Fiesta Restaurant Group Inc (FRGI) 2014 Q4 法說會逐字稿

Greetings and welcome to the Fiesta Restaurant Group fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Lynn Schweinfurth, Senior VP and Chief Financial Officer. Thank you. You may begin.

Thank you. Good afternoon and thank you for joining our call.

Our fourth-quarter and full-year 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 not based on historical information. These forward-looking statements include, without limitation, statements regarding our future financial position and results of operations, business strategy, budget, projected costs and plans, and objectives of management for future operations.

Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in our SEC filings.

Please note that today's conference call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and a reconciliation to comparable GAAP measures is available in our earnings release.

Now, I'd like to turn the call over to Tim Taft, President and Chief Executive Officer.

Thanks, Lynn, and good afternoon, everyone.

We capped off yet another great year of outstanding results at Fiesta Restaurant Group with strong fourth-quarter performance. We're very proud of our support teams in the corporate and brand offices, as well as our operating teams in the field who work hard every day to deliver a great experience to our guests, and ultimately, to our shareholders. We believe that the initiatives we have in place have positioned us well for continued growth, and we are excited by opportunities that lie ahead of us.

In the fourth quarter, we grew revenues by 14.7% compared to the prior-year period through a combination of 24 net Company-owned restaurant openings and strong comparable restaurant sales growth at both brands. These top line improvements also translated well to our bottom line, along with the benefits our refinancing last year as our 2014 adjusted EPS grew by 70% over the prior-year period.

In the fourth quarter, Pollo Tropical comparable restaurant sales rose 7.7%, while Taco Cabana comparable restaurant sales grew 6.1%. On a two-year basis, Pollo experienced a 14.7% comparable restaurant sales increase, while Taco Cabana experienced a 3.2% increase. Note that Taco Cabana contended with harsh winter ice storms in the fourth quarter of 2013. Lynn will speak to the many specifics in a moment, but for now, suffice it to say that this momentum for both brands has continued handsomely into the first quarter, as well.

Now, I'd like to try something little different with respect to how our business results are communicated. We have to believe the investment community is more interested in hearing what we believe are our strategic challenges and what we're doing about them versus listening to sauces and side items promoted during the quarter. What we have proposed therefore is an ongoing dialogue on our progress against a handful of key business drivers we have identified for both brands. Hopefully, you are going to come away with a greater understanding of our priorities and how this management team is navigating the waters of significant growth.

One fact puts Pollo Tropical's growth trajectory into crystal-clear perspective. The Company took 26 years to reach its 100th Company-owned domestic location. We believe it will take us less than 4 to get to our second 100.

Let me begin with our first business driver, human capital. The history of the restaurant business is littered with people and brands that wanted to grow faster than they should have or were capable of. Often times, they cut corners or put inexperienced operators in charge of new units in new markets. It is our greatest desire we not make those same mistakes.

As we have picked up the pace of development for Pollo Tropical, we recognize the security and luxury of building restaurants in Florida, where the future restaurant leaders are already in place and looking for their next assignment. Although we will continue to add new restaurants in core Florida markets, our energies will be focused on growing our restaurants in new and emerging markets, where training and replication of the Pollo differences will be critical.

Let's talk about the Texas market for a moment. Less than a year ago, we were anxious to launch our new Big Blue Caribbean style prototype with its reworked menu. Thus far in Texas, we have opened 11 Big Blue Company-owned restaurants in total with several currently under construction. We have the opportunity to pick up that pace, but in order do so, we believe that we must operate at a higher level with uncompromising commitment to staffing and training.

With that in mind, we have three training restaurants in Texas located in Houston, San Antonio, and Dallas, and we will be adding more in the near future. We proactively grow the brand. We believe that a really talented, newly trained GM in Texas needs a little more seasoning than their counterpart in Florida. Therefore, we are investing in the Texas restaurants in order to support and train these GMs properly. This year, 10 to 12 planned Pollo openings will be in Texas, and our goal is to have more restaurants in each market developing the leaders of future locations.

Secondly, let's talk about oil. Last month Lynn and I attended the ICR exchange conference in Orlando. Far and away, the most frequently-asked question was related to the negative effect that oil prices will have on the State of Texas where we have such a high concentration of restaurants. Quoting a recent article in the Dallas Morning News, in 2014, Texas led the nation in job growth to the tune of 457,000 jobs. That was a 4% increase and double the next state on the list. This result followed job creation of 2% in 2013.

