Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco First Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and lines will be opened for your questions following the presentation. Please note, that this conference is being recorded today, March 9, 2023. 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, you should have access to our fourth 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 discussion today will include forward-looking statements, including statements related to the impact of the COVID-19 pandemic and macro economic environment on our business as well as our marketing and new product initiatives, our strategic color, capital expectations, capital expenditure plans, remodel plans, expected 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 current 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-K for 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 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. Now, I would like to turn it over to our President and CEO, Larry Roberts.

Thanks, Ira, and good afternoon, everyone. We are pleased with our performance in the fourth quarter as system wide comparable restaurant sales increased by 4.7%, including a 6.5% increase at company-owned and a 3.5% increase at our franchise locations. These results were driven by the success of our Stuffed Quesadilla promotion that resonate well with both new and existing customers, as well as the continued improvement in our company-owned and franchised restaurant operations. In fact our system restaurant operations in the fourth quarter were the best days in all year. Last visit excellence and social media scores reached new highs for the year, while customer complaints were at their lowest levels. The continued improvement in our restaurant operations are reflected in our brand tracker results in which we made significant progress against our competitive set across all five key attributes, which are, food and menu quality, service environment, value and overall brand experience. Our strong results on value were especially reassuring given the year-over-year pricing at company-owned restaurants in the fourth quarter was 10.6%. It again demonstrates the value is determined by more than just price and consumers recognize the lengths we go to at El Pollo Loco to serve delicious food that is freshly prepared every day in our restaurants. Another highlight of the quarter was the opening of the first El Pollo Loco restaurant in Colorado in November. The opening had a new weekly sales record for El Pollo Loco and the restaurant's average weekly sales are still well above expectations four months after opening. We're very excited for our franchise partners and look forward to continued success as they, along with other franchisees, build restaurants in Colorado. While we continue to be pressured by inflation, our team's did an admirable job managing our businesses, delivering a restaurant…

Thank you, Larry and good afternoon everyone. For the fourth quarter ended December 28, 2022, total revenue increased 6.4% to $115.9 million compared to $109 million in the fourth quarter of 2021. Company-operated restaurant revenue increased 6.4% to $99.6 million from $93.6 million in the same period last year. The increase in company-operated restaurant sales was primarily driven by a 6.5% increase in company-operated comparable restaurant sales. The increase was comprised of a 7.3% increase in average check size, partially offset by a 0.8% decrease in transactions. During the fourth quarter, our effective price increase versus 2021 was a little over 10.5%. Looking ahead, including our quarter-to-date results, we are currently expecting first quarter 2023 system-wide comparable restaurant sales to increase 0.5% to 1.5% inclusive of a company comparable restaurant sales increase of 3% to 4%. Our sales expectations reflect the negative impact of adverse weather conditions experienced in California and other Western markets during the first quarter of 2023. In addition, the last two weeks of the quarter will be rolling over our incredibly successful Beef Birria promotion in the prior year. Franchise revenue was $9.4 million during the fourth quarter compared to $8.8 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 3.5% as well as the opening of 11 new franchise restaurants opening during or subsequent to the fourth quarter of 2021 and revenue generated from three company-owned restaurants sold to an existing franchisee during the fourth quarter of 2022. This was partially offset by the closure of two franchise restaurants during or subsequent to the fourth quarter of 2021. Turning to expenses, food and paper costs as a percentage of company restaurant sales increased 110 basis points year-over-year to 28.3% due to increased commodity costs, partially offset…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Drew North with Baird. Please proceed with your questions.

Good afternoon. Thanks for taking the question. My first one was just on Q1. I was wondering if you would be able to give some estimate about the weather impact for the first quarter so that we can gauge the underlying trend, at least in the quarter-to-date period?

