Fiesta Restaurant Group, Inc.
Q1 2020 Earnings Call Transcript

Published: 11 May 2020

[Operator:]

Good afternoon and welcome to the Fiesta Restaurant Group Inc. First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following our presentation, we will conduct a question-and-answer session. Instructions will be provided for you at that time to queue up for question.I would now like to turn the call over to Raphael Gross, Managing Director at ICR. Please go ahead.

[Raphael Gross:]

Thank you operator. Fiesta Restaurant Group's first 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 earnings -- in the company's earnings release.On the call today are President and Chief Executive Officer, Rich Stockinger; and Chief Financial Officer, Dirk Montgomery.And now I'll turn the call over to Rich.

[Rich Stockinger:]

Thank you Ray. The world is a much different place since our last earnings call an update to our shareholders. I'd first like to thank all the investors and other participants on the call today for their continued support during the COVID-19 crisis.I'll be covering three topics today. Our key priorities during this crisis; an update on our operational and other changes in response to the crisis; and a brief update on our sales driving efforts and first quarter results. Dirk will then provide a financial update. Our priorities in this time of crisis have been and will continue to be as follows. Taking steps to ensure the safety and well-being of our team members and customers, protecting the reputation of our brands and our company, doing right by our employees, our shareholders, our vendor partners, our service providers and landlords and continuing to be a leader in our communities. I am proud of our team for their focus on those priorities, while maximizing liquidity and developing new and better ways to drive sales and maximize results.We have been working to maximize efficiency and operating flexibility since the crisis began. In order to protect cash availability, early in the second quarter we drew down our capacity -- all our capacity on a revolver and had a total cash balance of $91.6 million as of May 6. We have been successfully working with our vendor partners, service providers and landlords regarding more flexible payment terms and cost reductions. We cut our 2020 CapEx plans in half and are focusing only on necessary capital projects.We were in full compliance of our loan financial covenants at the end of the first quarter and we are proactively working with our lenders to amend our own loan financial covenants to avoid any potential issues in the future given the economic uncertainty related to this global pandemic. Dirk will provide more color on our liquidity management activities in a moment.Now more than ever finding new and better ways to drive sales is a key focus for teams. We are developing a better business model designed to enable our customers to enjoy our brand safely wherever and however they choose. We have expanded and will continue to expand delivery options. We have created more in-home dining options, including Pollo Pantry and TC Pantry and are rapidly improving our curbside and pick-up capabilities to be faster and safer for our customers.Additionally, we are in the final stages of making our restaurants ready for a return to safe dine-in activity in Florida and Texas, and we are confident that we will ultimately exit this crisis as the company is better positioned for future sales growth. On March 16, 2020, we announced we have closed all our dining room seating areas in all Pollo Tropical and Taco Cabana restaurants in Florida and Texas respectively due to the COVID-19 pandemic. Since that time, we have continued to make proactive changes designed to ensure the safety of our guests and team members which is our top priority. We have taken the following health safety preventive measures in response to the COVID-19 pandemic

[Dirk Montgomery:]

