Greetings, and welcome to Ark Restaurants Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Love, Secretary. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the second quarter ended April 1, 2023. My name is Christopher Love, and I am the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; and Anthony Sirica, our President and Chief Financial Officer. For those of you who have not yet obtained a copy of our press release, it was issued over the newswires yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our homepage at www.arkrestaurants.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 a 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. Thank you.

Hi, everybody. Before I get into this, Anthony, I would like to discuss our situation with cash and where we stand, especially in relation to the fact that we increased the dividend from $0.50 annualized to $0.75 annualized. So please give...

Our balance sheet remains strong. The significant items that took place this quarter was on March 30, right before quarter end. We amended our banking arrangements with our lender. The primary purpose was to move from LIBOR to SOFR. But in connection with that, we paid down a $6.7 million loan, and we implemented a $10 million credit facility, revolving credit facility. Subsequent to the quarter end, we paid down additional two loans, a total amount of $6.1 million. So in total, we paid down $12.8 million of debt between March 30 and April 5. We made the decision because we had a very strong cash position. The rates were over 8%. So, this will generate at least $1 million of cash savings over the next year. Also, subsequent to quarter end, you probably saw in the press release, we raised the dividend from $0.125 to $0.1875 per quarter. And our latest cash balance as of today is about $15 million in the bank, and our current debt position is $7.3 million. So, I think that's pretty much.

Thank you, Anthony. I want to discuss the performance at each venue during the last quarter and, more importantly, our outlook moving forward since we are only halfway through the June quarter. As noted in the press release, our events and catering departments performed exceptionally well, particularly in New York and Washington, D.C., contributing to an overall increase in company sales of about 8%. This figure excludes Gallagher's in Las Vegas, which was closed from early February to the end of April for renovations required by our new lease with MGM. The loss of sales from Gallagher's significantly affected our EBITDA and net income. Generally, New York has been strong, and Alabama continues to meet our expectations as we progress through the June quarter. Washington, D.C. is also performing well. Florida had a good quarter, but we've recently seen a drop in customer counts at our full-service restaurants there. Additionally, we've experienced seasonal changes in Las Vegas. It's challenging to compare our performance to last year since Gallagher's has just reopened, heavily impacting our sales in New York, New York. However, it seems somewhat softer than before. In New York, customer counts are holding up well, which is crucial. Revenues hinge on customer counts multiplied by menu price increases, but in Florida, customer counts are declining, and revenues are slipping slightly in the past weeks. It's tough to determine if this is a trend or just a temporary fluctuation, but I suspect we are losing some lower-income customers from our full-service restaurants. Meanwhile, the food courts in Tampa, Hollywood, and Las Vegas remain very strong. We need to see how Gallagher's performs; we've increased prices and introduced a new menu reflective of the renovation and quality. Early responses on Yelp indicate excellent reviews. The team has done an impressive job. Additional renovations are planned for the food court at New York, New York, but those should not impact sales since we'll work on one unit at a time, distributing the sales from the closed unit across the others. Overall, the quality of our product, service, and restaurant appearance is in very good shape. While we're pleased with our performance, we do have concerns about lower-income customers and their frequency of visits amid what appears to be a slowdown, a sentiment echoed by other restaurateurs, particularly outside New York. So that's the restaurant side of it. We should begin to mention Meadowlands more often in these conference calls. New York state is about to reveal the three downstate casino licenses. We anticipate that Yonkers racetrack, located just north of Manhattan, as well as Aqueduct racetrack in Queens, will receive these licenses. The destination of the third license remains uncertain. I have spoken with lawyers representing various groups competing for the license, including one involving Steve Cone from Shea Stadium in partnership with the Mets, and another from Hudson Yards in New York, SL Green. No one seems clear on where this license will be awarded, but since Aqueduct and Yonkers are likely to receive two of the licenses, it will significantly affect gaming in Atlantic City. We believe that as these licenses are released, New Jersey legislation will need to address the lost tax revenue from Atlantic City and will have to negotiate for a casino in the northern part of the state, with Meadowlands being the most appealing option. Meadowlands actually handles more sports betting than all the casinos in Atlantic City combined and is likely the largest sports betting site in the country. We view this as a sensible choice. There are no environmental permits to consider, and we have everything prepared. If a casino license is granted for the Meadowlands, we could be operational in six weeks, which is not the case with any other location. Therefore, we are quite confident that legislators will proceed, as a public vote is necessary. We hope that by November of next year, a referendum vote will take place to permit a casino in the northern part of the state. We are the third largest stakeholder in the Meadowlands Racetrack LLC, which is a location we believe will receive a license. Being the third largest, we own just under 8% on a fully diluted basis. However, we maintain exclusive rights for all restaurants at Meadowlands, except for the Hard Rock Cafe, which owns 20% of the deal, while a New York developer, Jeffrey Gural, holds about 30%. We hold just under 8%, along with a number of other investors, including a Canadian hedge fund that specializes in casino operations and investments. If you have any questions, I’m here to answer them.

