Scott Crane - Chief Executive Officer Tim Mullany - Chief Financial Officer.

Analysts:.

Good afternoon and welcome to the RAVE Restaurant Group First Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there'll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Tim Mullany, Chief Financial Officer. Please go ahead..

Thank you, Operator. Good afternoon, everyone and thank you for joining the RAVE Restaurant Group’s first quarter 2018 earnings conference call. Everyone should have access to our first quarter 2018 earnings release that was published this morning. The press release can be found at www.raverg.com in the Investor Relations section.

Before we begin, I would like to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put 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. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Please note that during today’s conference call we will discuss certain non-GAAP financial measures which we believe to be useful evaluating our performance. Any discussion of such information should not be considered in isolation or as a substitute for the results prepared in accordance with Generally Accepted Accounting Practices.

A reconciliation of comparable GAAP measures is available in our corrected earnings release. With that, I would like to turn over the call to Scott Crane, Chief Executive Officer..

Good evening, good afternoon to everyone. Thanks for being on the call.

I'm actually really excited to share our first quarter results, both brands, we have made significant progress this quarter and I would say our strategic plan and turnaround plan is on course, which also helps us obviously result in adjusted EBITDA increases and net income which you probably seen already.

It was primarily attributable by increased AUV the Company owned locations as well as positive same store sales at Pizza Inn locations was extremely exciting. Also we have made a lot of great strides in streamlining our overhead G&A across the board to help the bottom line, bringing in stronger and increased shareholder value.

As you all probably know, we have raised our $5 million shelf offering that is effective two days ago on the fixed, to give us more access to additional capital and also helping us to take proactive steps to position the Company to continue to execute against our strategic plan.

Our flagship brand Pizza Inn is seeing renewed energy with increased international comparable sales growth in the double-digit and 1.4% same-store sales growth, domestically it's gaining positive momentum and also showing new unit development both additionally pure domestically as well as internationally and seeing our current franchise base want to remodel and grow as well.

So we are seeing new growth with new franchise pipeline and runway and new growth with specific franchises and remodels.

Also at Pizza Inn with new marketing strategies, promotions to drive awareness and traffic, but one of the big strategies is the all day buffet, we did some consumer research like we did in Pie Five back in March, we did in May at Pizza Initial and basically instead of coming up with the next cool pizza which is going to be important at some point in time, if you saw for all day buffet we would come x number of times more often it vary by consumers.

So, now as of the end of October the impaired change now rolled out or closed most of the chain all day buffet, you could imagine if you want to come in and we serve the buffet from 11 to 2 and 5 to 8, you really don’t want to come in at 1:30 or 7:30, because the pizzas are going to be old and or not be refresh.

So, Bob Bafundo and the team over there have done a great job with that and it’s great for families, for college, kids in between classes. So that’s been a big move for us in the Pizza Inn world.

Also, this next year as I told you before, we are going to celebrate our 60th anniversary of Pizza Inn which is going to be a big PR push for us and I think certainly you will see it many, many, many periodical, but something we are going to really put a lot of I would say effort and calories behind.

Pie Five have been focused on stabilizing the AUVs, average unit volumes, we saw an increase in AUVs over year-over-year. So, we are focused on right now in increasing profitability looking at other outlets of the occasion base which I brought with up delivery et cetera.

We are testing chicken wings, we are testing large pizzas that the consumer works that they use us much more often if at home at night, if we had a larger communal offering for the family. So we are already testing that in location, enrolling that up to a couple of more test locations for franchisees.

So, lot of energy around that and then also looking at ways to improve I would say cash-on-cash or ROI if you will with how we deliver the product to the consumer and do we meet whether it’s all the square foot, do we need all of the capital expenditures, so we are really digging deep into that line-by-line.

Delivery is still proving to be successful, you can imagine as 85% of the people that get pizza delivered so that’s really been still a big focus on our - it’s been big investment though as well.

I would tell you to roll it out and the launch in a current environment that we are in Pie Five is just really got to - it’s just a big investment for us, but it’s paying off and I think in the long run it’s going to really [indiscernible]. So, that’s good.

In the first quarter, we open three new franchisee and one Company restaurant for Pie Five, and five were closed bringing the total quarter end to 83.

We did open our first store two weeks ago in SFO in San Francisco International Airport, which is our third airport and the sales I guess I can’t give the number, but it’s one of the highest revenue units in the system. So that’s really exciting for us.

