Fiesta Restaurant Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Greetings and welcome to the Fiesta Restaurant Group Third Quarter 2015 Conference Call. I would now like to turn the conference over to your host today Ms. Lynn Schweinfurth, Senior Vice President and Chief Financial Officer. Thank you, Ms. Schweinfurth. You may now begin.

[Lynn S. Schweinfurth:]

Thank you. Good afternoon and thank you for joining our call. Our third quarter 2015 earnings release was issued after the market closed today. If you've not already seen it, it can be found on our website www.frgi.com under the Investor Relations section. Before we begin, I must remind everyone that our call today will include statements that are not based on historical information. These forward-looking statements include, without limitation, statements regarding our 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 we 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 our SEC filings. Please note that today's conference call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our 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 our earnings release. Now, I'd like to turn the call over to Tim Taft, President and Chief Executive Officer.

[Timothy P. Taft:]

Thanks, Lynn, and good afternoon, everyone. Even though, it's every operator's objective to not miss on expectations, we have for the first time in our history. And even though the performance is not up to our usual standards, we've got a lot to be proud of, and the reasons behind the miss, were a good deal of consideration. And so it's important to note that our business fundamentals remain strong and we're still on track to deliver annual operating targets that we set out to achieve in the onset of the year despite these hiccups. During the quarter, revenues grew by 10.8% as we benefited from the combination of 27 net company-owned restaurant openings as well as comparable restaurant sales increases at both brands. Pollo Tropical comparable restaurant sales grew 4.2% during the third quarter and 10.1% on a two-year basis, extending its track record of positive gains to 24 consecutive quarters. The growth consisted of a 5.2% increase in average check, but it was offset by a 1% decrease in comparable transactions as I will explain. Taco Cabana has been firing on all cylinders. Comparable restaurant sales grew 4.8% during the third quarter, which included a 0.4% decrease in comparable transactions that I too will explain in a moment, in detail. On a two-year basis, comparable restaurant sales were 8.3%. This extends Taco Cabana's record of positive comparable restaurant sales gains to seven consecutive quarters in 20 quarters of the past 21 quarters. Margin contraction led to only a modest increase in earnings growth compared to a year ago. And Lynn will discuss the cost drivers in a few minutes that are mainly consistent commodity increases and operational inefficiencies at our newest Pollo restaurants. I'd therefore like to concentrate on explaining our sales drivers and particularly the transaction declines at both brands. Let's start with Taco Cabana as its core reason for negative transaction was the avian flu related egg shortage and the impact of pricing on the breakfast day-part. As you're all aware, that dramatic nationwide egg shortage has caused the cost of egg to skyrocket. Although we are able to maintain our egg supply without interruption, we are forced to take significant price increases at the beginning of the third quarter on our egg-related breakfast menu items at Taco Cabana. The price increases were favorable to our check average, but negatively affected breakfast transactions. Note that prior to the mid-summer egg prices, breakfast had been the most significant transaction driver for the brand, and that momentum was erased with the price increase. Importantly, by the third quarter, we offered our guests some pricing relief to start the recovery effort of recapturing those lost breakfast transactions. October month-to-date comparable sales of Taco Cabana increased 1.5%. We're pleased that breakfast transactions are beginning to recover with an increase of 0.4% two weeks ago that preceded severe rain experienced in Texas over the past week. With respect to Pollo, the first factor that negatively impacted transactions in the third quarter was related to planned sales cannibalization of existing restaurants when we open up new restaurants. As we stated in the past, our comprehensive growth strategy included adding new Pollo Tropical restaurants in our existing markets that meet our investment return requirements and improve overall operating quality and brand awareness. As cannibalization release some operational stress from high volume restaurants and allows us to significantly grow market share, in the short term create sales cannibalization that negatively impacts guest traffic. In Q3, transaction comps were adversely impacted by cannibalization by nearly 1.5%. As more and more restaurants enter the comp base, we expect the impact to increase to a range of about 2% to 2.5% in 2016. Through this past Sunday, October month-to-date comparable sales were approximately 1% at Pollo Tropical. The impact of cannibalization to comp transaction was almost 2%. In addition, we intentionally tried to balance our October marketing window with minimal operational complexity as we rolled out various supply chain and IT initiatives, we believe it positively impact margins as early as Q4, and for years to come. While we've been able to manage the negative effect of sales cannibalization over the past two years, this pressure was amplified during the quarter by weather as we experienced much higher than normal precipitation in our core Florida markets during August and September with two tropical storms and a considerable flooding throughout the Northern part of the state. The effects of this weather led to decline in transactions of almost 1.5%. We continue to experience more rain in Florida than it's typical. To put a final point on how we're able to grow market share dramatically. Since 2012, we have grown the number of transactions in our three South Florida markets, Dade, Broward, and West Palm Beach counties by 4 million transactions. In 2014 alone, we produced over 1 million additional transaction in these three same markets. To round out our view of the Pollo transaction counts, we've also been under-spending on marketing in key South Florida DMAs in order to feed emerging markets that we're not yet or only recently became media efficient. This includes places like Tampa, St. Petersburg, Atlanta, Jacksonville, Orlando, and Nashville. Now, as Paul Hardy would say, now you know the rest of the story. Considering these factors, overall growth and demand for our product has actually been quite strong. We've successfully added new stores to existing and emerging markets and captured a larger share of our potential customers' wallets. Our intention in 2016 is to increase overall marketing expenditures as a percentage of sales, so that