El Pollo Loco Holdings, Inc. (LOCO) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the El Pollo Loco Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Larry Roberts, Chief Financial Officer. Thank you, you may begin.

Thank you, Operator, and good afternoon. By now everyone should have access to our fourth quarter 2014 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 conditions. We are also filing our 10-K for the fiscal year 2014 early next week and will 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 a course of GAAP and reconciliations to comparable GAAP measures are available in our earnings release. Lastly, I want to remind you that our fourth quarter of 2014 consisted of 14 weeks compared to 13 weeks in the fourth quarter of 2013. Comparable restaurant sales are an a comparable calendar period 14-weeks to 14 weeks for the quarter. With that, I would like to turn the call over to Steve Sather.

Thanks, Larry. Good afternoon, everyone. And thank you for joining us on the call today. We are very pleased to report our fourth quarter results which reflect continued operating momentum including pro forma earnings of $0.14 per share. Excluding the impact of the extra week, our pro forma earnings for the quarter increased 45% compared to last year’s pro forma EPS of $0.09. Other highlights for the 14 weeks ended December 31, 2014, include system-wide same store sales growth of 7.6% excluding the 14th week adjusted EBITDA growth of 21.5% and the opening of 11 company owned and franchise restaurants resulting in a total of 16 new restaurants for 2014. Our healthy 7.6% same store sales growth in the quarter was our 14th consecutive quarter of positive same store sales and included a balanced mix of transactions and check growth. We believe we are uniquely positioned in the restaurant industry and what we’ve referred to as QSR-plus. We define QSR-plus as offering the high quality food and dining experience you’d expect at a fast casual restaurant combined with the speed convenience and value you’d find at a traditional quick service restaurant essentially getting the best of both worlds. Our comp growth is evidenced with our compelling value proposition alongside our fresh handcrafted Mexican inspired cuisine continues to appeal to our guests. Our Menu allows us the flexibility to create new and unique menu items that complement our signature fire grilled chicken and provide our customers with even more choices at a great value. Our current promotion highlights what we believe to be a key long term opportunity for El Pollo Loco which is to expand our menu to include additional proteins that complement our chicken and Mexican heritage. It features savory marinated Baja Shrimp which adds great flavor to both our new and existing dishes. Guests can substitute our Baja Shrimp across the menu and any Taco, Burrito, Tostada salad or other favorite giving them the customization that they craved. Additionally, we recently featured signature LTO dishes which highlighted our new Shrimp offering. These included a Shrimp Mango Tacos, Shrimp Verde Enchiladas, The Shrimp & Chicken Avocado Bowl and my personal favorite the Avocado Shrimp Salad. Unlike in prior years, Shrimp will run on the menu until the end of May. Additionally, healthier food is a brand equity that we continue to leverage. This quarter we added new items to our under our 500 menu which has resonated well with our health conscious guest. The new offerings include the Chicken & Shrimp Grilled Tostada, Double Chicken Wet Burrito, a Grilled Chicken & Kale Salad and the Skinny Chicken Quesadilla. This under 500 menu gives consumer authentic healthier options without having to sacrifice flavor. Switching to development, our pipeline continues to be robust and positions us for 8% to 10% unit growth over the long term. We opened six company restaurants in the fourth quarter bringing our total company openings for the year to 11. Four of the restaurants we opened were in existing markets and two were in newer markets. Additionally, during the fourth quarter our franchise partner opened five restaurants in existing markets. In our newest market in Houston we opened two locations during the fourth quarter and we’ve opened one additional restaurant to date in 2015. While it’s still early we are very pleased with the results at these new locations. Given our initial success in the Houston area, we plan to open five to seven more restaurants this year in Houston area and are currently working to secure leases in our next Texas market Dallas where we are targeting our first opening in 2016. We are also actively pursuing company and franchise development in a number of additional Western markets. All of our new restaurants are opening with a new hacienda design and we continued to remodel our existing restaurant base with the new design which showcases a more modern and inviting dining experience within our restaurants and is a better representation of our elevated brand positioning. Through the end of 2014 we have completed over 200 remodels and remain on track to have the entire system completed by 2018. With that, I’d like to now turn the call over to Larry for a detailed discussion of our fourth quarter results. Larry?

