Fiesta Restaurant Group Inc (FRGI) 2016 Q4 法說會逐字稿

Good afternoon welcome to the Fiesta Restaurant Group fourth-quarter and full-year 2016 earnings conference call. I would now like to turn the call over to Raphael Gross, managing director at ICR. Please go ahead, Raphael.

Good afternoon, everyone. Fiesta Restaurant Group's fourth quarter and full-year 2016 earnings release was issued after the market close today. If you have not already accessed it, it can be found on the Company's website, www.frgi.com, under the Investor Relations section.

Before we begin, I must remind everyone that during the call today, the Company will make various statements that are not based on historical information. These forward-looking statements include, without limitation, statements regarding the Company's future financial position and results of operations, business strategy, budget, projected cost 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 the Company can give no assurance that forward-looking statements will prove to be correct. Important factors that can cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in the Company's SEC filings.

Please note that during today's conference call, certain non-GAAP financial measures will be discussed, which the Company believes can be useful in evaluating its 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 the Company's earnings release.

Now, I'd like to turn the call over to Danny Meisenheimer, Chief Operating Officer of Fiesta Restaurant Group.

Thank you, Raph, and good afternoon, everyone.

We are pleased to have Rich Stockinger with us on the call today. Rich, our newly appointed Chief Executive Officer and President, has extensive experience successfully leading restaurant brands in both private and public Companies. The management team is thrilled to partner with him to successfully grow our two brands that we believe have significant potential.

Rich will make a few comments before we open up the call to questions today. But let me take this opportunity to officially welcome him to Fiesta. Our press release provides details of our Q4 and 2016 results, so I won't restate it, other than to say results were below our expectations, and our new Pollo Tropical markets obviously did not perform as hoped thus far. As a result, we have a reset and a growth plan that we will refine further under Rich's leadership.

This year, the Company plans to slow down development, focus on building consistent and sustainable growth, and to plan for the future. Specific goals for 2017 include the following: improving operational execution and hospitality; evolving our menu strategy in building transactions for consistent quality of new and existing products; building off-premise transactions through third-party delivery and catering; increasing guest frequency with compelling loyalty programs.

In the area of development, slow down the pace of recent growth in order to refine our site selection and market potential tools, and develop a roadmap for the future; continue implementing our Pollo reimaging program in South Florida; identify organizational needs and structure to create success; and refine our long-term strategy.

Let me provide more specifics around each of these areas of focus. Improving operational execution and hospitality -- we are committed to focusing on operational excellence while we support and minimize distractions in our restaurants. Training and recertification of management and crew members is well underway, as is hospitality trading for our cashiers and dining room attendants.

Development of more shift leaders continues to be an area of focus to ensure a great guest experience and to build a development path for future restaurant leaders. We believe this emphasis should also improve our ability to attract high-quality team members, and reduce turnover. We have recently rolled out an employee engagement program across the organization to further assist in this effort.

We are implementing an emerging market revitalization plan at Pollo. In addition to the system programs I just mentioned, we are investing in brand ambassadors, additional labor, and food quality to ensure great guest experience and the freshest product availability throughout the day.

Evolving our menu strategy. We continue to focus on menu simplification with the goal of streamlining store operations, enhancing speed of service and the overall guest experience, while improving financial results. Additionally, our refinements are intended to improve the presentation of the menu for ease of navigation, to highlight signature products, and to emphasize new products. We have also removed products that are unpopular, hard to execute, or less brand-relevant. In addition, we will be adding nutritional information on all menu displays in the coming months.

Product innovation and limited time offerings will continue to be part of our menu and marketing arsenal. At Pollo, we are regionalizing some items to broaden appeal and profitability in each of our markets. Finally, we are also investing in upgrading the quality of product offerings either through higher-quality ingredients or through improved adherence to our operational and equipment maintenance procedures.

Increasing guest frequency with compelling loyalty programs: as online ordering and mobile app platforms are available system-wide at both brands, we are now turning our focus toward our loyalty programs. After successfully piloting Pollo's loyalty program for several months in Orlando, we rolled out the program to our North Florida and emerging markets during the fourth quarter to further build frequency of visits within our current guest base.

