Fiesta Restaurant Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

Welcome to Fiesta Restaurant Group Fourth Quarter 2020 Earnings Conference Call. I would now like to turn the call over to Raphael Gross, Managing Director at ICR. Please go ahead sir.

[Raphael Gross:]

Thank you. Fiesta Restaurant Group's fourth quarter 2020 earnings release was issued after the market closed today. If you have not already accessed it, it could 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.

[Rich Stockinger:]

Thank you, Raphael. I'd first like to thank all of the investors and other participants on the call today for their continued support. I'll be covering three topics today, a recap of the progress we made in the fourth quarter on key 2020 priorities, the status of sales-driving initiatives for each brand, and an overview of our key priorities for 2021. Dirk will then provide a financial update. As we closed 2020, we were pleased with the strong progress we made against our priorities identified in March when the pandemic began. We continue to place the safety of our guests and customers first, we maximized liquidity through increased restaurant EBITDA margins, working capital efficiency, and property sales. And we made important investments in our digital platform that we expect will result in strong sales growth in 2021. As a result of COVID, we have had to concentrate on other sales channels to offset the sales loss from dining room closures, representing approximately 25% of our pre-COVID sales. In the fourth quarter, both brands generated drive-thru comparable restaurant sales growth of at least 24% versus last year. And we more than tripled our delivery comparable restaurant sales, compared to the fourth quarter of 2019. From a margin perspective, we continued our momentum from the third quarter, improving adjusted EBITDA margins at both brands, compared to the fourth quarter of 2019. Our margin improvement was driven by continued improvements in food cost reduction and labor efficiency. Net income was $0.9 million and pre-tax income was $1.5 million for the quarter. Consolidated adjusted EBITDA, a non-GAAP measure, increased 42% versus last year to $14.6 million. After excluding the extra week in the 2020 fiscal year, estimated, consolidators, adjusted EBITDA grew 13.4% compared to 2019. The impact of the extra week in fiscal 2020 on consolidate adjusted EBITDA is estimated at $2.9 million. Our overall financial position improved from the start of the pandemic. With the reduction in total debt from $148.4 million as of March 18, 2020 at the start of the pandemic, to $73.3 million as of January 3, 2021. Net debt, a non-GAAP financial measure was reduced from $74.4 million at the start of the pandemic, down to $23.3 million as of January 3, 2021. On November 23, we entered into a new senior credit facility agreement, which replaced our prior senior credit agreement with a more flexible and longer-term loan maturing in 2025 that provides greater liquidity, and will also allow us to continue our investments in growth, including consumer facing and digital initiatives. We made very good progress, selling our 16 own properties over the quarter. By the end of the year, we had closed sale or sale leaseback transaction on 13 of the 16 properties, generating net proceeds of $26.8 million, and expect to sell the remaining three properties in the first half of 2021. However, there can be no assurance that the anticipated the remaining property sales will occur.

[Dirk Montgomery:]

Thank you, Rich, and good afternoon, everyone. I'll start by reviewing our fourth quarter results and then provide you with an update on our financial plans for 2021. We were very pleased with our fourth quarter performance in terms of sales, profit growth and margin improvement. Total revenues decreased 6.6% to $148.9 million in the fourth quarter of 2020 from $159.5 million in the fourth quarter of 2019 driven by the comparable restaurant sales declined in 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. Our fourth quarter, same-store comp sales trend improved from the third quarter 2020 levels with Pollo Tropical comp trends improving 290 basis points to down 8.2% for the fourth quarter and Taco Cabana same-store comp sales improving 420 basis points to down 10% for the fourth quarter. As Rich noted, our historical penetration of dine-in sales has been approximately 25% and strong off-premise and drive-thru growth for the quarter was offset by the dine-in traffic loss.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question is from Joshua Long with Piper Sandler. Please go ahead.

[Joshua Long:]

Great. Thank you for taking the question and thanks for the update, particularly on Taco Cabana here into the first part of the year. I might have missed it, but curious if you could provide a similar update on Pollo and I had a follow-up as well.

[Rich Stockinger:]

Yes. Thanks, Josh. The – for both brands, we saw improvement in comp sales trends in January compared to the fourth quarter trend. So off to a good start in January for both brands.

[Joshua Long:]

All right. Thank you. Then, I imagine that the disruption there was probably – primarily focused on Taco Cabana just given its Texas-centered geography there. Anything to call out for Pollo in the February to-date period? Anything worth noting?

[Rich Stockinger:]

No, I mean, we – certainly, no weather-related impacts in February for Pollo.

[Joshua Long:]

Great. Thank you. And then, as we think about the top line recovery over the course of this year, I mean a lot of good work has been put in and then, at each brand has been repositioned as well with a lot of exciting investments there on the digital channel, on the food side really across the whole spectrum here. When you think about that guidance for positive same-store sales for the year, would you be able to provide more context, your expectations around how that builds, obviously you have some, I wouldn't say, easy compares. You'll be lapping over some of the severely negative numbers in 2Q and 3Q. And so, just try to put some more context around how we square up the brand momentum within what is on negative comps from prior year to that end up at positive just for the year, any sort of bookings you might be able to help put on that in terms of pace for magnitude would be very helpful from a modeling perspective?

[Dirk Montgomery:]

Sure. I mean, just because the – let's start with the second quarter, I mean the second quarter of 2020 was obviously extremely low with the third quarter being also very low. So we're expecting this year's comp sales to mirror that. In some sense in that, we expect a much higher comp rate in the second and third quarters as we lap those numbers, and I think really that's about all we can provide at this point. I think, as Rich mentioned, we see the initiatives that – our growth initiatives that we describe building in momentum throughout the course of the year.

