Fiesta Restaurant Group Inc (FRGI) 2012 Q3 法說會逐字稿

Good day, everyone and welcome to the Fiesta Restaurant Group third-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 Lynn Schweinfurth, Chief Financial Officer. Please go ahead, ma'am.

Good morning and thank you for joining our call. By now everyone should have had access to our third-quarter 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 our formal remarks, I must remind everyone that our discussion today, including our 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.

And now, before I review our financial performance and discuss our outlook, I would like to turn the call over to Tim Taft, Fiesta's CEO and President, to begin with some opening thoughts, along with a brief update on the business.

Thank you, Lynn. We're proud of our third-quarter accomplishments and are excited to be sharing with you highlights from our recent performance, along with an update on our current initiatives.

Before we do, I'd like to first acknowledge the contributions of Jim Tunnessen, Pollo Tropical, and Mike Biviano, Taco Cabana. Both of them are going to be retiring from Fiesta in January. Both Jim and Mike have been in their positions for about 10 years and have been effective stewards in distinguishing these fast casual brands in a competitive environment and have been instrumental in positioning us to be the successful enterprise that we are today.

Turning our attention to the quarter itself, which by all accounts was a strong period that should provide us with momentum as we finish out the year. As you can see we posted healthy revenue gains, positive guest traffic, expanded margins and realized a substantial increase in our bottom line profitability. All in all, it was a great first quarter for Fiesta as a standalone company. Pollo Tropical continued to experience strong top line momentum as it generated a solid 7% growth in comparable restaurant sales, driven by a 5.9% increase in guest traffic. Although the brand sales performance is exceptional in its own right, it's even more so considering the formidable comparison from the year ago period. During the quarter, we promoted Create Your Own TropiChop with a drink for $4.99, a Caldo Gallego soup LTO and a new guava bar for dessert. Pollo has now had positive comparable restaurant sales for 12 consecutive quarters, and despite the body language that some restaurant chains have suggested regarding a soft a October, even before the impact of Hurricane Sandy, Pollo continues to operate solidly having generated October comparable sales of 7.5%, including strong transactional growth.

Turning to Taco Cabana, our Tex-Mex brand experienced considerable sales growth during the quarter of 1.8%. These sales were accomplished even while lapping the significant price increase of 3.9% from the same year-ago period in 2011. Guest traffic grew 0.6 points over the three month period. Like Pollo, Taco is also building an impressive track record of consistency and achievement. It has now generated positive comparable restaurant growth for nine consecutive quarters and positive transaction growth in each of the last three quarters.

With respect to Taco's sales trends, we are particularly pleased to have migrated away from the brands heavy reliance on price increases as a catalyst for comparable growth, which historically has negatively affected transactions. Recently we've seen price increases we've taken not negatively affect transactions, which in our estimation is due to the improvement in our service level, along with our customers' heightened perception of our value proposition and overall dining experience. On a related note, October comparable sales posted a 6.4% increase which was mainly driven by guest traffic.

Taco's quarterly promotions focused on our favorite under $5 menu featuring original cabana bowl or burrito, but we also rolled out a happy hour program geared towards boosting weekday traffic with half-price nachos and $1.50 margaritas from 4.00 PM to 7.00 PM. These efforts have resonated very well with our customers. In the fourth quarter we have tweaked our television message to focus on Taco's value proposition while driving transactions.

Having discussed our brand highlights for the third quarter, I'd like now to discuss our overall business strategy as it relates to enhancing long-term shareholder value. On the top line we intend to drive sales by providing our customers with quality core products and innovative promotional vehicles at a great value and by delivering an elevated brand experience that we believe rivals casual dining. Additionally on the margin side, we seek to leverage variable costs through purchase and supply chain initiatives, managing our commodity exposure and controlling hourly labor and other restaurant level expenses, while also realizing the positive impact of sales increased on fixed costs. Having already addressed the sales component of the P&L, you will notice that cost of sales, restaurant wages, and related expenses and other restaurant operating expenses all decreased as a percentage of restaurant sales, as the team has done a strong job managing our commodity exposure and executing operational discipline on key cost categories. On the commodity front, we have strategically locked in the bulk of our major commodity purchased through next year. Given commodity cost increases, we do expect cost of sales as a percentage of restaurant sales to be higher next year compared to this year.

Lynn will address our consolidated segment levels results during her financial review and I will, therefore, like to conclude with some thoughts on development remodeling and franchising. First, as we continue to develop new restaurants we also seek to refine our elevated positioning, making sure that we get credit in the guests' eyes for the enhancements and investments that we have made in the new ambience, decor, plateware, flatware and service standards. The restaurants that we have opened under the quote-unquote elevated model are performing well as a group and exceeding the systems average. In addition, we continue to refine our restaurant prototype and service model which will help us lower our cost of entry into new markets.