Sure. Thanks, Drew. I'll probably give you a little bit more on top of that. First, I start by highlighting that as we talked about earlier in the year that we really saw good momentum coming out of 2022. When we saw really for the quarter strong comps, actually comps have been improving from month-to-month, starting October, November, December, each month got stronger. And so we really felt like we were heading into a new year with a pretty strong momentum. If we now look at where we are quarter-to-date, really company comp sales are up a little over 6% and franchisees, I think right around 0.5% positive, which is actually pretty strong given -- we're estimating that the weather impact is probably in the range of 2% to 4% in terms of same-store sales growth. And that's really rain and just on top of cold weather during the quarter. So again, when I look quarter-to-date, we feel like the trends we saw in the fourth quarter have begun in the first quarter. And unfortunately, the weather is knocked us back a bit. But from a quarter-to-date perspective, the comps are pretty good even despite the weather. But as Ira highlighted in his comments, lapping Birria coming up over the last couple of weeks of the quarter, that's going to bring the comp growth down for the quarter.

Great. That's very helpful. Thanks a lot for the color. And then one follow-up on the comp. I guess, how are you looking at the comparison as we get to Q2, especially amid the successful Beef Birria promotion last year. I just wanted to get your sense of your level of confidence in your ability to cycle that period with sustaining positive comps against tough comparisons there.

Well, we feel like we'll be able to drive positive comps. I mean, because what will happen is during the beginning of the quarter, we'll be lapping Birria from last year, but then we're also doing Birria promotion during the second quarter. So you've got a little offset in terms of lap. I mean Birria earlier last year as our second module. This year is our third module. So they have a timing disconnect, but -- you should see early in the quarter, lapping Birria from last year. So that will be an uphill battle on the comps. But then as later in the quarter, we should start seeing that churn more favorable because we'll be launching Birria versus last year when we were on to something besides Birria.

Perfect. And then just one more from me here related to unit growth. Given a key component of the strategy from here to fuel franchise-led development, I was hoping you could provide some color on where franchise level profitability or cash flow sit today maybe how that compares to last year 2021 or even pre-COVID. And perhaps just higher level, any additional insights into how the conversations are going with franchisees and the sentiment there as you look to get back to 5% unit growth in the out years.

Yes. No, I don't -- I see some franchise profit and loss statements. I don't see them all. The ones we've seen I mean their cash flows remain very strong. I mean the great thing for our franchisees is if you look at over the past three years, I mean, their sales are up over -- right around 20% over the three-year period. So their performance is very good, and they still feel very good about the business and the sales are generating. And obviously, the profitability has been hit a bit by the inflation last year, but still seeing them deliver good cash flow. So I think financially, our franchisees are in good shape. In terms of development, and I'll call it the attracting new franchisees, again, good progress last year in our – ability – we're working against. I mean, these things always take a little bit of time as you're bringing new franchisees in the system, but we feel like again, we'll get some more development deals done this year on that. So we feel good about how we're progressing there. And then our existing franchisees are also interested. We'll say, I think some are maybe -- we're trying to evaluate the economic situation with a potential recession, but again overall the sentiment in the system is very positive about where El Pollo Loco is and the sales are seeing and their profitability.

Thanks for all the color. I'll pass it on.

Thanks.

Thank you. Our next questions come from the line of Todd Brooks with The Benchmark Company. Please proceed with your questions.

Hey, good morning, everyone. A few questions for you, if I may. First, Larry or Ira if you look at the weather headwinds, which you highlighted in the quarter and parse that out how are the consumers that are making it into the restaurant behaving as far as how they're building checks, how they're attaching? Is third-party delivery still mixing at the same level than it was in let's say the second half of 2022?

