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Edited Transcript of FRGI earnings conference call or presentation 7-Aug-19 8:30pm GMT

Q2 2019 Fiesta Restaurant Group Inc Earnings Call

SYRACUSE Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Fiesta Restaurant Group Inc earnings conference call or presentation Wednesday, August 7, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cheri L. Kinder

Fiesta Restaurant Group, Inc. - Interim CFO, Treasurer, VP, Corporate Controller & CAO

* Richard C. Stockinger

Fiesta Restaurant Group, Inc. - CEO, President & Director

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Conference Call Participants

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* William Everett Slabaugh

Stephens Inc., Research Division - MD

* Raphael Gross

ICR, LLC - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Fiesta Restaurant Group, Inc. Second Quarter 2019 Earnings Conference Call. Today's conference call is being recorded. (Operator Instructions) I would now like to turn the call over to Raphael Gross, Managing Director at ICR.

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Raphael Gross, ICR, LLC - MD [2]

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Good afternoon, everyone. Fiesta Restaurant Group's second quarter 2019 earnings release was issued after the market closed today. If you have not already accessed it, it can be found on the company's website, www.frgi.com, under the Investor Relations section.

Before we begin, I'd like to inform you that during the call today, the company will make various statements that are not based on historical information. These forward-looking statements include, without limitation, statements regarding the company's future financial position and results of operations, business strategy, budget, projected cost and plans and objectives of management for future operations. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, and the company can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in the company's SEC filings.

Please note that during today's conference call, certain non-GAAP financial measures will be discussed, which the company believes can be useful in evaluating its performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and a reconciliation to comparable GAAP measures is available in the company's earnings release.

On the call today are President and Chief Executive Officer, Rich Stockinger; and Chief Accounting Officer and Interim Chief Financial Officer, Cheri Kinder.

And now I will turn the call over to Rich.

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Richard C. Stockinger, Fiesta Restaurant Group, Inc. - CEO, President & Director [3]

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Thank you, Ray.

Starting with Pollo Tropical. Comparable restaurant sales fell 1.3% during the second quarter. That said, our sales metric matched the Black Box benchmark index, and our transactions metric outperformed the Black Box benchmark index in the markets in which we operate.

Sales were strongest for restaurants outside of our core South Florida market. As was the case in the first quarter, restaurants in our core South Florida markets, and particularly in Broward County, were negatively impacted by cannibalization from new development, along with increased competitive intrusion. We continue to believe, however, that the overall impact of these newly developed locations provides positive sales momentum within the market, notwithstanding the cannibalization effect and for the business overall as it enables us to enhance the guest experience.

Outside of the core, we are experiencing noticeable improvement in sales and margins. This is particularly the case in the 21 restaurants we operate within our Orlando market. Comparable restaurant sales and transactions in our Orlando market increased 7.3% and 5.8%, respectively, during the second quarter. This was 760 and 950 basis points better than Black Box fast-casual industry peer comparable restaurant sales and transactions, respectively.

We believe Pollo's ability to outperform the benchmark index with respect to transactions was a direct result of the popularity of our everyday value platform, Pollo Time, which includes $3.99, a one quarter chicken meal on lunch weekdays; $5.99 one half chicken meal on dinner weekdays; and $12.99 original family meal on weekends. Our primary marketing activity during the quarter supported Pollo Time. Specifically, this marketing initiative featured a TV campaign with real guest testimonials and emphasized the freshness and quality of our chicken, ingredients and recipes.

We are excited to implement a variety of new product innovations in the third quarter. These include new Cuban sandwiches, available with 24-hour citrus-marinated grilled chicken or Pollo's famous roast pork, fresh 24-hour citrus-marinated chicken wings; empanadas filled with Nutella; a new Honey Lime Chopped Salad; and the return of Churrasco Steak and Tostones, a delicious crispy complement to any Pollo Tropical menu item or family meal.

Our My Pollo digital loyalty program continues to gain traction with over 165 members at the end of June as we actively promote the program using digital ads, social media, in-restaurant POP and sign-ups at local store marketing events. Guests are encouraged to download our app to earn redeemable points to stay informed in real-time of special offers reserved for these members. However, for those who do not want to download our app, we offer them to join our e-mail club, which functions the same as our digital app and has grown to over 539,000 members. We are very encouraged by this adoption rate, as it will ultimately allow us to accumulate and analyze our guest preferences and purchasing practices and, in turn, better target marketing efforts in order to provide guests a more customized and tailored experience.

