ONE Group Hospitality Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to The ONE Group First Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Tyler Roy.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and hello, everyone. Before we begin our formal remarks, let me remind you that part of our discussion today will include forward looking statements. These forward looking statements are not guarantees of future performance and you should not place undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Please also note that these forward looking statements reflect our opinion only as of the date of this call.

Speaker 1

We undertake no obligation to revise or publicly release any revisions of these forward looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During today's call, we will discuss certain non GAAP financial measures, which we believe can be useful in evaluating our performance. However, the presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of these measures such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales and total food and beverage sales at owned and managed and licensed units to GAAP measures, along with the discussion of why we consider these measures useful, please see our earnings release issued today.

Speaker 1

With that, I'd like to turn the call over to Manny Hilario.

Speaker 2

Thank you, Tyler, and hello, everyone. We sincerely appreciate you joining us today and for your interest in The ONE Group. To begin, I'd like to express my gratitude to each of our dedicated team members, including the nearly 6,500 new teammates who joined The ONE Group last week with the closing of the acquisition of Safflower Holdings Corp, the parent company of the Benihana and Ross Sushi restaurant brands. For the remainder of this call, we will be referring to Sapphire Holdings as Benihana. Thanks to our remarkable teams, we have solidified our leadership position in high end and polished casual vibe dining.

Speaker 2

Let's discuss highlights from this Q1 2024 and provide an update on the strategic initiatives that shaped the quarter. First, despite a challenging sales environment, we grew sales 3% to $85,000,000 driven by the strength of our company owned new restaurants, which contributed significant revenues at margins above the rest of the system. 2nd, with only moderate pricing and stickier than expected inflation, we kept restaurant level margins intact at 16%. This was enabled by the cost saving initiatives that we enacted in the Q4 of last year, which generated approximately $3,000,000 in restaurant operating profit throughout the quarter. Next, we managed G and A effectively as G and A excluding stock based compensation as a percentage of revenue improved by 20 basis points year over year.

Speaker 2

All of this resulted in $10,500,000 in EBITDA nearly in line with last year despite the tough consumer environment experienced throughout the industry. During the quarter, we celebrated the opening of our 28th STK Steakhouse. The restaurant is located in Washington D. C. Across from the Walter E.

Speaker 2

Washington Convention Center and inside the Marriott Marquis Hotel. The opening of this new STK marks an important step in The ONE Group's strategic expansion initiatives and long term growth strategy. We are thrilled to be welcoming new guests to this exquisitely designed restaurant and providing them with a truly memorable dining experience. Looking ahead, we remain laser focused on continue to drive top line growth while further enhancing operational efficiencies. These strategic priorities for 2024 include: 1st, a focus on driving sales.

Speaker 2

Similar to others in the industry, during the Q1, we experienced a decrease in comparable store sales from a choppy and challenging consumer environment. And as a result, we have focused on efforts on delivering value coupled with strong execution. We continue to promote our $3 $6 $9 $9 happy hour menu at both brands and our $69 $39 Steak Nut America offerings at STK and Kona Grill respectively. In addition to cater to folks looking for higher end experiences, we continue to innovate on our culinary program with premium product lines. To amplify these value driven and experiential offerings, we leveraging our robust digital marketing capabilities, supporting these strategies, coupled with a relentless focus on delivering fantastic guest experiences.

Speaker 2

We are confident that we can successfully navigate the current challenging sales environment and drive sustainable sales growth. Our second key priority is to improve KonaGrow margins. At the end of 2023, we performed an in-depth review of our Kona growth portfolio of restaurants and the terms that about a quarter of the 24 restaurants we acquired are underperforming due to challenging real estate. The bifurcation of performance continued into the Q1 as our core base of restaurants saw significantly healthier margins than these other locations. As previously mentioned, we will address each of these locations on a case by case basis.

Speaker 2

As we look at our pipeline of new units, we expect the new Kona Grill's to have a target AUV of $5,000,000 and a 17% restaurant level margin. For both the STK and Kona Grill brands, we have implemented several key initiatives to improve restaurant operating profit and overall profitability. Managing menu and product mix is 1, enhancing purchasing efficiencies for both food and operating supplies, maximizing productivity through smart scheduling practices, evaluating all third party vendor relationships and reduce travel costs. We saw these initiatives take hold during the quarter as we were able to maintain margins. We are confident that this momentum will continue throughout 2024 as we further optimize operations.

