Bryan Elliott – Restaurant Analyst, Raymond James
Paul Flanders – VP and CFO
Tim Taft – CEO, Fiesta Restaurant Group, Inc.
[No Q&A session for this event]
Carrols Restaurant Group, Inc. (TAST) 14th Annual ICR XChange Conference (Transcript) January 11, 2012 1:35 PM ET
Good afternoon. Bryan Elliott, I’m the Restaurant Analyst at Raymond James and I’m pleased to be able to introduce Carrols Restaurant Group, which is at a very interesting stage in its history; we’re getting ready to split the company into two pieces. A Burger King Franchise operation will be spun out and the Hispanic brands, which have been tweaked and modified and actually performing very, very well here in the last few quarters will be owned under the Fiesta Restaurant Group brand and that will trade as a separate equity in the stock market. So we’re very anxious to see that happen and I think it’s a very interesting situation.
Representing the company, CEO, recently named CEO of Fiesta Restaurant Group, Tim Taft and leading off the presentation, Chief Financial Officer Paul Flanders.
Thank you, Bryan. As Bryan said, Tim will follow me. I'm going to give a little overview here on the business, some of the financial information and Tim’s going to talk in more detail about Fiesta Restaurant Group.
We operate three brands in the quick serve and fast-casual segments. The company has about 551 restaurants. We’re located in 17 states. LTM revenue’s about $814 million.
Fiesta Restaurant Group, which consists of Pollo Tropical and Taco Cabana brands consists of about 250 company operated restaurants which we run in about six different states. We also have 35 franchised units, most of those are located outside the country, Puerto Rico is probably the biggest one of our franchisees.
Both these concepts are very well positioned for growth. Tim will touch on the average unit volumes that both these concepts generate, but they’ve got very strong unit economics which provides opportunities to grow as well as track of returns on invested capital.
We’re also the largest Burger King operator with some 300 restaurants located in 12 states. Historically, since we bought Pollo in 1998, we really haven’t invested particularly heavy in the Burger King brand. It’s more because we’ve used – looked at it mores as a cash cow to fund growth of the – our Hispanic brand concepts.
As I said, both these brands are very well positioned for growth, long-term development will continue in their core markets plan and we’ve begun to expand outside of those markets with some new units that Tim will touch on as well as we’ve focused or refocused in our international expansion through franchising within the last couple of years.
Obviously, we benefit from being a franchisee of the Burger King system, you know, given the size and scope of that brand.
I don’t have to tell anyone here, there’s obviously – we’ve obviously been through a pretty serious recession here in the last two years. I think the fact is, we came through this pretty well, all things considered. And I think we really credit the fact that we’ve got diversification in brands, commodities, the geographies with which we operate in enhance stability in what was a pretty challenging environment. And through that period, we’ve actually approved capital ratios and reduced our financial leverage.
As Bryan said, we’re in the process of us doing a spinoff of Fiesta. The intention is to separate those two businesses into two publically traded companies with the spinoff of Fiesta; we announced this early in 2011. It’s a pretty natural revolution for us, I think, because they’re really two different businesses. Burger King, obviously a more mature brand, Fiesta is more a growth oriented company and we believe that the spinoff will well serve the shareholders of both companies since we’ll position each of these companies to pursue their individual business plans and growth strategies.
In the case of Fiesta, that’s obviously new unit expansion. In the case of Burger King, I think we have the opportunity to expand through acquisition.
We’ve been working on this spinoff all year long, people keep asking when’s it going to be done. We were hoping to get it done by the end of 2011. Right now it looks like it’s going to be the first quarter. Basically, we’ve done the financings – the financing and the capital structure’s in place. We’re waiting for a tax ruling from the IRS on the spinoff. It’s just taking a lot longer than we anticipated, not necessarily because of any problems, but just it’s taking time to get through the process. We think we’ll get that pretty quickly. We’re in registration with the Fiesta shares so we’re already in the process of turning and responding to some of the SEC comments.
So I think – we’re hoping to get this done by middle of February. Our financials do go stale around that time, so if for some reason we get delayed a little bit, it could slip into March, but right now we’re hoping to get this done by February.
As I said, we’ve already done the financing and put the capital structure in place so that’s – we’re all set in that regard.
On the Fiesta side, we did a – sold a $200 million secured notes in a 144A placement and also with a – we have a $25 million drawn revolver. And on the Carrols LLC side, which is the Burger King operating subsidiary, we did a bank credit facility of about $85 million, $65 million of that’s in term loans and at the closing, the undrawn $25 million revolver.
In terms of where we are located, this, I think gives you some sense of the – the light-brown or orange colored states represent where our Burger Kings are located. You can see we’ve got a presence in the Northeast, mostly in New York State, the Upstate New York markets. We’re in markets like Cleveland, which is a large number of our Ohio restaurants and then we go as far down as the Carolinas today.
