Carrols Restaurant Group, Inc.

Good morning. Welcome to the Carroll's Restaurant Group first quarter 2021 earnings conference call. At this time, all participants are in 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 require 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, Thursday, May 13, 2021, at 830 a.m. Eastern Time, and will be available for replay. I will now turn the conference over to Tony Hull, Carol's Chief Financial Officer. Please go ahead, sir.

Thank you, Rob, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning and an earnings review presentation that are both available on our website at www.carols.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, among other things, 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 comfortable gap measures is available with our earnings release. With that, I will now turn the call over to our Chairman and CEO, Dan Accardino. Dan?

Thanks, Tony, and good morning, everyone. I will start off by providing a business update before Tony reviews our quarterly financials and outlook in greater detail. We had a very encouraging start to 2021 and delivered what we view as a strong quarter that we believe has set the stage for a great year at Carroll's. Comparable restaurant sales rose 14.7% in the first quarter at our Burger King restaurants, driven by a 49.5% increase in March same-store sales. Our strong performance in the month of March was preceded by a week February where we lost 682 store days, between our Burger King and Popeyes restaurants due to severe winter weather, particularly in the southern geographies we serve. We attribute our recent Burger King momentum to a successful dollar value product promotion that resonated with our customers, as well as a partial return to pre-pandemic behaviors and activities and recent government stimulus payments. Our year-over-year comparisons were also favorable, particularly beginning mid March as we begin to lap our COVID impacted performance in 2020. We once again outpaced the overall Burger King system during the quarter as we have done for 19 out of the past 21 quarters. Using a calendar basis rather than the fiscal period basis we report on, our first quarter 2021 comparable Burger King restaurant sales increased 12.3% compared to 6.6% for the the U.S. Burger King system, and I remind everyone that we are approximately 14% of the Burger King system. Our latest outperformance of the U.S. Burger King system is by far the largest I can recall, and we believe it was due primarily to three factors. First, the Northeast and Midwest regions, which comprise nearly 50% of our footprint, performed better than other geographic areas during the quarter. Second, we did a relatively better job reopening our restaurants, particularly during late night hours than the rest of the system, and therefore outperformed during this day part. And third, we sold about 30% more bacon cheeseburger units daily per store that were part of the dollar value promotion at Carroll's than was sold nationally. To expand on what we are currently experiencing, Our April Burger King comparable sales increased 31.5%. Much of this improvement is due to lapping lower COVID-impacted traffic, particularly as we begin to see our most impacted day parts last year, breakfast, evening, and late night come back and come back strong. But the momentum we are seeing is more than that. In fact, if you compare our April 2021 results to April 2019 results, Our comparable restaurant sales increased 10.3%, even at only approximately 90% of the traffic compared to 2019. We believe this indicates that we have more positive impacts to come for our business as the economy continues to rebound. As a point of reference, comparable March and April sales for our Burger King restaurants in 2021 compared to 2019. showed the same improvement of just over 10% in each month. As of quarter end, our dining rooms in most cases were open but not widely used, as most activity inside our restaurants represented carryout orders. Delivery comprised 4.8% of our total Burger King restaurant sales during Q1, up from 3.5% in Q4 last year, and the average check size rose sequentially to $17.51 from $17.02 for delivery. This compares to our overall first quarter average check for Burger King of $8.81, including delivery. Our three largest delivery partners, DoorDash, Uber Eats, and Grubhub, now provide fully integrated delivery services at approximately 90% of our Burger King restaurants at a $17 million-plus quarterly revenue run rate, We believe this convenience option will remain significant for us even in a post-pandemic environment. Turning now to profitability, adjusted restaurant-level EBITDA increased by 73% to $39.5 million compared to the same period in 2020, as margins improved by 360 basis points to 10.1% of restaurant sales. In terms of some of the restaurant-level drivers, cost of sales as a percentage of revenue was 29.2% this past quarter, compared to 29.3% a year ago, even after the addition of delivery costs of 80 basis points. Beef and waste costs were favorable in Q1 compared to last year, and it remains so in Q2, with their favorability partially offset by higher other commodity costs. Labor costs as a percentage of sales were favorable versus the same period a year ago, and were up only 4% year over year compared to nearly an 11% growth in sales. Our current team size for Burger King Restaurant averaged 21 employees during the first quarter, similar to the fourth quarter of 2020, and we continue to benefit from limited use of our dining rooms for eat-in service until March 2021 when they fully reopened. While we are working through challenging labor availability, as virtually all of our quick-serve and casual dining competitors have reported, we believe that this issue could potentially be alleviated As younger people gain more access to the vaccine and the supply of potential high school and college aged hourly team members seasonally increases within the next six weeks. We recently increased pricing by approximately 2% and at this point expect to carry this level of pricing throughout the year. However, we see challenges with respect to restaurant level input costs. We believe we have flexibility to take additional pricing as needed in this robust economic environment and will not hesitate to do so if necessary. Turning to restaurant development, recall that in January we amended our area development agreement with Burger King Corporation, significantly reducing our required capital expenditure, spending on remodels and new restaurant construction while forfeiting our right of first refusal on any Burger King franchise sale in portions of our geographic footprint, Under the new agreement, we believe we have the flexibility to grow our business organically and through acquisitions in a manner that will optimize our profit growth potential while generating consistent free cash flow and keeping our leverage in check. In fact, we are still pre-approved to acquire up to 500 Burger King restaurants and territories where we currently operate and are pursuing a number of acquisition opportunities at the moment. In March, Popeyes agreed to our request to terminate the development agreement we inherited in connection with our 2019 Cambridge acquisition. We are working with a brand to establish a new area development agreement that optimizes the growth potential of this high-growth franchise for both parties. Over the past 12 months, we have significantly increased our available liquidity to over $200 million and reduced our leverage by more than 1.5 turns to 3.4 times. While building and acquiring restaurants in both brands remains a strategic objective of ours, if compelling returns are not available, we will instead continue to build free cash flow, further delever our balance sheet, and return cash to stockholders. Looking ahead, we are excited about the promotional calendar with its emphasis on value and several new product offerings, including Burger King's new chicken sandwich, which will be promoted with extensive national advertising in the near future, We think that the product-specific campaign will establish tremendous awareness and enthusiasm for what we view as a best-in-class chicken sandwich offering and are eager to see what uplift may come about through this support. On a related note, we are also excited by the rollout of Burger King's new loyalty program entitled Royal Perks that is geared towards increasing the level of one-on-one engagement Burger King has with its customers, reducing the use of paper coupons and driving traffic to weaker day parts. In 2020, mobile orders accounted for about 1% of our sales, and we are confident Burger King's new loyalty program will accelerate the growth of that distribution channel and drive increased traffic by improving customer engagement. To conclude, we believe 2021 is poised to be a great year for Carroll's. We have undeniable momentum coming out of Q1, We are managing our costs. We are able to execute our organic and non-organic growth efforts in a balanced way, and we are keeping our capital expenditures and leverage in check. Above all, our goal is to generate a meaningful and healthy amount of free cash flow this year for the benefit of our shareholders. With that, let me turn the call over to Tony to review our quarterly financials.