Portillo's Inc.

Greetings and welcome to the Portillo's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Barbara Novarini, Portillo's Director of Investor Relations. Thank you. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our fiscal second quarter 2023 earnings call. You can read through the results we announced this morning in our earnings press release and supplemental presentation at investors.portillos.com. With me on the call today is Michael Osanlu, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer. Let's begin with a reminder that any commentary made during this call about our future financial results and business conditions constitute forward-looking statements, which are based on management's current business and market expectations and are not guarantees of future performance. We do not undertake to update these forward-looking statements unless required by law. Our annual report on Form 10-K and our Form 10-Q both include discussions of risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call will make reference to non-GAAP financial measures. Any non-GAAP financial measure should not be considered as an alternate to GAAP measures. We direct you to the materials we released this morning for the reconciliations of these non-GAAP measures to the most comparable GAAP measures. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Now, let me turn the call over to Michael Osanlou, President and Chief Executive Officer.

Thank you, Barb, and good morning, everyone. We're glad to have you with us for our second quarter 2023 earnings call. I'm proud to report that we delivered another quarter of double digit revenue and restaurant level EBITDA growth, results that highlight the durability of our brand. We grew total sales by 12.3% and achieved restaurant level margins of 25.3%. We generated this level of profitability even under the weight of adding six new restaurants since Q2 of 2022. Michelle will detail our financial performance in a moment, But first, let me walk through the main drivers of this momentum that we have. To continue this positive, oh, sorry. First, we feel great about our class of 22 restaurants and their overall contribution to our financial performance. While it's still early, this class of restaurants continues to outperform our underwriting expectations. And I know we've talked a lot about the colony, But year-to-date, this restaurant has already done over 8.5 million in sales. That's not an annualized number. That's a year-to-date number. That's feeding a lot of happy Texans. Tucson and Gilbert are already generating average weekly sales comparable to our mature Arizona restaurants. And Sherrillville, Indiana is cruising, generating Chicago-like AUVs. To continue this positive trajectory... We heavily emphasize quality and execution so that we deliver an outstanding experience for both team members and guests. New restaurants tend to have lower margins early on because we invest additional resources to ensure great performance. But what's really exciting is that the class of 22's margin drag has been lighter than expected. That's a testament to both the operating strength of that class and the fact that they're overachieving on the top line. Which brings me to my next point. We've earned the right to grow because of the strength in our core. In the second quarter, same restaurant sales grew 5.9%. Michelle will decompose that comp for you in a minute. But in an economic environment that's been sending mixed signals, we delivered mid-single-digit comps against the low single-digit target we have in our long-term growth algorithm. Our restaurants are fully staffed, and we're empowering our team members to prioritize the guest experience by serving delicious, high-quality food in an engaging environment at a great price point. This focus has allowed us to sustain multi-year highs in key guest experience metrics, like speed of service, accuracy, overall satisfaction, and importantly, in our value perception. These metrics carry even greater weight when consumers are feeling pinched because guests are a lot choosier about where to spend money when their wallets feel lighter. We're confident that offering a consistently great experience for our team members and in turn for the guests they serve is the right way for us to thrive amidst economic fluctuation. Finally in this quarter, we saw continued restaurant level margin improvement. We've implemented two strategic initiatives to help us maintain this momentum. One, we've been actively managing our commodity exposure, locking in prices when appropriate and letting the rest ride. We continue to expect some margin benefit from that unlocked portion of our commodity basket as the rate of inflation continues to ease. Second, we continue to hunt down labor efficiencies across the system. One example of this is our Kitchen 23 initiative. We've already completed a third of the Kitchen 23 conversions that we planned for this year. These involve quick and capital-light remodels of legacy Chicagoland restaurants that feature our relocated salad bowl, grab-and-go retail displays, and self-service fountain drinks. These changes are generating real operational efficiencies and helping us meet our 2023 margin improvement goals. But Kitchen 23 is not just about cost efficiency. We're also seeing incremental beverage and product sales from smarter merchandising. And frankly, the restaurants just look better. This initiative is doing everything we've hoped it would, and you'll see more of them come online in ongoing retrofits and as new builds in the class of 23. Now let me remind you that Q2 is typically our seasonally highest margin quarter, and we have a couple of margin headwinds on the horizon. We recently implemented our annual wage increases for the restaurants, and the remainder of the year will be heavy with restaurant openings. Despite that, we remain committed to year-over-year margin improvement for the full year of 2023. Now let's talk about the new restaurants opening in the class of 23. As a reminder, we've announced that we'll open three new restaurants in the Dallas-Fort Worth market, three in Chicagoland, including our second Portillo's pickup in Rosemont, Illinois, one location in Arizona, and one in Central Florida. The bulk of the class of 23 will be in the Sun Belt, where we continue to build out markets to achieve efficient scale. For example, Queen Creek in Arizona marks our sixth in the Phoenix metropolitan area. We also recently announced Claremont, which further develops the Central Florida market. And expanding our footprint in the DFW market is a clear priority. We're actively building in Allen and Arlington, which we plan to feature at site visits during Development Day on September 19th. And we'll round out the Class of 23 with one more location in Fort Worth. These eight Class of 2023 restaurants are actively underway, and we're very happy with that progress. We'll open two restaurants in Q3 and the rest in the fourth quarter. We do have a ninth restaurant in the 2023 pipeline, but we will deliberately pace that out into the first quarter of 2024. Operationally, it's not ideal to open restaurants during our seasonally busiest period, and this tactic was very successful for us with the colony earlier this year. All told, we're navigating an uncertain economic environment and delivering profitable growth while building successful new restaurants. Performance in our core is solid. It allows us to reinvest our cash flow to fund more growth. And remember, all of our growth is self-funded. With that, let me hand it over to Michelle.