Earnings Transcript for FRGI - Q4 Fiscal Year 2022

Operator: Good day, and welcome to the Fiesta Restaurant Group Fourth Quarter 2022 Earnings Call. Alll participants will be in listen-only mode. [Operator Instructions] 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 Raphael Gross from ICR. Please go ahead.

Raphael Gross: 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 to comparable GAAP 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 Yoesting. And now I’d like to turn the call over to Dirk.

Dirk Montgomery: 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

Tyler Yoesting: Thanks, Dirk. Overall, we are pleased with our financial results for the quarter, with growing sales momentum and improving margins. We are very excited to see strong comparable restaurant sales growth in the fourth quarter of 11% versus 2021, despite the impact of the hurricanes in the first half of the quarter, which we estimate reduced comparable sales by approximately 60 basis points. Our momentum continued into January with comparable restaurant sales of 10.2%. The most encouraging news on our sales trend is clearly our improvement in comparable transaction trends, which were positive in January 2023 compared to January 2022 and have continued into fiscal February month-to-date. Regarding sales performance, total revenues increased 9.3% to $97.6 million in the fourth quarter of 2022 from $89.3 million in the fourth quarter of 2021, driven by the comparable restaurant sales increase and partially offset by the impact of the hurricanes, estimated at approximately $0.5 million. Fourth quarter improvement compared to 2021 resulted from a 16.3% increase in the net impact of product channel mix and pricing and a decrease in comparable restaurant transactions of 5.3%, including approximately 0.5% due to the impact of the hurricanes. Fourth quarter 2022 positive mix impact was driven by the addition of check building higher ticket menu items such as pork chunks, the GrillMaster Trio and Churrasco protein items as well as the continued success of check-accretive limited-time offers, including the return of ribs in the fourth quarter. The fourth quarter 2022 net loss was $4.1 million or $0.16 per diluted share. This compares to net loss in the fourth quarter of 2021 of $4.7 million or $0.19 per diluted share. On an adjusted basis, fourth quarter 2022 consolidated net loss from continuing operations was $1.9 million or $0.08 per diluted share compared to an adjusted net loss of $4.3 million or $0.17 per diluted shares in the fourth 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 grew to $6.9 million and 7.1% of total revenue in 2022 compared to $2.5 million and 2.8% of total revenue in 2021. Loss from operations was $4.4 million or 4.5% of restaurant sales in the fourth quarter of 2022 compared to a loss from operations of $7.1 million or 8% of restaurant sales in the fourth quarter 2021. Turning to restaurant-level results. Restaurant-level operating profit margin, formerly restaurant-level adjusted EBITDA margins and a non-GAAP measure was 16.2% in 2022 compared to 14.3% in 2021. Restaurant-level operating profit margins increased during the fourth quarter compared to 2021, primarily due to the impact of higher restaurant sales driven by higher pricing and lower special incentive pay, partially offset by higher commodity costs and repairs and maintenance costs. We were pleased with our margin growth in the quarter compared to 2021 as well as our 210 basis point improvement over the third quarter of 2022. Regarding fourth quarter trends in key expense categories, cost of sales as a percentage of restaurant sales in the fourth quarter of 2022 increased to 31.2% compared to 30.1% in 2021, due to higher commodity costs and sales mix, partially offset by our phased menu price increases and improvements due to operational efficiencies. Restaurant wages as a percentage of net sales decreased to 25% in the fourth quarter of 2022 from 27.9% in 2021, driven primarily by lower special incentives and bonus pay, partially offset by the impact of higher wage rates. Other restaurant operating expenses as a percentage of restaurant sales increased in the fourth quarter compared to 2021, due primarily to the impact of higher repair, maintenance costs, higher utility costs and higher property and general liability insurance costs. General and administrative expenses increased to $15.1 million for the fourth quarter of 2022 from $12.7 million for the fourth quarter of 2021, due primarily to the higher employee and other support costs. General and administrative expenses for the fourth quarter 2022 included $3.5 million in non-recurring expenses comprised of $1.6 million of general and administrative efficiency initiative costs including $1.3 million for accelerated charges related to the deferred implementation and service contract costs related to our current accounting system; $1.4 million of restructuring costs related to the departure of our former CEO; and $0.3 million of digital platform costs. General and administrative expenses for the fourth quarter of 2021 included $1 million related to non-recurring digital platform costs. Turning now to cash flow-related comments. In the fourth quarter of 2022, our total cash balance decreased $10.4 million from the third quarter of 2022 to $35.8 million, including $3.6 million of restricted cash. Capital expenditures in the fourth quarter of 2022 were $6.4 million, and we also made final payments related to our accounting system for $2.5 million and final CARES Act deferral payment of $1.7 million. The fourth quarter cash balance has historically been lower than the third quarter due to annual payments, primarily for real estate taxes. We are targeting an increase in the cash balance over the course of 2023. In addition, we continue to have no debt on our balance sheet and have $10 million in undrawn revolver capacity as an additional source of liquidity as part of the loan agreement we executed in 2020. We are making progress finalizing the settlement of – on the 2021 winter storm insurance claim we noted previously and expect a resolution in the first half of 2023. In addition, we expect to file insurance claims associated with the impact of the 2022 hurricanes upon completion of our final assessment of damages and losses. Regarding investment performance. Our refresh remodel program is generating consistent sales lift in comparison to Pollo Tropical local market unit restaurant sales trends. We completed 32 refreshes and remodels through the end of the fourth quarter. Refreshers are realizing an average lift of 4%, with remodels realizing an even higher average lift. I’ll close with a few comments on our outlook for 2023. We are encouraged by our sales momentum in 2022 that continued to accelerate in January 2023. We are very focused on achieving our growth objectives through our four key growth themes. We expect the sales benefits will continue to build momentum as we realize the full impact of those initiatives. Our outlook for food and labor costs is for continued inflation in 2023, but more moderated than inflation pressure we saw in 2022. The pricing action of 4% that we took in September 2022 should more than offset anticipated ongoing inflation in 2023. As a result, we expect our additional pricing action planned for March 2023 to result in margin improvement on a run rate basis above Q4 2022 margin levels. We are targeting restaurant-level margins in 2023 of 18% on a run rate basis through the combination of our continuing transaction growth and additional pricing actions, barring any unforeseen changes in our cost structure and operating environment. We expect 2023 G&A expense to decline versus 2022, driven by efficiency efforts, including, but not limited to, the ongoing outsourcing of accounting transaction processing and downsizing of our Dallas service center office space completed in February 2023, as well as expense reduction from service vendor renegotiations, which will meaningfully contribute to the ultimate reduction in G&A to the targeted range of 8.5% to 9% of restaurant sales. Regarding capital expenditures, we project full year 2023 capital expenditures to be in the range of $22 million to $28 million. In closing, we demonstrated strong sales growth as well as ongoing margin improvement in the fourth quarter, which we expect to continue as we build on the momentum of our strategic growth initiatives. Thank you for listening, and we will now open the call for questions. Operator?