Speaker 2

Our 3rd key priority is to rely on self funded growth for company owned operations. This year we have opened 1 company owned SDK in Washington D. C. For the remainder of the year, we expect to open an additional 5 to 7 new SDK and Kona Grill venues, which includes 1 to 3 company owned SDKs, 2 company owned KonaGrows and 1 to 2 managed or licensed units. We also plan to open 1 to 2 company owned Benihanas and 1 company owned Rock.

Speaker 2

There are currently 4 company owned restaurants under construction in the following cities. An STK restaurant in Aventura, Florida at the Aventura Mall, a Saltwater Social which is a high end seafood 5 dining restaurant that will be located in Denver or Colorado in the Cherry Creek neighborhood, a Kona Grill restaurant in Tigard, Oregon at the Bridgeport Village and a Ra Sushi restaurant in Plantation, Florida. Over the long term, we plan on growing 3 to 5 new units of each of our growth brands STK, Kona Grill and Benihana. We view this as a proven and scalable international platform with compelling white space. We see an addressable market of over 800 venues, which includes 400 restaurants for Benihan in the U.

Speaker 2

S. Alone, 200 STKs and 200 Kona Girls. We are clearly in the early innings of a robust growth strategy. Our 4th key priority is the successful integration of Benihana. This acquisition not only aligns with our vision of being the undisputed global leader in VIBE dining, but it will also generate tremendous synergies.

Speaker 2

From our ability to manage commodity cost at scale, drive many mix through culinary innovation, leverage our combined digital databases and digital capabilities and utilize our robust reservation management system, we have a tremendous opportunity to create value for our shareholders through this combination of top entertainment brands. Lastly, our 5th key priority is to continue to return value to our shareholders through share repurchases. We generate tremendous cash flow and we believe there is an opportunity to leverage our internally generated cash to create balance between growth and shareholder accretion via share count reduction. To this end, earlier this year, the company's Board of Directors authorized a $5,000,000 share repurchase program on top of the $50,000,000 program that was already completed last year. To conclude, I'm pleased with how we have kicked off the New Year despite navigating a particularly challenging restaurant environment.

Speaker 2

This is a testament to the fantastic job our team is doing. We believe that our strong leadership team combined with our strategic initiatives positions us well to navigate the evolving market conditions and capitalize on growth opportunities. We are excited for the future and we will remain focused on executing our strategy and enhancing shareholder value. I will now turn the call over to Tyler.

Speaker 1

Thank you, Manny. Let me start by discussing our Q1 financials in greater detail. Total GAAP revenues were $85,000,000 increasing 3 percent from $82,600,000 for the same quarter last year. Included in our total revenues is our owned restaurant net revenues of $81,500,000 which increased 3.7% from $78,600,000 for the same quarter last year. The increase was primarily attributable to the opening of 6 restaurants since July of 2023.

Speaker 1

This was partially offset by a 7.9% decrease in comparable sales consisting of a 6.8% decrease at SDK a 9.7% decrease at Kona Grill. Management license and incentive fee revenues were $3,500,000 decreasing 12.3% from $4,000,000 in the Q1 of 2023. The decrease was primarily attributed to decreased revenues at our STK restaurants in North America and the exit out of STK Westminster as we consolidated our London operations in the Q4 of 2023. Owned restaurant cost of sales as a percentage of owned restaurant net revenue improved 100 basis points to 23% in the Q4 of 2024 compared to 24% in the prior year, primarily due to operational cost reduction initiatives, product mix management and pricing offset by cost inflation. Owned restaurant operating expenses as a percentage of owned restaurant net revenue reached 130 basis points to 60.9 percent in the Q1 of 2024 from 59.6% in the Q1 of 2023 due to fixed cost deleveraging and operating cost inflation, partially offset by operational cost reduction initiatives.

Speaker 1

Restaurant operating profit was 16.1 percent for the Q1 of 2024 compared to 16.4% in the Q1 of 2023. On a total reported basis, general and administrative expenses were flat at $7,500,000 for the Q1 20242023. When adjusting for stock based compensation, adjusted general and administrative expenses were $6,200,000 in the Q1 of 20242023. Reopening expenses were $2,900,000 compared to 1,300,000 prior year. The increase was related to payroll, training and non cash pre open rent for STK Washington D.

