Fiesta Restaurant Group Inc (FRGI) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Fiesta Restaurant Group's second-quarter 2012 earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Tim Taft, Chief Executive Officer and President. Please go ahead, sir.

Good morning. Before we begin, I'd like to formally welcome everyone to Fiesta Restaurant Group's first earnings call as an independent public company. As you know, the spinoff from Carrols Restaurant Group was completed on May 7 of this year, and I can assure you that for me and the entire team, the excitement has yet to wear off.

As the first official order of business today, I want to welcome Lynn Schweinfurth, our new Chief Financial Officer, and announce that with her appointment, Fiesta's senior management team is now complete. By way of background, Lynn has spent most of the past 20 years in both restaurant and retail businesses, and in that time has developed financial management and leadership experience that we believe will provide us with significant value as we move forward with our strategic plans. Most recently, she worked for Winn-Dixie Stores Inc., but perhaps many of you are familiar with her from her tenure at Brinker and Yum Brands. We are very excited she has joined our organization, and I look forward to you all getting to know her better over time.

I'd also like to thank Paul Flanders, the CFO of Carrols, for his work before and through the spinoff, as well as for serving as our interim CFO until Lynn's appointment on July 16. Paul will also be available during the Q&A portion of our call to answer any spinoff- and transition-related questions as needed, and we appreciate him joining us today.

Finally, I'd also like to acknowledge John Todd, who recently joined Fiesta as our CDO. The Chief Development Officer role is new to our Company, but one we view as critical given our commitment to grow our two brands, maximize profitability, and expand both efficiently and strategically. John is being charged with all facets of Fiesta real estate strategic development, including identification of new target markets, site selection, design, and construction of the new restaurants, and the upgrading and re-imaging of existing facilities. In addition, he'll work directly with me on various franchise initiatives.

I'd now like to turn the call over to Lynn Schweinfurth for a few preliminary comments before we go into the business results.

Good morning, and thank you, Tim, for that introduction. First, I would also like to thank Paul Flanders and his team, who have been very helpful to me since I joined the Company. I am very excited to be a part of Fiesta at this early stage of its development as a separate company. I sincerely believe that this company has exceptional long-term growth potential that will be realized, and I am committed to seeing this through.

By now everyone should have access to our earnings release, which was issued earlier today. If you have not already seen it, it can be found on our corporate website at www.frgi.com under the Investor Relations section.

Before we begin, I must remind everyone that our discussion today, including Tim's opening remarks, may 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, budgets, 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. Before I dive into the numbers, I'd like to turn the call back over to Tim for some brief overview comments on the business.

Thank you, Lynn. I am very pleased with our second-quarter results, which reflect our compelling business model. We've got two brands that are posting comparable restaurant sales increases in the mid to high single-digit range. We are effectively managing our costs and are generating profitable growth.

We are also investing in our restaurant base by developing new restaurants with compelling results to date, remodeling our Taco Cabana restaurants to further the brand evolution very much in progress, and pursuing high-quality franchisees to develop restaurants internationally. Trends at Pollo Tropical are among the strongest in the fast casual segment, even against the backdrop of a slow economy.

Pollo Tropical's comparable restaurant sales were a robust 7.8% during the quarter, driven by an increase of guest count of 6.9%. This result is exceptional, considering that we grew comparable restaurant sales in the prior-year period by over 10%. Promotions during the quarter focused on our ever popular TropiChop, which is a customizable bowl containing rice, veggies, and beans, served with a choice of grilled chicken, pork, or shrimp, finished with fresh toppings from our salsa bar.

At Taco Cabana we experienced a comparable restaurant sales increase of 4.5%, which was the same increase in the prior-year period. Sales growth was driven by an increased average check of 3.8% and guest traffic count of 0.6%. We promoted hickory-smoked brisket in April and May, while in June we introduced to chipotle corn Street Tacos.

Priority initiatives are focused on building sales, both on and off premise, including home meal replacement and by delivering an elevated brand experience at a great value. This experience is driven through quality products and innovative menu, an energetic and fun atmosphere, and distinctive service. I believe our focus and execution against these initiatives contributed to our successful lap of formidable comparable restaurant sales from last year.

