Q4 2023 One Group Hospitality Inc Earnings Call

Participants

Tyler Loy; Chief Financial Officer; One Group Hospitality Inc

Manny Hilario; President and Chief Executive Officer; One Group Hospitality Inc

Nick Setyan; Analyst; Wedbush Securities Inc

Mark Smith; Analyst; Lake Street Capital Markets

Presentation

Operator

Greetings, and welcome to The One Group Fourth Quarter and Full Year 2023 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Tyler Loy. Please go ahead.

Tyler Loy

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.
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 opinions only as of the date of this call, we undertake no obligation to revise or publicly release any revision. But before the spin and 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 for 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. We see our earnings release issued today. And with that, I would like to turn the call over to Manny Hilario.

Manny Hilario

Thank you, Tyler, and hello, everyone. We sincerely appreciate you joining us today and for your interest in The One Group. To begin, I would like to express my gratitude to each of our dedicated team members. Our results would not be possible without their unwavering commitment to being the best restaurant in every market we operate by delivering exceptional and unforgettable experiences to every guest every time. Thanks to our remarkable teams, we have solidified our leadership position in fine dining in both high end and polished casual.
Let me begin by discussing our fourth quarter financial highlights. First, we delivered record quarterly revenue of nearly $90 million and record quarterly EBITDA of $14.5 million, a 11.5% increase versus last year. Our restaurant-level margin increased 40 basis points to 19.2%, driven by a 120 basis point improvement in cost of goods and other cost savings initiatives we have put in place.
G&A as a percentage of revenue improved by 80 basis points, driven by cost management of controllable expenses. All of this drove adjusted EBITDA expansion of 140 basis points, 16.1% of revenue. Also during the quarter, we opened four new company-owned restaurants, reinforcing our ability to open restaurants. Every four to six weeks.
In October, we opened an STK in Charlotte, North Carolina and a Kona Grill in Phoenix, Arizona, our third point of growth in the area in December, we opened in domestic and Boston, Massachusetts and investigate in Salt Lake City, Utah. These restaurants are off to strong starts and their success bolsters our belief in the long-term EBITDA and earnings power of our development pipeline as we demonstrate industry-leading ROEs for our shareholders.
These four restaurants, along with the addition of the other furnace early in the year, allowed us to increase our consolidated revenues 5.1% for 2023 and deliver $40.1 million in adjusted EBITDA. In addition, it will deliver more run-rate EBITDA into the future. We are also pleased with the addition of STK Washington, DC, which just opened today.
Now looking towards 2024, I would like to discuss our key priorities for the year. First, continue to drive sales. The first few months of the year have pointed to a choppy and challenging sales environment, which will require a sharp focus on value and execution. As a result, we have placed an emphasis on value with a focus on our $3, $6, and $9 Happy Hour and launch of steak night America priced at $69 per person at STK and $39 for Kona Grill, all of which are exceptional values.
Our happy hour program is one of the most compelling in the industry as we offer a sampling of offerings from our main menu at attractive entry price points. The velocity of this daypart continues to accelerate and it is a key initiative for the company in addition, we'll continue to own the holidays and special occasion business.
As you probably know, our guests love to celebrate with us in our venues really come to life for these occasions during the first quarter, we had a record Valentine's Day, and we are looking forward to Easter Mother's Day as well as the many birthdays anniversaries to be celebrated with us to emphasize these messages, we will overlay our robust digital marketing capabilities across these strategies, along with fantastic guest experiences, our culinary innovation and premium product lines such as widen from around the world and our bounties of the Seven Seas promotions.
