Earnings Transcript for FRGI - Q3 Fiscal Year 2021

Operator: Good day and welcome to the Fiesta Restaurant Group Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Raphael Gross, Managing Director at ICR. Please go ahead sir.

Raphael Gross: Thank you, operator. Fiesta Restaurant Group’s third quarter 2021 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 is 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, 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 of the investors and other participants on the call today for their continued support. And special thanks on this Veterans Day to our veterans and active military for their service. I'll be covering three topics today. The business update and overview of third quarter results, the status of our 2021 strategic priorities and thoughts on 2022. Dirk will then wrap up with financial update before we open the call for questions. Like we said, we also have Patty Lopez-Calleja, Chief Experience Officer here with us to provide more color on our digital status during the Q&A session. As you know, we announced the sale of Taco Cabana in July and successfully close a transaction on August 16th. Concurrent with the Taco Cabana divestiture we use the sale proceeds to fully pay off our outstanding term loan balance plus a prepayment premium totaling $76.9 million. As a result, we are now debt free with the total cash balance of $55.8 million as of October 3rd. And our leadership team is fully focused on achieving what we believe are significant growth opportunities for the Pollo Tropical brand. Regarding third quarter results, we were pleased with the Pollo Tropical's third quarter sales performance despite lost hours and other operating challenges from staffing shortages throughout the quarter. Third quarter 2021 comparable restaurant sales were 13.8% versus 2020, and accelerated to a 0.9% over 2019, an improving from the second quarter 2021 comparable restaurant sales versus 2019, which were below 1.8%. Comparable restaurant sales results were much stronger in markets that had adequate staffing. Those markets realized third quarter 2021 comparable restaurant sales of approximately 16.7% versus 2020 and up 4.3% versus 2019. With very promising sales acceleration in non-core markets, including double-digit positive comps versus 2020 and 2019 in both the Tampa and southwest Florida markets. Our positive comparable restaurant sales growth versus 2020 and 2019 continued in October. And we are optimistic about accelerating sales momentum as we continue to achieve increased staffing levels. As we all know, staff availability has been an industry-wide challenge. We have approached this issue with a very disciplined and forward-thinking approach and took proactive action in the third quarter that has positively impacted staffing levels and margins. We achieved adequate staffing levels at a total company level by September and continued to show staffing improvement in October. In addition, the combination of pricing action and ongoing labor optimization is resulting in meaningful margin improvement in October compared to the third quarter of 2021. Additional details on key action items are as follows. We first increased wage rates to at least market benchmarks across all units and positions, began offering hiring incentives and increased recruiting resources. In select markets that are more understaffed, we are offering above market wage rates. In order to remain competitive in these challenging market conditions, we are also enhancing our benefit packages including offering more accessible, comprehensive and affordable medical plans and the addition of other attractive benefits such as including emergency child care, family leave, company paid educational programs and commuter assistance. We are taking a phased approach to price increases, which should enable us to recover margins while maintaining value perceptions. We implemented a 3.7% price increase in late August, and are targeting additional price increases in the fourth quarter of approximately 4% to 6%. In addition, we are accelerating our ongoing labor optimization efforts to improve staffing efficiency, which we expect will increase both staff availability and margins. Let me provide a bit more color on our staffing and margin improvement plans. Regarding staffing the fact that comp sales were up 16.7% versus 2020 and up 4.3% versus 2019 in markets in which we radically staff is promising. The only major market that is currently below adequate staffing levels is Miami-Dade where we are implementing additional actions to improve staffing levels including offering additional pay rate incentives for weekends, increased training and recruiting resources and enriched sign-on and referral bonuses. Those additional actions are resulting in improvements in staffing issues in that market. Our phased approach to price increases over the third and fourth quarter is trailing the wage rate increases, which resulted in a short-term reduction in margins that we anticipate will be recovered in the first half of 2022, as we implement additional pricing action and continue our enhanced and ongoing labor optimization efforts. As a reminder, our historic pricing action in 2019 and 2020 was slightly over 1% over that two-year period, which is well below our estimates of competitor price increases over that time. Our internal competitive price benchmarking and research conducted by our outside pricing analytics consultants gives us confidence that we can implement our planned price increases while still maintaining attractive value perceptions with our customers. We intensified our ongoing efforts to optimize labor schedule in October, which will include refinements such as scheduling and shorter time increments, compressing prep and open close hours and improving the accuracy or sales forecast that drive schedule. We have already seen positive results from those refinements. With wage rate, restaurant wages as a percentage of sales decreasing approximately 200 basis points on a run rate basis by the end of October compared to the third quarter of 2021. After adjusting for short-term incentives such as sign-on bonuses that are being phased out as staffing improves. Based on planned pricing action and labor scheduling optimization efforts underway, we fully expect margins will improve