Thank you. Ladies and gentlemen, we will now start the question-and-answer session. Our first question comes from James Stevens, a Private Investor. Please go ahead.

So just talking about the balance sheet for a second. If I understand correctly, as of today, cash is roughly $15 million and debt is roughly $7 million. So we have net cash of roughly $8 million. Is that correct?

Correct. That's before float, but yes.

Yes. Cash has decreased significantly from the end of last year, almost by $10 million, but this is a positive development. The debt has also significantly dropped, nearly by $14 million, which puts us in a much better position.

Exactly.

And what is the interest on that $7 million of debt?

Yes, it's about $8 million, between $8.1 million and $8.2 million. The SOFR is similar to LIBOR, with a slightly different spread. If the LIBOR spread was 3.5, then the SOFR is 3.65.

So, it's still pretty expensive debt. Is there a hope to pay that down further? Depending how this year shapes up, we would consider that, but we're also looking at a couple of deals out there. So we have to manage that. That's why we didn't pay down the more. Got it. And then in terms of renovations, you talked about Gallagher's, it looks like in the release that there's another $4 million that has to be spent on America and I think another $3.5 million on Broadway Burger. So it's like $7.5 million between the two of them. Is that right?

Let me add something. Broadway Burger is part of our fast food court in the Village Streets, even though it doesn't have the same percentage lease as the fast casual food options. We believe the renovation will not exceed $2 million. Sam is here; is that correct?

Yes.

We think it's $2 million. We have specific language in the lease extension that says once the plans are approved by the landlord, the concept, whatever we're doing, if it comes in below what the lease extension said, then that's going to be the number. So... When we negotiated this lease, we were unsure about the extent to which they wanted these concepts to change. We knew they did not want Gallagher's altered and that they were not looking to change the fast food court. They might want to change America in terms of concept, and we would still manage it. The current management has been quite accommodating with us. Gallagher's was straightforward; we showed them the plans, and Sam, who was in charge of that, can confirm this. They have been very flexible and not overly demanding, making a few suggestions that we attempted to incorporate. However, the suggestions were not expensive. We invested just under $2 million in Gallagher's, and I don't foresee the food court renovation exceeding that amount. Regarding their expectations for America, which will be decided next year or the year after, they are not rushing to make changes. One reason for this is that our performance keeps improving each year; last year, we saw an 11% increase in sales in America compared to the previous year. Therefore, it is uncertain whether they truly wish to change the concept or just enhance it. So, we do not need to be concerned about spending a lot of money at this moment, if that is the inquiry.

Got it. And you mentioned that there's a little concern out there for going into a recession, a little concerned about the bottom rung customer. What's interesting is Tilman Fertitta was on the other day, and obviously, they have restaurants all over and spanning the range from inexpensive to luxury. And his point was that it was the higher end customer that seems to be impacted. I wonder if that's what you're seeing?