[Rich Stockinger:]

Josh, the key to me is we're now analyzing the business on by a channel for each channel, the investment per channel, the sales per channel, the profit by channel and the fact that we are very close to breakeven right now, especially at Pollo, at least Taco right now with the storm. The fact that our dining rooms just opened, and we've already seen the mix go up and the dining rooms preopening through now gives us a lot of support that these sales should continue. And now, we're going to start comparing ourselves to 2019 just not ready to give the guidance toward that. But we are very excited about the momentum.

[Joshua Long:]

Great. Thanks. And one more for me. In terms of all the work you've been doing by channel, can you remind us where we are – where the brands are now in terms of pricing and really optimizing that margin structure by channel given the growth in the delivery in the off-premise segment as well?

[Rich Stockinger:]

Sure. So just to speak to off-premise pricing, I mean we do have different pricing structure in off-premise, particularly for delivery like most of our peers. In terms of absolute pricing, I guess, capability, as we've mentioned before, our price increases over the last couple of years have been conservative and on the low side. And so, I think we feel like that combined with very high-value perceptions at both brands puts us in a position to feel like we can make modest price increases without negatively impacting traffic in 2021.

[Joshua Long:]

Thank you.

[Rich Stockinger:]

Thanks, Joshua.

[Operator:]

Our next question is from Brian Vaccaro with Raymond James. Please go ahead.

[Brian Vaccaro:]

Hi, thanks and good evening. Any question about reopening the dining rooms and I think you said it's nearly all employers earlier now open. I understand it's still early, but just curious because consumer response has been so far and if you're seeing any noticeable moderation in other segments.

[Rich Stockinger:]

Yes. Again, it's too early to tell. We just opened them up several weeks ago. The mix has gone up. The sales mix from where we were pre to where they are now, I mean it's only taking it away from the drive-thru. It hasn't taken away from the other trade channels, which is important to us. So again, I firmly believe it's going to come back, especially in core, especially in the Tri-County core area, but it's going to take us a little time to me and focusing more and more on those other channels, because of the changing in consumer behavior. So anything we get at the dining room, even if it comes out of the drive-thru, with all the effort we're putting in the drive-thru to the speed of service and all the digital platforms is only going to help us incrementally.

[Brian Vaccaro:]

Hi, great. And can you help frame, I guess, the cost side of that equation as you reopen dining rooms? Can you frame how many hours you need to bring back, what additions you need to bring back, service the dining rooms? And is there anything from a cost perspective, maybe opening drink machines, I believe those are sometimes inefficient. Just any other – can you help frame where you've been really great margins, along with a lot of other fast casual and quick service brands that have been optimizing and seeing the drive-thru is really strong during COVID, what's the reasonable expectation on the margin impact to re-open dining rooms?

[Rich Stockinger:]

Yes, again, our goal is that the margins will not go down. In terms of the peak periods, we have to add one or two people from, a staff position. In terms of the soda machines, we have removed all our soda machines at Pollo, as well as the saucing islands. We have zero complaints on that, so that those margins will stay. We have not removed them yet at Taco, but we have not reopened them yet. And the decision will be made on that shortly.

[Brian Vaccaro:]

Okay, so you have on the service…

[Rich Stockinger:]

And they will have no impact on the cost of goods sold by opening up the dining rooms.

[Dirk Montgomery:]

Yes, I mean, we've been – I guess the one bright spot from being in COVID now for almost an entire year, the packaging costs, any packaging costs increases are largely behind us. And so I don't think we expect packaging cost increases. And overall, we really expect the impact of dine-in on our total unit margins to be neutral. Where our intent is to manage it that way.

[Brian Vaccaro:]

Okay, great Dirk you guided 2021 comps you said stable versus 2020 levels. Does that mean stable inflation, or do you expect stability on the COGS ratio itself?

[Dirk Montgomery:]

No, I mean, when we said stable, we expect COGS to be flat on a rate basis compared to 2020 and 2021.

[Brian Vaccaro:]

Okay. And so we're talking about an COGs ratio. And if I look at 2020, it was sort of a tale of two halves, where your COG ratio was a lot lower in the second half compared to the first half. So do you expect it to be closer to the second half of the first half, or just curious what you're guidance will be? Because you started out in the high 31s and you finished at 30, even across both brands combined. I’m just trying to make sure I read the message there.

[Dirk Montgomery:]

Yes, that's correct. And indeed it's a great question, Brian. We actually expect to be flat to our Q4 run rate. There was a lot of noise in both brands, earlier in the year, particularly when COVID hit. And so we really expect to be flat versus the Q4 run rate.

[Brian Vaccaro:]

Okay. And then on the G&A line, I noticed that picked up a little bit here, sequentially, in the fourth quarter. I'm curious what your G&A expectations are in 2021? Could you give an update? I think there was a review process that was underway on the G&A line, any update on that front?

[Dirk Montgomery:]

Yes, so we generally expect G&A to be roughly flat in 2021 against 2020. We aren't planning any significant increases in headcount. And we're working to improve G&A efficiency. So we do have a number of ideas that we're still refining on that front. And so I think a flat assumption in dollars we feel is reasonable, year-over-year.

[Brian Vaccaro:]

All right, thank you. I'll pass it along.

[Raphael Gross:]

Thank you, sir.

[Operator:]

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 day.