Q4 2021 Portillos Inc Earnings Call

Okay.

Hello, and thank you for standing by welcomed to the fiscal fourth quarter of 2021 conference call and webcast for per kilo is incorporated.

I would now like to turn the call over to Mr. Fits you tailor managing director at ICR to begin.

Thank you Rob.

And welcome everyone with me on today's call is Michael of San Luis President <unk>, President and Chief Executive Officer, and Michelle Hook, the company's Chief Financial Officer.

Before we begin our formal remarks, let me remind you that are part of our discussions today will include forward looking statements.

These statements are not guarantees of future performance and should not be unduly relied upon.

We do not undertake to update these forward looking statements unless required by law.

For you to today's earnings release, and our SEC filings for more detailed discussion of the risks that could impact portola as future operating results and financial condition.

Our remarks also include non-GAAP financial measures, such as adjusted EBITDA and restaurant level adjusted EBITDA.

We direct you to our earnings release issued this morning, which is available on our website for the reconciliations of these non-GAAP measures to their most comparable GAAP measures.

Any non-GAAP financial measures should not be considered as an alternative to GAAP measures such as net income or operating income or any other GAAP measure of liquidity or financial performance. Finally, after we deliver our prepared remarks, we will open the line for your questions. Let me now I'll turn the call over to Michael <unk>, President and Chief Executive Officer Portela has.

Michael.

Thank you Hugh and good morning, everyone. We appreciate you taking the time to join US on our year end earnings call.

2021 was a milestone year for portfolios, we're thrilled with the completion of our IPO and the Investor reception that we received and we're very proud of how we ended the year I'm happy to share the Portillo posted strong top and bottom line growth in the fourth quarter, resulting in a successful fiscal year for us.

We grew total sales 17, 5% or $79 $5 million and we grew restaurant level, EBITDA 16, 5% or $21 million Michelle will give you a lot more detail on the numbers, but I wanted to highlight our great results for the year, we added five new restaurants in 2021.

All of which opened well staffed and it performed at or above our expectations. This included our first entry into Michigan as well as our first restaurant in the Orlando market. Both places that we're going to continue to fill out in the near term as we expand portfolios recognize this success despite the volatility in it.

The restaurant industry faced all through 'twenty one.

Our multichannel model proved yet again to be a competitive strength, even in the face of the great resignation, continuing COVID-19 restrictions and ever changing commodities cost we continued to perform.

This is reflective of our dedication to delivering an unrivaled experience to our guests through our unbelievable team members. We regularly say that people are the heart of ports halos and I'm. So grateful to our team members who through all these challenges have embraced our purpose and lived our values of family greatness energy and fun.

Now the fourth quarter is always baked for portfolios and it was again this year, we have so many loyal fans that make portillo part of their holiday celebrations and Theyre gatherings. This remained true and we saw heavy catering sales over the holidays.

Still omicron did impact us both from a sales and staffing perspective, we saw a greater number of cancellations and an increased number of team members out because of Covid.

Despite that we had a very strong fourth quarter and closed the year out well, we delivered against all of our growth commitments.

We're very happy with our recent performance, but what's even more exciting is our future. We have one of the best teams in the restaurant industry, all of whom are dedicated to delivering greatness on every front, we're committed to our portfolio's family staffing continues to be a challenge for the industry, but we believe in taking care of our team members who.

In turn take great care of our guests not only do we offer competitive pay we invested another $12 million last year to have a total rewards package that includes schiff meals extra pay on key holidays flexible scheduling at a more affordable health care program, we offer an experience unlike any other in our.

Team members clearly agree about a quarter of our new Portillo team members come to us through internal referrals.

We provide a full spectrum of training and leadership development opportunities for those team members first we've implemented new training materials offering a blended approach to learning that includes both hands on activities as well as E. Learning modules. This is the way people want to learn today.

Second we've launched a leadership development program, we call ignite it emphasizes leadership training for our team members, who want to take the next step in their career with Portillo.

This includes skills like leading change having difficult conversations building relationships things that our team is going to use throughout their entire career. What we've found is that this dedication to their growth keeps team members with us and we've seen an internal management promotion rate of over 80 per.

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A metric that we're extremely proud to share.

While many restaurant brands have had to close doors or rope off tables because of staffing our doors have remained open. We've also invested in making technological improvements, but they have to be real changes and upgrades.

Positively impact the guest or team member experience for example, we rolled out a new version of our POS system, that's easier for our team members to use it increases throughput and reduces training time for new hires.

Traditionally we had three different systems for order, taking one inside one in the drive through and then a handwritten process for line busting when the lines get long.

Our new system is the same throughout the restaurant. So we only need to train the team member wants to be able to take orders anywhere.

When it comes to our food our culinary approach is to have an owner will veto proof menu and that means we scrutinize anything we add to the menu it needs to be a significant improvement over existing items. It has to add meaningful traffic and it has to reduce operational complexity and that's a very high bar.

But one of our most successful new items ever was a spicy chicken sandwich that we launched last year. It was a massive win that met all of our criteria first it test it off the chart with our consumers our guests simply love. It second it's been incremental to our business and third it's operationally very simple to execute on.

Top of being a delicious sandwich, we've got a lot of buzz for it with our guests.

We use world class digital marketing that was clever and witty and cost effective and if you haven't seen any of our spicy chicken marketing. Please check it out just Google Port pillows spicy chicken.

