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

Jake Bartlett - SunTrust Robinson Humphrey Mary McNellis - Robert W. Baird Matthew DiFrisco - Guggenheim Securities Alexander Slagle - Jefferies Sharon Zackfia - William Blair.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Fourth Quarter 2017 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 8, 2018.

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 fourth 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 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-K for 2017 tomorrow and would 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 and thank you for joining us on the call today. Before we get started I wanted to take this opportunity to thank all of you for your continued support. As you know I'm retiring this month in order to spend more time with my wife and family and this will be my last earnings call.

I’ve had the honor to lead this special brand and team for over the last 7.5 years. During that time we successfully repositioned the brand targeting the QSR plus niche. We first assembled a formidable team without whom our many achievements would not have been possible.

Together we instilled an intense focus on all aspects of the business which drove meaningful improvement in our company operated avenue [ph] volumes and restaurant level margins. This heightened focus included involvement from our franchise partners at every level. Today our franchise relations have never been stronger.

Their insights have supported initiatives such as our hot standard design and remodel program which is now in the second phase with the Vision Design. I truly enjoyed working with this incredibly talented and dedicated team and I'm extremely proud of the successes that we have shared.

I'm thrilled with the Board’s appointment of Bernard Acoca as President and CEO. He brings years of experience from some of the most well recognized restaurant companies like StarBucks and Yum! Brands and has a proven record for driving results.

I'm confident that he is the right person to build upon our strong foundation and steer El Pollo Loco in this next chapter. I continue to believe that there is tremendous opportunity for growth ahead for El Pollo Loco and I look forward to seeing their many successes in the future. With that I’ll hand it over to Larry. .

Thanks, Steve. It’s been pleasure working with you and I wish you and Jodie all the best. Given our recently announced CEO transition I will be handling most of today’s call. Steve will be available during Q&A, and in case you did not see that in recent release, Bernard will start work on Monday, March 12.

I’d like to start our discussion today with a brief review of our fourth quarter results. I’ll then provide an update on the first quarter as well as our major strategic initiatives before offering initial guidance for 2018. We will then open the line for questions.

As to our fourth quarter results we reported revenue growth of 2.9% to $95.2 million and pro forma net income of $0.11 per share. The revenue growth was largely a result of increase in company-operated restaurants sales which rose3.3% in the quarter to $89.3 million. Additionally franchise revenue was $5.9 million during the quarter.

The increase in company-operated restaurant sales was largely driven by the contribution from 24 new restaurants opened during and subsequent to the fourth quarter of 2016 partially offset by five restaurant closures during the same period.

System wide comparable restaurant sales increased 1.4% during the fourth quarter including 0.9% growth in company-operated restaurants and 1.9% at franchise locations. Restaurant contribution margin as a percentage of sales was 18.5% of company-operated restaurant revenue.

This was flat when compared to the same quarter in 2016 as pricing and lower commodity cost offset higher labor cost driven by minimum wage increases in California. General and administrative expenses increased by $2 million year-over-year to $10.9 million. At a percentage of total revenue G&A expense increased 190 basis points versus 2016.

The increase was driven by higher securities related legal cost and bonus accruals, partially offset by lower preopening and stock option costs. Excluding the cost associated with the Securities litigation in both periods G&A expenses in the fourth quarter of 2017 increased by approximately $500,000 or 30 basis points compared to 2016.

During the fourth quarter of 2017 the company recorded a $16.4 million expense net of course to our reserves related to the impairment of the assets of 11 restaurants in Texas and one in Arizona. This impairment charge included the entire remaining value of capitalized assets of our company-operated restaurants in Texas.

Overall we reported a $38,000 net loss for the fourth quarter of 2017 compared to net income of $418,000 in the same period of 2016. Pro forma net income for the quarter was $4.4 million as compared to $4.6 million in the fourth quarter of last year.

