Q1 2022 Portillos Inc Earnings Call

Hello, and thank you for standing by welcome two per kilo as fiscal first quarter 2022 conference call and webcast. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad.

Should you need assistance during the conference call you may signal, an operator by pressing star zero.

I would now like to turn the conference over to Barbara <unk> Director of Investor Relations at Portola is to begin.

Thank you operator, good morning, everyone and welcome to our fiscal first quarter 2022 earnings call, which is also my first call as Portillo, New director of Investor Relations I'm looking forward to working with our analysts and shareholders, both current and future and learning more about what resonates with you.

With me on the call today is Michael assign Lu President and Chief Executive Officer, and Michelle Hook, the company's Chief Financial Officer, and before we begin our formal remarks, let me remind everyone that part of today's discussion 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 and refer you to today's earnings press release, and our SEC filings for more detailed discussions of the risks that could impact portal its 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 the 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 our liquidity or financial performance. Finally, after we deliver our prepared remarks, we will open the lines for your questions.

Let me now turn the call over to Michael of Sanlu, President and Chief Executive Officer.

Thank you Barbara and welcome to the Port Pillows family Barb joins us after spending over 10 years in equity research and Investor Relations at Morningstar farms.

<unk> was also a lifelong Chicago and so she is going to be a great resource to help our analysts and our shareholders better understand ports yellows and our growth journey.

And what a journey continues to be I am pleased with four kilo strong topline performance in the quarter. We grew total sales 14, 6% to $134 5 million same restaurant sales grew eight 2%, which reflects strong demand for port pillows demand that comes from our continued focus on delivering.

A great experience at amazing food at an unbelievable value, we continue to produce healthy profitability generating almost 21% restaurant level EBITDA margins, which puts us in a unique class in the restaurant industry.

<unk> will provide a lot more detail on our most recent quarterly results in a moment, but I'd first like to remind everyone, where we're headed as a company. We're on track to grow same restaurant sales. We've got the runway to sustain long term adjusted EBITDA growth and more importantly, we're a growth company we're on track for 10%.

<unk> annual unit growth and we're excited about it while we may be new to the public markets, where a 59 year old brand with a long history of success and a solid foundation upon which we'll continue to build.

Let's talk a little bit about that growth pipeline.

We're proud of the in restaurant Portillo his experience and are thrilled to see guests returning to our dining rooms. This year, but we're also really excited about the direction of our off premise business. Our first portillo pick up location in Joliet, Illinois, just celebrated its three months anniversary and continues to perform.

Our expectations, that's despite opening in the dead of winter in Chicago as small box footprint has managed to impress us and continues to impress.

We also recently celebrated the opening of a beautiful restaurant in St. Petersburg, Florida, It's absolutely gorgeous, we used our retro diner style design, but it fits into the local environment.

It's early but we're thrilled about how this restaurant is performing and how guests in St. Pete have responded to us.

Similar to Joliet, it's also performing above our underwriting expectations.

We now have four restaurants in central Florida, and will continue to build that market in 'twenty two and beyond we're also on track to continue growing in the sunbelt, where scaling operations in Arizona with another restaurant in the Phoenix suburb of Gilbert and our first entry into Tucson, both slated to open later this year.

And of course, we can't wait to open in Texas.

Grant escape in the quality, that's the name of the town, but quality.

We opened that restaurant in the fourth quarter, and we will continue to grow in Dallas Fort worth in 2023, we've already identified some of our next sites and even more importantly, we have identified the operators, who will grow and build that market for us.

And you May have noticed recently that we've announced openings in the Orlando suburb of Kissimmee and share Avilla, Indiana that will take us to seven restaurants. This year meeting our 10% commitment.

I can't talk about our exciting development pipeline without sending my thanks to share average scotto are inspiring chief development and supply chain officer, who is retiring this summer after 44 years of service.

Sure starting with <unk> as a teenager and our hard work dedication and ambition letter to the C suite, we want all of our team members to realize that kind of success is possible here to fill his shoes. We're actively searching for a chief development officer, who will execute our rapid growth pipeline with the same unwavering commitment to our values.

If those values family greatness energy and fun that allow us to be this confident about our growth trajectory.

People are the heart of Port pillows, and we know the linchpin to our success. So we prioritize our team members' experience. We know that our teams are more engaged when in a fund supportive and efficient work environment and you can see the proof of this and our retention statistics.

Our hourly turnover rate is 20 to 30 percentage points below the current industry average. This is a reflection of the work we put into being an employer of choice, we're creating unrivalled team member experiences treating them like family and its working.

So how do we win in the long term beyond having beautiful well staff restaurants.

Today I want to highlight three main points about our resilience, both as a company and as a high growth restaurant concept.

First we have very attractive profit profitability predicated on great revenue, we generated $8 3 million in <unk> in the 12 months ended Q1 'twenty two.

That revenue drives plus size profitability, which gives us the financial flexibility, we need to continue investing for growth.

Second we focus on what we can control as experienced restaurant operators were able to categorize cost pressures into those we see as transient versus those that are likely more permanent we.

We see commodity market volatility is a transient pressure brought on by external market shocks are responses to continue to limit the magnitude duration and timing of input cost increases through fixed price contracts.

We are now covered for over half our spend throughout the rest of the year Michelle will talk more about this.

Occasionally we do see a stair step change in cost that signals a more permanent change and as you know wages in the restaurant industry are resetting to reflect the more demanding competitive labor environment and thats not changing anytime soon.

So again focusing on what we can control we ensure that as a company one we offer our team members a compelling opportunity that can only get a port <unk> and to our team members are as productive as possible. In fact, we've implemented some operational efficiencies. This year that have had a measurable impact.

Third we don't wait until times are tough to look for efficiencies across our business. We're an operations company and it's our operators, who oftentimes help us come up with it implement great ideas one of the more recent developments comes from streamlining our digital ordering experience by upgrading the user interface guests who.

Order through our App or website can now customize their orders in just a few clicks.

The early results show a significant upward trend in order completion with our cart conversion rates already improved by 50%.

What that means is we now have more guests who complete their orders instead of advancing their carts bottom line. This translates into more digital sales and this improvement is holding we see this as early evidence that we've successfully reduced friction in that experience for our digital guests.

And finally as I mentioned in the past.

The commitment to our Port <unk> family is why our turnover continues to trend better than the industry average.

At the start of the first quarter, we were still understaffed at a few locations now we're very proud to say that we're back to pre COVID-19 staffing levels. The.

The importance of that is that well staff restaurants on average produced higher guest satisfaction scores, we see better order accuracy speed of service and overall satisfaction.

And we know guest satisfaction scores act as a leading indicator of same restaurant sales.

When you have a good experience youll be back it's that simple.

In March we achieved the highest order accuracy and the highest customer satisfaction scores that we've seen in the past 24 months. This is not an accident that has everything to do with the attention our managers and team members have been giving the overall guest experience.

On last quarter's call, we talked about being an oasis for our guests we want to be that rest of it even in the face of high inflation high gas prices and increased concern over global volatility.

We will remain that fun welcoming place that our guests can take their family for a convenient delicious high quality meal at a great price point.

But I want to be clear about something this doesn't mean, we're not taking pricing. It means we're being very thoughtful and methodical about how we take pricing while we've raised prices to counteract some of the input cost pressures. We've seen we're still mindful of preserving value for our guests as I said earlier, we have healthy margins, we don't have.

To overshoot inflation to shore up our profitability.

That said when we have taken price, there's been little to no resistance or elasticity effect.

We are very confident in our pricing power.

At the end of the day, we're on track we're executing the playbook, we shared with you during our IPO. We are confident in our long term growth algorithm.

The restaurant industry is cyclical it is going to have its ups and downs, but we know how to manage our business for that with that I'll hand, it off to Michel to share more details of the quarter.

Great. Thank you Michael and good morning, everyone. During the first quarter, we saw strong top line growth, but cost pressures that impact our bottom line.

However, we remain confident in the fundamentals of our business model and remain committed to our long term strategy.

Let's discuss the details of our first quarter results.

Revenues were $134 5 million, reflecting an increase of $17 2 million or 14, 6% compared to the first quarter of 'twenty one.

This was driven by an eight 2% increase in same restaurant sales.

Bind with the opening of new restaurants in 'twenty, two and 'twenty one.

Same restaurant sales increase of eight 2% was primarily driven by a seven 5% increase in average check and a two 9% benefit from the change in recording third party delivery pricing.

This was partially offset by decline in traffic of two 2%.

A higher average check was primarily driven by seven 1% increase in menu prices combined with a <unk>, 4% increase due to menu mix.

As previously mentioned on our last call, we did see a negative impact on our sales during the first several weeks of January as a result of all Mcbride.