And then the other thing we are really excited because we have a lot of interest still in franchise development in both brands actually as I said. So, that I think tells you the power pieces and the segment and we just continue to tweak and make our model the industry leading model that intend to make it.

And then we are looking at also here soon to be discussed I would say in the next few weeks, we think the game changer in a new franchise concept here [indiscernible].

So, that’s interesting for us and exciting to go tackle the convenient store and travel center space, which roughly there are 53,000 to 70,000 depending on how you look at it opportunities out there and there are chains that have 6,000 to 7,000 and 9,000 units so we are looking to maybe tacking map as well as you will announcement on that very soon.

And then also I wanted to just invite a new Board member. Brian Bares, at Bares Capital Management, he is a new Board member announced a couple of weeks ago.

I want to welcome his team and then also thank Steve Johnson who has been a long time Board member and a guy I worked with 20 years ago for his long-term service, but he resigned as last month as well. So, welcome Brian and Steve thanks for your service. With that, I'm going to turn it back over to Tim..

Alright, thank you, Scott. So I will walk through the financials for the quarter. Total consolidated revenues for the first fiscal quarter decreased by 13.8% to $13.2 million, compared to $15.3 million in the first quarter of the prior year. Pie Five total retail sales decreased 17.3% in the same period of the prior year.

Similarly Pie Five system wide retail sales also decreased 17.3% while Company store average weekly sales increased 4.6% year-over-year. Pizza Inn domestic comparable store retail sales also increased at 1.4% from the same period of the prior year. While total domestic retail sales decreased by 0.9%.

Net loss of $0.4 million was $1.1 million less than in same quarter of the prior year primarily due to the closure of underperforming Company Pie Five units; recognition of deferred franchise fees, and reductions for general and administrative expenses.

On a fully diluted basis the loss was $0.03 per share for the first quarter of fiscal 2018 compared to a loss of $0.14 per share for the same period of prior year. Adjusted EBITDA of positive $0.4 million was $0.6 million greater than the same quarter of the prior year.

Company owned Pie Five operating cash flow decreased to $0.1 million from the same period of the prior year. Net reduction of one Pie Five restaurant during the quarter brought the total Pie Five restaurants opened at the end of the quarter to 83. As of the end of the quarter we had a 159 domestic Pizza Inn units with 60 international Pizza Inn units.

In the first quarter Pizza Inn domestic franchise retail sales remained flat at $21.9 million; the number of franchise for [indiscernible] locations decreased during the first quarter to 89 units while the final number of Delco and Express franchise units remained flat at 68 units.

Food and supply sales increased as percentage of total revenue by 9.3% to 68.5% while franchise revenue increased by 5.7% to 14.9% compared to the same period of prior year. The remaining Company restaurant sales revenue of 16.5% was 14.3% below the same period of the prior year. At quarter-end, we had a cash balance of $4 million.

During the first fiscal quarter, our cash used in operating activities was $1 million versus cash used in the prior year of a $1.5 million. In the first quarter, we had capital expenditures of $353,000 compared to $162,000 in the same quarter of the prior year.

The capital expenditures were primarily related to the opening of one Company owned unit in August. So, as a reminder, we disclosed a great deal of brand-specific financial and operating performance in our quarterly earnings release tables and in our SEC filings.

This information includes brand-specific comp and non-comp restaurant average unit volumes and income statement line item details and various explanations. Our Form 10-Q was filed with the SEC earlier today. And in closing, we are starting to see great signs of the turnaround plan and the turnaround plan is actually on course.

We are intensively focused on strengthening our value proposition, innovation and improving traffic and sales for our brands. With that, we will open up for questions..

Sure, thanks. So, this is in regards to the Pie Five franchisee. Had you look at anything to operate additional improve basically how fast you can make the pieces. Just as a consumer as well I went through some of your stores and the cooking part of the process is very fast, the product is pretty good.

But the assembly part of the piece seems to be a bottleneck and it seem like it’s very quick to get the piece assemble and get entry happen.

One of the things I have noticed is that if you go in with your kids and they were to Cheese Pizza or Pepperoni Pizza, basically I have one person touching the pizza doing the cross, the sauce and the cheese and the toppings.

So, just wondering if you look at operationally and think to increase the throughput?.

Yes. So, it’s a good question and we got a couple of answers to there. So one is, to making sure that we are staffing correct for the throughput at that desired time or was that desired capital, so that’s first.

