BurgerFi International, Inc. (BFI) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, everyone, and thank you for participating in today's conference call to discuss BurgerFi's Financial Results for the Third Quarter Ended September 30, 2021. Joining us today are Ian Baines, CEO of BurgerFi International; Julio Ramirez, CFO of BurgerFi Brand; and Michael Rabinovitch, CFO of BurgerFi International. Following their remarks, we will open the call for your questions. Before we begin today, I want to remind everyone this conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements relating to BurgerFi's estimates of its future business outlook, store opening plans, same-store sales and restaurant operating margin growth plans, prospects of financial results, including projected sales, restaurant EBITDA or financial results from the company's acquisition of Anthony's Coal Fired Pizza & Wings. Forward-looking statements generally can be identified by words such as anticipates, believes, estimates, expects, intends, plans, predicts, projects, will be, will continue, will likely result and similar expressions. These forward-looking statements are based on current expectations and assumptions. These are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2020, and those disclosed in other documents we file with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements are attributable BurgerFi or persons acting on BurgerFi's behalf are expressly qualified in their entity by the cautionary statements included in the conference call. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements except as required by law. Given these risks and uncertainties, listeners are cautioned not to place undue reliance on such forward-looking statements. Also, the following discussion may contain non-GAAP financial measures. For a discussion and reconciliation of these non-GAAP financial measures, please see our earnings release for the third quarter 2021. I would like to remind everyone this call will be available via telephonic replay for two weeks starting today. A webcast replay will also be available via the link provided in the press release as well as on the company's website at https//www.burgerfi.com. Now I'd like to turn the call over to your host, CEO of BurgerFi, Ian Baines. You may begin.
Ian Baines: Thank you, operator. Good morning, everyone. We're happy you can join us today. I'm glad to be here on my first earnings call as CEO of BurgerFi. I was previously CEO of Anthony's Coal Fired Pizza & Wings. And effective November 8, I assumed the role of the combined company CEO. We're excited to bring together these two fantastic brands. As a reminder, on November 3, 2021, BurgerFi closed on the transaction to purchase 61 company-owned premium casual dining locations operating under the name Anthony's Coal Fired Pizza & Wings for $156.6 million. Anthony's was a very attractive acquisition for BurgerFi given its strong profitability potential and top-tier unit economics, with the average unit volumes of 2.3 million sales -- $2.3 million; sales per square foot nearing $700 and 19% restaurant-level margins on a pre-COVID basis. In addition to Anthony's core restaurants, we see additional growth opportunities through a smaller concept footprint and a new virtual brand called The Roasted Wing. There is also a significant overlap in our geography with both brands having a strong foothold in the Florida market. Through this transaction, we aim to strengthen our profitability, and we expect this will be an accretive acquisition for the BurgerFi and provide a solid foundation for additional growth. We're also thrilled to partner with L Catterton as they are now one of our largest shareholders. And Andrew Taub, a managing partner with L Catterton, has joined our Board. We have great things in store for both brands, and I'm looking forward to leading the growth of the combined company moving forward. I'm fortunate to be able to draw from over 40 years of experience in the restaurant and hospitality business. We're all the way back from being a classically trained chef to becoming the President and CEO in the U.K., in Canada and also here in the U.S. In my time in the U.S., I've worked with two of the largest publicly traded restaurant companies, Brinker International and Darden Restaurants. Additionally, I have spent over 13 years in the private equity world focused on creating value for brands such as Cheddar's Scratch Kitchen, which successfully sold to Darden Restaurants in 2017 for $780 million. I'll start today with an overview of the changes in our corporate structure before handing it over to Julio to highlight BurgerFi's third quarter update. From there, we will turn it over to Mike to walk through our financials. So as a reminder, following the transaction, Mike Rabinovitch will be the CFO of the combined company. Julio Ramirez will remain CEO of the BurgerFi brand, and Patrick Renna will become President of the Anthony's brand. Now I'd like to express my full confidence Julio and Patrick and their teams leading both brands. Our long-term goal is to assemble a strong, multi-platform growth company in the fast casual and casual dining industries. And I'm extremely excited with the progress we're making towards this end. I now like to turn the call over to Julio Ramirez, CEO and President of the BurgerFi brand. Julio?
