Oppenheimer 18 th Annual Consumer Conference June 20, 2018

Transcription

1 Oppenheimer 18 th Annual Consumer Conference June 20, 2018 David Burke, Chief Executive Officer Phyllis Knight, Chief Financial Officer 1

2 Safe Harbor Some of the statements contained in this presentation may constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of These statements reflect the current views of our senior management team with respect to future events, including our financial performance, business and industry in general. Statements that include the words expect, intend, plan, believe, project, forecast, estimate, may, should, anticipate, and variations of such words and similar statements of a future or forward-looking nature are intended to identify such forward-looking statements. We intend for our forwardlooking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions. Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements, including, among others, the risks and uncertainties disclosed in our annual reports on Form 10-K, quarterly reports on Form 10-Q and other filings made with the Securities and Exchange Commission. Any forward-looking statements you read in this presentation reflect our views as of the date of this presentation with respect to future events and are subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. You should carefully consider all of the factors identified in this presentation that could cause actual results to differ. This presentation will discuss some non-gaap financial measures, which the Company believes are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results compared in accordance with GAAP. The Company has provided reconciliations of comparable GAAP to non-gaap measures in tables found in the Supplemental Information portion of this presentation. 2

3 Who We Are NASDAQ: SAUC IPO: 2008 One of the Largest Franchisees for Buffalo Wild Wings Leading operator Strong cash generator 65 BWW locations Market capitalization $34M Recent share price $ week range $ $2.86 Insider ownership 50% Institutional ownership 17% Shares outstanding 26.9M Cash Flow Yield % of EV of 8.4% 3 Market data as of June 15, 2018 (Source: S&P Capital IQ); Ownership as of most recent filing

4 Wings. Beer. Sports. Total of 1,255 restaurants system wide 1 DRH owns 65 locations (~10% of franchised locations) Distinctive branding Exceptional guest experience Wings, signature sauces and seasonings Domestic, imported and craft beers 1 as of December 31,

5 Why Invest in DRH? With our cash flow yield and leverage ratio, DRH is similar to how many PE firms would target and structure their investment 1. High cashflow yield: Cash flow yield of approximately 8.4% 1 Operating cash flow of $11.8 million on $161 million in sales or 7.3% 2 2. Leverage model with low cost of capital $111.1 million in senior-secured bank debt 2 Scheduled principal payments of approximately $12.5 million per year Pricing grid, currently L+350 (mostly hedged for fixed rate just over 5.0%) Swaps currently in-the-money 3 At current stock price valuation, approximately 2/3rds levered 4 1. Q1 18 TTM operating cash flow from continued operations / enterprise value based on June 1, 2018 closing price of $ Based on April 1, 2018 Quarter End 3. Assumes 30-day LIBOR rate of 1.85% 4. Total Debt / Enterprise Value based on June 1, 2018 closing price of $1.25, market cap of $33.7 million, $111.1 million in debt 5

6 Return on Investment There are multiple levers that may contribute to enhanced returns 1. De-leveraging Most automated lever is to convert at least $12.5 million of debt to equity annually Cost of capital is reduced as balance sheet is de-levered Debt Facility Summary Pricing $111.1 million outstanding with bank syndicate $12.5 million annual mandatory amortization Current interest expense at approx. $6 million Facility term through June of 2020 Financial covenants: Coverage ratio = 1.0x 1.2x through term of loan LALR = 6.5x through Q then step-downs Quarter Beginning Maximum LALR Q x Q x Q x Q x LALR L + Pricing Greater than/equal to 5.0 : % Greater than/equal to 4.5 : % Greater than/equal to 4.0 : % Greater than/equal to 3.5 : % Less than 3.5:1 2.25% Over 70% hedged with fixed approximately 5.0% with current LALR 6

7 Return on Investment We are consistently working to grow our profits by increasing our topline and running a more efficient operation 2. Profitability A. Achieving higher average unit volumes Buffalo Wild Wings is now owned by Inspire Brands (which is owned by renowned franchise brand operator, Roark Capital) BWW brand will be repositioned to increase market share and thus AUVs with a 40+% cash conversion rate B. Implementation of more efficient cost structure Significant, sustainable reductions of overhead costs over last 18-months Sustainable operational efficiencies in labor and opex C. Lower input costs Massive, positive change in fresh, traditional chicken wing spot prices vs. prior year, equating to an estimated 1.5 percentage point benefit 7

