El Pollo Loco Holdings, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco fourth 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, March 9th, 2023. And now, I would like to turn the conference over to Ira Phil, the company's chief financial officer.

Thank you, Operator, and good afternoon. By now, you should have access to our fourth quarter 2022 earnings release. If not, it can be found at www.lpoyoloco.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 and macroeconomic environment on our business, as well as our marketing and new product initiatives, our strategic pillars, cash flow expectations, capital expenditure plans, remodel plans, expected 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 current 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-K for 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. Now, I would like to turn it over to our President and CEO, Larry Roberts.

Thanks, Ira. And good afternoon, everyone.

We are pleased with our performance in the fourth quarter as system-wide comparable restaurant sales increased by 4.7%, including a 6.5% increase at company-owned and a 3.5% increase at our franchise locations. These results were driven by the success of our stuffed quesadilla promotion that resonated well with both new and existing customers, as well as the continued improvement in our company-owned and franchised restaurant operations. In fact, our system restaurant operations in the fourth quarter were the best they had been all year. Last visit excellence and social media scores reached new highs for the year, while customer complaints were at their lowest levels. The continued improvement in our restaurant operations are reflected in our brand track results in which we made significant progress against our competitive set across all five key attributes, which are food and menu quality, service, environment, value, and overall brand experience. Our strong results on value were especially reassuring, given the year-over-year pricing at company-owned restaurants in the fourth quarter was 10.6%. It again demonstrates that value is determined by more than just price, and consumers recognize the lengths we go to at Apoyo Loco to serve delicious food that is freshly prepared every day in our restaurants. Another highlight of the quarter was the opening of the first Apoyo Loco restaurant in Colorado in November. The opening set a new weekly sales record for Apoyo Loco, and the restaurant's average weekly sales are still well above expectations four months after opening. We are very excited for our franchise partners and look forward to continued success as they, along with other franchisees, build restaurants in Colorado. While we continue to be pressured by inflation, our teams did an admirable job managing their businesses, delivering a restaurant offering profit margin of 14.7%, which was 230 basis points better than the third quarter, and adjusted net income earnings per share of 16 cents. As we look ahead, we're excited to build upon this momentum in 2023 as we continue our focus on our four strategic pillars, which are, one, embed our unique Apoyo local culture, two, build awareness and own our lane, three, deliver exceptional service profitably, and four, accelerate development. Throughout 2022, we've made significant progress in creating a servant-led leadership culture predicated on recognition, greater interaction with team members and career development while still maintaining accountability. We also implemented programs to create greater support center appreciation for the work our restaurant teams do every day. Another pillar of the culture we are building at Apoyo Loco is to provide greater support to the communities in which we operate. Along these lines, in November, we announced a new partnership with Feeding America to raise money for the Feeding America network of local food banks. Through this campaign, which runs until June 30th, El Pollo Loco aims to raise $400,000 through a limited-time roundup campaign. Ultimately, 90% of donations made through this campaign will be distributed to food banks around our restaurants and the communities we serve. Our charitable organization, El Pollo Loco Charities, is matching the first 100,000 roundup transactions. In addition, Apoyo Local Charities is finalizing an agreement to support a large charitable organization in Orange County, which we expect to announce shortly. While Apoyo Local Charities has existed for many years, we plan to significantly increase its fundraising capabilities in order to amplify its impact on our communities. We believe these types of initiatives reinforce the familiar culture we are building throughout our system. Our second pillar is build awareness and own our lanes. Apoyo Loco is a differentiated concept founded upon our famous five real chicken and entrees, sauces, and dressings that are made fresh in the restaurant every day. These are served with the speed and convenience of fast food restaurants. It's food that combines our authentic Mexican roots with the culinary culture of Los Angeles. Our strategy is to continue driving this differentiation while working to attract younger consumers to the brand through our product offerings, advertising, and remodeled restaurants. A great example of this strategy was our Oversurfed Quesadillas promotion during the fourth quarter, which included three options, one of which was beef. Oversurfed Quesadillas achieved a mix of almost 7% of total sales, with beef being the top performer. Their promotion success was at least partially due to the continued use of TikTok to reach younger consumers, which achieved over 10 million views during the module. We are very encouraged by the performance of both over-stuffed quesadillas and beef, both of which have the potential to be permanent menu items that help us attract younger consumers. Recognizing that many consumers are increasingly budget conscious, we also focus on value offerings during the fourth quarter with the promotion of our $24 family feast and revised fire grill combo meals starting at $5. Both resonated well with consumers and further highlighted the need to provide value offerings to maintain frequency among budget-constraining consumers. As we entered 2023, we introduced local burrito grillers at the beginning of January and started marketing our double tostada salads in late February. Both promotions included shredded beef options as we continued to test our way to permanently serving shredded beef at our restaurants. Our local burrito grillers are handheld and come with local dipping sauce comprised of cheese and a special consomme. While this is our third consecutive year promoting Desatas, we continue to see incremental growth of this platform, and with a pre-promotion sales mix of about 13.5%, it is now our highest-selling non-chicken-on-the-bone menu item. Adding a shredded beef option enables us to pair a fam favorite with a continued development of shredded beef on our menu. To further enhance our value offerings, in addition to our $24 family feast and fried grill combos starting at $5, we will be introducing three pollo bowls priced at $5 beginning in late March. These screen well with