FRGI
#Thank you, Raph.
2017 was a busy yet transformative year at Fiesta.
Last March, we embarked on a journey that would revitalize 2 great restaurant concepts, each with tremendous brand equity and growth potential.
We carefully crafted a detailed Strategic Renewal Plan and then quickly put the team in place to implement that plan.
While we began implementing the plan, we reduced our marketing efforts until we were ready to reintroduce our guests to our brands to experience comprehensive improvement, addressing among other things, food quality, hospitality and restaurant facilities.
Two hurricanes in the third quarter, one after the other, delayed our progress.
However, we have established real momentum and feel great about our trajectory.
Today, we are gratified to see that our revitalization efforts are taking hold at Pollo Tropical and we intend to capitalize on this in 2018.
As you know, we relaunched Pollo Tropical brand in October, and the improvement in sales during the fourth quarter this year demonstrates good progress.
The brand recorded its best comparable sales performance in the past 7 quarters and has increased comparable sales in December, January and February months to date.
In December, Pollo generated comparable sales of 2.8% in Florida, exceeding the Florida Black Box industry benchmark by 40 basis points, due in part to advertising to support our relaunch.
Miami-Dade and Broward County areas, our core markets where we initially focused our renewal plan efforts, have led our sales recovery as expected.
Comparable sales in Miami-Dade County, our largest market, were 3.8% and exceeded the Miami-Dade Black Box industry benchmark by 130 basis points.
Comparable sales in Broward Country were 3% and exceeded the Broward Black Box industry benchmark by 50 basis points.
Momentum continued into January, and we grew comparable restaurant sales by 0.6%.
It is important to note that brand comparable sales in January were negatively impacted 70 basis points due to a fiscal calendar shift of New Year's day.
Miami-Dade and Broward County areas increased comparable restaurant sales by 2.6% and 3.3% in January 2018, respectively.
Pollo Tropical, Florida, comparable sales were 0.2% lower than Black Box Florida benchmark, while Miami-Dade and Broward County areas exceeded the Black Box Miami-Dade and Broward County benchmarks by 0.7% and 1.4%, respectively.
Month-to-date through the first 3 weeks of February, Pollo comparable sales increased 1.2%, led once again by Miami-Dade and Broward Counties with February comparable restaurant sales growth month-to-date of 3.5% and 2.9%, respectively.
We continue to prioritize the importance of using fresh and high-quality natural ingredients and are, therefore, excited to have transitioned Pollo Tropical to No Antibiotics Ever, or NAE, chicken.
NAE chicken is meaningful to health-conscious consumers looking for high-quality, natural ingredients, and our transition marks a significant milestone for the company.
With that, Danny will provide an update on our initiatives underway at Pollo Tropical.
Thank you, Rich.
Over the past several months, we've been conducting research in all of our markets, speaking to current, occasional and lapsed users of the Pollo brand.
We've talked about many things, including what is important to them, what products they want, what we're getting right and what we must do to get better.
During these studies a very important finding emerged in the area of product opportunity.
Our loyal and lapsed users were asking for one new menu item more than any other in all of our operating markets, a boneless fried chicken option.
And keeping with the renewal plan's primary objective of brand revitalization, our culinary team spent months considering, developing, testing and launching this new product platform.
As a result, Pollo Tropical recently introduced its citrus-marinated crispy Pollo bites in all locations.
This exciting new product is founded on the 24-hour citrus marination process that made our brand famous.
And taking this recipe along with our fresh never-frozen chicken breasts and the NAE product, hand-cutting each breast into large pieces before breading and frying, we have developed one-of-a-kind product.
Our citrus-marinated crispy Pollo bites don't come from a conveyor belt, a machine or a plant.
They are not widgets.
Like our fire-grilled chicken, they come from the kitchens of our 146 Pollo Tropical restaurants and are prepared fresh each and every day and only after they've been marinated for 24 hours.
In addition, guests have the option to choose if they wish to dip or dunk their bites from a variety of our unique island sauces, including cilantro garlic, guava barbecue, pineapple rum and many more.