Pro forma diluted earnings per share were $0.11 for the fourth quarter of 2017, compared to $0.12 in the prior year period. For reconciliation of pro forma net income and earnings per share to the comparable GAAP figures, please refer to our earnings release.

In terms of our liquidity and balance sheet, we had $8.6 million in cash and equivalent and $93.3 million in debt outstanding, each as of December 27, 2017.

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 2018, we expect our capital expenditures to total $27 million to $31 million.

I would like to know provide an update on current trends in the first quarter to-date, as well as our key strategic initiatives for 2018. We continued to see solid results in our core markets in the fourth quarter of 2017, with December being our strongest month in terms of sales performance.

Unfortunately, this momentum has not carried into the first quarter of 2018 and we are experiencing sales decline across our business.

To-date, system wide same-store sales were negative, and we expect to finish the quarter down one to two percentage point as a result of aggressive price competition in the QSR segment and very weak same-store sales performance in several of our non-core markets.

We believe that the aggressive discounting being marketed by our competitors is impacting our sales and transactions.

As we've discussed over the past several years, a portion of our customer base is highly motivated by price and we believe that these customers are visiting El Pollo Loco less frequently in response so aggressive discounting by competitors.

We are however undertaking a number of initiatives in order to reclaim these customers, attract new ones and increase frequency amongst our loyal guests. First, we'll be a more aggressive with our promotions and are currently testing a value menu that if successful will be launched in June.

This value menu will be in addition to continuing to advertise our $20 unique family meal, which has resonated well with our customers and drove sales growth throughout 2017. Second, we will continue with our authenticity media message that drives home our differentiation with a deeper connection with our customers.

Third, we are making significant investments in our restaurant training programs in order to improve the customer experience in our restaurants, and fourth, we will continue to push technology to drive sales.

With regard to the technology, our local reward loyalty program now has 500,000 members and transactions from loyalty members contribute to over 5% of sales over the last four weeks. We're currently working with Punch and Ancyra [ph] to analyze loyalty customer data in order to improve customer insights and individual customer engagement.

Ultimately, we believe these will drive increase sales and profits through better targeted programs. We expect to begin implementing new marketing programs resulting from this analysis over the next several months.

In addition, we continue to work with Olo to optimize our mobile ordering and delivery platforms and have now successfully integrated them with DoorDash who we have selected to be your delivery partner.

We are in the process of rolling out delivery through our system and expect to complete it by the end of this month, at which point 65% to 70% of our restaurants will fall DoorDash's service coverage area. This initial rollout will not include the DoorDash marketplace which we expect to add in Q2.

In addition to loyalty and delivery, we're also developing Self-Ordering Kiosks which we expect to test in restaurants later this year. We believe Kiosks will have increase throughput, order accuracy and average spend while also allowing us to improve labor efficiencies.

I would like to now talk about our non-core company markets which include Northern California, Phoenix, Dallas and Houston. Performance of new stores continues to be mixed and overall they are not achieving our expectations, especially in Huston and Dallas.

Just to provide a little context, in Q4, 2017 our Texas restaurants reduced company same-store sales by 30 basis points and restaurant contribution margin by 240 basis points.

In January we close two restaurants in Texas, leaving us with 13 restaurants in Houston, 11 company-operated and two franchise and 10 restaurants in Dallas, 6 company operate and 4 franchise. We're continuing to execute our brand re-launched program in both of these markets. However to-date, we have yet to see significant sustained sales growth.

Consequently we decided the fully impair all company restaurant in Dallas and Houston, which when combined with one restaurant in Phoenix resulted in a non-cash impairment charge of $16.4 million net of closed store reserves that I noted earlier.

While we are continuing with our relaunch program in both Texas markets we have initiated a review of all of our non-core market to determine the best strategy going forward.

As we have discussed, our challenges in Texas have led to a sharpening of our development criteria and a refocusing on core markets, where new restaurants have a high probability of success. During the fourth quarter, we opened four company restaurants, one each in Sacramento and Phoenix, and two in Southern California.

