Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, July 31, 2025. And now I would like to turn the conference over to Ira Fils, the company's Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon. By now, everyone should have access to our second quarter 2025 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 2025 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 2024 previously filed as well as our Form 10-Q for the second quarter to be filed 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 second quarter of 2025 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, which is available in the Investor Relations section of our website. With respect to the restaurant contribution margin outlook, we will be providing 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 company-operated 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 second quarter, we made meaningful progress against our strategy as the investments we've made in our brand relaunch and menu innovations are resonating with our customers. Despite ending the quarter with slightly negative sales performance, we saw modest sequential improvement in overall sales and achieved a return to positive system-wide traffic growth. This traffic growth reflects our careful balance of innovation and value in response to the current macroeconomic environment. Given value-conscious consumer behaviors, we implemented targeted discounting through Taco Tuesday, our app-only offers, third-party delivery promotions and traditional coupons. Importantly, we took this targeted approach rather than discounting our everyday menu. It's clear that consumers are looking for better deals, and these offers resonated with our customers in driving traffic. In addition, even as we invested in transactions through targeted value offerings and continued to roll off pricing, we were able to drive year-over-year margin expansion. Through our focus on operational excellence, we grew both restaurant level and corporate profitability on both a dollar and margin basis. Overall, progress takes time, especially in this consumer environment, but we believe we are on the right track in our journey to achieve long-term sustainable growth. As we look ahead, we will remain focused on the growth drivers we've put in place, including menu innovation, improved 4-wall operations, continued digital growth and unit development. With that, let me give you an update on each of these drivers, starting with our brand and menu innovation. At the heart of our brand that wins pillar lies our signature fire-grilled citrus-marinated chicken, the cornerstone of our brand's success and differentiator. During the second quarter, we introduced our new Fresca Wrap and Salads, which perfectly demonstrates the versatility of our fire-grilled chicken platform. These products feature our…

Thank you, Liz, and good afternoon, everyone. For the second quarter ended June 25, 2025, total revenue was $125.8 million compared to $122.2 million in the second quarter of 2024. Company-operated restaurant revenue increased 2% to $104.3 million from $102.3 million in the same period last year. The $2 million increase in company-operated restaurant sales was primarily driven by a 1.2% increase in company-operated comparable restaurant sales as well as additional sales from the opening of 2 restaurants during or subsequent to the second quarter of 2024. The increase in comparable restaurant sales included a 1.5% increase in average check size and a slight decrease in transactions of only 0.3%. During the second quarter, our effective price increase versus 2024 was about 3.1% Franchise revenue increased 14.8% to $13.4 million during the second quarter, driven by a $1.6 million in IT pass-through revenue related to the franchisee rollout of our new point-of-sale system, which is offset by a corresponding expense in franchise expenses. In addition, the increase in franchise revenue was due to the 5 new franchise-operated restaurant openings during or subsequent to the second quarter of 2024. The increase in franchise revenue was partially offset by comparable restaurant sales decrease of 1.1%. While franchise comparable sales were down 1.1%, we are very encouraged to see franchise traffic growth continue to accelerate with traffic up 1.5% in the second quarter for our franchise system, which drove the positive system-wide traffic of 0.8% that Liz mentioned earlier. Looking ahead, third quarter to date through July 23, 2025, system-wide comparable store sales decreased 0.7%, consisting of a 0.6% increase in company-operated restaurants and a 1.4% decrease in franchise restaurants. As we look to the remainder of the year, the trends are certainly mixed. Although we saw some positive growth weeks in May…

[Operator Instructions] Our first question comes from Jake Bartlett, Truist Securities.

I had a number. I wanted to start with -- you mentioned it kind of a challenging macro environment. I'm hoping just for a little more detail. You're obviously doing a lot to counteract that, and it's nice to see some impact. But I just want to make sure I understand how strong the headwind is that you're fighting against with all of your initiatives.

Sure. Thanks for the question, Jake. So you're right, things like innovation with our Fresca salads and wraps and just we only got a few days of quesadilla in on this quarter but really the 1,000 wraps together with value. So I spoke about just some of the targeted value that we had out there, whether it was in the app or through the traditional couponing through delivery, all of that is really helping, and you saw it in the transaction growth. When we see the consumer headwinds, it's really in -- across all different income groups. And it's a bit -- we keep saying choppy in the industry. It's the fact that at the beginning of the month, you see a lot more activity towards the end of the month, when consumers are waiting for a payday or a payday effect, you see it even more pronounced. You also -- we're also seeing it as consumers are really reacting to the value, which tells me that a consumer wants to spend or wants to enjoy our products, but they're limited on what they can spend. And so that's -- you see value even more pronounced and more attractive in that dynamic.

