Greetings. Welcome to El Pollo Loco’s Fourth Quarter 2019 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] Please note this conference is being recorded. I will now turn the conference over to Mr. Larry Roberts, CFO. Mr. Roberts, you may begin.

Thank you, operator. Good afternoon. By now, everyone should have access to our fourth quarter 2019 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, including statements related to our key initiatives for 2020 and beyond, plan for new store openings and our financial outlook for 2020. 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 2019 tomorrow and we encourage you to review the 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. I now like to turn the call over to President and Chief Executive Officer, Bernard Acoca.

Thanks, Larry. Good afternoon, everyone, and thank you all for joining us today. We ended 2019 on a strong note, with our highest system-wide comparable restaurant sales growth result of the year at 3.9% for the quarter. Not only did this mark our 6th consecutive quarter of positive system-wide comparable restaurant sales growth, but it was also achieved against the tough industry backdrop and a challenging 4.4% sales comparison from 2018. Successful lapping of these compares generated an impressive 2-year system comp of 8.3%, which is the best we’ve had in 4 years. The results generated in the quarter, also helped propel our 2019 full year system-wide comparable restaurant sales growth to its highest level since 2015. I’m proud of these results and even more so of the fact that the comp sales in the quarter were driven predominantly by traffic. Before discussing our key initiatives for 2020, I’d like to provide a little more detail on our successes in the fourth quarter of 2019. Sales growth across the month was relatively consistent despite more difficult rollovers in November and December. We are pleased to report that this momentum has continued into 2020, which we believe is attributable to our differentiated LA-Mex culinary innovation, expansion of our delivery capability, sustainment of our $5 value platform, the diversification of our media strategy, strengthening operations, and the ongoing success of our Transformation Agenda. The fourth quarter was predominantly focused on our Holiday promotion. The holidays are a season we believe we are uniquely qualified to be associated with and own at El Pollo Loco. To achieve this, we approach this year’s Holiday promotion very differently from years past. Holiday 2019 was designed to create a seasonal experience for our customers as much as it was intended to deliver holiday relevant food they…

Thanks, Bernard. Before we get into our fourth quarter results, I’d first like to provide update on our store development. During the quarter, we opened 1 new company-operated restaurant in Los Angeles. For the full year 2019, we opened 2 company-operated restaurants along with 2 franchised restaurants. Looking ahead to 2020, we expect to open 3 to 4 company-operated and 5 to 8 franchised restaurants. We have shifted gears somewhat and now expect to enter our next new markets with franchise development as opposed to company-operated restaurants. Consequently, we don’t have as much control over the timing. And while we are currently in active negotiation for new territories, the new market entry may flip into 2021. We continue to make progress on our remodel effort. During the quarter, we completed 2 company-operated restaurant remodels. I’m pleased to report that our new asset design work is nearly complete. During the first half of 2020, we expect remodel 3 to 4 stores using new design, which will then be used for all new builds in our next round of remodels beginning in the back half of the year. Over the next several years, the company and franchisees are required to remodel over 300 restaurants, and we are very excited by the impact these will have using our new asset design, which better exemplifies and communicate our LA-Mex positioning. Now on to our financial results. For the fourth quarter ended, December 25, 2019, total revenue was $107.5 million as compared to $106.3 million in the fourth quarter of 2019. Company-operated restaurant revenue increased slightly to $94.8 million compared to $94.6 million in the same period last year. The slight increase in company-operated restaurant sales was driven by strong company-operated comparable restaurant sales growth of 4.3% as well as by the contribution from the…

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

Great. Thanks for taking the question. My first is really on the 800 pound of virus in the room. And the question is whether your guidance for 2020 for same-store sales is contemplating much of an impact from the coronavirus and the kind of the spread and the concern about it from consumers. But also whether – what you’re seeing now, I think investors would be curious to see what the near-term experience has been especially as you have a fairly dense concentration in the LA market?

Yeah, Jake, so our guidance does not include any impact from the coronavirus. We’ve left that out of our guidance. I’d also highlight that even as of up to the day we have not seen any impact on our sales or transactions in our restaurants. So again, no impact that we’ve seen yet in our restaurants and our guidance does not include anything on the coronavirus.

