Q2 2022 Portillos Inc Earnings Call

August 4, 2022

[music].

Greetings and welcome to the Porcello second quarter 2022 earnings conference call.

At this time, all participants already listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Barbara Dover really please go ahead.

Thank you operator, good morning, everyone and welcome to our fiscal second quarter 2022 earnings call with me on the call today is Michael Elliston, Lu President and Chief Executive Officer, and Michelle Hook, the company's Chief Financial Officer.

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 discussion of the risks that could impact the portfolio 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 to 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.

This morning, we also announced the date of our inaugural Investor Day, which will be held in New York on Tuesday November eight we're excited to share more about our growth story with you. So please stay tuned for more information on how to participate.

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

Thank you Bob.

First start by thanking all of our incredible team members our collective focus on the guest experience and operational excellence led to another quarter of revenue growth and strong profitability for portfolios and.

In the second quarter of 2022, we grew total sales, 7.0% to $156 million same restaurant sales grew one 9% even against a very tough comp of 25.0% from the same quarter last year.

Average unit volumes remained strong at $8 3 million.

Our ability to handle that kind of volume resulted in 25, 5% restaurant level adjusted EBITDA margin.

Our labor savings initiatives early in the quarter helped drive. These results. We expect these changes to have a long term impact and we'll continue to look for efficiencies within our operating model mix.

Michelle is going to detail our financial results in just a moment, but first I'd like to go over the major drivers of our success and why I'm. So confident in the sustainability of our approach.

First let's talk about our profitability levers.

We generated 470 basis points of sequential margin improvement at the restaurant level in a tough environment.

There's no question that inflation commodity prices and labor volatility remain challenging.

So we continue to focus on what we can control factors that largely fall into the buckets of strategic price management labor efficiency and team member engagement.

By sticking with our price laggard strategy earlier this year, our value proposition is stronger than ever portals is known for offering high quality delicious food at an affordable price.

We view the cost of that high quality food as a reinvestment in our guests even in a year like this one when commodity prices have gone wild.

We will not gouge, our guests or lower our standards on food quality just to manage short term margins.

Across our menu by carefully pricing at or below inflation.

We have preserved the value proposition that we offer our guests.

We also saw a benefit from labor efficiencies that we implemented in late Q1 early Q2.

And we've shared these stories about excluding the salad Bowl trimming sausages, using pre cut onions, and many more.

These ideas start with our team members, we empower them to embrace a spirit of continuous improvement both for the business and themselves and those little improvements in aggregate improved labor hours, which in turn had an impact on our bottom line in the quarter.

But I'd like to stress that these are not one quarter efforts that lead to one quarter results.

We know that offering our guests a consistent efficient experience has long term benefits. If a gas has a positive experience they come back and they bring their family and they bring their friends. This is evident from our guest satisfaction scores.

Our order accuracy and overall satisfaction scores from Q2 remain the highest we've seen in the past 24 months, we consider these leading sales indicators that bode well for the back half of the year.

Our guests have had positive experiences and they will be back.

At Portola as we prioritize a robust dynamic culture, which is an important part of the value proposition we offer our team members.

Of course, we offer a variety of benefits and above average pay but we know it's culture that wins by leaning into our values of family greatness energy and fun, we create an environment that brings people in and keeps them as part of the portfolios family.

We're also developing our next generation of leaders over the past year, we filled approximately 80% of our leadership openings internally, we gave them resources to excel and have fun at work. This leads to a culture that attracts and retains some of the best team members in the industry are.

Folks are efficient disciplined and deliver the port pillows experience, while eager to learn and grow with us.

Now I want to be clear, we will continue to pay at or above market. So while we implemented cost savings initiatives early in the quarter. We did raise wages at the beginning of the third quarter in order to stay competitive.

The labor efficiency piece can have a benefit to margins like it did this quarter, but will also continue to feel the impact of wage increases over the coming quarters.

We're also continuing to execute against our 10% New unit growth commitment for the year in Q2, we opened St. Petersburg, Florida, a beautiful restaurant, that's a testament to the power a strategically great real estate.

It has high visibility off the well traffic Tyrone Boulevard and a fantastic set of co tenants.

It's the perfect place for your family to stop after they've had a great day at the beach and we're thrilled by how well it's performing.

We're also very excited about our development plans for the rest of the year, we have shovels in the ground and share Avilla, Indiana and at the Grand scale development in the colony. The site of our highly anticipated first restaurant in Texas.