Taco Cabana is predominately located in Texas where 152 of their restaurants are located, and Pollo is based right out of Miami here, so we’ve got a lot of restaurants here in South Florida; there’s 85 in Florida. We’ve begun to expand north, as you can see, and then our first unit opened in the Atlanta market.
To the right there, this sort of summarized our new unit growth there over the last two years. We went public in 2006 and out of the gate, 2007, 2008, we were building about 20, and most of these, or almost all of these are Fiesta restaurants. We’re building about 20 units a year. And see, we’ve pulled that development back here in the last couple of years during the recession. We really used free cash flow in this timeframe to pay down debt.
We’re starting to accelerate that new unit growth and in 2012, we anticipate doing 12 to 15 units.
As I said, we’re Burger King’s largest franchisee. We operate about 300 or 4% of the U.S. and Canadian system. We obviously benefit from the brand and I’ve described the brand to you, I’m sure you’re familiar with it.
Our revenues are about $350 million on the Burger King side and our average unit volumes are pretty comparable to what the system-wide averages are, between $1.1 and $1.2 million. We’re obviously – to diversify from a geographical perspective as you just saw and given our scope and size, we’ve got pretty mature, sophisticated operating systems which cause us to have better margins than most franchisees, which will bode well as we embark on growing that brand.
Burger King has obviously been around a long time, the second largest hamburger restaurant chain. It’s obviously in a turnaround at this point. I would say early stages of the turnaround. Our comps, the Burger King system comps were negative, I think, nine quarters in a row, finally turned positive in the third quarter and the second half of the year really. So we’ve begun to see at least a stabilization in trends. And I know that 3G Capital, which acquired the brand in October, 2010 has worked hard in terms of product development, broadening the consumer appeal to help turnaround this brand.
As I said, I think we’re pretty well positioned after the spinoff to capitalize that number of the acquisition opportunities that should exist in the system and that’s really the strategy going foward on the Burger King side.
In terms of same store sale trends, we’ve got all three brands here on this slide as you can see going back to 2007. I saw the recessionary effects, obviously here in Florida. The earliest recession got to Texas for a short period of time, a little later in 2009. I think what’s interesting to note about this slide is our comps were all in – for Hispanic brands, Pollo for example, were only 1% negative through that timeframe, which I think speaks really to the high quality of these brands and the strong value proposition that they offer.
You can see that the more recent trends have continued to improve. Pollo is up about 7.5% in 2010. Through the nine months they’re up over 10.5%. Taco Cabana has also continued to improve, up 4% for the first nine months. And Burger King has been negative here for a while, as I said, and just recently comps have turned positive here in the last couple of quarters.
We’ll go through this whole slide, but through the nine months, the revenues were up about 3%. You can see operating margins expanded up slightly and that’s despite an increase in food costs. We’ve obviously been effected by commodity inflation as I’m sure everybody in this industry has been.
And then in terms of earnings, if we adjust out for some non-recurring items, there’s a couple repair charges in both years, we wrote off some costs on the refinancing earlier this year and we’ve obviously had some spinoff related expenses. So on an adjusted basis, earnings per share are up about $0.66 cents to date, up from $0.53 last year.
And lastly, as I said, we’ve reduced our debt and our leverage in this timeframe. We had, in September, we had about $276 million in debt and you can see our leverages come down this year despite the recession.
And with that, I’d be happy to turn it over to Tim.
Thank you, Paul. Good afternoon. Paul has walked you through many of the specifics of the three companies, the impending spinoff of Fiesta Restaurant Group as well as the separate financing capital structure that’s in place going forward. My goal, briefly, today, was to introduce myself to you and to begin a dialog over today and the next couple of days, and on a go-forward basis about Fiesta Restaurant Group and who it we are, where we’ve been, where we’re going, but most importantly, what we’re currently doing in order to move our company to achieve the kind of goals that we’ve set forward for ourselves.
Fiesta Restaurant Group, as Paul has mentioned, are two differentiated restaurant brands operating the quick casual restaurant segment, deliver fresh, high-quality experience food at a compelling value.
Paul mentioned that we have 249 corporate restaurants trailing 12 months of around just under $470 million, 35 restaurants, 35 franchise restaurants, five domestically, 30, you can see the various countries that we operate. We employ around 7,100 team members.
Some of the investment highlights that, to me, are exciting are, number one is a strong management team that currently exists within the two brands, and we’ll speak more about those gentlemen here in a moment. Industry-leading average unit volumes; as I mentioned, distinctive food and taste profiles, and I know everybody up here over the last couple of days has said exactly the same thing, but we believe that we’re well positioned to benefit long term because of our favorable demographic and consumer trends that have been showing themselves over the last five years. And as Paul mentioned, really superior unit economics that are going to support new unit growth as we move forward.
We talked about how you’d average in the volume. This was a snapshot of a lot of some of our competitors inside the QSR and Fast Casual Restaurant Group. Ours are actual numbers. The rest are brought to us by Tetchromic. You can see, Pollo Tropical, 2.3 million average unit volume and Taco Cabana of 1.7.
