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Edited Transcript of HABT earnings conference call or presentation 2-Mar-16 10:00pm GMT

Q4 2015 Habit Restaurants Inc Earnings Call

Irvine Apr 8, 2016 (Thomson StreetEvents) -- Edited Transcript of HABIT RESTAURANTS INC earnings conference call or presentation Wednesday, March 2, 2016 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Russ Bendel

The Habit Restaurants, Inc. - CEO and President

* Ira Fils

The Habit Restaurants, Inc. - CFO and Secretary

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Conference Call Participants

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* Will Slabaugh

Stephens Inc. - Analyst

* David Tarantino

Robert W. Baird & Company, Inc. - Analyst

* Jeff Farmer

Wells Fargo Securities LLC - Analyst

* Andrew Charles

Cowen and Company - Analyst

* Joshua Long

Piper Jaffray & Co. - Analyst

* Paul Westra

Stifel Nicolaus - Analyst

* Matthew DiFrisco

Guggenheim Securities LLC - Analyst

* Brian Vaccaro

Raymond James & Associates, Inc. - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Habit Restaurants fourth-quarter and full-year 2015 earnings conference call. Please note that this conference is being recorded today, March 2, 2016. On the call today, we have Russ Bendel, President and Chief Executive, and Ira Fils, Chief Financial Officer.

By now, everyone should have access to the Company's fourth-quarter and full-year 2015 earnings release. If not, it can be found at www.habitburger.com in the investor relations section.

Before the Company begins their formal remarks, I need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put 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. The Company refers you to their recent SEC filings for more detailed discussion of the risks that could impact our future operating results and financial condition.

Lastly, during today's call the Company will discuss non-GAAP measures which they 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 GAAP, and a reconciliation to comparable GAAP measures are available in our earnings release.

With that, I now turn the call over to Russ Bendel. Please go ahead.

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Russ Bendel, The Habit Restaurants, Inc. - CEO and President [2]

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Thank you. Good afternoon, everyone. Welcome to our earnings conference call. I will start the call first with an overview of the quarter and our thoughts on the business for 2016. Ira will then review our fourth-quarter financial results in more details around our financial guidance for the upcoming year.

At a high level, we are pleased with our results for the fourth quarter. Total revenue increased 25.4% to $60.6 million, compared with the fourth quarter of 2014. Company-wise, comparable restaurant sales increased 3.3%. This is our 48th consecutive quarter of positive comparable restaurant sales growth.

Adjusted EBITDA for the quarter increased 28.8% to $6.8 million, compared with $5.3 million for the fourth quarter of 2014. We also opened 13 Company-operated restaurants and one franchise location during the fourth quarter of 2015 and finished the year with 137 Company-operated locations and 5 franchised licensed locations.

Now for a few more details regarding our results starting with comp growth. We are particularly pleased with our comparable sales growth during the quarter, given the significant hurdle of 13.2% from Q4 of 2014, resulting in a two-year stack comps sales growth of 16.5%. The components of 3.3% comp sales increase included a 3.5% decrease in average transaction, of which 3.3% was price and the remainder was mix related and a relatively flat traffic, down about 20 basis points.

In the fourth quarter, we introduced a bold and flavorful limited-time menu offering with our Tempura Jalapeno Charburger. We promoted this LTO with several digital media initiatives and targeted newspaper inserts in a select number of locations. The Jalapeno Charburger was very well-received and sold at a premium price, driving check-out reach in our menu mix. Perhaps most importantly to note, the Habit delivered another positive comparable sales quarter with little or no external media in most markets.

Moving on to unit growth -- during the 2015 fiscal fourth quarter, we opened 13 new Company-operated Habit Burger Grills, including our first locations in Idaho and Virginia. In addition, we opened our first franchise location in Washington, Idaho. Washington and Virginia represent the Habit's entrance into our seventh, eighth and ninth states, respectively. We are very pleased with the 2015 class of openings.

Our first store on the East Coast is coming into the comp base in Q1 of 2016. After moving through its honeymoon period, this location is showing consistent growth, and we are very pleased with its performance. Other new store openings on the East Coast are still too early to comment on, but all in all, our new market expansion plan continues to be on track.

Looking forward to 2016, we continue to expect to open between 30 and 32 Company-operated stores, and we expect our franchisees to open between 4 and 6 locations during the year. To date, in the first quarter of 2016, we have opened two new Company-operated locations. As was the case in 2014 and 2015, the majority of our 2016 new locations are expected to open in the back half of the year.

