Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Fourth Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in listen-only mode, and lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 7, 2024. And now I would like to turn the conference over to Ira Fils, the company's Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good afternoon. By now, everyone should have access to our fourth 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 growth opportunities, strategic and operational initiatives, expectations regarding sales and margins, potential changes to our product platforms, capital expenditure plans, expectations regarding kiosk rollouts, the ability of our franchisees to drive growth, expectations regarding commodity and wage inflation, remodel plans and our 2024 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-K for 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 Interim CEO, President and COO, Maria Hollandsworth.

Thank you, Ira, and good afternoon, everyone. During the fourth quarter, we continued to make great progress in reemphasizing what makes our brand unique, our one-of-a-kind, better-for-you grilled chicken offering. As we go forward, we aim to lean into this differentiating strength through our marketing and product development, both to drive our top line growth and help us achieve the immense potential we have ahead of us. To that end, our organization is aligned around five key operational pillars. The first operational pillar attract, hire and retain top talent demonstrates our belief that success in the restaurant industry is highly correlated with employee engagement. This includes building a compelling employer brand with strategies aligned with our values as well as creating a culture of accountability and recognition while fostering a positive and inclusive environment. Our second operational pillar being known for our famous fire-grilled chicken prioritizes our focus on our key differentiators, including our fire-grilled chicken, flavors from Mexico and better-for-you positioning consistently and frequently. In late December, we reintroduced Double Pollo Fit Bowls to help make new year resolution planning easier and more convenient. Packed with double the protein, the double Pollo Fit Bowls are a filling and nutritious choice for those craving a delicious flavorful meal. Since launch, we have seen great reception with guests typically skewing female and a little higher income. Starting in February, we began the promotion of our current tostada platform alongside the introduction of a seasonal shrimp tostada and shrimp taco available for Lent. Additionally, guests can substitute Shrimp for chicken or a shrimp to any on-tray for a small upcharge. We're excited to be able to emphasize our better-for-you chicken offerings while providing a relevant seafood option during this time of year. Additionally, in late December, we launched a new menu board…

Thank you, Maria, and good afternoon, everyone. For the fourth quarter ended December 27, 2023, total revenue decreased 3.2% to $112.2 million compared to $115.9 million in the fourth quarter of 2022. Company operated restaurant revenue decreased 5.7% to $94 million from $99.6 million in the same period last year. The decrease in company-operated restaurant sales was primarily driven by a $5.8 million decrease in revenue from the refranchising of 80 company-operated restaurants to existing franchisees in prior quarters as well as a 0.2% decrease in company-operated restaurant sales. This was partially offset by additional sales from restaurants opened during or subsequent to the fourth quarter of 2022. The decrease in comparable restaurant sales included a 0.4% decrease in average check size, offset by a 0.2% increase in transactions. During the fourth quarter, our effective price increase versus 2022 was approximately 6%. For 2024, we expect our pricing to be in the mid- to high single digits to help offset the impact of the April 1 California minimum wage increase. Franchise revenue increased 17% to $11 million during the fourth quarter, driven by a 1.6% increase in franchise comparable restaurant sales as well as five new franchise restaurant openings during or subsequent to the fourth quarter of 2022 and 18 refranchise restaurants I've mentioned earlier. Looking ahead, 2024 first quarter to date through February 28, system-wide comparable store sales increased 3.8%, consisting of a 2.2% increase in company-operated restaurants and a 4.7% increase in franchise restaurants. We are excited about the sales momentum in the business as we move past some of the underlying weather impact experienced in Q1 and feel we have created a strong marketing plan and calendar for the remainder of the year. Turning to expenses. Food and paper costs as a percentage of company restaurant sales…

[Operator Instructions] The first question that we have comes from Jake Bartlett of Truist Securities. Please go ahead.

Hey, guys. Thanks for taking the question. This is actually Vince Sengelmann on for Jake. Just firstly, on the development guidance, I think slightly below our expectations for the system openings. Can you kind of frame your expectations for sort of your shift to more remodels? What is kind of holding you back in really accelerating development here?

So I think from a -- first of all, from a remodel standpoint, we completed, as we mentioned, 33 franchise and 15 company. And we're seeing a good sales momentum from the remodels. And so it's why the franchisees are accelerating their development. We're getting a mid-single-digit sales lift from the remodels when we're spending a little under $400,000 on average for these remodels. So it's -- we're getting a good return on those. So that's definitely why we're continuing to push forward with the remodels. From a development standpoint, hey, we are working to continue to bring in more franchisees into the system and this is where, where we're sitting today is based on what we think -- we have relatively good visibility to the openings this year, and that's really driving what our guidance is for 2024, and we are still very actively in the process of recruiting and bringing on more franchisees.

Hi, Vince, it's Maria. I also included that on my prepared speech, I did talk about how we have initiatives in place in all these areas. And you're going to hear more about this. Liz is actually very passionate about development. So you're going to hear more about this in the next quarters to come.

Okay. Great. That's super helpful. And then just shifting gears a bit. Just on your strategy to offset the wage increases in California, can you kind of give us an update, I think at ICR you mentioned that you're looking to your operational initiatives to offset roughly a third to a half of the impact of the wage increases. Where are you on track to meet that goal? Are there any early learnings you're getting from, let's say, testing of the new salsa processing equipment or the kiosks that you're willing to share or any update on timing of the price increases?

Yeah. In terms of the kiosks, we have learned that if we have the cash machine and that works better for us if the kiosk is on the counter -- that is -- our customers will learn quickly and adapt very easily as well as if we have multiple kiosks in the restaurants. That's the one thing we've learned. It's really helped us with being efficient when it comes to our customers putting their orders as well as our team members preparing the orders for the -- our customers.

Yeah. So I think that and where we are in the salsa, that's -- we feel like we're still waiting for the processors. We've already simplified the process from going to two salsas to one, and we haven't had any negative guest feedback from that. So we feel good about where we're headed there. We have also -- and we've got the processors on order. Maria talked about the kiosks. And we're also we're working on kind of our whole labor -- we did a whole project on our whole labor tables as we're trying to really see if we can really streamline things like in-times and out-times to really be just more efficient from our labor standpoint -- from a labor standpoint. And we're -- so far, we're seeing good results there and plan on rolling that out when we -- April 1, consist -- at the same time, minimum wage goes up. So I think we're still comfortable with that range of a third to half of that of the California minimum wage impact will be offset by labor savings. And honestly, the rest of it, we're working on taking some pricing. We've already taken a little bit. And for the year, we're going to be in the mid to high single digits on pricing. And we'll adjust that as we manage the impact of the minimum wage increase of our labor savings. And our whole goal is really to protect margins while balancing traffic as well because we are cognizant of the impact the pricing can have on track.

So we will continue to look for operational efficiencies with labor all throughout the year. We also know that labor alone is not enough to drive best-in-class margins. So we're also going to do a deep dive into the rest of the P&L and look forward to sharing more of that in the upcoming quarters.

Okay. Great. And then just last one for me. Just an update on the consumer. Could you kind of help us understand your strategy and your messaging around balancing value versus your premium offering and whether you've seen any shift in the consumer environment?

I don't necessarily know if we've seen a shift. I think we've seen the consumer under pressure a little bit for a couple of quarters as we've seen them. We've seen our check not raised to the amount of our pricing because what we do see is consumers are managing their check, they're doing it through a couple of ways there. From a mix standpoint, they're trading down a little bit and they're also buying less checks per item, less items per check, sorry. And we're seeing a little fall off on family meals as well. So the combination of that and the fact that we're actually seeing a little more Lunch business, which has a lower check, has weighed on our check a little bit. But I do think the lower end consumer is under a little bit of pressure, and I do think we're seeing that in regards to our check. But it's not -- I don't know if it's like a relatively new thing. I think we've seen it for a couple of quarters now.

Yeah. And for us, when we rolled out our menu boards last December, we know that our customers are looking for favorable food and also consistent value. And so we are testing ways to offer more value across our menu to meet this consumer demand. So look more for more information on this in the next quarters as well.

Awesome. Thank you very much.

Thanks, Vince.

Thank you.

The next question we have comes from Zach Riddle of William Blair. Please go ahead.

Hi, good afternoon. Just a couple of questions for you guys. I guess first off, so just looking at the P&L, the food and packaging costs seems to have come in a little bit higher than we expected in the fourth quarter. Just wondering kind of what drove that? I mean, was it bone-in chicken, boneless chicken, some other ingredients or something like that? Or just kind of what caused that cost to be a bit higher? And then secondarily, I know you just opened or recently opened your second location in Colorado. And I remember last year, the first location was performing really well right out of the gate. So I was wondering if you guys could give us an update on how the Colorado market in general is doing today and maybe how that second restaurant is performing. Thanks.

Yeah. So the first question, in regards to the commodities, I don't know if there was any one item that drove that unfavourability. I think we did get a little bit, may be from the Carnitas promo. But we -- the basket came in pretty much as we expected for Q4 on that side. From a good news standpoint, I will tell you, yes, we did open our second store in Denver, and we're very excited how both of them are performing. The first one which opened over a year ago is still performing very well. And the second store is above our expectations as well. So we are very excited about how the two stores in Denver are performing.

Great. And I guess, just as a follow-up, how should we think about the cadence and maybe number of LTOs in 2024 versus 2023?

I think in 2024, the cadence will be similar. We are reducing it from six LTOs to five LTOs this year. So a small change for us just because we've seen things, for example, when we've seen the positive reception we've gotten from items like the Pollo Fit Bowls and the tostadas, the consumers are coming back and they want -- we put these on LTO and then when we take them off, they're like, hey, where are these items that we've that we built some frequency on with them. And so that's why we've decided to extend the LTOs a little bit and go from six to five this year.

Great, thanks. That does it for me for questions.

Thank you. 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 the management team for closing remarks. Please go ahead.

Thanks again, everyone, for your interest in El Pollo Loco, and we look forward to talking to you again next quarter. Have a great evening.

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.