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spk00: Good day and welcome to the Fiesta Restaurant Group fourth quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Raphael Gross, partner at ICR. Please go ahead.
spk01: Thank you, operator. Fiesta Restaurant Group's fourth quarter 2001 earnings release was issued after the market closed. 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's 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, Chief Experience Officer Patty Lopez-Callea, and Chief Financial Officer Dirk Montgomery. And now I'd like to turn the call over to Rich.
spk05: 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 business update and an overview of the fourth quarter results, the status of our strategic priorities and thoughts on 2022. Dirk will then wrap up with a financial update before we open the call for questions. Again, we also have Patty Lopez-Quez, our Senior VP Strategic Initiatives and Chief Experience Officer here with us to provide more color on our digital status during the Q&A session. We are optimistic as we begin 2022. We have top line momentum. Our restaurant EBITDA margins are on track to reach targeted levels by the end of the first quarter. And the divestiture of Taco Cabana business has enabled much greater focus and progress on the Pollo Tropical strategic initiatives in the fourth quarter. Regarding the fourth quarter results, we are pleased with Pollo Tropical's 2021 comparable restaurant sales performance, which continued to accelerate in January and February of 2022. Fourth quarter 2021 comparable sales were 9 percent versus fourth quarter of 2020. And comparable restaurant sales have now been at 2019 levels for two consecutive quarters. Comparable restaurant sales results were much stronger in the markets that have reached improved staffing levels. Those markets representing all major markets except Miami-Dade realized fourth quarter 2021 comparable restaurant sales of approximately 13.5% versus 2020 and 3.9% versus 2019. Our momentum continued to build in the first quarter with accelerating comparable same store sales growth of 7.5% in January and 8.5% 0.8% in February. And we remain optimistic about continued sales momentum as we expand our growth initiatives. As we all know, industry-wide staff availability challenges continued in the fourth quarter. Our proactive action plans that included wage rate increases, hiring incentives, and improved benefits are working. Current staffing levels have improved compared to the third quarter of 2021. At select units that have not reached optimal staffing levels, we are taking additional actions, including incentive pay for challenging scheduling day parts, such as late night shifts, expanded recruiting resources, and we are also testing added team incentives for completed schedules. We will continue to benchmark our total comp and benefits package against our peers and make additional changes as needed to ensure we can remain an employer of choice in all of our markets. During the fourth quarter, we continued our plan for opportunistically improving margins in an increasingly inflationary environment through phased pricing increases of 5.2 percent late in the fourth quarter of 2021, and 5% in early March of 2022, as well as ongoing labor optimization, including significant overtime reduction. As a reminder, based on internal competitive price benchmarking and research conducted by our outside pricing analytics consultants, we believe our pricing action from 2019 through 2021 was well below our peer group. We are on track for restaurant-level adjusted EBITDA margins, a non-GAAP financial measure, to reach our targeted range of 18% to 20% on a run rate basis by the end of the first quarter of 2022. Again, barring unforeseen changes in our core structure and operating environment. Preliminary estimated first quarter of 2022 quarter-to-date restaurant EBITDA margins through February were above both Q3 and Q4 of 2021, and we expect margins to continue improving following our recent price increase in March. Restaurant-level adjusted EBITDA margins declined during the fourth quarter of 2021 compared to 2020, primarily due to total labor cost increases. which were only partially offset by our phased pricing action late in the fourth quarter. A large portion of the labor cost increases are short-term only, estimated at $0.8 million, or approximately 90 basis points as a percentage of sales. Fourth quarter 2021 loss from continuing operations was $6.8 million, compared to income from continuing operations in the fourth quarter of 2020 of $2.5 million. The decrease was primarily due to higher labor costs, advertising expenses, G&A expenses, and repair and maintenance costs partially offset by the impact of higher restaurant sales and improved cost of sales margins. Higher labor costs were driven primarily by hourly wage increases, short-term hiring incentives, and additional overtime and training. Dirk will provide additional details regarding fourth quarter results as part of his prepared comments. Next, an update on our strategic priorities. As I mentioned in prior calls, we had three key strategic priorities throughout the year and have added a fourth in 2022. One, 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 brand wherever and whenever they choose. Two, enhance our digital platform and make improvements in customization, ease of use, and speed of service for off-premise and including an enhanced digital drive-through experience, curbside pickup enabled by geofencing technology, and the introduction of our QR kiosk-in-hand technology for ordering and payment. Three, continue to test and refine the Pollo Tropical brand proposition and unit design and investment in preparation for future remodels as well as expansion in existing and new markets. And four, and lastly, increase our investments in the development of our field management