Additionally, our franchisees opened one location in Salt Lake City. Looking ahead to 2018, we expect to build six to eight new Company operated restaurants as well as six to eight new franchise location. All of these restaurants will be reflective of the new vision design, which we believe better showcases our QSR plus positioning.

During the quarter, we completed our 14 visionary model and we continue to be pleased with initial results. Franchisees completed 13 remodels in 2017 including three at our vision design. We are continuing to focus on reducing remodel costs while preserving the restaurant sales lift.

Initial 2018 plans call for 20 company remodels and 30 franchise remodels. Lastly, with reflect to our 2018 outlook we are providing a following annual guidance. We expect pro forma diluted net income per share of $0.68 to $0.73, which includes an estimated $0.14 benefit from the lower tax resulting from the tax reform legislation enacted in 2017.

Our pro forma net income guidance for 2018 is based in part on the following annual assumption. We expect system wide comparable restaurant sales growth to be approximately flat. We expect to open six to eight new company owned restaurants and expect franchisees to open six to eight new restaurants.

We expect restaurant contribution margin of between 18.7% and 19.6%. We expect G&A expenses of between 8.8% and 9% of total revenue excluding legal fees related to securities class action litigation and CEO transition costs. We expect adjusted EBITDA of between $61 million and $64 million and we are using a pro forma income tax rate of 26.5%.

Please bear in mind, that our guidance maybe materially impacted by strategic decisions made during the course of the year as we integrate a new CEO. That concludes our prepared remarks. We would like to thank you again for joining us on the call today. And we are now happy to answer any questions that you may have..

[Operator Instructions] Our first question comes from Jake Bartlett of SunTrust. Please proceed with your question..

Thank you. Larry, this is maybe a bit of a candid question. But looking at the environment around competition and the value oriented environment, you are seeing impact the first quarter results. That was well telegraphed. What is your view -- why your competitors and then you sort of looking to answer with the mid-year change in the strategy.

Why didn't you go towards more value in the first quarter, I mean anticipating that, was something that surprised or you did you have a value answer that didn’t quite work maybe just some context around that. .

Yeah – thanks.

I mean what we – all last year we were talking about the fact that we’re seeing the value initiated by competition having an impact and consistently we had said, we want to be careful about really getting into that game of costs, just because you start discounting and it hurts your profitability and it's very hard to come out of and so and what we see really in a fourth quarter and then in the first quarter it was the intensifying of that discounting so certainly as we looked around lot more competitors have joined in, discourage discounting that we have seen the level of discounting has increased.

So we are really surprised. We were trying to stay out of it and just stay with just our strategy about differentiating our concept through the authenticity message. Being careful maybe doing things around the menu that bring a little bit more value, but keep driving between our meals.

The one thing we did do in the first quarter was we went to the $5 combos and started advertising $5 combos. But we really try to be careful about really jumping into which we're still doing. I mean we're going to test the value menu.

But we may or may not roll it out depending on what results look like over the next one to two months, because we do want to careful about getting down that game where you're just discounting maybe driving incremental sales, but your hearing overall profitability. So again, not sure we're really caught by it.

We were just trying to stay away from it and be careful about how much we jump into it. As even now we're going to be testing some things, but we're going to be cautious about really jumping into the fray where the burger guys have gone, again recognizing that you hurt profitability.

And it can be a challenge to get out of that, once you start going down that path. .

Yes, got it. That makes a lot of sense. And then another question, it looks like your unit growth is going to be constituted more of your core markets in '18. It's hard to think about the growth opportunity in your core markets.

What does that look like? Do you think you can grow this kind of low-single digits or mid-single digits in your core markets? I know you've done work around and realize there is greater opportunity in your core markets. .

Yeah Jake. That we've looked at it and I think when we we've identified somewhere around I mean 30 to 40 trade areas remaining in our core markets. And that doesn't mean we can go out and do 10 deals a year in a core markets right away.