consumers, and we believe they resonate well with cost-conscious consumers while providing attractive margins. While menu innovation continues to be a key element to our brand, we're implementing several initiatives this year to further differentiate our unique offerings as well as broaden our consumer base. First, we've hired a new creative agency, Organic, who are tasked with building awareness and driving our differentiation by bringing a fresh look and new energy to our advertising across all media channels. This new approach recently debuted with our current test data promotion. Second, in April, we will be launching a completely revamped app and loyalty program. These upgrades will make it significantly easier for consumers to order food from us, and our loyalty program will provide additional options for engagement and food redemption. Third, we are evaluating our menu approach with a menu board test that will include an add-on panel to drive higher check and product platforms like overstuffed quesadillas. Over time, we believe we can drive more sales by building on past product successes and structuring the menu towards permanent platforms versus six- to eight-week limited-time offerings. Lastly, we believe desserts and catering present significant opportunities for incremental sales that we have not aggressively pursued. As a result of many businesses returning to work and group gatherings increasing, we decided to revamp our catering offerings to adjust to the evolving landscape of the way consumers eat in groups. We are committed to developing a robust catering program that we believe has the potential to drive significant incremental sales. While still early in the process, we are excited for the catering opportunities ahead and will update you as the year progresses. That brings us to our third pillar, deliver exceptional service profitably. Throughout 2022, our teams worked hard to properly staff our restaurants and train our team members and we've been reaping the benefits of these efforts. Crew member turnover during the fourth quarter was down to 100% and 93% of our company owned restaurants were fully staffed. All company operated restaurants are able to open all sales channels for all operating hours. As highlighted earlier, During the fourth quarter, we continued to see improvement in company and franchise-operated restaurants' drive-through times, class visit excellence scores, social media ratings, customer complaints, and value scores. These metrics have continued to improve during 2023. This is not to say that we don't have pockets of challenged restaurants, but overall, the system is operating at high levels, which we believe will drive increased sales. With staffing challenges largely behind us and the significant improvement in company-owned restaurant operations, in 2023, we are expanding our operations focus to include bench building, enhanced training, and cost management. We believe that the key to building sustainable, consistent restaurant operations is through the development of restaurant leader bench, including area managers, general managers, assistant managers, and shift leaders. To that end, we have put a renewed focus on leadership development not only to benefit our current restaurant base, but also to ensure we have the leaders necessary for the continued growth of the local brand. In addition to leadership development, at the team member level, we've completed the rollout of an enhanced e-learning platform across the system. This will not only improve the training our team members receive, but enable us to attract completion of the various modules, thereby ensuring employees are certified for the positions they are working. With improved staffing levels and customer service at company-operated restaurants, we are now increasing our focus on better managing labor and food costs. This includes minimizing overtime, meal break penalties, staffing inefficiencies, and food waste. I am pleased to say that we're already making good progress against these since the start of the year. Simplifying our operations remains a top priority, and we're building upon the work we did last year by implementing several initiatives geared for reducing complexity and improving product quality. Soak tanks for cleaning grill filters and broilers will be implemented in company-owned restaurants by May and throughout the system this summer. A simplified new employee onboarding process will be rolled out to company-owned restaurants in May, and we are revamping our operations manuals with a targeted rollout this summer. In addition to these, we continue to work to simplify the menu, reduce the time it takes to prepare salsa, and are testing dishwashers and ordering kiosks. We are excited by the progress we're making to simplify operations, and it remains an area of huge opportunity. Let's now turn to our last pillar, accelerate development. While I expect to continue developing four to six company-owned restaurants annually in our four markets, accelerating development will depend on franchisees, both new and existing, and will require us to successfully enter new markets. To execute this strategy, as we highlighted on our calls last year, we greatly enhance our franchise recruiting efforts. These efforts have resulted in dramatic increases in inquiries and prospects who meet our investment criteria. During the fourth quarter, we signed a development agreement with a new franchise group to open eight restaurants in the Kansas City area. This brought us to five new development agreements for a total of 25 restaurants. In addition, as mentioned earlier, our franchise partners successfully opened our first restaurant in Denver market, which we believe is a great example of the success our franchisees can have in new markets driven by the strength of the Okoye Local brand. We continue to work on a number of franchise development agreements and look forward to announcing additional partnerships as we progress through 2023. In summary, while unfavorable weather is proving to be a headwind in early 2023, We are excited about the prospects of El Pollo Loco this year. Our restaurant operations are as good as they have ever been and will continue to get even better. This is aided by the culture we are building throughout the El Pollo Loco system, which is focused on recognition, engagement, leadership development, and supporting our communities. Our brand positioning is clear, and in addition to a strong marketing calendar, we are implementing several other sales-driving initiatives that will further differentiate our brand and drive awareness with younger consumers. Finally, efforts to attract new franchisees to the Pollo Loco system are paying give-ins, and we're on our way to accelerating new unit development. We remain confident that our focus on the four strategic pillars is successfully positioning us for success for years to come. Finally, I'd like to thank each member of the familia, including all our team members and franchisees, for their hard work and dedication in making Pollo Loco truly special. With that, let me turn the call over to Ira for a more detailed discussion of our fourth quarter financial results.