Sales trends in transactions improved from January to February .

In March our same restaurant sales grew two 5% as we began to roll over a tougher comp of 24, 6% and March of 'twenty one.

This tougher cap will continue as we will lap a 25% comp in the second quarter.

When you look at our first quarter cap and a three year stack basis, we grew six 8%, which is in line with our long term target and speaks to the consistency and durability of our brand.

Yeah.

Cost of goods sold excluding depreciation and amortization as a percentage of revenues increased to 34, 4% in the first quarter of 'twenty two from 29, 9% in the first quarter of 'twenty. One. This increase was largely driven by a 15, 7% average increase across.

Commodity prices with higher impacts in pork chicken and beef prices.

Additionally cost of goods sold was negatively impacted by one 9%, resulting from the change in recording third party delivery pricing.

These increases were partially offset by the increase in our average check.

As Michael stated earlier, we ultimately view commodity market volatility is transient, but we are taking measures to limit the magnitude duration and timing of cost increases in key categories. We have locked in pricing on almost 80% of our be flat and we continue to actively look to fixed price.

In other areas when opportunities arise.

As of today, we have almost 55% of our commodity basket locked in for 2002.

As a reminder, in March I provided a range of 13% to 15% expected increase in our commodity basket in 'twenty two and we are currently forecasting to be at the higher end of that range in the second quarter and for the full fiscal year.

Now moving on to labor labor.

Labor as a percentage of revenues increased to 27, 7% in the first quarter of 'twenty two from 26, 5% in the first quarter of 'twenty one this.

This increase was primarily driven by hourly rate increases.

Rates were up approximately 13% versus Q1 of 'twenty one.

New restaurant openings and 21 in the first quarter of 'twenty, two and continued expansion of our dining capacity also drove higher investments in labor.

This was partially offset by an increase in our average check.

All told we are doing a lot to mitigate the more permanent labor cost pressures that Michael described earlier labor.

Labor does continue to be more productive versus pre COVID-19 levels and more recently, we have put additional efficiencies in place to further optimize our labor.

We staff, our restaurants with exceptional team members, who live our values each and every day.

We do this by prioritizing our culture.

Other operating expenses increased <unk> 5 million or three 1% in the first quarter of 'twenty, two and occupancy expenses increased $1 million or 14, 3%. Both a result of new restaurant openings in 'twenty, one and 'twenty two.

Restaurant level, adjusted EBITDA decreased 6% to $28 million in the first quarter of 'twenty two from $29 8 million in the first quarter of 'twenty one.

Restaurant level adjusted EBITDA margins were 28% in the first quarter of 'twenty two versus 25, 4% in the first quarter of 'twenty one.

The decrease of 460 basis points was driven by the impact of increased commodity costs, which we believe to be transient and to a lesser extent labor inflation to combat. These headwinds during the first quarter, we increased menu prices approximately one 5% and we expect additional man.

New price increases during the second quarter of 'twenty two.

As you May recall, we had taken a two 5% of price last April and if we did nothing in Q2, we would be at approximately four 5% pricing for most of Q2.

Which in this environment does not meet our objectives. So we will strategically be taking pricing in the next few weeks.

Our goal is to remain a great value for our guests while mitigating some of these cost increases.

Our G&A expenses increased $3 9 million to 11, 7% in the first quarter of 'twenty two from 10, 1% in the first quarter of 'twenty one.

This $3 9 million increase was due primarily to a $3 3 million increase in equity based stock compensation expense and approximately <unk> 7 million of transaction related expenses.

The majority of our G&A increase was due to these specific items and we are carefully managing underlying expenses in this inflationary environment.

Preopening expenses decreased <unk> 7 million to <unk>, 4% in the first quarter of 'twenty two from one 1% in the first quarter of 'twenty one.

This decrease was due to the timing and geographic location of restaurant openings in the first quarter of 'twenty two versus 21.

All of this led to adjusted EBITDA of $17 6 million in the first quarter of 'twenty two versus $18 5 million in the first quarter of 'twenty, one a decrease of four 9%.

Below the EBIT line interest expense was $6 1 million in the first quarter of 'twenty two a decrease of $4 6 million from the first quarter of 'twenty one to.

This decrease was driven by the payoff of our second lien term loan in the fourth quarter of 'twenty, one and lower outstanding borrowings under our first lien term loan.

We ended the quarter with $32 2 million in cash.

We will be using our cash balance plus operating cash flow to support our continued growth and new restaurant openings.

So like Michael said, we're on track.

The structure of our business allows us to grow same restaurant sales by low single digits on average check.

Our solid development pipeline is on track to deliver 10% unit growth this year check.

Our revenue growth.

As in the high single to low double digits checks and.

And while our EBIT performance is a bit wonky. This year and is under some industry wide pressures, we haven't had to slowdown and we certainly feel confident in our long term growth algorithm.

Pressing on.

So that we can continue to lay the groundwork that will sustain that low teens adjusted EBITDA growth over the long run.

Thank you for your time and with that I'll turn it back to Michael Thanks, Michele before we open for questions I, just want to revisit our commitment to our guests as experienced operators, we understand what it takes to build and sustain and obsessed fan base. We know it's crucial to deliver our delicious menu our value price point and our unrivaled experience.

We prioritize quality and strive for consistency. This foundation has allowed <unk> to be a success for the last 59 years through multiple recessions oil embargo. The dot com bust 911 housing market crashes wars, pandemics et cetera.

<unk> is not only survived we have thrived we have persevered through all of these challenges and uncertainties and we're confident in our ability to weather the pressures we face today like we said in March we have demand consumers are choosing portfolios.

And with that let's turn it over to the operator for questions.

We will now begin the question and answer session.

And the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any key to withdraw your question. Please press Star then two.

Our first question is from John Glass with Morgan Stanley . Please go ahead.

Hi, Thanks, good morning.

Hi, John just talk a little bit about.

Thank you good morning.

Can we talk a little bit about the performance of the stores that were opened in the fourth quarter, Indiana.

I think it's west Madison, how are those trending versus your initial expectations. When you talked about a very successful operation that in St. Pete How do you think the operations are doing from a mosquito service standpoint of retention, maybe just talk a little bit about how that opening has gone from an operation standpoint. Thanks.

Yes, let me I'll give you some overview, Jon and I'll, let Michelle I'll give you a little bit more detail in general I would tell you we're very very happy with all of our openings. So.

Even opening in the winter or out of season in Westfield, We're very happy with that restaurant, we're happy with all of our new openings.

As I think you know we changed dramatically the way, we open new restaurants to make sure that we are aggressively training management at those new restaurants. So they know the portfolios way they know what our guests expect the training of our team members is all about training them on handling Portillo volume.

All right, we will do 5000 $6000 hours, which in some businesses. It's a good day and so we train them on speed, we train the management on the portfolios, where we have had exceptional openings.

Say Pete might be the best yet we.

Paid at the very top of the market, we feel like we got fantastic team members, who are deeply engaged in our business, we handled enormous volumes with grace and and that business is really doing well for us and it's important because as you know central Florida is a big growth opportunity. So every time, we open <unk>.

<unk>, we continue to enhance our brand and continue to.

Spanned our opportunities.

Yes, John just to add on to what Michael was saying so in terms of Westfield West Madison in Joliet, when you think about when those restaurants opened.

During the winter months and given the locations. Yes. There is definitely some seasonality we saw during the first part of that was the openings, but to Michael's point, what I will tell you is that they are performing above our underwriting expectations and we feel really good about that with St. Pete having their grand opening on April 5th.

Early indications are very good there as well.

And Michelle just on wages I understand there is pressure industry wide you took a big step up last year, though.

You think the wage inflation, therefore should moderate to your business in the back half of this year, just given that or do you think maybe there is another round of bigger increases needed just to continue that high retention that you have.

Yes, John and we did obviously signal this and the filing this morning that we do expect additional rate increases later this year, but to your point, we put substantial increases in place in June of last year, and so I do expect as you look at the comparability year over year, when you get towards that back half of the year for <unk>.

That comparability to ease some but we do expect to put in some more rate increases this year, but not to the extent that we had to do in June of last year.

Okay. Thank you.

Yes.

The next question is from Nicole Miller with Piper Sandler. Please go ahead.

Thank you. Good morning, if you have done this and I'm not sure you have but if you can look at the performance of the fully staffed stores versus those that have lagged a little bit of late.

What could we expect in the model going forward as the enterprise is now fully staffed with that produce like a higher comp on the demand you're seeing or what it produce a better margin with operational excellence.

What happened.

I think.

So I don't think we have looked at it that specifically it is actually a great insight on your part so we will do that but anecdotally I can tell you. It's exactly what you described when we have fully staffed restaurants, we see that the guest satisfaction measurements things like order accuracy speed of service all of those metrics tick up which in.