It's important to note a couple things. One, of the 450,000 jobs that were created in 2014, only 39,000 were related to oil exploration and refining. Two, there is no doubt the oil production is slowing down, but we have little to no exposure in west or south Texas where exploration is most active. Three, lower gas prices should rightfully be viewed as tailwind and not a headwind, as it currently costs about 50% as much for Texans to fill their gas tanks as it did a year ago. That's a lot of discretionary dollars flowing back into the economy. Certainly, we will monitor and provide future updates into what we are seeing.

Next is our remodeling and re-imaging efforts. By mid-year, the Taco Cabana system will be completely remodeled. We have no doubt the restaurant refresh coupled with enhanced operations, marketing, and improved media buy-in are reflected in the sales growth we are experiencing. Drive down three streets in Orlando, and you will see our new Big Blue prototype under construction. The reaction to the new design, frankly, has been more than we hoped it would be, and its expansion into the rest of our markets is greatly anticipated by our loyal fans. We believe the new brand image created by this design is a game changer as the building fulfills more effectively the promise of a uniquely Caribbean experience.

As we have shared in the past, many of our customers, even second and third generation, have said that our former design typified a building that would offer Mexican fare. We therefore view big blue as a seismic shift in how we are showcasing the brand. And, beginning in Orlando, we will be re-imaging our existing restaurants in that market, so the same big blue signature elements will be apparent throughout Orlando. This will ensure a consistent brand image that is updated and relevant. You should expect that once Orlando is completed, we will look to expand our re-imaging efforts to the rest of the Florida markets starting in 2016.

As a reminder, the South Florida restaurants are our highest volume in the system averaging between $3 million and $4 million per unit. That kind of human traffic places great strain on building, kitchen equipment, and comfort systems. We look at the re-imaging initiative as a means to not only elevate the brand in the eyes of our guests while taking care of these most precious revenue producers but to also provide a more pleasant work environment for our team members.

Fourth is our off-premise consumption; this is more than an initiative. It will be a material and measurable element of our future evolution with respect to how our guests will order, receive, and consume our products. Become an off-premise consideration: customers currently and in the future will be looking for food that they feel good about eating and asking questions about whether they have healthy menu choices and if they have the confidence that the products are not filled with chemicals and trans fats.

They'll expect that the food, when brought home, is transported well. Meaning it is not degraded and become unrecognizable when placed on the table, and it tastes good as if they had dined in the restaurant. They'll ask questions such as does the food have a strong price value? Am I impressed with the quality for the buck?

Finally, they're going to demand convenience. My time is short, my life hectic, how can I accomplish all of the above and make it easy to order and pick up?

Off-premise includes catering, which currently represents only about 1.5 points of sales for both brands. In our view, catering sales should be able to reach high single digits to low double digits as percentage of restaurant sales over time. Off-premise often includes online ordering: the use of our new mobile App which has now been rolled out to over 50% of our elevated Pollo markets as well as to go and drive through. Basically, every meal that is not consumed on property falls into this category.

We believe it's not as simple as putting packaging materials together and advertising or cobbling together a few things and expecting them to work smoothly. It will be a fully integrated approach from labor scheduling and kitchen layout to the refined use of technology and processes that integrate food production across distribution discipline.

Lastly is our development pipeline and real estate selection: not only do we have complete visibility into our 2015 pipeline, John Todd and his team are already focused on 2016 and beyond. For Pollo Tropical, we have already opened three Company-owned restaurants in 2015 with 13 currently under construction. Restaurant openings will be paced pretty evenly throughout the year. As previously discussed, we anticipate 10 to 12 restaurants in Texas, 2 in Nashville, which will enable us to be substantially media efficient by the third quarter in this market, and we'll add 4 in Atlanta and the rest in Florida.

To remind everyone, our Company-owned development strategy can be categorized into three different groups. There is a legacy south Florida markets where we have the highest averaging in volumes, as I mentioned earlier; the low to mid-penetrated markets which include Jacksonville, Fort Myers, Naples. Tampa, and Orlando; and, lastly, our emerging markets in Texas, Atlanta, and Nashville.

In terms of Taco Cabana, we'll opportunistically develop this concept in Texas while testing our new Cabana Grill outside of Texas. Our second Cabana Grill opened in the fourth quarter in Jacksonville. Although early, we are please the with the reception, but time will tell as the story unfolds.

The Taco Cabana team should be congratulated for their advances they have made over the last three years. We believe the brand is starting to show consistent strength, and that improvement has come as a result of hard and fine work. To sum up the second quarter and year, I must say I could not be more proud of our team for their accomplishments. Opening successful restaurants is hard enough, but to do it halfway across the country in a completely new environment without the traditional support network with a new prototype is quite remarkable.

The question of whether Pollo Tropical would be embraced by Texas has been answered with a resounding yes. Our direction moving forward will be to protect and grow our core market while we enter and develop new geographies. With that, let me turn the call back over to Lynn.