Six of our new 2016 locations will be drive-throughs. Through the end of 2015, we already have 6 drive-throughs in operation and have been pleased to date with the favorable unit economics in those locations despite slightly higher investment costs. We will continue to utilize our drive-through design in real estate sites that will allow us to implement this design to our advantage.

Overall, we believe our total restaurant potential in the United States is in excess of 2,000 locations, which includes developing both new and our existing markets.

As many of you who follow the Habit know, our brand is really differentiated on four pillars: quality, genuine hospitality, our environment, and value. We have seen 48 consecutive quarters of same-store sales growth by focusing on these brand pillars and not discounting. We believe that our disciplined approach to telling our brand story and exceeding guest expectations is the best way to sustainably grow the Company over the long term, as evidenced by our top-tier AUVs of over $1.9 million per location.

While we will continue to leverage effective marketing tactics via digital media, social media, public relations and marketing in our local communities to build awareness and trial, we are not going to waiver from our commitment to becoming everyone's favorite Habit one burger at a time.

I would like to wrap up my comments by saying that I am extremely proud of the nearly 4,000 men and women in our restaurants who have helped us deliver another strong quarter and year and continue to make the Habit a very special Company.

I would now like to turn the call over to Ira to discuss our fourth-quarter financial results as well as more details around our outlook for 2016.

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Ira Fils, The Habit Restaurants, Inc. - CFO and Secretary [3]

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Thanks, Russ. Now turning to the results of our 13-week fourth quarter ended December 29, 2015. Total revenue increased 25.4% to $60.6 million in the fourth quarter of 2015 from $48.4 million in the comparable quarter last year. Company-wide, comparable restaurant sales increased 3.3% in the fourth quarter, marking our 48th consecutive quarter of same-store sales growth.

The increase in comparable restaurant sales was driven primarily by a 3.5% increase in average check, partially offset by a 0.2% decrease in transactions. Effective pricing in the quarter was approximately 3.3%, which includes the 2.8% increase we took at the end of June of 2015 and the 3.1% increase taken at the end of December of 2015. To put that in a little more perspective, a charburger combo meal -- which includes a burger, fries and a drink -- would cost you just $7.15 in Southern California's store today, up from $6.50 last year at this time. A very compelling value for a complete meal.

The 13 new restaurants we opened during the quarter were open for a combined 66 sales weeks during the quarter. All 137 Company-operated locations were open for a combined 1,678 sales weeks during the fourth quarter.

Turning to expenses, as a percentage of Company-revenue, (inaudible) paper costs were 31.5%, which was a 230-basis-point decrease compared to last year. The decrease was largely driven by commodity cost declines in beef, chicken and dairy, partially offset by slightly higher produce costs. Labor and related expenses as a percentage of Company revenue was 31.6%, which was a 150-basis-point increase versus the fourth quarter of 2014 of 30.1%.

The 150-basis-point increase was driven by a 110-basis-point increase in benefits combined with a 40-basis-point increase in direct labor wages. The 110-basis-point increase in benefit costs was primarily driven by costs associated with the affordable health care act and paid sick leave in California combined with higher workers compensation expense. The 40-basis-point increase in direct labor wages was driven by the combination of inefficiencies and carrying costs related to the new restaurants, wage inflation, and incremental labor costs associated with extended hours.

Occupancy and other related expenses as a percentage of Company revenue increased approximately 30 basis points to 16.2% of Company revenue. The increase was primarily due to higher rent and common (inaudible) maintenance expense. Our general and administrative expenses increased $1 million to $6.3 million during the fourth quarter of 2015 from $5.3 million in the same quarter last year. The increase was primarily due to costs associated with supporting an increasing number of restaurants, costs associated with an increasing number of administrative employees in the field, and corporate supervision required to support the new restaurants along with legal, accounting, insurance and other regulatory costs associated with being a public company. As a percentage of revenue, general and administrative expenses decreased 50 basis points to 10.4% from the fourth quarter of 2015.

The Company also incurred $504,000 in public stock offering related costs in the fourth quarter of 2015. Depreciation and amortization expense increased to $3.1 million from $2.5 million last year. As a percentage of Company revenue, depreciation and amortization increased slightly to 5.2% in the fourth quarter of 2015, compared to 5.1% in the fourth quarter of 2014. Preopening costs for the quarter increased to $954,000, compared to $754,000 in the fourth quarter of 2014. The increase is primarily due to an increase in the number of store openings to 13 openings in Q4 of 2015, compared to 11 openings in Q4 of 2014. As a percentage of Company revenue, preopening was flat at 1.6% compared to the prior-year quarter. For 2016, we expect preopening to be approximately $90,000 per new restaurant.

