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spk02: Thank you for standing by. This is the conference operator. Welcome to the Fiesta Restaurant Group second quarter 2022 earnings call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad. 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 Raphael Gross, partner at ICR. Please go ahead.
spk01: Thank you, operator. Fiesta Restaurant Group second 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, 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 operation, business strategy, budget, projected costs and plans, and objectives of management for future operations. Actual outcomes and results may differ materially unless 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 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.
spk03: 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, an overview of our second quarter results, the status of our strategic priorities, and thoughts on our plans for the second half of 2022. Dirk will then wrap up with a financial update before we open the call for questions. Again, we also have Patty Lopez-Guea, our Chief Experience Officer and Senior Vice President of Strategic Initiatives, here with us to be able to provide more color on our strategic initiatives during the Q&A session. First, a few takeaways from the second quarter. We are very encouraged by our sequential sales growth throughout the second quarter, which continued to accelerate into the third quarter, with June and July comp sales at or above 10%. Most importantly, traffic trends have improved from the first quarter, with recent year-over-year traffic acceleration of 340 basis points over the first quarter, 2022 traffic results of minus 7%, with select markets now realizing positive traffic trends. This was achieved as a direct result of the actions we shared last quarter aimed at improving staffing levels, offering value-oriented promotions, and menu innovation focused on new product news while raising check. Like most in our industry, inflation headwinds challenged our anticipated recovery in store margins in the second quarter. We expect our margins to improve measurably in the third quarter, driven by our accelerating traffic trends from improved staffing, effective value-focused promotions, menu innovation, and the execution of a prudent pricing plan of 4% to 6%, which will be taken in September. Providing color on our accelerating sales trends, Second quarter 2022 comparable restaurant sales were 8.4% versus the second quarter of 2021, showing improved growth from first quarter comps of 8%. We have now generated comparable restaurant sales results at or above 2019 levels for four consecutive quarters, despite lowering operating hours due to challenging staffing issues. Our restaurant remodeling activity also caused disruption to operating hours in a number of units. After adjusting for the negative impact of remodeling disruption, comparable restaurant sales for the second quarter of 2022 compared to 2021 would have been approximately 40 basis points higher. Throughout the quarter, we saw comp sales and traffic acceleration in markets with improving staffing levels. The Palm Beach, Miami-Dade, and Orlando markets in aggregate generated comparable restaurant sales improvement of 200 basis points in the second quarter compared to the first quarter and further accelerated their improvement in July to double-digit comps, 500 basis points above Q1. More importantly, recent traffic trends are positive compared to 2021 in West Palm and and Orlando markets. Miami-Dade July comp sales improved 540 basis points compared to the first quarter, with recent traffic trends down only 1 to 1.5 percent compared to 2021. Very encouraging trends in those markets. I'm now going to provide a quick recap of our innovation, pricing, and promotion strategy which are proving to be even more effective during this challenging economic period. As we have taken pricing action by applying a barbell approach, we have minimized price increases of our high-value, affordable items like pollo time and family meals to ensure we maintain our value proposition. We have coupled value promotions with check building through menu innovation and higher price highly appealing menu items, including Tarasco Steak Proteins and the Grillmaster Trio. We've worked closely on pricing strategy with our pricing analytics consultant, Personica, which has allowed us to create a tiered pricing platform by unit and a very targeted approach to taking pricing in restaurants and specific menu items with lower price sensitivities. thus mitigating the impact of traffic. Our revenue optimization strategies are proving very effective as evidenced by the following. Pollo's strong value and quality perceptions among consumers are leading to a very strong net positive gains in new guests as measured by an external consumer purchasing pattern research firm. As of March 2022, The Pollo brand realized a 29% net positive gain in new guests over the prior year with increased guest visits among both regular quick service and fast casual users. This net growth in Pollo customers is the highest gain