FRGI
#Thank you, Raph.
Q3 was certainly a challenging quarter for Fiesta and our team members as hurricanes Harvey and Irma impacted the majority of our restaurants and the communities where they operate.
Within 2 weeks of Hurricane Harvey's arrival into Texas, that caused severe flooding in the Houston area and disruption to our San Antonio operations, we closed every Pollo Tropical restaurant in Florida and Atlanta as we prepared and withstood the impact of Hurricane Irma.
Given the severity of the storms, I am pleased to report that there were no injuries incurred by our team members and that all of our restaurants that we had planned to reopen have done so with the exception of 1 Taco Cabana location.
Resuming full operations after the storms had passed was a tremendous effort undertaken by our team members and supplier partners, and we thank them all for their diligence and tenacity.
We are proud that Taco Cabana and Pollo Tropical served thousands of meals to evacuees and first responders in both Texas and Florida.
These efforts have been captured on video and can be accessed on our website.
In addition, through our nonprofit Fiesta family foundation, we are continuing to assist many of our team members who have personally suffered losses as a result of these storms.
In the aftermath of Hurricane Harvey and the related uncertainty, we decided to permanently close our 2 Houston Pollo Tropical locations.
Due to limited awareness of the Pollo Tropical brand and the high relative overhead costs needed to support the 4 remaining restaurants in San Antonio, we decided to permanently close all 6 Pollo Tropical restaurants in Texas and focus on revitalizing core markets and our brand repositioning strategy.
The hurricanes resulted in a short-term loss of business and inventory as well as some property damage and delayed our brand relaunches, but we are back on track now.
As Danny will explain, we relaunched Pollo Tropical last month with new menu items and a new ad campaign.
Importantly, just prior to the hurricanes, we were experiencing better sales trends at Pollo Tropical with comp sales that improved from high single-digit decline to low single-digit decline.
Taco Cabana sales trends admittedly were still soft, but this was expected since we had significantly reduced our promotional discounts and advertising for several months.
However, we remain optimistic that the strategic renewal plan is taking hold as leading qualitative indicators that preceded improving sales trends at Pollo Tropical are now beginning to build at Taco Cabana.
In our earnings press release, we laid out the significant accomplishments we have made so far across key elements of our strategic renewal plan.
We are working hard every day to fundamentally improve the guest experience and induce trial and increase frequency.
Our guests, particularly in core markets, already have strong affinity for our brand and that, coupled with superior financial performance of these restaurants, is why we are focusing our efforts and investment in core markets first.
Strategically, we're in the process of repositioning our Pollo Tropical brand outside of our core markets beginning with locations in North Florida and the Atlanta metropolitan area.
We are planning to regionalize the menu in stages, starting in the first quarter.
We have recently completed research that validates the new products we are planning to roll out, including fried chicken options; side dishes like sweet potato, casserole and fried okra; and an extension of our desert line, potentially including peach cobbler and pecan pie.
Before I turn the call over to Danny, who in addition to serving as our company's COO, has recently taken on an additional role as Pollo Tropical President, I would like to welcome 3 accomplished executives to our Fiesta leadership team.
Chuck Locke was recently named Taco Cabana President.
Chuck is highly respected in restaurant executive with more than 20 years of operations, development, marketing and finance experience.
Before joining us, he served as Chief Operating Officer of Anthony\xe2\x80\x99s Coal Fired Pizza, a polished casual dining concept based in South Florida.
He is now just a few weeks into his new role and is already working hard to strengthen the implementation of our strategic renewal plan.
Tony Dinkins was recently named Senior Vice President of Human resources, overseeing our overall talent management strategy.
Tony has 25 years of human resources experience working at leading organizations across multiple industries.
Most recently he served as Senior Vice President of Human Resources at Cable & Wireless Communications.
Maria Chang Mayer will join us in just over a week.
She will serve as our new General Counsel and Secretary, bringing to Fiesta an impressive breadth of legal experience.
Our team members have the passion and resolve to implement our plan, and we believe their actions are going to fundamentally enhance our core business models and our performance as we enter 2018.
I thank them for their efforts and commitment in overcoming some very real obstacles this past quarter, and know that they would agree with me when I say that we believe we are squarely on the right track.
