Carrols Restaurant Group (TAST) Q4 2019 Earnings Call Transcript

Carrols Restaurant Group (TAST)
Q4 2019 Earnings Call
Feb 25, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Carrols Restaurant Group fourth-quarter and full-year 2019 earnings conference call. [Operator instructions] I would like to remind everyone that this conference call is being recorded today, Tuesday, February 25, 2020, at 8:30 a.m. Eastern Time and will be available for replay.

I will now turn the conference over to Tony Hull, chief financial officer. Please go ahead, sir.

Tony Hull -- Chief Financial Officer

Thank you, Rob, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning, which is available on our website at www.carrols.com, under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, guidance or plans. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them.

We also refer you to our filings with the SEC for more details, especially the risks that could impact our business and results. During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. A reconciliation to comparable GAAP measures is available with our earnings release.

With that, I will now turn the call over to our chairman and CEO, Dan Accordino. Dan?

Dan Accordino -- Chairman and Chief Executive Officer

Thanks, Tony, and good morning, everyone. Let me briefly recap 2019 and discuss our strategy for 2020 before I turn over to Tony to review our quarterly financial results and provide 2020 guidance. 2019 was a busy and productive year at Carrols, where we've put in place growth catalyst from which we intend to reap benefits for years to come. We increased our total revenue by 24% to $1.46 billion and substantially expanded our portfolio size by over 30% to 1,101 restaurants in 23 States primarily through our transformational transaction with Cambridge that we completed on April 30.

In addition, over the course of the year, we successfully built 31 new restaurants, including 21 Burger King and 10 Popeyes restaurants and remodeled 74 Burger King restaurants. Importantly, as you know, the Cambridge acquisition brought to us a growing and strong second brand in Popeyes. We were very excited about the tremendous potential this brand has within our portfolio as part of the transaction but even more so now given the success of the Chicken Sandwich platform since its launch last August and relaunch in November. Specifically, we think the sandwich is changing the demographic profile of the Popeyes customer because as a handheld item, it is more lunch friendly and more female-friendly.

Over time and supported by further product extensions, we believe it can have significant positive implications for Popeyes' financial performance and future development. Nevertheless, we also faced some real challenges last year, while we posted 2.2% growth in Burger King comparable restaurant sales for a solid two-year trend of 6%. This annual result was at the lower end of our expectations due to a deceleration during the last two months of the year. For the fourth quarter itself, comparable restaurant sales rose 2%.

October started out strong, and we had anticipated that momentum would continue. However, unfortunately, trends softened in November and December, despite the success of the Impossible Whopper and our lapping the highest levels of discounting during those two months. During the fourth quarter, promotions and discounting fell to 19% at comparable Burger King restaurants as a percentage of restaurant sales, compared to 26.6% in the year-ago fourth quarter. Recapping Burger King's fourth-quarter marketing and promotions, the brand featured the 2 for $6 Mix & Match, the Impossible Whopper, the $1.49 10-piece Chicken Nuggets, the 4, 5 and 6 Whopper Meal Deal, the Crispy Taco, the Pretzel Bacon King, Chicken Caesar Sandwiches and Rodeo Stacker King.

Notably, in the year-ago fourth quarter, 10-piece Chicken Nuggets were a $1. Although adjusted restaurant-level EBITDA on a per-restaurant basis at Carrols has historically been relatively consistent over long periods of time, our full-year 2019 adjusted restaurant-level margins declined by 300 basis points and our adjusted EBITDA margin declined by 280 basis points compared to 2018. Adjusted EBITDA for 2018 was $86.1 million. These 2019 results were impacted by labor cost pressure and commodity inflation at our legacy Burger King restaurants, investments in restaurant staff training and management oversight as part of the Cambridge integration and the excess sales discounts to certain customers over a 10-week period last summer, as we previously disclosed.

The Cambridge integration is on track. In terms of our integration playbook, we completed the POS system implementation in November and are now working with Ops team to increase customer satisfaction scores, which will lead to higher sales and optimize food labor costs among other items. We began 2020 with renewed optimism, regarding what we can accomplish with respect to our restaurant sales and EBITDA growth trajectory. I have been in this business for a long while, and I'm confident that we will return to normalized cycle average restaurant-level profitability over the longer term.