Okay. Then that’s really helpful. And then, on the comments about the momentum into 2020, I know weather was a bit difficult early part of the first quarter last year. Can you provide some just context as to maybe quantify where you stand right now quarter to date and maybe what you were comparing against, so we can get a better sense of that momentum?

Yeah, so, again, quarter to date, we feel really good about the momentum we have in the business. I’d highlight that we are continually positive in transactions this quarter. So we feel good. I don’t want to get into any more detail than that. But I would say, last year, the impact of the weather was somewhere probably around 50 to 100 basis points as of now. That would decline as we move through the quarter, because March – the weather last year was good. But the overall quarter impact will decline. I also highlight that while we did have that kind of weather upside this year that even now in the business we’re seeing the good levels of momentum and now we’re lapping good weather versus good weather last year.

Got it. And then, last question is really on menu pricing and then the impact on margin, so if you could – I know you gave us what the check was in the fourth quarter, if you could break out what the menu pricing was in the fourth quarter, and then also what you expect for menu pricing in 2020.

Yeah, so the fourth quarter, we had pricing of around 3.7% on our business. And as we head into 2020, obviously, it could vary as we work through the year. But right now the target, it will be somewhere around 3.5%. That could go up or down depending on how we see the reaction. We just took pricing up about 1.8% just a couple of weeks ago. So we’ll see what the reaction is to that. The other thing I highlight is we actually could lean in a little bit on pricing depending on what we see, because as we look at the last round of pricing we took, which is November last year, which is about 0.8%. And looking at our value scores through the fourth quarter of last year, we actually saw an important in value. And I think that’s all that has to do with service and probably the menu offerings. So again, we’ll assess where we are right now. Targeting around 3.5%, could go up or down depending on the reaction of what we see from consumers, but feeling good about where our value scores are, and in fact – despite the fact that we took probably somewhere around 3.5% of pricing last year until the value scores are strong and actually improves a little bit in the fourth quarter.

Great, that’s...

And the transactions.

And the transactions stayed positive. Yeah.

Great. Thank you very much.

The next question is from the line of Matthew DiFrisco with Guggenheim. Please proceed with your question.

Thank you very much guys. Just a question. I think you talked a little bit there about – and you threw out a number there about 300 in the remodels, can you go over that a little bit as far as the timeline of that. And then, if you look at sort of almost 500 stores in the system or nearly 300 franchise, 200 companies, how should we think about 300 breaking out? Is it assumed that company is going to lead and then maybe so the majority of your company, so two-thirds of that 300 is going to be company and then maybe the remainder is going to be franchised and you expect the rest of the franchise to follow? How should we think about that?

Yeah, Matt, it’s early days and the thing I would say is, is that based on last – we have a 7-year remodel cycle. And we actually finished that cycle really last year. So we are now at the point where we’re starting it overdue on remodels. Now, we’ve told everybody to hold off including ourselves until we work through the new asset design. And once we worked that through the first-half of this year and then start building more remodels second half of this year, then we’ll start ramping up the program. And so, I think from there it will be fairly even over the next several years and probably I would expect a 60-40 split franchise company. I think it’s going to be fairly even. Everybody has remodels to do and as an obligation in our franchise agreement. And we think with the options we’ll be providing with the new asset design that people want to sign up for them.

Yeah. I also want to provide a little strategic context for really where we are in the journey in regards to the new restaurant design. So quite ironically or coincidentally, we’re really at the 2-year mark of our transformation agenda, which we’ve always said is a 3-year transformation. And what we’ve managed, I think, over the course of the past 2 years to successfully demonstrate is the consistency and comparable restaurant sales, which now we’ve indicated we’re 6 consecutive quarters of that, the improvement in the simplification of our operations, and again, the back half of 2019, certainly with a increasing strength in the fourth quarter demonstrated that our operations are improving and continue to improve and that has resulted in a much stronger value proposition for the consumer, which makes us feel a bit confident that should this continue, we can command a bit more pricing power. And now we find ourselves as we’re about to embark in year 3, at a really exciting juncture in the company history, because we have all these remodels in front of us. And the thing that is quite frankly, been holding the brand back a bit, if you take a look at again independent research is our environment scores. So the ability to remodel these stores over the course of the new few years, we’ll take that anchor off our necks, if you will, modernize the brand. And I think at that point, we’ll have all guns blazing in terms of how we want to present ourselves to the world and the potential upside that can present.

