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Edited Transcript of FRGI.OQ earnings conference call or presentation 4-Nov-20 9:30pm GMT

·35 min read

Q3 2020 Fiesta Restaurant Group Inc Earnings Call SYRACUSE Nov 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Fiesta Restaurant Group Inc earnings conference call or presentation Wednesday, November 4, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dirk A. Montgomery Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer * Richard C. Stockinger Fiesta Restaurant Group, Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Brian Michael Vaccaro Raymond James & Associates, Inc., Research Division - VP * Nicole Miller Regan Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Raphael Gross ICR, LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to the Fiesta Restaurant Group Inc. Third Quarter 2020 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. -------------------------------------------------------------------------------- Raphael Gross, ICR, LLC - MD [2] -------------------------------------------------------------------------------- Thank you. Fiesta Restaurant Group's third quarter 2020 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 costs 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 with me today are President and Chief Executive Officer, Rich Stockinger; and Chief Financial Officer, Dirk Montgomery. And now, I will turn the call over to Rich. -------------------------------------------------------------------------------- Richard C. Stockinger, Fiesta Restaurant Group, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Rafe. I'd first like to thank all of the investors and other participants on the call today for their continued support during the COVID-19 crisis. I'll be covering 3 topics today - our key priorities for the balance of the year, an update on the status of our sales driving efforts; and third quarter results highlights. Dirk will then provide a financial update. Our top priority has been, and will continue to be, effectively managing through the COVID-19 crisis, with a focus on the safety and well-being of our team members and our guests. Our decision to temporarily close our dining rooms effective July 12 was primarily driven by our concerns about the increased infection rates in our markets. In late September, we began selectively reopening certain dining rooms and patios with limited capacity and hours at both brands, and we'll continue to make changes to our operations model as needed to safely operate. Our leadership and operation teams have been spending a significant amount of time taking the appropriate steps to ensure team member and customer safety through COVID-19 employee and guest protocols and precautions. We are continually adapting those procedures to changing conditions and health regulator recommendations. Our second priority is maximizing liquidity. We continue to improve liquidity over the course of the third quarter through better working capital management, improved margins, and cash flow from operations. We generated significant improvements in margin rates and profits for the quarter compared to both the second quarter and last year's third quarter. Net income was $4.6 million, which included benefits from deferred tax valuation allowance adjustments and benefits from the CARES Act that is described in more details in the earnings release we published this afternoon. And pretax income was $0.4 million. Driven primarily by strong restaurant level adjusted EBITDA margin growth and G&A efficiencies, consolidated adjusted EBITDA increased 22% versus last year to $14.8 million. We believe that the restaurant-level margin improvement we saw versus last year should continue into the fourth quarter at current sales trends. As of November 2, total debt was $21.4 million, and net revolver debt was $9 million. At the beginning of the COVID crisis, on March 18, our total debt was $148.4 million, and net revolver debt was $74.4 million. We have successfully reduced our net debt balance by $65.4 million during the last 7.5 months. Please see the non-GAAP disclosure in our earnings release for more details on how we calculate net revolver debt. We sold 4 of our 16 owned properties during the quarter, sold another 5 properties in the fourth quarter, and have offers or contracts on the remaining 7 properties, although there can be no assurance that those transactions will ultimately be completed. We are also exploring the potential refinancing of our current credit agreement; again, although we cannot make any assurance of the completing refinancing transaction at this time. But Dirk will provide additional details of our liquidity plans in his update. Our third key priority is finding new and better ways to drive profitable sales growth. As a reminder, our business mix historically have been more heavily weighted towards the dine-in occasion compared to our fast-casual peers for both brands at approximately 26% of our revenue. The evolving status of the pandemic has clearly had an impact on consumer comfort levels with the dine-in experience. Our approach to opening dining rooms will be based on 2 key criteria on a location-by-location