Fiesta Restaurant Group, Inc.

Thank you for standing by. This is the conference operator. Welcome to Fiesta Restaurant Group fourth quarter 2020 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Instructions will be provided for you at that time to queue up for questions. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Rafael Gross, Managing Director at ICR. Please go ahead, sir. Rafael Gross Thank you.

Fiesta Restaurant Group's fourth quarter 2020 earnings release was issued after the market closed 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'd like to inform you 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 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 the company 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 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. On the call with me today are President and Chief Executive Officer Rich Stockinger and Chief Financial Officer Dirk Montgomery. And now I'd like to turn the call over to Rich.

Dirk Montgomery Thank you, Rafe. I'd first like to thank all of the investors and other participants on the call today for their continued support. I'll be covering three topics today. A recap of the progress we made in the fourth quarter on key 2020 priorities, the status of sales driving initiatives for each brand, and an overview of our key priorities for 2021. Dirk will then provide a financial update. As we closed 2020, we were pleased with the strong progress we made against our priorities identified in March when the pandemic began. We continue to place the safety of our guests and customers first, We maximize liquidity through increased restaurant EBITDA margins, working capital efficiency, and property sales. And we made important investments in our digital platform that we expect will result in strong sales growth in 2021. As a result of COVID, we have had to concentrate on other sales channels to offset the sales loss from dining room closures. representing approximately 25% of our pre-COVID sales. In the fourth quarter, both brands generated drive-through comparable restaurant sales growth of at least 24% versus last year, and we more than tripled our delivery comparable restaurant sales compared to the fourth quarter of 2019. From a margin perspective, we continued our momentum from the third quarter, improving adjusted EBITDA margins at both brands compared to the fourth quarter of 2019. Our margin improvement was driven by continued improvements in food cost reduction and labor efficiency. Net income was $.9 million, and pre-tax income was $1.5 million for the quarter. Consolidated adjusted EBITDA, a non-GAAP measure, increased 42% versus last year at the $14.6 million. After excluding the extra week in the 2020 fiscal year, estimated consolidated adjusted EBITDA grew 13.4% compared to 2019. The impact of the extra week in fiscal 2020 on consolidated adjusted EBITDA is estimated at $2.9 million. Our overall financial position improved from the start of the pandemic, with the reduction in total debt from $148.4 million as of March 18, 2020, at the start of the pandemic, to $73.3 million as of January 3, 2021. Net debt, a non-GAAP financial measure, was reduced from $74.4 million at the start of the pandemic down to $23.3 million as of January 3rd, 2021. On November 23rd, we entered into a new senior credit facility agreement, which replaced our prior senior credit agreement with a more flexible and longer-term loan maturing in 2025 that provides greater liquidity and will also allow us to continue our investments in growth, including consumer-facing and digital initiatives. We made very good progress selling our 16 owned properties over the quarter. By the end of the year, we had closed sale or sale leaseback transaction on 13 of the 16 properties, generating net proceeds of $26.8 million and expect to sell the remaining three properties in the first half of 2021. However, there can be no assurance that the anticipated remaining property sales will occur. In addition, we generated full-year cash flow provided by operating activities of $40.3 million. Now I'll highlight Q4 results and the status of our initiatives to accelerate sales in this changing environment at each brand. We made continued progress during the fourth quarter on developing a better business model designed to enable our customers to enjoy our brands safely across all channels, wherever, and however they choose. Our two big focus areas over the quarter were further enhancing our digital platform and improving the drive-through experience. We are seeing building benefits and positive consumer feedback on our new apps at both brands. Both brands currently have high app store ratings of 4.9 stars for Pollo and 4.8 stars for Taco. compared to ratings of below three on our prior app. Total online sales across both brands grew 37% in the fourth quarter versus 2019. In addition, check averages for online orders placed via the app since the new apps were launched have increased by 42% at Foyo Tropical and 18% at Taco Cabana. In the fourth quarter, we began the implementation of enhancing our curbside pickup ordering to include geofencing functionality, which enables the restaurants to know when the customers arrive for pickup, enables communication to customers that their order is ready, very important to our customers, and creates the ability to run location-based consumer promotions. We expect the implementation on geofencing to be completed in the first half of 2021. Regarding the drive-thru channel, we believe this channel will continue to be very important, and we began an initiative in the fourth quarter to upgrade our infrastructure as we move forward replacing our current drive-thru technology with industry-leading digital technology. The first phase of the drive-thru initiative began in the fourth quarter with improvements in faster, upgraded payment devices and improved connectivity in our remote ordering devices called pods. to take customer orders faster and further back in car lines. These upgrades will improve order cycle time during peak drive-through demand periods, and we are encouraged with the early results of this initiative, which will continue into 2021. Our approach to opening dining rooms will continue to be based on two key criteria on a location-by-location basis. Our ability to maintain safe health environments to our team members and guests and our ability to generate a profit on dining room sales based on incremental staffing while not deteriorating margins. Partly in response to what we believe is growing consumer interest, we began to open dining rooms at both brands in late February. Pollo Tropical recently opened its dining rooms with the exception of four units. Taco Cabana currently has 63 dining rooms open, and