Fiesta Restaurant Group Inc (FRGI) 2014 Q3 法說會逐字稿

Greetings and welcome to the Fiesta Restaurant Group third-quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Lynn Schweinfurth, Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you. Good afternoon and thank you for joining our call. Our third-quarter 2014 earnings release was issued after the market closed today. If you have 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 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, 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 filing.

Please note that during 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 would like to turn the call over to Tim Taft, President and Chief Executive Officer.

Thank you, Lynn, and good afternoon everyone. I'm going to go off script a little here to share with everyone something that the Fiesta nation learned about a little over a week ago. The Dallas Business Journal hosted their annual CFO award program where our own Lynn Schweinfurth came home with the CFO of the Year for Public Restaurant Companies. Lynn no doubt will tell you that this is a team effort and she is right. But this honor is about being a leader, about character and about performance, and it surprised no one she was this year's recipient.

I'm getting some dirty looks here, so why don't we move on to some more even good news, that's our third-quarter results. In the third quarter, we marked yet another period of outstanding results, and I thank the entire team for their contributions to Fiesta's continued success. Our achievements to date support the confidence that we have in our direction and demonstrate our commitment to delivering on our promise to guests and shareholders alike.

During the quarter, we grew revenues by 10.4% through a combination of contributions from newer restaurants and comparable sales gains and increased EPS by 62% as we expanded restaurant level margins, leveraged fixed expenses, and lowered our interest expense. Lynn will walk you through the numbers in greater detail shortly, so I will limit myself to a few overarching themes, some individual brand highlights and a few of our development and brand elevation plans for next year.

Realizing greater efficiency through scale is an important component of our strategy. We have made considerable progress on this front, especially with respect to optimizing our supply chain. More recently, in the first quarter, we reached a multiyear product and marketing agreement with Coca-Cola which combined the system soft drink gallonage of both brands while at the end of July, we completed the transition of Taco Cabana to Performance Food group as its main distributor. This placed both brands under the same distribution company for the first time.

Given the number of warehouses and the closer proximity to restaurants in Taco Cabana markets, we believe PFG will provide faster delivery of products to ensure improved quality and freshness, in addition to significant cost savings over the term of the contract. We also believe our consolidated distributor is better equipped to accommodate Fiesta's growth plans due to its distribution network in the southeast. And while Taco Cabana has benefited from PFG's established relationship with Pollo Tropical, our introduction of Pollo Tropical to Texas has been aided considerably by Taco's 36-plus year operating history in the state with respect to selecting and securing great real estate sites along with sharing infrastructure, managerial oversight and recruiting efforts. In addition, we believe our new Caribbean inspired prototype and new menu offerings have helped to cultivate the warm reception Pollo has received in Texas as demonstrated by great social media buzz, and more importantly, initial sales that continue to exceed our expectations.

It is important to note that, in building the Pollo Tropical presence in Texas, we have thus far invested very little in media and have instead limited our exposure to preopening media events such as local TV, morning programs, or local radio shows as forums to communicate our brand attributes in the context of upcoming restaurant opening. We believe that, as we fill out these markets and add media weights, we're going to see similar sales expansion to what has been experienced in Tampa, Orlando and other markets that are now just reaching media efficiency.

We opened nine Company-owned restaurants in the third quarter, including seven Pollo Tropicals and two Taco Cabanas. We now expect to open 26 Company-owned restaurants in 2014, including 22 Pollo Tropical, four Taco Cabana restaurants, meeting the high end of our target range. Of the Pollo Tropical openings, 10 will be opened in key Texas DMAs, including five in Dallas Fort Worth, three in Houston, and two in San Antonio with the balance in the Southwest, central and south Florida. With 20 new Company-owned restaurants opened through the end of third quarter, we have six remaining openings this year, including the second Cabana Grill restaurant located in Jacksonville that's expected to open in December. We intend to use the second Cabana Grill location to further evaluate the opportunity for expansion of a differentiated Taco Cabana concept outside of Texas.

Successful brand and operating refinements will be applied to future openings of Taco Cabana and in some cases to existing Taco Cabana restaurants. These include repositioning the kitchen by 90 degrees, which has enhanced efficiency and throughput, showcasing product freshness by enabling customers to watch tortillas being hand pressed and toasted right in front of them, and adding new menu items such as tostadas and black refried beans.

