Good day, ladies and gentlemen, thank you for standing by. Welcome to the El Pollo Loco Fourth Quarter 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation.

Please note that this conference is being recorded today, March 10th, 2022. And now, I'd like to turn the conference over to Laurance Roberts, Chief Executive Officer, and interim Chief Financial Officer..

the menu, operations processes, and equipment. With regards to the menu, we continue the process of eliminating low mix menu items and removing unnecessary ingredients. In conjunction, we are working on a new simplified menu board which we will test later this year.

The goal of the project is to make the menu board easier for customers to comprehend and for team members to execute. The result should be faster service with better order accuracy. Lastly, we are introducing a more robust front-end assessment of new products and deal offers to ensure they are not overly complex operationally.

In addition to menu simplification, we're looking closely at process simplification including an active evaluation of the most labor intensive activities in our restaurants to find ways to improve our kitchen efficiency without impacting product quality.

Example of this, they changed by Stanlis Serrano peppers and pre -cut cilantro, which will remove preparation activities from our restaurants starting in mid-March. Finally, we are upgrading our equipment with the goal to simplify our back-of-house processes and enhance our few qualities.

For example, we are currently testing new equipment to make our house saucer. Early results are very positive with a significant win-win. Not only does it eliminate one to three hours of work in the restaurants, the saucer is dramatically better and more consistent.

As you can see, we have a lot to be excited about from these efforts and we believe they will allow us to deliver improved service to our customers in 2022 and beyond. Our last pillar is accelerating development. Our system restaurant volumes now average over $2 million, which we believe are very enticing to restaurant too is looking to expand.

While we've had some success in 2021, our franchising activity fell short of our goals. Fairly our message is not getting out there as effectively as we would like. And in response, we are ramping up efforts to better capture qualified franchisees in this highly competitive environment.

To start, we have strengthened our franchise team by adding a Senior Vice President of franchising during the fourth quarter. And we are in the process of hiring a Director of Franchise Sales to will be 100% focused on recruiting new franchisees into the El Pollo Loco system.

With resources in place, our focus is on modifying, enhancing our franchise recruiting efforts, including the development of a new website and completely new marketing materials that include the use of both print and video.

In addition, we will be broadening our franchise recruiting efforts to include larger multi-concert franchisees, as well as mid-scale operators. Lastly, we're fine-tuning our recruiting process by involving senior management early in a process, including attendance at various conventions.

We expect these improvements will be completed by the end of the first quarter and are confident that we will make strides in our franchise efforts during the current year. In summary, despite the challenges we have faced over the past two years, I truly believe that El Pollo Loco brand is stronger than ever.

The entire organization is fully engaged on the four pillars of our strategic priorities that will further strengthen our position as a very distinctive concept that resonates across a broad range of consumers. I'm very excited by the work we're doing and the opportunities ahead of us.

Most importantly, I'd like to thank all of our restaurant and support center teams, as well as our franchisees for their hard work and commitment to better El Pollo Loco brand. With that, let me briefly review our fourth quarter financial results in greater detail.

For the fourth quarter ended December 29th, 2021, total revenue decreased 1.3% to $109 million compared to $110.3 million in the fourth quarter of 2020. Company-operated restaurant revenue decreased 2.9% to $93.6 million from $96.4 million in the same period last year.

The decrease in company-operated restaurant sales was primarily due to $4.6 million attributed to the extra operating week in fiscal 2020 and a $2.5 million decrease due to the sale of eight company-owned restaurants to a franchisee during 2021.

These were partially offset by a 6.2% increase in company-operated comparable restaurant sales and $2.3 million in non-comparable restaurant sales which included restaurants temporary closed due to the pandemic during last year's fourth quarter.

The increase in company-operated comparable restaurant sales was comprised of a 5.6% increase average check and a 0.6% improvement in transactions. During the quarter, our gross pricing increase versus 2020 was 6.8%. As I mentioned earlier, Omicron has negatively impacted our performance at the beginning of our first quarter.