Thank you, Larry, and good afternoon, everyone. For the fourth quarter and December 28, 2022, total revenue increased 6.4% to $115.9 million compared to $109 million in the fourth quarter of 2021. Company-operated restaurant revenue increased 6.4% to $99.6 million from $93.6 million in the same period last year. The increase in company-operated restaurant sales was primarily driven by a 6.5% increase in company-operated comparable restaurant sales. The increase was comprised of a 7.3% increase in average check size, partially offset by a 0.8% decrease in transactions. During the fourth quarter, our effective price increase versus 2021 was a little over 10.5%. Looking ahead, including our quarter to date results, We are currently expecting first quarter 2023 system-wide comparable restaurant sales to increase 0.5% to 1.5%, inclusive of a company-comparable restaurant sales increase of 3% to 4%. Our sales expectations reflect the negative impact of adverse weather conditions experienced in California and other Western markets during the first quarter of 2023. In addition, the last two weeks of the quarter will be rolling over our incredibly successful beef barrier promotion in the prior year. Franchise revenue was $9.4 million during the fourth quarter, compared to $8.8 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 3.5%, as well as the opening of 11 new franchise restaurants opening during or subsequent to the fourth quarter of 2021, and revenue generated from three company-owned restaurants sold to an existing franchisee during the fourth quarter of 2022. This was partially offset by the closure of two franchise restaurants during or subsequent to the fourth quarter of 2021. Turning to expenses, food and paper costs as a percentage of company restaurant sales increased 110 basis points year-over-year to 28.3% due to increased commodity costs, partially offset by higher menu prices. Commodity inflation during the fourth quarter was approximately 16% and did moderate from a high of 23% during the third quarter of 2022. We continue to expect commodity inflation to decelerate to be between 3% and 5% for 2023. Labor and related expenses as a percentage of company restaurant sales decreased 40 basis points year-over-year to 31.9% as wage increases were offset by higher menu prices and lower overtime expense as staffing levels continued to improve. Labor inflation during the fourth quarter was approximately 8%. We continue to expect wage inflation of 4% to 6% for 2023. Occupancy and other operating expenses as a percentage of company restaurant sales increased 20 basis points year over year to 25% due to higher utilities and insurance expense. Our restaurant contribution margin for the fourth quarter was 14.7% compared to 12.4% in the third quarter of the year. Looking into 2023, we expect restaurant contribution margin to be in the mid-teens. General and administrative expenses improved 40 basis points year over year to 8.3% of total revenue as we gained leverage on the 6.4% revenue increase. Increases in legal settlement expense, recruiting expenses, and other general and administrative expenses were offset by a decrease in labor-related costs, primarily related to lower incentive compensation. We recorded a provision for income taxes of $2.3 million in the fourth quarter of 2022 for an effective tax rate of 26.4%. This compares to a provision for income taxes of $1.7 million and an effective tax rate of 21.5% in the prior year fourth quarter. We reported gap net income of $6.5 million or $0.18 per diluted share in the fourth quarter compared to gap net income of $6.2 million or $0.17 per diluted share in the prior year period. Adjusted net income for the quarter was $6 million or $0.16 per diluted share compared to adjusted net income of $6.1 million or $0.17 per diluted share in the fourth quarter of last year. Please refer to our earnings release for a reconciliation of non-GAAP measures. Regarding development, during the fourth quarter, one new company restaurant was opened and two new franchise locations were. The one new company opening was in Las Vegas. One of the new franchise locations was in Colorado, and the other new franchise location was in Utah. For the full year 2022, we opened a total of four new company restaurants and nine new franchise restaurants. During the fourth quarter, we remodeled two company restaurants and eight franchise restaurants. which brings our completed remodels for the year to six company and 16 franchise remodels. Looking into 2023, we expect to complete 10 to 15 company remodels and 20 to 30 franchise remodels. Turning to liquidity, as of December 28, 2022, we had $66 million of debt outstanding and $20.5 million in cash and cash equivalents. Subsequent to the end of the quarter, we paid down $8 million on our 2022 revolver, and as of March 9, 2023, our outstanding borrowings were $58 million. Turning to our 2023 outlook, as we are providing the following guidance items. The opening of four to six company-owned restaurants and eight to 12 franchise restaurants. Capital spending of $27 million. to 31 million and G&A expenses between 42 and 45 million and adjusted 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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 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 poll for your questions. Our first questions come from the line of Drew North with Baird.