Thank you, Rich and good afternoon everyone. I'm going to provide an update on first quarter results and then provide some commentary on our financial management strategies during this period of economic uncertainty.Total first quarter revenues decreased 11.5% from the prior year period to $146.7 million due primarily to the comparable restaurant sales declines at both brands and the impact of COVID-19 underperforming Taco Cabana restaurants in the first quarter of 2020.We continue to make progress in off-premise sales during the quarter consisting of online catering and delivery. Off-premise sales more than doubled compared to last year in the first quarter compared to prior year. And our penetration is still well below our competitors with 7.1% at Pollo Tropical and 5.6% at Taco Cabana.Off-premise continues to be a huge opportunity for us especially in these times. The consolidated net loss was $7.3 million or $0.29 per diluted share including a $0.17 per diluted share negative impact from other items including $3.2 million in impairment charges and $1.2 million in closed restaurant rent charges compared to net income of $2.3 million or $0.08 per diluted share including a $0.05 negative impact, primarily from $1.1 million closed restaurant charges in the first quarter of 2019.On an adjusted basis the net loss was $2.9 million or $0.11 per diluted share. This compared to an adjusted net income of $4.1 million or $0.15 per diluted share in the first quarter of 2019. Please see the non-GAAP reconciliation table in our earnings release for more details.With that, let's go through some of the significant accounting entries during the first quarter. We recorded a $4.2 million noncash impairment charge, primarily related to assets for three underperforming Pollo Tropical restaurants and two underperforming Taco Cabana restaurants that we continue to operate, which had an unfavorable impact on net income of $3.2 million or $0.13 per diluted share in the first quarter of 2020.Now turning to our individual brands. At Pollo Tropical, comparable restaurant sales decreased 7.3% compared to a 2.6% decrease in the first quarter of last year. This year's decline consisted of an 8.3% decrease in comparable restaurant transactions, partially offset by a 1.0% increase in average check, increase of an approximately 0.2% in pricing.Pollo Tropical continues to gain market share as evidenced by the outperformance compared to Black Box on both the comparable sales and transaction basis for the quarter. We have also experienced an estimated 35 basis point impact during the first quarter from new store cannibalization within our core South Florida market. However, we believe new development is a positive for the brand overall since it allows us to enhance the guest experience while growing our total share in the market.Comparable restaurant sales for Polla Tropical increased 0.6% during the first 10 weeks of the first quarter of 2020, building on the sales momentum from the fourth quarter. We were pleased that the Pollo brand has generated four consecutive months of positive comps through February of 2020, before the impact of the COVID crisis.Reflecting the impact of COVID-19, comparable store sales decreased 32% during the last three weeks of the first quarter of 2020. Comp sales decline due to the COVID crisis stabilized in late March and early April and Pollo has realized sequential sales improvement weekly since that time with the sales trend for the two weeks ended May three of down 37.8%. We are seeing improvement every week now.Turning into branch profitability for the first quarter. Restaurant level adjusted EBITDA a non-GAAP measure as defined in our SEC filings decreased at Pollo Tropical by $5.7 million to $15.4 million or 18% of restaurant sales from $21.2 million or 22.3% of restaurant sales. As a percentage of restaurant sales in the first quarter, Pollo Tropical experienced higher cost of sales due to sales mix and higher commodity costs, restaurant wages and related expenses due to the impact of lower sales and fixed costs and other operating expenses.Other operating expense increases included higher third-party delivery fees and contracted cleaning services in addition to the negative impact of lower comparable restaurant sales. Adjusted EBITDA, a non-GAAP measure as defined in our SEC filings decreased by $5.5 million to $8.8 million for Pollo Tropical in the first quarter of 2020.During the quarter, we also recorded $3.7 million of impairment charges, primarily related to the assets for the three underperforming Pollo Tropical restaurants that we continue to operate. At Taco Cabana, comparable restaurant sales decreased 13.5% compared to a 0.5% decrease in the first quarter of last year. This year's decline consisted of a 14.9% decrease in comparable restaurant transactions, partially offset by a 1.4% increase in average check. The increase in average check was driven primarily by limited time offerings and an increase in transactions with alcohol sales.Comparable restaurant sales for Taco Cabana decreased 8.6% during the first 10 weeks of the first quarter of 2020 prior to the impact of COVID-19 and decreased 28.3% during the last three weeks of the first quarter of 2020. Comp sales decline due to the COVID crisis stabilized in late March and early April and Taco had realized sequential sales improvement weekly since that time with the sales trend for the two weeks ended May 3 of down 18.6%.Drive-thru sales from March 9 through the end of April grew 11%, driven in part by alcohol promotions and strong food sales. As Rich mentioned, driven by the strength of our Cinco de Mayo margarita promotions, we have the strongest Cinco de Mayo holiday sales in five years with May 5 holiday sales growth of 24% compared to last year's holiday sales. We believe the Taco brand has very good momentum and we're seeing new customers come to the brand.Turning to the brand's first quarter profitability. Restaurant level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings decreased at Taco Cabana by $4.2 million to $5.3 million or 8.8% of restaurant sales from $9.5 million or 12.8% of restaurant sales. As a percent of restaurant sales in the first quarter, Taco Cabana incurred higher cost of sales due to operating inefficiencies and increased discounting and promotional activity and higher other operating expenses including higher third-party delivery fees and insurance costs in addition to the negative impact of lower comparable restaurant sales.Adjusted EBITDA a non-GAAP measure as defined in our SEC filings decreased at Taco Cabana by $3.8 million to negative $0.1 million in the first quarter of 2020. During the quarter, we also recorded $0.5 million impairment charges related to assets for two underperforming Taco Cabana restaurants that we continue to operate.Turning now to a few additional financial items. Under our current share repurchase program, we repurchased 25 million shares during the first quarter on/or before March 12. We have suspended share repurchases during this period, in which we are closely managing cash flow.Total capital expenditures in the first quarter of 2020 were $6.1 million. Our expenditures consisted of $2.5 million for maintenance, $1.6 million for new company-owned restaurant development, $1.0 million for restaurant remodeling and $0.9 million for technology and corporate.Now turning to our financial management plans in response to the economic challenges presented by the COVID crisis. Our entire organization has been working to improve efficiency and protect staff from day one, implementing the following measures; we aggressively cut our capital expenditure budget for 2020 to only necessary investments. 2020 capital expenditures are currently expected to be in the range of $20 million to $25 million compared to previous estimates for 2020 of less than $40 million.Working capital efficiency has been improved as a result of vendor and landlord payment term and pricing renegotiations, which are expected to improve cash flow in 2020 by $10 million to $15 million. We have very disciplined process in place for improving capital spending and vendor payments. Rich and I review all projects and payments.In early April, total of 168 office and field personnel were terminated or furloughed, representing total annualized salary savings of approximately $9.3 million, of which approximately $5.5 million is related to terminated employees. In addition, the salaries for all vice presidents and executives were reduced by 10% to 35% for at least one quarter. We intend to market our 15 owned properties for sale or sale leaseback and four properties now are either in the letter of intent stage or have contracts signed for sale, although there can be no assurance that any sales or sale leaseback transactions will be ultimately consummated.As a result of our efforts, cash balances since the first week of April when we drew down on the revolver have actually increased from $76.3 million to $91.6 million as of May 6th. As Rich mentioned, our sales trend is currently at breakeven profitability. Our goal is to fund capital expenditures through the increased cash flow from working capital efficiency and property sales. As a result of all of the efficiency efforts and the recent sales trends, we feel confident that we will have adequate liquidity through the end of 2020.In closing, we feel very good about our top line momentum, it continues to improve weekly. We are very focused on improving efficiency and we will continue to stay focused on safety and well-being of our customers and team members. We are confident that we will ultimately exit this crisis with the company better positioned for future sales and profit growth.Thank you for listening, and we will now open up the call to questions. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] We will now take our first question from Nicole Miller from Piper Sandler. Please go ahead. Please go ahead. Your line is open. Please ensure your mute function is turned off to allow your signal to reach our equipment.

