Fiesta Restaurant Group, Inc.

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.

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.

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.