Stephen Sather - Chief Executive Officer and President Laurance Roberts - Chief Financial Officer.

Matthew DiFrisco - Guggenheim Securities Reena Krishnan - Jefferies LLC. John Glass - Morgan Stanley Jake Bartlett - SunTrust Robinson Humphrey, Inc. Sam Beres - Robert W. Baird & Co. Paul Westra - Stifel, Nicolaus & Company Matthew Curtis - William Blair & Co. LLC..

Good day, ladies and gentlemen and thank you for standing by. Welcome to the El Pollo LoCo First Quarter 2016 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this conference is being recorded today May 5, 2016.

On the call today, we have Steve Sather, President and Chief Executive Officer of El Pollo LoCo; and Larry Roberts, Chief Financial Officer. And now, I would now like to turn the conference over to Larry Roberts..

Thank you, operator and good afternoon. By now everyone should have access to our first quarter 2016 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.

We 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 condition. We expect to file our 10-Q for the first quarter of 2016 tomorrow and we encourage you to review that document at your earliest convenience.

During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

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

Thanks, Larry. Good afternoon, everyone. And thank you all for joining us on the call today. Our 2016 first quarter results included our 19th consecutive quarter of system-wide comparable store sales growth and a pro forma net income of $0.17 per share.

For the quarter, we saw a 7/10ths of a percent increase in system-wide comparable restaurant sales growth that consisted of 1.8% growth at franchise restaurants and a 6/10th percent decline at company-operated restaurants.

The increase in system-wide comparable sales came on top of 5.1% growth last year for a two-year growth rate of 5.8% and a three-year growth rate of 13%. We continue to be pleased with our progress on the value, operational and service initiatives that we put into place throughout 2015.

While we have noted that their impact on comparable sales will take time, our company transactions while still negative has steadily improved since the second quarter of 2015. In the first quarter our consumer data and NPD research both showed continued improvement in our value and last visit excellence scores.

These are further supported by the recently published Nation's Restaurant News Consumer Picks Survey in which our likely to recommend score increased by over 12 points in 2015 versus 2014.

The improvement in these key indicators suggest that our initiatives are working, which we believe should ultimately lead to higher transactions and sales over time.

Last week we launched a refreshed advertising campaign, which includes the introduction of the brands new tagline Fresh from the Grill and showcases are flame-grills and the more flavorable and healthier food they deliver.

We have also started diversifying our media spend and engage Harmelin media as our new media company to help us more efficiently and effectively engage our target customers across a broader range of channels including mobile and digital. After a transition period Harmelin will be fully engaged by the fourth quarter.

Lastly, we continue to make progress on our mobile app another sales driving initiative, which will go in to test this month. The new app will allow guests to order from our full menu and to pay using any credit card from their mobile devices.

By the end of year we expect to have the app fully rolled out and fully functional, which includes the acceptances of coupons, gift cards, catering orders as well as Apple and Android pay.

We believe that these guest experiences of sales driving initiatives will further enhance our differentiated value proposition ultimately driving continued sales growth. Switching to development let me first start by welcoming John Dawson to the El Pollo LoCo team as our Chief Development Officer.

Given our growth strategy we really wanted a strong experienced leader of the development team. And John clearly fits that bill.

We are very fortunate to get someone with John’s development background and experience including 17 years at McDonald's, eight years at Dunkin’ Brands, and most recently as President and Chief Executive Officer of The Coffee Bean & Tea Leaf.

John officially joined the team on Monday and we look forward to his leadership in further developing and executing our growth strategy. During the first quarter, we opened three new company restaurants including two new company operated restaurants in the Greater Houston area. We will continue to further expand our footprint in Texas in 2016.

Work together with our franchise partners. We expect to enter the Dallas market and open approximately seven restaurants this year. Subsequent to the end of the quarter, we’ve opened one more company restaurants in Nevada, our 25 location in the state.

After a thorough review of our new restaurant pipeline, we now expect to open 17 to 20 new company operated restaurants this year with a more balanced opening schedule as compared to 2015. During the first quarter, our franchisees open one new restaurant in Brownsville, Texas continuing our expansion in South Texas.

On the franchise side, we continue to focus on accelerating development and feel good about the progress our existing franchisees are making including those in Houston and Dallas. In addition, we are in discussion with several highly qualified new franchise candidates looking to develop in new markets.

We remain confident in our ability to deliver 10 to 15 new franchise restaurants this year. I would like to touch briefly on the progress of our Houston development. Although, we only have limited operating history on an average our restaurant sales performance is now running modestly below our expectations.

Additionally, we are currently incurring higher cost as a result of opening seven restaurants over the last five-month period. While the timing of our entry into Houston is certainly a factor with weaker sales trends partially attributable to the well-publicized hotel industry slowdown.

