Q4 2022 Portillos Inc Earnings Call
Speaker 1: The I C.
Speaker 2: Greetings. Welcome to Portillo 4th Quetter and fiscal year 2022 earnings conference call. At this time, all participants are no listen only mode. A brief question and answer session will follow the formal presentation. If anyone should need operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Barbara Noverini, Portello's Director of Invest Relations. Please go ahead.
Speaker 2: Thank you operator. Good morning everyone and welcome to our fiscal fourth quarter 2022 earnings call. With me on the call today is Michael Osanlo, President and Chief Executive Officer, and Michelle Hook, the company's chief financial officer. Let me also remind everyone that part of today's discussion will include forward-looking statements.
Speaker 3: These statements are not guarantees a future performance and should not be unjuly 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 risk-secure impact portillo's future operating results and financial condition.
Speaker 3: Our remarks also include non- GAAP financial measures, such as a Dushed Ibadah and restaurant level adjusted Ibadah. We directly to our earnings release issued this morning, which is available on our website, for the reconciliation of these non- GAAP measures to the most comparable GAAP measures .
Speaker 3: 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 gap measure of our liquidity or financial performance.
Speaker 3: Finally, after we deliver our prepared remarks, we will open the lines for your questions.
Speaker 3: Now let me turn the call over to Michael Osamlou, President and Chief Executive Officer. Thank you, Barb. Good morning, everyone. We appreciate you joining us for our year-end earnings call.
Speaker 4: Portillo's had a great first full year as a publicly traded company. Our brand is synonymous with quality and value, and true to form we closed 2022 with solid financial results.
Speaker 4: And we're off to a great start for 23. I'm excited to share more about what's on the horizon for us. Give you a preview of this year. But before I do, let me recap our fourth quarter financial results.
Speaker 4: In the fourth quarter of 2022, total sales increased 8.6% to 150.9 million. Same restaurant sales grew 6%.
Speaker 4: For the fiscal year of 2022, total sales increased 9.7% to 587.1 million. Same restaurant sales grew 5.4%.
Speaker 4: We ended the year with an average unit volume of 8.5 million per restaurant.
Speaker 4: Restaurant level adjusted EBITDA margin was 21.2% for the quarter and 22.6% for the fiscal year. Now Michelle will go over financial results in more detail, but let me discuss the underlying drivers of our performance as we closed out the year.
Speaker 4: The grant level adjusted EBITDA margin was 21.2% for the quarter and 22.6% for the fiscal year. Now Michelle will go over financial results in more detail, but let me discuss the underlying drivers of our performance as we closed out the year. People love Portillos.
Speaker 4: Many fans bring us into their homes for holiday gatherings and celebrations, and we certainly lost a little bit of momentum during Winter Storm Elliott that week of December 23rd. But whether never keeps Portillo's fans away for very long. As you'll see in a graph provided in our earning supplement.
Speaker 4: Sales bounce right back to following week and we've maintained strong sales since.
Speaker 4: Our entrace, sold, and transaction metrics are both up year to date in 2023. Now that includes some pent up demand from the storm, but it also gives us confidence that our price-lagged strategy is working well. Again, Michelle is going to give you more detail in a moment, but we feel really good about where we're priced.
Speaker 4: compared to competitors and the value proposition that creates for our guests. Let's pivot to where it's a little warmer and talk about what's been happening in the sunbelt.
Speaker 4: Recent openings of Kissimmee, Florida, the colony in Texas, and Tucson, Arizona, get us nearly through the class of 22 with Gilbert, Arizona on deck to open. And let me express how good that little bit of sunshine feels. In particular, we're thrilled with the reception we've received at our first restaurant in Texas.
Speaker 4: Since our grand opening on January 18th, the colony has been the number one restaurant across the entire system. This theme has been matching the volumes of restaurants in Chicago that have been open for decades.
Speaker 4: Specifically, the colony has averaged $48,000 in sales per day since the grand opening.
Speaker 4: Now, that annualizes to 17 million per year, and that's a crazy number, so please don't model that. It's definitely coming down. But we feel really good that this restaurant will significantly exceed our underwriting expectations and set us up for further success in Texas as we continue to explain.
Speaker 4: the 30-day average of all the restrooms we've opened since 2021.
Speaker 4: This early outcome validates what we've learned along the way, that disciplined openings set up our new restaurants for success. We're also getting a really good read on our other restaurants in the class of 22. Our Portillo's pickup location in Joliett, Illinois, has just over a year of operating history
Speaker 4: St. Pete is about to reach its first anniversary, and Sherable Indiana has been operating for over a quarter. All these restaurants are performing well, and all are exceeding our underwriting expectations.