Through February 23rd, first quarter system-wide comparable restaurant sales increased 7.4%, consisting of a 1.5% increase at company-owned restaurants and 11.2% increase at franchise restaurants while two-year system-wide comparable sales were up 3.5%.

Franchise revenue was $8.8 million during the fourth quarter compared to $7.9 million in the prior-year period.

This increase was driven by a franchise comparable restaurant sales increase of 14.2% as well as the opening of three new franchise restaurants during or subsequent to the fourth quarter of 2020 and revenue generated from eight company-owned restaurants sold to an existing franchisee during 2021.

This was partially offset by the closure of two franchise restaurants during the same period. Turning to expenses; food and paper costs as a percentage of company restaurant sales increased 80 basis points year-over-year to 27.2% due to increased commodity costs and investments in new packaging. These were partially offset by higher menu prices.

As highlighted earlier, commodity inflation accelerated during Q4, 2021 and continues to increase early in 2022. For the first quarter, we expect commodity inflation of approximately 18%. We believe that commodity inflation will decline later in the year as prices for boneless chicken, avocado and other products fall from the current highs.

Labor and related expenses as a percentage of company restaurant sales decreased 10 basis points year-over-year to 32.3% as higher menu prices and the benefit of lapping 2020 COVID -related costs offset higher wage inflation, overtime cost and other labor-related costs.

Based on the continued labor pressure that we're experiencing, we're expecting wage inflation of approximately 6% during the first quarter of 2022. Through February 23, we have incurred approximately $2.2 million of COVID -related expenses, including leave of absence and overtime pay.

Occupancy, and other operating expenses as a percentage of company restaurant sales decreased 60 basis points to 24.9% due to sales leverage, favorability and cleaning supplies, in a collection of an insurance claim. Our restaurant contribution margin for the quarter was 15.7%.

General and Administrative expenses increased to $9.5 million, from $8.9 million in the year-ago period due to an increase in management bonus expense and legal costs, partially offset by $600,000 decrease in stock compensation expense. As of recent, the total revenues, G&A increased approximately 60 basis points to 8.7%.

We recorded a provision for income taxes of $1.7 million in the fourth quarter of 2021, for an effective tax rate of 21.5%. This compared to a provision for income taxes of $2 million and an effective tax rate of 26.3% in the prior year fourth quarter.

We reported GAAP net income of $6.2 million or $0.17 per diluted share, in the fourth quarter, compared to GAAP net income of $5.5 million or $0.15 per diluted share in the prior-year period.

Proforma net income for the quarter was $6.1 million or $0.17 per diluted share, compared to proforma net income of $5.7 million or $0.16 per diluted share in the fourth quarter of last year. For a reconciliation of proforma net income and earnings per share to the comparable GAAP figures, please refer to our earnings release.

Regarding development during the fourth quarter, one franchise restaurant was opened in , while no new company restaurants were open. Turning to liquidity, as of December 29th, 2021, we had $40 million of debt outstanding and $30 million in cash and cash equivalents.

Lastly, due to the uncertainty surrounding the COVID-19 pandemic, the company is not providing a financial outlook for the year ending December 28, 2022 to have or we are providing the following limited guidance for fiscal 2022. The opening of 3 to 6 company-owned restaurants and 6 to 10 franchise restaurants.

Remodeling of 10 to 20 company-operated restaurants in 20 to 30 franchise restaurants. The capital spending of $20 million to $25 million and a proforma 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 I'm now happy to answer any questions that you may have..

Thank you. At this time, we'll now be conducting a question-and-answer session. . And our first question will be coming from the line of Jack Corrigan with Truist , please proceed with your questions..

Hey, Larry, thanks for taking the questions and congratulations on being appointed CEO. Well, it's well deserved..

Thank you, Jack..