we not only spend what is appropriate in South Florida, but also invest and drive brand awareness in our newer markets including Texas. We believe the increase in media spending across all markets, especially our three key South Florida counties, coupled with newly created media efficiencies, will put us in an improved position to drive much needed awareness throughout our marketing footprint. In terms of brand initiatives, our R&D and supply chain teams have been focused on reducing our chicken cost, as there have been a contraction of chicken supply for smaller whole birds. This has caused related costs to increase substantially this year over last. Our current initiatives are centered around offering more dark meat chicken options and purchasing larger chickens for diced chicken needs, while ensuring we are delivering high-quality products. We recently rolled out these initiatives, which we believe will benefit in the fourth quarter and beyond. In fact, we believe chicken costs will drive down our overall commodity basket down in 2016 versus 2015. In particular, we believe increased marketing of Pollo that we discussed earlier, coupled with new product news at both brands, will help drive transaction growth in the coming year. In addition, we will be rolling out loyalty programs at both brands, continuing our remodeling efforts at Pollo and continuing to focus on off-premise transaction growth. These efforts in conjunction with our continued focus on consistency, quality operations and new restaurant development, should allow our company to generate meaningful growth in 2016. Turning our attention to other important business drivers, like human capital. Our people are the key to Fiesta's success and we therefore dedicated significant resources to properly train and engage our managers and team members. This paid great dividends during the third quarter, in particular, as we opened the largest number of restaurants in a single quarter with 15 openings. Guest surveys demonstrate that high quality execution is in place in our newest markets in Texas, where operating metrics are exceeding the brand in key areas measured, including speed of service, taste, cleanliness and friendliness. These are very encouraging results, and as we accelerate our new restaurant development into 2016, we will continue to enhance our recruiting process and our resources to attract, retain great talent and invest more in training restaurants to develop future managers within their own markets. Which leads us to development update. Through the end of the third quarter, we had opened up 28 restaurants of the 32 to 34 restaurants we have planned for this year. The 28 restaurants of course, include 15 aforementioned openings during the quarter, which consisted of one Taco Cabana in Texas, 14 Pollo Tropical restaurants. The Pollo Tropical openings consisted of two in Tennessee, three in Georgia, four in Texas and five in Florida. We're also converting the Cabana Grill outside of Atlanta into a Pollo Tropical restaurant which will result in a total of 11 Pollo Tropical restaurants in the Atlanta DMA by the end of 2015. We continue to test the non-24-hour format of Taco Cabana under the Cabana Grill logo in Jacksonville. Turning briefly to fourth quarter, we've planned an additional promotional window in November with a value emphasis starting November 2. We will launch the $3.99 chicken meal and the $9.99 family meal anniversary offers – chicken, rice and beans for both – our signature offerings. We believe, this promotion will improve the trajectory of comp transactions as we did not have the same marketing emphasis on the prior year period, and with these aggressive price points. For 2016, we'll pick up our restaurant development pace with 40 to 44 planned openings; all but four openings will be Pollo Tropical restaurants and almost half of the Pollo Tropical development will be in Texas with the balance in Florida and Georgia. Our development pipeline remains healthy and our human capital is primed and ready to grow our footprint in new and emerging markets as I've just indicated. Since Texas is a very important component of our development strategy, we thought it'd be worthwhile to discuss the state of the Texas economy. We realized that some within the industry have talked about pressure that they are experiencing related to oil. But from our vantage point, we're not seeing any change in consumer spending patterns to date, with the exception of the impacts of weather. We are noticing a little more competition for labor, nothing insurmountable, but in our estimation, a reflection of the growing and diversified business environment in the markets in which we operate. Texas economic metrics continue to be stronger than that of the overall national economy. Next, our Pollo Tropical reimaging efforts. Early in the third quarter, we completed the reimaging of two Pollo Tropical restaurants in Nashville that were originally built under the old prototype. Together with the two recently opened Big Blue restaurants in that city, we are now at the scale to be media efficient in this market and have just started our marketing push with overwhelmingly positive results thus far. The original two restaurants in Nashville generated same-store sales increases of between 5% and 9% in the third quarter. We're on schedule to reimage the Orlando market by year-end and have already completed the majority of our projects in the latter part of the third quarter. Lastly, let's talk about off-premise business. We've set a goal to double our current off-premise business over the next ten years and have positioned our first corporate director of off-premise consumption to spearhead this effort. Our off-premise business represents tremendous growth opportunity for us and we're committed to off-premise experience by better understanding how do our customers order, receive and consume our products. We're building our catering, to-go, and drive-thru sales by leveraging the successful introduction of online and mobile app at Pollo Tropical. For Taco Cabana, we're in the early stages of rolling out a similar app with plans to fully roll out the system-wide by mid-2016. Right now, Taco Cabana has its operations in Dallas-Fort Worth area where we have 46 restaurants. In closing, there are so many great things happening in the Fiesta. And we look forward to a promising 2016. We have accelerated development in 2015, opening 15 restaurants during the third quarter alone and continue to do so in 2016. We will be building greater brand awareness through additional investment in broadcast media and new Pollo Tropical markets and increasing weights in our existing DMAs. These efforts will perhaps make up for the strategic sales transfer we've created in most every market we serve. We will benefit from a more favorable commodity outlook beginning in 2016, which will help our cost of sales line considerably and allow us to increase prices more modestly than we have in the past year. With that, let me turn the call back over to Lynn.

