Good day ladies and gentlemen and thank you for standing by. Welcome to the El Pollo Loco's Second Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the lines will be opened for your questions following the presentation. [Operator Instructions] Please note that this conference is being recorded today, August 5th, 2021. 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 2021 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're taking in response as well as our marketing initiatives, cash flow expectations, capital expenditure plan, and plan for new store openings among others. 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 currently expect. We refer you to our recent SEC filings including our Form 10-K 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 2021 tomorrow. I would 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 in different locations today. Please bear with us if you experience any slight delays or minor audio quality issues. Bernard, please go ahead.

Thank you, Larry. Good afternoon everyone and thank you for joining us today. We're very pleased with the continued sales recovery in both our Los Angeles and outer market restaurants during the second quarter, culminating in a 21% increase in system-wide comparable restaurant sales. On a two-year basis which I believe captures a more complete picture of our performance coming out of this pandemic, our system-wide comparable sales grew 14.8%. As mentioned in our previous earnings call, this was a quarter in which we achieved not only our number one 1 and number two highest sales volume days in company history with our National Burrito Day and Cinco de Mayo promotions respectively, but also achieved company comparable restaurant weekly average unit volumes of over $40,000 for 18 straight weeks, further highlighting the strength we're seeing in our business. With the further relaxation of restrictions, our positive sales trajectory has continued into the third quarter. Through July 28, our third quarter-to-date system comparable sales are up 10.6% and on a two-year basis, system comparable sales have increased 14.6%. From a profitability standpoint, despite some pressure on labor and food costs, we were able to leverage our increased sales and post a strong restaurant operating profit margin of 20.8% during the quarter and pro forma earnings per share of $0.29. Looking at our sales in a bit more detail, restaurants outside of Los Angeles continued their positive sales trajectory during the second quarter. In addition, I'm especially pleased to report that our LA market has strengthened since the lockdowns were lifted. In fact the gap and system comparable sales performance between our LA and outer market restaurants improved throughout the second quarter with LA System comp sales exceeding out our markets in June by 150 basis points. You may remember that we…

Thanks, Bernard. Let me start with a development update. During the second quarter no new company or franchise restaurants were opened. We successfully completed two company remodels using our new L.A. Mex design in Los Angeles. Looking ahead we expect to open two to three company-owned and four to six franchise restaurants during the back half of the year. All in all, we continue to expect our capital spending for 2021 to be in the range of $20 million to $25 million. Now on to our financial results. For the second quarter ended June 30, 2021, total revenue increased 22.5% to $122 million compared to $99.6 million in the second quarter of 2020. Company-operated restaurant revenue increased 22% to $107 million compared to $87.7 million in the same period last year. The increase in company-operated restaurant sales was primarily due to a 16.4% increase in company-operated comparable restaurant sales and an increase of $2.4 million in non-comparable restaurant sales. The increase in company-operated comparable restaurant sales was comprised of a 0.4% increase in average check and a 15.9% improvement in transactions. During the quarter, our gross pricing increase versus 2020 was 3.6%. As Bernard mentioned earlier, our sales momentum has continued into the third quarter. Through July 28, third quarter system-wide comparable restaurant sales increased 10.6% consisting of a 7.2% increase at company-owned restaurants and a 13.1% increase at franchise restaurants. Franchise revenue was $8.4 million during the second quarter compared to $6.7 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 24.5% as well as the opening of two new franchise restaurants during or subsequent to the second quarter of 2020. This was partially offset by the closure of three franchise restaurants during the same period. Turning to expenses. Food…

Thank you. [Operator Instructions] And we do have a question coming from the line of Jake Bartlett with Truist Securities. Please go ahead.

