Earnings Transcript for FRGI - Q1 Fiscal Year 2022

Operator: Good day, and welcome to the Fiesta Restaurant Group First Quarter 2022 Earnings Call. All participants will be in listen-only mode. 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. Raphael Gross, Partner at ICR. Please go ahead.

Raphael Gross: 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 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 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-Calleja; and Chief Financial Officer, Dirk Montgomery. And now I'd like to turn the call over to Rich.

Rich Stockinger: 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

Dirk Montgomery: Thank you, Rich, and good afternoon, everyone. I'll start by reviewing our first quarter results, and then provide you with an update on our outlook for the remainder of 2022. As a reminder, due to the divestiture Taco Cabana's results are presented as discontinued operations in our financial statements. The consolidated results, I'll be reviewing today will be focusing on continuing operations and on the Pollo Tropical brand. Overall, we were pleased with our strong comparable restaurant sales growth in the first quarter of 8% versus 2021, and our comparable restaurant sales were at or above 2019 levels for the third consecutive quarter, with first quarter 2022 comparable restaurant sales of 4% versus 2019. This is the highest sales trend versus 2019 that we have seen in the post-pandemic period very encouraging. In addition, as we indicated last quarter, our restaurant EBITDA margins, a non-GAAP measure have now almost fully recovered to our targeted range of 18% to 20%. Most importantly, we made strong and measurable progress on our growth initiatives and expect those initiatives to contribute meaningfully to sales growth for the balance of this year. Regarding sales performance, the first quarter improvement compared to 2021 resulted from a 15% increase in the net impact of product and channel mix and pricing and a decrease in comparable restaurant transactions of 7%. The increase in product/channel mix and pricing versus 2021 was driven primarily by menu pricing of 13.8% and mix impact of 2%, partially offset by increases in discounts and promotions of 0.8%. First quarter 2022 mix impact was driven by successful add-on offerings including avocado slices and check accretive new menu items and LTOs including the return of the Grillmaster Trio, Churrasco Steak protein items and the Surf-n-Turf Trio. In addition, our strong sales momentum has accelerated to date in May with the May month-to-date comparable restaurant sales trend exceeding both the first quarter and April comparable restaurant sales levels. Total revenues increased 8.4% to $95.6 million in the first quarter of 2022 from $88.2 million in the first quarter of 2021, driven by the comparable restaurant sales increase. First quarter 2022 consolidated net loss was $1.4 million or $0.05 per diluted share and includes approximately $0.1 million from discontinued operations. The first quarter 2022 loss from continuing operations was $1.3 million or $0.05 per diluted share. This compares to consolidated net loss in the first quarter of 2021 of $2.1 million or $0.08 per diluted share including a $0.05 per diluted share negative impact from discontinued operations. First quarter 2021 net loss from continuing operations was $0.7 million or $0.03 per diluted share. On an adjusted basis first quarter 2022 consolidated net loss from continuing operations was $0.4 million or $0.02 per diluted share, compared to adjusted net income of $1.4 million or $0.05 per diluted share in the first quarter of 2021. Please see the non-GAAP reconciliation table in our earnings release for more details. Consolidated adjusted EBITDA a non-GAAP financial measure was $5.3 million and 5.5% of revenue in 2022, compared to $9.7 million and 11% of revenue in 2021. Turning to restaurant level results. Restaurant level adjusted EBITDA margin a non-GAAP financial measure was 16.1% in 2022, compared to 21.2% in 2021. Restaurant level EBITDA margins declined during the first quarter compared to 2021 primarily due to higher labor and commodity costs, which were only partially offset in the quarter given our pricing action to offset those costs in the last month of the quarter. As we communicated previously to maintain value perceptions with our customers, we implemented a phased approach to menu price increases and took a lower pricing increases on items purchased by value-conscious customers including our Pollo Time promotional items. Recent price increases include a 5.2% price increase in mid-December 2021 and a 5.0% increase in March of 2022. As a result of this phased approach to menu price increases, margin improvement is trailing the impact of cost increases with improved margins expected in future quarters compared to the first quarter of 2022, barring unforeseen changes in our cost structure and operating environment. Following the price increase in March, our estimated run rate level adjusted EBITDA margin was above 17%. After adjusting for operating expense items that were onetime expenses in the first quarter, the estimated run rate restaurant level adjusted EBITDA margin would have been approximately 30 to 50 basis points higher. We continue to target restaurant-level adjusted EBITDA margins, a non-GAAP financial measure of 18% to 20% as our sales growth and labor optimization initiatives increasingly gain momentum. Regarding the first quarter trends in key expense categories, cost of sales as a percentage of restaurant sales in the first quarter of 2022 increased to 32.3%, compared to 31.1% in 2021 due to higher food and packaging costs, partially offset by our phased menu price increases. Restaurant wages as a percentage of net sales increased to 24.8% in the first quarter of 2022 from 23.2% in 2021, driven primarily by higher labor costs due to higher wage rates and overtime due in part to labor shortages, partially offset by lower medical benefits, including the impact of higher sales and lower incentive bonus costs. Other restaurant operating expenses as a percentage of restaurant sales increased in the first quarter compared to 2021, due primarily to the impact of higher repair and maintenance costs, higher utility costs, higher delivery fee expense due to increased delivery channel sales and higher insurance costs. Rent in the first quarter increased compared to 2021, due primarily to the impact of lease renewals at higher rates. General & administrative expenses were $12.3 million for the first quarter of 2022 and $10.7 million for the first quarter of 2021, due primarily to increased professional fees, higher employee benefits and other support costs. General & administrative expenses for the first quarter of 2022 included $1.3 million in non-recurring expenses comprised of $0.7 million of professional fees, $0.3 million digital platform costs and $0.3 million of general and administrative efficiency initiative costs. The remaining portion of the increase in 2022, compared to 2021 was driven primarily by medical claim expense increases. Turning now to cash flow-related comments, in the first quarter of 2022 our total cash balance was $40.8 million including $3.6 million of restricted cash and grew slightly from the fourth quarter of 2021 total cash balance of $40.6 million. Capital expenditures in the first quarter of 2022 were $3.8 million. In addition, we continue to have no bank debt on our balance sheet. And we have $10 million in undrawn revolver capacity as an additional source of liquidity, as part of the loan agreement we executed in 2021. One additional cash benefit we expect looking forward, is the final payments of the insurance claim proceeds from the costs associated with Winter Storm Uri. We reached a partial settlement in the fourth quarter of 2021 and we are in the process of finalizing our claim with insurers. I'll close with a few comments on our outlook for the remainder of 2022. We are very encouraged by our sales momentum thus far, in 2022 that continues to accelerate month-to-date in May. We are very focused on achieving our growth objectives through our four key growth initiatives and we are on track with those initiatives so far this year. And we expect them to continue to contribute to accelerating sales growth for the balance of the year. Regarding commodity costs, we have finalized contracts on all major commodities for calendar 2022 and our recent pricing actions in the fourth quarter of 2021 and March of 2022 are expected to fully offset our estimates of 2022, commodity cost increases on a dollar cost basis. On a full year basis, we expect food and packaging cost increases in 2022, compared to 2021 of 15% to 20%. As we expected, margins improved in the first quarter to a run-rate -- sorry to run-rate approaching 18% and we continue to target restaurant-level adjusted EBITDA margins of 18% to 20%, as our sales growth and labor optimization initiatives increasingly gain momentum, barring any unforeseen changes in the operating environment. From a labor rate perspective, we feel comfortable that our current wage rates are competitive based on recent benchmarking, at a unit level by role that confirmed our current rates are at or above market. We believe that any additional inflationary pressure in food or labor costs for the balance of the year can be successfully offset by, a combination of additional pricing actions and ongoing labor optimization initiatives. Regarding capital expenditures, we expect full year 2022 capital expenditures to be in the range of $25 million to $30 million. The increase from 2021 spending is being driven largely by refreshes and remodels for which we expect to invest $7 million to $10 million and total technology investments in the range of $4 million to $6 million, primarily in our digital platform and restaurant technology infrastructure. In closing, we are encouraged by our accelerating sales and margin momentum thus far in 2022, which we expect to continue as we build on the momentum of our strategic growth initiatives. Finally, we will continue enhancing the customer experience across all service channels, further investing in our growing digital platform and the development of our field management teams refining our brand position and new unit design features and additional refresh and remodel tests to drive future growth and unlocking unmet demand through improved kitchen productivity. Thank you for listening and we will now open the call up for questions. Operator?