Now let's turn to individual brand highlights from the third quarter. Pollo Tropical generated a 5.9% increase in comparable restaurant sales against a 6.5% comparison, resulting in a two-year cumulative comp sales growth of 12.4%. Comp sales this year consisted of 4.6% increase in transactions, 1.3% increase in check. Note that the cumulative impact of price increase was 1.6%. Pollo Tropical has now generated comp sales growth for 20 consecutive quarters. The brand continues to benefit from higher off-premise and home meal replacement sales as the food travels well and is offered at very competitive price points along with greater brand awareness and media efficiency in some Florida markets through new restaurant development.

We've also enhanced throughput by eliminating low selling products, which has increased speed of service, improved accuracy and reduced waits. We promoted our Create Your Own TropiChop during July and August, and our new chicken avocado club wrap in Florida markets in September. We also extended the rollout of our tropical light menu to Texas, which includes healthier options. The menu is now offered in West Palm Beach and Texas and will be rolled out system-wide by year-end.

Looking ahead, we think the smartphone app which has been testing over the past several months and rolling out some more restaurants will make Pollo Tropical a more convenient option for people on the go and a more viable option for catering.

Turning to Taco Cabana, restaurant sales grew a solid 3.5% against a 1.8% comparison for two-year cumulative comp sales of 5.3%. Comp sales growth this quarter consisted of a 0.9% increase in transactions and a 2.6% increase in average check. Check average was positively impacted by a new menu board that moved more guests from combos to more profitable plates and the cumulative impact of menu price increases of 1.1%.

We completed 31 Taco Cabana remodels through the end of the third quarter. The related sales lifts have contributed to our topline performance and overall brand perception and appeal while incremental EBITDA contributions continue to meet healthy investment return hurdles. At the end of the year, we will have only 23 or 14% of our Company-owned restaurants remaining to be remodeled to complete the program. We plan to remodel these remaining restaurants in 2015.

During the third quarter, we promoted two bundle deals, each at $4.99 price point, the Chicken Cabana Bowl and a drink and a State Street taco three pack and a drink. For breakfast, we featured the Rise and Dine breakfast taco for $1.09. We believe our promotions are reinforcing everyday value and helping to drive incremental transactions while our operations team is doing an outstanding job raising the level of execution to ensure a great guest experience.

Now let me briefly discuss our plans for 2015. Currently, there are several restaurants under construction that will be opened in 2015. More specifically, we are anticipating opening a total of 26 to 30 new Company-owned restaurants next year, which include 24 to 26 Pollo Tropical and two to four Taco Cabana restaurants. We'll also close up to four locations, of which three could be Taco Cabana and one is a Pollo Tropical relocation. The new Pollo Tropical restaurants will be built in existing markets with the majority being in Texas and Florida. We will also add two new restaurants in the Nashville DMA and reach a penetration level to become media efficient.

In 2015, we will launch a remodeling program for Pollo Tropical restaurants starting with our Orlando market. The brand has performed exceptionally well in this market with quality operational execution. Orlando represents a logical launch of the remodeling program and has already had both core and elevated restaurants in the same market. The remodel design will include features and brand elements consistent with the new Caribbean prototype that we have successfully introduced in Texas. Going forward, new restaurants in the Orlando market will be built using a new prototype as well.

Upon completion of the remodeling program in Orlando, restaurants throughout the market will offer our elevated service model, consistent pricing and Caribbean aesthetics. We believe this initiative will drive incremental transaction growth and we'll plan to expand the program in other markets based on successful results in future years. Overall, the plan is working. And we will continue to work the plan.

Now let me hand the call back over to Lynn.

Thank you Tim. Let's begin with a third-quarter summary before diving deeper into the results themselves. Afterwards, I would like to provide an update on our full-year outlook as well as offer our initial thoughts on operating targets for 2015.

First, during the third quarter, we grew total revenues by 10.4% to $155.3 million as we benefited from the positive impact of 21 net new Company-owned restaurant openings over the past year and comparable restaurant sales growth at both brands. As Tim indicated, Pollo delivered comp sales growth of 5.9%, further solidifying its position among the best performing fast casual operators. In addition, Taco delivered positive comp sales growth of 3.5%, including transaction growth of almost 1%, its best performance since the fourth quarter of 2012. So far in the fourth quarter, the comp sales growth momentum has continued with quarter-to-date comp sales growth of 6% at Pollo and 5% at Taco through this past Sunday, November 2.

Turning to the P&L, restaurant level adjusted EBITDA as a percentage of restaurant sales improved 100 basis points to 20.9% due to favorable cost of sales, labor, rent, and advertising expenses that were partially offset by higher other operating expenses. In dollar terms, restaurant level adjusted EBITDA rose 15.5% to $32.3 million.