So far, our loyalty membership has grown to 25,000 members, of which the majority were not previously rewards e-club members, a legacy program at Pollo. We will be launching loyalty across the balance of the system later this year. With learnings from Pollo's program, we now planning to pilot the Taco Cabana loyalty program this spring and implement systemwide later in the year.

Building off-premise transactions through third-party delivery and catering: a new facet of our off-premise business is third-party delivery. We have 17 Pollo restaurants currently testing third-party delivery, and we are targeting a total of 80 by the end of the second quarter. Our intention is to continue rolling out delivery to additional markets as soon as we have completed the technological details with our delivery partners.

Longer-term, we would expect delivery to be available across the system at locations that would best stand to benefit from this service. Taco will pilot third-party delivery in the coming months with the intention of rolling this offering out across the system, where appropriate, later this year.

Additionally, we have rolled out our enhanced catering program at Pollo and have hired catering managers to sell and support catering in each of the respective markets including Dallas, Fort Worth, Houston, San Antonio, and Atlanta. In addition to adding dedicated catering managers, we have enhanced our online catering menu and ordering experience, improved our packaging, and refined our processes and related training. Taco is currently in the process of enhancing its catering program in a similar fashion.

Development: as I previously indicated, we reduced 2017 Company development to focus on higher-return and lower-risk opportunities with balance across the two brands. We believe this will facilitate better planning, execution, and pacing surrounding new openings and better overall investment returns.

We continue to focus on improving new restaurant-level economics, while still delivering the quality that our guests expect from both Pollo and Taco. These efforts include implementing new building prototypes that are both more efficient and lower in cost.

In addition, we will update our site selection, sales forecasting, and market potential tools for both brands to better analyze and target future opportunities. In 2017, Pollo development will be focused in Florida, where we plan to open 12 new restaurants throughout the state.

For Taco, we are increasing our development pace in 2017 to ten new restaurants in both existing and smaller Texas markets. Of these openings, four will be building conversions, including three Pollo conversions and a fourth from another QSR brand.

Building conversions are expected to require less investment compared to new buildings we construct, and higher comparable returns. In addition, two of the new buildings will utilize our new small building prototype. This new prototype currently carries a lower investment cost of approximately $1.6 million, and still delivers the full menu and brand experience.

Our Pollo reimaging program: in 2016, we remodeled nine restaurants in South Florida and five in Atlanta, and continue to see results that meet or exceed our targeted returns. For 2017, we plan to reimage approximately 20 restaurants, all in South Florida where we operate our busiest and most profitable restaurants.

Refining our long-term strategy: as I previously mentioned, we are excited to work with Rich to refine our long-term strategy and to identify organizational needs, structure, and focus to create long-term success. In hindsight, Fiesta simply went too far too fast with its Pollo Tropical store development. This taxed our ability to consistently operate restaurants with the level of execution that built this great brand.

In addition, site selection in some cases was not optimal. As a result, we lost both time and money in our efforts in Texas. We strongly believe in the model and expansion potential of our two brands and expect our 2017 focus to strengthen our foundation for value creation and growth.

With that, I will now turn the call over to Lynn.

Thank you, Danny.

Given the amount of detailed information that we disclosed today, including fourth-quarter results, leadership and strategic updates, and our form 10-K, I will make my comments brief. On behalf of the management team, we would like to welcome Paul Twohig, our newest nonexecutive board member to the Company, and congratulate Stacey Rauch on her appointment as nonexecutive Chairman of the Board of Directors.

Both Paul and Stacy have extensive successful experience in their respective functional areas in the industries, and we believe their leadership will further strengthen the results of the Company. We would also like to thank Jack Smith for his leadership and continued support and guidance.

Let me remind you that the fourth quarter and full-year 2015 included one extra operating week, which contributed to approximately $11.8 million in total revenue. Excluding the effect of the extra week in 2015 for comparative purposes, total revenues increased 2.1% compared to last year during the fourth quarter.