We introduced the new crispy bites in our Southwest Florida, Atlanta and Jacksonville markets on January 15th of this year.
They were promoted as a 5- and 8-piece meal option and that's a kid's meal offering and also as a 5-piece add-on option.
In the Southwest Florida market, we also promoted this new product with television and social media support where we saw products mix build in excess of 3%.
On February 12, these markets began expanding the platform to include salads and the Create Your Own TropiChop bowl.
To date, the response has been very encouraging.
Sales are increasing.
Guests satisfaction has improved.
And future purchase intent scores are high.
This early start was also important because it allowed us to measure the results and assess operational performance before expanding a rollout.
As a result, I'm happy to announce that was accomplished.
Just 2 weeks ago, all remaining Pollo Tropical locations, including our South Florida market in Dade and Broward Counties, introduced the citrus-marinated crispy Pollo bites.
These markets began receiving broadcast and social media support the week of February 19, and just like Southwest Florida, Atlanta and Jacksonville markets will soon expand the platform to include additional menu items across all markets.
This platform has been widely accepted by guest as evidenced by its growing percentage of total menu mix and we're only at the beginning.
The citrus-marinated crispy chicken program will soon include wrap options, party trays and a new family meal.
Furthermore, in the coming months, the brand will launch its new citrus-marinated crispy chicken sandwich program throughout the system.
The new sandwiches will play a very important role in the expansion of this platform.
On a side note, the taste of these sandwiches is only exceeded by the size.
We even had to create a larger box to hold them.
As previously mentioned, the new platform's receiving broadcast and social media support.
We are using new tactics, relevant messaging and bold ideas to communicate our points of difference with this product.
Breaking the mold of conventional thinking is important.
We believe social media will play and is playing a significant role in this introduction.
Finally, to successfully reposition our brands outside of our core markets, we are regionalizing our menus in stages to address specific needs across our footprint.
With that, let me turn the call back over to Rich.
Thanks, Danny.
As we previously indicated, Taco Cabana is several months behind Pollo Tropical in its revitalization efforts.
Since we reintroduced median October, Taco Cabana's sales performance sequentially improved during the fourth quarter, and we're able to narrow the performance gap versus the industry benchmark.
New TC brand President, Chuck Locke, who joined our team only a few months ago, and his team are working in earnest to implement plan initiatives to revitalize the brand in preparation for a full relaunch by mid-2018.
Guest metrics are improving, which we believe are leading indicators that sales momentum will continue to improve similar to the path we experienced at Pollo.
Improving guest metrics include better overall guest satisfaction scores, better social media scores, fewer guest complaints and more guest compliments.
We are focused on attracting loyal guests while increasing the profitability of each transaction by offering high-quality menu and promotional items at reasonable prices despite eliminating deep discounting; therefore, increasing our average check.
This focus is transforming our guest base and will initially result in transaction declines.
However, we anticipate a gradual improvement in trends as we build guest loyalty and frequency at Taco Cabana.
In the latter part of 2017, we reduced our operating hours at Taco Cabana and are no longer open 24/7 across the majority of the system.
In many cases, we're closing at 1:00 a.
m.
Sunday through Wednesday, while we remain open 24 hours Thursday through Saturday.
This change in operating hours has negatively impacted sales but has had minimal impact on profitability, reduced operating hours have other quantitative and qualitative benefits, including security, staffing and restaurant cleanliness.
Comparable restaurant sales declined 3.4% in January at Taco Cabana.
Similar to Pollo, sales were negatively impacted by approximately 60 basis points due to the fiscal calendar shift of New Year's Day.
Reduced operating hours negatively impacted results by approximately 1.6%.
Pricing, higher sales mix and lower discounts, promotions partially offset a decrease in transaction.
For the first 3 weeks in February, Taco Cabana restaurant sales declined 2%.
We have been experiencing improvement in our Taco Cabana sales trajectory and continue to be optimistic about our performance in the coming months as the brand has fully launched midyear.