Excellent. I appreciate that color. Just then the last point, you mentioned also that the new market is probably going to be more timeline around 2021 and that’s going to be a franchise risk company market. So your 2020 development plan of 3 to 4 company and 5 to 8 franchise, I’d assume, is it correct then to assume that 2021 and beyond with that new market being a franchise market that, in theory, you would grow more franchise stores, maybe 3 to 4 company, but maybe that 5 to 8 goes higher. So your percentage of future growth is going to be even more skewed towards franchise than what your current store base is?

Yeah. That would be the correct assumption.

Excellent. Thank you so much.

Our next question is from the line of David Tarantino with Robert W. Baird. Please proceed with your question.

Hi, good afternoon, and congrats on a strong finish to 2019, it sounds like a good start to this year. So my question is a follow-up on the unit growth. And I think, you’ve mentioned that you’ve now pivoted to focusing on franchisees entering the new market instead of company. And I was just wondering if you could talk about why you made that change. That’s my first question.

Yeah. So David, this is Bernard. I think for a few reasons. One, we are right on track, where we expected to be with our new restaurant design of the future. And as we mentioned earlier, we are also on track to start building that new design in our core market of Los Angeles in a few different formats here. And what we really wanted to do is to vet that out. We’re very, very excited about what that new design holds for the brand and holds for the company. But we want to test that out in a company environment first. See the returns that that new asset can bring us. And then once we do that and start to build that out in the core market and prove the model out, then unleash it, if you will, in new markets with franchisees, local franchisees, who we believe, quite frankly, know their local markets better, can take full advantage of this proven asset that will be building in the second half of this year and can probably gain greater traction and speed with that model on a go forward basis. So those are primary reasons for the change.

Great. And then, Bernard, maybe the second part of the question is, just the overall interest you’re seeing among franchisees to build new units. The 5 to 8 would be a nice step up from what you did in 2019. But just – if you could talk about the overall interest you’re seeing among your existing base, and then also with potential new franchisees to enter these new markets at this point?

Yeah. Well, I think, we always have strong franchisee interest to build new stores, new restaurants. I think, we have kind of tempered that or held them back a bit with that, because we’ve been playing catch up with this new restaurant design that we want to provide them to be able to open up these new restaurants at a greater pace. So that’s really why I am so excited about what we have in front of us certainly in the back of this year and beyond. So in regards to franchisees wanting to open up with us in new markets, certainly, we’re always in discussions with our franchisees to do that. But we are going to really start to more actively recruit new franchisees bring some new franchisees into the system, which quite candidly, we haven’t been very aggressive with over the past few years. And so we’ve managed to successfully grow the brand with some very well established, very, very talented, and franchisees that have been with us a long time; but we’re in the process of actively recruiting new franchisees to coincide with the development of this new restaurant design in the future.

Yeah. I just add that there are a few discussions going on right now, fairly preliminary, but there are discussions with franchisees – our new franchisees in – at our markets.

Great. And then last question on this front. So I think, last year – maybe first half of last year, you talked about a goal to get to 5% system unit growth. And I just wanted to confirm, is that still the plan? And then how long do you think it will take to just to get to that plan?

That is still the goal. I think, as we talked about that ICR, realistically, we’re probably looking 2 to 3 years out to be at that. Again, this year is a little bit of step up, we’re going to put a lot of efforts around, as Bernard just highlighted both in our current franchisees and recruiting new franchisees to get that ramped up. But we’re probably 2 to 3 years out from getting to a 5% new built number.

Great. Thank you very much.

Thanks.