Thank you, Tim.

We are very pleased with the financial and operational progress we made in 2014 against our key strategic initiatives. We have opened more Company-owned restaurants than ever before and have readied our organization for continued growth to support accelerated new restaurant development and continued sales growth of our existing restaurant base.

Let me begin with a summary of the fourth quarter. We grew total revenues by 14.7% to $156.2 million during the recent three-month period as we benefited from sales contributions from new Company-owned restaurant openings over the past year and terrific comparable restaurant sales growth at those brands. Pollos delivered comparable restaurant sales growth of 7.7% and has now delivered 21 consecutive quarters of comparable restaurant sales growth.

The growth in comparable restaurant sales resulted from a 3.8% increase in comparable guest traffic along with a 3.9% increase in average check. Average check was driven by menu price increases that positively impacted restaurant sales by 4.3%.

We continued to see a small decline in mix due to the implementation of the Tropical Lite menu across the balance of the system. And, while Tropical Lite carries a slightly lower sales mix, it is ultimately more profitable.

Tacos similarly delivered strong comp sales growth of 6.1%, marking its best performance since the fourth quarter of 2012. You may recall that ice storms in Texas negatively impacted Taco's comparable restaurant sales performance in the fourth quarter of 2013.

The increase in comp restaurant sales resulted from an increase of 1.6% in comparable guest traffic and a 4.5% increase in average check. Average check was driven by menu price increases that positively impact restaurant sales by 1.9%,and a positive change in sales mix due to the implementation of new menu boards during the first quarter of 2014.

Sales growth momentum has continued so far in the first quarter with quarter-to-date comp sales growth of 8.6% at Pollo and 4.1% at Taco through this past Sunday. Restaurant-level adjusted EBITDA as a percentage of restaurant sales improved en 10 basis points to 20.9% due to favorable cost of sales, labor, and rent expenses that were partially offset by higher advertising, other operating, and pre-opening expenses. In dollar terms, restaurant-level adjusted EBITDA rose 15.2% to $32.5 million.

Improvement in G&A year over year as a percentage of revenue drove 80 basis points of margin expansion and contributed to a 23.3% increase in consolidated adjusted EBITDA to $20.7 million and a 100-basis-point improvement in consolidated EBITDA as a percentage of revenue to 13.3%. 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 price increases, a shift in sales mix to more profitable menu items due to Taco's new menu boards, and effective supply chain initiatives. These more than offset commodity cost increases. Taco took about 1% in pricing in mid-October, and Pollo took over 5% pricing in mid-November in 2014.

Restaurant wages and related costs improved as a percentage of restaurant sales by 70 basis points as sales growth at both brands and lower medical costs more than offset inefficiencies and incremental labor at new, elevated Pollo restaurants. Rent expense improved as a percentage of restaurant sales by 30 basis points, as sales growth more than offset higher rent at newer Pollo restaurants.

Other restaurant operating expenses increased as a percentage of restaurant sales by 70 basis points. This was a consequence of timing related to certain repair and maintenance expenses, higher real estate taxes, and higher general liability expenses. In addition, we occurred travel-related expenses associated with bringing employees to Texas to support and work in our new Pollo restaurants. These increases were partially offset by lower utility costs.

Advertising expense increased as a percentage of restaurant sales by approximately 50 basis points due primarily to the timing of promotions. Pre-opening costs increased by $0.4 million to $0.8 million in the fourth quarter of 2014 due to six Company-owned restaurant openings in the fourth quarter versus three in the year-ago period and the timing of expenses for future restaurant openings, which are typically incurred beginning four to six months prior to opening. We are expecting pre-opening costs of between $4 million and $5 million in 2015.

G&A expenses increased $0.7 million to $13.3 million in the fourth quarter due primarily to human capital investments, as Tim mentioned, as we have more managers in training than ever before to support the ongoing Pollo expansion effort in Texas, Georgia, and Tennessee. We also have made investments in our infrastructure to support our growth strategies. However, as a percentage of revenue, G&A expenses improved 80 basis points to 8.5% during the quarter due to the impact of sales growth that was substantially higher than that of the increase in G&A expenses.

Depreciation and amortization increased $0.8 million to $6.1 million in the fourth quarter of 2014 due to new Company-owned restaurant openings over the past year and remodeling at Taco Cabana, partially offset by impact of sale lease back transactions completed at the very beginning of FY14 and in the prior fiscal year.

Interest expense decreased by $3 million to $0.5 million in the fourth quarter compared to the prior-year period. This expense reduction was due to $134 million of reduction in our outstanding debt to $66 million at quarter-end from $200 million and a reduction of our interest rate on borrowing from 8.9% to a weighted average of 1.8% at the end of the FY14 under our senior credit facility.