in three years. Value perceptions for Pollo brand continue to be significantly above local QSR benchmarks based on second quarter MPS data provided by Qualtrics. POYO traffic trends were in line with NAPTRAC Florida fast casual traffic trends for the second quarter, with POYO gaining traffic share in June. We are clearly seeing that our coordinated efforts to balance menu innovation, promotional activity, and analytic-based pricing is not only helping to build revenue and win back traffic, but it's also increasing our brand relevance with consumers. To summarize, our second quarter performance, we were encouraged by our sales acceleration as a result of our actions we shared last quarter, and that top line momentum further accelerated in July compared to the second quarter. Our margin recovery plans continue to deliver positive results even as headwinds have increased, and we believe These actions will build momentum as we measurably improve margins by the end of the third quarter. We continue to target restaurant-level EBITDA margins of 18% to 20% as we leverage our sales growth and continue to optimize labor. Dirk will provide additional details regarding the second quarter results as part of his prepared comments. We previously discussed our agenda for capturing growth for POYO. focusing on four areas of strategic opportunity. And again, we made strong progress in each of those areas in the second 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, including dine-in to better enable our consumers and customers to access and enjoy our brand wherever, and whenever they choose. Next, 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 for our counter guests as well as our new digital drive-through system. The third area of focus is to continue 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 on increased investment in developing our restaurant and field talent with a major focus on our field management teams and structure regarding our reference to drive growth across all channels we continue to drive year-over-year growth in the delivery channel with comparable restaurant sales growth of 17.2 percent in the second quarter of 2022 versus the second quarter of 2021. in addition dine-in and counter-takeout sales are showing strong growth as we improve staffing levels. With dine-in and counter-takeout, comparable restaurant sales growth up 25.1% in the second quarter of 2022 versus 2021. On the digital front, we made great strides in enhancing this platform with the ongoing rollout of our digital drive-through technology. Five units will be completed by the end of August, and 8 to 10 units by year end. 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. And sales results for digital drive-through units open to date are at or above those expectations. In addition, dining rooms now have access to the kiosk in hand QR code feature to maintain service in short staff locations, and to allow customers to bypass lines and order online in busier dine-in restaurants. Marketing programs for curbside orders were just recently commenced to allow for adequate staffing, and early results are showing check growth in curbside transactions above the company average. Curbside technology has the capability to drive significant sales growth based on initial results and competitive benchmarks. And we plan to continue marketing support behind this opportunity. Growth in digital channel sales delivery and online were very encouraging in the second quarter with 14.9% comparable restaurant sales growth versus the second quarter of 2021. An online check average more than 8% above company average. Results like this underpin our strong belief that there's 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 during the second 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 to complete 20 to 30 refurbishments of varying scope levels to grow traffic while continuing to refine and execute our kitchen productivity ideas. Most importantly, the early sales lift achieved from refreshes and remodels continues to exceed our initial expectations. The refreshes completed to date have generated a unit sales lift of approximately 4% positive to 6% positive when comparing the sales trend to each unit before and after the refresh to a control group of other POIL units in each refresh unit's local market. In addition, the average investment per unit for refreshes and remodels has been in line with targeted levels. The first remodel that incorporated kitchen productivity enhancements was recently completed and includes both the existing kitchen line retrofit and an additional make line for online and delivery orders. Early results are very encouraging with double-digit growth in both digital and drive-through transactions based on pre-remodel and post-remodel sales trends in comparison to its market trends. The average weekly sales of this unit has grown above pre-remodel sales from approximately $92,000 per week to a recent peak of $102,000 per week. Based on these positive early results, we are in the process of identifying additional refresh remodel units that can accommodate the kitchen productivity improvement ideas with a