Good day, ladies and gentlemen, and thank you for standing by. Welcome to El Pollo Loco Fourth Quarter 2018 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 7, 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'd 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 2019 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 the 2018 fiscal year tomorrow, and we encourage you to review that document at your earliest convenience. During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release. 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. Our transformation agenda continued to drive momentum in the quarter, and I'm incredibly proud of our fourth quarter results. During the quarter, we achieved 4.4% system-wide comparable restaurant sales growth, which was our best system-wide result since the first quarter of 2015, and a two-year sales comp of 5.8%. We are proud that we drove these results by bringing more people into our restaurants, achieving system-wide comparable restaurant transaction growth of 2.3%. This quarter, we delivered restaurant operating profit margin of 18.7% and pro forma EPS of $0.16 on an ongoing operating basis, up 45% over the comparable quarter last year. This was all accomplished despite significant headwinds in the quarter in the form of California wildfires, and avocado shortage, a spike in tomato prices, and a nationwide recall by the CDC on romaine lettuce. In the hyper-competitive category, we achieved these results without engaging in the steep discounting of our competitors. In fact, we reduced the amount of discounting year-over-year, which is testament to the growing strength of our brand. We believe these results are evidence that the initiatives we launched as part of our transformation agenda in March of last year are producing the desired results, and we are just getting started. I would like to personally thank all of our employees and franchisee partners without whom these results would not be possible. The passion, commitment, and resilience that our employees and franchisees demonstrate to take care of our customers and one another give me great confidence that our company mission to feed the love that makes us all feel like family is being brought to life by them each and every day. During the quarter, we further strengthened our leadership team, adding industry veteran,…

Thanks, Bernard. Before we get into our fourth quarter results, at first I'd like to touch on a store base. During the fourth quarter, we opened two new company operated restaurants in Southern California. Franchisee also opened two new restaurants during the quarter one in Utah and one in Texas. Looking ahead, we expect the open three to four company operated restaurants along with three to five franchise restaurants in 2019. As remodels, the company completed eight vision remodels in the fourth quarter and franchise he completed an additional 14. This year, we planned to complete 10 to 15 company remodels and expect our franchise partners to complete another 10 to 15. Now on to our financial results for the fourth quarter ended December 26, 2018, total revenue increased 11.6% to $106.3 million from $95.2 million in the fourth quarter 2017. Total revenue in the quarter included $5.2 million of advertising revenue related to franchise advertising plan contributions required as part of a new accounting guidance implementation. Excluding the advertising fund revenue total revenue would have increased 6.2% driven by increasing company operated restaurants sales. Company-operated restaurant sales rose 6% in the quarter the $94.6 million from $89.3 million in the fourth quarter of last year. This increase in company operated restaurant sales was driven by contribution from the 12 new restaurant opened during and subsequent to the fourth quarter of 2017 as well as by 3.7% increase in company-operates comparable restaurant sales. Partially offset by seven restaurant closures during the same period. The increasing company-operated comparable restaurant sale was composed of a 1% increase in transaction and 2.7% increase in average check. Franchise revenue increased 9.2% in the fourth quarter to 6.4% million compared to 5.9% million in prior year period. The increase is largely driven by a 5.1%…

Thank you [Operator Instructions] Our first question is from Jake Bartlett with SunTrust. Please proceed with your question.

Great, thanks for taking the question. First, I had a question about the guidance in same-store sales, and just how confident you are that you can -- you keep it this kind of current level, this strong level and maybe in that answer, kind of give us an indication as to what -- how you're trending right now?