We are proactively influencing a number of initiatives to drive higher brand awareness and comprehension.

These include better communication of the brand both on the inside and outside of our restaurants, shifting resources from TV to other forms of media including radio, increasing trial to in-store events, and focusing media on our current menu versus promoting limited time offers.

We will also look to bring elements of our new vision prototype to our restaurants in Houston later this year. Finally, we continue to believe that the best way to build the brands awareness is through greater penetration and we remain committed to our Houston development strategy and are confident in its long-term success.

As we discussed last quarter, we believe it’s important to update our restaurant design in order to stay relevant to our guest and ensure our restaurant reflects our elevated brand promise. We believe that our new vision design does exactly that and better reflects the quality of our food and our QSR-plus positioning.

The consumer feedback that we received on our new vision design continues to be very positive and going forward all new restaurants, which have not already begun the permitting phase, will be built to utilizing this design including our initial entry into Dallas.

With that, I would like to turn the call over to Larry for a detailed discussion of our first quarter results and 2016 guidance.

Larry?.

Thanks, Steve. For the first quarter ended March 30, 2016, total revenue increased 4.3% to $94.4 million from $90.4 million in the first quarter of 2015. The growth was largely the result of the increasing company operated restaurant sales which rose 4.3% in the first quarter to $88.4 million.

This increase in company operated restaurant sales was driven by the contribution from the 17 new restaurants opened during and subsequent to the first quarter of 2015 partially offset by a decrease in comparable restaurant sales of 0.6%.

Comparable restaurant sales were comprised of 0.2% increase in average check offset by 0.8% decline in transaction. Franchise revenue increased 5.1% in the quarter to $6 million from $5.7 million in the first quarter of 2015.

This increase was driven largely by the contribution of six new restaurants opened during and subsequent to the first quarter of 2015 as well as by comparable restaurant sales growth of 1.8%. Turning to expenses. Food and paper cost, as a percentage of company restaurant sales, decreased by 170 basis points year-over-year to 30.3%.

The improvement was predominantly due to lower commodity costs particularly lower contracted chicken prices. As a reminder, for remainder of the year prices for all of our chicken needs are locked in and we continue to expect commodity deflation of 3.5% to 4% for the year.

Labor and related expenses, as a percentage of company restaurant sales, increased 220 basis points year-over-year to 27.7%.

The increase in labor expenses was driven primarily by the increase in minimum wage, additional labor invested in our existing restaurants and incremental labor required during the start up of 11 restaurants opened in the fourth quarter of 2014 and three restaurants opened during the first quarter of 2016.

These were partially offset by lower workers compensation expense. Occupancy and other operating expenses as a percentage of company restaurant sales increased 110 basis points compared to the prior year first quarter to 21.3%.

The increase was primarily due to rent expense on new and renewed restaurant leases and an incremental cost related to opening new restaurants in the fourth quarter of 2015 and first quarter of 2016. General and administrative expenses increased by $1.8 million year-over-year in the first quarter to $9.2 million.

As a percentage of total revenue, G&A expenses increased 130 basis points to 9.8%. The increase was due primarily to $1.5 million of legal cost related to the securities class action litigation as well as the increases in restaurant pre-opening costs, travel expenses and professional fees.

Excluding cost associated with the securities litigation, G&A expenses in the first quarter of 2016 would have been approximately $7.8 million, which would have been an increase of $285,000 in the prior year period and slightly lower year-over-year as a percentage of total revenue at 8.2%.

Depreciation and amortization expense increased to $3.8 million from $3.1 million in the first quarter of last year. As a percentage of total revenue, depreciation and amortization increased 50 basis points year-over-year. The increase was primarily driven by our new store development as well as by our remodeling program.

Interest expense decreased by $385,000 year-over-year to $826,000 from $1.2 million in the first quarter of 2015. The decrease is due to the $44.5 million of prepayments on a revolver made during 2015 and in the first quarter of 2016.

During the first quarter, we incurred a charge of $264,000 relating to the present value of expected payments under our income tax receivable agreement. This agreement calls for us to pay our pre-IPO shareholders 85% of the tax savings realized as a result of utilizing our pre-IPO net operating losses and other tax attributes.

We recorded a provision for income taxes of $3.8 million in the first quarter of 2016 reflecting an estimated effective tax rate of 40.9%. This compares to a provision for income tax’s of $4.7 million in the prior year first quarter.

We reported GAAP net income of $5.4 million or $0.14 per diluted share in the first quarter compared to a net income of $6.8 million or $0.17 per diluted share in the year ago period. In addition to our GAAP net income, we have calculated pro forma results adjusting for one-time or unusual expenses.