Innovation also extends within our restaurants themselves not only if we identified ways to reduce the size of our back of house without impacting operations, but we've also implemented a third drive thru lane as a way to offer increase convenience to the growing number of guests who choose a digital ordering experience.

Our drive thru is already one of the most efficient in the business now there's dedicated third lane draws consumers toward direct ordering channels, our website and our app by offering a rapid pick up option for guests who use those channels. We first launched it in West Madison, Wisconsin, and it's also in place in Joliet, Illinois at our first.

Off premise only restaurants, which we call port till those pick up.

We're super excited by the early results of this portillo pickup prototype it opened on February 1st it's a fraction of the size of our typical restaurant and it's still serving an unbelievable amount of food for drive through takeout third party delivery and catering.

Due to the smaller size and format. This new model has the potential to unlock whole new real estate options for us and help infill existing markets to better serve our guests however, and whenever they want to get their port till those.

Importantly, we're confident in our ability to deliver sustainable and profitable growth.

With new restaurants opened successfully in Indiana, and Wisconsin in the fourth quarter and the recent opening of Joliet in February we are now at 70 restaurants, and we're not slowing down.

Our second restaurant for 2022 is scheduled to open in St. Petersburg, Florida in early April .

And then next we look forward to opening an additional five restaurants in the third and fourth quarters will continue to build scale in existing markets as well as the growing sunbelt.

Now I'm sure you saw recent announcement around our first Texas restaurant, it's located in the Grand Scape complex in the count in the colony on the north side of Dallas.

This restaurant is going to be a showstopper. It is our garage style dream with a Texas twist and importantly, it's going to be a place where our Texas guests will get the true Portillo. His experience I'm confident this restaurant will be a home run for us and paved the way for future growth in Texas.

For each one of our new restaurant openings, we have a very prescriptive hiring strategy that allows us to find values driven team members, who then in turn delivered the port till those guests.

Portola as experience for our guests.

The hiring environment, we create and the great frontline leadership, we develop enabled us to hire over 100 team members for our Joliet restaurants, and we're currently at over 120 hires for St. Petersburg already.

So it gives us tremendous confidence that we can find staff for all of our new restaurants with amazing values based team members.

We're also really conscious of the cost environment, right now, including labor cost food cost distribution energy in build costs.

We don't have a set date that we take price, but we stay flexible.

We look at cost and pricing daily to evaluate our menu and our competitive position yes.

Our strategy is to be a price laggard, we intentionally price below inflation and we haven't priced as aggressively as many other restaurant brands.

And that's because we believe in offering strong value to our guests in times of economic uncertainty. We know people are seeing prices increase all around them.

We want to be a respite from that a comforting place where people don't have to think about that we want them to come have a beef sandwich and a great experience, leaving those stresses at the door that's our priority.

As we continue on the path of a new public company, we're excited about the future.

There's a lot happening for portfolios in 2022, and we're only just getting started.

So with that I'm going to hand, it off to Michele to share more details of the quarter and our expectations moving forward.

Thank you Michael and good morning, everyone I want to thank our amazing team members in our restaurants at our commissaries and at our restaurant support center for their work that they do as we continue to work together and navigate this challenging landscape.

Our people centric culture is centered on working together to create a fun energetic atmosphere, while living our values.

As I discussed on our third quarter earnings call. We completed our successful IPO in late October you can find all the details on that transaction in our 10-K filed this morning desk.

This transaction did have a onetime effect on our G&A in the quarter and I'll touch upon that later.

Now turning to our results for the fourth quarter and full year 2021, we are extremely proud of our performance as we saw strong and balanced top line growth. The second half of the year proved challenging with one micron and pressures on our commodity and labor costs.

Despite these headwinds we were able to exceed our expectations on a restaurant level adjusted EBITDA growth and adjusted EBITDA growth in both the quarter and full year 2021.

We remain confident we can continue to deliver healthy topline and bottom line growth in 2022 and beyond and more importantly, we remain committed to our long term outlook and metrics that were provided in our earnings release. This morning.

Let's now dive into details.

Revenues were $138 $9 million.

<unk>, an increase of $24 million or 17, 2% compared to the fourth quarter of 2020. This was driven by a 10, 3% increase in same restaurant sales combined with the opening of seven new restaurants since the beginning of the fourth quarter of 2020 the C.

Restaurant sales increase of 10, 3% was primarily driven by nine 5% increase in average check and a 0.8% increase in transactions are higher average check was due to increases in our menu prices of approximately six 4% with the remainder being a <unk>.

From a mix of items sold.

As Michael previously mentioned, we did see a dampening as a result of all of them are crown in both our sales and staffing levels in the fourth quarter, particularly during the last few weeks of the quarter on our seasonal catering business.

We continue to see these negative impacts during the first several weeks of January .

However trends in both our sales and staffing levels have since improved and sales trends and transactions improved from January to February .

Our same restaurant sales during period, one of 'twenty two grew nine 2% and then accelerated to grow at 13, 6% in period two we.

We estimate same restaurant sales for the first quarter of 'twenty two to be in the range of seven five to eight 5% rolling over a comp of 24, 6% in period three F. 2021 .

For the full year revenues were $535 million up $79.5 million or 17, 5% year over year, and an increase of more than 12% compared to 2019 revenues.