basis - our ability to maintain a safe health environment for our team members and our guests, and our ability to generate a profit on dining-in sales based on incremental staffing requirements while not deteriorating margins. Pollo Tropical currently has 23 dining rooms open, and Taco Cabana has 20 dining rooms and 70 patios open. We are evaluating sales trends weekly to determine which units should be open for dine-in business. We continue to operate our drive-thrus as well as our counter, curbside pickup, delivery and online ordering. We also have been, and will continue to make, investments in our digital platform and our restaurant infrastructure to enhance the customer experience in those channels. We have made very good progress during the third quarter on developing a better business model, designed to enable our customers to enjoy our brands safely across all channels, wherever and however they choose. During the third quarter, we fully launched curbside carryout at both brands. We released new apps for both brands to create a much-improved digital experience and continue to invest in drive-thru customer experience enhancements that improve speed of service. All of those efforts led to the growth in the third quarter comp sales versus the second quarter. And October month-to-date trends at both brands show continued improvement versus the third quarter comps. Our menu innovation efforts have been focused on new items that are attractive in growth channels such as drive-thru and delivery. We're very excited about our new Cuban pressed sandwich line at Pollo Tropical and the return of an expanded offering of enchiladas at Taco Cabana, with both platforms launching recently. We are also encouraged by the upside potential of our margarita platform at Taco, which is bringing new customers to the [plan] and driving check average growth. Now, I'll highlight Q3 results and the status of our initiatives to accelerate sales in this changing environment at each brand. Starting with Pollo Tropical, third quarter comparable restaurant sales showed strong acceleration sequentially over the course of the quarter, with third quarter comp sales of minus 11.1%. Third quarter comps were benefited by a negative impact of Hurricane Dorian in 2019 by approximately 140 basis points. But Pollo showed very good growth even after adjusting for that weather impact. The improvement in sales trend also continued into October. This improvement all came despite the state of Florida being more negatively impacted by COVID-related challenges compared to other regions, impacting our sales compared to national brands. Driven in part by menu innovation and improved speed of service from efficiency initiatives, Pollo drive-thru average sales per week in the third quarter grew 16% versus the second quarter and 29% versus last year. We will continue to focus on drive-thru operating model and technology improvements, going forward, and believe we can continue to aggressively grow this channel with shifting consumer preferences. Our off-premise initiatives are gaining traction, with total off-premise sale penetration of 12.1% compared to 4.4% in the third quarter last year. Delivery sales in the third quarter more than tripled compared to last year, driven in part by the expansion to 4 delivery service providers from only 1 last year. Average delivery sales per week accelerated from the second to the third quarter, with average weekly sales growing 33%, driven by both traffic and check growth. Our new app, developed by a leading digital design developer, Bottle Rocket, went live for Pollo in late July, and we expect to significantly grow our online sales through this much-improved experience. Although the app was just recently launched, Loyalty Club sign-ups since the app went live have increased 53% compared to the average weekly sign-up rate prior to the new app. On the menu innovation front, our biggest news is the launch of our new line of 5 Latin-inspired press sandwiches, including a classic Cuban sandwich, a grilled and a crispy Chicken Cuban, and a Mojo Roast Pork sandwich at a price of $5.99 to $6.99. The new line was launched in early October after a very successful test. All of these sandwiches are hand-pressed and travel very well in the drive-thru and delivery. Early results on the launch are very encouraging. Handheld category sales per day have roughly doubled, and the average check for transactions with sandwiches is well above the brand check average, suggesting a significant check growth opportunity for transactions with sandwiches. We will be marketing the new sandwich line through traditional, digital and social media across Florida now that the elections are over. On the margin side, our operations team continues to drive sustainable margin improvement. The team once again did a great job, optimizing staffing models and food cost management to improve efficiency during the quarter. Third quarter restaurant adjusted EBITDA margins grew from the second quarter level to 21.2% and were 110 basis points over last year. We are very proud of the Pollo Tropical leadership team for this strong third quarter performance. Turning to Taco Cabana, the third quarter