Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Third Quarter 2024 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, October 31, 2024. 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 everyone. By now everyone should have access to our third quarter 2024 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 our growth opportunities, strategic and operational initiatives, expectations regarding sales and margins, potential changes to our product platforms, capital expenditure plans, expectations regarding kiosk rollouts, the ability of our franchisees to drive growth, expectations regarding commodity and wage inflation, remodel plans, and our 2024 guidance 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 the year ended 2023 previously filed, as well as our Form 10-Q for the third quarter to be filed for a more detailed discussion of the risks and current impact of our future operating results and financial condition. We expect to file our 10-Q for the third quarter of 2024 tomorrow. 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, which is available in the Investor Relations section of our website. With respect to the restaurant margin contribution outlook we will be providing today on today's call, please note that we have not provided a reconciliation to the most directly comparable forward-looking GAAP financial measure because without unreasonable efforts we are unable to predict with reasonable certainty the amount of or timing of non-GAAP adjustments that are used to calculate income from operations and comparable restaurant revenue on a forward-looking basis. Now, I would like to turn it over to our CEO, Liz Williams.

Thank you, Ira, and good afternoon everyone. During the quarter we drove top line growth through a 2.7% increase in system-wide comparable sales. We expanded restaurant level margins 230 basis points year-over-year to 16.7% and we continue to make great progress on reducing the cost of our prototype to stimulate future restaurant development. While I am pleased with the progress we have made thus far, there is still a lot to do. We have a substantial opportunity ahead of us to become the national fire-grilled chicken brand. As we approach our 50th year in business with plans to modernize this beloved brand, the foundation is critical. I continue to be impressed with the culinary, operational and people focused foundation that has allowed us to get off to a fast start with our transformation. At the end of September, we invited all of our franchise partners to meet in person for our annual franchise conference. Our team came out of the conference energized and ready to tackle our key priorities, consistent sales growth, improved margins and igniting new unit development. We will do this by executing on our five strategic pillars. First, brand that wins through our craveable, affordable and better for you chicken offerings. Second, hospitality mindset by embodying the El Pollo Loco culture and providing our guests with fast, friendly and consistent service. Third, digital-first, bringing frictionless experiences to our guests. Fourth, winning unit economics, making sure margins matter. And finally, driving unit growth again with national expansion by becoming flexible and affordable. With the current macroeconomic environment continuing to put pressure on our guests, it is more important than ever to lean on our strengths, providing portable, craveable, fresh food all for a good value and with the convenience of fast service to ensure we are a brand…

Thank you, Liz, and good afternoon everyone. For the third quarter ended September 25, 2024, total revenue was $120.4 million or no change as compared to the third quarter of 2023. Company operated restaurant revenue decreased 1.5% to $101.2 million from $102.7 million in the same period last year. The $1.5 million decrease in company operated restaurant sales was primarily driven by a $5.3 million decrease in revenue from the refranchising of 19 company operated restaurants to existing franchisees in prior quarters, partially offset by a 2.8% increase in company operated comparable restaurant sales and additional sales from restaurants open during or subsequent to the third quarter of 2023. The increase in comparable restaurant sales included an 11.3% increase in average check size and approximately 7.6% decrease in transactions. During the third quarter, our effective price increase versus 2023 was 8.4%. Franchise revenue increased 10.5% to $11.3 million during the third quarter, driven by a 2.7% increase in franchise comparable restaurant sales as well as three new franchise restaurant openings during or subsequent to the third quarter of 2023 and the 19 refranchised restaurants I've just mentioned earlier. Looking ahead fourth quarter to date through October 23, 2024 system-wide comparable store sales decreased 0.5%, consisting of a 0.8% decrease in company operated restaurants and a 0.3% decrease in franchise restaurants. We believe, we will finish Q4 slightly positive as we expect our same-store sales trends to improve as we are rolling over our 2023 Carnitas LTO in the back half of the quarter, which underperformed our expectations last year, and we continue to innovate with value promotions. Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 170 basis points year-over-year to 25.1% due to menu pricing and lower discounting partially offset by commodity inflation…

Thank you. [Operator Instructions] And our first question comes from the line of Todd Brooks with Benchmark Company. Please proceed with your question.

