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20180329 sauc sidoti conf presentation final

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20180329 sauc sidoti conf presentation final

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20180329 sauc sidoti conf presentation final

  1. 1. Sidoti Conference March 29, 2018 David Burke, Chief Executive Officer Phyllis Knight, Chief Financial Officer 
  2. 2. Safe Harbor 2 The information made available in this presentation contains forward‐looking statements which reflect the  Company’s current view of future events, results of operations, cash flows, performance, business prospects  and opportunities. Wherever used, the words "anticipate," "believe," "expect," "intend," "plan," "project,"  "will continue," "will likely result," "may," and similar expressions identify forward‐looking statements as  such term is defined in the Securities Exchange Act of 1934. Any such forward‐looking statements are subject  to risks and uncertainties and the Company's actual growth, results of operations, financial condition, cash  flows, performance, business prospects and opportunities could differ materially from historical results or  current expectations. Some of these risks include, without limitation, the impact of economic and industry  conditions, competition, food and drug safety issues, store expansion and remodeling, labor relations issues,  costs of providing employee benefits, regulatory matters, legal and administrative proceedings, information  technology, security, severe weather, natural disasters, accounting matters, other risk factors relating to our  business or industry and other risks detailed from time to time in the Securities and Exchange Commission  filings of DRH. Forward‐looking statements contained herein speak only as of the date made and, thus, DRH  undertakes no obligation to update or publicly announce the revision of any of the forward‐looking  statements contained herein to reflect new information, future events, developments or changed  circumstances or for any other reason. 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.
  3. 3. Who We Are NASDAQ: SAUC IPO:  2008 Market capitalization $38M  One of the Largest Franchisees for  Buffalo Wild Wings  › Leading operator › Strong cash generator › 65 BWW locations › Recent share price $1.41 › 52 week range $1.30 ‐ $4.12 › Insider ownership 50% › Institutional ownership 17% › Shares outstanding 26.7M 3 Market data as of March 22, 2018 (Source:  S&P Capital IQ); Ownership as of most recent filing  Cash Flow Yield % of EVof 9%
  4. 4. 4 Wings. Beer. Sports.® • Total of 1,255 restaurants  system wide1 • 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, 2017
  5. 5. $106.4 $144.8 $166.5 $165.5 2014 2015 2016 2017 42 62 64 65 2014 2015 2016 2017 5 Sales and Unit Growth Net Sales Store Count $ Millions Added 43 locations over the last six years,  placing us among the largest BWW franchisees in the system
  6. 6. Why Invest in DRH? 6 1. High cashflow yield: • Cash flow yield of approximately 9.0%1 • Operation cash flow of $12.5 million on $165 million in sales or 7.6%2 2. Leverage model with low cost of capital • $113.9 million in senior‐secured bank debt2 • 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‐money3 • At current stock price valuation, approximately 2/3rds levered4 With our cash flow yield and leverage ratio, DRH is similar to how many PE firms  would target and structure their investment 1. Operating cash flow from continued operations / enterprise value based on March 22, 2018 closing price of $1.41. 2. Based on December 31, 2017 Year End 3. Assumes 30‐day LIBOR rate of 1.85% 4. Total Debt / Enterprise Value based on March 22, 2018 closing price of $1.41 market cap of $37.6 million, $113.9  million in debt
  7. 7. Return on Investment 7 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 There are multiple levers that may contribute to enhanced returns Debt Facility Summary Pricing • $113.9 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 Q2 2018 then step‐downs Over 80% hedged with fixed rate @ approximately 5.0%  with current LALR Quarter Beginning Maximum LALR Q3 2018 6.25x Q2 2019 6.00x Q3 2019 5.75x Q4 2019 5.50x LALR L + Pricing Greater than/equal to 5.0 : 1 3.50% Greater than/equal to 4.5 : 1 3.25% Greater than/equal to 4.0 : 1 2.75% Greater than/equal to 3.5 : 1 2.50% Less than 3.5:1 2.25%