Due to improved leverage ratios, our variable margin rate above LIBOR improved by 25 basis points, and this is reflected in a sequential reduction in interest expense compared to prior 2014 quarters. We incurred an impairment charge of $0.2 million in the fourth quarter related to a previously closed property that is sub-leased to a third party.

Our fourth-quarter income tax provision was derived using an estimated annual effective income tax rate of 36.7%, while in the same period last year the provision for income taxes was derived using an estimated annual effective income tax rate of 29.1%, excluding discrete items. The work opportunity tax credit, or WOTC as we refer to it, was reinstated for 2014 in December. This is reflected in our fourth-quarter tax rate. The year-over-year tax rate increase in 2014 compared to 2013 is due to the retroactive reinstatement in 2013 of WOTC for 2012 resulting in tax credits for both 2013 and 2012 being recognized in 2013.

Net income increased to $9 million in the fourth quarter of 2014, or $0.34 per share as compared to a net loss of $5.5 million in the prior-year period, or $0.22 per share. The fourth-quarter 2013 results included the negative impact of a pretax charge of $16.4 million, or $0.42 a share after tax, related to the early extinguishment of debt.

Our refinancing efforts in late 2013 contributed EPS growth of 25% in 2014 due to a combination of lower debt costs partially offset by the share impact of an equity offering. On an adjusted basis as we laid out in our earnings release, net income increased over 84%. In addition, even after the impact to our share base associated with the equity offering completed in late 2013 as mentioned, adjusted EPS grew 70% in the fourth quarter.

Turning to brand margins, at Pollo, margins contracted in the fourth quarter due primarily to other operating expenses that were negatively impacted by higher costs for certain repair and maintenance expenses along with additional training expenses in new markets. These were partially offset by the improvement in cost of sales. From a profitability standpoint, adjusted EBITDA at Pollo grew 20.2% in the fourth quarter of 2014 to $13.5 million off of the 23.6% increase in restaurant sales.

Taco Cabana restaurant margins improved this quarter due to sales leverage, favorable product mix as a result of our new menu board, and favorable timing of advertising expenses. From a profitability standpoint, adjusted EBITDA at Taco increased 29.5% to $7.2 million compared to the prior-year period off of a 6.5% increase in restaurant sales.

At quarter-end, we had a cash balance of $5.1 million and paid down $5 million of borrowings under our senior credit facility compared to the end of the prior fiscal year. After reserving $8.8 million for letters of credit, we had $75.2 million of borrowing capacity under our senior credit facility, and we are in compliance with all related covenants.

Overall, we met or exceeded all of our 2014 commitments. We opened 22 new Pollo restaurants and 4 Taco restaurants, meeting the high end of our 2014 new Company-owned restaurants development range. Two Company-owned restaurant closures were delayed and will now close in early 2015.

Overall, for the year, Pollo exceeded our initial comp store sales commitment of 3% to 5% with comp store sales coming in at 6.6% in 2014. Taco delivered comp store sales of 3.3% meeting the high end of its initial comp store sales range of 1.5% to 3.5% in 2014.

G&A expenses of $49.4 million fell within our initial guidance of $48 million to $50 million. Our tax rate of 36.7% was within our expected range of 36.5% and 37.5% with the reinstatement of WOTC. We did increase our capital spending during the year, but with a very good reason, accelerated timing of new restaurant development, which just happens to carry our highest return on investment. And, as I mentioned previously, we have strong liquidity with over $75 million available under our credit facility at the end of FY14.

Now, let's discuss our 2015 financial expectations. Consistent with our preliminary guidance provided last quarter, we expect mid-single-digit comp store sales growth at Pollo and low single-digit comp store sales growth at Taco. As a reminder, the Pollo comp sales expectation includes approximately 1% in sales cannibalization similar to 2014 as we continue building our presence in existing markets. In addition, year to date in 2015, we have experienced lower promotional discounts than we currently expect to carry for the balance of the year.

G&A expense expectations continue to be between $53 million and $55 million, which compares with $49.4 million in 2014 and will drive margin expansion given the higher revenue base. Higher G&A is a consequence of training and staffing expenses Tim addressed earlier that we view as critical to ensure a successful expansion in Texas along with infrastructure needs for a successful growing restaurant Company.

The effective tax rate for 2015 is expected to be between 38% and 40% assuming WOTC is not reinstated. If WOTC is reinstated for 2015, the tax rate would improve about 150 basis points. Commodities will be materially higher than what we have experienced over the past several years, with inflation that we continue to project in the mid-single digits for our consolidated purchases. The increase will be in the mid- to high single digits at Pollo and low single digits at Taco. Protein inflation, especially chicken, is driving a material portion of these increases.