Thanks, Steve. As a reminder please note that the fourth quarter of 2014 contains 14 weeks versus 13 weeks in the prior year period. The fourth quarter ended December 31, 2014 revenues increased 18% to $90 from $76.2 million in the fourth quarter of 2013. The increase in revenue was predominantly driven by an increase in company owned restaurant sales which was 18% in the fourth quarter to $84.1 million from $71.3 million in the same period last year. Approximately $4.6 million of the increase in company owned restaurant sales was attributed to the extra week. Contributing to our company revenue growth during the fourth quarter was a 6.4% increase in comparable restaurant sales. The comparable restaurant sales growth was comprised of a 3.1% increase in traffic and a 3.3% increase in check. Franchise revenue increased 18.5% year-over-year to $5.9 million, largely due to franchise comparable restaurant sales growth of 8.6%. Turning to our expenses, food and paper costs, as a percentage of company restaurant sales improved by 40 basis points year-over-year to 31.8% driven by 2% in menu price increases taken in the second half of 2014 partially offset by higher commodity cost. For 2015, we expect overall food and paper inflation to run 2.5% to 3% at higher chicken prices which we have locked [ph] in for 2015 offset by capability and other commodities. To offset higher food and paper cost, we took an additional 1% menu price increase at the beginning of February and are implementing several cost saving initiatives. Labor and related expenses as a percentage of company restaurant sales decreased 74 basis points year-over-year to 25.1%. The decrease in labor was driven by leveraging our strong comparable restaurant sales growth during the quarter and a reversal of accrual for federal unemployment taxes due to a penalty waiver granted by the U.S. Department of Labor. These were partially offset by higher minimum wages in California. As we have mentioned previously we do not expect these to be significantly impacted by Affordable Care Act in 2015 as the health insurance program was already fully compliant with the Act prior to its implementation. I’d like to point out in the first quarter of 2015, we had an unusually high number of group health insurance liability claims, seven to be exact versus only one for all of 2014. As a result of these claims, we are currently estimating a $500 to $760,000 impact between labor and G&A during the first half of fiscal year. Although the exact timing is difficult to precisely pinpoint. Our group insurance plans are always difficult to predict, at this point we do not anticipate higher than normal claims activity for the balance of the year. Occupancy and other operating expenses, as a percentage of company restaurant sales improved by 80 basis points year-over-year to 20.7%. Approximately 40 basis points of the improvement was due to 53 week. Higher sales and favorable general liability claims partially offset by using advertising expenses drove the balance of the improvement. General and administrative expenses increased by $1.8 million year-over-year in the fourth quarter to $80.5 million. As a percentage of total revenue, G&A expenses increased 64 basis points to 9.5%. The increase was driven predominantly by investments supporting our growth, incremental public company cost, a onetime bond for certain employees at our support center in recognition of their contributions to a successful IPO. These were partially offset by leverage on strong sales growth. On a pro forma basis and excluding the onetime bonus, G&A as a percentage of total revenue increased by 10 basis points versus the fourth of 2013. Depreciation and amortization expense increased to $3.3 million from $2.6 million in the fourth quarter last year. As a percentage of total revenue, depreciation and amortization increased 16 basis points year-over-year. The increase was primarily driven by our new store development as well as our accelerated remodeling program. For 2015 we expect depreciation and amortization expense to be between 3.7% and 3.9% of company revenue. Interest expense decreased by $4.1 million year-over-year to $2.8 million from $6.9 million in the fourth quarter of 2014, largely due to the pay offs of our second lien credit facility with the proceeds of our IPO in July and the lower interest rate associated with our previously announced November 2014 closing on our new credit facility. During the fourth quarter, we incurred a charge of $1.3 million relating to the present value of expected payments under our income tax receivable which calls for us to pay our pre-IPO shareholders 85% of the savings realized as a result of utilizing our pre-IPO net operating losses and other tax attributes. We recorded an income tax benefit of $2.6 million in the fourth quarter of 2014 compared to a tax [ph] revision of $6000, 000 last year. Our tax revision for the fourth quarter reflected additional tax benefits primarily due to California Enterprise owned tax credit claims. We reported net income of $4.6 million or $0.12 per diluted share in the fourth quarter compared to a net loss of $18.1 million or a loss of $0.53 per diluted share in the year ago period. Weighted average diluted shares outstanding were approximately $39.7 million for the fourth quarter of 2014 and 28.7 million shares for the year ago period. To account for the IPO and its changes to our capital structure, we have calculated pro forma results including net income and basic and diluted share count as if the IPO had occurred at the beginning of fiscal 2013. To arrive at pro forma net income, we have made adjustments for the elimination of management fees from our sponsor, credit facility interest expense, IPO and secondary offering related expenses that were not capitalized, costs incurred to refinance our debt estimated ongoing public company costs, expenses associated with the tax receivable agreements, losses on disposable of assets, asset impairments and closed store costs. We have added back provision for income taxes and have applied a 40.5% income tax rate. Included in our earnings release is a reconciliation of our GAAP results to our pro forma results. We believe that the pro forma results provide a useful view of our business in our post-IPO capital and cost structures. Accordingly, pro forma net income for the quarter was $5.5 million as compared to $3.4 million in the fourth quarter of last year. Pro forma diluted earnings per share were $0.14 for the fourth quarter of this year compared to $0.09 in the prior year period. Fourth quarter 2014 results included an estimated penny per share positive impact due to the extra week in the quarter. We have used a diluted weighted average share count of 39.7 million shares for the fourth quarter of 2014 and 38.4 million shares for the year ago period, which reflect our shares post IPO. In terms of our liquidity and balance sheet, we have $11.5 million in cash and equivalent as of December 31, 2014 and $165.8 million in our debt outstanding. For the foreseeable future, we expect to finance our operations, including new restaurant developments and maintenance capital through cash from operations and borrowings under our credit facility. We expect our capital expenditures to total $34 million to $37 million for the fiscal year 2015. Turning to our 2015 guidance, the Company expects 2015 pro forma diluted net income per share ranging from $0.67 to $0.71. This compares to pro forma diluted net income per share of $0.55 in 2014. As I noted, fiscal year 2014 pro forma diluted net income included an estimated penny per share positive impact due to the extra week. Pro forma net income guidance for 2015 has based in part on the following annual assumptions. We expect system-wide comparable restaurant sales grow of 3% to 5%. We expect to open 16 new company-owned restaurants and expect our franchisees to open 11 new restaurants. For the company-owned restaurant, development this year will be back half weighted. We're very pleased with the sites we have lined up for 2015 with most new units expect to open in third and fourth quarter. As of the today, we've open one new unit in 2015 with one under construction and 2015 and permitted and fixed under Letters of Intent. We expect restaurant contribution margin are between 21.7% and 22%. We expect G&A expenses of between 8.2% and 8.4% of total revenue and we expect adjusted EBITDA of between $56.5 million and $59.2 million. With that, I'll turn the call back to Steve for closing remarks.