We're also starting construction on three more sites our restaurant in West Kissimmee March the second in the Orlando, Florida area, and we continue to build scale in Arizona with upcoming restaurants, and Gilbert and Tucson.

All five of these restaurants will be opened by the end of the year.

Portola is still relatively new public company and we've stayed true to the commitments that we've made and we're doing what we said we're going to do.

By focusing on what we can control we've produced consistently strong financial results. This is evident in our margins, which remained best in class. Despite the unpredictability of the broader environment.

We remain hyper focused on our value proposition the guest experience and our team members' engagement and efficiency.

In doing so we create an environment that guests want to visit the team members want to do well in and that allows us to self fund the exciting development pipeline that will generate new obsessed fans.

So with that let me hand, it over to Michelle to share some more details of the quarter.

Great. Thank you Michael and good morning, everyone.

Our second quarter results highlight the effectiveness of our business model, which showed up in particularly strong restaurant level adjusted EBITDA margins and consistently high average unit volume we deliver these strong financial results even in the face of material cost increases.

Let's now dive into the second quarter resolved.

Revenues were $150 6 million, reflecting an increase of $9 9 million or 7.0 per cent compared to the second quarter of 2021.

This increase was driven by the opening of four new restaurants in the second through fourth quarters of 2021, and two new restaurants. During the first half of 2022 combined with a one 9% increase in same restaurant sales.

The same restaurant sales increase of one 9% was primarily driven by a four 8% increase in average check and a 2.7% benefit from the change in recording third party delivery pricing.

This was partially offset by a decline in transactions of five 6%.

The higher average check was primarily driven by a six 8% increase in menu prices, partially offset by lower items sold per transaction.

When you look at our second quarter comp and a three year geometric basis. We grew six 2%, which is in line with our long term target of low single digits and continues to speak to the consistency and durability of our brand.

Throughout our 59 year history, our brand has historically done well throughout all economic cycles.

Cost of goods sold excluding depreciation and amortization as a percentage of revenues increased to 34, 4% in the second quarter of 2022 from 30.0% in the second quarter of 2021.

This increase was largely driven by 15, 2% average increase across all commodities, we saw higher impacts and pork chicken and beef.

Additionally cost of goods sold was negatively impacted by one 7%, resulting from the change in recording third party delivery pricing.

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

The commodity market continues to remain volatile and we have and are taking measures to mitigate our risk within key input categories.

We have locked in pricing on approximately 78% of our commodity basket for fiscal 2022.

We continue to forecast our commodity basket to increase at the higher end of our previously guided 13% to 15% range for fiscal 2022.

Now moving on to labor.

Labor as a percentage of revenues increased to 25, 2% in the second quarter of 2022 from 24, 5% in the second quarter of 2021.

This increase was primarily driven by investments to support our team members, including hourly rate increases made in June of 2021.

Higher equity based compensation and new restaurant openings in 2021 and 2022.

These increases were partially offset by operational efficiencies lower variable based compensation and an increase in our average check.

As Michael discussed all the continuous improvement efforts can make a difference and we saw that this quarter and our labor numbers. However, we will continue to see headwinds in our labor rates at the beginning of the third quarter of 2022, we made additional wage investments in our hourly team members.

This combined with the expected commodity inflation, well have an impact on our restaurant level adjusted EBITDA margins during the second half of 2022.

Other operating expenses increased $1 3 million or 9.0% in the second quarter of 2022.

Occupancy expenses increased <unk> 3 million or three 8%.

Both primarily the result of new restaurant openings in both 2021 and 2022.

Restaurant level adjusted EBITDA decreased 10, 9% to $38 4 million in the second quarter of 2022 from $43 1 million in the second quarter of 2021.

Restaurant level adjusted EBITDA margins were 25, 5% in the second quarter of 2022 versus 36% in the second quarter of 2021.

The decrease of 510 basis points was driven by the continued impact of increased commodity costs and to a lesser extent labor inflation.

We are partially offsetting these increases through menu price increases and operational efficiencies.

During the first and second quarters of 2022, we increased menu prices on certain items by approximately one 5% and three 5%.

These increases combined with pricing actions taken in 2021 resulted in an effective increase in price of approximately six 8% in the second quarter of 2022, and 7.0% year to date.

We will continue to monitor the existing environment and remain flexible and strategic in our pricing approach moving forward.

Our goal remains providing a great value for our guests.

