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spk00: Hey, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco third quarter 2022 earnings conference call. At this time, all participants have been placed in the listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, November 3rd, 2022. And now I'd like to turn the conference over to Ira Fields, the company's chief financial officer.
spk04: Thank you, Operator, and good afternoon. By now, everyone should have access to our third quarter 2022 earnings release. If not, it can be found at www.elpoyoloco.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 COVID-19 pandemic and macro environment on the business. as well as our marketing and new product initiatives, cash flow expectations, capital expenditure plans, remodel plans for new store openings, and expected income tax rate, 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 risks 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 third 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 included 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. Now, I'd like to turn it over to Larry Roberts, Chief Executive Officer.
spk02: Thanks, Ira. And good afternoon, everyone. Before we get into the quarter, let me start by welcoming our new Chief Operating Officer, Maria Homsworth to the Apoyo Local family. As you may have seen from our press release, Maria joins us from Duncan, where she was Regional Vice President of Operations. Prior to Duncan, Maria spent over 20 years with Jack in the Box in numerous operating roles, including her most recent position as Vice President, Strategic Initiatives and Operations Services. With the recent addition of Ira Fields as CFO, and now Maria, I believe we have an outstanding leadership team that will provide the necessary skills and expertise to drive the continued expansion of El Pollo Loco. I'd also like to highlight that over the last 12 months, our system-wide sales exceeded $1 billion. This is a great accomplishment for El Pollo Loco and highlights the affinity people have for our brand and the huge growth opportunities we have ahead of us. Finally, As many of you have probably seen, on October 11th, we announced a declaration of a $1.50 special dividend and authorization to repurchase up to $20 million of our common stock. These programs underscore the strength of our balance sheet, and more importantly, the confidence we have in our business going forward. Turning to the third quarter, We're pleased with our continued top line momentum with system-wide comparable restaurant sales growth of 3.8%, including a 3.4% increase at company-owned restaurants and a 4.1% increase at franchise locations. Trends we saw towards the end of the second quarter continued into the third quarter, including the healthy growth of our lunch business year over year. I'm also pleased to add that our fourth quarter has started Similarly to the third, with system-wide same-store sales through October 26th increasing approximately 3.5%, including a 5.4% increase at company-owned restaurants and a 2.2% increase at franchise locations. Store-level margins during the third quarter continued to be pressured by wage, commodity, and utilities inflation. However, staffing levels improved throughout the quarter, and our company-operated restaurant teams made good progress managing their businesses resulting in pro forma earnings per share of 14 cents. We were very pleased with our Tostada promotion, which ran until mid-August. During several weeks of the promotion, Tostadas achieved an 18% menu mix, which was 400 base points higher than their previous peak, and they continue to make that over 14%, which is 200 base points higher than their pre-promotion mix. During the balance of the third quarter, we focused on value, marketing a family feast at $24 and a revised fire grill combo meals starting at $5. We believe these value offers are critical to attracting more value-conscious consumers. Looking ahead to November and the balance of year, we are very excited about our next promotion, overstuffed quesadillas, which includes a beef option that builds on the success of beef birria earlier this year. We believe this promotion will be highly appealing to younger consumers and a great fit for enhanced efforts in digital and social media with a particular focus on the use of TikTok. We'll also continue to promote our $24 family feast, which delivers great value for family and group gatherings. Looking ahead to next year, our 2023 marketing calendar will expand to six promotion modules from five this year. As a result of investments made in our product development process, These promotions will include the introduction of several new products that we believe will resonate with both new and existing consumers. More excitingly, we believe that several of these products have the potential to be permanent menu items that will broaden our appeal and drive increased frequency among current customers. Shifting to restaurant operations, I couldn't be more pleased with the progress we have made in our company operations. As I have previously noted, Our franchise partners have operated at very high levels throughout the last three years. After making this a key priority, service at our company-operated restaurants has dramatically improved over the past six months. Virtually all of our company-operated restaurants now operate full hours across all channels daily. While overtime staffing is still required in a number of locations, we expect to continue its downward trend given the applicant flow and our intensive focus on hiring and training. In addition to improved staffing levels, our focus on drive-through times, last visit excellence scores, and leadership training for area leaders is delivering outstanding