Thanks, Larry. As we moved into 2015, we're excited about the continued operating momentum and the long term opportunities to bring freshly prepared crazy you can taste entrees to an even wider audience. Our success to-date is due to our focus on four pillars of our brand. These are high quality of food, compelling value, excellent service and a warm inviting atmosphere. Our ongoing focus on these four pillars positions the brand well for the future and we'll support our continued growth through increasing comparable restaurant sales, expanding the restaurant base and enhancing the restaurant operations. Thank you for joining us today. We appreciate your interesting in El Pollo Loco. And now we'd happy answer any questions that you might have. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of John Glass with Morgan Stanley. Please proceed.

Thanks very much. If I could just start with just couple of clarification questions on the details, Larry, on the G&A can you quantify that bonus was, so we can sort of understand what would be going – run rate going for. You sort of gave some color, could you quantify that, I mean on the labor line I think you talked about also some I think its medical claims or whatever was to clarify that, so I can understand what the underlying G&A was and what the labor was?

Hey, thanks John. Yes. On the bonus, we haven't really announced the amount to employee as a onetime and it's not going to withdrawing. So, it's only in this year's number, it’s not going to be a next year's number. It's really reconnection for the all the hard around IPO that people were put in it.

It’s in the 2014.

Yes. In 2014 networks. So I'd rather not actually say the amount. At this point in time we're still working through the final detail and we haven't announced it yet, formally we told people are coming but the amount? Again, it's not recurring. Yes, on the medical claims, this is one is really difficult to predict because these are – basically they are the result of the employee. There could be spouses going in – usually hospitalization because of the magnitude of the claims. We're self-insured, which actually saves us a lot of money, does lead into some volatility around the timing of claims and so we've just now had seven claims this versus last year, I think we only one and when I say, seven claims, I mean, seven claims, going to push against our stock lost which is by $125,000 stock lost. And so, what we're saying is we're going to have somewhere $500,000, $750,000 impact. Q1, Q2 -- your price being 450 to 500 in Q1, the balance in Q2. I just work through, just before I got in here about where that we'll allocate the majority of that will actually be allocated G&A, not labor, they will be some at labor, but majority will actually been in G&A

And I think I misspoke when I asked question. In the fourth quarter there was accrual reversal in labor, what was that worth?

