Good day, ladies and gentlemen and thank you for standing by. Welcome to the El Pollo Loco fourth quarter 2015 earnings conference call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this conference is being recorded today March 10, 2016. On the call today is Steve Sather, President and Chief Executive Officer of El Pollo Loco, Larry Roberts, Chief Financial Officer and Ed Valle, Chief Marketing Officer. I would now like to turn the conference over to Larry Roberts. Please go ahead, Mr. Roberts.

Thank you, operator and good afternoon. By now everyone should have access to our fourth quarter 2015 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 condition. We expect to file our 10-K for 2015 tomorrow and 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. 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. I am pleased to report fourth quarter results that included our 18th consecutive quarter of system-wide comparable store sales growth and a pro forma net income growth of over 10% when adjusting for an extra week in last year's fourth quarter. For the quarter, we saw a 1.8% increase in system-wide comparable restaurant sales growth, but consisted of 1.8% of the company-operated restaurants and a 2.4% increase for franchise restaurants. The increase in system-wide comparable sales came on top of strong 7.6% growth last year for a two-year growth rate of 9.4% and three-year growth rate of 15.9%. For the full year, system-wide comparable restaurant sales growth was 2.2%. During 2015 we have focused on further enhancing our value proposition by delivering against our four brand pillars which are great food, excellent service and a warm and inviting environment and at a good price. As previously highlighted, our research found that while our guest love our food and put us on par with fast casual competitors in terms of taste and quality, our value proposition have gotten somewhat distorted. With regard to price, in addition to restoring the $5 combo panel and reemphasizing combo offerings across our menu, during November we implemented approximately a 0.8% price increase, which is below our typical 1.5% to 2% annual increase. Additionally, based on studies of price elasticity, we developed and implemented three tiers of pricing across our business. We believe this sophisticated approach will allow us to be nimbler and better able to deliver great food with great service at a great value to our guests. In addition, we continued to drive value by enhancing overall experience of our customers. As we have previously highlighted, we have implemented…

Thanks, Steve. Before I get started, I would like to remind you that the fourth quarter of 2014 contained 14 weeks. This compares only 13 week in the current fourth quarter of 2015. For the fourth quarter ended December 30, 2015, total revenue was $86.3 million as compared to $90 million in the fourth quarter 2014. The decrease was predominantly due to the decrease in company operated restaurant sales to $80.7 million from $84.1 million in the prior year period. The year-on-year comparison was impacted by approximately $4.6 million as a result of the extra week in 2014. Company operated comparable restaurant sales growth for the quarter was 1% comprised of a 2.6% increase in average check offset by a 1.6% decrease in transactions. Franchise revenue decreased to $5.6 million from $5.9 million in the fourth quarter of 2014. The decrease included a $0.5 million decline in sub-lease income resulting from the expiration or buyout of sub-lease agreements in 2014. Excluding the impact from the sub-lease income, franchise revenue increased by 3.4% driven by comparable restaurant sales growth of 2.4% as well as contribution from new restaurant and higher point of sale fees. Turning to expenses. Food and paper cost, as a percentage of company restaurant sales, decreased by 40 basis points year-over-year to 31.4%. The improvement was predominantly due to higher prices and lower discounting partially offset by increases in commodity costs. Looking ahead to 2016, we have our chicken needs locked for a year and we expect commodity deflation of 3.5% to 4% for the year. Labor and related expenses, as a percentage of company restaurant sales, increased 50 basis points year-over-year to 25.7%. The increase in labor expenses was primarily driven by our investment in incremental labor, higher expenses related to employee fixed pay resulting from new…

Thank you, Larry. We have made great progress during 2015 to strengthen the foundation of our business through our service and operating initiatives. These initiatives will help drive our business forward in both the near and the long term. I believe we have a unique brand that operates from a position of strength in terms of food taste and quality. We continue to have a long runway of growth ahead of us and we are excited about the opportunity that lies ahead. Thank you for joining us today. We appreciate your continued interest in El Pollo Loco and we would now be happy to answer any questions that you might have. Operator?