8 Return on Investment With deleveraging and profit-enhancing initiatives, both multiple expansion and EBITDA growth become more probable 3. Multiple Expansion A. As our Net Debt-to-EBITDA ratio is reduced due to the aforementioned levers (reducing overall balance sheet risk), we would expect to see multiple expansion B. Multiple expansion strengthens our ability to grow the company through acquisition or greenfield development of other franchise concepts Higher level of accretion, more options, stronger balance sheet 4. Growth EBITDA Expansion A. With new growth opportunities comes incremental EBITDA in addition to our base EBITDA B. Our Support functions (G&A) are efficient and scalable so we can enjoy significant leverage with additional locations/brands in our portfolio (platform model) 8

9 Unique Opportunity Diversified Restaurant Holdings, Inc. is the only means to invest in the upside of the recently acquired Buffalo Wild Wings brand DRH is the only publicly-held BWW franchisee in the system BWW is no-longer a public entity owned by Inspire Brands / Roark Capital Group Roark has a proven track record to help reposition franchise brands for renewed success Our low-cost leverage is a unique benefit to increase the potential of a high-roi investment 9

10 Illustrative Free Cash Flow Conversion to Equity through Debt Reduction Current State Business Multiple Normalization Expansion ($ millions) Current Year 1 Year 2 Year 2 Y Year 2 Adjusted EBITDA $ 19.9 $ 20.0 $ 20.0 $ 26.0 $ 26.0 Capital expenditures $ (4.7) $ (2.1) $ (2.7) $ (4.5) $ (4.5) Changes in net working capital $ - $ - $ - $ - $ - Interest $ (6.6) $ (5.4) $ (4.8) $ (4.8) $ (4.8) Taxes $ - $ - $ - $ - $ - Free Cash Flow $ 8.6 $ 12.5 $ 12.5 $ 16.7 $ 16.7 Scheduled debt amortization $ (12.1) $ (12.5) $ (12.5) $ (12.5) $ (12.5) Cash balance $ 4.4 $ 4.0 $ 4.0 $ 4.0 $ 4.0 Debt balance $ $ $ 88.9 $ 80.6 $ 80.6 Net debt $ $ 97.4 $ 84.9 $ 76.6 $ 76.6 Net debt / EBITDA 5.5X 4.9X 4.2X 2.9X 2.9X Equity market cap $ 38.0 $ 50.5 $ 63.0 $ $ Debt $ $ $ 88.9 $ 80.6 $ 80.6 Enterprise value $ $ $ $ $ EBITDA Multiple 7.6X 7.6X 7.6X 7.6X 10.0X Equity market cap cumulative growth 32.9% 65.8% 207.8% 372.0% 10

11 Illustrative Free Cash Flow Conversion to Equity through Debt Reduction With deleveraging and normalization of the business, both multiple expansion and EBITDA growth become more probable with the potential for significant equity appreciation Illustrative Value Creation ($ millions) $179.4 $38.0 $106.6 $85.0 $50.5 $117.0 $63.0 CURRENT YEAR 1 YEAR 2 Current State Business Normalization Multiple Expansion 11

12 Sales and Unit Count 2017 results reflect negative changes to corporate promotional, marketing and media strategies; New franchisor ownership creating renewed energy and excitement behind the brand and expect these efforts will begin to be realized in our results later in the year Net Sales Store Count $ Millions $166.5 $165.5 $ $144.8 $ Q 18 TTM YTD 12

13 EBITDA Cost of sales, driven by record high chicken wing prices, accounted for over 65% of the decline in EBITDA in 2017, followed by the impact of slower traffic and Hurricane Irma closures; operating expenses were held in check despite the sales headwinds Restaurant-Level EBITDA* Adjusted EBITDA* $ Millions $ Millions $22.6 $29.7 $32.3 $28.3 $26.8 $17.4 $21.6 $23.3 $19.9 $ Q 18 TTM Q 18 TTM * Adjusted for pre-opening expenses and other non-recurring expenses. See EBITDA reconciliation slide. 13

