Fiesta Restaurant Group, Inc.

Good day and welcome to the Fiesta Restaurant Group first quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Mr. Rafael Gross, partner at ICR. Please go ahead.

Thank you, Operator. Fiesta Restaurant Group's first quarter 2022 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, less expressed or forecasted in such forward-looking statements, and a 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 and Senior VP of Strategic Initiatives 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 overview of the first 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. We also have Patty Lopez-Gaia, our Chief Experience Officer and Senior VP of Strategic Initiatives here with us to provide more color on our digital status during the Q&A session. We continue to make good progress in our business in the first quarter with revenues continuing to show positive upward trends and margins showing sequential improvement from the fourth quarter of 2021 to the first quarter of 2022, with the margin run rate late in the first quarter positively impacted by the planned price increase implemented in early March. Additionally, we made significant progress on the brand's growth agenda, which we shared previously, and we anticipate continued progress on our growth initiatives throughout the balance of the year. Regarding first quarter results, our strong revenue growth continued with first quarter 2022 comparable restaurant sales performance of 8% versus first quarter of 2021, and we have now generated comparable restaurant sales results at or above 2019 levels for three consecutive quarters despite lost operating hours, some staffing issues, and remodeling disruptions in select units. We generated even stronger first quarter 22 comparable restaurant sales of 11.1 percent versus the first quarter of 2021 in markets where labor shortages have not negatively impacted operating hours. Encouragingly, our digital initiatives contributed to online channel first quarter 2022 comparable restaurant sales growth of 15.5% versus the first quarter of 2021. After adjusting for our estimates of the impact of staffing and remodeling disruption, we believe comparable restaurant sales for the first quarter of 2022 compared to 2021 would have been approximately 60 to 90 basis points higher. First quarter 2022 restaurant level adjusted EBITDA margins, a non-GAAP financial measure, improved to 16.1% compared to 14.3% in the fourth quarter of 2021. Following the 5% pricing taken in early March, estimated restaurant level adjusted EBITDA margins grew to above 17% on approximate run rate basis. We continue to target restaurant level adjusted EBITDA margin of 18 to 20% as our sales growth and labor optimization initiatives increasingly gain momentum. When compared to the first quarter of 2021, our restaurant level adjusted EBITDA margins declined during the first quarter of 2022, primarily due to total labor and food cost increases, which were partially offset in the quarter given our pricing action to offset those costs in the last months of the quarter. Dirk will provide additional details regarding first quarter results as part of his prepared comments. As we communicated previously, the completion of the Taco Cabana sale in 2021 enabled our singular focus on significant growth opportunities in the Pollo Tropical business. I also previously discussed our agenda for capturing that growth for Pollo focusing on four areas of strategic opportunity, and again, we made strong progress in each of those areas in the first quarter of 2022. First, we continue to concentrate activity on accelerating growth in non-dine-in channels and improving the guest experience across all channels to better enable our customers to access and enjoy our brands wherever and whenever they choose. We continue to enhance our digital platform and make improvements in customization, ease of use, and speed of service for off-premise guests, including an enhanced digital drive-through experience, curbside pickup enabled by geofencing technology, and the introduction of QR kiosk-in-hand technology for ordering and payment. The third area of focus is to continue to assertively execute against our refined Pollo Tropical brand proposition through a more relevant, contemporary, and efficient unit design, guiding our investments in refurbishments as well as new unit expansion. And lastly, we are placing intense focus and increased investments in developing our store and field talent, with a major focus on our field management teams and structure. Regarding our efforts in drive growth across all channels, we continue to drive year-over-year growth in delivery channel with comparable restaurant sales growth of 17.8% in the first quarter of 2022 versus first quarter of 2021. In addition, first quarter 2022 online comparable same-store sales grew 15.5% compared to 2021, and current online check averages in 2022 continue to be above the average of all other channels. Finally, dine-in and counter-takeout sales are showing strong growth as consumers become more comfortable with the dine-in experience, with dine-in and counter-takeout comparable restaurant sales growth of 23.1% in the first quarter of 2022 versus 2021. On the digital front, we made great strides in the first quarter enhancing our digital capabilities. The rollout of upgraded digital drive-through technology is underway after completing the pilot location in late fourth quarter 2021. We will have expanded the digital drive-through technology to five or six additional units by the end of the second quarter, and we plan to increase the rollout pace of this additional feature during the remainder of the year in 10 to 14 additional units. We are targeting 3% to 5% growth in drive-through revenue on a run rate basis within the first year following each digital unit installation. As a result of improved staffing levels, we also reopened curbside capability in all units. Curbside technology has the capability to drive significant sales growth based on our experience to date and on competitive benchmarks. And we plan to add marketing support behind this effort in the immediate future. Growth in digital sales channels, that's delivery and online, was very encouraging in the first quarter with 17.2% comparable restaurant sales growth versus the first quarter of 2021, and over triple the comparable restaurant sales dollars compared to the first quarter of 2019. Results like this underpin our strong belief that there is even greater upside to come from our past and current investments in the digital platform enhancements. We also made very good progress on our third priority in the first quarter, refining our new unit and refurbishment designs that include multiple ideas for improved kitchen productivity, driving increased output, lowering wait times, and delivering greater labor efficiency. Our focus this