Hey, thanks for taking my questions. Appreciate it. First question just looking at kind of the sequential progression in same store sales kind of that north of 300 basis point drop quarter to date versus what you were able to generate in Q3, I guess what are kind of the components of that? Is there some real change in average check that's dragging things down? Is there a change in traffic? Is there something competitively that you've seen that you think has impacted the businesses maybe leading you to, to seek out more of that $5 value price point that many others are running? I'm just trying to get some color around this slowdown here.

Yes, thanks, Todd. Fair question. It definitely is that value oriented consumer more than ever telling us that they need more value. And we've been working over the last couple of weeks identifying what we can do to really bring that to bear. So we also came into, if you think about our calendar with 2024, we came in with limited innovation. So we really had a calendar of reheats [ph] and I'd say the first half of the year through middle of the year, the double tostada, the chopped salads, the stuffed quesadilla, they were on reheat number two or we have value at a higher price point as we talked about over the last couple quarters at that kind of $9 to $12 price point. But what we realized as we've moved further into the year is two things. One, the reheats are losing some steam. So we're running double tostada and for most of the month of October we were running double tostada. We've hit that now a couple times this year and a couple times over the last years. And it's a great product, consumers love it. But it is still a really high price point and we need more innovation. So the couple things that we've done to do that and to bring what we call new news is the $5 Hoya bowl. Of course the Hoya bowl isn't a new Item, but that $5 price point we were able to get our franchise system in pretty quick order to align that. We're going to go on national media with that $5 price point. So that will be trafficking here in the next couple of weeks. I think the week of November 11 was the soonest we could get that up. I just saw the commercial today. It looks great. And then the other thing that we've done is two for $5 tacos and we've been testing that out on Tuesday we had a just two days ago was the first Tuesday it ran. It was really nice to see how quickly transactions in one day respond when you put an offer like that out there. So again, it's a hint to us on how do we grow that. Obviously it'll grow over the next couple weeks on Tuesdays. And then how do we take that seed and grow it even further and how do we do that all while keeping our products also up at that $9 to $12 price point that people love as well. So I think you'll see a continued emphasis on value. And then moving into next year, we have to have more new innovation, which I feel comfortable we do.

Okay, great. And then the price mix, does that change or the average check, does that change much as we think about Q4 versus Q3?

Yes, it starts to soften a little bit. We'll be a little bit under 7% pricing as we move into Q4.

Okay, great. Thanks, Ira. The margin performance is so ridiculously strong. It's great to see. Just wanted to frame the question this way. And obviously you've given us that guide up on where you think the Q4 restaurant level margins will be. How high is up on restaurant level margin without generating positive traffic to go with it? So how close do you think we're getting to a margin ceiling until we can get the traffic flywheel working in our favor as well?

Irregardless of sales, hey, sales are important and we're working hard to improve them. But we have a lot of cost initiatives that we're working on that we feel we have a lot of opportunity as we talked about, to continue to grow the margins next year, especially on the procurement side. We launched a project earlier in the year where we're looking at everything from a total cost to serve basis. And we're really excited about the opportunities and projects that we're working on in place that we know are going to help us drive more margin improvement next year.

But following on that, I want to be clear we're not going to trade off just getting to some. As much as we'd like to have the highest margins out there in QSR, we're not going to trade that off for traffic. I think getting everyone to invest in the $5 Hoya bowl and the two for five just shows we're willing to make the investments to drive traffic. And another place as an example, catering, we just completed signing up a partnership with Easy Caterer as an example and are working with other mechanisms to get our catering out there. Now we will take it is a high ticket. So that's great. It's a high check. But you do, when you work with these aggregators, you do give up a lot of margin as well. We're willing to do that, to invest, to get our product out there so people can try it. So want to be clear with everyone. We want to grow traffic and it's a big and. And we want to grow a profit.

Okay, that's great. And if I can squeeze one more in and I'll jump back in queue. Exciting to hear the magnitude of the expected remodel cadence. Half the system over the next four years. I know that the, we're still in that, that kind of prototype design phase for what you are planning these remodels to entail, whether it's the, the five year or the 10 year model. But is there kind of a structural lift that franchisees are being told that they can expect or that maybe you're targeting out of each of the versions of the remodel? And I'm just trying to think about this structural same store sales tailwind that you may be creating for Loco with the remodel program. Thanks.