[Nicole Miller:]

Good afternoon. Can you hear me okay?

[Rich Stockinger:]

Yes, we can Nicole.

[Nicole Miller:]

Oh, great. Thank you. I wanted to ask a couple of questions just about the nature of the concepts. I'm thinking about the Taco Cabana improvement specifically. And could you talk a little bit about that being maybe more suburban in terms of locations and maybe more influenced by dinner patterns, both of which seem to be holding up in the marketplace?

[Rich Stockinger:]

Yeah. I would say, we've been consistent from sales improvements from what we had before. Again that is again being driven by the new rules in the state of Texas. The only area I would say that is lagging a bit behind and has nothing to do with anything else that is Houston. And as you know, Houston is not only getting hit by the negative impact of COVID-19, but also in the oil and gas industry. But other than that, no we've seen consistent line starting at lunchtime, seven days a week, regarding our alcoholic beverage promotions, as well as -- again these are new guests and they're having our food and enjoying our foods and coming back again in the past might have just driven away by us.

[Nicole Miller:]

Okay. Very, very helpful. Last question, I mean, I was just kind of thinking back to the beginning of this story maybe as a public company. And it was always the unit level economics were strong and that was the basic premise. And there's a home-court advantage for each brand. So could you talk somehow and let us understand core versus non-core or by vintage or top-tier versus bottom tier? Or are literally these comp trends in the performance across both concepts across every single location? I would love to just understand some pushes and pulls there? Thank you.

[Rich Stockinger:]

Sure. The sales trends right now per portfolio is pretty much consistent. So, it's not just core being down or rental being down, it's much pretty across the board. And again as you know because of the yearly leases' difference the profitability margins are much higher here in core than they are outside of core portfolio. And at Taco, I would say again, I think here in -- and I am assuming this with the increase in the alcoholic beverages and the guests that are coming in now are different than in the past, we believe the margin enhancement is a great possibility even more than we had said in the last quarter. We've taken actions regarding food costs that are -- lowering the value of the food cost. We've now got the latest schedules on significantly. So, again for Taco, San Antonio is doing well, Houston is hurting a little bit like I said before and Dallas is showing the most improvement.

[Nicole Miller:]

Thank you for taking my questions.

[Rich Stockinger:]

Thanks, Nicole.

[Operator:]

[Operator Instructions] We will now take our next question from Brian Vaccaro from Raymond James. Please go ahead.

[Brian Vaccaro:]

Thanks and good afternoon. I wanted to start on the sales performance at Pollo if we could. And Q1 seemed to play out about as expected, but it seemed that April worsened maybe a bit before starting to recover and it seems to be lagging the broader industry recovery we're seeing. So, I'm just curious to get your perspective on what may have driven that maybe something regional or macro specific in South Florida or something else that's worth highlighting.