Turn yields better comp sales and better profitability. So your intuition.

<unk> is 100% right and we will certainly looked at number up.

Okay, Great I know, it's kind of detailed so thanks.

And then just wondering if there was any purposeful reason I'm, calling out <unk> comp on a three year basis, essentially maybe start with <unk> could you talk a little bit about price mix and traffic and then do you want us to look at the rest of the year on a three year basis, because that could be kind of interesting and helpful. Knowing.

That things ease as you go through QQ.

Yes, absolutely Nicole the reason why I wanted to make sure to call out a three year stack was because if you go back and even look sequentially. When you look at what the three year stack wells in 'twenty. One I think you truly do see the consistency of our performance on a three year stack basis, and so it does take out.

Some of that noise. When you look at the comparability on a two year stack and then rolling over.

Covid period in 'twenty, and so that's where we wanted to really look at that consistency of the brand. So for me I'm going to continue to look at all metrics Nicole.

We're going to look at obviously the cap the two year stack the three year stack, but yes, I think that for me is a good metric that kind of removes.

Some of that noise and to me looks at what we want to deliver on our long term cap basis, and us being able to do that and deliver that.

And how is price and mix in <unk> again.

Price in the first quarter, we were up seven 1%.

And <unk> was a 0.4% nickel.

Yes.

Got you thanks.

Yes, no problem.

The next question is from Derek Sorry, David Tarantino with Baird. Please go ahead.

Good morning, Michelle.

Revisiting the.

The commentary on the three year comps I was wondering if you could comment specifically on what you saw in March.

You gave you gave the number on a one year basis.

Yes.

And indicated it might've been a little lower than the full quarter on a three year comp, but I know, there's all kinds of Rocky comparison. So wondering if you could clarify that for me.

Yes, I definitely wanted to make sure David that on a three year stack basis, right, but to the point I made with Nicole earlier that we made sure you guys understood that consistently and then March the point I wanted to get across there was when you look at the comparison.

And what we are rolling over we started to comp over tougher compares starting in March which is going to continue in Q2, but to your point like a few just where do you look at March alone. The three year stack is very healthy.

If you just were to isolate March alone it would be roughly around 9% David.

Oh got it okay. So our math there wasn't correct. Okay. Thank you and then.

And is that.

Is that.

Yes. The second question I have that helps very much. Thank you and then the second question I have is just on the pricing I don't think.

Thank you mentioned the amount that youre planning to take in the second quarter.

And I was wondering if you could maybe give some context, even directionally on how much that might be and then.

Related to that is the strategy on the pricing to address inflation that's occurred since the last time.

We spoke or is this more of a catch up for what you haven't taken given the inflation.

Saw in the first quarter. So I guess in other words do you think that pricing that you are.

Taken in Q2.

We will start to flow through.

Better margins than what you had in the first quarter.

Yes, I think David we didn't give the Q2 pricing because it's still TBD at this point and so we're still having those conversations and it's still fluid we have not put those price increases in place and so that's why we didn't give the numbers. So obviously I'll, let you guys know what that is.

Next quarter, but our goal remains to what what Michael talked about we want to definitely continue to price.

At or below inflation, and so thats how were thinking about it.

But like I said, if we did nothing right we would be at about four 5% pricing. When you look when that pricing started to roll off and so we want to make sure we get back up to the levels that we were at before and again with the guiding principle that we want to be at or below inflation.

Great. Thank you very much.

No problem.

The next question is from Sara Senatore with Bank of America. Please go ahead.

Thank you very much.

A couple of clarifying questions. Please the first is on the traffic and so I know that you said.

Value propositions are very strong.

Omnicom seem to have had an impact on mobility, but just trying to understand the idea of kind of negative traffic in the quarter given that <unk> I think was.

Mhm, primarily dissipated by the middle of January so.

Excuse me a shift between channels like somewhere drive through or delivery and things that might have order aggregation.

So that's that's a first a clarifying question and then I just have a quick question on labor.

Well.

Thank you for answering your own question, because you are 100% rights era that it is it's still an order aggregation thing.

We say is traffic to be more accurate is transaction, so what I look at to feel.

To know whether or not we should feel good about our business are not as good is underlying.

Underlying sales of entree sandwiches, and salads right the argument being that consumer behavior isn't changing a whole lot youre not going to eat to burgers versus one so how many burgers chicken sandwiches beef sandwich is things that we sell and the aggregate of all of our underlying entrees is up about.

One 7% in the quarter that gives me confidence that we're actually feeding more people right and so so I think that the transaction noise is exactly what you were implying which is that one.

When people go through the drive thru it tends to be you're feeding more people per transaction when people come into our restaurant it tends to be your feeding fewer.

Fewer people per transaction, so that is still being down a little bit inside the restaurant means our transactions are artificially suppressed.

Look at that number of one 7% up on entre sandwiches, salads et cetera, and that gives me solace to know that we're feeding more people.

Does that makes sense, so think of it yes, yes. That's thank you for the clarification and then just on labor Sean can you just help me think through like going forward.

I look at the change in your labor as a percentage is down kind of looks like exactly what I would expect in terms of high single digit pricing and low double digit labor inflation.

When should we see productivity is the issue that you know the productivity improvements are being offset by having a fully staff versus last year is when when might we start to see that delta be a little different than just you know kind of net pricing.

<unk>.

Yes, Sir and we started to put things in place in March.

And started to see in March some.

What I would describe as meaningful improvement and labor efficiencies and so I would expect.

US to continue to see those trends within Q2 and beyond but understand to that like I mentioned before there are additional rate increases that we do have to put in place yet this year, but we are definitely seeing improvements in labor through the efficiencies we put in in March.

Alright, Thank you very much.

No problem.

Okay.

The next question is from Andy Barish with Jefferies. Please go ahead.

Good morning, guys. Thanks.

I just wanted to check.

Hit the deck.

Thank you put out with the quarter.

It looks like unit openings, maybe one in the third quarter, and then a little bit more backend backend loaded is that just.

Given what's going on with supply chain and equipment and things like that.

Yes, that's exactly right, although I wouldn't necessarily put on supply chain equipment I'd put it more on the permitting process municipalities have been slow to rebound and so that's what's slowing us down but.

We had one slide a couple of weeks and it would just happened to be with going from the third quarter to the fourth quarter. So.

We're either got shovels in the ground actively building.

The other five still Andy so.

We're confident about 7% for the year.

Got you Thanks and then.

I guess just.

Straightforward with the dress.

Dress the elephant in the room I mean April comps are you willing to.

Sure.

A number or if youre still positive given given the ramp.

Yeah, we're going to leave that elephant in the room still.

And I think what Michele shared which I think is important to recall is that we are.

We're lapping some lofty numbers and and just just.

That's an important thing to keep in mind, we're lapping 25 plus percent comp numbers our goal our goal for the year stands we're confident in the performance of our business.

We're confident about the consumer demand that we have but.

You got to be cognizant of the fact that we have some big numbers, we're lapping yeah, and Andy I mentioned lapping the 25% in Q2.

April alone we were lapping a 34 plus cap. So April was a challenging one and then it obviously that.

The lap becomes a little bit easier to get to the 25. So as Michael said, we're going to keep that all sat in the room, but.

But what you ought to be mindful of those tougher lapse in Q2.

Gotcha.

I appreciate the color there and anything Michelle on sort.

More of kind of one time costs hit in the labor line in the in the <unk> still there.

On over time or even.

Covid exclusion pay or stuff like that that was noticeable.

Yes, we had a little bit of that in there Andy.

That that did impact us in terms of some labor pressures in Q1 and.

Nothing that I would call significant on the margin, but definitely a little bit of that in Q1 that we don't expect to see in Q Q2 and beyond.

Okay.

Great.

I'll pass it on thank you.

Thanks, Andy.

The next question is from Chris <unk> with Stifel. Please go ahead.

Thanks, Good morning, guys.

I was hoping you could dig in a bit more in the wage investments you plan to make later this year is there anything you can share in terms of around the magnitude of the investment and whether there are certain positions in the field that you want to address or support.

Okay.

Here's what I'd say Chris.

Is we are we.

We want to take wage off the table for employees as they make decisions on where to work.

And we see pockets in.

In our system, where we might be a hair behind some of our competitors.

And so we are going to make some investments.

It's certainly less than what we've made in the last 24 months.

Definitely feel like the pace of inflation is slowing.

But there are places, where we need to make some modest investments.

The key to our success our algorithm when it comes to.

Labor is take wage off the table as they come in and then provide fantastic culture training and development. So that our turnover is lower than everybody else's in the industry that creates really great outcomes on labor when you have turnover.