over the remainder of 2021 and into 2022. We are targeting restaurant level adjusted EBITDA margins, a non-GAAP financial measure returning to the 18% to 20% range in the first half of 2022, barring any unforeseen changes in our core structure or operating environment. Now, for an update on the third quarter profitability. Restaurant level adjusted EBITDA margins a non-GAAP financial measure declined the third quarter compared to 2020 primarily due to the wage rate increases and hiring incentives offered ahead of the pricing action. Restaurant level adjusted EBITDA, a non-GAAP financial measure for Pollo Tropical as a percentage of restaurant sales decreased with third quarter restaurant level adjusted EBITDA as a percentage of restaurant sales of 14.8% in 2021 compared to 21.2% in 2020 and 20.1% in 2019. Continuing operations adjusted EBITDA, a non-GAAP financial measure decreased to $3.7 million, compared to $8.2 million in 2020. The decrease was primarily due to higher labor costs, advertising expenses, G&A expenses, repair and maintenance costs partially offset by the impact of the higher restaurant sales and improved cost of sales margins. Approximately $0.9 million of the third quarter 2021 labor cost increase compared to 2020 includes overtime and staffing related incentives that are short term in nature. Dirk will provide additional details regarding the third quarter results as part of his prepared comments. Next, an update on our strategic priorities. As I mentioned on prior calls, our strategic priorities are as follows. One, concentrate on accelerating growth in nine non-dine in channels and improving the guest experience across all channels to better enable our customers to enjoy our brand wherever and whenever they choose. Enhanced two, enhance our digital platform and make improvements in customization, ease of use and speed of service for off premise including an enhanced digital drive-thru experience, curbside pickup enabled by geofencing technology and the introduction of QR kiosk in-hand technology for ordering and payment. Three, continue to test and refine the Pollo Tropical brand proposition and unit design and investment in preparation for future remodels, as well as expansion in existing and new markets. Regarding non-dine in channel growth, we continue to drive year-over-year growth and delivery with comparable restaurant sales growth of 33% in the third quarter of 2021 versus the third quarter of 2020. In addition, third quarter 2021 online comparable same-store sales grew 42% compared to 2020. Our app store rating for the app is currently 4.9 for iOS and 4.8 for android out of 5 stars, much improved from our prior app ratings before the enhancements. In addition, the average app user check for the third quarter of 2021 was approximately 18% higher than the non-app user checkout. Over the third quarter we continue to make investments to enhance our digital platform and improve the customer experience. We completed a number of mobile app enhancements and made good progress on the design of our digital drive-thru platform, which we will be piloting in the fourth quarter. With staffing levels more stable in the fourth quarter we are starting curbside initially in 77 select fully staffed locations with our new geofencing technology and launching contactless QR code usage to provide customers another alternative to drive-thru in pilot locations. We are very excited that we will be able to offer our guests such state-of-the-art digital platforms. Finally, regarding our third strategic priority. We continue to work on improving the customer experience through better speed of service, order accuracy and labor efficiency. Against that mission we are redesigning our kitchens with assistance from TPA and industrial engineering firm. We will be testing the redesign in a mock restaurant and during the fourth quarter. Our re-model program is also advancing with an additional six to eight units at varying scope levels completed by year-end. Aimed at testing key restaurant design and operation platform enhancements. Looking forward toward 2022, we are in the process to finalizing our commodity and food cost negotiations for next year. We have not yet completed the negotiations in all major categories, but we expect that we will see higher food cost in 2022 compared to 2021. We intend to offset any food cost increases with additional pricing action. Regarding future uses of cash and investments for growth we will be taking a disciplined approach to using our cash for investments. As we have in the past, we will prioritize spending on strategic growth initiatives that will continually enhance our brand image and drive operational effectiveness and efficiency. But before we finalize capital plans for 2022 we will evaluate the results of our digital platform tests and remodels being completed in Q4 of 2021. We also intend to continue the approved share repurchasing program as a good use of cash that we believe improves returns for our shareholders. As we mentioned last quarter, we are working toward reducing G&A to appropriate levels now that we have detested Taco Cabana. Third quarter 2021 continuing operations G&A was $11.2 million or 12.6% of revenue, and includes $2.6 million of overhead costs excluding stock-based compensation that were previously allocated to Taco Cabana. Our goal is to reduce G&A as a percentage of sales that is comparable to our peer group, which we believe is 8.5% to 9% of Pollo Tropical sales. We make progress during the third quarter qualifying areas of potential savings and will be finalizing implementation plans over the remainder of the year. We are targeting 2022 to achieve the targeted G&A level on a run rate basis. In summary, we are optimistic about continuing our positive sales momentum as we improve staffing levels and as we accelerate progress from our digital initiatives. As we implement additional pricing action in the fourth quarter and continue our refined labor optimization efforts, we expect margins to continue the improvement that we've seen in October. We expect that our continued efforts to drive an upgraded customer experience across all service channels an ongoing investment in expanding our digital platform will accelerate top-line growth going forward. Now Dirk will provide the financial update and closing comments.