[Lynn S. Schweinfurth:]

Thank you, Tim. As Tim mentioned, we opened more restaurants during the quarter than any previous quarter. And while these openings did stress our margin, that's expected. I continue to be impressed with the ability of our operating team to control margins, as well as they do. From a transaction perspective, we had some short-term challenges that I will further help to quantify. That being said, our two brands are extremely competitive in the marketplace and we continue to be focused on long-term profitable growth in the years ahead. So, let me next provide a summary of our quarterly financial results after which I will review our full year outlook and then walk you through our initial operating targets for 2016. For the third quarter, we grew total revenues by 10.8% to $172.1 million through sale contributions from new company-owned restaurant openings over the past year and positive comparable restaurant sales at both brands. Pollo generated comp restaurant sales growth of 4.2%, the growth consisted of a 5.2% increase in average check, but was offset by a 1% decrease in comparable guest traffic. As Tim mentioned earlier, third quarter comp transactions were negatively affected by sales cannibalization and rainy weather in Florida. Together these factors negatively impacted transactions by approximately 2.5 percentage points in the third quarter. Average check was driven by menu price increases that positively impacted restaurant sales by 5.4%. Taco Cabana generated comp restaurant sales growth of 4.8% which consisted of a 5.2% increase in average check which was partially offset by 0.4% decrease in comparable transaction. The decline was related to lower breakfast transactions as Tim explained which alone impacted comp transactions by about a 1 percentage point. Average check was driven by menu price increases that positively impacted restaurant sales by 4.3% as well as the positive change in sales mix of 0.9%. Once again the higher sales mix was due to the implementation of new menu boards in February which eliminated combo meals entirely and helped shift our guest ordering patterns to plate (17

[Operator:]

Thank you. Our first question is from Alex Slagle of Jefferies. Please go ahead.

