept restaurant-level margins intact at 16%. This was in enabled by the cost saving initiatives that we enacted in the fourth quarter of last year, which generated approximately $3 million in restaurant operating profit throughout the quarter.
Next, we manage G&A effectively as G&A, excluding stock-based compensation as a percentage of revenue improved by 20 basis points year over year from all of this resulted in $10.5 million in adjusted EBITDA, nearly in line with last year. Despite the tough consumer environment experienced throughout the industry.
During the quarter, we celebrated the opening of our 28 STK Steakhouse restaurant is located in Washington, D.C. across from the Walter E. Washington Convention Center and inside the Mary up to marquee hotel.
The opening of this new STK marks an important step into one group strategic expansion initiatives and long-term growth strategy. We are thrilled to be welcoming new guests to this exquisitely designed restaurants and providing them with a truly memorable dining experience.
Looking ahead, we remain laser focused on continuing to drive top line growth while further enhancing operational efficiencies.
Key strategic priorities for 2024 include, first, a focus on driving sales similar to others in the industry. During the first quarter, we experienced a decrease in comparable store sales from a choppy and challenging consumer environment.
And as a result, we have focused our efforts on delivering value, coupled with strong execution. We continue to promote at $3, $6, $9 happy hour menu at both brands in our $69 and $39 statement America offerings at STK and Kona Grill, respectively.
In addition to cater to folks looking for higher end experiences, we continue to innovate on our culinary program with premium product lines to amplify the value driven and experiential offerings. We are leveraging our robust digital marketing capabilities supporting these strategies, coupled with a relentless focus on delivering fantastic guest experiences, we are confident that we can successfully navigate the current challenging sales environment and drive sustainable sales growth.
Our second key priority is to improve clinical margins at the end of 2023, we performed an in-depth review of our clinical portfolio of restaurants and determined that about a quarter of the 24 restaurants that we acquired are underperforming due to challenging real estate.
Bifurcation of performance continued into the first quarter as our core base of restaurants saw significantly healthier margins and these other locations. As previously mentioned, we will address each of these location.
On a case, by case basis, as we look at our pipeline of new units, we expect the new clinical rules to have a target AUV of $5 million and a 17% restaurant level margin for both the STK and Kona Grill brands. We have implemented several key initiatives to improve restaurant operating profit and overall profitability, managing menu and product mixes, one, enhancing purchasing efficiencies from frozen food and operating supplies, maximizing productivity through smart scheduling practices, evaluating all serve third party vendor relationships and reduce travel costs.
We saw these initiatives take hold during the quarter as we were able to maintain margins, we are confident that this momentum will continue throughout 2024 as we further optimize operations for the third key priorities to rely on self-funded growth for company-owned operations that previously mentioned this year, we have opened one company-owned STK in Washington, D.C.
For the remainder of the year we expect to open an additional five to seven new STK and Kona Grill venues, which includes wanted three company-owned STKs, do company-owned corner grows and one to two managed or licensed units. We also plan to open one to two company-owned Bernie Han, U.S. and one company owned Rob.
There are currently four company owned restaurants under construction in the following cities and STK restaurant and happened to have Florida at the oven to remodel a saltwater social, which is a high end seafood five dining restaurants will be located in Denver, Colorado in the Cherry Creek neighborhood, a Kona Grill restaurant in Tigard, Oregon at the Bridgeport Village and a Raw Sushi restaurants in Plantation, Florida over the long term, with plans on growing three to five new units of each of our growth brands, STK. funnel, grow and Ventana.
We view this as a proven and scalable international platform with compelling white space. We see an addressable market of over 800 venues, which includes 400 restaurants for behind the U.S. alone, 200 SDKs and 200 (inaudible) growth. We are clearly in the early innings of a robust growth strategy.
Our fourth key priorities, the successful integration of any Hana This acquisition not only aligns with our vision of being the undisputed global leader in vibe dining, but it will also generate tremendous synergies from our ability to manage commodity costs at scale, drive menu mix through culinary innovation, leverage, our combined digital databases and digital capabilities and utilize our robust reservation management system. We have a tremendous opportunity to create value for our shareholders through this combination of top entertainment brands.
And lastly, our fifth key priority is to continue to return value to our shareholders through share repurchases. We generate tremendous cash flow and we believe there's an opportunity to leverage our internally generated cash to create balance between growth and shareholder accretion, see a share count reduction for this. And earlier this year, the Company's Board of Directors authorized a $5 million share repurchase program on top of the $50 million program that was already completed last year.
To conclude, I'm pleased with how we have kicked off the new year despite navigating a particularly challenging restaurant environment. This is a testament to the fantastic job our team is doing. We believe that our strong leadership team, combined with our strategic initiatives, positions us well to navigate the evolving market conditions and capitalize on growth opportunities. We are excited for the future, and we will remain focused on executing our strategy and enhancing shareholder value.
I will now turn the call over to Tyler.

