Carrols Restaurant Group, Inc.

Good morning. Welcome to Carol's Restaurant Group, Inc., second quarter 2021 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 require operator assistance during the conference, please press star zero on your telephone keypad. I would like to remind everyone that this conference call is being recorded today, Thursday, August 12th, 2021 at 8.30 a.m. Eastern Time and will be available for replay. I will now turn the conference over to Tony Hall, Chief Financial Officer. Please go ahead, sir.

Thank you, Doug, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning and an earnings presentation that are both available on our website at www.carolls.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 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 compared in accordance with general accepted accounting principles. A reconciliation to comparable GAAP measures is available with our earnings reliefs. With that, I will now turn the call over to our Chairman and CEO, Dan Accordino. Dan?

Thanks, Tony, and good morning, everyone. I would like to begin with some color on our recent performance before discussing the special cash dividend we announced earlier today. Afterwards, Tony will review our quarterly financials and outlook in greater detail. Beginning with our top line, comparable sales rose 12.6% during the second quarter at our Burger King restaurants, which was driven mostly by the 31.5% increase in April. Recall that in May 2020, comps declined only slightly, while in June of 2020, comp sales already turned positive. As a result, our sequential trend of comp sales growth slowed through the three-month period this year, but we're still positive throughout the second quarter. Importantly, relative to 2019, our quarterly comparable Burger King restaurant sales increased 7.8%. despite only serving approximately 89% of the traffic in the second quarter of 2019. We once again outpaced the overall U.S. Burger King system, as we have done for 20 out of the past 22 quarters. Using a calendar basis rather than the physical period basis we used to report, our second quarter 2021 comparable Burger King restaurant sales increased 14.2% compared to 13% for the entire U.S. Burger King system, reflecting a positive differential of 120 basis points. In July 2021, comparable sales at our Burger King restaurants increased 1.8% compared to July 2020 and improved 4.4% compared to 2019 on a same-store basis. Turning to the promotional calendar, Burger King emphasized several new product and value offerings during the second quarter, Most notably among these was the hand-breaded chicken sandwich, which was promoted with extensive national advertising beginning in June. The campaign established tremendous awareness for Burger King's new chicken sandwich, which we believe is best in class, and we doubled our crispy chicken sandwich sales per store. From a value standpoint, Burger King's focus was on the buy one, get one, plus a dollar offer as an alternative to the two-for-five platform. Interestingly, and perhaps not surprisingly, the new chicken sandwich has fared better within our Northeast and Midwest regions, but sales have not been as strong in the South Central and Southeast. We believe that the concentration of chicken-based QSR restaurants based in the South, coupled with numerous chicken sandwich introductions across the industry by our peers, has weighed more heavily on its reception in these regions. We are encouraged by the rollout of Burger King's Royal Perks Loyalty Program, which 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. This platform provides the brand with valuable data and insights, and members of these types of programs typically show higher spending frequency as compared to non-members. So far in 2021, mobile orders accounted for about 1% of our sales. We are confident Burger King's new loyalty program will accelerate the growth of this distribution channel and drive increased traffic by improving customer engagement. During the second quarter, all of our dining rooms were open, and they remain so today despite the emergence of the Delta variant. Dining room usage increased during the quarter at our Burger King restaurants, where eat-in and take-out combined were tracking at about 14% of total sales by June, and drive-through was down to approximately 80% of total sales compared to the mid 80s during most of our COVID impacted months. Last year during Q2, only about 20% of our dining rooms were open. On a related note, delivery comprised 4.7% of our total Burger King restaurant sales during Q2, up from 2.8% in Q2 last year and flat with 4.8% in Q1 of 2021. The average check size rose sequentially to $17.56 from $17.51 for delivery The overall second quarter average check for Burger King was $9.01, including delivery. Integrated delivery services are available at about 90% of our Burger King restaurants in most of our Popeyes locations. At its current $20 million quarterly run rate, review this convenience option as an ongoing sales contributor, even when the pandemic subsides. Turning now to profitability, adjusted restaurant level EBITDA declined by 11.6% compared to the same period in 2020. as margins decreased by 340 