  8. 8. Return on Investment 8 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  We are consistently working to grow our profits by increasing our topline and  running a more efficient operation
  9. 9. Return on Investment 9 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 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) With deleveraging and profit‐enhancing initiatives, both multiple expansion and  EBITDA growth become more probable
  10. 10. Unique Opportunity 10 • DRH is the only publicly‐held BWW franchisee in the system • BWW is no‐longer a public entity – owned by Roark • 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 Diversified Restaurant Holdings, Inc. is the only means to invest in the upside of  the recently acquired Buffalo Wild Wings brand
  11. 11. Illustrative | Free Cash Flow Conversion to  Equity  through Debt Reduction 11 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 113.9$                  101.4$                  88.9$                     80.6$                 80.6$                 Net debt 109.5$                  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$                     117.0$               179.4$               Debt 113.9$                  101.4$                  88.9$                     80.6$                 80.6$                 Enterprise value  151.9$                  151.9$                  151.9$                   197.6$               260.0$               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% ($ millions) Current State Business Normalization Multiple Expansion
  12. 12. 12 $38.0  $50.5  $63.0  $38.0  $85.0  $117.0  $38.0  $106.6  $179.4  CURRENT YEAR 1 YEAR 2 Illustrative Value Creation  ($ millions) Current State Business Normalization Multiple Expansion 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
  13. 13. EBITDA Headwinds – Outlook  Headwinds: 2017 Current Outlook Sales  Promotion driven, value seeking consumer  without cohesive brand strategy  Major shift in brand media strategy results in  significant negative trend departure from  CD industry in H2 2017  New approach under changed  ownership – proven track record • Media, promotion, food and  beverage strategy  Seasoning of loyalty program Cost of sales  Record high wing prices weigh down margins  Wing market has corrected 13 Responses: 2017 Current Outlook Labor  Offset labor inflation and sales deleveraging  with labor productivity improvements  Savings and productivity  initiatives will carry over into the  future  We should benefit from leverage  of sales lift going forward Operating Expenses  Tight management of operating expenses to  offset sales deleveraging General &  Administrative  Labor reduction  Expense reduction  Sales and COS pressure offset by productivity and savings initiatives, coupled with a tight capex management  Net EBITDA impact applied tension to bank covenants – negotiated significant covenant relief for 8 quarters  allowing DRH to maintain existing debt amortization schedule and low interest rates
  14. 14. $22.6 $29.7 $32.3 $28.3 2014 2015 2016 2017 14 EBITDA  Restaurant‐Level EBITDA* Adjusted EBITDA* * Adjusted for pre‐opening expenses and other non‐recurring expenses.  See EBITDA reconciliation slide. $ Millions $ Millions $17.4 $21.6 $23.3 $19.9 2014 2015 2016 2017 Cost of sales, driven by record high chicken wing prices, accounted for over 65% of the year‐over‐year  decline in EBITDA, followed by the impact of slower traffic and Hurricane Irma closures; operating  expenses were held in check despite the sales headwinds
  15. 15. Adjusted EBITDA Bridge 15 Cost of sales, driven by record high chicken wing prices, accounted for over 65% of the year‐over‐year  decline in EBITDA, followed by the impact of slower traffic and Hurricane Irma closures; operating  expenses were held in check despite the sales headwinds * Other includes: Occupancy ($0.4M) driven by NROs, Other Opex ($0.3M) driven by delivery expense, Compensation ($0.6M)  driven by minimum wage increases and management labor $18.5  $18.5  $19.4  $19.9  $2.0  $2.9  $1.4  $23.3  $1.5  $0.9  $0.5  FY 2016 Adj. EBITDA 53rd Week Impact Sales Impact COS (Traditional Wings) *Other Restaurant Level Initiatives G&A Reductions FY 2017 Adj. EBITDA
