Ark Restaurants (NASDAQ:ARKR) Q2 2021 Earnings Call

0:00 Greetings and welcome to Arc Restaurant's second quarter 2021 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Sonal Shah, General Counsel. Thank you. You may begin. My name is Sol, and I'm General Counsel of Arc Restaurant. With me on the call today are our Chairman and CEO.

0:49 For those of you who have not yet obtained a copy of our press release, it was issued over the wires yesterday and is available on our website. To review the full text of that press release, along with associated financial tables, please go to our homepage at www.arcrestaurants.com. Before we begin, however, I'd like to read the Safe Harbor Statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements and that these statements are not guarantees of future performance and therefore undue reliance should not be placed on them. We refer everyone to our filings with the Securities and Exchange Commission for more detailed discussion of the risks that may have a direct bearing on our operating results, performance, and financial condition. I'll now turn the call over to Michael.

1:42 Hi, everybody. First of all, I want to point out that Anthony Sirica, our CFO, is not on the call today. He is ill, not with COVID. It is not anything serious. Thank you very much. to have had the cooperation of all our employees during a very, very difficult time.

2:33 These restaurants have been up and running for some time now, but during the shutdown and for a few months into the beginnings of reopening, most of our key employees had given up anywhere from 50% to 90% of their base pay. to remain with us, and that was a big help in enabling us to get these operations open quickly, get them running smoothly. We are, as many companies are complaining, trying to find good people to work. There is a shortage right now, but we are operating at, you know, very, very good smooth levels, and we Thank you for joining us.

3:45 of $495,000. That means we removed from the EBITDA some $4 million plus of loan forgiveness. So this is truly an operating number. It has nothing to do with the PPPs. So it was negative $4.95 for the quarter. But in the quarter, we had two other adjustments, which we cannot include in the EBDOT. But we increased our vacation pay accrual $500,000 after discussions with our outside auditors. That's a non-cash item, but shows as a non-cash expense.

4:33 Thank you for joining us. Somewhere between $1.1 million and $1.2 million of additional non-cash expenses. If they were to add it back to EBITDA as an adjusted number, we would have been positive some $600,000 to $650,000 in cash flow for the quarter. What we experienced during the quarter was a very bad January, very bad February. Somewhere toward the middle of the third quarter, Week in February we started to see a huge pickup in revenue in Las Vegas, Alabama, and Florida.

5:31 Those restaurants continue to do extremely well. Florida usually It's too early to tell, but we're sort of confident that we're not going to see the usual slowdown that's typical for southern Florida. There seems to be a lot more activity the first few days post-Mother's Day. So we're very excited about that. We're doing well when the weather's good in Sequoia and Washington, D.C. We have 600 outdoor seats. We've been under restrictions of 25% of indoor seating in Washington, D.C. That will probably go away in the next couple of weeks.

6:21 We've also been under severe restrictions in New York and Washington, D.C. in what we're allowed to do in events. Events are very important to us at Robert in New York, Bryan Park, and Sequoia. We are seeing demand for events in Washington, D.C., and as the restrictions are relaxed, we think we'll see significant return of event volume. But We're doing well in Sequoia when the weather's nice. The weather's nice right now, so we're seeing some good cash flow numbers. New York is still a problem for us. Bryan Park sits in the middle of the city. There's 6 million square feet of office buildings facing us. The last survey done, they're only 9% occupied.

7:17 There's very little tourism. There is... No Theater District, all of which Brian Park relies on heavily. So our volumes there have literally been during the early January, February, before the weather got nice, those volumes were probably 10% of what we usually do. To give you an example, this past week, with the weather being somewhat nice on certain days... We did $200,000. That compares to a $600,000 week last year. So those volumes are severely bad. Robert, at the top of the Museum of Art and Design, is also suffering.

8:07 We're on the ninth floor. The museum has had scant visitorship. It relies on tourism to the extent we rely on events there. There have been none. It's a 150-seat restaurant with social distancing. When we had 25% occupancy allowance, we had 35 seats. So both Robert and Brian Park have suffered. Real Grand in New York is doing well. It has outdoor seating. Clyde's is not doing well. So New York remains the problem for us, but our cash flows, given the unexpected strong revenues in Florida, Las Vegas, and Washington now, are growing.

9:06 Really taking up the slack that would have been strong cash flows from New York. Our office G&A is down during the pandemic. We let go of certain positions. We're operating more efficiently on a payroll basis. We also have a better lease market. Thank you for joining us. continue to extend upwards, I think cash flows and margins will be much better.

10:10 We are seeing a price inflation and certain commodities we use. To our surprise, where we had thought we had no elasticity, especially at Rustic Inn where shellfish prices have gone literally up 20%, We've been able to raise prices and get customer acceptance. Rustic is seeing record weeks every week. Some of that has to do with price increase, which has been accepted, but it also has to do with what's going on in southern Florida and pent-up demand. We've put price increases into about half of our restaurants.

10:58 We're seeing no pushback whatsoever. So that's the situation. We expect a very strong third quarter. You know, it remains to be seen how the lifting of COVID restrictions influence our event business. But if our event business starts to come through, I think we'll do much, much better in New York. And that's our situation. On a balance sheet basis, we've – As the press release indicated, we've converted some $4 million of the $15 million in PPP money that we applied and received. So far, about $4 million of that has been granted.