As a result of these menu price increases and operational efficiencies restaurant level adjusted EBITDA margins sequentially increased from 28% in the first quarter of 2022 to 25, 5% in the second quarter of 2022.

Our G&A expenses increased $3 3 million to 10, 3% in the second quarter of 2022 from eight 6% in the second quarter of 2021.

This increase was primarily driven by increases in equity based compensation expense of $3 4 million.

Pre opening expenses decreased <unk> 2 million <unk>, 3% in the second quarter of 2022 from <unk>, 5% in the second quarter of 2021.

This decrease was due to the timing and geographic location of restaurant openings in the second quarter of 2022 versus 2021.

All of this led to adjusted EBITDA of $27 6 million in the second quarter of 2022 versus $32 5 million in the second quarter of 2021, a decrease of 15, 1%.

Below the EBIT line interest expense was $6 1 million in the second quarter of 2022, a decrease of $4 6 million from the second quarter of 2021.

This decrease was driven by the payoff of our second lien term loan in the fourth quarter of 2021, and lower outstanding borrowings under our first lien term loan.

Income tax expense was $2 3 million in the second quarter of 2022, and our effective tax rate for the quarter was 17, 9%.

We ended the quarter with $49 7 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 micro side, we're doing exactly what we said we're going to do we are focusing on what we can control, which is strategic price management.

Labor efficiency and team member engagement our.

Our value proposition is stronger than ever and we are well positioned for continued growth.

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

Thanks, Michele before opening for questions I want to reiterate what we've shared over the last few calls.

Portillo, who has been around for 59 years, we persevered through a wide range of external pressures throughout these past six decades, we're able to do this and still continue to grow because we remain focused on what we said we would prioritize it starts with our people centric values driven culture.

We care for and invest in our team members, who in turn care for our guests that are committed to delivering our delicious menu at a value driven price point in creating an unrivaled experience while doing so.

We know that's what it takes to sustain this business is how we built the national following of loyal fans, it's our quality and our consistency that when consumers over and keeps them coming back. Thank you.

With that let's turn to Q&A operator, please open the line for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is or the question queue you.

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Your first question comes from David Tarantino with Baird.

Hi, David.

Good morning.

I had a couple of questions first is on the sales trends youre seeing.

And I was wondering.

Michael or or Michelle if you could comment on kind of what you're seeing.

As the quarter progressed as Q2 progressed in terms of consumer behavior and the strength of the consumer.

As you sort of see it evolving here.

So as we get into the early part of this quarter as well.

Yeah.

It's.

I think a couple of points I want to make David So recall that in Q2 of 29 21, we had a 25% comp. So we're actually really really happy with our performance in Q2, and the way, we lapped that comp with a positive comp. So we feel we feel really really good.

I think I think everyone in the industry has seen a little bit of softening or tightening with the consumer I would say that our value proposition and the and our consumer over indexing, a little bit above average income et cetera, probably insulated us from that of her.

But overall you know I don't.

We feel really good about where we are we think that we're getting some trade down customers and that our value proposition is really resonating with consumers right now.

Great. Thanks for that and then on the Labor line.

Very impressive I guess performance.

Kind of where you were in the first quarter. So I wanted to ask.

Are the productivity savings.

That you brought in towards the beginning of the second quarter, where the where those fully developed as you got into the second quarter or is there more benefit to come in the second half of the year from those and then I guess.

Relatedly, how do you.

How do you think about the <unk>.

The margin outlook for the second half of the year in light of the investment you made in labor Michelle. Thanks.

Yeah, David I'll take that one so the bulk of the efficiencies you would've seen that come through in Q2 sort of I don't expect to see any incremental <unk> in terms of those benefits.

In the back half of the year I think we called out what you will see is a little bit of headwinds given that we put in another round of rate increases at the beginning of the third quarter.

But having said that when you look at the compare right, which as you know we did put in a round of wage increases in June of 2021, I think when you look at our our hourly rates were up about 12, 5% in Q2, I think when you get into the back half of the year, we do expect to see some easing of that compare.

And so that that was already expected, but it's gonna be mitigated to an extent by those rate increases.

And that's what we expect to see in the back half.

Great. Thank you very much.

Yeah. Thanks, David.

Next question, Sharon Zackfia with William Blair.

Hi, Good morning, Sharon Good morning, just.

Just a few a few questions your value proposition to me it seems like it.

