Q3 2022 El Pollo Loco Holdings Inc Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by and welcome to the I'll call Yabloko third quarter 2022 earnings Conference call.
At this time, all participants have been placed in a listen only mode and the lines will be opened for your questions. Following the presentation. Please note that this conference is being recorded today November 3rd 2022.
Now I'd like to turn the conference over to IRA self the Companys Chief Financial officer. Thank.
Thank you operator, and good afternoon by now everyone should have access to our third quarter 2022 earnings release, if not it can be found at www Dot El Pollo Loco Dot com in the Investor Relations section.
Before we begin our formal remarks I need to remind everyone that our discussions today will include forward looking statements, including statements related to the impact of COVID-19, pandemic and macro environment on the business as.
As well as our marketing and new product initiatives cash flow expectations capital expenditure plans remodel plans for new store openings and expected income tax rate among others. These forward looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect we refer you to our recent SEC filings, including our Form 10-K for a more detailed discussion of the risks that could impact our future.
Operating results and financial condition.
We expect to file our 10-Q for the third quarter of 2022 Tomorrow.
And we would encourage you to review that document at your earliest convenience.
During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
The presentation of this additional information should not be included in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release now I would like to turn it over to Larry Roberts Chief Executive Officer.
Thanks, Sarah and good afternoon, everyone.
With the recent addition of IRA fields F CFO and now Maria I believe we have an outstanding leadership team.
By the necessary skills and expertise to drive the continued expansion of a pull your logo.
I'd also like to highlight that over the last 12 months are system wide sales exceeded $1 billion.
This is a great accomplishment for El Pollo Loco and highlight the affinity people have for our brand and a huge growth opportunities. We have ahead of us.
Finally, as many of you probably seen October 11th we announced the declaration of a one dollar and 50 cents special dividend, an authorization to repurchase up to $20 million of our common stock.
These programs underscore the strength of our balance sheet and more importantly confidence we have in our business going forward.
Turning to the third quarter.
We're pleased with our continued hapai momentum with system wide comparable restaurant sales growth of 3.8% <unk>.
Including a 3.4% increase a company owned restaurants, and a 4.1% increase at franchise location.
Treasury solid towards the end of the second quarter continued into the third quarter, including the healthy growth over lunch business year over year.
I'm also pleased to add that our fourth quarter has started similarly to the third with system wide same store sales through October 26th increasing approximately 3.5%, including a 5.4% increase a company owned restaurants, and a $2, 2% increase at franchise locations.
Sure level margins during the third quarter continued to be pressured by wage commodity and utilities inflation, however, staffing levels improved throughout the quarter and our company operated restaurant teams made good progress managing their businesses, resulting in pro forma earnings per share of 14.
We were very pleased with our <unk>.
Started promotion, which ran until mid August .
During several weeks of the promotion to size achieved and 18% menu mix, which was 400 basis points higher than their previous peak and they continue to make that over 14%, which is 200 basis points higher than you are pre promotion mix.
<unk> bounced the third quarter, we focus on value marketing a family feast at $24 and a revised fire grow combo meals starting at $5.
We believe these offers are critical to attracting more value conscious consumers.
Looking ahead to November and the balance of the year. We're very excited about our next promotion overstuffed case with US which includes a beef option that builds on the success of beef barrier earlier this year.
We believe this promotion will be highly appealing to younger consumers and a great fit for enhanced efforts in digital and social media with a particular focus on the use of Tictoc.
I'll also continue to promote our $24 family fees, which delivers great value for family and group gatherings.
Looking ahead to next year or 2023 marketing calendar will expanded six promotion modules from five this year.
As a result of investments made in our product development process. These promotions will include the introduction of several new products that we believe will resonate with both new and existing consumers.
More excitingly, we believe that several of these products have the potential to be permanent menu items that will broaden our appeal and drive increased frequency among current customers.
Shifting to restaurant operations I couldn't be more pleased with the progress we've made in our company operations.
As I have previously noted our franchise partners have operated very high levels throughout the last three years after making as a key priority service. Our company operated restaurants have dramatically improved over the past six months.
Actually all of our company operate restaurants now operate full hours across all channels daily.
Overtime staffing is still required in a number of locations. We expect to continue its downward trend given African flow and our intensive focus on hiring and training.
In addition to improve staffing levels are focus on driving times last visit excellent scores and leadership training for <unk> is delivering outstanding results in company operated restaurants.
Driving times have continued to improve on and now the fastest they had been in almost two years.
In addition to the hard work and dedication of our team members. Our last visit excellent scores have improved by over 25 percentage points since March to the highest level ever been more importantly, as our drive through times and last is excellent scores have improved so have all our other key operating metro.
Six, including our values scores, social media ratings and customer complaints.
