Bernard Acoca - President and Chief Executive Officer Larry Roberts - Chief Financial Officer.

Mary McNellis - Baird Kevin Robinson - SunTrust Robinson Humphrey Andy Barish - Jefferies.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Second Quarter 2018 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, August 2, 2018.

On the call today, we have Bernard Acoca, 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. Good afternoon. By now everyone should have access to our second quarter 2018 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 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 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 2018 later today and 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. I'd now like to turn the call over to President and Chief Executive Officer, Bernard Acoca..

Thanks, Larry. Good afternoon, everyone, and thank you all for joining us today. At a high level, results in the second quarter included revenue growth of 0.6%, excluding franchise, advertising fee revenue, a system wide comparable restaurant sales decline of 0.9% and adjusted EBITDA of $17.5 million.

These results were in line with our expectations, and we are reaffirming our full year guidance, which Larry will review in more detail. While our results match our guidance, it's important to call out that we are not satisfied with them and are working hard to do better.

With that being said, I'd like to begin today by reviewing the progress we've made against the 3 key strategies that underpin the transformation agenda, we laid out on our last call. Our first strategy is creating a people-first culture. It goes without saying that people are our greatest asset.

Throughout my career, I've seen the incredible power company culture has to drive long-term growth by putting your employees' needs and considerations first. As I've immersed myself in this business and gotten to know our people, the word I've heard them use to describe El Pollo Loco, more than any other, is family.

I believe this sense of family is a massive source of strength, which can be harnessed to unite us and give us purpose. Building upon this, we have launched a program called heart-centered leadership, which is similar to servant leadership, a concept some of you may be more familiar with.

Heart-centered leadership is about leading with authenticity, humility and transparency. It's about motivating and inspiring people in the right way. Over the last several months, we've trained our support center teams on it. We've trained our field leaders on it, and we've trained our franchisees on it.

Another investment we are making in our culture and our people involves the four essential roles of leadership. This training program builds the business acumen of our leaders by teaching how to inspire trust, create a vision, execute strategy and coach potential.

Over the balance of the year, we will be working with our field leaders, support center employees and franchisees to learn these roles and establish plans for applying and sustaining them over the longer term.

In addition to our leadership training we have aligned on our new company mission, to feed the love that makes us all feel like family and our five core values, both of which are now being communicated and embedded throughout our system. These are critical to building a one system mindset, founded on values that we all share.

Lastly, we've implemented Workplace by Facebook in our company-owned restaurants, a technology tool that is helping our new culture come to light in dynamic ways that have exceeded our expectations.

Workplace by Facebook has managed to help eliminate barriers between our support center and restaurant employees, enabling robust, operational dialogue in real time, while also further building a sense of community amongst our team.

I have to say that I've been blown away by the levels of recognition, friendly competition and best practice sharing we've already seen from employees using this social media platform. I'm very excited about these actions to develop and facilitate a people first culture at El Pollo Loco.

Culture is the foundation upon which we will continue to build an exceptional brand and is the enabler for everything we will do going forward, which brings me to our second strategy, differentiating the El Pollo Loco brand in everything we do. Knowing who we are and what our brand stands for have never been more important.

In order for our brand to maintain its relevance and authenticity in this age of digital disruption, it is paramount for us to focus on those brand equities that we believe best differentiate us as well as foster the deepest possible emotional connection with our customers.

We have recently built our brand architecture around a powerful brand promise, to nourish our connections to tradition, culture and one another through the fire-grilled goodness that brings people together, which is our commitment to the world. And over five brand differentiators, which underscore what we do better than anyone else.

This codification of our brand architecture is a very clear articulation of who we want to be and has been organized and arranged in a brand book, which we will roll out and train the entire system on very shortly.

This brand book, which encapsulates everything the brand needs to stand for will be the strategic filter through, which we will make all future decisions, including marketing communications, product development and store design.

Through this work, we're confident that we can transcend the purely functional aspects of our food offerings to stand for something much more emotional and aspirational, a hallmark of the most dynamic brands.

And forming our brand work is an expensive customer segmentation study, the biggest piece of consumer research the company has ever conducted, which we started fielding a few months ago.