Dirk Montgomery: Thank you, Rich, and good afternoon everyone. I'll start by reviewing our third quarter results and then provide you with an update on our outlook for the remainder of 2021. One reporting note before I start. Due to the divestiture, Taco Cabana's results excluding corporate overhead costs are presented as discontinued operations in our financial statements. The consolidated results I'll be reviewing today will be focused on continuing operations and on Pollo Tropical. Overall, we were very pleased with our third quarter comparable same store sales performance of plus 13.8%, compared to the third quarter of 2020 and up 0.9% versus the third quarter of 2019. Our same-store com sales growth compared to 2019 also outpaced second quarter 2021 comparable same store sales versus 2019. We are very encouraged by the strong momentum we are seeing in markets that are more fully staffed. As we continue to improve staffing levels, we are optimistic that our sales momentum will accelerate. Third quarter 2019 same-store sales were negatively impacted by hurricane Dorian and details on the weather-related impact are noted in today's earnings release. The third quarter improvement compared to 2020 resulted from a 4.2% increase in comparable restaurant transactions and a 9.6% increase in the net impact of mix and pricing. The increase in product channel mix and pricing versus 2020 was driven primarily by increases in delivery and drive-thru check average and menu price increases of 5.7% Total continuing operations revenues increased 13.7% to 88.6 million in the third quarter of 2021 from $77.9 million in the third quarter of 2020 driven by the comparable restaurant sales increase at Pollo Tropical. Third quarter 2021 consolidated net income was $17.3 million or $0.66 per diluted share and include $0.78 per diluted share of positive impact from discontinued operations primarily from the gain on the sale of Taco Cabana. The third quarter 2021 loss from continuing operations was $3.2 million or negative $0.12 per diluted share. This compares to consolidated net income in the third quarter of 2020 $4.6 million or $0.18 per diluted share, including $0.10 per diluted share negative impact primarily from impairment charges and closed restaurant rent charges offset by the favorable impact of $0.23 per share, primarily from adjustments to the deferred tax valuation allowance, the impact of federal tax rate changes and other income. Third quarter 2020 net income from continuing operations was $4.4 million or $0.17 per diluted share. And on an adjusted basis, third quarter 2021 consolidated net loss from continuing operations was $2.4 million or $0.09 per diluted share, compared to adjusted net income of $1.2 million or $0.04 per diluted share in the third quarter of 2020. Please see the non-GAAP reconciliation table and our earnings release for more details. Continuing operations consolidated adjusted EBITDA, a non-GAAP financial measure was $3.7 million and 4.1% of revenue in 2021 compared to $8.2 million in 2020 and 10.5% of revenue. Turning to restaurant level results. Pollo Tropical restaurant level adjusted EBITDA margin, a non-GAAP financial measure was 14.8% in 2021 compared to 21.2% in 2020 and 20.1% in 2019. Restaurant level EBITDA margins declined during the third quarter compared to 2020 primarily due to hourly wage rate increases, short-term hiring incentives and additional overtime and training ahead of planned pricing action to offset those costs. $0.9 million of the labor cost increases for overtime and staffing related incentives are short-term in nature, representing approximately 100 basis points as a percentage of sales. We expect the planned pricing action we are taking combined with ongoing labor optimization will recover restaurant level EBITDA margins, a non-GAAP financial measure to the range of 18 % to 20% by the first half of 2021 barring unforeseen changes in our cost structure and operating environment. As Rich mentioned, we are already seeing improved margins in October preliminary results. The combination of labor optimization and pricing action resulted in a 200 basis point reduction and restaurant wages as a percentage of sales on a run they run rate basis in October compared to the third quarter of 2021 after adjusting for temporary hiring incentives and bonuses being offered on a short-term basis to improve staffing levels. As a reminder due to the impact of holidays in November and December, our restaurant wages as a percentage of sales in those months has been historically 100 to 150 basis points above October levels. To further improve margins we intend to take additional pricing action in December in the range of 4% to 6%, and will continue our labor optimization efforts. As Rich mentioned, our historic pricing in 2019 and 2020 was low in comparison to our competitors which should allow us to take additional pricing while maintaining attractive value perceptions with our customers. Regarding third quarter trends and key expense categories. Cost of sales as percentage of restaurant sales in the third quarter of 2021 decreased