[Operator Instructions]. Our first question comes from the line of Matthew DiFrisco from Guggenheim Securities. Please proceed with your question.

Thank you. A question with respect to the guidance. I guess I just want to fully understand the G&A. It sounds like the pressures that are causing a little bit of the EPS growth could be muted somewhat are going to continue into 2016, I presume, as far as the growth rate of the expense line of depreciation. Is that correct? Can you guys hear me?

I apologize. It seems as though our speaker one has disconnected. Hold on one second. Mr. Sather, can you hear me?

Yes. I can.

Yes.

Okay, Mr. Sather.

Okay. So the question, I don't know if you guys heard the question or not.

Yes. We got the question regarding depreciation.

Okay.

And the short answer is yes. And the way I look at it, when we look at our 2016 guidance, what we are seeing is basically our 2016 build are one on a margin basis about 40 basis points of headwind and also even on an income basis, they will be EBITDA positive, but on an income basis they will likely be a negative with the pre-opening costs, the upfront labor we put in to open a restaurant and the timing of builds. So I think that's why you end up seeing depreciation, another way of looking at why depreciation is a bit of a headwind to 2016 earnings.

Understood. And then I guess just on the G&A guidance as well, are we looking at longer-term in the mode of also getting some better G&A leverage potentially as far as taking down that as a relative expense in the beginning of 2016 and beyond?

Yes. Matt, just one thing I want to clarify, when you look at the guidance and see those percentages, obviously they are higher than they were in 2015, but there is a lot going on in 2015. So I just want to walk you through some things real quick. And that is, if you strip out pre-opening costs which ends up in G&A and just look at what I call our base G&A, 2015 was basically about 7.8% of revenue and if you look at 2016 the same way, you are at 7.9% of total revenue. So roughly about flat. And 2015 actually included about $1.5 million less in bonus. So if you put apples-to-apples, we actually are getting a little bit of leverage in 2016 on what I call our base G&A.

That's very helpful. And then I guess, can you just finish up with a little bit more color on the guidance of the same-store sales? I guess you are doing around -- a lot of management sometimes back away from looking at things on a two-year basis, but you obviously did pretty well in the fourth quarter, better than what people had been modeling, sort of flattish and you came in better than one, I wonder, should be viewed as a 1Q slowdown in effect when you are looking at flattish same-store sales? Or are you sort of saying, more of the fourth quarter trends?

Yes. Matt, this is Steve. If you look at the last year, our Q1 last year was 5.1% system comparable sales, which was very strong, actually our record average unit volumes. And that's a big reason we expect flattish comps in the first quarter of 2016 and really reflects what we are seeing so far. As regard to the balance of the year, we believe that the operations and marketing initiatives that we have put in are very strong and we have confidence that they are working. We talked about in the beginning of the call that various operational things that we did in third and primarily really fourth quarter, redesigning our center line, streamline POS, the pagers which is inside speed of service, are really hitting the ground. And the company stores where they are all installed, we are averaging about a 25 to 30 second improvement in speed of service. And then we talked about the investment in labor we have made on the ops initiatives. And then on the value end too, we have restored the $5 combo panel, emphasized combo pricing across the menu and then took a very, what we thought was a cautious 0.8% price increase in November versus our normal 1.5% to 2%. And then really to look at it more scientifically and did a study based on price elasticity of where we have three tiers pricing on the different stores in the restaurants. So we think that we have a lot of confidence in the second through fourth quarter. And to give you a little bit of color on that, the consumer feedback that we are currently seeing now that all of those initiatives are installed, is very positive for us. The key metrics of which we are looking at last visit excellence and value are headed in the right direction and we are also seeing a directional improvement in the transaction trends since Q2 last year. So we think again, first quarter is going to be tough. That's what we are seeing. We are fairly well through first quarter now and that's why we gave the flattish comps there.