Interesting, our research tells us that millennials rate us higher than nonmillennials on NPS scores at both brands. We view this as a strong opportunity to focus considerable efforts and initiatives related to appealing to the millennials through digital channels and on social media. These include working with our digital partners to develop programs that specifically identify and target these guests within our markets to take advantage of this identified opportunity.

On catering, we are making headway in positioning ourselves as a compelling B2B and B2C option. We have invested in additional infrastructure, including catering hub units and new delivery vehicles, to make sure our catering offering maintains the same delicious, fresh, flavorful food offerings that we are known for within our restaurants. In early July, we launched our new catering menu, which is better aligned with our retail menu. Our parties by Pollo platform places greater emphasis on party platters of various sizes designed to meet the need of any informal family or social gatherings. Additionally, we lowered the prices on our catering menu to improve appeal to a broader audience. While this program is still in its early innings, we're excited with the opportunities for catering programs going forward.

Now let's turn to delivery. As you already know, DoorDash delivery is available at all Pollo locations. Delivery at Pollo is still in its infancy, representing only about 2% of our total sales and, we believe, coming primarily as a transfer from drive-thru. That said, we believe that over time, there is an upside to reach 10% or even 15% of sales based upon what we are seeing in the industry. And given that our food travels so well, we expect such sales to become increasingly incremental. Still we need to be mindful of additional costs related to delivery and, therefore, have recently begun increasing menu prices for orders placed through DoorDash. Operationally, the POS tablets that we rolled out last quarter have continued to improve our drive-thru speed of service and guest interaction at our restaurants, and we will begin testing kiosk ordering as well to further improve our in-store order efficiency.

Lastly, on remodeling. We will be spending approximately $3 million to remodel between 10 and 13 restaurants in the second half of 2019 to better match their interior to our food quality. These projects have largely just begun, and we will provide further updates in the coming quarters.

With that, let's turn our attention to Taco Cabana. At Taco Cabana, comparable restaurant sales fell 3%, which is similar to Black Box fast-casual industry peer comparable restaurant sales declines in the markets in which we operate, as Cheri will discuss later. We believe the decline in comparable restaurant sales is partially attributable to the unusually heavy rainstorms in Texas during the second quarter, which has especially impacted our patio business. Despite these setbacks, we're making headways with the various initiatives that we discussed on our last call. Again, all these initiatives are being supported by impactful digital media and traditional marketing.

Starting with Taco's menu offerings, our focus will continue to be on value promotions and everyday value offerings. However, we are excited to share new product innovations in the third quarter, including Beyond Meat offerings, carnitas and carne asada offerings.

As I mentioned in the past, another margin driver at Taco is our alcohol sales. And during the second quarter, we launched a gold margarita made with Sauza Gold Tequila in conjunction with our week-long celebration of Cinco de Mayo as well as our new Bacardi Gold Rum runner beverage. Additionally, we are testing several new alcohol beverages, including a Sopapilla hitchhiker; a blue margarita, which is on the rocks; a frozen sangria swirl and 60-ounce pitchers of beer or margaritas. We also have other new beverages in development.

The MY TC! loyalty program now has over 163,000 members using our loyalty app and 322,000 members on our e-mail program. We see higher average check for loyalty members compared to the system, and to that end, we will continue to aggressively promote MY TC! program to encourage membership.

As with Pollo, we look forward to accumulating and analyzing our customers' purchasing habits and preferences to better target our marketing efforts and tailor our offerings in the future.

Turning to delivery. DoorDash delivery service has remained at approximately 1.5% of sales during the second quarter. Again, similar to Pollo, to offset delivery costs, we are developing a new delivery menu with increased prices.

We are also repositioning Taco's catering program to be a compelling option for both B2B and B2C customers. To that end, we are launching a new catering menu with lower prices, which is better aligned with our retail menu to bolster our offering of delicious, fresh and flavorful food for any business or social occasion.

