Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded today, July 30, 2020. On the call today, we have Bernard Acoca, President and Chief Executive Officer of El Pollo Loco; and Larry Roberts, Chief Financial Officer. And now I would like to turn the conference over to Larry Roberts.

Thank you, operator, and good afternoon. By now everyone should have access to our second quarter 2020 earnings release. If not, it can be found at www.elpolloloco.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements. Including statements related to the impact of the COVID-19 pandemic on our business and strategic actions we are taking in response as well as our marketing initiatives, cash flow expectations, capital expenditure plan and plans for new store openings. 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-Q for the second quarter of 2020 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. Before I turn the call over to President and Chief Executive Officer, Bernard Acoca, I'd like to note that Bernard and I are, of course, in different locations today. Please bear with us if you experience any slight delays or minor audio quality issues. Bernard, please go ahead.

Thanks, Larry. Good afternoon, everyone, and thank you for joining us today. I hope that you and your families are staying safe and healthy. We're very pleased to be here today to discuss our second quarter results. As you know, the quarter began in the midst of the COVID-19 pandemic. And as you can imagine, our results reflect some formidable challenges. However, they also reflect a clear trend of momentum in our business, and I'm convinced that many of our actions over the last few months will serve our business well over the longer term. As I discussed on our last call, with the onset of the pandemic, we moved quickly to transform our business in accordance with state and local restrictions. We rapidly shifted our operational focus to drive-thrus were available, take out, mobile pickup and delivery. At the same time, we have worked tirelessly to implement or update multiple procedures in order to protect our employees, our franchisees and our customers. Make no mistake, our approach from the beginning has been to ensure that we not only weather this storm, but also continue to differentiate our brand and be a source of comfort and reassurance during these stressful times. I'm proud that our actions and priorities have supported our employees, franchisees, customers and communities in which we do business while also delivering solid and improving financial results. Overall system comparable restaurant sales were negative 9.7% in the second quarter. However, we experienced accelerating and consistent comparable restaurant sales momentum throughout the quarter. April was our most challenging month with system-wide comps decreasing negative 26%. However, we recovered significantly in May, posting a decline of only negative 6.3% and delivered positive comps in June of plus 0.6%. Additionally, I'm happy to report continued progress in July, with third quarter-to-date…

Thanks, Bernard. As discussed last quarter, one of our priorities during the COVID-19 pandemic has been to augment our liquidity. And as a cautionary measure, we fully drew down our $150 million revolving credit facility, adding $34.5 million of cash to our balance sheet. During the second quarter, we generated cash from our operations. And as of June 24, 2020, we had $60.3 million in cash and equivalents and $138.8 million in debt outstanding. We continue to be cash flow positive and expect to pay down a substantial portion of our debt in August provided there is no significant deterioration in market conditions. Before we get into our second quarter results, I'd first like to provide an update on our store development. During the quarter, we opened one new company-operated restaurant in Las Vegas and two franchise restaurants, one in Tucson, Arizona and the other in Southern California. As a reminder, we have temporarily halted company-operated new unit development and remodel activity, and as a result, do not expect any additional new company-owned or franchise restaurants in 2020. We're also pushing ahead with our new asset design, which better exemplifies and communicates our L.A. Mex positioning. At the moment, we expect to remodel 2 restaurants in the fourth quarter using the new design, which will then be used for all new builds in our next round of remodels in 2021. Now on to our financial results. For the second quarter ended June 24, 2020, total revenue was $99.6 million compared to $113.7 million in the second quarter of 2019. Company-operated restaurant revenue was $87.7 million compared to $100.1 million in the same period last year. The decline in company-operated restaurant sales was driven by an 8.5% decrease in company-operated comparable restaurant sales, which we believe was largely a result of…

[Operator Instructions]. Our first question comes from the line of Jack Corrigan with SunTrust Robinson Humphrey.

First, just a quick bookkeeping question. Can you disclose what the system-wide sales were in the quarter? And then can you talk about the impact you've seen from reclosing dining rooms in California? Is there any divergence in the sales trends in those markets versus any of your other markets?

