Fiesta Restaurant Group Inc (FRGI) 2015 Q3 法說會逐字稿

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

Thank you. Good afternoon, and thank you for joining our call. Our third quarter 2015 earnings release was issued after the market closed today. If you 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 will include statements that are not based on historical information. These forward-looking statements include without limitation statements regarding our future financial position and results of operations, business strategy, budget, projected costs and plans, and objectives of management for future operations. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in our SEC filings.

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

Thank you Lynn, Good afternoon everyone. Even though it's every operator's objective to not miss on expectations, we have for the first time in our history, and even though the performance is not up to our usual standards, we have got a lot to be proud of, and the reasons behind the miss bare a good deal of consideration. It is important to note that our business fundamentals remain strong, and we're still on track to deliver annual operating targets that we set out to achieve in the onset of the year despite these hiccups.

During the quarter revenues grew by 10.8%, as we benefited from the combination of 27 net company-owned restaurant openings, as well as comparable restaurant sales increases at both brands. Pollo Tropical comparable restaurant sales grew 4.2% during the third quarter, and 10.1% on a two-year basis. Extending its track record of positive gains to 24 consecutive quarters. The growth consisted of a 5.2% increase in average check, but it was offset by a 1% decrease in comparable transactions as I will explain. Taco Cabana has been firing on all cylinders, comparable restaurant sales grew 4.8% during the third quarter, which included a 0.4% decrease in comparable transactions that I too will explain in a moment in detail. On a two-year basis comparable restaurant sales were 8.3%. This extends Taco Cabana's record of positive comparable restaurant sales gains to 7 consecutive quarters, and 20 of the of the past 21 quarters. Margin contraction led to only a modest increase in earnings growth compared to a year ago. Lynn will discuss the cost drivers in a few minutes, but they will mainly consist of commodity increases and operational inefficiencies at our newest Pollo restaurants. I would therefore like to concentrate on explaining our sales drivers, and particularly the transaction to call in both brands. Let's start with Taco Cabana as its core reason for negative transaction was the Avian flu related egg shortage, and the impact of pricing on the breakfast day part. As you are aware the dramatic nationwide egg shortage has caused the cost of eggs to skyrocket. Although we were able to maintain our egg supply without interruption, we were forced to take significant price increases at the beginning of the third quarter on our egg related breakfast menu items at Taco Cabana. The price increases were favorable to our check average, but negatively affected breakfast transactions.

Note, that prior to the mid-summer egg prices breakfast had been the most significant transaction driver for the brand, and that momentum was erased with the price increase. Importantly, by the third quarter we offered our guests some pricing relief to start the recovery effort of recapturing those lost breakfast transactions. October month to-date comparable sales at Taco Cabana increased 1.5%. We are pleased that breakfast transactions are beginning to recover, with an increase of 0.4% two weeks ago, that preceded severe rain experienced in Texas over the past week.

With respect to Pollo, the first factor that negatively impacted transactions in the third quarter was related to planned sales cannibalization of existing restaurants when we open up new restaurants. As we have stated in the past, our comprehensive growth strategy includes adding new Pollo Tropical restaurants in our existing markets, that meet our investment return requirements and improve overall operating quality and brand awareness. As cannibalization relieves some operational street from high volume restaurants, and allows us to significantly grow the market share, in the short-term it creates sales cannibalization that negatively impacts guest traffic. In Q3 transaction comps were adversely impacted by cannibalization by nearly 1.5%. As more and more restaurants enter the comp base, we expect the impact to increase to a range of about 2% to 2.5% in 2016.