to 30.7%, compared to 31.7% in 2020 due to price increases, sales mix and lower promotions and discounts partially offset by higher food and packaging costs. Restaurant wages as a percentage of net sales increased from 23.3% in the third quarter of 2020 to 28% in 2021 driven primarily by higher labor costs due to higher wage rates and overtime due in part to labor shortages partially offset by the impact of lower medical costs and the impact of higher restaurant sales. Higher labor costs are driven primarily by hourly wage rate increases, short-term hiring incentives, additional overtime and training and short-term guaranteed operations leadership bonuses. Approximately $0.9 million of the third quarter 2021 labor cost increases compared to 2020 included overtime and staffing-related incentives that are short-term in nature. Other restaurant operating expenses as a percentage of restaurant sales increased in the third quarter compared to 2020 due primarily to the impact of higher repair and maintenance costs and higher delivery fee expense due to increased delivery channel sales, partially offset by the impact of higher restaurant sales on utilities costs. Rent in the third quarter increased compared to 2020 due primarily to the impact of sale lease backed transactions and lease renewals at higher rates. Turning now to cash flow related comments. In the third quarter our cash balance decreased from the second quarter balance of $65.8 million to $52 million at the end of the third quarter. We utilize the proceeds from the sale, the Taco Cabana sale to fully repay our outstanding term loan and utilize cash on hand to pay transaction costs related to the Taco Cabana sale. We also made a one-time payment of approximately $3 million for the employer portion of social security benefits from 2020 that we were allowed to defer under the CARES Act as part of COVID relief. One additional cash benefit we expect looking forward is the payment of the insurance claim proceeds from the costs associated with Winter Storm Uri. Our claim has been filed and we are awaiting a response from our insurers. Total capital expenditures for the third quarter of 2021 were $6.4 million, which included three million Taco Cabana and $3.4 million for Pollo Tropical. 3.0 million of the Pollo Tropical capital expenditures were for maintenance with a remainder for remodels, technology investments and corporate development related expenses. We resumed our stock repurchases during the third quarter of 2021, repurchasing a total of 338 223 shares for $3.9 million. I'll close with a few comments on our outlook for the remainder of 2021. We expect the margin compression we saw in Q3 to be short-term. In our October preliminary results we have already seen margin recovery and we expect to see ongoing margin improvement going forward driven by intensified labor optimization and additional pricing action. In October, we continue to make progress on increasing our staffing levels and are optimistic about continued top line momentum with October same store sale comps above 2019 levels. Commodity food costs are expected to remain roughly stable for the remainder of 2021 based on current supply commitments we have in place for calendar 2021 across key commodities. The entire restaurant segment is facing cost pressure challenges as we look toward 2022. As Rich noted, we've not yet completed the negotiations in all major categories, but we expect that we will see higher food costs in 2022 compared to 2021 and need to finalize key commodity negotiations before we communicate estimates of cost increases for 2022. We intend to offset any food cost increases with additional pricing action and we are confident that we can recover margins without significant traffic risk given our low level of relative historical pricing action. Regarding G&A, our goal is to reduce G&A as a percentage of sales to what we believe is comparable to our peer group, which is 8.5% to 9% based on Pollo Tropical sales. As Rich mentioned, we made progress during the third quarter qualifying ideas of potential savings and we will be finalizing implementation plans over the remainder of the year. As part of the Taco Cabana divestiture we continue to provide back office services to Taco Cabana through mid-December and we are targeting 2022 to achieve the targeted G&A level on a run rate basis. Finally, full year 2021 capital expenditures are expected to be in the range of $25 million to $30 million, including approximately $6.5 million related to Taco Cabana prior to the close of the sale. As we look toward the balance of the year, we are focused on continuing efforts to be a preferred employer and accelerating our margin improvement above the third quarter of 2021. In addition, we will continue our ongoing efforts to drive an upgraded customer experience across all service channels, further investing in our growing digital platform and continuing to refine our brand proposition and new unit design features in remodel tests to drive future growth. Thank you for listening. And we will now open the call up for questions. Operator?