Julio Ramirez: Thank you, and welcome, Ian. We're very happy that all of you can join us on the call today. I'll start with a brief history and overview of BurgerFi and then highlight some of our third quarter activities and results. From there, I'll turn it over to Mike to walk through our financials before I close later with our outlook and growth opportunities. With that, I'm going to start us off with a brief history of our business as some of our listeners may be new to our story. The first BurgerFi restaurant opened 10 years ago just outside of Fort Lauderdale, and the success was immediate. People loved our food, decor, ambience and the overall energy of the brand. Our mission statement of redefining the way the world eats burgers and enriching lives through the best burger experience is more relevant than ever, building on our great-tasting food. We offer the highest-quality ingredients and premium burger experience in an exceptionally clean, eco-friendly restaurant prepared and served by a highly energetic and motivated team. We've grown to approximately 116 franchise locations and corporate-owned restaurants in 22 states, two countries and Puerto Rico. I'm proud to say that in our home state of Florida, we believe we are the premier better burger chain with approximately 60 locations. Recently, we were named the top better burger fast casual chain in USA Today's 2021 Fast Casual Top 100 Movers & Shakers List for 2021 as well as the 10Best Reader's Choice survey in USA Today. By the way, on Fast Casual, it's our eighth year in a row on the list, and we hope to repeat again. Our menu innovation pipeline remains strong, and we continue to enjoy the strong performance of our SWAG, that Spicy Wagyu Angus Burger, first introduced in March of this year. Our SWAG burger features five spicy ingredients, a double wagyu and brisket blend burger with charred jalapeños, candied ghost pepper bacon to pack the heat, sweet tomato relish to add a bit of sweetness, habanero pepper jack cheese, and hot steak sauce, five ingredients. Our SWAG burger has doubled our premium wagyu sales. And due to its continued success, we made it a permanent menu item beginning in July, a great example of our menu. I want to take a moment and thank all of our employees for their commitment and hard work, especially during this unprecedented time that we have been facing. I'd now like to turn the call over to our CFO, Mike Rabinovitch, who will provide additional commentary on our performance for the third quarter. Mike?
Michael Rabinovitch: Thank you, Julio, and good morning, everyone. Our third quarter total revenue increased 25% to $11.1 million compared to $8.9 million in the year-ago quarter. New restaurant openings, same-store sales increases, supported by our new SWAG burger premium burger introduction in March '21 and a high retention rate on digital continued to drive a strong improvement in system-wide store sales for the third quarter. In fact, corporate-owned restaurants delivered an impressive 7% increase in same-store sales during the third quarter. Our franchise locations also performed very well with same-store sales increasing 9% in the third quarter. System-wide sales in the third quarter also increased 25% to $41.4 million compared to $33.2 million in the year-ago quarter, fueled by same-store sales increase of 8%. Digital channel sales comprised 37% of our system-wide revenue in the third quarter of '21. We continue to be very pleased to retain such a high digital component of our business, while our in-restaurant dining continues to recover. As Julio will discuss later, we will continue to invest in technology with the goal of delivering a more frictionless omnichannel experience to drive guest satisfaction and sales. Restaurant-level operating expenses for the third quarter were $7.8 million compared to $6.3 million in the year-ago quarter. Our restaurant-level operating margin improved significantly to that of the year-ago quarter. The margin improvement was driven primarily by leverage from same-store sales, improvements in the efficiency of managing the costs of our digital channel sales as well as controlling store operating expenses, which helped offset the inflationary costs in food and challenges within the labor market. We reported a net loss attributable to common shareholders in the third quarter of $5 million, which compares to a net loss attributable to controlling interest of $800,000 in the year-ago quarter. The increased loss primarily resulted from the amortization of intangible assets resulting from the purchase of BurgerFi in December 2020, noncash share-based compensation expenses, mergers and acquisition costs and selected investments related to being a public company. Preopening expenses were also higher compared to the year-ago period as we accelerated our corporate-owned store development this year. Adjusted EBITDA in the third quarter was approximately $200,000 compared to a loss of $32,000 a year-ago quarter. The improvement over the comparable period was driven by revenue growth and a higher operating margin, largely offset by investments related to being a public company and the investments to drive the development of corporate-owned restaurants. Moving on to the balance sheet. Our cash balance at September 30 was $28.3 million compared to approximately $40 million on December 31, 2020. The difference reflects the repayment and termination of our revolving line of credit of $3 million in the first quarter of '21 as well as capital expenditures year-to-date of $8.2 million, primarily related to the construction of new corporate-owned restaurant locations. Moving on to our outlook, we remain optimistic about our short-term and long-term prospects. However, similar to other restaurant companies, we are experiencing challenges with the availability of materials and labor for construction and development of new restaurants. Therefore, we are updating our expectations for new store openings in 2021 to approximately 18 company- and franchise-operated BurgerFi restaurants, down from our previous target of 25 to 30 locations. During the third quarter, we opened 10 new restaurants, including one opening in October -- I'm sorry, year-to-date through the third quarter, we opened 10 new restaurants, including one in October. Further, we have signed 32 leases, of which 14 restaurants are currently under various stages of construction and development. Most of the new locations