The increase versus 2020 was driven by 10, 5% increase in same restaurant sales combined with the opening of seven new restaurants since the beginning of the fourth quarter of 2020.

The 10, 5% increase in same restaurant sales was driven by a healthy balance of menu price increases of approximately four 4% transaction growth and next of items sold.

Before I close out my comments on revenues I did want to point out a change that will impact certain metrics in 'twenty two.

At the end of 'twenty, one we revised how we account for third party delivery partners.

We now reflect the total price charged for delivery orders burst as regular menu price says in revenues.

The delivery price differential was previously reflected in cost of goods sold as an offset to commission fees paid to our partners.

As a result, we expect this change to positively impact our same restaurant sales growth by 2% to 3% in each quarter in 'twenty, two and for the full fiscal year with a corresponding increase to cost of goods sold.

This change will not impact restaurant level, adjusted EBITDA or adjusted EBITDA. We will continue to note the impact of this change in future 'twenty two filings.

Cost of goods sold excluding.

Excluding depreciation and amortization as a percentage of revenues increased to 32, 6% in the fourth quarter of 'twenty, one from 37% in the fourth quarter of 'twenty.

This increase was primarily driven by an increase in our commodity prices, specifically in our beef chicken and pork prices.

And this was offset by an increase in our average check.

We continue to see commodity inflation during the first quarter of 'twenty two in January I provided a range of 5% to 7% expected increase in our commodity basket in 'twenty two.

We now currently anticipate 13% to 15% inflation across our commodity basket in 'twenty two.

You can tell we're dealing with real time changes in commodities energy freight and distribution.

As a reminder, beef chicken import comprised approximately 50% of our commodity basket and we are seeing significant increases in all of those categories.

Now moving into labor labor as a percentage of revenues increased to 26, 2% in the fourth quarter of 'twenty, one from 24, 3% in the fourth quarter of 2020.

Primarily due to an increase in hourly rates investments made in training and discretionary bonuses.

Shelley offset by an increase in our average check and the impacts of lower staffing.

The labor market continues to remain extremely challenging and everybody is competing for talent.

We made a substantial investment in team member pay in the second quarter of 'twenty, one as part of our ongoing commitment to pay benefits training and talent development.

We continue to see the impacts flow through in the fourth quarter as our average hourly rates were roughly 20% in the fourth quarter of 'twenty, one versus the fourth quarter of 2020.

We anticipate making additional wage investments in 'twenty two as the environment continues to be fluid and we remain committed to ensuring our restaurants are staffed with exceptional team members. We are extremely proud that despite these labor challenges, we've not had to limit service channels our hours of operation that.

Speaks to the extraordinary productivity of our frontline team members during these challenging times.

We're proud that even with these increases in food and labor, we produced strong restaurant level adjusted EBITDA dollars and margin in the fourth quarter and full year 'twenty one.

Our other operating expenses increased $2 $5 million or 19, 5% in the fourth quarter of 'twenty, one which was primarily driven by the opening of seven new restaurants since the beginning of the fourth quarter of 2020.

Additionally, operating expenses were impacted by incremental costs as we expanded our dining capacity.

Occupancy costs were flat as a percent of sales primarily due to the quarter over quarter sales increase previously described inclusive of the opening of seven new restaurants since the beginning of the fourth quarter of 2020.

As a result of all of their boss restaurant level adjusted EBITDA increased one 3% to $35 million in the fourth quarter of 'twenty one.

Restaurant level adjusted EBITDA margins were 25, 2% in the fourth quarter of 'twenty, one versus 'twenty nine 2% in the fourth quarter of 2020.

The decrease of approximately 400 basis points was largely driven by the impact of commodity and labor inflation.

As mentioned on our third quarter call. We did increased menu prices approximately 3% in early Q4 to combat these headwinds.

We do expect these headwinds in both labor and commodities to continue in 'twenty, two and we expect our restaurant level adjusted EBITDA margins to be negatively impacted in each of the four quarters.

We plan to partially offset these increases through additional menu price increases as well as operational efficiencies.

During the first quarter of 'twenty, two we did increased menu prices approximately one 5%.

As a result of this current pricing action combined with the previous actions taken in 'twenty. One we estimate the net pricing effect in Q1 of 'twenty two to be in the range of seven to seven 2%, which is slightly below inflation.

Our G&A expenses increased $39 $4 million to 37% in the fourth quarter of 'twenty, one from 10, 1% in the fourth quarter of 2020.

$39 4 million increase was due primarily to a $29 $3 million increase in equity based stock compensation expense, a $6 $6 million option holder payment and $2 $9 million of transaction related expenses all associated with the <unk>.

I P O.

The $600000 remaining G&A increase was due to ongoing cost of the business largely with N wages.

We are continuing to invest in G&A. This year with an eye on the long term growth potential for the company and expect to spend between 70 and $75 million inclusive of equity based stock compensation expense.

Preopening expenses were relatively flat in the fourth quarter of 'twenty, one versus the fourth quarter of 2020, as we opened two new restaurants in both quarters, we expect preopening expenses to be between six and six and a half million dollars in 'twenty two as we are anticipating opening seven new restaurants during the year.

All of this led to adjusted EBITDA of $23 $2 million in the fourth quarter of 'twenty, one versus 'twenty $3 $5 million in the fourth quarter of 2020, a decrease of one 2%.

Below the EBITDA line interest expense was $7 $6 million in the fourth quarter of 'twenty, one a decrease of $3 $2 million from the fourth quarter of 'twenty.