[Alexander Russell Slagle:]

Hey, thanks. Question, I was wondering if you could walk us through the details of the Pollo same-store sales again, maybe just highlighting the cadence of the comp through the quarter and did that essentially follow the trend of the increasing rainfall in the Miami area and the steady increase in the cannibalization over the course for the quarter?

[Lynn S. Schweinfurth:]

Generally that's correct, but we started to see more weather in the latter part of August and through September. So that's when the weather impacts were greater. On a cannibalization basis, we quantified what the quarterly number was. The cadence, I might have to get back to you on, but we also disclosed what the October cadence is and October will come in at 1.9% negative impact to transactions related to cannibalization.

[Alexander Russell Slagle:]

Okay. Is there any rain or weather in the October as well?

[Lynn S. Schweinfurth:]

There is.

[Alexander Russell Slagle:]

Okay. And then on the cost of goods outlook, is that mostly chicken coming down? I think that's what you highlighted in your comments. I was just trying to...

[Lynn S. Schweinfurth:]

Yes, on cost of sales, when you get to the brand margins, you'll actually see a increase in cost of sales as a percent of restaurant sales at Pollo and that related to the step-up in cost for our chicken contracts this year. However, as Tim mentioned, in the fourth quarter we are expecting to see those costs come down and that's related to the chicken initiatives that he spoke about. On the Taco side, cost of sales did go up as well and that has to do with the increase in the egg cost that we spoke about.

[Alexander Russell Slagle:]

Got it. Thank you.

[Operator:]

Thank you. The next question is from Nicole Miller of Piper Jaffray. Please go ahead.

[Nicole M. Miller Regan:]

Thank you. A couple of quick number ones and then a big picture. But how many stores are in the Pollo comp base please.

[Lynn S. Schweinfurth:]

I believe it's 104 at the end of the quarter.

[Nicole M. Miller Regan:]

And you reiterated the CapEx for growth CapEx, but is it also the same reiterating for total CapEx for the year?

[Lynn S. Schweinfurth:]

Yes, that's absolutely fair.

[Nicole M. Miller Regan:]

Okay. And then as you exit the year, do comparisons get easier or more difficult, so we can put that into context with the quarter-to-date guidance that you've given us for Pollo and Taco, please?

[Lynn S. Schweinfurth:]

Well, we haven't really given any quarter-to-date guidance.

[Nicole M. Miller Regan:]

I didn't mean guidance. I kind of meant trend, sorry, wrong word. Sorry.

[Lynn S. Schweinfurth:]

Okay. And can you repeat your question? So, your question is how the balance of the quarter will play out?

[Nicole M. Miller Regan:]

No. How the balance of last year played out? So did things get better or worse last year, so we can understand if things are going to get easier or more difficult this year?

[Lynn S. Schweinfurth:]

Got it. Well, we did take a considerable amount of price last November of over 5%. And so that did help to drive sales sequentially in the quarter. But again, it was pricing related more so.

[Timothy P. Taft:]

And Nicole, this November versus November a year ago, we've got a pretty aggressive pricing event that's going to be taking place that will be backed by media. It's a price point that we have not used in quite a while. And so, we're putting, again, media will be high in that. So comparing that apples-to-apples versus the initiatives of a year ago, we feel strongly that on a comp comparison that should be beneficial to us.

[Nicole M. Miller Regan:]

And then just a last...

[Lynn S. Schweinfurth:]

And just as...

[Nicole M. Miller Regan:]

Sorry.

[Lynn S. Schweinfurth:]

Okay. I was going to highlight as well, just as it relates to last year versus this year, we'll be on air for an incremental marketing window in November. Tim mentioned that in his pre-opening comments. So that should help drive a better comparison in November.

[Nicole M. Miller Regan:]

Excellent. That's very helpful. And thank you very much.