Our second key priority for the year is to improve clinical margins. Remember that we purchased the brand in the fourth quarter of 2019. And within six months, we were in the grips of the COVID-19 pandemic. 2023 was the first year. We had the opportunity to assess what we consider to be normalized operations in a more normal environment of the 24 restaurants we purchased, we have 18 locations with an AOV of 5.6 million and approximately [30%] restaurant-level margins, both of which we consider to be healthy, although we believe further revenues and margin improvement exist at those restaurants when added to the new Kona Grill restaurants, we have built and are building.
We believe a [70%] restaurant level margin is possible for the future. Conversely, we have six point of wells was AOVs are 3.9 million and generate modest restaurant-level margins. These restaurants created an approximate 300 basis point impact to the overall margin profile of the brand in 2023. And we plan to address these restaurants on a case-by-case basis for both brands, we have implemented several initiatives to improve restaurant operating profit and overall profitability for our company.
These initiatives are focused on purchasing efficiencies for both two and operating supplies, maximizing productivity through smart scheduling and evaluating third-party vendor relationships and reducing travel costs. As you can see from the Q4 performance, these initiatives have started to positively impact the margins, we believe the momentum will continue into 2024.
Our third key priority for the year is to rely on self-funded growth for company owned restaurants and renew our asset-light development focus going into 2024, we believe we can sustain all of our development investing activities through only cash flow generated from operations this year. We expect to open six to eight new venues with one or two of them being managed or licensed.
This is inclusive of the STK in Washington, DC located at the Mary up Grand Marquis that open today. There are currently three additional Company-owned restaurants under construction in the following cities, which we anticipate will open in the near future and STK restaurant and haven't are floored at the advent or a mall, a Kona Grill restaurant in Tigard, Oregon at the Bridgeport Village and as saltwater social restaurant as seafood high in five restaurants in Denver, Colorado in the Cherry Creek neighborhood.
Circling back to our managed and licensed business, we are seeing increased growth in opportunities in the management license side of the business, and I will be spending more time developing our asset-light pipeline.
One thing that might be difficult to understand is how the COVID-19 pandemic impacted the F&B model for hotels, hotel guests. We're trying to use delivery service providers to provide their wholesale equity needs and has taken some time for hotels to revert back to their previous models. That said, we are seeing increasing inbound interest from brands that cater as a net attractor for hotels, which both STK and Kona Grill are.
In addition, like our award winning restaurant in Los Cabos Airport, we are seeing increased interest in both brands for airport locations.
Lastly, our fourth key priority for the year is to continue to return value to our shareholders through share repurchases. As previously mentioned, we generate significant cash flow from operations, and we believe there's an opportunity to leverage that to create balance between growth and shareholder value via share count reduction. To this end, the company's Board has authorized an additional $5 million in share repurchases to be added to the $15 million in repurchases, which we concluded during the fourth quarter of 2023.
To conclude I'm pleased with our 2023 results despite a particularly challenging restaurant environment, managed well by our team, which continues doing a fantastic job successfully dealing with challenges every day.
Now I'll turn the call back to Tyler.