Also, cost of sales as a percent of restaurant sales is expected to increase sequentially from the first to the second quarter and from the second to the third quarter in 2015, given our negotiated contract pricing. Healthcare costs will also increase as previously projected due to both higher costs and an increased number of employees participating in our Healthcare programs in compliance with the Affordable Care Act.

In terms of pricing, as I previously mentioned, we took pricing at both brands in late 2014 and are continuing to project full-year pricing at Pollo as a little over 4%. Taco, as recent as this week, increased prices by 1.5%, and in conjunction with the pricing taken last fall, Taco will carry effective pricing of 2.5% in 2015. Overall, we believe we can bridge the dollar impact of higher costs with pricing cost mitigation tactics and expense savings opportunities.

We continue to focus on accelerating new Company-owned restaurant development balanced with ensuring our restaurant teams are adequately trained to deliver a great guest experience from day one. Due to additional progress, we are increasing our new Company-owned restaurants projected openings in 2015 by two. We now plan to open 28 to 32 new Company-owned restaurants in 2015.

Two restaurant closures we originally expected to happen in late 2014 have been pushed into 2015, and therefore, we are now anticipating that we will close up to six restaurants in 2015. Of the six restaurants, five will be Taco restaurants. These restaurant closures are primarily associated with highway expansions or lease terminations in trade areas that have become less vibrant.

Finally, given our progress with accelerating the timing of Company-owned restaurant openings this year and in early 2016, we are increasing our projected capital expenditures in 2015 to be between $90 million and $100 million. This consists of one, new restaurant development capital expenditures of $70 million to $77 million; two, capital expenditures to complete the Taco remodeling program, to implement a new Pollo re-imaging 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.

As a reminder, 2015 will be a 53-week fiscal year, and this extra week is factored into our operating targets. So, in closing, we are pleased not only with our financial performance in 2014, but also with the tremendous progress we believe we have made as an organization to prepare the Company to meet its long-term growth goals.

Operator, please open the line for questions.

(Operator Instructions)

Our first question comes from the line of Will Slabaugh with Stephens. Please proceed.

Thank you. I want to ask you first -- .

Hello?

One moment, please. Mr. Slabaugh, please proceed.

Yes, sorry about that. Can you hear me?

Yes.

Wanted to ask you first about Taco. Things are clearly accelerating there. Can you talk first what you think the consumer is appreciating that wasn't there before? Either the remodels or some of the menu changes? And then, secondarily what your plans are for the brand from here in terms of both keeping that comp momentum going, and then if you have plans for unit expansion that might have changed at all?

Well, first of all, I think it's not just one or four or five things. It's a combination of a lot of things. You mentioned a couple of them, Will. The fact that the restaurants are remodeled, the fact that all of the operating measurements that a customer gives us feedback on, is across the board are the highest they've ever been. So, the restaurants are operating at a higher level than they ever have. The food is more consistent. It's friendly. It's cleaner. All in all, it's just a better overall experience.

Because we have a sister Company, they have a sister Company called Pollo Tropical, the capital is a rare commodity. So, we've raised the bar on Taco Cabana, and we're looking -- continue to add additional sites, but we want them to perform at a higher level. So, we have challenged them, in the real estate department, to find future locations that are going to perform at a higher level. But our intent is to continue to keep that brand heading in the direction that it's going.

Got it. Just a quick follow up if I could on something you mentioned, Lynn, around people and training investments for next year. I wanted to clarify if that should show up on the P&L somewhere that maybe it wasn't as impactful in 2014, and might be more impactful in 2015 in terms of either labor or G&A?

Yes, I think certainly in 2014 you saw some of those training expenses in the other operating expenses line item, and that relates to employees that came over to Texas on a temporary basis and worked in our restaurants and incurred travel and related expenses. Turning to 2015, I think most of the training expenses you will see in the P&L will fall to the G&A line item which holds the managers and training expense. You saw some of that in 2014, and it will certainly continue and increase in 2015.

Great. Thank you. Congrats on the year.

Thanks, Will.

Thank you.

Thank you. Our next question comes from the line of Alex Slagle with Jefferies. Please proceed.

Thanks. I just wanted to clarify one thing on Taco Cabana. Lapping the new menu board roll out as we enter 2015, and maybe if you could just talk to how that impacts your outlook? The make-up of the same store sales for that brand? I know you have been getting a good positive mix component.