We introduced All-day Breakfast Tacos in January as well as TC Time!, which is taco boxes where guests can order a dozen tacos ---+ or a dozen ---+ dozen breakfast tacos or a dozen lunch or dinner tacos.
TC Time! mix continues to build solidifying, affordable and differentiated platform at a great value.
We are testing draught beer and sangria offerings in select Taco Cabana locations.
Based on initial results, we're expanding that to additional locations.
Development of the TC patio party is underway for execution in the second quarter.
That includes entertainment in our restaurant's patio area and featured alcoholic beverages to complement shareable TC menu items.
We are leveraging all relevant opportunities to tell the TC story and drive guest engagement, being targeted communications, including traditional, social, digital and local restaurant marketing.
We have introduced USDA Choice inside skirt steak, seasoned chicken, seasoned shrimp and soon Applewood-smoked Texas brisket.
It's an exciting time at T<UNK>
The team is proud of our quality improvements and are sensing the change in guest appreciation of our products.
Our revitalization efforts at both brands go beyond sales improvement alone.
We also focus on improving margins while delivering exceptional and consistent hospitality.
We firmly believe that both of these objectives can be achieved in the course of 2018 as our sales continue to improve.
Operationally, we continue to refine controls, reporting an accountability to address the continuing challenge of higher food costs and labor costs, including recipe and specification changes, new labor models that we've implemented at both brands.
We believe these refinements are leading to improved execution and profitability as we are building sales.
We believe our brand culture is evolving as our teams are embracing the high standards for food quality, hospitality and restaurant environment.
I want to thank all our team members for their hard work and commitment to the Strategic Renewal Plan.
Their passion has played an important role to our early success.
With that, let me turn it over to <UNK>.
Thank you, Rich.
Let me initially touch on capital items.
As previously disclosed in November 2017, we refinanced our debt and entered into a new senior secured credit facility with a syndicate of lenders.
Our senior credit facility now matures in November 2022 and provides up to $150 million of revolving credit borrowing.
As of year-end, we have strong liquidity with only $75 million of debt outstanding.
Today, we announced our plan to implement a share repurchase program of up to 1.5 million shares of the company's common stock.
In 2018, 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.
We anticipate that 2 Taco Cabana restaurants will close this year when we open new sites in superior locations in the same trade areas.
Investments we are making in technology and systems are expected to build sales platforms in the foreseeable future.
New digital menu boards are operating in all restaurants, and we are planning to leverage these digital platforms to tell the story of each brand through videos and to effectively deliver targeted promotional messages around different day parts and days of the week.
New website, mobile apps and loyalty programs are planned to be launched in the second quarter.
We also intend to invest in and build delivery, catering and off-premise opportunities with dedicated resources during the year, which we believe is a significant business opportunity.
We have brought in third-party industry experts, including Olo, MonkeyMedia and Punchh to help us in these efforts.
Annual capital expenditures in 2018 currently are estimated to be $60 million to $70 million, including $26 million to $29 million for the development of new restaurants.
Other capital spending will include deferred and other capital maintenance, IT and infrastructure investments, restaurant remodels and others.
Let me now turn to fourth quarter results.
Comparable restaurant sales at Pollo decreased 0.1% in the fourth quarter of 2017 compared to a 4% decrease in the fourth quarter last year.
This year's decline included a 2.7% decrease in comparable restaurant transactions, offset by a 2.6% increase in average check.
The increase in average check was primarily driven by menu price increases that positively impacted restaurant sales by 2.9%.
Mix was negatively impacted this quarter primarily as a result of a higher priced promotion, Steak Churrasco, in the prior year period.
Sales from new restaurants on existing restaurants negatively impacted comparable restaurant transactions by approximately 70 basis points.
Comparable restaurant sales at Taco Cabana in the fourth quarter of 2017 decreased 7.4% compared to a 3.5% decrease in the fourth quarter of last year.