Well, I'm sorry, yes, so that's, that accrual was about $400,000 and again what that relates to is, we accrued all, basically during the year we accrued for the fair unemployment tax penalty that the State of California is incurring some with the old [ph] government and the Governor of California along with other states apply for a waiver, that waiver was approved in November, so that's allows us to reverse the accrual on Q4.

That's great. And then, Steve I could just sneak one more in Dallas, your thought process around entering that market, do you approach it in the same way you approach Houston. Do you think about it differently – in other words there's a different competitive dynamic, sort of different marketing dynamic that you can use or can use them with the similar techniques of Houston, Houston successfully, maybe you can just give high level thoughts about how that maybe the same or different.

Thanks John, good question. We're very pleased with the Houston performance and have been really looking at Dallas and other Texas markets for the last year. We've all gone to Dallas, our real estate people than very active there. We think there is tremendous opportunity and Dallas that would be equal that we see in Houston. We would entire it in a similar fashion, still working through how we need in Houston on our operator side, the first three we put seasoned help for your local restaurant teams to make sure our operations hit the group running and we had a lot of research on the marketing and lot of blogger, events and thanks to really introduce that brand there, which was very successful and we plan to use the successful parts of that certainly as we enter Dallas, but we're very excited about that. And those units would a little upsides now that we're looking at will assume sign least zone they want or schedule to open first part of 2016.

Okay. Thank you.

Thank you. Our next question comes from the line of David Tarantino of Robert W. Baird. Please proceed.

Yes. Good afternoon. Congratulations on a nice finish to the year. I have a question about the Houston market where I know you've said you're very pleased with the results so far, but is there any sort of context you can give us around how the sales volumes have started? I know, unlike the new store models that is given us has been new markets open around the $1.5 million, so perhaps you talk about whether Houston is meeting or exceeding that level at least early days on run rate?

Yes. Thanks David, and it’s still Houston, we've got three restaurants couple are more still – the GS [ph] really coming out the honeymoon period, so they're starting to settle down. The one thing I'll say is that they're exceeding expectations.

Okay, worth a shot I guess.

Depends on how you put.

Well, and then the next question is on comps, the comps have been very strong and then for us especially that compares three things in the fourth quarter. So, could you talk about maybe what some of the key drivers were in the fourth quarter and what the momentum look like existing the quarter and if you care to comment on what you're seeing so far in Q1. And then, maybe separately, do you think the macro environment is helping at all, with lower gas price?

Yes, David. Ed Valle, our Chief Marketing Officer is here with us today. So that’s right in his spot.

Hi, David, so that our calendar is built around these dates that just this group called mainstream foodies and really a couple of the big needs that's going to be a healthier food and variety, so we'll keep that in mind as we and consultation by the way as we built our calendar. So, some of the things that performed strongly for us in the fourth quarter were Stuffed Quesadilla, which kind of crept into the last first three weeks of the fourth quarter. But the Create Your Own Bowl performed, it hit our sales metric and it also hit and sort of exceeded our consumer metrics on high level of satisfaction, and repurchase intent. So that something we were very happy about it and you will see that back again in the future. Carnitas also came in and did well for us. And then on the family side, really the families, the three-course family meal, family chicken really picked up in the quarter as well, also than the rest of the year with the Create You Own three-course meal and then we also had – we offered a three-course with Tostada salad, Cheese Enchiladas and that did exceptionally well for us as well. So a kind of – it was sort of steady through the quarter, but a couple of those things really sort of kicked it in. Underneath that, we talk about below the line items, David, we also had our ultimate double menu that was up there and that performed exceptionally well for us. And then at the very beginning of the year, we did the under 500 which just plays with that healthy unique [ph] taste, that's a product line that we put in and we left at because we thought that support and every time we target that healthy unique taste, we get a very positive response from a sales perspective. Moving into, I think your question was moving into the first quarter, I think we really sort of like what we see without getting too much into specifics, you may have seen Baja shrimp on our menu, that performs exceptional well for us in facts its stronger this year than it was last year. It went in as what we call seasonal LTO, which means, it's in for about 12, 13 weeks or three modules. And then, we're also to give you a little bit more of preview on the alternative proteins. We're also looking at carne asada bringing that into our module for also as a seasonal LTO. The reason why that's important these alternative proteins, because they increase frequency among our core users, so we're pretty excited about the 2015 calendar and we do a lot of very thorough testing to build these calendars. Did I get them all, David.

