Q3 2020 El Pollo Loco Holdings Inc Earnings Call
[music].
Good day, ladies and gentlemen, thank you for standing by.
Welcome to the Isle coiled Loco third quarter 2020 earnings conference call.
At this time, all participants have been placed in a listen only mode.
Lines will be opened for your questions. Following the presentation.
Please note that this conference is being recorded today October 29 2020.
On the call today, we have for an article occur President and Chief Executive Officer of El Pollo Loco, Larry Roberts, Chief Financial Officer.
Now I would like to turn the conference over to Larry Roberts.
Thank you operator, and good afternoon by now.
Everyone should have access to our third quarter 2020 earnings release if.
If not it can be found at www dot.
Calm in the Investor Relations section.
Before we begin our remarks.
I need to remind everyone.
The discussion today will include forward looking statements, including statements related to the impact of the COVID-19 pandemic dinner business and strategic actions, we are taking in response.
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 expect.
We refer all of you to our recent SEC filings 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 2020 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.
Contagion of this additional information should not be considered in isolation, whereas a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release.
Before I turn the call over <unk>, President and Chief Executive Officer for New Artico go.
I'd like to note that Bernard and I are in different locations today.
Please bear with US if you experienced any slight delays for minor audio quality issues. Bernard. Please go ahead.
Thank you Larry good afternoon, everyone and thank you for joining us today I.
I hope that you and your families are staying safe and healthy.
We're very pleased to be here today to discuss <unk> third quarter results.
We posted strong results for our most recent quarter that included a return back to positive comparable restaurant sales, while continuing to take advantage of operational efficiencies.
All in all our efforts resulted in pro forma diluted earnings per share of 28 cents.
A 40% increase compared to last year.
We also managed to achieve the highest restaurant contribution margin in over two years.
System wide sales increased 1.8% during the third quarter.
While system wide sales comps continued to remain slightly positive in the current quarter thus far.
Softening trends, we were seeing at the end of July specifically at our core Los Angeles market carried forward through the third quarter and into October.
Los Angeles economy has been hard hit, especially during the pandemic with an unemployment rate of 15.1% in September nearly doubled the national rate.
California was also hit with the second wave of the virus during the third quarter, leaving many businesses and schools as well as restaurant dining rooms close to this day.
As of now none of our company operated restaurant dining rooms are open in the state.
For a bit of context, it's worth noting that system comparable sales outside of Los Angeles increased 6% during the quarter.
Which gives us comfort that our L.A. sales trends are largely macro driven and.
Enabling us to potentially realize upside once the economy and the CFA opens up an economic conditions improve.
Likewise, we are encouraged that we are about to start on November 2nd one of our historically strongest promotions to conclude the fiscal year our.
Our holiday promotion that features our one of a kind handmade tamales.
On the margin front.
We achieved a 22.4% restaurant contribution margin within the quarter.
After adjusting for onetime kobin related insurance recovery settlement.
Our restaurants delivered a restaurant contribution margin of 20.3% continuing the momentum achieved in the second quarter.
This compared to 18.6% last year.
And was the first time, we delivered margins greater than 20% in two years.
Our teams continue to do a fantastic job delivering operational efficiencies with an acute focus on food and labor cost management that is readily apparent in our results.
We also continue to benefit from significant average check growth.
Offsetting softer traffic trends and helping to drive additional labor efficiencies.
We believe the improvement we are seeing in our operating efficiencies will benefit us as sales in our core la markets returned to more normalized levels.
During the third quarter, we returned to new product news with the launch of our LMS fritos.
As a reminder, Elie Max which is the term we used to describe the food. We serve is the confluence of the healthy and active lifestyles of Los Angeles culture.
And Mexican inspired tradition.
LMS burritos are the poster child for L.A. Bax cuisine, which is why the rollout included the world's first Quito certified Brito as well as our chicken was polio Brito, which was certified began by the American Vegetarian Association.
Oh local remains the only chicken brand that has rolled out a chicken alternative proteins system wide.
We look forward to expanding our portfolio to include even more better for you products in 2021.
We also continued our focus on family meals during the quarter as families continue to spend more time than ever at home and our healthier and affordable complete meals remain a popular option.
As more meals. These days become shared versus individual occasions family meals continue to account for over 30% of our sales mix during the third quarter.