With that, I'll turn the call over to Danny.
Thank you, Rich.
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Thank you, Danny.
Comparable restaurant sales at Pollo decreased 10.9% in the third quarter of 2017, compared to a 1% decrease in the third quarter last year.
This year's decline included a 13.1% decrease in comparable restaurant transactions, partially offset by a 2.2% increase in average check, of which 1.2% was attributable to menu price increases.
Comparable restaurant sales and transactions were negatively impacted approximately 5.5% to 6.5% by the hurricane.
Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant transactions by approximately 60 basis points.
Turning to Taco Cabana.
Comparable restaurant sales in the third quarter decreased 12.6% compared to a 4.1% decrease in the third quarter last year.
This year's decline included a 14.3% decrease in comparable restaurant transactions, offset by a 1.7% increase in average check due to pricing.
Comparable restaurant sales and transactions were negatively impacted approximately 2% to 3% by Hurricane Harvey.
In mid-October, we rolled out tiered menu pricing at both brands based upon a pricing elasticity analysis at the individual restaurant level that was completed during Q3.
We believe the price changes will result in incremental, effective pricing of approximately 2% at each brand.
In terms of our key restaurant-level line items, we have highlighted our year-over-year variance explanations by brand and on a consolidated level in our 10-Q that will be issued this afternoon.
We use restaurant-level adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as adjusted EBITDA, excluding franchise royalty, revenues and fees, preopening costs and general and administrative expenses, including corporate-level general and administrative expenses.
At Pollo, third quarter restaurant-level adjusted EBITDA decreased by $6.5 million.
We estimate that restaurant-level EBITDA was negatively impacted by hurricanes Harvey and Irma by approximately $3 million to $4 million.
Restaurant-level adjusted EBITDA was also negatively impacted by a decline in restaurant sales, higher cost of sales as a percentage of restaurant sales and higher repair and maintenance costs, partially offset by the positive impact of closing unprofitable restaurants.
At Taco, third quarter restaurant-level adjusted EBITDA decreased by $5.7 million.
We estimate that restaurant-level adjusted EBITDA was negatively impacted by Hurricane Harvey by $1 million to $1.5 million.
Restaurant-level adjusted EBITDA was also negatively impacted by a decline in restaurant sales, higher cost of sales as a percentage of restaurant sales and higher restaurant wages and repair and maintenance costs, partially offset by lower advertising expenses of $1.6 million.
Please refer to our earnings release and 10-Q for all related non-GAAP reconciliation tables.
Now let's quickly go over charges recognized in the third quarter.
We recognized additional impairment and other lease charges of $15.9 million, primarily related to 6 Pollo restaurant closures in September and additional Pollo and Taco restaurants that we continue to operate and other lease charges for restaurants closed during the quarter, partially offset by recoveries related to previously closed Pollo Tropical restaurants.
We estimate that the cash impact of lease and other charges in 2017, related to all restaurants that have closed in 2016 and 2017, will be approximately $3.5 million to $4 million assuming ongoing lease, tax, utility and other obligations, net of payments received for lease terminations and assignments of $0.9 million.
Thus far, we have made good progress subleasing or terminating leases of our excess properties.
As previously disclosed, the 6 closed Pollo Tropical restaurants contributed approximately $3.7 million of restaurant sales and $1.2 million of pre-tax restaurant-level operating losses, including $0.6 million of depreciation expense to results for the 6 months ended July 2, 2017.
In 2016, these restaurants contributed approximately $6.7 million of restaurant sales and $2.2 million of pre-tax restaurant-level operating losses, including $1 million of depreciation expense and $0.4 million of preopening costs to results in 2016.
Adjusted net income was $1.7 million or $0.06 per diluted share compared to adjusted net income of $8.1 million or $0.30 per diluted share in the prior year period.
We utilize adjusted EBITDA, a non-GAAP financial measure, for the purpose of assessing performance and allocating resources to segments.
This includes adjustments for significant items that management believes are related to strategic change and/or are not related to the ongoing operation of our restaurants, in addition to stock-based compensation, impairment and other lease charges and other expense income.