To arrive at pro forma net income, we have made adjustments for expenses associated with the tax receivable agreement, losses on disposable assets, asset impairment, closed store costs and legal expenses associated with a securities class action lawsuit. We have added back provision for income taxes and have applied a 40% income tax rate.

Included in our earnings release is a reconciliation of our GAAP results to our pro forma results. We believe that the pro forma results provide a useful view of our business and cost structures. Accordingly, pro forma net income for the quarter was $6.6 million as compared to $7.1 million in the first quarter of last year.

Pro forma diluted earnings per share was $0.17 for the first quarter of 2016 compared to $0.18 in the prior year period. For the first quarter of 2016 GAAP and pro forma results were negatively impacted by the temporary closure of our restaurant due to fire in late 2015.

While this restaurant reopened in late March, revenues and net income were negatively impacted by approximately $750,000 and $217,000 respectively. In terms of our liquidity and balance sheet, we had $8.9 million in cash and equivalents as of March 30, 2016 and $121.1 million in debt outstanding.

For the foreseeable future, we expect to finance our operation including new restaurant development and maintenance capital through cash from operations and borrowings under our credit facility. We expect our capital expenditures to total $34 million to $38 million for the full-year. Turning to our 2016 guidance.

We continue to expect pro forma diluted net income per share of $0.70 to $0.74. This compares to pro forma diluted net income per share of $0.71 in 2015. Our pro forma net income guidance for 2016 is based in part on the following annual assumptions which reflect to revise expectation for restaurants in Houston.

We expect system-wide comparable restaurant sales growth to be in the low single-digit. We expect to open 17 to 20 new company-owned restaurants and expect our franchisees to open 10 to 15 new restaurants. We expect restaurant contribution margin of between 21% and 21.4%.

We expect G&A expenses of between 8.4% to 8.6% of total revenue excluding legal expenses related to securities class action litigation. We expect adjusted EBITDA of between $68 million and $70.5 million and we are using a pro forma income tax rate of 40%. With that, I will turn the call back over to Steve for some closing remarks..

Thank you, Larry. We continue to focus on delivering against our four brand pillars, great food, excellent service, a warm and inviting atmosphere and a good price. While further enhancing our value proposition and customer experience, we believe this will strengthen the foundation of our business and drive results over the long-term.

We continue to have a long runway of growth in front of us and we are excited about the opportunity that lies ahead. Thank you for joining us today. We appreciate your continued interest in El Pollo LoCo and we would be happy to answer any questions that you might have.

Operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matthew DiFrisco with Guggenheim Securities. Please proceed..

Thank you. Just set a couple of questions I wonder if you can give us an update on last time you spoke about the driver to the comp and trying to improve your value proposition with the combo meals and emphasizing those more.

Can you talk about that or give us some sort of metrics to gauge how successful that was in the sell through?.

Yes, Matt. This is Steve. We've got the - on the company menu the $5 value combos are on that. We did that last - that was last summer when we put that back in and that remains on the menu today. We looked at a number of initiatives as you know to drive that value aspect it's not just the food and the value pricing.

It's also the service that we're giving and the atmosphere, but we think we've got the menu now right. We reinstated the snack menu on the menu board we did that also last summer and also a number of our LTOs were really looked at the pricing that we're putting on those and we've got those in the mid-5 and maybe low six range.

So we made adjustments on prices on that. And what you really look at on the value it's really not just price it's really the function of everything that we're doing. We're getting great ratings on our food.

Now we want to bring up that service and atmosphere and provide that overall value and I think the real measure of all this including what you talked about the combo meals is the metrics that we're seeing the improvement and they've been improving, our transactions have been improving, all of our NPD our market force the recent Nation's Restaurant News.

All indicated that we're getting improved performance there, including that value aspect. So thanks for that question..

Okay. And then also I guess just can you dig into a little bit of the mix there I think you said. Last call you are estimating a little less than 1% on the price a little bit below what you’ve historically taken and your mix was or your average check was 0.2.

So are you having now a negative mix and I guess is that something that we should think about going forward or is that just something that was maybe promotional scheduled that was more seasonal..

If you look at the mix and towards the balance of the year, we expect to be slightly – well flat to slightly negative given the calendar and our real focus on value. We expect transactions to be slightly positive. And then on pricing, we've taken – just took actually in April a 70 point pricing increase in our company stores.

So we're currently running about 1.5% on price if you look at that as well. We took as you know eight-tenths of a percent last fall in November and we took it in a very scientific method. It was a three tier approach separating the restaurants into three tiers.