teams. Regarding our efforts to drive growth across all channels, we continue to drive year-over-year growth in the delivery channel with comparable restaurant sales growth of 27.6% in the fourth quarter of 2021 versus the fourth quarter of 2020. In addition, the fourth quarter 2021 online comparable same-store sales grew 29.9% compared to 2020. Our app store ratings continue to be very high with 4.9 for iOS, and 4.6 for Android out of five stars. Finally, online check average in 2022 continued to be above the average of all other channels. On the digital front, we continue to make strides on enhancing our platform by successfully completing the pilot of our much improved digital drive-through customer experience, reopening curbside capability that was placed on hold during staffing challenges, and launching QR kiosk in-hand technology for faster in-store ordering and payment in all units. Features of our improved digital drive-through experience include end-to-end customer experience tracking, capability to offer day part and customer-specific promotions, and integration with the Pollo Tropical app and loyalty program, which are collectively expected to improve traffic. order accuracy, speed of service, and increased check averages through upselling. Digital channel sales, which is delivery and online, growth was strong in the fourth quarter with 28.1% comparable restaurant sales growth versus the fourth quarter of 2020, and over triple the comparable restaurant sales dollars compared to the fourth quarter of 2019. And yet, We still believe there's significant upside in the digital platform growth as we fully implement our growth initiatives. We've also made very good progress on our third priority in the fourth quarter, refining our new unit and remodeled designs, including improved operations productivity. With assistance from a leading operations engineering firm, we completed and successfully tested a new, more efficient kitchen line design that significantly reduces order cycle times. The new kitchen design will be tested in upcoming remodels as a retrofit to improve productivity and unlock unmet drive-through demand in high-volume units. Given the long car lines during peak periods in our core markets, an increase in drive-through productivity has the potential to drive meaningful incremental sales. We are taking a disciplined approach to refurbishing existing units by testing key restaurant design elements and operating platform improvements with two levels of investment and scope. Refreshes with an investment of approximately $290,000 on average and full remodels with an investment of approximately $500,000 on average. We completed three remodels and five refreshes in 2021, with all but one finished late in the fourth quarter. Customer feedback on the remodels has been very positive, and we plan to complete 20 to 30 refreshes and remodels in 2022, with the majority being refreshes. Finally, we are adding another strategic priority to increase our investment in field talent development to improve execution, team retention, and customer satisfaction. In part, to enable this focus on development execution, we are expanding the number of regional directors of operations positions to six RDOs to reduce the span to approximately 21 units and to improve execution and ultimately enable new unit growth in existing geographies. The RDOs report to the senior RDO who serves as our head of restaurant operations, with the senior RDO reporting directly to me. In addition, we reinvented the unit general manager role to be named executive general manager, or EGM. This new role was designed to shift the focus of the EGM to a higher level of leadership that reprioritizes their focus First and foremost, two people, customers and team leaders, followed by process and then profit. We know that our existing managers that place a higher priority and focus on people first drive a higher level of restaurant sales and profits. In the fourth quarter, we developed a much more comprehensive training program for the redesign EGM role That includes leadership development and talent management training. Our first training class was completed in the fourth quarter, and every restaurant leader will complete this enhanced training in 2022. We believe this refined role, combined with investments in field talent development at all levels, will improve execution, team retention, and customer satisfaction. all of which should lead to improved financial results. Regarding future uses of cash and investments for growth, we'll be taking a disciplined approach to using our cash for investments. As we have in the past, we will prioritize spending on strategic growth initiatives that will continually enhance our brand image and drive operational effectiveness and efficiency. In the fourth quarter of 2021, we continued our share repurchase program that our board of directors had previously authorized for the purchase of an aggregate 3 million shares of common stock. During the fourth quarter, the company repurchased 516,074 shares, valued at approximately $5.4 million, which we believe is a means to improve shareholder value. As we mentioned last quarter, we are working toward reducing G&A. and finalized plans to reduce G&A expenses to targeted range of 8.5 to 9 percent of current sales on a run rate during 2022, with implementation plans in the second half of 2022. In summary, we are optimistic about continuing our positive sales momentum as we continue to expand our growth initiatives, including ongoing investments in our enhanced digital platform. We are well on the way this quarter to recovering restaurant EBITDA margins to targeted levels, and believe our field operations talent initiatives will drive an upgraded customer experience across all service channels. Now, Dirk will provide the financial updates and closing comments. DIRK WRIGHT- Thank you, Rich, and good afternoon, everyone.
