Luby's, Inc.

Thank you and again welcome everyone to Luby’s 2019 fiscal first quarter earnings conference call. This call is also being webcast and can be accessed through the audio link on Luby’s website lubysinc.com.

Information recorded on this call speaks only as of today, January 28, 2019. Before we continue, I would like to remind you that the statements in this discussion, including statements made during the question-and-answer session regarding Luby’s future financial and operating results are forward-looking statements.

Those statements include risks and uncertainties, including but not limited to, general business conditions, the impact of competition, success of operating initiatives, changes in commodity costs and supply of food and labor as well as seasonality of the company’s business, taxes, inflation, governmental regulations and availability of credit as well as other risks and uncertainties disclosed in the company’s periodic reports on Forms 10-K and Forms 10-Q. With that, I would like to now turn the call over to Luby’s President and CEO, Chris Pappas.

Thanks, Steve. Good morning, everyone and thank you all for joining us on today’s conference call.

I will begin with an update on the quarter and our turnaround plan followed by a recap of our annual shareholder meeting that was held on Friday. I will then turn the call over to our COO, Todd Coutee followed by remarks of our CFO, Scott Gray.

We continue to navigate through a challenging competitive environment during the first quarter and experienced pressure on the top line with a 3% same-store sales decline at our Cafeteria brand and a 5.5% same-store sales decline in total company sales. However, our Culinary Contract Service business remained strong and we increased sales in the first quarter by $2.6 million to $9.5 million, which represents a 10.4% of sales in the first quarter of 2018 versus 6.6% in the prior year quarter.

From an expense perspective, we reduced our food and operating cost at a greater percentage than the sales declined. In addition, we have taken substantial actions to restructure our corporate overhead that will result in more than a $3 million savings in selling, G&A, administrative costs.

We know we have a lot of work to do. While sales pressures persist, we continue to make progress on a turnaround plan to generate consistent and sustainable same-store sales growth and improve store profitability, all with a goal of increasing strong shareholder value.

The four pillars of our strategic plan include: first, raising awareness of our brands, lot of marketing; second, strengthening our core operations; and third, optimizing business the future for the future; and fourth, that we maintain strong corporate governance. We are taking targeted actions to keep up with the evolving restaurant industry, which include raising the level of execution and the quality standards that have always been the core of Luby’s, rightsizing our corporate overhead and pursuing plans to re-franchise many of our company-owned Fuddruckers.

Ultimately, our goal is to capitalize on what people love about the Luby’s brand. We are taking food and service to the friendly environment for lunch and dinner, while focusing on how to innovate the growing ways that connect with today’s consumer, lot of digital aspects of it.

We will continue to further enhance the guest experience at each of our restaurants to remain relevant and appealing to keep loyal guests coming back and to draw new ones. We are taking steps to improve our financial flexibility, including a property asset sales program, which has generated proceeds of $26.8 million to-date or about 60% of our $45 million target.

We also refinanced our debt closing on a $60 million worth of refinancing on December 13, 2018 which at the same time put almost $20 million in cash on the balance sheet. Scott will provide more detail later in the call.

Now, I would like to turn to a discussion of our Annual Shareholder Meeting that was held last Friday. I would like to thank all our shareholders who participated and voted for the directors at the annual meeting.

We believe that there is significant value to be realized at Luby’s. Based on the preliminary vote count, we are pleased that our shareholders have chosen to elect the company’s slate of highly qualified directors to chart the path forward for Luby’s.

With its annual election now completed, the whole focus returns to executing our turnaround plan. We will be working tirelessly, helping Luby’s reach its full potential in order to drive value for all of you, our shareholders.

As we move forward, I would like to say a few words about where we have been and where we are going as a company. The reality is that our restaurants have adapted to a great number of changes over the decades and this leadership team has a successful track record of steering the company through previous difficult periods in the restaurant industry cycle.

Through each of these shifts, Luby’s has maintained its purpose, culture and vision. Today, our primary brands, Luby’s Cafeteria, Fuddruckers are iconic American brands with legions of loyal guests.

The business of operating these mature brands in highly competitive marketplaces is tough, but we believe we have the experience and dedicated people to operate our company to the highest standards and manage the business to return to profitability and ultimately more growth. We believe that our company has tremendous value both from its iconic brands and their operations as well as our company assets.

The Luby’s Fuddruckers brand that feeds millions of guests each year, have tremendously loyal dedicated followers as reported in recent restaurant surveys that take place both brands as best-in-class when rated against their pure popularity. In addition, the real estate has value and offers us flexibility that many of our competitors don’t have.