11:44 When we're all done, about $13 million will be forgiven. Our balance sheet right now looks like about if all $13 million is forgiven, Our balance sheet will probably have net debt at that time of something like $7 to $8.5 million net debt, meaning long-term debt, less cash. That's the best position we've been in in a long time. The cash flows are very strong at this point, as they should be during this period of With that, let me take questions and see if I could be helpful.

12:36 At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue.

13:21 For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Jeffrey Kaminski with JJK Consulting. You may proceed with your question. Hi, Michael. Good afternoon. Congratulations on continuing to come through at a difficult time. I've been on these calls for a lot of years now, as you know, and I've generally asked the questions specific to some development, whether it be a Meadowlands or last year the PPP situation. My question today is more big picture. This has been a transformational year, you know, and I just was wondering, looks like you closed a few properties, you lost a lease here and there, you've come through, we've come through a situation where, you know, outdoor seating is at a premium and maybe events less so. Do you see going forward, Michael, any redirection or pivot to Have you learned anything that might change the direction of the company, whether it be more emphasis on bar liquor or less emphasis on events? Just your thoughts on, you know, you have plenty of time to think about things given the trying year we've just come through. So I was curious if there's a strategy that may change going forward.

14:48 So the answer is the strategy changed some time ago and we're pretty much staying the course where we would be more inclined to buy properties with cash flow as opposed to building properties ourselves and taking that risk. The properties we've bought... Thank you very much. And that's the situations we're looking for, these one-off restaurants where people are retiring or no longer have an appetite to continue in their business. If they cash flow positive and if they have a long lease, for instance, Blue Moon has a 26-year lease, we can buy those properties at very attractive prices.

16:09 It makes far more sense than building out ourselves. So that's the basic strategy. We think those properties will continue to come up We are one of the few buyers for those properties. The reason for that is we can offer an all-cash deal where restaurants are generally bought locally for 30% down in some notes and people who are retiring don't generally want to deal with the notes or will favor somebody that could do an all-cash deal. We have a lot of confidence that we can buy these things and run them well and Everything that we've purchased so far, Rustic, Shuckers, JB's on the Beach, Blue Moon, the two properties in Alabama, they're running at probably the best revenues in their history.

17:08 We retain management in all of those cases. The chefs have been retained. We have a great experience with them. We're able to lend some knowledge to them that has helped them become more efficient. They're all ideally located on the water or in spectacularly important locations. That's what we're really looking for. You mentioned Meadowlands. We continue to be highly optimistic that We will get a casino license there. Right now, the Meadowlands, post-pandemic, to the extent we're post-pandemic, is cash flow positive. Throughout the whole period, we have been cash flow positive because of sports betting.

18:08 So that was fortunate for us that New Jersey legalized sports betting. But the real payoff there will be a casino license, and we consistently think we're closer and closer. But closer and closer may be another two years. So we have a strategy that we're following. We're not looking to buy 15 restaurants a year. One or two good properties come up, we'll buy them and feel very comfortable that we can absorb them without extending our balance sheet. Thank you. You're welcome, Jeff. Our next question comes from the line of Roger Lipton with Lipton Financial Services.

18:56 You may proceed with your question. Yes, hi, Michael. Always nice to talk to you. Simple question, which is on everybody's mind, and I just thought I would ask, are you giving any thought yet to the timing of the dividend, reinstituting the dividend? So, we have not had any discussions with the board regarding that. There would be, I imagine, historically, the board would like, first of all, the board and I and Anthony are very concerned that our balance sheet remain, you know, very strong.

19:49 Once all the loans of the 13 million to the 15 million that we think will be granted are granted, the balance sheet will be in very strong position. I think before we decide on a dividend, we would like to see where... We would like to be more satisfied that the world is safe. And so I think we're probably six months or a year away from knowing that. I'm just taking a guess. I'm not an epidemiologist. So I think there will be a waiting period, even if we can afford comfortably to issue a dividend, to get back to that.

20:40 The only argument against that, because historically we want to do that, the only strong argument against that is what can we do with the money? I mean, we've had spectacular results buying these properties. You know, the recent acquisition of Blue Moon was something like a million seven down and another million dollars in notes over four years. I think Blue Moon earns a million bucks the first year of 12 months we have it. Now, some of that has to do with pent-up demand from the pandemic, and we're seeing that demand flow into the restaurant. But Rustic, you know, we bought it for $7.5 million, including the land, when it was making $1.5 million.

21:27 Pre-pandemic, we were making $3.4 million. These returns are outsized. If we can continue to find these things, maybe we don't want to be so aggressive in reinstituting a dividend if we have a better use for the money. We'll see. But we're six months to a year away from making that decision, I would think, Roger. Okay. For what it's worth, you may realize Bloomberg predicts that it might go back. How they put this prediction together, I have no idea. They didn't talk to me. Yeah, they're predicting in September. Okay. September 8th, it reads through 12 cents. The only thing I would suggest in your contemplation, and you've thought about this, is that the stock doesn't begin to reflect the value of the company in terms of your various properties.

22:32 And who knows when Thank you for joining us. But you've thought of all that. As a shareholder, I would kind of like to get some sort of a cash return while I'm waiting for the stock to do what it ought to do. Okay. But good job, of course. Thank you. Thanks, Roger.

23:17 Okay. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Michael Weinstein for closing remarks. Thank you all for participating. I'll speak to you next quarter and stay well. Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.