Carrols Restaurant Group, Inc.

Good morning. Welcome to the Carroll's Restaurant Group, Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be given at that time. If anyone should need operator assistance during the call, please press star zero on your telephone keypad. I would like to remind everyone that this conference call is being recorded today Wednesday, March 3, 2021, at 8.30 a.m. Eastern Time, and will be available for replay. I will now turn the conference over to Tony Ho, Chief Financial Officer. Please go ahead, sir.

Thank you, Melissa, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning, an earnings review presentation that are both available on our website at www.cows.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, or plans. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We also refer you to our filings of the SEC for more details, both with respect to the forward-looking statements as well as risks that could impact our business and results, including the impact of COVID-19. During today's call, we will discuss certain non-GAAP measures that 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 generally accepted accounting principles. The reconciliation to comparable GAAP measures is available with our earnings release. With that, I will now turn the call over to our Chairman and CEO, Dan Accordino. Dan?

Thanks, Tony, and good morning, everyone. Let me begin by briefly recapping the current state of our business and then briefly review our quarterly results. Tony will follow by discussing our financials in greater detail. After enduring one of the most challenging periods in our country's history, we believe the fundamentals of our business and the health of our company are extremely strong. Our liquidity position has improved substantially. Our near-term capital requirements are very manageable. We continue to deleverage, and we have grown comparable restaurant sales for the company's Burger King restaurants for three consecutive months through January. We further believe that the combination of vaccinations, continued stimulus aiding our core customer base, and easier year-ago comparisons will add to that momentum this year. For a long time, a recurring concern we have heard from investors regarding franchisees, including large ones like Carol's, was that we'd be perpetually hampered by onerous capital requirements imposed by the franchisors. Any free cash flow generated by the business would be required to go towards seemingly endless new store construction, refurbishments, and renovations. Additionally, some portion of those projects would inevitably have low returns on invested capital. Over the last three quarters and even through a pandemic, we believe we have demonstrated that those concerns were misguided. The nature of the franchisee-franchisor relationship can, in fact, be equitable, and despite being a franchisee, our business model enables us to generate significant pre-cash flow and direct a thoughtful capital allocation program to benefit our shareholders. In January, we shared that we had elected to amend our area development agreement with Burger King Corporation. forfeiting our right of first refusal on any Burger King franchise sale in portions of our geographic footprint. We felt then, as we do now, that Carroll's was being given little to no value for it. We also believe strongly that our ability to opportunistically acquire stores, should that be attractive, won't suffer as a result. In fact, we are still pre-approved to acquire up to 500 Burger King restaurants in territories where we currently operate. Under our new arrangement with our franchisor, we have the flexibility to grow our business organically and through acquisitions in a manner that we believe will best optimize our profit growth potential while generating consistent and enhanced free cash flow and keeping our leverage in check. What has permanently changed as a result of amending the Area Development Agreement is a meaningful reduction in our multi-year capital obligations. Long-time investors and followers of the sector have to reorient their thinking to this new reality. While acquiring restaurants in both brands remains a strategic objective, if compelling store-level returns aren't there, we won't chase them. We'll simply build free cash flow, further deliver our balance sheet, and return cash to shareholders through the repurchase of our own shares. We generated free cash flow of $56.1 million during the full year of 2020 and utilized $10 million of cash to repurchase 1.5 million shares in the fourth quarter after we reinstated our repurchase program. We think growing free cash flow while permanently retiring shares on an opportunistic basis will be beneficial to shareholders over time. Our business generated a meaningful level of free cash flow last year, and we believe that we can continue to generate strong free cash flow. While we will leave it to the analysts and investor communities to determine what the right multiple is for our business, we certainly believe that our current stock price doesn't reflect our current level of free cash flow generation. I would also note companies can boost their free cash flow metrics for periods of time by starving their business of much-needed capital. We have not done that, and we will not do that in the future. We are targeting a $60 million net capital expenditure spend for 2021. This is modestly higher than our earlier plan, but reflects what we believe will be strong ROI initiatives, such as an acceleration of our digital menu board rollout, some new equipment at our Burger King restaurants related to preparing the brand's new chicken sandwich, and remodels and new builds that will be at or slightly above our previous intentions. Still, we feel very comfortable making these investments in our brands, and they do not detract from our commitment to generate meaningful free cash flow. Longer term, we feel good about the promotional calendar ahead of us with its emphasis on value and new product offerings and are excited by the testing of a new loyalty program. We are also pursuing a number of acquisition opportunities now that we are close to completing the integration of the large number of stores we acquired in 2019 and And we see white space in our geographies for high-value, high-return new store development. Turning to our fourth quarter results, we demonstrated our resiliency with improving trends at our Burger King restaurants in November and December compared to October, despite the challenging operating environment. Our Popeye's restaurants lapped the full introduction of the well-received chicken sandwich, yet still delivered positive comparable restaurant sales on a two-year stack basis of 8.3%. Comparable restaurant sales in January for our Burger King restaurants improved 5.5%, which was greater than we expected. February has been another story, however, due to some unprecedented severe winter weather in all of our regions, but particularly in the South Central region. Fortunately, spring is around the corner, and we expect to show renewed momentum in March as we begin to lap COVID-impacted 2020 performance in the latter part of the month, and Burger King launches what we believe to be a best-in-class chicken sandwich offering. Our geographically diverse restaurant portfolio of nearly 1,100 