Right. Well, I think we will lap the menu board application in January -- or we have lapped it in January here in 2015. So, you won't see that impact on a go-forward basis. But, as we mentioned, we are certainly seeing some great momentum with the brand. Right now, our guidance is low single digits, but we've reported over a 4% same store sales, quarter-to-date number, so we are still seeing some good results there after the menu board lap.

Got it. Thank you. Then, one just on the cost efficiencies below the restaurant level. Obviously, seeing some nice G&A leverage. Maybe you could provide a few more details on the nature of the specific cost mitigation, expense savings, opportunities you've been looking at?

Yes. I think certainly on the cost mitigation side, it's really what we like to refer to as the belly of the P&L and looking for areas, particularly at the restaurant level, where we can see some cost opportunities.

Great. Thanks.

Thank you. Our next question comes from the line of Jeff Farmer with Wells Fargo. Please proceed.

Great. Thanks. Just quickly following up on Alex's last question there. So, talking about the cost efficiencies, specifically with those 10 or so Pollo Tropical units opened in Texas. I am just curious if you have had good or bad surprises on the cost-efficiency front across labor, operating, any other line item? It looks like you have done a good job of keeping those inefficiencies down, but I am curious what your further thoughts are?

Jeff, you used the term. There is inefficiencies, and there will continue to be some until we get to a greater penetration. I think that's why you find us putting just about 50% of the restaurants that we'll build next year in Texas.

Okay. Shifting to the top line for the same group of 10 restaurants, curious if you could share with us some of the common themes between some of those restaurants that are off to a stronger start on the top line and then the same question for some of those Texas restaurants that might be off to a slower start. Again, common themes across site selection, regional managers, whatever it may be?

I would say that overall the new restaurants in Texas continue to perform very, very well. There are new geographies that we're going into so they might be one-off. We're not really advertising and not borrowing money from Taco Cabana, like we thought we might have to, in order to get the message out. So, these restaurants are performing, and they're performing well.

The new restaurants that are not yet in the comp basis, that we might have been opening in Orlando and Tampa and some of the emerging markets, those, too, are performing very well. Adding to the mix for media efficiency in those markets, and as a result of that, you can clearly see trajectory of same store sales increases since we've gone to media efficiency. You've got a combination of restaurants that are being built in the core market in Miami, south Florida that are doing very, very well. Then those restaurants that we are adding into the emerging markets like Jacksonville, Atlanta, Nashville this year; and certainly in Orlando which is really much the prototype for what Dallas, Texas, and Atlanta will look like. We've got some media efficiency, and as a result of that, we're able to really drive same store sales handsomely.

Thank you.

Thank you. Our next question comes from the line of Joshua Long with Piper Jaffray. Please proceed.

Thanks. Tim, appreciate the color around the strategies and really wanted to clarify, or confirm rather, that the underlying strategies haven't necessarily changed although your discussion of and presentation of them in the conference call is a little bit more in depth now. I'm thinking, specifically in regards to training restaurants and how you're opening up the Texas markets. Nothing necessarily has changed there. It's just you're providing a little bit more of a different perspective than say prior conference calls. Is that fair to say?

It absolutely is. Josh, what the intent was, was to really focus on a handful of key business drivers to give you some insight, and everybody else some insight, as to how we're going about them. Lynn mentioned earlier in answer to one of the questions about the additional cost for bringing people from Florida over here to Texas restaurants. There has been a big shift in the last six months. And, in the beginning of the year when we were bringing folks over and moving them here and having them relocate, and then we had people that we were shipping and putting in hotels, and either -- or taking people from the restaurants here and shipping them to Florida to train.

That's all changing now. A, we realized that our -- we have come to realize that our site selection, our human capital selection, getting these general managers and putting them through our training program that we do not need to move people from Florida anymore. We are getting great, great candidates. They're doing a great job.

Secondly, instead of having to ship them to a Florida restaurant we have training restaurants now, and that's a big change from just a few short months ago. So, that's going to help. Our plan on a go-forward basis is to have more training programs, more training stores, so we can really accelerate if we want to the ability to ramp up development for Pollo. But, you're right in that no strategy changes have taken effect. All we're trying to do is report it in a way that we can go back to quarter after quarter and give updates, if that works for everybody. We're hoping it does.

Yes, I think it was very helpful. Staying on that same point, the discussion of the training restaurants -- one in each of Houston, San Antonio, Dallas. Is that the right number? We're still a far ways from reaching media efficiency in a lot of these markets. So, just trying to think about maybe the puts and takes between building a second training restaurant verses putting some incremental dollars around digital and media. Just trying to understand the pushes and pulls in these markets as you continue to build them out and work towards media efficiencies over time.