Tyler Loy

Thank you, Manny. And let me start by discussing our fourth quarter financials in greater detail. Total GAAP revenues were $89.9 million, increasing 1.8% from $88.3 million for the same quarter last year. Included in our total revenue is our owned restaurant net revenue of $85.2 million, which increased 1.5% from $83.9 million for the same quarter last year.
The increase in revenue is primarily attributable to the opening of six owned venues and '23. This was partially offset by 4.3% decrease in comparable sales. Consolidated comparable sales increased 40.1% compared to 2019, our pre pandemic stage here, management license and incentive fee revenues were $4.8 million, increasing 7.6% from $4.4 million in the fourth quarter of 2022.
Owned restaurant cost of sales as a percentage of owned restaurant net revenue grew 120 basis points to 22.8% in the fourth quarter of 2023 compared to 24% in the prior year, primarily due to menu mix management, operational cost reduction initiatives, pricing and partially offset by increased commodity price owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 70 basis points to 57.8% in the fourth quarter of 2023 from 57.1% in the fourth quarter of 2022 due to wage and general operating cost inflation.
Operating profit was 19.3% for the fourth quarter of 2023 compared to 18.9% in the fourth quarter of 2022. On a total reported basis, general and administrative expenses decreased 6.5% to $7.9 million compared to $8.5 million in the prior year, reflecting the impact of the many initiatives we have already have in place when adjusting for stock-based compensation.
Adjusted general and administrative expenses were $6.7 million in the fourth quarter of 2023 compared to $7.3 million of same quarter last year. Preopening expenses were $2.9 million compared to $1.7 million in the prior year. The increase is related to payroll and non-cash pre-opening rent for application center broking, which both opened in October 2023 and for SPP, Boston and Essex, a solid city which opened in December 2023.
Interest expense was $1.9 million in Q4 2023 compared to $0.7 million in the fourth quarter of 2022. Income tax benefit of $1.5 million in the fourth quarter of 2020 compared to income tax expense of $0.2 million in the fourth quarter of 2022.
Net income attributable to The One Group Hospitality was $4.6 million or $0.15 per share compared to a net income of $5.1 million in the fourth quarter of 2022 support the Adjusted net income per share adjusted net income of $5.3 million or $0.17 adjusted net income per share compared to an adjusted net income of $6.5 million in the fourth quarter of 2022 or $0.19 net income per share.
Adjusted EBITDA for the fourth quarter attributable to The One Group Hospitality Inc, was $14.5 million compared to $13 million in the fourth quarter of 2022. Adjusted EBITDA margin for the fourth quarter grew 140 basis points to 16.1% compared to 14.7% in the prior year period.
We've included a reconciliation of adjusted EBITDA and adjusted net income in the table. Our fourth quarter and fiscal year 2023 earnings release. Since September 2022, we have purchased 2.3 million shares or approximately 7% of our outstanding shares under our buyback program purchases.
Pursuant to this program were completed in October of 2023. Turning to liquidity, we finished the quarter with $21 million in cash and $10.6 million available under our revolving credit facility. Subject to certain conditions, it may increase the momentum we plan to fund all our development and investment activities with internally generated cash.
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. As always, remind our investors, the actual number and timing of new restaurant openings for any given period.
It's subject to a number of factors outside the Company's control, including macro economic conditions, weather and factored in the control of landlords, contractors, licensees and regulatory and licensing authorities. Based on the information available now and expectations as of today, we are issuing the following financial targets for 2024.
Beginning with revenues. We project our total GAAP revenue of between $360 million and $380 million.
The average license fee revenue are expected to be between $15 million to $16 million.
Total owned operating expenses as a percentage of owned restaurant net revenue of approximately 83%. Total G&A, excluding stock-based compensation of approximately $30 million, adjusted EBITDA of approximately $45 million restaurant preopening expenses between $4 million to $5 million, operating income between $13 million to $15 million, effective income tax rate between 5% and 10%.
Total capital expenditure, net of allowances received from landlords of between $30 million and $35 million.
And finally, we plan to add six to eight (inaudible) on '24.
I will now turn the call back to Manny.

Manny Hilario

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying 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.
Thank you all for your interest in The One Group. As I always say, none of this would be possible without the fantastic support of our teammates who bring our mission of great execution to life every day. We have some exciting times ahead, and I look forward to seeing you out there we appreciate everyone joining us on the call today. Tyler and I are happy to answer any questions they may have. Operator?

Question and Answer Session

Operator

we will now begin the question-and-answer session (Operator Instructions)
Nick Setyan, Wedbush Securities.

Nick Setyan

Thank you. I think you just given your revenue guidance for '24, and I would love to maybe get some more insight on the choppiness comment around Q1 and quarter-to-date. Obviously, we see the industry data. We know it hasn't been great, but it would just be very helpful if you guys could actually give us some numbers. So we can bridge the gap between Q1 and to what extent Q1, as you know, impact, is that the '24 revenue guide?

Manny Hilario

Yes, Nick, this is Manny. I think just clarifying a little bit on the comment, as you pointed out, January pretty much for everyone was a super it was a challenging month just because of the high comps everyone was coming going up against.
So we do think that the beginning of this year was probably our toughest part of the lap for the year. So that's probably how I would characterize that. So I don't think we're particularly any different situation relative to the industry about the tough lap on the beginning of the year. Tylor anything else,

Tyler Loy

Nick, I think you alluded to on the guidance on how you think about your same-store sales for the kind of the full year guidance the Q1 results are reflective of kind of where we feel like none, the full-year number is going to come in.

Nick Setyan

Okay. Fair enough. And then in terms of the actual unit guidance, six to eight, you said I wanted to license. Would you mind just breaking out what you think sort of STK versus NOK? We'll be?

Manny Hilario

Yes. So I think in that guidance, we have 2 growth in that guidance for now.