Just higher than average youre spending a lot of money to recruit train and bring in new people and so that's how we're approaching this the situation take wage off the table. There are some pockets, where we have to make some small investments and then train the heck out of people make sure that they are loved and appreciated and orange.

Joining their experiences at portfolios.

That's very helpful insight.

And then Michael you mentioned measurable efficiency improvements can you review with those initiatives were and what were you able to drive in terms of productivity gains.

I'll give you one example, and I give a ton of credit to our operators because this is something that they found.

A traditional port to Loews has this L shaped up series of production lines on the long long part of the <unk> is a traditional sandwiches burgers hotdogs beef et cetera on the short side, we had what we called our salad Bowl, where we assemble salads.

Scratch salads and they're amazing.

Our team members said you know what we would be a lot more efficient if we could move the salad bowl over to the main part of the L. There's some space in the back near where the drive through lanes are and so we've been doing that and we took the salad Bowl area. We moved it to the back of the line in a bunch of restaurants, it creates labor efficiencies because if those.

Folks are slow they can slide over and work on another station it create guest efficiencies because in a traditional portillo. If you ordered a burger and a solid you actually have to pick it up in two separate places. So this is a huge guest win.

And we're able to staff the salad bowl with two fewer people than we used to currently we have seen a tick up in our items per labor hour productivity because of that and so it's early going.

We have some creative ideas on what to do with some of that space. We vacated that we think will create further efficiencies for our business, but that's one example of real tangible savings.

No. That's helpful. Thank you guys.

You bet Thanks, Chris.

The next question is from Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning.

Question on the restaurant level margins can you talk about kind of where March was relative to the full quarter given some of those omnicom related disruptions early in the quarter and then if I look at 2018 in 2019 before the pandemic typically you would seasonally you see a couple of hundred basis points or more or less.

In our second quarter relative to first quarter is that going to be the pattern. This year or is there something we should think about to temper that and then last question can you talk about Chicago and kind of what you saw with the.

Backseat mandate lifted on on premises.

Yes, sure and I don't want to get into intra period margins. So all.

I'm going to punt on that one but I will say to you is when you look at the trends and I think you hit it.

When you look at our Q2 trends and you look at higher revenues traditionally and Q2.

And Q4 in those periods for us.

Start to leverage a little bit more I think when you look at that and given some of the things Michael just mentioned from.

From a labor efficiency standpoint, my expectation would be.

Again and not.

Getting into detailed numbers that we would see improvement in margins in Q2.

Okay, and then as your third question Sharon sorry.

Yes, so I think I think the other lease sorry go ahead the trend Youre asking you were asking about whats happened in Chicago land with the lifting of the vacs mandate et cetera, and so look we're seeing some positive I would describe it as positive momentum right.

In Q1, what we saw is that our inside sales came up to 40% of our mix and that was in the twenty's a year ago. So we're really happy with that trend, it's not back up to the low fifty's that it used to be but it's improved and so we're.

We're cautiously optimistic that there is more improvement more people coming into the restaurants.

But you never know there is there is.

Now in places where people are afraid of a new variant of <unk>.

Covid, so we're cautiously optimistic, but I would I'm hesitant to bank on it or planned for it.

Okay, we'll try to order and today to help you out in Chicago.

On the G&A line, Michelle you had originally I think expected $70 million to $75 million of share you are kind of well below that run rate in the first quarter is 70 to 75 still the right number for the year.

I'm not I'm not going off of that yet Sharon because we do have investments remember we're definitely in growth mode. We have investments that we do want to make.

In the back half of this year. So if we are.

If we continue to.

Trend at those levels and we're definitely carefully managing that line like I mentioned I will update you all next quarter, but we still have investments coming in the back half of the year. So right now that's still a good range to use but to your point we're trending more.

Lower than that but I still believe for the full year, that's a good range.

Okay. Thank you.

Yes, no problem.

Once again, if you have a question. Please press Star then one.

Okay.

Our next question is from Dennis Geiger with UBS. Please go ahead.

Great. Thank you Michael Ho Michelle I'm curious, if you could touch a bit on kind of what youre seeing from customers of late any.

Any changes in behaviors, perhaps how they are using the menu I know Michael you mentioned no pushback on the.

Pricing at all but any other changes or shifts in behavior or purchase shifts to call out I assume customers can do without their cake shakes, but if there's anything notable that you would mentioned of late b be interested there.

I would say overall there is.

Very little change in mix in sales patterns et cetera, we're seeing a slight very slight uptick where people are going from a regular beef sandwich to our big beef sandwich promote regular burger to a double Burger delivery continues to grow we're seeing both.

Our own self delivery as well as third party delivery growing that's a continuing that's a continued trend, but the underlying consumer demand the frequency with which they visit how much. They are eating all of that's pretty pretty stable Dennis.

Helpful. And then just one other as it relates to the new units and the returns.

Last quarter, I think we talked about the higher build costs that you and the industry are seeing.

And despite all that your ability to kind of continue to see those solid returns. So I'm just curious as we think about the strength.

Dave that you are seeing in Juliet in St. Petersburg is it is it sort of stronger sales at better margins a combination of the two things that.

Even in this kind of elevated newbuild environment.

Support those those really solid new unit returns.

Yes, I think so.

Both Joliet in St. Pete, we're not particularly expensive builds so where we have been cautious and I think pretty careful about what we say about our new builds but I think Joliet and Juliet certainly was on the low end given the size and even St. Pete came in at.

Relatively attractive build for us so.

Wasn't the build cost of those necessarily those were problems, but but the consumer has been very very strong for both of those Joliet as I think everyone knows is a drive through only concept for us it's a triple Lane drive thru and so.

It is a bit of a pilot an experiment and it's been fantastic so far so.

We think there is something there to this drive through only concept and then St. Pete is just I.

I feel like it's one of those where we did everything really well it's been a great trade area.

As a beautiful restaurant it reflects the local environment, we hired really effectively we train the heck out of our folks who are super happy to be there and the volumes came in strong and we did a great job in handling that volume. So I think St. Pete is an example of executing our playbook effectively.

And when we do we expect to beat our numbers.

Great. Thanks, Michael.

The next question is from Gregory Frankfurt with Guggenheim Securities. Please go ahead.

Hey, Thanks for the question Michael.

There's been a bunch of talk about the most recent couple openings, but maybe even the four five that Michael that you had a hand in before the most recent few how are those continuing to trend.

Because I mean, those were a great class of stores and I am curious if kind of you held them on our sales and margin from those.

I mean, the short answer is yes, Greg we're very happy with the class of <unk> 2020 one.

As a class theyre, performing very very well and I would say as a class are performing above our underwriting expectations. So they can.

Some are some are.

Just plowing ahead at ridiculous revenue levels and somewhat slowed down a hair, but as a class.

Very very excited by the classes of 2021 and the early 'twenty twos.

Got it and then maybe just on the labor side I think.

You touched on staffing improving.

How is turnover been as turnover starting to tick down at all.

Yes Zach.

Kind of staying at elevated levels.

So obviously turnover in the restaurant industry are.

Some lofty numbers so what we like to do is we various <unk> track ourselves against the rest of our industry and I can tell you that we are 20 to 30 percentage points lower than the rest of our industry you see some some restaurant companies.

Very very high turnover levels approaching 200%, we're still in the low 100%, which in this industry. At this time represents a 20% to 30 percentage point.

Benefit versus others. So we think that we're a little bit more sticky than than others in the restaurant industry.

Got it. Thank you maybe if I can sneak one last one.

Just on the hedging Michelle that you mentioned.

I think it was you were 50% for the rest of the year are you significantly below or above the futures curve.

We kind of think without the 'twenty three and 'twenty four.

In terms of what the commodity impact could be.

Yeah.

Yeah, and Greg just to be clear so for the full year, we're locked in at that almost 55% market basket and so.

And I will tell you that our biggest concentration, which I mentioned being being the beef we're locked in at a rate that was below our own internal budgeted projections. So we feel good about that.

And obviously when you look at the other commodities.

Most of those are locked in in Q2, and when we look at the Q3 Q4.

<unk> on those you obviously weigh what the what the cost is the blocking and at that given certain pricing and so like I said when opportunities arise we're going to lock in but I think when you look to your question on forward projections, right, that's where I am not going to locker lock ourselves into something now knowing that.

There could be opportunities in the future because as you know when you look at for our projections, we do expect some easing and and like we said we know these pressures are more transient. So we're not locking into really longer term numbers because we do think as you look into 'twenty three 'twenty four that again.

We would expect and hope to be some easing there.

Thank you guys.

Yes, Thanks, Greg.

Okay.

And with that we will conclude today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.

Okay.

Okay.

[music].

Okay.

Yes.

Yeah.

Sure.