It may be better today than it's ever been you know relative to the grocery island, where other restaurants or do you have any quantitative measures on how consumers are waiting porcello the value proposition.

And kind of concurrent with that are you seeing any trade down around the menu and then one other item as well I think last quarter, you talked about kind of people served as opposed to transactions kind of looking at entrees are items is there a way to contextualize that for the June quarter.

You bet. So let me start with our value proposition I think the most important.

Stat that we track is what we call overall satisfaction score Osaka, because it embeds things like how accurate you are speed of service value proposition all of these things and what I'm excited by is that our Oss score is at a 24 month high and so we feel great about where we are and I think thats a good.

Good leading indicator and as you know I think broader inflation, depending on what you see prices have gone up nine ish percent. There are restaurant companies that have priced in the low teens and where our pricing is slightly below 7%. So we have lagged inflation. So yeah.

I personally feel great about where we stand versus the grocery stores versus competition and versus what the consumer is seeing and I think it's I think it's helping us.

Metric that we had talked about last quarter was sandy.

Sandwiches in entrees sold and so we were slightly positive for the first quarter were slightly negative for the second quarter and were basically flat for the year and I think given the broader.

Macroeconomic dynamic the traffic that we're seeing at other restaurant companies, we feel really good about that I feel really good to be flattish in terms of total people served year over year for the first half.

Thank you.

You bet sure.

Next question, John Glass with Morgan Stanley .

Thank you very much and good morning, good morning.

First Michelle just a following up on a question about restaurant margins. When you say easing I want to make sure I understand the context, because the first quarter in the second quarter were very different are you seeing easing from the second quarter level or the first first half average and maybe if you can just quantify what the.

The rate of increase of labor dollar or is there a labor increase wage increase was just so we understand that.

Yeah, John what what im referring to in the back half of the year is compared to what we saw in Q2, right, where we had a full round of efficiencies right that we're essentially built into that quarter without any additional incremental rate increases and so when you. If you take that same logic and say, okay in the back half of the year right.

I continue to see those efficiencies, but I layer on top of digital additional investments in wages, that's where I think we'll see some pressure in the back half compared to Q2.

Okay and in the increase what is the increase in wages.

We don't we're not disclosing that.

Okay, and then Michael you either the development schedule has not changed versus last quarter. I think there's one that slipped there are a lot of brands that are seeing some slippage in development.

Stan that you've got things under control and from a construction standpoint do you have all the equipment everything you need to open the remaining restaurants or is there a risk that you can't get some items in that that creates risk in how are you thinking maybe differently about your development strategies for 'twenty three as a result of this current environment or your warehousing more equipment earlier.

For example, anything that's changed just given where there have been some delays from a variety of a variety of issues in the supply chain.

Yes, those are that's a very insightful question Jon so.

We definitely have lost a few weeks of this year on our development cycle. So we were hoping to get one and in Q3, it's split a hair.

So we've lost weeks, but we haven't loss, it's not like we lost months and it's not like any of our restaurants are in jeopardy of not opening this year and it's a lot of what you were describing we have been I think appropriately conservative in buying equipment as soon as we can so our HVAC kits.

We have a bunch of those are already slotted for 23 openings because of the dynamic that you're describing so we're trying to derisk it as much as possible. The other thing that we've seen is the permitting process has just taken longer than any historical norms and so for 'twenty three we have been budgeting.

Significantly more time for permitting still the construction process, we feel really good about and we can get that done and appropriate amount of time, but.

We frankly have doubled our budgets for amount of time it takes to permit restaurants.

So that's how we've derisked, our 23 pipeline, we're still very comfortable with our commitments for 23, we're going to get 10%.

New unit count.

We already have a number that are signed.

Permit exam their way all that stuff so.

But it is derisking it by building in more time for permitting and Derisking. It by sourcing all the critical equipment way in advance.

Got you. Thank you.

But.

Next question, Nicole Miller of Piper Sandler.

Good morning, Good morning, Hi, good morning, Thanks for the update.

Asking store level margin a question here a different way if we think about around 25% in the second quarter, and then seasonality would be maybe a couple of hundred basis points lower in <unk> and then <unk> can be you know historically looking at seasonality equal to two Q do we start there.

And then just make a little haircut for the inflation you talked about or is it something much more significant.

No Nicole I think I think you nailed it it's not something I would deem to be much more significant I think.

When you when you talk about the revenue as you mentioned and you look at Q2 being at.