Okay. Thank you very much.

Thank you Matt.

Our next question comes from the line of Sam Beres from Robert W. Baird. Please proceed with your question.

Hi. Good afternoon. Thanks for taking the questions. The question is related to the Q1 comps guidance as well. Maybe first off, flattish expectations for system comp growth, but would you expect to continue to see a divergence between the company and franchise same-store sales trends? And then maybe secondly in terms of the flattish expectations, can you comment at all on any impact you are seeing from promotional discounting activity within the larger QSR space?

Yes. On the promotional activity, we are seeing, in the QSRs, the burger guys are going at it just like they are in the rest of the country. We are seeing the heavy discounts. It's a little too early to see whether that has any reflection on us, probably a little bit. But we have been focused on that value equation and we really think long-term that they are going to have, the burger guys will have trouble keeping that up forever. And we like our equation where the quality of our food and our improved service and certainly our warm inviting environment and a reasonable price increase that we took, that will benefit us long-term. As far as the franchise versus company, if you look it this year, on the franchise side what you are seeing is, right now on the transactions, we are really about the same right now. When we took our 0.8% in the fall or late November, franchisees took a little bit more aggressive price increase. As we have stated, we are going to look at towards the balance of quarter two and see if we take any more company pricing. But we are watching it very closely because our franchisees have to be more aggressive on the price side. The transactions are now starting to match up.

Great. Thanks for the perspective. And then maybe secondly, if you could provide some perspective on performance you have seen for new units? I know that you have opened a lot in late Q4, but what are you seeing in terms of initial sales volumes, customer reception to the new units? And how should we think about new unit performance going forward here in 2016?

Yes. Matt, on the new unit performance, we don't really get into disclosing, especially markets in terms of unit performance. Overall, we look at how they perform versus what we call our model. And we are pleased with the performance overall. Houston, which is where most people like to lead with a questioning, still early days. We just opened five more restaurants in Houston. So now we have 10. We have another one getting ready to open. So pleased in Houston, but we have got to watch how these five restaurants perform and see how they do. And we have always said, we think probably later this year, is when we really get a real good read on Houston. But overall for the balance of the portfolio, I think we are pleased with the performance of our new units.

And on the operational performance, just specifically on Houston, we are also very pleased. We made a great investment, as you know, last year as we opened these units up and from the metrics that we get from a operational performance, we are very pleased with that and we will continue that as we roll into Dallas next year with that focus.

Great. Thank you.

Our next question comes from the line of John Glass from Morgan Stanley. Please proceed with your question.

Hi. This is [indiscernible]. I have a question about the unit openings for next year. You did say that it was going to be more balanced. Is that roughly half in the first half, half in the second half? Or is just not all going to be loaded towards the fourth quarter?

Yes. You are breaking up there. [indiscernible] latter. I still expect to see probably a little bit more heavily weighted second half of the year. But I look forward as second and third quarter will probably be your biggest quarters, but more in the third quarter and then a little bit more weighted towards the back half of the year. But certainly better than having 11 of your 14 restaurants, with such a percentage, in the fourth quarter and the back of the fourth quarter, for that matter.

Okay. And then just on that, for the opening is this quarter and 4Q 2015, were those mostly weighted towards the second quarter? Even though you beat us on comp, I had revenues a little bit lower on the company side. Now I am just curios about the [indiscernible] those, the pace of the openings within the quarter?

Yes. So as I understood, because you were breaking up a little bit. But when you look at the Q4, we were very back-end loaded in Q4 in terms of the openings. In fact, of the 11, six were in December. So that is probably, when you look at your models, impacting your revenue for the fourth quarter.

Okay. And then just lastly, on the comp guidance for next year, I know you are going to be assessing pricing in or at the end of the quarter, but what pricing are you modeling in for the low single digit growth rates here?