Speaker 1

C, which opened in March 2024 and the SDK and Kona Grill restaurants currently under development. Interest expense was $2,100,000 in the Q1 of 2024 compared to $1,800,000 in the Q1 of 2023. Income tax benefit was $300,000 in the Q1 of 2024 compared to income tax expense of $200,000 in the Q1 of 2023. Net loss attributable to The ONE Group Hospitality Inc. Was $2,100,000 or $0.07 net loss per share compared to a net income of $2,600,000 in the Q1 of 2023 or $0.08 net income per share.

Speaker 1

Adjusted net loss was $600,000 or $0.02 adjusted net loss per share compared to an adjusted net income of $3,200,000 in the Q1 of 2023 or $0.10 net income per share. Adjusted EBITDA for the Q1 attributable to The ONE Group Hospitality Inc. Was $10,500,000 compared to $10,900,000 in the Q1 of 2023. We have included a reconciliation of adjusted EBITDA and adjusted net income in the tables in our Q1 2024 earnings release. During the Q1, our Board of Directors authorized an additional $5,000,000 share repurchase program.

Speaker 1

However, there was no stock repurchases in the Q1 2024. Now I would like to provide some forward looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward looking statements as discussed in our SEC filings. We always remind our investors the actual number and timing of new restaurant openings for any given period is subject to a number of factors outside the company's control, including macroeconomic conditions, weather and factors under control of landlords, contractors, licensees and regulatory and licensing authorities. Based on the information available now and the expectations as of today, we are updating our 2024 targets to include the addition of Benihana.

Speaker 1

The guidance includes projections for Benihana from May 1, the date of the acquisition until the end of the year. Beginning with revenues, we project total GAAP revenues of between $700,000,000 $740,000,000 which consists of an additional $340,000,000 to $360,000,000 for the addition of Benihana. Managed franchise and licensee revenue are expected to be between 17 $1,000,000 $19,000,000 which consists of an additional $2,000,000 to $3,000,000 for the addition of Beniana. Total owned operating as a percentage of owned restaurant net revenue of approximately 83 percent. Total G and A excluding stock based compensation of approximately $40,000,000 adjusted EBITDA of between $95,000,000 $100,000,000 restaurant preopening expenses between $7,000,000 $9,000,000 and effective income tax rate of between 5% 10%, total capital expenditures net of allowances received from landlords of between $50,000,000 $60,000,000 and finally, we plan to add 8 to 11 new venues in 2024.

Speaker 1

Based on the guidance discussed, coming out of 2024, our annual run rate system wide SMB revenues will be in excess of $1,000,000,000 Our run rate GAAP revenues will be approximately $950,000,000 and our run rate adjusted EBITDA will be greater than $140,000,000 I will now turn the call back to Manny.

Speaker 2

Thank you, Tyler, and thank you all for your time today and interest in The ONE Group. We are in the early stages of our long term growth strategy as we continue to build a portfolio of high volume brands with compelling returns for our shareholders. We've recently added Benihana and Ross Sushi, 2 vibe and entertainment dining brands that will diversify and strengthen our industry leading portfolio of world class experiential restaurant concepts and blend perfectly with STK and Kona Grove. This is an exciting time to be part of this company and we appreciate your support. Tyler and I would be happy to answer any questions that you may have.

Speaker 2

Operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Jim Celera, Stephens Inc. Jim, please go ahead.

Speaker 3

Hi, guys. Good afternoon. Thanks for taking our question. Manny, I was curious if you could maybe level set what you saw from the consumer during the quarter and just kind of run that versus the results versus your expectations. I don't know we hear a lot about consumer engaging and value seeking behavior, especially with restaurants.

Speaker 3

And so if you can just maybe give us an idea for the appetite for some of the experiential dining that you talk about and how that jibes with what the consumers engaging in with kind of a value oriented lens right now?

Speaker 2

Yes. So great question. I think as we mentioned in our earlier last quarter's call, we certainly see choppiness in the sales environment. So it's a little bit more uneven environment in terms of predictability on sales week over week, so it's a little bit choppier. In terms of the consumer behavior, we clearly see consumer gravitating towards the happy hour, our $3.69 price points are holding up very well.

Speaker 2

So we do see trading to happy hour. And then within the dinner sets at STK, we will also see we actually see 2 things. We have a group of consumers that are actually trading and sharing more at the table and then we have a group of consumers that still trade up to the premium items like Y Goose. So we do have a little bit of a bifurcated behavior within STK. So I would say that's kind of what I've been noticing is a lot more consumers opting for the high end product.

Speaker 1

Okay, great.

