Laurance Roberts - CFO Stephen J. Sather - CEO and President.

Matthew DiFrisco - Guggenheim Securities Brian - Morgan Stanley.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco First Quarter 2017 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and all the lines will open for your questions following the presentation. Please note that this conference is being recorded today, May 4, 2017.

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 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 2017 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 discussion 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 2017 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, and good afternoon everyone. We appreciate your joining us on the call today. First quarter results included revenue growth of 5.7% and pro forma net income of $0.16 per share.

System-wide comparable store sales decreased 0.3% during the first quarter, including 0.4% decrease at Company-operated restaurants and a 0.2% decrease at franchised restaurants. Comparable store sales performance in the quarter came in ahead of our expectations as sales in March improved over the first two months of the quarter.

I'm pleased to note that positive trends have continued thus far into the second quarter. We continue to believe that we can drive sales momentum and profitability by executing our strategy of highlighting our authentic brand and differentiated product, while enhancing our strong value equation.

Our unique brand and product offerings will be emphasized this year in our new creative campaign, The Road to Authenticity, which we launched in January.

The campaign focuses on several key themes, including our differentiated brand story, the work that goes into preparing our food, the quality and healthiness of our offerings and the authentic influence of our hometown, Los Angeles. We are currently analyzing recently completed consumer research, designed to evaluate the campaign's effectiveness.

While the work is not yet complete, early indications are encouragingly positive. As highlighted in our previous earnings call, we're focused on addressing the softness in our family meal business that we experienced in 2016. During the quarter, we promoted several family meal offerings.

These offers, which included two variations of our $20 family meal, were designed not only to deliver great value to our customers, but to maintain or even improve margins. We've been very pleased with the performance of these promotions as family chicken sales are up 4% so far this year, reversing the 2016 declines.

Our current offer provides the option to add eight pieces of chicken to any family meal for only $5. We are optimistic that this promotion will continue to drive positive momentum in our family meal business, as we believe it creates exceptional value for our guests.

In support of our marketing efforts, we recently kicked off our Grill Master Challenge, a fun and exciting way for our cooks to refresh their knowledge and test their expert skills against other cooks from around the system. As you know, our Grill Masters are the key at crafting our hero product, authentic flame-grilled citrus-marinated chicken.

As far as the challenge, all of our cooks will be recertified as Grill Masters. The challenge, which will run through July, is an opportunity for these extraordinary cooks to encash prizes, recognition and bragging rights.

At the same time, it demonstrates our dedication to enhancing our product quality and service, which are key components of our QSR+ positioning. As many of you know, we've been working to enhance our value proposition to driving increased convenience and loyalty.

During the fourth quarter of last year, we rolled out our mobile ordering system, including a new mobile app. This system is the foundation for future technology innovation around convenience and loyalty. This includes third-party delivery, which is currently being tested in 23 stores in Las Vegas.

We continue to expect to roll delivery system-wide during the second quarter. In addition, building upon the mobile app will be our new loyalty program, which we expect to launch in early June. We believe that our delivery and loyalty programs will bolster both convenience and value, thereby driving higher sales.

Turning now to development, during the first quarter we opened five new Company-restaurants and franchisees opened four new restaurants. Subsequent to the end of the first quarter, we have opened an additional two Company-restaurants. We are on track to open 15 to 20 new Company-operated restaurants this year and 8 to 12 new franchise restaurants.

Our Houston restaurants continue to respond positively to recent marketing and operational initiatives. These initiatives are designed to better communicate our concept, build awareness, drive trial, and deliver exceptional experience, to encourage repeat visits.

While it's still early in this long-term plan and sales at these restaurants remain below targeted levels, we are pleased with the recent progress. Additionally, we are currently reviewing research, which should help us fine-tune our efforts to attract customers and drive sales and profitability.

Dallas, our newest market, now has 11 restaurants in operation, including three franchise restaurants. Results in these restaurants vary significantly based on the quality of the trade area.

While as a whole, they are lagging behind our expectation, those in the more densely populated trade areas are meeting our expectation, which we believe bodes well for the future. It also supports the adjustments we've previously made to our site criteria to focus on more densely populated trade areas.