During the quarter, we opened up three company-owned restaurants consisting of one Pollo Tropical in Miami and two Taco Cabana's in Houston and Dallas respectively. As this would imply, we have no reservations opening new restaurants in core markets when we can achieve a compelling return on investment and in some cases, provide some relief to locations near by that might be operating above optimal capacity. For the balance of the year, we plan to open up three additional restaurants in Pollo in Texas for a total of 10 in 2012. For 2013 we're planning to open 14 to 17 company-owned restaurants across both brands, about 0,66 of the new restaurants being Pollo and the remaining 0.33 being Taco.

Next year, Pollo Tropical will mark its initial entry into Nashville, Tennessee market along with continued development in Atlanta and further penetration across Florida and an eye to the West, while Taco will concentrate its development within Texas. Plate selection for these restaurants is indicative of our criteria of seeking out new high-profile sites in areas with higher household incomes that we've targeted in the past and have a position and -- excuse me, as we position our concepts as general market brands.

In terms of franchise development, we continue to pursue international expansion and have more than 10 Pollo Tropical franchise restaurants planned in 2013. 2013 will also mark the first time we expand Pollo Tropical outside the Western Hemisphere as we plan to open our first franchise restaurants in India as part of a 10 restaurant commitment by our new franchisee. Our expansion into India is the culmination of the year-long effort that began with the Fiesta participating in a US Department of Commerce sponsored franchise trade mission to India. Interestingly, the brand already has years of experience with Persian preferences in our Trinidad franchise where South Asian immigrants comprise more than 30% of the population.

More recently in the fourth quarter, we sold our two Cabana company-owned Taco Cabana restaurants in New Mexico to our long-standing franchisee in that state. As part of that sale, we also signed an agreement for the franchisee to open up three more Taco Cabana franchise restaurants in that market, further bolstering Taco Cabana's presence outside of Texas. While we've not laid out formal domestic franchising strategy at either brand just yet, we do believe with the right partner at the appropriate time and we think that both concepts will be attractive candidates for franchising and markets that we do not see company development likely in the near term. We will follow up on this topic as we crystallize our go forward strategy.

On the remodeling front, we are continuing our multi-year program at Taco Cabana where we are currently updating restaurants in San Antonio and Houston, much like we did in Dallas, Fort Worth and Austin last year and earlier in 2012. The enhancements include brighter interior, contemporary food topography, new salsa bars, wood furniture, flat screen TV and free Wi-Fi. All refresh restaurants also provide the new service standard with a host who delivers orders to guests rather than guests having to go to the counter to pick up their food or return for additional items such as desserts. While we had originally planned to complete this project in the spring of 2013 and now it appears more likely that we'll wrap up in early 2014. San Antonio and Houston contain some of the oldest restaurants in the systems and these renovations may require more time than their predecessors. We simply need to balance this initiative while managing our internal resources who are simultaneously working on development of new restaurants.

Finally, it's now been about six months since the spinoff and in that time we've moved quickly to establish our own corporate identity and are beginning to build out our in-house capabilities across various functional areas. As you've already seen in our earnings release, we have chosen to locate our company headquarters in Addison, Texas, within Dallas County. We expect our office will serve as an efficient and effective support center and hub to serve the corporate needs of both brands. We have about 2.5 years remaining on our transition services agreement with Carrols and we intend to complete the material portion of the transition by the end of 2013, well ahead of schedule. We are building out our teams and expertise across numerous disciplines, including migrating from a server-based IT infrastructure to cloud-based infrastructure, as well as putting in place processes and procedures in areas such as accounting, payroll, human resources and benefits management. We believe we will ultimately have an efficient scalable infrastructure that we can leverage over time as we build out our restaurant footprint.

With that, I'm going to turn it back over to Lynn to review the third quarter financials, as well as provide some initial opening targets, operating targets, for fiscal 2013. Lynn?

Thanks, Tim. As mentioned, this is the first full quarter that Fiesta Restaurant Group has reported its quarterly results as a standalone company and we are very pleased with the results generated. Fiesta is poised to meet or exceed our own high expectations for fiscal 2012 and is entering fiscal 2013 with momentum.

Before discussing the quarter, I want to confirm that, for your convenience, we have posted a summary of fiscal 2011 quarterly P&L results for Fiesta on our Investor Relations website. This is under our events and presentations section. And filed such summary with the SEC in our Form 8-K with our press release this morning. This summary includes information previously disclosed by the Company and that can also be obtained in various filings. Okay.