Higher end and then as you know Q4 picks up with that catering business right, which is at this point still TBD in terms of what that looks like you know given the environment and where we're headed and so.

That that's you know you pretty much set at all so I don't have much more to add other than absolutely. We expect to see a little bit of those headwinds come through in both quarters on that labor line.

Okay, and then I just wanted to ask about staffing levels, it's a little bit of a two part question, but maybe they kind of go together in the second quarter I imagine it seemed like everyone kind of entered with really good staffing levels and it kind of became under staff the seasonality kicks in like you need more and more people and I don't know where you ended up there.

And then of course like three Qs is you know.

<unk> not as seasonally strong so staffing can be recalibrated. So I'd be curious about that but then also when you speak to the efficiencies. It's interesting you can hire more spend more but then do better on labor. So how are you doing doing in terms of items sold per labor hour.

So great questions I would tell you that our staffing we feel great about.

And we are at pre Covid levels of staffing at this point. So we've got plenty of people you know we benefit we have a lot of loyal team members, who return home from college from school and want hours and want to work at Portillo. So we actually bulk up staffing over the summer quite well in this this year has.

Not only not been an exception to that but it's been a great driver of that.

And then IPO.

<unk> hugely important we're seeing we're seeing great performance. We are way ahead of where we were pre COVID-19 and we're nearly as efficient as some of the COVID-19 months.

And keep in mind during those Covid months, we really weren't open for dine in and so when you've opened up dining and you're maintaining that efficiency. We feel really good about it. There's a lot that we learned during COVID-19 about how to share stations ought to get team members to move from one station to another to help out lots of little things.

That we have retained and that have just made us more efficient operator post COVID-19.

Thank you.

You bet.

Next question to Andy Barish with Jefferies.

Good morning, Andy.

Hey, good morning, Michael and team how are you.

Great. Thank you.

Good.

<unk>.

On the just a question on the new.

New restaurant opening kind of impact slash inefficiencies.

As much as you're willing to share is that coming in kind of in line with what you.

You know kind of thought internally or is it a little bit better just given.

It seems that new store productivity is coming out of the gates at a little higher volume.

Yeah, Andy I think Michael commented on.

The performance, particularly of our new restaurants, we've opened this year in Joliet in St Pete and and so we're really pleased with the performance there, but I'd say, we're on track in terms of what we've talked about when you look at the margin profile of year one of those restaurants.

And getting up to a year two year three profile. So we feel really good about that performance and as you know that starts with the top line and making sure that you know we have a healthy topline and and we're doing that and those new restaurants, which then in turn is flowing down to the bottom line, but those restaurants like our existing restaurants right are challenged with the same.

Things that we've been talking about whether that's commodity inflation or labor inflation, right youre going to see that flow through there, but we are really pleased with the performance of any of the units.

Fantastic and then can you give us.

Update on some of the tech initiatives you've talked about.

Pos in the handheld and I think I think labor scheduling which may be.

It is still to come or I might have.

I might have kind of forgotten how that was layering in here.

Yeah. So we actually have deployed a new labor scheduling tool.

Which we're having great.

Great because we're getting a ton of efficiency, but we're also automating it so that it's saving a lot of time for our managers, who can focus in on other more value added thing. So the labor scheduling tool is great. It allows for peer to peer communication our team members can trade shifts much more easily and so.

It's having both a economic impact, but an even more important cultural impact on how our team members engage with each other and with management. So we feel great about that we are on our way.

We are well on our way too.

Getting what I would describe as best in class.

POS capabilities right. So we're on a path hopefully to get to Apple pay Google pay whatever however, anybody wants to interact with us from a pace standpoint, our goal as you know hopefully by the first quarter of 'twenty three to have everything in place. So that we can do that yeah.

Yeah, I would just add to that Andy we've also begun to point, we've talked about digital menu boards.

At the at the front of that implementation and getting digital menu boards across all of our restaurants with the goal to have those in.

This fiscal year, some might flow into Q1, but we feel good about that initiative as well.

Okay. Thanks for the update.

You bet.

Question, Sara Senatore with Bank of America.

Hi, Thank you I wanted to follow up on the a couple of comments on the on the demand and traffic in particular.

I think we've actually heard from a couple of restaurants now that customers unique customers.

Ladder up but youre seeing transactions that are down and I'm trying to understand the dynamic there is people order more or continuing with the group ordering something I thought we might see reverse.

Post COVID-19.

And in particular with respect to your comp how should we think about price and check versus.