Turn to this past Sunday, October month to-date comparable sales were approximately 1% at Pollo Tropical. The impact of cannibalization to comp transactions was almost 2%. In addition, we contentiously tried to balance our October marketing window with minimal operational complexity, as we rolled out various supply chain and IT initiatives we believe will positively impact margins as early as Q4, and for years to come. While we have been able to manage the negative effect of sales cannibalization over the past two years, this pressure was amplified during the quarter by weather, as we experienced much higher than normal precipitation in our core Florida markets during August and September, with two tropical storms and considerable flooding throughout the northern part of the state. The effects of this weather led to a decline in transactions of almost 1.5% We continue to experience more rain in Florida than is typical. To put a finer point on how we're able to grow market share dramatically, since 2012 we have grown the number of transactions in our three South Florida markets, Dade, Broward, and West Palm Beach counties by over 4 million transactions. In 2014 alone we produced over 1 million additional transactions in these three same markets. To round out our view of the Pollo transaction counts, we have also been underspending on marketing in key South Florida DMAs, in order to feed emerging markets that were not yet, or only recently became media efficient. This includes places like Tampa, St. Petersburg, Atlanta, Jacksonville, Orlando, and Nashville. Now as Paul Harvey would say, now you know the rest of the story.

Considering these factors, overall growth and demand for our products has actually been quite strong. We have successfully added new stores to existing and emerging markets, and captured a larger share of our potential customers' wallets. Our intention in 2016 is to increase overall marketing expenditures as a percentage of sales, so that we not only spend what is appropriate in South Florida, but also invest in driving brand awareness in our newer markets including Texas. We believe the increase in media spending across all markets, especially our three key South Florida counties, coupled with newly created media efficiencies, will put us in an improved position to drive much needed awareness throughout our marketing footprint. In terms of brands initiatives, our R&D of supply chain teams have been focused on reducing our chicken costs, as there has been a contraction of chicken supply for smaller whole birds. This has caused related costs to increase substantially this year over last.

Our current initiatives are centered around offering more dark meat chicken options, and purchasing larger chickens for diced chicken needs, while ensuring that we are delivering high quality products. We recently rolled out these initiatives, which we believe will benefit in the fourth quarter and beyond. In fact, we believe chicken costs will drive down our overall commodity basket down in 2016 versus 2015. In particular we believe increased marketing at Pollo that we discussed earlier, coupled with new product news at both brands, will help drive transaction growth in the coming year. In addition, we will be rolling out loyalty programs at both brands, continuing our remodeling efforts at Pollo, and continuing to focus on off-premise transaction growth. These efforts in conjunction with our continued focus on consistency, quality operations, and new restaurant development, should allow our Company to generate meaningful growth in 2016.

Turning your attention to other important business drivers, like human capital. Our people are the key to Fiesta's success, and we have therefore dedicated significant resources to properly train and engage our managers and team members. This paid great dividends during the third quarter, in particular as we opened the largest number of restaurants in a single quarter, with 15 openings. Guest surveys demonstrate that high-quality execution is in place in our newest markets in Texas. Where operating metrics are exceeding the brand in key areas, measured including speed of service, taste, cleanliness, and friendliness.

These are very encouraging results, and as we accelerate our new restaurant development into 2016, we will continue to enhance our recruiting process and resources, to attract and retain great talent, and invest more in training restaurants to develop future managers within their own markets. Which leads us to development update. Through the end of the third quarter we have opened up 28 of the 32 to 34 restaurants we had planned for this year. The 28 of course include 15 aforementioned openings during the quarter, which consisted of one Taco Cabana in Texas, and 14 Pollo Tropical restaurants. The Pollo Tropical openings consisted of two in Tennessee, three in Georgia, four in Texas, and five in Florida. We are also converting the Cabana Grill outside of Atlanta into a Pollo Tropical restaurant, which will result in a total of 11 Pollo Tropical restaurants in the Atlanta DMA by the end of 2015. We continue to test the 24-hour format of Taco Cabana under the Cabana Grill logo in Jacksonville.