Operator: Thank you. We'll take our first question from James Rutherford from Stephens Inc. Please go ahead.

James Rutherford: All right. Thanks very much and congratulations on the improvement you're seeing especially in regards to staffing. And actually that's where I wanted to start with the questions. Maybe a bit of a clarification. I was hoping you could reconcile the comment in -- I think it was Rich's prepared remarks that the company maybe was on average was fully staffed in December. But at the same time you're still seeing a divergence in comp in a quarter I think plus 0.9 on a two-year for the total company and then the ones that are fully staffed over 4%. So are there still some restaurants they're no longer fully set like what is the percentage of restaurants that are fully and are still a little bit lacking on the staffing side?

Dirk Montgomery: Yes. Thanks James. So the -- we are fully staffed and we're fully staffed as of the end of the quarter in all major markets except for Miami-Dade. And so the big spread that we're seeing in comp trends actually is balance of company compared to Miami-Dade. So, the positive comp trend that we referenced a plus 4.3% versus 2019 and up 16.7 versus 2020 is referencing basically all major markets except for Miami-Dade. We are making progress in Miami-Dade. As Rich mentioned, we have implemented additional initiatives, additional incentives to increase staffing levels, and those staffing levels are continue to improve. So -- but we still have some more work to do in Miami-Dade. It's not at an adequate level as we sit here today.