I think you got most of them. I guess the question also was on the macro environment and maybe what your views are on whether lower gas prices or anything else you're seeing in the economy is starting to have positive impact on the business?

My comment on that is even when gas prices were high; our comps were pretty consistent throughout the quarters. I look at our business really sort of based on this macro trend of this group of Main Street Foodies, who just want better food at more reasonable prices. And I think that's what gives us the stability in our comps quarter to quarter to quarter. Lower gas prices will put more money into the pockets of consumers and I think it’s certainly helped other restaurant chains out.

Right. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed.

Hi, good afternoon. The follow-up on the discussion on alternative proceed, can you update us on sort of what non-chicken is now as a percent of your revenue mix and addition to improving the frequency of your core customers do you have any evidence that it's bringing new customers in the doors?

Yes. We do actually. So, we've seen an increase just through 2014 of 9% in terms of new customers coming into the brand. So, and in terms its percentage of business in 2014, those tend to run the percentage of mix by about 10%, anywhere from 8% to 10% with the alternative proteins. But remember Sharon we only put those in four or five weeks in 2014, right, because we want to test them over the five-week period. We want to understand. We want to go do consumer intercepts. And then we want to understand if it plays a role in the 2015 calendar. And they certainly will play a solid role in the 2015 calendar.

So, how do we think about this over time if they grow kind of disproportionately in coming years, how that relates to the cost structure of the company, I mean are they gross margin neutral or they are little dilutive? Larry, maybe if you could help us out on that?

Yes. Overall, on these products right now, the where they run they're probably – they're slightly detrimental to margin, as you can imagine especially where cost are today, Shrimp was actually was not increased year on year, obviously beef everybody highlighting those prices are still very, very high. So as of now I mean they are a slight negative to margins. Of course they are driving sales, so that's a big positive. And then longer term, hopefully we would see both shrimp and especially beef come down in price and make them potentially the margin neutral.

That's great. Thank you.

Thank you. Our next question comes from the line of Paul Westra with Stifel. Please proceed.

Good afternoon, guys. This is Michael on for Paul. Just I have few questions here. I was wondering, if I can ask about the clarification about the Hacienda remodels. It sounds like just it will be well up to the entire system by 2018, I was just curious if is that decision made on a case by case basis? Are we assuming that each one of this will be accretive?

In our franchise agreement it calls for remodeling every seven years and as we've mentioned before we had delayed some of that going into this. So, it is called out for contractually every seven years. We felt it was necessary to skip the even it's relevant. Initially as we reported it's about a 3% incremental sales on top of what they are already getting. But the customer satisfaction is putting the brand where it needs to be today in this QSR-Plus now with our facilities. And we started with the oldest ones first obviously. 20 to 25 this year 2015 company and about 40 to 50 on the franchise side.

Okay. Great. Then I just wanted to touch on to see if guys have any opinion on sort of some recent news about the avian flu specifically in the Sun Belt, and if there are any disruptions that could be on your new markets in Texas, if I seeing customer perception or prices in the supply chain?

On the Avian flu, no, we thus far not seen, I don't believe avian flu are actually impacting chickens at all. I understand it's on Turkey farms. Obviously our suppliers although do everything they can to make sure that food does not get into their facilities. So far we are not seeing any disruption in chicken supply, no impact on prices. We've locked in prices for the year, but again we’re not seeing any supply disruptions as a result of the Avian flu.

And is this pretty common I would imagine this happen, does recur often?

Yes I mean I think if you look historically you will see strange pop up every so often some are clearly more lethal than others, and obviously we are watching this train to see how progresses I know our supply partners are also obviously watching it very, very closely like these things do pop up, but like I said right now we are not seeing any impact at all.

Okay, well I appreciate the clarification guys. Again, congrats again on your result.

Thanks, great thanks Michael.

Thank you. I’d now like to turn the floor back over to management for closing remarks.

Well we want to thank everybody for their continued interest in El Pollo Loco and we look forward to giving you ourselves for next quarter. Thanks everybody. Bye.

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