Turning briefly to the fourth quarter, we have planned an additional promotional window in November, with a value emphasis starting November 2nd. We will launch the $3.99 chicken meal, and a $9.99 Family Meal Anniversary offer. Chicken rice and beans for both. Our signature offerings. We believe this promotion will improve the trajectories of comp transactions, as we did not have the same marketing emphasis in the prior-year period, and with these aggressive price points. For 2016 we'll pick up our restaurant development pace with 40 to 44 planned openings. All but 4 openings will be Pollo Tropical restaurants, and almost half of the Pollo Tropical development will be in Texas, with the balance in Florida and Georgia.

Our development pipeline remains healthy and our human capital is primed and ready to grow our footprint in new and emerging markets, as I have just indicated. Since Texas is a very important component of our development strategy, we thought it would be worth while to discuss the state of the Texas economy. We realize that some within the industry have talked about pressure that they are experiencing related to oil, but from our vantage point, we're not seeing any change in consumer spending patterns to-date, with the exception of impacts of weather.

We are noticing a little more competition for labor, nothing insurmountable, but in our estimation a reflection of the growing and diversified business environment in the markets in which we operate. Texas economic metrics continue to be stronger than that of the overall national economy. Next, our Pollo Tropical reimaging efforts. Early in the third quarter we completed the reimaging of two Pollo Tropical restaurants in Nashville, that were originally built under the old prototype. Together with the two recently opened big blue restaurants in that city, we are now at the scale to be media efficient in this market, and have just started our marketing push with overwhelmingly positive results thus far.

The original two restaurants in initial Nashville generated same store sales increases of between 5% and 9% in the third quarter. We're on schedule to reimage the Orlando market by year end, and have already completed the majority of our projects in the latter part of third quarter. Lastly, let's talk about off-premise business. We have set a goal to double our current off-premise business over the next ten years, and have positioned our first corporate director of off-premise consumption to spearhead this effort. Our off-premise business represents a tremendous growth opportunity for us, and we're committed to off-premise experience, by better understanding how do our customers order, receive, and consume our products.

We're building our catering, to-go, and drive through sales, by leveraging the successful introduction of online and mobile app at Pollo Tropical. For Taco Cabana we're in the early stages of rolling out a similar app, with plans to fully roll out the system-wide by mid-2016. Right now the Taco Cabana app is operational in the Dallas-Fort Worth area, where we have 46 restaurants.

In closing, there are so many great things happening at Fiesta, and we look forward to a promising 2016. We have accelerated development in 2015, opening 15 restaurants during the third quarter alone, and continue to do so in 2016. We will be building greater brand awareness through additional investment in broadcast media and new Pollo Tropical markets, and increasing weights in our existing DMAs. These efforts will perhaps make up for the strategic sales transfer we have created in most every market we serve. We will benefit from a more favorable commodity outlook beginning in 2016, which will help our cost of sales line considerably. And allow us to increase prices more modestly than we have in the past year. With that, let me turn the call back over to Lynn.

Thank you Tim. As Tim mentioned we opened more restaurants during the quarter than any previous quarter, and while these openings did stress our margins as expected, I continue to be impressed with the abilities of our operating team to control margins as well as they do. From a transaction perspective we had some short-term challenges that I will further help quantify. That being said, our two brands are extremely competitive in the marketplace, and we continue to be focused on long-term profitable growth in the years ahead.

So let me next provide a summary of our quarterly financial results, after which I will review our full-year outlook, and then walk you through our initial operating targets for 2016. For the third quarter we grew total revenues by 10.8% to $172.1 million, through sale contributions from new company-owned restaurant openings over the past year, and positive comparable restaurant sales at those brands. Pollo generated comp restaurant sales growth of 4.2%, the growth consisted of a 5.2% increase in average check, but was offset by a 1% decrease in comparable depth traffic. As Tim mentioned earlier, third quarter comp transactions were negatively affected by sales cannibalization and rainy weather in Florida.