In summary, Fiesta experienced some challenges during the second quarter, but we continue to make progress against our planned initiatives for this year. We are keeping our menus fresh through ongoing innovation, marketing our freshness through traditional and digital channels, growing My Pollo and MY TC! loyalty and e-club programs, strengthening our relationship with DoorDash for delivery services, developing menus and offerings for realizing catering opportunities and improving our 4-wall operational efficiency. These efforts form the foundation of our sales growth platform in the years to come.

With that, let me turn the call over to Cheri to go through our financials in greater detail.

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Cheri L. Kinder, Fiesta Restaurant Group, Inc. - Interim CFO, Treasurer, VP, Corporate Controller & CAO [4]

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Thank you, Rich, and good afternoon, everyone.

Our second quarter results were muted in part by the negative impact of higher rent expenses in 2019 as a result to the new lease accounting standard. Absent this change and despite negative comparable restaurant sales, our consolidated adjusted EBITDA margin, a non-GAAP measure, is comparable to the year ago period.

Total revenues decreased 3.1% from the prior year period to $171.4 million, due primarily to comparable restaurant sales declines at both Pollo and Taco and restaurant closures in 2018, as we operated 10 fewer locations at the quarter end versus the year ago period.

Comparable restaurant sales at Pollo decreased 1.3% compared to a 3.4% increase in the second quarter last year. This year's decline consisted of a 1.8% decrease in comparable restaurant transactions and a 0.5% increase in average check, inclusive of 1.5% in pricing and the impact of lower-priced Pollo Time offerings. As Rich mentioned, sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant sales by approximately 120 basis points.

While Pollo Tropical comparable restaurant sales matched Black Box fast-casual industry peer comparable restaurant sales in the markets in which we operate, transactions are approximately 240 basis points higher.

At Pollo, restaurant level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings, decreased by $0.8 million because of a $0.4 million increase in rent expense due to the adoption of the new lease accounting standard and lower restaurant sales.

The new lease accounting standard had a significant impact on our results of operations because we had $18.6 million in deferred sale leaseback gains from which we will no longer receive a benefit to rent expense. Prior to adopting the new lease accounting standard, we amortized deferred sale leaseback gains as a reduction to rent expense. We also have a number of closed restaurants for which we had previous reserves and would not have recognized current period expense under the previous accounting standard. This reserve was recorded as an adjustment to the right-of-use asset when we adopted the new lease accounting standard, and rent expense related to close restaurants is now recognized each period.

Restaurant level adjusted EBITDA margins at Pollo decreased compared to the prior year by 20 basis points to 23.1% as the result of the 40 basis points negative impact of the new lease accounting standard and other changes in operating margins. More importantly, absent the negative impact of lease accounting changes, restaurant level adjusted EBITDA margins would have improved compared to the year ago period driven by lower cost of sales, partially offset by higher labor costs and other operating expenses as a percent of restaurant sales.

Comparable restaurant sales at Taco Cabana decreased 3% compared to a 3.1% increase in the second quarter last year. This year's decline consisted of a 3.1% increase in average check, inclusive of 2.8% in pricing, offset by a 6.1% decrease in comparable restaurant transactions. Taco Cabana comparable restaurant sales were approximately 10 basis points lower than Black Box fast-casual industry peer comparable restaurant sales in the markets in which we operate, and transactions were approximately 60 basis points lower. However, we believe the negative weather comparisons we experienced were particularly impactful to our patio business.

At Taco Cabana, restaurant level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings, decreased by $1.2 million, primarily due to a $0.5 million increase in rent expense due to the adoption of the new lease accounting standard, lower sales and higher advertising expenses as a percentage of restaurant sales. This was partially offset by lower labor costs as a percentage of restaurant sales.

As a percentage of restaurant sales, the restaurant level adjusted EBITDA margin decreased by 110 basis points to 12.1%, including a 60-basis-point negative impact of the new accounting standard.

During the quarter, consolidated adjusted EBITDA, a non-GAAP measure defined in our SEC filings, decreased by $1.4 million to $18.8 million, primarily due to the impact of the new lease accounting standard, which negatively impacted consolidated adjusted EBITDA by $0.8 million as well as the impact of lower sales.

In addition, during the quarter, we recorded a $46.5 million noncash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit. Prior to the write-down, the carrying value of goodwill for Taco Cabana was $67.2 million.