I couldn't be prouder of our company operated restaurant teams and restaurant leaders, who have worked incredibly hard to improve operations as well as our franchise operators, who has consistently delivered exceptional service to a very challenging times.
In conjunction with the improvements we've made in our four will operations, we continuing efforts to simplify a restaurant operations. During the quarter. There are now very close to implementing several significant initiatives geared towards reducing operational complexity and improving product quality. These include the use of soap tanks to clean broilers and grill filters revised onboarding.
Processes that will cut the number of hours spent hiring and training new employees and new salsa, making equipment that will further improve product quality and reduce preparation and cleaning time.
We expect these a roll out to our system during the fourth quarter enable and our team members to execute their daily duties more consistently and efficiently, thereby delivering an enhanced past experience.
Turning to development, we opened two new company owned in for new franchise restaurants during the quarter.
In addition, we remodeled for a company and to franchise restaurants.
We are pleased to have recently finalize a five unit development agreement for Chico Redding, California, and southern Oregon that we spoke to last quarter to.
The date, we assigned for development agreements for a total of 17 restaurants, and we continue to have discussions with those existing and new franchisees to develop El Pollo loco units and new markets.
Our investments in franchise recruiting are clearly paying off as we continue to see a high level of interest from prospective partners, which gives us confidence in our expansion strategy and expect Nugent growth to increase to 14 to 20, new restaurants in 2023.
[noise] Inclosing as we look ahead. The work we're doing this last year has is excited about 2023.
First our company operated restaurant operations have improved significantly from where they were last year with continued focus they will improve even further the entire <unk> system.
We will be providing service at very high levels as we enter the new year.
Second utilizing our improved development process, we have a strong and exciting marketing calendar that includes new products, several which could be permanent menu items capable of driving incremental traffic <unk>.
Third we continue to invest in an enhanced our loyalty digital and social media platforms. We will also be revamping, our mobile app and web site, which will enable the relaunch of our loyalty program with a brand new customer experience towards the end of the first quarter of 2023, and lastly are franchisee recruiting program continues to <unk> gain traction.
And we look forward to bring in new partners into they'll pull your local family and introducing are great food more cities across the United States.
While it's very difficult to predict the future economic environment. We remains confident that that work. We're doing this year is saying I'll put a logo up for future growth and success.
I would like to thank our team members in franchise partners. The work. They do every day to make a polio loco and exceptional brands.
With that let me turn the call over to IRA for more detailed discussion of our third quarter financial results.
Thank you Larry and good afternoon, everyone for the third quarter ended September 28th 202002.
Total revenue increased 3.6% to $119 $9 million compared to $115 $7 million in the third quarter of 2021.
Company operated restaurant revenue increased 3.2% to $103 $2 million from $100 million in the same period last year. The increase in company operated restaurant sales was primarily driven by a three 4% increase in company operated comparable restaurants.
Sales the.
The increase in company operated comparable restaurant sales was comprised of a 7.5% increase in average check size, partially offset by 4.1% decrease in transactions.
During the third quarter are effective price increase versus 2021 was a little over 10%.
Based on current economic conditions, and consumer sentiment and including eight additional 2.5% price increase in November we continue to expect approximately 10% pricing for the full year.
Looking ahead fourth quarter to date through October 26 <unk>.
System wide comparable restaurant sales increased 3.5% <unk>.
Consisting of a 5.4% increase at company owned restaurants, and a $2, 2% increase at franchise restaurants.
For the same time period or two year system wide comparable restaurant sales were up 11.1% further demonstrating the positive momentum we are experiencing today.
Franchise revenue was nine $5 million during the third quarter compared to $8.9 million and the prior year period.
This increase was driven by a franchise comparable restaurant sales increase of 4.1% as.
As well as the opening of nine new franchise restaurants open jury or subsequent to the third quarter of 2021 and revenue generated from eight company owned restaurants sold to an existing franchisee during the third quarter of 2021.
This was partially offset by the closure of two franchise restaurants during or subsequent to the third quarter of 2021.
Turning to expenses.
Food and paper costs as a percentage of company restaurant sales increased 250 basis points year over year to 29.2%.
Due to increased commodity cost <unk>.
Partially offset by higher menu prices.
Commodity inflation during the third quarter was approximately 23%.
Although still elevated we expect commodity inflation to ease to 15% to 16% in the fourth quarter, we anticipate full year 2022 inflation to be approximately 20% labor and related expenses as a percentage of the company restaurant sales increased <unk>.
450 basis points year over year.
32.3% in the third quarter of 2021 under the cares Act the company recognized a $3.2 million employee retention credit, which drove 320 of the 450 year over year basis point increase the <unk>.