comparable restaurant sales improved 500 basis points from the second quarter comps to down 14.2%. The sales acceleration has continued in October, with month-to-date comp trends showing improvement from the September trends. The drive-thru business will be an increasingly important channel in our business, with 37% growth in average weekly sales in the third quarter compared to last year. A significant contributor to this growth acceleration has been the success of the Margarita Platform, which is driving revenue growth and bringing new customers to the brand through value pricing, menu innovation, and creative promotions. A great example of our menu innovations and promotion strategy is the Margarita-Palooza promotion that ran in the third quarter. This promotion featured 12 flavors for $2, including summer seasonal flavors such as Strawberry Mango and Spicy Guava. Alcohol penetration averaged 7.5% over the quarter but peaked at 9% during the first 4 weeks of the promotion compared to 3% liquor mix pre-COVID. Alcohol transactions are check-accretive, averaging over $3 per transaction above nonalcohol transactions. We believe that the Margarita Platform is also bringing more new customers to the brand. The excitement around Margarita-Palooza event was very strong. In July, social media, we had 1 million impressions, a 147% improvement in reach, a 57% increase in page views and a 175% increase in likes compared to the prior month. The Margarita Platform is also bringing in new customers. The post-COVID new customer acquisition rate increased 4% based on credit card purchasing research through August, and we realized a 154% increase in social media engagement during the Palooza promotion. Taco has developed a calendar of margarita promotional events for the remainder of 2020 and into 2021 to continue to leverage the revenue growth opportunity from this platform. Off-premise sales is building momentum and grew average weekly sales compared to the second quarter with significant revenue growth over last year, driven by delivery. Off-premise sales penetration was 7.9% compared to 3.6% last year. Delivery average weekly sales in the third quarter more than tripled versus last year and grew over second quarter levels. The new app went live on schedule in September, and we expect to significantly grow our online sales through this much-improved app. Finally, in the second and third quarter, we refocused our culinary and menu selection criteria to focus more on differentiated and authentic and Tex-Mex recipes that are true to the heritage of this 40-year-old brand. This, in part, was made possible by our new chef, Sergio Remolina, who has 30 years of culinary experience and was previously the Director of Latin Cuisine studies at the Culinary Institute of America. Late in the third quarter, we began to test some of the ideas coming out of our improved culinary process. In late September, we rolled out a line of Tortas. And in October, we launched an expanded and higher quality enchilada line that tested very well in late Q3 and has continued to show exciting results. In terms of margin improvement, the Taco operations team did an outstanding job in the third quarter, improving margins to well above the second quarter and last year's third quarter. Restaurant-level adjusted EBITDA margins for Taco improved over 500 basis points versus last year, from 9.2% to 14.9%. The restaurant margin improvement was driven in part by significant labor efficiencies from optimizing our restaurant staffing model and lower cost of sales driven by lower commodity costs and waste reduction. Taco Cabana adjusted EBITDA grew significantly above last year to $4.2 million, improving the adjusted EBITDA margin rate from 1.6% in 2,019 to 7.0 in 2020. We are very encouraged by the sustainable margin growth and [foundation] revenue growth the Taco team established in the third quarter. As we look forward towards 2021, we plan to continue investing in customer-facing technology and operational improvements at both brands to make the dining experience more convenient in the channels that are most important. During the fourth quarter, we plan to implement enhancements to our curbside technology to improve the customer experience, including geofencing capability to allow our operations teams to automatically see when a customer is close to the restaurant for pickup. We will continue the process of updating and improving our drive-thru Pod order-taking devices and drive-thru menu boards to improve speed of service and marketing quality for drive-thru. In addition, our loyalty programs are being enhanced, including a recently introduced program for catering. In summary, we are excited with the progress we have made over the quarter on managing the COVID crisis successfully, growing margins and profit, and finding new ways to meet our customers' needs and improve sales. We believe the investments that we have made in sales growth initiatives will provide returns in the future. We improved our restaurant-level adjusted EBITDA margins at both brands compared to the second quarter and prior year third quarter, and grew consolidated adjusted EBITDA by 22% versus last year. In addition, we reduced