basis points to 11.3% of restaurant sales. The magnitude of the margin compression we experienced in the second quarter was driven by two main factors. First, our objective to increase the operating hours of our stores to take advantage of the strengthening post-COVID economy in the face of severe labor constraints. And second, a spike in food and labor input costs as the entire economy opened at the same time. Food, beverage, and packaging costs as a percent of net sales increased primarily because of higher pork and other commodity costs along with the incremental impact related to higher delivery activity. Although these increases were partially offset by menu price actions we instituted in March of 2021. Labor costs as a percent of net sales also rose sharply due to the contrast between the beneficial labor environment that was in place in the second quarter of 2020 during the early stages of the pandemic and the incredibly tight labor market experience in the second quarter of 2021 during the reopening phase of the pandemic. I can tell you that the velocity and magnitude of the change was greater than anticipated as the second quarter unfolded. The most significant unexpected headwind was the nearly 12% increase in average hourly wages for our team members, including overtime. This cost us approximately $3 million more than we had planned and was driven by competitive pressures as well as difficulty filling positions during operating hours. The other major labor headwind came from our inability to staff our restaurants properly with managers at the beginning and end of each day. We were required to pay premium to team members to open and close restaurants, and this also cost us about $3 million. In the second quarter of 2021, we also provided standard overtime hours to assistant managers that were restricted in the year-ago period. Our team size per Burger King restaurant averaged 21 employees during the second quarter of 2021, which was similar to the first quarter, but higher than the 19 we averaged in the second quarter of last year. As a consequence of the expansion of operating hours, however, these employees are having to work more hours per week. In late July, we increased menu pricing by another 2% and plan to do the same in October, as well as implement other menu price increases that we may deem necessary as the year progresses. You may recall that we had intended to hold pricing at about 2% for the entire year, but given the challenges we are seeing with respect to restaurant-level input costs, we intend to use the flexibility we have to take additional pricing in the midst of this more elastic economic environment. We expect that the incremental benefit to our bottom line from these pricing actions should help us largely offset the current high-cost environment. Turning to our restaurant portfolio, we acquired 19 Burger King restaurants late in the second quarter in two separate transactions. These restaurants are located in Indiana and Michigan, two Midwestern states where we already have a significant presence. We believe that we can improve upon the average sales volume of these restaurants and increase their margins over time as we integrate them into our existing operations. We currently have no additional multi-restaurant acquisitions in the pipeline, given the high multiples we are seeing being paid for QSR acquisitions in the private market. In the past year, we have not only increased our available liquidity to over $175 million, but also reduced our total net leverage to 3.8 times from last 4.18 times a year ago. Today, we believe our liquidity is ample, as is our ability to generate consistent earnings. Consequently, we expect to be able to continue to invest in strong return, producing organic growth through remodeling our existing restaurant portfolio and building new restaurants, as well as acquiring restaurants in both brands when they can be purchased at reasonable multiples. Given this backdrop, as well as confidence in the outlook for our business, our Board of Directors concluded that the company should move ahead with plans to return capital to our stockholders in order to further enhance shareholder value while keeping our leverage in check at under four times over the cycle. As highlighted in our earnings release this morning, our Board of Directors approved a special cash dividend of $0.41 per share, which will be paid October 5, 2021, to stockholders of record as of August 25, 2021. This $25 million special cash dividend marks the first dividend we have paid in nearly 15 years as a public company. So to conclude, we are facing our cost challenges head-on with more aggressive pricing, which we believe will stabilize margins in the back half of the year and positively impact overall EBITDA levels. Our franchisor is also working with us and other Burger King franchisees to optimize value menu items in order to relieve margin headwinds At the same time, the flexibility we now have with respect to our balance sheet is enabling us to tangibly demonstrate our commitment to using resources at our disposal to enhance value for our stockholders. With that, let me turn the call over to Tony to review our quarterly financials. Thank you, Dan.