Together with our franchise partner, we expect to open an additional three to five restaurants in Dallas/Fort Worth area in 2017. Additionally, I'd like to highlight our Dallas franchisee, the Henry Group's recent commitment to build an additional 13 restaurants over the next five years in the Dallas/Fort Worth, Austin and Waco markets.

This is very exciting for El Pollo Loco and represents the start of our expansion in Texas outside of Dallas/Fort Worth and Houston. We continue to seek high-quality franchisees to develop both existing and new markets, and we recently announced a development incentive program aimed at driving growth in select new markets.

This program offers financial incentives to both the new and existing franchisees with multi-unit development agreements in markets outside California and Nevada. While it's still early, these incentives, along with our new marketing campaign and Vision design, are generating increased interest from existing and prospective franchisees.

As we continue to build our pipeline, we look forward to working with qualified franchise partners who are passionate about the El Pollo Loco brand to supplement our brand growth. Lastly, I'd like to touch on our Vision prototype, which we feel better showcases our authentic identity and QSR+ positioning.

Going forward, all new Company-operated restaurants and the majority of our new franchise-operated restaurants will open with the Vision design. Feedback continues to be positive as we continue to monitor the reception of the design.

In addition, we have completed five Vision remodels in California and currently have plans for an additional nine by year-end, including five in Las Vegas. Additionally, we are not required to do so, we have several franchisees committed to completing Vision remodels this year.

With that, I'd like to turn the call over to Larry, who will go over our first quarter results and 2017 guidance in detail.

Larry?.

Thanks Steve. For the first quarter ended March 29, 2017, total revenue increased 5.7% to $99.8 million from $99.4 million in the first quarter of 2016. The growth was largely as a result of increase in Company-operated restaurant sales, which rose 5.7% in the quarter to $93.4 million.

This increase in Company-operated restaurant sales was driven by the contribution from the 23 new restaurants opened during and subsequent to the first quarter of 2016, partially offset by the 0.4% decrease in comparable restaurant sales.

The decrease in Company-operated comparable restaurant sales was comprised of a 2.2% decrease in transactions, partially offset by a 1.9% increase in average check. Franchise revenue increased 5.6% in the quarter to $6.3 million from $6 million in the first quarter of 2016.

This increase was driven by the contribution from 17 new restaurants opened during and subsequent to the first quarter of 2016, partially offset by comparable restaurant sales decline of 0.2%. Turning to expenses, food and paper cost as a percentage of Company-restaurant sales decreased 130 basis points year-over-year to 29%.

The improvement was predominantly due to lower commodity costs, particularly lower contracted chicken prices and freight cost. While we are currently experiencing higher produce cost, especially with regard to avocado prices, for the full year we expect commodity deflation of about 2.5% to 3%.

Labor and related expenses as a percentage of Company-restaurant sales increased 100 basis points year-over-year to 28.7%.

The increase in labor expenses was due primarily to higher workers' compensation expense, higher minimum wages in California and Los Angeles, and the impact of incremental labor required for 23 new restaurants opened during or after the prior year quarter.

For 2017, we expect labor inflation of about 4% as a result of minimum wage laws and tighter labor market. Occupancy and other operating expenses as a percentage of Company-restaurant sales increased 70 basis points year-over-year to 22%.

The increase was primarily due to rent expense relative to revenue volume generated and other incremental cost related to opening new restaurants in 2016 and in the first quarter of 2017. General and administrative expenses increased by approximately $500,000 year-over-year in the first quarter to $9.7 million.

As a percentage of total revenue, G&A expenses were flat year-over-year at 9.8%. G&A expense in the first quarter of 2017 included $351,000 in legal costs related to the securities class action litigation, as compared to $1.5 million of securities litigation cost in the first quarter of 2016.

G&A during the first quarter of 2017 also included $92,000 of executive transition costs related to our previously announced CEO search.

Excluding the cost associated with the securities litigation in both periods and the executive transition expenses, G&A expenses in the first quarter of 2017 increased approximately $1.5 million year-over-year and was 110 basis points higher as a percentage of total revenue.

This increase resulted primarily from higher payroll expense due to an increased number of corporate employees and an increase in non-securities related legal expenses. Depreciation and amortization expense increased to $4.3 million from $3.8 million in the first quarter of last year.