In September we relaunched our local rewards loyalty program with new enhancements that we believe will grow acquisition and increase engagement.
As a result of the relaunch local rewards recently reached a milestone of 2 million members enrolled in the program and our App downloads have grown approximately 45% since the beginning of September.
As a reminder, the revised rewards program includes a new free signup offer that can be redeemed immediately upon joining.
Lower threshold to redeem loyalty rewards with a five dollar award being issued.
Every $50 spent.
And exclusive and relevant offers based on customers purchase history intended to increase incremental visitation check.
Check and ultimately sales.
We are encouraged by the momentum we are seeing as we look to make this program a bigger part of how we go to market over time.
Lastly, as it relates to our third quarter initiatives, we launched GPS enabled curbside pickup on September 28.
Now available at over 90% of our system wide restaurants customers can place their order through our App Park in one of our dedicated curbside parking spaces and have their orders delivered to their car with direct with the restaurant being notified of their arrival through the GPS functionality.
Execution of the launch went exceptionally well and we're very pleased with the seamlessness of the technology.
Customer feedback has been positive and we can then and we continue to reduce average wait times with our goal of being one minute or less.
Overtime, we expect an increasing number of customers to utilize curbside pickup.
As it provides an additional means to conveniently and safely access our brand, especially in the Kobin world.
Looking ahead, we have a number of initiatives underway or planned for the fourth quarter.
We just recently celebrated Hispanic heritage among my supporting small Latina business owners, who had been disproportionately impacted by the effects of the COVID-19 pandemic.
Our partnership with we all grow Latina enabled us to create the first of its kind Bettina small business directory for food related businesses to encourage the community to patronize These businesses.
As well as award I $130000 in grant money to 13, Latina small business owners.
In addition, the El Pollo Loco leadership team will be providing one on one mentoring opportunities to these grant recipients as a means of helping them navigate through these challenging economic times.
During the fourth quarter, we will also roll out stage, one of our new drive thru initiatives.
It's no secret that the drive thru has taken on added value as a result of coated and we believe that we have an opportunity to enhance the drive thru experience for our customers with improvements in speed and accuracy.
We have just completed training our teams on proper labor deployment.
Ride through processes side item projections and pre packaged food.
Food preparation and line layouts.
We believe that this initiative will reduce window and order times, and thereby significantly enhance drive through capacity.
To further enhance our dry through operations. We are currently testing order, taking tablets capable of taking credit card payments and holding equipment with further plans to test additional technologies to improve the drive thru experience for our customers.
Our goal is to cut in half the time it takes for customers to place orders and pick them up at the drive through window.
Finally, given the success we have had over the past two years, we will once again celebrate the holidays in a big way coil logo tapping into what makes this time of year. So special.
We are excited to bring back our holiday tamales tables. In addition to two other El Pollo Loco seasonal classics are.
Our homemade personally bear day, a traditional Mexican holiday Sue.
And our decadent Mexican hot chocolate meet with I will lead that chocolate.
All our holiday food and drinks will be served in festive holiday packaging and cups, which should become a seasonal iconic feature of our brand.
In addition, we will be offering a lineup of holiday themed gift cards and restaurants retail outlets and online.
Before I turn the call over to Larry I'd like to reiterate again, how appreciative I am of the extraordinary efforts of our employees and franchisees.
Their resilience and passion for our brands have been instrumental in navigating this unprecedented environment.
While the cobot crisis will likely continue to present challenges I continue to be very excited about the progress we've made against our transformation agenda.
Our culture and brand fundamentals are now well established and we are driving against our off premise strategies.
Our new product pipeline has never been stronger and our operations continue to improve as we institute systems and processes to ensure our customers have an exceptional experience in our restaurants.
Lastly, as we finalize and test our new restaurant of the future during the fourth quarter.
We will have completed the final piece of the transformation agenda.
Which sets us up well for future sales and unit growth as we seek to expand and our existing and new markets in the years ahead.
Now I'd like to turn the call over to Larry to review, our third quarter results in more detail.
Thanks Bernard.
As discussed previously.
In March we fully drew down our $150 million revolving credit facility, adding $34.5 million of cash to our balance sheet.
During the third quarter, we paid down $55 million of debt and as of September 20, Threerd 2020 at $83.8 million at that outstanding and $29.5 million in cash and equivalents.
