El Pollo Loco Holdings, Inc.

Welcome to the El Pollo Loco Fourth Quarter 2020 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 11, 2021. On the call today, we have Bernard Okoka, President and Chief Executive Officer of El Pollo Loco, and Larry Roberts, Chief Financial Officer. And now, I'd like to turn the conference over to Larry Roberts.

Thank you, Operator, and good afternoon. By now, everyone should have access to our fourth quarter 2020 earnings release. If not, it can be found at www.alpoyoloco.com in the investor relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements, including statements related to the impact of the COVID-19 pandemic on our business and strategic actions we are taking in response, as well as our marketing initiatives cash flow expectations, capital expenditure plans, and plans for new store openings, among others. These forward-looking statements are not a guarantee of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions. We expect to file our 10-K for 2020 tomorrow and would encourage you to review that document at your earliest convenience. During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliation to comparable GAAP measures are available in our earnings release. Before I turn the call over to President and Chief Executive Officer Bernard Acoka, I'd like to note that Bernard and I are in different locations today. Please bear with us if you experience any slight delays or minor audio quality issues. Bernard, please go ahead.

Thank you, Larry. Good afternoon, everyone, and thank you for joining us today. I hope that you and your families are staying safe and healthy. As previously communicated in our January 12th press release, system comparable restaurant sales for the fourth quarter declined by 0.2%. Our sales performance combined with 2.9 million of COVID-19 related expenses resulted in pro forma fourth quarter earnings per share of 16 cents. Our fourth quarter performance continued to be a tale of two cities. Our outer market sales performance, restaurants outside of Los Angeles, remained strong during the quarter, while Los Angeles and the surrounding areas were heavily impacted by the ongoing increased spread of COVID-19, particularly during November and December. This resulted in staffing shortages, forcing us to temporarily close and reduce hours of operations in a number of our restaurants. In addition, we believe that high unemployment in the L.A. area, which has been well above the national average, exacerbated the negative impact during the quarter. All in all, we believe our L.A. sales trends are largely macro-driven, and as a result, temporary, as demonstrated by the system-wide L.A. comparable sales decline of negative 2.1%, compared to the comparable sales increase of 3.3% in our outer markets during the fourth quarter. As we have entered 2021, we have finally begun seeing COVID-19 cases in California decelerate beginning in mid-January, allowing the majority of our restaurants in the state to open with regular hours and all modes of service with the exception of dining rooms. While we have reopened patios throughout California, dining rooms remain closed at this time in accordance with state regulations. However, a number of counties have begun to ease restrictions, and it is expected that Los Angeles and Orange County will allow dining rooms to reopen to 25% capacity next week. Given current COVID-19 case levels, we are increasingly optimistic that restrictions will continue to be relaxed, and we will be able to reopen our dining rooms in California in the near future. In the meantime, sales trends in the first quarter to date continue to reflect trends experienced in the fourth quarter of 2020. System comparable restaurant sales in Los Angeles continue to be negative, while restaurants in our outer markets, particularly in Phoenix, Salt Lake City, and Dallas, are performing well. With COVID-19 cases recently trending downward in California, we expect sales to improve in Los Angeles, as businesses reopen and economic activity picks up. We are optimistic that the worst is behind us and we can now focus more of our efforts on the future. Despite the challenges of 2020, our team was largely able to complete our three-year transformation agenda that was guided by four key strategies. Establish a people-first culture, clearly differentiate the brand, simplify operations, which then creates the conditions for long-term business expansion. Accomplishing these during a pandemic is truly a testament to the resilience and dedication of our support center employees, restaurant teams, and franchise partners, and I am proud to be able to work alongside each and every one of them. With that, I'm excited to speak with you today about our next phase of growth, which we are internally calling our three-year acceleration agenda. In a nutshell, our acceleration agenda is all about scaling for rapid and successful growth over the next three years by leveraging the operations and brand work we've completed over the past three years and implementing and expanding our beautiful new LA Mex restaurant design, which we believe will deliver improved unit economics versus what we have today. Our transformation agenda established the foundation and fundamentals required for successful growth. And now the acceleration agenda establishes a three-year strategic roadmap for El Pollo Loco to execute our growth plans and grow new units in DMAs where we currently do not have a presence. There are four strategies that underpin our acceleration agenda. One, expand the brand, grow in new geographies with franchisees. Two, support the brand. Build the right organization for asset-like growth. Three, evolve the brand. Digitize the business to compete. And four, focus the brand. Exaggerate what makes us so special and different. We will expand the brand by growing our footprint in new geographies. This all starts with our partnership with existing franchisees and our renewed efforts to attract and recruit new franchisees. Through the work we've done in the past several years, we believe we have strengthened our foundation, streamlined our operations, and evolved our brand to the point that we can jumpstart our new unit development. We will initially focus our expansion on contiguously penetrating western and southwestern DMAs before eventually moving east. Our efforts to recruit new franchisees, which we began