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

Matt DiFrisco - Guggenheim Securities David Tarantino - Robert W. Baird.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the El Pollo Loco Second Quarter 2017 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will open for your questions following the presentation. Please note that this conference is being recorded today, August 03, 2017.

On the call today we have Steve Sather, President and Chief Executive Officer of El Pollo Loco, and Larry Roberts, Chief Financial Officer. 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 second 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 second quarter of 2017 by early next week, and we encourage you to view 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'll turn the call over to Steve Sather..

Thanks, Larry, and good afternoon everyone. And thank you for joining us on the call today. We are pleased to announce second quarter results that included revenue growth of 8.3% and pro forma net income growth of 8% to $0.21 per share.

System-wide comparable store sales grew 2.9% during the quarter, including 2.4% increase at Company-operated restaurants, and 3.2% increase at franchised restaurants. We’re particularly pleased with transaction growth return to a positive territory in the second quarter and expect the trend to continue in the third quarter.

Our results were driven by continued efforts to highlight our authentic brand, differentiated offerings and QSR plus positioning. Our entrée promotions during the quarter were focused on our signature avocado Tostada Salads and our new layered sale of LTO.

Both of these salad offerings highlighted the freshness of our food and the relative healthiness of our products, which we believe help distinguish us from other QSR concepts.

The four new layered avocado salads feature fresh ingredients, including ripe avocado and our signature citrus marinated fire grilled chicken layer together to create colorful and nutritious menu items. The salads were extremely well received and total salad mix during the promotion hit a record high.

We also had continued success with our unique family meal offering. During the quarter, we kept the focus on the $20 price point, which we believe help sustain our momentum. Similar to the first quarter, this promotion drove family meal growth over 4% year-over-year clearly resonating with customers.

We will continue to drive this price point for the balance of the year, as we believe it creates an exceptional value option. A key component of our QSR plus positioning is providing a great guest experience. During the quarter, we put a major focus on enhancing our operations, particularly in the Northern California region.

The renewed focus drove improved operating and consumer metrics and correspondingly, drove improved sales and profitability. We expect to take learnings from these efforts and apply them other markets to continue improving our customer service and delivering higher sales.

During the second quarter, we made significant progress on our technology initiatives, designed to drive increased convenience and loyalty. We believe the leveraging technology allows us to better connect with our customers, and provide them with higher quality and differentiated dining experience.

During the quarter, we rolled out delivery and partnership with Olo's Dispatch Delivery service and it's now available in approximately 40% of our locations across the system. While the initial uptake from customers has been modest, we believe the delivery can be a sales driver in the future.

We will continue to improve upon this initiative in addition to adding delivery service to additional restaurant locations as we partner with other third-party providers. Additionally, during the quarter, we launched our all-new loco rewards loyalty program, developed by Punch.

This program, accessible through our new mobile approximately, offers customers 1 point for every $1 spent at El Pollo Loco, and a $10 reward after collecting 100 points. In addition to our free entrée rewards upon signing-up and a birthday reward, customers will also receive surprised offers tailored specifically for them.

We believe that our delivery and loyalty programs not only bolster both convenience and value for our guests, but they also allow us to learn more about our customers’ behavior become more targeted in communications. Overtime, we believe that our loyalty program will both attract new customers and increase frequency of our current guests.

Turning now to development. During the second quarter, we opened four new Company-operated restaurants, two in Dallas-Fort Worth and two in Phoenix. Additionally, franchisees opened one new restaurant in the Dallas-Fort Worth. Subsequent to the end of the second quarter, the Company and franchisees have each opened one additional restaurant.

Looking ahead, we’re tightening our new unit opening guidance for 2017 and now expect to open 17 to 19 new Company-operated restaurants this year along with nine to 11 new franchise restaurants.

With regard to our Texas operations, Dallas Fort Worth and Huston, continue to be a challenge and to-date we have not been able to maintain the momentum in Texas that we saw at the end of the first quarter.

We currently have 15 restaurants in Huston, 13 Company operated and two franchised, and 13 in the Dallas Fort Worth market, 9 company operated and 4 franchise.

Performance in both these markets continues to be below our targets, and is the primary reason we are lowering our full year earnings guidance despite the positive momentum in our core markets.

We continue to analyze the market in order to help fine-tune our efforts to attract customers, drive sales and improve profitability in these highly competitive markets.

To further help focus our Texas efforts, we decided to close three restaurants that are performing poorly, don't need our more stringent criteria and are consuming resources that we believe can be better deployed elsewhere in the market.

As previously discussed, we are refocusing our development efforts in Huston and Dallas on high density trade areas. As a result of this more selective approach, we expect to build fewer restaurants in both Texas and in total in 2018 as compared to 2017.

