Steve Sather - President and CEO Larry Roberts - Chief Financial Officer Ed Valle - Chief Marketing Officer.

David Tarantino - Robert W. Baird Andy Barish - Jefferies John Glass - Morgan Stanley Sharon Zackfia - William Blair.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Third Quarter 2014 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation.

Please note that this conference is being recorded today, November 6, 2014. On the call today we have Steve Sather, President and Chief Executive Officer of El Pollo Loco; Larry Roberts, Chief Financial Officer; and Ed Valle, Chief Marketing Officer. And now, I would like to turn the conference over to Larry Roberts..

Thank you, Operator, and good afternoon. By now everyone should have access to our third quarter 2014 earnings release, if not, it can be found at www.elpolloloco.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.

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 expect, refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

We are also filing our 10-Q for the third quarter of 2014 tomorrow. I will encourage you to review that document at your earliest convenience. Lastly, during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in a course of GAAP and reconciliations to comparable GAAP measures are available in our earnings release. With that, I’d like to turn the call over to Steve Sather..

Thank you, Larry. Good afternoon, everyone. And welcome to our quarterly earnings conference call. We are very pleased to have continued our operating momentum during our third quarter.

Highlights for the 13 weeks ended September 24, 2014, included revenue growth of 8.5% to $86.6 million, a 7.9% increase in system-wide comparable restaurant sales that included a nice balance between traffic gains and check growth, a 10.4% increase in adjusted EBITDA, a 12.7% increase in pro forma net income and the opening of four new restaurants.

On a pro forma basis, we earned $0.12 per share for the quarter driven in large part by the strength of our comparable restaurant sales growth.

The broad appeal of our menu offerings together with our compelling value proposition are clearly resonating with our guests as demonstrated by the consistency of our comparable restaurant sales, which now includes 13 consecutive quarters of growth.

We believe that we are uniquely positioned in the restaurant sector by offering the high-quality food and dining experience you would expect from fast casual restaurants, while providing the speed, convenience and value typically of traditional quick service restaurants, the combination of which we refer to as QSR+.

We remain focused on creating new and unique menu items that complement our signature fire grilled chicken and provide our customers with even more choices at a great value.

Our product calendar remains a key driver of engaging customers and promoting brand awareness and we continue to test alternative proteins following our success earlier this year with our carne asada and shrimp limited time offers.

Our under 500 calorie menu also continues to resonate extremely well with our health conscious guests and overall consumer trends. In our current promotion create your own bowls, we are tapping into our customers desire to further customize their meals.

Starting at just $5.79 per bowl, guests first select their protein and then fill them with their choice of rice, beans and a variety of toppings. We believe that create your own bowls meets the demands of our mainstream foodies, who are empowered by creating meals to satisfy their personal preferences.

Turning to new restaurant development, we have a robust pipeline in place to produce a longer term system-wide unit growth of 8% to 10%.

Our growth will be balanced between existing and new markets, as we have both a substantial opportunity to build density in our existing markets and also expand in -- expand our footprint into select new markets located within contiguous states.

To that point, I’m excited to welcome Mark Belanger to El Pollo Loco, who will be responsible for overseeing our existing franchise relationships, as well as creating new partnerships to facilitate our expansion into new key markets.

To-date through the third quarter, we have opened five new company restaurants and expect to open an additional five to six company restaurants during the fourth quarter, which will allow us to reach the high end of our previously announced nine to 11 company locations.

Additionally, we expect to open four franchise restaurants during the fourth quarter. I’m also pleased to announce that we have opened our first restaurant in Houston during October.

While early, we are very pleased with the results to-date and we are excited to continue our development in this key market as a gateway to expanding our national footprint.

We also continue to remodel our existing restaurant base with our Hacienda prototype design, which showcases a more modern and inviting dining experience within our restaurants and we believe is more representative of our elevated brand perception and appeal.

Through the third quarter, we had remodeled 69 restaurants and remain on track for roughly half to -- roughly half of our restaurants to be remodeled by year end with the entire system estimated to be completely remodeled by 2018. With that summary, I’d like to turn the call back over to Larry to discuss our third quarter financial results..

Thanks, Steve. Turning to the results of our 13-week third quarter ended September 24, 2014. Total revenue increased 8.5% to $86.6 million in the third quarter of 2014 from $79.8 million at comparable quarter last year.

The majority of our revenues are made up of company-owned restaurant sales, which increased 8.6% to $80.9 million during the quarter compared to $74.5 million in the year ago period.

The increase was primarily due to the 6.4% increase in company-operated comparable restaurant sales consisting of a 3.3% increase in traffic and a 3.1% increase in average check. Franchise revenue increased 7.5% to $5.7 million year-over-year for the quarter, largely due to franchise comparable restaurant sales growth of 9.1%.