In addition, as I will explain in more detail in a moment, we have reset our priorities for 2020 in terms of capital allocation, taking a more disciplined approach to expenditures that we believe will lead to free cash flow generation this year. Based upon Burger King's marketing initiatives and product roll-out schedule, including adding a delivery option for customers beginning late in the second quarter, we project a 2% to 3% improvement in comparable restaurant sales for 2020. Our top line will also reflect the full year's benefit of revenue from 349 restaurants we acquired, remodeled and built during 2019 and early 2020. Additionally, all of our IT systems now in place for inventory management and scheduling and labor investments and training on these systems are already completed.

We expect to improve cost of sales margins at our Cambridge Burger King restaurants by approximately 100 basis points in each of the first three quarters of 2020. We are also confident that we can close the sales gap between our Cambridge and legacy Burger King restaurants as we narrow the differential and guest satisfaction scores and eliminate remaining cash and food loss issues at the Cambridge restaurants. In terms of Popeyes, we expect to improve cost of sales and labor, restaurant labor costs in 2020 by 200 basis points and 300 basis points, respectively, as a percent of sales in 2020. Finally, we expect reduced headwinds at our legacy Burger King restaurants on the cost of goods sold and labor fronts in 2020 compared to the steep headwinds faced in 2019.

Now let's discuss our 2020 strategy. Given the work remaining to be done in improving the restaurants that we acquired last year, we have consulted with our board and have decided to reset our growth and capital allocation strategy in 2020 to prioritize organic sales and margin improvement within our current restaurant portfolio and to aggressively reduce our capital spending in order to generate free cash flow and delever our balance sheet. As we stated in our January investor presentation, our nondiscretionary capex was naturally declining after 2020 now that approximately 85% of our restaurants have been remodeled and the average tenure of our franchise agreements is 12.8 years. Nonetheless, we saw an opportunity to more aggressively reduce our capital commitments even sooner, which will set the stage for us to generate free cash flow in 2020.

The company will be uncompromising and unemotional in its commitment to only the highest ROI projects. Not all capex projects have equal returns. For example, new restaurant development in markets with advantageous real estate and labor costs and be prioritized about others. The ROIs and associated payback periods on restaurants that we can develop ourselves are significantly more attractive than where larger portfolios can be purchased today.

This is especially true in our southern markets where land and development costs are lower than in other markets. The history of this company was owning and buying stores in the northeast region. That's a fantastic high-barrier market if you already own stores there, as we do. Focusing on our new development in the south is simply a better proposition, and you're going to see that over the coming years as our store mix increasingly skewed south.

In summary, for 2020, we are laser focused on capital allocation. Our priorities are expediting free cash flow generation and using that free cash flow for deleveraging. We will accomplish this objective through the following strategic steps: first, slowing down the pace of acquisition activity; second, limiting new restaurant development in 2020 to six new Burger King restaurants with attractive expected return on capital. We also are completing the new build of six Burger King restaurants this quarter that we started in late 2019.

In total, we plan to open 12 Burger King restaurants this year. By comparison, we opened 21 Burger King restaurants last year and 10 Popeyes restaurants last year. Third, reducing our remodeling activity this year to just 12 Burger King restaurants with high returns on capital by comparison. We remodeled 74 Burger King restaurants and four Popeyes restaurants last year.

Fourth, taking a renewed look at operating expenses across the expanded business with a goal of creating greater efficiencies and improve margins over time. While we still firmly believe that Carrols is better positioned than most operators to pursue acquisitions within both the Burger King and Popeyes systems, we also appreciate the need to pause our pace so that in the near term, we can demonstrate organic growth within our existing business and delever our balance sheet. This will be accomplished by strengthening the performance of our entire restaurant portfolio and ensuring that our acquired restaurants are contributing to this overall growth. Therefore, we are placing on hold the Popeyes transaction that I referenced on our third-quarter conference call among other acquisition opportunities.

I mentioned earlier we have already remodeled approximately 85% of our Burger King restaurants, making the Carrols fleet one of the freshest and newest among all Burger King franchise operators. We will be maniacally focused on returns on capital for the remaining restaurants that need to be remodeled. In total, we expect to reduce our net capital expenditures in 2020 to approximately $55 million to $65 million. This compares favorably to our net capital expenditures of about $100 million in 2019.