<unk> of the increase was due to higher wage inflation overtime costs and other labor related costs, partially offset by lower workers compensation expense.
We continue to expect wage inflation of about 8% for the full year.
During the third quarter, we incurred approximately 440000 of Covid related expenses.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 100 basis points to $26, 1% due to higher utility costs repairs and maintenance expense and marketplace delivery fees.
Our restaurant contribution margin for the quarter was 12.4% compared to 24% in the prior year.
We expect Q for restaurant margins to rebound somewhat from Q3, but still be below prior year levels.
As a result of the high commodity in wage inflation.
As we look into 2023, we believe commodity inflation will be between three and 5% and wage inflation will be between four and 6%.
General and administrative expenses increased to $9 $9 million from nine $4 million, an increase of $5 million or 5.3%.
As a percentage of total revenues.
G&A increased approximately 10 basis points to 8.2% a total revenue.
We recorded a provision for income taxes of $1.8 million in the third quarter of 2022 for an effective tax rate of 26.2%. This.
This compares to a provision for income taxes are $3.7 million in.
An effective tax rate of $26, 4% in the prior year third quarter.
We reported GAAP net income of $5 million or 14 cents per diluted share in the third quarter compared to GAAP net income of $10.2 million or 28 cents per diluted share in the prior year period.
Pro forma net income.
For the quarter was $5 million or 14 per diluted share compared to pro forma net income of $10 million or 27 cents per diluted share in the third quarter of last year.
For a reconciliation of pro forma net income and earnings per share to the comparable gap figures. Please refer to our earnings release.
Turning to liquidity.
As of September 28th 2022, we had $20 million of debt outstanding and $19.3 million in cash and cash equivalents.
Subsequent to the end of the third quarter October 11th our board of Directors declared a special dividend of $1 50 per share payable on November 9th to shareholders of record as of the close of business on October 24th.
The payment of the dividend will be funded by a combination of a drawdown on a revolver combined with cash on hand.
On November 3rd we borrowed an additional $46 million to fund the special dividend.
Outstanding borrower borrowings as of November 3rd 2022.
$66 million with cash on hand expected to be approximately $10 million after the payment of the special dividend.
In addition, our board of directors approved a new share repurchase program with authorization to purchase up to 20 million a shift dollars of shares terminating on March 28th 2024.
Lastly, due to the uncertainty surrounding the COVID-19, pandemic and current economic conditions, we won't be providing a full financial outlook for the year ending December 28th 2000, 2002. However, we are providing the following limited guidance for fiscal 2022.
The opening up for company owned restaurants, and seven to nine franchise restaurants re.
Remodeling of six company operated restaurants, and 20 to 25 franchise restaurant.
Capital spending of $19 million to $22 million and a pro forma income tax rate of 26.5%.
This concludes our prepared remarks, we'd like to thank you again for joining us on the call today and.
And we are happy to answer any questions that you may have.
Operator, please open the lines for questions.
Thank you will now be conducting a question and answer session. If you would like to ask a question. Please press star one.
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Thanks for all of your questions.
Participants using speaker appointment may be necessary to pick up your handset before pressing the stock.
One moment please for your question.
Our first question comes from the line of Jake Bartlett.
Please proceed with your question.
Hey, guys executive Jack Okay. Thanks for taking the question.
First I just wanted to ask about.
Restaurant level margins and your commodity guidance, 35% for 23.
What's your level of visibility.
3% to 5% guidance, how much do you have locked now.
And you were saying.
Ticket prices down to 40% right now so can you remind us how.
How much you have logged in 2022.
As we're seeing the spot prices a sensor.
Track.
I can see.
Inflation or deflation.
Yeah, Hey, Hey, Jake this is IRA so uhm. So we were in the process of booking.
For next year, probably book and we're very close.
To that we're booking about 75% of our chicken will be booked our chicken by will be booked for next year. So we have some pretty good visibility into the or commodity guidance for next year.
Yes.
<unk> I just add to that.
You seen a chicken markets is the the drop off and chicken prices certainly we are seeing now on the boneless the bonus tie in boneless breast.
And then that you got on the bone that we purchased a little less so than we are seeing an increase in that year over year from what we booked this past year.
Okay great.
A quick question for wage inflation.
4% to 6%.
The next year.
And then.
Mentioned, some productivity things that you're putting in place so tanks, the onboarding process will solve some making equipment.
So how much.
Do you expect those things in your pricing.
Wage inflation for.
For those more.
Customer facing.
Processes.
Yeah. So I think overall on the wage inflation in Maine bear in mind.
None of this includes the 257, which we now believe won't even try.
Unlikely even take effect.
Next year, if it does will be late in the year. So again, we have pretty good visibility into the actual.
Wage inflation turns what we're anticipating.
In the current environment in terms of the efficiency.