  16. 16. Traditional Chicken Wing Prices See   Dramatic Fall after Record Highs in 2017 16 $ / lb. Fresh Jumbo Northeast Chicken Wing Spot Prices Source: Urner Barry Comtell™ UB Chicken – Northeast Jumbo Wings NOTE: Logistics cost to restaurants is $0.29 / lb. over the spot price 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 $1.34
  17. 17. COS Trends and Wing Impact 17 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 * Q3 actual reported COS was 29.2% which included $323K in cover charges for a UFC fight that had no cost associated with it ** Q1 2018 = Jan Actual + Feb – Mar Forecast 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 28.8% 28.1% 28.1% 27.6% 28.0% 27.9% 27.4% 29.2% 29.4% 29.9% 29.5% 29.3% 28.0% 28.5% 28.1% 28.1% 29.4% 21.7% 20.1% 20.4% 19.5% 20.3% 20.9% 19.5% 23.5% 24.0% 24.9% 25.3% 24.7% 21.0% 18.4% 20.4% 21.1% 24.7% $1.89  $1.77  $1.80  $1.79  $1.92  $1.92  $1.70  $1.95  $2.02  $2.03  $2.14  $2.13  $1.88  $1.53  $1.81  $1.87  $2.07  Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 FY 2014 FY 2015 FY 2016 FY 2017 Total COS % Wing Cost % of Total COS Wing Cost/Lb ***
  18. 18. Quarterly Restaurant EBITDA Trends 18 * FF = Franchise‐related fees which includes 5.0% royalty and 3.0 – 3.15% NAF (national advertising fund) ** 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 $2.3 million Record high chicken wing prices coupled with sales deleveraging placed added pressure on recent margins AUV ($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              $2.8     $2.8     $2.6    $2.5 21.8% 20.6% 19.4% 20.3% 21.5% 20.0% 19.6% 16.5% 19.0% 16.6% 15.9% 17.1% 21.2% 20.4% 19.4% 17.1% 5.5% 5.9% 6.4% 6.6% 6.5% 6.8% 7.0% 7.2% 6.5% 7.1% 7.6% 7.2% 5.2% 6.2% 6.8% 7.1% 8.0% 8.0% 8.0% 8.0% 8.2% 8.1% 8.1% 8.1% 8.0% 8.1% 8.2% 8.1% 8.0% 8.0% 8.1% 8.1% 12.6% 13.4% 13.0% 12.7% 11.5% 12.1% 13.3% 14.0% 12.3% 12.9% 13.8% 13.1% 13.2% 12.9% 12.7% 12.9% 23.3% 23.9% 25.1% 24.8% 24.4% 25.2% 24.7% 25.0% 24.7% 25.5% 25.4% 25.3% 23.8% 24.4% 24.8% 25.2% 28.8% 28.1% 28.1% 27.6% 28.0% 27.9% 27.4% 29.2% 29.4% 29.9% 29.2% 29.3% 28.5% 28.1% 28.1% 29.4% 0 0.5 1 1.5 2 2.5 3 3.5 KEY Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 FY2014 FY 2015 FY 2016 FY 2017 AUV ($M) COSLABOROPEX FF* OCC REST.   EBITDA ****
  19. 19. G&A Run Rate Trending Down 19 $7.9  $7.6  $7.2  $1.0  $0.8  $0.7  4.7% 4.8% 4.9% 5.0% 5.1% 5.2% 5.3% 5.4%  $‐  $1.0  $2.0  $3.0  $4.0  $5.0  $6.0  $7.0  $8.0  $9.0  $10.0  FY2016  FY 2017  2018 Fcst G&A $ Marketing $ Total G&A % of Sales Targeted second half 2017 run rate of 5%  • $1 million run rate savings target Post – Bagger Dave’s spin‐off overhead  restructuring coupled with tight spending  controls • Reductions in salaries and support  office expenses Reduced (more targeted) local  marketing spend • Better leveraging of National Ad Fund  spend • More targeted local spend 5.4% 5.1%
  20. 20. Value Creation – Going Forward 20 ‐ 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 ‐ Franchisor under new ownership – demonstrated track record  ‐ Renewed focus on the customer and marketing  ‐ Leaner and more efficient organization well positioned to leverage   improved commodity cost environment and future sales growth ‐ Longer term disciplined, value‐accretive growth through acquisition  ‐ Roll‐up of other BWW franchisees ready for exit as cycle turns ‐ Proven integration skills ‐ Opportunities with new franchised concepts Value  Proposition Current  Environment Growth    Strategy
  21. 21. Sidoti Conference – Supplemental  Slides March 29, 2018
  22. 22. 22 Management Team David Burke Chief Executive Officer,  President Phyllis Knight Chief Financial Officer,  Treasurer Jason Curtis Chief Operating Officer  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  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  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
  23. 23. EBITDA Reconciliation 23
  24. 24. EBITDA Reconciliation cont. 24 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.

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