Turning to our expenses, food and paper costs, as a percentage of company revenue, increased 18 basis points compared to last year to 32%, driven primarily by higher commodity costs partially offset by menu price increases taken in the fourth quarter of 2013 and the third quarter of 2014. Market prices for chicken continue to remain high.

While we are currently in the process of negotiating our chicken contracts, we expect our food costs to be higher in 2015. However, we fully expect to mitigate the impact of any commodity inflation next year. Labor and related expenses as a percentage of company revenue sales decreased 58 basis points to 24.9%.

This decrease was primarily due to leveraging of labor costs as a result of our company-operated comparable restaurant sales growth and lower medical insurance costs due to lower claims activity.

Occupancy and other operating expenses, as a percentage of company revenue, increased 38 basis points to 22.4%, due to an increase in utility costs related primarily to higher gas and electric costs, as well as higher advertising costs and increased general liability costs resulting from higher claims activity.

Turning to general and administrative expenses, our reported G&A increased $1.2 million or 19.9% to $7.5 million during the third quarter of 2014 from $6.3 million in the quarter last year. As a percentage of total revenue, general and administrative expenses increased 83 basis points to 8.7%.

The third quarter of 2014 included a $200,000 increase of stock option expense primarily due to the issuance of new stock options as well as higher professional fees incurred in preparation for our IPO.

On a pro forma basis, general and administrative expenses were $7.1 million compared to $6.6 million last year and as a percentage of total revenue remained flat at 8.3%.

Depreciation and amortization expense increased to $2.9 million from $2.6 million last year and as a percentage of total revenue, increased 9 basis points to 3.4%, primarily due to our remodeling program. At the end of the third quarter, under our Hacienda program, we’ve remodeled 86 company-operated and 111 franchise restaurants.

As Steve noted, we expect to have remodeled over 50% of our system by the end of 2014. As we previously announced, during the third quarter, we completed the sale of six company-operated restaurants in the greater San Antonio area to AA Pollo, which resulted in a gain on disposition of restaurants of $2.7 million.

The sale was part of a multi-unit franchise development agreement in which AA Pollo will develop 20 new El Pollo Loco restaurants in Houston and San Antonio.

Interest expense decreased approximately $5.6 million to $4 million, due to lower interest rates on our debt following our October 2013 refinancing and a payoff of our second lien credit facility with the proceeds of our IPO in July.

We incurred a charge of $40.1 million relating to the present value of expected payments under our income tax receivable agreement which calls for us to pay our pre-IPO shareholders 85% of the tax savings realized as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods.

We recorded an income tax benefit of $61.4 million to the third quarter of 2014 compared to a tax revision of $130,000 last year. After an evaluation of deferred tax assets, we released the valuation allowance of $62.4 million and also applied for tax credits that resulted in $5.4 million of additional tax asset and tax benefit.

Based on the release of the valuation allowance, during the quarter, we recorded income taxes expense to adjust our year-to-date results to an effective tax rate of 40.5% after consideration of certain book to tax differences.

We reported net income of $25.8 million or $0.70 per diluted share compared to net income last year of $918,000 or $0.03 per diluted share. Weighted average diluted shares outstanding were approximately $37.2 million for the third quarter of 2014 and approximately $29.6 million for the prior period.

To account for the IPO and its changes to our capital structure, we have calculated pro forma results including net income and basic and diluted share count as if the IPO had occurred at the beginning of fiscal 2013.

To arrive at pro forma net income, we have made adjustments for management and consulting fees from our sponsor, credit facility interest expense, IPO related expenses that were not capitalized, estimated ongoing public company costs, losses on disposable assets, asset impairments and closed store costs.

We have added back provision for income taxes and have applied a 40.5% income tax rate. Included in our earnings release is a reconciliation of our GAAP results to our pro forma results. We believe that our pro forma results provide a useful view of our business given our post-IPO capital and cost structures.

Accordingly, pro forma net income for the quarter was approximately $5 million compared to $4.4 million last year. Diluted pro forma earnings per share were $0.12 for this year compared to $0.12 for last year.

We have used a diluted weighted average share count of 39.9 million shares for the third quarter of 2014 and 37.8 million shares for the third quarter of 2013, which reflect our shares post IPO.

In terms of our liquidity and balance sheet as of September 24, 2014, we had cash and cash equivalents of approximately $41.8 million and outstanding debt of $188.7 million.

For the foreseeable future, we expect to finance our operations, including new restaurant developments and maintenance capital through cash from operations and borrowings under our credit facility. We expect our capital expenditures to total $26 million to $30 million during the full year of fiscal 2014.

With regard to fiscal 2014, we are updating the following full year guidance. First, we expect system-wide comparable restaurant sales growth of 6.4% to 6.6%, including company-operated comparable restaurant sales growth of 5.4% to 5.6%.

