Good day, ladies and gentlemen and thank you for standing by. Welcome to the El Pollo Loco Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, March 9, 2017. On this call today, we have Steve Sather, President and Chief Executive Officer of El Pollo Loco and Larry Roberts, Chief Financial Officer. And I would now like to turn the conference over to Larry Roberts.

Thank you, operator and good afternoon. By now, everyone should have access to our fourth quarter 2016 earnings release. If not, it can be found at www.elpolloloco.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. 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 2016 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 and good afternoon everyone. We appreciate your joining us on the call today. Fourth quarter results included revenue growth of 7.2% and pro forma net income of $0.12 per share. System-wide comparable store sales decreased 1.3% during the quarter, including a 60 basis point decrease at company-operated restaurants and a 1.9% decrease at franchise restaurants. In line with what we have heard from many of our peers, comparable store sales growth slowed through the fourth quarter and the softness has persisted this year. The softness is at least partially due to the heavy rains that we have had here in Southern California this winter, the impact of which we estimate to be 1% to 1.5% thus far in the first quarter. But we are not satisfied with these results. We remain committed to enhancing our value equation, which is comprised of great food, excellent service and a warm and inviting atmosphere, all at a good price. The major focus in 2017 is to clearly communicate our differentiation from other QSR and fast causal concepts as well as to enhance convenience and loyalty. At El Pollo Loco, our differentiation starts with the food and our heritage, more specifically it starts with our authentic, signature flame-grilled, citrus-marinated chicken which is crafted by our talented grill masters in our open kitchen or as I like to call it the theater of chicken. Our grill masters, many of whom who have been with the company for 20 plus years, are the key to producing our differentiated, craveable Mexican-inspired menu, which is why we highlighted one of our best in our recent – most recent ad campaign. Pedro Lopez mastered the art of grilling our signature chicken at our original Alvarado Street location, where he dedicated himself to serving guests for the past…

Thanks, Steve. For the fourth quarter ended December 28, 2016, total revenue increased 7.2% to $92.5 million from $86.3 million in the fourth quarter of 2015. The growth was largely the result of the increase in company operated restaurant sales, which rose 7.1% in the quarter to $86.5 million. This increase in company operated restaurant sales was driven by the contribution from the 29 new restaurants opened during and subsequent to the fourth quarter of 2015, partially offset by a 0.6% decrease in comparable restaurant sales. The decrease in company operated company restaurant sales was comprised of a 60 basis point decrease in transactions and a flat average check. Franchise revenue increased 7.8% in the quarter to $6 million, $5.6 million in the fourth quarter of 2015. This increase was driven by the contributions from 16 new restaurants opened during and subsequent to the fourth quarter of 2015, partially offset by comparable restaurant sales decline of 1.9%. Turning to expenses, food and paper costs as a percentage of company restaurant sales decreased 80 basis points year-over-year to 30.6%. The improvement was predominantly due to lower commodity costs, particularly lower contracted chicken prices and freight costs. Looking ahead, we have locked in our chicken needs for the year and expect commodity deflation of about 2% for 2017. Labor and related expenses as a percentage of company restaurant sales increased 220 basis points year-over-year to 27.9%. The increase in labor expenses was driven by higher wage rates, reflecting the impact of California minimum wage increases and increased labor costs resulting from new restaurants opened in 2015 and 2016. For 2017, we expect labor inflation of about 4% as a result of minimum wage loss and tighter labor markets. Occupancy and other operating expenses, as a percentage of company restaurant sales, increased 160…

Thanks Larry. We continue to steer through this challenging environment by focusing on what matters most to our guest, the value equation. By value, I don’t mean just price, but rather the food, service and environment that you get for the price. Initiatives such as our recent mobile and online ordering app, our new learning management system, our up-to-date vision design and our authentic advertising campaign highlighting our high quality food are all aimed at increasing the value equation, thereby strengthening our brand and driving financial results. We remain committed to the Texas market and are working hard to drive improved brand awareness, sales and profitability in Houston. We are on track with our 2017 development plans and we will continue to partner with high quality franchisees to build our pipeline for the future. On a more personal note, as you may have seen it earlier today, I have informed the Board of my intention to retire by the end of this year, subject to the Board finding a suitable replacement. Over the last 40-plus years, I have been beyond fortunate to earn living in this great industry, including the last 11 years spent leading this special brand and team in multiple capacities. I am very proud of what we have accomplished in my time here. However, well I have my health, I have decided I would like to spend more time with my wife and family while also pursuing personal interests. As I have said repeatedly, El Pollo Loco continues to have tremendous opportunity of growth ahead of it and I intend to do everything I can to help ensure that the brand reaches its full potential. Again, I would like to thank you for joining us on the call today. Now we would be happy to answer any questions that you might have. Operator?