I have been speaking with cousins or individuals closely connected to Red Rocks, and they are noticing that higher-income customers are beginning to spend a bit less. However, our check averages are generally holding steady, with one exception being Rustic. I don't perceive any issues with the spending habits of our higher-income clientele. Our menu includes a wide variety of options, and apart from the higher-priced crab and shellfish at Rustic, most items are reasonably priced. Gallagher's may be on the expensive side, but it's still cheaper than any of the steakhouses in Las Vegas. Additionally, our location does not attract high rollers, and the room rates are significantly lower than those at places like Bellagio or Wynn. Most of our other restaurants have dinner check averages around $40 to $50, with options available at even lower price points. At Rustic, we've observed that customers are starting to share entrées, opting for two appetizers and one entrée instead of two entrées. Overall, I believe our high-end customers remain stable, but it seems that customers who are renting apartments or facing higher grocery bills are feeling the pinch, affecting their disposable income for dining out. This group appears to be the one that is diminishing in numbers.

I think our high end is different than his high end.

Yes.

You got mass growth. I mean, he's got these places with astronomical per-person checks. So I think his high end, maybe that section of it is probably suffering.

I recently visited a Gallagher's restaurant and noticed they serve a 40-ounce Tony Hawk steak with bone marrow for $140. I was surprised by the price, recalling when a hamburger cost $4.95. Later, I went to a restaurant in Aria where the same dish was priced at $325 to $350. While our prices are still high, we're actually lower than most others on the strip. Many of our menu items reflect this. We've raised prices in the past, but for the last six to seven months, we've kept our prices steady. We're concerned that customers might start questioning these costs, especially since a $28 hamburger is common in New York City, while ours is priced at $17 or $18 at Bryant Park.

Yes. No, that's all really helpful. And I just have one more question and then I'll let someone else jump in there. So just in terms of the operating income or EBITDA because I know you prefer to look at that. It's a little disappointing to see an 8% rise in sales and actually would have been better with Gallagher's and really see on the bottom line or with EBITDA that it's down, and I know there are some factors in there. But are we ever going to get back to these years of $14 million, $15 million worth of EBITDA? Or is that obviously, in a worsening economy, it's going to be difficult to achieve that, but all things being equal, especially with the interest savings on paying off some of that debt? Are we going to be able to get back there? Are you still there?

Their line is still connected.

Can you hear me?

We can hear you, Mr. Stevens, I'm trying to see their line is connected, but they're not answering.

Okay. I'll stand by.

Okay, are we connected?

Okay, did you want to receive this connection, Michael?

No, I think we were talking about pricing, and we don't think we're out of line pricing. We think a lot of restaurants are out of line going into what might be a recession and where people are being more careful. But despite that, and we're still seeing a slight deterioration.

Okay. And I had one more question. I'm not sure if you heard me when the line cut out. Did you about...

We didn't hear it.

We didn't hear it.

Okay. Did or did not?

Did not.

Did not. Please repeat it.

Okay. So all I was saying was that, I mean, you guys are doing a good job in a tough market. It's a little discouraging to see an 8% rise in revenue and actually would have been better with Gallagher's. And so on the top line, it's good to see that, but it's tough to see on an operating income basis or EBITDA. I know you prefer to look at that the number is lower. And so I guess I'm just wondering, we can't control the economy and the consumer, but all things being equal, is it going to be possible, especially with the interest savings to get back to that $13 million, $14 million worth of annual EBITDA.

I see no reason not to improve. We should be aiming higher. I’m not referring to the annual results for the fiscal year ending in September; I’m focusing on the EBITDA rate as the economy transitions. We made a crucial decision back in 2008, 2009 when times were tough. We chose not to lay anyone off because we understood that customers spending money in restaurants wanted a full experience, especially in those difficult times. They did not want to enter a restaurant that cut back on its service to save on payroll. On the contrary, our payroll expenses are increasing, largely due to minimum wage legislation. We are experiencing several payroll hikes because of new minimum wage laws in states like Nevada, New York, and Florida. Consequently, our payroll is rising, and we are not letting anyone go, even if sales dip slightly. We are not increasing menu prices either, as we observe stability in food costs. Although crab prices are decreasing somewhat, overall costs remain stable. The prices of the products we purchase are not declining, but we are facing rising insurance premiums, which is alarming. We are trying to find better rates, particularly in liability coverage. Utility prices are also on the rise, affecting our expenses. However, our primary focus is on retaining our customers, who are not aware of increasing gas, electricity, or insurance costs. They relate to the price of chicken in supermarkets and what they see at our restaurants. Our goal is to keep our customers happy; if we perform slightly worse but maintain customer loyalty, we will succeed in the long run. We are prepared to adjust prices if commodity costs decrease to ensure customers perceive they are receiving quality products at fair prices. Historically, we have prioritized taking care of our employees and ensuring customer satisfaction. This remains our core message. Though we may face a temporary dip in EBITDA, ultimately, we believe we will succeed.