Speaker 4: We expect that to continue for the full class of 22. Looking ahead, we're committed to opening nine new restaurants in 2023 with a heavy emphasis on the Sun Belt. We're already out of the gate in Texas. We recently announced our next locations in Allen and Arlington, and we've started work on both sites.
Speaker 4: As we continue to navigate the new normal in the restaurant development life cycle, our 23 openings will still be backcast loaded. However, we're already planning to better balance our 24 restaurant openings across the four quarters.
Speaker 4: As we continue to bring Portillo's to both new and long-time fans across the nation, we remain focused on creating value for our three core constituents.
Speaker 4: We're taking care of our guests by delivering delicious food at an unbeatable value. We're providing unrivaled work and personal growth experiences for our team members, and for our shareholders, we're committed to improving our already healthy restaurant level margins despite the flurry of restaurant openings in 23. With that, let me hand it over to Michelle. Go.
Speaker 5: Great, thank you, Michael, and good morning, everyone. Before we discuss our fourth quarter financial results, let me address our November 2022 secondary offering. We completed the sale of approximately 8 million shares of Class A common stack at an offering price of $22.69 per share.
Speaker 5: We use the proceeds to purchase shares primarily from the private equity firm that acquired Portellos in 2014 and subsequently sponsored our IPO in 2021.
Speaker 5: The transaction allows them to monetize another portion of their holdings and portellos. This is a common and expected course of action. In private equity backed IPOs, sponsors will reduce their ownership over time for the simple purpose of returning capital to their limited partners.
Speaker 5: No one from Portillo's Management Team sold shares in the offering. We completed two secondary offerings in 2022, which have collectively increased the liquidity of our class A common stock and diversified our shareholder base.
Speaker 5: Since the end of Q2 2022, we've increased the amount of publicly traded class A shares from 50.4% of total shares outstanding to 67% of total shares outstanding. Note that these transactions only cause the ratio between our publicly traded class A
Speaker 5: and privately how a class B shares just shift, but total share count remains the same. These transactions have not been diluted to existing PTOO shareholders. Now turning to the results of our fourth quarter 2022, where we saw strong top line growth. During the fourth quarter, revenues were up 150.9 million.
Speaker 5: reflecting an increase of 12 million or 8.6 percent compared to last year, driven by 6 percent increase in same restaurant sales, combined with the opening of five new restaurants since the beginning of the fourth quarter of 2021.
Speaker 5: The same restaurant sales increase of 6% was primarily driven by an increase in the average check of 6% and a 2.3% impact from the change in recording third party delivery pricing.
Speaker 5: This was offset by 2.3% decrease in transactions. The higher average check was driven by an approximate 7.9% increase in certain menu prices partially offset by lower item sold transaction. We experienced positive trends through the quarter. We also experienced positive trends through the quarter.
Speaker 5: until Winter Storm Alley at significantly disrupted sales during the last week of our fiscal quarter. We estimate that the storm had a negative impact of at least 70 basis points on our same restaurant sales growth in the fourth quarter of 2022. Subsequent to the fourth quarter of 2022, we have seen improvements in our sales trends.
Speaker 5: As same restaurant sales grew 12.3% in our first fiscal period of 2023, and we estimate same restaurant sales to grow 7.9% in our second fiscal period of 2023.
Speaker 5: We currently anticipate our same restaurant sales growth to be in the range of 8 to 10 percent and total revenue growth to be in the range of 16 to 18 percent for the first quarter of 2023. We expect to open nine new restaurants in the class of 2023 in the back half of this year.
Speaker 5: with three to four targeted openings in the third quarter and the remainder in the fourth quarter. Now let's look at our costs. Cost of goods sold, excluding depreciation and amortization, as a percentage of revenues increased to 35% in the fourth quarter of 2022.
from 32.6% in the fourth quarter of 2021. This increase was largely driven by 14.5% average increase across most commodities, especially in beef and chicken.
Additionally, cost of goods sold was negatively impacted by 1.4% resulting from the change in recording third-party delivery pricing. These increases were partially offset by the increase in our average check.
In 2023, we expect our overall commodity inflation will ease and are currently estimated mid-single-digit commodity inflation for the full year. As you would expect, it will start high and taper down over the course of the year. For reference, Q3 of 2022 was up 15.4%.
and Q4 of 2022 was up 14.5%. Q1 of 2023 will be a sequential improvement from these past quarters.
2022 was up 14.5%. Q1 of 2023 will be a sequential improvement from these past quarters. Now let's look at labor.