Got it. And there was some -- in terms of the franchise traffic, obviously, great to see. But there seems to be a big drag on check specifically for the franchise overall. What is the dynamic going on there? Is there a little more discounting potentially going on, a little more focus on value in those markets?

A couple of things. If you remember last year, we had the very large minimum wage increase in California where a lot of our restaurants are. And so there was a lot of pricing taken last year. And I would say the franchisees, if you remember, they took a little bit more than a company did. And so this year is they're lapping that and just our ability to take price in this value-conscious environment, we're just not taking a lot of price, which is healthy, and I appreciate that we're not doing that, and that's helping us grow the transactions. So that is some of it. And then also, you can imagine, when prices get a little bit higher, say, if they're higher at one restaurant than another, that's going to make the value even more attractive. And then we also are seeing, in some instances, we had some franchise partners experiment with different promotions and family meal discounts that were just greater than what we were doing in corporate restaurants.

Got it. And then my last question, then I'll jump back in the queue, maybe come back. But is on the acceleration of unit growth, it sounds like you're talking about 20-plus for 2026, a doubling, as you mentioned, the fastest growth in some time here. One is -- one question is just your level of confidence that, that will be achieved, whether it's really dependent entirely or mostly on franchise development? And then what's giving the franchisees the confidence to do that? It's obviously a challenging environment still. What are they seeing that making them so confident to really accelerate growth like we haven't seen in a while?

Right. So the exciting part of the brand, despite having the macro environment that we have, the good news is our average unit volumes are $2.2 million. We have a healthy business that's getting even healthier as the last 1.5 years, we've really focused on unit profitability and everything as we've -- you've seen the margin expansion. So pretty amazing that even in a world where labor costs are increasing, value and discounting is increasing, we're also increasing the unit level margins. And so you put that together, a healthy business model inspires franchise partners to want to build. And then when you couple that with the fact that we have taken a lot of cost out of the building in the restaurant, that also is very inspirational. And then you layer on an incentive to get franchise partners even more excited. You put that all together and our returns are back in a place where it's a healthy return and they're inspired to grow again. And so moving to your question on confidence on the pipeline, very confident on the pipeline. So as I look out over the next year, and I have the confidence to be able to give that number, that's because many of those sites either have leases signed or some of those sites are under development because nowadays, some sites take over a year to get opened. So as we look at the pipeline, we see that. One of the other factors that's helping us with development is also the second-generation sites that we're finding. So, I talked about this over the last couple of months. As different concepts have had to close, their misfortune has become our fortune in the sense that you can pick up one of those sites, you don't have to do as expensive of a build-out because you already have walking coolers and framing and bathrooms and hoods. You really have to come in and, of course, redesign it and rebrand it, but it's sometimes as much as half the cost of a traditional build. So that makes the returns even higher. So I'd say it's a lot of factors, but giving us great confidence that the flywheel is going again for El Pollo Loco.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

This is Will on for Jeremy. I just wanted to start with same-store sales trends for the quarter. You noted some sequential improvement. But can you maybe walk through in a bit more detail how Q2 progressed after May? And then maybe what the rest of Q3 looks like in terms of comp? I think August and September might be a little tougher than July, but just anything you could call out there would be helpful.

Yes. We definitely saw sequential improvement. We had talked -- I think we had talked about being down around a little -- around 1% in April. And we saw sequential improvement as we walked through into May and then even more so in June as some of the marketing initiatives that we were doing really started to take hold around the brand relaunch, which happened in mid-May and the Frescas. And some of the things that we were doing, coupled with that in regards to discounting really helped drive that traffic and really helped that back part of the quarter, Q2. And we did see a little bit of a slowdown in July as the timing of the 4th of July wasn't great. We saw a little noise there. And as we mentioned on the call, it's just been a little choppy so far in quarter-to-date. But we do feel very confident in a lot of the things that we're doing to continue to keep the recent acceleration we've seen in traffic going.

I might just add -- Yes, I was just going to add, as we feel confident at the back half of the year in terms of the sales trends, the things that are underpinning that are the innovation and the continued thoughtful value that we spoke about. The brand relaunch off to a good start, only just beginning. So right now, the media in the middle of the summer is not great. And so, as we get into fall and we just get better media and media placement, we'll really be able to accelerate telling consumers about the brand relaunch. And then also a lot of effort going in behind service improvements and just operational improvements that we think will help with sales comps as well.