This year's fourth quarter decline included a 12.2% decrease in comparable restaurant transactions, partially offset by a 4.8% increase in average check due to 3.2% in pricing and positive sales mix associated with higher priced promotions, sales mix and lower discounts and promotions.
As we mentioned on our last call, we completed the rollout of our tiered menu pricing in mid-October at both brands based on our pricing elasticity analysis.
And these changes resulted in incremental effective pricing of approximately 3% at each brand.
At Pollo, fourth quarter restaurant-level adjusted EBITDA decreased by $5.4 million.
Restaurant-level adjusted EBITDA was negatively impacted by a decline in restaurant sales, higher cost of sales as a percentage of restaurant sales due to renewal plan investment and higher average hygiene expenses due to the brand relaunch.
At Taco, fourth quarter restaurant-level adjusted EBITDA decreased by $7.9 million.
Restaurant-level adjusted EBITDA was negatively impacted by the deleveraging of restaurant-level operating expenses due to year-over-year sales declines, higher wages and renewal plan investments.
Please refer to our earnings release and our SEC filings for all related non-GAAP reconciliation tables.
For the fourth quarter, we recognized additional impairment and other lease charges of $2.7 million, primarily related to previously impaired locations, 4 Pollo restaurants that closed in the fourth quarter, an office location that was closed in December 2017 when we consolidated 2 administrative offices in Dallas to 1 and changes related to 2 Taco Cabana restaurants that were closed.
During the quarter, consolidated adjusted EBITDA, a non-GAAP measure defined in our SEC filings declined to $8.9 million, primarily driven by lower restaurant-level adjusted EBITDA at both brands, partially offset by lower G&A expenses.
The enactment of the new tax law resulted in a onetime adjustment to our deferred income taxes of $9 million, with a corresponding noncash increase to the provision for income taxes as a discrete item during the fourth quarter of 2017.
The change in the corporate tax rate reduced the nominal value of our deferred tax assets, but it did not reduce the future tax deductions they represent.
We estimate our effective tax rate in 2018 will be 23% to 25% down considerably from our tax rate over the last few years of approximately 38%.
Turning to our restaurant portfolio.
We opened one company-owned Pollo Tropical restaurant in Florida during the fourth quarter.
Having completed our restaurant portfolio assessment, we closed 4 Pollo Tropical restaurants in Atlanta and do not plan on closing more Pollo restaurants in the foreseeable future.
We also closed 2 Taco Cabana restaurants, including one that was severely damaged by Hurricane Harvey and one that was nearing lease expiration.
To conclude, we are encouraged by momentum at Taco and early signs of improvement at ---+ to conclude, we are encouraged by momentum at Pollo and early signs of improvement at Taco.
Guest metrics are improving, and we are optimistic about momentum building in 2018.
And as sales build, margins should follow too.
With that, we will open the line for questions.
Thank you.
Jeff, this is <UNK>.
I would certainly point you to the fact that we are expecting cost of sales to increase this year over next year from a cost of sales perspective, but we haven't specifically guided to a cost of sales target.
Yes.
For '18, actually, we've seen wage rates be fairly nominal at Pollo.
And at Taco, we expect them to be in the low to mid-single digits.
Yes.
I would say, at Pollo, we'll be at about the same level as we have been.
But at Taco, we are reducing the promotion and discount amount by quite a few percentage points.
Well, by prior margin profile, if we were to look back at the last few years, I think it's going to take us some time to get back to those levels.
We did invest considerably in 2017 as it relates to food cost, labor and repairs and maintenance.
And we also have some nonrecurring charges in 2017.
But as we lap those impacts this year, we would hope to get to at least those margins, if not, a little bit better from a restaurant EBIDTA standpoint.
Sure.
It's Rich.
At Pollo, we had implemented some moderate price increases, I think, early spring.
And then we did it in the fall.
And had ---+ and also implemented the tier pricing for the first time.
And so absolutely 0 resistance on any of the price increases.
And at Pollo, we'll be looking at potentially doing a potential price increase late spring, a nominal.