So mix again would be flat to slightly negative and transaction improvement and then the price adjustments. We’ll also take a look at adjusting our prices as we normally do this November, but we’ll see how the consumers accepting that at that point..

And then my last question with respect to development. I think you – 17 to 20 is a little lower than last time you talked, which was 18 to 22. Are those the stores I guess the one or two stores that sort of came out of your guidance range for company openings.

Is that coming out of the Houston market specifically and reflective of sort of the floods and some other issues that are going on down there?.

We took a close look at really the high end of the range including that we kept the two in that roll-over from last year and made an adjustment on two that we thought one was in Houston..

Yes. Let me just step in. I mean what we did was we’ve actually really scrubbed the development schedule. And when we look at – we had two restaurants that we’ve looked at probably opening this year. At that point lease is signed and when we review those leases and review just sites. We just decided not to move forward on them.

We didn't think they were the right size for our concept and so that's one of the reasons why we brought the top-end of that range down. I think overall, I don't want to have a top-end of the range that we don't think we can hit. So we dropped that, but it’s really reflective of a couple of restaurants again that we reviewed.

I didn't think they have the right thing to move forward on into a real scrubbing of the development schedule..

Okay. Thank you..

Thank you. Our next question comes from Andy Barish with Jefferies. Please proceed..

Hi, good afternoon guys. This is actually Reena Krishnan sitting in for Andy. Just one clarification in terms of the comps.

Was there any impact that you guys possibly saw from Easter?.

There was a slight impact or two - 2/10ths, but not significant impact..

Okay. And then just in terms of as you're trying to bring in more service into the equation as we're thinking about the labor line here. You had previously said that you're expecting about a 100 basis points impact or labor pressure.

Is that still accurate just given where minimum wages buy and how you are trying to bring up the service level into the equation here?.

Yes, I mean what we're seeing is, initially we did think the – you look at labor is the minimum wage and then a labor investment would be about 100 basis point impact for the full-year. What we're looking at is probably in Q1 looking through the details we’re not where we want to be, we have dip of miss on our base business.

I define base business as 2014 bills and prior and we since gotten under control if you go into the second quarter now it’s running on target in terms of labor. And then the other additional impact we’re seeing is again from 2015 and 2016 build.

We think initially I highlight about 40 basis points impact in those restaurants and now I think it's going to be a little more than that. And that’s just reflecting the unit volumes that we've got in a fact that.

And the reality is I mean we've got a lot of new units out there, we've got a lot more being built and we’re not going to cut back on labor because they hit. The margin numbers we really think we've got to make sure in places like Houston and Dallas, some of this labor as an investment to make sure we're running good operation into these market..

Okay. Thank you..

Our next question comes from John Glass with Morgan Stanley. Please proceed..

Thanks very much. I wanted to first just ask about Houston and I apologize because I missed Houston in your commentary at the beginning. You cited some weakness there.

I'm assuming it’s oil and floods and stuff, but this is I think the first time I've heard that - is this been sort of creeping up and now it's big enough to notice or was it and all of a sudden kind of situation in Houston maybe talk about that and is it been all the stores or are you worried about certain locations, a little more color around what you're seeing is Houston?.

Yes, John, thanks for the question. This is Steve. First of all we think it's still very early in Houston. Seven of our 11 restaurants open since the last fall, but that being said the unit volumes that we're now seeing are modestly below our original IPO expectations.

If we looked at a lot of the internal metrics and operating from the consumer measure et cetera, we're pleased with that. Our primary focus is on building brand awareness and how we communicate our brand.

So we implemented a number of changes like tweaks to this number of actions, we've shifted the media this year; we're going to go more on radio and digital. We're doing some more local store marketing efforts, added some external signage. Our marketing calendar is going to more educate the consumer.

We're implementing some materials that we're emphasized the brand and also some direct mail pieces. We're also going to bring this fall. We have had very good reception to our vision design that we're going to roll Dallas with. And so we'll bring some of those design elements into Houston later this year.

Finally, the best way I think to really build brand awareness is through great restaurant penetration. And we're still very committed to Houston and its long-term success, but we've opened many of these units late last year and we just saw the volumes slightly lower and we wanted to bring that out.

But we're very committed to Houston and Dallas, in fact in Dallas we're looking at opening. I believe we have – probably in Dallas we have I believe six stores opening next year. So very pleased there..

And I assume that there's been no impact on any of the Houston stores in the comp base, would that have an impact in the comp or not?.

John, there is I think one restaurant that now is in comp. Yes, so that have much of an impact on our comp, to the extent it does, it’s something negative because of the – lets’ call it honeymoon period and fall off with the time, but it’s too small making difference in our comp..