net debt by over $65 million, down to $9 million compared to net debt at the beginning of the COVID crisis while staying current on rent with our landlords. I want to thank our leadership team, our operations team members and my Executive Committee. They're not only persevering during this tough quarter, but in seizing the opportunity to reimagine our business to find better ways to meet our customers' needs. Thanks to our team, we are stronger today than when the crisis began, and will be even stronger at the end of the year, ready to capitalize on opportunities that await beyond the crisis. I'll now turn it over to Dirk to cover the financial highlights in more detail. -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Rich, and good afternoon, everyone. Let me start by reviewing our third quarter results, and then provide you with an update on our cash and liquidity. Total revenues decreased 16.4% from the prior year period to $137.3 million because of the comparable restaurant sales declines at both brands, which was due principally to the impact of COVID-19, along with a decrease in sales related to closed restaurants at Taco Cabana. Both Pollo Tropical and Taco Cabana significantly improved their comparable restaurant sales trends from the second quarter to the third quarter. In addition, Polo Tropical generated strong sequential improvement in monthly comp sales during the third quarter. Both brands also showed improved comp sales momentum in October versus the third quarter trends. From a channel perspective, consolidated off-premise sales grew to 10.3% of total revenue during the third quarter as we continued to evolve our operating model to make it easier and safer for our guests to order the freshly prepared and delicious food they love. As Rich indicated, drive-thru is an increasingly important growth driver for our business, and average weekly sales revenue showed strong growth versus the second quarter sales rate and prior year third quarter, driven by successful promotions and menu add-ons such as Taco's Margarita-Palooza promotion and the Topped Tostones menu add-ons at Pollo Tropical. Consolidated net income in the third quarter was $4.6 million, or $0.18 per diluted share and included approximately $0.12 per diluted share of negative impact, primarily from impairment charges and closed restaurant rent charges, offset by the favorable impact of $0.22 per diluted share primarily from adjustments to the deferred tax asset valuation allowance, the impact of federal tax rate changes, and other income. This compared to net loss of $22.2 million, or $0.84 per diluted share in the prior year quarter, which included a $0.73 per diluted share negative impact primarily from $19.3 million in goodwill impairment charges net of tax. On an adjusted basis, the net income was $2.1 million, or $0.08 per diluted share this year. This compared to adjusted net income of $0.2 million, or $0.01 per diluted share in the third quarter of 2019. Please see the non-GAAP reconciliation table in our earnings release for more details. Strong growth in restaurant margins versus last year at both brands led to an increase in consolidated adjusted EBITDA, a non-GAAP measure, of 22% versus last year to $14.8 million. At both brands, improved labor efficiency and food cost reductions were major drivers in the margin improvement we believe are sustainable, going forward, at current sales trends. Now turning to our individual brands. The Pollo Tropical comparable restaurant sales decreased 11.1% compared to a 3.8% decrease in the third quarter of last year. This year's decline consisted of a 22.1% decrease in comparable restaurant transactions, partially offset by 11% increase in the net impact of product, channel mix and pricing. The increase in product channel mix and pricing was driven primarily by increases in delivery and drive-thru average check and sales channel penetration and menu price increases of approximately 0.2%. Note that third quarter comp sales of Pollo Tropical benefited from the negative impact of Hurricane Dorian in 2019. After adjusting for that impact, comp sales this year would have been approximately 140 basis points lower. Drive-thru sales penetration increased to 67% of net sales in the third quarter, and average check for drive-thru grew by over 14.6% versus the third quarter of last year. Delivery sales dollars more than tripled versus last year, while penetration grew to approximately 9% of net sales. And average check for delivery grew by 15% versus the third quarter of last year, driven by an increase in items per order. Turning to the brand profitability for the third quarter, restaurant-level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings, decreased at Pollo Tropical by $1.3 million to $16.4 million, but improved as a percentage of restaurant sales to 21.2% from 20.1% in the third quarter of last year. As a percentage of restaurant sales, Pollo Tropical experienced lower cost of sales by 30 basis points compared to last year of 31.7% due to operating efficiencies, lower promotions and discounts, partially offset by sales mix, lower rebates and discounts, and higher commodity costs. Lower restaurant wages and related