While the final report is not due until October, the preliminary results are already shedding more light on who our core customers are, how they view and use us and what our biggest opportunities are with them.

What the data is starting to reveal, is that while we appeal to a wide segment of customers, Hispanic customers continue to be a massive source of strength for us. In addition, there's a huge opportunity for El Pollo Loco to own families, given their affinity for the brand and the fact that almost 30% of what we sell every day are family meals.

More than ever before, moms and dads today are looking for healthier, better-for-you foods and they can feel good about serving their family. This is a sweet spot for El Pollo Loco, because while others may make claims, few, if any QSR restaurants, truly offer freshly prepared food with high-quality ingredients to the degree and at the prices we do.

To this end, we are increasing our intensity and focus around our product pipeline to broaden and deepen our appeal to families through innovation and better-for-you offerings. While the results of our work won't be fully implemented until 2019, we have adjusted our balance-of-the-year marketing and calender to reflect some early learning's.

These include higher Hispanic-targeted media wastes and more 30-second advertisements that enable us to better tell our story. We've also added new family dinner offerings, made changes to the LTO calendar to drive more compelling product news and are working to build a stronger, sales-driving mentality at the restaurant level.

We believe that the impact of these changes can be seen in the positive comp sales results, we experienced in July. Finally, if we are successful in developing our culture and differentiating our brand, then we will have license to grow, which is our third strategy, expanding our business profitably and responsibly over the long term.

We believe our challenge is growing in noncore markets, particularly Texas, stemmed from the fact that our growth strategy hasn't been as focused as it needs to be. As a result, we've confused customers, and the operational complexity has made it difficult for our employees to deliver great food and service at times.

With lower awareness levels in noncore markets for the El Pollo Loco brand, we need to do a better job of appealing to our primary customers by over emphasizing what sets us apart from other restaurant concepts. While the brand re-launch we implemented late last year has helped, we still have work to do.

As we discussed on our last call, during the first 4 to 5 months of the year, we saw a tangible increase in unit sales volumes in both Dallas and Houston. Since the onset of summer, sales volumes have flattened in Dallas and softened a little in Houston.

While we remain encouraged by the progress we have made in these markets, we clearly have more work to do and have additional initiatives planned for later in the year.

One initiative we plan to implement at the beginning of September is the elimination of a significant number of low-mixing menu items with an entirely new menu board design, aimed at making ordering easier.

This will bring greater attention to what we do best, our fire grilled chicken on the bone and bring less complexity for our operators so that they can deliver service that wows. While it's still early, we believe we're gaining greater clarity on what we need to do to grow sustainably in noncore markets and new geographies in the future.

The other key piece of our growth strategy is centered on providing frictionless convenience to our customers. Restaurants used to live by the acronym, QSC, quality, service and cleanliness. But in today's on-demand economy, it needs to be QSCC, quality, service, cleanliness and convenience, frictionless convenience.

Frictionless convenience is providing un-tethered access to your brand no matter how customers want to engage or interact with you. We're seeing consumer demand for this access in the areas of mobile ordering, mobile payments and delivery. To that effect, we are continuing to add ever greater functionality to our mobile app.

Within the next few weeks, we will be rolling the capability for customers to seamlessly pay with their mobile phones, using a stored-value component built into our app. As well as the ability to E gift El Pollo Loco to a friend or family member, delivery using our mobile app or website has been rolled out across the system.

And through our partnership with DoorDash, we have delivery capabilities in approximately 80% of our restaurants. During late May and June, we were added to the DoorDash marketplace whereby users can order El Pollo Loco for delivery directly through the DoorDash app.

Looking ahead, we believe, success in delivery will be predicated in our loyalty program, which is still growing to the tune of 15,000 to 20,000 members a week and is now close to 1 million members. It is continuing to gain traction and currently comprises 7% of sales.

Now that we've laid the groundwork, our goal is to determine how best to drive incremental sales through our loyalty program by translating the rich purchase history data into personalized communications.