James Rutherford: Okay. And that's the helpful clarification. There's a bit of a numbers question. What is the two-year traffic growth in the quarter? And how did that progress even if it's just kind of qualitatively? What I'm getting at is whether you saw any impact on traffic from the pricing action or competitive factors or rollover stimulus. There's a lot of things happening in the market. I'd love to know what would happen with traffic over the course of the quarter?

Dirk Montgomery: Yes. So, I mean, we don't have a two-year traffic number broken down, but we can tell you that basically we've seen continued traffic improvement across really all of the channels except for dine-in. And so dine-in has continued to be challenging. We did see a slight increase in dine-in traffic from Q2 to Q3 and our mix has increased slightly in dine-in from Q2 to Q3, but we're still not at the historic level as it relates to the mix of dine-in traffic, which historically the counter sales were -- the dine-in sit down sales were roughly 25% of total sales.

James Rutherford: Okay, great. And also that's one margin question, there's a lot that you could ask on this. But I just want to sort of sum up with this overarching philosophy around margins. It sounds like you all are fairly confident in the ability to expand margins into next year. And I'm curious with commodities being a wild card and to a certain extent I guess labor also with certain restaurants still not fully staffed. Is the confidence because you are committed to pricing at whatever level is necessary to get that 18% to 20% margin range or is it because you feel like you have enough visibility into the cost picture over the next couple of quarters?

Rich Stockinger: Yes. I mean, it's probably a little bit of both. I mean, I think if we think about -- as we just think about the pricing action that we have taken and that we have planned, that pricing action in aggregate which is of course always subject to flow-through assumptions, should more than -- be more than adequate to offset the labor cost increases on a run rate basis that we expect over the next year from the wage rate increases that we just took. So -- and we also as we said, the fact that our historical pricing action really now over the last three years has been well below the competitive set. We feel like we can take pricing action and still maintain value perceptions.

James Rutherford: Got it. Okay. Actually just one more in for Patty if she's there on digital. I just wanted to hear a little bit more about what the digital drive-thru entails. Is what is that experience exactly like and what kind of impact on the customer experience? And then I'll turn it over to the queue. Thanks so much.

Patty Lopez-Calleja: Hi, James. Yes. The digital drive-thru experience is two-part. We have our on-peak and our off-peak work streams. The off-peak work streams is we have this beautiful new digital menu board that will have order confirmation. We'll have a component for up-selling and that's what -- then that will be our off-peak hours clearly during off between lunch and dinner and prior to that and late night. Our on-peaks which is where we really see those long lines at all of our restaurants of the pod person the mobile ordering devices that are fairly common now within the industry those with a heavy drive-thru will have a micro site which is with a QR code that is unique to each consumer. So when they click on that micro site their cell phone becomes an order confirmation board. The purpose behind this is twofold is to make sure that all of our guests are they may not be familiar with our entire menu or with our limited time offers can see that and also for accuracy. Folks are seeing exactly what they're ordering real time and they could also make their payment on their cell phone as they are placing the order with our mobile ordering devices. Then the huge menu boards actually become collateral for app acquisition telling our brand story and for hiring purposes, so they become another way to tell our brand story.

James Rutherford: Thanks for that. Very helpful.

Rich Stockinger: Thanks James.

Operator: Thank you. The next question comes from Brian Vaccaro with Raymond James.

Brian Vaccaro: Thanks. Good evening. I just wanted to circle back on staffing levels. And when you say adequate staffing levels, I'm just curious, does that mean that levels are back to where they were pre-COVID back in 2019? Or is that versus some other target that might be different versus 2019. And could you also just help quantify how much improvement you saw maybe July, August versus maybe what you're seeing more recently moving through October? Is there a way to quantify the degree of improvement you've seen?