Yeah. So third-party delivery is basically mixing about the same. It's about 7.5% to 8% of sales, which is where it was through thing most of last year. So it's not growing. It is in terms of total dollar sales is growing. But in terms of mix, it's been basically flat not seeing a decline in that. So certainly the consumers who want their food delivered or still ordering food to be delivered. Yeah, I think when you look at the overall customer base as we highlighted last year in the fourth quarter – in our third quarter call, but we are seeing consumers react a little bit by maybe buying a little bit less. I mean, a little bit in average check managing that down. We say that, with our drink mix. Our drink mix is down from where it's been. And just again, it just looks like the lower income consumer is managing or check down a bit by the number of items, they order. So again drink mix is down number of items per ticket is down just slightly. So there definitely seems to be a little bit of impact there as people are managing their budgets a little more tightly, again, amongst low-income consumers. I think when you get to the kind of the mid-level and higher levels we're just not – I think they're still acting the same as they were through all of last year not seeing much of a difference there.

Okay. Great. And you spoke to more of a focus on value with the $5 and $24 price point kind of messaging in the quarter. Value mix as a percent of the menu have you seen that pickup as well kind of pointing to maybe the consumer you were just referring to seeking out more value?

Well, we can see the $24 family meal improved the mix on the dinner on the family meals a little bit. So we felt good about that. The $5 originally well, the overall mix is probably pretty comparable to where it was previously. So at least, it's been able to sustain that mix. And the one that's got the most excited are the $5 bowls. We went out and did some consumer screening around okay from a value perspective what would consumers see as being the best value alternative that we could offer. And these $5 bowls were the clear winners and the great thing about them is we can do them at pretty good margins and make those offerings. So that's why we'll look at in a couple of weeks going out and market these $5 bowls. And we do think that's going to resonate with the lower-income consumer and get them back into our restaurants as frequently as they used to be, so very excited about getting those out there and launching those and seeing the reaction that we get from consumers.

Okay. Great. And then a final one for me, and I'll jump back in queue. If we look at the pricing you talked about north of 10% menu price in Q4. Where is the expectation for where Q1 menu pricing will be running year-over-year? And thoughts on this environment on further price increases as we move across the balance of fiscal 2023?

Yeah. So for Q1 we'll be just shy of 11% pricing as we took another price increase. We took a 2.5% price increase in March. And as we move forward through the year, we're going to be careful with our pricing. We're thinking about taking another moderate price increase later in the year. So as we move forward through the year you'll see our effective pricing decline as some of the higher increases we took last year. So by the time we get to the end of the year we'll be carrying in the 4% pricing range.

Okay. Great. Thanks, Ira.

Thank you. Our next questions come from the line of Matt Curtis with William Blair. Please proceed with your questions.

Hi. Good afternoon. Thanks for taking my question. With company-owned comps outpacing the franchise comp in the fourth quarter. I was just wondering, what factors drove that? I mean was it overly due to more normalized staffing and operating outage relative to last year, or was it something else?

Yeah. Thanks, Matt. I mean, the laps are obviously easier for company restaurants versus franchise restaurants. I mean the franchise restaurants performed extremely well for a number of quarters comp sales basis. Now, I do think one of the factors driving that lap, is the fact that the company operations, as we highlighted earlier, we're, quite frankly, not very good going back a year ago. And I think consumers did start trading off company locations to go to franchise locations, we're already getting very service. So as we've made a dramatic improvement in the company operations, I think one of the factors out there is that, we are seeing customers returning to the company restaurants because now they're getting a better experience. And so I think that is a factor and -- when we look at the average unit volumes in Los Angeles, where we saw a big swing when the company operations were poor a big swing from those average unit volumes in favor of franchisees versus company restaurants. And now those have swung back quite a bit. So there is the indication that, yeah, the improvement we made in the company operations has moved the entire system up. But I do think there's, more consumers now coming to company locations that had previously done the franchise locations because our company operations just weren't where they needed to be. So hats off to our company operators or the big improvements we've made.

Okay, great. And then I guess on restaurant level margins for this year. Could you walk us through what your expectations are in terms of the cadence? I mean, can we expect it to be stronger in the second half of the year as the inflationary pressures dissipate to some degree, or do you expect something else at this point?

