El Pollo Loco Holdings, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Local First Quarter 2022 Earnings Conference Call. At this time, our participants have been placed in a listen-only mode, and lines will be open for your questions following the presentation. Please note that this conference is being recorded today, May 4, 2022. And now, I would like to turn the conference over to Larry Roberts, Chief Executive Officer and Trump Chief Financial Officer.

Please proceed. Thank you, Operator, and good afternoon. By now, everyone should have access to our first quarter 2022 earnings release. If not, it can be found at www.opoyoloco.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 guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risk and uncertainties that could cause actual results to differ materially from what we currently expect. We refer you to our recent SEC filings, including our Form 10-K, for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-Q for the first quarter of 2022 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 reconciliations to comparable GAAP measures are available in our earnings release. With that, I'd like to touch on our first quarter results and the progress we are making on our strategic initiatives. While the COVID resurgence heavily impacted restaurant performance in January and early February, I'm pleased to say that the Omicron impact largely dissipated and became negligible in the second half of the quarter. System-wide comparable restaurant sales increased 7.8% in the first quarter, including a 2.3% increase at company-owned restaurants and an 11.5% increase at franchise locations. From an earnings standpoint, COVID-related costs negatively impacted store-level income during the first quarter results by approximately $2.3 million, while commodity and labor inflation also continued to persist, which I will speak to in a moment. However, despite the challenges, our teams managed the external headwinds well, and we earned pro forma diluted earnings per share of 7 cents. More importantly, The launch of our shredded beef birria limited-time offer on March 17th significantly accelerated our top-line momentum, which has continued into the second quarter, with system-wide comparable restaurant sales growth of 12.4% through April 27th. This is our first promotion utilizing several new marketing strategies, so we are very excited by the positive results we are seeing and our prospects for the balance of the year. To further strengthen our business and accelerate growth in 2022 and beyond, we've been working on executing the four pillars of our strategic priorities during the quarter, which are culture, brand differentiation and awareness, customer service, and accelerated development. For today's call, I'd like to update you on two of the pillars. The first pillar I would like to discuss is brand differentiation and awareness. What clearly distinguishes El Pollo Loco from other restaurant concepts is our food, and this was clearly demonstrated by the shredded beef beer relaunch. A couple of years ago, our team identified a popular California food trend in which shredded meat housed in tacos and burritos was dipped into a Mexican consomme and eaten similar to beef au jus. As we've said in the past, Our food combines our Mexican roots with the culinary culture of Los Angeles, and our beef berry offering embodies this characteristic perfectly. Our take on the product consists of marinated shredded beef served in tacos, quesadillas, and burritos, and comes with a unique Mexican consomme dipping sauce, all served in a unique box with chips and salsa. The timing of the offer could not have been better for us as it coincided with the completion of new marketing strategies that have combined to make shredded beef birria one of, if not the most, successful new product launches we have ever implemented. Our marketing campaign refocused on what differentiates El Pollo Loco, which is our freshly prepared food, and significantly increased our emphasis on social media. Not only did we increase our marketing spend on social media, We created new, unique content across the major social media platforms, enabling us to send targeted messages to various user groups, particularly to our younger consumers. As an example, we created a dip and drip TikTok campaign to promote our Beef Theory offerings using multiple influencers. The campaign has resulted in over 21 million social media impressions across and thousands of pieces of organic user-generated content created by customers online. We recently crossed 125,000 followers on TikTok, and the El Pollo Loco hashtag now has more than 120 million views on the platform. The shredded beef beer product and our messaging clearly resonated with our customers as we experienced a strong acceleration in our beer sales even before our TV marketing went live. Shredded Beef Birria product mix reached 12.5%, which helped drive new company, franchise, and system sales records three weeks in a row during March and April. To build upon this excitement, we promoted the Birria Burrito, a national burrito day, which resulted in a record sales day for the system. Sales mix for Beef Birria remained above 10% for six straight weeks, and as a result of this success, we are testing the use of the shredded beef product for future LTOs to further diversify our offerings while still staying true to our LAMEX positioning. Next up on the marketing calendar are tostadas, which was our strongest limited-time offer promotion last year. Tostadas are a customer favorite, and we believe they will be successful once again, especially when combined with our new marketing tactics. Looking to the longer term, we are furthering our research and customer segmentation efforts. We believe that COVID has changed the way consumers access our brand, and we have active research underway in overall customer segmentation, value, and the family meal group occasion. In addition, we continue to invest in our loyalty, delivery, and digital marketing platforms to improve the user experience and to more finely segment consumer data in order to increase effectiveness of our promotions. These platforms continue to grow with e-commerce now contributing over 12% of our sales mix and delivery approximately 8%. Needless to say, we are very excited by our marketing initiatives and believe that they will continue generating strong sales results. That brings us to our next pillar, customer service, which because of employment issues, has been a challenge across certain segments of our company-operated restaurants. While things have improved slightly, hiring and retaining employees has been challenging in a number of areas, especially Las Vegas and east of Los Angeles, where there's heavy competition from casinos and warehouse facilities. In addition to our cultural initiatives launched last year, we are taking additional actions to recruit, train, and retain team members. These include adding both external and internal recruiting resources, further wage adjustments, retention bonuses, revamped training programs, and other incentives. While these may result in incremental cost to our business, we are confident that they will be more than offset by increased