Thank you. At this time, we will be conducting the question-and-answer session. [Operator Instructions] Our first question comes from Jake Bartlett of SunTrust. Please proceed with your question.

Great. Thanks for taking the question. My first question is about, this earnings season, especially some of the late report have talked about a real deceleration in February, partly weather for California, but also related to tax refund delays, you haven’t mentioned that and so I am wondering whether you think it’s impacting you and also whether you can help us understand just the cadence of same-store sales as you have experienced them in the first quarter so far in your January versus February and then kind of more recent trends?

Hi. This is Steve. We certainly are aware of some of the issues that everyone has pointed out. We did have weather impact in Q1. We actually think that’s going to be about 1% to 1.5% in Q1 this year and that’s why as we mentioned on the call, we think we will be 1% or 2% negative in Q1. So we think that we also – other things like the tax refund impact, we have heard that, we have heard that rebounded in the – towards the end of February when the actual refunds came out a little bit. It’s very hard to pinpoint that. But the weather certainly here in Southern California where we have a predominance of stores has affected us in Q1. Larry?

I will just add. You asked a question around the cadence during the quarter. It’s very difficult to judge for us the cadence during the quarter just because of the weather impact and what we have seen is a lot of volatility. Based on that weather, it’s been very up and down. Recently, we have had a string of good weather days and so we have seen a pop back up. That could also relate to tax refunds. But it’s just very difficult to measure a cadence just given the variability in the weather and whenever it hits, we see a drop off and then it rebounds and we get good weather. So I really can’t too much about whether we would really see a trend line or a real cadence during the quarter yet.

Okay. So the weather – my impression was that it was more of a February event. But you are saying that it was kind of – it’s been pretty continual in February and/or in January and February?

It’s been more probably late January and February, but certainly, there was a weather impact in January also.

Okay. And then on the unit targets, it looks like the franchise target for ‘17 is a little lower than where you came out in ‘16, any reason for that or are there any markets that are kind of slowing down or any kind of commentary around the development targets?

Yes. This is Steve. No particular market and most of our – we have our Texas development, which about half of the company will be – development will be in Texas. Our franchisee continues to develop in Dallas and in Houston there as well down – as down in the Rio Grande Valley. But there is no – if you look at the – on the franchise side Utah still developing, Southern California some development here, not really…

The only thing I would add to that is I think what you are seeing is relatively flat development. I think that reflects – I think we have consistently said that, in order to really ramp up development, we need to get new franchisees in the system, especially into our markets. And we have brought some new people in, but it’s going to take them a little while to get geared up and start developing. And so I think right now, when we look at 2017, that’s what we are calling for relatively flat development.

Okay. And then it looks like there was a closure in the fourth quarter. If I am right about that, where was the closure in the franchise side?

I think we are checking on that.

Okay. It could have been in that WKS and…?

Watsonville. Franchise in Watsonville.

Okay. Thank you very much.

Thank you.

Our next question comes from Matthew DiFrisco of Guggenheim Securities. Please proceed with your question.

Thank you. You have mentioned in the prepared remarks a little bit about this family value, I wondered if you could talk specifically about maybe give us some numbers that you thought as far as the bundle, the $20 family bundle, how that worked as a percentage of sales potentially or did that index to where you thought it would or was it a little bit under indexed?

Yes. We do – no, we were very pleased with the – in module 1 as we mentioned we ran the family choice meal, which included eight pieces of chicken, two sides and the consumer’s choice of a family size super salad and that ran about 8% of the chicken – or 8% of our mix, which was very strong. We think that $20 price point is very key on these family meals and you will see that emphasize throughout this year. We are currently offering another family program, that’s two additional sides with any family meal for $3 and we are seeing good performance on that, but we like the $20 price point on that as well. So you will see those testing in and out this year.