Improvement in G&A year-over-year as a percentage of revenue drove 70 basis points of margin expansion and contributed to a 24.9% increase in consolidated adjusted EBITDA to $21.9 million, and a 170 basis point improvement in consolidated EBITDA as a percentage of revenue to 14.1%.

Cost of sales improved as a percentage of restaurant sales by 50 basis points this quarter compared to the prior-year period, primarily due to the benefit of modest price increases, a shift in sales mix to more profitable menu items due to Taco's new menu board rolled out at the beginning of the year, and effective supply chain initiatives that more than offset commodity inflation. Supply chain management initiatives, among other things, included the financial benefit of new contracts for food distribution and soft drinks entered into earlier in the year as well as other food commodity contracts that were in effect during the quarter.

Restaurant wages and related costs improved as a percentage of restaurant sales by 60 basis points as sales growth at both brands and lower medical costs more than offset inefficiencies and incremental labor at new, elevated restaurants and higher workers compensation costs.

Rent expense improved as a percentage of restaurant sales by 20 basis points as sales growth more than offset higher rent at new Pollo Tropical openings. Other restaurant operating expenses increased as a percentage of restaurant sales by 30 basis points. This was a consequence of timing and cost of certain repair and maintenance expenses partially offset by lower insurance expenses.

Advertising expense decreased as a percentage of restaurant sales by approximately 30 basis points due primarily to the timing of promotions. Preopening costs increased by $0.8 million to $1.4 million in the third quarter of 2014 due to nine Company-owned restaurant openings in the third quarter this year versus four in the year-ago period and the timing of expenses for future restaurant openings which are typically incurred between four to six months prior to opening. We continue to expect preopening costs of approximately $4 million in 2014.

G&A expenses increased $0.2 million to $11.8 million in the third quarter of 2014 but improved 70 basis points as a percentage of revenue to 7.6% in the third quarter of 2014 due to the impact of higher sales on essentially flat overhead as we focus on ensuring that our infrastructure spending is efficient yet adequate in meeting or exceeding our short and long-term business objective.

Additionally, as called out in our press release today, during the quarter, we recognized a benefit related to a favorable litigation settlement that positively impacted results by $0.5 million.

Depreciation and amortization increased $0.9 million to $6 million in the third quarter of 2014 due to new restaurant openings over the past year and remodeling at Taco Cabana partially offset by the impact of sale-leaseback transactions completed at the very beginning of fiscal 2014 and in the prior fiscal year.

Interest expense decreased by $3.9 million to $0.5 million in the third quarter of 2014 compared to the prior-year period. This expense reduction was due to the $134 million reduction in our outstanding debt to $66 million at quarter end from $200 million and a reduction of our interest rate on borrowings from 8.9% to 2.2% under the new senior credit facility.

We incurred an impairment charge of $0.2 million this quarter related to a decision to opportunistically relocate an existing restaurant to a superior location in the same trade area prior to lease expiration.

During the quarter, we recognized other income of $0.6 million related to condemnation proceeds received from an eminent domain proceeding pertaining to a Taco Cabana restaurant that closed during the quarter. Our third-quarter income tax provision was derived using an estimated annual effective income tax rate of 38.3% while in the same period last year, the provision for income taxes was derived using an estimated annual effective income tax rate of 36.5%, excluding discrete items. The 2014 rate is higher than the prior-year period due to the expiration of the work opportunity tax credit at the end of 2013.

Net income increased 81.6%, or $4.1 million, to $9.2 million in the third quarter of 2014 as compared to net income of $5 million in the prior-year period. Diluted EPS increased to $0.34 per share from $0.21 per share. Note that despite our equity offering last year, which increased our share count, approximately 15% diluted EPS still grew by almost 62%.

Turning to brand margins, at Pollo, margins contracted due primarily to other operating expenses that were negatively impacted by timing and temporary higher costs for certain repair and maintenance expenses in new markets partially offset by lower insurance costs.

From a profitability standpoint, adjusted EBITDA at Pollo grew 13% in the third quarter of 2014 to $12.1 million off of an 18% increase in restaurant sales. Taco Cabana restaurant margins expanded materially this quarter due to sales leverage, favorable product mix primarily due to the impact of new menu boards, and favorable timing of advertising expenses.