This decrease was driven by the payoff of our second lien term loan and lower outstanding borrowings under our first lien term loan.

During the fourth quarter of 'twenty. One we also recognized a $7 $3 million loss on extinguishment of debt due to prepayment penalties and a write off of debt discount and deferred issuance costs.

Now turning to the balance sheet.

As previously mentioned, we used proceeds from the IPO along with cash on hand to repay the redeemable preferred equity and Paul repay outstanding borrowings under our second lien term loan and purchase LLC units from certain pre IPO LLC members.

After making all those payments our balance sheet remains in a strong position and we ended the quarter with $39 $3 million in cash.

We'll be using our cash balance plus operating cash flow to support our strong growth in new restaurant openings in 'twenty. Two we are expecting capital expenditures to range between 60 and $65 million.

Thank you for your time and with that I'll turn it back to Michael.

Thanks Michelle.

Before we open for questions I, just want to reiterate what our main goal is as a company. We are committed to taking care of our team members, who in turn create an unrivaled experience for our guests that experience is our priority in a world full of stress is we want to be the stress relief our guests can expect a fun atmosphere.

A great meal at an amazing price we are their oasis you can see by our sales and comp trajectory that consumers are choosing portals, we have demand.

Commodity and labor pressures will come and go the world May face uncertainties, but we're going to keep the hotdog steaming in the cheese sauce flowing so thank you.

Operator, turning it over to you. Thank you.

Well now be conducting a question and answer session if you'd like to ask a question. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to move your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Thank you. Our first question comes from the line of David Tarantino with Baird. Please proceed with your questions.

Hi, Good morning. My first question is on the margin outlook.

Michelle given all the moving parts you described on the cost inflation outlook.

And then this incremental pricing that you took in the first quarter. How are you thinking about restaurant level EBITDA margins.

For the near term I guess for 2022, if you can give us a sense of the framework that we should be thinking about.

Yeah, David Obviously, you know given the fluidity of the situation right I mentioned that just in January we had commodities five to seven and now we're at 13% to 15% and so it's a very fluid situation for us, but you know as we think about that we know margins are going to be pressured and you know.

I'm not giving any definite definitive guidance on margin for a reason and that's because of the uncertainty surrounding that and but I do expect it to be pressured I expect it to be pressured against what we saw both in the third quarter and fourth quarter.

Coming into the first quarter as well as the out quarters, and 22 simply because of that commodity outlook.

And then also just want to remind you like as you think about you know restaurant level EBITDA.

You know the labor market to continues to remain fluid as well and so you know we are looking at potentially making additional investments there and so Michael and I as he mentioned are going to continue to look at our pricing as a lever, but also looking at operational efficiencies, but we do want to remain price laggards as he mentioned, but I do.

I expect the margins to be pressured.

And then maybe as it related follow up but it sounds.

And the philosophy on being a price laggard.

But do you have a sort of long term target that you want to manage to on that line I guess.

Some of this inflation sounds like it's not temporary so.

Or is there a path.

I think in the past you've had in mid <unk>.

Twenties.

Restaurant level EBITDA is that is that a goal longer term and I guess, how do you get there over time.

Yeah, obviously, we want our goal to continue to be to produce the margins that you and we've seen historically, David and you know the mix of our margin profile is going to vary in terms of our core Chicago land market versus our Artur market. So I'll just remind you that as we continue to build outside of our core market right and we build those out.

Markets margins are going to naturally be pressured as well by us continuing to build in those outer markets.

And that will continue to pressure the margin profile overall, regardless of what's going on in the inflationary environment. So that's just a reminder, as well, but you know absolutely as Michael thinking I know I think about the margin profile right. As we think about putting again next course, Chicago land market, which traditionally has been in the 30 plus.

That margin range versus the outer markets you know yeah. The blended range I would expect to be above the 20% range as we move forward.

David can I just build on what Michelle said, so you know.

In times of like uncertainty like this we are our belief as well.

Others might be shrinking portions taking prices above inflation. Our philosophy is we're going to take traffic we want to be.

Great place for consumers, we're very conscious of all the price pressures that consumers face and our goal is to drive traffic and drive to drive transactions and drive revenue, but we're also Michelle and I are much more concerned about margin dollars and margin percent and our goal is to make sure that we're working hard to grow margin dollars and.

We're just not quite as talked up about the percentages.

Great. Thank you both.

Good to hear from you David.

The next question comes from the line of Nicole Miller with Piper Sandler. Please proceed with your question.

Good morning, and thank you I'm, just kind of following up on that.

Topic, but asking it a different way so understanding the leg strategy on price I was curious if you or how you manage the gap so.

Like you said Michelle back in January if you are facing 5% to 7% inflation.

And so had 7% price who knows if you were to put all of that into effect, but let's see you're managing at most of the 200 basis point gap or no GAAP I mean, it could've been in your favor frankly and.

And now you could be facing like a mid to high single digit gap.

What gap.

Is in the model that is still allows you to achieve a store level margin percentage or dollar profit growth.

Yeah.

Thank Nicole to Michaels point, the way that we're thinking about it clearly is in terms of dollars, but there was a reason why you know Michael and I put a pricing action in effect in January right because as we saw some of those additional headwinds come into play right. We put an additional point and a half of pricing in play in the first quarter of <unk>.