Got it. And then just a follow-up on that. I'm curious if you had any more color to share in terms of how the quesadilla and the Fresca wraps have been mixing and then how early results have performed against your guys' initial testing?

Yes. So, the Fresca -- we looked at Fresca as wraps and salads together. And so those were mixing in the 4% to 5% in total. And we've -- the wraps were always planned to phase out as we brought in quesadilla. And so, we still have the salads, and we love the fact that the salads have a following. Those are still mixing at a couple of points of sales mix. They're not on promotion with a small dedication on the menu. And then the quesadilla got out of the gates up at about 4 to 5 points. mix and continues to grow. We're just a couple of weeks into quesadilla. And like I mentioned, the media behind quesadilla is not that great. So we've got some plans over the next couple of weeks. We can't -- no one can -- no one is more excited for some good football on TV to bring some eyeballs, but to continue to get the word out of our quesadilla in addition to all of the social and just the buzz going around quesadilla. I answered your question compared to test, mixing higher than we saw in test.

Our next question comes from Matt Curtis with William Blair.

Just another question on the new menu items. I mean you launched Fresca in May then quesadilla. It seems like right at the end of the quarter. I mean it's good to hear they've gotten a favorable reception. But I'm wondering if you've seen any associated transaction lift that you can discern or alternatively, if you've seen any trade-off on average ticket just given the more value-oriented price points?

Yes. So we are seeing -- the nice part about the transaction lift is we're seeing more frequency from our existing customers and the innovation does that with existing customers. It gives them a reason to want to come in more. I also believe that, that is, again, because of those operational improvements that we're making and then some of the deals. So it's hard to tease apart which piece is driving each part of that, but pleased to see the increased frequency from existing. And then we are seeing new customers. So I attribute reaching new customers to more so to the innovation. So that is certainly helping as well.

Okay. And I know it's still early, but could you tell us more -- a bit more about the initial reaction to the rebrand, particularly in the -- in your core L.A. market? And basically, what I'm trying to get at is, do you have a sense of how much this helped you get back to positive transactions by the end of the second quarter?

So again, I'd say it's part of the whole mix. hard to tease apart what's attributed to that specifically. But one of the things that we were very pleased to see was, again, as we launch that the new customers in terms of just newer folks to the brand, we did see a notable uptick there, which again would tell us that it's doing its part. I believe though that, that will build over time just because getting eyeballs on that, especially given our size, it just takes time. And then also with a brand relaunch, there are so many different touch points. So I put in the bucket of brand relaunch just as importantly, how the restaurant looks. And so, as we get around remodeling more and more restaurants, that too, even if it's not someone's home restaurant, if they're across town and they get to see a remodeled restaurant, that too helps fulfill this whole brand relaunch persona, whether you see it on TV or in social or you drive by it. So, I believe that will take some time to build as well.

Our next question comes from Marshall Pittman with Jefferies.

I just want to touch on pricing and margins quickly. Are you still expecting about 2% pricing in the back half with the additional increase coming? And can you just talk about confidence in taking that increase despite an uncertain macro and consumer appetite for value out there?

Yes. What we did do is we're moving up a price increase that we had planned for later in the quarter to -- in Q3 to move up in earlier in the quarter. So we should see Q3 about 2.5% pricing. And when we get into Q4, we'll be about 2.7%. It is more about moving it a little earlier than it is taking more pricing. And I think what we found is we're being really thoughtful and surgical about the types of pricing we're taking. For example, we had a great opportunity to take our combo pricing up from $250 to $280. So a very targeted type of price increases. And that's really -- and it helps us balance how we've gotten a little more aggressive with our discounting, which has really helped, among other things, drive some of the traffic that we've seen.

Okay. And just to follow up, we've talked about a margin target for the full year of 7.25% to 7.75%. Obviously, strong results in the second quarter here. Do you think that range is still realistic? Or could we see a little bit of upside in the back half?

Yes. I think we think that range is realistic. We always believe there's upside. We're always working to kind of beat what we put out there, obviously. But we feel pretty good about where we're at. We have -- from a commodity standpoint, we have a lot of visibility to where we're at. We have very limited exposure to any international purchases. So tariffs aren't as a big a concern for us. And so we're working hard to continue to drive that margin improvement.

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 Liz Williams for closing remarks.

Thanks again, everyone, for your interest in El Pollo Loco. We look forward to talking to you again next quarter. Have a great evening.

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