Nick Setyan

Got it. And then the saltwater social, is this like a new concept?

Manny Hilario

Yes, it's a seafood version of STK. So that will be our third restaurant in the Denver market. So we'll have our STK downtown, and we're going to have a clinical role in Cherry Creek, and this will be our second restaurant in Cherry Creek.
Cherry Creek is a very active neighborhood and that we think that there's a void in the A vibe dining category in that neighborhood. So we think that and this will be a great way of introducing that down into the neighborhood.

Nick Setyan

Okay. Thanks very much.

Operator

Mark Smith, Lake Street Capital.

Mark Smith

Hi guys, first question for me. Just wanted to dig into kind of average weekly sales at STK and in particular, can you guys talk about kind of new restaurants and what kind of kind of volume they're opening up.

Manny Hilario

I mean, the new restaurants are opening up greater than 200,000 per week volumes. So I think our model is about 8 million. And the new units are you know, settling in between [10 million and 12 million] a year. So very significant high volumes.

Mark Smith

Okay. And then looking back at cheese for any commentary just around, I know you said you're excited about Valentine's Day was positive. But any commentary on Canada, the holiday period saw in Q4 and kind of how that comped year over year?

Manny Hilario

I mean, I think we've pointed out on our on our prepared statements, the holidays themselves, we have fantastic days. So I think the Christmas Day Christmas Eve, New Year's Eve was fantastic. So I would say that you know, and Thanksgiving was also fantastic. So I think the actual performance on the holidays was was was it was very, very good.
And then I would say that in terms of it's things like the events business. We have a very good books in terms of bookings, but we did see a little bit less of last-minute bookings on events, which we typically see right in the beginning of December, a pretty big rush for last-minute events. We didn't see that this trend last year. But overall, I would say that's the end of the holiday business was very good for the business for the company.

Mark Smith

Okay. And then you talked about emphasizing value in kind of what you call the choppy market here. You gave your guidance for restaurant level margins, how can we kind of think about and how are you guys balancing emphasizing some value proposition, lots in time driving what looks like improvements in restaurant level margin?

Manny Hilario

Well, I mean, we did that in the fourth quarter. So I mean, with this feature in our three, six, nine, another value layers in there, but also remember that we balance that with premium price promotions in the restaurant. So you will balance that with things like the white good promotion STK or we would do the bounty of the Seven Seas promotion.
So we're barbelling the value with the premium products. And obviously, the higher end consumer still is actively participating on trading up to premium products. So that's how we we balance a big part of that and just keeping the the higher end promotions a really strong.
And then the second thing that would do to balance that out as we put a lot of attention into our cocktail program. So if you were in the restaurants during the holidays, you probably noticed our emphasis on holiday cocktails and as well as brunch daypart cocktail. So we balance the value introductions to that make the brand accessible with some premium cocktail and product offerings in restaurants.

Mark Smith

Okay. And then the last one for me just as we think about these next three that are currently under construction. I know that things can always shift a little bit, but any insight into kind of the timing of the next three openings?

Manny Hilario

Yeah I mean, the next restaurant that we will be opening is on I went to a mall in Florida. That restaurant has been in construction now for about two months, maybe even a little longer than that. So it's in good progress. And again, the million-dollar question these days about these openings is how you clear out the permits at the end, some of some of the times it takes two to three weeks to get all the inspections. And it seems like it takes a little bit of a long time to clear that out.
But I would say a tool towards the middle to the end of the second quarter for that happened to our malls, restaurants to open and then immediately thereafter, we will open on the saltwater social and then our early net third quarter or mid third quarter, we opened the Kona Grill in Tigard, Oregon, and then the rest of the development is towards the the end of the third beginning of fourth quarter. We will have a license restaurant in there in the middle of the second quarter of this year.

Mark Smith

Okay, perfect. Thank you.

Manny Hilario

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Manny Hilario for any closing remarks.

Manny Hilario

Thank you, as always, I'd like to recognize the team for its commitment to Ormat mission and executing at a very, very high level. So I appreciate everyone's contributions for that. And then also thank you for your time today to be on the call here and I look forward to seeing all in our restaurants. Everybody have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.