Hi, guys. It's actually Jack on for Jake. Thanks for taking the question and congrats on some strong results here. First, I just wanted to ask about current sales trends and what's really driving that. It's good to see the dine-in business coming back. But I think pre-COVID you were about 30% of your sales mix was dine-in. Do you see it getting back to that level, or you think the enhancements that you've made to your drive through and your digital platforms are -- are you really targeting something below that? And then I guess, the consumer who's coming back to dine in is that your core Hispanic consumers returning, or is some of the new consumers you've picked up during COVID?

Yes. So I think what we're seeing is the longer a market has been opened -- California was one of the last, if not the last open. Over time that dine-in business continues to get stronger and stronger. Will it return back to pre-COVID levels? Tough to say because I think some consumer behaviors have irrevocably changed given, how much they've gotten accustomed to the convenience of the off-premise side of the business. But what's interesting is that we're looking at this and it's -- while it's too early to tell, some of this dine-in business is now starting to look maybe a bit more incremental to the business than we previously had anticipated. So it's coming back albeit slowly. Will it come back to pre-COVID levels, tough to say. But right now we're just encouraged by the fact that it's a steady build.

Great. That's really helpful. And then I guess on your planned price increase in the second half do you -- would you get the details of, how much you think price you think you can take at this point, or are you still working on that?

We're still working through it. I would say, it's going to be somewhere in the range of the 2% to 3% range -- is what we're looking at. But again we still have a little work to do in terms of analyzing it and determining what the final price increase will be.

Great. Thanks. I’ll pass it along.

Thanks for the question.

Our next question comes from the line of Todd Brooks with C.L. King & Associates. Please proceed.

Hey good afternoon, and congrats on the momentum in the quarter.

Hey Todd.

Thanks Todd.

Couple quick questions. One if -- going back to that price increase question, what will you be running for price in late Q3, Q4? Do you stack the anticipated increase over what you're running right now?

Yeah. So Q3 would be -- again since we're still determining exactly the amount. These are rough numbers. But Q3 would be somewhere in the 4.5% range and then Q4 would be anywhere from -- it could be 4.5% to 5% in that range.

Okay. And then you talked about just some labor cost pressure in the back half of the year. I guess if you're looking at your inflationary cost inputs relative to the planned pricing increase. How much of the pressure you're looking to absorb? How do we think about how labor especially should be pressured in the back half of the year?

Yeah. So we're still looking at as I said in my opening remarks that the full year wage inflation number will be somewhere 4.5% to 5% range. That's just wage rates increased pay the impact that will have. But on top of that we've got the other impacts, which is around some of the things that Bernard highlighted in his section, extra training dollars some additional pay for key employees mainly shift supervisors would be the area where we think we need to boost the pay a little bit to be competitive with what's going on in the marketplace. And then as we highlighted we also have done a general manager stipend in which we're paying some extra pay to GMs who are managing our high-volume restaurants, which one is compensates them for that complexity but it also creates a great incentive for them to continue growing sales in those restaurants. So I guess I'd frame it up as you got your base wage inflation 4.5% to 5% and then you've got these additional costs in the business that we've invested in to attract and retain people.

Okay, great. And then a final one for me if I could. If you look at -- and Bernard you talked about some of your product focus activities here in the second quarter that were focused on existing products whether it was the $5 Fire-Grilled Combo or the Tostadas and finding a new way to market and make them relevant within the period. As you look to the second half, I mean, I guess, if we can talk about potential menu newness or new platforms that you're excited about. Or are you finding efficiencies with messaging against the existing menu that you feel like you can drive the same type of traffic lifts if you're successful on how you promote them and jump the awareness on them? Thanks.