expenses due to labor [on efficiencies] were partially offset by incentive bonus and lower advertising costs. These were partially offset by higher rent expenses and higher other operating expenses, which included higher third-party delivery fees. Despite lower comp sales, Pollo Tropical did an exceptional job managing food costs and labor to improve restaurant-level adjusted EBITDA margins compared to last year. We incurred incremental costs related to COVID-19 of $0.2 million during the third quarter, including quarantine pay and costs related to mask and sanitizer. Management and hourly wage costs as a percentage of net sales decreased compared to last year by 0.9% due to labor efficiency initiatives. Adjusted EBITDA decreased by $0.4 million to $10.6 million for Pollo Tropical in the third quarter of 2020. We view this as a great outcome considering the decline in restaurant sales. At Taco Cabana, comparable restaurant sales decreased 14.2% compared to a 4.8% decrease in the third quarter of last year. This year's decline consisted of a 23.8% decrease in comparable restaurant transactions, partially offset by a 9.6% increase in the net impact of product channel mix and pricing. The increase in product channel mix and pricing was driven primarily by increases in drive-thru and delivery sales channel penetration and an increase in average check for drive-thru orders, driven in part by an increase in transactions with alcohol sales and menu price increases of 1.6%. Taco drive-thru revenue per unit grew roughly 36.6% versus last year, representing 83% of net sales, driven in part by increased average check of roughly 17.4% over last year, in part driven by alcohol promotions. Turning to the brand's third quarter profitability, restaurant-level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings, increased at Taco Cabana by $1.90 to $8.8 million, or 14.9% of restaurant sales from $6.9 million, or 9.2% of restaurant sales prior year. As a percentage of restaurant sales, Taco Cabana decreased cost of sales by 270 basis points to 28.9% in the third quarter due to lower commodity costs, operating efficiencies, lower taxes, lower promotions and discounts and menu price increases, partially offset by sales mix and lower rebates and discounts. Lower restaurant wages and related expenses due to labor efficiencies and lower payroll taxes were partially offset by higher incentive bonus and lower advertising expenses. These were partially offset by higher rent increases and other operating expenses, which included higher third-party delivery fees in addition to the negative impact of lower comparable restaurant sales. Similar to Pollo, our team's ability to manage food costs and labor has allowed Taco Cabana to improve restaurant-level adjusted EBIT (sic) [EBITDA] margins compared to last year, outstanding work there. Taco Cabana incurred incremental costs related to COVID-19 of $0.2 million for the third quarter, including quarantine pay and costs related to masks, sanitizer, and COVID testing. Driven by efficiency initiatives, management and hourly wage costs as a percentage of net sales decreased versus last year by 200 basis points. Adjusted EBITDA increased at Taco Cabana by $3 million to $4.2 million in the third quarter of 2020. Regarding income taxes, we had a benefit from income taxes of $4.2 million in the third quarter of 2020. This benefit was primarily from accelerating depreciation as a result of changes permitted by the CARES Act and a cost segregation study completed prior to filing our 2019 federal income tax return. This acceleration allowed us to carry additional tax net operating losses back to prior periods with a higher tax rate and resulted in a reduction in net deferred tax assets and the related valuation allowance against those deferred income tax assets. These were discrete items in the third quarter. Let me quickly touch on our cash and liquidity. At the end of the third quarter, we had $18 million in cash and $41.8 million in debt, including $39.9 million in outstanding borrowings under our amended senior credit facility and $1.9 million in capital lease obligations. The reduction in our net revolver debt, a non-GAAP measure as defined in our SEC filings, to $9 million as of November 2, 2020, from $74.4 million at the beginning of the COVID crisis, was funded by cash flow from operations, including extended vendor payments and the sale, or sale-leaseback, of 9 company-owned properties. As we indicated previously, we had 16 owned properties that we've been marketing for outright sale or sale leaseback, of which 9 have sold through early November. We currently have offers or contracts in place for the sale or sale-leaseback of all 7 remaining company-owned properties being marketed, with additional transactions expected to close the remainder of the year to enable further debt paydown. However, there can be no assurances that such transactions will be completed during the fourth quarter or at all. We are also exploring the potential refinancing of our current credit agreement, although we cannot make any assurance of the timing or uncertainty of completing any refinancing transactions at this time. Turning to capital expenditures, total