Traffic because of the traffic declines I know you had a tougher compare but.

They did accelerate and and I just wanted to sort of understand how much of that is sort of industry versus.

Your calibration of check in traffic. Thank you.

You bet I think I think one of the things to be cautious of is when people are talking traffic I think no one's actually quoting in the traffic numbers, but they're all floating is check or number of transactions through their Pos.

And that is heavily skewed by your channel mix. So for US for example, when we have somebody going through the drive thru that typically is feeding more than one person and it tends to be multiple people going per order in the drive thru, whereas on dine in it tends to be it tends to be.

Each person is ordering for themselves. So there is just a slightly different dynamic.

Historically youll recall, we were like 50 ish percent dine in.

And roughly 45 ish percent to drive thru and delivery.

Our dine in is still only 38% it has not come back.

Fully and so drive thru is still very very strong and dine in is artificially a little suppressed I think that channel mix is what youre seeing reflected in the transaction count. So there are just fewer checks.

Going through the.

Fewer checks fewer bigger checks in the drive thru equate to people and that's why we like to make sure we're paying attention to entre sandwiches sold entree salads sold I think for US that's probably the best proxy of how well we're doing in terms of people eating at port pillows and.

The number I quoted earlier were up.

Just a little under 2% in the first quarter were down a little under 2% in the second quarter were basically flat for the year in terms of entree sandwiches sold entree salad and that's that's what we're looking at that gives us opt.

Optimism about our.

People trends.

Yes trends not necessarily transactional traffic.

Does that make sense. It doesn't just to clarify when you talk about that channel mix.

Is it.

The same as it was a year ago, I guess that that's sort of the the real question is to the extent that it's different from pre COVID-19 I understand but it's relatively stable year over year.

No. So so think of it this way that in 2019 inside the restaurant was 53% drive thru was 41% at the peak of Covid in 2020 inside the restaurant was 27% drive thru was 63%.

21 inside was 31% drive thru was 58% and now today drive thru is 49% inside is 38%. So you can see from the 2019, which is a more normal year, we're still down 15 percentage points in terms of our mix.

And of course delivery has doubled during that time frame.

That's the difference and all of that but like so 38% dine in versus 53% from 2019, that's still.

It's probably not going back to 53%, but it should go up from 38%.

Got it thank you.

Matt.

Next question, Chris <unk> with Stifel.

Hi, Chris Hey, good morning, good morning, guys.

Michelle I believe on the last call you mentioned that total bill costs had increased by about $1 million from the plan I'm just wondering if youre still seeing that level of inflation and if theres anything you guys are looking at for 'twenty three that might help reduce the investment cost for bill.

Yeah, Chris were 22 bells, I still expect to see those inflationary pressures in the 'twenty two belt.

For 'twenty three we're working on that to Michaels point as we speak but absolutely. We're looking at ways that we can reduce that and not just standby and so we're looking at different prototypes a smaller prototype builds we're looking at different.

Options with them to lay out in the kitchen, and just different bill of materials as well, Chris we're looking at as well and so I think as Michael and I sit here today, our expectation is that that will come down for the builds in 'twenty three I don't have that exact number just yet but that is my expectation, but I don't expect that to be the case for the <unk>.

That we have remaining in 'twenty two.

Excellent and then Michael we're starting to hear more companies talk about the need for value and promotion and I. Obviously appreciate the <unk> value proposition remains very strong, but if you do start to see consumer spending environment continued to weaken we can further at least and competitors become more aggressive discounting and offering promos.

How could you adjust portillo marketing plan maybe too.

Adapt to that more challenging environment.

Yeah, Great question I think the first thing is that we are not a high low type of retailer, we're not going to.

<unk>, we don't like going on sale discounting once you start on that discounting path I think you are stuck on it and I think it has.

Strong negative repercussions for your business longer term and it's why we have been so cautious about pricing and making sure that we are not getting ahead of inflation or.

We're not pricing ahead of the.

The value that we provide.

The combination of.

<unk> pricing slightly.

Slightly behind inflation.

And also improving service levels is a really powerful one too because value is not just price as you well know Chris right value as a whole package of experience.

And we're providing according to our guests the best experience that they have had with us in 24 months with great speed of service and great value.

It's a winning proposition and so it's making sure you're not over pricing, making sure that you are providing guests a great experience.

Food Hot fresh and fast and so that's our formula for success I don't want to get into the business up.