Once we accomplish this, we believe that our loyalty program will become an increasingly integral part of our go-to-market ecosystem moving forward. Lastly, this month, we will be testing self-ordering kiosks in a few of our Los Angeles restaurants to determine how we want to leverage this technology more broadly in the future.

In summary, El Pollo Loco is a tremendous brand with many points of differentiation. Our transformation agenda will ensure that our values, mission and differentiators are all working together to drive company strategy in an extremely focused way.

By investing in and growing our talent, accentuating our core strengths and building upon them as well as growing our business responsibly and profitably for the long-term, I'm convinced that we can take this brand and this company to the next level.

We are encouraged by the progress we're making, and I look forward to sharing with you the impact it's having on our business, as we go forward. Finally, in addition to the growth we expect to deliver by executing our transformation agenda, our strong balance sheet affords us the flexibility to create additional value for our shareholders.

To that end, subsequent to the end of the second quarter, our Board of Directors approved the initiation of a $20 million share repurchase program through June 26, 2019. We believe, this authorization is indicative of the confidence we have in our business and our commitment to enhancing long-term returns for our shareholders.

And now I'll hand the call over to Larry to review our second quarter results in detail..

We expect system wide comparable restaurant sales growth to be approximately flat. As I noted, we now expect to open seven to eight new company-owned restaurants and expect our franchisees to open eight to 10 new restaurants. We expect the restaurant contribution margin of between 18.7% and 19.3%.

We expect G&A expenses of between 8.2% and 8.4% of total revenue, excluding CEO transition cost and legal fees related to securities class action litigation and reflecting our change in accounting for franchise advertising fees. We expect adjusted EBITDA of between $61 million and $64 million, and we're using a pro forma income tax rate of 26.5%.

This concludes our prepared remarks. I'd like to thank you again for joining us on the call today, and we're now happy to answer any questions you may have..

[Operator Instructions] Our first question comes from Mary McNellis, Baird..

Bernard, you had mentioned that you returned the positive comps in July.

Would you be willing to quantify that quarter-to-date performance? And then, if not, could you elaborate on what you think specifically drove that improvement?.

Yes, I mean, I'm not going to comment directly on the numbers themselves, but we were very pleased with how July progressed, and we are attributing it to, I think, some of the early gains we're seeing through the execution of our transformation agenda. And so we're pleased with the progress that we're seen there..

Fair enough.

And then on a couple of those drivers within the transformation agenda, I just want to ask on the menu simplification initiative, can you clarify whether you've already started to test that initiative in some locations, and if you have tested it, what you've seen thus far? And whether you see opportunity to roll that out to the core markets as well as the noncore?.

So I think, where you'll see that initiative first take effect, as I mentioned, earlier in the call is in Dallas and Houston, where this September, we will implement a more simplified menu.

We're going to be reducing SKUs to the tune of 12 to 15 SKUs there on the menu, and that will also be accompanied by a new menu board design, which we will believe -- which we believe will make ordering a lot easier.

Later in the year, and we're still kind of finalizing timing on that, we're going to be testing a rationalized menu with the fewer SKUs as well in our core market of Los Angeles. That one, we want to do -- certainly do a little bit more extensive testing on to determine the impact that will have on our overall business.

So leaning in a little bit more in Texas, where we feel that makes a lot more sense for us, given the nature of that market and given where the nature of -- where that business is, testing it later in the year here in our core -- one of our core markets of Los Angles, and that one will be a longer test for us to really understand the impact that can have to our overall business..

And then just lastly, on delivery, what are you seeing in terms of consumer uptick so far?.

So it's early days for us. We just launched this initiative in June. When we started out, we had about 65% of our store footprint covered. We've recently expanded that to 80%.

So it's growing, but what I would say is this, the real key to success for us, we believe in smart, judicious, profitable delivery growth moving forward is really driving a lot of that business through our loyalty program.

And I think -- while delivery has become the hot topic in the industry right now, I think people are getting a little bit ahead of themselves.

And what we want to do is be really smart in the way that we choose to incorporate delivery and embrace delivery as part of our business, so that what we are driving is not only incremental but certainly profit accretive, and again, just to reiterate, we think the best way we're going to do that is a by simultaneously [growing] loyalty business and using that as the conduit to delivery moving forward..