Net loss was $43.4 million or $1.62 per diluted share in the second quarter of 2019, which includes an unfavorable impact of $1.73 per diluted share related to the noncash impairment of goodwill compared to net income of $9.5 million or $0.35 per diluted share in the second quarter of 2018.

Adjusted net income, another non-GAAP measure, was $5.7 million or $0.21 per diluted share and would have been $0.02 per diluted share higher in the second quarter of 2019, absent the lease accounting changes. This compares to adjusted net income of $6.8 million or $0.25 per diluted share in the second quarter of 2018.

Please see the non-GAAP reconciliation table in our earnings release for more details.

Turning to development capital expenditures. We maintain our plan to open 3 restaurants at Pollo Tropical and 3 restaurants at Taco Cabana with capital expenditures' expectations of $45 million to $55 million. So far, through the end of the second quarter, we've opened 1 Pollo Tropical restaurant in South Florida and 3 Taco Cabana restaurants in Texas.

Our CapEx range includes $12 million to $15 million to develop new company-owned restaurants, $10 million to $12 million to implement IT and other systems projects and $1 million in catering equipment. In addition, we are also planning to invest $16 million to $18 million for restaurant remodeling at both brands, including equipment to support new menu platforms and other facility enhancements as well as $9 million to $11 million for capital maintenance.

As we mentioned in our press release, we made payments to reduce our outstanding borrowings under our credit facility by $21 million to $61 million, which is $17 million lower than the balance at the end of 2018.

Finally, we announced an increase to our share repurchase program of an additional 500,000 shares of common stock. As a reminder, we previously announced plans on February 26, 2018, to repurchase up to 1.5 million shares of common stock. We had already purchased 270,627 shares of common stock under this share repurchase program, and following the increase, approximately 1.7 million shares of common stock are available for purchase.

The number of shares repurchased and the timing of repurchases will depend on a number of factors. The program also has no time limit and may be modified, suspended, superceded or terminated at any time by the Board of Directors.

Thank you for your interest in Fiesta Restaurant Group, and we will now open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Will Slabaugh, Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [2]

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I had a question on Pollo, first. What do you think it takes to get Pollo, in particular, back to its historically consistent outperformance at not only the core markets, where I know you're roughly in line, but also the industry, which was the case for a long period of time?

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Richard C. Stockinger, Fiesta Restaurant Group, Inc. - CEO, President & Director [3]

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Thanks, Will, it's Rich. I think first of all, if you look at Pollo versus our -- the Black Box metrics, we're beating our competitors in the market where we are. There's definitely geographic -- sociogeographic impact of some areas, especially in core that's not as favorable today as it once was back in the heyday.

Second, I do believe just starting the catering program has a huge impact -- potential impact for us. The loyalty program, which has again just started, should have another huge impact for us, which we currently don't know. It's just starting.

And third is delivery of which right now is giving us 0 as compared to our competitors.

So I believe we're on our way. Yes, we definitely have more competitive intrusion into the market than we did before, including which I consider to be the gold standard against us right now is Chick-fil-A, but we feel we can more than overcome their coming into our market by these other vehicles.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [4]

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And can you talk a little bit more about that competitive intrusion? Is it primarily Chick-fil-A you're referring to? Or are there other competitors that you would name out or -- that we're going to listen with that intrusion?

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Richard C. Stockinger, Fiesta Restaurant Group, Inc. - CEO, President & Director [5]

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Yes, there are others. But as was recently as today announced by several people, Chick-fil-A is definitely the formidable competitor coming in, and they've identified South Florida as a market that they're coming in, and they are coming into us.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [6]

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Got it. And last thing for me, still sticking with Pollo. Can you talk about the elements of the Pollo remodel that you're looking at and how that might look different in -- different from a customer perspective?

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Richard C. Stockinger, Fiesta Restaurant Group, Inc. - CEO, President & Director [7]

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Yes. We are just starting the repositioning project that I've mentioned several times at these calls. So it's not -- has nothing to do with that. This is purely going to be things that the guests can see, paint, chairs, tables, lighting the buildings, et cetera. So we did a lot of work in the back of the house as part of the renewal program and deferred maintenance. But this'll have none of the elements that'll be determined as the repositioning and positioning of the brand.

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Operator [8]

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We have reached the end of the question-and-answer session, and this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.