Yes. So first of all, the system sales for the quarter were $203.3 million, so 2-0-3 point 3 million dollars. And then in terms of -- and in terms of the closures and the impact on comp sales, I mean, they have a really minor impact. Obviously, if you have to close the restaurant during the day, it lines up versus prior year, there'll be minor impact. I can't say as of yet we've seen any impact in terms of the comp sales when we reopen a restaurant. So far, they seem to reopen at roughly the same sales levels. That's certainly something we keep an eye on as we move forward.

And just to be clear on that point, almost all our dining rooms are closed, virtually all of them beyond just California.

Okay. What would the kind of the trigger point be for reopening dining rooms? And what do you think that would do to your margins at that point?

Well, I think there's a couple of trigger points. One is I think you have to have at least 50% capacity allowance. I don't think it makes sense to open up at anything less than that. The other thing is we'll look to see -- but we estimate you probably need somewhere around a 2% to 2.5% comp lift when you open a dining room to achieve breakeven. So that's something we watch. And certainly, the first time around, when we reopened dining rooms, we did feel like we were seeing a comp lift from that. But of course, now as Bernard highlighted, most of our dining rooms are now closed. I think Houston is the only market where they're still open.

Our next question comes from the line of Andy Barish with Jefferies.

Just a quick follow-up on that. Bernard, you talked about a little California weakness kind of late in the month of July. Is that all associated with this? Or is there something else you want to point to?

Yes. So last 7 to 10 days of the month, we started to see a bit of a softening trend in -- primarily the Los Angeles Orange County area, particularly the Los -- the core Los Angeles area. It's tough to say at this point whether it's going to be a trend or not. It's too soon to tell. But we do think that it is related to higher level of COVID cases naturally occurring in that part of the world. And then if I look at other macro factors, unemployment in that part of the world is at 19.5%, which is nearly double that of the national average. So we think those 2 things might we having an effect, but it's, again, too soon to tell.

Got you. And then on the impressive margin performance, for the time being, as you kind of have gotten back to previous average unit volumes or close to, are these large and sustainable? I mean they're basically at levels we've seen in the past.

Yes. Andy, I mean, first of all, let me step back and talk about what kind of really drove the second quarter margin performance. And then I'll talk a little bit more what we're thinking, balance of the year, although it's obviously very, very hard to tell. But in the second quarter, really what drove the great margin performance was, one, obviously, we've got some great leverage from the pricing we took, especially on our food costs. And then the other, we saw was really strong labor efficiencies. A large part of it was driven by the fact that you have low transactions in high check, and we have a labor model based on transaction, so that really helped the flow-through on that. But I also, I have to say, it's easy to say the model works that way, but the operators did a fantastic job of really managing labor to the tables that we use, they managed labor in what were really challenging times. So those were probably the 2 big factors that really drove the strong margins during the second quarter. And as I look out balance of year, it's very, very difficult to tell what's going to happen and how does that check versus transaction mix change. But I do caution, that's why I put it in my opening comments was, I do look at -- see some cost that will increase balance of the year. One is if transactions, and I would hope that transaction would come back and drive more of the growth back half of the year versus check, that will add some labor to our model. Some of the personal protection equipment costs, those will be there. If we open dining rooms, there's potential for some extra cost. I'm not sure if they're going to be extra cost. So I don't want to say that the current margins will flow through for the full year because I do think there are some costs that will come into play back half of the year that could have a slight downside impact on margins. Having said that, I still do expect that the operators and some of the benefits that we've gotten through this crisis will continue, especially around the food cost management, and some of the benefits that we've seen from closing the dining room, closing salsa bars and those things. So I do think that some of those will continue on, but I do think there's going to be some cost pressures back half of the year. And also don't forget that we did have the L.A. minimum wage increase in July. That will also have an impact back half of the year. And of course, a lot of that will play on how much pricing we decide to take in Q3 or Q4, which we're currently looking at and how much we think we can take given the current market conditions.