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

It's Alex on for Andy. Just wanted to dig into the, I think the 0.9% check growth and I guess, it seemed like you're running about maybe 1.9%, 2% price in the quarter.

So what's kind of -- what's been going on with mix? And what's been driving that negative mix? I would think that we would have seen some stabilization there?.

Yes, Alex, so you're right. The mix is negative in the quarter.

I would highlight though, it was certainly improvement from the first quarter, and if you recall in the first quarter, we highlighted mix was negative mainly driven by lower family meal mix and also driving some other, the 5-dollar combos along with some of the loyalty program discount, the things that we're running drove negative mix in Q1.

Some of that got better in Q2. Family meal mix, is one of the things that got better in Q2. The loyalty discounts were still there, so again, we had some of the drivers of negative mix in the second quarter that we had in the first quarter. However, there were some other factors that we were mitigating, and some of those will continue quite frankly.

There will continue through some of the balance of the year also, but we continue to think that mix will continue to improve like it did in Q2. It will continue improving in Q3 and Q4..

And then just wanted to dig in a little bit on to the development guidance and the uptick, the slight uptick, I guess, to the company units as well as the raise to the franchised guidance.

And as you think about the brand architecture and how that can potentially impact the Vision design overtime, I guess, what sort of drove the uptick and then as we think about next year, any sort of pause or shift in how we should think about that?.

Yes, so right now I mean we're still working on next year's development plan. So I know the development team is hard at work both with franchisees and on the company side, finding sites and getting them through the approval process.

I mean, incurrent increase that you see for this year was really moving forward development that was really slightly for probably early next year is where we thought was coming in, but it's actually moved forward into this year. So that augmentality is really just moving forward.

Having said that, we're really working hard at next year's development pipeline, although we're not ready to give guidance as to what we think 2019 will look like..

And then just one last one, if I may.

The work on the heart-centered leadership and the training that's been happening, I know it's still early, but are you seeing any changes in retention metrics or any minor shifts in kind of hospitality and feedback scores as you invest in the team?.

Yes, I mean, it's -- it would be premature for us to kind of be able to tell you right -- at this juncture that, that is having a meaningful impact on those metrics.

But what I can say with absolute certainty is just the energy, the reaction, the level of engagement by our employees as well as our franchisee community is really something that we haven't seen around here in quite some time. We just returned from our leadership conference, our franchisee leadership conference in San Diego a few weeks ago.

I hope I'm not taking some of our franchisees' quotes out of context here but the level of energy, enthusiasm for the transformation agenda, the kind of Vision moving forward and the partnership that we are really trying to even reestablish with our franchisees to embrace and adopt a 1-system, 1-brand mindset has been extremely well received.

And the only other part that I'll share with you is that using technology as an enabler through this Workplace by Facebook, platform, we have been able to gauge what employee engagement looks like real time in a way that we haven't been able to in the past, where on a daily basis, I am able to have conversations with people on the front line, see what they're doing, see how they're responding to our initiatives, and we're just so encouraged by what we're seeing there.

So I'm looking forward to being able to answer your question at a later date, I just would think it's a little premature for me to give you an answer at this point..

[Operator Instructions] Our next question comes from Jake Bartlett, SunTrust Robinson Humphrey..

This is Kevin Robinson on for Jake. And I just have 2 questions. One, the loyalty members were 750,000 first quarter.

Where are you right now in terms of that number? And also can you talk about like the average check versus your nonloyalty members? And how frequent the loyalty members use your services? Just trying to get a sense of how you could leverage that going forward? And my second question is, can you talk a little bit about the current landscape in terms of your peers and you in terms of deep discounting and what are the customers looking for? Those are my two questions..

Yes, so in regards to our loyalty membership, you are right, we reported 750,000 members last quarter. We're approaching very close to 1 million now. The check, I'll say is roughly comparable, it's perhaps slightly low -- slightly lower, not by much, but slightly lower.

And in terms of frequency there, that's still data that we're still trying to get at, and incrementality is really the name of the game for us. What I will say about our loyalty program quite honestly, because if you can recall, we launched this thing a little more than a year ago. We're exactly where we want to be.