Speaker 3

And then maybe if I can just ask a question on the new unit side. Could you just give us an update on new unit environment permitting, any labor delays, anything I know depends on where you're opening stores obviously, but we've heard some other restaurant operators may have some delays in getting new unit openings, whether it's labor shortages or permitting delays? Just anything you can talk about what you're seeing on your end?

Speaker 2

Yes, another great question. I mean historically we always plan 3 to 6 months for the permitting cycle. Now we actually think it's 9 months. We've actually added 3 extra months to the permitting cycles. They are longer.

Speaker 2

There seems to be a lot more back and forth, and the responses seem to be a little slower in terms of when we send in submissions. So I would say that's still part of the environment. But generally, new units and unit development, the one thing I will tell you is that when we open new stores, there's a lot of excitement for new stores. So that's the upside on development right now is when we open great locations like we just did in Washington, D. C, We see an incredible amount of business coming to us because I think the consumer right now in addition to they're looking for something different and experiential.

Speaker 2

So I think that anytime we open one of our restaurants, we do get rewarded with some very strong upfront revenues.

Speaker 3

Perfect. Thanks guys. Appreciate the color. I'll hop back in the queue.

Speaker 2

Thank you, sir.

Operator

Thank you. Your next question comes from Mark Smith, Lake Street. Mark, please go ahead.

Speaker 4

Hi, guys. Similar to the last question, just on consumers, just curious as you look at actually, first, can you just talk any more about Kona Grill consumers, maybe more so than STK and any changes in behavior during the quarter?

Speaker 2

I mean, actually for the quarter Tyler and I were talking about this earlier, we actually I would expect that they would have traded down on the P mix and actually our P mix trade is only down 3 points. So we don't see a lot of trade down at Kona Grill. So I would say that consumer actually has not traded down as much as I would have expected. But the reality of it is they still are gravitating towards, as I mentioned earlier, the $3.69 price points on the happy hour. And then we also now feature $39 Steak Night America at Kona Grill.

Speaker 2

So I do think that right now value is king and that the consumer will gravitate towards that, except as I mentioned earlier, higher end consumer still is going for the Wagu and still ordering the premium product. But the other consumers are definitely trading to the value propositions.

Speaker 4

Okay. And as we think about the Spenehana consumer, any initial thoughts that you have on potential behavior if maybe they lean more towards more or will behave more like that higher end STK consumer or maybe more like the Kona consumer? Any broad thoughts you have would be great.

Speaker 2

Yes. I mean, so my early observation is lots of celebrations. So they're still willing to go after the premium or the top items on the menu. So my view so far with the brand is that people the behavior of Benihana has not really changed, if you will. I do think that the upside at Benihana though is on premium products.

Speaker 2

I think that there's a lot of room for us to introduce some of the premium products that we have access to through our SDK program, particularly Wagyu. So I think you'll see us introducing seasonal products that are a little bit higher price point. And I think there is a group of consumers in that brand that will opt to it. As a matter of fact, we know that because the demographic studies that we've done do show that they do have some higher end consumers in the brand. It's a pretty broad based use brand because it's celebration.

Speaker 2

So we think there's actually a pretty large upside for us as we go forward on that. And then also on beverage, we also think there's a nice upside on beverage at Benihana. And not just only because of the offerings, but also because of the service style. And drinks don't really play a big role in that now, but I think over the next couple of months. We'll be putting more emphasis on beverage and on the bar, And I think that's actually going to be helping the average check as well as profitability for Benihana over the next year or 2 years.

Speaker 4

Perfect. And I think the last one for me and I apologize that I missed some of this. Of the I think it's 8 to 11 new restaurants expected this year. Can you just go through kind of the breakdown of those again? And then any expectations on kind of near term Q2, which those openings maybe happen over the next couple of months?

Speaker 5

Sure, Mark. This is Tyler. So it's going to be 1 company owned ROTH. It is 1 to 2 company owned, Fennehana locations, 1 Saltwater Social in Denver, 1 to 2 Kona Grills and then 3 to 4 STKs.

Speaker 2

And the next one coming out of the shoot is going to be STK in Aventura, Florida. So that will be the next opening that we have. And then thereafter, we have Softwater Social and we have a Raw and we have a Kona Grill all bunching in around the middle of Q3 in terms of opening and then the rest is towards the end of Q3, early Q4.

Speaker 5

And sorry, Mark, those are the 3 Kona grills.

Speaker 2

Yes, 2 to 3 Kona grills.