14 REST. EBITDA OPEX LABOR COS Quarterly Restaurant EBITDA Trend AUV ($M) $3.1 $2.8 $2.7 $2.7 $2.7 $2.6 $2.6 $2.6 $2.8 $2.5 $2.4 $2.4 $2.4 $2.8 $2.8 $2.6 $ % 28.1% 28.1% 27.6% 28.0% 27.9% 27.4% 29.2% 29.4% 29.9% 29.2% 29.3% 28.2% 28.5% 28.1% 28.1% 29.4% % 23.9% 25.1% 24.8% 24.4% 25.2% 24.7% 25.0% 24.7% 25.5% 25.4% 25.3% 25.7% 23.8% 24.4% 24.8% 25.2% % 13.4% 13.0% 12.7% 11.5% 12.1% 13.3% 14.0% 12.3% 12.9% 13.8% 13.1% 13.0% 13.2% 12.9% 12.7% 12.9% 1.5 FF 2 OCC 8.0% 8.0% 8.0% 8.0% 8.2% 5.5% 5.9% 6.4% 6.6% 6.5% 8.1% 8.1% 6.8% 7.0% 8.1% 7.2% 8.0% 6.5% 8.1% 8.2% 8.1% 8.2% 7.1% 7.6% 7.2% 7.4% 8.0% 8.0% 8.1% 5.2% 6.2% 6.8% 8.1% 7.1% % 20.6% 19.4% 20.3% 21.5% 20.0% 19.6% 16.5% 19.0% 16.6% 15.9% 17.1% 17.4% 21.2% 20.4% 19.4% 17.1% KEY Q Q Q Q Q Q Q Q Q AUV ($M) Q Q Q Q FY 2014 FY FY 2016 FY On June 29, 2015, we acquired 18 locations in the St. Louis market to add to our existing 44 units, which had a dilutive AUV of $2.3 million 2 FF = Franchise-related fees which includes 5.0% royalty and % NAF (national advertising fund) 14

15 EBITDA Outlook Implemented significant, sustainable reductions of overhead to improve our profitability and financial strength Negotiated significant debt covenant relief through the end of 2019 allowing DRH to maintain existing debt amortization schedule and low interest rates Anticipate achieving higher average unit volumes in the future; will benefit from leverage of leaner and more efficient organization Sales Cost of sales Labor Operating Expenses General & Administrative New approach under changed ownership proven track record Media, promotion, food and beverage strategy Seasoning of loyalty program Wing market has corrected Implemented labor productivity improvements Tight management of operating expenses Salaries and expense reductions 15

16 Traditional Chicken Wing Prices See Dramatic Fall after Record Highs in 2017 Volatile fresh wing spot prices had ranged between $1.41 and $2.16/lb. since 2015; prices have been on the decline since October 2017, with the spot price currently at $1.25 $ / lb. Fresh Jumbo Northeast Chicken Wing Spot Prices Source: Urner Barry Comtell UB Chicken Northeast Jumbo Wings NOTE: Logistics cost to restaurants is $0.33 / lb. over the spot price 16

17 COS Trends and Wing Impact Traditional wing costs were escalated throughout 2017 and hit record highs in Q4, but have recently declined from these highs; wings as % of total COS spiked to 24.7% in 2017 $2.14 $ % $ % 28.1% 27.6% 28.0% 27.9% $1.92 $ % 29.2% 29.4% 29.9% $ % 29.3% $2.02 $ % $ % 28.1% 28.1% 29.4% $2.07 $1.77 $1.80 $1.79 $ % 24.9% 25.3% 24.7% $1.81 $ % 23.5% 21.7% 20.1% 20.4% 19.5% 20.3% 20.9% 19.5% 21.5% $ % 21.1% Q Q Q Q Q Q Q Q Q Q Q Q Q % FY 2014 FY 2015 FY 2016 FY 2017 Total COS % Wing Cost % of Total COS Wing Cost/Lb NOTE: Wing prices shown are the average price paid per pound of fresh, jumbo chicken wings including distribution costs of approximately $0.29 per pound 1 Q3 actual reported COS was 29.2% which included $323K in cover charges for a UFC fight that had no cost associated with it 17

18 Lower G&A Run Rate ($M) G&A costs continue to trend down as cost savings initiatives take effect; achieved target of 5% of sales, despite lower than anticipated sales $9.0 $ % 5.6% 5.4% $ % 5.2% $7.5 $7.0 $8.9 $ % 4.8% $7.6 $ % $6.0 FY2016 FY Fcst 4.4% G&A $ Total G&A % of Sales Note: G&A expenses are shown net of non-recurring expenses. 18

19 Value Creation Going Forward Current Environment Later 2018 > Franchisor under new ownership demonstrated track record > Renewed energy and excitement behind the brand > Progress behind the scenes on many fronts including marketing, advertising, information technology, menu and more > Testing and evaluating new initiatives with the franchisor > Traction from changes > New and improved media strategy rollout planned for fall > Well positioned to leverage improved commodity cost environment and future sales growth Value Proposition > Best in class operations > Strong cash flow targeted at debt reduction converts to equity value > Tax benefits to offset over $70 million in pre-tax income 19