I will tell you that it's a great first step to have one in each of the markets, but as I mentioned in our earlier remarks, that we plan on adding more. So, we're going to have multiple training stores in each one of these cities that we're opening up. Now these are operating restaurants that we'll be able to run an increasing number of managers and general manager candidates through there. So, the more we have on the ground, the more we're going to be able to train restaurant managers, and then we'll be able to put them very efficiently into new operating units.

That makes sense. Should we expect any sort of material differences in either size, the prototype, the look and feel of the restaurants? We have seen a lot of the new big blues in Dallas and across the other markets. Should they be pretty similar? It's just a matter of moving new people in and training them on a rotating basis?

The customer will see no difference in the restaurants.

Understood. Then, maybe staying on that same point, Lynn, and shifting over to a modeling perspective. In 3Q, we had talked about the difference -- you'd provided some color around average weekly sales for comparable and non-comparable stores. I was curious if you have that information for 4Q?

Yes. Actually, it's been added to the back of the earnings release in one of our tables. For comp stores for Pollo, AUVs were $2.9 million, and for non-comp stores, AUVs were $2.1 million. The non-comp base makes up about 70% of the non-comp store base, is non-core Florida restaurants and emerging markets.

Understood. Thank you. Then, just a couple quick modeling questions on the extra week this year. Do you have an approximation for what that's worth on a sales or an EPS basis, however you are thinking about it?

Well, we got that same question last quarter, and unfortunately, I'm going to give you the same answer this quarter. That is, we are not providing EPS guidance. So, therefore we are not providing EPS guidance on the 53rd week.

Understood. And then, shifting over to commodities. Last time we had spoken, sounded like you had about 70% to 80% of your basket locked. Just curious if that has stayed flat? If you had some opportunities to lock in some other items? Or, any other pushes and pulls on the commodity basket?

The majority of our commodity purchases are locked. However, we'll continue to look for opportunities throughout the year. One point of clarification that I provided in my prepared comments. The sequential cost of sales number as a percent of restaurant sales will sequentially increase from Q1 to Q2 and again from Q2 to Q3 just based on our contracts in place.

Understood. And then, implying that in 4Q, we should see that decelerate or at least be sequentially lower from 3Q?

Well, reasonably closer to Q3.

Okay. Understood. Thank you.

Thanks, Josh.

Thank you. Our next question comes from line of Alton Stump with Longbow Research. Please proceed.

Thank you. Good afternoon.

Good afternoon.

Good afternoon.

Great job with the quarter. As you look at the comp front -- Taco Cabana, in particular, I think has been the most surprising to see that accelerate. This is a hard question, I realize. But, how much of that do you think is due to the economy getting better? Whether it's gasoline prices coming down versus your own improvements that you have made internally?

Well, I think the expression that high tides raises all boats. There is no doubt that an improved economy is going to have an impact. I think that what we've seen over the last three years, as I've mentioned, a quarter after quarter, year after year of improvement of operations, and we can't discount by any stretch the amount of money that we spent in remodeling these restaurants. And, when you remodel a restaurant the lift that it gets. We're also, versus a year ago, we have a new media planning and buying agency that makes our buys a lot more efficient than they were before, so you are seeing our spots more frequently than you have in years past. As I mentioned earlier to Will, it's a combination of a lot of those things that at the end of the day, the operators at the restaurant level are making things happen.

Makes sense. One quick follow up, and then I will hop back in the queue. Not asking you to provide guidance out past 2015 which I am sure you don't want do. Is it safe to say, just in your opening comments, Tim, as you talk about labor and spending investing to make sure you have the right labor force, particularly in Texas, with Pollo getting in there -- would you say that you are positioning yourselves that in 2016, you could ramp up off of the current level that you have planned for Pollo builds, at the 10 to 12 number? Or, is that more of a 2017, 2018 event that we could see that ramp up?

I think we've been consistent from the very beginning, and as an enterprise, our goal is to grow from 8% to 10% each year. We haven't said anything contrary to that. There is no doubt though that if we want to be in a position to accelerate growth, the very first thing that is going to have to take place is having quality managers and general managers enter the system.

We've been very consistent when talking to analysts and the investment community, that our number one issue of holding the Company back for accelerated growth, really was human capital. Because of the fine job that Lynn has done on debt and the cost of money to build, our real estate and development teams are really cranking out a lot of opportunities for the brand. So, we've got to get the people sidelined up. And, when that happens, we may have something new to talk about. But, until then, we just plan on doing a better job today than we did yesterday. That's going to be an ongoing effort for us.

Got you. Makes sense. Thank you.

Thank you, Alton.

(Operator Instructions)

Our next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed.