[Operator:]

Thank you. The next question is from Will Slabaugh of Stephens. Please go ahead.

[Will Slabaugh:]

Yes, thanks. Wonder if you could talk about the decision to pick up unit growth, which I believe takes you to around 13.5% growth versus just below 10% for this year, so a nice little pickup. So what's kind of giving you the confidence there in what you're seeing depict that growth up into 2016?

[Timothy P. Taft:]

Well, first of all, it wasn't too long ago, it was March of last year was the first time we built a Pollo Tropical in Texas and at the end of this year we're going to have 23 in the state of Texas. We added two restaurants in Nashville to bring it to media efficiency and we've talked about it in my opening comments about how that market has responded very well to not only the reimaging but the fact that we now have four restaurants on the ground. The response in Texas to Pollo has been everything that we thought it would be and more. And the opportunities in Florida to build additional restaurants finally that were at media efficiency, we're getting to a point where we're going to have that many more media dollars to help drive top line. So the answer to the question is really twofold. And I will say that it has always been our goal to increase the cadence by which we would open up additional restaurants. And one of the biggest things that we had to do is get the team – the operations team staffed and ready for that and get them accustom to that kind of pace. And at the same time, the construction and development team had to ramp up and get their processes in place. So our goal is to focus on the brand and build more and we'll be talking about that in future quarters.

[Will Slabaugh:]

Got it. And just a quick follow-up, if I could, on the promotion of $3.99. Have you tested this price point before? I know that you said it's been a little while since you've rolled it out. I'm just curious if you're expecting that promotion price point to hurt your average ticket as you roll that out?

[Timothy P. Taft:]

Well, the first thing, we're not necessarily testing and we'll show it first in digital and then we can turn that on and turn that off very quickly. But we're going to be going on air in not all markets with $3.99. So it's like, for instance, in South Florida where the volume is the number one thing that you have to get past in the throughput, we will offer $3.99 in that market. So again in that market what we'll do is we'll offer a $9.99 family meal. So we'll be very selective in the markets. So we put $3.99 and then – because we'll make sure that those are the markets that can handle that kind of increased volume.

[Will Slabaugh:]

Got it. Thank you.

[Timothy P. Taft:]

And finally, Will, we use to run that some time ago, and the response has always been very, very good. We've never really felt the need to roll that out since then, but given some of the competition and everybody that is kind of acting little differently with respect to their discounting strategy, we're going to roll that out and get a chunk of our business back.

[Will Slabaugh:]

Understood. Thanks.

[Operator:]

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

[Jeff D. Farmer:]

Great. Thank you. Just understanding your weather and cannibalization comments earlier, I heard you loud and clear on that, but October same-store sales for both of your concepts and most every other restaurant concepts did slow in October. So I was just curious what's your read on the consumer is or potentially any other drivers of the weakness that we've seen in the restaurant sector over the last several weeks, any thoughts would be helpful.

[Timothy P. Taft:]

Yes. Jeff, I have to tell you that we're very reluctant to talk about weather just because everybody has a problem with weather. But when we talk three months from now and we will be talking about weather in October, people will have a hard time to remember exactly what we were talking about. And remember that hurricane called Patricia that tore through Mexico and came ashore in Texas and then went east and affected areas starting from Nashville down to Orlando. That's a considerable weather event that has impacted almost the entire marketing area. So you can't shy away from that. And I'd say that in Miami, it was raining again yesterday normally and that's unseasonable. Usually the weather is clear, but we still continue to have some bad weather. I don't believe we don't feel that it's anything other than what we have, as Lynn mentioned in her comments, kind of self-inflicted. The cannibalization has had an impact on transactions, but overall the number of transactions that we have created incrementally in Florida and Atlanta over the last three years is in excess of $8 million. So we're doing the right thing. We just got caught this quarter because of weather.

[Jeff D. Farmer:]

Okay. And then you touched on it, but again another popular topic on all these calls, accelerating the greater-than-expected wage inflation, literally almost every call it's been a hot topic. I'm just curious how you're thinking about it? And then I you are reluctant to use pricing or take incremental pricing based on the commodity outlook for next year. But I guess, A, how do you think about your wage inflation outlook heading into 2016? And if you felt you needed to use some pricing to help you offset some of that pressure, would you?