The real estate offers greater flexibility when the time comes to relocate or exit a location as capital can be redeployed or used to repay the debt especially. In 2000, when we came on board, we had to close underperforming stores and take decisive action for Luby’s debt and operations.

By 2006, that debt was paid off and we were profitable and growth started back within stores. By 2009 in the financial crisis, we again had to follow a similar strategy and by 2013, our stock had doubled.

Here are we today and some of that strategy is put in place and is needed again get operations turned around get the right people in positions, close underperforming locations, pay down our debt, right-size our overhead costs and reestablish the foundation needed for future growth. We strongly believe that our future is bright.

The story of Luby’s today is one of progress, especially when it comes to delighting our guests with the unique experience and delicious comfort food that has always made Luby’s Cafeteria and Fuddruckers great. We are proud to be part of this community of family and friends that enjoy making Luby’s and Fuddruckers part of their daily lives.

And we look forward to serving generations to come as we work and enhance shareholder value. Now, I would like to turn the call over to Todd Coutee for some comments.

Todd?

Thank you, Chris. I am pleased to join the call today.

Since I last spoke with you, I have been hard at work realigning our organization by getting the right people in the right positions, coaching our restaurant managers and inspiring our frontline employees by setting the right tone and leading by example. In just a few months, I have witnessed positive changes in all aspects of our operations, but particularly with staff engagement with our guests.

As we work on repositioning our brands, our marketing team is utilizing more measurable, digital marketing campaigns in conjunction with traditional media outlets. Our intention is to highlight the differentiation with respect to our competitors.

Within our Luby’s Cafeteria business, we continue to provide guests convenient, great tasting, home style meals at an excellent value in a comfortable environment. We have an intense focus on product execution and menu innovation in order to keep our Texas comfort food up on trends.

Luby’s Culinary Services, our contract food service brand continues to be an amenity to healthcare, senior living communities and corporate dining facilities along with sales through our retail grocery outlets. Fuddruckers remains a strong brand.

We plan to re-franchise many of our company-owned Fuddruckers as we transition to a primarily franchise model, while retaining company-owned stores in our core market of Houston. I am excited to be working alongside Chris with our executive team and most importantly, our dedicated team members and loyal guests.

With that, I would like to turn the call over to our CFO, Scott Gray. Scott?

Thank you, Todd. And before I begin, I just want to give extended thanks to all of our employees who we serve and who represent our team here at Luby’s Inc.

for their dedication, their efforts and their trust. Just prior to the end of our first fiscal quarter 12/19/2018, we completed our debt refinancing that Chris mentioned.

This funding provides the company the necessary liquidity as we execute on our turnaround plans to enhance our operating performance. The new debt agreement with MSD Partners, which is Michael Dell Partners, is comprised of three elements: a $60 million 5-year term loan, a $10 million delayed-draw term loan; and a $10 million revolving credit facility.

The $60 million term loan closed on December 13, which was a refinancing of our existing outstanding, just around $40 million outstanding. As a result of that draw at the close, we had a $19.8 million in cash on the balance sheet subsequent to the close at the end of the quarter on December 19, 2018.

Of this cash balance, $11.1 million is classified as restricted cash that is earmarked for interest expense payments as well as other cash balance commitments. As previously discussed, it is our intent and desire to reduce the debt balance as soon as we can.

We have our asset sale plan that we have announced back in April. And as it’s listed in our press release, we are 60% complete with that plan and we plan to utilize the sale of those property sales to lower the debt.

I will quickly touch on the first quarter financial results next. Adjusted EBITDA was a positive $1.2 million, down $0.8 million from first quarter last year.

The decrease was primarily the result of a $1.9 million decline in restaurant level profits partially offset by increases in franchise segment profit and Culinary Services segment profit as well as a decrease in SG&A expenses. It is worth noting that the SG&A cost in the first quarter did include this year approximately $1 million in one-time proxy solicitation and communication cost as well as one-time employee severance cost.

Normalizing that impact, the SG&A cost decreased $1.3 million and EBITDA increased modestly year-over-year about $200,000. We look forward to improved results year-over-year next quarter.

While the first quarter results are hardly an acceptable result on their own, relative to our trend, it does represent sequential improvement. In fact, food costs and operating expenses as a percentage of restaurant sales improved despite a 3% Cafeteria same-store sales decline and an overall 5.5% same-store sales decline.

We realized 100 basis points improvement in food cost as a percentage of restaurant sales due in large part to an increased average menu price. Operating cost as a percentage of restaurant sales also improved due to improved cost controls in restaurant supplies.