So I'll answer the first part of the question, I'll let -- for the same-store sales portion of the question I'll let Larry answer the balance of it. What we can say right now is that in the current quarter that we're in we are positive. However, I don't think what we could have envisioned at the start of this fiscal year is the -- what is now approaching record rainfall in Southern California or in California, in general, I should say, where we have 80% of our restaurants, and what has turned out to be record cold weather in the month of February -- the coldest February in 60 years. So normally, it's hard for me to talk about weather as being a factor in our business, but when you got that many restaurants located in the state of California, given what we have been experiencing thus far within the quarter, it is starting to have an impact. With that being said, we are positive and we are fighting through it, and we do believe that is an anomaly that is seasonally-based versus something that we're going to live with for the duration of the year.

Got it. Yes, sorry.

Yes, Jake, so -- Jake, so I think what we're saying is we feel good about that range for the full-year despite what we're seeing at a soft start at the first quarter, really driven by weather. The other thing I'd highlight about the first quarter is in addition to the weather impact is quite the result to be a little softer than we expected. We have a couple of other expense items in the first quarter really around severance and some high gas prices, which really hit in December, which we saw in January-February. So as we look at the quarterization of the year, I think Q1 will be a little softer relative year-over-year versus the other quarters of the year. So I think as you guys look at your models and things, I suggest you look at that, because again I think given the softer start to the year in terms of sales and some of the expenses we've seen, Q1 year-over-year will be a little softer than the other quarters ever -- again, we still believe the $0.70, $0.75 range that we're projecting is a good range.

Got it. And I had a couple of questions about margins, and just looking at the margin guidance for restaurant level margins, it looks like you're expecting about a similar decrease year-over-year on a basis points basis. Despite having what it looks to be stronger comps, and so just trying to understand that on the restaurant level, maybe that's an indication that maybe the company might not be as strong as the system or maybe that's baked into your guidance, if you could address that. And also the question about G&A, and it looks like it's expected to accelerate pretty meaningfully in '19 as a percentage of sales, which is also year-over-year growth kind of aside from many of the one-time charges, what is driving that and should we -- when should we expect you to get leverage on G&A going forward?

Yes, so let me talk G&A first, and I'll talk margins. G&A, the biggest driver of the increase is the bonus adjustment. So obviously when it will be year-over-year, we go back to a 100% bonus accrual projection will be hitting plan, and so when you see year-on-year, overall, after securities litigation costs and CEO transition costs, I think we're up about $3 million or so that get within that range. The bonus adjustment is by far the biggest driver of that. We have a little bit higher in terms of equity compensation in that number. And then the balance of salaries and other G&A expenses are roughly flat. So overall, we've done a real good job in terms of managing G&A overall, but again, we'll have bonus adjustment, and a little bit on the equity that will drive the cost up year-over-year. If we have the year that we are targeting at this year, then I'd expect to start leveraging G&A next year, quite honestly as we continue to build sales and not have this seems like annual bonus adjustments that we have to lap into the future. So in terms of margins, what you're seeing now is the wage inflation, which has -- if you look at the past several years, it has become higher and higher for us. One, just from the magnitude of the minimum wage increases here in California, the other one is the ability to manage the compression has gotten tougher, basically managing a difference between your higher pay at labor and restaurant by shift leaders and cooks relative to cashiers and shifts. So we've had to move more than more in line with minimum wage increases. So we haven't had the ability to manage that compression. So you got the wage pressures, and versus the last three years where we had food cost deflation, this year, as you have heard in our opening remarks, we expect to have a little bit inflation in food costs. I don't have that offset. So we've been pretty consistently saying you really need to be probably 3.5% comp growth in order to hold margin flat, maybe even north of that. So that's why you're seeing -- the high-end of the range were basically flat on margins, but if you get lower, you could see some margin degradation if we don't get that kind of comp lift.

Got it. Thank you very much.

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

Thank you so much. I have a couple of questions. Just first on the remodels that you've been doing, can you just talk about how much of those -- what's the type of lift you're seeing of those, and I guess, are you gaining some momentum on those or is that becoming a greater factor to some of the momentum we saw towards the end of the year on the comp?

