Carrols Restaurant Group, Inc.

Welcome to Carol's Restaurant Group, Inc.' 's third quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions on how to ask a question will be given at that time. I would like to remind everyone that this conference call is being recorded today, Thursday, November 9th, 2023 at 830 a.m. Eastern Time and will be available for replay. I will now turn the conference over to Greta Miles, Carol's Controller and Assistant Treasurer. Thank you. Please go ahead.

Thank you, Operator, and good morning, everyone. By now, you should have access to our earnings announcement released earlier today and our 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 plans, and the future direction of revenues, input costs, or other aspects pertaining to our business. 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. 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, and a reconciliation to comparable GAAP measures is available with our earnings release. With that, I will now turn the call over to our President and CEO, Deborah Derby.

Thank you, Greta, and good morning, everyone. We're thrilled with our results for the third quarter, as we not only achieved comparable sales growth of 8.1% at our Burger King restaurants, we also saw positive traffic growth earlier than anticipated this year. In addition, we had great traction with recent product launches, such as the BK Royal Crispy Wraps, which significantly outperformed expectations. Our strong top line growth drove a 530 basis point expansion in restaurant-level EBITDA margins compared to a prior year period, and was the basis for free cash flow generation of over $30 million in the quarter, and the reduction in our net leverage ratio to 2.8 times. Equally important, our team members continue to remain focused on providing our new and returning guests with an excellent customer experience, as we saw improvements in all KPIs measured by our franchisor, including a 33% increase in guest satisfaction. As a result, we are on the cusp of achieving A-level operator status under our franchisor scoring system in less than 12 months. To see such progress across our portfolio of 1,020 Burger King restaurants in such a short period of time is a real testament to the talent and hard work of our field and restaurant team members. Together, our operational improvements allowed us to increase our hours of operation by over 3% while reducing labor hours by about 2% compared to the prior year period. We continue to see productivity efficiencies in labor, with wage inflation decelerating to approximately 4%, manager and hourly turnover remaining stable, and enhanced operational efficiency from our team members. Our success in the quarter also extended to our Popeyes restaurants, which are now part of the second largest chicken fast food chain in the U.S. The introduction of sweet and spicy wings helped drive both comparable sales growth and improved profitability. Similar to our Burger King restaurants, we are seeing continued progress in our customer satisfaction scores at our Popeyes restaurants as well. These strong quarterly results and operational improvements would not have been possible without the hard work and dedication of our more than 24,000 Carol's team members, and I want to thank them personally for their continuing efforts and commitment. Our digital business, including delivery and mobile, has also seen substantial growth and is now approaching 10% of our overall sales, a year-over-year increase of 300 basis points. There are two major areas which we believe are contributing to this increase. First, the successful marketing and product launches by our franchisor, including the BK Royal Crispy Wraps, have amplified Burger King's relevance across demographic groups, including the younger consumer, which is generally more tech-savvy. We've seen across-the-board improvements to both mobile and delivery in terms of comp sales, traffic, and average check. Second, delivery continues to benefit from a relatively strong dinner and late-night performance. with the latter continuing to be aided by our increased hours of operation that I referenced earlier. To further drive the momentum we are seeing in our digital business, we are in the process of rolling out self-order kiosks at approximately 250 of our restaurants over the next four months, with the vast majority of this investment being funded by Burger King's Royal Reset Program. While Burger King is still early in the testing and adoption process, we're encouraged by the results that they have seen thus far. In addition, we recently expanded our local value initiatives that I talked about last quarter, now reaching approximately 60% of our Burger King restaurants. These promotions continue to drive incremental traffic and increase the average check in day parts where we see an opportunity for increased business. I would also like to touch on our capital spending plans as we look towards 2024. We are still in the process of finalizing our strategy, but we continue to remain focused on organically driving sales and profitable growth in the near term. primarily through reinvestment in our restaurants. In order to accelerate that organic growth, in 2024, we plan to remodel about 45 Burger King restaurants. While this will increase our overall capital expenditure somewhat from 2023 levels, we will continue to only invest in remodels that we believe cumulatively will meet our mid-teen return hurdle rate threshold. Similar to the benefits we are leveraging with our 2023 remodels, we will be able to avail ourselves of meaningful contributions from our franchisor for our 2024 remodels through their Reclaim the Flame program. We believe that such economic assistance, along with our robust earnings profile, makes it an opportune time to accelerate the modernization of our portfolio and reap the benefits of our investment. Burger King's latest restaurant format, named Fizzle, was unveiled in October at the Burger King Franchisee Convention. The new Fizzle image will meaningfully enhance the guest experience through digital improvements, updated drive-thru and pickup, as well as signature design elements. We are excited to have the first ground-up sizzle restaurant in the entire Burger King system, which just opened a couple of weeks ago in Marion, North Carolina. For 2024, we are planning for approximately half of our Burger King remodels to be in this new and improved image. We are delighted to add another great quarter to a string of excellent quarters since the beginning of 2023. For the fourth quarter, we expect a strong finish to the year with comparable sales at our Burger King restaurants in the mid-single digits. aided by accelerating traffic growth. Finally, based on the board's confidence in the outlook for our business and strong cash flow profile, they have declared an initial $0.02 per share regular quarterly dividend. As we look to 2024 and beyond, we remain focused on maintaining the momentum we achieved this year while continuing to drive positive traffic growth and incremental EBITDA. As I have said in each of the previous quarters, Carroll's is a great company with talented and committed team members. We believe we have only scratched the surface of our immense potential and look forward to building on these achievements going forward. With that, I will now pass the call over to our Chief Financial Officer and Treasurer, Tony Hall, for a more detailed discussion of our financial results.