Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco First Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and lines will be opened for your questions following the presentation. Please note that this conference is being recorded today, May 4, 2022. And now, I'd like to turn the conference over to Larry Roberts, Chief Executive Officer, Interim Chief Financial Officer. Please proceed.

Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2022 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 first quarter of 2022, 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'd like to touch on our first quarter results and the progress we are making on our strategic initiatives. While the COVID resurgence heavily impacted our restaurant performance in January and early February, I'm pleased to say that the Omicron impact largely dissipated and became negligible in the second half of the quarter. System-wide comparable restaurant…

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Jake Bartlett with Truist Securities. Please proceed.

Great. Thanks for taking the question. And congrats, Larry, on the recent improvements. It's great to see in sales.

Thanks.

My first question is, it's -- you mentioned excitement and how much the beef, kind of, beef promotion has helped. Do you attribute all the increased improvement to that, or to what degree did increase staffing, your ability to staff the restaurants and operate full hours contribute to that increase, do you think?

I think that may have helped a little bit, Jake. I do think though we really saw a big inflection point with launch of Birria. We've been seeing steady, I'll call it, comp sales improvement through late February, early March, a pretty consistent basis. But then the launch of the Birria product with the marketing issues, really, you just saw, again, an inflection point where really accelerated to the point where we're seeing obviously high comp sales, and as I highlighted, record sales across the company, the franchisees in the system for three straight weeks. So that product launch, again, we are seeing improvements, but that product launch really accelerate that improvement.

Great. Great. That's good to hear. The next question is on the differential between average weekly -- or the same-store sales between the company and the franchise. And it sounded in your comments like you attribute a lot of that differential to operations and the franchisees just running better operations. The question is, is that true? I mean, is that how you're looking at it now that really is the operations is the opportunity to close that gap, or I think historically over the last year or two, you've talked about the company stores being more impacted by labor shortages, just given where your -- you have the stores. So, I'm wondering if you can differentiate or just disaggregate the impact of the pace of operations, the quality of operations versus just being in stores that are hindered by staffing more?

Sure. Yes. So, let me first start by saying a huge shout out to our franchisees and our franchise system. I mean, they have done really a phenomenal job of operating throughout COVID and throughout the current economic challenges. I mean when you look at the ops metrics or the key ops metrics, they continue to operate and throughout they've operated at really high levels of execution. So, a real shout to our franchisees. And we have a number of company restaurants operating at really high levels. But when I step back and look at the business and you see the sales gap between company and franchise, in general, it's entirely driven by transactions. So, for example, I think the first quarter, as I highlighted, we were down 3.5% transactions, franchisees were plus 5%. And the franchisees has been consistently around 5% transaction growth, while we have generally been negative. So, that immediately points to the execution in a number of our restaurants that is creating that gap. Now, I will say a number of our company restaurants, especially, as I highlight in the call in Vegas, and I'll call it the East of LA, Inland Empire, the Desert area, they are the most staffing challenged. And we have a little bit more exposure in those markets and franchisees, but -- and so that's what we're really focused on. But again, I just look at the way the franchisees have reacted. And remember, our franchisees tend to be small to midsize. And so when I look at it and I talk to the franchisees, I think the thing that stands out to me is they have been able -- they react very, very quickly to what's going on in the economic environment. So, they need to make changes quickly, they…

Sure. Great, thank you so much. I appreciate it.

Our next question comes from Andy Barish with Jefferies. Please proceed.

Hey Larry, just trying to kind of level set on some of the margin commentary. Obviously, there's about 250 basis points of COVID stuff in the first quarter, but then, you kind of left the quarter, as you mentioned, doing about 14% in March. I mean, is that kind of a good run rate on restaurant level margins. Again, taking into account some of what you just went through in terms of some incremental costs from retention and training and wages and things like that. How should we kind of level set on restaurant level margins here?

Yeah. If I look at the balance of the year and the things we have in place, especially on the pricing and some of the cost reduction things we're working on. I think March is a starting point, but I expect to see a gradual improvement in margins, through the end of the year. Starting out March, I'll call that, mid-teens. Again, I would expect to improve every quarter and get, call it, the mid- I call it, the mid upper teens by the end of the year.