[Timothy P. Taft:]

Yes, absolutely, we would. And I think that in Lynn's comments she made that pretty clear that although our basket price is going to be going down because of the price of chicken and some of our initiatives they are going to be going down, we are not taking as much price as we normally could. We'd like to keep our powder dry. So if something like that should happen, we'll be prepared for it. The good news is that the two main states that we operate in, Texas and Florida, I don't think we'd be on the front or at the top of the list of the states that we'll see those kind of inflationary costs.

[Jeff D. Farmer:]

Okay. Thank you very much.

[Operator:]

Thank you. And the next question is from Nick Setyan of Wedbush. Please go ahead.

[Nick Setyan:]

Thanks for taking my questions. What is the menu price in the quarter-to-date period at Pollo? Is it the 5.4%, Lynn?

[Lynn S. Schweinfurth:]

Yes. We're currently at 5.4%, but once we roll off the pricing event for the full quarter, it should be closer to 2.6%.

[Nick Setyan:]

2.6% for the full quarter and that starts mid-November in terms of the rolling off?

[Lynn S. Schweinfurth:]

It starts early – yes, early to mid-November.

[Nick Setyan:]

Okay. And then we get down to about 1% in Q1?

[Lynn S. Schweinfurth:]

For Pollo we will likely take price early next year and right now I think the discussion is around February.

[Nick Setyan:]

So, I mean, when we're talking about 1% pricing at Pollo, if I'm not mistaken that's what you've said for next year, in terms of Q1 itself, what should Q1 look like?

[Lynn S. Schweinfurth:]

Well, Q1 should look a little less than 1%. 1% is the full-year assumption.

[Nick Setyan:]

Got it. Got it. So Q1 a little bit less than 1% and maybe progressively a little bit more as the year progresses?

[Lynn S. Schweinfurth:]

Correct.

[Nick Setyan:]

Okay. What was the weather impact in the quarter-to-date period Pollo and Taco?

[Lynn S. Schweinfurth:]

For the third quarter, we did quantify that in the earnings release, so we're a little over 1% at Pollo for weather, and in Taco actually bad weather occurred a little bit later. So we'll talk about that in the fourth quarter call.

[Nick Setyan:]

But in terms of the quarter-to-date period, you haven't quantified it?

[Lynn S. Schweinfurth:]

We have not, but I'd be happy to share the number being probably in the range to-date of 30 basis points to 40 basis points.

[Nick Setyan:]

And that's at Pollo or Taco?

[Lynn S. Schweinfurth:]

That's at Pollo.

[Nick Setyan:]

Got it. In October, weather was about 30 bps, 40 bps, and what about Taco?

[Lynn S. Schweinfurth:]

Taco, I might have to disclose that at a little later time, we're still working through some of the numbers, and we'll see what happens for the balance of the quarter as well.

[Nick Setyan:]

Got it. Okay. And in terms of the COGS in Q4, is there a potential step-up in COGS given the price point of the Pollo testing or Taco testing with the price point of $3.99 LTO?

[Lynn S. Schweinfurth:]

Actually, no, the cost of sales should go down for Pollo around those chicken initiatives we spoke about, so in that base, the cost of sales will actually improve in the fourth quarter from the third.

[Nick Setyan:]

Got it. When we talk about the media, an increase in media spend, is that inclusive of taxes at Pollo? What are we thinking about kind of media and taxes at this point?

[Timothy P. Taft:]

The first market that we'll – we'll move into this media will be San Antonio, that will be part of the – the latter part of 2016 and then you'll see some increased weights in Houston and in Dallas, but San Antonio is a market that is ready right now according to operations.

[Nick Setyan:]

Okay. When does the loyalty get rolled out?

[Timothy P. Taft:]

It's ongoing. I mean, (42

[Lynn S. Schweinfurth:]

Yeah, about mid-year, next year.

[Nick Setyan:]

So you've already started?

[Timothy P. Taft:]

There's varying aspects of the loyalty program that are really ongoing but the one that we referenced in our comments really starts in mid-year of 2016.