in January, will go hand in hand with the rollout of our new LAMEX design which will modernize and reset our brand through remodels and new builds. For 2021, we are planning to complete 55 remodels with a longer-term goal to complete over 300 remodels over the next four to five years. In terms of new builds, we are targeting six new restaurants with the LAMEX design in 2021. Our second strategy, support the brand, translates into building the right organization for asset-like growth. As we transition to a greater focus on franchise growth, we will reallocate resources to provide more support to our franchisees. We will focus not just on compliance, but more on building the operational capabilities of our franchise partners, including the development of franchise-specific leadership training programs. Our third strategy is to evolve the brand through the use of technology. This includes growing our digital channels, which encompasses our loyalty program, local rewards. As I've said in the past, our loyalty program is the centerpiece of our go-to-market strategy for the long term. We're very pleased with the progress we made in 2020, growing digital sales from 5% to 10% of total sales and growing the number of loyalty members nearly 40% to the current total of 2.3 million. We were also very pleased that Newsweek Magazine recently rated local rewards among the top 10 of 241 loyalty programs in the United States across 43 categories. Our focus on digital will continue in 2021 as we recently engaged a new digital agency named Organic, which is a subsidiary of Omnicom. It is important to note that digital now comprises 40% of our total media spend which is indicative of the progress we have made on this front. We will work with Organic and our other partners to continue to enhance and accelerate our digital programs with the goal being to increase digital sales to 30% of our total sales over the next three years. Another aspect of evolving the brand is leveraging our technology and processes to offer more frictionless convenience and further improve our speed of service. Last September, we implemented GPS-enabled curbside pickup, which is now available at over 97% of our system-wide restaurants. This service enables our guests to conveniently place their order through our app, park in one of our dedicated curbside parking spaces, and have their orders delivered to their car with the restaurant being notified of their arrival through the GPS functionality. We are very pleased with the execution at our restaurants, with customer wait times averaging about 90 seconds at company-owned restaurants, which is significantly faster than competitors offering the service. While still representing a small mix of our total sales, it is steadily growing, and we do expect curbside to continue to gain popularity as more customers download our app and take advantage of the convenience it offers. With regards to speed of service, we continue to focus on our drive-thru channel. Drive-thru has become an essential sales channel because of COVID-19, and we believe we have a massive opportunity to enhance the customer experience with improvements in both speed and accuracy. During the fourth quarter of 2020, we successfully implemented a number of measures to improve speed of service at our drive-thru windows. These included more efficient labor deployment, readiness guidelines, prepacking side items and salsa, and better positioning of equipment. We are now testing order-taking tablets that enable team members to take orders and payment from customers while they are in the drive-through queue. We are very excited about this test, and our goal is to significantly increase drive-through capacity by cutting in half the time it takes for customers to place orders and pick them up at the drive-through window. This brings us to our last strategy, Focus the Brand, which is designed to exaggerate what makes El Pollo Loco special and different. This will be accomplished through our LA Mex positioning, which combines the traditions of Mexico with the healthier lifestyles and edgy culinary innovation of LA. While we will continue to sell the food customers have come to love at El Pollo Loco, we will also look to broaden our reach by expanding our portfolio of Better For You products. We believe expanding our product portfolio in this way, combined with our commitment to digitize our business, enables us to cast the widest net and attract new customers to the El Pollo Loco franchise. Over time, the ultimate goal is to establish and popularize LA Mex Cuisine and make it as well known as Tex Mex Cuisine. In addition to firmly establishing LA Mex Cuisine, we will also seek to differentiate ourselves by forging an emotional connection with our customers or what we call moments of connection via the service we provide in our restaurants and online, primarily via our loyalty program. Moments of connection are about creating memorable experiences that delight our customers by acknowledging who they are as individuals and what they need from us as a brand. To that end, we will continue to train our general managers to be powerful coaches whose main responsibility is to build restaurant teams that feel not just empowered to take care of our customers, but to build relationships with them over time. Similarly, we will look to humanize our digital experiences by surprising and delighting our customers with events and offers that demonstrate that we know them better than any other brand. In closing, I'd like to thank each and every one of our team members and franchise partners for their tremendous job operating in this highly uncertain environment. We've successfully completed our transformation agenda despite the pandemic, and we are well positioned to accomplish our acceleration agenda through the strategies I've just laid out. Most importantly, as we continue to navigate the COVID-19 pandemic, as a people-first company, we will continue to take all necessary measures to ensure the health, safety, and well-being of our employees, franchisees, and customers. We are very optimistic about the future of our business and are confident that our go-forward strategies, combined with everything we've done to date, will drive sales and profit growth when we return to a more normalized operating environment. Now, I'd like to turn the call over to Larry to review our fourth quarter results in more detail.