Together these factors negatively impacted transactions by approximately 2.5 percentage points in the third quarter. Average check was driven by menu price increases that positively impacted restaurant sales by 5.4%. Taco Cabana generated comp restaurant sales growth of 4.8%, which consisted of a 5.2% increase in average check, which was partially offset by a 0.4% decrease in comparable transactions. The decline was related to lower breakfast transactions, as Tim explained, which alone impacted comp transactions by about a percentage point.

Average check was driven by menu price increases that positively impacted restaurant sales by 4.3%, as well as the positive change in sales mix of 0.9%. Once again, the higher sales mix was due to the implementation of new menu boards in February, which eliminated combo meals entirely, and helped shift our guest ordering patterns to plates, with additional side items, like drinks and chips and queso. In addition to opening 15 restaurants we closed the Cabana Grill in the Atlanta DMA, and will be converting it to a Pollo by year-end. We also closed one Pollo Tropical restaurant as planned, and relocated our restaurant to a superior site in the same trade area. Net enterprise restaurants increased by 27, or 9.5% to 312. Cost of sales increased as a percentage of restaurant sales by 60 basis points, primarily due to commodity cost increases from the impact of higher chicken and egg prices, and higher sales discount.

As we have shared over the past few quarters our chicken contract had a step-up in cost this quarter over last quarter. These costs increases were partially offset by price increases, effective supply chain management initiatives, and favorable sales mix shift, as a result of the new menu boards at Taco Cabana that I mentioned earlier. Restaurant wages and related costs held steady as a percentage of restaurant sales, as the favorable impact of sales increases on fixed costs, offset the higher labor costs at new company-owned restaurants.

Pre-opening costs increased $0.3 million compared to last year to $1.7 million, due to 15 company-owned restaurant openings in the third quarter versus 9 in the year-ago period, as well as the timing of expenses for new restaurant openings, which are typically incurred beginning four to six months prior to opening. As Tim indicated earlier, this was the largest number of restaurant opening we have ever had within a single quarter. SG&A expenses increased $2.4 million compared to last year to $14.3 million. The increase was primarily due to ongoing human capital investments, related to manager training, to support our expansion of Pollo restaurants in new markets.

However, we are also incurred a $0.9 million pre-tax charge related to a class action settlement, and related legal fees and other costs for alleged violations of the telephone consumer protection act, for unlawful faxes alleged to have been sent in December of 2010 and January of 2011. Last year we had a benefit of $0.5 million related to a litigation matter settlement. So if we exclude settlements for both this year and the prior year period, General and Administrative expenses as a percentage of revenues were about 30 basis points better than the prior-year period.

Depreciation and amortization increased $1.6 million to $7.6 million in the third quarter of 2015, due to new company-owned restaurant openings over the past year. We incurred lease impairment charges of $0.4 million this quarter, related primarily to a previously disclosed decision to relocate a Pollo restaurant to a superior site in the same trade area. Other income of $0.2 million included expected business interruption insurance proceeds for a Pollo location temporarily closed due to a fire that we reported in the second quarter. In the prior-year period, we recognized Other income of $0.6 million, resulting from an imminent domain proceeding. Interest expense held steady at approximately $0.5 million in the third quarter. Our weighted average effective interest rate at the end of the quarter was 1.8%.

The provision for income taxes is derived by using an estimated annual effective income tax rate of 37.8%, which was slightly lower than the estimated rate of 38.3% in the same period last year. Net income decreased to $7.9 million in the third quarter of 2015, or EPS of $0.30, as compared to net income of $9.2 million in the prior-year period, or EPS of $0.34. Adjusted net income increased to $8.8 million in the third quarter, or EPS of $0.33, as compared to net income of $8.6 million in the prior-year period, or EPS of $0.32. These numbers are summarized in the table attached to the earnings release.