Based upon our outlook that Tony will detail shortly, we expect to generate up to $25 million in free cash flow this year. Assuming neutral working capital changes, our free cash flow will be deployed to reduce our debt in absolute dollars, as well as our debt leverage ratios, as defined by our covenants. With that, let me turn the call over to Tony to review our financials in further detail and discuss our 2020 guidance.

Tony Hull -- Chief Financial Officer

Thanks, Dan. As this is my inaugural conference call as CFO. I wanted to express how excited I am about the opportunities we have ahead of us and look forward to working with Dan and the team as we strengthen Carrols foundation for operating two world-class brands. Now let's delve into the fourth-quarter results.

Revenue increased 30.3% over the prior-year period to $401.1 million, including $73.6 million in restaurant sales and $3.4 million of convenience store sales from the Cambridge acquisition. The convenience stores were closed and sublet to a third-party in January, and we will no longer have operating results to report. Burger King comparable restaurant sales during the quarter outpaced the U.S. Burger King's system by about 140 basis points, increasing 2%.

Our comp sales gain consisted of an 8% increase in average check, including menu pricing of 2% and a 6% decrease in traffic. The sharp increase in average check was due to substantially lower promotions and discounts as a percentage of restaurant sales, which fell to 19% compared to 26.6% during the same period last year but which also had a corresponding -- this also had a corresponding negative impact on traffic. On a two-year stack basis, comparable restaurant sales rose 4.7%. Results at the Cambridge Burger King restaurants were impacted by our integration playbook as we added labor and repair and maintenance costs to improve operations.

With Carrols' systems now in place and our best practices being bedded operationally, we expect to see meaningful improvement in both topline and restaurant-level operating margins. As Dan mentioned earlier, in 2020, we believe we are on track to improve cost of sales margin in our Cambridge restaurants, and we are optimistic about closing the sales gap between our Cambridge and legacy Burger King restaurants this year. Adjusted EBITDA declined $1.8 million during the quarter to $22.7 million from $24.5 million in the fourth quarter of last year. Adjusted EBITDA margin decreased 220 basis points to 5.7% of restaurant sales.

Adjusted restaurant-level EBITDA increased $3.4 million to $42.9 million in the quarter from $39.5 million in the fourth quarter last year. Restaurant-level adjusted EBITDA margin was 10.8% of restaurant sales and decreased 200 basis points. Turning to our expense line items, Q4 cost of sales increased approximately 65 basis points in aggregate. If you adjust our convenience store revenue and related cost of sales, restaurant-only cost of sales increased 10 basis points as a percentage of restaurant sales compared to the prior year.

Ground beef averaged $2.26 per pound in the fourth quarter of 2020 and increased 21% from about $1.87 per pound in the fourth quarter of last year. These costs have stabilized in December, and for 2020, we are forecasting year-over-year beef inflation of approximately 9% compared to the annual average of $2.16 in 2019. Restaurant labor expense increased 85 basis points as a percentage of sales compared to the prior-year quarter, inclusive of a 5.7% increase in the hourly wage rate in our legacy Burger King restaurants in addition to the inclusion of Cambridge restaurants. Restaurant rent expense increased 40 basis points as a percentage of sales compared to the prior year primarily due to the higher rent as a percentage of sales on restaurants we acquired in 2019 and the elimination of deferred gain amortization on sale-leaseback transactions as a result of the new lease accounting standard.

Our restaurant operating expenses increased 75 basis points as a percentage of sales compared to the prior-year period due to proportionally more credit card usage and related fees higher general liability accruals and increased levels of operating expense from restaurants we acquired in 2019. General and administrative expenses were $23 million in the fourth quarter of 2019, including $1.5 million in Cambridge acquisition costs and integration costs compared to $16.8 million in the prior-year period. Those expenses included in that period were $0.4 million in acquisition and integration costs. Excluding acquisition and integration costs in both periods, general and administrative expenses increased slightly to 5.4% as a percentage of total revenues from 5.3% last year.