Well, as Steve highlighted, we have taken 0.8%. We are reviewing everything. What we are looking at is possibly trying to take probably another 0.7% or 0.8%. It will get us to a full year of 1.5%. But again we are being cautious knowing what's going on in the marketplace with the discounting and everything else, we may or may not take that. But that's what we are assessing. And we are looking at current performance of our tiered restaurants. We are using an outside consultant firm to help us with those analyses. And then of course, we are looking at our franchisees who Steve highlighted took more aggressive pricing to see how their performance is. I mean, it's very early days for them. We want to see over a little more time what that impact is. So again we are cautious but if you ask me what we are targeting, we hope to price 0.7%, 0.8%, 1% to get to a full year of 1.5%.

Thank you.

Our next question comes from the line of Doug Cooper from Sidoti. Please proceed with your question.

Good afternoon, Steve, Larry.

Hi Doug.

Hi Doug.

I just wanted to dig in a little bit more on the labor line. It seems like as the discussion several months ago was, food deflation of 3% to 4% gets you, call it a little over $4 million. You have wage pressure $5 million, roughly you are almost offsetting that completely. And then, I guess you would invest a little bit into additional labor, call it $1.5 million, I guess. That $1.5 million is like another 20 basis points, I guess. So I kind of seeing another 20 or 30 basis points to get your 100 on the labor line. So I am just trying to reconcile, did you put in additional labor, you are seeing a good response from the extra labor in the stores and you just wanted to increase that and make sure you are covered?

So I think, Doug, the disconnect between your model and the number you just ran through is and you are right, we initially said investment in labor about $1.5 million. It's really more 41.5 million to $2 million. And what we looked at last year was, during the year there were some period when we ran really, really tight, probably below where we should have been. And so when we did our planning we said, we are going to go ahead and bring that to where it was, plus another $1.5 million. So when you really look at the overall investment, it's probably more $1.5 million, $2 million. And if we get to $2 million, you are going to find your 20 to 30 basis points.

Okay.

Doug, this is Steve. I am very pleased that we added that additional labor, because our teams focused with that right during the peak hours and we are seeing the good speed of service improvements and better metrics. And many people have said, why are you investing in additional labor beyond what's the required minimum wage increase in California, but it's really the long-term growth of the business and it was the right thing to do and we are seeing the benefits.

Okay. Thank you. And final question is, any consideration to some additional debt pay down in 2016? Is the focus going to be completely on development? And did you mention the CapEx range? I don't know if I got that.

Yes. We gave a CapEx range, I believe it was $35 million to --

$41 million.

$41 million in CapEx. With that, we expect to be -- incremental free cash flow will be free cash flow positive, mainly because we are not a taxpayer. So there are no taxes we are paying. So we get that benefit. So we will be free cash flow positive and to the extent that we have extra cash after funding our development and remodels, we will look to pay down debt.

All right. Thank you

Thanks Doug.

Our next question comes from the line of Sharon Zackfia from William Blair. Please proceed with your question.

Hi. It's Matt Curtis, on for Sharon. I just had a question on the Vision store design that you are testing. You guys completed a lot of remodels over the last couple of years to get to the Hacienda store design. So I am just curious on why you think you may need something else for Dallas and what you are specifically looking to improve?

Well, if you look at the Vision design, which we have done, we took one store and we completely remodeled it to look like that, it's a very strong improvement on the inside. And I believe it's been very well received so far from the people that we surveyed. Still in the early stages. Our franchisees love it as well. We are really at a, our franchise agreement requires remodeling every seven years. So we are really through the -- we are about 70% complete on the Hacienda design and we are really at a stage now where its a right time for us to look at this, especially in new markets. Our plan is to continue to get the feedback and do the research on it. We will enter the Dallas market, because we feel that strongly about this new Vision design and what we see. It kind of takes you more into the feeling of more of the fast casual. If you look at that value equation that Ed and his team always refer to, talk about product which we have. We have great food and all of our research reflects that. It is then service, which we are elevating that service level and then the environment. And I think what we saw in some of the research we did was we have our Hacienda design served us very well. We hadn't really done any remodeling in over 10 years. But it was more of a QSR look and we think this is going to give us the best of both worlds and appeal to the fast casual consumer. So if you get out the California stop at our Fullerton location and our first one to open up in Dallas. So we feel very good it.