As a percentage of total revenue, depreciation and amortization increased 30 basis points year-over-year. The increase was primarily driven by our new store development. During the quarter, we closed one restaurant in Texas and one restaurant in Arizona, the assets of which were previously recorded as impaired during the third quarter of 2016.

As a result, the Company recorded $871,000 of asset impairment and closed-store reserves. Prior to IPO, we entered into a tax receivable agreement that calls for us to pay 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 $3.5 million in the first quarter of 2017, reflecting an estimated effective tax rate of 41.6%. This compares to a provision for income taxes of $3.8 million and an effective tax rate of 40.9% in the prior year first quarter.

We reported GAAP net income of $4.9 million or $0.12 per diluted share in the first quarter, compared to a net income of $5.4 million or $0.14 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 items.

To arrive at pro forma net income, we have made adjustments for expenses associated with the tax receivable agreement, gains or losses on disposal of assets, asset impairment and closed-store costs, gains and losses related to a fire in one of our restaurants and recovery of insurance proceeds, legal expenses associated with a securities class action lawsuit, and expenses associated with executive transition.

We have added back provision for income taxes and have applied a 39.5% 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 structure.

Accordingly, pro forma net income for the quarter was $6.1 million, as compared to $6.6 million in the first quarter of last year. Pro forma diluted earnings per share were $0.16 for the first quarter of 2017, compared to $0.17 in the prior year period.

In terms of our liquidity and balance sheet, we had $6.7 million in cash and equivalents as of March 29, 2017, and $101.4 million in debt outstanding. For the foreseeable future, we expect to finance our operations, including new restaurant development and maintenance capital, through cash from operations and borrowings under our credit facility.

Looking ahead to 2017, we continue to expect our capital expenditures to total $40 million to $45 million for the full year. Turning to our outlook for 2017, we are reiterating our guidance for the year. We expect diluted net income per share of $0.55 to $0.59. This compares to pro forma diluted net income per share of $0.66 in 2016.

Our pro forma net income guidance for 2017 is based in part on the following annual assumptions. We expect system-wide comparable restaurant sales growth to be approximately flat to 2%. We expect to open 15 to 20 new Company-owned restaurants and expect our franchisees to open 8 to 12 new restaurants.

We expect restaurant contribution margin of between 20.4% and 20.8%. We expect G&A expenses of between 8.5% and 8.7% of total revenue, excluding legal fees related to securities class action litigation.

We expect EBITDA of between $67 million and $70 million, and we are using pro forma income tax rate of 39.5%, which reflects our successful program to obtain WOTC credits. Now I'll turn the call back over to Steve for closing remarks..

Thanks, Larry. We are encouraged to see improving trends across our core business, bolstered by our new marketing campaign as well as initiatives designed to enhance convenience and loyalty.

We continue to believe that our authentic brand, differentiated product and strong value equation will drive positive financial results, despite what remains a challenging environment. While we still have a ways to go in order to meet our expectations in Houston, stores in that market are responding to recent marketing and operational initiatives.

Our development plans remain on track for 2017 and we are continuing to garner interest from both new and existing franchisees to further build our brand. Again, I'd like to thank everyone for joining us on the call today. We're happy to answer any questions that you have.

Operator?.

[Operator Instructions] Our first question comes from [indiscernible] with Robert W. Baird. Please proceed..

My first question is on the comps, and appreciate the talk about the acceleration in March, but is there any more perspective you can provide just on kind of the monthly cadence of comps throughout Q1? And along with that, maybe your thoughts on what the impacts were of things during Q1, such as weather or the Easter shift?.

This is Steve. First of all, you mentioned weather. We did really see a reversal of weather that we had particularly in February and a little bit in January. In March, we saw that reverse, and that certainly helped. As far as cadence of the comps, the January, the first period was a negative 0.5% for the system sales.

In February, we were a negative 2.8%. And that reversal came in March, a positive 1.8% for the system in March. And while the Company transactions were down for the overall quarter, they were slightly positive in March. And while we don't get into hard numbers for Q2, we can say that the trend in March has also continued for Q2.

So, we're pleased directionally with that..