Yes. Overall, when we look at the Vision remodels over the last couple of years, you're able to get varying performance anywhere from roughly flat up to north of high double-digits in terms of the growth. On average -- if you average, you're probably running somewhere around 5% to 7% overall lift. Now we'll highlight that the remodels that we did in late '16 and '17 and earlier '18, you're getting higher lift in those numbers because what we're doing is we're gaining towards the tail end of the restaurant that need to be remodeled. So these are pre-half the end there but they are also the ones we wait the longest on just because they have slight issues, they have other issues that we just wait until we are going to do the remodel. So we expect less lift on those. So going forward, what we're doing is really going back through only doing restaurants that are pre-half agenda [ph], so those will go back prior 10 years or so that haven't been touched. And we're looking for -- before going to do remodels, we're also going to be working on get those costs down and do some modifications to the Vision remodel because obviously with our new brand image and things, we want -- and we build some of those elements into those remodels as we're doing them. So that's why number of remodels is only 10 to 15, and again, the lift we're seeing from the later ones is little lower, which we expected just because again they have other issues, which put them at the very end of the list of restaurants remodeling.

Okay. And then just a bookkeeping question. I think you said also the debt balance was around $74 million at the end of the year? Is that correct?

Yes.

That incorporates the $36 million of the legal settlement, or are there some does the balance now in entering into '19 has that creeped up or is that $74 million representative of you fully paying out any liabilities you may have had to cash?

No. So the $74 million is where we ended the year. And then, it was just fairly recently that we entered into these agreements in principle on the legal settlements. So if those go through, we'll see those borrowing balances increase probably in three, four, five months or so. So as I project the year, I expect to be starting obviously at $74 million. We should see an increase kind of mid-year and then come back down again, given our free cash flow and I expect to get back down to probably $75 to $85 million level in debt.

Okay, so you might go back -- the $36 million added onto that might take you up to $110 million and then you come down basically throughout the year. Is that the way to think of it?

Yes, something that -- yes.

And that's incorporated in your guidance or EPS guidance?

Yes.

Okay. And then the last question, I guess if you look at the comp guidance, I think clearly you guys said that it is positive in 1Q. However, I guess if we look at it that's the weather and assuming you're going to have sunny, dry California return Are you seeing the same type of -- is there any reason to think that these two year momentum that you saw in the fourth quarter in end when the calendar switched but you're seeing that on the normalized days still?

Well, I think the answer to that is reflected in the full-year guidance. So I mean, I think you're seeing is there you know, project comps for the full-year that are closer to that range. So I think that is reflected in the quarterly and full-year guidance we provided.

Okay, thank you.

Our next question is from David Tarantino with Robert W. Baird. Please proceed with your question.

Hi, good afternoon. My first question is on the Q4 sales trends. And you saw nice inflection in the traffic and the positive territory. So Bernard, I guess I'm curious to know your thoughts on what the key drivers of that inflection were. I know you have a lot of components for the transformation plan, but are there one or two things that you see in the business that really drove that inflection?

Yes, I think it's, pretty consistent with what we've been sharing out. It's never one thing it's, several things that I think in the aggregate have really helped get us more consistent traction with business. I'd say one of the drivers certainly is the fact that we're clear on who our primary customers in terms of who frequency is most often which is a Hispanic customer. And while we certainly haven't neglected the general market customer, what we did in 2018 was we took our media spend, which was less than 8% when I joined the organization, and we took that up to over slightly 20 to put more of a focus on the Hispanic customer, when we see visit our restaurants on the 50% of our customers on a daily basis following that Hispanic category. Now, still, 80% of our media expands in the general market, so it's not like we're not equally going after with the same intensity that consumer group but we felt in 2018 until we made that correction that we were not doubling down on who our best and most loyal customer was, is I should say, so that's one thing. I think second thing is when you truly have clarity around your customer hierarchy. We've been able with the segmentation work that we've done and the brand work that we've done, we've been able to develop, I believe, a more compelling product pipeline, which you saw with our Chicken Tamale promotion in the fourth quarter, as well as advertising that I think is more reflective of who our core customer is and really what our brand needs to stand for going forward. I think our differentiators were more readily apparent as the year progressed. So I think that was another big driver. The business…

Right. That's really helpful in that on the operation side that you mentioned simplification of the menu so can you elaborate on what you're seeing so far with that reduction in the number of SKUs?