In addition to the sales comparison, the extra week negatively impacted our margin and profitability comparison. We quantify the estimated EPS impact of the extra week in 2015 at $0.07. Pollo comparable restaurant sales decreased 4%, which included a 7.3% decrease in comparable restaurant transactions and a 3.3% increase in average check.

Hurricane Matthew negatively impacted comparable restaurant transaction growth by approximately 1.3%. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant transaction growth by approximately 1.1%. Average check was primarily driven by menu price increases that positively impacted restaurant sales by 1.8%.

Mix was positively impacted by our higher-priced Churrasco Steak promotion this year, compared with a value-oriented promotion, the $3.99 quarter chicken value offering, in the prior year. Through the first seven weeks of the 2017 first quarter, comparable restaurant sales at Pollo decreased 6.2%. This compares to the prior-year period when comparable restaurant sales were essentially flat.

Turning to Taco, comparable restaurant sales in the fourth quarter decreased 3.5% as a result of the 4.5% decrease in comparable restaurant transactions and a 1% increase in average check, while menu price increases positively impacted restaurant sales by 2.5%. Mix was negatively impacted by higher discounts and promotions related to multiple meal deals being offered this year compared to the prior-year period.

Through the first seven weeks of the fiscal first quarter 2017, comparable restaurant sales at Taco decreased 6.9%. This compares to the prior-year period when we generated a comparable restaurant sales increase to 3.4%. In terms of quarterly restaurant expense and cost drivers, please refer to our earnings press release, which provides an explanation for each P&L line item on a consolidated basis.

Unfortunately, with negative comparable sales, sales deleverage negatively impacted profitability at both brands, across fixed and semi-fixed operating costs. As a reminder, we disclose a great deal of brand-specific financial and operating performance in our quarterly earnings release tables and in our SEC filings. This information includes brand specific comparable and non-comparable restaurant average and restaurant volume, and income statement line-item details and variance explanations.

In closing, we would like to thank our Fiesta team for their dedication and commitment to support and deliver a great guest experience every day. We continue to believe in the long-term potential of our business model and future profitable growth of our two brands.

With that, I'd like to turn the call over to Rich, who would like to make a few comments, after which we will begin the Q&A. Rich?

Thank you, Lynn.

To those that know me, I look forward to working with you again. To those that do not, I look forward to meeting you and working with you in the future. I'm extremely excited to be here today, working with the 12,000-plus Fiesta team members on our two unique brands.

With passion and commitment, we plan on dissecting every aspect of Pollo Tropical and Taco Cabana to provide the best quality, value, and hospitality for our guests. We will look into the successes and the failures of the past to maximize the potential of this Company in the future. Our brands have so much potential, which makes me bullish about the future of this Company.

We will work closely with the board on refining our approach to the business in both the short term and the long term. We will put together a very detailed strategic plan to maximize the results of our existing restaurants, expand wisely, and look for strategic opportunities. Our objective is to enhance value for our key stakeholders, our guests, our team members, our vendor and supplier partners, and of course our shareholders.

Since my first day as CEO this great Company is tomorrow, please direct your questions to Danny or Lynn. Operator, please open the call for questions. Thank you.

(Operator Instructions)

Will Slabaugh of Stephens Inc.

Yes, thank you.

I wanted to ask a little bit more about the detail that you gave around the new stores in your release this afternoon. Should I gather from that, that to the best of your knowledge, are we losing roughly $12 million in operating income when you add up those two groups of new stores on an annual basis by leaving these newer markets stores open?

Is that what you were trying to get across? Just curious, if that's not correct, how would you look at that?

Will, we did disclose in our materials this afternoon, the operating loss is associated with a couple buckets of our restaurant that we believe are at risk. And so we provided not only the operating losses but some cash-flow-related information, as well. So that information included pre-openings, which certainly is one-time in nature, and the other was depreciation, which is a non-cash expense.

So should we be thinking about -- this is an ongoing situation, in terms of evaluating those stores remaining open, or is there something that we have a set period of time we are going to allow them to be open, while that process is ongoing? Or how should we think about your viewing of these restaurants?