Price really high and then discount do bogo or whatever that is that erodes and destroys the brand over time.

Excellent. Thank you guys.

Beth.

Once again, if you would like to ask a question. Please press star one on your telephone keypad.

Next question Gregory Frankfurt with Guggenheim Securities.

Hey, good morning, Thanks, guys.

Morning, Hey, guys doing this morning.

Alright.

My first question is just at the Investor day that you have coming up but what are the goals for that.

Just what are you trying to communicate or just maybe if you can.

He's out.

Should expect for that.

Yeah, absolutely, Greg we want an opportunity clearly to engage with our investors and.

<unk> laid forth our as we think about our strategic outlook our plans.

Talk about development, which we know is significantly important to our.

For our investors and our shareholders and.

The goal is to to do all those things to showcase our our leadership team as well I think you all get to hear from myself and Mike are quite a bit but we want to make sure you get to hear from other leaders in their areas and some of the some of the good work that we're doing there as we think about the future of porcello. So.

It's as simple as that I don't know Michael anything you'd add yes, and I have one very mundane goal, which is I want to put Italian beef sandwiches in the minds of all of my investors.

Theres a lot of investors in New York, who sort of understand is on paper, but don't understand us with their mouth and got and so Greg if you're in New York, we're going to bring our beef us out we're going to feed people it'll be a really fun event.

And I think once people taste, our food they understand they understand what makes us special.

No. That's helpful. And then just maybe on kind of the numbers.

Where would you shake out on pricing for the third quarter, if you don't take new pricing.

Can you maybe talk about how and when youre or what you're thinking through as you evaluate.

Yeah.

Pricing in the balance of the year.

Yeah, Greg so we'd be at about eight 3% price in Q3, if we took no other pricing action.

And when we look at Q4, if you recall, we took up pricing at the beginning of.

Q4 is why we took about 3% at the beginning of Q4 of 'twenty two and so if we did nothing that eight 3%.

Become five and so we're going to continue to evaluate obviously the landscape of whats going on and if we're going to pull that pricing lever any further.

But just know that that that 3% that we took in Q4 of 2022 or 'twenty one sorry.

Lap off and then there would be a drop off if we continue to do nothing in Q4.

Got it got it and then maybe just my last question is.

On delivery.

Can you maybe talk a little bit how youre approaching the pricing strategy. There I think it's been interesting watching chipotle widen out the price on the delivery business really substantially the last.

12 to 24 months and I think I said Sim.

<unk>.

A new pricing on delivery versus Carryout, but maybe correct me if that's wrong.

What's wrong and you see an opportunity to kind of widen that overtime.

So I don't want to comment on what anybody else does what we do what we believe is look if guests want that third party delivery options, that's that's great but.

But we're going to do our best to maintain that as a margin neutral business for our investors and so overall on third party delivery.

Wherever it is we are margin neutral right now and that's where we that's where we like to be.

And.

That's a fine business I do think that that business with the total cost of that business is likely to feel more pressure earlier than our drive thru business or our other channels.

But our goal is for our investors.

Margin neutral on third party delivery and Greg you will recall right, we do our own delivery as well so high value orders higher price orders Portillo delivers with port till those team members and we get great feedback from our guests we give them an amazing experience. They have somebody who comes in and sets. It up it's a very nice dynamic.

<unk>.

And that works really well for us.

Thank you guys appreciate it.

You bet.

If there are any further questions. Please press star one on your telephone keypad.

Okay.

Great. Thank you everyone.

I appreciate you participating in the in the call.

This concludes today's teleconference. You may disconnect your lines at this time, but thank you for your participation.

Okay.

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Okay.

Hum.

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Yes.

[music].

Greetings and welcome to the Porcello second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

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 discussion of the risks that could impact portillo, its future operating results and financial condition.

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

Liquidity or financial performance.

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

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

Thank you Bob.

In the second quarter of 2022, we grew total sales, 7.0% to $156 million same restaurant sales grew one 9% even against a very tough comp of 25.0% from the same quarter last year.

Average unit volumes remained strong at $8 3 million.

Our ability to handle that kind of volume resulted in 25, 5% restaurant level adjusted EBITDA margin.

Michelle is going to detail our financial results in just a moment, but first I'd like to go over the major drivers of our success and why I'm. So confident in the sustainability of our approach.

First let's talk about our profitability levers.

We generated 470 basis points of sequential margin improvement at the restaurant level in a tough environment.