Two to combat some of these headwinds, but remember pricing is not the only action that we mentioned were still looking at operational efficiencies as a as a means to close that gap, but we don't want to get out over our skis on pricing either Nicole alright, we understand as Michael mentioned in his commentary that there is inflation going on all around our <unk>.

<unk> in our gas and we want to continue to drive that traffic into our restaurants and be a good value to our consumer and so yes. We know there is a gap there. We know we continue to have to address to close that but we're looking at a couple of different mechanisms outside of just pricing, but you know I I want to be clear that what I said holds true that we do things.

Margins will take as a percent there are definitely going to take an impact in the short term as we work through these challenges.

Yeah.

Maybe one other way of looking at it and it might not be associated but I'd be curious about Michael your comments at the very beginning of the call the benefits of the multi channel model. So how our employees and our guests impacted if you were to push one channel over another or turn one channel on or off I mean.

Previously you've been mandated you know for example to close dining rooms is that better to push everybody through a drive through is there some kind of impact that benefits employees are the customers in terms of speed service accuracy or even benefits you know the enterprise on margins or is it really kind of normalized all else equal.

Yeah.

You know to be honest.

But I don't think we think about directing our customers necessarily do channel I think what's important is to be responsive to your customers and how they want to consume portfolios. So we saw it we saw during the bulk of Covid.

The importance of having a drive through digital channels off premise all of that was hugely important but right now we're seeing consumers start to come back into our dining rooms right back in 2019, we had 53% inside in 'twenty. One it was about 36% and it's starting to tick back up in <unk>.

We want to be there for the consumer however, they want to experience us so.

I'm a broken record our thing is we want to be a consumer centric company, we want them to enjoy their time at Portola as we wanted to be a dis stressor in a world full of stresses and we don't want them to feel like their pocket books are being crushed right now with fuel costs, where they are they are discretionary income is being challenged and we.

Philosophically believe that a value.

That they a great value is going to win with consumers in the near term.

When and if prices start to come back down in terms of fuel commodities et cetera, we will reevaluate our pricing, but for now I think Nicole we feel really good that we have a very strong P&L, we generate a lot of cash and we can use this time to take share and invest in guess.

Thank you.

Thank you. Our next question is from the line of Chris <unk> with Stifel. Please proceed with your questions.

Thanks, Good morning, guys.

Michelle My question is regarding.

The Preopening and Capex. It was a lot higher than we had expected but unit opening guidance was unchanged are you seeing greater inflation, there or is there some sort of timing issue at the end of the year.

Both.

Chris to answer your question so.

You know I'll start with the Capex. So yes, we're seeing inflationary pressures clearly in our build costs and you know right now we're building restaurants I believe.

You. All we gave you all a range of four $5 million to $5 million was generally or build cost and we're seeing about $1 million higher build costs on the high end of that range. So call it about $6 million.

Build cost that we're seeing today on our on our Capex. The other thing that's in the Capex is remember we're going to start to build restaurants in.

In 'twenty two that are going to open in the early part of 'twenty three so there's some 23 build cost in there as well as we're making significant investments in our technology. Michael mentioned the point of sale system. We're also putting in digital menu boards and all of our restaurants. So there is some technology investment.

In that Capex number as well.

Okay. That's helpful. And then can you help us understand.

Can you help us understand how the pricing should flow through the rest of the year roll off I guess through the rest of the year absence any absent any additional pricing and then maybe also comment how you think about the timing of pricing action.

Yeah, absolutely so don't.

Don't know exactly what we're going to do the rest of the aircrafts as Michael mentioned right. We want to remain flexible in terms of how we approach pricing.

But I'll.

At Q2 as an example, if we did nothing else right and we just rolled forward with the pricing actions that we took in Q1 of this year as well as the pricing actions. We did in 'twenty. One Q2 would have us at about a 5% price because we do have some of that price dropping off that we took in 'twenty one in Q2 as well.

Looking into the out quarters, it's generally you're going to run a little bit under the under our that around four ish percent, but that again, Chris that depends on you know.

What we're going to do and what pricing actions, we're going to take in 'twenty. Two so I can't say for certainty that's going to be exactly what it is but at least wanted to give you some visibility into Q2, which gives us some visibility into the first half of the year, but we want to keep our options open in terms of you know when and how we take price.

Helpful. Thank you guys.

Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your questions.

Hey, good morning, guys.

I would imagine even.

With some of the challenges late in the <unk>.

And what I imagine with some overtime spend and things like that you still saw some pretty decent labor productivity.

Talking about operational efficiencies.

This year there are a couple of things we can focus on that front as you know is wage inflation continues to move higher.

Yes.

Great to hear from you Andy So I would tell you that there is both labor efficiency and productivity and there are two separate things. So we we've got really smart at cross training our team members historically.

With Covid, we had a stilted operating model and now that we're getting back into a healthy operating model I think we're going to see our productivity measures improve we look at items per labor hour and I think we're going to see our items per labor hour improved to a very strong numbers that gives us some productivity, it's a trade off.

We're paying more per hour, but we're using less hours. So that's one thing the second way that we can enable that in a very smart fashion simple fashion is little productivity enhancers. It just keep adding up right I've talked about a couple of things that we've done we do a lot of catering.

This is going to sound crazy, but we used to use these boxes that we'd have to tape up now we have these boxes that just basically pop and rock gets saved hundreds of hours. We have catering bread that is pre cut historically, we would get our bread and we cut it we package. It and then we give it to guess at it.

