Good day, ladies and gentlemen, and thank you for standing by. Welcome to El Pollo Loco, Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, August 3, 2023. And now I would like to turn the conference over to Ira Fils, the company's Chief Financial Officer. You may begin.

Thank you, Operator. And good afternoon. By now, everyone should have access to our second quarter 2023 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 our strategic and operational initiatives, expectations regarding cash flow, sales and margins, potential changes to our menu platforms, capital expenditure plans, future share repurchases, expectations regarding commodity and wage inflation, remodel plans, expected new store openings, franchise partnerships and our 2023 guidance, 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 2023 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, which is available in the Investor Relations section of our website. With respect to the restaurant contribution margin outlook we will be providing on today's call, please note that we have not provided a reconciliation to the most directly comparable forward-looking GAAP financial measure because without unreasonable efforts, we are unable to predict with reasonable certainty the amount of or timing of non-GAAP adjustments that are used to calculate income from operations and company-operated restaurant revenue on a forward-looking basis. Now, I would like to turn it over to our President and CEO, Larry Roberts.

Thanks, Ira, and good afternoon, everyone. I'd like to start by thanking our El Pollo Loco team members and our franchise partners for the hard work they put in every day to make this brand great. Without the dedication of everyone in the organization, we would not have been able to achieve the outstanding improvements we've seen across our operational metrics, including drive-through times, social media ratings and customer complaints for both company and franchise restaurants. These efforts help deliver restaurant contribution margin of 16.9%, an improvement of 190 basis points compared to last year's second quarter, and adjusted earnings per share of $0.23. While our system-wide comparable restaurant sales decrease of 3.4% was below our expectations, primarily due to the lapping of our extremely successful beef birria promotion last year. We are encouraged by the positive trend we've seen to start the third quarter with system-wide comparable restaurant sales growth of 1.8% over the past four weeks ending July 26. This includes comparable sales growth at company restaurants of 2.1% and a 0.4% decline in transactions. We believe that our improved sales performance is, to some extent, driven by refocusing on our famous fire grilled chicken through our current promotions, including our new Double Chicken chop salads and our new summer family meal that includes eight pieces of fire grilled chicken, three large size, tortillas and fresh salsa. Notably, guest feedback on our new chop [ph] sales has been very strong with quality, taste, healthy and overall ratings among the highest we've seen for some time. Most importantly, the sales emphasize a major differentiator for El Pollo Loco relative to our competition, which is the freshness of our food and the healthier options we offer on our menu. This differentiation consistently shows up in our consumer research and is…

Thanks, Larry, and good afternoon, everyone. For the second quarter ended June 28, 2023, total revenue decreased 2.1% to $121.5 million compared to $124.1 million in the second quarter of 2022. Company-operated restaurant revenue decreased 2.4% to $103.9 million from $106.5 million in the same period last year. The decrease in company-operated restaurant sales was primarily driven by a 2.3% decrease in company-operated comparable restaurant sales, including a 2.3% increase in average check size, offset by a 4.5% decrease in transactions. During the second quarter, our effective price increase versus 2022 was approximately 9.5%. As Larry mentioned earlier, we are encouraged with our improved sales performance in July with system-wide comparable sales for the month, up 1.8%, including a 2.1% increase in company-operated restaurants through July 26th. Franchise revenue increased 0.5% to $10.1 million during the second quarter, driven by eight new franchise restaurant openings and four company-operated restaurants sold by the company to existing franchisees in each case during or subsequent to the second quarter of 2022. This was partially offset by a franchise comparable restaurant sales decline of 4.1%. Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 240 basis points year-over-year to 27.4% due to higher menu prices, partially offset by increased commodity costs. Commodity inflation did moderate during the second quarter to approximately 1%. We expect commodity inflation to decelerate to between 1% and 2% for 2023. Labor and related expenses as a percentage of company restaurant sales increased 10 basis points year-over-year to 31.1%. The higher menu pricing and improved labor management was offset by wage rate increases and the leverage lost on the comparable sales decline. Labor inflation during the second quarter was a little over 4%, and we expect inflation of about 4% for the full-year 2023.…

Thank you. We will now be conducting a question-and-answer session. [Operator instructions]. Our first question comes from Todd Brooks with The Benchmark Company. Please proceed.

Thanks for taking my questions. Appreciate it. Larry, I want you to lead off with a question, just kind of reflecting on the comments that you made tonight, I hear a shift in kind of tone or thinking about strategy with fire-grilled working, core menu focus being recognized for fresh and every work of the marketing balance. Is there a kind of let's say repositioning, but strategic change that you're looking to make for the brand going forward from here?