Speaker 4

2 to 3, not 1 to 2. Okay. Thank you.

Operator

Thank you. Your next question comes from Michael Symington, Weebush. Michael, please go ahead.

Speaker 6

Hi. This is actually Michael on for Nick at Wedbush. Just for us, I guess, maybe just a modeling question to start. Could you provide the comp breakdown in Q1 for both STK and Kona?

Speaker 5

Yes. Give me one second. It was minus 6.8 for STK, Michael, and minus 9.7 for KonaGrow. And then traffic.

Speaker 6

Sorry, in terms of traffic and pricing embedded in that?

Speaker 5

Yes, got it. So checks down at SDK minus 4 and then average check was minus 2.5 and pricing in that average check was 4. And then for Kona Grill, traffic minus 14. Percent, our average check was plus 4.5 percent with pricing up 7% in there.

Speaker 6

Great. Thanks. And then you guys have talked about targeting 17% margins at Kona. Just wondering if you could provide an update on the margin profile you're seeing at the new units and how that really compares to some of the older legacy units that you talked about needing to potentially look at a little bit of work on?

Speaker 2

I mean the prototype ones have done really well the new ones. So and the reason is I think labor has been better. I mean, I'll just preface that by saying that it's still early on their life cycle. So their profitability will be improving there as well. But I would say the new stores have been on how we expected on the margin.

Speaker 2

I would say in general the Kona Grill brand, we do have core restaurants, which we kind of refer to from the acquisition around 18 of the restaurants have an average margin of about 13% plus. And then we have about 6 CONUS in there that frankly the real estate is not what we would do today. So I think really the margin fix with Kona Grill is to continue opening those new restaurants. I think the core ones are still in solid margins for the casual sector. And then we got to work out the plan for this other 6 restaurants and get them to a better place.

Speaker 2

So that's really how we're targeting that. But I'm pretty pleased with the progress on the new restaurants on the margin side.

Speaker 6

Great. Thanks very much. I'll hop back in the queue.

Operator

Thank you. Your next question comes from Roger Lipton, Lipton Financial. Roger, please go ahead.

Speaker 7

Yes. Hi, Mandy. Hi, Tyler. Congratulations on getting the deal completed so quickly. It seems like about 5 weeks from announcement to closing.

Speaker 7

So the lawyers must have been busy. A couple of questions. It sounds like the synergies from the combining the companies is going to be in place pretty quickly. Can you give us some idea of where that's coming from? That run rate sound like by the end of this year, it will be pretty much in place.

Speaker 7

So that's the first question. The second question is what does the current balance sheet look like post the closing in terms of cash and long term

Speaker 2

debt? Yes. I mean, so I think the synergies, a lot of the initial ones, which we are already working on are supply chain. So I think that's going to be a really good area of synergies for us. We've already started looking at beef and integrating our supply chain because we have a lot of purchasing power on that side.

Speaker 2

And I think that's going to be significant for us. I think there's also some other efficiencies with rebates and some other stuff in supply chain. So that'll be level 1. That'll be relatively enacted quickly. I think the outlook on just the operations, I think there's a lot of things that we can do in terms of for instance, we have a call center.

Speaker 2

I also think that we can have labor efficiency at the restaurants when we bring in our services to the call center. So that's looking pretty good.

Speaker 5

And then Roger, in terms of the balance sheet, in the previous IR presentation, we had said a little north of 50 there on the balance sheet. And then debt after the transaction is going to be about $350,000,000 So net debt, we anticipate to be around $300,000,000 or so.

Speaker 7

Okay. All right. Very good. Thanks very much.

Speaker 2

Yes. The only thing I would add to that is we also have a $40,000,000 revolver that we brought in with this new debt deal and no covenant. So we have the credit the loan term loan is a no covenant term loan and then we only have financial covenants if we draw over a certain amount on our revolver, which we have no plans to do at any time in the near future.

Speaker 7

Okay, good. Thanks very much. Good work. Thank you.

Speaker 2

Thank you, sir.

Operator

Thank you. There are no further questions at this time. Please proceed.

Speaker 2

Thank you everyone for joining today. Again, thanks to our over 10,000 teammates who work hard, very hard to every day to live our mission of creating great memories and doing that through executing great experiences, memorable experiences and exceptional experiences at the restaurants to every guest every time. So thank you for that. And then I look forward to seeing you all out in our restaurants. Everyone have a great day.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.

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ONE Group Hospitality Q1 2024
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