Subsequent to the end of the third quarter, we paid down an additional $28 million of debt.
Before we get into our third quarter results I'd like to reiterate that we have temporarily halted company operated unit development as a result, do not expect any additional new company owned restaurants in 2020.
Nor do we expect franchisees to open new restaurants during the balance of 2020.
We will complete two remodels during the fourth quarter using a new asset design, which will then be used for all new build and our next round of Remodels in 2021.
Now onto our financial results.
For the third quarter ended September 20, Threerd 2020, total revenue was approximately $111 million compared to approximately $112.1 million in the third.
Third quarter 2019.
Company operated restaurant revenue.
Was $97.3 million compared to $99.1 million in the same period last year.
The modest decline in company operated restaurant sales was driven by the sale of five company operated restaurants to franchisees and the closing of two restaurants during or subsequent to the third quarter between 19 as well as a $600000 decrease due to a temporary closures primarily.
Related to the Cobot Nike pandemic.
This was partially offset by 0.2% increase in company operated comparable restaurant sales and an increase in revenue generated from the three new restaurants opened during that same time period.
The increase in company operated comparable restaurant sales was comprised of an 18.1% increase average check partially offset by a 15.2% decline in transaction.
During the quarter, our growth pricing versus 2019, but 3.7%.
Franchise revenue was $7.8 million during the third quarter compared to $7.3 million net prior year period. This.
This increase was primarily due to a franchise comparable restaurant sales increase of 3% as well as the opening of two new franchise restaurants in additional revenue generated from five company operated restaurants. So by the company the franchisee during or subsequent to the third quarter between 19.
This increase was partially offset by the closure of nine franchise locations during the same period.
Turning to expenses.
Food and paper cost as a percentage of company restaurant sales decreased 220 basis points year over year to 25.6%.
Improvement was predominately due to higher menu prices lower food and paper usage, which was largely a result of diamond closures and effective waste management and favorable sales mix. These were partially offset by commodity inflation.
Labor and related expenses as a percentage of company restaurant sales were 29.6%, which was the same as last year as higher hourly wages in California, and labor costs associated with the COVID-19 pandemic were offset by increased menu prices and operating efficiency.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 40 basis points to 24.5%, primarily due to sales de leverage and increases in operating costs and marketplace delivery fees.
During the third quarter of 2020, the company received insurance proceeds of $2 million lead to sales losses and expenses related to the COVID-19, pandemic and resulting from closure.
General and administrative expenses increased by approximately $300000 year over year to $9.8 million.
The increase was a result of higher management bonuses and stock compensation expense largely offset by decreases in legal fees preopening costs and other miscellaneous expenses.
As a percentage of total revenue general and administrative expenses increased approximately 30 basis points to 8.8%.
We recorded a provision for income taxes of $1.6 million in the third quarter of 2020 for an effective tax rate of 14.2%. This.
This compares to a provision for income taxes of $2.9 million.
The effective tax rate of 31.5% prior year third quarter.
We reported GAAP net income of $9.9 million or 28 cents per diluted share the third quarter compared to net income of $6.4 million or 18 cents per diluted share in the prior year period.
Proforma net income for the quarter was $9.9 million as compared to pro forma net income of $7.2 million in the third quarter of last year Pro.
Pro forma diluted earnings per share were 28 cents for the third quarter of 2020 compared to 20 cents in the prior year period.
For a reconciliation of pro forma net income and earnings per share the comparable GAAP figures. Please refer to our earnings release.
Now looking to the balance of 2020.
While market economic conditions continued to be challenging due to the COVID-19 pandemic based on current information, we are providing to filing limited outlook for the fourth quarter of 2020.
System same store sales of approximately 1% to 2%.
Restaurant contribution margin of 18% to 18.5%, which includes an estimated 60 basis point negative impact from this year's 50 Threerd week.
Gene Ace band of $9.6 million, the $10 million, excluding legal costs associated with a securities derivative lawsuit.
This concludes our prepared remarks I'd like to thank you again for joining us on the call today and we are now happy to answer any questions that you may have.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for your questions.
Our first question comes from the line of Jake Bartlett materially Securities. Please proceed with your questions.
Hey, guys. This is actually Jack on could shake thanks for taking the question.
I'd like to start asking about the margins the guidance implies a decent step down.
In the fourth quarter I, just what is driving that is it.