sales from improved customer service. While we have many company-operated restaurants executing at a high level, we are very focused on improving our operations. To improve execution, we have rolled out a new operation scorecard and tools to enable our area leaders and general managers to better manage their restaurants and remedy issues as they arise. We've also made drive-through execution the number one priority for all our company-operated restaurants. With approximately 55% of our sales coming via the drive-through, we believe better execution has the potential to significantly improve sales at company-operated restaurants. Longer term, We continue to work on initiatives to simplify our operations, including additional product reductions, revamped back-at-house processes, new equipment, and a revised menu board. As the gap between franchise and company sales performance demonstrates, many company-operated restaurants have a significant sales opportunity by improving their operations, especially at the drive-thru. As evidenced by our system sales, El Pollo Loco is resonating with consumers. I'm confident that our company operations will significantly improve, which will just further strengthen our brand. In summary, we believe the strategic initiatives we've put in place are gaining traction and positioning the El Pollo Local brand to capture the opportunities ahead. Most importantly, I'd like to thank all of our team members and franchise partners for their passion, commitment, and dedication in making this brand and this family truly special. With that, let me briefly review our first quarter financial results in greater detail. The first quarter ended March 30, 2022. Total revenue increased 2.2% to $110.1 million compared to $107.7 million in the first quarter of 2022. Company-operated restaurant revenue increased decreased slightly to $94 million from $94.2 million in the same period last year. The decrease in company-operated restaurant sales was primarily due to a $2.6 million decrease due to the sale of eight company-owned restaurants to a franchisee during 2021 and $0.5 million from restaurants closed during the past year. The decrease was partially offset by a 2.3% increase in company-operated comparable restaurant sales and $1.1 million in non-comparable restaurant sales, which included restaurants temporarily closed due to the pandemic during last year's first quarter. The increase in company-operated comparable restaurant sales was comprised of a 6% increase in average check and a 3.5% decrease in transactions. During the quarter, our effective price increase versus 2021 was 8.2%. As I mentioned earlier, our momentum continued into the second quarter, and through April 27th, second quarter system-wide comparable restaurant sales increased 12.4%, consisting of a 6.5% increase at company-owned restaurants and a 16.4% increase at franchise restaurants. Franchise revenue was $9.3 million during the first quarter compared to $7.6 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 11.5% as well as the opening of four new franchise restaurants during or subsequent to the first quarter of 2021 and revenue generated from eight company-owned restaurants sold to an existing franchisee during 2021. This was partially offset by the closure of two franchise restaurants during the same period. Turning to expenses, food and paper costs as a percentage of company restaurant sales increased 360 basis points year-over-year to 29.5% due to increased commodity costs and investments in new packaging, partially offset by higher menu prices. Commodity inflation during the first quarter was approximately 18%. We have yet to see any easing in commodity inflation and currently expect it to be approximately 21% in the second quarter and 18% for the full year. Labor and related expenses as a percentage of company restaurant sales increased 210 basis points year-over-year to 34.8% due to higher wage inflation, overtime costs, and other labor-related costs. Based on the continued labor pressure that we're experiencing, we're expecting wage inflation of 7% to 8% for the full year. As I noted, during the first quarter, we incurred approximately $2.3 million of COVID-related expenses, including leave of absence and overtime pay. Occupancy and other operating expenses as a percentage of company restaurant sales increased 10 basis points to 25.4% due to higher marketplace delivery fees and utility costs, partially offset by lower operating supplies costs. Our restaurant contribution margin for the quarter was 10.3%. Margins were especially challenged in January, but recovered during the quarter to 14.3% in March. As I noted previously, effective pricing during the first quarter was 8.2% versus 2021. Due to continued commodity inflation, pricing in the second quarter will be approximately 9% and roughly the same for the full year. Our planned pricing may be adjusted based on economic conditions and consumer sentiment. In addition to our pricing actions, we are currently testing cost reduction initiatives to further mitigate the impact of labor and commodity inflation on our margins. General administrative expenses decreased to $10 million from $10.5 million in a year-ago period primarily due to a decrease in management bonus expense. As a percent of total revenue, G&A decreased approximately 70 basis points to 9%. We recorded a provision for income taxes of $0.9 million in the first quarter of 2022 for an effective tax rate of 30%. This compares to a provision for income taxes of $1.6 million and an effective tax rate of 28.7% in the prior year first quarter. We reported GAAP net income of $2.1 million, or $0.06 per diluted share, in the first quarter compared to GAAP net income of $4 million, or $0.11 per diluted share, in the prior year period. Pro forma net income for the quarter was $2.6 million, or $0.07 per diluted share, compared to pro forma net income of $4.7 million, or 13 cents, per diluted share in the first quarter of last year. For a reconciliation of pro forma net income and earnings per share to the comparable gap measures, please refer to our earnings release. Regarding development, during the first quarter, one company restaurant was opened in Las Vegas and two franchise restaurants were opened in California. Turning to liquidity, as of March 30, 2022, we had $40 million of debt outstanding and $25.5 million in cash and cash equivalents. Lastly, due to the uncertainty surrounding the COVID-19 pandemic and current economic conditions, we won't be providing a full financial outlook for the year ending December 28, 2022. However, we are providing the following limited guidance for fiscal 2022. The opening of three to six company-owned restaurants in 6 to 10 franchise restaurants, remodeling of 10 to 15 company-operated restaurants in 20 to 30 franchise restaurants, capital spend of $20 to $25 million, and a pro forma income tax rate of 26.5%. This concludes our prepared remarks. I'd like to thank you again for joining us on the call today, and I'm now happy to answer any questions you may have.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment while we post our first question. Our first question comes from Jake Barlett with Truist Securities. Please proceed.