Tyler Loy

Thank you, Manning. Let me start by discussing our first quarter financials in greater detail. Total GAAP revenues were $85 million, increasing 3% from $82.6 million for the same quarter last year. Included in our total revenues as our owned restaurant net revenues of $81.5 million, which increased 3.7% from $78.6 million for the same quarter last year.
The increase was primarily attributable to the opening of six restaurants since July of 2023. This was partially offset by a 7.9% decrease in comparable sales, consisting of a 6.8% decrease at STK and a 9.7% decrease account have grown management license and incentive fee revenues were $3.5 million, decreasing 12.3% from 4 million in the first quarter of 2023.
The decrease was primarily attributed to decreased revenues at our STK restaurants in North America and the exit out of STK Westminster as we consolidated our London operations, the fourth quarter of 2023
Owned restaurant cost of sales as a percentage of owned restaurant net revenue improved 100 basis points to 23% in the fourth quarter of 2024 compared to 24% in the prior year, primarily due to operational cost reduction initiatives.
Product mix management and pricing, offset by cost inflation and owned restaurant operating expenses as a percentage of owned restaurant net revenues decreased 130 basis points to 60.9% in the first quarter of 2024 from 59.6% in the first quarter of 2023 due to fixed cost deleveraging and operating cost inflation, partially offset by operational cost reduction initiatives.
Restaurant operating profit was 16.1% for the first quarter of 2024 compared to 16.4% in the first quarter of 2023. On a total reported basis, general and administrative expenses were flat at $7.5 million for the first quarter of 2024 and 2023 when adjusting for stock-based compensation.
Adjusted general and administrative expenses for $6.2 million in the first quarter of 2024 and 2023. Preopening expenses were $2.9 million compared to $1.3 million in the prior year. The increase was related to payroll training and non-cash pre-opening rent for STK Washington, DC, which opened in March 2024, and STK and Kona Grill restaurants currently under development.
Interest expense was $2.1 million in the first quarter of 2024 compared to $1.8 million in the first quarter of 2023. Income tax benefit was $0.3 million in the first quarter of 2024 compared to income tax expense of $0.2 million in the first quarter of 2023.
Net loss attributable to The ONE Group Hospitality Inc. was $2.1 million or $0.07 net loss per share compared to a net income of $2.6 million in first quarter of 2023 or $0.08 net income per share. Adjusted net loss was $0.6 million or $0.02 adjusted net loss per share compared to an adjusted net income of $3.2 million in the first quarter of 2023 or $0.1 net income per share.
Adjusted EBITDA for the first quarter attributable to The ONE Group Hospitality Inc. was $10.5 million compared to $10.9 million in the first quarter of 2023. We have included a reconciliation of adjusted EBITDA and adjusted net income in the tables in our first quarter 2024 earnings release. During the first quarter, our Board of Directors authorized an additional $5 million share repurchase program. However, there was no stock repurchases in the first quarter of 2024.
Now, I would like to provide some forward-looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward-looking statements. As discussed in our SEC filings, we have 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 control of landlords, contractors, licensees and regulatory and licensing authorities based on the information available now and expectations.
As of today, we are updating our 2024 targets to include the addition of Beni. Ana guidance includes projections for vending, Ana from May 1, the date of the acquisition until the end of the year.
Beginning with revenues, we project total GAAP revenues of between $700 million and $740 million, which consist of an additional $340 million to $360 million for the addition of Manyata. Managed franchise and licensee revenue are expected to be between $17 million and $19 million, which consists of an additional $2 million to $3 million for the addition of betting on our.
Total owned operating expenses as a percentage of owned restaurant net revenue of approximately 83%. Total G&A, excluding stock-based compensation of approximately $40 million, adjusted EBITDA of between $95 million and $100 million, Restaurant preopening expenses between $7 million and $9 million, an effective income tax rate of between 5% and 10%.
Total capital expenditures, net of allowances received from landlords of between $50 million and $60 million. And finally, we plan to add 8 to 11 new venues in 2024. Based on the guidance discussed coming out of 2024, our annual run rate system-wide F&B revenues will be in excess of $1 billion. Our run rate GAAP revenues will be approximately $950 million and our run rate adjusted EBITDA will be greater than $140 million.
And I will now turn the call back to Manny.