Yes, so we talked about the fact that we've been testing this in Los Angeles and we launched it in Texas as well last year. We mentioned that the time that in our tests we saw no sales degradation if anything, we saw a mix shift a little some slight mix shift into what we wanted to achieve with into our chicken on the bone products and we eliminated low margin, low mixing items from the menu that we just didn't think earn their keep any longer with the intensive simplifying our operations back of how so that labor could be redeployed front of house. We launched that as of Saturday, last Saturday. And we naturally too soon to tell what it's doing now that we have it at scale but based on how long we tested it in our markets in 2018 we know we have a lot of confidence that what we saw in test will carry forward now that we've launched it throughout the system in 2019. So too soon to give you any further detail on that since it's relatively new but you know will be -- we will share out more detail as it becomes available.

Great. And Larry a a couple of quick one's for you is that I might have missed it but did you talk about how much pricing is in your same store sales assumption for 2019?

No, you are the first to ask that, David. So we are -- our target for this year is in the -- I called the mid-3% range, mid 3s. Having said that, what we're planning to do is do an incremental pricing during the year. So each time we do that, like we just took some pricing this past weekend and so each time we take that we will monitor to see what the impact is because despite the cost pressures where you want to be careful about getting too far out in front. On a pricing front but right now the target is in the mid 3% range. And but again, we'll set that as move along to determine to keep moving on that path.

Got it. And then, last one on I think on the labor line. You mentioned there was an accrual reversal in that line on Q4 and I think we heard that from a couple of companies that have a lot of restaurants in California. So how big was the impact of that accrual and I guess can you confirm that that's going to continue to be a benefit in 2019, so 19, versus '18 will be neutral when you add it all up?

Yes, so I think the impact of reversing the accrual was somewhere around $600,000 $700,000 in that range and really the reason why it hasn't the big change in the fourth quarter is because we've been including all year and then it finally came out I guess it was October, November that California has finally repaid all the money to do so government and therefore is no longer going to be penalized from employment taxes and so we're able to reverse that growth and going forward there should be no year-over-year impact, but the quarters will look it'll be more evenly spread across the quarter, so that the accrual benefit in Q4 of 2018 will be spread across the first three quarters next year.

Yes understood. Okay, thank you very much.

Our next question is from Sharon Zackfia with William Blair. Please proceed.

Hi, good afternoon. Actually, following up on the labor question, it looks like the per unit labor spend accelerated a lot in the fourth quarter, if you kind of break into it. And I guess I was curious whether the group insurance dynamic that you talked about was meaningful in the quarter because it seems like the 60-basis point increase on the 3.7 comp is out of keeping until we saw the rest of the year.

Yes, I mean, so the group insurance was not insignificant, it was probably to feel it, $400,000 to $500,000.

Okay. And what was that, Larry? Is that like, are you self-insured, or can you talk about what that is?

Yes, we're self-insured, so…

Okay.

Yes, we'll see why fluctuations on that number just based on the claims that come through.

Okay perfect. And then a question on the plans for 2019, I think at one point you had mentioned the potential for some new chicken flavor profiles, and I don't know if that was still something that you're thinking of in terms of menu innovation for 2019, and maybe give us some color on how impactful that might be or when we might see that in the restaurant?