results in company-operated restaurants. Drive-through times have continued to improve and are now the fastest they have been in almost two years. In addition to the hard work and dedication of our team members, our last visit excellence scores have improved by over 25 percentage points since March to the highest level they have ever been. More importantly, as our drive-through times and last visit excellence scores have improved, so have all our other key operating metrics, including our value scores, social media ratings, and customer complaints. I couldn't be prouder of our company-operated restaurant teams and restaurant leaders who have worked incredibly hard to improve their operations, as well as our franchise operators who have consistently delivered exceptional service through very challenging times. In conjunction with the improvements we made in our four-wall operations, we continued our efforts to simplify our restaurant operations during the quarter and are now very close to implementing several significant initiatives geared towards reducing operational complexity and improving product quality. These include the use of soap tanks to clean broilers and grill filters, revised onboarding processes that will cut the number of hours spent hiring and training new employees, and new salsa-making equipment that will further improve product quality and reduce preparation and cleaning time. We expect these to roll out to our system during the fourth quarter, enabling our team members to execute their daily duties more consistently and efficiently, thereby delivering an enhanced test experience. Turning to development, we opened two new company-owned and four new franchise restaurants during the quarter. In addition, we remodeled four company and two franchise restaurants. We are pleased to have recently finalized a five-unit development agreement for Chico Redding, California, and Southern Oregon that we spoke to last quarter. To date, we have signed four development agreements for a total of 17 restaurants, and we continue to have discussions with those existing and new franchisees to develop El Pollo Loco units in new markets. Our investments in franchise recruiting are clearly paying off as we continue to see a high level of interest from prospective partners, which gives us confidence in our expansion strategy and expect new unit growth to increase to 14 to 20 new restaurants in 2023. In closing, as we look ahead, the work we were doing this last year has us excited about 2023. First, our company-operated restaurant operations have improved significantly from where they were last year. With continued focus, they will improve even further, and the entire El Pollo Loco system will be providing service at very high levels as we enter the new year. Second, Utilizing our improved development process, we have a strong and exciting marketing calendar that includes new products, several of which could be permanent menu items capable of driving incremental traffic. Third, we continue to invest in and enhance our loyalty, digital and social media platforms. We will also be revamping our mobile app and website, which will enable the relaunch of our loyalty program with a brand new customer experience towards the end of the first quarter of 2023. And lastly, Our franchisee recruiting program continues to gain traction, and we look forward to bringing new partners into the Apoyo Loco family and introducing our great food to more cities across the United States. While it's very difficult to predict the future economic environment, we remain confident that the work we are doing this year is setting Apoyo Loco up for future growth and success. I'd like to thank our team members and franchise partners for the work they do every day to make Apoyo Loco an exceptional brand. With that, let me turn the call over to Ira for more detailed discussion of our third quarter financial results.
spk04: Thank you, Larry, and good afternoon, everyone. For the third quarter ended September 28, 2022. Total revenue increased 3.6% to $119.9 million compared to $115.7 million in the third quarter of 2021. Company-operated restaurant revenue increased increased 3.2% to 103.2 million from 100 million in the same period last year. The increase in company-operated restaurant sales was primarily driven by a 3.4% increase in company-operated comparable restaurant sales. The increase in company-operated comparable restaurant sales was comprised of a 7.5% increase in average check size partially offset by a 4.1% decrease in transactions. During the third quarter, our effective price increase versus 2021 was a little over 10%. Based on current economic conditions and consumer sentiment, and including a additional 2.5% price increase in November, we continue to expect approximately 10% pricing for the full year. Looking ahead, Fourth quarter to date through October 26th, system-wide comparable restaurant sales increased 3.5%, consisting of a 5.4% increase at company-owned restaurants and a 2.2% increase at franchise restaurants. For the same time period, our two-year system-wide comparable restaurant sales were up 11.1%, further demonstrating the positive momentum we are experiencing today. Franchise revenue was $9.5 million during the third quarter, compared to $8.9 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 4.1% as well as the opening of nine new franchise restaurants opened during or subsequent to the third quarter of 2021 and revenue generated from eight company-owned restaurants sold to an existing franchisee during the third quarter of 2021. This was partially upset by the closure of two franchise restaurants during or subsequent to the third quarter of 2021. Turning to expenses, food and paper costs as a percentage of company restaurant sales increased 250 basis points year over year to 29.2% due to increased commodity costs, partially offset by higher menu prices. Commodity inflation during the third quarter was approximately 23%. Although still elevated, we expect commodity inflation to ease to 15% to 16% in the fourth quarter. We anticipate full-year 2022 inflation to be approximately 20%. Labor and related expenses as a percentage of company restaurant sales increased 450 basis points year-over-year to 3%. 