This reflects the larger initial scope of required oversight due to the expanded restaurant base. Our net loss was $9.9 million in the fourth quarter of 2019 or $0.20 per diluted share compared to net income of $1.8 million or $0.04 per diluted share in the prior year. The net loss for the fourth quarter of 2019 included $1.8 million of impairment and other lease charges and $1.5 million of integration and acquisition expenses. Net income for the prior-year quarter included $0.3 million of impairment and other lease charges, as well as $0.4 million of acquisition expenses.

Excluding these charges, adjusted net loss in the fourth quarter of 2019 was $6.2 million or $0.12 per diluted share compared to adjusted net income of $2.5 million or $0.05 per diluted share in the prior-year quarter. As a reminder, a summary of the adjustments in arriving at adjusted net income or loss, including impairment, acquisition and integration costs and other items are detailed in the tables accompanying this morning's release. Total capital expenditures were $49 million in the fourth quarter of 2019 and $146 million for the full year. However, with $48.4 million of sale-leasebacks last year, net capital expenditures for 2019 were $98 million.

At the end of the fourth quarter, our cash balances were $3 million and total outstanding debt in finance lease liabilities was $472.3 million. At December 29, our first-lien net leverage ratio, as defined in our senior credit facility, was approximately 4.11 times compared to a maximum permitted of 5.75 times. As of February 24, we had $70.8 million of borrowings drawn on our revolver. This represents an elevated level of borrowing for us as during the first two months of the year, we funded carryover capital expenditure payments and working capital payables from 2019 during the lowest revenue and earnings-generation period of the year.

As we move into the stronger revenue and earnings periods in the second and third quarters, we expect to see the revolver balance decline accordingly. Lastly, we repurchased 270,043 shares of our common stock in the fourth quarter at a cost of approximately $2 million at an average purchase price of $7.44 per share. Since the board of directors approved our $25 million stock repurchase program in August 2019, we have purchased 553,112 shares for a total cost of approximately $4 million at an average cost of $7.26 per share. As a reminder, we have no obligation to repurchase stock in this program and the timing, actual number and value of shares purchased will depend on the stock price, trading volume, general market and economic conditions and other factors.

With that, let me provide you with the following guidance for 2020, which has an extra week compared to 2019. We expect total restaurant sales of $1.64 billion to $1.69 billion comparable restaurant sales for our Burger King restaurants that have been owned for more than 12 months. As of the end of 2019 it's expected to be 2% to 3%. Note that the Cambridge Burger King restaurants will enter the comparable restaurant base on May 1.

Commodity costs are expected to increase 2% to 3% with the beef cost, as I mentioned earlier, expected to rise 9%. General and administrative expenses are expected to be $80 million to $85 million, excluding stock comp expense, reflecting the full-year impact of overhead costs required to oversee and support our enlarged restaurant base. Adjusted EBITDA is expected to be $100 million to $110 million. Interest expense is expected to be approximately $30 million based on our debt terms and stable LIBOR levels.

Gross capital expenditures are expected to be $70 million to $75 million, including approximately 35% for maintenance, 15% for remodeling and 40% for construction of new restaurants. Of the total, approximately $25 million will be expended in the first quarter of 2020 primarily relating to the completion of new restaurants and remodels that commenced in 2019. Proceeds from the sale leasebacks in 2020 are expected to be approximately $10 million to $15 million, resulting in net capital expenditures of $55 million to $65 million. To reiterate, the substantial reduction in our net capital expenditures in 2020 compared to 2019, coupled with improved margins and operations at our restaurants, should provide us with the means to generate positive free cash flow this year.

We intend to use that free cash flow to reduce our outstanding debt and the debt leverage ratio. We are fortunate to have a supportive franchiser in RBI, who has fully in locked step with us adjusting our capital priorities for 2020. Our intention is to balance the goals of solid organic growth by realizing the full potential of our current restaurant portfolio while maintaining a strong balance sheet, and we are confident in our ability to do just that. That concludes our prepared remarks.

And with that, operator, let's go ahead and open the lines for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Thank you. Our first question comes from the line of Jake Bartlett with SunTrust. Please proceed with your question.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking the questions. Dan, you mentioned in the press release that you're entering 2020 with great optimism about the sales trajectory. I'm hoping you can provide us maybe with some detail about current trends or any other sources of that optimism.

