Fiesta Restaurant Group, Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

Good afternoon, and welcome to the Fiesta Restaurant Group Fourth Quarter 2018 Earnings Conference Call. Today’s conference call 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 a question. I would now like to turn the call over to Raphael Gross, Managing Director at ICR.

[Raphael Gross:]

Good afternoon, everyone. Fiesta Restaurant Group’s fourth quarter 2018 earnings release was issued after the market close 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 can 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 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; Senior Vice President, Chief Operating Officer and Pollo Tropical brand President, Danny Meisenheimer; and Chief Accounting Officer and Interim Chief Financial Officer, Cheri Kinder. And now I will turn the call over to Rich.

[Rich Stockinger:]

Thank you, Raph. 2018 results were driven by the investments and initiatives we put in place, as we implemented the Strategic Renewal Plan beginning in 2017. There’s still much work to be done but our foundation is now firmly in place and the team is energized by the strong affinity for our brands and their long-term potential. As such, we will no longer speak of our ongoing efforts to build shareholder value as the Strategic Renewal Plan, although all the tenants remain in place. In December, we marked the conclusion of our plan with a number of initiatives including the re-launch of catering with dedicated resources, expanded loyalty programs, a new third-party delivery program and the completion of our comprehensive portfolio review that entailed closing our remaining nine Pollo Tropical restaurants in Atlanta, along with 500 performing Pollo Tropical restaurants in Florida, and nine Taco Cabana restaurants in Texas. Pollo Tropical had struggled in the Atlanta market for some time, but we had also held out hope that results would improve if it had time to experience the enhancements we had made as part of the plan. Unfortunately, Atlanta did not experience the same positive momentum as our other markets and there was no reasonable path forward for it. With these actions behind us, we entered 2019 from a position of strength, characterized by quality operations, a healthier more profitable restaurant pace, improving guest metrics, and programs in place to improve traffic and build margins. This year we will continue focusing on delivering a consistent, distinctive guest experience, improving traffic trends, realizing margin expansion and building our fundamental sales growth platforms to create long-term value for our shareholders. In addition, later this year, we plan to develop and test the refined Pollo Tropical restaurant concept with broader mass appeal for potential future expansion. Pollo Tropical recorded a quarterly comparable restaurant sale decline of 1.9% in fourth quarter after three consecutive quarters of comparable restaurant sales growth in 2018. This decline arrived from the very strong fourth quarter we recorded in 2017 due to the recovery period after Hurricane Irma and the Pollo Tropical brand re-launch, which was supported by significantly higher advertising spending in late 2017. Importantly, we had our highest monthly Net Promoter Score or NPS in December at Pollo Tropical led by our largest markets, Broward and Miami-Dade counties in South Florida. Our NPS score and trajectory give us confidence that we're improving the overall guest experience at our restaurants and turning more guests into promoters of our Pollo Tropical brand. In the first quarter of 2019 through February 17 Pollo Tropical restaurants sales decreased 3.7%. Pollo Tropical comparable restaurant sales were approximately 370 basis points, worse than Black Box fast-casual industry peer comparable restaurant sales through February 10th. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable sales during this timeframe by approximately 90 basis points. We are experiencing improved trajectory of sales and transactions in February compared to January and are closing the gap between our results and the Black Box industry results. With that said, our traffic trends are clearly not where we believe they can and should be. We are therefore taking further steps to address this head on concurrent with what we're doing in terms of catering, delivery and loyalty. Despite rising NPS scores, the feedback from guests is that they are not visiting us as often as they would like to in view of the strong value messaging from both limited and full-service brands. To address this, perceived under competitiveness in our price value equation, we've re-launched everyday value platforms this month and are beginning to see improved transactions and sales. Our Pollo Time offering consists of weekday value offers of $3.99 Quarter Chicken at lunch and $5.99 Half Chicken at dinner along with the $12.99 Original Family Meal, Saturday and Sunday. Taco Cabana is similarly launching its own everyday value platform called TC Time. We think these platforms will go a long way in accentuating the quality of our offerings and the ability to enjoy our food at value price points. Note that these Pollo Time offers still have a favorable margin as we now have in place a very favorable chicken contract for 2019. We've recently announced that we entered into an agreement with DoorDash bringing them on-board as our delivery partner. For the fourth quarter, Pollo Tropical restaurant level adjusted EBITDA improved $3.1 million to $19.1 million. And as a percentage of restaurant sales, restaurant level adjusted EBITDA margins improved 330 basis points to 21% compared to the fourth quarter of 2017. Turning to Taco Cabana, comparable restaurant sales grew by 5.1% and we generated our ninth consecutive month of positive comparable restaurant sales growth at the brand in December 2018. NPS improved sequentially through the quarter with significant improvement in our core market, San Antonio where we operate over 40 restaurants. We continue to believe we are attracting new and loyal guests that will lead to continued improving comparable restaurant transactions. In the first quarter of 2019 through February 17, Taco Cabana's comparable restaurant sales increased 1.8%, Taco Cabana comparable restaurant sales of about 240 basis points better than Black Box fast-casual industry peer comparable restaurant sales through February 10th. We scaled back our Patio Program in early 2019 because of cold weather which we believe had a negative impact on comparable sales. We are planning to expand it again as the weather improves. Taco Cabana's financial trajectory generally improved throughout the year as we continued to evolve the guest base through our strategic repositioning away from the Quick Service segment and deep discount promotions to higher quality menu offerings that represent everyday good value. Taco Cabana restaurant level adjusted EBITDA improved $4 million to $8.9 million. And as a percentage of restaurant sales, restaurant level adjusted EBITDA margins improved 480 basis points to 11.8%. Restaurant level adjusted EBITDA margins improved 180 basis points sequentially from the third quarter of 2018. Overall, in the fourth quarter, we experienced revenue growth of 3.3% and consolidated adjusted EBITDA a non-GAAP measure as defined in our SEC filings of $15.8 million, an increase of 77% compared to the fourth quarter of 2017. I also want to acknowledge the departure of Lynn Schweinfurth our former CEO, who left -- CFO who left Fiesta last month. We wish her all the best in her recent move to Denver. In the meantime we have placed in Cheri Kinder, our long time Chief Accounting Officer and Interim CFO along with her finance team in leading the charge until we name a permanent CFO. You'll be hearing from Cheri shortly when she provides our financial review, but this search process is well underway. I would also like to publicly welcome Louis DiPietro, who joined us in December as a General Counsel and Corporate Secretary from Panera Bread Company, where he served a similar role for 12 years. His background includes two decades of experience and expertise in areas of corporate governance, SEC rules and regulations, contract negotiations, mergers, acquisitions, dispositions and restaurant refranchise. I am confident, Louis will serve Fiesta as well as we set our course for future growth and build long-term shareholder value. With that, let me turn the call over to Danny for a more detailed update on Pollo initiatives. Thereafter, I will provide an overview of Taco initiatives, before Cheri goes through our financial results.