I guess my first question is on current same-store sales trends and I appreciate you've given the year-to-date trends.

But I guess, could you split out the company and franchise two-year trends year-to-date? And would you be willing to give any more color, maybe breaking out January and February, just so we know if there was some inflection as Omicron receded?.

Yeah. Just the two-year trends have been pretty consistent across the company and franchise. I think the company is somewhere around flattish. Our franchisees continue to be strong. And top of my head I think they're in low double-digits on a two-year basis..

Okay. Good..

Let me --.

We can follow-up after the call as well..

Yeah.

And then what's the second part of your question?.

Yeah. I was wondering if you'd be willing to break out January versus February and was there any inflection there? I guess maybe if we get a more real time trend..

Yeah, in January, we are harder hit than February. I mean, January is really the peak of COVID. So that both, in our sales and franchisee sales. And then they start bouncing back, late January or early February is when we saw the inflection point and we started seeing improvements in sales..

Okay, great. That's helpful. And then I guess any more detail on the staffing environment currently? I think you said 5% to 6% same store sales impact in 4Q.

Is it still that level of impact right now? And I guess maybe what is the staffing level versus 2019 or where you'd like to be?.

Yes. I mean, our staffing levels have improved significantly over the past month or so. I mean, really started back in December.

We started seeing progress, COVID knocked us back a little bit and flattened out and now they've improved to the point where we really have very few, if any, restaurants, certainly during a week, we have really no restaurants that aren't fully open in all channels. A few are still -- have slightly reduced operating hours, but it's just a handful.

So overall, the impact due to staffing levels is down to negligible, basically just about zero. The only thing we do see is on weekends, we see some callouts and things, but overall, we're now able to keep all of our restaurants open, all channels, and basically all hours of operation..

That's great. That's really helpful. And then I guess for inflation up to 18% in the first quarter is a sizable jump.

Have you taken any more price or do you plan on taking any more price to combat that or offset that? And are you maintaining -- I think you previously said your full-year expectation for high single-digit to low double-digit commodity inflations, are you maintaining that for the full year and expected to come down in the second half?.

Well, we are expecting it to come down in the second half. I guess, I'm holding off in terms of giving a full-year outlook, just given to the volatility that we're seeing across all markets. Just a little color on the 18% number. Part of that is driven by the fact that we had such great contracts last year.

I think last year, our commodity inflation during Q1 was zero. So there is a big step-up we incurred in the fall, late in the year, when we renegotiated our contracts. That's part of the driver. And then the other big drivers on the acceleration and inflation were around really three products.

One was boneless chicken -- boneless breast in particular, which we had made a decision to let float year-end when we negotiate a contract, and those prices have gone up. Fortunately, we did lock in bone-in chicken because that's also been impacted on in terms of the markets.

But we're locked in at that rate so that has not resulted in additional inflation on top of what we were expecting. The second product was avocados. That should be -- that will be temporary. That was really due to the issues in Mexico which stopped exports from Mexico to the U.S. on avocados for a couple of weeks.

And so that should get back in line here. And then the third item was really pinto beans and that was driven by weather. Here in California with the rains, our supplier had to shut down production of pinto beans for a while and we had to source it from another supplier. So that drove the pinto bean cost during the quarter.

So we had a couple of market factors and I'd say a couple of non-market factors driving that 18% rate. Having said that, like I said, I expect inflation to remain at high levels but we do see it coming down over the back half of the year..

Thanks. Appreciate all that color..

And then in terms of pricing, your other part of the question was pricing..

Yes..

Yes. I mean, we ran in the first quarter, 8.2% price. We're getting ready to take an additional 3% price here in the next week or so. We will be constantly looking at that. And whereas in the past, we've tended to take pricing one to two times a year.

I think this is going to be an environment in which we are constantly looking at price and looking at it could be every module taking price just to keep up with inflation but we want to make sure that we're monitoring inflation, seeing where it's heading before making these pricing decisions rather than try to get out in front of it and take a huge price increase that may impact our consumer.