are in markets we operate in. And as a result, we're excited about continuing to build on the strength of the brand in those areas. In addition, we are encouraged by the performance of our Ghost Kitchens and through our partnership with Reef and Epic Kitchens, we have increased our number of Ghost Kitchens year-to-date by 15, meeting our target of 15 to 20 new Ghost Kitchens locations by the end of '21 with sometimes to spare. In terms of restaurant-level margins, we saw a significant year-over-year improvement, which was driven by leverage from higher same-store sales improvements in the omnichannel, management and controlling store operating expenses. This strong year-over-year increase also reflects the impact of the 4% price increase we took in late June. We are pleased with the flow-through that we saw in the third quarter and look forward to higher operating margins in the fourth quarter where we have higher seasonal sales expected to produce higher operating margins sequentially. Separately, we also know that most of our franchise locations reopened in September and October, which should continue to add momentum to our revenue recovery. In terms of capital outlay, we are planning capital expenditures of approximately $13 million for 2021, down $2 million from our previous forecast of $15 million, as some locations construction and opening have slipped from late '21 to early '22 due to the aforementioned challenges related to securing equipment, delays in permitting and the scarcity of labor. We look forward to a more robust store opening plan in the first quarter as a result of these delayed locations. Now I'd like to touch on some of the details of Anthony's transaction. As previously mentioned, we purchased Anthony's from L Catterton for $156.6 million. When considering Anthony's pre-COVID-19 revenue and operating margin per store for the 61 stores we acquired, we believe that Anthony's will produce strong operating performance as the COVID environment stabilizes. On a revenue multiple basis, we paid approximately 1x revenue. In the transaction, we assumed $71.3 million in debt comprised of $61.1 million of bank debt, carrying an interest rate of 4.75% and $10.2 million of other notes payable bearing no interest. The bank debt will mature in June of 2024. Now I'll send it back to Julio to discuss our growth plan and strategic initiatives going forward. Julio?
Julio Ramirez: Thank you, Mike. I'd like to talk about our strategic vision and reiterate our growth plans. Our top priority remains the guest experience. As dining rooms have reopened, we remain laser-focused on providing the guest with a seamless experience with fantastic-tasting food. Further, we remain very focused on off-premise and digital dining as we have optimized our digital and ordering solutions so that our guests can choose where and when they want to have their BurgerFi meal. Guests can order pickup and delivery through our BurgerFi mobile app, order through our website, order from the largest third-party delivery providers in the market. Additionally, to grow our brands in and outside of our existing markets, and as Mike mentioned, we have developed ecosystems in the form of delivery-only Ghost Kitchens in various markets across the U.S. We are using these kitchens to both gain entrants into certain markets where we don't have a physical presence as well as providing added visibility and awareness in markets where we currently are growing. This allows us to test new growth opportunities while building brand recognition and integrity without the large upfront fixed cost of opening a new restaurant. We currently have approximately 24 Ghost Kitchens operating across the U.S., all of which are helping us understand how we can build our brand in unique ways outside of our core strategy of company-owned and franchised restaurants. Another way we are looking to improve our guest experience is through continued refinement of our omnichannel experience. With Henry Gonzales as our new Chief Marketing Officer; and Karl Goodhew as our new Chief Technology Officer, we've been working on a more consumer-focused and data-driven approach to drive engagement among our consumers and ultimately increase sales and profitability. Carl is focused on building out our loyalty mobile application and delivery features as well as our payment capabilities. By leveraging upgraded technology and innovative multichannel services, we're very excited to provide our customers with the experience of choosing when and where they want their order. Linking upgraded technology with our refined consumer-focused marketing, we are confident that we will increase our brand recognition and further improve our customer experience as we enter 2022. Our development strategy is focused on building clusters of company-owned restaurants in key cities such as Jacksonville and Tampa, Florida, Atlanta and Nashville, along with franchise restaurant expansion as well. From the Southeast, we want to work our way up the Eastern Seaboard. We already operate in the Carolina's, the suburbs of Washington, D.C. and Virginia and Maryland, Philadelphia and New York. So by moving north, we're creating a prominent brand presence along the East Coast. Looking to other U.S. opportunities, we intend to pursue multiunit franchise deals in markets like the Southwest and Midwest, but only if they meet our rigorous criteria. We require our potential franchise partners in these markets to be well capitalized, have restaurant and retail experience, a deep knowledge of the geography they do business in and, lastly, be a good cultural fit for our company. To address our international opportunities, we already have strong performing restaurants in Puerto Rico with plans to open additional locations in that market. We also continue to have conversations with potential franchise partners in Latin America who have many years of experience and believe there's huge potential for growth. Earlier this year, we signed a multiunit deal to open six restaurants in the eastern province of the Kingdom of Saudi Arabia. We expect the first restaurant to open before the end of the fourth quarter of 2021. We'll certainly keep you posted on the development in that region in our year-end call. This is a very exciting time at BurgerFi as our brand is on trend with the consumer, and we see the significant growth opportunities across the globe. With that, operator, please open up the call for questions.