Please proceed with your questions. Good afternoon. Thanks for taking the question. My first one was just on Q1. I was wondering if you would be able to give some estimates about the weather impact for the first quarter so that we can gauge the underlying trend, at least in the quarter-to-day period.

Sure. Thanks, Drew. I'll probably give you a little bit more information On top of that, you know, first I start by highlighting that, as we talked about earlier in the year, that we really saw good momentum coming out of 2022 when we saw, you know, really for the quarter, you know, strong comps and actually comps had been improving from month to month starting in October, November, December, each month got stronger. And so we really felt like we were heading into the new year with pretty strong momentum. If we now look at where we are quarter to date, you know, really company comp sales are up, you know, a little over 6%. And franchisees are thinking right around, you know, half a percent positive, which is actually pretty strong given, you know, we're estimating that the weather impact is probably in the range of 2% to 4% in terms of same-store sales growth. And that's really, you know, rain and just – on top of, you know, cold weather during the quarter. So, again, when we look at quarter to date, we feel like, you know, the trends we saw in the fourth quarter have continued in the first quarter. And, you know, unfortunately, the weather has knocked us back a bit. But from a quarter to date perspective, you know, the comments are pretty good, even despite the weather. But as Ira highlighted in his comments, you know, there was a lap of beer coming up over the last couple weeks of the quarter.