Right, so what I can say is in the remodels that we've done over the years, we've seen, a mid single digit uptick after a remodel and certainly we're putting a lot of emphasis on remodels next year. I think over the next couple of years. As an example, we've got almost half of our system will be touched over a couple of years. But next year will be the first year to really have a large quantity of those. And we have with this new prototype that we unveiled earlier this week, we have a few remodels that are actually going to be completed this week with this new design that then we will roll out next year. And so we'll see, we'll get a new batch of data in here in the next couple weeks on how that looks. But I think it looks like a beautiful restaurant and no reason to believe it would be any different from what we've seen in the past.

Okay, great. Thank you both.

Yes, thank you.

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

Great. Thank you so much for taking the question. Mine was on the macro environment that you're seeing. Obviously it's still under pressure. You can see that with the volatility of your same-store sales. But I'm wondering whether you're in different regions, whether you're seeing anything specific just to California itself or whether really the environment is pretty similar across your system.

California definitely has some of the biggest transaction declines. We don't have the largest samples outside of California, so I will say that. But in some of our restaurants in Texas, for example, Houston, the Rio Grande Valley, San Antonio, I'm seeing healthier transaction growth there. By and large, though, I think the consumer is under pressure in all of the markets. Las Vegas is an example of the market not in California, but that Las Vegas consumer as an example is hurting as well. So – but, obviously predominantly, we are predominantly still in California. We plan to change that over time. But I definitely think that California consumer has been hurt more than anyone.

Got it. And I'm thinking of just other, factors that might have contributed to the deceleration that you saw. Quarter-to-date and some of your hamburger QSR competitors are running promotions right now that are very, very successful and really getting a lot of attention. To what extent do you think that that could impact demand for El Pollo Loco as consumers are really kind of going a little bit gaga over some of these innovation that the larger QSR players are offering right now?

Yes, I think it's less about innovation and I think it's more just about what you can get for what you pay at a really low end. And obviously when some of the competitors just have a loud megaphone to be able to put that out there. And quite frankly, we just haven't competed there as much. We haven't had things down in that $5 price point up until now. We've had a few things, but not as seriously as we're going to get in there. So, I think that is certainly part of it also, if you think of, just overall pricing on the menu as well. And, this has been true since I think that the test of time in the restaurant space, even a family meal of chicken as an example, if it's $29.99 today, but just a couple years ago it was $21 or $22, that's a big increase for someone that's under $100,000 in income. And so I think it all is playing in effect. I wouldn't blame it just on the $5 value war. I think it's pricing all up and down the menu.

Got it. And last question on the, promotional approach in the near term, but can you remind me what your experience has been with the $5? I've been hearing about the $5 bowls for a long time and it seem it comes and gets pulsed in periodically. When's the last time you offered it and you promoted it nationally and what was the outcome when you were doing that last?

I'll have to do some digging to find out when the last time it was we ran it nationally. From what I understand it has always been a very responsive LTO that we run. I can tell you just from running. Like I said, Taco Tuesday. Just a couple days ago I saw, I woke up and saw in the daily sales a responsive nature there. So I think those two things matter. The other thing I will say about this brand, we still do coupon drops. So we are one of the few brands that still drops coupons every like six to eight weeks. And again just showcasing the power of value, when we drop the coupons we see a very responsive reaction in terms of transactions. And those coupons are all over the menu. So they're everything from a couple dollars off of family chicken to a burrito to a salad. So we kind of have something for everyone. Just again reconfirming that there's that value hunter in QSR that is looking for a good deal. So we need to do I would say all of the above in terms of reaching our consumers. It's value in the coupons, in the app, in the $5 Hoya bowl and Taco Tuesday. So we're really turning that on. And the nice part is we're doing a lot of cost work on the other side so we can afford to do that. And I think because we're doing all that cost work, we were able to get our franchise system aligned to come along with us.

Got it. And then switching to margins, kind of multi part question but the first is you beat, handily beat your guidance in the third quarter for restaurant level margins. I'm not sure whether you beat your same-store sales, you didn't beat ours. So something drove that. So what was the surprise, if there was to, that really drove the upside in the margins in the third quarter and then you're raising your guidance for 2024. Is that more of a pull forward or do you still expect and do you still expect to be around the 18% in 2025 or should we think of 18% has increased as well as you've found more efficiencies.