[Nick Setyan:]

Got it. So that's mid-year's 2016. And then lastly, in terms of the Taco Cabana or Cabana Grill testing, Jacksonville's ongoing in terms of the four openings next year, are any of those – any new kind of test markets for Cabana Grill?

[Timothy P. Taft:]

No, they're all going to be Taco Cabanas.

[Nick Setyan:]

Okay. Okay. And so what are we thinking about kind of what the testing there looks like and in terms of what we're thinking about the Cabana Grill as a concept and outside of Texas, the potential there?

[Timothy P. Taft:]

That's really one of the greatest news headlines that we've got to talk about with respect to Taco Cabana. Remember, the reason to come up with a concept outside of Texas non-24 hours, and call it something other than Taco Cabana, that decision or that direction really started about four years, five years ago, and the reason was because Taco Cabana was circling the drain, and it's been set addressed, it hadn't had any money spent on it. And over the last three years or four years, and last two especially, the reason for building a Cabana Grill or pursuing Cabana Grill, the reason has really evaporated because Taco Cabana now has improved its performance to such a level and there is opportunities inside the State of Texas with a new design that might allow us to move into C&D counties. The opportunity to grow in Texas is a much brighter proposition today than it's been. Cabana Grill has been a great incubator because we've learned a lot about menu, about kitchen equipment, about layouts, designs that we're incorporating all that into the Taco Cabana – the design. But, again I, Nick, the great thing about Taco Cabana, and the resurgence as of late is that, it's a viable brand that is capable of standing on its own.

[Lynn S. Schweinfurth:]

I think the other thing, I would just reinforce that Tim did mention earlier is, next year we're going to be on media with new product news and on the Taco side, some of those new products were actually developed by Taco or by Cabana Grill.

[Timothy P. Taft:]

Yeah.

[Nick Setyan:]

Okay. And just kind of a final question. The guidance for next year in terms of the comp, I mean, at both ground given the pricing that you mentioned, implies a significant positive transaction trends, especially at Pollo, I mean, when you're talking about going against a 2% transaction run rate, I guess, kind of maybe you could talk about some more specific drivers, I mean, media, aside from media, I guess?

[Timothy P. Taft:]

Well, let's – and I want to challenge the idea that media is not necessarily a big idea and I will answer the question about the other things, Nick, but keep in mind that over the last three years – two years to three years especially, we have been taking money from the big three counties down in Florida, Miami, Broward and Palm Beach. And we've been taking money away, we've been stripping media dollars and redeploying those to these emerging markets. So, those markets that I mentioned are somewhere around half of the total sales, and we have been not spending as much money as they've been generating. So, that is – that's a huge opportunity to drive sales in what is essentially half of the restaurants that we have especially – essentially the highest volume restaurants. In addition to that, because of everything that we've done over the last two years, we're in an opportunity so all of those other outline markets, the other ones in Florida that have never been media efficient are now media efficient. So will be able to stand on their own next year, so you'll have not only incremental dollars going into the existing DMAs that are now media efficient, and you'll have incremental dollars going into promote your highest volume markets. So the accumulation of all that effect of media, we believe that it's going to have a strong impact on it. One of the things that we have been doing over the last couple or three years, because our volumes have been increasing so much and looking at throughput, we have not done really – the R&D department, although they do unbelievable work, we've been taking and repeating the same kind of promotions. You'll see more innovation next year for Pollo. You'll see LTOs, and you'll also see a very strong push towards not only the menu, but also a push towards improved operations as well as labor. Do you have anything to add, Lynn?

[Lynn S. Schweinfurth:]

Yeah, actually, we spoke about remodels earlier, but we're continuing our remodel program at Pollo. We'll complete 15 restaurants in 2016. We also continue to focus on off-premise, and Tim already mentioned that, but that continues to be a push for us. Online, app, helping to drive that type of business, including catering and then, in terms of some of our newer markets, looking beyond broadcast media in Georgia and certain parts of Texas next year. So, we'll not only have the benefit of greater media wave, so we're also going to have incremental markets where we've seen in the past the ability to drive sales very materially, when we go on media for the first time and thereafter.