But I'd also highlight on top of the pricing, I mean the entire organization is looking at ways to how else do we improve margins in the business and that's everything from we looking at the makeup of products that we have, we looking on the menu, and what we provide in our combo meals and things, looking at the types of ingredients that we use.

So there's a lot of work going on to see how we might improve our margins across the board. At the same time, what we want to be really careful about is don't do anything to jeopardize the quality of the food.

I don't want to be in a position in which because we're trying to protect margins in the short-term, we jeopardize the consumer experience and the quality of our food. And so everything we do is very focused on maintaining that food quality.

So some of these things, the bigger things we have in the pipeline that we're looking at from a margin standpoint will have to be tested and reviewed again to make sure that we don't upset the consumer and really impact our food quality..

That's great. I appreciate all that color and congratulations again..

Thank you..

Our next question is coming from the line of David Tarantino with Robert W. Baird and Company. Please proceed with your question..

Hi. Good afternoon and congratulations, Laurance, on the appointment..

David Thanks..

Well done. Very well done. A couple of questions on some of your strategic points you made. First on the marketing, I think you've mentioned that the brand messaging has maybe gotten off center in terms of your key points of differentiation. I was wondering if you could elaborate on what you meant by that.

And I guess what the changes you hope to make with the marketing and advertising strategy going forward?.

Yeah, thanks, David.

So when we look back and look at the marketing during last year, if you recall, you're going back several years ago, we developed a brand book with a tag line, and that brand book highlighted what we're going to focus on, the colors, the fonts, everything about the advertising and marketing and that was all going to tie into this brand book.

And when we went back and looked at it, we realized, also new colors are coming in, the tagline, if you look at the advertising last year and you say each module basically has two sets of commercials, one for dinner and one for the -- it's called the entree family meals and entrees.

So you basically had twelve on call commercials, we used fee to flame our tagline twice. I think the focus was also a little bit away from the food and consumers using the food and got more into quite frankly, naked people with Nachos and those types of things.

So it just felt like we were going a route that myself along with the marketing team just felt like we should get back to focusing on what we really had determined in our brand work that we've done has get back to that and just a really focused on the food, on the brand book. The target consumers we were going after and those types of things.

So that's what we're going back to, again, it's not I wouldn't say a huge, huge shift, but it is getting back to the fundamentals of we believe really differentiates the brand..

Got it.

And when does your new, I guess, your evolved approach begin? Has it already started or is that on to come?.

It really starts here in the next module. And let me just highlight. We're really excited about the next module we're on. It's one of the most unique products the business has launched and served to our customers. It's capturing a trend that is very big out here in California. And I think other Hispanic markets, and that is a beef birria product.

So it's centers around this great beef that we have sourced. And then it's dipped into a Mexican, call it juice or sauce, the birria. So we're super excited about it. And looking forward to the success that we think we're going to have with this product. But that will get more into really focusing in on the food.

Really nothing cute about the advertising, it speaks for itself. And you can already have fun with it just from the dipping, so really looking forward to that and that to me is really where we start getting back to the more consistent advertising, more focused on the brand, the quality of the food.

And we want to make sure also all our advertising is when people see the ad, they know it's El Pollo Loco. And it doesn't get too far off track from what we've traditionally done..

Great. Thank you. And then one more question on the development outlook. I know you mentioned having some setbacks or not making as much progress on the franchising side. And I was wondering, I think previously you had talked about getting to a mid-single-digit type unit growth for the system.

And I wanted to ask, is that still the goal? And then what type of timeframe do you think you need to establish that type of growth on a consistent basis?.

Well, David, that is still the goal and 2013 -- 2023 it's still the goal. I think, like I said in the previous call, that's certainly a challenging goal. So it may be that we get to a run rate towards the backend of 2023. But like we said, we're pushing the pedal to the metal, a lot of resources this first quarter to really raise our game on that.