spk03: I'll start by reviewing our fourth quarter results and then provide you with an update on our outlook for 2022. As a reminder, due to the divestiture, Taco Cabana's results, excluding corporate overhead costs, are presented as discontinued operations in our financial statements. The consolidated results I'll be reviewing today will be focused on continuing operations and on the Pollo Tropical brand. We were very pleased with our fourth quarter comparable same-store sales performance of 9% compared to the fourth quarter of 2020, and comparable restaurant sales were at 2019 levels for two consecutive quarters. We are very encouraged by the continued momentum we are seeing in markets that are more fully staffed, and as we continue to improve staffing levels, we are optimistic that our sales momentum will accelerate. Fourth quarter comp sales improvement compared to 2020 resulted from a 9.4% increase in the net impact of product channel mix and pricing and a slight decrease in comparable restaurant transactions of 0.4%. The increase in product channel mix and pricing versus 2020 was driven primarily by increases in delivery and drive-through check average and menu price increases of 7.8%. Total revenues increased 1.7 percent to $89.3 million in the fourth quarter of 2021 from $87.9 million in the fourth quarter of 2020, driven by the comparable restaurant sales increase at Pollo Tropical. Fourth quarter of 2021 consolidated net loss was $4.7 million, or 19 cents per diluted share, and includes 8 cents per diluted share of positive impact from discontinued operations due in part from the partial settlement of the insurance claim associated with Winter Storm URI and a tax accounting related favorable adjustment on the gain related to the sale of Taco Cabana. The fourth quarter 2021 loss from continuing operations was 6.8 million or 27 cents per diluted share. This compares to consolidated net income in the fourth quarter of 2020 of 0.9 million or 3 cents per diluted share, including a 7 cent per diluted share of negative impact from discontinued operations. Fourth quarter 2020 net income from continuing operations was 2.5 million or 10 cents per diluted share. On an adjusted basis, fourth quarter 2021 consolidated net loss from continuing operations was 3.4 million or 13 cents per diluted share compared to adjusted net income of 2.4 million or 10 cents per diluted share in the fourth quarter of 2020. Please see the non-GAAP reconciliation table in our earnings release for more details. Continuing operations consolidated adjusted EBITDA, a non-GAAP financial measure, was $2.5 million and 2.8 percent of revenue in 2021, compared to $9.1 million and 10.3 percent of revenue in 2020. Turning to restaurant-level results, Pollo Tropical restaurant-level adjusted EBITDA margin, a non-GAAP financial measure, was 14.3% in 2021 compared to 21.8% in 2020 and 19.2% in 2019. Restaurant-level EBITDA margins declined during the fourth quarter compared to 2020, primarily due to hourly wage rate increases, short-term hiring incentives, and additional overtime and training ahead of planned pricing action to offset those costs. 0.8 million of the labor cost increases for overtime and staffing-related incentives are short-term in nature, representing approximately 90 basis points as a percentage of sales. As Rich mentioned, during the fourth quarter, we continued our plan for opportunistically improving margins in an increasingly inflationary environment through phased pricing increases as well as ongoing labor optimization, including a significant overtime reduction. Driven in part by our labor optimization initiatives, restaurant wages as a percentage of revenue decreased meaningfully from September to December of 2021. And we are working with TPA, a leading labor optimization engineering firm, to further optimize labor in 2022 by implementing restaurant labor productivity best practices. We are on track for restaurant-level adjusted EBITDA margins, a non-GAAP financial measure, to reach our targeted range of 18 to 20% on a run rate basis by the end of the first quarter of 2022, barring unforeseen changes in our cost structure and the operating environment. Regarding fourth quarter trends and key expense categories, cost of sales as a percentage of restaurant sales in the fourth quarter of 2021 decreased to 30.1% compared to 31.3% in 2020 due to price increases and sales mix. partially offset by higher food and packaging costs. Restaurant wages as a percentage of net sales increased from 23% in the fourth quarter of 2020 to 27.9% in 2021, driven primarily by higher labor