Opening more dining rooms, and labor increase there or just any color you can you can give on that.
Yes.
Biggest driver of.
The margins in the fourth quarter first of all generally fourth quarter.
His seat.
Softest quarter that we have because of the holidays, giving increases there which are for volume and therefore, a lower parts, which kind of usually throughout the fourth quarter to be a bit lower.
The thing I would highlight is again as I said in my opening comments is it.
If you adjust for the 60 basis points.
You actually get to a range of you know the teams to above 19.
And those would actually be the the best fourth quarter margin.
That weve delivered since at least 2016.
I don't see as a huge step down in terms are.
Our operating performance and heavily managed costs.
As a reflection of again, what we normally see enough work for your little softer I'm already because of holidays.
Okay, great that makes lot of sense.
Okay, and I guess moving forward with margins into next year as you reopen dining rooms, and they had some of that labor back how should we think about margins long term I know I know, it's difficult to give longer term guidance right now, but just help us frame that a little bit for 21.
Yes, the longer term.
Right on the last call.
At the margin challenges would be around number one how much pricing do take this fourth quarter.
We're going to be taking over 4% base effective price. Obviously helps margins next year, we'll be looking at how much pricing, we feel comfortable taking again, we'll look to take somewhere in the range of what we've taken this year.
The other big driver the one you highlighted.
His well actually this one is.
Next year sales as we see transactions.
Increase relative to check.
That will.
But more labor and restaurants, because way, where labor model and transaction here.
So we expect again to see the labor costs rise a bit.
The actions increase relative to the deck and.
And then the second factor is as we opened 10 rooms acid piece, it's not yet clear because I think what we'd look to do is.
Transaction increase use that labor and then direct gross add any incremental labor on top of what that transactions are.
But thats still something we have to assess.
What kind of requirements, we have based on.
The covidien cleaning and other features.
I'll have to be maintained to be clients with local regulations and things. So that's the piece that will a little bit I think just the rise in transaction levels.
We'll probably margins, but at the same time they.
They should improve sales so the overall profitability of like to improve but the the margins may be a press fit.
'cause it's transaction driven sales growth that will say.
Okay. Thank you very much.
Hey, Larry in the meantime, if can get real quick phone, we get a little bit of static in listening to your commentary so I'm not sure if its trend or the.
The operators and but just to make sure. We're hearing you clearly.
Okay.
Thank you. Our next question is coming from the line of Agri Barish with Jefferies. Please proceed with your questions.
Hey, guys good to hear from you.
For the last year or so you were beating the franchisees in terms of same store sales on that flipped around here in the in the Threeq can you.
Can you give us a sense of.
What's going on there is it geographic or pricing I, just just trying to understand that difference in the Threeq you.
Yes, Andy I think it has more to do with what I refer to her prepared remarks in terms of the concentration of our restaurants predominantly in California, we have more of them on the company side.
So I think you're seeing that reflected a bit in the.
The Democrats and the results 20 versus franchise so.
As I mentioned you know we.
Our countering greater economic headwind in the world in Los Angeles, specifically.
As in our our markets, we had been seeing really strong performance.
As I mentioned in my prepared remarks, 6% sales.
In that part of the World. So I think that has more to do with anything else.
Yes.
And just to add a little firmer data onto that Andy Yeah. If you look at the number of restaurants I mean, the company we have about 73% of restaurants in L.A. were franchise is about 47%.
So clearly any other markets outperform.
You could franchisees to outperform since they have a percentage of the fed wants an outer markets.
Right.
And Andy I'll, just make on that just if its not abundantly clear, California, All company restaurants dining rooms are shut down and.
In our outer markets most of the dining rooms are open so just another an important point.
Understood and then can you give us a sense.
Real estate pipeline.
You know kind of how things are shaping up for next year, you know opportunities.
Maybe created are not out there from the crisis at this point.
Okay.
Yeah, I'll take that one we are still working through.
Next year I think the piece I'm very comfortable saying is that I expect the company restaurant development company owned it'd be somewhere between three and five restaurants.
I'd say, we're working through the franchise piece, just seeing where they are.
Based on your Workover would impact and things are certainly expect franchise development to be higher than this year, which was basically.
I think two restaurants, but we're still working through that but again I always accompany three to five.
And still working through franchise, which should certainly be more than this year.
Okay. Thank you very much.
