Fiesta Restaurant Group, Inc.

Good day, and welcome to the Fiesta Restaurant Group fourth quarter 2022 earnings call. All participants will be in 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. Please note this event is being recorded. I would now like to turn the conference over to Rafael Gross from ICR. Please go ahead.

Thank you, Jason. Fiesta Restaurant Group's fourth 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 The comparable gap measures is available in the company's earnings release. On the call with me today are Interim Chief Executive Officer, Dirk Montgomery, and Chief Accounting Officer and Acting Chief Financial Officer, Tyler Yosting. And now, I'd like to turn the call over to Dirk.

Thank you, Rafe. I'd first like to thank all 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 fourth quarter results, the status of our strategic growth initiatives, and thoughts on our plans for 2023. Tyler will then provide a financial update before we open the call for questions. First, key takeaways on fourth quarter results. During the fourth quarter, we continued the double digit comparable restaurant sales momentum from the third quarter with improved margins while continuing to make progress on the key priorities we communicated previously, including continued increases in operations staffing levels and tangible headway on G&A expense reduction. As discussed in prior quarters, we are intensely focused on transaction growth, and we are beginning to see positive momentum on this front. Year-over-year comparable transactions, which had slowed in previous quarters and reached negative 2.4 percent in December, turned positive to modest year-over-year transaction growth at the start of 2023 and further improved in fiscal February month to date. In addition, early 2023 transaction momentum has been strong in our key South Florida markets, which are generating positive transaction growth in 2023 versus 2022 year to date. Our accelerating com transaction momentum was the direct result of the actions we shared previously to improve staffing, expand our sales growth initiatives, and continue our successful pairing of value item pricing with check accretive limited time offers. As we noted previously, improved staffing levels have been a key enabler to transaction growth. Hourly team staffing levels continue to improve in the fourth quarter versus the first half of 2022 and have further improved year to date in 2023. In addition, during the fourth quarter of 2022 and into 2023, we've seen a continued reduction in hourly turnover rates, indicating that our retention levels are also improving. As we mentioned in prior quarters, we placed a high focus on the development of our restaurant managers in 2022, which in part has led to a significant reduction in unit manager vacancies from the first quarter of 2022 to the first quarter of 2023. Our pricing, innovation, and promotion strategies are contributing to revenue growth momentum, Fourth quarter pricing action that was originally targeted for December 2022 was deferred to allow us to obtain additional marketing insights and competitive benchmarks that support selected pricing action that now will be taken in March 2023. In addition, we continue to maintain our promotion barbell approach by pairing lower price increases on our high-value affordable items like Pollo Time and Family Meals to ensure we maintain our value proposition combined with offering check-accretive, limited-time offers and menu innovation. 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. In the fourth quarter, we saw a positive impact on check averages from the pricing action of 4% in September, while maintaining a higher value perception level compared to our peer group. Another point of evidence that our revenue optimization strategies are continuing their effectiveness is our modest share gain in 2022 based on Pollo Tropical comp traffic trends slightly outpacing NAPTRAC Florida fast casual comp traffic trends, even with our phased pricing actions over the course of the year. We were pleased with our margin improvement in the quarter after considering our originally planned December pricing that was deferred to March. Similar to the third quarter of 2022, we generated continued year-over-year growth in restaurant-level operating profit, a non-GAAP financial measure, driven by our comparable sales growth and targeted margin improvement actions. Restaurant-level operating profit margins of 16.2% improved versus third quarter 2022 margins of 14.1% and versus fourth quarter 2021 margins of 14.3%. This year, we are targeting restaurant-level operating margins of 18% on a run rate basis through the combination of continuing transaction growth and pricing. In his financial review, Tyler will provide additional details on our expense and margin trends. Now I'll provide a brief update on the status of our strategic growth initiatives. We made good progress through 2022 on the strategic growth initiatives that we discussed in prior quarters and believe that those initiatives should largely be continued. After transitioning to the interim CEO role in December, I moved quickly to ensure that we maintain momentum while sharpening our focus on operations excellence and reprioritizing the opportunities that we believe will have the biggest impact on transaction growth and margin expansion with an eye toward accelerating the key initiatives that will have the biggest impact. In addition to reevaluating our strategic priorities, my near-term focus has been placed on working with a leadership team to optimize the organization for effectiveness and efficiency. Our initial organization changes have been aimed at continuing to improve our capability for operations support and realigning and consolidating our customer insights, digital, and marketing resources under one streamlined marketing function that we believe will enable us to accelerate growth across all channels. We have developed four key themes to guide our revised strategic focus, all still aimed at growing traffic and improving margins, but with a more focused and disciplined approach. Number one, building operations excellence. Number two, creating a great guest experience across all channels. Number three, enhancing the Pollo Tropical brand. And number four, developing great teams. I'd like to expand on two of the four themes today, building operations excellence and developing great teams. Regarding operations excellence, we have identified four key areas of focus to improve the effectiveness of our operations. Number one, improve our consistency of execution by refocusing on fundamentals through back-to-basics training and challenging our operating routines to place an increased focus on the key elements of guest experience, food quality, speed, accuracy, and hospitality. Number two, simplify the operating model. Number three, improve peak time productivity. And number four, continue to improve cross-functional operations support including IT infrastructure, HR field support, and reporting tools. A number of the initiatives that fall within our operations excellence theme have been discussed in prior quarters, and we are now making them a top priority because we believe they will accelerate traffic growth and margin expansion. Regarding the fourth theme, developing great teams, we made great progress in 2022 on the establishment of leadership development for operations management. We believe that we are already seeing leading indicators of the positive benefits of that investment in reduced turnover and improved retention of our restaurant manager level. Based on that success, our plans in 2023 are to complete the ongoing rollout of the leadership development platform across all levels of operations leadership. In addition, we are also developing operations best practices training modules to support our operations excellence initiatives. G&A efficiency and effectiveness will continue to be a high priority, and we made measurable progress on a number of efficiency initiatives since the third quarter, including the implementation of accounting outsourcing and downsizing the Dallas office in February 2023, and service vendor renegotiations in multiple expense categories. Those initiatives completed or underway are expected to meaningfully contribute to toward our target of reducing our G&A expense run rate to 8.5% to 9% of restaurant sales. After less than 90 days in my new role, our strategy development, initiative assessment, and organizational optimization are still a work in process, but our management team is very excited about the steps we've taken since December that we believe will focus and accelerate our efforts to grow traffic and expand margins. Reflecting on the year as a whole, it is easy to see the progress we have made, less so the multitude of challenges we faced as we navigated the turbulent economic and industry waters throughout the year. Comparable restaurant sales finished the year in double digits at 11% compared to 8% in the first quarter of 2022, while slightly improving our share of traffic. The most significant business interruption from challenging staff levels seems to be mostly behind us, allowing us to increase our focus on providing a consistent and high quality guest experience. Year over year transaction trends in the first quarter of 2022 were negative 7% and are now trending positive as we start 2023. Restaurant level EBITDA margins are rebounding and are now on an upward trend after dipping in the middle of the year. Margins are trending up and are targeted to hit 18% in 2023 while continuing to focus on growing traffic in maintaining positive sales comps. Our G&A reduction plan is now firmly in place and we have made major progress towards delivering the anticipated savings we have previously shared with you. Finally, we exited 2022 having moved forward on all key strategic initiatives and our 2023 agenda is now freshly prioritized and closely aligned to the growth opportunities we see for our brand. As a consequence, we feel extremely confident about our prospects and our ability to harvest the potential this brand clearly has. Now, Tyler will provide a more detailed financial update.