costs due to higher wage rates and overtime due in part to labor shortages. Higher labor costs were driven primarily by hourly wage rate increases, short-term hiring incentives, additional overtime and training, and short-term guaranteed operations leadership bonuses. Approximately 0.8 million of the fourth quarter 2021 labor cost increases compared to 2020 included overtime and staffing-related incentives that are short-term in nature. Other restaurant operating expenses is the percentage of restaurant sales increased in the fourth quarter compared to 2020 due primarily to the impact of higher repair and maintenance costs and higher delivery fee expense due to increased delivery channel sales. Rent in the fourth quarter increased compared to 2020 due primarily to the impact of sale-leaseback transactions and lease renewals at higher rates. Turning now to cash flow-related comments. In the fourth quarter, our cash balance decreased from the third quarter balance of $52 million to $36.8 million at the end of the fourth quarter. Significant cash outflows for the fourth quarter included $5.4 million for stock repurchases, $4.1 million in capital expenditures, and a software licensing payment of 2.5 million. We also made a one-time payment of approximately 1.6 million for the employer portion of Social Security benefits from 2020 that were allowed to defer under the CARES Act as part of COVID relief. One additional cash benefit we expect looking forward is the final payments of the insurance claim proceeds from the costs associated with Winter Storm URI. We reached a partial settlement in the fourth quarter and we are in the process of finalizing our claim with our insurers. I'll close with a few comments on our outlook for 2022. We are very encouraged by our accelerating sales momentum so far in 2022, which we expect to continue as we expand our growth initiatives. We have finalized contracts on all major commodities for calendar 2022, and our recent pricing actions in the fourth quarter of 2021 and last week are expected to fully offset 2022 commodity cost increases on a dollar cost basis. As I mentioned, we expect restaurant-level adjusted EBITDA margins to reach our target range of 18 percent to 20 percent by the end of the first quarter of 2021, inclusive of commodity cost increases for our 2022 contracts, barring any unforeseen changes in the cost structure. From a labor rate perspective, we feel comfortable that our current wage rates are competitive based on recent benchmarking at a unit level by role that confirmed our current wage rates are at or above market. We will continue to test additional incentives in the select units that have not yet reached optimal staffing levels, and we believe that any significant cost increases from those measures can be successfully offset by a combination of additional future pricing action and ongoing labor optimization initiatives. Regarding capital expenditures, we expect full-year 2022 capital expenditures to be in the range of 25 to 30 million. The increase from 2021 spending is being driven largely by refreshes and remodels, for which we expect to invest 7 to 10 million. Total technology investments in the range of 4 to 6 million, which are primarily in our digital platform and restaurant technology infrastructure. In closing, we are encouraged by our accelerating sales and margin momentum thus far in 2022, which we expect to continue barring unforeseen changes in the operating environment. We expect G&A expenses to reach the targeted range of 8.5 to 9% of current restaurant sales on a run rate basis in the second half of the year. And finally, we will continue enhancing the customer experience across all service channels further investing in our growing digital platform and the development of our field management teams, and refining our brand proposition in new unit design features and additional remodel tests to drive future growth. Thank you for listening, and we will now open the call up for questions. Operator?
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from James Rutherford with Stevens. Please proceed.
spk02: Hey, good afternoon, and thanks for taking the questions. I wanted to start on the staffing comments. If I heard correctly, I think fourth quarter staffing did improve from 3Q levels. So correct me if I'm wrong there, but I know you rolled out a lot of new benefits starting 2022. So how does your staffing look here today in early March? If there's a way to quantify that, perhaps percentage of 2019 levels or percentage of target levels or however you can kind of frame that up for us.