20 Supplemental Slides Oppenheimer 18 th Annual Consumer Conference June 20,

21 Management Team David Burke Chief Executive Officer, President Appointed President and Chief Executive Officer in October 2016 Served Chief Financial Officer and Treasurer since 2010; has served as a member of the Board of Directors since inception of the Company Prior to DRH, employed by Federal-Mogul with roles in finance, corporate development and marketing Phyllis Knight Chief Financial Officer, Treasurer Appointed Chief Financial Officer and Treasurer in October 2016 More than 30 years of finance, accounting and leadership experience Prior to DRH, served as EVP and CFO of Polar Corporation and Champion Enterprises Jason Curtis Chief Operating Officer Held the Chief Operating Officer position since 2002 Named to the BWLD Leadership Council to serve as a liaison between franchisees and the BWLD corporate office Certified by the National Restaurant Association as a Foodservice Management Professional 21

22 EBITDA Reconciliation Fiscal Year Ended (Unaudited) December 31, December 25, Net loss $ (20,458,076) $ (6,002,481) + Loss from discontinued operations 173,925 9,641,529 + Income tax expense (benefit) 18,997,756 (2,270,792) + Interest expense 6,633,709 5,763,684 + Other (income) expense, net (106,586) 172,031 + Loss on asset disposal 310, ,306 + Depreciation and amortization 13,115,072 14,696,846 EBITDA $ 18,666,336 $ 22,339,123 + Pre-opening costs 405, ,279 + Non-recurring expenses (Restaurant-level) 131,000 71,184 + Non-recurring expenses (Corporate-level) 665, ,655 Adjusted EBITDA $ 19,868,117 $ 23,345,241 Adjusted EBITDA margin (%) 12.0 % 14.0% + General and administrative 9,081,866 9,265,432 + Non-recurring expenses (Corporate-level) (665,333) (335,655) Restaurant Level EBITDA $ 28,284,650 $ 32,275,018 Restaurant Level EBITDA margin (%) 17.1 % 19.4% December 27, 2015 (16,192,492) 15,685,630 (83,514) 4,214,452 (785,591) 967,035 11,922,548 15,728,068 1,439,390 1,128,805 3,325,393 21,621, % 11,385,201 (3,325,393) 29,681, % 22

23 EBITDA Reconciliation cont. Restaurant-Level EBITDA represents net income (loss) plus the sum of non-restaurant specific general and administrative expenses, restaurant pre-opening costs, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses related to acquisitions, equity offerings or other non-recurring expenses. Adjusted EBITDA represents net income (loss) plus the sum of restaurant pre-opening costs, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses. We are presenting Restaurant-Level EBITDA and Adjusted EBITDA, which are not presented in accordance with GAAP, because we believe they provide an additional metric by which to evaluate our operations. When considered together with our GAAP results and the reconciliation to our net income, we believe they provide a more complete understanding of our business than could be obtained absent this disclosure. We use Restaurant-Level EBITDA and Adjusted EBITDA together with financial measures prepared in accordance with GAAP, such as revenue, income from operations, net income, and cash flows from operations, to assess our historical and prospective operating performance and to enhance the understanding of our core operating performance. Restaurant-Level EBITDA and Adjusted EBITDA are presented because: (i) we believe they are useful measures for investors to assess the operating performance of our business without the effect of non-cash depreciation and amortization expenses; (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness; and (iii) they are used internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and restaurant pre-opening costs, which is non-recurring. The use of Restaurant-Level EBITDA thereby enables us and our investors to compare our operating performance between periods and to compare our operating performance to the performance of our competitors. The measure is also widely used within the restaurant industry to evaluate restaurant level productivity, efficiency, and performance. The use of Restaurant-Level EBITDA and Adjusted EBITDA as performance measures permits a comparative assessment of our operating performance relative to our performance based on GAAP results, while isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. Companies within our industry exhibit significant variations with respect to capital structure and cost of capital (which affect interest expense and tax rates) and differences in book depreciation of property and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. Our management team believes that Restaurant-Level EBITDA and Adjusted EBITDA facilitate company-to-company comparisons within our industry by eliminating some of the foregoing variations. Restaurant-Level EBITDA and Adjusted EBITDA are not determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing, or financing activities, or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. Neither Restaurant-Level EBITDA nor Adjusted EBITDA should be considered as a measure of discretionary cash available to us to invest in the growth of our business. Restaurant-Level EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies and our presentation of Restaurant- Level EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual items. Our management recognizes that Restaurant-Level EBITDA and Adjusted EBITDA have limitations as analytical financial measures. 23