With regard to future development, we continue to see highly qualified franchisees to partner with us to develop both new and existing markets. Our development incentive program aims at driving growth in select new markets along with our new marketing campaign, and Vision Design, continue to generate interest from existing and perspective franchises.

As we continue to build our pipeline, we look forward to working with qualified franchise partners, whereas passionate about the El Pollo local brand, as we are. Switching to our new Vision Design. We continue to be pleased, with the reception of and the initial results from, our Vision remodels.

The Vision prototype better reflects our authentic brand identity and QSR Plus positioning. As we have noted, all new Company operated restaurants and the majority of our new franchise operated restaurants will open with the Vision design.

We have now completed seven remodels in California and currently have plans for seven more by year-end, including five in Las Vegas. Additionally, we have several franchisees committed to completing Vision remodels this year.

We are continuing to work to value engineer the Vision design in order to reduce cost, while still achieving the result in sales lift. Before I turn the call over to Larry, I'd like to recognize Enrique Pulido, the winner of our Grill Master Challenge.

As we discussed on the first quarter call, our Grill Master Challenge is a fun and exciting way for our cooks to refresh their knowledge and test their expert skills against other cooks from around our system, while at the same time, reinforcing product quality and service, which are key components of our QSR plus positioning.

The competition was closed however, Enrique distinguished himself as the Top Grill Master. Congratulations to Enrique, as well as our other talented competitors in this year's challenge. With that, I'd like to turn the call over to Larry, who will go over our second quarter results and our 2017 guidance in detail.

Larry?.

Thanks, Steve. For the second quarter ended June 20, 2017, total revenue increased 8.3% to $105.6 million from $97.5 million in the second quarter of 2016. The growth was largely the result of increase in Company operated restaurant sales, which rose 8.8% in the quarter to $98.9 million.

This increase in Company-operated restaurant sales was driven by the contribution from the 24 new restaurants opened, during and subsequent to, the second quarter of 2016, as well as by the 2.4% increase in comparable restaurant sales.

The increase in Company-operated comparable restaurant sales was comprised of 0.5% increase in transactions and a 1.9% increase in average check. Franchise revenue increased 1.4% in the quarter to $6.7 million from $6.6 million in the second quarter of 2016.

This increase was driven by the contribution from 17 new restaurants opened during and subsequent to the second quarter of 2016, as well as by 3.2% growth in comparable restaurant sales. These are partially offset by lower development and renewal fees and point of sales charge pass-through to franchisees.

Turning to expenses, food and paper cost, as a percentage of Company-restaurant sales, decreased 27 basis points year-over-year to 29.5%. The improvement was predominantly due to lower commodity costs, particularly lower contracted chicken prices and freight cost. We continue to experience higher produce cost, especially with regard to avocado prices.

As a result, we now expect full year commodity deflation of about 2.5%. Labor and related expenses, as a percentage of Company-restaurant sales, increased 10 basis points year-over-year to 26.9%.

The increase in labor expenses was due primarily to higher workers' compensation claims activity, higher and minimum wages in California and Los Angeles, and the impact of incremental labor required for 27 new restaurants opened during or after the prior year quarter. These were partially offset by favorable workers’ compensation adjustments.

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 30 basis points year-over-year to 21.8%.

The increase was primarily due to rent expense relative to revenue volume generated and other incremental costs related to restaurants built in 2016 and the first 26 weeks of 2017. General and administrative expenses increased by approximately $1.3 million year-over-year in the second quarter to $9.6 million.

As a percentage of total revenue, G&A expenses increased 60 basis points year-over-year. G&A expense in the second quarter of 2017 included $1.1 million in legal costs related to the securities class action litigation as compared to $340,000 of securities litigation cost in the second quarter of 2016.

G&A during the second quarter of 2017 also included $139,000 of executive transition costs related to our previously announced CEO search.

Excluding the cost associated with the securities litigation in both periods and executive transition expenses, G&A expenses in the second quarter of 2017 increased approximately $400,000 year-over-year and were 30 basis points lower year-over-year as a percentage of total revenue.

This dollar increase resulted primarily from higher payroll expense due to an increased number of corporate employees in higher accrual related to the Company's annual bonus program. Depreciation and amortization expense increased to $4.6 million from $4 million at second quarter of last year.

As a percentage of total revenue, depreciation and amortization increased 30 basis points year-over-year. The increase was primarily due to our new store development. During the quarter, we recorded approximately $400,000 of expense related to the impairment of assets of one restaurant in Texas.

We recorded a provision for income taxes of $4.2 million in the second quarter of 2017, reflecting an estimated effective tax rate of 35.2%. This compares to a provision for income taxes of $5.3 million and effective tax rate of 42.4% in the prior year second quarter.