Okay. And just lastly just when you think about development 2017 you've got a new development person on board, but you also talked about how you scrubbed your development for 2016 and a couple of units fell out.

Why did those fall out I mean are you finding that you weren't – you're changing your criteria or would you find your criteria wasn't being adhered where I guess why did that happen and as you think about 2017, how do you think about initial thoughts or high level thoughts on how may stores, as you think you should or could open in 2017?.

John, one of them fell out because as we look at it a little details or is really part of a two restaurant deal with the landlord and we really only want one of them. But initially we thought we're going to have to take both nor get the one that we really want it and our development team did a great job negotiating, so they can break it apart.

And so with that and we did not go forward with the other unit and it's mainly because it was going to have a significant impact on two other restaurants of ours. And while we thought maybe the penetration work we just said looks a little too risky and now that we don't have to do it, we're not going to do it.

And then the other one was just one that came in and initially we thought we get the rent down, but the rent came in at level I was just too high for us to swallow, so we just said let’s pass on that..

Gotcha.

Okay, any thoughts on 2017?.

John, I just want to add, but those were two of that we didn't have, we actually find the balance now, our pipeline is basically almost everything has signed leases I think only one restaurant doesn't have a signed lease, for everything we have to sign and moving forward..

And just on 2017, is there any way to put a framework around that?.

Yes, this is Steve. Just roughly half are going to be in new markets that would be in Houston and Dallas area and the remainder in our existing markets California, Arizona and Las Vegas..

Thank you..

And also we expect a better balance across the quarters not backend loaded like we had last year. So it will be little back ended, little heavier weight on the second and third, but not like we did last year….

At 2016..

2016..

I mean the 2017 again the pipeline is coming together, we have got number of signed leases and we all got confident about the development schedule..

And John, as we’ve mentioned on the call we're very pleased to have John Dawson on Board although he just started Monday. We think he's a great addition to our development team..

Yes. You bet. Okay. Thank you..

Thank you. Our next question comes from Sharon Zackfia with William Blair. Please proceed..

Hi, this is Matt Curtis on for Sharon. Just have another question on Houston.

Are you actually going to be spending more on marketing in Houston during the second quarter or pulling dollars forward from the rest of the year? Are you just changing what you're allocating those dollars to?.

It's really more of just an allocation..

Okay..

We charge our restaurant 5% bill that's what we spend. We might pull a little incremental in but it won't be that significant those are really just a shift in where we're spending that money..

Okay.

And then on comps through the quarter, how the comps trend through the quarter? I mean was February the strongest month or not? And then if you'd be willing to share what trends were like in April that would be helpful?.

Matthew, give me a second. The one thing let me start with April, I mean we normally don't give guidance the quarters, but what we’ll say about April is that we talked about how our transaction have fairly improved since Q2 last year although they've still been negative.

And right now that improvement continues and actually Q2 to date we're running positive and we expect to see positive transaction through the quarter..

Okay..

Yes. Just in terms of how comps work during the quarter, I mean so much of it’s driven by what you're [laughing and saying] and so you know each of the periods we – the company level ran negative. And we're little more negative in period three.

But then the other two periods from a company basis again Q2 we feel good about where the transactions are to date expect to be positive for the quarter..

Okay. Thanks for that. And then I guess finally on your mobile app.

I know you haven't gotten into testing it no more after that obviously but do you view the app is more of a check builder or something that could be a potential transaction driver?.

I see it near term I think it’s a check builder, I think longer-term it’s a transaction driver. Especially as we start layering things like royalty programs and obviously reaching people through digital pads and those type of things.

But yes I think like most other companies out there - many of them it's going to be probably a check builder early on and long-term a transaction driver..

Okay. Appreciate it. Thanks very much..

Thank you. Our next question comes from Jake Bartlett with SunTrust. Please proceed..

Great. Thanks for taking the question. My question is about your labor exposure to minimum wage. There was some detail in the K that kind of showed how much revenue you get from Los Angeles County.

Maybe if you could just clarify how many of your company-owned stores are impacted or within Los Angeles County itself, given that they're having a higher wage increase?.

Sure, yes, so. Jake initially I think I previously communicated at LA County, we thought somewhere around 55 restaurants - company restaurants to be impacted. We expense gone through and scrub really look through legislation and scrub to see how many restaurants will be impacted. And the number I believe is 22, so 22, 23 restaurants will be impacted.

So that's probably the half of the original impact we thought would be and so we're previously I think we've built in probably a $0.5 million for the LA minimum wage impact. We’re still working through how we manage the compression, wage compression. But I expect now to be somewhere around $0.5 million what we originally anticipated for LA..

Okay. And just to clarify in the K you said that I think it was 42 or some around there – of your revenue is generated in Los Angeles County.