In terms of managing margins on profitability, we are working to realize operating leverage on sales through purchasing and supply chain initiatives, managing our commodity exposure, and executing operational discipline on key cost categories, particularly food and labor. During the second quarter we opened up 4 Company-owned restaurants -- three Pollo Tropical, including one in Atlanta, Georgia, our second in that state; one in Jacksonville, Florida, a third in that city; and one in Green Acres, Florida, which is located in the Palm Beach market. We also opened up a Taco Cabana in San Antonio, Texas.

In our estimation, these are all high-quality sites which we believe will demonstrate our ability to build long-term relationships with a broad customer base. We selected these sites with our refined selection criteria of high-profile sites in areas with higher household incomes. This strategy has already proven successful with the stores we opened since late 2010, and we think it greatly increases the overall development potential of our brands.

Since the end of the second quarter we've had 2 restaurant openings -- 1 Pollo Tropical restaurant opening in the Miami market, and 1 Taco Cabana opening in Allen, Texas, bringing our total number to 6 for the year. During the balance of the year, we plan to open 4 to 6 additional restaurants, for a total of 10 to 12 new restaurants opening in 2012.

6 restaurant closures we planned in 2012 already occurred in the first quarter. On a related note, we continue to pursue international franchise development as a longer-term growth strategy with both new and existing franchisees. Our franchise base, which is primarily international, now extends to 40 locations across 8 countries, and we believe that over time, what today is a small revenue stream may become an increasingly important, high-margin business segment.

To build our presence, we are teaming with experienced local business partners who are actively involved in the food service industry and that provide local insight and expertise. Late March we opened up 2 franchise restaurants in Costa Rica and have begun to build our presence in Panama. In addition, we signed multi-unit development agreements with new franchisees in Guatemala and another new franchisee in India.

Closer to home, the focus of our multi-year remodeling program is now centered on Taco Cabana, and we are updating our older units in San Antonio and Houston to reflect the clean, contemporary look that has been a hit with both guests and prospective developers alike in areas like Dallas/Fort Worth and Austin, where we remodeled our restaurants in 2011 and earlier this year in 2012.

Taco Cabana's interiors are being updated with bright colors, contemporary food photography, inviting new salsa bar, wood furniture, flat-screen televisions, and free wi-fi. Patios are also getting new seating and sunshades using the unique papel picado design element.

In addition to the physical improvements, we're also elevating the level of service. For instance, guests no longer pick up their order at the counter. Instead, hosts deliver orders right to the table and assist the guests throughout the dining experience. We will continue our brand evolution at Taco Cabana with our remodeling program in San Antonio and Houston, which we expect to be complete about this time next year.

Overall, we had a very successful quarter. We completed our spinoff from Carrols, which we believe will allow our Company to pursue its own strategies and grow at a faster pace as a stand-alone organization. My senior management team is now fully in place and is proactively planning the thoughtful transition towards becoming a self-sufficient organization with a commitment to minimizing disruption to our operators while maximizing effectiveness and profitability.

Financially, we experienced strong sales and operating profit performance during the quarter, which I will now ask Lynn to further elaborate on. With that, I'm going to turn it back over to Lynn.

Thanks, Tim. Let me now provide an overview of second-quarter and year-to-date financial performance.

Like Tim, I was very pleased with our recent financial results, which met our own high expectations. Comparable restaurant sales growth was strong. Additionally, the Company's continued focus on leveraging sales by effectively managing margins played out in the quarter. In addition, the Company continues its efforts to strategically invest in our existing restaurant base and in new restaurant development.

For the quarter, total restaurant sales increased 6.3% to $128.8 million from $121.2 million as we benefited from strong comparable restaurant sales and saw guest traffic growth at both brands. Cost of sales improved by 65 basis points to 32.2% of restaurant sales due to menu price increases and effective supply chain management that helped to mitigate commodity inflation, which was modest.