focus on high volume units. To further improve kitchen and drive-through productivity and unlock unmet demand at peak times, we are working with the engineering firm TPA to enhance our labor model used for scheduling to more accurately match schedules to sales trends and to improve efficiency of opening, closing, and prep routines. The improved scheduling model will be tested in the second half of this year, and we expect meaningful productivity improvement from this initiative. Regarding our refresh and remodel pace, we have completed 17 refreshes and five remodels through the second quarter of 2022, on track with our goals for the year. For the remainder of 2022, we are targeting eight to 12 additional refreshes or remodels, with the majority of these projects being the lower investment refreshes. Finally, our fourth strategic priority is to target increased investment in restaurant and field talent development to improve our execution ability, increase team retention, and deliver improved customer satisfaction. As we noted previously, we have reprioritized our operations leadership to focus first and foremost on people, guests and team members, then followed by operating process and profits. We are on track to complete the rollout of our enhanced and comprehensive leadership development and talent management system for 100% of our restaurant leadership, field human resources, and training team members by the end of 2022. In addition, we have significantly increased the emphasis on people and development in our ongoing operations training and communication. Based on the success of the program, We are expanding this platform to include enhanced training for assistant managers that focuses on leadership skills and talent management, which we launched in the fourth quarter. We can clearly see that the redefined general manager role, combined with investments in field talent development at all levels, is improving execution and increasing team retention, all of which leads to improved guest satisfaction and financial performance. Due to our investments in talent, our general manager turnover levels are down from prior quarter with the lowest number of open positions that we have seen in recent years. To recap, we are on track with all four of our strategic growth initiatives to achieve the goals we set for 2022. In the second 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. In addition to our focus on the strategic initiatives, improving overall efficiency and productivity of our business also remains a top priority. We are implementing expense reduction plans, which should result in a measurable reduction in G&A expense levels in the second half of this year and ultimate reduction in G&A to a targeted range of 8.5% to 9% of restaurant sales on a run rate basis. In summary, as I said at the start, we are very encouraged by our continued strong sales momentum thus far in 2022, and we continue to be intensely focused on driving sustainable traffic growth across all channels while also taking highly targeted action to improve store margins. Finally, and most importantly, We 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 capabilities our field management teams, continue 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.
spk04: Thank you, Rich, and good afternoon, everyone. I'll start by reviewing our second quarter results and then provide you with an update on our outlook for the remainder of 2022. Overall, we were pleased with our financial results for the quarter, and we're very excited to see strong comparable restaurant sales growth in the second quarter of 8.4% versus 2021. We gained momentum as we completed the second quarter with June and July comp sales of 10% or higher, with further comp sales acceleration in early August. The most encouraging news on our sales trend is clearly our improvement in traffic trends, which accelerated over the second quarter and continued to improve in July. As Rich commented, over the last three weeks, we have seen a 340 basis point improvement in recent year-over-year traffic trends compared to the first quarter. with select markets now realizing positive traffic trends. The action items we shared last quarter, including our focus on improving staffing, offering value-oriented promotions, and ongoing menu innovation, are working and building top-line momentum. Regarding sales performance, total revenues increased 8% to $98.5 million in the second quarter of 2022 from $91.2 million in the second quarter of 2021, driven by the comparable restaurant sales increase. Second quarter improvement compared to 2021 resulted from a 15.1% increase in the net impact of product and channel mix in pricing and a decrease in comparable restaurant transactions of 6.7%. The second quarter 2022 positive mix impact was driven by the addition of check building, higher ticket menu items, such as the family bundle packages, Grow Master Trio, and Churrasco protein items, as well as the continued success of add-on offerings, including avocado slices. The second quarter 2022 consolidated net loss was $6.2 million, or 25 cents per diluted share, and includes income of