So we're not shifting the goal at this point, 2023, but admittedly, that is a more -- I'll call it a challenging goal than I would have said a year ago..

Got it. Thank you very much..

Thanks, David..

Our next question is coming from the line of Andy Barish with Jefferies Group, LLC. Please proceed with your questions..

Hey, Laurance. My congrats as well..

Thanks, Andy..

Just wondering, you knew 4Q, 1Q were going to be top on the margin side of things.

Do you have the visibility in your plans that kind of see progression as we move through the rest of the year?.

Yeah. .

Margin improvement?.

Yeah. No, actually, I figured that's what you're talking about Andy. Yes. But of course, the volatility in commodities. I say yes with the caveat.

If things stay according to what we think is going to happen, then I would see progression during the year, especially as we look to take more price and as we hopefully implement some of these cost savings initiatives that we have planned..

Got you. Very helpful. And when you, when you think about sort of pricing as you move through this year, I think you've mentioned family meals are already priced above the $20 mark for a lot of your franchisees.

Is that something you're testing in the company-owned stores to move up on that important products in the mix?.

Yes. So of the 3% price I mentioned, really 2% is what I would call our straight menu price increases. A percentage point of that is what we're expecting from the restructuring of our family meals on the menu. And so we're moving forward with that and that will be this next module which launches, I guess, in a week or so.

So that will be done and we will be off between our price point which most of our franchisees had moved off of. I'd say the other one that we're really now evaluating is we do Fire-Grilled Combos, several things on the menu at $5.

We're looking at that and saying, well, do you come off that price point as many franchisees have done or do you restructure it in a way that from a food cost perspective is better? So that's a piece of work that's going on now and it's one of the many, I'll call, cost initiatives that we have going on in the business..

Got you. And then just one final one on the balancing of renewed innovation just with the improvements the brand has made in terms of some of the operational simplifications over the last couple of years.

How do you make sure you keep some of that efficiency and productivity while still exciting the customer with some new products?.

Yes.

Well, that's what the -- all the work going on, as I mentioned earlier on the call, bringing in additional resources to really manage the product development pipeline and so we are really ramping up our consumer research, putting new products in front of those consumers, making sure that we're going to have a lot more success and a limit-time offers.

And in terms of the efficiency piece, it's really looking at the number of ingredients that we put in the products. I think many times we put too many ingredients in the products or probably more than necessary.

I mean, they are fantastic products, but do we need everything we put in them? From a consumer experience, do they really notice it? From an employee perspective, they know that there are complicated to make.

The other thing that we're reevaluating and we're doing research on is, as you're probably familiar, most of our LTOs, we always knew three new items. So if we're doing a new burrito, we do three new burritos. I think the earlier says, you may only need two burritos. You don't really need that third one.

So there's just a lot of work going on there around, not only really dramatically improving the new products and the chances of them being big successes, but also around how do we simplify things to make it easier in the restaurants to execute..

Thanks. Very helpful color..

Okay. Thanks Andy..

Thank you. . The next question comes from the line of Zackfia Sharon with William Blair..

Hi, it's Matt (ph) for Sharon. Firstly, a question on comps, if you kind of take the trend line through February 23rd and just extrapolate that, I'm wondering what you expect for comps for the full quarter? And the reason I ask is just because the comparisons they get so much tougher in March..

Yes, they do. So that's why, as I talked about comps for the quarter in March for our Period 3, the comp growth gets more challenging. The other more challenging thing that we see in Period 3 is a disconnect on the lapse. So last year, we did six modules, this year, we're doing five modules.

One of those module launches took place actually a couple of weeks ago. So you see the lap of that even makes it a little more challenging. I don't want to get into an actual comp forecast for the quarter but you're correct. I mean, the fact that we're at season comp over 7% through February.