Yeah. I think there's two things going on. I think if you just -- before we talk about that for a second just think about it seasonally Q2 tends to be just because of volumes our highest margin of the year with Q1 being the lowest and then the back half of the year tends to be around the average. But I think this year you will see a little bit of an increase as we move to the back on margins as we move to the back half of the year based on the timing of our expectations in regards to inflation.

Okay, great. Thanks very much.

Thank you. [Operator Instructions] Our next questions come from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

Great. Thanks for taking the question. Mine is about some of the cost in the labor line, like over time that that has -- it seems like its normalized and that's helping the labor margin. If I look at labor per operating week the year-over-year change was much less than it had been in prior quarters. So the question is as you move into 2023 what kind of a lift -- to what kind of a margin tailwind do you have in the labor line that could offset some of the wage inflation that should continue? That's overtime training recruiting. Just trying to figure out really what kind of leverage you can get in labor even with a little bit of wage inflation?

Yeah. I mean, I'm trying to think what the precise numbers are. But the bottom line is I mean, we highlighted last year that over time was significantly higher than where it is on average, which we are bringing down and getting back to our more normalized levels meaning back to where we were back in 2019. COVID costs are coming down because we're not having to pay people who are out on COVID leave. Meal breaks is another one. I mean, meal breaks isn't as big of a number quite frankly that -- so we're getting in control of those food waste. So I think overtime it's probably the biggest result. I'll let Ira chime in if he's got any other thoughts?

No. Yeah. I think Larry hit it on the head. There's a lot of opportunity there. And if you think about the overtime, the meal breaks all the things we're focused on, it's half a point to one point of favorable margin impact as we think about 2023.

Great. That's really helpful. And then my other question, Larry, you made a comment about potentially moving to more of a platform approach to the menu versus six to eight LTOs. I know over the years you had been moving towards platform. Maybe just remind us or me where you stand in the evolution, I mean, back historically you had, I think it was 10 LTOs or advertising windows. But where do you stand in terms of the cadence of LTOs and windows? And just maybe clarify the comment there. Are you planning on evolving that further so it's less focused on LTOs?

Well, I should clarify, you're right. We used to do -- we got up to 10 LTOs. We're now at 6. I mean 6 is to me the right number. We did five last year, we'll do six this year. I just feel like that's the right number in terms of the cadence of the timing of how often you want some new news coming. When I talk about the platforms, I mean, again, this is something that we're evolving. We've talked about in the past, but I don't think we've ever committed to it and really tested it. And so like we said earlier is we do have a menu import test going on -- there are some additional, what I'll call, platforms, so there's an add-on menu to encourage people to trade up and buy additional items. We're leaving case ideas on the menu to see again how that does post promotion. But the idea is that you wouldn't go away from LTOs, but your LTOs will be more focused around actually building these platforms. So I think many times in the past, we do LTOs, and we just pull them out. And -- okay, but you got a pump in sales, but then you pulled it out and it didn't really grow what I'll call long-term sales because it just came in and went out. What I'd like to do is see okay, so if I do a Quesadillas platform, for example, and maybe it starts out -- I'll make up a number, right, a 4% mix. Over time, if I keep coming back to Quesadillas, can I get that up over time to a 5%, 6%, 7% mix. I mean it's really a lot like start us outs. I mean that's probably the best example. If you went back three years ago, Tostadas were mixing about 8% of sales. And then each year for the last three years, we've come back and talked about Tostada sales-- so before the current promotion, we had to stop Tostada up to 13%, 13.5% mix on a stand-alone basis. And now there's recent promotion, can we get this up even higher to 14%, 14.5% mix. So by having Tostada as a platform that you come and advertise every year, can you keep growing yourselves that way versus again coming out with these onetime LTOs that come in and come out, and then you're back to where you were. So what you're trying to do is keep growing that baseline by keep building these platforms. And so that's the thing we're looking at strategically, and we're testing a bit with this new menu board. But that's the way I feel like we should be building sales in the company versus these kind of relying on these onetime LTOs to beat prior year.