Operator: Thank you. Our first question comes from Edward Reily from EF Hutton. Please go ahead.

Edward Reily: Hey, guys. Thanks for taking my call. You guys mentioned a 6% to 7% increase in revenue for refreshed units. I was wondering if you had any data on the remodels?

Dirk Montgomery: Yes. So Eddie, thanks for the question. So the remodel lift, we're in early stages on the remodels, so we haven't had a lot of post-remodel period in those remodels in aggregate. So we weren't publishing that number, but we can tell you that so far the lift on the remodels is actually in excess of the refreshes and above our expectations by the way. So we're very encouraged by the remodel lift, but we need a little bit more time in the post period to really feel comfortable that what we're seeing is going to continue. But we have no reason to think that it won't. So, so far, so good, actually much better than we expected.

Edward Reily: Okay. Got you. And on that 6% to 7% boost in revs, I'm assuming that that drops right to the bottom line. And I'm calculating out over 50% return on investment. Should we expect the same or similar for the remodels?

Dirk Montgomery: I mean it's a little bit early for us to really kind of get a feel for the returns on the remodels just given how early we are. But going back to the refreshes, your math is correct. We typically see a 40% flow-through on incremental sales. This is incremental traffic and sales. So that 6% to 7% is actually incremental to, on a pre/post basis incremental to the market performance for each unit. So we look at the pre/post for that unit compared to its comparable market. So the actual absolute lift is actually higher than the 6% to 7%. But, yes, so far I think we're happy. We're very happy with the lift and we're happy with the returns.

Edward Reily: Got it. And then you guys have mentioned a share repurchase plan in the fourth quarter. I was wondering given the recent volatility in the market, could you comment on how you're thinking about capital allocation with regards to share repurchase?

Rich Stockinger: We just completed the previously approved share repurchase program. The only thing I can say is that our Board continually evaluates available options to maximize shareholder value.

Edward Reily: Okay. Great. And a final one for me. Just was wondering with all this recession talk, how do restaurants typically perform during times of economic stress?

Dirk Montgomery: Sure. So I mean two comments. Number one, in the last downturn that we had the restaurants performed very well. We saw a lot of trade down from casual and higher-priced options. And when people trade down, they typically trade down to quality. And as you know our quality scores, quality perceptions with consumers is very high. So I think we would expect to do well. And also, our value perceptions among consumers is well above the QSR benchmark as measured by our customer survey tracking. So I mean we feel really good about our ability to actually continue the trends that we've got, if we enter a further downturn. But also with additional inflationary pressure, we feel very comfortable that we can offset that pressure with additional price.

Edward Reily: Great. Thanks guys.

Rich Stockinger: Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the management team for any closing remarks.

Rich Stockinger: Again, we're really excited with the results the continued momentum in both sales and the margins and look forward to reporting our second quarter results shortly. Thank you.

Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.