Second, we expect to be in the high end of our prior plan to open 9 to 11 new company-owned restaurants and four new franchise restaurants. And third, we anticipate restaurant contribution margin of between 21.4% and 21.6%. With that, I will turn the call back to Steve for a discussion of our growth strategy and closing remarks..

Thank you, Larry. As we move into the end of the year, we are encouraged by our third quarter’s strong financial performance and are excited about the long-term opportunities we have to grow our company and bring our unique menu of freshly prepared, Crazy You Can Taste entrees to an even wider audience.

We believe our differentiated menu and the great value we provide to our guests position us well for the future. As we look ahead, we believe we have significant whitespace opportunity to grow our restaurant base to over 2,300 restaurants nationwide, as well as a number of initiatives that we believe can support ongoing sales growth.

Thank you for joining us this afternoon. We appreciate your interest in El Pollo Loco. And now we’d be happy to answer any questions that you might have. Operator, please open the lines for questions..

Thank you, sir. [Operator Instructions] Our first question comes from David Tarantino with Robert W. Baird. Please state your question..

Hello, good afternoon. And congratulations on solid results. Steve, I wanted to ask if you could elaborate on the Houston market opening, since it’s your first entry into a major new market.

I was just curious to know kind of what you are seeing from an initial customer response or sales and how that compares to your expectations heading into that opening?.

Certainly, David. First, let me say we are very pleased with the initial weeks. While it’s still early, the initial weeks’ sales are very encouraging. We had opening today a of -- we had opening events.

We had a tremendous amount of interest as we -- as the store was under construction but it’s a little bit too early to actually give the actual sales figures. We want to get through our kind of a honeymoon period, which for us typically goes four to eight weeks, initially very strong.

I think what’s more important is what we’re hearing -- I will turn it over to Ed, what we are hearing about from the consumer because we’ve done some research after we’ve opened. And of course, we monitor our market force metrics. So I’ll turn it over to Ed to tell you what the consumer is saying about us..

Yes, I think, as Steve said, we are very pleased with our entry into the Houston market. We went in with a solid amount of marketing support, cable TV, direct mail and a slew of local events that we’ve had there. The Houston consumer understands our concept and is using us in the right way.

We are seeing higher revisit and food quality scores, so we are very pleased about that. And we are really looking forward to our next opening in Copperfield..

Yes, we have two under construction right now, David, Copperfield and the Katy location, as well..

Excellent. Thank you. And then maybe one more on the development outlook.

Could you give us an update on what the pipeline is looking like for 2015 and your progress on both the company and the franchise side from that standpoint?.

Yes, David. I can take that. We are very, very pleased with the pipeline we have going into 2015. We are well on track to deliver 16 company openings and 11 franchise openings in 2015. So, we feel very, very good about the pipeline..

Great. Thank you very much..

Our next question comes from Andy Barish with Jefferies. Please state your question..

Hey, guys. I am wondering on the chicken cost side of things, this is typically the time of year you’re going into contracting. And chicken has been a little -- actually, really expensive. So you mentioned you expect up but mitigation.

I guess, how does that sort of translate into kind of an early look at food costs as a percentage?.

Yes, David. So as you said, we are right in the middle of our chicken negotiations right now. I think we’re seeing some of the other concepts where you’ve seen that and the chicken market is tight right now. And so we do expect to see chicken cost increase going into next year.

Based on where we are today, we don’t see it being an increase that won’t be able to mitigate next year through a combination of probably some cost management along with potentially looking at a price increase, if necessary. As you know, I mean we are a very value oriented concept. We put a lot of value on maintaining our value as a concept.

So pricing is always kind of a last alternative. Having said that, we are also brand -- because of our value and our transactions, we have the ability to price if we need to. So we’re going to kind of look at the balance of things that we can do but we fully expect to be able to mitigate any chicken cost increase..

Thanks. And then just a follow-up on the same-store sales composition. It looks like mix was probably about 1 point, 1.5 points or somewhere in that range, what promotionally was going on to drive that? That was I think a little bit better than we were looking for at least..

Well, we came out in August with our Ultimate Double, which did exceptionally well for us. And we introduced a three-course family meal as well, with our cheese enchiladas which through that period, we were hitting our highest mix on family chicken. And then towards the back end of the quarter, we came out with our stuffed quesadillas, Andy..

Great. Thank you..

[Operator Instructions] Our next question comes from John Glass with Morgan Stanley. Please state your question..

Thanks very much. Maybe just drilling down in the comps again. You talked in, I think it was in September about 5 to 5.5 for company stores, so it came out ahead of that.

Did you see indications sales accelerated through the quarter? Maybe some context around also the core markets, which are the majority, maybe some of the ancillary California markets, was there a big difference in comps there?.

