Fiesta Restaurant Group, Inc.

Today, and welcome to the Fiesta Restaurant Group third quarter 2022 earnings conference call. All participants will be in the 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, please press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Rafael Gross from ICR. Please go ahead.

Rafael Gross Thank you, operator. Fiesta Restaurant Group's third 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 might differ materially from these 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 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, Ray. I'd first like to thank all of our 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 our third quarter results, the status of our strategic growth initiative, and thoughts on our plans to successfully close out 2022. Dirk will then provide a financial update before we open the call for questions. We also have Patty Lopez-Cayette, our Chief Experience Officer and Senior VP of Strategic Initiatives, here with us, available to provide more color on our strategic initiative during the Q&A session. First, key takeaways on the third quarter results. The third quarter of 2022 was a positive quarter for the business, with progress being made on all fronts and meaningful quarter-over-quarter improvements in our results after factoring the impact of Hurricane Ian on our operations. We saw continued traction across our key priorities of driving traffic growth and improving margins and our strategic growth initiatives are building momentum. Providing more color on our accelerating sales trends, our comfortable restaurant sales improved to double-digit growth in the third quarter. Excluding the estimated impact of the hurricane and further accelerating in October, moreover, our traffic comps improved approximately 140 basis points from the second quarter to the third quarter, inclusive of the negative impact of Hurricane Ian of approximately 220 basis points. Our accelerating comp transaction momentum was a direct result of the actions we shared previously to improve staffing, expand our sales growth initiatives, and continue our successful pricing of value item price with check accretive limited time offers. As we noted previously, Improving staffing levels has been a key enabler to transaction growth. Staffing levels improved measurably in the third quarter versus the second quarter and further improved in October, which along with the ongoing impact of our growth initiatives should enable us to further accelerate comp traffic growth in the fourth quarter. Our top line momentum is building. not only in total, but in each of our key markets. All key markets improved their comp transaction trends versus 2021 in the third quarter versus the second quarter after adjusting for the estimated hurricane impact. In addition, the West Palm and Orlando markets generated positive comparable transaction growth versus 2021 in the third quarter after factoring the hurricane impact our key miami-dade market meaningfully improved its overall staffing levels from the second to third quarter which was a key driver in the approximately 600 basis point improvement in comp transaction trends in the second quarter to the third quarter with the third quarter comp transactions down only 1.5 percent compared to 2021 excluding the hurricane impact. In addition, our pricing, innovation, and promotion strategy are contributing to revenue growth momentum. Regarding pricing, we continue to take a phased and targeted approach to pricing with assistance from our pricing analytics consultant for SONICA to opportunistically recover margins while minimizing the negative traffic impact of pricing action. This strategy includes applying a barbell approach by pairing lower price increases on our high-value affordable items like foil time and family meals to ensure we maintain our value proposition combined with offering check-accreted limited-time offers and menu innovation. In the third quarter, we took pricing action of 4% in September. and we saw a positive impact on check averages from the return of our higher-priced RIB limited-time offer, as well as the continuation of the Tarasco Steak Proteins and Girlmaster Trio. Our revenue optimization strategies are continuing their effectiveness, evidenced by the following. Value perceptions for the Pollo brand continue to be significantly above local QSR benchmarks, based on recent NPS data provided by Qualtrics. COIDO comp traffic trends prior to the hurricane in July and August outpaced NAPTRAC Florida's past casual comp traffic trends. In addition, our customer price sensitivity, as measured by Personica, social media and consumer surveys has remained in line with historical levels. We are clearly seeing that our coordinated efforts to balance menu innovation, promotional activity, and analytic-based pricing is helping to build revenue and win back traffic. We are pleased with our margin improvement in the quarter after considering the hurricane impact, and particularly the margin run rate that we saw at the end of the quarter following our 4% September price increase. We continue to drive margin improvement and we expect to exit 2022 at our targeted restaurant level operating profit margin range of 18 to 20% on a run rate basis. Dirk will provide additional details on sales and margin trends as part of his update. Now I'll provide a brief update on the status of our strategic growth initiative. The priorities we communicated previously remain unchanged, and we continue to make significant progress during the third quarter across all of those initiatives. Most notably, our refresh remodel program continues to generate consistent sales growth in comparison to Poya local market unit trends. Refreshes to date have generated a very good sales of approximately 4%. We completed 26 refreshes and remodels through the end of the third quarter and expect to complete four to six additional units in the fourth quarter. DARK and his team have become a successful implementation of our G&A expense reduction plan, including but not limited to the outsourcing of accounting transaction processing and downsizing our Dallas service center and office space. which will meaningfully contribute to an ultimate reduction in G&A for a targeted range of 8.5 to 9% of restaurant sales. Our digital platform continues to gain momentum and is making a growing contribution to revenue growth. We made great strides in enhancing our digital platform with the ongoing rollout of our digital drive-through technology with five units completed to date, generating encouraging average drive-thru channel sales growth, and 8 to 10 units to be completed by year-end. In addition, we are seeing growing customer usage of our app, the QR code feature, and curbside, which contributed to 14% digital platform comp sales growth in the third quarter versus 2021, inclusive of the hurricane impact. The operations and HR teams led by Patty have made great strides over the course of the year in a number of important areas to improve our overall talent level. Overall staffing levels have improved significantly through October to the highest levels since the first quarter of 2021, and the improved staffing has contributed measurably to our building's top-line momentum. Our talent development platform improvements have resulted in a decreased turnover and increased internal promotion, due in part to the rollout of our enhanced and comprehensive restaurant leadership development and talent management training. Based on the success of the program, we are expanding this platform in the fourth quarter to include enhanced training for assistant managers that focuses on leadership skills and talent management. In summary, we are encouraged by our continued strong sales momentum and the traction on our growth initiative thus far in 2022 and are intensely focused on driving ongoing traffic growth across all channels while also taking action to improve margins. Now, Dirk will provide a more detailed financial update.