Turning to the quarter, revenue growth was 5.8% driven by strong comparable restaurant sales, incremental sales associated with our net restaurant growth, and increased franchise revenue. Development has and will continue to be an increasing growth platform for our company. Cost of sales, restaurant wages and related expenses, other restaurant operating expenses and advertising expenses all improved as a percentage of restaurant sales this quarter versus the prior year comparison, driven by positive impact of sales increases on fixed costs, timing of advertising expenses and lower utility rates.

We continue to experience the impact related to the qualification of certain leasing transactions for sale lease back accounting treatment upon completion of the spin off in May. We have called out the impact of this treatment to rent expense, depreciation and amortization expense, and interest expense in our press release, both on a consolidated basis and on an adjusted segment EBITDA basis. G&A increased $2.1 million to $11.2 million, impacted by both the building of our Fiesta corporate team and the charge taken for retirement agreements that were signed during the third quarter.

So let me turn to the brand results. Quarterly restaurant sales at Pollo increased 9.8% in the third quarter over the prior-year period to $57.4 million from $52.4 million. This increase was primarily due to a comparable restaurant sales increase of 7%, which included 5.9% increase in guest traffic and a 1.1% increase in average check. Comparable restaurant sales in the five-week October period were even stronger, up 7.5% driven by strong transactions.

Adjusted segment EBITDA is defined as earnings attributable to the applicable segment or brand before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other income and expense and gains and losses on extinguishment of debt. It includes an allocation of corporate general and administrative expenses and brand general and administrative expenses, each excluding stock-based compensation to arrive at a profit or loss measurement for each brand. With that being said, Pollo's adjusted segment EBITDA was $9.1 million in the third quarter, compared to $8.5 million in the prior-year period. The third quarter this year included the negative impact of the qualification for sale lease back transactions and the retirement agreement signed during the quarter, which together negatively impacted results $0.9 million.

Quarterly restaurant sales at Taco increased 2.8% in the third quarter over the prior-year period to $70.3 million. This increase was primarily due to comparable restaurant sales increase of 1.8%, which included a 0.6% increase to guest traffic and a 1.2% increase in average check. Taco implemented a price increase of 1.2% in early October, bringing the total effect of price increase to 2.4% for the monthly period. This increase complemented strong guest traffic, generating 6.4% in comparable restaurant sales growth for the October period. Taco's adjusted segment EBITDA came in at $6.7 million in the third quarter, compared to $7.3 million in the prior-year period. Similar to Pollo, the third quarter this year included the negative impact of the qualification for sale lease back transactions and the retirement agreement signed during the quarter, which together negatively impacted results of $1.3 million. We recorded an estimated effective annual income tax rate of 39.3% for the third quarter, which improved from the prior quarter primarily as a result of adopting the consolidated tax filing position in the state of Florida. Also, the rate does not include the beneficial impact that a reenactment of the work opportunity tax credit would create. We would recognize any such credit in the period of reinstatement.

At the end of the third quarter, we had a cash balance of $3.1 million. There were no outstanding borrowings under our senior credit facility and we were in compliance with related covenants. After reserving $9.4 million for letters of credit guaranteed by the senior credit facility, $15.6 million was available for borrowing. We continue to look for opportunities to enhance liquidity and we closed on one sale lease back transaction and the sale of an excess property, together generating $2.5 million of cash proceeds during this quarter. In the third quarter, cash interest payments on our notes were $8.8 million and cash taxes were $0.4 million.

In the press release this morning we introduced certain expected operating targets for fiscal 2013, which included comparable restaurant sales increases for Pollo of 5% to 6% and for Taco, up 3% to 4%. Additionally, we are anticipating that we will see a negative impact in cost of sales as a percentage of restaurant sales, up 50 to 60 basis points net of the impact of price increases due to increasing commodity costs. As Tim has already shared, we have locked in a material portion of our key commodity categories and, therefore, have good visibility into our commodity costs to be incurred next year.

For fiscal 2013 our new restaurant pipeline is expected to produce between 14 and 17 new company owned restaurant openings. We currently anticipate closing three restaurants next year; two of which have leases that are expiring and one restaurant is being relocated. For fiscal 2013, capital expenditures are expected to be between $45 million and $50 million; $30 million to $34 million for new restaurants, $7 million to $8 million for remodeling Taco restaurants in Houston and San Antonio, approximately $6 million in maintenance capital expenditures, and approximately $2 million of other corporate project.