And then we'll look down later in the year again.
We still think it's a significant value for the product that we're offering.
And again, we have no issues regarding price.
At Taco, it's been a combination of 2 things.
When we introduced the new steak from the old steak, we did take a price increase on the steak.
We now have 0 complaints and very minimal impact on complaints on any price increases on the steak.
The rest is coming from not so much a price increase per se, but we've now repositioned things like the breakfast tacos where you used to have a little asterisk if you wanted to add cheese.
Now we list everyone with cheese at first and then without cheese second.
And be ---+ to be honest with you, people are ordering more with cheese.
When we roll out these new proteins, we roll out it naked, but we also roll out it as loaded.
And of course, the loaded has a higher price point.
So the feedback on the pricing has been minimal.
I don't anticipate taking just a price increase, per se, at Taco.
Definitely not now.
And I would look at it again towards the end of the year, but I would be hesitant to do that.
Because, as you know, with the reduction in discounts, that, in essence, is a price increase.
Yes.
In 2017, in the fourth quarter, we spent more in media in '17 compared to '16.
Looking out into the first quarter, I believe it's more comparable with the prior year.
It's being done on-premise at each store.
Nothing comes in any difference.
We're using our same chicken breast as we used for the other items on the menu.
It's marinated 24 hours.
We tumble it for 30 minutes and the rest is in still marination.
We then cut the chicken breast fresh, and then we hand batter it on-premise and then we fry it on-premise.
We don't anticipate, and we have not had any equipment changes.
We've got the right equipment.
But again, once we roll out the chicken breast and the sandwich and if this thing continues to be taking off as it's done so far, there may be an initial fryer we're going to need primarily down here at Miami-Dade County.
But we're ---+ that would be a good thing.
Yes.
This is Danny.
It's their most preferred item these days.
In fact, we have to make sure that we have enough for our guests.
So, yes, our employees love them.
Yes, it's a great question, and it's early.
But we believe it's coming from 2 to 3 opportunity areas.
One is when we did the research that we mentioned earlier, we identified 2 types of users.
Those that are very loyal and then those that we referred to as switchers.
They're very heavily involved in quick casual and QSR, but we have a small share of those experiences.
So within that both categories, there is a preference for this product.
So we think those switchers are giving us some of that share.
The second thing is this is a great add-on product.
And just as we're selling these as meals, we're selling just as many or almost as many as add-ons.
So it has the opportunity to increase share with those lighter users and, certainly, as an add-on opportunity with all users.
And, of course, even with our loyalists, we think they are not just dedicated grilled chicken people, they love fried chicken as well, and especially the boneless platform.
That's very important because the further out of South Florida you go, the further north, the boneless is a real preferred product.
And then, of course, most of all, the thing that makes us so special and so unique is the fact that this is a ---+ this is our citrus marination process, 24 hours.
It built the brand.
And when you finish it off with our unique dipping sauces, it's just a terrific product.
Yes, it's Rich.
I think we said both our guest sat scores have improved since we started the renewal program and continue to improve.
We're really excited to see the same thing happening at Taco now that we saw at Pollo when we first launched this back in October.
So again, the OSAT scores are going up.
The accuracy is going up.
The hospitality is going up.
And the food scores are going up significantly.
Great to see the positive comp momentum at Pollo and you underlining your confidence with the initiation of the repurchase.
In terms of the comp in January and February, I mean, you mentioned Miami and Broward are ahead of, I guess, Northern Florida.
What accounts for that discrepancy or the delta between Miami and Broward and the rest of the Pollo markets.
Sure.
I think when we ---+ in the past quarters, we talked about that we're going to concentrate on our core markets and things in the past that might have been taken away or not the deferred maintenance we started there and made the restaurants look good, both what the customer can see as well as what the customer cannot see.
The marketing dollars that might have been going to other markets that are now closed are now being spent where it should be spent where the sales are as a percentage of sales, so each one gets what they should be getting.
And so as a marketing dollars in Miami-Dade, it actually went up to what it had technically not had before.
And again, Miami-Dade, when we did the research, those guests were not happy.
They were not happy with a lot of things that were done and as soon as we changed it in the food quality, I will tell you word of mouth, as you know, is important.
And the people recognized the improvements in the quality of food and we now have lines.
And we're pretty excited about the opportunity to increase the sales, again, starting with Miami-Dade, Broward and working all the way up.
Our comps are up throughout Pollo.
It's not just Miami-Dade and Broward.
It's there though that we're outpacing our competition.
Yes.
It's great to see.
<UNK>, in terms of the margins, Q4, especially with the hurricane impact in Q3, it was a little surprising that the margins weren't a little bit higher at Pollo especially.
Is this kind of a trough.
And as sales improve, hopefully, the margin trajectory will improve alongside sales.
Or should we anticipate some more investments ---+ incremental investments to keep a lid on your margins a little bit more.
No.
I think your first comment was what we believe to be the case and that is with more sales.
And we'll be able to leverage more on the margins.
Okay.
In terms of the buybacks, do we anticipate basically taking up the leverage a little bit more.
Or do you think you'll actually have an opportunity to generate enough cash flow over and above the CapEx in 2018.
Yes.
I think it's a little bit of both.
I mean, it really will depend on where we end up as it relates to the market itself.
We are anticipating free cash flow this year.
So we think we can utilize some cash flow for purposes of share repurchases.
Okay.
That's great to hear.
And in terms of timing of share repurchases, we could see it start tomorrow or next week.
Or is that going to be a little bit down the road.
I think it will depend.
Okay.
And in terms of G&A run rates, obviously, with the incremental investments, I mean, is 2018 kind of the right level to think about it.
Could it be up or down in terms of absolute dollars.
I think we were ---+ we are certainly hoping that from a percent of revenue standpoint, that we'll build some leverage there or have a better margin on our G&A line item compared to the prior year.
Just a couple of questions on the store margin front.
And <UNK>, on the last call ---+ I guess, starting with Pollo, on the last call, I think, you said you thought store margins would sort of normalize in the low 20s and I think you might have said you thought that, that would be achievable sometime in '18 with the benefit of store closures, et cetera.
Is that still a reasonable target.
Or has that been a little bit reset here with the fourth quarter number.
No, I think it's a reasonable target.
I would say, it's low 20s to mid-20s, somewhere in that range.
So it's gotten a little bit better with some additional store closures.
Okay.
And I guess, can you help bridge us from, say, the what we're 18% or so, 17%-and-change this current quarter.
I think we've ---+ is it fair to say that in '18, you've got some investment in food where you're going to have some deleverage on the food line, you've also got some deleverage on the advertising line.
If that's not correct, please correct me.
But where else ---+ I guess, it's sales leverage, is there another line that you would point to that would suggest meaningful margin leverage on the Pollo line in '18.
Yes.
There is a couple of other areas.
One that falls in been other operating expenses.
We had more repair and maintenance expenses come through at the end of the year for both Pollo and Taco.
Advertising actually was a little bit more of a spend in the fourth quarter to support the brand relaunch at Pollo.
So those would be 2 things I would point to, but to your point, with sales leverage and an improving trajectory, we would hope to certainly improve our margins accordingly.
Okay.
And sorry if I missed it, but on the food cost line in the fourth quarter, can you share what amount of the inflation for both Pollo and Taco was.
I can and it's also laid out in the 10-K document that we filed tonight.
There is a couple of different categories that we've listed.
One has to do with the new products and how much those products are costing.
And then the other point of reference is what the commodity costs are.
So maybe I can just point you to those tables in our filings that we issued this evening.
Yes.
On the Taco side, R&M was heavier at Taco in the fourth quarter.
And then throughout the year, we spent a little bit more to ready our stores as part of the renewal plan.
So we did incur additional labor than our normalized levels.
And then from a cost of sales standpoint, I think we've now hit more of a normalized ability to execute our new recipes going into early 2018.