Thanks, Todd. So, let me step back. I hit a number of points in my opening remarks, but I want to step back and talk about what are the really the key things we're focused on right now. And first and foremost, to me is to continue the progression in operations. To me, ultimately, like I said in my opening comments, you can't drive sales and profitability over any time period in a restaurant business without having great operations. The great thing is, we fixed company operations, service from where they were last year. We got the cost under control. Now in operations, it's really around raising the bar on food quality and consistency across the system. And we started doing that by retraining. We are starting to monitor complaints around food issues and making sure that we hold people accountable and address them as quickly as possible. So again, raising the bar in operations and really focused on food quality consistency is a major focus. So, that would be really the first thing I'd say. On the marketing side, to more your question, really, I see three things. First of all, refocus and drive our brand differentiation. It's all around chicken and freshness. Our consumer insight data tells us those are the things that really differentiate us in front of consumers. And so in order to do that, the advertising campaign, the content on your social and digital channels, product news and the menu all have to be geared towards driving that differentiation. So to some extent, I mean, that's something we really talk about, but we are now going to be really, really focused on driving that in the business. In addition to marketing is going to be around the new sales channels, which I talked about, catering…

That's great to hear. And I guess a follow-up on one of the pillars that you just laid out there. Hearing kind of a potential internal goal, why you get back to '18, but potentially getting back to '20. What's the unlock to do that? Is that AUV driven in your mind? Are there -- because it feels like you've extracted a lot of efficiencies out of the business in the operations already. Is this a volume-driven recovery to that type of restaurant level market?

I think it's a bit of both. But honestly, I'm trying to deal without relying on sales. I think sales will be the add-on. So, it's looking at where we can find efficiencies. So, as we're looking at the new Sousa processor equipment. I think that's an opportunity. Kiosk, we're pushing those tests. That could be a huge opportunity to drive margin improvements. And then I think there is on the sales line, I mean, especially catering. I think we estimate for every 1% catering sales, we get about a 30 basis point improvement in margins, somewhere in that range. So it's a combination of both, but we're not just saying, hey, we've got to grow sales because we want to make sure that we're also doing it on the cost side.

Okay, great. I'll jump back in queue. Thanks Larry.

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

Great. Thanks for taking my question. Larry, my question is about the momentum in the business. And I understand that the difficult compare from Birria last year in the second quarter, but there was a deceleration versus '19 kind of looking at a four year stack on same-store sales. So I'm wondering what you think is driving that? And you might speak to the macro environment, how Loco is positioned in that. But just trying to understand the underlying momentum in the business and really what's driving that?

Yes. So Jake, I mean, I think actually right now, we're seeing a change in momentum in the business. I mean we provided a four week look as of July 26, 27, I can't remember which day it was. But actually, the first week of that was actually negative. That was 4th of July weekend. And the lap was just a little strange were 4th of July fell, so that was a negative week. And so then the last three years have been even better. I think when you look at, call it, last quarter, again, I highlighted that I thought we were seeing some pullback from lower in consumers in terms of frequency check. So, I think that was a driver. And I think Birria itself just didn't resonate the second time around, and I think getting away from focusing on chicken actually hurt us the second time around with Birria. So I think those are some of the factors. And I'm just really watching now the trends in the business now and some current encouraging trends. I don't want to get too far out there in terms of, hey, everything is great and sales are going to keep climbing. But definitely seeing better trends. And I'd say what's great is, on the sales side, what we're seeing is the change in trend is being led by L.A. in Southern California. So that's been great to see. It's been mainly lunch driven, but dinner has also been positive. And then we're also seeing pretty much consistency across the different demographics. So it seems to be pretty widespread. And again, L.A., Southern California driven, which is great to see since you know that's where the majority of our business is.

That's great to see. And I guess given the improvement, I guess, maybe that means you don't need to make any meaningful changes to the balance of the value. But how do you feel you're positioned in terms of value and there's the menu innovation in the more premium side. But do you think you need to make any kind of changes there any tweaks to get the balance to be more effective in this environment?

Well, first thing I'll say that when we look at our value scores via our consumer surveys, they're actually very strong right now overall. However, what we are doing is in the menu board test is we are looking at providing perhaps a value panel. And so right now, we are screening with consumers various options around value, whether it's at probably more $6, $7. How do those screen, and then we'll get out and test that with consumers to see -- do they drive incremental sales, but you don't want to see is a lot of trade down, but doing it in a way that's got very good margins and look at those ones that screen the best with consumers. So we are looking at that. And so that would be something we would look at either really back half of the year or early next year. It really seems to resonate, we try to get that on the menu. But we got to test our way that. Other than that, we still have our $5 bowls. We've got fire-grill combos which are all at a pretty attractive value price point. So and like I said, our value scores right now are strong with consumers.

Great. And then my last question is just on margins and a good quarter for margins and restaurant level margins, your commodity inflation has been taken down. I think your labor inflation a little bit to 4% from 4% to 5%. But at the midpoint of guidance, I think you say the same for the annual number. So just wondering what the moving pieces are there and maybe within that, I think pricing is going to make a difference. So if you could share what you expect menu pricing to be in the back half of the year? And just to add on to this long question, in the past, you've given us some guidance for the current quarter, you gave us guidance for the year with restaurant level margins. But any guidance or any indication for the third quarter would be helpful.

Yes, Jake. So our pricing plans are pretty similar to what they've been. If you think about in Q2, we were about 9.5% effective pricing. As you roll forth through the balance of the year, you'll see that decline as we took a lot of price towards the end of last year. So Q3, we should be about 7.25%, and in Q4 will be about 5.5%. And if you think about how margin plays out kind of for the balance of the year, typically, you see Q2 as our best margin quarter, and you see Q1 as our lowest margin quarter. And the last couple quarters of the year tend to be similar to kind of like the full-year number for the most part. With Q4 being a little better than Q3 as you typically see a little spike to the utilities. So, just to give you a little play how that plays out. I think we feel really good about our visibility in regards to commodities, and that's why we were able to bring the guidance down. And our wage rates have been pretty consistent as well. So we feel, we have a lot of visibility from a cost standpoint and a lot of then really what drives any differences is how sales moves, as Larry talked about, it's about 30 basis points or so on the margin depending upon any 1% move on sale.

Great. I appreciate it. Thank you so much.

Thanks, Jake.

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

Hey, good afternoon guys. It sounds like from the prepared remarks, you expect Toms to stay positive in the back half of the year, even against some tougher lapse. I assume that confidence is coming from sort of the promotional lineup. But is there anything else, I mean I know there's a lot of initiatives, but what kind of gives you that confidence at this point?

Yes, Andy. So I see as the key sales growth driver in the back half of the year. First of all, I think, getting back and refocusing on chicken the Chop sales, and then we have KCDs our next up and KCD has performed very well last year. So that gives us confidence that we've got good promotions going on now and coming up next. I expect that we'll continue to see improvement in operations and customer service. And I think one of the big opportunities is, and this comes from focus groups I watched last week, which is around, we did focus groups with lapsed users and asked them, why did you stop coming to El Pollo Loco? And these go back they've last for a while, and it wasn't around price points or anything like that. It was around their last experience at El Pollo Loco. And so, with the improvements in main operations and the continuing improvements we'll make, we will really be targeting to bring last users back into the restaurants back half of the year. I do think the loyalty program will continue to make changes to that. So that will be a driver. And I think the realignment of the media spend I talked about versus the first half of the year, continue to fine-tune that to really get focused on those channels that deliver the strongest sales will be a driver. And then I think the last one is going to be around catering, which we'll look to roll out at the end of September. So it's moved into the fourth quarter. Terms going to the holidays, having a really strong catering platform, I think, will be a sales driver. So, I think we've got a number of good things on the agenda to drive the sales in the back half of the year.

And just a follow-up on the marketing. I think you've got a new agency of record. I'm not recalling the timing exactly, but has the creative from that group started to be out there yet?

Yes. So that group started. The first run was, I guess, February, so our module two, but that was kind of throwing there quickly, put something together quickly. So it wasn't the full blown here it is. But they are now fully in force and the advertising we have now is full on with the new agency, the agency names organic and really pleased with what we're seeing in terms of the look and feel the advertising, I mean it's got more energy with the music. We're now really focusing on the food has prepared. We've done that before. But for example, CHOP sales show the chicken being chopped. And so doing those things and then we really reshot the whole family dinner promotion, the advertising and really make sure that, okay, we need families in it. So we've got families now in there because you're targeting mom. So the look and feel, the energy, the vibe, and I think we've got a lot of the right ingredients in there that we want to have to really drive, first of all, a slightly I call more modern brand and more energy behind the brand than also the product quality and the freshness of the food are really coming through in the advertising.

Got it. And then finally, just the 10-or-so units from both company and franchise have been pushed now from this year. Are those expected to open in '24 or some of those kind of evaporated with some challenges out there? Or how do you kind of look at that start to '24? Is it right to think of these 10 units kind of moving into next year?

Some are moving into next year. I'd say somewhere around about half are probably moving next year and half have just fallen through. Either the development has stopped for the landlord went with a different deal. So I'd say it's half and half at this stage.

Okay, thanks guys.

[Operator Instructions]. Our next question comes from Jen North with Baird. Please proceed with your question.

Great. Thanks for taking the question. A number of mine have been asked already, but I'll follow up on margins or the inflation outlook. Can you just update us on how much the commodity basket is locked for the balance of 2023? And perhaps any earlier reads on your contracting efforts for chicken looking out to 2024, do you see opportunity to lock in at rates below the levels paid in 2023? Or what's your level of visibility to the inflation outlook to 2024 at this point?

I think more broadly, we view the outlook next year positive just given, we haven't seen a lot of pressure in regard specifically on the chicken side. We don't have -- we just started, quite frankly, our RFP process. So we'll have more on that in the next quarter. But we feel -- I think that we've seen commodities decelerate substantially this year, and we are definitely looking for 2024 to be a much more moderate commodity inflation environment. For the back half of the year, I think we're around 80-plus percent or so locked in on the chicken side. Really, what's not blocked is just the breast meat, which floats, and we have a collar on that. So again, the spot price on that has been very favorable, and we feel like we do have quite a bit of visibility to where we're headed from a commodity standpoint.

That's helpful. And one clarification, Ira, the pricing metrics you mentioned earlier on in the call as we got to Q3, Q4, was that contemplating additional pricing as we got to September or assuming no changes in price as the new menu rolls out?

It is. There's a 2% price increase built into that when the new menu rolls out in the September time.

Perfect. And then one more from me. Just thought I'd give you the chance to update on the kiosk rollout, if you have any details to share. I know it was expanded to additional locations this past quarter. So it's still early, but getting to a more critical mass of the test, I guess, and other brands have been successful with the rollout of kiosk. So maybe if you're willing to share, could you speak to the benefits you're seeing on check or margins at this point in the units where the kiosks have been rolled out and perhaps the interest level from franchisees at this point?

Sure. A little more detail on kiosk I said, we have, I believe, it was 11 kiosks now in service. That includes some franchise restaurants. In company restaurants, what we have found is that to really drive kiosk usage, it's important to have new cash machines, the ability to use cash to pay and so when we put those in, we're seeing anywhere in our test restaurants from, I'll call it, dining room transactions, so meaning either somebody eating in the dining room or coming in and ordering for it to go. We're seeing anywhere from restaurants, 75% to 80% kiosk usage and the lows will be in the 20s, but even though we're seeing increase. And so overall, we're seeing really good usage on the kiosks. We're seeing nice average check lifts. And the other thing we're seeing is when you start getting up to 50% plus in terms of usage, you can start looking at labor hours. So, we are pulling some labor hours out of those restaurants that have a high usage rate. And so now given the success there, we are rolling out 10 more kiosks on the company side. They'll be in Las Vegas. And the reason why I've chosen in Las Vegas is because there's no EBT ability in Las Vegas. So in California, we think the usage will even go further as we integrate EBT usage into the kiosk system. And because we get a lot of EBT sales here in California. But Vegas, they don't have EBT. And so, we're already in a couple of restaurants there. We're seeing very high usage in Vegas. And in fact, I think we're going to basically test a restaurant where it's just kiosk service. And see what that does. So we're trying to really push the envelope on the kiosks, similar to what other concepts have done. I see what they're doing. And I think there's a big ability there to both drive check and reduce labor hours in the restaurant.

Thanks for all the color. I'll pass it on.

Sure.

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

Great. Thanks. So this is a fairly detailed question about compares, but I just want to make sure I getting it right. So last third quarter, July was relatively weak relative to the quarter. That was going up against the opposite where July of 2021 was the strongest. So, last year might have been just related to the year before. So the question is, as we think about the rest of the quarter and kind of where sales can land, do you view the compares as more difficult going forward? Or maybe on a kind of a stack basis, 4-year basis versus pre-COVID it's not. So I just want to make sure I don't get too carried away by the fact that compares seem to get considerably harder in August in September.

Yes, Jake. So the way I was looking at it, actually, is throughout the 4th of July week and looked at, say, the last three weeks plus. And actually, again, we were positive last year in that same time period year-over-year. And then especially L.A., company restaurants, I mean I'll just give you 2022 over this time frame, we're up about 1.6%. In L.A. at this point, we're up close to 5%. So I think we're lapping. I don't think the numbers are negative when you actually throw away 4th of July weekend and do the compares. And so I feel like there's good enough momentum that as we move through the quarter, that last getting more challenging. So I still think we'll be able to deliver positive same-store sales growth, but I think that's probably one reason why we're just don't get too far out there in front of our skis. We still got to deliver. But certainly, I think the trends over the last several weeks have been reassuring, especially in terms of the L.A. Southern California market.

Great. That's helpful. And yes, I think that's it. Thank you so much, appreciate it.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would now like to turn the call back over to Mr. Larry Roberts for closing remarks.

I'd just like to thank everybody for joining the call tonight, and I hope you have a great night, and we'll talk to you next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.