The bread is going bad the minute you start cutting it you are inconsistent cut sizes, we now have pre cut bread and catering sizes that saves hours. Another crazy little one our Maxwell Street Polish eight came into us and we would hand cut hand trim. The sausages. It means team members are putting on it.

Cut glove, they're cutting this our team members don't enjoy doing that it's wasted time, we throw the ends of the sausage away, that's food waste now those sausages or coming into us pre cut and trim.

There is another whole raft of ideas like that that will take wasted hours away from our team members, who can then be focus on much more productive productive actions.

Our ops team is aggressively pursuing all of those things now the caveat it cannot negatively affect the consumer experience. So we're not going to do anything that negatively affects the consumer experience, but theres wasted effort in our restaurants, there's food waste in our restaurants that we are going to be all over.

Thanks, Let me just shift to the topline Michel you talked about you know obviously the March acceleration last year and you Don.

The implications of the two year trends running in the mid twenties.

Is that kind of where you were in January and February as well.

You know I know theres, a lot of moving pieces, but just trying to get a sense of.

You know where things are running currently.

I mean definitely to your point, Andy lots of moving pieces, but yeah. I mean, clearly we're seeing the commodities as I mentioned in that 13% to 15% range that is.

Is impacting us and as we look at you know rolling into this year too.

Our labor, we're continuing which is this is a good thing right. We're continuing to staff up at the levels that we need to be in our labor utilization numbers look very good so.

When you look at some of the performance in the fourth quarter and I think Michael talked about some of the productivity et cetera.

We did see because of OMA crown in the fourth quarter to some lower staffing levels. So as we start to staff up right in the first quarter and beyond that puts a little bit more pressure on that labor line as well as well as the commodity line.

So those are two things to consider as we look at Q1 versus say, a Q4 and some of those trends.

You know that our that our swing and.

A direction that's higher than they were in Q4 so.

That's one thing I would point to without getting into Super specifics on where exactly margins were in January and February but they were definitely impacted versus what we saw in Q4 on both lines.

Yes, I was looking more at that.

Thanks for the color there I fully understand but looking more at kind of that is there a big difference in the two year trend of same store sales in March that versus kind of the first couple of months of the year.

Yeah, No February Andy is traditionally the lowest month for us in terms of sales. So as we see coming out of the colder February into March.

Our sales trends when we look at average weekly sales and looking at that metric and our trends are definitely improving but remember we're comping over right 24, 6% in from period three of last year. So we're comping over a big number but our sales trends remained very healthy and and that's a good sign to Michael's point.

We have demand right and Eddie.

I think the question.

It's a real wonky set of numbers. So if you go back to January and February of 2020, those are actually a really good numbers for US. We came we were performing really well and then things fell off a cliff with omicron in March of 2020. So then when you go to 'twenty. One we look good we look we look okay in January and February because we're lapping.

Strong numbers with.

With Covid still happening and then in March of 'twenty. One we look really good because we are lapping a complete shutdown from 'twenty. So this year the numbers are.

We're lapping decent numbers in January and February and really good looking numbers in in March but the two year stack is pretty consistent for us and we feel the two year stack looks pretty good the three year stack looks even better when you compare what we were doing this.

Year versus 19.

Yeah. If you look at got you okay.

Yeah. If you look at the two year stack Andy rate in Q1 of last year, we did a <unk>, 8% comp and then you know we gave the range of 7.5% to 885% for Q1 of this year. So to Michael's point, we are very comfortable with the two year stack in Q1 of 'twenty, two and how that's shaping up.

Okay, and then just one final one from me kind of ticking up a little.

Further look back historically, you know in periods, where gasoline prices had been had been rising what are some of the long term operators you know in the system kind of seen in.

In the Chicago land market, maybe where obviously you've had the longest operating and densest presence.

When you go back and you look at Port Pillows performance, whether it's.

Great recession, or the recession early 2000 or even in the recession.

Short recessions in the 19th we are a counter recessionary business, our business picks up and I think.

I'm, a student of history I talked to <expletive> .

His philosophy was always we want to provide a value based oasis for guests when everyone else is jacking up prices and fuel prices are going up we're going to take traffic and that's exactly the playbook that we're applying today.

We think that the margin pressure is idiosyncratic, but the demand for our business winning over guess and that long term it creates more value for us we will fix the margin stuff.

Whether it's in quarter two quarter, three I don't know, where but it's going to resolve itself, but demand from your guess is really important and we're blessed because as you know we have the P&L flexibility to invest in our guess right now.

Thank you very much.

Thank you Andy Thanks, Andy.

Thank you. The next question is from the line of Dennis Geiger with UBS. Please proceed with your questions.

Thanks, Good morning, Michael I'm, Michelle encouraging to hear that because of how you've treated you people and I assume because of your hiring practices you have not had to limit service channels or hours of operation.

Michel you spoke to some certainly some nice improvement in staffing levels, but can you just kind of give us the latest on staffing relative to where you'd like to be maybe you know how short maybe you are if if if your shortage at all on the on step levels.

It's a great question, let me let me.

It's a little bit of a nuanced question because I'd like to think about what's an ideal number of team members for each restaurant versus are we able to staff all the hours that we want at each restaurant and those are two slightly different issues. Because you can staff the hours, you're just you're just asking a lot of your folks they're working more.