And then just one final one. What did the tests on curbside show you to kind of move forward on that and roll it out? And how much -- what percentage of the company-owned stores or system is able to do curbside?

We're still in the midst of evaluating all of that. But we feel good enough about how to incorporate this technology pretty seamlessly in our existing app by partnering with the company, a technology partner called Radius Networks, who does this for a broad array of companies in our industry. We're hoping that we will penetrate the vast majority of restaurants throughout the system with this initiative. Given that it's part of our app experience, it will be a mandatory program where it can be accommodated. And it dovetails very, very nicely with our Loco Rewards relaunch in September, and the refresh of the app that comes along with that will naturally also include curbside service, which is a GPS-enabled program. So we're feeling optimistic about it. We still have some things to figure out between now and then. But given that it is a pretty prevalent technology throughout the industry, we're leaning in a little bit prior to the holidays to launch it in September.

Our next question comes from the line of Matt DiFrisco with Guggenheim.

Could you just talk about how much -- well, how much was delivery? I heard you say it tripled or doubled since the start of COVID. What is it as a percent of sales now?

So all digital e-commerce sales are slightly above 9%. If you take a look at delivery, it's a little bit above 6%.

So 3/4 or so of your digital is delivery, and it's 6%. And then where -- Larry, where do we find on the income statement the lion's share of the expense of the free delivery? I'm assuming you're bearing the cost of that. Would that be in other operating expenses in the restaurant line?

Yes.

But on that free delivery program, to be clear, unlike other brands in the industry that pay their third-party marketplace partners for free delivery, what I want to communicate here is that we actually entered a very unique deal with Postmates in this regard, where on behalf of our system, we entered an agreement where we technically don't pay for it in a traditional sense. We bartered our media to be able to provide free delivery for the length of time that we have. And we do it in such a way where we go deeper than brands typically do in this space by really doing more than just slapping on a third-party delivery logo on to our communications. We actually had, throughout the quarter, a dedicated television spot that showed a Postmates delivery driver doing a contactless delivery in the commercial itself. We go deeper with our delivery partners where they feel that what we're able to do is humanize the transaction for them in a way that they don't typically get from other partners, and so they're willing to go and do more for us in that regard. So in terms of paying for free delivery in a traditional sense, we haven't done that.

Just to clarify, though, that the percent of check that is normally charged, even on free delivery, that is a cost that we incur, and that is on the other operating expense line.

Is there an offset in marketing? Is the franchise ad fund contributing and offsetting that? Or are you spending that franchise ad fund on traditional advertising?

It's not an incremental expense to the ad fund. It's what we would have spent regardless.

Okay. And then I'm sorry if you answered this in the last question about the curbside, but did you say how many -- would 100% of your stores be getting, in theory, curbside even though it's with drive-thru? Or are you going to limit it only to those without drive-thru?

No, we are going to try to put it in as many stores as we reasonably can. Naturally, there's sometimes some landlord restriction issues and things of that nature, but we think we can get it in many stores throughout the entire system.

And then my last clarification. 3% July, but then you said, but you have seen some L.A. headwinds since some reclosures have happened. So are you still positive in July even as the most recent weekly data with L.A. sort of at its apex of reclosing?

So, you've got -- go ahead, Larry.

I was going to say, so the approximately 3% or in the earnings release, we -- 2.8%. That is basically quarter-to-date, which is mostly July and a little bit of June.

Okay. So it does include L.A.? Okay, with the closing?

Yes. Yes.

[Operator Instructions]. Our next question comes from the line of Mary Hodes with Baird & Company.

This is Drew North on for Mary. Can you just discuss how you're thinking about the unit development outlook on the other side of pandemic in what seems like it could be a more favorable real estate environment? Do you think you'll be able to resume or even accelerate growth in 2021? And has the pandemic changed your real estate strategy at all?