During the quarter, consolidated adjusted EBITDA declined 44.1% to $13.2 million, primarily driven by lower restaurant-level adjusted EBITDA at both brands, partially offset by lower G&A expenses, primarily as a result of lower Pollo Tropical regional administration costs related to restaurant closures.
For 2017, we continue to expect annual capital expenditures to be $60 million to $70 million, including $22 million to $25 million for development of new restaurants; $22 million to $26 million for ongoing and deferred capital maintenance; $13 million to $16 million for other corporate projects such as IT and systems projects and indoor video menu boards; and approximately $2 million to $3 million for remodeling costs.
Next year, we expect to open 9 new company-owned Pollo Tropical restaurants in Florida and 7 new company-owned Taco Cabana restaurants in Texas.
The Taco Cabana restaurants will include 5 closed Pollo Tropical restaurants that will be converted.
For 2018, annual capital expenditures are estimated to be $60 million to $68 million, including $26 million to $28 million for the development of new restaurants; $23 million to $25 million for the ongoing reinvestment in our Pollo Tropical and Taco Cabana restaurants, including approximately $11 million to $13 million in deferred maintenance needs, approximately $4 million to $6 million for restaurant remodeling costs and approximately $7 million to $9 million of other expenditures, which primarily include information technology and systems projects.
With momentum building at Pollo, leading indicators beginning to show promise at Taco and a full senior management team in place to implement our plan, we look forward to a successful 2018.
Thank you for your time this afternoon.
And now Rich, Danny and I would be happy to answer any of your questions.
Matt, please open up the line.
I would say, from the current media campaign that we have at Pollo, we're getting as we thought we would.
Building awareness around the renewal is not something that is immediate, but we are seeing improvement in the trends.
We see it in our sales.
We see it in our check average, because that's the combination of the renewal plan as well as the message in the offer, which currently, at the moment, is a chicken and ribs combination offer.
So that's part of for our strategy.
So we see the lift in check, we see the lift improvement in transactions and then, clearly, in sales.
But the awareness campaign will take time to really seed.
We're just a few weeks into that media campaign around that message.
What I would suggest, <UNK>, is look at the year-over-year numbers that you're modeling and also, from our perspective, we're planning a build to momentum.
So start more conservative in the beginning and then hopefully we are planning to see momentum build over time as guests are coming into the restaurants, they're experiencing a great atmosphere, improved food quality and better hospitality and coming back with more frequency.
Well, I can start and then ---+ it's Rich, and then, everybody else can jump in.
We have a very strong now Fiesta team, with the expertise that will be able to bring it across the 2 brand lines.
And that can be from human resources, food and beverage, legal, you name it ---+ marketing.
We can now use those resources at the 2-brand level.
At Pollo, we've got Danny.
He's familiar with the Pollo.
The Pollo team is in place and the Pollo team is excited, passionate and is achieving the results.
The trajectory that we need to get to your first ---+ your earlier question, to not only breakeven, but to positive comp store sales.
Chuck is new.
Chuck spent the first 2 weeks in the kitchen.
He learned all the food, specs, recipes, et cetera.
I expect Chuck to have a significant impact.
His operations background is significant.
He's also a people's leader.
He's a great leader, but the people not only respect him but like him.
So I expect that working with us as a team, we will bring the same type of passion, and it's there at Taco, to get the same results that we're currently experiencing here at Pollo.
The one thing that I would add to that is that, this is ---+ the plan is grounded and confirmed in research, and there has been an extensive amount that has occurred for each brand.
And we're nearing the completion of that research and it's taught us a lot, but it's also confirmed a lot about what we're doing.
And so, that's a great guidepost for each brand.
And as Rich said, sharing these resources and building these teams, it's really nice to see the plan come together and be confirmed.
And I would just finally add that there's collaboration right now among the management team to really deliver the plan that we've put in place.
And everybody has a positive attitude in terms of what they think the future will hold and it feels great to be part of the team.
I apologize, but I'm not really sure what's going on with our phones today.
But you guys mentioned that October obviously was trending flat and you guys didn't launch the new ad campaign until the 23rd.
So I guess, just revisiting that previous question, have you guys seen a little bit of a step-up from those flat trends.