Okay. Great. So it's nothing really specific about Dallas. It's more of just an organic evolution of the store design that you are testing? Is that right?

Yes. I think that's a perfect description. I think also that we wanted to get ahead of the game here. Last time we waited again almost 10 years before we did any major design. And we want to be where the consumer is. And the consumer demands that environment. You have to have all three. It's not enough just to have the good food and service. You have got to have the environment as well.

Okay. Understood. And then would you mind breaking out average check into the mix and price components?

Can you just give us one minute here?

Sure.

And this would be on --

Again is it our 2016 plan or to the --

No. I am talking about the fourth quarter. Sorry.

The fourth quarter. I didn't bring that with me.

That's going to be on the --

So I have got it for the fourth quarter. We broke out, I think transactions and check. You want to break out the check?

Yes. Right.

Pricing was in that 1.9% of that 2.7% check.

Okay. All right. And then you mentioned the three pricing tiers. First of all, are those in place right now? It sounded like they are, but I just wanted to confirm that. And then secondarily, I mean obviously one would be high, one would be low, one would be mid. Where would Houston slot into that pricing structure?

You are correct. It's the three tiers. We implemented that when we took our November price increase. And Houston's at the low end competitive, Houston prices versus California. And that's one of the reasons we developed the three tier along with utilized our metrics with that because we know that we are going to have areas like California, where minimum wage may increase more rapidly than other areas and Houston is very competitive.

Okay. Great. Thanks very much.

Thank you.

[Operator Instructions]. Our next question comes from the line of Andy Barish from Jefferies. Please proceed with your question.

Hi. Good afternoon guys. It's actually Reena Krishnan, sitting in for Andy Barish. I just wanted to see if you could maybe give us some color on how traffic trends progressed through the quarter, just as you were trying to reinforce your return to value messaging for the last few months? Could you give us any sense of how traffic trended, just on a monthly basis or through the first half or second half of the quarter?

Yes. So the transactions trends during the quarter, as Steve highlighted, firs of all, the trend was positive since Q2. If you go through the fourth quarter, they also trended positive through the quarter as it moved. And then if you look at the quarter-to-date number for Q1, again at least currently we are seeing again an improvement in transactions, still on the negative side, but improving.

Okay. Got it. And is there any weather impact potentially in that as well? Or have you guys been able to parse what portion of that maybe just in California?

We didn't have a lot of bad weather. We had a little bit of rain in the first week of this period one, but nothing to speak of impact. But we can't complain at all on weather. We have very good weather.

Okay. And then last question just in terms of the use of pagers and POS systems, that's currently just at company-owned stores?

It's in all the company stores and we just met with our franchisees this morning, we are about 70 franchised stores right now and they are installing weekly as we speak because they want to see that speed of service improvement on the inside. About 56% of our business on average is inside. That's either dine-in or they come in to take out and they use our salsa bars. And so it's very important and we are very pleased to see that improvement in speed because quite frankly we never measured that as accurately as we are now. So we like the pagers. We have done consumer surveys on the pagers. It's like what you are getting casual dining. The noise level is lower and it let's the guest, while they are waiting for their food, go to the salsa bar and not be listening for their name to be called. So it's an overall win-win for us. We like it.

Okay. Thank you very much.

Thank you.

There are no further questions in queue at this time. I would now like to turn the conference back over to management for closing comments.

Well, thank you everybody. I hope you look forward to our next call and continue to watch our progress. And thanks again for your continued support.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your time and participation. You may disconnect your lines at this time. Have a wonderful rest of your day.