restaurants across 23 states has provided us somewhat of a cushion in dealing with the pandemic, given the shifting rise in cases. It has also helped limit short-term staffing and supply issues across our portfolio. In the fourth quarter, we performed relatively better in the Northeast, but worse in the South Central region, as Tony will elaborate more specific terms. As you all know, our service model is centered on convenience through drive-through at the counter, takeout, and small but growing delivery business. These attributes have enabled us to navigate COVID better than our full service peers because these channels are more resilient sales platforms than depending primarily on sit-down dining. Whether it's indoor or outdoor and subject to ever-changing capacity restrictions, the majority of our dining rooms remain closed in the fourth quarter based upon mandates or at our discretion. We are open for takeout only. Delivery comprised approximately 3.5% of our Burger King restaurant sales during the fourth quarter, with an average order size of $17.02. In January, delivery accounted for 4.6% of sales. These improvements are up from 2.9% in the third quarter as more customers sought out this enhanced level of convenience, particularly in colder climates. Our four delivery partners, DoorDash, Uber Eats, Postmates, and Grubhub, are now providing fully integrated delivery services at approximately 889 of our Burger King restaurants, up from 870 at the end of the third quarter. Looking ahead, we believe that more of our Burger King restaurants can provide a delivery option as providers begin servicing their markets in a meaningful way. Turning now to fourth quarter profitability, we were able to improve restaurant-level EBITDA. adjusted EBITDA, and adjusted net income compared to the same period a year ago. Even excluding the impact of contributions from the additional operating week, we still enhanced profitability margins on lower comparable restaurant sales. Within our four walls, our traction was reflected in lower food waste as we have adjusted our production requirements based on our shifts in certain day parts, and even more so in labor where we have incurred higher wage rates but have been able to modify labor hours based on day part sales trends. Our current team size for Burger King Restaurant averaged 21 employees during the fourth quarter, up from 20 in the third quarter and 19 in the second quarter. This slight increase was due to the normalization of certain labor elements depending on geography and local conditions related to the expansion of hours. We view this average as a reasonable target run rate going forward. By way of comparison, in the fourth quarter of 2019, we averaged 23 employees. In addition to favorable expense trends at the restaurant level, we've also benefited from reduced regional and corporate overhead by having streamlined our regional management structure and our training process. For the full year, we opened seven new Burger King restaurants, including one in the fourth quarter. We also permanently closed 34 underperforming Burger King restaurants. These locations were losing money in a post-COVID environment, and their closure should benefit our EBITDA in 2021. We believe we have a stronger company as a result of the actions taken last year, particularly with the addition of meaningful and profitable delivery sales and the implementation of certain cost savings initiatives that we expect will continue to benefit us throughout the year. Turning to our balance sheet, we remain in a strong position financially. We ended the year with $65 million in cash and $136 million available to be borrowed under our revolving credit facility. We believe we have a very manageable debt level of $494 million, given the attractive current interest rate environment with no near-term maturities, and we have no outstanding borrowings under our revolving credit facility. One recurring theme we have been asked about lately is the discussion in Washington about a federal minimum wage increase to $15 an hour. While it is unknown if and on what timeframe this could become a factor in our business, we would like to point out some of our thoughts on the topic. In New York State, where we will reach a minimum wage rate of $15 an hour this summer for fast food workers specifically, this change has not altered the fact that these are some of the best performing restaurants in our portfolio. In fact, EBITDA of our New York restaurants has grown 10% over the past five years, despite that increase in the minimum wage rate during the same period. We have seen that in an environment where just a small proportion of employees are earning upwards of $15 an hour, our sales benefit even without the ability to raise prices. We believe that in a situation where all workers benefit from higher minimum wages, we will have the ability to reassess restaurant staffing levels and raise product prices more aggressively to offset rising labor costs. In closing, we believe that we are well positioned to execute on our stated goals and can now step up our organic and non-organic growth efforts in a balanced way while keeping our capital expenditures and leverage in check. Our game plan is to continue generating a significant level of free cash flow, and we are confident in our ability to execute on this objective. Finally, I would like to now end my prepared remarks by welcoming two new individuals to the Carol's team. First, Carl Houck recently joined us as chief operating officer. Carl has proven experience managing large-scale restaurant and retail operations, as well as a well-deserved reputation for growing businesses and managing costs. Most recently, he served as the president and CEO of the Wendy's division of NPC International, the largest Wendy's franchisee in the system. During his tenure there, Mr. Houck led that Wendy's organization to their most successful year in 2020. prior to their recently announced sale. Prior to that, Carl served as vice president of stores and co-CEO for Barnes & Noble, senior vice president of national operations and customer experience with Advanced Auto Parts, and worked in a variety of operational positions, including a district manager, director of operations, and regional vice president at Starbucks over a 14-year time frame. He also ran national operations in Australia and became a CEO managing director of Starbucks Switzerland and Austria where he led a complete turnaround of the business in the span of 24 months. I previously served as COO of Carol's from 1993 to 2011 before becoming CEO in 2012. While I do not have any immediate plans to retire, we do think it is crucial to build our bench especially given our anticipated growth. Second, Gerald Landau recently joined us as General Counsel. Prior to joining Carol's, Gerald was the Chief Operating Officer in General Counsel Barrington Capital Group, a value-oriented investment firm, Vice President of Law at International Specialty Products, and an attorney at Skadden Arps. We are confident that both Carl and Gerald will be valuable members of our executive team and want to thank Bill Myers, who we cajoled out of retirement after nearly two decades with Carol's to serve as our interim general counsel this past year. With that, let me turn the call over to Tony to review our quarterly financials.