[Timothy P. Taft:]

And Nick, I'd offer one last thing that not to ruin the surprise by marketing, but you'll see a new campaign, an evolved campaign that will be being unveiled for Pollo beginning in 2016.

[Nick Setyan:]

Perfect. Thank you very much.

[Timothy P. Taft:]

Thank you, Nick.

[Operator:]

Thank you. The next question is from Brian Vaccaro of Raymond James. Please go ahead.

[Brian M. Vaccaro:]

Thanks, and good evening. Just wanted a couple of quick clarifications and following up sort of on the October comp trends and appreciate the estimate, Lynn, on the weather. But I'm trying to get my head around sort of the slowdown at Pollo a little bit. And I guess, is there anything worth to highlight from a macro perspective, as you look across the regions, maybe parsing out South Florida specific to October or even the latter part? Just thinking about, is it softness concentrated in South Florida and the other markets are holding it better. Maybe an update on sort of that recovery you were seeing in consumer spending in South Florida sort of way for you to get at that? And are you seeing that recovery sustained or has it stalled out for some reason?

[Timothy P. Taft:]

Well, interestingly enough, it's a tight rope, Brian, that we've been walking over the last couple years with borrowing money from South Florida and spending it on the other emerging markets. The interesting thing is that, when you look at Broward, Dade and West Palm Beach, those markets are doing well. But markets that have not responded well because of the cannibalization are all the outlying markets that once have not yet been media efficient. Those are the ones that are really a drag on the system, and the reason for that is simple math. We have not been the top-line awareness in those markets because we've never been on TV, has not been high enough really to absorb immediately the cannibalization impact of new restaurants. So, when you take a look at it, our South Florida markets are doing very, very well. It's really the new markets that are now most recently media efficient the ones that are really a drag.

[Lynn S. Schweinfurth:]

And I think the only other thing I would add is, the promotion we did this year was not as impactful as the prior year promotion, but part of that was also intended because we're rolling out a lot of initiatives to the restaurants. So, we wanted to rollout something that was easy to execute and that has been done before, but did not have the same punch as our prior year promotion.

[Brian M. Vaccaro:]

Okay. That's helpful. I'm shifting gears to the Pollo Tropical store margins in the third quarter, down the 140 bps, I think you said. Can you help kind of parse out what the comp based margins were versus the non-comp to get a better understanding of the inefficiencies on the new units?

[Lynn S. Schweinfurth:]

Well, certainly, most of the restaurants have the chicken impact, but then those are exaggerated of course in new restaurants, because there are inefficiencies in cost of sales in new restaurants on the cost of sales line item as well. On the labor line, certainly the new restaurants were the ones that drove the overall labor impact on the margin, which was negative compared to some preceding quarters, but also intended and understood. I think the third category was rents. Obviously, we had a whole bunch of stores opening up in the quarter, and we're going into high profile real estates that are on an absolute basis typically more expensive than our other sites, and we're opening up stores at lower sales volumes versus the system. So, the new stores were really the drivers on the drags of margin.

[Brian M. Vaccaro:]

Okay. That's helpful. And then one last one from me. I wanted to ask about the food cost inflation outlook in 2016, I wanted to just confirm, I heard correctly, that you said slight year-on-year inflation at Taco and deflation at Pollo, I was wondering if maybe you could isolate the impact of the savings from the changes in chicken specs that I believe you said are rolling sometime in fourth quarter?

[Lynn S. Schweinfurth:]

Yeah. They're actually already in place in our restaurants, and there's a couple more initiatives we're looking at. But we won't see a benefit in the fourth quarter and then those will carry forward next year. Generally, I will tell you that chicken is really the biggest driver of our commodity basket next year. Most of our other pricing isn't too much different than this year. There's some ups, some downs, so it's really, primarily being driven by chicken, chicken being favorable next year over this year.

[Brian M. Vaccaro:]

And are you – last one just, are you contracted on all of your chickens, some of it for 2016?

[Lynn S. Schweinfurth:]

We're contracted on most of it.

[Brian M. Vaccaro:]

Okay. All right. Thank you.

[Timothy P. Taft:]

Thanks, Brian.

[Operator:]

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