I think we're going to be in the 4 to 5, 3 to 5 in core markets just because that has challenge to give the five real steak at [indiscernible] and permitting and all those things. So while we still think there is some good opportunity there, it can be difficult to access the sites, find the sites.

So I'm expecting 3 to 5 probably in that range in core markets going forward. .

Got it. Thank you very much. .

Our next question comes from Mary McNellis of Robert W. Baird. Please proceed with your questions. .

Good afternoon, thanks for taking the question. My question is on performance in Texas.

Could you just confirm our math that restaurant margin is negative in your Texas market?.

I don't want to get into where the actual margins are? I'll just stick with what I said earlier, which was it's an impact of about 240 basis points in the fourth quarter on margins. I don't want to get into whether it's positive or negative, and what the -- of how positive or how negative it is..

Okay. Understood.

And then any way to talk about maybe when it make sense to think about closing additional units or possibly even exiting that market altogether?.

Yes so what we're talking about in the past, as we do have a relaunch program that we began implementing back in October.

And as we highlight previously that involved really going back through retraining all the employees in the restaurants, doing some work to the assets, ramping up, doing some work different more things and marketing and different things and marketing.

Some of those things really have just kicked off over the last 3 or 4 weeks including a radio advertising in Dallas. So we've got the relaunch program, we continue to monitor it.

As I said in the opening remarks, I mean there are still the results are below expectations, but again it's still early days and some of the things we've done in the relaunch. So we'll continue to reading the relaunch program.

And then once -- gets onboard, we'll reevaluate the relaunch really where the results are going and then we'll start making some strategic decisions based on results and what else we're seeing in the marketplace. .

That's from that perspective, just last one on that topic.

Can you provide what you're expecting for D&A for 2018?.

G&A. .

D&A.

Depreciation?.

Just give me a second. I expect it's going to be about 4.5%, sales earnings. .

Perfect, okay. Thank you. .

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

Thank you. I have a question, but first just a bookkeeping. I think you said that's the quarter-to-date comp.

Was the quarter-to-date comp down 2%, or are you guiding to down 2% for the quarter? So I'm wondering are you seeing those trends right now or is it worse?.

No we’re seeing those trends right now, we are guiding to negative one to negative two for the quarter system comps. .

Okay, anything in the year ago that we should consider I mean is this a lot of people on the West Coast are lapping some of the very favorable weather comparisons from last year I mean is there anything as far as sequentially looking at what you are lapping changing throughout the quarter in 1Q. .

No, I'll just highlight what others have talked about in California is that we are lapping favorable weather from last year, really starting late February, I guess really February most of February weather impact was, so we are lapping that. And we highlighted last year we thought that was point impact on comps last year. So we are lapping that. .

So I mean how much of a variance, so you are doing 1% to 2% now how much of a swing factor on our year ago comparisons, what’s the difference from what you are lapping now with what you’re going to end the quarter with for lapping. .

I am not sure, I fully understand the question. But what I am saying is last we had a 1 percentage point impact on system comps.

So in fact only I can say are down negative 1% to 2% would look like worse when you take into account that favorable lap that we had this year versus last year?.

Okay and then just if I were to can you walk us through some of the economics I know you are not doing delivery just yet, but when Postmates becomes a bigger factor and your 65% of your restaurants are covered.

How do those economics work can you share with us I guess there is always some concern that be flow through on the comp might not be as strong as the flow through of incremental sales coming through the store and there is the risk of cannibalizing you’re already very strong off premise business.

So I am just wondering more of your off premise business are people come and carry out of the store. So could you walk through the economics on how we should think about that and the level of accretion or how that can impact margins. .

Yes, so we are using DoorDash and there's really two types of delivery, that were implementing with DoorDash. The one that been rolled currently is really what we call dispatch. So these are customers who are going on to our website or using a mobile app, in ordering delivery directly to us.

So those transactions, for us the economics are, I think is a $1 delivery fee plus a $0.50 additional fee. The consumer is paying for the delivery of the call 599 or depending on what their rate is.