You know, that's going to bring the comp growth down for the quarter. Great. That's very helpful. Thanks for all the color.

And then one follow-up on the comp. I guess, how are you looking at the comparison as we get to Q2, especially amid the successful beef buria promotion last year? I just wanted to get your sense or your level of confidence in your ability to cycle that period with sustaining positive comp. against tough comparisons there.

Well, we'll feel like we'll be able to drive positive comps. I mean, because what will happen is during the beginning of the quarter, we'll be lapping Beria from last year, but then we're also doing a Beria promotion during the second quarter. So you've got a little offset in terms of lap. I mean, Beria started earlier last year as our second module. This year is our third module. So there's a bit of a timing disconnect, but, you know, you should see early in the quarter, you know, laughing barrier from last year. So that will be an uphill battle on the comps. But then as later in the quarter, we should start seeing that turn more favorable because we'll be launching barrier versus, you know, last year when we were on to something besides barrier.

Perfect. And then just one more from me here related to unit growth.

Given a key component of the strategy from here is to fuel franchise-led development, I was hoping you could provide some color on where franchise-level profitability or cash flow sits today, maybe how that compares to last year, 2021, or even pre-COVID, and perhaps just higher level, any additional insights into how the conversations are going with franchisees and the sentiment there as you look to get back to 5% unit growth in the out years.

Yeah, now I don't, I mean, I've seen some franchise profit and loss statements. I don't see them all. The ones we've seen, I mean, their cash flows remain, you know, very strong. And the great thing for our franchisees is if you look at over the past three years, I mean, their sales are up over right around 20% over the three-year period. So their performance is very good. They still feel very good about the business and the sales they're generating. And obviously, the profitability has been hit a bit by the inflation last year, but still seeing them deliver good cash flows. So I think financially, our franchisees are in good shape.

In terms of, you know, development and, I'll call it the attracting new franchisees, again, you know, good progress last year in our... ...ability... ...working against.

I mean, these things always take a little bit of time as you're... bringing new franchisees in the system, but we feel like, again, we'll get some more development deals done this year on that. So we feel good about how we're progressing there. And then our existing franchisees are also interested. Yeah, I will say I think some are maybe trying to evaluate the economic situation with a potential recession. But, again, overall, the sentiment in the system is very positive. about where applicable is and the sales are seeing and their profitability.

Thanks for all the color. I'll pass it on.

Thanks.

Thank you. Our next questions come from the line of Todd Brooks with the Benchmark Company. Please proceed with your questions.

Hey, good evening, everyone. A few questions for you, if I may. First, Larry or Ira, if you look at the weather headwinds, which you highlighted in the quarter, and parse that out, how are the consumers that are making it into the restaurant behaving as far as how they're building checks, how they're attaching? Is third-party delivery still mixing at the same level that it was in, let's say, the second half of 22?

Yeah, so third-party delivery is basically mixing about the same. It's about 7.5% to 8% of sales, which is where it was during most of last year. So it's not growing. Well, it is in terms of total dollar sales is growing. But in terms of mix, it's been basically flat, not seeing a decline in that. So certainly the consumers who want their food delivered are still ordering food to be delivered. Yeah, I think when you look at, you know, overall customer base, you know, as we highlighted last year in the fourth quarter, you know, in our third quarter call, But we are, you know, seeing consumers react a little bit by maybe buying a little bit less. I mean, you know, a little bit of an average check, you know, managing that down. We see that with our drink mix. Our drink mix is down from where it's been. And just, again, it just looks like the lower income consumer is managing their check down a bit by the number of items they order. So, again, drink mix is down, number of items down. per ticket is down just slightly. So there definitely seems to be a little bit of impact there as people are, you know, managing their budgets a little more tightly, again, amongst low-income consumers. I think when you get the kind of mid-level and higher levels, we're just not, you know, I think you're still acting the same as they were through all of last year, not seeing much of a difference there.