When you want them to more than maybe they want to and you are paying a little overtime.

It ballpark current situation is we're probably about 10% light in bodies and.

That's why Michelle alluded to this right.

There are markets where minimum.

The entry wage keeps going up.

And it's.

It's.

Daunting task, but it's like a game of musical chairs and I want to make sure we're portfolios as a chair when the music stops. So we're going to continue to be smart and thoughtful about investing in frontline people. We can live on the down 10% for quite a while but I don't want that number to go much lower than that.

That is very helpful. Thank you and then just a.

One as it relates to the Newbuild cost and Michele you spoke to the $1 billion.

So in in higher cost wondering if you could just clarify if that's basically all inflation versus anything that's unique to the upcoming newbuild restaurants versus what you've built historically and I guess the follow up which is probably next to impossible to know is it possible to share kind of how you think about whats sustained.

As it relates to the higher costs.

From the inflation versus maybe where you might have visibility into into what might be a bit transitory. Thank you guys.

Yes.

It's a great question, Dennis if I could answer it fully and honestly I'd be like pressure beyond belief, here's what I'll tell you. It is truly inflationary costs and it's things like the price of steel or masonry or would or the labor associated with it or the fuel associated with getting there.

That stuff to our build site. So it is truly inflationary costs. Our team is working smart and hard to make sure that we're value engineering the buildings as wherever when steel goes we're using masonry when masonry goes up we're using some other material, but we're trying to be smart down.

Investing in the building appropriately not hurting the guest experience, but not not wasting money. So so we're doing that on a very very consistent basis and.

Six months ago, we didn't see this level of inflation six months ago. Michel now we're like yes, we've been pretty careful but we didn't anticipate a war in Ukraine, we didn't anticipate fuel costs, where they are and so we're just being as transparent and honest as possible what will happen in three to six months I don't know.

I would be surprised if the rate of growth of all of these costs continued that would be very surprising to me.

But the reality is that we're still building with certain returns on invested capital targets that we are not we're not going to bend on we have to return to our investors and so even now as we're building we're very comfortable with the return on investment that these buildings will bring.

The total cash flow that cash on cash returns that we generate that is a non negotiable for us.

That's great. Thank you.

Beth.

Our next question is from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Hi, Good morning, I appreciate the color on January and February and I guess I'm curious, whether you saw any kind of noticeable impact from the vaccine mandates in Cook County during that timeframe and kind of concurrently whether you've seen a benefit that's been lifted.

And then if you have any.

Michel I just wanted to clarify I assume you are exploding.

Post the kind of contract or be flat.

It is through March or April or are you just choosing a float on all those proteins and are you comfortable that theres going to be enough supply if you don't market.

Let me sure good to hear from you. Let me answer the first part of your question and I'll turn it over to Michelle you you well you obviously.

You know what what are situations Chicago was in December and January with.

Vaccine mandate showing your vacs card going it was.

I don't know how to describe that without having to put money in our swedger.

But so it was crazy and as we saw the vacs mandates come off we have seen the pick up in our performance right. So you can see that in the underlying demand you can look at it in terms of comp I like I think comp can sometimes be misleading numbers. So I look at just revenues generated right weekly revenues.

And we have a very very good trajectory our restaurant dining rooms are becoming revitalized again, because people want to go to restaurants. They want to go out and you know that Chicago still represents a very healthy portion of our business. So the trajectory for our Chicago land business is very very good I think Chicago ins have said.

Ed that Theyre done with Vacs mandates they want to go out to eat and they want to enjoy themselves and that's what we're seeing in our restaurants right now that's what gives Michel and I confidence that we have very strong consumer demand and that the.

Idiosyncratic cost issues that we face will deal with but we're going to take as much of that consumer demand and share as we can.

Yeah sure and to answer your question on commodities. So as we sit here today I might have mentioned this before when we talked in January but we're 100% what we were a 100% in our on our be flat in Q1, and we have a box in place for the remaining quarters. So Q2 is locked on the flats.

About 40% Q3, we're at about 50% and Q4 at about 70%. So you blend all that together about call. It just above 60% locked on the flat for the year.

And then the other thing so that we traditionally have not done but given the volatility of one thing that we just recently did was we entered into a fixed pricing contract on our hot dogs and our hot talks are around 6% of our basket, but we locked into a fixed pricing arrangement on our hotdogs.

For April through the rest of the year just to mitigate some of the volatility there.

Outside of that Sharon.

We're pretty much floating with the market on our other line items.

Okay. Thank you.

Yes.

Our next question is from the line of Gregory Frankfurt with Guggenheim. Please proceed with your question.

Hey, Thanks, I had two.

Two quick ones. The first one was just just on wage inflation.

Maybe frame up where it is right now either from a total wage inflation perspective, or an hourly wage inflation perspective.

And our applications picking up I think that's what we've heard from some companies I'm curious if you guys have seen that as well.

Great Great to hear from you. So I think Michelle said at the Q4 'twenty one versus Q4 'twenty, our wages were up about 20% for our frontline hourly workers and so.

We think that we.

We think that that pace of growth will slow down, but it's still we're not seeing an end in sight.

High single digit low double digit wage inflation. So that's that's how we're modeling it on a go forward basis.

To be very surgical on that where we're thinking about wages being we're trying to be very precise on when we do add wages, where are we adding them right are we adding them to nights and weekends to day shifts, which restaurant has what problem and how do we address that restaurant and a very specific way.