So in general, has the family ordering on a proportion basis on a year-over-year, can you give us some context to that, is that – are these drivers to it and expanding it as a share of the menu or are you still sort of in recoup mode in trying to get back to where you are at higher levels historically in years past?

Yes. Matt, with this offering, we saw a nice jump up in our family meal mix. I mean we were back up around 29% or so versus I think we are running probably around 27% last year. So that meal, the increase we saw in the family meal itself which was a jump of about somewhere around 6% up to 8% corresponded to an increase in the overall family meal mix.

And while we have reengineered these, it’s also improved our margins on those because they are different offering than our prior 3-course family meal.

Great. And then I guess if you look at the flat check, can you just give us the composites, I am sorry, if I missed that, did you say what the menu price increase was in there?

The menu price increased about 1.5% which leads you to do a mix of negative 1.5%, really driven by the fall off in the family meal mix that we saw in the fourth quarter. But really, we saw all of last year and saw more in the fourth quarter.

Okay. But you were up year-over-year, 29% in family meals versus 27% in the fourth quarter?

No, no, that was [indiscernible] first quarter this year. Yes, I am sorry, if you look at fourth quarter last year we were down in family meals.

Got it. So you can say that then you have corrected – you are addressing the issue and it seems to be responding?

So far so good, yes.

Excellent. And then my last question, I guess if we were to look at the margins and the amount of deleverage, you did just incur with only a slight, I call it miss on the comp number, is this a scenario still though where maybe labor, obviously range you can’t predict so well, so if the sales were more consistent in a trend basis that you would have been able to manage these margins, I am just trying to get to was there some surprise and volatility driven by weather causing the weakness in the comp that might have exacerbated some de-leverage on the labor line, I am just trying to get better a handle on how much labor opportunity there could be in a better comp environment longer term?

Yes. So looking at the fourth quarter – I mean just to reflect if I look at year-on-year, I think Q4 last year about 21.7% restaurant operating profit, 2016 came in at 18.5%. And the biggest driver of that was our 2015 and ‘16 bills, which I have highlighted previously. That was about a 230 basis point drag on overall margins. If I look at labor, that was down about 1.5 percentage points. I think it certainly had the combination of the minimum wage and other wage inflation exacerbated by the fact that you had negative comps. To be honest with you I haven’t gone really through and figured out well, how much of the negative comp impacted that, but certainly, those are the numbers I have to go through and calculate how much negative comps drove that negative 1.5% labor shortfall. But again, you had the wage inflation with negative comps. That combination was about 1.5% or 1.5 percentage points of labor de-leverage.

Right, but in your guidance for 1Q though also I am assuming that there is some conservative guidance in there because of the weather, very hard to manage the labor margins in this current quarter, so that’s incorporated in your guidance as well?

Yes.

Okay. Thank you, guys.

Alright.

Our next question comes from David Tarantino of Robert W. Baird. Please proceed with your question.

Hi, good afternoon. I have a couple of questions, first on the impairments, can you provide a little bit more detail on the locations that were impaired? I think you gave us 2 were in Texas, 1 in California. Could you talk about where the other 4 were and sort of the characteristics of the restaurants that you are impairing? Is there anything to be learned on, I guess, what didn’t meet your expectations on those?

Yes. So David, the other 4 restaurants that had partial impairments, 3 were in Houston and 1 was Los Angeles. The one in Los Angeles is a very old unit. So, there wasn’t much of a impact from that one. Steve talked more about the outlook on Houston overall. I will focus on the accounting side. And as we have highlighted, we do the quarterly impairment reviews every quarter. We actually start looking at restaurants and measuring whether we should impair them or not after about a year of being open. And so we have ran basically the models. And just from an accounting standpoint and kind of ignoring the Houston market situation and again Steve will talk to that, we just decided that these restaurants from our accounting perspective and based on our accounting guidelines, that we should go ahead and impair a couple of them full impairment and then, like I said, 3 other restaurants to have partial impairment in the quarter.