So, if you are just one person there, it maybe substitute like in, that’s maybe the desire staffing at that position, but making sure we staff correctly. So that would be the first most basic answer.

But we are also testing a couple of new operational things and I won’t going to tell the detail, but one where if you walk in, you order your pizza first, you order all you ingredient to early and they bring it in and they make it you can still follow your pizza if you want, can we get some extra mushrooms et cetera, but it’s all run out [indiscernible] instead of waiting and say okay what else would you like.

So, yes we have - and then we have another operational test going with some franchisees of how to speed up between the make and then the cut station when they cut your pizza how to stream line that so [indiscernible] off your pizza by product or given you your name.

So we have multiple things working, you can be assured, but I appreciate your question and comment and yes we are working on that..

Our next question comes from [Steve Otto] (Ph) of Private Investor. Please go ahead..

Good afternoon guys. Couple of questions, one is can you talk a little bit about the difference in the rollout in the corporate stores of the sandwich product and the timing of that versus say the wing or the larger pizza sizes.

And then can you give us any quantifiable improvising on I think last quarter you talked about some minimal increases that you could attribute to wings and the size of the pizza and delivery and that kind of thing.

So any color you can give on that side will be helpful and then second question with the status of the Atlanta, Houston markets, and has there been any franchise development agreement associated with the transfer of those units?.

So, good question. So I can speak to the first of your first question, Tim can speak to the quantifiable data, I mean he knows what to say, what he shouldn’t say. yes so we have rolled out delivery across the chain generally, so that's working out well.

And I would again comment on the percent, we have also just recently I think by the end of this month, so November we will have sandwiches rolled out generally across the board, because there [indiscernible] there is [indiscernible] stores and there is just puts and takes with who does and doesn't but I would say the majority of the system will have sandwiches rolled out, because the test has worked really well with sandwiches and they really high quality products.

And the large one I would tell you is extremely successful in my opinion in the test stores, but it's only in like a few stores. Because that's a little bit different roll out.

So we are working on that as well with franchise partners as well as the rest of our restaurants, but they are all I would they are all significant I believe to our success and growth with Pie Five, I will tell you that, and Tim can speak to the numbers itself and then lastly the Atlanta, Houston we have transferred those to a franchisee and then Tim can talk about that as well..

Yes.

So I guess very briefly, one of the objectives are reasoning for opening that the August Company store, Village 121, was really to use that as a test base for some of these initiatives, we have quite a few going in and actually there has been a lot more testing of products and operational practices in the last nine or so months than it has been in the last three or so years in my view, and that’s a good thing.

So recognizing that we understand everything we test is not going to be successful or if that’s rolled out across the system.

I think we have had some really good feedback on this so from a wings perspective, while we won't disclose actual percentages yet, I think it would be harmful to do that given that it's a singular location and not enough for the sample size.

I will say that stores incidence of wing sales has been meaningful, and something that's been very well received by the Company here. So we are very positive on that platform.

As Scott mentioned, sandwiches are in a couple of locations now, and also providing very meaningful incidence levels there as well, beer offering as an example in this Company store that we have rolled out, again we won't give out any data, has not been meaningful in the same way wings and sandwiches side, so that's been a very good test that we performed there to learn that.

But there are things outside of that, that we are also doing that we haven't mentioned that we think will be meaningful for the overall organization, and we are on the right track to do that and hopefully roll some of these out system wide in the not too distant future..

Related to the Atlanta, Houston market as Scott mentioned, those have been franchised so they’ are no longer part of our store count. We have had 13 Company stores at the end of the quarter and those are excluded from that count, so we are excited not to [indiscernible] see what this experience franchisee can do in those locations..

This is Scott and just I believe that part of the deals is to say have another unit or two is in the agreement and I can just tell you that separately. But it’s not just those two cities to run two stores and he is also a franchisee in another city as well so, he is active..

Okay. And can you give us any idea of I think last quarter you talked about opening 20 somewhat Pizza Inn units in the coming year.

Is that still on track and what would it look like for Pie Five?.

Well, Pizza Inn so it is a 20 odd Pizza Inn. I think you mean - or do you....

Well, Yes actually while you should Pizza Inn, but what was the ramp for each concept look like over the next 12 months, I guess..

I will let Tim speak to that, but we do have significant runway and sales, but I will let you speak to that..