Great, thanks, very helpful. And I guess on the learnings from Birria, I mean, it sounds like the consumer certainly associated a crazy chicken chain with beef for the last month or so. So what else, I guess, did you learn from the Birria and the deep promotion? And how might we see that return at different points later in the year or next year?

Well, breaking it into two things. The first is the product itself with Birria. I mean, in Birria have the beef with shredded deep fried and you have the Consomé. We are looking to test -- actually it’s in test right now as a limit-time offer item as part of a mix. Some of it will be chicken, some of it will beef. That we would look to do in what we call module 5, which would be kicking off, I think, early November. So we think there could be a place for beef at least in one more LTO, possibly even a full-time menu item at some point. We're really looking at the full-blown Birria that we're doing now as something we'll look at during next year as another LTO, given the success and we call it Birria 2.0. So we'll make some changes in terms of the product and the packaging, but we definitely see it as something that we can look to do again next year. So that's on the product side. The second piece is just around the approach to marketing that we've taken and real kudos, a real shout out to the marketing team and the way they execute against this. And even the ops team, which we executed, we actually rolled out, I got pre-training for this product to make sure the execution was really strong as we roll it out. But on the marketing side, you're just going to see more and more of what we do with Birria. Again, it just happened to coincide with Birria, these new marketing tactics that we wanted to put in place, which was again heavier spend on social media and really going on those platforms to attract a younger customer. We really felt like Birria was…

That's great. And then the -- just on the product itself, I mean, I know it's priced in a premium band on your menu. Was it gross margin dilutive or neutral or maybe even slightly favorable, just given how expensive chicken is right now? How should we think about that?

No, it had a higher food costs. So from a calendar perspective, it was an investment on food costs. So again, through second quarter, you'll have Birria there for really the month of May, obviously, April, it comes off and then we go to Tostadas, which is a lower food cost item. So Birria is the most expensive item proof food cost percentage that we'll do this year. Q – Andy Barish: That's great. Thanks and have a happy [indiscernible] tomorrow. A – Larry Roberts: All right. Thanks, Andy.

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

Hi, good afternoon. I guess I'm curious on Birria of that kind of 10% plus mix that it generated over the last six weeks. How much of that do you think is incremental versus kind of consumers swapping around on the menu? And I asked that because I think the LTO ends June 1. So I'm kind of wondering how you think about any potential comp falloff that we should all be thinking about as the Birria LTO ends? And then secondarily, as you brought in these younger consumers, and it sounds like you did bring in maybe some newer demographics to El Pollo Loco, were you successful kind of getting any kind of rewards sign-ups in tandem with those new demographics that were coming in, or how do you kind of plan on continuing the momentum that you've built with those younger demographics? A – Larry Roberts: Thanks, Sharon. First on the Birria mix, we didn't really see much shift in the menu mix overall across the rest of our categories, maybe a little bit on family difficult to tell because we actually changed our approach on the family meals a bit. But overall, Birria didn't really look to pull much from other items on the menu. So having said that, we're going in with Tostada’s, -- if you recall, Tostada’s last year, normally, they're like a 7% to 8% mix, somewhere in that range. And they were about 14% mix during our Lumentime[ph] offer last year. So we really feel like Tostadas is really a strong follow-up to Birria and we'll be able to maintain the momentum we've built now. Shifting to, I'll call it, the demographic piece there's no doubt we have seen a lot of new users coming to the concept at least by the Birria…

Larry, in tandem with kind of thinking about the younger consumer, are you talking with the idea of any changes to your hours or doing any kind of later night daypart.

I would say right now, no. Really, right now, given the staffing issues and challenges, I think it would be a challenge to extend it out. I think at some point, as we develop a better menu for late night, that's certainly something on the, I'll call it, longer-term strategy, something to look at. And the team is starting to look at products that are, I'll call it, more snackable and things that we could put on the menu that would be more appealing one to a young consumer and also to a late-night consumer. So I think that's down the road. It's probably not this year, but maybe something that we look at next year.

Okay. Thank you.

Thanks.

Our next question comes from David Tarantino with Baird. Please proceed.

Hi. Good afternoon, Larry. I wanted to come back to this question about marketing. And I guess the way I think I will ask it is, is there anything in your consumer data or you're learning thus far that would suggest that the lift you've seen from Birria ore about the marketing than the product itself. And the reason I ask that, I guess, is that would perhaps be a leading indicator for success on future offerings. So I just wanted to get your thoughts on whether you think it was more about the marketing than the product, or do you think it was the combination of the two?

I definitely think it's a combination of the two. And I just say that Birrias had six straight weeks of over 10% mix. And it's coming down on the curve, but it continues to be a very strong mix, which just tells us and we'll dig into it more with data, but it indicates that there's a good amount of repeat. Now the one area where we do know that we've seen repeat is around loyalty. There's probably been, I think, in the first couple of weeks that a 25% repurchase rate, which is actually pretty good in that short time frame. So we feel good that the product has definitely resonated. But certainly, when you see the kickoff with the TikTok and other social media channels and the growth we saw with that clearly indicates I think it's the power of the end when you have a great product that really resonates along with a great marketing strategy. And again, that's why we're excited about tostada because, again, we know that tostadas is a distinctive product for us, is a great product for us and working through how we promote that similar Birria, our target isn't to get back to last year's mix on tostadas is to beat last year's mix on tostadas and continue driving the brand and how it resonates with the younger consumers.

Makes sense. And then I had one clarification on your margin outlook. You mentioned – is that the move to high teens, would that be assuming the current momentum in the business continues, or are you making some assumption that the sales trajectory will change in the second half of the year?

No. I mean it really assumes a continuation of where we are, more or less. I would couch you, I expect from where we are in March to continue improving margins. I would say it's going to be in between mid- to high teens, where I would project to be out towards the end of the year and -- but that does rely on, I guess, inflation doesn't get any worse in that our sales continue to perform as they have at the current unit volumes that we're seeing.

Got it. Got it. And then on the commodity costs, I think you had locked in chicken prices that perhaps more favorable rates than the current market conditions. I guess, is that correct? And have you given any initial thoughts on what 2023 could look like if the market stays the way it is.

Yes. So we -- the majority of our chicken-in-a-bone is locked in at certainly favorable costs at current market conditions. We do have a portion with one supplier that is not locked in. But the key -- the big inflation drivers, obviously are the boneless breast meat and boneless [indiscernible] nearly boneless breast meat. So that's what we're really watching. And I don't think at this point, we have an outlook for next year. It just continues to be a tight market chicken as a whole, but especially around boneless breast meat. You see so much demand out there, and suppliers are having a hard time keeping up with that. So it's a little premature for us to be taking a stab of what next year will look like. We need another quarter or so. And then I think, we'll have a better idea of what next year looks like from a chicken supply standpoint.

Makes sense. Thank you.

All right. Thanks.

[Operator Instructions] Our next question comes from Todd Brooks with The Benchmark Company. Please proceed.

Hi Larry, how are you?

Todd.

A question for you. With the strength of birria which is impressive in and of itself. Can you give a sense of what your consumer was seeing otherwise? We've heard other concepts talk about stimulus lap in kind of period three, period four as a headwind. We've heard concepts talk about fuel price increases with the Ukrainian war that we saw in March being a headwind. Do you have a sense of where your consumer stands? And maybe how much, if any kind of weakness or lap pressure, you were able to overcome with birria actually implying that birria that much more powerful than the reported number?

Yes. I mean, great question. I guess I go back and look at, again, the first quarter yes, we -- again, we had fairly good momentum coming out of March, especially when you go to our franchisee comps first quarter, 11.5%, and they were still improving. So it felt like from a consumer standpoint, and I said this on the March call is from a consumer standpoint, our brand looks to be really strong. I mean we're seeing sales growth across the business, our franchisees, especially seeing transaction growth with our franchisees. And the reality is, I mean, their price points are still higher than ours. So the brand is clearly resonating. Now birria took it to a new level. But when I look at -- are we seeing any consumer pushback at this point? I'm not seeing it yet. That's not to say it won't happen, but our transaction numbers are roughly pretty comparable to where they've been over the last several quarters. The franchisees are driving positive transactions despite taking pricing. And so, thus far, not seeing the pushback and maybe the other concepts have seen. So, I think birria propelled this new level. I'm not sure from a brand standpoint, whether we were seeing the impact that others have highlighted from reduced stimulus sector and things like that, I just wasn't seeing it in the business leading up to birria.

Perfect. That's great to hear. And then, you talked about still working against staffing, especially in the company stores in some of the tight markets. Do you have a sense, even though the reported numbers were great for the quarter, what either reduced operating hours or I don't know if you have any full unit closures anymore once we got out of Omicron? But what staffing might have cost you from a same-store sales standpoint on the corporate store side in the quarter?

Well, in terms of -- what we look at is, not necessarily the impact of overall staffing, but it's the impact where we've had to either close early or reduce our service channels. And that continues to be 15, 20 restaurants a day, and that can be from staffing from callouts, which as I recall, I have to think the numbers, I mean it could be 1% of sales or 1% sales impact. As I recall, when I look at the numbers, so it's not a huge impact on the business overall. It's a very, very slight drag on our comps, but not huge.

Okay, great. Thanks for the question. Larry, appreciate it.

Thank you.

Our next question comes from Jake Bartlett with Truist Securities. Please proceed.

Great. Thanks for taking the follow-up. Larry, my question is going to require kind of looking way back in time, definitely before your time at the brand. And the question is how polyloco is positioned in a downturn? So, what were same-store sales? I don't mind modest go back that far during the great Recession I don't if you have that. But just maybe if you could -- if you have that, it would be helpful. And maybe just how the brand is positioned now versus then in terms of value and your ability to pivot towards that, if need be, if this big our word comes to pass.

Okay. You can't hold me 100% accountable for these numbers. But as I recall, Great Recession looked at the numbers years ago, I mean, polyloco was definitely impacted. I think they were down somewhere in the 5% to 10% range during one of the years. So definitely saw an impact. Now, if you go back to that time, polyloco was very, very reliant on. It was just -- I mean not strictly had entrees, but really reliant on chicken-on-the-bone, family meals and individual meals. I mean, that was the core. If you recall, you're kind of coming out of that time frame is when the brand began shifting more focus or at least emphasizing more the entree side of the business. So I'd say pre-2013, 2012, as you recall, I mean, we were at 55% to 60% chicken-on-the-bone and the balance was entrees. And then, coming out of 2013, 2014, it flipped around to basically being the other way around. And so, that part of the business -- so I'm not sure you can use the last recession as the best bellwether, because the business has changed in terms of what we offer in the entree side of the equation and the value we offering on the entree side of the equation. And so, that's my recollection of what took place back years ago, but I'm also very optimistic that, given our positioning today and even more of the value offerings that we have today, versus where we were previously, that I think were well situated -- if there’re a recession, not that we won't feel something, but I think we'll hold up very well and see hopefully quite a bit of trade down into our brand.

Great. That's really helpful. And actually, I did have another one. And I believe last quarter you gave an indication of what you thought G&A was going to be up year-over-year in 2022. I think the first quarter came in a little lighter than we were expecting. So any change on just how we should think about G&A for the second through the fourth quarter?

Yes. I think, second and third -- second through fourth quarter G&A should be a little higher year-over-year than it was. When I look at the full year, I'm expecting it to be, again, higher than last year. I'm thinking probably somewhere in, probably, $2 million to $3 million range, overall.

Great. Thank you so much. It’s helpful.

Okay.

Thank you. At this time, I would like to turn the call back over to Mr. Roberts for closing comments.

No. Well, thanks, everybody, for joining the call today. I really appreciate it. And I hope you took away that we really feel great about where the business is. We're situated. We've got a lot of great things in the pipeline from a product standpoint, a lot of great marketing initiatives and a real focus on the company operations and a big opportunity there, as we improve those, very confident that we're going to see additional sales growth come from those company restaurants. So, thanks again, and everybody, have a great night.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.