Initiatives that we put in place.
A lot of those are really just going to be freeing up labor to focus on the customer.
Will be evaluating whether we think any of those are things that we can actually start pulling some labour out I think there might be some potential there for right now I'll certainly some of those we've done so far this really just screen things up and as we look at these will evaluate whether we think we can actually.
Reduce labor hours in a restaurant and all but that's.
To be determined and then certainly on the pricing side.
Will be carrying.
Pricing above inflation heading into the queue, one and it really.
Especially the first part of the year.
<unk> will be evaluating what level is a price and we think we can take and whether or not we can be taking anything I would call catch up pricing, which kind of catches you up to the.
Pricing shortfall, we've had over the last year or two years this rapid inflation.
Okay does that someone so.
To clarify matters.
10% pricing for the full year.
About 12, and a half in the fourth quarter not doing that correctly.
No I think you're right.
On the high side, they're J work.
A little North of 10 also in the fourth quarter.
Okay.
How how would that assuming you didn't take any more pricing.
Of effort increase how how would that rolled through.
Quarters next year.
[noise] surface near the full price.
Yeah, Yeah as you carry off.
The first quarter of next year, you'll be you know again about 10, and a half ish or so through through the first quarter that will start to step down.
And actually into part of the second quarter and it should start to step down as we get into the June timeframe to.
If we did nothing else into the seven per cent range, and then really the balance of the year will depend upon.
How we decide upon taken as Larry mentioned, some some additional pricing as.
As we look back.
In the back half of the year.
Okay. So helpful passed along.
Thanks. Thanks.
Thank you once again as a reminder.
Ask a question. Please press star one on your telephone keypad.
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Our next question comes from the line of David Tarantino.
Please proceed with your question.
Hi, good afternoon.
I wanted to ask another question just about margins structure.
My question is what is the path to to getting back to the margins.
<unk>.
Accustomed to delivering.
I think Larry you reference may be a catch up amount of pricing.
Is there is there a strategy, but you have to if inflation doesn't come down to try to.
You know kind of return margins to to the levels you've had that historically.
Yeah David.
Talk and all that the IRA.
Chime in.
First of all a big focal point right now as we continue.
The the hiring overtime overtime, they got a lot better from where we were but it's still you will certainly higher than we were pre pandemic and so huge focus on getting overtime down as being one of the.
Margin drivers <unk>.
And quite frankly, just getting if we can get rid of COVID-19.
I mean, that's continues a cost of somewhere around $5 million a quarter.
In Covid cost, which is probably something that is fairly unique to California in terms of the legislation that we have to comply with.
I mean, a highlight on some of the the off sufficiency measures.
Again, some of that it's going to be.
Redeployed labor.
I think there's some things we're working on that enabled us to.
Perhaps we do some of the labor costs.
That way and then I'd also say on the supply chain side.
We're looking at some things in my a sourcing perspective.
That should help us save costs addition to the different lower commodity cost looking to change whether it's changing.
Vendors on things or looking at some of the items. We source, we think it could be opportunities there also.
To improve margins so you combine those.
With.
Like I said, the the potential opportunity next year to maybe you're able to take some catch up pricing.
We think that will be the margin drivers for next year to get it back up to those levels that were more accustomed to being at.
There anything else IRA.
I think you hit the hit the high points I think just I.
We feel like we have pretty good visibility into our commodity inflation.
Inflation for next year.
So that gives us confidence that we will likely be able to take a little bit of pricing.
Above the level of inflation next year, which will which will help improve margins next year until tomorrow.
Where they've been and then just structurally that thing is Larry talked about in regards to overtime.
And some of the Covid related pay that we were required to make.
Is going to be a little bit of a little bit of a tailored for us next year.
Got it and then.
The last one the last one and hopefully utility inflation will be like it has been I mean gas prices. It's hard to believe they are going to look from where they have been.
Understood I guess a follow up is how are you and your franchisees looking at kind of the far wall profitability equation, when when you're making decisions on building new yeah, It's nice to see the <unk>.
Projected stuff up next year on openings, but so are you are you penciling in higher margins in the future is that is that how your penciling out. These deals are I guess, how do you think about it.
Yeah, No we were penciling that there would be return.
Too much better margins and what we're seeing this past year. Yeah. So we're looking at is we're looking at it and kind.
Getting back to margin levels, where we've been in the past.
Great. Thank you very much.
Alright.
Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mister Roberts for any closing remarks.
Yeah, I'd just like to thank everybody for joining a call today.
I hope to hear that.
We feel very good about where the business is now and really.
Excited about the next year and so thanks again for joining and.
Since we won't talk again until next year and wish everybody a great holiday season, and look forward to talking with you again next next year.
Everybody.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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