approximately $0.3 million from discontinued operations. The second quarter 2022 loss from continuing operations was $6.5 million, or 26 cents per diluted share. This compares to consolidated net loss in the second quarter of 2021 of 83,000 or zero cents per diluted share, including an 11 cent per diluted share of negative impact from discontinued operations. Second quarter 2021 net income from continuing operations was 2.7 million or 11 cents per diluted share. On an adjusted basis, second quarter 2022 consolidated net loss from continuing operations was 2.1 million or $0.09 per diluted share compared to adjusted net income of $3.4 million or $0.13 per diluted share in the second quarter of 2021. Please see the non-GAAP reconciliation table and our earnings release for more details. Consolidated adjusted EBITDA, a non-GAAP financial measure, was $5.7 million and 5.7 percent of total revenue in 2022 compared to $9.1 million and 10 percent of total revenue in 2021. Turning to restaurant-level results, restaurant-level adjusted EBITDA margin, a non-GAAP financial measure, was 15.2 percent in 2022 compared to 20.3 percent in 2021. Restaurant-level EBITDA margins declined during the second quarter compared to 2021, primarily due to higher labor, repair and maintenance, utilities, insurance, and commodity costs, and sales mixed within cost of sales, partially offset by the impact of higher restaurant sales in the quarter. In addition to increased inflation pressures, we also proactively invested in expanded labor hours to improve staffing levels. Those results were only partially realized during the second quarter. Those investments to improve staffing levels contributed to building sales momentum versus in July and in early August. Second quarter restaurant level adjusted EBITDA non-recurring expenses which adversely impacted restaurant-level adjusted EBITDA margins by 100 basis points related primarily to short-term supply disruption caused by plant damage to a chicken supplier. The supply disruption required the use of a backup supplier from May to early July, and our primary supplier is back to full operating capacity. Regarding second quarter trends and key expense categories, cost of sales as a percentage of restaurant sales in the second quarter of 2022 increased to 33.2% compared to 30.4% in 2021 due to higher commodity costs partially offset by our phased menu price increases. As noted, higher commodity costs were partially due to additional chicken costs of approximately 0.9 million as a result of utilizing the backup supplier. Restaurant wages as a percentage of net sales increased to 25.1% in the second quarter of 2022 from 24.1% in 2021, driven primarily by higher labor costs due to higher wage rates, overtime pay, and training costs, partially offset by the impact of higher restaurant sales. In the second quarter, staffing levels improved, enabling us to open all sales channels more consistently, which we expect will drive further sales growth. Other restaurant operating expenses as a percent of restaurant sales increased in the second quarter compared to 2021 due primarily to the impact of higher repair and maintenance costs, higher utility costs, higher insurance costs, and higher delivery fee expenses due to increased delivery channel sales. General and administrative expenses were $12.8 million for the second quarter of 2022 and $11.1 million for the second quarter of 2021 due primarily to increased professional fees, higher employee and other support costs. General and administrative expenses for the second quarter of 2022 include $1.7 million in non-recurring expenses comprised of $1.2 million in professional fees, $0.3 million digital platform costs, and $0.2 million of general and administrative efficiency initiative costs. General and administrative expenses for the second quarter of 2021 include $0.3 million related to non-recurring digital platform costs. Turning now to cash flow related comments. In the second quarter of 2022, our total cash balance was 42.9 million, including 3.6 million of restricted cash, and grew 2.1 million from the first quarter of 2022. Capital expenditures in the second quarter of 2022 were 4.6 million. In addition, we continue to have no debt on our balance sheet, and 10 million in undrawn revolver capacity is an additional source of liquidity as part of the loan agreement we executed in 2020. We are continuing efforts to finalize settlements on the winter storm insurance claim we noted previously, which represents a future potential cash inflow once that claim is fully settled. I'll close with a few comments on our outlook for the remainder of 2022. We are very encouraged by our sales momentum so far in 2022 to continue to accelerate in July and into early August. We are very focused on achieving our growth objectives through our four key growth initiatives, which are on track and we expect will continue to build momentum as we realize the full impact of those initiatives. From a labor rate perspective, we feel comfortable that our current wage rates are competitive based on recently updated wage rate benchmarking at a unit level by role that confirmed our