There's no question that inflation commodity prices and labor volatility remain challenging. So we continue to focus on what we can control factors that largely fall into the buckets of strategic price management labor efficiency.

And team member engagement.

By sticking with our price laggard strategy earlier this year, our value proposition is stronger than ever Portillo as is known for offering high quality delicious food at an affordable price.

We view the cost of that high quality food as a reinvestment in our guests even in a year like this one when commodity prices have gone wild.

We will not gouge, our guests or lower our standards on food quality just to manage short term margins.

Across our menu by carefully pricing at or below inflation.

We have preserved the value proposition that we offer our guests.

We also saw a benefit from labor efficiencies that we implemented in late Q1 early Q2.

And we've shared these stories about moving the salad Bowl trimming sausages, using pre cut onions, and many more.

But I'd like to stress that these are not one quarter efforts that lead to one quarter results, we know that offering our guests a consistent efficient experience has long term benefits. If a gas has a positive experience they come back and they bring their family and they bring their friends. This is evident from our guest satisfaction scores.

Our guests have had positive experiences and they will be back.

At Portola as we prioritize a robust dynamic culture, which is an important part of the value proposition we offer our team members.

We're also developing our next generation of leaders over the past year, we filled approximately 80% of our leadership openings internally.

We gave them resources to excel and have fun at work. This leads to a culture that attracts and retains some of the best team members in the industry.

Our folks are efficient disciplined and deliver the port pillows experience, while eager to learn and grow with us.

The labor efficiency piece can have a benefit to margins like it did this quarter, but we will also continue to feel the impact of wage increases over the coming quarters.

We're also continuing to execute against our 10% New unit growth commitment for the year in Q2, we opened St. Petersburg, Florida, a beautiful restaurant is a testament to the power of strategically great real estate.

It has high visibility off the well traffic Tyrone Boulevard and a fantastic set of co tenants.

It's the perfect place for your family to stop after they've had a great day at the beach and we're thrilled by how well it's performing.

We're also very excited about our development plans for the rest of the year, we have shovels in the ground in <unk>, Indiana and at the Grand scale development in the colony. The site of our highly anticipated first restaurant in Texas.

We're also starting construction on three more sites, our restaurant and West Kissimmee marched the second in the Orlando, Florida area, and we continue to build scale in Arizona with upcoming restaurants, and Gilbert and Tucson.

All five of these restaurants will be opened by the end of the year.

Portola is still relatively new public company and we've stayed true to the commitments that we've made and we're doing what we said we're going to do.

We remain hyper focused on our value proposition the guest experience and our team members' engagement and efficiency.

So with that let me hand, it over to Michelle to share some more details of the quarter.

Great. Thank you Michael and good morning, everyone.

Let's now dive into the second quarter results.

Revenues were $156 million, reflecting an increase of $9 9 million or 7.0% compared to the second quarter of 2021.

The same restaurant sales increase of one 9% was primarily driven by a four 8% increase in average check and a two 7% benefit from the change in recording third party delivery pricing.

This was partially offset by a decline in transactions of five 6%.

The higher average check was primarily driven by a six 8% increase in menu prices, partially offset by lower items sold per transaction.

Throughout our 59 year history, our brand has historically done well throughout all economic cycles.

Cost of goods sold excluding depreciation and amortization as a percentage of revenues increased to 34, 4% in the second quarter of 2022 from 30.0% in the second quarter of 2021.

This increase was largely driven by 15, 2% average increase across all commodities.

We saw higher impacts and pork chicken and beef.

Additionally cost of goods sold was negatively impacted by one 7%.

<unk> from the change in recording third party delivery pricing.

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

The commodity market continues to remain volatile and we have and are taking measures to mitigate our risk within key and pet categories.

We have locked in pricing on approximately 78% of our commodity basket for fiscal 2022.

We continue to forecast our commodity basket to increase at the higher end of our previously guided 13% to 15% range for fiscal 2022.

Now moving on to labor.

Labor as a percentage of revenues increased to 25, 2% in the second quarter of 2022 from 24, 5% in the second quarter of 2021.

This increase was primarily driven by investments to support our team members.

<unk> hourly rate increases made in June of 2021.

Higher equity based compensation and new restaurant openings in 2021 and 2022.

These increases were partially offset by operational efficiencies lower variable based compensation and an increase in our average check.

This combined with the expected commodity inflation will have an impact on our restaurant level adjusted EBITDA margins during the second half of 2022.