Dirk Montgomery: Yes. Sure Brian. So the targets for staffing have not changed. We've used the same KPIs. We basically measure the head count that we have on the staff compared to the optimal head count to optimize scheduling. And our target is 80% or higher.

Rich Stockinger: It's consistent to 2019.

Dirk Montgomery: Yes. And we're back at the 2019 levels. So we definitely eclipsed where we're at before. I guess the staffing challenges started kind of around the end of the first quarter beginning of the second quarter. I'm sorry, can you can you repeat the second part of the question?

Brian Vaccaro: Yes. It was just the degree to which you saw improvements sort of where were you July and August if there's a way to quantify that from an average staffing level or percentage of stores maybe that were meaningfully understaffed and kind of where that is today? Just to frame the level of improvement you've seen over the last three or four months.

Dirk Montgomery: Sure. So, I mean, in the second quarter we were -- total company overall we were in the 70% range in terms of staffing which -- then in the third quarter in total we sequentially improved month-to-month to 80% at the end of the third quarter and that improvement continued into the mid 80s in October.

Brian Vaccaro: All right. Very helpful. I wanted to just clarify and thanks for the comments on your October margin improvement you've seen. Just to make sure we're kind of framing things and on the same page the order of magnitude. Would you be willing to share where store margins were in October even if preliminary?

Dirk Montgomery: Yes. No. I mean not -- couple comments. Number one, we feel a lot more comfortable with our improvement in wage rate -- total wage rate dollars as a percentage of sales just because October results are still preliminary. But that metric reduced by 200 basis points in October on a run rate basis. So we believe that we're kind of on our way towards the returning margins to the 18% to 20% range. The balance of the fourth quarter is that is a little bit noisy. I'm sure as you all can appreciate, because we've got holidays in November and December, which tend to make those months a little bit higher from a labor plus dollars as a percentage of revenue perspective. But we feel like our run rate is very much on a trajectory as we head into 2022 to get to the 18% to 20% range that we talked about.

Brian Vaccaro: Okay. That's helpful. And I guess on commodities I just wanted to touch base there. Can you help us with where was your commodity inflation in the third quarter? And when you say roughly stable in the fourth quarter, are you saying that you expect your COGS ratio to be similar to what you saw in the third quarter? I think it was 30.7% something like that or are you talking about the inflation rate in the fourth quarter being similar to Q3?

Dirk Montgomery: No. The COGS -- the cost of sales as a percentage of revenue. So, we expect to see stable cost of sales as a percentage of revenue overall in the quarter. That does not include the price increases that we plan to take, because that would -- that will be in December most likely and will be kind of in the back half of that period. So, it's not going to have a material impact probably. But -- and I mean just in terms of overall commodity trends this year, I mean, we have seen and have reflected in our cost increases in packaging costs like most of the competitive set. So we've seen increases, I'd say packaging is probably the area where we've had the highest increase. We've had some moderate increases in poultry prices. But overall, we expect the cost of sales relationship to sales to be stable in the fourth quarter compared to the third quarter.

Brian Vaccaro: All right. That's great. And then just the last one for me. Could you just elaborate on the progress that you've made in assessing the new unit prototypes and potentially accelerating growth at Pollo. Maybe comment on what guardrails do you have in place on the level of investment you're willing to make here versus say more meaningful buyback program? And then what's your latest thinking on pursuing company-owned unit growth versus maybe initiating a more meaningful franchise program to fuel that unit growth? Thank you.