This is what I would term as being Phase 1 of the launch of any company's loyalty program. And in kind of that first-year time period what you really want to do is it's all about membership acquisition and establishing a database of customers. And I think we're very have -- we very successfully have done that.

Now we're embarking and about to enter Phase 2, which is really about segmenting that database, based on our customers' rich purchase history and trying to figure out the best and most profitable way to drive incremental visits and/or guest check. And that is what we're a studiously working on right now.

The second part of your question forgive me, I forgot that.

Can you ask it again?.

It was just in comparison the, I think [indiscernible]….

The value?.

Yes, the value part. So landscape is the second question..

Yes, so I think the thing that we did and we have been doing I think pretty astutely, it's that we haven't gotten sucked into some of these value wars that have been -- being played out in the industry. Because I think what a lot of people have seen through mix shift is that they haven't necessarily been profit accretive.

In many cases, they haven't been transaction accretive. That's the thing that the industry is obviously still wrestling with. We have been focused on two things in regards to value, and I think you'll continue to see us doing that.

One, do a better job of communicating the incredible value that we already provide our customers today through the quality we provide, and we want to do a lot of robust story telling around that.

All the pains we take in our restaurant every single day, the things that we make from scratch every morning, the things that we hand cut, hand dice, et cetera, really focusing the quality aspect of our food. And the second thing is really focusing on the terrific value and price points that we already offer our customers today.

So we offer a $5 value menu that has been a staple of our menu for quite some time. What you'll see us doing in the future is bringing new news to that and expanding it even further to provide some additional relevance to it.

But what we're not doing is, I think what a lot of people have been doing and at that is, really lowering their price points in the hopes of enticing this ever-elusive incremental customer. I don't think we're going to win at that game. That's not right strategy for us..

The only thing I'd add is that we obviously track value scores very closely, both directly from customer feedback, the, what they call, a 100 number or through the Internet, when they give us feedback, and then we also use external research with various companies and thus far what we've seen is the value scores remained strong, so we feel like we're on the right track, just as Bernard said..

Our next question comes from Andy Barish, Jefferies..

Just a quick follow-up to that question, actually. Bernard, you mentioned that the average check for the rewards numbers is actually slightly lower. Is that because of an offer being redeemed or -- I was just wondering about that dynamic..

I believe that does play a part of it in terms of the offers being redeemed is the part what keeps that check low and over time, that should be reduced, and so that we could see that check improve..

And then just thinking obviously, early as well, but thinking a little bit about the pipeline of innovation, you mentioned earlier, Bernard.

On the heels of the comment around existing value on the menu, is that really where we should expect to see new products sort of in that $5 value menu or the family meal platform?.

Well, I think what you're going to see from us is obviously, maniacal focus on the dinner occasion and on the lunch occasion. And on the dinner occasion, we're going to be hyper focused against families and really figuring out how to make that occasion much more an emotional aspirational experience, if you will.

That one won't be as price point driven, but it'll really be through the products, the really relevant innovation we bring to that day part, all about the great better-for-you of things we can bring to families so that mom and dad's can feel really good about what they serve their kids during that occasion.

I think during lunch, really targeted more to that individual diner, you'll see us be much more, let's call it, transactionally focused more promotionally focused, more retail harder hitting.

But the connective tissue that will exist between the dinner occasion and the lunch occasion will be this better-for-you element whatever and as often as we can forge it. And that'll really be one of our big differentiators moving forward. So I -- that's really the kind of philosophical approach we're bringing to our calendar moving forward..

And I guess thinking about the improvement that you're seeing in July, has it been broad-based in across both day parts or are you seeing any balance sort of toward that later dinner day part with those family meals?.

No, I think the thing that we've been encouraged by July is that we're seeing it across-the-board during all day parts, and that's what we've been focused on..

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Bernard Acoca for closing remarks..

I just want to thank everyone for joining us on the call this afternoon and evening, depending on where you are. And we thank you for your questions and your continued confidence in us, and we look forward to talking to you on our next earnings call. Thank you..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..