Yes.

Okay.

Yeah.

Okay.

Yes.

[music].

Yes.

[music].

[music].

Hello, and thank you for standing by welcome two per kilo its fiscal first quarter 2022 conference call and webcast.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask question to join the question queue. You May Press Star then one on your telephone keypad.

Should you need assistance during the conference call you may signal, an operator by pressing star zero.

I would now like to turn the conference over to Barbara <unk>.

Cho of Investor relations at Portola to begin.

Thank you operator, good morning, everyone and welcome to our fiscal first quarter 2022 earnings call, which is also my first call as Portillo with new director of Investor Relations I'm looking forward to working with our analysts and shareholders, both current and future and learning more about what resonates with you.

With me on the call today is Michael Elliston, Lu President and Chief Executive Officer, and Michelle Hook, the company's Chief Financial Officer, and before we begin our formal remarks, let me remind everyone that part of today's discussion 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 and refer you to today's earnings press release, and our SEC filings for more detailed discussions of the risks that could impact portillo future operating results and financial condition our.

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 the 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 our liquidity or financial performance. Finally, after we deliver our prepared remarks, we will open the lines for your questions.

Let me now turn the call over to Michael <unk>, President and Chief Executive Officer.

Thank you Barbara and welcome to the Port Pillows family Barb joins us after spending over 10 years in equity research and Investor Relations at Morningstar farms.

<unk> was also a lifelong Chicago and so she is going to be a great resource to help our analysts and our shareholders better understand ports yellows and our growth journey.

And what a journey it continues to be I am pleased with Portillo strong topline performance in the quarter. We grew total sales 14, 6% to $134 5 million same restaurant sales grew eight 2%, which reflects strong demand for port pillows demand that comes from our continued focus on delivering.

A great experience at amazing food at an unbelievable value.

We continue to produce healthy profitability generating almost 21% restaurant level, EBITDA margins, which puts us in a unique class in the restaurant industry.

Michelle will provide a lot more detail on our most recent quarterly results in a moment, but I'd first like to remind everyone, where we're headed as a company. We're on track to grow same restaurant sales. We've got the runway to sustain long term adjusted EBITDA growth and more importantly, we're a growth company we're on track for 10%.

<unk> annual unit growth and we're excited about it while we may be new to the public markets, where a 59 year old brand with a long history of success and a solid foundation upon which we'll continue to build.

Let's talk a little bit about that growth pipeline.

We're proud of the in restaurant Portillo his experience and are thrilled to see guests returning to our dining rooms. This year, but we're also really excited about the direction of our off premise business. Our first portillo pick up location in Joliet, Illinois, just celebrated its three month anniversary and continues to perform.

Our expectations, that's despite opening in the dead of winter in Chicago as small box footprint has managed to impress us and continues to impress.

We also recently celebrated the opening of a beautiful restaurant in St. Petersburg, Florida, It's absolutely gorgeous, we used our retro diner style design, but it fits into the local environment.

It's early but we're thrilled about how this restaurant is performing and how guests in St. Pete have responded to us.

Similar to Joliet, it's also performing above our underwriting expectations.

We now have four restaurants in central Florida, and will continue to build that market until 'twenty two and beyond.

Also on track to continue growing in the Sunbelt, where scaling operations in Arizona with another restaurant in the Phoenix suburb of Gilbert and our first entry into Tucson, both slated to open later this year.

And of course.

We can't wait to open in Texas at Grand Scape in the quality, that's the name of the town the colony.

We opened that restaurant in the fourth quarter, and we will continue to grow in Dallas Fort worth in 2023, we've already identified some of our next sites and even more importantly, we've identified the operators, who will grow and build that market for us.

And you May have noticed recently that we've announced openings in the Orlando suburb of Kissimmee and share of El Indiana that will take us to seven restaurants. This year meeting our 10% commitment.

I can't talk about our exciting development pipeline without sending my thanks to Sherri Alper Scotto are inspiring chief development and supply chain officer, who is retiring this summer after 44 years of service.

Sure starting with <unk> as a teenager and our hard work dedication ambition letter to the C suite, we want all of our team members to realize that kind of success is possible here to fill her shoes. We're actively searching for a chief development officer, who will execute our rapid growth pipeline with the same unwavering commitment to our values.

It is those values family greatness energy and fun that allow us to be this confident about our growth trajectory.

People are the heart of Port Pillows, and we know they are the linchpin to our success. So we prioritize our team members' experience. We know that our teams are more engaged went in a fun supportive and efficient work environment and you can see the proof of this and our retention statistics, our hourly turnover rate is 20% to 30%.

<unk> points below the current industry average this is a reflection of the work we put into being an employer of choice, we're creating unrivalled team member experiences treating them like family and its working.

So how do we win in the long term beyond having beautiful well staffed restaurants today.

Today I want to highlight three main points about our resilience, both as a company and as a high growth restaurant concept.

First we have very attractive profitability predicated on great revenue.

We generated $8 3 million in <unk> in the 12 months ended Q1 'twenty two.

That revenue drives plus size profitability, which gives us the financial flexibility, we need to continue investing for growth.

Second we focus on what we can control as experienced restaurant operators were able to categorize cost pressures into those we see as transient versus those that are likely more permanent we.

We see commodity market volatility is a transient pressure brought on by external market shocks are responses to continue to limit the magnitude duration and timing of input cost increases through fixed price contracts.

We are now covered for over half our spend throughout the rest of the year Michelle will talk more about this.

Occasionally we do see a stair step change in cost that signals a more permanent change and as you know wages in the restaurant industry are resetting to reflect the more demanding competitive labor environment and thats not changing anytime soon.

So again focusing on what we can control we ensure that as a company one we offer our team members a compelling opportunity that can only get a port <unk> and to our team members are as productive as possible. In fact, we've implemented some operational efficiencies. This year that have had a measurable impact.

Third we don't wait until times are tough to look for efficiencies across our business. We're an operations company and it's our operators, who oftentimes help us come up with an implement great ideas. One of the more recent developments comes from streamlining our digital ordering experience by upgrading the user interface guests who.

Order through our App or website can now customize their orders in just a few clicks.

The early results show a significant upward trend in order completion with our cart conversion rates already improved by 50%.

What that means is we now have more guests who complete their orders instead of advancing their cards.

Bottom line this translates into more digital sales and this improvement is holding we see this as early evidence that we have successfully reduced friction in that experience for our digital guests.

And finally as I mentioned in the past.

The commitment to our Port <unk> family is why our turnover continues to trend better than the industry average.

At the start of the first quarter, we were still understaffed at a few locations now.

We're very proud to say that we're back to pre COVID-19 staffing levels.

The importance of that is that well staff restaurants on average produced higher guest satisfaction scores, we see better order accuracy speed of service and overall satisfaction.

And we know guest satisfaction scores act as a leading indicator of same restaurant sales.

When you have a good experience youll be back it's that simple.

In March we achieved the highest order accuracy and the highest customer satisfaction scores that we've seen in the past 24 months. This is not an accident. This has everything to do with the attention our managers and team members have been giving the overall guest experience.

On last quarter's call, we talked about being in a ways for our guests we want to be that rest of it even in the face of high inflation high gas prices and increased concern over global volatility.

We will remain that fun welcoming place that our guests can take their family for a convenient delicious high quality meal at a great price point.

But I want to be clear about something this doesn't mean, we're not taking pricing. It means we're being very thoughtful and methodical about how we take pricing while we've raised prices to counteract some of the input cost pressures. We've seen we're still mindful of preserving value for our guests as I said earlier, we have healthy margins, we don't have.

To overshoot inflation to shore up our profitability.

That said when we have taken price there's been little to no resistance or elasticity effect, we are very confident in our pricing power.

At the end of the day, we are on track.

We're executing the playbook, we shared with you during our IPO, we are confident in our long term growth algorithm.

The restaurant industry is cyclical it is going to have its ups and downs, but we know how to manage our business for that with that I'll hand, it off to Michel to share more details of the quarter.

Great. Thank you Michael and good morning, everyone. During the first quarter, we saw strong top line growth, but cost pressures that impact our bottom line. However, we remain confident in the fundamentals of our business model and remain committed to our long term strategy.

Let's discuss the details of our first quarter results.

Revenues were $134 5 million, reflecting an increase of $17 2 million or 14, 6% compared to the first quarter of 'twenty one.

This was driven by an eight 2% increase in same restaurant sales.

Combined with the opening of new restaurants in 'twenty, two and 'twenty one.

Same restaurant sales increase of eight 2% was primarily driven by a seven 5% increase in average check and a two 9% benefit from the change in recording third party delivery pricing.

This was partially offset by decline in traffic of two 2%.