Is that – was I miss interpreting that?.

No, I mean those [indiscernible] back and review that knowing that you are interested in this question. And part of it was kind of forward-looking to think okay where else might adopt to LA minimum wage rules. And we kind of – I think we put that language in there.

But again we actually went through the details of the legislation and I think we’re probably – we are conservative in our 10-K, but we actually went back and did the detail analysis, we dug into it, we determined that 22 company that think about. I’m trying now to fill my head; it was less than 22 on the franchise side with the impact..

Got it. Okay, we can maybe go over it offline..

Yes..

But I mean it says in the K that on September 29, the Board of Supervisors in LA County adopted the ordinance within The City of Los Angeles, but we can come back to that later. But maybe just overall in terms of the minimum wage increase that California looks to be passing through I mean you’re going to have multi-year of wage pressure from that.

How do you plan on dealing with that longer term? I mean do you think you can get efficiencies or maybe raise pricing enough to get labor leverage or to hold labor as a percentage to sales going forward or what’s your approach to deal with that kind of pressure going forward?.

Matt, let me just give you a quick overlook, obviously looking at a number of ways to manage that impact – first of all we did see this year some commodity deflation. We're looking at scrubbing every line of the P&L for cost savings.

Obviously, technology we think that's a big aspect we're looking at kiosks in the stores so we can possibly offset some of the labor there, cashier labor and then pricing ultimately on the end of that. But we want to make sure that we don't do anything to offset the value equation that we have.

And of course all the other competitors will be facing the same thing and I think Larry if you have other detail beyond that, those are the areas we're looking at..

Yes, those are main points I was going to hit. I think the – yes, we set up our quality or about to set California minimum wage taskforce to go after all the things. We go after to mitigate the impact, certainly looking for other cost savings.

And then probably big one we’ll be looking at what technology is out there have been used to get more efficient and help manage it that way rather than just take price..

Great. And then another question on your – the traffic looks to be recovering and that's encouraging. Are you seeing – who you're getting back, it seems like a tough environment still to gain back that value consumer given what they're hearing from some of the QSR competitors.

But are you seeing maybe your higher end consumer growing faster or are you getting back both your kind of the value consumer you would identified is losing few quarter ago or how is that working on?.

Yes. The initial indications are that the heavy user, the heavy consumer that allows our brands is really coming and coming more frequently..

Yes. I’ll just add. I think Steve is absolutely right. And I’ll add that we don't want to get too positive, but the fact that the burger guys are out there heavily discounting and again we're seeing improvement in our transaction trends, it is somewhat encouraging..

The stuff we took with our pricing has been spot on and really brought the – we’re focused on the transaction increase and given the heavy competitive from the burger guys and all the QSRs I think we're holding our strategy very well and we think that strategy is the right one, because I think if you get into that discounting and it's going to hurt the brand long-term..

Great. And the last question on your tiered pricing plan.

Could you maybe explain how that's being implemented? Is it a matter of increasing in some markets and holding other markets like Houston flat or are you actually decreasing in some markets? Maybe if you can give us an idea of maybe how much you're increasing in kind of Tier 1, Tier 3, Tier 2 just give us sense how that’s all working..

Yes, really we separated it out into – really was five tiers if you add it in Houston, which we haven't taken any price increasing there as we're just launching the brand, so that could be really the fourth. We also treat our Sacramento market like that.

The others were in the three tiers and how we take pricing as we see the ability through working with our metrics to move from one tier into the next, which raises the prices, we shift that store into that and those are in our – the balance of our markets are LA, Las Vegas and Phoenix..

And just to add. That’s really our restaurant by restaurant type of analysis, it’s not like sections of LA, Orange County it’s restaurant by restaurant..

Got it. Thank you very much..

Thank you..

Thank you. Our next question comes from Sam Beres with Robert W. Baird. Please proceed..

Hi, good afternoon. First question, Steve I know you’ve talked in the past about some operational enhancements, whether it’s the pagers and the company locations and moving the franchised as well the new center line kind of prep layout.

So maybe wondering if you could talk about where you are seeing speed of service trend in the most recent quarter and how you think that's impacting potentially the improving trend on traffic?.

Yes, well thank you for that question because we're very – as you know last year we implemented a number of initiatives and most of them were in the third quarter, the majority in the fourth quarter being our line improvements, our POS simplification, pagers on the inside for inside speed of service, we also increased our labor on the inside or labor in the store to improve that as well.

What we're seeing on speed of service is where we've always been very strong on the drive through, we've always measured that. That's running just about four minutes for both company and franchise and we monitor that, we monitor daily. Both company and franchise have always focused on that.