Turning to brand margins, consolidated restaurant level EBITDA margins decreased in the third quarter by 70 basis points, due to margin contractions at both brands. Pollo's margin decreased by 140 basis points, given the previously discussed expected increase in chicken cost, and new restaurant openings. Operating inefficiencies from the 14 newly-opened Pollo restaurants during the quarter led to higher labor and rent expense as a percentage of sales. Taco Cabana's margin decreased by 20 basis points, as the brand also experienced higher cost of sales, due to the increase in egg costs, higher labor costs due to Workers' Compensation and medical expenses, and unfavorable timing related to advertising expenses during the quarter. At quarter end we had a cash balance of $1 million, and after reserving $5.5 million for letters of credit, we had $77 million of borrowing capacity under our senior credit facility. We continue to be in compliance with all related covenants.

With that let's now review our financial expectations for 2015 which is a 53-week fiscal year. As a reminder for purposes of calculating the flow through on incremental sales attributable to the 53rd week, we allocate most expenses on a weekly basis, with the exception of rent and approximately two-thirds of our G&A expenses. For the full year 2015, we continue to expect mid-single digit comp sales growth at both Pollo and Taco. Restaurant openings will meet the high end of our previously communicated range, or a total of 34, 28 of which have already opened successfully to-date. Net Company restaurants will increase by 27 this year, with 7 closures netted against the 34 openings.

G&A expense expectations remain at the high end of our annual range of $53 million to $55 million, including the impact of this year's legal settlement previously discussed. We expect annual pre-opening expense to be $4.5 million, given our current development pipeline. And finally, we are maintaining our capital expenditure projections for new restaurant development of between $70 million and $77 million.

Now I would like to provide you with our initial operating targets for the upcoming fiscal year. Keep in mind that 2016 is a 52-week fiscal year. In terms of comparable restaurant sales growth, we are modeling low to mid-single-digit at both Pollo and Taco. Tim already provided you with our marketing initiatives, which will be complemented by pricing at Pollo of 1%, and pricing at Taco of 1% to 2%. Overall, commodity costs are expected to be slightly up at Taco, and lower at Pollo in 2016 compared with 2015, which is why we are planning to take only modest pricing at both brands. This is consistent with our philosophy of protecting our value proposition, and reserving future pricing to offset inflationary events.

As a percentage of restaurant sales consolidated cost of sales is expected to improve by 100 basis points to 150 basis points, to approximately 30% to 31%, based on what we know today, as we are still in the process of finalizing some contracts that will impact 2016. Tim mentioned that we plan to invest in more advertising at Pollo, and are currently planning to increase advertising costs by 50 basis points as a percentage of brand restaurant sales to 3.1%. G&A expenses are expected to be between $60 million and $62 million.

We are anticipating an effective tax rate of approximately 37% to 39%, assuming the work to opportunity tax credit is not renewed, or if the tax credit is renewed we expect an improvement to our effective tax rate of approximately 100 basis points. We are planning to open between 40 and 44 company-owned restaurants, including up to 4 new Taco restaurants, and the balance being Pollo restaurants. We are also expecting to close one Pollo restaurant. Restaurant openings are more back end weighted in 2016, with 40% of the openings currently projected to occur in the first half.

Finally, our capital expenditures are expected to fall between $95 million and $110 million in total. All-in-all a challenging quarter, both self-imposed in some respects, and externally influenced in others. However, we continue to make decisions for the benefit of the long-term, and we remain confident with the fundamentals of our business and our strategy. We are looking forward to a bright future, as well as a successful 2016. With that, let's open the line for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first questions comes from Alex Slagle of Jefferies. Please go ahead.

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

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

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

There is.

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

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

Got it. Thank you.

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

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

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

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

Yes, that's absolutely fair.

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

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

I didn't mean guidance. I meant trend. Sorry wrong word. Sorry.

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

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

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

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

And then just a last--, oh, sorry.

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

Excellent. That's very helpful. Thank you very much.

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

Yes. Thanks. Wonder if you can talk about the decision to pick up unit growth, which I believe takes you to around 13.5% growth, which is just below 10% for this year, so a nice little pickup. What's giving you the confidence there and what you are seeing, to pick that growth up in 2016?