Yes. And David on Houston and as we talked on the call and mentioned the last call, we are not happy with our current sales. They are underperforming our expectations. But during December, January and February of this year, actually we initiated tests there to improve sales and with a number of different elements and tactics to drive the sales. Some of these we think are very – have seen that are successful and we have expanded those now to the other stores in Houston and used them in Dallas as well. And some of these where we used Street teams to go around the stores, focus on businesses, talk about our catering, educate people with menus about El Pollo Loco. Ed and his team tested different coupon drops and FSI drops. We also had radio advertising now that we are utilizing there and greater community involvement, too. We are doing fundraisers there. And we have seen those, while not bringing them to where we want initially we have seen tangible improvement in those store sales. We have also focused on our operations in Houston to just make sure, because that’s ever so important as they have a great experience there and we have relocated several of our top management people there as well. And finally, we are just starting to conduct research with Ipsos consumer research. And what we will do there is we will do a deep dive into the consumer experience at the restaurants and really continue to understand and stay in the market. Again, we used some of these and some of these elements in Dallas. Dallas, it’s still early in Dallas, but they are performing in line with our expectations, so little bit different market in the Dallas market.

And then just – that’s very helpful, Steve. Thank you. Just following up on this, is there any sort of way you could mention where the locations are in Houston in terms of volumes versus where you need them to be to earn the cost of capital or to meet your hurdle rates? Is it – anything you can offer there? Are they at 70% of what you wanted or 80%, 90%, anything in that sort of thinking that you could share with us?

We normally haven’t given details like that. I mean, I think, David, all I would say is obviously, if your – if a restaurant that’s failing impairment test, the volumes are – we originally set a target of, I think it was what 28.8 was the target in Houston. So they are fairly far below that at this time. Again, I think we still feel like we will be able to drive sales in those restaurants. But at this time, using our accounting guidelines, we just said they are far enough below that we feel like we should impair them.

Great. And then last question on this front is some of the efforts, it sounds like you are getting some traction early. Is there a lot of investment that you have baked into your guidance in Houston or is it, I guess, measurable as you think about the impact on the earnings for this year?

No. Really, David, the only incremental investment in, I’ll call it, Houston, Dallas, similar to last year is about $300,000 of incremental marketing spend over and above the 5% marketing contribution. Most of things we are doing there are, they are not super high cost and a lot of it’s more FSI drops and those type of things, which are part of our normal advertising budget. The three teams are a little bit incremental, but even that going forward be covered in our advertising budget, so not a lot of this is actually incremental over and above the 5% plus the $300,000.

Great. Thank you very much.

[Operator Instructions] Our next question comes from John Glass of Morgan Stanley.

Hi, guys. This is Chris on for John. So, I wanted to get your sense of how you are thinking about the comp gap between the company franchise stores in 2017. I know the gap had been narrowing over the course of ‘16. But given that company comps flipped to better than franchisee comps this quarter, wanted to get your sense about that gap in ‘17 and whether you think that it’s going to start pointing towards historical norms? I think it’s been a couple of 100 bps difference. So, any sense there will be great?

Well, Chris, this is Steve. The franchisees have been a little bit more aggressive on taking price this year and I think that’s impacted their transaction growth. So that’s where you have seen that company start to perform stronger. Larry, the balance of this year, I would say it will probably be pretty close.

Well, I think, Steve, what you are highlighting is last year as we saw that gap between our pricing and franchisees pricing, you start seeing a change in transactions and it kind of built during the year, I think that’s one reason why you see in Q4 company comp sales outperform franchise comp sales. Going into ‘17, right now, what we are kind of assuming is roughly be on par with each other. Again, we don’t yet see entirely what franchisees are doing around pricing. I think they will be a little more reserved than they were say last year. I could be wrong. But right now we think they will be basically comp sales or company or franchise sales will roughly be in line with each other.

Yes. We focus very much on the, what we call that value equation and working with our franchisees to clearly understand that it’s not just price, it’s the food, service, environment over the price, and all of that is really that value equation. And I think the – especially with our focus on the $20 family meal that franchisees have recognized the importance of that.

Okay, thanks. That’s helpful. And with regard to pricing or your pricing in ‘17, I apologize if we gave that already, but what are you baking into the guidance?

It’s about 1.5% price for the year.

Okay. We are currently up to 1.5%. And in the spring, we have a potential to go up there. Normally, we do something in late fall, but we will analyze those very closely, because we want to maintain that value equation.

Yes. Just to make sure, the pricing we are contemplating in the spring will basically be in line with what we took in last year to maintain that 1.5% pricing. We feel like we want to be a little bit cautious and not get too aggressive on price just given the competitive environment.