The higher average check was primarily driven by seven 1% increase in menu prices combined with a 0.4% increase due to menu mix.

As previously mentioned on our last call, we did see a negative impact on our sales during the first several weeks of January as a result of all Mcbride.

Sales trends in transactions improved from January to February and March our same restaurant sales grew two 5% as we began to roll over a tougher comp of 24, 6% and March of 'twenty one.

This tougher cap will continue as we will lap a 25% comp in the second quarter.

When you look at our first quarter cap and a three year stack basis, we grew six 8%, which is in line with our long term target and speaks to the consistency and durability of our brand.

Cost of goods sold excluding depreciation and amortization as a percentage of revenues increased to 34, 4% in the first quarter of 'twenty two from 29, 9% in the first quarter of 'twenty one.

This increase was largely driven by 15, 7% average increase across all commodity prices with higher impacts in pork chicken and beef prices.

Additionally cost of goods sold was negatively impacted by one 9%, resulting from the change in recording third party delivery pricing.

These increases were partially offset by the increase in our average check.

As Michael stated earlier, we ultimately view commodity market volatility is transient, but we are taking measures to limit the magnitude duration and timing of cost increases in key end product categories.

We have locked in pricing on almost 80% of our be flat and we continue to actively look to flex pricing in other areas when opportunities arise.

As of today, we have almost 55% of our commodity basket locked in for 2002.

As a reminder, in March I provided a range of 13% to 15% expected increase in our commodity basket in 'twenty two and we are currently forecasting to be at the higher end of that range in the second quarter and for the full fiscal year.

Now moving on to labor.

Labor as a percentage of revenues increased to 27, 7% in the first quarter of 'twenty two from 26, 5% in the first quarter of 'twenty one.

This increase was primarily driven by hourly rate increases.

Rates were up approximately 13% versus Q1 of 'twenty one.

New restaurant openings and 21 in the first quarter of 'twenty, two and continued expansion of our dining capacity also drove higher investments in labor.

This was partially offset by an increase in our average check.

All told we are doing a lot to mitigate the more permanent labor cost pressures that Michael described earlier.

Labor does continue to be more productive versus pre COVID-19 levels and more recently, we have put additional efficiencies in place to further optimize our labor.

We staff, our restaurants with exceptional team members, who live our values each and every day.

We do this by prioritizing our culture.

Other operating expenses increased <unk> 5 million or three 1% in the first quarter of 'twenty, two and occupancy expenses increased $1 million or 14, 3%. Both a result of new restaurant openings in 'twenty, one and 'twenty two.

Restaurant level, adjusted EBITDA decreased 6% to $28 million in the first quarter of 'twenty two from $29 8 million in the first quarter of 'twenty one.

Restaurant level adjusted EBITDA margins were 28% in the first quarter of 'twenty two versus 25, 4% in the first quarter of 'twenty one.

The decrease of 460 basis points was driven by the impact of increased commodity costs, which we believe to be transient and to a lesser extent labor inflation to combat. These headwinds during the first quarter, we increased menu prices approximately one 5% and we expect additional man.

New price increases during the second quarter of 'twenty two.

As you May recall, we had taken two 5% of price last April and if we did nothing in Q2, we would be at approximately four 5% pricing for most of Q2.

Which in this environment does not meet our objectives. So we will strategically be taking pricing in the next few weeks.

Our goal is to remain a great value for our guests while mitigating some of these cost increases.

Our G&A expenses increased $3 9 million to 11, 7% in the first quarter of 'twenty two from 10, 1% in the first quarter of 'twenty one.

This $3 9 million increase was due primarily to a $3 3 million increase in equity based stock compensation expense and approximately <unk> 7 million of transaction related expenses.

The majority of our G&A increase was due to these specific items and we are carefully managing underlying expenses in this inflationary environment.

Pre opening expenses decreased <unk> 7 million <unk>, 4% in the first quarter of 'twenty two from one 1% in the first quarter of 'twenty one.

This decrease was due to the timing and geographic location of restaurant openings in the first quarter of <unk> 22 versus <unk> 21.

All of this led to adjusted EBITDA of $17 6 million in the first quarter of 'twenty two versus $18 5 million in the first quarter of 'twenty, one a decrease of four 9%.

Below the EBIT line interest expense was $6 1 million in the first quarter of 'twenty two a decrease of $4 6 million from the first quarter of 'twenty one.

This decrease was driven by the payoff of our second lien term loan in the fourth quarter of 'twenty, one and lower outstanding borrowings under our first lien term loan.

We ended the quarter with $32 $2 million in cash.

We will be using our cash balance plus operating cash flow to support our continued growth and new restaurant openings.

So like Michael said, we're on track the.

The structure of our business allows us to grow same restaurant sales by low single digits on average check.

Our solid development pipeline is on track to deliver 10% unit growth this year check.

Our revenue growth.

As in the high single to low double digits checks and.

And while our EBIT performance is a bit wonky. This year and is under some industry wide pressures, we haven't had to slowdown and we certainly feel confident in our long term growth algorithm.

We're pressing on.

So that we can continue to lay the groundwork that will sustain that low teens adjusted EBITDA growth over the long run.

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 revisit our commitment to our guests as experienced operators, we understand what it takes to build and sustain and obsessed fan base. We know it's crucial to deliver our delicious menu our value driven price point and our unrivaled experience, we prioritize quality and strive for consistency.

This foundation has allowed <unk> to be a success for the last 59 years through multiple recessions oil embargo. The dot com bust 911 housing market crashes wars, pandemics et cetera.

<unk> is not only survived we have thrived we have persevered through all of these challenges and uncertainties and we're confident in our ability to weather the pressures we face today like we said in March we have demand consumers are choosing portfolios.

And with that let's turn it over to the operator for questions.

Thank you we will now begin the question and answer session.

Join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any key to withdraw your question. Please press Star then two.

Our first question is from John Glass with Morgan Stanley . Please go ahead.

Hi, Thanks, good morning.

Hi, John just talk a little bit about.

Thank you and good morning.

Can we talk a little bit about the performance of the stores that were opened in the fourth quarter, Indiana and I think it's west Madison, how are those trending versus your initial expectations when you.

Talked about a very successful operation that in St. Pete How do you think operations, we're doing from a mosquito service standpoint of retention, maybe just talk a little bit about how that opening has gone from an operation standpoint. Thanks.

Yes, let me I'll give you some overview, Jon and I'll, let Michelle give you a little bit more detail in general I would tell you we're very very happy with all of our openings. So.

Even opening in the winter or out of season in Westfield, We're very happy with that restaurant, we're happy with all of our new openings.

We as I think you know we changed dramatically the way, we open new restaurants to make sure that we are aggressively training management at those new restaurants. So they know the portillo whey. They know what our guests expect the training of our team members is all about training them on handling Portillo Volte.

<unk> right, we will do 5000 $6000 hours, which in some businesses. It's a good day and so we train them on speed, we train the management on the port till those where we've had exceptional openings.

And I think say Pete might be the best yet we paid at the very top of the market. We feel like we got fantastic team members, who are deeply engaged in our business, we handled enormous volumes with grace and and that business is really doing well for us and it's important because as you know central Florida is a big.

<unk> growth opportunity. So every time, we open successfully we continued to enhance our brand and continue to.

Expand our opportunities.

Yes, John just add on to what Michael was saying so in terms of Westfield West Madison and Joliet. When you think about when those restaurants that opened during the winter months and given the locations. Yes. There is definitely some seasonality we saw during the first part of that was the openings, but to Michael's point, what I will tell you is that they are.

Performing above our underwriting expectations and we feel really good about that with St. Pete having their grand opening on April 5th.

Early indications are very good there as well.

And Michelle just on wages I understand there is pressure industry wide you took a big step up last year, though.

Do you think the wage inflation, therefore should moderate to your business in the back half of this year, just given that or do you think maybe there is another round of bigger increases needed just to continue that high retention that you have.

Yes, John and we did obviously signal this and the filing this morning that we do expect additional rate increases later this year, but to your point, we put substantial increases in place in June of last year, and so I do expect as you look at the comparability year over year, when you get towards that back half of the year for <unk>.

That comparability to ease some but we do expect to put in some more rate increases this year, but not to the extent that we had to do in June of last year.

Okay. Thank you.

Yes.

The next question is from Nicole Miller with Piper Sandler. Please go ahead.

Thank you. Good morning, if you have done this and im not sure you have but if you can look at the performance of the fully staffed stores versus those that have lagged a little bit of late.

What could we expect in the model going forward as the enterprise is now fully staffed with that produce like a higher comp on the demand youre seeing or what it produce a better margin with operational excellence.

Might happen.

I think.