From a profitability standpoint, adjusted EBITDA at Taco increased 43.7% to $9.8 million compared to the prior-year period off of a 3.6% increase in restaurant sales. At quarter end, we had a cash balance of $1.9 million and paid down $5 million of borrowings under our senior credit facility compared to the fiscal year-end. After reserving $7.5 million for letters of credit, we had $76.5 million of borrowing capacity under our senior credit facility, and we are in compliance with all related covenants.

Now, let's review 2014 financial expectations. Consistent with our guidance last quarter, at Pollo we expect to exceed the high end of our comp sales growth range established earlier in the year of 5%. This includes anticipated sales cannibalization associated with new store development that will negatively impact our comparable sales growth over 1 percentage point on a full-year basis, but note that the impact of this is higher in the second half of the year than the first.

With respect to Taco, we continue to expect comp sales growth between 1.5% and 3.5%, as previously communicated. G&A expense expectations continue to be between $48 million and $50 million which compares with $48.5 million in 2013 and will drive margin expansion given a higher revenue base. Assuming the work opportunity tax credit is not reinstated in 2014, we continue to estimate an effective tax rate of 38.3%. However, if this credit is reinstated before the end of our fiscal year, we would expect a rate of 36.5% to 37.5%.

Finally, 2014 capital expenditures are projected to be higher than what we have previously communicated, due primarily to the timing of new Company-owned restaurant openings that will fall early in 2015 that we are spending money against in late 2014 in addition to land purchases. Therefore, we would expect capital expenditures to be between $70 million and $75 million in total in 2014.

So, let's turn to preliminary operating targets for the upcoming 2015 fiscal year. With respect to comp sales growth, we are modeling Pollo at mid single digits and Taco at low single digits. Note that the Pollo comp sales expectation includes some sales cannibalization next year of approximately 1%, similar to 2014, as we continue building our presence in existing markets.

Inflation will be higher than what we have experienced in the past several years. More specifically, we believe commodity inflation will be in the mid-single digits for our basket of commodity purchases on a consolidated level in 2015. The increases will be in the mid to high single digits at Pollo and the low single digits at Taco. This is obviously higher than the 1% inflation we are expecting in 2014. Protein inflation, especially chicken, is driving a material portion of these expected increases in 2015.

We are proactively looking into various means to mitigate costs, including the potential of altering our product specifications and/or supplier sources while maintaining our current high quality standards.

One of the areas that is coming in better than our original expectation is the cost for healthcare in 2015. In addition, we are in the process of identifying other expense opportunities in the middle of the P&L.

We are increasing prices more than we have had to do in the past while ensuring that we will continue to offer a great price value relationship to our guests. Therefore, we are planning to increase prices at Pollo by a little over 4% and prices at Taco by approximately 2.5% in 2015 compared to 2014. Overall, we believe we can bridge the dollar impact of higher-than-expected commodities with pricing, cost mitigation tactics, and expense savings opportunities.

As Tim indicated, we plan to open 26 to 30 new Company-owned restaurants in 2015, of which 24 to 26 are expected to be Pollo restaurants. We are also anticipating that we will close up to four restaurants in 2015.

G&A is expected to be $53 million to $55 million. We are planning for an effective tax rate of approximately 38% to 40% assuming the work opportunity tax credit is not reinstated for 2015. If the tax credit is reinstated for 2015, then our tax rate will improve approximately 150 basis points.

And finally, total capital expenditures in 2015 are projected in the range of $78 million to $88 million. This consists of, one, new restaurant development capital expenditures of $58 million to $65 million; two, capital expenditures to complete the Taco remodeling program to implement a new Pollo remodeling program and capital maintenance at both brands of $14 million to $15 million; and three, capital expenditures for IT and other projects of $6 million to $8 million.

Lastly, 2015 will be a 53-week fiscal year and this extra week is factored into our operating target.

Before we take your questions, let me conclude by saying that we are very pleased with our performance through the first three quarters of 2014 and our business fundamentals give us continued confidence as we enter 2015. At every level of the organization, we are working collaboratively to execute our operational and development strategies to meet high expectations for financial performance to drive shareholder value.

Operator, please open the line for questions.

(Operator Instructions). Will Slabaugh, Stephens Incorporated.

Thank you and congrats on the quarter. I wonder if you could talk just a little bit more about what you've seen in the new Pollo units in Texas. I'm not sure if you're willing to speak to the volumes at this point, but it would be good to hear if they're still running at or ahead of plan, how you view the efficiencies around the costs of the new stores relative to your expectations as well.

I think there's a couple of measurements. One certainly is topline, and we continue to be extremely encouraged by what these restaurants are producing.