year is targeting investment to complete 20 to 30 refurbishment of varying scope levels to grow traffic while continuing to refine and execute our kitchen productivity ideas. To date, the sales lift following completion of refurbishments is exceeding our initial expectations by approximately 300 to 400 basis points. Improving kitchen productivity in higher volume units is very important because we are seeing consistent evidence that we have unmet demand at peak dining times due to above average wait times. As a reference, our average drive-through car stack line at peak times is approximately nine cars, creating longer than expected customer wait times. By reducing kitchen cycle times, we can unlock unmet demand to drive meaningful sales growth in existing units. As a result of the work completed on the 2.0 new unit design and kitchen productivity research by TPA, a highly experienced kitchen design optimization consultant. We have developed a number of solutions to drive an improved customer experience while increasing kitchen productivity. These solutions include, one, installing an additional kitchen make line dedicated completely to online and delivery orders, coupled with a dedicated order identification and pickup system. Two, and secondly, retrofitting a total redesign of our existing make line to be significantly more efficient, improving workflow to reduce our cycle times. Early in the first quarter, we worked with TPA to validate the efficiency improvement potential of the kitchen retrofit in a test kitchen site, and the results exceeded our expectations. At the conclusion of our initial test, Kitchen order cycle times were cut roughly in half, which would result in improved drive-through productivity from the current average of approximately 40 to 50 cars per hour to approximately 80 to 100 cars per hour, presenting a significant revenue opportunity at peak times. Based on just a 10-car-per-hour increase, Through improved productivity at peak lunch and dinner hours, the revenue improvement potential represents a 5% revenue growth opportunity per unit. We will continue to refine and execute these kitchen productivity enhancements in refurbishments and in existing restaurants. The first remodel with kitchen productivity enhancements is nearing completion and includes both the existing kitchen line retrofit and the additional make line for online and delivery orders. In addition, we are in the process of determining the exact right match of these kitchen productivity improvement ideas against our higher volume, higher opportunity units. We have developed two different target levels of investment for our unit refurbishments. Unit refreshes with an average investment of approximately $250,000 to $300,000 and more extensive unit remodels with a target investment of $525,000 to $590,000 per unit. Seven remodel refreshes were completed in the first quarter of 2022, and 15 in total have been completed since 2021. We are targeting 20 to 30 refreshes and remodels in 2022, with the majority of projects being of the lower investment refreshes. We are currently highly encouraged by the early sales lift achieved from the refreshes and remodels. We completed 11 refreshes to date with an estimated average pre-post sales lift of 6 percent to 7 percent when compared to comparable market level performance. In addition, our refurbishment sales lift is exceeding our expectations with an average cost below targeted levels. Finally, our fourth strategic priority is to target increased investment in store and field talent development to improve our execution ability, increase team retention, and deliver improved customer satisfaction. As we noted last quarter, we have reprioritized our operations leadership to focus first and foremost on people, guests, and team members, then followed by operating process. We know from our own experiences that managers who place a higher priority and focus on people first drive a higher level of restaurant sales and profit. As we noted on our last call, we have developed a more comprehensive training program for the redesigned executive general manager role, including leadership development and talent management training. Our first training class was completed in the fourth quarter. and we are on track to complete this training across our brand by the end of 2022, covering 100% of our restaurant leadership, including every general manager and district manager, as well as field human resources and training team members. In addition, we have significantly increased the emphasis on people and development in our operations training and communication, as well as making this focus a major theme at our upcoming annual operations conference. Finally, we expanded the number of regional directors of operation from four to seven to reduce their span of control. Also aimed at improving the execution of our guest proposition, allowing greater focus and time on team member development and coaching. We can clearly see that the redefined general manager role combined with investments in field talent development at all levels improves execution, increases team retention, and drives greater guest satisfaction, all of which leads to improved financial performance. To recap, we are on track with all four of our strategic initiatives to achieve the goals we set for 2022. In the first quarter, we made measurable progress on each initiative and we expect to see accelerating sales momentum, the balance of the year, as a direct result of these initiatives. While expanding the capacity of our stores to meet unmet demand is a key focus with our strategic approach, improving the overall efficiency and productivity of our business also remain a top priority as we have moved along our plans aimed at reducing our overall G&A to target range of 8.5% to 9% of current sales on a run rate basis during 2022. We have finalized implementation plans for the second half of 2022 and expect to see the positive impact over that timeframe. In summary, our team's efforts to proactively and successfully manage external labor supply and inflationary challenges have delivered sustainable improved progress in the quarter. We are highly encouraged by our continued sales and margin momentum thus far in 22. something we expect to see continue for the balance of the year barring unforeseen changes in our operating environment. Finally, and most importantly, we will continue to drive revenue and profit growth across our business through enhancements to our customer experience across all service channels, implementation of further upgrades to our digital platform, continuing to develop the capabilities of our field management teams, continuing to execute our brand proposition through remodeled and refreshed restaurant designs, and by unlocking unmet demand through improved kitchen capacity and productivity. Dirk will now provide a financial update.