Got it. Thank you.

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

Good afternoon. It’s Matt Curtis on for Sharon. Just going back to the previous question on the restaurant level margin guidance, I guess I still don’t quite see how the guidance calls for restaurant level margins to stay roughly flat on a flat to 2% comp this year. When if you look at last year, you guys were down over 100 basis points on margins when you had a similar comp?

Yes. So, let me kind of walk you through our thinking on the margin piece. First of all, whereas last year we saw a pretty big drop as a result of 2015 and ‘16 builds. I don’t expect to see as much as a negative in 2017 just because I expect 2015 maybe to be slightly accretive to margins and ‘16 maybe slightly negative as they come online this year, but nothing like the magnitude we saw last year. Probably more importantly, when you look at the pricing we are taking and the overall calendar, I think overall calendar we will look at maintaining our food costs based on promotional calendar in line with last year. And then we are also going to get some food cost upside from our lower commodity costs. We are expecting deflation of somewhere around 2%, maybe even a little north of 2%. Those, when you combine all that, will offset the labor inflation we expect to see in our business. So that’s why we feel like margin wise we will be somewhere around flat.

Okay, alright, that helps. And then on the impairments and closures, well, I guess on the closures, could you explain what the P&L impact is from those store closures, either in terms of revenue or EPS?

I will say in terms of margins, I know it’s about a two-tenth improvement in margin. If I look at overall restaurant operating profit is as much as about $1 million and that us pre-tax.

Okay, got it. Thank you.

Our next question is a follow-up from Jake Bartlett of SunTrust. Please proceed with your question.

Great. Thanks. Just kind of following-up on the questions about the margins, I am trying to understand COGS, I know your – I think your guidance has been about 4% deflation in ‘16, what did you experience in ‘16 for deflation and then why didn’t you get more of a benefit in the fourth quarter, it looks like it would imply much lower deflation in the fourth quarter?

Yes. So what it was is we had overall deflation for the year. I think it was north of 4%. It’s more in the range of 4.5%. But that – and I think it came up the previous call actually is our expectation in the fourth quarter, was we would see a little bit less of that just because some of laps actually came through in the fourth quarter. So some of the upside that we had in the first three quarters, we did not get in the fourth quarter because we are already had that – we were lapping that back into Q4 of the previous year. So we always thought fourth quarter deflation would be a little bit lower. And then we also from a calendar perspective, I believe that promotional calendar was a little bit more expensive in the fourth quarter. So combined those resulted in a lower COGS improvement versus the previous quarters.

Okay. So you are saying that in ‘17 that you are not going to have any impact from the calendar, it’s going to be more of a pure just math on menu price and deflation?

Primarily, although I think there is a little bit of calendar impact for the year.

Sorry, there should be, so – it’s just not that straight math?

Yes. I think a straight math will get you most of way there. But like I said, I think there is a little bit of calendar benefit. But the straight math of just looking at the overall COGS deflation should get you most of the way there. And of course, then the price increase also on top of that.

And should it be pretty even 2% deflation throughout the year or just end the year with less and start more or how should we think about that?

No, it should be even through the year.

Okay. And then just kind of bookkeeping question, but could you give us the system wide sales in the fourth quarter?

Yes. System wide sales in the fourth quarter was $190.6 million.

Okay, that is great. And then I guess lastly one question on the app, so you have three months under your belt, what have you learned, has it – how has the mix been in terms of the number of orders, has it posed any more challenges or less challenges operationally, what’s the experience been so far?

We are very pleased with our – the apps that we rolled out really late in fourth quarter. We are seeing about 0.7% to 0.8% of sales going through that. I just had pulled some figures this morning actually. We have had 55,000 orders in 94 days that we have used it. Our average check is higher on that. We think as we roll mobile, which we are going to test the mobile in our Las Vegas market...

Delivery.

I am sorry, delivery at the end of this period, we think – and then we will roll that in quarter two. And then also loyalty in quarter two, we think that will also drive that. So we are very pleased with the system so far.

Great. Thank you very much.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to over to Mr. Steve Sather for closing comments.

I would like to thank everybody for joining us today and thank you for your continued interest in El Pollo Loco. And thank you, operator.

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