Yes. So that something that we're still have in test right now in terms of just ideas that we are concepts screening and also just playing within our -- in our test kitchen to figure out how to best operationalize, but what I will say is -- so that's something that we're still, we're still investigating and figuring out the best way to bring to market, but what I will say certainly with Hector's arrival here as Chief Marketing Officer, what we are going to be doing at a far more accelerated rate is, putting a lot more ideas at the top of the -- on our product development funnel. So that we've got a pantry full of really compelling ideas to the degree to which we haven't had them before. So really ramping up product innovation is a huge growth driver for us moving forward and developing compelling innovation that really hits the mark in terms of what our customers want from us is going to be something that you'll see going forward and we've got some exciting things planned for 2019.

Are you planning on to keep the marketing in budget the same as a percent of sales or is there any thought on moving that?

Currently it's staying where it is. No but so there's no there's no way a short term desire to change that at the moment.

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

Hey, Bernard. Hey, Larry. This is Alex on for Andy. Just wants some follow-up on a David question around pricing and clarify. Are you looking for mid-threes for the full-year or really a ramp up to that to 3% by year end and I guess thinking about the mix and how are you seeing it as really positive mix there with up sell work. I'm trying to understand the traffic dynamics in the guidance here?

Yes, so we expect for the full-year the average about mid-threes.

Okay. And would you expect mix to remain positive?

I think we are targeting mix to be flat more or less flat maybe slightly positive a lot of depends on how successful we are in terms of driving family meal which is obviously one big initiatives that we have, if we move that mix up I would expect to be positive mix. I'm kind of thinking flat to slightly positive I think.

Okay, that makes sense. And then historically the franchisees had outperformed the company on comp but you know that is something that you're working on last quarter as well and you're in the fourth quarter both the comp and traffic I saw that gap widened a bit. With the work you're doing around increase staffing at dinner, drive-through and pick of the week. Do you think you can try to close that gap this year?

I think those were tests, so I want to make sure that just understand that that wasn't necessary spread throughout the entire company system and so you know we were taking we're still looking at what adding incremental labor very you know judiciously and selectively in our business can do to drive results. But what I would say is the real opportunity in our business is driving a level of operational consistency throughout the system unit by unit by unit. All this be very candid, we've got some outstanding restaurant operations in certain geographies and we've got opportunities and others and the key goal is to drive a level of consistency throughout that I think will then be reflected in the results. So that's really where we are focusing the line share of our effort these days.

That makes sense. And then I guess, given Larry's comment on the family meals, we see here in this quarter the approach of value looks like curve in add-on offering with the poor performance a lot as. Do you think about the strategy this year for value really around kind of add-ons kind of holistic value versus maybe what we seen previously with that discounting around single entrees?

Yes, so I think here our approached was in 2018 and continues to be to reduce our discounting year-over-year that's kind of the opposite of what you hear a lot of our competitors doing or saying and I think again that is a testament to the strength of our brand and our ability to command and have pricing power in the market. And I think the reason why we're able to do that is because we have become better storytellers and really explaining what the quality difference is in our products and explaining to the world the hard work that we do each and every day in terms of everything that is hand crafted made from scratch etcetera that our competitors simply don't do. With that being said, a lot of these value add-ons you're seeing us promote and advertise in conjunction with family meals are really designed to address the fact that again in 2018 we made in the second-half of the year a concerted effort to go after families and we have a mantra internally within the company that we want to own families. One of the ways that we're figuring out how to do that is to you know really insure that moms have an opportunity to provide her family with everything that they want where as you know her husband or dad to selecting for his family might decide that he wants chicken on the bone but the younger children in the family wants something else. Now we are providing a kind of value offering where chicken on the bone could be had by perhaps by the older members of the family and then there's something for the younger members of the family to enjoy and indulge that's if chicken on the bone isn't something that they want and moms and dads can add that on for value price which serves not only consumer need in this particular case but provides value to the family well helping us increase our overall ticket. So that's one of the ways we are really trying to become more relevant at dinner, while not discounting our business necessarily.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, thank you everyone for attending this quarter's call. We look forward to regrouping with you in next quarter as we continue to make progress against our transformation agenda. Have a great evening.

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