The chart on the right is another kind of a follow-up chart to what Paul just showed a moment ago that shows beginning in Q1 2010 through Q3 2011, the steady and consistent growth quarter over quarter of these two restaurant companies. It was asked, a question is begged, well, what happened in Q4. In our earnings call, Paul had mentioned that when it was asked how October went, our response, I believe was that the momentum had not yet subsided.
Pollo Tropical is – a show of hands, anybody in here been to Pollo Tropical? Okay, there’s not excuse not to go. As Paul mentioned, there’s probably 55 in the DMA here in South Texas. Sorry? What did I say? Sorry. You can take the boy out of Texas. Thank you, Rafe. South Florida. And I was going to volunteer until I was corrected, thankfully, that I was going to take you to dinner later one. That would have been a heck of a drive back to Texas.
We offer convenient service drive through, but if you go to a Pollo Tropical, what you would experience are fresh, hand-cut salsas, authentic Caribbean tastes, proteins, chicken, obviously, freshly marinated, citrus marinade, wings, fajitas, grilled ribs, shrimp and something that we’ve really been moving forward with and seeing some success on are the – not only the attractive value proposition, but a lot of the off-premise and a lot of opportunities for us to attack the portability opportunity that exists in the restaurant industry.
If I may, people asked earlier, what’s the breakdown between lunch and dinner and it’s roughly 45, 55% and then in the counter versus drive through, 45% and then 55% through at the counter, dine-in.
Taco Cabana, based in Texas, San Antonio is 33 years old, high, fresh quality TexMex flavors of Mexico made fresh by hand, sizzling fajitas, quesadillas, burritos, tacos; typical TexMex but with an authentic genuine Mexican flavor. Strong dinner day part, our restaurants like Pollo Tropical are open 24 hours a day with an average check of about $8.05.
You can see, because we’re 24 hours, the various day parts and how they are all significant parts of the our sales mix as well as drive through to counter is about 50/50.
I can speak for longer than I have about the various initiatives to elevate our brands. Simply stated, what we’re doing with these two brands is making sure that we started off with a high-quality food, that has been our niche from the very beginning. We’re making sure that we align our operations to that high-quality food, we’re making sure that we’re updating our restaurants in a more contemporary and relevant fashion for our consumers and we want to make sure that when we’re building these brand new designed restaurants in high-profile locations, that those two strategies marry one another.
I mentioned earlier about the experienced management team. I’ve been in the restaurant business and hospitality industry for 35-plus years. The thing that’s great about these two companies, Jim Tunnessen here at Pollo has been with Carrols for now 40 years and he’s been in charge of Pollo Tropical since 2003. Mike Biviano at Taco Cabana in San Antonio has been with our company for 38 years and running the Taco Cabana business since 2002.
As I mentioned, we have a very good, a solid infrastructure in each of the two corporate offices supporting operations with brand, long tenure brand people, purchasing supply chain management folks, real estate and the transitional services for me is the icing on the cake for us. And that is, that we get to move forward with the spinoff with a safety net that Carrols will provide us on an ongoing basis until such time as we can unwind ourselves completely and in a methodical way from Carrols so we can be standalone on our own once and for all.
Our long-term business strategy, everybody else has said the same thing, grow, grow , grow. That’s our strategy. Same store restaurant sales, you can see, you can read for yourself, new products, certainly, that’s going to be a part of the mix with both brands but it’s going to be very important for us to look at non-traditional outside typical traditional four-wall lay of generating business. We have two brand new CMOs, well, brand new, they’ve been with the brands now for two years. These guys are very big in developing our social media from what was non-existent to looking at different ways to input off-premise, again, not purchases for off-premise consumption, looking at home meal replacements, looking at ways to speed ordering, getting those into the physical plants, have them ready for either to-go or to curbside delivery.
Strategy unit development, as Paul said, we’ve got the strong economics offer us the ability to grow our brands on a go-forward basis.
What we plan on doing is growing in not only our existing markets and filling those out, but branching out and building outside of our existing marketing footprint and improving margins. One of the things that everybody in each CFO and CEOs talk about is the struggles that all of us are having with commodities. One of our first hires was a supply chain management expert, Joe Brink, who I’ve worked with for a number of years and Joe has already made a sizable dent in what was going to be our expected increase costs for next year and as well as just leveraging on our existing sales as they continue to increase. That coupled with the fact that we’re remodeling our restaurants, we’re almost – we’ve completed Dallas, we’ll be finished by the end of first quarter in Austin and then we move to, in the Taco restaurants, to Houston and to Dallas. Pollo, by the way, had been remodeled and finished about a year and a half ago.
Our next – that’s it for Fiesta. Our next breakout is going to be at 3:15. Thank you for the opportunity. I look forward to furthering the dialog later on. Thanks, Rafe.
[No Q&A session for this event]
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