We've seen real improvement on the inside because we really – since we put the pagers and that's a way of measuring the inside speed of service. We did take it prior to that for mystery shops, but that was more of a range it would be under four minutes, four to six minutes.

So now we're getting what we saw when we first initiated the inside speed of service with the pagers was that we might be over five minutes initially. So as we've added those in we're now close to that four minute mark in all the company restaurants and franchise about I would say 80 or 90 have put the pagers because they see that improvement.

So we think those enhancements that we made in the fourth quarter and back half of last year are really part of improving our operations this year. And it's really reflective in every metric that we look at. If you look at the NPD metrics, we just got our first quarter and we improve there on all the service metrics.

If you look at our market force metrics the highest that last visit excellence has been. You look at the Nation's Restaurant News one that just came out. We went from I think seventh down to fourth and then improved in the majority of categories especially on speed of service fee.

So we're very happy that we took the time and did that right last year on all of that and we think we're going to reap the benefits and improving it most here especially franchisees add those pagers into their store..

That’s helpful. Thanks. And maybe one follow-up. The company has been leading the franchise system in terms of the ramp up in unit development. So any perspectives on the competency haven’t accelerating the pace of franchise unit growth in 2017 and beyond.

Are you seeing the pipeline built for your company, you can deliver a high rate of franchise growth next year?.

Yes, we are seeing some nice improvement. We didn't increase our forecast on the franchise side yet, but they have had nice improvement, we've said 10 to 15 and we feel very comfortable that will hit that are higher.

We're also looking at as we mentioned in the call a number of highly qualified franchisees especially if you look at the Henry Group that joined us in Dallas is going to co-develop Dallas with us.

They're going to open up almost simultaneously with us so they're going to have two or three stores opened this year as well and we're looking at groups for other smaller markets in our existing markets plus we've got existing franchisees in Utah and two of our existing groups are developing the Utah market.

So we're seeing good interest there, good actual action on that..

Yes, and just to add to that I think - I just add that’s really the key to giving our franchise acceleration, in Utah we have existing franchisee to – are looking to develop.

But I think we are working hard sign is getting new franchise into the system and certainly in terms of the long-term growth 2017 and beyond is critical that we continue adding new franchisee like one we have in Texas and one we have in Houston.

We get them on board then we feel good about being able to ramp up franchise development in the later years..

Great, thank you..

Think you. Our next question comes from Paul Westra with Stifel. Please proceed..

Great, thanks. Good evening.

I was wondering if you just kind of officially give us an update on your view of the excuse me in the competitive environment in discounting out there I know alluded to it in one answer, but maybe how that started off and maybe feel the same it’s gotten better or worse now in April versus maybe in the first quarter?.

Well, I think first of all I think we're seeing the – in LA I think the economy is reasonably strong, the competitive environment is what you see especially in the burger brands, it's what you see in all of the markets. There's a lot of discounting going on.

The burger were so to speak as we said we're not getting into that but that certainly is going on. The burger war so to speak as we said we're not getting into that. But that certainly is going on here and we're very pleased with our transaction growth that we've maintained and improved in light of that competitive environment.

So we think that strong performance there, but it certainly is there and we're aware of it..

And can you tell whether it's gotten any better or worse as we moved out throughout the year?.

I would say you know it's hard for us to put an actual dollar number on it. We see it as we go around and see all the promotions..

I think a hit list..

Hit list a little bit..

Well, I think when you see this - started in the last year hit hard in January and I don't think really have seen much change I think it’s as strong today and what we can see in the marketplace as it was say in January..

Paul, we really think as I mentioned it would be a mistake for us to try and kind of join those burger wars have joined that really heavy discounting. That’s those battles haven't worked for a long-term and it's really going to we think denigrate the brands and that's not, we think - we're clearly differentiated with our food and our taste.

And we're offering that a great value and that's where our positioning with the QSR+ we think is the right one and we're going to stay with that..

Great. Thanks and then moving over to you’re thinking about the store level margin number I guess maybe seasonally the question your full-year margin guidance points to the number like 50 basis points stronger for the year than what you saw in the first quarter. We said last couple of years it was the reverse to our first quarter.

Margins were bit higher and I know you hit some of that regarding inefficiency of the labor and some of the new stores start ups but anyway to quantify it that impact and you sort of why this year we'll see stronger margins in the final three quarters?.

Yes. Paul, like I said when we look at the first quarter in terms of margins. I think the ones. We always anticipated the first quarter would be a little lower this year. Given the number of new restaurants coming on Board, but late last year we knew the last year, we knew that was going to have an impact on the first quarter.