Our supply chain team continues to be proactive in identifying cost savings and cost avoidance opportunities, blocking in prices at the right time when it makes sense, and leveraging the size and scale of both brands for better overall pricing. In fact, we have opportunistically locked in many of our material commodity purchases through the balance of the year, resulting in expected low single-digit cost inflation.

Restaurant labor costs improved by about 50 basis points to 26.6% of restaurant sales as we leveraged higher sales volumes on fixed labor costs and experienced lower medical claim costs. Rent expense increased $1.2 million to $5.4 million in the second quarter of 2012 compared to the prior-year period.

As previously disclosed, at the time of the spinoff sale leaseback transactions that were originally classified as lease financing obligations qualified for sale treatment, and the related leases as operating leases. Rent expense is being incurred for these leases as of the spinoff date, and the impact in the second quarter was an increase in rent expense of $1.1 million. This increase was offset by $1.6 million in reduced interest expense, and $0.3 million in reduced depreciation expense.

Other restaurant operating expenses improved by about 35 basis points to 12.7% of restaurant sales as a result of higher sales volumes on fixed operating expenses and lower utility expenses, particularly offset by higher preopening expenses associated with new restaurant development and expenses associated with our remodeling initiative at Taco Cabana.

General and administrative expenses increased to $10.5 million compared to $9.1 million in the second quarter of 2011. These expenses were higher due primarily to the hiring of certain Fiesta management personnel. Additionally, there were some legal and other costs incurred in connection with the spinoff.

Depreciation and amortization expense was $4.4 million in the second quarter of 2012 compared to $4.9 million in the second quarter of 2011. This reduction of $0.6 million was primarily due to the elimination of depreciation expense of $0.3 million that was the result of the qualification of sale treatment for sale leaseback transaction.

So based on all the preceding results and drivers, income from operations increased over 25%, to $12.9 million from $10.2 million. Interest expense increased $1.5 million to $6.3 million in the first quarter of 2012 due to our refinancing activities in the third quarter of 2011 that included the issuance of $200 million of senior secured second-lien notes that are due in 2016.

This increase was partially offset by $1.6 million in reduced interest expense due to the qualification for sale treatment of sale leaseback transactions. Income tax expense, inclusive of discrete items, was $2.6 million, which was derived using an estimated effective annual income tax rate for 2012 of 42.7% compared to income tax expense inclusive of discrete items of $1.8 million in the prior-year period, derived using an estimated effective annual income tax rate for 2011 of 37.3%. The 2012 estimated effective annual income tax rate of 42.7% includes the negative impact of the current elimination of the work opportunity tax credit.

Net income for the second quarter of 2012 with $3.9 million or $0.17 per diluted share compared to net income of $3.6 million or $0.16 per diluted share in the second quarter of 2011.

Turning to year-to-date results, there are a few items to highlight. First, G&A. Equity-based compensation on a year-to-date basis is $1.2 million, which included $0.4 million of expense related to the accelerated vesting of restricted shares held by the prior Chairman of the Board of Directors compared to $0.9 million in the prior-year period. In addition, the Company has also incurred $0.8 million of spinoff-related expenses.

The Company recorded year-to-date impairment and other lease charges of $6.9 million, $5.9 million attributable to the closure of 5 Pollo Tropical restaurants in New Jersey in the first quarter, compared to an annual charge of $1.1 million in the prior-year period.

Turning to the balance sheet, during the second quarter we exercised a purchase option set forth in the leases of 5 of our Taco Cabana properties. As a result of this transaction, the Company reduced its lease financing obligations by $6 million in the second quarter.

In addition, as the result of the classification for sale leaseback accounting during the second quarter of 2012, the Company removed from the balance sheet the associated lease financing obligations of $114.2 million, property of $80.4 million, and deferred financing costs of $1.6 million. At quarter end total outstanding debt was $201 million, including $1 million of capital leases.

The Company is in compliance with all covenants under our senior secured credit facility and the indenture governing these senior notes. After reserving $9.4 million for letters of credit guaranteed by the senior secured credit facility, $15.6 million was available for borrowing at the end of the second quarter.