Rich Stockinger: Yes. I'll take that one. We -- again, we are still in the process of testing and testing out in a mock restaurant environment to make sure that the results that we got from the outside engineers are accurate. And assuming they're accurate we have an investment, which I think we've said already that it's going to be approximately $1.7-ish million versus historically well over $2 million. But more importantly the kitchen lines will be set up differently as a result of the time in motion studies that the engineers have done. We know that we have significant improvement available to us by setting up the kitchen lines and the lines differently the way our current business is today versus the way it was 20, 30 years ago. So that's what we're going to do first and foremost. We will then try that out in a restaurant. It's going to be here in probably Miami-Dade or Broward. It's going to be in our core market, so we can be very close to it. So we're going to take that. And we're also going to take that what we've learned there and see how we can retrofit some of our existing restaurants. So, example, if we can go from 90 to 120 cars at lunch per hour it's significant growth within our core restaurants. We believe there's a significant opportunity to increase comp store growth and grow restaurant sales without even building new restaurants. But we are looking at that first and foremost, and then we'll be looking at potential additional units again testing in different markets within Florida, because we have not yet got to the point where we're going to expand a significantly in the next year or two and we will be looking at going outside of Florida, but we're not ready at that stage right now.

Dirk Montgomery: And I think one of your other questions was around kind of uses of cash. I mean, as we said in our prepared comments, we're taking a very disciplined approach to all these investments. That's why we're testing a number of remodels this year, and we're evaluating what design features are the most attractive. Which ones will drive sales, which ones drive traffic. And we're then going to finalize our plans for 2022 based on those results.

Rich Stockinger: Brian, we're taking a very disciplined approach. We know how important the future of Pollo is when it comes to growth. And we want to make sure that we take a disciplined approach based on facts and data tested before we start rolling out significantly within Florida or outside of Florida. And then on the second question on the franchise, we're starting to see a lot of movement on the licensing. People coming to us on the licensing. We just opened at Hard Rock Stadium here where the dolphins play. We'll be opening up one in with the Miami HEAT play. We've had several inquiries regarding airports in Florida as well as other transportation centers. So we're going to do that first. Other type of franchising, your typical franchising will wait until we get the test results of the new prototype from the sales to investment margin and then we'll be taking a look at those plans.

Brian Vaccaro: All right. That's very helpful. Thank you.

Rich Stockinger: Thanks, Brian.

Operator: Thank you. We'll take our next question from Eddie Reilly with EF Hutton.

Eddie Reilly: Hey, guys. Thanks for taking my question. I was wondering about the 8% to 9% target on the G&A margin. Do you expect this to come more from revenue growth? Or is there going to be an absolute reduction in G&A going forward?

Dirk Montgomery: Yes. There will be an absolute reduction. I mean, we're -- now that we've divested Taco, obviously, there are expenses that we can reduce and we can better optimize our overall resource level. And as we said, we're qualifying ideas right now. These are -- the ideas are also by the way not -- they're pretty standard typical ideas for improving efficiency. We just need to get through the TSA period. It's completely qualify the ideas before we start implementation.

Eddie Reilly: Got it. And then second question for me. I was wondering if you've seen much growth in the form of people joining the loyalty program and downloading the MyPollo! App?

Rich Stockinger: We haven't done a full court press yet on the loyalty, because frankly we've got so many other things in the hopper that we're working on. The loyalty will follow. That's most likely going to be a strategic initiative sometime in 2022. But we have enough right now. On the app acquisition we are improving, we are increasing the app. We said earlier about the check difference between the app user being 18% higher than the non-app user. So our focus right now is in increasing the acquisition of the app. The loyalty will follow probably sometime next year.

Eddie Reilly: Got you. And just on that greater ticket size. Are you guys taking a different approach on pricing for dine in versus other channels?

Rich Stockinger: Yes. To some extent yes. So, we have been and will continue to take a different approach with the delivery channel. So, we historically have price delivery at premium. The analytic work that we've done suggests that the sensitivity levels are much lower on delivery customers than they are for non-delivery. And so, we do charge a higher price for delivery like our peer group and we continue to test and evaluate that sensitivity level so that we can really optimize it.

Eddie Reilly: Great. Thanks guys.

Operator: Thank you. And at this time there are no additional questions in the queue. That does conclude today's conference. We thank you all for your participation. You may not disconnect.