And just to add to that a little bit, the other thing we saw was, overall when I look at the quarter, the first quarter, the weather impact was roughly around 60 basis points, and then the Easter impact for the quarter was roughly favorable 40 basis points, which of course would have come off or will come off in the second quarter, it will reverse to be a negative impact on our second quarter..

So I guess maybe as a follow-up, so March obviously saw the whole Easter impact and you are expecting to see that whole negative impact in April, so I guess the quarter to date comped you still said slightly positive, to confirm that?.

What we said is the quarter to date, the second quarter to date is basically on par with the trends we saw in March..

And that's including the drag you've seen from Easter?.

Yes..

Okay, that's helpful. Thank you. And maybe just in terms of the Company transaction side, I know Steve, you did say that they turned slightly positive in March, but overall while comps in Q1 for the Company I think was near the Q4 level, transactions did take a step back.

So, any color you can provide there kind of on that sequential cadence?.

Larry, do you have those specific numbers on the transaction?.

I mean transactions for the first quarter are somewhat difficult to read, because I mean that hit in February with the weather, that's basically all transactions. So, I think [indiscernible] drove the negative transaction that we had in the quarter, the negative 2.2% in transaction at the Company restaurants.

Like we said, coming at in March, we saw some strength in transactions. We continue to see strength in transactions.

So, personally I'm not too concerned about the overall negative in the quarter just because, again, that weather impact, which was really focused in February, was really all transaction related and really had a negative impact on transaction..

That's helpful. Thanks.

And maybe one more, last one for me, I appreciate the commentary on Houston maybe seeing some directional benefit from those marketing and operations programs, but any perspective you can provide on the magnitude of benefit you have seen since you have implemented some of those programs, which I think started more so, the most recent ones in Q4?.

We are pleased. Again, it's early we think. We started this in testing a number of different marketing initiatives as well as operational investments. So, on the operations side, we put some of our best operators, including our top operator, down in the Houston, Dallas market.

We also tested a number of marketing initiatives, and what we have done is we really tested them out through December, January a little bit, and February, but we've landed on ones that we think are seeming to be very positive for the market, and those are targeted direct market mail and FSIs. That's working very well.

We have utilized street teams and we have used them in Houston and we've moved them up into Dallas as well that go in about a mile radius around the store and meet with business owners, schools, they do a lot of – one of the things we have additionally found is fund raising promotions where we bring different charity groups and school groups into the stores and they get a percentage of our sales.

That's getting very popular. We have actually scheduled over 60 of those in both the markets. And then we used radio, which we are still on right now, through the mid part of the summer I believe, with the ones that were effective.

And although we've seen sales improvements across all restaurants, they are still performing slightly below our target levels and we still have a lot of work to do. So, we are seeing these improvements, we saw them also in the consumer metrics. If you look at our market force metrics, those are moving in a positive direction.

And we just completed some research which looks – again initially, we looked at that, it looked positive but a lot more to dive into that, and that will help us further guide both Houston and Dallas. So that work continues on, we're directionally positive, but that gives you a lot of the update on what we are doing.

And what we learned in Houston, we are taking to Dallas, both in those direct mail and FSIs, street teams, fundraising and the radio..

Great, that's helpful. Thanks guys..

Our next question comes from Matthew DiFrisco with Guggenheim Securities. Please proceed..

I just wanted to ask a little bit about the competitive environment, and especially in Southern California.

I'm curious if you could, have you seen some of the pressure last year obviously with the deflationary environment out there in food cost? You cited that in the year ago with the bundling meal and some of the lower end customer business maybe being taken down by the fast food or QSR+ guys' competition.

Where do we stand as far as year-over-year and are we seeing the grocery channel and inflation in general just coming back enough that we are seeing less discounting going on in your opinion?.

I'll take that first. This is Steve. I don't think the competitive environment has gotten any less, especially in the QSR burger chains, still a lot of heavy discounting going on there. We still have that gap between the restaurant prices and the grocery prices.

We think that by focusing on what we call our value equation, value proposition, and the four brand pillars of the great food, service, environment, over a reasonable price, we think that's the way to go and not get into that heavy discount. We have mentioned this on a number of calls in the past and we follow that. I think it's been worked very well.