Year to date, net cash provided from operating activities was $15.9 million, and our cash balance was $2.7 million at the end of the quarter. As previously mentioned, during the second quarter we exercised a purchase option set forth in the leases of 5 of our Taco Cabana properties. We purchased those five properties for approximately $6 million, and we are actively marketing 4 of the 5 properties for sale leaseback, and hope to conclude a transaction in the coming months.

On a year-to-date basis, Fiesta's capital expenditures totaled $17.4 million -- $10.4 million for new restaurant development; $3 million for restaurant remodeling; and $3.5 million for capital spending, primarily associated with restaurant maintenance.

Turning to segment results, Pollo Tropical restaurant sales increased 8.5% to $56.6 million compared to the second quarter of 2011, due primarily to a 7.8% increase in comparable restaurant sales, which consisted of a 6.9% increase in guest traffic and a 0.8% increase in average check. The increase in average check resulted from a 2.9% increase in menu prices, partially offset by sales mix. In addition, 3 restaurants opened during the second quarter.

Adjusted segment EBITDA for our Pollo Tropical restaurants increased to $10.5 million in the second quarter of 2012 from $9.5 million in the second quarter of 2011, as the brand leveraged fixed costs on higher sales. Adjusted segment EBITDA was negatively impacted by $0.4 million in rent expense associated with the qualification for sale treatment of the sale leaseback transactions in the second quarter of 2012 compared to the prior-year period.

Taco Cabana restaurant sales increased 4.4% to $71.6 million compared to the second quarter of 2011, due primarily to an increase in comparable restaurant sales of 4.5%, which consisted of a 0.6% increase in guest traffic and a 3.8% increase in average check, of which 3.7% was related to menu pricing. 1 restaurant opened during the quarter.

Adjusted segment EBITDA for our Taco Cabana restaurants was $6.9 million in the first quarter of 2012 compared to $7 million in the first quarter of 2011. Adjusted segment EBITDA was negatively impacted by $0.7 million of rent expense associated with the qualification for sale treatment of the sale leaseback transaction in the second quarter of 2012.

We continue to expect fiscal year comparable restaurant sales to increase approximately 6% to 7% for Pollo Tropical and 4% to 5% for Taco Cabana. With that, I'd like to open up the call for questions that Tim, Paul, and I would be happy to respond to.

(Operator Instructions) Andrew Gadlin, CJS Securities.

Good morning. Congratulations on a very nice quarter.

Thank you, Andrew.

Was wondering, in regards to the new restaurants, if you could update us on how they are developing. Have they mirrored in the -- obviously, they're pretty new, but have they mirrored your results in Jacksonville and Atlanta in the early going?

Well, we are happy with the results thus far. It's opened up at a different time of the year, but we're happy with the sales, and we're happy that -- you know, any time you can have a restaurant open up in a new area that is averaging -- higher averaging of volume than the system averaging at volume, we are pleased with that.

And so -- but it is above the system-wide average.

Yes, it is.

Okay. Also wanted to ask about the competitive dynamic. There are a number of other restaurants targeting the Latin food market. How do you see that impacting you or shaping up?

Well, there's no doubt that there are a lot of people in the segment. Two things. One, in Fiesta's Pollo Tropical, we believe that we are extremely differentiated, that there is really nobody out there that is in that space, when you look at our menu mix from top to bottom, and our quality of our food, and our service mechanisms.

At Taco Cabana there is no doubt that there's a lot of people in the Tex-Mex segment. We like the position that we are in, because there is -- I'd say that the epicenter of Tex-Mex is San Antonio, Texas; we've got a good number of restaurants in that marketplace, and we still have extremely high averaging at volumes.

Again, differentiated versus our competitors in that, once again, we have -- all of our proteins are grilled fresh, and our sauces, rice, and beans are made 24 hours a day. So it's those points of difference that we see continuing to help set us apart.

Thank you -- and just a housekeeping question. Are you still using Carrols for any of your back-office services?

Yes, we are. The majority of our accounting and other support functions are being provided under the transition services agreement.