Or because you were going over maybe the hurricane from last year, there's a lot of volatility there.
I would say, there is the volatility around when we were lapping the hurricane from last year.
But what we said earlier is, we were seeing results that were nearing where we're at today prior to the hurricane, so we feel like we've been building momentum.
And now that we've ---+ we have advertising, we hope that, that momentum can continue and hopefully build from there.
And just one additional thought on that is, we're also comparing against a discount period from last year in terms of direct mail.
So the comparisons are not quite apples-and-apples, but it's ---+ but we have seen progress.
Got it.
And then, I mean, in kind of a more normalized environment, how should we think about, I guess, the reset, new level of margin profile of Pollo.
Well, that is a big question.
I think we have a much healthier store base today, with a lot of the unprofitable stores having been closed, so the Pollo profile is certainly better in terms of sales.
So I think we're running about $2.5 million in sales on an average basis.
And then we're in the low 20s in terms of restaurant-level margins.
And we were higher previously in our higher-performing restaurants; however, we've made investments in food and in labor and in maintenance, so we're seeing that impact on our margin.
Got it.
So low 20%-ish.
Makes sense.
And then, just on G&A.
Are we still tracking kind of in that sort of the high 50s range for the year.
We haven't specifically guided toward G&A, but as we've shared, we've absorbed some savings this year, we'll see a little bit of savings next year.
So that, from a directional standpoint, seems appropriate.
Just because the Q3 G&A is so much lower than what we've seen, is that kind of the right way to think about it.
Or are we going to see some stock comp volatility, et cetera, to maybe move that around.
Yes.
We did see some stock comp impact this quarter just based on the timing of some of the grants that were issued.
We also have lower bonus payments this year because of our current performance.
So you'll want to take that into account as you think about next year.
Well, let's say, it's a very good question.
We are going to continue the advertising in a very pragmatic manner for the balance of the year.
We'll have advertising in the month of November as well as some in December for this year.
And then, next year, you would look for promotional windows of 6 to 7; and you would look for a strong presence of marketing and media throughout the state of Florida into Atlanta.
But you'll also see us doing more with social and digital media in the days and months to come as we target some of these users that we feel provide us with some larger opportunities.
And I think on the menu board, it's much simpler.
That's not my opinion, that's also our guest's opinion, to follow.
It leads up with the things that we do well at, which is the family meal as well as the half chicken and quarter chicken.
So ---+ and it also has the desserts.
And it's early; early indications are that desserts are doing extremely well, primarily the new cheesecake as well as new the key lime pie.
And that has increased our check average, which is not from price, it's primarily because of the add-on with the new sides that we talked about earlier as well as the new desserts that people are trying and liking.
Yes, we will.
Yes.
So right now we are targeting at least 30% return.
So the stores that we're opening in 2018 are primarily in South Florida, which generate returns in excess of that number.
And then, of the Taco Cabana new restaurants that will be opening, 5 of the 7 are conversions, which require a much lower investment amount ---+ and the conversions of a Pollo restaurant, much lower investment cost with which to open up a new Taco restaurant.
Okra.
Clearly, our research has showed us, in using one of the major research firms that are in the restaurant industry, that the menu differentiation by geographic area is the way to go ---+ the way we need to go.
This was done by research of both internal guests as well as our nonexternal guests, but I'll answer it another way.
The one item that we're looking at is fried chicken, and people have already said rich fried chicken.
But this will be our marinated chicken.
It's not going to taste like some of our competitor's fried chicken.
And it will not ---+ in the beginning, we're testing, it'll not be a bone-in, it'll be a boneless breast.
So we're still keeping the core of Pollo Tropical.
You'll still have the flavor from the marination that we have throughout the chain.
It's some of the side items that we're doing and some of the one-off items that are more local, giving the ---+ our users the ability to try something else in addition to just your typical bone-in whole chicken, quarter chicken, half chicken with the rice and beans.
So we're not changing the essence and core of Pollo, we're just bringing the outside of it to more a localized brand.
Yes, across the geographies, the consistency would be 75%, in that range, with the menu flexibility of up to 25%.
We'd like to thank everyone for their interest and their investment in the company, and thank you very much for participating on the call today.