Operator: And our first question will come from Peter Saleh from BTIG.
Peter Saleh: Congrats on closing the acquisition. Just a little bit of housekeeping. The -- I think when the deal was announced, I think the purchase price all-in was about $161.3 million. I know the numbers came in a little bit below that, about $4 million. Can you just help us reconcile? Was that all just lower debt that was assumed? Or was there something else there?
Michael Rabinovitch: Yes, Peter, it's a good question. The way that the acquisition agreement was structured is it had two mechanisms that would result in purchase price changes. The first one was the purchase price would be reduced by any transaction costs that Anthony's incurred as a part of the transaction. And they reduced the number of common shares that were issued, not the cash or the debt assumed. And then the second one is a net debt calculation at closing, which really is fixed on the debt side, but the cash balance fluctuates. And so those two adjustments gave rise to a reduction in purchase price that came out of the common.
Peter Saleh: Got it. Okay. All right. Great. All right. So just on the menu pricing that you guys are operating with, you mentioned a 4% price increase in late, June. Can you just give us a sense of what is the effective price in the comp now? And how many windows or opportunities do you see on annual -- in a year to raise prices? Is it 2x? Is it 4x? How do you guys think about pricing at BurgerFi?
Michael Rabinovitch: Okay. So I'll take the question into parts. It's Mike. The effective rate in comp for the third quarter on company-owned locations, corporate-owned locations would be the full effective rate of around 4% because we did take that price increase before the third quarter began around the second to third week of June, okay? So on a third quarter versus third quarter last year on company-owned stores that's in there. Now on the franchise side, the franchises control the timing and the magnitude of their own price changes, and they tended to lag a little bit by weeks, and so they would creep into July and August. So you would probably have something south of that 4%, let's call it, 2.5% to 3.5% impact within their numbers on the third quarter versus third quarter. So that should answer your first question. The second question is, how often do we look at price? Well, BurgerFi, prior to going public, haven't really aggressively evaluated its competitive set for price. But I think during the high inflationary periods on food and labor during COVID, it was forced to. And there's a delicate balance that we play with all market participants of the guest experience with the operating margin. We continue to face cost inflation on the food side, even after taking the price increase. We're going to have to be compelled to continue to look at our pricing, but being sensitive to the overall guest experience and being sensitive to the average ticket. So will we do a price review on menu at least annually? We will.
Peter Saleh: Great. Mike, do you feel like -- do you have other operational, I guess, low-hanging fruit that you can pull or pick to kind of offset some of the margin pressure you're seeing from commodity and labor inflation? Or is it really price just the biggest and most meaningful lever that you have going forward?
Michael Rabinovitch: I think price is one of the levers. There's a good side of price. There's a downside of taking price. In that you don't want it to affect your guest experience and frequency and the robustness of your business. But we think that there continues to be opportunity, some of which we've harvested in the quarter. I mentioned that we've gone after the efficiency of managing our digital channel. And what that really means is it's the management of who delivers who, which ordering platforms we use, the third-party providers like Uber Eats and Door Dash and the like, how much we do through our own app, how we incentivize customers between them and they have different costs, and then renegotiating those contracts as well. So we've made some headway in the quarter on those operating expenses, and we believe there's more to come. And then within the rest of the operating costs within the restaurants, we think that there's additional opportunity. We think that the labor market has been very challenging. The cost of labor has impacted us, but the real impact is in the productivity of our labor with the high turnover rates that we're experiencing, the number of hours and team members it takes to deliver the experience is not as efficient as it has. So we look forward to, in the short term, continuing to go after some of that low-hanging fruit. And on a post-COVID basis, we hope for a more stable environment where we would be able to get a better labor rate. And then we're going to embark on another journey now that we're part of a larger company where we source and procure direct and indirect materials, food and services. The scale of our company, one of the rationales of the transaction was to gain scale. So now we have a business that essentially has 3x the volume. And so we're going to be revisiting our entire procurement cycle, whether they be direct or indirect and seeing what kind of gravy we can get from that.
