Good day, ladies and gentlemen and thank you for standing by. Welcome to the El Pollo Loco Third 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. Please note, that this conference is being recorded today, November 4th, 2021. And now, I would like to turn the conference over to Larry Roberts, Interim Chief Executive Officer and Chief Financial Officer.

Thank you, operator and good afternoon. By now, everyone should have accessed to our third 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 discussion 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 plans and plans 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 third quarter of 2021 tomorrow and 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 go into the quarterly results, I’d like to quickly touch on the recent announcement of our CEO transition. On behalf of everyone at El Pollo Loco, I would like to thank Bernard Acoca for his valuable contributions to the company. As you know, during Bernard’s tenure as CEO, our team developed a culture predicated on servant-led…

Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Andy Barish with Jefferies. Please proceed.

Hey, Larry. Just a couple of quick things. On the negative mix that you’re seeing, you know is that just the dining room reopening more kind of individual transactions? Or is there anything else to read into as we look at that check average versus pricing component?

Yeah. And I’m not a 100% sure what you’re getting at. But what we’ve seen around check is, obviously, we’ve got the pricing and we’re also seeing more items for check, which is you know continue to drive a check. And again, you know we always thought that the average check would start coming down in negative by this time after lapping COVID, but just staying positive as a reflection of, again, a little bit more favorable mix than we expected in family meals and then we’ve got the pricing. And like I said, we’re also seeing more items per transaction, you know, all of which are keeping the check up relative to where we thought it would be, given what we’re lapping last year.

Okay. And then, just I assume the margin base for the third quarter is the 17.2% that you’re kind of looking off of to you know to see pressure in the fourth quarter. Am I thinking about that correctly?

That’s correct. Yes.

Excellent. Okay. I’ll pass it on if anybody else has some questions. Thanks.

Thank you.

Thank you. Our next question is from Jack Corrigan with Truist Securities. Please proceed.

Hey, Larry. Thanks for taking my question. First, can I just ask about you know commodity inflation and what that implies that the fourth quarter would be just as along the same page, is that –

Yeah. So you know fourth quarter commodity inflation is probably in a range of 8% to 8.5% is what we’re seeing. That’s really driven across the Board, a number of the commodities, probably packaging is the one that has been a little bit more surprising than we thought. And part of that inflation in packaging is, I mean, you had the core inflation around just the makeup of packaging, but we’re also continuing to see you know packaging held up in the port. So we’re having to outsource additional different packaging, which is causing some of those increases in the packaging costs.

Great, that’s helpful. And then I guess in terms of current sales trends and the labor environment, do you think that you know the labor situation has been the primary driver to you know the decelerating trends that you’re seeing? Is there anything on the consumer demand side that you think is impacting that as well? And I guess do you think that the labor has peaked, to say in terms of your problems with the labor environment –

Yeah, let me give a little more –

Do you think getting better from here?

Yeah. Let me give you a little more detail about the labor situation that we’re seeing. I mean first of all, I mean, it’s not across all of our restaurants. And as we dig into it, there is a number of restaurants that are you know more significantly impacted by the staffing challenges. So those are the ones we are really focused on right now, and we put together project teams and operations within investments in terms of adding more people to really support those restaurants that have really significant staffing changes. And again, it’s not all the restaurants, it’s probably you know 15% to 20% of our restaurants where we’re seeing it, many of which are actually east of LA that tends to be – we’re seeing more staffing challenges. So I just want to clarify, it’s not entirely across the entire business. It’s really a group of restaurants that are most significantly impacted that we’re really, really focused on. And those are the ones that we’re seeing the comp sales shortfall certainly relative to the balance so. And then when we break it down, we’re pretty sure right now we’re not seeing a consumer pushback on the brand. Number one is, you’re seeing the franchisees continue to drive strong transactions and strong comp sales. If you break out the restaurants from those that are having the most significant staffing challenges to those that aren’t, again, there’s a big difference. Those that have not had a bad staffing challenges they continue to be very positive in sales, you know positive in transactions, I mean not insignificantly positive in transactions. And so that’s why we really feel like this is a staffing challenge – and more importantly, a retention challenge and that’s why we continue to put more and more emphasis and programs against solving that issue. We get that issue solved. Our comp sales will be you know right back more in line with where we have been with franchisees, and it will take care of itself. So that is the big focus. Again, just to reiterate, it’s a group of restaurants that are most significantly impacted outside of that from a consumer perspective, you know things are still looking very positive.

Great. That’s really helpful. And then just one last one on development in the stores you know pushed off into ‘22. Do you expect those to open in the first quarter or first half of ‘22? Is there – are they pretty much ready to go? Or there’s just you know one or two key pieces of equipment missing? Or you know what’s kind of the status of those that have been pushed off?

Well, it’s a mixture of two things, really it’s working through the permitting or its equipment being delayed. Either way, the expectation would be that both the company and franchise restaurants would get built the first half of next year.

Great. That’s it from me. Thanks.

Our next question is from Drew North with Baird. Please proceed.

Thanks for taking the question. Larry, you touched on this a bit in your prepared remarks, but I thought to ask if you see any changes in the company’s strategy or near-term priorities as you take over that company?

Yeah. I mean, as I said in the call, I mean the strategy stays the same in terms of focus on the acceleration agenda. Obviously, the current market conditions are requiring us to shift the focus and put actually more focus on exactly what I talked about earlier, which was around the operations, you know we need to resolve the staffing retention challenges that we have in these restaurants that are challenged right now. And I believe also the big push needs to be around simplifying the operations. Again, we’ve done things over the last couple of years that have helped. But I really believe that going forward, with the environment we’re likely to see at least through most of next year and maybe in the future, that we have a lot more we can be doing to make it easier to execute in the restaurants so that it’s easier to retain employees and potentially free up labor in the restaurants that focus on customers rather than you know doing some of the things we’re doing today in the restaurants. So, I think on top of the acceleration agenda, those are the two big things right now that we are really, really focused on.

That’s helpful. And on the staffing challenges, I guess, is there a way to frame up where you are today in your company restaurants versus optimal levels? And are you seeing any initial signs that your initiatives are working around hiring and retaining employees?

Yeah. And you know I thought about in my opening remarks talking about that a bit. But we’re again early into – we’re about three weeks into it, we are seeing positive signs. We are seeing various restaurants you know get up the staffing level that need to be at. We are seeing some restaurants, turn around their comp sales and getting back to you know certainly less negative, even positive. So we are seeing some early success. But in my view is, you know that’s nice, but you got to keep that focus and see that sustained. So that’s what we’re focused on. So yes, we are seeing progress. You know we’re reporting on every single week on those, and I have calls every week to go through with the team. Where we are, what the progress is. So we do feel very good about it. We’ll work on the right things. We’re seeing the progress in those restaurants. But again, we need to sustain that over time. We still have ways to go. I mean in those restaurants, we’re still short in probably several hundred staff members you know that’s across our business. But again, a lot of that will be in the short of staff restaurants that I talked about.

And then I was hoping to squeeze one more in on Q4. You spoke about the margin pressure sequentially versus Q3. But can you give us a ballpark estimate on maybe where you would expect Q4 restaurant level margins given the current sales and cost outlook? I mean, how much of the inflation or extra costs in Q4 do you think are temporary versus structural? And so then how could we think about that right annualized margin picture as we look into 2022?

Yeah. So as I go through it, I think a lot of it is going to be shorter-term in nature. I mean like shorter-term, I mean, I don’t know what the short-term and long-term is at this point, given supply chain challenges and everything else. But I think longer-term, a lot of this will work its way out. So on the supply chain side, I mean, almost all of the inflation should at some point come back to normal once supply chains get back to normal. Now and that is a great question, right. But there’s nothing there that says you know those are going to be long-term structural issues that they’ll never come back down to the levels they were before. You know the same with natural gas. And then labor, of course, you know as you’re adjusting rates and things that probably stays in the business longer-term, because it’s going to be very hard to take down wages. But I do think some of the other costs and labor we’re seeing around overtime you know meal break penalties and those types of things that are really staffing related, those should come down over time and get back to where they had been in the past. And so to offset maybe some of those structural issues, you know we will be relooking or obviously, we’re doing pricing, we’re looking at pricing. As we go into next year from a pricing perspective, it’s not just going to be probably across the Board price increases. But I think there’s more we can do around really getting target on certain menu items, limit-time offers. I think we can adjust the pricing on. I think we can look at other areas where you know we can reduce pricing maybe it’s discounting, we do some discounting. So it’s going to be a very targeted approach to how else you actually get some pricing without just doing across the Board menu price increases that you know we’ve oftentimes done in the past. In terms of fourth quarter margins, I mean, I just – there’s so many variables going on. I think what we’re seeing is, you know as Andy pointed out, you work off the 17.2 percentage point restaurant operating profit margin. And you know we’re indicating that we will come in below that given the inflationary pressures we’re seeing around commodities and then the labor costs and utilities. And then also, you know you can work in the comp sales, but it will be you know a bit below the 17.2%.

Understood. Thanks for the color.

[Operator Instructions] Our next question is from Sharon Zackfia with William Blair. Please proceed.

Hey, good afternoon. Larry, that labor impact at the company-owned locations you mentioned, is that kind of manifesting itself and throughput? I mean, is it just everything slower and so consumers are baulking at the drive-thru? Or how is that manifesting the sales?

A couple of areas, Sharon. One is, a number of these restaurants we’ve had to reduce the operating hours.

Yeah, that’s right. Okay.

Another group of restaurants, we’ve actually had to reduce the sales channels. The main one being is the go orders. We basically had to – you know we don’t have a front counter cashier, so we don’t have to go orders in a group of restaurants, which is you know not insignificant impact when you say 20% of your mix is basically to go inside the restaurant. And then the third element is, there are you know throughput challenges also.

Okay. And then you mentioned pricing in the last question. Can you remind us what kind of price you have right now in the menu? And I mean, would you be proactive in trying to fully insulate margins early in 2022 if this persist? I mean, how do we think about kind of how quickly you would pull the trigger on some of these dynamics?

Well, the first trigger we’re pulling here is about a week from now. We are going to take additional pricing here in a week or so. And that is going to take our Q4 pricing up to about 6.8%. And then that will roll into next year. And as we’re rolling that into next year, we’re also going to be looking at very quickly to at least have ready to go. I’m targeting that ready to go in January is, as I’ve talked about earlier, is some other areas where we can look at pricing on the menu, but more specifically, maybe around limit-time offer pricing. It may be that some of the deal offers what we do that we adjust the prices on those to bringing kind of more in line with where our menu prices are as a whole. So reduce the discount that were given. So there’s a number of things we’re going to be working on over the next couple of months to be ready to go early January where we can even take more effective pricing if we need to, depending on where commodities and labor are coming out as we enter 2022.

And I’m sorry if I missed this, but are you locked in at all on ‘21 on your commodities? And like if so, if you were re-upping for ‘22 today, like how much additional inflation would you be seeing?

There is going to be some additional inflation in 2022, mainly around the chicken contracts, right. I mean and so what gets hard to tell is, I’ve got – I know I have chicken price increases coming. But I expect some of the other commodities will come down like tomatoes, avocadoes and those things should come down as we get into 2022, because some of them are you know somewhat seasonally-driven. But even from Q4 you know we highlighted 8%, 8.5% commodity inflation in the fourth quarter. I expect that to be a little bit higher as we enter into 2022.

Okay, thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Larry Roberts for any closing remarks.

I’d just like to thank everybody for joining us today. Really appreciate it. And everybody, have a great night. Thank you.

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