Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, November 3, 2022. And now I’d like to turn the conference over to Ira Fils, the company’s Chief Financial Officer.

Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2022 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, including statements related to the impact of the COVID pandemic and macro environment on the business as well as our marketing and new product initiatives, cash flow expectations, capital expenditure plans, remodel plans for new store openings and expected income tax rate among others. 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 currently expect. We refer you to our recent SEC filings, including our Form 10-K for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-Q for the third quarter of 2022 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 included 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. Now I’d like to turn it over to Larry Roberts, Chief Executive Officer.

Thanks, Ira, and good afternoon, everyone. Before we get into the quarter, let me start by welcoming our new Chief Operating Officer, Maria Hollandsworth, to El Pollo Loco family. As you may have seen from our press release, Maria joins us from Dunkin’, where she was Regional Vice President of Operations. Prior to Dunkin’, Maria spent over 20 years with Jack in the Box in numerous operating roles, including her most recent position as Vice President, Strategic Initiatives and Operations Services. With the recent addition of Ira Fils as CFO and now Maria, I believe we have an outstanding leadership team that will provide the necessary skills and expertise to drive the continued expansion of El Pollo Loco. I’d also like to highlight that over the last 12 months, our system-wide sales exceeded $1 billion. This is a great accomplishment for El Pollo Loco and highlight the affinity people have for our brand and the huge growth opportunities we have ahead of us. Finally, as many of you have probably seen, on October 11, we announced a declaration of a $1.50 special dividend and authorization to repurchase up to $20 million of our common stock. These programs underscore the strength of our balance sheet, and more importantly, the confidence we have in our business going forward. Turning to the third quarter. We’re pleased with our continued top line momentum with system-wide comparable restaurant sales growth of 3.8%, including a 3.4% increase at company-owned restaurants and a 4.1% increase at franchise locations. Trends we saw towards the end of the second quarter continued into the third quarter, including the healthy growth of our lunch business year-over-year. I’m also pleased to add that our fourth quarter has started similarly to the third with system-wide same-store sales through October 26, increasing approximately 3.5%,…

Thank you, Larry, and good afternoon, everyone. For the third quarter ended September 28, 2022 total revenue increased 3.6% to $119.9 million compared to $115.7 million in the third quarter of 2021. Company-operated restaurant revenue increased 3.2% to $103.2 million from $100 million in the same period last year. The increase in company-operated restaurant sales was primarily driven by a 3.4% increase in company-operated comparable restaurant sales. The increase in company-operated comparable restaurant sales was comprised of a 7.5% increase in average check size, partially offset by a 4.1% decrease in transactions. During the third quarter, our effective price increase versus 2021 was a little over 10%. Based on current economic conditions and consumer sentiment and including an additional 2.5% price increase in November, we continue to expect approximately 10% pricing for the full year. Looking ahead, fourth quarter-to-date through October 26, system-wide comparable restaurant sales increased 3.5%, consisting of a 5.4% increase at company-owned restaurants and a 2.2% increase at franchise restaurants. For the same time period, our 2-year system-wide comparable restaurant sales were up 11.1%, further demonstrating the positive momentum we are experiencing to date. Franchise revenue was $9.5 million during the third quarter compared to $8.9 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 4.1% as well as the opening of 9 new franchise restaurants opened during or subsequent to the third quarter of 2021 and revenue generated from 8 company-owned restaurants sold to an existing franchisee during the third quarter of 2021. This was partially offset by the closure of 2 franchise restaurants during or subsequent to the third quarter of 2021. Turning to expenses. Food and paper costs as a percentage of company restaurant sales increased 250 basis points year-over-year to 29.2% due to increased…

[Operator Instructions] Our first question comes from the line of Jake Bartlett with Truist Securities.

This is actually Jack Corrigan for Jake. First, I just wanted to ask about restaurant level margins and your commodity guidance of 3% to 5% for ‘23. What level of visibility for that 3% to 5% guidance, how much do you have locks now? And we’re seeing chicken prices down in the 40% range right now. So can you remind us how much you had locked in 2022? Just so as we’re seeing the spot prices of those are actually tracking what we might be seeing in your commodity inflation or deflation.

Yes. Jack, this is Ira. So we are in the process of booking for next year, probably book, and we’re very close to that. We’re booking about 75% of our chicken will be booked, our chicken buy will be booked for next year. So we have some pretty good visibility into the -- our commodity guidance for next year.

Yes. And Jack, I’ll just add to that. You’re seeing in chicken markets is the drop-off in chicken prices, certainly, we’re seeing that a lot on the boneless, the boneless side and boneless breast. And then the chicken and the bone that we purchased a little less so, and we are seeing an increase in that year-over-year from what we booked this past year.