Our next question comes from the line of Alan Goldberg with a Private Investor. Please proceed with your question.

Michael, you probably don't remember me, but we had dinner down in Florida, and we are both the same age. So I, too, remember a $4.95 and $3.95 hamburger. So we are the same age, and I don't know whether that's good or bad. As everybody is aware, Florida is growing unless something goes on politically down there, but Florida is growing substantially. They estimate 365,000 new residents a year, almost $4 million over the next 10 years. The areas that we are involved in are in the key areas. Have we given any thought to do things, I hate to use the word less popular, but no less populated parts of the state. People that are coming down from New York, Cleveland, Chicago, Pittsburgh, as you know, the places they're shocked at our prices in the upscale areas, shocked. And so I'm wondering, have we look into how we can take advantage of that with restaurants in areas that are not so well known. That's my first question.

One moment, it looks like we lost them again.

Oh, boy. Okay. I'll stay on the line if that's okay.

So, we're back on. Okay. They're reconnected now.

Okay. So Alan?

Yes, Michael.

Yes. So you were making the point of the increase in Florida residents.

Correct. I currently live in that area full-time and have noticed that people are not relocating to neighborhoods where home prices start at $9 million. The retirees from the North and Northwest are opting for less popular areas with similar weather. So, my question is, have we considered exploring opportunities in less affluent areas?

So, what drives our decision to make acquisitions is the price we're paying for cash flow and whether we think that cash flow is sustainable. We don't care where we go. As long as we know we can manage it. And the restaurants we have either bought or secured long-term leases on in conjunction with the purchase of the operation are all institutions. They come with great management, all management stay with us, Blue Moon, JVs, Rustic, Shuckers, they've all stayed with us and those are the situations we're looking for. We've looked in different parts of Florida including as far north as Jacksonville.

And we look near Disney.

We are evaluating opportunities near Disney and may be a bit conservative in our bid, but we definitely want to ensure we have a margin of safety. There have been instances where we had an asset purchase agreement with a willing seller while we were also prepared to buy, but unfortunately, the landlord prevented us from securing the lease we desired. However, when we are able to obtain a solid long-term lease, like with Blue Moon and our joint ventures, we are ready to proceed. We have explored numerous deals in Florida, and we are very selective, adhering strictly to the multiple we are willing to pay and ensuring we do not exceed it.

Okay. And please continue to be picky, but the reason I even brought it up is I was driving from Sarasota across to where I live in the Palm Beaches. And as I got towards the middle of the state, which was farmland and it looked like nowhere. There was a great big sign tall homes breaking ground, 1st of January 2024, starting at $950,000.

Yes. But Alan, I want to clarify that we are not focused on opening new restaurants. Our goal is to acquire cash flow.

I understand.

So, the idea is if there's somebody in the middle of the Everglades doing $10 million and throwing off $2 million and prepared to sell the restaurant's growth...

You're ready to go there.

We're prepared to enter that market, but we're focusing more on leasing rather than owning the properties. Our primary focus is to own the land under an operation that we can buy at a multiple so that we have predictable cash flow forever.

That's wonderful. I'm very pleased. I hope we get a little lucky in the Meadowlands. That would certainly be a little more icing on top of the cake, and that would be wonderful. But the main thing, as you say, is to stay alive and keep in business and do what you've been doing for years. I'm very pleased.

Gentlemen, there are no further questions in the queue. I'd like to hand it back to management for closing remarks.

All right. Speak to you next quarter. Stay well, everybody. We'll see what happens. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.