We reported GAAP net income of $7.8 million or $0.20 per diluted share in second quarter compared to a net income of $7.3 million or $0.19 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 income expenses associated with our tax receivable agreement; gains or losses on disposal of assets, asset impairment and stores closure costs; gains and losses related to acquire [Nuevo] Restaurants; and recovery insurance proceeds; legal expenses associated with the securities class action lawsuit and expenses associated with the executive transition.

We've added back provision for income taxes and have applied 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 $8.2 million as compared to $7.6 million in the second quarter of last year. Pro forma diluted earnings per share were $0.21 for the second quarter of 2017 compared to $0.19 in the prior year period.

In terms of our liquidity and balance sheet, we have $4.4 million in cash and equivalents as of June 20, 2017 and $94.9 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.

For the full year, we now expect our capital expenditures to total $42 million to $44 million. Turning to our outlook for 2017, we are revising our guidance for the full year. We now expect pro forma diluted net income per share of $0.54 to $0.57.

This compares to our previous range of $0.55 to $0.59, and pro forma diluted net income per share of $0.66 in 2016. Our revised 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 1% to 2%.

We now expect to open 17 to 19 new Company owned restaurants and expect our franchisees to open nine to 11 new restaurants. We now expect restaurant contribution margin of between 20.3% and 20.7%. We continue to expect G&A expenses of between 8.5% and 8.7% of total revenue excluding legal fees related to securities class action litigation.

We now expect adjusted EBITDA of between $66.5 million and $68.5 million, and we continue to use a pro forma income tax rate of 39.5%, which reflects a successful program to obtain WOTC credits. Now, I'll turn the call back over Steve for closing remarks..

Thanks, Larry. Our core business is performing well, driven by our strategy of highlighting our QSR plus position through our new marketing campaign, LTOs and efforts to improve operations, as well as by initiatives designed to enhance convenience and loyalty.

We are working hard in Texas to drive trail and repeat business, and in turn, improving sales and profitability. We believe that our authentic brand differentiated product and strong value equation will drive positive financial results and create long-term value for our shareholders. Again, I'd like to thank you all for joining us on the call today.

We're now happy to answer any questions that you may have.

Operator?.

Thank you. We’ll now be conducting a question-and-answer session [Operator Instructions]. Thank you. Our first question comes from the line of Matt DiFrisco with Guggenheim Securities. Please go ahead with your questions..

The question was with respect to your average check in the quarter.

I jumped on a little late there, and was just curious if you can give some color on what were the drivers of that?.

You are asking about what was driving our average check during the quarter. I think there are couple things; number one, was again the increased mix in growth of our family meals. As we highlighted, we had 4% growth in family meals again during the quarter and that was the driver of check.

I think the other one contributing probably to a smaller amount was the increased usage of our mobile app. We do see that as a check driver we’re seeing higher average check among our mobile users. So I think those were the two big factors driving our average check during the quarter..

And did you disclosed how much is being done on the mobile?.

I think now we’re running somewhere around to 1.2% to 1.3% in transactions in that range..

And then how would you roll out the -- or what are you looking at to test delivery, and how would you implement that with third party, the choice of the third parties.

What are you going to be looking at to select those?.

On the delivery, we've got through the Olo dispatch we've rolled out to about 40% of our stores. Right now, as you know, deliveries are a rapid changing industry.

We think we’re not fully satisfied yet with the service we’re receiving on that and we’re also -- we're not participating with any of the delivery marketplace providers, but many consumers are using right now. So as a response, we're looking to add those delivery services of that operated and marketplaces.

But we also want the ones that delivered direct orders for a reasonable fee. So we think this will significantly increase the number of restaurants that we’re doing again about 40% or about 180 of our restaurants have delivery right now could increase it into the mid-350s.

And we’re looking at various providers right now to assist us with that in delivery..

Can you share with us what you're seeing with delivery in those stores, those 40% that do have it at that store level, what delivery represents the percent of sales?.

It's a very small amount, right now. I mean, again, it's a very new launch. We expect it to build overtime. And I think, Steve, took you through number of initiatives we're doing to grow that side of the business. But I will say, initially, it's been a fairly small amount of mix transactions..

Our next question is from the line of David Tarantino with Baird. Please go ahead with your questions..

My question is about what you're seeing in Texas. It sounded like coming out of the last call that you were very confident in some of the initiatives that you'd put in place on the marketing and operation side. But it seems like maybe the impact of those that's stated.

So can you talk about what you're seeing there and maybe provide some perspective on what the new game plan might be to get the sales going in those markets?.

Let me give you a little overview on that. So we just see a lot of -- some variability in the results in Texas. And as we previously discussed on our call in the first quarter, we had a positive response to some of the initiatives that we implemented in the first quarter. And we really felt good about the momentum we were headed to into Q2.