Yes, I can just start off with that, John. We did the -- we had what we think was a strong third quarter. And I think the comps were also, if you look at the transactions and the transactions as they’ve trended up, both from first quarter to second quarter into third quarter, being our highest mix in the company side.

We were 33 on transactions and 30 on check average. So we think that was very strong and really points to that of the value relationship that we are giving the consumer at this point, as well as all the other work that we’re doing with the remodels getting completed, the new Hacienda design.

There seems to be a real momentum here building with the transactions. And I’ll turn it over to Ed to talk about certainly the promotions we did John..

John, on top of the sort of highlighted promotions that you see on TV, we had a couple of things that we had going on for us that were seeded earlier in the year. And one was the Five Under 500, a menu that we put out and we actually left that in. And we put out in January and we kept that, as we call it, below the line.

Not promoted but we saw a nice mix on that throughout the year and also our signature salads that we came out with in the spring. We kept those in through the summer and into the third quarter and those performed really, really well for us.

The more and more that we go, after this mainstream foodie, with either directly healthy products or better-for-you type of products, we just see the brand pick up more and more momentum. So you saw that transaction growth in Q1. You saw it build in Q2. The 500 and the signature salads are really solidifying.

And you see these transactions continue to grow into Q3. So that was a big part of it as well..

Yeah. We see as kind of a layering effect as we go through the year and Five under 500 is still on the menu.

And the Ultimate Double we left in for -- was that a couple of quarters, Ed?.

Yes..

So nice layering effect of those products, as well as the current promotion. So we’re very pleased with those trends, John..

And when you look ahead, you’re starting to lap tougher comparisons in the fourth quarter than in the third, so you obviously have some confidence that momentum continues.

And when you look at either the fourth quarter or even the first quarter of next year, are there any significant product laps we should be aware of, the Five under 500 or salads or anything else that creates maybe a little more lumpiness in sales?.

I could have looked at every quarter and said, wow. It’s actually difficult then I tell that to Steve all the time. But there is nothing that I see that we cannot get over. I feel like, John, this is a brand that fits so uniquely in this QSR plus space, bringing restaurant quality food at slightly above QSR prices.

We just continue to target this mainstream foodie. And we feel that they’re growing and growing and growing and they continue to fuel and drive our business. And you can see that performance versus the rest of the restaurant industry..

Thank you very much..

Thanks, John..

Our next question comes from Sharon Zackfia with William Blair. Please say your question..

Hi. Good afternoon. So most of my questions were answered. So, I will go back to Houston.

Can you remind us kind of how you are supporting Houston from a marketing standpoint? And then I know it’s really early but kind of anecdotally, are the Houstonians using the menu the same way that you see in Southern California? Is the mix similar? Is it a different demographic that you are seeing, just any kind of color without getting into the sales cadence at this point?.

Sure. Well, we went into Houston -- just take a step back -- with cable TV, direct mail and local events. And remember, our strategy in Houston was really to go in and land the chicken.

And once we landed the chicken, let’s have people understand that we take that chicken and we chop it up into some of the healthiest or healthier products that you can really get out there at a reasonable price. So we’re seeing more of a percentage of chicken, as designed, that was the strategy.

And we are also now starting to see the entrees pick up a little bit more mix. We think that the Houston market is using us in the right way. We did go in there and do some tracking with some consumers. We saw very, very high revisit scores and the food quality scores are also extremely high as well.

As far as the type of consumer, it’s the same balance that we see here in LA, so slightly -- big difference, more chicken..

And I might add to that, Sharon that on the operation side, we took actually our highest performing area leader that’s our multi-unit level leader and transferred that person, moved them to Houston.

As well as the GM, AM and shift leaders for the first three stores are all seasoned El Pollo Loco operators, who have actually transferred and are now living in Houston opening up these stores. So we are very pleased at the operational execution and along with the marketing efforts that Ed’s done. I feel very, very good about the Houston market..

Okay.

And then when you open a new market like this, do you typically see more dine-in versus drive-through, because in the locations that we visited, it seemed really, really crowded inside, as if people were kind of getting used to it?.

That’s not uncommon. People when they first come and they don’t understand El Pollo Loco, a lot of times they come inside because they want to really learn the menu and take that time. We’re seeing a little bit of shift as we go. Drive-through is getting a little bit more right now.

Of course, inside is comprised of eat in and take out because people use that salsa bar as well. So we saw a little lower drive-through at first. It’s picking up each week and we expect that to get up to the norm in probably two or three months in when they learn how to use the brand..

Okay. Great. Thank you..

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing remarks. Thank you..

Well, we thank you very much for your continued support and interest. And we look forward to our next quarter conference call. Thanks, everybody..

This concludes today’s conference. All parties may disconnect. Have a great evening..