Well, first of all, it wasn't too long ago it was March of last year was the first time we built one, a Pollo Tropical in Texas, and at the end of this year we're going to have 23 in the state of Texas. We added two restaurants in Nashville to bring to Media efficiency and we talked about in my openings comments about how that market has responded very well, to not only the re-imaging, but the fact that we now have four restaurants on the grounds. The response in Texas to Pollo has been everything that we thought it would be and more, and the opportunities in Florida, to build additional restaurants finally that were media efficiency, we're getting to a point where we're going to have what many more media dollars to help drive topline.

So the answer to the question is really two-fold, and I will say that it has always been our goal to increase the cadence by which we would open up additional restaurants, and one of the biggest things that we had to do is get the team, the operations team staffed and ready for that, and get them accustomed to that kind of pace. Meanwhile, and at the same time we had the construction and development team, had to ramp-up and get their processes in place. So our goal is to focus on the brand, and build more, and we'll be talking about that in future quarters.

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

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

Got it. Thank you.

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

Understood. Thanks.

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

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

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

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

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

Okay. Thank you very much.

Thank you. (Operator Instructions). The next question is from Nick Setyan of Wedbush. Please go ahead.

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

Yes. Currently it's 5.4%, but once we roll-off the pricing event for the full quarter, it should be closer to 2.6%.

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

Yes. Early to mid-November.

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

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

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

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

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

Correct.

Okay. What was the weather impact in the quarter at Pollo and Taco?

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

Quarter-to-date period you haven't quantified it?

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

And that's at Pollo or Taco?

That's at Pollo.

Got it. And in October the weather was about 30 to 40 bips. What about Taco?

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

Got it, okay. And then in terms of the COGS in Q4, is there a potential step-up I think COGS given the price point of the Pollo testing, or not the testing but the price pointing of the $3.99 LTO?

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

Got it. When we're talking about the Media, the increasing Media spend is that inclusive of Texas and Pollo, what are we thinking about Media in Texas at this point?

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

Okay. When does the loyalty get rolled out?

It's ongoing. I mean there's.

Yes.

Mid-year.

Yes about mid-year next year.

So you have already started?

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

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

No. They're all going to be Taco Cabanas.

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

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

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

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

Well, I want to challenge the idea that Media is not necessarily a big idea, and I will answer the question about the other things, Nick, but keep in mind that over the last three year, two to three years especially, we have been taking money from the big three counties down in Florida, Miami, Broward, and Palm Beach, and we have been taking money away, we have been stripping Media dollars, and redeploying those into these emerging markets. So those markets that I mentioned are somewhere around half of the total sales, and we have been not spending as much money as they have been generating.

So that is a huge opportunity to drive sales in what is essentially half of the restaurants that we have, essentially the highest volume restaurants. In addition to that because of everything that we have done over the last two years, we're in an opportunity to all of those other outlying markets, the other ones in Florida that have never been Media efficient are now Media efficient, so they will be able to stand on their own next year. So you will have not only incremental dollars going into the existing DMAs that are now Media efficient, you will have incremental dollars going in to promote your highest volume markets.

So the accumulation of all of that effect of Media, we believe that it's going to have a strong impact on it. One of the things that we have been doing over the last couple three years, because our volumes have been increasing so much, and looking at throughput we have not been really the R&D department, although they do unbelievable work, we have been taking and repeating the same kind of promotions. You will see more innovation next year for Pollo, you will see LTOs, and you will also see a very strong push towards not only the menu, but also a push towards improved operations, as well as labor. Did you have anything else?

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

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

Perfect. Thank you very much.

Thank you, Nick.

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

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

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

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

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

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

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

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

And last one. Are you contracted on all of your chicken, some of it? For 2016?

We are contracted on most of it.

Okay. Alright. Thank you.

Thanks, Brian.

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