Interest expense decreased approximately 28.1% to $110,000 due to the paydown of our debt in the fourth quarter of 2014.

GAAP net income for the quarter -- for the fourth quarter of 2015 was $1.3 million, or $0.04 per diluted share. On an adjusted, fully distributed, pro forma basis, net income for the fourth quarter was a pro forma $1.2 million, or a pro forma $0.05 per fully distributed weighted average share, compared to a pro forma of $0.6 million, or a pro forma of $0.02 per fully distributed weighted average share in the fourth quarter of 2014.

In terms of our liquidity and balance sheet, as of December 29, 2015, we had cash and cash equivalents of approximately $47 million and outstanding debt of $2.4 million, which consisted solely of our Dean's long-levered financing. We expect our capital expenditures to be $36 million to $38 million during fiscal year 2016. Based on our growth plans, we believe our expected cash flows and current cash on hand will be sufficient to fund our capital needs for the next several years.

With regards to fiscal year 2016, we are providing our guidance as follows. We expect total revenue of between $286 million to $290 million. Comparable restaurant sales are expected to increase approximately 3% for the full year.

Keep in mind we are considering the cadence of our -- keep in mind, when considering the cadence of our 2016 quarterly comparable sales growth, that we will lap more challenging results in the first half of the year as compared to the back half. Additionally, we have witnessed more aggressive QSR value promotional activity early in 2016, likely driven by the significant decline in these prices.

We are currently working on additional ways to further remind our guests of our value and quality and service that have been a hallmark of the Habit brand and a driver of our long-term growth.

We expect restaurant -- a restaurant contribution margin of 20.6% to 20.1% of sales for the full year of 2016. General and administrative expenses are expected to range between $28 million and $28.5 million. We expect to open 30 to 32 Company-operated restaurants, with 2 openings in the first quarter of 2016. We expect our depreciation and amortization expense to be approximately $15 million for the year. And finally, we expect a pro forma effective tax rate of approximately 43% for the year. The pro forma tax rate assumes the conversion of all our common units of the Habit restaurants at all C shares for shares of our class A common stock, which would eliminate the noncontrolling interests.

With that, we are happy to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Will Slabaugh, Stephens.

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Will Slabaugh, Stephens Inc. - Analyst [2]

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I wonder if we could talk a little bit more about the competitive environment, the comment that you made a minute ago. Sort of what you're seeing out there now, who you see as your main competitors and what a response from Habit might look like.

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Russ Bendel, The Habit Restaurants, Inc. - CEO and President [3]

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Yes, that's a good question, Will. Let me start out at a higher level maybe. As you know, the first quarter of 2015, we had a reported comp of 12.6%. So that was quite a feat to lap over. And as Ira indicated in his guidance section, we definitely have been witnessing more aggressive QSR and casual dining value promotional activity in 2016 -- early 2016 here. And as he also said, probably ties into the more favorable beef prices of late.

This has most likely had a short-term impact on our sales. But we are kind of working on -- currently working on ways to further remind our customers of our everyday value, quality and service that really has been a hallmark of the Habit brand and a driver of our long and consistent 48 quarters of 12 years of consistent quarterly comps.

Again, as Ira indicated, we are expecting approximately comps of 3% for 2016. And what we are experiencing currently has been factored into all of those forecasts.

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Will Slabaugh, Stephens Inc. - Analyst [4]

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Understood. And just one more if I could, just following up on the unit growth comments that you made, talking about the new states that you enter for 2015, it sounds like you are pretty pleased there. So I didn't know if you had any more commentary as far as how pleased you are with some of the newer units in brand-new markets where they hadn't heard of Habit before.

And then secondarily, if you could talk about where the sites might land in 2016 in rough standards.

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Russ Bendel, The Habit Restaurants, Inc. - CEO and President [5]

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Yes, as we said in our comments just earlier, our first -- our original store on the East Coast in North Jersey in Fairlawn is going to enter the comp base during this quarter of -- this first quarter of 2016. And as we have always reported, we continue to be very pleased with how that store and, in total, how Jersey is performing.

In total, we now have 6 stores on the East Coast, three of which are in -- at the year-end, we had 6 stores: 3 in North Jersey, 2 in Florida, and a first store in Northern Virginia. They don't have a lot of operating history behind them. But we continue to be pleased in total with how they are performing, and we continue to be aggressive and looking for additional sites in all three of those markets.

On another -- kind of to reflect also how we feel about the East Coast, we have always communicated that we see for 2016 and beyond that...


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