32.3%. In the third quarter of 2021, under the CARES Act, the company recognized a 3.2 million employee retention credit, which drove 320 of the 450 year-over-year basis point increase. The remainder of their increase was due to higher wage inflation, overtime costs, and other labor-related costs partially offset by lower workers' compensation expense. We continue to expect wage inflation of about 8% for the full year. During the third quarter, we incurred approximately $440,000 of COVID-related expenses. Occupancy and other operating expenses as a percentage of company restaurant sales increased 100 basis points to 26.1% due to higher utility costs, repairs and maintenance expense, and marketplace delivery fees. Our restaurant contribution margin for the quarter was 12.4% compared to 20.4% in the prior year. We expect Q4 restaurant margins to rebound somewhat from Q3 but still be below prior year levels as a result of the high commodity and wage inflation. As we look into 2023, we believe commodity inflation will be between 3 and 5% and wage inflation will be between 4 and 6%. General and administrative expenses increased to $9.9 million from 9.4 million, an increase of 0.5 million or 5.3%. As a percentage of total revenues, G&A increased approximately 10 basis points to 8.2% of total revenue. We recorded a provision for income taxes of 1.8 million in the third quarter of 2022 for an effective tax rate of 26.2%. This compares to a provision for income taxes of $3.7 million, an effective tax rate of 26.4% in the prior year third quarter. We reported gap net income of $5 million or $0.14 per diluted share in the third quarter compared to gap net income of $10.2 million or $0.28 per diluted share in the prior year period. Performa net income for the quarter was $5 million or $0.14 per diluted share compared to performant and income of $10 million or $0.27 per diluted share in the third quarter of last year. For a reconciliation of performant and income and earnings per share to the comparable gap figures, please refer to our earnings release. Turning to liquidity. As of September 28, 2022, we had $20 million of debt outstanding and $19.3 million in cash and cash equivalents. Subsequent to the end of the third quarter on October 11th, our Board of Directors declared a special dividend of $1.50 per share payable on November 9th to shareholders of record as of the close of business on October 24th. The payment of the dividend will be funded by a combination of a drawdown on our revolver combined with cash on hand. On November 3rd, we borrowed an additional 46 million to fund the special dividend. Outstanding borrowings as of November 3rd, 2022 were 66 million with cash on hand expected to be approximately 10 million after the payment of the special dividend. In addition, our board of directors approved a new share repurchase program with authorization to purchase up to 20 million of dollars of shares terminating on March 28, 2024. 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 four company-owned restaurants, and seven to nine franchise restaurants. A remodeling of six company operated restaurants and 20 to 25 franchise restaurants. Capital spending of 19 to 22 million and a pro forma income tax rate of 26.5%. This concludes our prepared remarks. We'd like to thank you again for joining us on the call today and we are happy to answer any questions that you may have Operator, please open the line for questions.
spk00: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 keys. One moment, please, while we pull for your questions. Our first question comes from the line of Jake Bartlett with Truist Securities. Please proceed with your question.
spk03: Hey, guys. It's actually Jack on for Jake. Thanks for taking the question. First, I just wanted to ask about restaurant-level margins and your commodity guidance of 3% to 5% for 23. What's your level of visibility for that 3% to 5% guidance? How much do you have locked now? The chicken price is down in the 40% range right now. So can you remind us how much you had locked in 2022? Just so as we're seeing the spot prices, if those are actually tracking what you might be seeing on your commodity inflation or deflation.
spk04: Yeah. Hey, Jake, this is Ira. So we're in the process of booking our next year. probably book, and we're very close to that. We're booking about 75% of our chicken will be booked. Our chicken buy will be booked for next year. So we have some pretty good visibility into our commodity guidance for next year.
spk02: Yeah, and Jack, I'd just add to that. You're saying in chicken markets is the drop-off in chicken prices, certainly we're seeing that a lot on the boneless, the boneless thigh and boneless breast. And then the chicken on the bone that we purchased, a little less so, and we are seeing an increase in that year over year from what we booked this past year.
spk03: Great. That's really helpful. And a similar question for wage inflation, you know, 4% to 6% for next year. And then, you know, you mentioned some productivity things that you're putting in place, the soap tanks, the onboarding process, installs and making equipment. You know, so how much Do you expect those things in your pricing to offset that wage inflation? Or are those more, you know, customer-facing processes?