So for that those should be very incremental they are highly profitable, because again they are going directly to us and they transaction fee is fairly low.

The second phase which we will be looking to launch in Q2, we will be introducing ourselves on the DoorDash marketplace, in which case will incur, what others are incurring which is a 20% of the ticket which is paid to DoorDash. So on a $20 ticket that would basically be $4 going to DoorDash.

So that’s where we really have to drive incrementality to make it work because obviously that’s a pretty big haircut off a ticket. And we’ll be covering that costs versus the consumer. .

Right. Thank you. .

[Operator instructions] Our next question comes from Andy Barish of Jefferies. Please proceed with your question. .

Hi, thank you. This is Alex on for Andy. Larry, would you mind going into a little more detail on that same-store sales gap between the core and the non-core, just thinking about the where the quarter-to-date is and then obviously the challenges in Texas. Trying to understand how much of that drag is coming from Texas in to the market. .

Yeah, I won't go again too much detail, more detail about the quarter, given the guidance as I said in the Q4 of last year, of the fourth quarter we saw about a 30 basis points drag from Texas.

It's been running between 30 and say 50 basis points a quarter drag through last year, So that’s kind of range we’re talking about in terms of look at the comp drag were incurring because of Texas. .

Got it and then I guess thinking about the re-launch and couple of months now in the rear view mirror what are the kind of metrics that you're looking at that are going to tell you that this is working or not with respect to either labor or awareness?.

Yeah. So really the things we're looking at in the relaunch was really planned to was, one, looking at the consumer responses. And so we have our measures that we used, last excellence [ph] that we get from customers. Mystery shops we're looking at and what we have seen throughout Texas is a nice improvement in those scores.

So we know that operationally, we've seen a nice move [ph] that were providing even better service to consumers as they're coming in. And of course and the obvious one is just watching sales and transactions and looking to start moving them up fairly significantly. And so that's -- so we feel good about where we are operationally.

We need to have people go and do some blind shops in the market. They're coming back saying, the operations look very good. We're seeing that and the operations metrics we're measuring.

And now we're just continuing to push, like I said we've gone on Radio now in Dallas and really trying to move the needle on and getting people on their restaurants, get them using us, and ultimately getting to come back.

So clearly right now we're really just watching sales and looking to drive sales and get them up fairly significantly from where they are today. .

Got it. I guess to circle back to the comment on competitive discounting from peers.

I mean are you seeing fairly, do you think that impact is fairly broad based across say the core non-core markets? Or do you think that hurts more in a place like Texas?.

No, we've actually seen it be fairly broad based. Again obviously our cores are performing the new market. But overall, we seen an impact across our business across our markets. .

Got it. Just last one if I may. For Jake's question, he'd asked about the growth in the core and you were said Three to five.

Just to confirm was that three to five units or 3% to 5% annual growth from?.

Three to five units I'm sorry. .

Got it. Okay. Thank you. .

Our next question comes from Sharon Zackfia of William Blair. Please proceed with your questions. .

Hi, good afternoon. I guess I have question on the comp trend. If I recall correctly, you had a really challenging February in the year ago timeframe. I don't know if you talked about whether you've seen any improvement in February relative to January.

And then just trying to kind a breakdown the flat comp guidance for the year given the negative trend in the first quarter. Obviously comparisons are getting tougher.

So I guess could you kind of quantify how much you're counting on delivery or value menu or marketing initiatives to get back to flat?.

Yeah, so I think Sharon, I'm not going to give the specific numbers. But we are looking to delivery and loyalty to really kick in and start delivering some comp growth. Loyalty we have now had in place roughly six months or so. We're still in investment phase. We're kind of getting the point now where we've made the investment.

I said on the opening remarks that we had 500,000 loyalty customers. We're actually over 640,000 as of today. So we continue to grow. We made that investment. We're using and Ancyra and Punch have been helping us with the analysis on the loyalty program.