Great. That's really helpful. And then my last question is on operations. And I know there's lot of moving pieces, especially as staffing has kind of -- has a big impact on your efficiencies and your ability to execute. But given the focus over the last years of simplification, you have more initiatives kind of underway right now. But how would you frame kind of the level of efficiency, speed of service now versus pre-COVID or maybe even now assuming a kind of normalized staffing environment. So what I'm trying to get is the model improved versus what it was three or four years ago materially? A – Larry Roberts: Yes. If I look where drive-thru times are now, I'll be honest with you, I don't have the pre-COVID numbers, but we've got now company drive-thru times down. Total drive-thru time is about four minutes. If you look at just -- and then franchisees are down to 3.5 minutes. I believe -- I'd have to verify this, but those are probably better than where we were pre-COVID, but I can't say for sure. But I do know they're dramatically better from where we were like a year ago. And if we look at drive-through window times, we're down to probably the best levels we've been at least on the company side in a long time the franchisees continue to be a little bit better on that. So the only thing I'll say is when you look across all of the operating metrics we look at like I highlighted on the call is they are all at very high levels today. I mean, I'll just give you a couple of examples. And again it's hard for me to go back pre-COVID because I don't really have the numbers off the top of my head. But if I go back a year ago and you look at customer complaints and again we were struggling in company operations. We were at 12 complaints per 10,000 transactions. We've cut that in half. Franchisees have actually come down. They were doing pretty well about I think 5.5% or so they're down to 3%. Our social media metrics now our franchisees are at 4% and we're getting closer on the company side to 4% and that's Yelp and Google reviews a number of stars. So -- and those are again I believe the best I've seen in a long time. So again I think the system as a whole has made tremendous progress on operations, the franchisees despite the fact that we're already operating well at high levels a year ago have made even more improvements and the company has made dramatic improvements. So apologies for not knowing what the 2019 numbers were, but if I go back over the last year and look at the improvements we've made they're huge. And I'm pretty sure that a number of things we're looking at are equal to if not better than where we were in 2019.

Great. No, that’s really helpful. I appreciate it.

Thank you. Our next questions come from the line of Todd Brooks with The Benchmark Company. Please proceed with your question.

Thanks. Just one quick follow-up here or a question. Obviously, you're accelerating the remodel activity in 2023 after getting a little over 20 done last year. Can you share with us what we or investors should be expecting as of remodels? What's the early experience been? Are we seeing it in kind of operational performance at the store? Are we seeing it in a revenue lift? How should we think about accelerating remodel activity as a potential tailwind for the business? Thanks.

Yes. I mean in general I think we've said we should be seeing sales lift of the 3% to 5% range on these remodels. I mean that's the expectations with the high end being really what we're targeting the 5%. With COVID and things it's been a mixed bag. But overall we're kind of in that range of what we're seeing. We're getting very positive feedback from franchisees on the remodel, positive feedback from consumers. But in somewhere in that 3% to 5% lift is what -- and when I say 3% to 5% that's versus a control group is what we should be seeing in these remodels.

And has the cost of the remodels has that tightened up as you've gone through this first wave? And what should we think about there for the cost of rolling out this next wave?

Yes, I think we're still seeing it. It varies depending on what level of remodel we do. When we have three different levels and what we're seeing is we're doing more of I'll call it -- I'll call it Level 1 which is a lower level remodel, which includes a full external remodel. But then internally some of the things like flooring and things we may not change out, but still get other elements in there. So, that's still running probably $250 million to $300 million. You're kind of mid-level like $350 million. And then as you go at the high level, you're looking probably more the $400 million to $450 million range, maybe even $500 million. But I think most of the remodels now are really Level one and Level 2.

Okay, perfect. Thanks Larry.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would now like to turn the call back over to Mr. Larry Roberts for closing remarks.

Okay. Well, I just want to thank everybody for joining us tonight and I hope you have a great night and I hope you're excited about El Pollo Loco as we are. Thanks very much.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.