But those sales didn't sustain. And we're really digging into a lot of the data to better understand that what that sales drop off was right now. At the same time, we've implemented a number of initiatives to help drive awareness and communicate the brand, and increase frequency currently. This is the increase in social media advertising.

We just introduced, in Texas, our Taco Platters, Taco’s as you know in Texas are very popular and we're seeing a better uptick on those and even in our current market. So we think that will continue to stay on the menu there. We’re continuing with the successful things we did in Q1. The fundraisers were very -- fundraising activities were very strong.

And we're pushing really aggressively our loyalty program in Texas this quarter as well. Also, we’re looking at some initiatives to simplify our concept.

So consumers can make it easier to understand also for our operators to execute, to help our efforts and as we focused on or commented on the call, we did closed three stores that weren't performing well and didn't meet our current development criteria on the density or the consumer aspect. And we think we can better deploy those assets.

As you know, the market is very competitive. But we think we have a unique concept there a very differentiated product in our Flame-Grilled Chicken. We also think that we're well in line with what consumers want today. So we feel positive about and confident on the Texas market, and we think these changes will help us focus better on that.

And we think we'll ultimately be successful in Texas, as well as other new markets. So that gives a little overview.

Larry, any comments to add to that?.

No, I think you hit the main points. So I think the one thing we’ve seen is that a little bit, Stephen, it's just -- Dave, clearly, a few things that come out in research are convenience and top of mind awareness are what you call the barriers right now. And I think convenience comes from just -- you don’t have a lot of restaurants in those markets.

But the one we were focused on is a top of mind awareness that get people in the restaurants and drive that frequency, because that top of mind awareness is what drive on their restaurants consistently. So that's why, as Steve highlighted, really going after some of these initiatives around loyalty, around social-media.

And we think those are things that will really drive that top of mind awareness. And as we launch those, we’re optimistic we're going to see volume start to move up..

And then I guess in the interim.

How are you thinking about putting new capital to work in those markets? Is it time to rethink whether you should be growing in those markets and so you start to see better performance among the units you've already opened?.

Well, as we mentioned, we’ve slowed down our growth in Texas. But we're still deploying capital to the sites that hit that tier 1 the high density with the new demographic research that we've done. So we’ll still continue to develop in Texas.

In fact, we’re starting construction on a store this coming Monday there, but it's one that meets that criteria. And that's why what we meant about refocusing our resources on those where we know they’re going to be strong..

[Operator Instructions] Our next question is coming from the line of J. Bartlett with SunTrust. Please proceed with your question..

This is [indiscernible] Robinson on for Jake Barlett. My question is you’ve talked a lot about store growth in new markets in 2018.

Could you give us an idea of what you mean for the overall unit growth rate in 2018?.

So as we highlighted in our opening comments, as Stephen just highlighted, we are going to slow down developments in Texas, focused on just those sites that meet our criteria. That will result in an overall reduction in our expected development in 2018 relative to 2017. I am not ready to give a number or a range on that right now.

The one thing I would highlight is that when you look at core markets, we actually expect development to accelerate in the core markets, core being Southern California, because we do feel like we've got actually a lot of opportunities in Southern California, still. So that will increase year-over-year significantly versus '17.

So bottom line is totally that one will decline, but we will see a higher development in what we call core markets..

And one follow-up.

Can you give us a sense of how much you expect the sales initiatives, like mobile ordering loyalty and delivery to be in 2017? Or is this something we’ll see more meaningful impact into 2018 type of story?.

Well, just on the loyalty program, we’re seeing very good -- I mean just -- first of all, it's very early for us. We just launched it seven weeks ago. But there has been a great adoption there. We've got almost 200 members as we speak today and we’re adding about 3,000 a day.

So we feel very good about the loyalty, but this will be a long-term driver and so increased frequency, and also bringing new people. And probably more importantly, it gives us great consumer data that will enable us to better understand our customers, and drive even more effective promotions. So we’re excited about the loyalty aspect of that..

And let me just add to Steve said just to give you a little more framework around why we feel like the loyalty program gotten up to a great start. As Steve said, we've been going for seven 7 weeks. We've already got around 200,000 people on our loyalty program, which we feel like is a strong number.

We're adding 3,000 to 4,000 new loyalty members every day. So we feel good about the program the launches on. And as Steve highlights in a long-term we expect to see it’d be a frequency in sales driver. And I'll say I'm cautiously optimistic that we'll get some benefit this year from that program from a sales standpoint..

Thank you. At this time, I'll turn the floor back to Stephen Sather for closing remarks..

I would like to thank everybody for joining us on the call today, and thank you for your continued support of El Pollo Loco.

Operator?.

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