[Rich Stockinger:]

Yes. Great question. At Pollo versus Black Box, we're pretty much right there and joined within our market. We've been not doing as well as the quick-service is doing. Keep in mind, in South Florida before this happened, 25% of the people in and around the bay were living at the poverty level or below. I'd be afraid to ask you what it is right now. So that's why we're pushing hard on the lower-cost, lower-priced promotions. We're pushing hard on things like the pantry which we've just introduced. But these prices are lower than the local grocery stores.So, I would say, we are not doing worse than local competitors in that class. We're not doing as well with the quick service. And one area also, keep in mind our menu is a lot different than quick service. So quick service is much more handheld and we do not. So, without the dining room, we've lost a lot of those people that are coming in for the platters at Pollo. And we expect as the dining room restrictions start to be removed or lessened, those people will come back.

[Brian Vaccaro:]

Okay. That's helpful. And I guess a follow-up on that. Rich, could you give some perspective thinking about some of those dynamics you just mentioned, could you give some perspective on quarter-to-date how variable has it been if you compare South Florida to Orlando, Tampa some of the other markets? Could you give any perspective across the individual regions?

[Rich Stockinger:]

I can give you a top line. They're pretty consistent on the sales decline and there's not much difference if you look at Northern Florida, Central Florida and South Florida in terms of the range being down around 30%, 32%. We kind of got close there right now and we're working on that. But no, there hasn't been a significant variance in the geographic region.

[Brian Vaccaro:]

Okay. All right. I wanted to also ask the Pollo Tropical off-premise, I think you said it was 7.1%. Could you share what percent of that is delivery? And could you also just give a little bit more on the traction that you've seen thus far with Uber Eats, which I believe has a pretty dominant share in South Florida in particular?

[Rich Stockinger:]

Keep in mind we just signed on Uber Eats the end of the first quarter. They have been a partner as they all have. Uber Eats as you know is the number one DSP in South Florida. And we just recently started rolling out. And we guided in now into our core market is Grubhub which is number two. So, we expect that number to grow in terms of the off-premise. Is it as high as our competitors? No. Is it as high as we want it to be? The answer is no. And again, I think it was more of a timing of getting in Uber Eats on and now getting Grubhub which is the number two and we expect those numbers to improve.

[Dirk Montgomery:]

And in terms of the mix of off-premise right now, the delivery is accounting for roughly 60% to 70% of the total off-premise dollars. That's currently a little bit skewed due to the conditions. We've had very good success in catering at the end of the calendar year very strong momentum. I think we expect that once things get back to normal that catering contribution will dramatically improve, because we've had great traction at the end of the fourth quarter in that channel. We also expect as Rich said that, our online sales should increase dramatically as we launch the Bottle Rocket new online and in app, which is supported by Bottle Rocket.

[Brian Vaccaro:]

All right. That's great. And then just last one for me. On the G&A cuts, obviously very difficult decisions that you had to make, but in terms of the permanent cuts that you've made, just curious if you could share in what functions you pare it back? And just any other color on the permanent changes, structural changes that you've made either from a personnel or maybe from a headquarters standpoint? Are you still going with the three headquarters? Or is there an opportunity have you made a decision to pare that back perhaps?

[Dirk Montgomery:]

Sure. So I mean we made cuts across the board in all functions and all occasions. Obviously, our focus was around making sure that we maintain the support that we needed to support operations in guest-facing activities. And as we mentioned in the press release, and in my prepared comments roughly $5.5 million of the estimated $9.1 million of annualized savings work from terminations versus furloughs. So no – furlough and the furloughed employees will be brought back. But those are kind of the mix dimensions of the separation. So I think we – the $5.5 million certainly would be viewed as more permanent. And the remainder comprising of furloughs is going to depend on the various is going to depend on various fronts.

[Rich Stockinger:]

You know, Brian we tend to look at every aspect of our business. I am taking a line from Governor Cuomo, who has done a great job in the State of New York as a leader. We are reimagining every aspect of our business not just the overhead, but the way we do things going forward. Because none of us on the phone call or in New York knows what the new world is going to look like.So we're undertaking this opportunity to look at every aspect of our business and not just replacing what we did before, but try and find a better method a better opportunity as we go into the new world. So we're not – we have no specific plans, but more to come. We're looking at ways to improve our business top line efficiency and the bottom line.

[Brian Vaccaro:]

Understood. Certainly, unprecedented times. I hope everyone's well and stays healthy. Thank you again.

[Rich Stockinger:]

Thank you. You too.

[Operator:]

That concludes today's question-and-answer session. I would now like to turn the call back to the management team for any additional or closing remarks.

[Rich Stockinger:]

In closing, again, I just want to thank our team members for their passion, for their loyalty, their hard work, not only the people out in the office and support, who've been working from home very difficult, but most important the people that are in the front lines. There's another saying, how much is a human life worth? They're priceless. And that's why we're taking every opportunity for the safety of our frontline employees. So again thank you to our team members, thank you to our shareholders and looking forward to speaking to you again next quarter. Thank you everyone.

[Operator:]

This concludes today's call. Thank you for your participation ladies and gentlemen you may now disconnect.