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Edward Reily from EF Hutton. Please go ahead.

Edward Reily: Hey guys. Just curious about the price hike in March. I’m wondering if you’re able to quantify that and maybe share do you have any other plans to increase prices throughout the rest of the year?

Dirk Montgomery: Yes. Thanks. Thanks, Eddie. It’s Dirk here. So we’re expecting a low to mid-single-digit increase. We’re still firming that up. But as it relates to the balance of the year, we’re going to evaluate additional pricing action based on competitive benchmarking. As we mentioned in our prepared remarks, we’ve been served very well by benchmarking the competitive set, and we feel really comfortable that we can make the price move that we’re contemplating this month while still maintaining value perceptions. So – and that pricing action that we’re taking in March, combined with the pricing action that we took in September well offsets the cost increases that we are anticipating in 2023, and actually will accrete margin. So we expect a margin pickup as a result of that phased pricing action that I just mentioned.

Edward Reily: Okay. And it’s also nice to see transaction growth picking up again. Is that also in the mid-single-digit range or so to the start of the year?

Dirk Montgomery: Yes, I’m sorry, Eddie. Yes, can you repeat that question please? I apologize.

Edward Reily: Yes, sure. Just on the transaction growth beginning in 2023, is that growing mid-single digits as well? I’m wondering if you could maybe quantify that for me a little bit?

Dirk Montgomery: Sure. I mean, it was up modestly in January. So in the release, it was just – it was up slightly 20 basis points. In February, our fiscal February is not over yet, and so we cannot – we can’t disclose the run rate, but it’s favorable relative to January so far month-to-date. We actually are finishing the month out this week, and so still have a few days left in our fiscal February, but the trend is definitely better, and we’re building momentum.

Edward Reily: Okay. And last one for me. On G&A efficiencies, you mentioned 8.5% to 9% run rate. So are you expecting that figure to be more towards the end of this fiscal year? Or should we maybe anticipate 8.5% to 9% of sales a bit sooner than that?

Dirk Montgomery: So I mean we are absolutely expecting meaningful year-over-year reductions in 2023. So 2023 against 2022, we are going to see a significant reduction. So our percentage of – G&A as a percentage of sales, we expect to be declining over time as the benefits of the initiatives that we mentioned really hit their full impact. It’s – sometime between late 2023 and early 2024, we expect to hit that run rate. We actually have to – there are a couple of initiatives that will not be fully implemented until 2024, so we won’t get the full benefit of certain initiatives until early 2024.

Edward Reily: Okay. Great. Thank you.

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

Dirk Montgomery: No closing remarks, and thanks, everyone, for joining.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.