Yes. So I would say in terms of changing strategy, a couple of things. One is, as we've highlighted before, we are relooking at the new asset design. As you recall, go back in earlier calls, we are working on new asset design. With the outbreak of the COVID-19, we are relooking at it and looking to make, what I would call, some tweaks. Probably in terms of a trade-off between dining room and we're emphasizing all the areas off-premise options, such as the drive-thru, takeout and those things. So we are relooking at the design. And as I highlighted, in terms of the remodel program, we are targeting to get at least 2 remodels with this new design in the fourth quarter. So we have a good read on it and then move into 2021 with this new design, which will be used in both remodels and new builds. In terms of the overall development strategy, really haven't changed that much. Obviously, we put things on hold for now. This year, we had, call it, one company and a couple of franchise restaurants that are in process, so those got completed and opened. Don't expect anything back half of this year. But then moving into next year, we'd love to get back to a more normalized schedule, which would be an acceleration from what it was in 2019. In terms of real estate, I think I've highlighted before, it's still not clear whether or not, for those looking for drive-thru, is whether we'll really see a lot of great real estate deals or more become available. Because I think when you look at the marketplace, you see that drive-thrus have done well, and a lot of people are going to be looking for drive-thrus. So I don't think that part is going to change that much. I think, for me, one of the questions is, the big opportunities might be in lines, but do you want to go with in lines given the reemphasis on off-premise consumption. So that's something we'll have to weigh. But I don't expect to see drive-thru pads become more available because of COVID-19 because I think a lot of people will be looking for drive-thrus, which they always have been. So I just don't think that's going to change that much. So I don't see real estate availability being a big win for us going forward.

Okay. And then are you willing to quantify how much debt you're planning to pay down in August if nothing changes in the current environment?

Well, we're still talking about it. I guess I'd just highlight the fact that we've got $60 million of debt as of the end of the quarter. We continued -- $60 million cash. We continue to build cash at this time. So I think we'll look to keep a certain minimum amount of cash, probably a little bit more than we used to keep just to make absolutely sure or get through this thing. But if you do the fact that we'll be -- we'll probably be in the mid-60s in cash and want to keep just a little bit more than we used to. You can, I think, figure out how much we'll look to pay down in August. Again, assuming that the market conditions remain pretty stable.

Our next question comes from the line of Todd Brooks with CL King & Associates.

Congrats on a nice quarter in a tough environment. You spoke earlier in the call, Bernard, about value being one of the pillars and the promo timing around the $5 Fire-Grilled Combo was well timed. Can you talk about the success of the program? Do we get back to kind of the incidences that we saw last fall of kind of that 8% to 10% of sales? Just any early reads on the success of promoting value with that program specifically?

Yes. So we think, naturally, given the environment that discretionary income is tightening up a bit. So naturally, this offer has more relevance now than maybe it even did a year ago when we launched it. When we launched it last year, naturally, it had the benefit of a full promotional effort behind it. It was the headline of the -- that promotional window. And because of the strength of and the media effort that we put behind that, we sustained a very high mix of, let's call it, 8% to 10%. In any given week, it's probably averaged at around 9-ish or so. Lately, we've seen a mix lift on that program since we returned to it. It was probably trending somewhere around, let's call it, 6% or 7%. And now we see it more consistently delivering closer to 7% or 8%, which is actually, quite frankly, what we want to see. Because this time around, if I take a look at our sales mix across our entire portfolio, it's a lot more balanced. So naturally, this isn't leading to check degradation in the same way than it was, say, a year ago. So right now we're, happy with where it is. We still think we can get more mileage out of it by putting a little bit more emphasis behind it, certainly in a market like L.A., where I think discretionary income is probably tightening up a bit more. So we're quite -- we're very pleased with where it's coming in. But to put a finer point on your question, it's probably gone up in mix by about, I'd say, any 1 to 2 points since we relaunched it.

Okay. Great. And then just dovetailing on what you said in the comments there, but also touching on the unemployment rates in L.A. County. Just thoughts of what you're watching as far as stimulus rolling off, especially the enhanced unemployment benefits and anything that you're doing promotionally to drive any further value messaging in the face of that? Or just, I guess what are you guys watching for? And what do you have ready to react to it if it is a bigger issue of kind of a spending drop off or a drop in ticket when some of the enhanced benefits roll off at the end of the month?