The other thing that we really are excited about is kind of the social media buzz and what people are saying about the product. And the good news is that the question we believe has squarely been answered, does this food translate to Texas? And the answer has been an overwhelming yes.

That's great to hear. And then one more question quickly on the remodels with Pollo. Did I hear you correctly that we should think about the look, the plating, the silverware, that whole elevated operation, should that be fairly similar in the remodeled stores as it currently is in the elevated stores in new markets?

First, what we're planning on doing is starting with Orlando, which is going to be an elevated store. So you'll have the hard plates and the modified table service in there. The thing that you should be on the lookout for is we call the restaurant that we are building, the new prototype in Texas, the folks in operations call it Big Blue. We're going to open up, build and open up three Big Blues next year in Orlando. And with that development, we're going to transform really the color, paint, mostly, to make them look like signature elements of Big Blue. So by the end of 2015, those new prototype colors will not look out of place in Orlando. The market will look like that, all of them together.

Thank you.

Imran Ali, Wells Fargo.

Thanks for taking my questions. You referenced Tampa earlier as a market that is only just beginning to take advantage of media efficiencies. Looking to 2015 and 2016, what other markets are close to reaching media efficiency?

I think that you're going to find Nashville is one that we'll open up too that will be media efficient. Tampa already is. Lynn, can you think of which ones are we not? Jacksonville.

We will not be media efficient in Atlanta either.

That's correct.

But Jacksonville we are nearing media efficiency today, Tennessee by the end of 2015, and then some of the southwest Florida markets we will be nearing efficiencies in the next one to two years.

And clearly the three DMAs in Texas where we just opened up.

Got it. That's great. And also I think you touched on this earlier, but what is your expectation for a new versus existing market development over the next couple of years?

New is defined in terms of opening up in a new marketplace where we don't have any penetration, is that your question?

Yes, that's right.

I think that what you're going to find is in the state of Florida there's, a lot of markets that we currently have not gone into, so you'll probably see us entering those. In Texas, right now we've targeted this year with Dallas Fort Worth, Houston and San Antonio. You'll see us going into the other major DMAs in the state of Texas. And primarily, all you have to do is take a look at a marketing footprint where we have media efficiency with Taco Cabana in Texas and those are the markets you'll see us move into with Pollo.

Great. That's very helpful. Thanks very much.

Nicole Miller (technical difficulty)

-- remodel program, how many units are actually in that Orlando area that we are talking about? I think there is probably a total around 10. Are all of those going to be remodeled? Just trying to reconcile that with your commentary on the three new Big Blues that are going to be in Orlando.

Right now there's about 13, so there will be three more. And then all of those will -- and then at the end of the year, all 15, 16 of those restaurants will all look like they belong to the same brand group.

Got it. And should that take, to do the 10 or so or 13 that are in the unit, or the market right now, should that take more or less the entire year? Should we think about those being relatively evenly spaced?

Yes, you should.

Great. And then although it's probably a little bit early, how are you thinking about the cost, being this is going to be one of the first remodels to this newer Caribbean look? How did you kind of approach the cost input-output conversation on the remodel side?

I think when you think of remodels for Pollo, you shouldn't think of it in the same way, the kind of money that we spent on Taco. We're talking mostly about soft goods and about paint, and maybe some tables, but we are not replacing roofs or replacing walls or the expensive kind of remodeling that we had to spend money on for Taco.

Okay, that's helpful. And then Lynn, shifting over to the cost of goods sold basket, can we kind of walk through what percentage of the basket is locked right now for the rest of the year and next year? Are we still in the preliminary stages of locking down a lot of those items? Is there an opportunity there? Kind of give us some perspective on what's happening with that.

Yes. This year, we have a great deal of visibility and we are for the most part locked in. Next year, we've locked in a good portion of our contracted products. There are still some moving pieces that we are still working on over the next several weeks, but I do think we still have a good amount of visibility and our estimates are reasonable based on what we know today, certainly based on what we've locked in, and then those negotiations that are currently underway.

Okay. And then last one for me, just kind of a bigger picture. As we are facing this inflation and we're still trying to manage this price value combination, how do we think about that in terms of the pricing we're going to have to take next year? You had mentioned some opportunities around maybe shifting product specs, but then also really focusing on the execution side. So just thinking bigger picture, how do we balance the value versus the menu pricing that we are taking in the current environment?

Clearly, one of our cornerstones is the price value relationship that we enjoy. We don't feel as though this price increase that we're going to be taking jeopardizes our position at all.

Okay, thank you.

(Operator Instructions). Nick Setyan, Wedbush Securities.