all our patios are now open. We are evaluating sales trends weekly to determine which units should be open for dine-in business. Now I'll highlight the Q4 results and the status of our initiative to accelerate sales in this changing environment at each brand. Starting with Pollo Tropical, fourth quarter comparable restaurant sales showed strong acceleration sequentially over the course of the quarter. With fourth quarter comp sales of 8.2% down, and December comp sales of minus 6.4. After adjusting to the impact of Tropical Storm Etta, Pollo sales would have been even stronger with the adjusted fourth quarter comp sales approximately 40 basis points higher. The improvement in sales trends compared to the fourth quarter of 2020 comp sales also continued into January of 2021. The drive-through and off-premise channels again, showed strong growth versus 2019 in the fourth quarter. Drive-through comparable restaurant sales grew 24% above last year during the quarter, and delivery growth led the off-premise channel. Delivery comparable restaurant sales for the quarter more than tripled versus last year and accelerated by 8% compared to the third quarter, driven by both improved check and traffic from improved marketing and promotions. On the menu innovation front, our new line of five Cuban-inspired fresh sandwiches performed well in the fourth quarter. Handheld category mix more than doubled to over 10% in sandwich check averages and margin dollar contribution were both accretive compared to the company averages, all resulting in absolute sales growth for the brand compared to pre-launch sales. We also brought back an increase in lapsed customer visits compared to prior promotional windows. We plan to further expand this line, and we recently launched a new Miami Heat Spicy Crispy Chicken Sandwich, which we are co-marketing with the Miami Heat NBA basketball team. From a margin perspective, Pollo grew restaurant-level adjusted EBITDA margins, a non-GAAP measure from 19.2% in 2019 to 21.8% in 2020. The 2020 margin rate includes an extra week in our fiscal year. After adjusting to the extra week, Pollo restaurant level adjusted EBITDA margin would have been 20.9% of sales or a 170 basis point improvement over last year. Turning to Taco Cabana, fourth quarter restaurant comparable sales improved 420 basis points from the third quarter comps down to 10% down. The improvement in sales trend compared to the fourth quarter comp sales also continued into January of 2021. The drive-through and off-premise channels again showed strong growth versus 2019 in the fourth quarter. Drive-through comparable restaurant sales grew 26% above last year during the quarter, and delivery growth led the off-premise channel. Delivery comparable restaurant sales for the quarter grew more than tripled versus last year and accelerated by 13% compared to the third quarter, driven by improved traffic from promotions and improved marketing. Our Margarita platform continues to be a driver of check growth in the drive-through. And Taco has developed a calendar of Margarita promotional events for 2021 to continue to leverage the revenue growth opportunity from this platform. In addition, In 2021, we'll be expanding alcohol sales with select third-party delivery service providers as a way to differentiate our brand and drive incremental sales dollars per order. As I mentioned in the third quarter, we have refocused our culinary and menu innovation to focus more on developing differentiated and authentic Tex-Mex recipes that are true to the heritage of Taco Cabana 40-year-old plus brand. In the fourth quarter, we introduced a higher quality line of enchiladas that performed well in the fourth quarter. Enchilada category mix grew from historical averages of 2.5% to over 7% for the quarter. Enchilada check average were accretive to the company average and drove total brand check growth compared to pre-launch results and also grew gross margin dollars per transaction versus the pre-launch period. We plan to continue to improve this category and launch additional differentiated new items over the course of 2021. From a margin perspective, TACO grew adjusted restaurant EBITDA margins, a non-GAAP measure, from 8% in 2019 to 13.6% in 2020. The 2020 margin rate includes an extra week in our fiscal year. After adjusting for the extra week, TACO adjusted EBITDA margin would have been 12.1% of sales, or 410 basis points above last year. My last topic is an overview of our 2021 key priorities. In 2021, we will continue to concentrate on non-dine-in sales channels to match the evolving changes in customer behavior, and we'll focus on creating a guest experience, a great guest experience across all channels. We are planning to make further enhancements to our digital platform and improvements in the speed and ease of use for off-premise sales channels, such as enhanced digital drive-through experience, geofencing technology designed to improve curbside speed, and infrastructure changes designed to improve our order cycle times for drive-through and delivery orders. We intend to continue to drive traffic and check through differentiated menu introductions, effective LTOs, and improved marketing. We also believe the reopening of our dining rooms will also be a key component in driving sales in 2021. In addition, we are continuing the process of refining the Pollo Tropical brand assets. We have completed qualitative research and are in the process of completing the quantitative phase of our research. The results of this research will allow us to develop an enhanced brand positioning and provide a clear brand strategy for both existing and new markets. In part to COVID and the brand refinement effort that is in process, we paused our new restaurant development plans in 2020. However, we intend to resume new restaurant development in the future. Development of new restaurants will incorporate what we have learned during the COVID-19 pandemic and our market research. During 2021, we plan to complete brand positioning and operating model refinements for Pollo Tropical that we believe will enable future geographic expansion through both company-owned and franchise locations. Our primary focus for Taco Cabana in 21 will be to continue to improving existing unit average sales and continue to improve the margins. In summary, we are pleased with the strong fourth quarter results and we are optimistic about 2021 and believe that our growth initiatives will build momentum and accelerate sales over the course of 2021. I want to thank our team members for ensuring that we are stronger today than when the crisis began and are ready to capitalize on opportunities that await beyond the crisis. I'll now turn it over to Dirk to cover the financial highlights in more detail.