Emanuel Hilario

Thank you, Tyler, and thank you all for your time today and interest in The ONE Group. 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.
We've recently added Benny, Hannah and Ross sushi to vibe and entertainment dining brands that will diversify and strengthen our industry leading portfolio of world-class experiential restaurant concepts and blend perfectly with STK and Kona Grill. This is an exciting time to be part of this company, and we appreciate your support and I would be happy to answer any questions you may have. Operator?

Question and Answer Session

Operator

(Operator Instructions) Jim Salera, Stephens, Inc.

Jim Salera

Hey, guys, good afternoon. Thanks for taking our question. Manny, I was curious if you could maybe level set what you saw from the consumer during the quarter and just kind of run that versus the results versus your expectations.
I don't know, we hear a lot about consumer engaging in value-seeking behavior, especially with restaurants. And so if you can just maybe give us an idea for the appetite for some of the experiential dining that you talk about and how that jives with what the consumers engaging in, what was kind of a value oriented lens right now?

Emanuel Hilario

Yes. So a great question. I think as we mentioned in our earlier in our last quarter's call, we certainly see choppiness in the sales environment. So it's a little bit more an uneven environment in terms of predictability on sales week-over-week.
So it's a little bit choppier in terms of the consumer behavior, we clearly see consumer gravitating towards the happy hour the $3,$6, $9 price points are holding up very well. So we do see trading to happy hour. And then within the dinner sets at STK, we will also see and we actually see two things we have a group of consumers that actually trading and sharing more at the table.
And then we have a group of consumers that still trade up to the premium items like white goods. So we do have a little bit of a bifurcated behavior within STK. So I would say that's kind of what I've been noticing is a lot more attraction to the entry price points in the menu. But at the higher end, I still see a lot of consumers opting for the high end product.

Jim Salera

Okay, great. And then maybe if I could just ask a question on the new unit side. Can you just give us an update on your new unit environment permitting, how many labor delays?
I think I know depends on where you're opening stores, obviously, but we've heard some other restaurant operators. You have some delays in getting new unit openings, whether it's labor shortages or permitting delays. Just anything you can talk about what you're seeing on your end?

Emanuel Hilario

Another great question. I mean, historically, we always plan three to six months for the permitting cycle. Now we actually think it's nine months, we've actually added three extra months to the permitting cycle. They are longer. There seems to be a lot more back and forth, and the responses seem to be a little slower in terms of one was centered submission.
So I would say that's still part of the environment, but generally new units and new unit development. And the one thing I will tell you is that when we open new stores, there's a lot of excitement for new stores. So that's the upside on development right now is when we open great locations like we just did in Washington, D.C., we see an incredible amount of business coming to us because I think the consumer right now in addition to they're looking for something different and experiential. So I think that anytime we open one of our restaurants, we do get rewarded with some very strong upfront revenues.