Congrats on another amazing quarter. Lynn, when are we thinking about taking that incremental price increase on the Pollo side? Is it end of Q4, early Q1 2015?

No, it will be taken in the fourth quarter.

In the fourth quarter? Okay. So Q4, what's the pricing going to look like in Q4?

We will take -- the absolute pricing is about 5%, so the effective pricing next year will be a little over 4%.

And then what about in Q4 of this year?

In Q4, the pricing will be in effect about roughly half the quarter.

Got it, okay. Perfect. And then in terms of the actual timing of the remodeling, I think someone else asked, you guys are -- I think previously the expectation was it's going to be weighted more towards the second half, and I guess now you guys are expecting to just kind of evenly do the remodels starting in Q1?

Well, there's two different things. I think we've got the final remodels of Taco Cabana are going to be in the first and second quarter and that will finish up Taco. And then we will probably begin the remodels of Pollo sometime late in the first quarter, and those 13 restaurants will be remodeled through the rest of the year.

Okay, great. And then the labor continues to leverage just way ahead of expectations. So are there any learnings that you guys can maybe communicate to us from these newer Pollo stores? Is it all like non-Pollo related, or are we actually seeing the profitability of these new stores ramp up ahead of your expectations?

I think there's a few things going on, Nick. One is we are certainly enjoying some high sales, so that certainly helps us to leverage our labor costs. But if you dig into our variable analysis, which is part of our Q filing tonight, you'll see that while we see some benefits associated with sales leverage and some other favorabilities, we are seeing some inefficiencies partially offsetting those benefits. So, there's obviously some moving pieces going on. The team continues, however, to focus on trying to make the restaurants as efficient as quickly as they can after they open the doors and after they understand what the recurring sales volume is so that they can schedule labor accordingly.

Okay. And just the last question, I promise. Can you possibly quantify the EPS benefit from that final week next year?

We haven't even given EPS guidance, so to carve that out just seems a little bit different than what our practice has been. But certainly all of the operating targets that we have provided do include the 53rd week.

Okay, I had to try. Thank you.

Nice work.

Alex Slagle, Jefferies.

Thanks. A question on the new Pollo Tropical stores in Texas. I wonder if you could talk to the sales mix dynamics you're seeing initially in those stores and how it might differ from some of the other markets and your expectations. Kind of taking everything from product mix, check size, frequency, drive-through usage, anything you want to point out.

I think the main take-away for us right now is one of the big reasons we wanted to move into Texas was because we were going to have the ability to use some of Taco Cabana's marketing dollars if we had to. But the fact is we really haven't had to do that. That's because as we open these restaurants up, not only the social, the media buzz, but the repeat trial has been very, very encouraging. So, when we open up, for instance we opened up the one here in Addison, and then three months, two, three months later, we opened up two more in Frisco. And both of those restaurants continue to do -- perform very, very well. And that's without using media dollars. So, I think that sampling has really been a big part of helping cement the trajectory of these restaurants. The ones in San Antonio are doing very, very well and the ones we've built in Houston are -- we are -- how do I say this. We are pleasantly surprised; we are encouraged; we are excited about it. We like what's happening.

In terms of sales mix, Alex, I think you're finding the new menu items that were developed specifically for Texas and the culmination of a lot of the other models that we have rolled out in the past. We are selling a lot of the Calypso beef, the new dinner rolls that are made of sugar cane. Those things are very, very popular.

And I think it's interesting. When you first open up one of these Big Blue restaurants, you have more dine-in and less drive-through because people want to come in and experience the ambience and what's going on inside the restaurant. And then once they're comfortable with their -- and they are able to maneuver around the menu, then they start going in the drive-through. And also now that we are rolling out the app, you're seeing more and more off-premise consumption.

Great. Thanks. Just one more question I may have missed on the cost of goods with the inflation and the pricing you're putting out there. Did you mention anything or have any expectations for is that pricing really going to offset or to what degree it's going to offset the inflation in 2015?

The inflation right now, as we expect it, is to be in the mid-single digits on the commodity inflation front. With pricing, we are intending to implement pricing at Pollo of a little over 4% effectively in 2015, 2.5% at Taco. So it will not completely offset the commodity cost increases we are expecting. However, some of our healthcare costs have come in better than expected and we are looking for other opportunities in the middle of the P&L that we think can help bridge the gap.

Thank you.

Thank you. At this time, this does conclude today's Fiesta Restaurant Group teleconference. You may disconnect at this time and thank you and have a great day.