Dan Accordino -- Chairman and Chief Executive Officer

Well, the Burger King marketing calendar, I think, is similar to what we had expected. And we would expect to continue to see product improvements, new product launches and a competitive value component to the marketing calendar. As we've said earlier, there will be an expansion of the plant-based product line. So I think that Burger King has a pretty compelling marketing calendar.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. Any comments on current trends? I note that through, I think, about now, last year, you were still going up against the $1 for 10 nuggets. Did that produce kind of the same trend that we saw in the fourth quarter? Maybe even what you saw as a deceleration in November and December.

Dan Accordino -- Chairman and Chief Executive Officer

Yeah. The trend in the first quarter is pretty similar to what you saw at the end of the fourth quarter, Jake, yes. Yes, we mapped $1 nugget on February 14.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Got it. And then just turning to margins, can you break out what the margins were in the fourth quarter, the restaurant-level margins for the legacy stores versus the Cambridge stores?

Tony Hull -- Chief Financial Officer

Yes. We don't break that out. But they definitely are lower, and that's where I think a lot of the optimism for 2020 comes from being able to have plans in place to get those margins improved and to improve the overall margins for the company.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Yes. Got it. I think...

Dan Accordino -- Chairman and Chief Executive Officer

I'll tell you, Jake.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Yeah, sorry.

Dan Accordino -- Chairman and Chief Executive Officer

So far, we've improved the Burger King Cambridge cost of sales margins by over 100 basis points already from where they were in September. In both Popeyes and Burger King, the labor margins have improved by over 200 basis points from where they were in September, so we're on track to making the improvements that we expected to make what's going to take a bit longer if Cambridge Burger Kings is increasingly having -- hitting the sales to the level that they should be. Some of that is due to operational improvements and some of it's just due to the geography where they're located the overall Burger King trend in the South Central. It's the softest part of the country right now because it's a very value-oriented part of the store base.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Got it. And then last question, just thinking about the legacy stores. Aside from the impact of the Cambridge stores margins improving, do you think that margins could improve in those legacy stores in 2020 on their own and that being a function of some of the initiatives as you're focusing on costs, as well as maybe the pricing level that you expect to be flowing through?

Dan Accordino -- Chairman and Chief Executive Officer

The legacy margins, from an efficiency standpoint, they're not going to be any more efficient in terms of their controls, so the legacy margins will be a function of primarily where commodity costs are. If commodity offer in the 2% to 3% range and given the anticipated pricing at the legacy restaurants, the margins will be similar to what they were in 2019.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you very much.

Operator

Next question is from the line of Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Thanks. And I wanted to follow up on those acquired locations in the South. I think you had mentioned that they were comping down mid-single digits the last couple of quarters. And I think you had indicated it's going to take a little bit more time really improve those.

But you are starting to see the improvements on the margin side. We assume that means the general operations are improving and, hopefully, the guest satisfaction and experience. Can you give any sense directionally on whether or not same-store sales, even though it's taken a step back nationally, are you starting to see improvements take hold at those acquired locations on same-store sales? Is that moving maybe to down low-single digits?

Dan Accordino -- Chairman and Chief Executive Officer

No. It's still mid-single digits negative, which is about where it was in the fourth quarter, Jeremy. We really haven't seen very much improvement at all. But again, those restaurants responded very favorably a year ago to $1 nuggets, and we just lapped that last week.

So we're expecting that in March that sales trend relative to last year should be less negative.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK. So on a relative basis, it's actually starting to improve and that should move forward even more as we get March.

Dan Accordino -- Chairman and Chief Executive Officer

That is our expectation.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK. And then I want to see the six convenience stores that came along with the transaction last year, that seems to be a one-off. And given the pivot in strategy to focus on free cash flow, are you looking to potentially sell those? And just...

Dan Accordino -- Chairman and Chief Executive Officer

They're already gone, Jeremy. We got rid of them before the end of 2019. They're gone.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK. Great.

Dan Accordino -- Chairman and Chief Executive Officer

I'm not in the slinky business.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK. And then I wanted to just -- I think in the release, you talked about delivery coming on board in Q2. In terms of thinking about expectations based on what other BK locations have seen thus far, what type of impact might that have on both the sales side of things but also on margin?