current rates are at or above market. We expect margins to improve measurably in the third quarter, driven by our accelerating traffic trends from improved staffing, effective value-focused promotions, menu innovation, and prudent pricing action of 4% to 6% that we plan to take in September. As Rich mentioned, we have multiple points of evidence that our pricing and value promotion strategies are proving effective and will allow us to continue to recover margins with additional pricing action while minimizing any traffic risk. We are targeting restaurant-level adjusted EBITDA margins, a non-GAAP financial measure of 18 to 20 percent, as our sales growth and labor optimization initiatives increasingly gain momentum, barring unforeseen changes in our cost structure and operating environment. G&A expense reduction plans are being implemented, which we expect will result in a reduction in expense levels in the second half of this year and an ultimate reduction in G&A to the targeted range of 8.5 to 9 percent of restaurant sales. Regarding capital expenditures, we expect full-year 2022 capital expenditures to be in the range of 25 to 28 million. The increase from 2021 spending is driven largely by refreshes and remodels, for which we expect to invest 8 to 10 million, and technology investments in the range of 6 to 8 million, primarily in our digital platform and restaurant technology infrastructure. In closing, we are very encouraged by our continued strong sales momentum thus far in 2022 and we continue to be intensely focused on driving sustainable traffic growth across all channels while also taking highly targeted action to improve store margins. Most importantly, we will continue to drive growth by further implementation of our key initiatives to enhance the customer experience across all service channels. Thank you for listening, and we will now open the call for questions. Operator?
spk02: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. Our first question comes from Edward Riley of EF Hutton. Please go ahead.
spk05: Hey, guys. Thanks for taking my question. One key theme in previous quarters has been staffing issues. Given that you're at the lowest number of open positions in recent years, would it be safe to say that the staffing challenges have largely dissipated?
spk03: I would say, hi, it's Rich, and I'll open up for everybody else. I would say not yet. We are improving. We still have some issues with call-outs. That happens especially on weekends. No, we still need to increase the staffing percentage by hopefully reducing turnover and by retention. But we're not done yet. We're gaining ground, though, and you've seen that because that's what's helping us increase the transactions as well as the sales. But we've still got some work to do.
spk05: Okay, great. Thanks for that. And then it looks like advertising spend isn't really out of the norm. I was wondering what's driving the growth in new customers.
spk03: The advertising spend is a bit higher than we had during COVID. It's up to about, I think it's 3.5% of sales. But the new customers, we're gaining a lot from the quick service. That was also part of the research where if you look at What we can get for a pollo time, which is less than $6, quarter chicken, rice, and beans for lunch, compared to our competitors and what they're charging for even at quick service, we've seen that we're taking some of that customer base from below us. And now I believe we're starting to see some of that customer base coming back from casual coming down to us. So it's not so much been the marketing, even though we're doing the social, we're doing the TV, everything we've done in the past. But I believe that the quote-unquote recessionary factors that we're going through right now is having a positive impact on our business and transactions. Gotcha.
spk04: And, Eddie, it's true.
spk03: Sorry.
spk05: Go ahead.
spk04: I was just going to add, Eddie, that our barbell strategy in terms of pricing and promotions we think is actually – being very effective in retaining our value proposition with our value-focused customers. So, you know, Rich underscored some of the evidence of that, but we think that that's what's causing us to actually retain the value-conscious customers and get matriculation from kind of both sides of the spectrum. We've got matriculation from casual and also from quick serve because of the value and the quality.
spk03: But, Eddie, the most important, the most important is having the staffing and opening up all the trade channels. We're now opening up back to regular hours that we were open before COVID. That is the most important because you can advertise the market all night long. But if you don't have the staff and the team to execute through all channels, it's not going to work. So with the increase in staffing, especially where we see staffing which is less of a concern like Palm Beach County and Orlando, we're seeing significant positive sales, including positive traffic.
spk00: Okay, great. Thanks, guys. Appreciate it.
spk02: This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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