Great. That’s really helpful. I had a similar question from wage inflation. I mean 4% to 6% for next year. And then you mentioned some productivity things that you’re putting in place [Technical Difficulty] the on-boarding process, [new sauce] making equipment. So how much do you expect those things in your pricing to offset that wage inflation? Or are those more customer-facing processes?

Yes. So I think overall, on the wage inflation, I mean, bear in mind, none of this includes the AB 257, which we now believe won’t even -- it’s probably unlikely can take effect next year, if it does, it will be late in the year. So again, we have pretty good visibility into the actual wage inflation in terms of what we’re anticipating in the current environment. In terms of the efficiency initiatives that we put in place, I mean, a lot of those are really just going to be freeing up labor to focus on the customer. We’ll be evaluating whether we think any of those are things that we can actually start pulling some labor out. I think there might be some potential there. But right now, certainly, some of them we’ve done so far is really just freeing things up. And then as we look at these, we’ll evaluate whether we think we can actually reduce labor hours in a restaurant at all, but that’s to be determined. And then certainly, on the pricing side, we’ll be carrying pricing above inflation heading into the Q1 and really -- especially the first part of the year, and then we’ll be evaluating what levels of pricing we think we can take and whether or not we can be taking anything I would call catch-up pricing, which kind of catches you up to the pricing shortfall we’ve had over the last year or 2 years with this rapid inflation.

Great. And just to clarify, my math is a 10% pricing for the full year that would get you to about 12.5% in the fourth quarter. Am I doing that correctly?

No, I think you’re on the high side there, Jack. We’re a little north of 10% also in the fourth quarter.

Okay. And just how would that -- assuming you didn’t take any more pricing after November increase, how would that roll through the quarters next year? Through pricing?

Yes, yes. As you carry off into the first quarter of next year, you’ll be again about $10.5-ish or so through the first quarter. That will start to step down and actually into part of the second quarter, and it should start to step down as we get into the June time frame to -- if we did nothing else into the 7% range. And then really the balance of the year will depend upon how we decide upon taken, as Larry mentioned, some additional pricing as we look back in the back half of the year.

[Operator Instructions] Our next question comes from the line of David Tarantino with Baird.

Larry or Ira, I wanted to ask another question just about margin structure. And my question is what is the path to getting back to the margins that you are accustomed to delivering. I think, Larry, you referenced maybe a catch-up amount of pricing. Is there a strategy that you have to -- if inflation doesn’t come down to try to kind of return margins to the levels you’ve had historically?

Yes, David, I’ll talk and I’ll let Ira chime in. I mean, first of all, a big focal point right now is we continue to be higher and over time. Over time, it’s gotten a lot better from where we were, but it’s still certainly higher than we were pre pandemic. And so a huge focus on getting overtime down as being one of the margin drivers. And quite frankly, just getting -- we can get rid of COVID, I mean that continues to cost somewhere around $0.5 million a quarter on COVID costs, which is probably something that’s fairly unique to California in terms of the legislation that we have to comply with. A highlight on some of the ops efficiency measures. Again, some of that is just going to be, I’ll call it, redeployed labor. But I think there are some things we’re working on that may enable us to perhaps reduce some of the labor costs that way. And then I’d also say on the supply chain side, where we’re looking at some things from a sourcing perspective that should help us save costs in addition to the dip to lower commodity costs, looking to change whether it’s changing vendors on things or looking at some of the items we source, we think there could be opportunities there also to improve margins. So you can find those with, like I said, the potential opportunity next year to maybe you’re able to take some catch-up pricing. We think that will be the margin drivers for next year to get us back up to those levels that we’re more accustomed than being at. Anything else, Iran?

No, I think you hit the hot points. I think just -- I mean, we feel like we have pretty good visibility into our commodity inflation for next year. And so that gives us confidence that we will likely be able to take a little bit of pricing above the level of inflation next year, which will help improve margins next year to more to where they’ve been. And then just structurally, the things Larry talked about in regards to overtime and some of the COVID-related pay that we were required to make is going to be a little bit of a tailwind for us next year.

And then last one. And hopefully, utility inflation won’t be like it has been. I mean, gas prices, it’s hard to believe they’re going to get up from where they’ve been.

Understood. I guess the follow-up is how are you and your franchisees looking at kind of the 4-wall profitability equation when you’re making decisions on building new units. It’s nice to see the projected step-up next year on openings. But I guess, are you penciling in higher margins in the future? Is that how you’re penciling out these deals? Or I guess, how do you think about it?

Yes. No, we’re penciling that there will be a return to much better margins than what we’re seeing this past year. Yes. So when we’re looking at this, we’re looking at kind of getting back to margin levels where we’ve been in the past.

We have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Roberts for any closing remarks.

Yes, I’d just like to thank everybody for joining the call today. I hope to hear that we feel very good about where the business is now and really excited about next year. And so thanks again for joining. And since we want to talk again until next year I wish everybody a great holiday season and look forward to talking with you again next year. Thanks, everybody.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.