I am very posted just spending the money like peanut butter, we've got to be really precise and I think that will help us.

And then the second part of your question is.

Like I mentioned this earlier, we opened Juliet we had no.

I mean, it sounds crazy, but we had no problem getting 100 people to join we're in the middle of.

Right now, we just turned over or St. Petersburg restaurant to the from from construction team to the new restaurant opening team.

We have over 120 team members signed up and my operators are they.

They say that these are amazing people, we have super high quality people and they are excited to open this restaurant and so.

I don't I think that there is some end insight because the level of optimism that I'm hearing from our hiring teams and from our frontline teams is unlike anything I've heard in the last couple of years.

Michael Thanks, and then my other question was just I think I have to ask on Texas.

Really good to kind of see the news I guess, we can talk about it a little more freely now that it's out there can you maybe talk about.

What the plan is and is.

Is it to kind of circle Dallas on the Dallas market kind of coming from the suburbs. There's just how you're thinking about that now that the news is out there.

Yes, and you've got an exciting opening this year. Thanks.

Yes, I just want to take a second I don't know if the folks on the phone are familiar with the development at Grand Scape and the colony, but it is.

It's worth visiting some time, if you want to see what the future of commercial real estate looks like it's unbelievable.

As a Nebraska furniture Mart that is a traditional box that does $1 billion of sales. It draws from attachment that is ridiculous. We're in front of a sporting goods store a shield that blows away any other sporting goods store in America. This is and it's an invite only.

Real estate development, they asked us to join them. There we have an amazing piece of real estate. It's within five minutes of Toyota is North American World headquarters, a huge office complex.

Plano and Frisco.

This is.

One of the greatest real estate sites I personally ever seen we're super excited feel honored and privileged to be part of that development and I think it's going to be a world class opening for us we're investing.

People and share of mind way in advance of that opening from that we're going to quickly build scale in the Dallas Fort worth Metroplex right. That's our strategy, we're going to build in Dallas I think that there is.

There is a lot more restaurants in Dallas Fort worth Dallas Fort Worth population Wise is right near Chicago and is likely to exceed Chicago in the next year or two and you know we have 30 plus restaurants in the Chicago land market I think Dallas is going to be an amazing market for port pillows. Once we achieve scale in Dallas, then we'll look at other mark.

Fits within Texas, but.

We're going to Dallas, we're going to make a hugely successful and we're just going to build scale in Dallas Fort worth.

Thanks, Michael.

You bet good to hear from you.

Thank you.

Final question is from the line of Sara Senatore with Bank of America. Please proceed with your questions.

Great. Thank you very much just two questions. Please. The first is you mentioned that the storm and Juliet. This new prototype are serving unbelievable amount of food do off premise could you give any more color on how I should think about volumes.

Is it the type of thing where you would actually see volumes that are similar.

In aggregate to an ascending a sort of an average store or should I think about it more just as an average store X the dining room capacity in the mix and so that that's question. One and then question. Two is you know I think you mentioned that.

Portola is counter cyclical I just wanted to sort of clarify that you know I I assume when you know when there is a.

Pressure on consumer incomes.

Sales slow as all the restaurants, you, but maybe less I'm just trying to I don't know if it was just an offhand comment, but I'm trying to gauge sort of how to think about your concept specifically in the context of potentially.

You know potentially a consumer that is softening with demand softening or incomes are under pressure.

Yes.

We're really happy with Juliet Sarah It is.

Doing everything that we would've hoped I mean keep in mind it opened in the.

Part of the winter in Chicago, We've had a couple of really bad snow storms in bad conditions, and it's still doing over 140000, a week right now and I think it's going to just keep building momentum. So we're exceptionally happy with that restaurant, we think that that restaurant has that restaurant has a lot of.

<unk>.

It's good news bad news is it needed to be a little bit of a pressure release valve from shorewood, which is about five miles away.

And we're not seeing much pressure release from Shorewood Sherwood is still.

Busting at the seams so.

We're super excited it's early going I don't know if I'd model that number but it is it's we're excited it's exceeding our expectations, it's exceeding what our ROI.

Modeling was and so we think that we might have.

Found something very special here.

And then I'm sorry, the second part of your question was about the consumer.

You mentioned.

Yeah, I was going to say, Sarah maybe I'll I'll attempt to tackle that one and if im way off point as Tom Michael and I that.

But I think Michael mentioned that during the times that we're in today high inflationary times and.

I think Michael mentioned <unk> wants to be considered good value for our consumers and I'll point to you know our average per person check is under $10. So as we look at.

When people are looking for good value.

I think <unk> provides us with our with our average check with the abundance of food that we provide I think as people look towards say our value proposition in times like this I think <unk> is one that Michael mentioned traditionally has done well in this type of environment, whether you look at prior research.

<unk> type environments Portela has performed well and if that was your question hopefully that helps if not let us know if you have a follow up.

Yes that was yes that was perfect I just you know, there's always sort of a debate between kind of Wap trade down versus trade out of restaurants on on the whole and that's what I was trying to get so thank you very much Michelle that was perfect. Thank you.

Great.

Thank you ladies and gentlemen, this will conclude our question and answers for today and this also concludes today's conference you may disconnect. Your lines at this time, we thank you for your participation and have a wonderful day.

Okay.