These improvements were partially offset by higher payroll and related costs as a percentage of restaurant sales. Our capital spend was also curtailed as planned at $1.1 million in the first quarter, down from $4.3 million last year in the first quarter.

We are on track to keep our maintenance CapEx spend below $8 million, which is targeted for fiscal 2019. Our sales trends after the first quarter ended December 19, 2018 have improved.

We did have a few days of easy comps last year, although there was severe weather in the prior year though. But even normalizing that impact, sales trends have improved from the first quarter performance.

In our last call, we indicated that our projected EBITDA for fiscal 2019 was projected at the low end to be $5 million for the year. Based on our current outlook, including the improved sales trends, we reaffirm that that continues to be the low end at $5 million and we look forward to improving as this year progresses and we will keep you updated on our calls each quarter.

And with that, I would like to turn the call back over to Chris.

Thank you, Scott. Here at Luby’s we believe that right team and leadership is in place to grow our sales and margin, improve our corporate costs, reduce our debt and enhance our returns.

Each step we are taking is with the goal of returning to profitability. With that, operator, we are now open for questions.

Thank you.

In the $80 million credit facility with MSD Partners, what was the evaluation that MSD used of Luby’s real estate?

In regard to that, I am not sure where they were showing that in the credit facility. I don’t think it’s not disclosed in the credit facility and it’s something that we don’t disclose to the public.

In what way would it harm Luby’s or Luby’s shareholders if the estimate of Luby’s real estate valuation either by Luby’s or by MSD Partners was made available to Luby’s shareholders?

It’s just a practice that we have chosen over the years. We are running the business as a operating company and such and we believe the value is driven and looked at oftentimes that the value is looking at is how we are operating as a company.

No further questions. Thank you.

Hi. Thanks for taking the question.

Just two quick ones from me. One on the maintenance CapEx that you say you plan to leave at sort of the $1 million level.

I am just curious how many of the Luby’s Cafeteria or any of the other brands need remodeling? How old is that sort of remodel life?

And at what point might you need to sort of raise it from that level? How much flexibility do you have is my first question?

Thank you for your call today. The maintenance CapEx that we show, I believe it’s…

It’s $1.1 million a quarter.

$1.1 million and we have an amount that’s kind of estimate for the year. We have estimated that $8 million – to be less than $8 million in the high side and that would be going towards just the normal repairs that are capitalized and such air conditioners and things that are multiyear write-off that have to be capitalized.

Over and above that, we have the right to go ahead and do some remodeling and such like that if we need to and those steps would raise that number up above…

Yes, we are primarily focused on trying to increase the operating – the cash flows from operations where we then we can start remodeling it.

Right, right. And over the years, we have attended to a lot of that updating as well that we felt like was just purely necessary to being over and above the normal run-rate of things that needed to get repaired that were capitalized.

So we have done a lot of that over the years. And it would be nice to do some more of it, but at this time, current situation, we are going to focus on maintaining a little more level that would just take care of most of the day-to-day capital, but normal capital expenditures that fall in this range that we have described.

Thank you. And then just on the marketing, I think you said it in your comments a little bit earlier as you were talking about these pretty mature brands in a pretty competitive environment.

I am just curious to know, what specifically are you doing in marketing, I mean, it sounds to me you are doing a lot of controlling, a lot of the controllables within your P&L. My question would be just to sort of stem the hemorrhaging and the decreases in traffic, what exactly – how do you exactly plan to stop that hemorrhaging?

Thank you. Todd who wants to speak to our marketing side?

Yes. In respect to Luby’s, we are going to work on connecting the brand back to Texans.

We are going to talk about our food in terms of being Texas comfort food. We are going to talk about all of our local partners in Texas.

We are going to look at towns we have been in the past of course as a brand and used the normal medians of advertising billboards, potentially some television. We are also looking heavy at digital campaigns to talk about Luby’s and Fuddruckers in regards to how we differentiate ourselves with the guests ability to build their own special burger as well as we are working on some more market trend burgers in different varieties.

Okay. One last one from me, so you have this one outlying Cheeseburger in Paradise sort of chain, is it the drag on the P&L?

What do you plan to do with that sort of standalone I mean you have been negative comping there for quite some time?

We have gotten it down to just one location that is profitable and so we have taken the actions this last year to go ahead and get down to this level and where it’s not going to be a drag on us. So thank you.

That was very good.

Thanks.

Thank you all for joining us today and we look forward to speaking with you again next quarter. We are going to be working hard to maintain your confidence in us and we look forward to visiting with you again next quarter in regard to our Luby’s brands.

Thank you.