I think we have a plan in place. And certainly that plan will be refined with Rich's involvement on a go-forward basis.

But right now, our models do pass the impairment model test. Certainly those have been in place for about a year's time. But we will have to continue to reevaluate the viability of the stores as we move forward, and I can't really give you a specific time frame around that evaluation.

Okay. And just a quick follow-up on the quarter-to-date numbers you gave. I think you said down 6.2% at Pollo, down 6.9% at Taco. I'm curious what you've seen quarter-to-date in terms of trends?

Have there been a few outlying weeks that have drawn to the weakness, or is there something else happening? In particular, we've heard some Texas accounts talk about weather being a little bit better, which has helped them out quarter-to-date, but it looks like that may be the opposite. So I'm curious what you're seeing in the state, as well.

I will take a first stab at answering your question and hand it over to Danny. I know early in the year, we did have an ice storm here in Texas, so that certainly had a negative effect in the early part of the quarter. The other consideration you will want to at least think about is, we are lapping two of our most successful months currently.

So on February, when Lent started sooner last year, we were on air the second week of February in terms of being on the media, and we haven't necessarily started the new promotional window until last week at Taco and this week at Pollo. So there's a little bit of a timing element associated with the second promotional window.

And just to add a little color to that, on the Pollo side, we are completely comparing apples to oranges from a media standpoint. Advertising has already taken place at this point in time last year, or we were coming to the end of that in 2016 and in 2017, it does not begin until next week.

So it's a complete non-comparison on the media and the promotion as it relates to Lent. And from a timing standpoint, to support what Lynn said, we just went on air with Taco and the Tampico Shrimp promotion. So results are to be determined.

Thank you.

Jeff Farmer of Wells Fargo.

Thanks. Lynn, I apologize if I missed this. It sounds like you guys are not providing any guidance beyond the unit development for 2017. Is that accurate?

That is accurate. In view of the uncertain restaurant industry environment today, along with the new leadership that we recently appointed, the Company has determined not to provide specific annual guidance for 2017 at this time.

Okay. More specifically, just one line item -- the preopening number, any help there? That was one of the things that people were pointing to as being much lower in 2017 versus 2016.

Sure. I believe it will be a little over $3 million in 2017. In total.

Okay. And just to follow up on Will's earlier question, I think I heard your answer that you might not have a timeframe. But I am curious in reference to those two buckets that are underperforming and those units, or those markets, outside of Florida. How much time will those restaurants have to deliver improved results before you either move forward with impairment or closure if necessary?

I think it's really hard to give you a timeframe at this point in time.

Okay, thank you.

(Operator Instructions)

Joshua Long of Piper Jaffray.

Great, thanks for taking my question. Wanted to circle back, to the extent we can talk about the revised site selection model, how you're thinking about it, and maybe the lower-cost prototype, as well.

At a high level, we had seen and talked about the Pollo brand coming into Texas, and maybe being co-located with Taco Cabana. In some cases, you had sharing sites and site lines. Curious if that gets reset completely, or just high-level, how you are thinking about what that site selection model might be from a changing perspective going forward.

Let's start with the prototype design. First of all, with Taco Cabana, what we have stated is that we are going to a smaller prototype design that we are using in the small Texas builds for this year. And we look forward to seeing how that performs, not only from a sales standpoint but from an investment standpoint.

From a Pollo standpoint, that process continues. We've made a great deal of progress in terms of looking at how to lower the cost from that prototype design, but there is additional thinking that needs to be put into place. We're learning from our testing, we're learning from the changes that we've taken on with that particular unit, but we need more time before that is fully implemented from a reduction and call standpoint.

As it relates to site selection, this is day one of new leadership. And one of the opportunities we have is for Rich to come in and take a look at the way we have developed. Not only from site selection, but market selection and development pace, all the way down to people. And so that process begins effective with new leadership.

So to name a date at this point in time would just be a guess. But the process does begin.

Understood. And in terms of the brand ambassador investments you mentioned at Pollo, could you talk a little bit about that? And maybe how that either supplements or changes marketing, and how the brand interfaces with the consumer going forward this year?