In addition to that, I think if you look at our marketing approach this year and starting with our new agency, Vitro, and our new Road to Authenticity campaign, I think that it has really elevated our communication strategy. And then the focus on family meals with value helps us give that value without that heavy discounting.

So, Larry, any other thing?.

Matt, what I would add, I think Steve hit all the main points, I don't think we've seen any real change in how competitive it is out there in terms of discounting and certainly the grocery chains are also very aggressive.

I think one of the highlights or what we need to highlight is, the way we have approached to family meals and success we've had in terms of getting growth back in family meals. I mean you'll probably recall, last year we were talking about how we are seeing a decline in family meal business as we were not advertising a price point of $20 on TV.

We've been able to go back and do that and then also do some other things around really driving value. At the same time, we have structured those that are actually favorable from a margin standpoint.

But clearly, being a little bit more aggressive in terms of messaging on a family meal has for now generated renewed growth in the family meals, which can increase the mix and overall growth. So, I think it just highlights that right now it's very competitive and you need to be on air with good deals for consumers.

At the same time, I think we've done a nice job and the market has done a nice job in terms of structuring those. So from a market standpoint, they are favorable..

Did you disclose how much the family meals represented as a percent of sales?.

They are normally around 28%, 27% to 29% of sales..

But they are up year-over-year?.

Yes, we have got a 4% growth year to date on family meals..

Okay. And then just to go back to the comp and the commentary, obviously you did a positive comp, 1.8% in March, and you are indicating that you are seeing a similar trend in 2Q.

I mean you actually have been seeing an improvement on a core trend if you sort of – if those are your numbers with the Easter effect in both of those, given that April got hurt by Easter and March got aided by Easter.

So, you're seeing acceleration would be implied then on a natural basis or a normalized same-store sales number, correct?.

I will say, we are cautiously optimistic about what we are seeing in this quarter to date, yes..

I had to try, right? So I was trying to get more than that..

It was a great try..

Good points for persistency on it..

All right, thank you. Appreciate it..

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

This is actually Brian on for John.

First, can we just get system-wide sales for the quarter?.

System-wide sales were $208.7 million..

All right, perfect. Thanks. And then just maybe what you guys are seeing so far in digital since you rolled out the app? I think you said last quarter it was 70 or 80 basis points as a percent of sales.

What are you guys seeing in the first quarter, and maybe kind of as you're going to rollout loyalty and delivery, what you think that could mean?.

This is Steve. We're about 0.8% on transaction mix right now, and launched that late last year on our mobile. We think this will continue to grow, especially as we launch a delivery and then loyalty, both of which will be launched in Q2. In fact, the delivery is being tested right now in Las Vegas. So, we're pleased with that.

We think it will grow at 0.8%, grow from that as we add the launch in Q2 with delivery and loyalty. It's a little early on for the total package, but that's where we are right now..

All right, great.

And then just one more if I could, what are you guys seeing so far in delivery that makes you confident in such a quick rollout from the test in 1Q to a full rollout in 2Q?.

I think first of all we are seeing that in Las Vegas we are not running into any operational problems, either from the delivery side of it or from the – in the in-store getting the orders ready. Still early, but this is kind of the first test that we have done with that.

We don't think it's going to be difficult to roll it out and we think it will also build then as we move it into the system. Really and when you look at it when you get into LA where you have that density of stores, and pop and density for our stores, a delivery makes a lot of sense for us with our family meals.

So, we are optimistic there, but we want to move slowly and make sure we get it right. That's why we are testing in Las Vegas..

Just to add to Steve's comments, I mean not only – I mean the Vegas test was really an operational test. So, as he said, haven't seen any issues from an operation standpoint. Also haven't seen any options from call it a systems perspective. I mean integration between our mobile app and delivery and in-store orders is working very well.

So that's why we have the confidence that we can move forward with it. And so we are basically ready to go..

All right, great, guys. Thanks..

There are no further questions. I would like to turn the floor over to Steve Sather for closing comments..

Great. Thank you, operator. Just want to thank everybody for joining us today on the call. Thank you for your continued support of El Pollo Loco and we look forward to our next call..

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