spk02: Yeah, so I think overall on the wage inflation, I mean, bear in mind, you know, none of this includes the AB257, which we now believe won't even, it's probably unlikely to even take effect next year. If it does, it'll be late in the year. So again, we have pretty good visibility into the actual wage inflation in terms of what we're anticipating in the current environment. In terms of the efficiency initiatives that we put in place, I mean, a lot of those are really just going to be freeing up labor to focus on the customer. We'll be evaluating whether we think any of those are things that we can actually start pulling some labor out. I think there might be some potential there. But right now, you know, certainly some of the things we've done so far, it's really just freeing things up. And then as we look at these, we'll evaluate whether we think we can actually reduce labor hours in a restaurant at all. But that's to be determined. And then certainly on the pricing side, you know, we'll be carrying, you know, pricing above inflation heading into the Q1 and really, you know, especially the first part of the year. And then we'll be evaluating what levels of pricing we think we can take and whether or not we can be taking anything I would call catch-up pricing, which kind of catches you up to the pricing shortfall we've had over the last year or two years with this rapid inflation.
spk03: Great. And just to clarify, my math is you said 10% pricing for the full year. That would get you to about 12.5% in the fourth quarter. Am I doing that correctly?
spk04: No, I think you're on the high side there, Jake. We're a little north of 10 also in the fourth quarter.
spk03: Okay. And how would that – assuming you didn't take any more pricing after the November increase, how would that roll through the quarters next year? You know, through the – Yeah, yeah.
spk04: As you carry off into the first quarter next year, you'll be, you know, again, about 10 and a half-ish or so through the first quarter. That'll start to step down, you know, and actually into part of the second quarter, and it should start to step down as we get into the June timeframe to, you know, if we did nothing else into the 7% range. And then really the balance of the year will depend upon, you know, you know, how we decide upon taking, as Larry mentioned, some additional pricing as we look back, you know, in the back half of the year.
spk03: Great. That's very helpful. I'll pass it along.
spk00: Thanks. Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of David Tarantino with Baird. Please proceed with your question.
spk01: David Tarantino Hi. Good afternoon. Larry or Ira, I wanted to ask another question just about margin structure. My question is, what is the path to getting back to the margins that you are accustomed to delivering? I think, Larry, you referenced maybe a catch-up amount of pricing. You know, is there a strategy that you have to, if inflation doesn't come down, to try to, you know, kind of return margins to the levels you've had historically?
spk02: Yeah, David, I'll talk and I'll let Ira, you know, chime in. I mean, you know, first of all, a big focal point right now is, you know, we continue to be, you know, higher in overtime. Overtime has gotten a lot better. from where we were, but it's still certainly higher than we were pre-pandemic. And so a huge focus on getting the overtime down as being one of the margin drivers. And quite frankly, just getting, if we can get rid of COVID, I mean, that continues to cost us somewhere around half a million dollars a quarter on COVID costs, which is probably something that's fairly unique to California in terms of the legislation that we have to comply with. I mean, I'll highlight on some of the ops efficiency measures. You know, again, some of that's just going to be I'll call it redeployed labor. But I think there's some things we're working on that may enable us to perhaps reduce some of the labor costs that way. And then I'd also say on the supply chain side, we're looking at some things from a sourcing perspective that should help us save costs in addition to just the lower commodity costs. looking to change whether it's changing vendors on things or looking at some of the items we source. We think there could be opportunities there also to improve margins. So you combine those with, like I said, the potential opportunity next year to maybe you're able to take some catch-up pricing. We think that will be the margin drivers for next year to get us back up to those levels that we're more accustomed to being at. Anything else, Ira?
spk04: No, I think you hit the hot points. I mean, we feel like we have pretty good visibility into our commodity inflation for next year, and so that gives us confidence that we will likely be able to take a little bit of pricing above the level of inflation next year, which will which will help improve margins next year to more of where they've been. And then just structurally, the things Larry talked about in regards to overtime and some of the COVID-related pay that we were required to make is going to be a little bit of a tailwind for us next year.
spk01: Got it.
spk02: And then I guess the follow-up. And hopefully utility inflation won't be like it has been. I mean, gas prices, it's hard to believe they're going to go up from where they've been.
spk01: Yeah. Understood. I guess the follow-up is how are you and your franchisees looking at kind of the four-wall profitability equation when you're making decisions on building new units? It's nice to see the projected step up next year on openings. But I guess are you penciling in higher margins in the future? Is that how you're penciling out these deals? Or I guess how do you think about it?
spk02: Yeah, no, we're penciling that there will be a return to much better margins than what we're seeing this past year. So when we're looking at this, we're looking at kind of getting back to margin levels where we've been in the past. Great.
spk01: Thank you very much. Thanks, David.
spk00: Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Roberts for any closing remarks.
spk02: Yeah, I'd just like to thank everybody for joining the call today. I hope you hear that, you know, we feel very good about where the business is now and really excited about next year. And so thanks again for joining. And since we won't talk again until next year, I wish everybody a great holiday season and look forward to talking with you again next year. Thanks, everybody.
spk00: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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