Jim Salera

Perfect. Thanks, guys. Appreciate the color. I'll back in the queue.

Emanuel Hilario

Thanks.

Operator

Mark Smith, Lake Street.

Mark Smith

I guess it's similar to the last question, just on consumers. Just curious as you look at actually first, can you just talk anymore about Kona Grill consumers maybe more so than STK and any changes in behavior during the quarter?

Emanuel Hilario

I mean, I was actually for the quarter in our Tyler and I were talking about this earlier, we actually I would expected that they would have traded down on the P mix and actually our RP. mix is only down three points.
So we don't see a lot of a trade down at Kona Grill. So I would say that consumer, it actually has not traded down as much as I would have expected, but a but you know, but the reality of it is they still are gravitating towards, as I mentioned earlier, $3, $6, $9 price points on on the happy hour. And then we also now feature $39 steak night America at Kona Grill.
So I do think that right now, value is king and that the consumer world gravitate towards that, except as I mentioned earlier, higher end consumer still is going for the Y, do and still ordering the premium product quota. But the other consumers are definitely trading to the value propositions.

Mark Smith

Okay. And as we think about the spending on a consumer and any initial thoughts that you have on potential behavior, you're maybe selling more towards, you know, more or will behave more like that higher end STK. consumer or or maybe more like the core consumer and any broad thoughts you have would be great.

Emanuel Hilario

Yes. I mean so my early observation is lots of celebrations. So they're still willing to to go after the premium or the top items on the menu. So my my view so far with the brand is that people or the behavior of Indiana has not really changed if you will. I do think that the the upside at any kind of though is is our premium products.
I think that there's a lot of room for us to introduce some of the premium products that we have access to through our SDK program, particularly why do so. I think you'll see us introducing seasonal products that are a little bit higher price points.
And I think there is a group of consumers in that brand that will opt to it. As a matter fact, we know that because the demographic studies that we've done to date show that they do have some higher end consumers and the brand. It's a pretty broad-based use brand because it's celebration. So we think there's actually a pretty large upside for us as we go forward on on on that.
And then also on beverage. We also think there's a nice upside on beverage at a venue owner, not just only because of the offerings, but also because of of the of the service style and drinks don't really play a big role in that now. But I think over the next couple of months, we'll be putting more emphasis on beverage and on the bar and I think that's actually going to be helping the average check as well as profitability for vending over the next year or two years.

Mark Smith

Obviously, I think the last one for me and I apologize that I missed some of this of the I think eight to 11 new restaurants are expected this year. Can you just go through kind of the breakdown of those again. And then, Neil, any expectations on kind of near term Q2, which of those openings maybe happen over the next couple of months?

Tyler Loy

Sure, Mark, this is Tyler. So it's going to be one company owned. Ross is one to two company owned any hotter locations, one saltwater social in Denver, one to two kind of growth and then a three to four STKs.

Emanuel Hilario

And next one coming out of the chute is going to be a STK. and F. and Sara Florida. So that'll be the next opening that we have. And then thereafter, we have saltwater social and we have around we have a clinic well are bunching in around the middle of the third quarter in terms of opening and then the rest is towards the end of third quarter, early fourth quarter.

Tyler Loy

And sorry, Mark, does the (inaudible) growth?

Emanuel Hilario

Yes, 2% to 3% kind of growth.

Mark Smith

2% to 3%, not 1% to 2%. Okay. Thank you.

Operator

Michael Symington, Wedbush.

Michael Symington

Hi. This is actually Michael on for Nick at Wedbush. I guess maybe just a modeling question to start. Could you guys provide the comp breakdown in Q1 for both STK and Kona?