Yeah, Todd. Yeah. So it's always a balance right? I think in the case of Tostada and $5 Combos, we were a bit deliberate in why we chose those. Well, I'd say it's a dual purpose. two reasons. One, we -- again as I mentioned in my opening comments through consumer research identified ways to present these in a fresh new way as being even more relevant to the customers that we're going after. That's one. But two we actually wanted to clear the decks a little bit for a period of time. In this case 16 straight weeks for our franchisees and our company operators because we saw where labor was going. We saw how challenging the environment was going to be. And so what we didn't want to do was add any more additional complexity in regards to training, new SKU what have you during a ready -- what is already a trying period of time for the entire restaurant industry. I think we have fared far better than most. Hence you see it in our sales. And I think relatively minimal disruption to our business. And so I think it was a smart move in that regard. Now with that being said, looking to the fall being a little bit more bullish and optimistic that the macro environment is going to improve a bit. We're turning back to new product news for the balance of the year. And so I'm extremely excited about what we have in the pipeline and can't wait to be very candid with you to launch some very exciting products starting in this September.

That's great. Super helpful. And it makes a ton of sense with the labor challenges for why you focused on that, so thank you and continued good luck.

Thanks Todd.

Our next question comes from the line of Drew North with Baird. Please proceed.

Great. Thanks for taking the question. I wanted to ask about the recent sales momentum in a slightly different way to see if we can get some perspective there. Wondering if management thinks that what you're seeing today in July or in Q3 is a new run rate for the business in terms of the absolute volumes, or if it's depressed in any way due to the pandemic or inflated I guess by any macro or company specific factors. Any perspective from a high level that you could provide would be helpful as we think about the second half?

Yeah. I mean I think that's why we're really focusing in on our two-year comps and how strong those have been is to, kind of, maybe take out some of the noise from last year. I think we're very bullish on our sales momentum and the growth drivers we have in place to continue to sustain strong positive same-store sales growth for the balance of the year. We're growing this business through transactions. The nice thing is even though we had huge check lift last year, we're still seeing check growth albeit not what we used to see. But we're really encouraged by the trends the sales trends that we've been seeing particularly on a two-year front. And so that coupled with what I just mentioned in terms of really marketing working in conjunction with our franchisees and our company operating team to drive these strong results. There's been a lot of nice growth levers in the business. I mentioned in my opening comments around what we're seeing with the strength of delivery, which we believe is incremental. What we're seeing with loyalty. And last year and in the last earnings call I talked pretty consistently about how our loyalty program is doing a very nice job of driving incremental average check compared to people who weren't enrolled in our loyalty program. The thing that we're starting to see now to complement that is incremental frequency of visitation or transactions. And that's super encouraging because that was something that was alluding us a bit in 2020. We think the noise naturally of what was going on with COVID made that hard to achieve. But now that the momentum in our business has returned that higher average check lift and now starting to see this increase in frequency of visitation with the loyalty program gives us a lot of optimism. So I think we can continue to deliver very strong sales growth for the balance of the year.

The one thing I'd add is -- just to give a little more detail on that is if you look through the monthly numbers April, May, June, July the two-year comps have been very consistent. That really within a range of one to two percentage points, through the entire time. So just I think further highlights, the consistency we're seeing in the business, as we move into the third quarter.

Great. That's helpful. And Larry did you mention that Q3 restaurant-level margin could be 250 basis points to 300 basis points lower in Q3 than Q2? And if that's the case, how should we think about, the Q4 margin? Do you expect it to pick backup a bit, as that price increase takes hold? And then, just maybe higher level, how are you thinking about the longer-term margin, that you'd like to deliver?

Let me just give you a little perspective on Q3 relative to Q2. And that is normally in the business, if you go back historically, you'll see that Q3 margins are generally below Q2, I mean almost every year they are. And there's a reason for that. Because although the sales volumes will be roughly the same, what you see is, a much higher cost utilities in the third quarter, because it's the summer months. And so you have higher electricity and gas usage, across the business. And then, we always have wage rate increases basically end of June, our merit increases in our restaurants, our restaurant managers, increases, so you need to see also that pressure. So you almost always see Q3 margins, lower than Q2. And then, we've got the other impact on top of that, kind of driving the balance which is around the packaging investment that we made, that we rolled out in the second quarter. And I'd just highlight that, allowed us to get to completely out of Styrofoam in our business which we think is a critical long-term investment. We've got the labor investments that I highlighted earlier and Bernard highlighted in the call. And then, we did see commodity inflation pickup at the end of Q2. And really around chicken prices, because we had to go outside our contract to source some chicken. Now I think that -- I'm cautiously optimistic that, that will go away overtime as our suppliers get back up to their capacity -- their full capacities to produce the chicken products that we use. So that's just the third quarter and an overview of what's driving that. I mean, the reason why we didn't give full year guidance or even fourth quarter guidance is I think it's really challenging right now to provide that giving all the moving -- things moving in the business around the labor challenges, and the supply chain challenges. So there's some gives and takes on that, which leaves us not real sure where the fourth quarter is. I mean, there are some things I think will be alleviated like, overtime pay and like I said commodity inflation. You do have lower volumes in the fourth quarter, so you do get less sales leverage in the fourth quarter. So I think it's just a little early to make a call on the fourth quarter and the full year, as we work through the labor and supply chain challenges, we have right now. But hopefully a little more flavor on Q3 thing gives you, what's going on in the business. And again, some of that will continue in the fourth quarter. Some of it hopefully will not.

Great. Thank you. I'll pass it on.

[Operator Instructions] Our next question comes from Sharon Zackfia with William Blair. Please go ahead.

Hi. Good afternoon. I wanted to ask about, California, since it's recently been completely open. Is that a market where you're seeing it build week-to-week, at this point?

Yeah. I mean, I think, as we've indicated, Sharon, you remember this story all too well. We used to have this kind of tale of two cities in our business throughout 2020. That carried into a little bit of Q1. And what we said was, once we kind of put COVID behind in our rearview mirror, we expect LA not only to come back, but to come back really, really strong -- strongly. And I think we've seen that in the second quarter. LA restaurants, started to outpace, the outer market restaurants which had fared well ever since July of 2020. And so to see LA come back as strongly as it has, is very, very encouraging. And that's our bread and butter business. And if that's not strong, vibrant and healthy the business is just off in general. So we're very, very pleased to see that come back as strongly as it has.

And I know the comp performance throughout the pandemic has been led by ticket until this quarter. But I think traffic is still below pre-pandemic levels. I'm curious, -- I'm sure part of that is just the shift to off premises. And I know more people per ticket. But I'm curious if you were able to lower your labor hours per restaurant, because you were being driven by ticket? And whether there's more incremental hiring per unit that needs to happen as transactions start to come back up again?

Yeah. So, I mean, when you look year-over-year, as you saw -- as you highlighted, I mean, this quarter we saw a lot of sales growth driven by transactions, which of course in our labor model means, there's more labor which is one of the drivers of year-over-year labor costs. So that -- and so as they move through the balance of the year, transactions are you're correct are still a good level below where they were two years ago. So we would expect that we'll continue having to bring more labor run more labor hours, as that sales growth continues as long as it's transaction driven.

Maybe a different way to ask the question is, I mean, where are labor hours today, like as a percent of 2019? And do they have to come all the way back, or have you learned new efficiencies where you can do the transactions per unit of 2019, but do it in a more efficient way?

Yeah. I'll be honest with you. I'm not sure where labor hours are today relative to 2020. I know that the trend -- or 2019. I know that the transactions are still I think around 10% or so below, where they were two years ago. So roughly, you'd say, -- it's probably roughly the same in terms of labor hours, right?

Okay.

As those come back -- have we found ways to be more efficient? I don't think so. I think the reality is that, as those transactions come back we want to provide great service. And so at this time, I would expect that we'd stay with our labor model. And add the hours as transactions come back, assuming they come back to the levels that they were a couple of years ago.

Okay. Thank you very much.

Mr. Acoca, there are no further questions at this time. I'll turn the call back to you for closing remarks.

Okay. Well thanks again everyone for joining us today. And continue to stay safe. And have a good evening.

That does conclude the conference call for today. We thank you once again for your participation. And ask that you please disconnect your lines.