[Danny Meisenheimer:]

Thank you, Rich. Since the onset of our planned implementation, our dedicated team has made significant improvements to the brand experience. We are now ready to leverage our accomplishments in 2019 to deliver results as we also plan for the long-term. During the fourth quarter, we laid the foundation for several key growth platforms. First, we implemented our new MyPollo digital loyalty platform in December. This app allows guests to find a location, order online, manage their points and redemptions and upload coupons among other things. We're now actively promoting the program using digital ads, social media, eClub mailings, in-restaurant POP and sign into local store marketing events. We believe MyPollo will help increase frequency and build and retain brand affinity. Also, for those that choose not to download the app, we're continuing to foster our eClub with promotional offers consistent the loyalty program, although eClub members will not be able to accumulate points. We've also formed a dedicated team to oversee our catering program, including both operations and sales and we're beginning to build our book of business. We rebranded our catering effort under Catering by Pollo Tropical and have refined the menu. We will further evolve our catering platform in 2019 to be even more competitive in the marketplace and to broaden the offering to appeal to different occasions and party sizes. We're also investing in 2019 in equipment to support this line of business with dedicated equipment for our catering healthiness, the introduction of the Bill’s Kitchen in Miami-Dade and new burritos. In the fourth quarter, we promoted Build Your Own TropiChops and family meals. And in addition, we celebrated our 30th anniversary with orchestral restaurant events and media outreach. As Rich noted earlier, we have an agreement with DoorDash to serve as our exclusive provider of delivery services. Delivery has now been fully rolled out in all of our stores. We can see the momentum building and we are excited as to the potential positive impact on our business. Our new chicken contracts kicked in during the fourth quarter and will be in place throughout 2019. This new contract will help us realize approximately $5 million to $6 million in cost savings for 2019, of which nearly all will benefit Pollo. Importantly, we continue to dictate the breed, feed and size of our chickens to ensure continued high quality. Turning to 2019, we are focused on building on our existing strategic priorities, including quality operations. A more effective staffing model has been put in place and equipment will be added to certain restaurants to support our growing crispy chicken platform and new product pipeline. We are continuing to roll out more portable POS tablets now with the capability of processing secure payments. We believe this will have a meaningful impact to speed of service in our drive-throughs. We will also begin testing kiosk in the first quarter. As Rich mentioned earlier, we are not simply waiting to see a sales lift from the new delivery catering loyalty platforms and anticipate that our Pollo Time offers will address the perceived price value opportunity every day. We will resume our restaurant remodeling in 2019 with 10 to 13 restaurants. Our intention is to upgrade the facilities to better match the quality of the food. We expect to invest about $3 million to remodel these restaurants. Our team is passionate about the state of the brand and the initiatives are underway in 2019. We believe we can build frequency and reach through our digital platforms, especially our new loyalty program. 2019 promotional calendar includes compelling product news supported by balanced marketing approach. Growing catering and delivery sales channels are additional significant opportunities for profitable growth. Focus on high quality execution should lead to improved speed of service. With that I'll now turn the call back over the Rich.

[Rich Stockinger:]

Thanks, Danny. Over the last two years we have made material changes to the Taco Cabana brand experience. We believe this repositioning of the brand will deliver sustainable sales and has improved our gross margin per transaction. In 2018, we experienced consistent improvement in sales and traffic trends. The fourth quarter NPS trended positively and margins are beginning to improve more effective cost management, sales growth and the closure of the unprofitable restaurants. During the fourth quarter, our Quesadilla and Shareables promotions included new and limited time product menus. In October we promoted the new Southwest Vegetable Quesadilla along with our entire Quesadilla product lines. In November and December we featured our new Shareables category which includes Kickin’ Nachos, Kickin’ Potato Skins, and our Trio Sampler. Also during the fall we rolled out our new Chicken Tortilla Soup. These promotions were supported by broadcast, outdoor, digital and social media. If you recall, in September, we rolled out our new TC! Loyalty Program system-wide as well as our updated online ordering platform and mobile app. Like Pollo Tropical for those who do not want to download or use the app, we continue to promote our email club offers that are consistent with the loyalty program. During the fourth quarter, we added an average of approximately 11,000 loyalty members per month and have consistently experienced a higher average check for loyalty members compared to the system. We're also excited by the opportunity to target our marketing efforts to individual loyalty members and to accumulate and analyze data which includes the detailed purchasing history of each member. Also like Pollo, we are planning to test in-restaurants sales order kiosk at Taco Cabana in 2019 and then the process of adding upgraded POS tablets at our Taco Cabana restaurants to securely process payments to increase sale through speed of service. We will shortly begin rolling out our delivery with DoorDash and we continue making progress implementing the infrastructure of our catering program. We are planning to remodel 10 Taco Cabana restaurants in 2019 and expect to invest about $3 million to remodel these restaurants. Improving our restaurant models and food and labor costs management without negatively impacting the guest experience is essential and an ongoing focus and priority of the brand. We are testing revised operating hours and are continuing to refine the way we manage food and labor. Updating our cooking guides to ensure consistent high quality products are being prepared throughout the day while reducing waste and optimizing staffing. In addition, we are increasing the ease of shift leaders to promote leadership development with the added benefit of reducing costs. Staffing open positions continues to be a challenge at both brands. We're addressing this challenge by investing in resources to improve recruiting, training and employ engagement and retention. We continue to be deeply committed to contributing positively to the communities where our restaurants are located. Some of our related initiatives include, pursuing more earth-friendly servicing and packaging materials, recruiting and supporting military veterans and providing hot meals to first responders and residents in need, assisting employees who have suffered losses or hardships to our non-profit Fiesta Family Foundation and providing donations to and volunteering at worthwhile organizations. In October, Breast Cancer Awareness Month, we were proud to have raised over $130,000 for Susan G. Komen Foundation by donating $1 for every piece of pie sold at Pollo Tropical and $1 for every loaded case of sold at Taco Cabana. We have accomplished a lot over the past two years, and we're optimistic about the future. We remain intensely focused on quality execution, increased transactions, margin expansion and long-term sustainable growth. With that, let me turn the call over to Cheri to go through our financials in greater detail.

[Cheri Kinder:]

Thank you, Rich. Good afternoon. Total revenues increased 3.3% from the prior year period to $167.6 million due primarily to comparable restaurant sales growth at Taco Cabana and new restaurants. Comparable restaurant sales at Pollo Tropical decreased 1.9% compared to a 0.1% decrease in the fourth quarter last year. This year's decrease consisted of a 6.3% decrease in comparable restaurant transactions and 4.4% increase in average checks inclusive of 4.3% in pricing. Sales cannibalization from new restaurants and existing restaurants negatively impacted comparable restaurant sales by approximately 60 basis points. Last year, Pollo Tropical recovered more quickly than other restaurant competitors in the market after Hurricane Irma. In addition, we spent considerably more on broadcast media in the fourth quarter of 2017 to rebuild momentum during the re-launch. More specifically, we spent $1.9 million more in advertising in the fourth quarter of 2017 compared to the fourth quarter of 2018. We believe this challenging comparison negatively impacted our comparable restaurant transactions in the fourth quarter of 2018. The Pollo Tropical restaurant level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings increased by $3.1 million and as a percentage of restaurant sales improved 330 basis points compared to the prior year period. Fourth quarter 2017 saw particularly high spend on advertising and repair and maintenance due to the Strategic Renewal Plan and the associated re-launch. As such, these increases were primarily driven by lower advertising expenses and lower repair and maintenance expenses. These increases were also driven by lower wages and related expenses and cost of sales as a percentage of restaurant sales partially offset by higher real estate taxes in the fourth quarter of 2018. As we mentioned last quarter, new contracts have recently put in place that reduced our cost of chicken during a portion of the fourth quarter. This and higher menu prices partially offset by menu offering improvements related to the plans, drove cost of sales as a percentage of restaurant sales almost 90 basis points lower in the fourth quarter of 2018 compared to the prior year period. Comparable restaurant sales at Taco Cabana increased 5.1% compared to a 7.4% decrease in the fourth quarter of last year. This year's gain consisted of a 9.6% increase in average check inclusive of 6.2% in pricing and positive sales mix associated with menu items and promotions with higher prices and a 4.5% decrease in comparable restaurant transactions. At Taco Cabana, restaurant level adjusted EBITDA a non-GAAP measure as defined in our SEC filings increased $4 million and as a percentage of restaurant sales improved 480 basis points compared to the prior year period. Similar to Pollo, Taco Cabana had higher spend on advertising and repair and maintenance costs in fourth quarter of 2017 related to the plan. Restaurant level adjusted EBITDA margins were positively impacted by lower advertising expenses, the lower repair and maintenance expenses as well as the benefit of sales leverage on fixed costs and lower medical benefit costs and cost of sales as a percentage of sales. These were partially offset by higher incentive bonus costs and higher real estate taxes in the fourth quarter of 2018. G&A increased $0.6 million to $13.5 million due primarily to severance and income settlement costs, system implementation, project advisory and consulting costs and investment in resources to build our off-premise business, partially offset by lower incentive-based compensation in the fourth quarter of 2018. The year-over-year comparison was also negatively impacted by favorable adjustments to Board and shareholder matter costs in the fourth quarter of 2017. During the quarter, consolidated adjusted EBITDA, non GAAP measure defined in our SEC filings increased $6.9 million to $15.8 million. In the fourth quarter we recognized impairment charges of $12.9 million and lease charges net of recoveries of $1.7 million. These were primarily related to 14 Pollo Tropical restaurants and nine Taco Cabana restaurants that closed in December 2018, nine of which were previously impaired. They were also related to adjustments to estimates of future lease costs for certain previously closed restaurants as well as impairment charges for four underperforming Pollo Tropical and Taco Cabana restaurants that we continue to operate. For the full year, the 14 closed Pollo Tropical restaurants contributed approximately $15.8 million in restaurant sales and approximately $5.2 million in restaurant level pre-tax operating losses including $2.2 million in depreciation expense. The nine closed Taco Cabana restaurants contributed $9.5 million in restaurant sales and $1.7 million in restaurant level pre-tax operating losses including $0.7 million in depreciation expense. 2018 capital expenditures totaled $57.9 million, including a $27.5 million for restaurant capital maintenance expenditures, including deferred and ongoing maintenance and new equipment for new menu platforms. $21.4 million for new restaurants and $8.4 million in technology and other corporate project expenditures including online ordering, loyalty programs, data warehouse development, and planned hardware upgrades. As of December 30, 2018, we were in compliance with all covenants under our senior credit facility, after reserving 4 million for letters of credit issued under the credit facilities, 68 million were available for borrowing. During the 2019, we currently plan to open three restaurants at each brand and capital expenditures are expected to be $45 million to $55 million, as we laid out in our press release. In addition to new restaurant development and ongoing capital maintenance, we will invest in remodeling 10 to 13 restaurants at each brand, upgrade our facilities including adding equipment to support new menu platforms and energy efficiency initiatives and catering equipment. Technology projects include rolling out portable POS tablets with the capability to accept secure payments, testing self service kiosk, upgrading kitchen video systems and other planned hardware upgrades. Thank you. We will now open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Will Slabaugh with Stephens. Please proceed with your question.

[Will Slabaugh:]

Thanks guys and sorry for the background noise. First question on Pollo, you’ve shown some nice improvement there on the top-line that seems to have taken a bit of a pause with the consumer. It would be helpful if you wouldn't mind showing any sort of cadence or what you sort of saw during the quarter and then end of the quarter for that period to the extent that you're willing? And then what happened, how would you sort of characterize the quarter itself at Pollo more broadly? And then what are you most positive of those initiatives that you’ll describe going on at Pollo? What are you most positive about getting those costs coming back to direction that you’d like?

[Rich Stockinger:]

Hi, Will. It's Rich. I let’s start there. In the fourth quarter we were going up against a very strong quarter of the year before. We were able to bounce back better than a lot of our competitors and Black Box et cetera after the big hurricane. So -- and as well as we spent a significant amount of advertising dollars in the fourth quarter that helped us get to bounce step back as quickly as we can. Because of the damage that happened because of Irma. In January this year, we should not have pulled away from the Pollo Time which we did. We put out the pinchos. The pinchos had done in the past for the brand was to drive transactions and clearly that did not work. We figured that out in the first several weeks. We’re able to get switched off to the Pollo Time program and we just could not overcome the weakness that we had the first several -- first three weeks, four weeks -- the first three weeks of January. It is now paying off. We've got the commercial going which reintroduces Pollo Time. And then especially been successful in driving increased traffic from where we were trending and transactions in our Miami-Dade market as well as in Broward.

[Danny Meisenheimer:]

Yes, just to add a little bit to what Rich just said, the opportunity in terms of recent weeks as that we now have delivery in all of our stores, as we mentioned in the press release that is effective with DoorDash and the new partnership. The catering and the opportunities with off-premise consumption is truly just coming online as the new sales agents are going into markets throughout the system. And we're seeing some really nice results from those efforts so far. And then the addition of the loyalty program which was really reliant on bringing on new management systems that have now become fully operational. At Pollo we have over 75,000 new members on the loyalty app and over 0.5 million on the email club and Taco has nice results with I believe 70,000 members on their eat club and over 280,000 on email. So these new initiatives are not coming along behind the price value message and then the add-on sales opportunities we have in the stores whether the pinchos or new soups, lemonades, those products of that nature.

[Will Slabaugh:]

Got it. Thank you for that color. One broader question if I could. You guys have done a good job in the past couple years of obviously trying both these brands around getting things going in mostly the right direction. And so I'm curious as you see the success happen and you get this -- your plan sort of underway and more or less kind of complete it I guess as we get towards the end of this year and into next year. Can you talk more about and sort of in game as you think about if there is one? Should we think about this as

[Rich Stockinger:]

Well. I can only talk about what the management team is to address and that's who we are. Right now I still think there is plenty of room in terms of increasing the unit level, average unit volume. Again we're going up against our competitors that have these programs in place for a significant amount of time. And that now includes loyalty which will drive transactions. It includes the catering program that not only drives the top-line but it drives the bottom-line. And with delivery we just started and we literally just started at Taco where we didn't have had delivery before. And it's already starting to show positive results from a sales perspective. Our margins we need -- we have we worked hard to get these margins up to I would call an industry leading margin at Pollo and Taco we've got more room to do. So right now it's going to be within the four walls. We've got limited growth right now organically and get these units the way we should be. After we do that it's going to be looking at growth organically and through franchise and licensing. I think the shareholder value is significant going forward if we just execute exactly what the two brands can execute and then down the road I just might go right now just to get these brands into a position where we can grow this and anything farther than that we have not addressed.

[Operator:]

[Operator Instructions] Our next question comes from the line of Joshua Long with Piper Jaffray with Piper Jaffray. Please proceed with your question.

[Joshua Long:]

Great, thanks for taking the question. In terms of thinking about some of the value offerings that you've shifted back to in order to drive some of that traffic. Are those similar or in line with what you've done in the past, have you had to adjust those or maybe sweeten the deal a little bit to cut through some of that noise, that we’ve seen here in the from some of your other peers in the industry? How are you thinking about that in terms of capturing the lion’s share from consumers?

[Rich Stockinger:]

Well from a Pollo standpoint, we've done in the last year $3.99 Quarter Chicken rice and beans to lunch, the $5.99 Half Chicken rice and beans to lunch, at dinner, weekdays and then on weekends we did the $12.99 Original Family Meal with rice and beans. I will be honest with you, it's driving it now just as much as it drove it last year. So we will keep that program going, we will look at it carefully especially outside of the core markets, where we may add or replace certain things. But that is in our core that is our meat and potatoes. It's right down the center of the lane, and our guest are responding to it, and with the chicken contract that we have this year, the gross profit -- the gross margin is still very favorable to us. And at TC, we're going to go start with some duos, we have $1.99 special two potato and a taco everyday all time, two shredded chicken tacos for $2.99, 2 gram beef tacos for $3.99, And it dozen bean and cheese tacos for $9.99. Try and again, we believe we have a great price value all the time. But we do believe based on the current environment, both with the quick service the fast-casual, as well as the Casual Dining segment that we need to put this out there to get the transactions back going in the right direction.

[Joshua Long:]

And maybe a follow up on that point is if the actual offerings or platforms are working and don't necessarily need to meaningfully change. Is there a number of impressions or maybe $1 spent in terms of advertising that might pick up to cut through some of that noise? Or do you -- should we think about it more as just having to really stick to your guns and/or in order to netting or or whoever else who I say that in terms of just keeping that messaging out there so your top of mind with your consumer.

[Rich Stockinger:]

We're going to stick to our guns but we're going to spend maybe a slightly a little less than last year because it's really the renewal program and starting that off but we're going after anything from digital, social, TV other forms of media and I'm really looking forward to the rollout of the loyalty program, the catering programs on both because we deliver the products that are the market wants, it’s what the customer wants. So real excited and again, looking forward to the results of the delivery and tracking that closely.

[Joshua Long:]

I think the last one from me. In terms of the remodels of the Pollo Tropical side, can you talk through maybe some of the big pieces there or what you're trying to accomplish, things you're going to touch, things that we might notice as we go back in -- or the consumer might notice as they go back into help drive some of that traffic in connection with the brands?

[Rich Stockinger:]

We're identifying those restaurants that are the oldest, the ones that need the refreshing in the front of the house. We've done a lot of work in the back of the house with the deferred maintenance, so the guests really didn't see that because we want to get started and restart a remodel program where you're going to start seeing some of that impact on the top-line.

[Operator:]

Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.

[Brian Vaccaro:]

Thanks. Good evening. I just wanted to circle back on a couple on the margin outlook. And I just want to clarify, you said you expect the ad spend to be down a little bit in ‘19 versus ‘18 is that consistent at both brands and are you speaking as a percentage of sales or total dollars in sales is coming down because of the closure so just wanted to be make sure we're on the same page on the ad spends comment?

[Rich Stockinger:]

Sure, the ad spend comment is both brands, I think last year we ended about 3.5% and we're going to be slightly lower than that this year. Again last year was the big push to be had with the launch of both brands.

[Brian Vaccaro:]

Yes, okay, perfect and really appreciate the color on the new chicken contract. Can you speak to any changes in the spec that fall within that new contract? And then also as it relates to the commodity inflation outlook for each brand, could you comment on those brands just the aggregate commodity inflation you expect?

[Rich Stockinger:]

Sure, in terms of the chicken we were lucky in getting the pricing in November, as you remember the glut was in the market. So we have sometimes it's better to be lucky than good. Hopefully we're both on that one. In terms of the other commodities, chicken is Pollo, I mean, it's basically chicken and produce are the big items, so we're fine there. And Taco, we've seen a little bump up we seen a bump up in steak but we're working on so we'll see a slight increase in the food costs but not significant. We've taken the pricing to cover that.

[Brian Vaccaro:]

Okay, thanks. And then just last one sort of that same angle, thinking about labor cost inflation at each brand I know there are some specific initiatives, especially in Taco Cabana from a labor scheduling perspective, but can you help us with how we should think about your labor cost outlook for each brand? Thank you.

[Rich Stockinger:]

The labor costs, again at Taco we kind of talk about a little with the shift leaders that -- and with the improvements that have been done with the management team. I do believe we're going to see it slightly favorable than last year, so it will an improvement. And that Pollo, a same thing, we've rebound the schedules, demanding guys regarding the frying program non-frying program, we're going to treat a slight uptick but it would not be significant.

[Operator:]

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