Well, I mean, I think we'll always evaluate the situation, determine if there's something we need to tweak or optimize on the fly. But to be honest with you, I think we feel really, really good about the fact that we haven't really had to change strategies because very early on in this pandemic, the 5 strategies that I talked about, we really assiduously worked on to put in place and then execute with excellence across the system, particularly in L.A. So drive-thru capacity becomes super important. The fact that we've now extended free delivery between now and the end of the calendar year becomes -- with Postmates becomes super important. We're going to probably dial up some of the media weight in L.A. against $5 combos some more, give it a little bit more of the allocation to make sure that message is getting across and resonating with our customers a bit more strongly. Things of that nature, we'll continue to refine and tweak. I don't think you'll see us do any kind of massive wholesale changes in the short term because, quite frankly, we don't feel like we've had to do that. But the situation is so incredibly fluid. You got to really -- I used to say, you could look at these things month-to-month. You got to really look at it almost week-to-week and really figure out how to optimize given the changing landscape. But we really feel good about the strategies we currently have in place. So I don't expect any massive change, if you will.

Okay. Great. And a final one for me. You talked about two of the new remodels opening in the fourth quarter. You had a full quarter of experience here, really optimizing off-premise because of the real requirement to do it based on the environment. And you touched on maybe some equipment solutions that are going to be implemented to help either enhance or maintain the efficiencies that you've generated. I guess now that we're moving forward with the 2 remodels, this is more of a remodel question versus new unit question. But what did we learn over the course of the quarter that really you're excited to be baking into the remodel and thankful that they hadn't been rolled out a couple of quarters ago instead?

Yes. I mean I think we're going to naturally take a very hard look as to what digital e-commerce looks like in terms of it being a seamless experience from the end-to-end customer journey. And so I think what you'll probably see -- we're still tweaking and refining this as we go. Because to your point, it was a little bit of a reset. We'll put more prominence behind digital pickup. Naturally, curbside will now factor into this. I think we've learned quite a bit about menu board placement in the drive-thru to get a maximum number of cars through the drive-thru. So that menu board needs to come up earlier in the stack in order to maximize drive-thru capacity. In terms of seating, I think we're going to naturally, like I'm sure many others in the industry, become a little bit less dependent on dine-in seats with more of the business we anticipate going off-premise. So we'll continue looking at the model and figuring out how we can tweak and refine it to reflect the new realities of how the business has changed today. But again, to put a fine point on it, I think you'll see much -- a sharper focus on off-premise and the digitization of our business as it pertains to delivery and digital mobile order pick up.

The only thing I'd add to that is it's not just the outside of the restaurant and the lobby of the restaurant, it's also the back of house. And we're looking at the back of house knowing that off-premise is going to get more emphasis than the dining room and even take-out was getting before. So it's really looking at the back of house, especially around the drive-thru, to make sure that we maximize the throughput to the drive-thru, both from the outside and the driving lane but also inside in the back of house with food preparation and have it ready to go as customers come to the window, so we can move through faster.

Our next question is a follow-up from Matt DiFrisco with Guggenheim.

Just a quick one with respect to the franchisees. Have you -- can you give us a comment on how many of them got PPP aid, and then in the context of how are their cash flow margins? Or are there any ones that might be at risk or might need some further assistance or asking for an abatement or a further deferral of payments?

No. I mean I really don't know how many of them actually got the PPE loans. I don't think that's something we've gone and asked them about. I will say in terms of their financial health, obviously, we have not offered any more royalty abatements or deferrals. Their health should be very, very strong. I mean they've seen comp -- their sales number are very comparable to ours. And so everything we hear and see is that the franchisees are healthy and in pretty good shape at this point.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Acoca for any closing remarks.

Well, I just want to thank everyone for joining us today. I hope you and your families stay safe and healthy, and we look forward to speaking to you very soon. Be well.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.