Yes. this is another one, so we haven’t given specific guidance as far as two units that we have anticipate to open. I would say that it’s not unreasonable for the next vacation to see that numbers somewhere in that range on the Pie Five side.

Pizza Inn, I will say has - we were seeing just a tremendous amount of excitement around that brand that we haven’t seen in recent years both on the domestic and an international level. So, what we have in our SECs filings separated out as the metric performance on international stores.

I would say that it’s been very, very significant of same store sales over there, it has been very exciting and we are looking to expand that success over there. And then you will see that we have 1.4% positive same store sales domestically for Pizza Inn. So, the base of the Pizza Inn franchise system as you know is very long establish here.

And then now seeing this healthy positive same store sales performance over the last several, several months has really reinvigorated their interest in expanding the brand. So, we will be happy to see that in the coming quarters..

Yes. On that side of the business, Steve it’s been years if not decades that you see net growth of net system and it’s been exciting to see the energy around the brand. And I would throw numbers out, but we have rolled out online ordering there, we have rolled out catering which has done extremely well.

Limited delivery because of so smaller town rural marketplace, but.

So, we are seeing energy around selling the brand which [indiscernible] the team are selling to new franchisees for the first time in a long-time with a new prototype that we have developed and a sales platform and a new website as well as we are seeing our current franchisees grow, add additional units and remodel current, because they are seeing that that’s been paying off when we had a small sample size like hey this is worthwhile.

So, it’s kind of across the board with Pizza Inn, Pie Five, it’s just making sure that how relevant can we be with the occasion that I talked about all these things. And how do we then get the awareness around the consumer at what we do.

So, we have changed the logo, we have changed a set of Pie Five Pizza Co, we are working on Pizza wings and sandwiches, so we will know what we do instead of Pizza Co without online order, without call ahead, now we do all of that and now we are delivering.

So, on both platforms we are working hard and the team is doing a really nice job against all that and the energy is good and the pipeline and the run way is good..

Thank you for the time comments..

[Operator Instructions] Our next question is from [indiscernible] private investor, please go ahead..

Hey guys, thanks for doing the calls, and we as the long term investors we know [indiscernible] without these forever, so we really do appreciate the call this quarter and the last quarter.

So shed some light on to what is happening now and into the future, so you guys have done a good job describing the changes that are taking place, listening to the voice of a customer, which is very different from previous management it seems, but where are your expectations around free cash flow, and if you are really going to grow and expand the base going forward, without doing more capital raises, and obviously free cash flow is a big piece of that.

So how do you anticipate that playing out going forward?.

So, as you know you seen in this recent filing we raised $5 million in an equity offering, $4 million in cash under books, I think organically when you match what we have been communicating in the last few quarters, that we have done a pretty meaningful pivot in our overall corporate strategy particularly with the Pie Five brand whereby won’t be or we do not anticipate to be deploying capital in any meaningful way in the new company store development in the near, medium term.

And as you know the Pizza Inn system is a 100% franchise. So with that pivot affectively coming with a very heavily if not completely pure franchise or we expect that our capital needs for CapEx to demonisms.

So having said that from a cash perspective, I think it's easy to - well if you can see that we feel fairly good that we will having enough organic cash to support the underlying system respectively.

Now there is couple of caveats to that, so one is that in this move from heavily mix corporate stores, with those franchise stores in our Pie Five side, we have been exiting out of a lot of those locations in non-performing markets.

Obviously when you do that, there is cost associated with that, we cleaned up a majority of those to-date, however there are still some cleanup remaining that we will require some cash, so that's number.

And then number two, as you know we are listed on NASDAQ and being on NASDAQ has some value to us obviously because it gives us some direct assets to equity investors should we desire that. NASDAQ has some minimum threshold shareholder equity requirements and/or share price requirements.

Right now, although we expected to change hopefully in a not too distant future, the share price is below that minimum marker, so what we are relying on is the shareholder equity threshold..

So even though we may not need the raise cash for the business, so to speak, and then in the position we are in right now we don't feel we do, if we do, we will have to maintain that shareholder equity position, because we are not yet net income positive that will require us to possibly access the equity markets going forward, and that's why you see very recently we filed that shelf registration to give us that capability..

Okay. Thanks. I appreciate that..

This concludes our question-and-answer session, as well as today's conference, we thank you for attending today's presentation and you may now disconnect your lines..