Okay, great. You spoke to more of a focus on value with the $5.24 price point. kind of messaging in the quarter. Value mix is a percent of the menu. Have you seen that tick up as well, kind of pointing to maybe that consumer you were just referring to seeking out more value?

Well, we can see the $24 family meal improved the mix on the dinner, on the family meals a little bit. So we felt good about that. You know, the $5 resonated well. The overall mix it's probably pretty comparable to where it was previously. So at least it's been able to sustain that mix. And the one that's got us the most excited are these, you know, $5 bowls. We went out and did some consumer screening around, okay, from a value perspective, what would consumers see as being the best value alternative that we could offer? And these $5 bowls were the clear winner's And the great thing about them is we can do them at pretty good margins and make those offerings. So that's why we'll look at, in a couple weeks, going out and market these $5 bowls. And we do think that's going to resonate with the lower-income consumer and get them back into our restaurants as frequently as they used to be. So very excited about getting those out there and launching those and seeing the reaction that we get from consumers.

Okay, great. And then a final one for me, and I'll jump back in queue. If we look at the price, and you talked about north of 10% menu price in Q4, where is the expectation for where Q1 menu pricing will be running year over year? And thoughts in this environment on further price increases as we move across the balance of fiscal 23?

Yeah, so for Q1, we'll be just shy of 11% pricing as we took another price increase. We took a 2.5% price increase in March. And as we move forward through the year, we're going to be careful with our pricing. We're thinking about taking another moderate price increase later in the year. So as we move forward through the year, you'll see our effective pricing decline as some of the higher increases we took last year. So by the time we get to the end of the year, we'll be carrying in the 4% pricing range

Okay, great. Thanks, Ira.

Thank you. Our next question has come from the line of Matt Curtis with William Blair. Please proceed with your questions.

Hi, good afternoon. Thanks for taking my question. You know, with company-owned comps outpacing the franchise comp in the fourth quarter, I was just wondering what factors drove that. I mean, was it all really due to more normalized staffing and operating hours relative to last year, or was it something else?

Yeah, thanks, Matt. I mean, the laps are obviously easier for company restaurants versus franchise restaurants. I mean, the franchise restaurants performed extremely well for a number of quarters comp sales basis. Now, I do think one of the factors driving that lap is the fact that, you know, the company operations, as we highlighted earlier, were quite frankly not very good, you know, going back a year ago. And I think consumers did start, you know, trading off company locations to go to franchise locations where they're getting very service. So as we've made a dramatic improvement in the company operations, you know, I think one of the factors out there is we are seeing customers returning to the company restaurants because now they're getting a better experience. And so I think that is a factor. And when we look at the average unit volumes in Los Angeles, where we saw a big swing when the company operations were poor, a big swing from those average unit volumes in favor of franchisees versus company restaurants And now those have swung back quite a bit. So there's the indication that, yeah, the improvement we've made in the company operations has moved the entire system up. But I do think there's more consumers now coming to company locations that had previously gone to franchise locations because our company operations just weren't where they needed to be.

So, you know, hats off to our company operators for the big improvements we've made.

Okay, great. And then I guess on restaurant-level margins for this year, could you walk us through what your expectations are in terms of the cadence? I mean, can we expect it to be stronger in the second half of the year as the inflationary pressures dissipate to some degree, or do you expect something else at this point?

Yeah, I think there's two things going on. I think if you just, before we talk about that for a second, just think about it seasonally. Q2 tends to be, just because of volumes, our highest margin of the year, with Q1 being the lowest, and then the back half of the year tends to be around on the average. But I think this year you will see a little bit of an increase on margins as we move to the back half of the year, based on the timing of our expectations in regards to inflation.

Okay, great. Thanks very much. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Jake Bartlett with Truist Securities. Please proceed with your questions.