So I don't think we have looked at it that specifically, it's actually a great insight on your part so we will do that but anecdotally I can tell you. It's exactly what you described when we have fully staffed restaurants, we see that the guest satisfaction measurements things like order accuracy speed of service all of those metrics tick up which in.

Turn yields better comp sales and better profitability. So.

Your intuition is 100% right and we will certainly looked at number up.

Okay, Great I know, it's kind of detailed so.

Thanks, and then just wondering if there was any purposeful reason on calling out <unk> comp on a three year basis, essentially maybe start with <unk> could you talk a little bit about price mix and traffic and then do you want us to look at the rest of the year on a three year basis, because that could be kind of interesting and helpful.

Knowing that.

Ease as you go through <unk>.

Yeah, absolutely Nicole the reason why I wanted to make sure to call out a three year stack was because if you go back and even look sequentially. When you look at what the three year stack wells in 'twenty one.

You truly do see the consistency of our performance on a three year stack basis, and so it does take out.

Some of that noise. When you look at the comparability on a two year stack and then rolling over.

Covid period in 'twenty, and so that's where we wanted to really look at that consistency of the brand. So for me I'm going to continue to look at all metrics Nicole.

To look at obviously the cap the two year stack the three year stack, but yeah I think that for me is a good metric that kind of removes.

Some of that noise and to me looks at what we want to deliver on our long term cap basis, and us being able to do that and deliver that.

And how is price and mix in <unk> again.

Price in the first quarter, we were up seven 1%.

And <unk> was a 0.4% nickel.

Yes.

Got you thanks.

Yes, no problem.

The next question is from Derek sorry.

Sorry, David Tarantino with Baird. Please go ahead.

Good morning, Michelle just kind of revisiting the.

The commentary on the three year comps I was wondering if you could comment specifically on what you saw in March.

You gave you gave the number on a one year basis.

Math.

Indicated it might've been a little lower than the full quarter on a three year comp, but I know, there's all kinds of Rocky comparison. So wondering if you could clarify that for me.

Yes, I definitely wanted to make sure David that on a three year stack basis, right, but to the point I made with Nicole earlier that we made sure you guys understood that consistently and then March the point I wanted to get across there was when you look at the comparison.

And what we are rolling over we started to comp over tougher comp compares starting in March which is going to continue in Q2, but to your point like a few just where do you look at March alone. The three year stack is very healthy.

If you just were to isolate March alone it would be roughly around 90% David.

Oh got it okay. So our math there wasn't correct. Okay. Thank you and then.

And is that.

Is that I.

I guess the second question I have that helps very much. Thank you and then the second question I have is just on the pricing.

Thank you mentioned the amount that youre planning to take in the second quarter.

And I was wondering if you could maybe give some context, even directionally on how much that might be and then.

Related to that is the strategy on the pricing to address inflation that's occurred since the last time.

We spoke or is this more of a catch up for what you haven't taken.

Given the inflation that you saw in the first quarter. So I guess in other words do you think that pricing that you've taken in Q2.

We will start to flow through a bit better margins than what you had in the first quarter.

Yes, I think David we didn't give the Q2 pricing because it's still TBD at this point and so we're still having those conversations and it's still fluid we have not put those price increases in place and so that's why we didn't give the numbers. So obviously I'll, let you guys know what that is.

Next quarter, but our goal remains what what Michael talked about we want to definitely continue to price.

At or below inflation, and so thats how were thinking about it.

But like I said, if we did nothing right we would be at about four 5% pricing. When you look when that pricing started to roll off and so we want to make sure we get back up to the levels that we were at before and again with the guiding principle that we want to be at or below inflation.

Great. Thank you very much.

No problem.

The next question is from Sara Senatore with Bank of America. Please go ahead.

Thank you very much.

A couple of clarifying questions. Please the first is on the traffic and so I know that you said you don't see the.

The value proposition is still very strong.

Omnicom seem to have had an impact on mobility, but just trying to understand the idea of kind of negative traffic in the quarter given that AUM of pricing.

Yeah.

Primarily dissipated by the middle of January so.

Excuse me a shift between channels like somewhere in the drive through or delivery and things that might have order aggregation.

So that's that's a first clarifying question and then I just have a quick question on labor.

Well.

Thank you for answering your own question, because you are 100% rights era that it is it's still an order aggregation thing we what we say is traffic to be more accurate is transaction. So what I look at to feel.

To know whether or not we should feel good about our business are not as good is underlying.

Underlying sales of entree sandwiches, and salads right the argument being that consumer behavior isn't changing a whole lot you are not going to eat to burgers versus one so how many burgers chicken sandwiches beef sandwich is things that we sell and the aggregate of all of our underlying entrees is up.

One 7% in the quarter that gives me confidence that we're actually feeding more people right and so so I think that the transaction noise is exactly what you were implying which is that one.

When people go through the drive thru it tends to be you're feeding more people per transaction when people come into our restaurant it tends to be your feeding fewer.

<unk> people per transaction so that.

Still being down a little bit inside the restaurant means our transactions are artificially suppressed I look at that number of one 7% up on entre sandwiches, salads et cetera, and that gives me solace to know that we're feeding more people.

Does that makes sense. Thank you that yes, yes. That's thank you for the clarification and then just on labor Sean can you just help me think through like going forward.

Look at the change in your labor percentages down kind of looks like exactly what I would expect in terms of high single digit pricing and low double digit labor inflation.

So when should we see productivity is the issue that you know the productivity improvements are being offset by having a fully staff versus last year is when when might we start to see that delta be a little different than just you know kind of net pricing.

Appalachian.

No Sara we started to put things in place in March and started to see in March some.

What I would describe as meaningful improvement and labor efficiencies and so I would expect.

To continue to see those trends within Q2 and beyond but understand to that like I mentioned before there are additional rate increases that we do have to put in place yet this year, but we are definitely seeing improvements in labor through the efficiencies we put in in March.

Alright, Thank you very much.

No problem.

Okay.

The next question is from Andy Barish with Jefferies. Please go ahead.

Good morning, guys. Thanks.

Just wanted to check.

Great.

Thank you put out with the quarter.

It looks like unit openings, maybe one in the third quarter, and then a little bit more backend backend loaded is that just.

Given what's going on with supply chain and equipment and things like that.

Yes, that's exactly right, although I wouldn't necessarily put it on supply chain equipment I'd put it more on the permitting process municipalities have been slow to rebound and so that's what's slowing us down but.

We had one slide a couple of weeks and it would just happen to be with us going from the third quarter to the fourth quarter. So.

We're either got shovels in the ground actively building.

The other five still Andy So we're confident about 7% for the year.

Got you Thanks and then.

I guess just.

Straightforward with the dress.

Address the elephant in the room I mean April comps are you willing to.

Is there.

A number or if youre still positive given given the ramp.

Yeah, we're going to leave that elephant in the room still.

And I think what Michele shared which I think is important to recall is that.

We're lapping some lofty numbers and and just just.

That's an important thing to keep in mind, we're lapping 25 plus percent comp numbers our goal our goal for the year stands we're confident in the performance of our business.

We're confident about the consumer demand that we have but.

You got to be cognizant of the fact that we have some big numbers, we're lapping yeah, and Andy I mentioned lapping the 25% in Q2.

April alone we were lapping a 34 plus cap. So April was a challenging one and then it obviously that.

The lap becomes a little bit easier to get to the 25, So as Michael said, we're going to keep that elephant in the room, but.

But what you ought to be mindful of those tougher lapse in Q2.

Got you.

Appreciate the color there and anything Michelle on.

More kind of one time costs hit in the labor line in the in the <unk> still there.

And over time or even.

Covid exclusion pay or stuff like that that was noticeable.

Yes, we had a little bit of that in there Andy.

That that did impact us in terms of some labor pressures in Q1 and.

Nothing that I would call significant on the margin, but definitely a little bit of that in Q1 that we don't expect to see in Q2 and beyond.

Great.

I'll pass it on thank you.

Thanks, Andy.

The next question is from Chris <unk> with Stifel. Please go ahead.

Thanks, Good morning, guys.

I was hoping you could dig in a bit more in the wage investments you plan to make later this year is there anything you can share in terms of around the magnitude of the investment and whether there are certain positions in the field that you wanted to address or support.

Okay.

Here's what I'd say Chris.

We are we want to take wage off the table for employees as they make decisions on where to work.

And we see pockets.

Our system, where we might be a hair behind some of our competitors.

And so we are going to make some investments.

It's certainly less than what we've made in the last 24 months. So I definitely feel like the pace of inflation is slowing.

But there are places, where we need to make some modest investments.

The key to our success our algorithm when it comes to labor is take wage off the table as they come in and then provide fantastic culture training and development. So that our turnover is lower than everybody else's in the industry that creates really great outcomes on labor when you have turnover.