Thank you. Congrats on the great quarter. Tim, as we talk about the remodels in Orlando, and potentially down in south Florida the following year, can you maybe talk about some of the throughput opportunities, particularly in south Florida, driven by both remodel and perhaps even some technology, whether it's mobile or some other IT initiative?

If I understand what the question, you are wondering how are we going to improve throughput in south Florida?

Yes.

Yes, okay. Great question. Thanks. I think one of the things that you'll see that we have already done versus a year ago is we're eliminating some of the periphery items that -- whether it's fish or whether they're fajitas or slushies or some kind of item that really slow the kitchen down. And, we're in the process even now -- ribs, we've had riblets. We're starting to phase those out. As a result of that, the operations are going to be that much more efficient. We'll be spending more time or have more time to spend on our core competency which is chicken -- the big three of, obviously, chicken and pork and the Calypso beef when that enters the market. But, it's a combination of a lot of things.

As I mentioned, Nick, we've got about 50% of our elevated restaurants have the online App now, and we've got restaurants, the new restaurants, that are opening are opening with pods. Those are the hand-held order takers which helps speed the input of orders into the kitchen facility. More than anything else, what we're -- all of those things are geared towards throughput and increasing same store sales.

Got it. Are the remodels themselves going to give you an opportunity, whether it's the layout of the kitchen, or the drive-through, to even improve it a little bit more?

Well, I think most of our restaurants are pretty much land-locked. We've got a bunch of restaurants that are $4 million restaurants that have less than 20 parking spaces. That why this emphasis of off-premise consumption is such an important part, especially in south Florida, because those restaurants are really -- I think there is only a certain amount that you can get done or serve inside those four walls.

And, that's why the emphasis for catering, the online App, to-go processes, is so critical. When you look 5, 10 years out in advance, that's where the big growth is going to continue to come from for Pollo. I think, that in terms of getting into kitchens and kitchen production facilities, that's not going to be part of the re-imaging. It's going to be more the signature elements and comfort systems, and the areas that the customers will see and experience.

Got it. In terms of the lower calorie menu that's being now introduced in Florida, how well is that mixing? And then, when is the timing of the Calypso beef introduction?

I, personally, am a big fan of the Calypso beef. I don't know if there is a bigger fan than myself. Danny Meisenheimer, the Chief Operating Officer, said recently that he believes that the [delite] menu is the potential to be a game changer for the brand. Just in terms of the mix and how people are using it. And, as Lynn had mentioned in her comments, about what that does to mix and what that does to profitability. But, as we get into the future and we start having, like everybody else, to put menu board calorie content on all of them. I think people are going to give them yet another reason to come to Pollo and that group of meals is a center.

Okay. Lynn, just one question for you on the ad spend. Given the volatility quarter to quarter, could you maybe help us direct -- or maybe direct us in terms of the cadence of that spend in 2015?

Well, it's certainly going to vary. But, I would say right now, we're expecting a heavier spend in the first quarter, and then that spend will go down a little bit in the back half of the year. But, that could change. And, overall, Pollo is typically spending about 2.5% of revenues or restaurant sales, I should say, on advertising, and Taco, 4%.

Perfect, Lynn. Thanks so much.

Thank you. Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed.

Good afternoon. I just had a quick follow up on the people side of the business. I guess we've heard from other industry participants that the labor market might be tightening up in certain regions. Turnover picking up for some and an availability of quality labor. Can you just touch on what you are seeing not only in Texas but in other emerging markets in that dynamic?

I really have nothing to offer other than what you just said. I think that when the economy gets better, you have more and more turnover. People are looking for a higher wage. I will tell you that one of the things that Pollo Tropical is blessed with and that's very low management turnover. And, their average tenure of a lot of their full-time employees is really just about the highest I have ever heard anywhere in the industry.

I will say, that one of the things that we're working on, and you'll hear about it in coming quarters is a general manager program that we want to put into place that really gives the general manager, the operator, some skin in the game. It will make us, we believe, a further opportunity to be employer of choice. Lynn is constantly putting together programs with HR to make this a more desirable place and a place that they can grow their career. And, one of the advantages that we believe that we have and people give us the reason that they are choosing to come work at Pollo, is because of the explosive growth, and they see an opportunity for them to make a career. So, we don't see any change in that. We believe that we've got some advantages there.

That certainly sounds interesting. Then, Lynn, one more question for you just on the labor cost side. You mentioned higher wage inflation and the cost associated with ACA into 2015. Can you help maybe qualify a little bit a little more color along those lines into 2015?

We haven't really quantified what the impact of ACA will be in 2015 verses 2014, but what I will say is we're trying to keep our restaurant labor margin at least neutral year over year as an organization.

Okay. Thank you.

Thanks Brian.

Thank you. We have no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.