And coming up with how best to utilize that customer data that we're collecting and really start targeting that. So we're really looking for loyalty -- I'd say loyalty especially and then ultimately delivery that you start kicking in and driving comp growth in this business.

Obviously it's starting fairly shortly as we get that data and loyalty and really start utilizing it to target our customers. And then on the other comp drivers that we're really looking at it. We'll get a little bit from remodels as we do them throughout the year.

And then also as I said reading results, and testing some value initiatives and especially the value menu. And we'll put that in test. It's going to test very shortly, read the results. And that's something also we see as we continue to implement that to be a comp driver.

But clearly technology is something that we made the investments in really over the last year especially the last six months on loyalty. And we expect them to start picking in and delivering comps over the next several months. .

I guess another question. I don't know if you gave us figures I missed that.

Did you give an outlook for commodity and labor inflation for '18?.

No, I didn't, but I can give it to you now. We expect commodity inflation of around 1% and labor inflations around 4.5%..

Thank you..

Our next question is a follow-up from Jake Bartlett of Sun Trust. Please proceed with your question..

Great, thanks.

So really kind of book keeping question, but what were the system wide sales in the fourth quarter?.

System wide sales in the fourth quarter were $198.5 million..

Great.

And then for the unit growth for the franchise, it sounds like your company is going to be in the core market in the fourth in the [indiscernible] but what about the franchise stores, are those going to be in the newer markets for the 6 to 8?.

Yes, I don't, there will be some of the newer market. So I know we have a few in Texas there are slotted, Salt Lake City then a market we're expect to see a couple of openings. I have to go back and look at the rest of detail but certainly some out in the other markets are expected..

Okay.

And then lastly, what was your menu pricing in the fourth quarter, what are your expectations for 2018?.

So pricing in the fourth quarter was 1.9% gross pricing and it's about the same for this year. Now the breakdown this year will be somewhere around 1.5% I'll say in the core market. Well I think core but it's 1.5% in generally and those going to be incremental pricing in LA and San Francisco in response to the minimum wage increases in those markets..

Got it.

So if I heard it correctly you were about 1.5 for the first quarter three quarters and you went to 1.9 in the fourth?.

Well Q3 last year is 1.8, so last year by 1.4, 1.2, 1.8, 1.9..

Okay. Thank you very much..

Thanks..

Our next question is a follow-up from Matthew DiFrisco of Guggenheim Securities. Please proceed with your questions..

Thank you.

Larry, I guess can you also give a little bit of intel on who you think to com -- have you been able to tell how the competition is that sort of turned around in the last couple of months, or last I guess in the last couple of months to start 2018? Is it broad QSR and including Burger guys or are there are couple of Chicken guys that have changed their messaging in response to the broader arena that sort of affected you because certainly value hasn't really changed much, it's been pretty strong last eighteen months of so?.

Yes, but like I said, we haven't really seen, I haven't seen KFC and Popeye and the other chain guys really change their tune. They are still doing kind of the $5 meals and the $20 family meals, that really haven't changed. Certainly we've seen the McDonald's, the Burger King get aggressive.

I also think there is just an overtime, more and more people become aware of those things and you see more and more people start to use the discounts pickup their foods at McDonald's and Burger King and those guys. But I have seen out here, [indiscernible] out there now being more aggressive and California Jack and Mark [ph] is now pushing it.

So, you said and then Taco Bell has kind of jumped in and they are starting to now be more aggressive along with Del Taco. So you just see a lot of these value players in response to I think McDonald's and Burger King's and others they are stepping their games and being more aggressive and they are promoting our discounting.

I mean Taco Bell used to not really push it that hard because they just talk themselves as a natural discounter but even their being more aggressive in terms of talking about. So, I think there is just an overtime effect that more and more people to start using it more and more.

I also do think that we've seen a higher share voice from a lot of QSR competitors really pushing these value menus and these deals for $2, $3, $4 in that range..

Thank you. That's very helpful..

Ladies and gentlemen we've reached the end of our question-and-answer session. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..