Tyler Loy

Yes. Give me second. It was minus [$6.8] for STK, Michael and minus [$9.7] for kind of grown.

Michael Symington

And then traffic. Sorry, in terms of traffic and pricing embedded in that.

Tyler Loy

Oh, you have got it. So some checks down at us, again minus [$4] and then average check was minus [$2.5] and pricing and that average check was [$4] And then for coated grow traffic minus [$14], pricing our average check was plus [$4.5] was pricing up [$7] in there.

Michael Symington

Great. Thanks. And then you guys have talked about targeting a 17% margins at Cona. Just wondering if you could provide an update on the margin profile you're seeing at the new units and how that really compares to some of the older legacy units that you've talked about needing to potentially look at a little bit of work.

Emanuel Hilario

I mean, the prototype ones have done really well. The new ones. So and the reason is, I think labor has been a better. I mean, I'll just preface that by saying that we're still early on their lifecycle, so their profitability will be improving there as well.
But I would say the new stores been on on how we expected on the margin, I would say in general, the Kona Grill brand, we do have a core restaurants, which we kind of refer two from the acquisition, around 18 of the restaurants have an average margin of about 13% plus.
And then we have about six corners in there that, frankly, the real estate is not what we would do today. So I think really the the margin fix with clinical role is to continue opening those new restaurants. I think the core ones are still in solid margins for for the casual sector.
And then we've got to work out the plan for this other six restaurants and get them to a better place. So that's that's really how we're targeting that. But I'm pretty pleased with the progress on the new restaurants on the margin side.

Michael Symington

Great. Thanks very much, and I'll hop back into queue.

Operator

Roger Lipton, Lipton Financial.

Roger Lipton

Yes, hi, Mani.
Hi, Tyler.
Congratulations on getting the deal completed so quickly, it seems like about five weeks from announcement to closing. So the lawyers must have been busy. A couple of questions on sounds like the synergies from that combining the companies is going to be in place pretty quickly.
Can you give us some idea of where that's coming from that run rate sound like you'd like by the end of this year, it will be pretty much in place to why that's the first question.
Second question is what does the current balance sheet look like post the closing in terms of cash and long-term debt?

Emanuel Hilario

Yes. I mean so I think the synergies, a lot of the initial ones which we are already working on our supply chain. So I think that's going to be a really good area of synergies for us. We've we've already started looking at beef and integrating our supply chain because we have a lot of purchasing power on that side. And I think that's going to be significant for us.
And I think there's also and some other efficiencies with rebates and some of the stuff in supply chain. So that will be Level one, they'll be relatively inactive quickly. I think the on the on the outlook on them on just the operations, I think there's a lot of things that we can do.
In terms of France, we have a call center. I also think that we can have labor efficiency at the restaurants when we bring in our and our services to the call centers. So that's looking pretty good.

Tyler Loy

And then, Roger, in terms of the balance sheet a year in the previous IR presentation, we had said a little north of [$50 million] there on the balance sheet, then debt after the transaction is going to be about $300 million. So net debt, we anticipate to be around $300 million or so, right now I'm going to answer I'm going to go at Cognos.

Emanuel Hilario

Yes. The only thing I would add to that is we also have a $40 million revolver that we brought in with this new debt deal and no covenants. So we have a the the credit for the loan and term loan has no covenants term loan. And then we only have financial covenants if we drive over a certain amount on our revolver, which we have no plans to do it anytime in the near future.

Roger Lipton

Thanks very much. Good work. Thank you.

Emanuel Hilario

Thank you, sir.

Operator

Thank you. There are no further questions at this time. Please proceed.

Emanuel Hilario

Thank you, everyone, for joining today. Again, thanks to our over 10,000 teammates who work hard very hard to every day to day two of our mission of creating great memories and doing that through executing them, great experiences, MemberWorks experiences and exceptional experiences at the restaurants to every guest every time. So thank you for that, and then I look forward to seeing you out in our restaurants. Everyone. Have a great day.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.