For fiscal 2013 general and administrative expenses are expected to be $44 million to $46 million, inclusive of up to $2 million in implementation and redundancy costs related to the transitioning off of the TSA and implementing our own administrative infrastructure capability. For fiscal 2013, the effective tax rate is expected to be similar to 2012, between 38% to 40%, excluding the reinstatement of hiring tax credits. In terms of cash income taxes, the Company became responsible for its own federal taxes after the date of the spinoff so the amount of taxes paid is expected to go up next year as a result of both higher income and a full-year tax liability. Lastly, we believe the cash generated from our operations, the availability of revolving credit borrowings under our senior credit facility, and proceeds from any sale lease back transactions that we choose to do, will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures, and debt service requirements in fiscal 2013.

And with that, let's open up the lines for questions.

Thank you.

(Operator Instructions)

Bryan Hunt, Wells Fargo Securities.

First of all, I was wondering if you could talk about the sales lifts from the refreshes in the new service models at Taco Cabana and Pollo, respectively. What kind of sales lifts are you getting and are those sales lifts sticky over time?

I'll try to answer that question and, Tim, if you want to jump in, we are seeing sales lifts of roughly 2.5% to over 4% for the markets that we're implementing remodeling initiatives next year. We're targeting between 3% and 5%, which is consistent with what we've seen in other markets. And we are seeing that the sales levels do sustain.

Okay. Next, I was wondering if you could talk about Atlanta, the store performance there, has it met your expectations?

The performance in the Atlanta restaurants we're very pleased with. I think the interesting thing is that every time we build one of our elevated restaurants in a new market, the thing that we're enjoying is that we learn something new in every single one of the markets.

For instance, in Atlanta, our transactions are very high and we're happy with those trends. The interesting thing is because we chose to build both of these restaurants in what are densely populated office areas, the sales dynamic is a little bit different. Instead of having multiple purchases, multiple people on a check, from these offices, we've got a lot of single person checks. So our check average is a little bit lower but our transactions are high. And we're -- again as I mentioned, we're enjoying that because as we build into other locations, we already have a marketing blueprint on how we will address those kind of opportunities in the future.

Okay. Next, you all talked a little bit about the cost of sales increase you're expecting for 2013. Could you give us a framework on what inflation may be in your purchases for next year?

I would say our inflation rate is roughly 3%.

Yes.

Okay. And then lastly, as you do these new store openings, is there any opening schedule, is it skewed more to the front end or the back end of the year or is it equally weighted throughout the year?

The new buildings?

Yes.

They're pretty flat throughout the year. You're going to see -- there's a number of Pollos and Tacos that could have opened in December and those have slid into first quarter of next year. But all in all, the growth pattern next year is pretty flat across 12 months.

All right. I'll get back in the queue. Thank you.

Andrew Gadlin, CJS Securities.

Regarding the franchising agreement which you established in New Mexico, could you talk a little bit about that transaction, what drove it and the timing of those three restaurants that are likely to open in, whatever the timeframe is?

Andrew, the franchisees name is Mel Sloan, now has over a 20-year relationship with this brand. He's also a landlord of four of our restaurants in El Paso. So when it came time towards the end of his franchise agreement and also the end of our lease, we started talking to him about what it is that could support both of our objectives. He wanted to grow. Mel is a big fan of the brand. He wanted to expand and he wanted to expand in that market where we had two restaurants. And it made a lot of sense because we were spending a disproportionate amount of money supervising them and running out there and making sure that they were running to our standards. We could turn those over, redirect our resources elsewhere, turn them to Mel. Mel runs a very, very good operation. He could expand out that market over the next three to four years, have up to seven or eight restaurants. And we would have -- we'd lock in our leases in the El Paso market for another 20 years at a most favorable rate. So it's the veritable win-win with a very good operator.

That's helpful. Thanks. And when do you think he's opening up new restaurants? What timeframe?

He's looking for real estate right now, so I would imagine that's probably going to take place over the next three to four years.

Got it. On the tax rate, just so I'm clear, are there any things, any benefits that you're expecting for next year?

No. Again, as I called out in our opening comments and also in the press release, we are not anticipating, in our number, any hiring credits until they are reinstated. So while that's still an uncertainty, we have not Incorporated that benefit that we would enjoy if the work opportunity tax credit was reinstated.

Do you know how big an impact that could be if they were reinstated?

It would be roughly 5%.

Got it. Okay. Thank you very much.

Jeff Omohundro, Davenport and Company.

Wonder if we could go back to Bryan's question on the cost of sales outlook for 2013 and get a little bit more granularity around how you're thinking about chicken and beef in the level of contracting on those commodities? That's my first question. I have some more. Thanks.