Dan Accordino -- Chairman and Chief Executive Officer

I'm not certain, Jeremy. We were not a big fan of delivery until the model change so that there will be a more restrictive menu in terms of what's going to be delivered, and we have the opportunity to increase prices on delivery by 10%. And that's what essentially we were waiting for. In May, we will have the opportunity to have our POS devices program so that we have a dual-pricing capability so that we can charge that premium, and at that point, we'll test delivery and see what the margin impact will be.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK, fair enough. And then also, again, as you pivot the strategy and focus on reducing debt and improving leverage ratios, in terms of looking at a portfolio, Tony, as you've had a chance to look at profitability and store-by-store location profitability, is there any meaningful change in terms of the closure rate expected to have in 2020 or potentially beyond that?

Tony Hull -- Chief Financial Officer

No, it's about the same as last year. About eight to 12 restaurants are expected to close based on various factors, obviously, the biggest one being lack of profitability.

Dan Accordino -- Chairman and Chief Executive Officer

And lease expiration.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Understood. OK. And then last thing, in terms of -- in the release, you talked about Burger King openings. And even though you're slowing that after the first half of the year, no mention of Popeyes, new Popeyes being opened.

Can you just provide a little color on that? Obviously, a brand that's on fire right now, and that was a little bit of surprise that you wouldn't look at new openings in that. Can you provide any color on that?

Dan Accordino -- Chairman and Chief Executive Officer

Sure. There may be some Popeyes openings. Because of the introduction of the sandwich, the demographic profile of Popeyes is changing. We're meeting with the Popeyes folks, as a matter of fact, this week to look at where might be the better opportunities to develop Popeyes.

So we're just slowing this down at this point, generating free cash flow and reducing our debt and, at the same time, evaluating where the opportunities might be to better leverage new Popeyes' development.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

That's great. Thanks, guys. Good luck.

Dan Accordino -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from the line of Brian Mullan with Deutsche Bank. Please proceed with your question.

Brian Mullan -- Deutsche Bank -- Analyst

Hey, guys. Thanks for taking the question. The release says there is a near-term plan to drive efficiencies in the business, which sounds separate maybe from the operational improvements expected from the integration of the Cambridge store. Just wondering if you could elaborate on that.

Is that a G&A opportunity or maybe something more far wide reaching?

Dan Accordino -- Chairman and Chief Executive Officer

It's more wide ranging than that, Brian. And we're in the process of looking at our technology transformation and which items, processes we can more quickly put on our systems basis with improved technology as opposed to dealing with these functions manually. We're also evaluating all of the costs in the restaurant P&L outside of cost of sales and labor, and we think now that with our critical mass, there are some things there that we can better streamline.

Brian Mullan -- Deutsche Bank -- Analyst

OK. Great. And just as a follow-up, with the strategy reset comes across very clearly the objective for the year, free cash flow and reduce debt leverage. Just wondering, is there an actual firm target for net leverage at the end of this year? And then if not, bringing into your picture...

Dan Accordino -- Chairman and Chief Executive Officer

Three-handle...

Brian Mullan -- Deutsche Bank -- Analyst

Three-handle?

Dan Accordino -- Chairman and Chief Executive Officer

Three-handle, a three-handle.

Brian Mullan -- Deutsche Bank -- Analyst

By the end of 2020. Understood. OK. Thank you very much.

Tony Hull -- Chief Financial Officer

Yes. That would be the goal, but there is a lot of stuff that can happen between now and then. But clearly, we're going to limit capex. Our EBITDA targets would allow us to get the leverage down, and our goal over time is to get to a high three to vote handle.

Brian Mullan -- Deutsche Bank -- Analyst

OK, understood. Thanks a lot.

Operator

At this time, we've reached the end of our allotted time for question-and-answer session. Let me turn the floor back to management for closing remarks.

Dan Accordino -- Chairman and Chief Executive Officer

Thank you all and we will speak to you again in a few months. Thank you.

Tony Hull -- Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Tony Hull -- Chief Financial Officer

Dan Accordino -- Chairman and Chief Executive Officer

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Brian Mullan -- Deutsche Bank -- Analyst

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