So great questions. I'll take the second one first and then dive into the first part. We still believe as we look out into next year we will be approaching 18% margins for the full year of next year. So nothing's really changed in our thinking there. We feel really good about the direction we're headed and the opportunities that we have there. I think where we did see some favorability on the – was on the, A little bit on the commodity side, as well as a little less and a little less discounting and a little bit. A little bit of mix. A little bit of the mix of the products that we were serving had a little less of the. Had a little more of the [indiscernible] meat item, which is a little less expensive than some of the other meats that we use sometimes. And so that also helped drive a little bit of the upside from a margin standpoint, as well as a little less discounting than we originally thought that we'd see. Yes. And, coupled with that, our OPS team continues to do an incredibly good job at managing on the labor side. And a lot of the initiatives that we put into place in Q2, they continue to build on those specifically around deployment. Labor deployment. And we saw a little upside on the labor side as well.

All right, thank you so much. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.

Hey, guys, just wondering if you could share contracting on chicken for next year, Ira, and maybe how that's sort of informing the early feelings around menu price. Obviously, you'll carry some of the California pricing through the first quarter, but just kind of wondering if you've sort of level set on where pricing for next year maybe shakes out.

Yes, I think we're looking at very moderate pricing next year pricing increases. We haven't landed on it completely, but we definitely feel the opportunities that we have on the commodity side and the product side will give the stability to be really thoughtful about pricing as we look at it next year. We have not locked the chicken yet. We are in the middle towards the end of the RF prepop. RFP process on chicken, and we feel really good about the direction we're headed there.

Got it. And then could you just give us a sense of sort of where you are on the. The promotion and discounting has kind of gone back and forth a little bit. The mix really popped this quarter to be plus three. Just any thoughts on kind of, how that looks for the fourth quarter as you bring in a little bit more $5 price points and things like that?

That will moderate some as we move into the quarter, and some of the mix was driven, less discounting was part of it. But some of the innovation that we've been doing around the menu really drove some of the positive places in the mix. Just a couple points I'll point out would be, we put, we added the crunchy tacos earlier in the year and that's continued to really be, tends to be add-ons and has been a real positive to the mix, we did, when we launched the burrito promotion this year, we put a lot more emphasis on upselling to the combos and that was also helpful in helping, driving our mix. And the other thing that we did, we continued the shrimp component with the tostada promotion we did in Q3. So we did a lot of things from an innovation standpoint which really helped drive that mix and check during the quarter.

Also with our family chicken, I think we did a better job of showcasing bigger options for families. So, historically we've shown our eight piece we've seen that when we promote on the menu the 10 and the 12, we drive a higher, not surprising. We drive, a higher ticket there.

Got it. And then, finally just, as we get towards the end of the year, Liz, and you've had time, is there anything sort of on the unit fleet, other than obviously, some of the remodel work you're doing? I mean, are there areas or, store closures that maybe, could help clean things up or you know, anything else on refranchising or just kind of how you view the fleet as you head towards the end of the year and into 2025?

Sure. We're fortunate in that our system volumes are healthy and we have a pretty tight, I guess when you look at the volumes around the average, it's a pretty tight distribution. We don't have, I know there's some systems that have some that are just, a million or you know, 12, 13 [ph]. We don't have a lot of those out there in our system and if we do, they're an in line with really favorable economics that would allow them to live on at that low end. So relatively healthy system, which I'm super pleased. Our franchise system is a tight group of franchise a very good seasoned long term group that is financially conservative and healthy. So we feel really good about our system health overall. And the best part about it is I mentioned earlier we had our franchise conference a few weeks ago. We unveiled a lot of the new work that we're working on, not only with the new unit; we shared with them, the new marketing calendar for next year and just a bunch of other growth initiatives. And the excitement we got from them, the feedback was terrific. They're really starting to lean into a pipeline for the next couple of years in terms of growth again. So I feel like in terms of system health and franchise health, I'd give us a very strong grade there.

Good to hear. Thank you.

Thank you. And ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn the call back over to Liz Williams for closing remarks.

Thank you. And just thank you everyone for taking the time today. It's always good to hear from you and we feel very optimistic about the days and months ahead. We think there's a lot of opportunity still in front of us and we look forward to talking with you again next quarter. Have a great evening and a Happy Halloween to all of you. Thanks again. Bye-bye.

And ladies and gentlemen, this concludes today's conference. You may disconnect your line at this time. Thank you for your participation.