Great. Thanks for taking the question. You know, mine is about some of the cost in the labor line, you know, like over time that seems like it's normalized and that's helping the labor margin. If I look at kind of labor per operating week, the year-over-year change was much less than it had been in prior quarters. So the question is, as you move into 23, what kind of a lift to, what kind of a margin tailwind do you have in the labor line that could, you know, offset some of the wage inflation that should continue? You know, that's overtime, training, recruiting, just trying to figure out really what kind of,

leverage you can get in um in labor even with a little bit of wage inflation yeah i mean i'm trying to think what the the precise numbers are but uh the bottom line is i mean we highlighted last year that the overtime was significantly higher than uh you know where it is on average which we are are bringing down and um Getting back to our more normalized levels, meaning back to where we kind of were back in 2019. You know, COVID costs are coming down because we're not having to pay people who are out on COVID leave. Meal breaks is another one. I mean, meal breaks isn't as big of a number, quite frankly. So we're getting out of control of those. Food waste. So I think overtime is probably the biggest result. I'll let Ira chime in if he's got any other thoughts.

No, yeah. I think, you know, Larry hit it on the head. There's a lot of opportunity there. And if you think about the overtime, the meal breaks, all the things we're focused on, you know, it's half a point to a point of, you know, of favorable margin, in fact, as we think about 2023.

Great.

That's really helpful. And then my other question, Larry, you made a comment about kind of potentially moving to more of a platform approach to the menu versus six to eight LTOs. I know over the years you had been kind of moving towards platform. Maybe just remind us or me where you stand in the evolution. I mean, back historically you had, I think it was 10, you know, LTOs or kind of advertising windows. But where do you stand in terms of the cadence of LTOs and windows and Just maybe clarify the comment there. Are you planning on evolving that further so that it's less focused on LTOs?

Well, I should clarify, you know, you're right. We used to do – we got up to 10 LTOs. We're now at six. I mean, six is, to me, the right number. We did five last year. We'll do six this year. And I just feel like that's the right number in terms of the cadence of the timing and how often you want some new news coming. When I talk about the platforms, I mean, again, this is something that we're evolving. We've talked about in the past, but I don't think we've ever committed to it and really tested it. And so, like we said earlier, is we do have a menu board test going on. There are some additional what I'll call platforms. So there's an add-on menu to encourage people to trade up and buy additional items. We're leaving quesadillas on the menu. to see, again, how that does post-promotion. But the idea is that you wouldn't go away from LTOs, but your LTOs would be more focused around actually building these platforms. So I think many times in the past, you know, we do LTOs and we just pull them out. And it's, well, okay, but you got a bump in sales, but then you pulled it out and it didn't really grow what I call long-term sales because it just came in and went out. what I'd like to do is see, okay, so if I do a quesadilla platform, for example, and maybe it starts out at a, I'll make up a number, a 4% mix, you know, over time, if I keep coming back to quesadillas, can I get that up over time to a 5%, 6%, 7% mix? I mean, it's really a lot like to status out. I mean, that's probably the best example. If you went back three years ago, to status, we're mixing about 8% of sales. And then each year for the last three years, we've come back and talked about Tostadas salads. So before the current promotion, we had Tostadas salads up to 13, 13.5% mix on a standalone basis. And now this recent promotion, can we get this up even higher to 14, 14.5% mix? So by having Tostadas as a platform that you come and, you know, advertise, you know, every year, can you keep growing your sales that way versus, again, coming out with these one-time LTOs that come in, come out, and now you're back to where you were. So what you're trying to do is keep growing that baseline by keep building these platforms. And so that's the thing we're looking at strategically, and we're testing it a bit with this new menu board. But that's the way I feel like we should be building sales in the company versus these kind of relying on these one-time LTOs to beat prior year.