<unk>.

Just higher than average youre spending a lot of money to recruit train and bring in new people and so that's how we're approaching this.

<unk> take wage off the table there are some pockets, where we have to make some small investments and and then train the heck out of people make sure that they are loved and appreciated and are enjoying their experiences at portfolios.

That's very helpful insight.

And then Michael you mentioned measurable efficiency improvements can you review with those initiatives were and what were you able to drive in terms of productivity gains.

I'll give you one example.

And I give a ton of credit to our operators because this is something that they found.

Traditional portio Loews has this L shaped up series of production lines on the long long part of the <unk> is the traditional sandwiches burgers hotdogs beef et cetera on the short side, we had what we called our salad Bowl, where we assemble salads.

Scratch salads.

And there are amazing.

Our team members said you know what we would be a lot more efficient if we could move the salad bowl over to the main part of the L. There's some space in the back near where the drive through lanes are and so we've been doing that and we took the sellable area. We moved it to the back of the line and a bunch of restaurants, it creates labor efficiencies because of <unk>.

Those folks are slow they can slide over and work on another station it create guests deficiencies because in a traditional portillo. If you ordered a burger and a salad you actually pick it up in two separate places. So this is a huge guest win and we're able to staff the salad Bowl with two fewer people than we used to current.

We have seen a tick up in our items per labor hour productivity.

Because of that and so.

It's early going.

We have some creative ideas on what to do with some of that space. We vacated that we think will create further efficiencies for our business.

But that's one example of real tangible savings.

No. That's helpful. Thank you guys.

You bet Thanks, Chris.

The next question is from Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning.

On the restaurant level margins can you talk about kind of where March was relative to the full quarter given some of those all mccahon related disruptions early in the quarter and then if I look at 2018 in 2019 before the pandemic typically you would seasonally you see a couple of hundred basis points or more or less.

In our second quarter relative to first quarter is that going to be the pattern. This year or is there something we should think about to temper that and then last question can you talk about Chicago and kind of what you saw in the <unk>.

The vaccine mandate lifted on premises.

Yes, sure and I don't want to get into intra period margins. So all.

I'm going to punt on that one but I will say to you is when you look at the trends and I think you hit.

When you look at our Q2 trends and you look at higher revenues traditionally and Q2 and Q4 in those periods for us.

Start to leverage a little bit more I think when you look at that and given some of the things as Michael just mentioned from.

From a labor efficiency standpoint, my expectation would be.

Again or not.

Getting into detailed numbers that we would see improvement in margins in Q2.

Okay, and then as your third question Sharon sorry.

Yes, well I think I think the other lease.

Sorry go ahead, the trend Youre asking you were asking about whats happened in Chicago land with the lifting of the vacs mandate et cetera, and so look we're seeing some positive I would describe it as positive momentum right.

In Q1, what we saw is that our inside sales came up to 40% of our mix and that was in the twenty's a year ago. So we're really happy with that trend, it's not back up to the low fifty's that it used to be but it has improved and so we're.

We're cautiously optimistic that there is more improvement more people coming into the restaurants.

But you never know.

Now in places where people are afraid of a.

A new variant of <unk> of Covid. So we're cautiously optimistic, but I would I'm hesitant to bank on it or planned for it.

Okay, we'll try to order and today that to help you out in Chicago.

<unk>.

On the G&A line, Michelle you had originally I think expected $70 million to $75 million. This year, you are kind of well below that run rate in the first quarter is 70 to 75 still the right number for the year.

I'm not I'm not going off of that yet Sharon because we do have investments remember we're definitely in growth mode. We have investments that we do want to make.

In the back half of this year. So if we are.

If we continue to.

Trend at those levels and we're definitely carefully managing that line like I mentioned I will update you all next quarter, but we still have investments coming in the back half of the year. So right now that's still a good range to use but to your point we're trending more.

Lower than that but I still believe for the full year, that's a good range.

Okay. Thank you.

Yes, no problem.

Once again, if you have a question. Please press Star then one.

Okay.

Our next question is from Dennis Geiger with UBS. Please go ahead.

Great. Thank you, Michael or Michelle I'm curious, if you could touch a bit on kind of what you're seeing from customers of late any any changes in behaviors, perhaps how they are using the menu I know Michael you mentioned no pushback on the.

Pricing at all but any other changes or shifts in behavior or purchase shifts to call out I assume customers can do without their cake shakes, but if there's anything notable that you would mentioned of late be interested there.

I would say overall there is.

Very little change in mix in sales patterns et cetera, we're seeing a slight very slight uptick where people are going from a regular beef sandwich to our big beef sandwich promote regular burger to a double Burger delivery continues to grow we're seeing both.

Our own self delivery as well as third party delivery growing that's a continuing that's a continued trend, but the underlying consumer demand.

The frequency with which they visit how much they are eating all of that's pretty pretty stable Dennis.

Helpful. And then just one other as it relates to the new units and the returns.

Last quarter, I think we've talked about the higher build costs that you and the industry are seeing.

And despite all that your ability to kind of continue to see those solid returns. So I'm just curious as we think about the strength.

Early days that Youre seeing in Juliet in St. Petersburg is it or is it sort of.

Stronger sales is it better margin the combination of the two things that.

Even in this kind of elevated newbuild environment.

Support those those really solid new unit returns.

Yes, I think so.

Both Joliet in St. Pete, we're not particularly expensive builds so where we have been cautious and I think pretty careful about what we say about our new builds but I think Joliet Juliet certainly was on the low end given the size and even St. Pete came in at.

Relatively attractive build for us so it wasn't the build cost of those necessarily those were problems, but but the consumer has been very very strong for both of those Joliet as I think everyone knows is a drive through only concept for us as a triple Lane drive thru and so.

No.

It is a bit of a pilot an experiment and it's been fantastic so far so.

We think theres something there to this drive through only concept and then St. Pete is just I.

I feel like it's one of those where we did everything really well it's at a great trade area.

As a beautiful restaurant it reflects the local environment, we hired really effectively we train the heck out of our folks who are super happy to be there and the volumes came in strong and we did a great job in handling that volume. So I think St. Pete is an example of executing our playbook effectively.

And when we do we expect to beat our numbers.

Great. Thanks, Michael.

The next question is from Gregory Frankfurt with Guggenheim Securities. Please go ahead.

Hey, Thanks for the question My question there.

Theres been a bunch of you talked about the most recent couple openings, but but maybe even the four five that Michael that you had a hand in before the most recent view how are those continuing to trend in our <unk>.

Those were a great class of stores and I'm curious if kind of you held them on our sales and margin from those.

I mean, the short answer is yes, Greg we're very happy with the class of <unk> 2020 one.

As a class theyre, performing very very well and I would say as a class are performing above our underwriting expectations. So they could.

Some are some are.

Just plowing ahead at ridiculous revenue levels somewhat slowed down a hair, but as a class.

Very very excited by the classes of 2021 and the early 'twenty twos.

Got it and then maybe just on the labor side I think.

You touched on staffing improving.

How is turnover been as turnover starting to tick down at all.

Yes Zach.

Kind of staying at elevated levels.

So obviously turnover in the restaurant industry are.

Some lofty numbers so what we like to do is we very assiduously track ourselves against the rest of our industry and I can tell you that we are 20 to 30 percentage points lower than the rest of our industry you see some some restaurant companies.

Very high turnover levels approaching 200%, we're still in the low 100%, which in this industry and at this time represents a 20% to 30 percentage point.

Benefit versus others. So we think that we're a little bit more sticky than than others in the restaurant industry.

Got it. Thank you maybe if I can sneak one last one.

Just on the hedging Michelle that you mentioned.

I think it was you were 50% for the rest of the year are you significantly below or above the futures curve.

As we kind of look out to 'twenty, three and 'twenty four.

Or what the commodity impact could be.

Yeah, and Greg just to be clear so for the full year, we're locked in at that almost 55% market basket and so.

Sure.

And I will tell you that our biggest concentration, which I mentioned being being the beef.

Locked in at a rate that was below our own internal budgeted projections. So we feel good about that and obviously when you look at the other commodities.

Most of those are locked in in Q2, and when we look at the Q3 Q4.

Locks on those you obviously weigh what the what the cost is the blocking and at that given certain pricing and so like I said when opportunities arise we're going to lock in but I think when you look to your question on forward projections, right, that's where I'm not going to locker lock ourselves into something now knowing.

That.

Could be opportunities in the future because as you know when you look at for our projections.

Do you expect some easing and and like we said we know these pressures are more transient. So we're not locking into really longer term numbers because we do think as you look into 'twenty three 'twenty four that again.

We would expect and hope to be some easing there.

Thank you guys.

Thanks, Greg.

Okay.

And with that we will conclude today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.