And how far do you -- or how long do you expect that to continue?

Well, various aspects will continue. Some shorter term and some longer term, but certainly that's in process as the management team has just been established, and we're actually game planning right now our transition plan.

Andrew, our transition services agreement is for up to three years. Our goal, as Lynn said, is to transition out. We have -- each of those individual disciplines that is currently being prepared for by Carrols, we provide them with a 90-day out when we think that we're going to be able to go live on our side, and then we just transition one at a time.

Got it. And then, finally, do you have any figures for July in terms of same-store sales growth?

Sales at Pollo were 6% -- plus 6% in July. And Taco Cabana was a little bit above flat. We were rolling over in July a big price increase from the year before.

Got it. Okay. Thanks very much, and I'll look forward to seeing you at our conference next week.

Thank you, Andrew.

Bryan Hunt, Wells Fargo Securities.

Thank you. And just continuing on the services agreement topic, when you look at that needs to fulfill some of these services that Carrols is performing for you, is it a software and people situation that you need to transition some of these services? Or is it more just bodies in the room? Just to get an understanding of how you accomplish building some of these services internally.

Well, one of the things we're doing is that, as we move from Carrols and our software -- as we move from Carrols to FRGI, a lot of what is currently held on servers, we plan to have most everything be cloud-based, so that's one element of it. The other part of it is just taking a look at -- having Lynn as the new leader for the financial side and establishing the kind of processes, features that she wants (technical difficulty) the Company.

Okay.

And I would just say the answer to your question is yes. It is all of the functionality you would anticipate in terms of a company needing to run the operations. I will also say that we will continue to proactively look for ways to minimize infrastructure costs as we move forward.

Okay. Great. And then, you talked a lot about remodeling. Could you talk about the recently remodeled stores, both at TC and at PT, and how those are performing relative to the stores that have yet to be remodeled?

Well, the restaurant -- Pollo Tropical, in large part, has been remodeled. Our focus really, right now, is on Taco Cabana. And when we talk about remodeling Dallas and remodeling Austin, not all of the restaurants in those two markets have been touched; just the older restaurants.

The answer to your question is, it really depends on the market. It depends on where it's located in the market. For instance, if you have a restaurant that, by zoning, does not allow you to touch the outside because they want it to look like every other building in the development, you don't get the same kind of lift that you might with one that we've gone in and completely redone the outside of the envelope, the landscaping, and then the inside of the restaurant, where those kinds of increases have been pretty dramatic.

Our goal is that if we could get out with the remodeling paying for itself, that we would consider that a victory, and we are certainly doing that.

You mean paying for itself on a cash flow basis or on a revenue basis?

On a cash flow basis.

And what's the average cost of a remodel?

Depending on the market, depending on the restaurant -- in Dallas, they were anywhere from about $125,000; Austin was around $100,000. As we get into San Antonio and Houston, which are older restaurants, you might see those anywhere from $125,000 up to $225,000.

Thank you. And what is the outlook for CapEx for the year, and has that changed?

The outlook is consistent with what we previously had indicated -- between $42 million and $46 million.

And you mentioned your tax rate -- the 42.7% outlook for the year. What's the cash tax?

I don't have that number off the top of my head.

All right. And my last question is, have you all started to look at, or begin hedging or locking in any of your food costs for 2013, given the volatility we've seen in commodities in the last couple of months?

Joe Brink right now is -- obviously, that's got his complete attention on not only beef, but chicken, but he's also looking at the other 600 SKUs to help mitigate those costs. Right now, to answer to your question, we don't have anything locked in through 2013. It's really going to depend on what the next 6 to 7 weeks looks like after this -- we get some further clarity on what is happening with corn and grain.

Thank you so much. I appreciate your time.

Thank you.

There are no further questions in the queue. I'd now like to turn the call back over to management for any additional or closing remarks.

That concludes our first annual -- or our first ever Fiesta Restaurant team results for the quarter. We appreciate you attending, and we look forward to speaking with you next quarter. Thank you.

And, again, that does conclude the call. We thank everyone for participating today.