Fiesta Restaurant Group, Inc.

Good day, and welcome to the Fiesta Restaurant Group's second quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Rafael Gross with ICR. Please go ahead, sir.

Thank you, operator. Fiesta Restaurant Group's second quarter 2021 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 unless it is expressed or forecasted in such forward-looking statements. 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.

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 two topics today, a business update, including an overview of second quarter results, and an update on the status of our 2021 strategic priorities. Patty Lopez-Quea, our chief executive officer, will provide a digital platform initiatives update, followed by Dirk wrapping up with a financial update. The most important event for the quarter was the announcement of the taco divestiture on July 1st. Additional details regarding the transactions are referenced in our form 8K file on July 7th. We made the strategic decision to sell Taco Cabana business to allow our leadership team to focus completely on accelerating Pollo growth. And we are very excited about the tremendous expansion opportunities we have for the Pollo Tropical business. We expect to close the divestiture transaction in the third quarter. Concurrent with the Taco Cabana divestiture, we are planning to use the sale proceeds to fully pay off our term loan balance. As a result, we will be a debt free after the transaction close and believe the cash balance as of the end of the second quarter of 2021 of $69.9 million will be materially unchanged subsequent to the close. Those funds will be used in part for focused investments to accelerate Pollo Tropical growth. I want to take a moment to thank the Taco Cabana team for their passion, effort, and success as we position that brand for growth over the last four years. We wish you all the best of luck, and we will miss all of you. Regarding second quarter results, we are pleased with Pollo Tropical's performance. with comparable restaurant sales improving to very close to 2019 levels with very strong margin results. Beginning in April, we began to experience hourly staffing challenges due to the workforce availability that had an increasingly negative impact on sales through the remainder of the quarter. We have taken a number of steps to improve recruiting and retention of our hourly workforce and staffing levels improved slightly in July compared to the second quarter. Despite the labor staffing challenges, oil tropical July comparable sales versus 2019 were slightly favorable compared to June comparable sales versus 2019 after adjusting for the July 4th holiday differences. We continued our strong margin performance in the second quarter with 2021 income from continuing operations of $2.7 million and income from continuing operations before income taxes of $1.8 million compared to a loss for both measures in the second quarter of 2020. Continuing operations adjusted EBITDA, a non-GAAP measure, was $9.1 million or 10% of total revenues compared to $2.6 million and 4.2% of revenue in the second quarter of 2020. Pollo Tropical grew restaurant-level adjusted EBITDA margin, a non-GAAP measure, from 16.3% in the second quarter of 2020 to 20.4% in the second quarter of 2021. In addition, our total cash balance continued to grow, reaching $69.9 million at the end of the second quarter. Dirk will provide additional details regarding the second quarter results and our outlook for the remainder of 2021 as part of his prepared comments. On our first quarter earnings call, we noted that we had begun to experience staffing availability issues and identified action plans we were taking to address those challenges, including raising the minimum hourly team member pay rate, providing special incentives for managers, and streamlining the recruiting process. Despite those efforts, staff availability issues intensified in the second quarter and had an increasingly negative impact on sales throughout the quarter. In an effort to maintain service, we implemented operations simplification measures and, where necessary, reduced operating hours, temporarily closed dining rooms, and postponed delivery and online ordering to allow our teams to focus on drive-through and counter takeout sales. As a result, total operating hours for the quarter across all channels were approximately 4% lower than our normal operating hours, a significant reduction in open hours of operation compared to the first quarter of 2021 and the fourth quarter of 2020. Staffing levels have gradually improved each month from the low point in April, but are still below optimal levels overall. We are implementing additional tactics to improve staffing levels, which include the following. We are continuing the additional $1 per hour increase for the hourly operations personnel through August and are in the process of completing unit-level benchmarking of wage rates by position to ensure our wage rates are competitive based on evolving market conditions. We are evaluating better tailoring our benefits platform to the unique needs of our employee base. We continue to challenge our recruiting resources and processes, including the addition of additional resources dedicated to specific geographics that are currently experiencing greater issues, as well as sign-on bonuses for hourly and management new hires. To increase retention, we are also upgrading our new team member onboarding process. We believe that we can offset the cost impact of increased wage rates through selective price increases while still maintaining attractive value perceptions with our customers. This is based on internal research and research conducted by our outside pricing analytics consultants. Over the last three years, we believe that our brands have taken lower price increases than our peer group. In April, we increased prices by 3% at Pollo Chapacal. and plan to evaluate additional pricing action as needed later this year in response to the cost pressures. COVID cases in the state of Florida have been on the rise since late June, which is a concern for both health, safety, and staff availability. As we have since the beginning of the pandemic, we will continue to put our team member and guest safety first and are following CDC guidelines to require all Pollo Tropical employees and vendors entering our restaurants to wear masks regardless of vaccination status. Now I'd like to provide an update on our strategic priorities. As I mentioned in the fourth quarter, our strategic priorities are as follows. Concentrate on accelerating growth in non-dine-in channels and improving the guest experience across all channels to better enable our customers to enjoy our brands wherever and whenever they choose. enhance our digital platform and make improvements in ease of use and speed of service for off-premise, including an enhanced digital drive-through experience, curbside geofencing technology enhancements to improve speed and customization of the consumer experience and continued improvements in our loyalty platform to drive incremental sales from loyalty members. Three, continue refining the Pollo Tropical brand essence in preparation for expansion in existing and new markets. We made good progress growing non-dining channels during the second quarter. At Pollo Tropical, we generated second quarter 2021 drive-through growth of 18% compared to the second quarter of 2020, and delivery and online channel growth of at least 80% in those channels compared to the second quarter of 2020. We continued our ongoing brand positioning research in the second quarter, which we believe will allow us to develop a more focused and effective strategy for our digital platform, remodels, and brand expansion. That work will continue the remainder of 2021. Over the second quarter, we continued to make investments to enhance our digital platform and improve the customer experience, and those efforts will continue through the remainder of 2021. Patty will provide additional details on our digital platform plans and progress in a moment. Finally, we made very good progress on our third strategic priority, which is to continue refining the Pollo Tropical brand essence in preparation for expansion, again, in existing and new markets for both company-owned and franchise locations. We are currently testing key restaurant design and operating platform improvements in remodels. and will continue to do so the remainder of 2021. Our first remodel was completed during the second quarter at the Westin location, and the initial customer feedback on the new design has been very positive. Design enhancements reflect preliminary research results on brand image and also incorporate guest behavior learnings from COVID and include the following changes. Updated color schemes, fewer dining room seats, optimize make lines to improve speed of service, and enhance mobile pickup capabilities. Summary, we are pleased with our sales and margin results for the quarter and believe that our sales run rate would have been at or above 2019 levels if not for the staffing issues we encounter. The Taco Cabana Divestiture will allow us to create a more effective, efficient, and focused organization applying appropriate resources to accelerate delivery of the exciting growth potential we have in our Pollo Tropical brand. This will include our efforts to drive an upgraded customer experience across all service channels, continuing to invest in expanding our growing digital platform, and finalizing our new unit expansion target for 2022. Now, Patty will provide a bit more color on our digital platform strategies and progress.