Peter Saleh: Great. Very helpful. My last question is on development delays. Can you guys elaborate a little bit on what's driving that? And do you feel like that persists into 2022? Or is that something that's just more confined to the back end of this year?
Julio Ramirez: Yes. I think we're well aware -- you're well aware of the challenging environment that's out there. I think the delays have been equipment availability, labor shortages, even our subcontractors have been dealing with COVID as we have ourselves. So it continues. I'm proud to say that the delays, those are all real stores that have leases signed, and it's been slipping. It sounds like they've gone away. So we remain focused to do the best we can, but it's a very challenging environment. I'm very proud of the fact that we'll probably double -- we will double the number of stores that we opened a year ago in this environment, I think that's a huge achievement. So we continue to plug forward. And again, these are things that are happening in the marketplace across equipment, across services and the lack of people, et cetera, and we continue to work very closely. I think we're doing -- we have a little bit more control on the company side because we're using outside regional contractors. That's helped us a lot. I think that's why we've been able to open the ones we have. Those contractors, for example, could buy equipment in advance. So I think that's helped a lot. A little tougher for franchisees, but we're working with them very closely as well to deal with it.
Ian Baines: Peter, let me address the second part of your question is, do we expect that to persist? I think the broad market supply challenges will persist into the first quarter. But to add some clarity, the number that we put out there for openings by the end of the year is 18 is the number that we felt most confident that we would come in at least at. I just want to point out that there are four other locations that have the possibility of opening in the last 10 days of December or they would roll into the next two to four weeks of January. But we did -- we wanted to be responsible and set the expectations appropriately because some of these factors of equipment and getting CEOs are outside of our control. So what's going to end up happening if those three to four locations that are in play for the last couple of weeks of December, if they roll into the first quarter January or February is, we'll end up having a very robust first quarter opening, in addition to the ones that were already slated to be developed and opened in the first quarter. So it's merely a timing of the calendar.
Operator: I show our next question comes from the line of Roger Lipton from Lipton Financial.
Roger Lipton: Julio, it was nice to meet you in Las Vegas. Can you describe how the on-premise versus off-premise sales mix has sort of moved over the last couple of years, pre-COVID through where we are today?
Julio Ramirez: Yes. I think I joined the company just over a year ago and really when COVID was going. And I think that from the numbers we saw at the beginning before COVID, we were in the mid-20s in terms of the digital experience. And at the peak of COVID, I think we cleared and had some strong months there. And I'll be honest with you, just like -- I always like to say, just like 9/11 changed air travel, I think that COVID perhaps changed a little bit the restaurant business and that I think we may not ever go back to what it used to be before. I think we're going to continue to have a very strong digital business. And I think the companies that do a better job of dealing with that and meeting our guests where they need to be met, which I'd like to say we're one of those, that will be there, we'll be able to operate at a higher level of digital going forward. But with time, we'll see where it goes.
Roger Lipton: So is it -- so say at the current time, it sounds like it's sort of in the middle. I mean maybe it's faded back to the 30% area, but down from the peak of 40%.
Michael Rabinovitch: Yes. So Roger, it's Mike. So currently, for the third quarter -- and I just want to add a definitional clarification, you're using the term on-prem and off-prem, and we use the term digital. There's a slight nuance. We look at digital as how the order was procured, whether it was through our app or one of the third-party delivery providers, our call center or our website. So we look at it as how things are being ordered. Now to address your definition of on-prem, off-prem, somebody could drive into the restaurant, order at the counter and get it to go. That would not be included in what we call digital. So I just want to clarify that first. And then on digital, for the third quarter, we were at 37%. We did peak at 40%. And we're happy for a stabilization because when we have restaurants enjoying our restaurant, they have the opportunity to enjoy some beverages and some beer and some wine and maybe some of the delicious concretes and shakes and custards that they may not order through delivery. So we're okay with a little bit of rebalancing. We're thrilled with the retention rate that we're getting the on-prem back, and we're still continuing to hold on to a whole new customer class through digital.
Roger Lipton: And the digital ordering create a higher average ticket?
Michael Rabinovitch: It generally does.
Operator: At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Baines for closing remarks.
Ian Baines: Thank you, Kevin. We are truly excited to bring together two strong brands which have -- both have an incredible loyal customer base, and we look forward to providing you more updates on our business for our year-end results call. I'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our fourth quarter results in the new year. Thanks again for joining.
Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