Brand ambassadors can be a great help to the brand because they are a direct contact to the guest.

And if you're in developing markets where you're trying to teach brand-new customers a brand-new concept with a brand-new menu -- that outreach, that direct contact and education between ambassador to guest can be very helpful in terms of building an understanding as to who we are and unlocking the potential of the brand.

Because it's not the easiest thing in the world to teach new people new ideas when it comes to restaurants. And they also provide hospitality in the dining room, beyond just menu education or brand education. It's always good to have that in the dining room beyond our servers, who have been delivering product to the tables.

We are not only very happy about that, but they also help us engage our guests in terms of signing up new loyalty members, which is one of the cornerstones of our program going forward in terms of building frequency.

Thank you. And could you provide a little bit of context on the menu simplification efforts, in terms of how many items have come off to date? If you have any sort of sense as to what an optimized number of menu items -- or maybe fewer LTOs, or just how you're thinking about simplifying that menu on a go-forward basis this year.

From a menu simplification, one of the things we look at is -- it's not only products, but it's SKUs, and it's just simplification of kitchen operations. Eliminating a handful of products can have a really nice impact in terms of simplifying kitchen operation, improving speed of service, and increasing accuracy.

So the product total in terms of number is single-digit. The SKUs associated with that can be at 20 or more. And we continue to look at ways to improve that in all of our operations, whether it's in Florida or Texas or Tennessee. As far as promotional items, we will have six windows this year at Pollo, which is typical for us, and seven, which historically is the same, for Taco.

Thank you.

(Operator Instructions)

Nick Setyan of Wedbush.

I didn't catch the operating cash flow in Q4. Would you be able to disclose that?

We will be issuing our 10K document this afternoon, so you will have a full view of our financial statements.

And then, what about CapEx requirements for next year?

Yes. We disclosed that in our prior-Q document, and I believe that they are also reaffirmed in the 10-K today. But generally, capital expenditures will be between $57 million and $68 million.

For new restaurants, CapEx should be between $35 million and $43 million. For remodeling and capital maintenance, between $14 million and $16 million, and then for other projects, CapEx should be between $8 million and $9 million.

Got it. So we are going to have pretty meaningful positive cash flow next year in terms of free cash flow. And there is an opportunity for some leverage here. As you lower the CapEx requirement, with the building, with the lower number of units, et cetera.

What is the thinking as a lower-growth business model here, in terms of your capital structure and an opportunity to take on a little bit more leverage, and obviously the evaluation of the shares perhaps invites a buyback here?

Yes. I think everything is on the table, and as we work with Rich on a go-forward basis, we will certainly take those items into consideration.

In terms of the positioning of both brands, obviously it quarter dates comps. You mentioned the comparisons are a little bit apples to oranges, but what is the near- to medium-term thinking around value versus price? Is there a barbell strategy that perhaps is more of a fit in terms of having a little bit more on the value side, etcetera? What's the thinking there?

From a Taco Cabana standpoint, it really divides into two camps. The first is the price value play, which has inherently been part of the brand and will continue to be so in the markets that we compete in. We feel it is the right thing to do. But there is also a new product or cravability that comes in behind that to support it. In terms of new products, or what in essence would be popular products or encore items that we may bring back.

From a Pollo standpoint, the new product side we believe offers a great deal of opportunity for us, and has historically been that way. But the price value piece is also extremely important at Pollo. But it is inherent to the brand in terms of the pricing for the quality of food that you receive, and when you put that combination together we continue to believe that is an extremely healthy offering. So new products and price value at Pollo.

And Lynn, would you be willing to comment on the inflation outlook on both labor and intensive costs for the brands?

Sure, I can touch on those. I think with labor, we are expecting some inflation, and that inflation is expected to be 3% or greater, at each of the two brands.

On the commodity side, we actually do believe that commodity costs are fairly benign this year over last. However, there are some chicken specifications that we are looking at to ensure great-quality product, which might have some cost implications in the future.

Thank you.

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