Thank you. Our next question is coming from the line of Todd Brooks with CL King and Associates. Please proceed with your questions.
Hey, good afternoon guys.
Few questions one now that were.
Close to birthing the two remodels some of the restaurant the future design.
Is there any I know it was a fluid process due to the learnings from covert is there any kind of sneak preview you can give us on what what we should be seeing in the remodels and what and.
Enhancements or changes were made out of learnings from Pemex.
Yeah sure. So I think what you are seeing is some you know we consider.
What weve been encountering with co the to be actually a blessing for us from improved standpoint that we've learned a lot about what adjustments we need to make on a go forward basis in these remodels and in this new restaurant design in the future.
Primarily around.
Technology and the drive through what we want to really create there so future rebuilds will have.
Our double drive through.
[music].
Naturally with the expansion curbside pickup you will find that in every one of our restaurants going forward now that we have it 90 plus percent of the system.
Smaller dining room footprints and in some cases, we won't even have dining rooms at all so we've got several different models that are very flexible depending on the trade area.
Depending on the geographic area.
Depending on whether or not.
We have a heavier drive through market versus dine in market. So some will just to actually have a double drive through and perhaps pick up takeout window. Some we'll have a much smaller dining room footprint, but when we do build the dining room, we've created a modular design whereby you can lift the garage.
These essentially what looked like garage doors open to create a much more.
Open dining room to a larger and large patio where.
Customers would feel more comfortable dining given how their mindsets have changed during this pandemic.
In regards to the Remodels. We've got in Q4 naturally these are not ground up Cesar remodel. So we're going to have more of what we've learned influencing the back of the house in terms of the technology will be incorporating their new equipment that will be incorporating there.
But what you will see more front of house, there will be digital pick up where it will be very very clear the customer based on if.
If they place their orders ahead, given through our mobile app, how big can readily pick up their food.
That's kind of just the gist of what you should expect from US going forward nationally. In addition to the new brand look that we have been implementing over the course of the past two years.
That's super helpful. Thank you and then you touched on.
Trust your work around drive through efficiency and I guess in test is there anything you can share with us about.
Successes that you've had in shrinking transaction time, so we can start to get our mind around potential capacity additions would drive through productivity gains.
Yeah, we've been midnight, we focused on two things window time, an order time and in order to speed those things up and we've got a an aspirational target of getting to 45 seconds window time, that's really what drives maximum capacity in the drive thru, we've implemented a bunch of different things are still in the process of.
Testing things, but.
From B the equipment lay out at the drive thru to having just completely rolled out deployment training throughout our company organization. So that you know we put aces in their places they understand what their roles and responsibilities are and they understand how to drive maximum efficiencies in the drive through.
One of the other things that were in the process of testing right now is order taking tablets.
It can also take credit card payment in the drive through in our pursuit to getting to a 45 second window time, but essentially we're looking to cut our drive thru times in half at the window right now and Weve.
We've actually on our path to eventually getting to that goal have set targets along the way for instance in the fourth quarter alone. We're taking some some incremental steps to get to 45 seconds, eventually, but a lot of work and attention being placed there.
When we get to the new Remodels, you know, we'll be looking to implement things like digital menu boards and the drive through which we don't currently have today.
Preview boards and the drive through that could speed things up et cetera. So we're putting a disproportionate amount of our attention on that channel given that we've gone from driving 45% of our business prior to the pandemic to close to 70% of it now and we think we can even drive more through that channel and real.
Slides, even greater sales comp upside.
Very helpful. And then just a final question I know the environment's topic on some on some uncertainty, but obviously.
Obviously, Hopewell Locos performance, but the return to positive same store sales just wondering on the franchising side can you talk about efforts and any sort of progress and drawing new franchisee partners to the brand. Thank you.
Yes, I'll take that one.
Yeah, Hi, guys. So a couple of things on that.
First of all this is an area that we are now pushing aggressively or are setting ourselves up to push aggressively. So we have hired an outside consultant work with us we are putting together a I'll call. It the package that we will go to market with we've identified the mark.
It's that we're going to focus on so I expect by year end, we will be out there really starting our recruitment of franchisees.
New franchisees for new markets.
Having said that at the same time, we've had a number of franchisee candidates I would say contact us unsolicited.
When we are talking to I mean, its unused number is probably.
Probably two or three.