The March comp scale is a little more challenging as we came out of COVID last year. And having said that, what we are seeing is if you look at the average unit volume lines in our business, those are growing nicely, coming out of COVID really strong as I highlighted in the call. We're -- we track to over $2 million of annual AUVs.

If you look at our franchisees in LA, they're now up around -- they probably average $44,000 a week. So we're seeing nice sales growth which is one of the things I'm also looking at as we get into March..

Okay. And then circling back to price. I think I heard you say you are running about an 8% price benefit here in the first quarter, are the franchisees being more aggressive on price right now? And I just ask because of the disparity in comps between franchise and company-owned.

And then more generally, how have consumers reacted to the price increases so far?.

Yes. So, first on the franchisee side, it's always a little difficult to judge exactly what pricing they've taken, the thing we use and what we look at is average check, because that's generally a good guideline for what pricing is being taken by our franchisees.

And so what you actually see is the gap between the company average check and franchisee average check has been very consistent and is consistent now, it's had a dollar more on the average check for franchisees. So that indicates to us that they basically have taken pricing at roughly the same levels as we have.

And when you look at performance and a big part of the gap between company and franchise performance is it's really all transactions. If you look at average check, growth is basically the same as transaction growth.

And that just comes from the impact that COVID has had on our business, not just this year, the prior years, the staffing challenges we had, and we're fixing those things and we're making progress. And to me, one of the upsides we have on the company side is we improve operations.

We should keep closing that gap with franchisees on the same-store sales side, and we should start getting more rapid sales growth than say the franchisees should. Now I hope to franchisees maintain it and we keep growing and accelerating our growth but we should have more upside on the company side as we continue to improve our operations.

In terms of consumer push back, it's difficult to read through COVID especially on the company side. But I would say right now, we're not really seeing it. We're seeing if you look at the pricing we've taken versus average check growth. There's probably two to three-point gap there, meaning we've taken more price than average check of increase.

But a lot of that is basically what we expected, which is as consumers coming back, people going back to work. Our lunch business and entree business are growing in a more faster rate than dinner.

And so there's a natural mix shift that you're going to get as you maintained your dinner business but you're gaining a growth more from your lunch and entree side of the business. So if I look at the franchisees, I certainly don't see any pricing pushback given their transaction growth on that side of the business.

So I don't see any pushback from consumers there..

Okay. Thanks for that. And then a last one from me. It looks like you're managing labor very well with the company-owned restaurants.

Is that primarily a function of turnover being down sequentially or have you discovered new efficiencies that maybe are helping you out more on the labor front?.

No, I don't think it's anything special. I mean, we've always done a very good job of managing labor in our business. In fact, well, we'd hope to see or expect to see here over the next several weeks and months is that we should be reducing over time and meal breaks penalties that had been a pretty sizable cost in the business.

And those are driven by the fact that we've had challenges staffing our restaurants. And so I expect that to actually come more in line to what we've seen historically. So from an efficiency standpoint, I don't see much different what we're doing today than we've done in the past..

Great. Thanks very much and good luck in the other world..

Thank you..

Thank you. At this time, we've reached the end of the question-and-answer session. I will now turn the call over to Laurance Roberts for closing remarks..

I'll just say, thanks everybody for joining the call today. I really appreciate it. I would just highlight again the few challenges on the inflation front and the staffing front where we're making some big progress.

I step away from the business and then just super excited about the prospects and I look at our sales performance, the things we're doing in the business to really continue to drive that sales growth.

And one thing I'd like to mention that I think got crossing the call is just the -- it's not just the sales growth that we're seeing in Pollo California, it's really across a broad spectrum of our markets, I mean basic -- almost all of our markets are seeing good sales growth and good comp growth which is another reason why I just highlighted because it just highlights the strengths of El Pollo Loco.

And again, see some challenges ahead on the cost side, brought from a -- where the brand stands from a sales perspective, I'm super excited that's where we stand. So again, thanks everybody for joining the call and I hope you have a great night..

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