As we mentioned in our comments, with the exception of chicken for Taco Cabana, all of our proteins for both brands have been locked up through the end of 2013. So Pollo, which obviously chicken is a big percentage of that mix, we're all done. Rice, beans, all the major components that could materially impact our cost of sales have been locked up through the end of next year. And as Lynn mentioned, that amount is -- equals around 3% inflation.

And then I might have missed this, but in the same-store sales outlook, what is the assumption about pricing for 2013, incremental pricing?

Incremental pricing will be a little over 2%.

Okay. And then appreciate the detail on the transition services agreement and the specific guidance around G&A next year. Is the $44 million to $46 million ex the $2 million non-recurring charges, so the $42 million to $44 million, is that a good baseline run rate when we start thinking about building out 2014? Or as the transition services agreement expires, does that number grow?

I think it's a good baseline for you to utilize for future years.

Very good. Thank you.

(Operator Instructions)

Rich Glass, Lockwell Investments.

A little off the topic here of what you've been discussing, but I'm wondering if you guys are planning on getting out on the road in front of the registration of stock from Jefferies that took place a couple days ago and it's either an opportunity or it's a risk here essentially given the amount of stock that's coming out. Just not sure what the plan is around that, even though I realize it's not company stock.

I would say that we don't have a planned road show set specifically to address the shelf that's been registered. However, we do have a number of groups that we're going to be visiting over the next couple of months that have invited us to come out and talk to investor groups.

Okay. Well, we would encourage that. Sounds like a great idea. Thanks a lot. Best of luck.

Thanks, Rich

Mitch Sacks, Grand Slam.

Congrats on a great quarter, guys. Two follow-up questions. I may have heard it wrong, I heard you say you're opening three additional restaurants in Texas this quarter? Those were Taco Cabanas not Pollo Tropicals, I assume?

Actually, if I can correct you, there are two Tacos opening up in Texas and one Pollo restaurant in the state of Florida.

Okay. And then on the closings, you talked about one relo and two closures. What chains are those in?

What chains. The brand make-up.

We're having -- there are two leases for Pollo and Taco. Excuse me, it's the other way around. It's two Taco leases are expiring and then we are offsetting a Pollo Tropical in the greater Miami area.

Okay. So when I do a store count for next year, I should take the two Taco Cabanas out of the mix?

Correct.

Okay. Thank you very much.

Robert Sassoon, RF Lafferty.

I have a question on the franchises, specifically the overseas franchises. How many actually -- remind me how many are actually franchises overseas, how many -- presuming mostly Pollo Tropical?

Pollo Tropical, all of the restaurants outside of the United States are franchised and that number is around 35. We have a couple non-traditional university kind of locations under our license agreement for Pollo.

And I know this is the actual -- the fifth quarter number year-to-date for the franchise royalty revenues or fees jumped about 38%, 39%. Could you give me an idea of what the system-wide sales from those are? And maybe provide a little bit more color about your franchising strategy, particularly in international markets going forward?

I'll speak to the franchising strategy. There is -- this is -- it's a blessing being in Miami and having our hometown in Miami because we have a lot of people that are -- that travel in and out of it so it made all the sense in the world to have our initial franchisees in close proximity to Miami and the Caribbean. As our brand becomes more and more expanded and people are becoming more and more familiar with it, we've had a lot of different people, as in evidence of our Indian franchisee that has signed up for 10 restaurants, and there's other people that we're currently in discussions with that are really outside of our traditional footprint.

So the opportunity, we believe, is still very, very strong as the chicken buying consumer outside of the United States and this part of the world is very, very strong. And what the research is showing us now is that our ability to tap into other geographies, other markets outside of our hemisphere are presenting themselves now. Similar kinds of non-fried chicken products are very popular.

Great. And do you have a number for system wide sales for the current franchises that you've actually given out?

We haven't actually given out that number, but I can say that our franchise system is healthy and is overall experiencing positive system wide sales.

And one more question on that, long-term, how significant is the franchise element of your business going to be? Or are you going to simply concentrate on company-owned operations?

Well, certainly company owned-operations have our undivided attention. We are building out our franchise team to make sure that we are able to due diligence in the other parts of the world as they come available. We are -- as I mentioned, the demand is -- it's steady for us and it's increasing. We are not signing up everybody that comes down the road. We're being very selective and we're making sure that strategically it sets and aligns with our overall growth objectives.

But our franchisees are very important to us certainly, but we have two completely separate teams that work on their own business segments individually and independently of each other. So domestically, we've got a big team and internationally, we've got a team that we're building now to facilitate that kind of growth.

Thank you.

And there are no further questions at this time. That will conclude today's call. We thank you for your participation, and have a good day.