spk05: Yeah, and it's good talking to you, James. I will tell you that Miami-Dade is still lagging behind, but better than we were even in the fourth quarter. We're not where we want to be yet, and let me explain that for a second throughout the whole company. We are better. We're getting where we need to, but we still have call-outs, as everybody else does in the industry, and difficulty in getting people to work weekends and late nights. So it's still an ongoing battle, but we are making strides. We have seen improvement, as the rest of the industry had, starting in, say, mid-January, and that continues today. But we're not where we want to be yet. We still have hours that are being disrupted because of either closing the dining room due to lack of staffing or shutting off online ordering systems. because we just don't have the staffing.
spk02: Okay. And then as a follow-up to that kind of topic on staffing, is the additional regional director of operations in that change you're making to the GM role aimed at helping close the gap on staffing, or are those being done for a different purpose?
spk05: Well, there's no doubt it's being done from a people perspective, and that people is our guests and guest satisfaction, but also from retaining talent and bringing in talent. So it does impact the staffing. There's no doubt about it. So we're bringing in top people at the RD level, RDO level, as well as we've been successful in also improving our existing GMs and bringing in top GMs. Again, it's all about people. first and then process and then profit so there's no doubt we have better rdos or more rdos better gm levels we will definitely expect to have improved retention which will decrease the amount of opportunity we need to have in stock okay uh and dirk thanks for providing the january and february one-year comps do you happen to have what those were on a two-year stack basis i just couldn't find
spk02: last year what you were comping in January and February, to do that math myself.
spk03: Sure. So January was, this is now, just to confirm, this is a two-year comp, so it's 22 versus 2020, was up 3.3 in January and up 2.4 in February. Okay. Great.
spk02: And the price component of that, you did have some additional price in January and February compared to where you were in December. Is that right?
spk03: Correct. Correct. Yeah, we're lapping two or three price moves from 2021 that we will continue to lap through 2022 at varying levels.
spk02: My last question, I'll turn it over, is just on the margins. It's really encouraging to hear the commitment to the 18, 20% exiting this first quarter. Looks like you did just over 14% four-wall margins in the fourth quarter. I know price is a component, but is there anything else? Could you just bridge this, Dirk, between the 14 to the 18 and 20% in a few short months? What gets you there?
spk03: Sure. So first of all, the... The 5.2% pricing action that we took late in the fourth quarter was taken in mid-December. And so from a margin perspective, in the fourth quarter of 2021, we didn't really get the full benefit of that pricing action in the restaurant margins. So a big part of that is pricing action above and beyond no additional changes in wage rate increases. So as we said, we feel very comfortable that our wage rate increases that we made in 2021 put us in a competitive position, recognizing we still have some staffing issues where we have to select units where we may need to add incentives. But by and large, the pricing action we took late in Q4 and then the additional pricing action that we just took last week, combined with labor optimization, will drive the margins to that 18% to 20% range by the end of the quarter.
spk02: All right. Very good. Thanks so much. Best of luck. Thanks, James. Thank you.
spk00: Our next question is from Eddie Riley with EFN. Please proceed.
spk04: Hey, guys. Thanks for taking the question. I was wondering if you could give us some examples of what would be included as a refresh versus a full remodel.
spk03: Sure. So, first of all, the refresh and remodels are based on... the new design elements for the brand, so updated color schemes, updated interior design. Also, as Rich said, we're looking to test the kitchen retrofit that is significantly more efficient, at least on the test store basis, the mock store, than current. So the difference really between the refresh and the remodel scope is really more what we would say non-customer facing elements. So a more complete renovation of ceilings, floors, certain pieces of infrastructure. We feel like both of those have enough of exterior and interior impact that customers will notice them, particularly when they drive by the store. Because we've got fresh paint, we've got new design elements on the outside of the building, you know, all of which will tell customers, hey, this is a new POIO.
spk04: Got it. Got it. Could you comment on the traffic in January and February of this year?
spk03: Sure. So we're seeing mid-single-digit down traffic so far. In that range, as I'm sure you know, we believe that the segment in total is seeing negative traffic. So we are seeing weeks where the traffic actually is low single digits. So we believe that as we continue to implement our growth initiatives that we actually are going to see traffic improve over the course of the year.
spk04: Okay, cool. Got it. Got it. That's it from me, guys. Thank you. Thank you.
spk00: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
spk05: Well, again, we appreciate the support we have from our shareholders and investment community. Thank you very much, and please, everyone, stay safe. Thank you.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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