capital expenditures in the third quarter of 2020 were $3.2 million, which primarily included $2.1 million for maintenance and $1.1 million for technology and corporate investments. As a reminder, our 2020 capital expenditures are not expected to exceed $22 million. In summary, our team has done a tremendous job during this challenging time as they work tirelessly to not only keep our guests safe but also improve operating efficiency. In addition, we believe our financial position is actually better now than it was at the onset of the pandemic. Combined with growth initiatives we've already put in place, including curbside capabilities, new apps and delivery channel sales, we believe that we have positioned Fiesta to emerge stronger once the pandemic is subsided. Thank you for listening, and we will now open the call up to questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Nicole Miller of Piper Sandler. -------------------------------------------------------------------------------- Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- A comp question and just a follow-up question on drive-thru. But first on comps, very happy to see the October improvement. Frankly, that's not what we've been hearing this earnings cycle from a lot of your peers. And so I was just looking through the numbers and wondering if you could give a little context. I see in Pollo Tropical that comparisons actually get more difficult by 400 basis points for the quarter. Maybe there was something different in October of the prior year. Can you just give us some context? And I look at Taco, and comparisons actually get easier by 400 basis points. So do you want us to just model that improvement? Or is there something else going on? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Sure. Thanks, Nicole. So on the Pollo side, I mean, I think we're seeing, I think, the benefits of some of the growth drivers that we talked about in the third quarter continue to accelerate as we head into the fourth quarter. On the Taco side, as you noted, we had a deceleration in comps in the fourth quarter of last year. So I think that, combined with our new product initiatives and continued effective promotions on the Margarita Platform are really what we see as growth drivers as we're heading here early into the fourth quarter. -------------------------------------------------------------------------------- Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Let me try that one more way. Could you give us exit rate of 3Q, and then maybe we could understand what to do with 4Q-to-date commentary? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [5] -------------------------------------------------------------------------------- Sure. So I mean, in the press release, we disclosed the exit rate comps by month. So just to recap, the comps for Pollo in September were down 8.7%; for Taco, down 14.2%. As we've commented in the past, we don't give specifics on in-quarter monthly comp trends, but the trends have improved from the rate that they were at the tail end of the third quarter. -------------------------------------------------------------------------------- Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [6] -------------------------------------------------------------------------------- All right. And then, I think you said the drive-thru was up 37%. Can we talk about what percent of sales, and maybe it's still almost everything, frankly, going through the drive-thru? And then, what are you measuring these days in terms of performance around speed, accuracy and overall guest satisfaction metrics? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [7] -------------------------------------------------------------------------------- Yes. So we can answer the second question first. Are you talking about drive-thru? -------------------------------------------------------------------------------- Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [8] -------------------------------------------------------------------------------- Yes, drive-thru. Thank you. -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [9] -------------------------------------------------------------------------------- So on drive-thru, we definitely are proud of the fact that we're seeing improvements actually in our drive-thru speed of service year-over-year at both brands. Both brands are a little bit different, but they're both trending in the low 5 range, which is 5 minutes is the benchmark in quick-serve I think around other customer service metrics where they've been improved, particularly at Taco. Taco's customer service measures have improved significantly dramatically actually year-over-year into the third quarter. I'm sorry, can you repeat the first part of that question, Nicole? I'm sorry. -------------------------------------------------------------------------------- Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [10] -------------------------------------------------------------------------------- Sure. I was just curious. I think you said up 37%, but just what percentage of sales are the drive-thru? And I guess it could be almost all of it these days. -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [11] -------------------------------------------------------------------------------- Yes. So I mean, I think we commented on the relative mix for drive-thru in the prepared comments. Let me just go back to those. So for Taco, the penetration was 83%, as we commented. And then for Pollo, just bear with me here, Pollo in the 65% range. That's penetration of total revenue. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Next question comes from Brian Vaccaro of Raymond James. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [13] -------------------------------------------------------------------------------- I wanted to circle back on some of the investments you've made and you're planning to make further around the drive-thru experience. I think you mentioned handheld order-takers and digital menu boards. And I guess the question is, do you have these in place in existing units? Or to what extent have you tested it? And could you help quantify some of the benefits you've seen, whether it be in sales or drive-thru speeds or perhaps average check benefits via suggested selling and the like? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [14] -------------------------------------------------------------------------------- Sure. So I mean, we've had more progress and just more work done on the Pods reinvestments. We haven't completed the program yet. But essentially, what we're doing is we're updating both the -- well, the Pod. The Pod is an order-taking and a payment device. And so what we're doing is we're working to upgrade those devices to be able to process payments faster. We're also working on our connectivity and signal distance capability, which will allow us to actually take orders more in advance in the line. So if you can imagine if you've got a signal that only goes, say, 6 cars deep, extending the signal so that you can go 10 cars deep with orders and processing those payments. Frankly, we're really just getting our technology updated to what many of our peers have implemented as far as the Pods and the payment. And the specific benefit of that is improvement in speed. And so we're definitely seeing speed improvements in terms of the line cycles. The speed of service metrics that we talk about on the order turnaround is really actually from order. So there's also a wait when you're in your car and you're in line prior to placing that order, and what the investments in pod and payment technology are going to allow us to do is to really compress that time. So it's really all about increasing flow-through. The good news is that we've proven that our kitchens actually have the capacity to handle significant improvements in order speed improvement, order speed reduction. So we're not going to create a constraint in the kitchen. And right now, we're in the process of testing, with good results, I might add, reengineered kitchen line that's more modular, that allows for faster speed in terms of assembling components for orders. So we're working both the order side as well as the kitchen efficiency side, and it's really all about speed. And I'm sorry, Brian, can you repeat the -- I think there were 2 parts to that question. I think I only answered one. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [15] -------------------------------------------------------------------------------- Yes, if you had any sort of quantification of what you've seen in terms of sales benefit or average check related to the digital menu boards, if you've had a chance to test that at this point? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [16] -------------------------------------------------------------------------------- Yes. So the answer is no, that we're in very early stages there. We're in the process of really selecting the technology that we're going to go with. But we've got a huge opportunity there. We benchmarked our digital menu board platform against the competitive set. And frankly, it's a big opportunity for us to create an update, which should result in check average increases due to add-on sales. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [17] -------------------------------------------------------------------------------- All right. That's great. And I guess shifting to margins, if we could; obviously, some significant efficiency gains at both brands across multiple cost lines. I guess, Dirk, could you walk through sort of how you see underlying margins playing out for each brand? Obviously, not quarter-by-quarter or anything or the like, but could you walk through some of the maybe near-term efficiency gains that might reverse as that environment hopefully normalizes 6, 9, 12 months, whatever you see on the other side of COVID? I'm thinking about things like waste reductions and streamlined menus and how order patterns have shifted, or maybe reduced repair and maintenance budgets, reduced advertising, just how you see this kind of ebbing and flowing as we move through the environment? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [18] -------------------------------------------------------------------------------- Sure. I mean, that's -- so let me kind of take those one at a time. I think the prime cost, food cost and labor, we see the margin improvement in those lines being largely sustainable. Obviously, if you pay -- for those of you that are in the state of Florida, I'm not sure if it officially passed, but there was a minimum wage legislation on the ballot that passed for $10, and that's going to be a cost increase for us, which we can easily accommodate through price increases, given that we haven't been aggressive on price historically. But I would say we feel like, beyond that, our ability to largely maintain the margins that we're seeing on the labor and food cost side are very high. In general, we're still not completed with our negotiations for 2021, but so far, they're pointing toward a stable or better cost versus last year in 2021 versus 2020. In the OpEx category, there's a lot in there. That's kind of a difficult item to break down. But generally speaking, as we grow sales, because there's a fixed component to other OpEx expense, we should be seeing leverage as revenue climbs back to historic levels. And on the G&A front, the last item, I mean, I think we felt good about our ability this year to reduce G&A, and we expect that to maintain certainly as we head into next year. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [19] -------------------------------------------------------------------------------- On the G&A front, have you identified any incremental savings opportunities versus what you've already sort of accomplished year-to-date? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [20] -------------------------------------------------------------------------------- I mean, we're always looking to try to improve efficiency, particularly in the non-guest-facing activities. No news yet, no new news on that front at this time. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [21] -------------------------------------------------------------------------------- And then, the last topic, you mentioned it briefly there, the Florida increase in the state minimum wage going to $15, I think, by 2026. I guess, how do you see that playing out on both the demand and labor cost perspective? And the question I was going to ask you, I'm not sure when the last time you completed a customer segmentation study was, but do you have a sense of the average income of your customer base, and what percent might be sort of in the lower middle-income bands? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [22] -------------------------------------------------------------------------------- So let me answer the first part of that question first, Brian. So the legislation, just for everybody on the phone who didn't see it, is time based. It's required to be enacted by September 30, so we have time to phase in that increase. And I'm sorry, was there another question around that, around the legislation? -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [23] -------------------------------------------------------------------------------- Not the legislation itself. I was really trying to think through what benefit could that have if a certain percentage of your customer base will be seeing, obviously, income growth through their wages. So I was asking if you had a sense of what the average income of your guest was, or what percentage of your sales or traffic sort of came from different income bands. Do you have any data on that you might be able to share? -------------------------------------------------------------------------------- Dirk A. Montgomery, Fiesta Restaurant Group, Inc. - Senior VP, CFO & Treasurer [24] -------------------------------------------------------------------------------- Yes. I mean, we don't have any specifics, but we would say that, I mean, a large percentage of our customer base, probably our likely service employees that would be positively benefited by any kind of wage legislation. So I think certainly, I think we expect that it's going to be a benefit for a significant percentage of our customers. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [25] -------------------------------------------------------------------------------- Okay. And can you help us frame the cost a little bit? What's the average wage today for an hourly employee at Pollo Tropical? Yes. So the average wage for our employees right now is in the $9.60 range. So the cost for us on an annualized basis, the cost impact with no pricing, just the straight-up cost impact, would be roughly $2.5 million. Now, right, so that represents a roughly 70 basis point price increase. So we feel like, given the fact that we haven't taken price aggressively in the last couple of years, that that's not really going to be a big challenge if we choose to increase price. A 70 basis point price increase would not be something that we feel like we could take a price increase at that level, if needed, to offset that cost. With any luck, hopefully, our negotiations on commodity costs will be enough to partially offset some of that increase, which, by the way, just a reminder, doesn't start until September 30. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Thank you. This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant evening.