Labor as a percentage of revenues increased to 26.5% in the fourth quarter of 2022 from 26.2% in the fourth quarter of 2021. The increase was primarily driven by incremental investments to support our team members, including hourly rate increases made in Q3 2022 in higher variable-based compensation expense.
These increases were largely offset by an increase in our average check and operational efficiencies. We anticipate making continued wage investments in 2023 and remain committed to providing a competitive total rewards package for our team members. Other operating expenses increased $3 million or 20% in the fourth quarter of 2022, which was primarily driven by new restaurant openings in 2021 and 2022.
as well as increases in repairs and maintenance expenses. IQC expenses were flat as a percent of sales. As a result of the above, restaurant level adjusted even a decreased 8.5% to 32 million in the fourth quarter of 2022. Restaurant level adjusted even a margins
We're 21.2% in the fourth quarter of 2022 versus 25.2% in the fourth quarter of 2021. The 400 basis point decrease in restaurant level margins was primarily driven by the continued impact of increased commodity costs and to a lesser extent labor investments. We're 21.2% in the fourth quarter of 2021.
We partially offset higher expenses through menu price increases and operational efficiencies. We raise menu prices 1.5 percent in the first quarter of 2022, 3.5 percent during the second quarter of 2022, and 3.4 percent during the fourth quarter of 2022. These actions resulted in an effective price increase of approximately 7.9 percent in the fourth quarter of 2022 and 7.5 percent year-to-date.
During mid-January of 2023, we did increase menu pricing to reflect a net 2% price increase as we continue to combat inflationary cost pressures and restore our margins. Our GNA expenses decreased 33.6 million to 11.7% in Q4 2022 from 37% in Q4 2021. The absence of IP over related expenses in Q4 2022 contributed to the overall decreases in equity-based compensation of 25.5 million, option holder payments of 6.6 million, and transaction-related fees and expenses.
of 2.3 million. Variable-based compensation also decreased by 1.7 million in the quarter. These decreases will partially offset by increases in our people and business. We will continue to make investments in GNA in 2023 and estimate that full year spend will be in the range of 72 to 77 million. Pre-opening expenses increased 1.7 million to 2% in the fourth quarter of 2022 from 0.9% in the fourth quarter of 2021.
This increase was due to the timing and geographic location of activities related to our plan restaurant openings at the end of fiscal 22 and early fiscal 2023. We expect pre-opening expenses to be between $7.5 million to $8 million in 2023, which covers four class of 22 restaurants and the nine additional restaurants we expect to open during the second half of the year. All this led to a adjusted evit of 18.1 million in the fourth quarter of 22 versus 23.2 million in the fourth quarter of 2021, a decrease of 22.1%.
Below the EVA-Deline, interest expense was $8.4 million in the fourth quarter of 2022, an increase of $0.8 million from the fourth quarter of 2021. This increase was primarily driven by $2 million of additional interest expense on our first lean term loan due to an increased interest rate partially offset by lower outstanding borrowings under a first lean term loan and by the payoff of our second lean term loan.
As of the end of the fourth quarter, the effective interest rate on the first lean term loan was 10.4%. On February 2nd, we announced that we entered into a new $500 million term loan and $100 million new revolver facility. The proceeds under the term loan and revolver facility, along with cash on hand, were used to repay outstanding debt under our previous first lean term loan and transaction related expenses. At prevailing rates, the all-in interest rate on the term debt
has been reduced by approximately 270 basis points. At these rates, we expect that our annual interest expense in 2023 will be approximately 8.5 million lower as compared with our previous dice facilities.
This new credit agreement provides additional financial flexibility to pursue our growth strategy and other strategic initiatives. Income tax benefit was 1.7 million in the fourth quarter of 2022 and an income tax expense of 1.8 million for the year.
Our effective tax rate for the year was 9.6% versus 20.9% in 2021. Our future effective tax rate will fluctuate as class A equity ownership increases and as equity based awards are exercised and vased. We ended the quarter with 44.4 million in cash.
Subsequent to the quarter, we deployed approximately 9.7 million of cash on hand in connection with the refinancing to pay off the existing term loan and transaction related fees and repaid 5 million about standing borrowings under our new revolver facility. Going forward, we will be using our cash balance.
plus operating cash flow to support our continued growth. In 2023, we are estimating our capital expenditures to be between 70 million to 75 million. We remain committed to delivering healthy top line and bottom line growth in 2023 and beyond.
More importantly, we're confident in our long-term outlook that was provided in our earnings release this morning. Thank you for your time, and with that, I'll turn it back to Michael. Thanks, