Fiesta Restaurant Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good afternoon and welcome to the Fiesta Restaurant Group Fourth Quarter and Full-Year 2016 Earnings Conference Call. I would now like to turn the call over to Raphael Gross, Managing Director at ICR. Please go ahead, Raphael.

[Raphael Gross:]

Good afternoon, everyone. Fiesta Restaurant Group’s fourth quarter and full-year 2016 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 must remind everyone 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 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 believe 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. Now, I would like to turn the call over to Danny Meisenheimer, Chief Operating Officer of Fiesta Restaurant Group.

[Danny Meisenheimer:]

Thank you, Raph, and good afternoon, everyone. We are pleased to have Rich Stockinger with us on the call today. Rich our newly appointed Chief Executive Officer and President has extensive experience successfully leading restaurant brands in both private and public companies. The management team is thrilled to partner with him to successfully grow our two brands that we believe have significant potential. Rich will make a few comments before we open up the call to questions today, but let me take this opportunity to officially welcome him to Fiesta. Our press release provides details of our Q4 and 2016 results so I won't restate it. Other than to say results were below our expectations and our new Pollo Tropical markets obviously did not perform as hoped thus far. As a result, we have a reset and a growth plan that we will refine further under Rich's leadership. This year the Company plans to slowdown development, focus on building consistent and sustainable growth, and to plan for the future. Specific goals for 2017 include the following. Improving operational execution and hospitality, evolving our menu strategy in building transactions through consistent quality of new and existing products, building off-premise transactions through third-party delivery and catering, increasing guest frequency with compelling loyalty programs, in the area of development slowdown the pace of recent growth in order to refine our site selection and market potential tools and develop a roadmap for the future, continue implementing our Pollo reimaging program in South Florida, identify organizational needs and structure to create success and refine our long-term strategy. Let me provide more specifics around each of these areas of focus. Improving operational execution and hospitality. We are committed to focusing on operational excellence while to support and minimize distractions in our restaurants, training and recertification of management and crew members is well underway as this hospitality training for our cashiers and dining room attendants. Development of more shift leaders continues to be an area of focus to ensure a great guest experience and to build a development path for future restaurant leaders. We believe this emphasis should also improve our ability to attract high quality team members and reduce turn over. We have recently rolled out an employee engagement program across the organization to further assist in this effort. We are implementing an emerging market revitalization plan at Pollo. In addition to the system programs I just mentioned, we are investing in brand ambassadors, additional labor and food quality to ensure great guest experience and the freshness product availability throughout the day. Evolving our menu strategy, we continue to focus on menu simplification with the goal of streamlining store operations, enhancing speed of service and the overall guest experience while improving financial results. Additionally, our refinements are intended to improve the presentation of the menu for ease of navigation, to highlight signature products and to emphasize new products. We have also removed products that are unpopular, hard to execute or less brand relevant. In addition, we will be adding nutritional information on all menu displays in the coming months. Product innovation and limited time offerings will continue to be part of our menu and marketing arsenal. At Pollo, we are regionalizing some items to broaden appeal and profitability in each of our markets. Finally, we are also investing in upgrading the quality of product offerings either through higher quality ingredients or through improved adherence to our operational and equipment maintenance procedures, increasing guest frequency with compelling loyalty programs. As online ordering and mobile app platforms are available system-wide at both brands, we are now turning our focus toward our loyalty programs. After successfully piloting our Pollo this loyalty program for several months in Orlando, we rolled out the program to our North Florida and emerging markets during the fourth quarter to further build frequency of visits within our current guest base. So far, our loyalty membership has grown to 25,000 members of which the majority we’re not previously rewards E-club members, a legacy program at Pollo. We will be launching loyalty across the balance of the system later this year. With learnings from Pollo’s program, we are now planning to pilot the Taco Cabana loyalty program this spring and implement system-wide later in the year. Building off-premise transactions through third-party delivery and catering, a new path to deliver off-premise business is third-party delivery. We have 17 Pollo restaurants currently testing third-party delivery and we are targeting a total of 80 by the end of the second quarter. Our intention is to continue rolling up delivery to additional markets as soon as we've completed the technological details with our delivery partners. Longer-term, we would expect delivery to be available across the system at locations that would best stand to benefit from this service. Taco will pilot third-party delivery in the coming months with the intention of rolling this offering out across the system, where appropriate later this year. Additionally, we have rolled out our enhanced catering program at Pollo and have hard catering managers to sell and support catering in each of the respective markets including Dallas/Fort Worth, Houston, San Antonio and Atlanta. In addition to adding dedicated catering managers, we have enhanced our online catering menu and ordering experience, improved our packaging and refined our processes and related [terminals]. Taco was currently in the process of enhancing its catering program in a similar fashion. Development, as I previously indicated, we’ve reduced 2017 company development to focus on higher return and lower risk opportunities with balance across the two brands. We believe this will facilitate better planning, execution and pacing surrounding new openings and better overall investment returns. We continue to focus on improving new restaurant level economics, while still delivering the quality about our guest expect from Pollo and Taco. These efforts include implementing new building prototypes that are both more efficient and lower in cost. In addition, we will update our site selection, sales forecasting and market potential tools for both brands and better analyze and target future opportunities. In 2017, Pollo development will be focus in Florida, where we plan to open 12 new restaurants throughout the state. For Taco, we are increasing our development pace in 2017 to 10 new restaurants and both existing and smaller Texas markets. Of these openings, four will be building conversions, including three Pollo conversions and a four from another QSR brand. Building versions are expected to require less investment compared to new buildings we construct and higher comparable returns. In addition, two of the new buildings will utilize our new smaller building prototype. This new prototype currently carries a lower investment cost of approximately $1.6 million and still delivers the full menu and brand experience. At Pollo reimaging program, in 2016, we remodeled nine restaurants in South Florida and five in Atlanta and continue to see results that meet or exceed our targeted returns. For 2017, we plan to reimage approximately 20 restaurants all in South Florida where we operate our busiest and most profitable restaurants. Refining our long-term strategy, as I previously mentioned, we are excited to work with Rich to refine our long-term strategy and to identify organizational needs, structure and focus to create long-term success. And hindsight Fiesta to simply not too far, too fast with the Pollo Tropical store development, this text our ability to consistently operate restaurants with a level of execution that build this great brand. In addition, site selection in some cases was not optimum. As a result, we lost both time and money and efforts in Texas and strongly believe in the model and expand some potential over two brands and expect our 2017 focus to strengthen our foundation for value creation and growth. With that, I will now turn the call over to Lynn.

[Lynn Schweinfurth:]

Thank you, Danny. Given the amount of detailed information that we disclosed today, including fourth quarter results, leadership and strategic updates in our Form 10-K, I will make my comments brief. On behalf of the management team, we would like to welcome Paul Twohig, our newest Non-Executive Board member to the Company and congratulate Stacey Rauch on her appointment as Non-Executive Chairman of the Board of Directors. Both Paul and Stacey have extensive successful experience in their respective functional areas in industries and we believe their leadership will further strengthen the results of the Company. We would also like to thank Jack Smith for his leadership and continued support and guidance. Let me remind you that the fourth quarter and full-year 2015 included one extra operating week, which contributed approximately $11.8 million in total revenues. Excluding the effect of the extra week in 2015 for comparative purposes, total revenues increased 2.1%, compared to last year during the fourth quarter. In addition to the sale comparison, the extra week negatively impacted our margin and profitability comparison. We quantified the estimated EPS impact of the extra week in 2015 at $0.07. Pollo comparable restaurant sales decreased 4%, which included a 7.3% decrease in comparable restaurant transactions and a 3.3% increase in average check. Hurricane Matthew negatively impacted comparable restaurant transactions growth by approximately 1.3%. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant transactions growth by approximately 1.1%. Average check was primarily driven by menu price increases that positively impacted restaurant sales by 1.8%. Mix was positively impacted by our higher price Churrasco steak promotion this year compared with a value oriented promotion to $3.99 quarter chicken value offerings in the prior year. Through the first seven weeks of the 2017 first quarter, comparable restaurant sales at Pollo decreased 6.2%. This compares to the prior year period when comparable restaurant sales were essentially flat. Turning to Taco, comparable restaurant sales in the fourth quarter decreased 3.5% as a result of the 4.5% decrease in comparable restaurant transactions and a 1% increase in average check, while menu price increase is positively impacted restaurant sales by 2.5%. Mix was negatively impacted by higher discounts and promotions related to multiple meal deals being offered this year compared to the prior year period. Through the first seven weeks in the fiscal first quarter 2017, comparable restaurant sales at Taco decreased 6.9%. This compares to the prior year period when we generated a comparable restaurant sales increase of 3.4%. In terms of quarterly restaurant expense and cost drivers, please refer to our earnings press release, which provides an explanation for each P&L line items on a consolidated basis. Unfortunately with negative comparable sales, sales deleverage negatively impacted profitability at both brands across fixed and semi-fixed operating costs. As a reminder, we disclosed a great deal of brand specific financial and operating performance in our quarterly earnings release tables and in our SEC filings. This information includes brand specific comparable and non-comparable restaurant, average restaurant volume and income statements line item details and variance explanations. In closing, we would like to thank our Fiesta team for their dedication and commitment to support and deliver a great guest experience every day. We continue to believe in the long-term potential of our business model and future profitable growth of our two brands. With that, I'd like to turn the call over to Rich, who would like to make a few comments after which we will begin Q&A. Rich?

[Richard Stockinger:]

Thank you, Lynn. To those that know me I look forward to working with you again. To those that do not, I look forward to meeting you and working with you in the future. I'm extremely excited to be here today, working with the 12,000 plus Fiesta team members on our unique-to-unique brands. With passion and commitment we plan on dissecting every aspect of Pollo Tropical and Taco Cabana to provide the best quality, value, and hospitality for our guests. We will look into the successes and the failures of the past to maximize the potential of this Company in the future. Our brands have so much potential which makes me bullish about the future of this Company. We will work closely with the Board on refining our approach to the business in both the short-term and the long-term. We will put together a very detailed strategic plan to maximize the results of our existing restaurants, expand widely and look for strategic opportunities. Our objective is to enhance value for our key stakeholders, our guest, our team members, our vendor and supplier partners, and of course, our shareholders. Since my first day as CEO of this great Company is tomorrow, please direct your questions to Danny or Lynn. Operator, please open the call for questions. Thank you.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Will Slabaugh of Stephens. Please go ahead.

[Will Slabaugh:]

Yes. Thank you. I wanted to ask a little bit more about the detail that you gave around the new stores in your release this morning or this afternoon rather. So should I gather from that that to the best of your knowledge are we losing roughly $12 million in operating income when you add up those two groups of new stores on an annual basis by leaving these newer markets stores open? Is that what you're trying to get across and then just kind of curious if that's not correct how we should look at that?

[Lynn Schweinfurth:]

Well we did disclose in our materials this afternoon, the operating losses associated with a couple buckets of our restaurants that we believe are at risk. And so we provided not only the operating losses, but some cash flow related information as well, so that information included pre-opening which certainly is one-time in nature and the other was depreciation which is the non-cash.

[Will Slabaugh:]

So should we be thinking about this as an ongoing situation in terms of evaluating those stores remaining open or is it something that we have a set period of time we're going to allow them to be opened while that process is ongoing or how should we think about your viewing of these restaurants?

[Lynn Schweinfurth:]

Will, I think we have a plan in place and certainly that plan will be refined with Rich's involvement on a go forward basis. But right now our models do pass the impairment model test and certainly those that have been in place for about a year's time, but we’ll have to continue to reevaluate the viability of the stores as we move forward and I can't really give you specific timeframe around that evaluation.

[Will Slabaugh:]

Okay. And just a quick follow-up on the quarter to date numbers that you gave. I think you said, down 62 at Pollo, down 69 at Taco. I'm curious what you've seen quarter to-date in terms of trends as it’s been if you outlined weeks, have [drawn] to the weakness or is there something else happening, and in particular we've heard some Texas counts have talked about weather being a little bit better, I would just help them out quarter to date, but it looks like that may be the opposite, so I'm curious kind of what you're seeing in this date as well.

[Lynn Schweinfurth:]

Well maybe I'll take a first stab at answering your question and hand it over to Danny. I know early in the year we did have an ice storm here in Texas, but that certainly have a negative effect in the early parts of the quarter. The other consideration you want to at least think about is we're lapping two of our most successful months currently. So in February when lent started sooner last year, we were on air the second week of February in terms of being on media and we haven't necessarily started the new promotional window until last week at Taco and this week at Pollo, so there's a little bit of a timing element associated with the second promotional window.

[Danny Meisenheimer:]

And just to add a little color to that, on the Pollo side, we’re completely comparing apples to oranges from an immediate standpoint. Advertising has already taken place at this point in time last year or we’re coming to the end of that from 2016, and in 2017 it does not begin until next week, so it’s a complete non-comparison on the media and the promotion as it relates to lent, and from a timing standpoint to for what Lynn said, we just went on here and with Taco and [indiscernible] promotion. So results are to be determined.

[Will Slabaugh:]

Thank you.

[Operator:]

Thank you. The next question is from Jeff Farmer of Wells Fargo. Please go ahead.

[Jeff Farmer:]

Thanks, Lynn. I apologize if I missed this, but so it sounds like you guys are not providing any guidance beyond the unit development for 2017, is that accurate?

[Lynn Schweinfurth:]

That is the accurate. In view of the uncertain restaurant industry environment today along with the new leadership that we've recently appointed, the Company has determined not to provide specific annual guidance for 2017 at this time.

[Jeff Farmer:]

Okay, and then well more specifically, so just one line item did the pre-opening number? Any help there because that was one of the things that people were pointing to as being much lower in 2017 versus 2016?

[Lynn Schweinfurth:]

Sure, and yes, I believe it will be a little over $3 million in 2017 in total.

[Jeff Farmer:]

Okay. And then I just to follow-up on Will's earlier question, and I think I heard your answer that you might not have a timeframe. But I am curious in reference to those two buckets that are underperforming in those units or those markets outside of Florida. How much time of those restaurants have to deliver improved results before you either move forward with some impairment or closure if necessary?

[Lynn Schweinfurth:]

I think it's really hard to give you a timeframe at this point in time.

[Jeff Farmer:]

Okay, thank you.

[Operator:]

Thank you. [Operator Instructions] The next question is from Joshua Long of Piper Jaffray. Please go ahead.

[Joshua Long:]

Great, thanks for taking my question. Why don’t you circle back to the extent that we can talk about the revived site selection model? How you're thinking about it and maybe even a lower cost prototype as well? The high level we had seen and talked about the Pollo brand coming into Texas and maybe being collocated with Taco Cabana and some cases you had sharing sites and sight lines. Curious if that kind of gets reset completely or just high level, how you're thinking about kind of what that site selection model might be from a changing perspective going forward?

[Danny Meisenheimer:]

Well, let’s start with the prototype design. First of all with Taco Cabana, what we've stated is that we're going to a smaller prototype design that we're using in the small Texas builds for this year and we look forward to seeing how that performs, not only from a sales standpoint, but from an investment standpoint. From a Pollo standpoint, that process continues. We've made a great deal of progress in terms of looking out how to lower the cost from that prototype design, but there is additional thinking that needs to be put into place. We're learning from our testing. We're learning from the changes that we've taken on with that particular unit, but we need more time before that is fully implemented from a reduction in cost standpoint. As it relates to site selection, this is day one of the new leadership. And one of the opportunities we have is for Rich to come in and take a look at the way we have developed, not only from site selection, but market selection and development pace, all the way down to people and so that process begins effective with new leadership. So to name it at this point in time would just be a guess, but the process does begin.

[Joshua Long:]

Understood, in terms of the Brand Ambassador investments you mentioned that Pollo, could you talk a little bit about that and maybe how that either supplements or changes marketing and kind of how the brand interface about the consumer going forward this year?

[Danny Meisenheimer:]

Brand Ambassador is can be a great help to the brand, because there a direct contact to the guest. And if you're in the developed markets, where you're trying to teach brand new customers, the brand new concept with the brand new menu, that outreach that direct contact and education between Ambassador to guests can be very helpful in terms of building an understanding as to who we are and unlocking the potential of the brand, because it's not the easiest thing in the world to teach new people new ideas when it comes to restaurants. So and they also provide hospitality in the dining room, beyond just menu education and brand education that was good to have that in the dining room beyond our servers who can delivering product to the table. So we're not only very happy about that, but they also help us get engage our guest in terms of signing up new royalty members, which we visit one of the cornerstones of our program going forward in terms of building frequency of visit.

[Joshua Long:]

Thank you. Could you provide a little bit of context on the menu simplification efforts in terms of how many items have come up-to-date? If you have any sort of sense as to what an optimized number of menu items or maybe fewer LTO’s, I guess how you are thinking about simplifying that menu on a go forward basis this year?

[Danny Meisenheimer:]

Well, from a menu simplification, one of the things we’ve looked at is, it’s not only products, but it’s SKUs and it’s just simplification of kitchen operation. So eliminating a handful of products can have a really nice impact in terms of simplifying kitchen operation, improving speed of service, increasing accuracies. So the product total in terms of number is single-digit, but the SKUs associated with that or at 20 or more, and we continue to look at ways to improve that in all of our operations whether it's in Florida or Texas or Tennessee.

[Joshua Long:]

Thank you.

[Danny Meisenheimer:]

And as far as promotional items, we will have six windows this year at Pollo, which is typical for us and seven, which historically is the same for Taco.

[Joshua Long:]

Thank you.

[Operator:]

[Operator Instructions] The next question is from Nick Setyan of Wedbush. Please go ahead.

[Nick Setyan:]

Hi. Highlighting the operating cash flow in Q4, would you be able to disclose that?

[Lynn Schweinfurth:]

We will be issuing our 10-K documents this afternoon. So you'll have a full view of our financial statements.

[Nick Setyan:]

Okay, and then what about CapEx requirements for next year?

[Lynn Schweinfurth:]

Yes. We’ve disclosed that in our prior Q documents and I believe they are also reaffirmed in the 10-K today, but generally capital expenditures will be between $57 million and $68 million and for new restaurants CapEx should be between $35 million and $43 million, for remodeling and capital maintenance between $14 million and $16 million, and then for other projects CapEx should be between $8 million and $9 million.

[Nick Setyan:]

Got it. So we are going to have I mean a pretty meaningful positive cash flow next year in terms of free cash flow and there is an opportunity for some leverage here as you kind of lower the CapEx requirement the building with the lower number of units et cetera. What is the thinking as a kind of lower growth business model here in terms of your capital structure around and an opportunity to take on maybe little bit more leverage and obviously the valuation of the shares perhaps invites of a buyback here?

[Lynn Schweinfurth:]

Well, I think everything is on the table and as we work with Rich on a go forward basis we’ll certainly take those items into consideration.

[Nick Setyan:]

In terms of the positioning of both brands, obviously the corrugate comps, you mentioned the comparisons are a little bit apples-to-oranges, but I suppose what is the near to medium term kind of thinking around value versus price? Is there a barbell strategy that perhaps is more about a fit in terms of having a little bit more on the value side et cetera. I mean what's the thinking there?

[Danny Meisenheimer:]

Well from a Taco Cabana standpoint, it really divides into sort of two camps. The first is the price value play, which has inherently been part of the brand and we continue to be so in the market - the weaker markets that we compete in. We feel it's the right thing to do. But there is also a new product or craveability and that comes in behind that to support it in terms of new products or what in a sense would be popular products or on core items that we make to bring back. From the Pollo standpoint, the new product side, we believe offers a great deal of opportunity for us and has historically been that way, but the price value piece is also extremely important at Pollo, but it’s inherent to the brand in terms of the pricing where the quality of food that you receive and when you put that combination together, we continue to believe that it’s extremely healthy offerings both new products and price value at Pollo.

[Nick Setyan:]

And Lynn, would you be able to comment on the inflation outlook on both labor and some costs for the brands?

[Lynn Schweinfurth:]

Sure. I can touch on those. I think with labor, we are expecting some inflation and that inflation is expected to be 3% or greater on each of the two brands. On the commodity side, we actually do believe that commodity costs are fairly benign this year over last. However, there are some chicken specifications that we're looking at to ensure great quality products, which might have some cost implications in the future.

[Nick Setyan:]

Thank you.

[Operator:]

Thank you. We have no further questions at this time. And with that, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.