So we anticipate our first quarter margins to be lower than past year’s. I think that the price little bit that took even a bit lower like I highlighted was the labor inefficiencies, which in Q2 we’ve eliminated that issue on our base business.

And you know still and some of our 2015 bills we built inefficiencies but you know we've seen that we need to keep some labor in these restaurants make sure we maintain our service levels.

So certainly in terms of that base inefficiencies that should go away as we move through the year and even some of the 2015 rollover impact and also should become better as these restaurants come on board and we – normally when we open these restaurants, we put a lot extra labor in them for the first eight weeks or so they'll work through that.

And so I would expect to see the margins improve that balance of year. The one thing I’ll highlight because when I look at the business I always break this down between – I look at into the 2015 bills, 2016 bills and then my base business and then you’ve get some other items going on.

And even in the first quarter, even with that labor inefficiency the base business – with [indiscernible] brand flat margins year-on-year. And so that to me is good performance certainly full-year and we're still looking for that base business, again those are 2014 bills and prior to run flat if not slightly improve margins through the year.

And again it's just the matter of building we're doing at new unit and 2015 rollover units, which we want to, maintain a labor in by making service levels. That were we are seeing a little bit more margin impact and that's why I dropped the margin guidance..

That's very helpful. Thank you.

And then maybe lastly, maybe a peek on what your current marketing sort of calendar and schedule looks like here in 2Q and as far out as you are willing to go, maybe what’s on the – coming down the pipeline for the summer?.

Yes, sure. If you look at – hey, hold on I’ll grab our calendar here. We're currently on our double chicken salads, which is our limited time offer. Again we always run our family meals as well here.

We don’t want to get too much into giving our marketing calendar publicly here for the balance of the year, but we’ve got some great things lined up for the balance of the year. We’re doing nine modules this year and we're very pleased with what Heather and the R&D group has for us..

But generally the LTOs repriced comparably on a year-over-year basis?.

Well, we actually lowered the – we lowered the range as I’ve said in the one of the comments before. We're trying to keep them in the mid to low if we go over $6 in the low $6 range.

We're very conscious on that value aspect and we think we've really done a lot over the last year really if you look from Q2 last year to address those issues and we think we've got the right products and the right pricing. So we don't want to get too high into the $6 – the high end of the $6 with these.

The most important thing is the products taste great, which they do..

Great. Okay, thank you. And look forward to those all stores..

Thank you. We have a follow-up question from Matthew DiFrisco with Guggenheim. Please proceed..

Thank you. Just one of those questions I asked earlier about the quarter to date trends, you were I think also referring to annual guidance. So I just want to make sure I heard that clearly.

You’re saying you anticipate positive comps and positive traffic in 2Q was that correct?.

No, what I said Matt was Q2 to date we are positive transaction and we expect to be positive transaction for the quarter.

So we're not giving – yes, we've given the full-year low single-digit comp growth that still our guidance for the full-year, but I’d like to say we've seen a positive trend in transaction in Q2 last year that continuing and again will be we are positive today and expect to be positive transaction for the quarter..

Positive transactions, okay.

I guess you were not positive transactions in 1Q that's right I was a little confusing you said continuing positive transactions?.

I mean the continuation in the positive trend in transaction although we are negative in Q1, they were still called less negative then each quarter of Q2 last year we still we got better although it’s negative. And now we are seeing Q2 that we're running positive and expect to be positive for the quarter..

Okay, that’s very clear. Thank you. And then the last question I guess just looking at you referred to 2017 guidance sort of half of your openings for the company coming outside of California.

Is there any risk that the underperformance in the Houston stores would cause you to further scrub or look at those? Potentially I guess if it's half of the 17 to 18 that you're opening that are 17 to 20 opening this year opening this year.

Call it eight to 10 stores that might open in Texas or other markets outside California, would you consider is there a risk of those maybe being differed for a longer-term growth later..

Yes, let me clarify first of all on the 2017 that I was referring to 2016 growth the 17 to 20 half in new markets have been the existing market since. And we haven’t really given a mix of 2017, it's really too early to call that.

But we're still very – first of all we are very optimistic on, obviously if you look at the commitments of Dallas, we feel very good on that.

And we feel good on Houston as well, but we are too early for us to really see what the mix will be for 2017, because we're bringing – we've got – if you look at the areas where we're under penetrated Northern California, Sacramento a lot of opportunity there.

I know John Dawson is just new one on board only been here four days now, but he sees a lot of opportunity in our existing markets as well and so again early for us to make a call on the mix in 2017..

Okay. Thank you. End of Q&A.

Thank you. I would like to turn the floor back over to Steve for closing comments..

All right. Thank you very much operator and thank you everyone for joining us today and your interest and we look forward to the next call. Have a good evening..

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation..