Earnings call transcript Q3 2022

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Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, November 3, 2022.

And now I’d like to turn the conference over to Ira Fils, the company’s Chief Financial Officer.

Ira Fils

Thank you, operator, and good afternoon. have our should earnings quarter everyone release. now, access third to XXXX By can www.elpolloloco.com found Relations not, be If it at section. in Investor the

expenditure everyone environment related and to Before need impact our of will formal rate marketing plans, our and new others. remodel reliance for not expectations, pandemic the product initiatives, are business openings forward-looking tax cash put new that and future therefore, as COVID remind statements as expected macro include statements forward-looking capital we today the income our of performance, including among flow These remarks, store undue statements, guarantees you them. the discussions plans on begin to not I well on and should

also could XX-K to more uncertainties refer materially could operating results subject of to differ and you and risks filings, our the cause future Form risks for SEC what recent results condition. including are we expect. that from financial numerous our to a These currently We discussion impact actual statements detailed that our

quarter We third XX-Q document your convenience. file XXXX tomorrow you our review for at earliest the would that expect to and to encourage of

comparable discuss prepared useful in which, should accordance with The results non-GAAP measures we believe, and can included available we GAAP in to be are earnings be not release. call, today’s of this During a as in for substitute, will performance. our in information evaluating measures, presentation additional isolation our reconciliations or GAAP

Roberts, like to Chief to turn Executive I’d it Officer. Larry Now over

Larry Roberts

good and Ira, everyone. Thanks, afternoon,

Loco Maria our let Hollandsworth, by Officer, new Operating into family. get Before the welcoming quarter, start we to El Pollo Chief me

with President Operations where Regional President, from joins Jack Strategic release, and including seen in Maria in to Initiatives operating years recent Box spent us roles, press as her Vice from Prior Services. she Dunkin’, numerous position As Operations. Maria XX most Vice Dunkin’, you the over may have was of our

necessary expertise as continued Fils of an Ira drive addition and skills that believe recent CFO With the the I El we have team the and to leadership provide outstanding Maria, of Loco. now Pollo expansion will

like accomplishment highlight I’d XX exceeded great our Pollo last highlight months, Loco for a $X of that huge our affinity sales ahead El This brand billion. the people have is us. growth and also we system-wide the the and opportunities for have to over

authorization of have XX, you Finally, of $XX we a seen, the of million to going the strength up These many have October our underscore common and declaration our our as balance and sheet, we more announced forward. programs on to probably $X.XX of special business importantly, a repurchase dividend stock. in confidence

quarter. Turning to the third

X.X% increase fourth sales locations. X.X%, our increase healthy restaurants our franchise top franchise growth into X.X% X.X%, year-over-year. the XX, system-wide third and including system-wide through X.X% company-owned increase at pleased I’m our quarter, comparable business a including at continued a saw X.X% the growth the quarter towards company-owned to October the at sales increasing we including We’re of end of momentum a at with restaurant a third pleased with with add has quarter line restaurants that of started to same-store second also similarly increase approximately and lunch Trends the locations. continued

very made quarter, pleased forma however, businesses, pro in their restaurant our third wage, the inflation, during We margins improved were teams utilities ran which promotion, level levels and company-operated to per good share staffing and Store quarter of managing until our with progress Tostada by pressured the mid-August. continued commodity $X.XX. be earnings throughout resulting

their was and is pre-promotion basis basis than XX%, higher XXX to Tostada their points which During menu several XXX XX% weeks peak, higher of previous over make the an achieved continue than which they promotion, that mix. points mix,

on focused value value, attracting During and the we are $X. value-conscious offers balance believe revised family more at combo critical marketing third feast starting We at a consumers. these meals $XX a of to fire-grill the quarter,

for Looking consumers next group promotion, great $XX a TikTok. Birria that younger success Quesadillas, to option with includes to We’ll on of beef appealing promote this gatherings. our will continue ahead in great fit November earlier be this and Overstuffed particular and our the excited are We about for the use builds on family which we social the promotion efforts which believe enhanced delivers and of also of focus a balance to year, Beef media family year. highly a value and digital fees, the very

to our XXXX next to year. expand modules Looking from marketing will promotion calendar year, X ahead X this

and result new to current products of these customers. among drive include consumers. excitingly, several new in resonate will product process, of believe development and a investments will that that potential be our existing introduction More made frequency our of both promotions the broaden appeal products As believe that we increased menu with will several items have we these permanent

restaurant to in pleased operations. couldn’t operations, I have made the more progress company Shifting with we our be

levels key across As very company-operated X channels I service daily. operated now throughout have priority, our high partners have years. our of our all company-operated After restaurants have operate dramatically months. full restaurants last all past previously over the making franchise the Virtually improved at noted, hours X this a

and and its a to downward continue While is applicant given number focus required intensive locations, training. overtime flow of the in on we our staffing expect trend still hiring

now delivering been leadership times, addition years. In for on X they excellence drive-through continued Leaders improved company-operated and have visit almost focus is fastest staffing restaurants. training Area improve Drive-through scores times results in to in last have our outstanding levels, and the to

since our been. improved have to by visit work members, dedication XX March over percentage addition highest team hard the excellence of to level points last scores our they the and have In ever

scores including and our other our metrics, social value improved, More last operating importantly, as times customer scores, have have media so drive-through excellence key and our all ratings complaints.

to of close franchise who on-boarding consistently the have several quality. significant These restaurant reduce employees tanks efforts service and operations, delivered equipment include making with that will that restaurant continued quality to reducing conjunction have and made we the clean teams In we worked the processes will time. soap cleaning well during operations incredibly source revised couldn’t preparation of use complexity product simplify product training geared to implementing our and improving filters, operations new improve and as and towards and of prouder operational further and X-wall initiatives number who hiring and leaders company-operated very exceptional broilers of new cut hours challenging spent grill hard their our quarter times. through in improve now our I improvements be our operators our very to the are restaurant as

expect and quarter, roll team enhanced daily system members thereby enabling We to during more consistently out these experience. our test to their an delivering duties efficiently, to the execute fourth our

to We Turning quarter. company-owned opened X and development. new new the during X restaurants franchise

remodeled and restaurants. X company we franchise X addition, In

X-unit units X pleased finalized have El we we a in a agreement Redding, and and are existing agreements development recently total to Chico have to new quarter. We California To those of that have to new Oregon date, development markets. develop discussions to Loco continue franchisees Southern XX for and Pollo for with signed spoke last we restaurants,

XX expect are see increase restaurants interest level recruiting gives in clearly to unit a investments confidence to partners, XX which of in prospective in strategy new from franchise high paying growth our us XXXX. as continue to Our new and we off to expansion

look closing, were about work In last XXXX. we we as has year ahead, us this the doing excited

levels El the improved First, improve entire we company-operated as significantly were even our they service operations in new high will have focus, they year. the further will where providing system year. last Pollo restaurant from be With very enter continued at Loco

Second, items of could capable process, we includes of utilizing permanent our menu a improved marketing strong that and driving incremental development calendar products, new be have several which exciting traffic.

to platforms. enhance and in continue loyalty, our invest we social digital Third, and media

lastly, of We enable will website, end our quarter more customer new loyalty And with of revamping Pollo will United cities the the brand-new we the look introducing be bringing traction, partners a across and our relaunch experience to and family app to States. great XXXX. towards gain our forward and program program which of our franchisee to food into first recruiting mobile also El Loco a continues

confident future an is El work I’d for like we franchise to setting work partners difficult to remain success. every While and it’s members thank our the the growth very they we environment, up future to day doing year economic this predict Loco Loco and Pollo Pollo are the do El exceptional that team make brands.

third that, to me the call discussion more financial for With our quarter of results. a turn over detailed Ira let

Ira Fils

and good afternoon, Thank you, everyone. Larry,

restaurant increase was year. The from in For the in third driven increase in Company-operated offset to ended $XXX.X million company-operated $XXX.X XXXX. XXXX the X.X% compared size, third in $XXX X.X% in of to decrease sales. average increased in to company-operated increase by total increase comprised partially quarter X.X% restaurant restaurant a X.X% was company-operated million restaurant sales September transactions. sales last a comparable increased million period by XX, million The check same of $XXX.X revenue the primarily in X.X% revenue a comparable quarter

we During increase price sentiment in was over the additional pricing third quarter, consumer the expect a Based conditions current full X.X% XXXX an for November, on including continue year. little our and price increase effective versus XX%. XX% approximately to economic and

restaurants. and X.X%, through at increase quarter-to-date a fourth a ahead, increased restaurants of restaurant sales company-owned XX, increase consisting comparable system-wide X.X% Looking franchise October at X.X%

subsequent up of time experiencing XX.X%, restaurants same the an compared million of comparable and are demonstrating franchise the X-year the of of to revenue system-wide subsequent restaurant the our third quarter quarter to opened third XXXX date. were as further $X.X was during was opening from the increase the a This during or third comparable positive quarter new revenue closure X generated year restaurants million the restaurants we in during prior to franchisee X quarter sales franchise XXXX. the of franchise to This restaurant XXXX. or company-owned sales X.X% of partially increase period. well Franchise by driven by For X was the third $X.X offset existing as momentum period, sold to during

company XX%. Food to increased a menu was Commodity increased commodity XXX XX.X% prices. costs, Turning during to approximately the to due points percentage expenses. by basis and costs higher as of partially sales paper year-over-year third offset restaurant quarter inflation

XX%. still XX.X%. to and a XX% expenses commodity to XX% to approximately ease Labor percentage sales increased anticipate XXXX related elevated, to We as year basis full quarter. restaurant inflation points XXX of be the we inflation fourth expect year-over-year to Although company in

$X.X third increase. offset Act, a the by which was of the the of lower and XXXX, point XXX partially higher to credit, overtime CARES company quarter remainder increase basis The other the In workers’ of their recognized inflation, compensation costs million employee due year-over-year retention wage costs, under XXX labor-related drove expense.

We continue inflation X% for wage about of full year. expect the to

COVID of related $XXX,XXX During approximately quarter, expenses. the third we incurred

percentage points other a and sales to increased fees. due to maintenance and XX.X% and delivery operating higher Occupancy XXX expenses repairs has basis company of marketplace expense costs, restaurant utility

quarter prior restaurant XX.X% contribution XX.X% was to Our year. compared in for the the margin

expect rebound result but inflation. We restaurant QX margins commodity high somewhat prior still be year wage QX below of levels the as and a to from

into look inflation we and between X% inflation XXXX, X%. commodity between and we will wage be As believe be and X% will X%

$X.X $X.X General increased to from million, of X.X%. million or and expenses $X.X million administrative an increase

G&A the prior an compares percentage a million XX.X%. a XXXX of taxes third revenues, of total X.X% tax effective reported for provision quarter in prior million for rate points per an recorded increased the $X the provision approximately to in period. quarter. in to or for As of We third $X.XX revenue. income $X.XX tax GAAP of year XX income million share $X.X diluted rate year This income of basis or compared net taxes diluted a net total quarter of of effective GAAP of the $X.X third of XX.X% in $XX.X per income share million, We to

$X.XX net Pro third in net to of $X.XX per $X the was the income compared share per for pro million of income quarter diluted last share quarter $XX forma or or million forma diluted year.

to per please For our refer comparable GAAP a earnings net forma reconciliation release. figures, to pro income share the and earnings of

Turning to liquidity.

and shareholders funded will outstanding the we third and the As to October Subsequent drawdown a of our X on November of with end of $XX debt declared of close XX, XX, on quarter be cash special revolver, dividend cash a of XXXX, September cash $X.XX to a on payable share Directors the combined hand. October XX. million payment million in on on of as our $XX.X the business Board of had record of by combination dividend The of of equivalents. per

hand, XXXX, On were the as special million $XX expected we November an cash to X, X, dividend. million special borrowed borrower the to of $XX $XX dividend. with additional be fund on after November million -- of Outstanding payment the borrowings approximately

$XX a purchase new Directors dollars In up Board to terminating program of XX, with on authorization of of our shares XXXX. to share repurchase March addition, approved million

conditions, the the to year be uncertainty full and COVID-XX ending pandemic due surrounding we outlook a Lastly, for December XX, financial current won’t providing the economic XXXX.

guidance we the of XX fiscal company-owned X restaurants to $XX restaurants, of limited spending following the income Capital forma pro for XX providing restaurants However, a of X restaurants. franchise XXXX. rate and are opening and company-operated X million and to The XX.X%. remodeling franchise $XX X of million tax to

our the any you on for we you questions that for line the to again please and concludes have. We’d are us This prepared call thank questions. joining to answer remarks. like Operator, open may happy today,

Operator

Bartlett Securities. with [Operator first comes Instructions] from Our Jake line of Truist question the

Jack Corrigan

Jack This is Jake. Corrigan actually for

about X% X% ask seeing and ‘XX. visibility level for the range how guidance, for down X% chicken to right restaurant margins X% prices have What we’re wanted locks you now? to guidance I First, now. to commodity level in much do that of And your of just XX%

So the seeing prices spot in can you of locked your those XXXX? we how had remind in much might tracking actually or we’re commodity Just you what inflation as be so deflation. seeing are us

Ira Fils

Ira. is Yes. Jack, this

So we year, are very we’re close for that. in probably the and process booking of to next book,

chicken about XX% year. be of will our booked, buy booking our chicken booked We’re next for be will

pretty we commodity good next the So year. guidance into have for some our -- visibility

Larry Roberts

I’ll And add Yes. that. Jack, just to

in on from drop-off the seeing side purchased we the the boneless little what certainly, and chicken And then lot so, the this boneless and and a booked an we’re we are that breast. boneless, bone increase a in seeing prices, that You’re the chicken chicken that is past markets we year-over-year less year. in seeing

Jack Corrigan

some I to And I things process, Great. putting similar that mean had then productivity really [new year. from making X% sauce] the a on-boarding mentioned question in place for wage That’s next helpful. X% Difficulty] you’re equipment. inflation. you [Technical

customer-facing much do Or pricing in how inflation? things wage you your processes? expect more offset those those So that to are

Larry Roberts

Yes.

can if on I which probably AB So includes will the bear none even does, late we think it’s now the in believe it unlikely in take I -- year. the overall, mind, be XXX, of effect won’t year, mean, it this wage inflation, next

anticipating inflation the in So actual terms current again, we pretty have good of what the we’re environment. visibility into wage in

we those of evaluating mean, going initiatives we lot just that start be those any to terms are put In things customer. actually I on up of the to labor whether really efficiency freeing out. some in place, we that of labor the are can a focus be pulling We’ll think

so whether there is these, at some we’ve evaluate now, freeing we that’s reduce restaurant be at a think right them be just things look to labor actually potential some up. there. all, we certainly, might then we’ll And I done far determined. we But in but can think hours of as really

above evaluating QX and and pricing, -- I call inflation. can can heading pricing shortfall we’ll carrying not we’ll on we or of of had year, the with take or what you think be years kind into inflation we’ve we and be whether anything certainly, of which we pricing over up rapid would this the taking X year to last the catches then first really part especially side, the pricing catch-up be pricing then And levels the the

Jack Corrigan

pricing And would for to get clarify, the is I that XX.X% full in the just to Am my doing quarter. about a you that Great. math fourth XX% year correctly?

Ira Fils

Jack. high the you’re think on side I No, there,

the north in little quarter. a of XX% fourth We’re also

Jack Corrigan

after year? more pricing? through Through would the November -- assuming just didn’t that how increase, next that take And Okay. quarters any pricing roll you how would

Ira Fils

yes. Yes,

quarter As quarter. into or Larry the step the year, and in depend the and off next back back the year of $XX.X-ish we if balance we you’ll as about actually decide nothing first down did will as you be as pricing the will really additional range. step to of so we through again start mentioned, the to we then frame some the upon upon should year. into into the how get half And look of it to -- time first second down else June carry That part the X% quarter, start of taken, into

Operator

the with [Operator David from of comes Instructions] next Tarantino Our line question Baird.

David Tarantino

And wanted about another Ira, to question path to structure. is the the Larry delivering. or to I margin ask my just accustomed margins you what question that is getting back to are

you margins to a catch-up historically? there have that -- I kind of Larry, amount referenced return you’ve you of inflation a to if strategy had try the down Is maybe doesn’t think, to levels come to pricing.

Larry Roberts

Ira I’ll still chime right than time. were, big talk first now is were be higher it’s time, let certainly to from I all, of it’s over David, and we point but a higher where we lot pre in. continue gotten better focal I’ll Yes, Over a mean, and we pandemic.

of getting can we somewhere huge comply on mean legislation costs, a quarter COVID, cost that down I COVID so probably just we that focus California with. which get -- of around is being something And continues as the terms a rid have drivers. And frankly, overtime fairly getting of in quite that’s million margin one to the on to unique $X.X to

it’s think supply to that A that may I’ll just way. is whether changing things there costs redeployed some some side, a I’d we should going there dip us there things say also the of of to at the on be, highlight perspective costs, lower we’re measures. where chain to of looking are the we’re help we opportunities then also improve margins. the save be source, that some to And call vendors the reduce some sourcing addition efficiency on in think to things to could items costs enable labor. of change or that some working at from ops Again, looking perhaps looking commodity it, But some us on I on labor

those for us can margin Iran? with, the that year able be to get the back So I that more next potential will at. said, opportunity take drivers We than like you those Anything maybe think being we’re to you’re to find else, year some catch-up next to accustomed up pricing. levels

Ira Fils

hit you I No, points. think the hot

visibility -- we next inflation pretty we I for good our year. commodity just have I think feel like mean, into

the improve bit And so more we be able that year, structurally, a overtime just they’ve to gives next year margins to which be Larry little take then talked that help next a to above required the us where year. And in tailwind will the COVID-related that likely confidence of will pricing pay regards inflation were of things to level make a of little about some and is going we next of for us bit to to been.

Larry Roberts

one. from then won’t I it they’re been. has mean, believe hopefully, last be to utility up And where to And inflation it’s prices, going like get they’ve hard been. gas

David Tarantino

next the you building equation kind are guess, guess, Understood. I penciling the are follow-up do in nice the guess in future? about out Or units. how new the X-wall making on I these I at franchisees think is how margins higher year you’re openings. your It’s when deals? you looking of step-up you and to how But on it? penciling you’re that projected decisions Is see profitability

Larry Roberts

year. penciling that return than we’re Yes. No, seeing better be what there this past to we’re much will Yes. a margins

to looking So getting of when levels in the at past. we’re margin kind this, at we’ve where we’re back been looking

Operator

to I’d session. Roberts closing question-and-answer remarks. our of end for to turn the the back reached over have call like We any Mr.

Larry Roberts

next we now I’d very hear the feel really call business I the thank where is for Yes, about today. hope about like excited to good year. that and just joining everybody to

everybody and you want again And year great with joining. next to I forward Thanks, next we until again holiday wish a year. And season look again talking so everybody. talk thanks to for since

Operator

Thank you. This concludes today’s teleconference.

lines day. your at Thank this disconnect participation, may you your for have a wonderful time. You and

El Pollo Loco (LOCO) 3 Nov 222022 Q3 Earnings call transcript