Great. That's really helpful. And then my last question is on operations. And I know there's a lot of moving pieces, especially as staffing has kind of, you know, had a big impact on your efficiencies and your ability to execute. But, you know, given the focus over the last years of simplification, you have more initiatives kind of, you know, underway, you know, right now. But how would you frame kind of the level of efficiency, speed of service, now versus pre-COVID, or maybe even, you know, now, you know, assuming a kind of normalized staffing environment. So, what I'm trying to get is, is the model improved, you know, versus, you know, versus what it was three or four years ago materially?

Yeah, I mean, if I look where drive-through times are now, I'll be honest with you, I don't have the pre-COVID numbers, but You know, we've got now company drive-thru times down. Total drive-thru time is about four minutes. If you look at just – and then franchisees are down to three and a half minutes. I believe – I'd have to verify this, but those are probably better than where we were pre-COVID, but I can't say for sure. But I do know they're dramatically better from where we were like a year ago. And if we look at drive-thru window times – you know, we're down to probably the best levels we've been, at least on the company side, in a long time. The franchisees continue to be a little bit better than us on that. So the only thing I'll say is when you look across all of the operating metrics we look at, like I highlighted on the call, is they're all at, you know, very high levels today. I mean, I'll just give you a couple examples. And, again, it's hard for me to go back pre-COVID because I don't really have the numbers off the top of my head. But if I go back a year ago and you look at customer complaints, and, again, we were struggling in company operations. You know, we were at 12 complaints per 10,000 transactions. We've cut that in half. You know, franchisees have actually come down. They were doing pretty well at about, I think, five and a half or so. You know, they're down to three. You know, our social media metrics now – Our franchisees are at four, and we're getting close on the company side to four, and that's Yelp and Google reviews, number of stars. And those are, again, I believe the best I've seen in a long time. So, again, I think the system as a whole has made tremendous progress on operations. The franchisees, despite the fact they were already operating well at high levels a year ago, have made even more improvements, and the company has made dramatic improvements So apologies for not knowing what the 2019 numbers were, but if I go back over the last year and look at the improvements we've made, they're huge, and I'm pretty sure that a number of things we're looking at are equal to, if not better, than where we were in 2019.

Great. No, that's really helpful. I appreciate it. Thank you.

Our next questions come from the line of Todd Brooks with the Benchmark Company. Please proceed with your questions.

Hey, thanks. Just one quick follow-up here or question. Obviously, you're accelerating the remodel activity in 23 after getting a little over 20 done last year. Can you share with us what we or investors should be expecting out of remodels? What's the early experience been? Are we seeing it in – kind of operational performance at the store? Are we seeing it in a revenue lift? How should we think about accelerating remodel activity as a potential tailwind for the business? Thanks.

Yeah, I mean, in general, I think we said, you know, we should be seeing sales lifts of 3% to 5% range on these remodels. I mean, that's the expectations with the high end being really what we're targeting, the 5%. You know, with COVID and things, it's been a mixed bag. But overall, we're kind of in that range of what we're seeing. We're getting very positive feedback from franchisees on the remodel, positive feedback from consumers. But in the end, you know, somewhere in that 3% to 5% lift is what – and when I say 3% to 5%, you know, that's versus, you know, control group is what we should be seeing in these remodels.

And has the cost of the remodels, has that tightened up as you've gone through this first wave? And what should we think about there for the cost of rolling out this next wave?

Yeah, I think we're still seeing it. It varies depending on what level of remodel we do. We have three different levels. And what we're seeing is we're doing more of I'll call it level one, which is the lower level remodel, which includes a full remodel. a full external remodel, but then internally some of the things like flooring and things we may not change out, but still get other elements in there. So that's still running, you know, probably 250 to 300. You're kind of mid-levels, like 350. And then if you go to high level, you're looking probably more at the 450 range, maybe even 500. I think most of the remodels now are really level one and level two.

Okay, perfect. Thanks, Larry.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would now like to turn the call back over to Mr. Larry Roberts for closing remarks.

Okay. Well, I just want to thank everybody for joining us tonight, and hope you have a great night, and hope you're as excited about El Pollo Loco as we are.

Thanks very much.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.