Carrols Restaurant Group, Inc.

Good morning and welcome to the Carroll's Restaurant Group Inc. Third 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 call, please press star zero on your telephone keypad. I would like to remind everyone that this conference call is being recorded today, Wednesday, November 10th, 2021 at 8 a.m. Eastern Time and will be available for replay. I'll now turn the conference over to Ms. Greta Miles, Controller for Carol's Restaurant Group. Please go ahead.

Thank you, Melissa, 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.carols.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion, including answers to questions posed to management, may include forward-looking statements or comments with respect to our strategies, intentions, or plan, and the future direction of revenues, input costs, or other aspects pertaining to our businesses. 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 with 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 prepared in accordance with generally accepted accounting principles. A reconciliation to comparable 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, Greta, and good morning, everyone. Before I discuss our third quarter 2021 top line, let me address the elevated labor and commodity cost headwinds that we and the restaurant industry generally are experiencing. They both hit our adjusted EBITDA and margins hard in the quarter. From a labor standpoint, in the third quarter, we worked to keep our restaurants open from at least 6 a.m. until 11 p.m. in order to take advantage of the economy reopening. Given the competition to recruit and retain workers, we were required to increase average hourly wages of our team members by 13.3% and pay shift premiums and overtime in order to meet customer demands. In addition, the Delta variant further challenged our ability to keep our restaurant staff during the quarter, given sporadic location-specific closures. At least for now, that challenge has abated so far this quarter. We believe we will continue to experience labor headwinds for at least the next six to nine months. Our supply chain was constrained on numerous levels. We use a combination of frozen beef from overseas suppliers and fresh beef from domestic suppliers. Beef represents about a quarter of our commodity basket, Container ships carrying frozen beef were stranded off the coast of California, unable to unload their product in a timely manner during the third quarter. This supply constraint contributed to our beef costs increasing 15.5% compared to last year. Domestic food and paper producers and distributors supplying most of our commodity requirements face labor constraints along with higher fuel costs, and many pass those increases on to us. The questions we are struggling to answer are, What portion of the higher labor costs are transitory, and will commodity costs follow their traditional cyclical patterns and revert to the mean? We don't have these answers, but we do know that the inflationary cost pressures we experienced during the third quarter were not expected to the degree that they impacted our industry. The economic conditions stemming from the pandemic and its effect on the labor force, supply chains, and consumer habits continue to be challenging to to navigate and difficult to predict. Turning to our sales in the third quarter of 2021, comparable Burger King restaurant sales rose 2.7% during the quarter with a sequential improvement in trends from July through September as year-ago comparisons eased and we rolled out pricing increases in late July and in August. We estimate that we lost about 1% of same-store sales growth through the COVID and staffing-related challenges that reduced operating hours in the quarter. During the third quarter, the eat-in and take-out channels combined contributed about 14% to total sales at our Burger King restaurants, while drive-through was approximately 80%. We also benefited from a 4.7% mix in delivery sales, which compared favorably to a 2.9% mix in the third quarter of last year. The average check size for delivery held at $17.53 compared to $17.56 in the second quarter of 2021. Our overall third quarter average check for Burger King rose to $9.23, including delivery, compared to $9 in the second quarter. Overall, our Burger King average check increased 7.8% year over year as a result of higher menu prices and reduced promotional discounting. To further mitigate input pressures, we have taken an additional eight-tenths of a percent in pricing in early October at our Burger King restaurants. We believe that the impact of price increases on customer demand in the current environment is small. Based on the price actions we have taken so far this year, lower promotional discounts, and possible further price action expected next year, we believe that our Burger King average check will increase in the mid to high single-digit percent range in the first half of next year. In terms of the trends in our Burger King sales by day part, most remain steady. The breakfast and evening late night day parts, however, continued to recover in the third quarter of 2021 compared to the same quarter of 2020. Breakfast increased 9% and contributed 12% of our sales in the quarter, and evening late night improved 10% and contributed 13% of our sales in the quarter. We once again outpaced the overall Burger King system as we have done for 21 out of the past 23 quarters. Our third quarter 2021 comparable Burger King restaurant sales increase exceeded the U.S. Burger King system by 430 basis points. We believe we were able to drive positive comparable sales and outperform the system during the quarter through a combination of menu price actions and actively reinstating restaurant hours. As an update, in October 2021, comparable sales at our Burger King restaurants increased 5% compared to October last year, continuing the sequential improvement we have been seeing since July of 2021. Popeye's comparable restaurant sales in October increased nine-tenths of a percent. Only in place a short time, Burger King's Royal Perks loyalty program is already beginning to have a positive impact on increasing the level of one-on-one engagement with our customers, and reducing the use of paper coupons. This platform, which is currently accessible in our restaurants only through the BK mobile app, will also be available to our dining room and drive-thru guests beginning next month. To conclude, today we are facing our cost challenges head-on with more aggressive pricing, which we believe will help alleviate the margin pressure that we are currently facing. Looking ahead, we believe we will be able to begin recapturing a portion of the margin erosion we are seeing this year as the benefits from menu pricing actions and lower promotional discounts continue to improve comparable sales and cost comparisons potentially ease on a relative basis. Finally, as we announced in September, I will be retiring as chairman, CEO, and president by June 30th of next year. I have been with the company for 50 years, a long tenure by any measure. I believe that now is the right time, both for me and for Carol's, to begin the transition to the next generation of leadership My intention over the coming months will be to work with our board of directors and management team to identify my successor and help that person succeed in their new role. And with that, let me turn the call over to Tony to review our quarterly financials.