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

Hi, good afternoon. I was hoping to talk through average ticket, because I think you’ve had some negative mix there that’s kind of blunted a little bit of the price flow through. So hoping you can give some color on if that’s been really the value dynamic that you’ve been introducing to the menu and when we would expect that to kind of neutralize or maybe turn more positive in 2020? And kind of as a corollary to that, how you view balancing kind of premiumization versus value on the menu today?

Yeah. Sharon, this is Bernard. I’ll let Larry go into a little bit more detail on some things. But I think, I just want to setup the strategy for you, because, I think it’s important for everyone to understand. So our menu is evolving. And if I look back on 2019 in full transparency, I’m not as happy as I would have liked to have been based on the products we had coming out of our pipeline. It took us a little bit of time to play catch up. And now, as I mentioned earlier, I’m extremely excited about the robust product pipeline that we have that is fully consumer vetted, that we are either have tested or in the process of testing or will test shortly. And the reason why I bring that up is, in the past, there was a tremendous amount of reliance on a single LTO to carry today. In our $5 Fire-Grilled Combos that we’ve launched in Q3 of last year is a pretty example of that. It was a one-trick pony. And we sustained it as a layer, a value layer, a permanent value layer in our business, because it got such strong traction. And quite frankly, we attributed to the time and are still attributing a good portion of our positive transactions right now to that value platform. Since then, we’ve managed to really ramp up the pipeline. The first promotion of the year was a good example of that. We talked about our Pollo Fit Bowls and our Wings. If you take a look at what’s going on right now, where we launched our new Mix & Match Street Taco promotion, we’ve got a few things going on simultaneously that make us a very different brand than we were even a year…

No, I think you hit the nail on the head in terms of the check that – or the mix decline was really driven by the $5 Combo menu, which basically we doubled the mix of that and it sustained very well. And it’s been our highlight. I’d expect to see – the first half of the year, you’re going to still see that, because we continue to talk about it. It still continues to mix well. And then, I expect as we lap it the negative impact on check should decline back-half of the year.

Yeah. Thank you very much.

Thank you. Our next question is coming from the line of Jake Bartlett with SunTrust. Please proceed with your question.

Great. I had a question on delivery and I believe that you mentioned it was about 3% of mix in the quarter. And if you could remind us what it was in the fourth quarter last year that’d be helpful. I think it was under 1%. And in that context, how much of the delivery increase in sales has been incremental do you think? How much do you think it’s been – it contributed to the same store sales in the quarter?

Yeah, so delivery mix a year ago, I think was around 1%, if I’m not mistaken.

It’s slightly below.

It’s slightly below 1%.

Yeah, that’s right.

So, yeah, we’ve grown it, we’ve grown it to 3%. We managed – we just added Grubhub about a week ago, so we expect that mix to continue to increase. To answer the other part of your question, how incremental is it, that’s always the tough question to answer. I think we’re definitely seeing some incrementality from it we believe. But it’s hard to really ascribe a specific number to it. I don’t know, Larry, if you had anymore commentary there?

Well, the other thing, I think the – we talked a little bit about this on our last call, because we’re talking about September a little bit last time, was the one thing we have seen is, as we’ve grown on the additional marketplace delivery providers, the fourth quarter we saw good transaction growth. Certainly, I think a chunk of that was attributed to the addition of the 2 more marketplace delivery providers. So I think, if you’d ask me, I think a good portion of it has been incremental to the business.

Okay. And then, as we think the potential risk from the virus and then the reaction from consumers, can you remind us what percentage of your business is off-premise, and then also what percentage goes through the drive-through?

Yeah, so about 30% of our business is takeaway or off-premise. We are less reliant than some other kind of typical QSR brands on our drive-through, but – so we do about 40% of our business through that channel and then the rest is dine-in.

Got it. So just to confirm, so 30% of people who walk in and take the food out, 40% through the drive through and then the rest is dine-in?

30%, yeah, dine-in.

Okay, yeah. Got it. Okay, thank you.

Thank you. At this time, we’ve reached the end of the question-and-answer session and I’ll now turn the call over to Bernard Acoca for his closing remarks.

Well, thank you for everyone for joining us this evening. We were excited to share our results with you today. And we look forward to sharing future quarterly results with you soon. So thank you. Have a good evening.

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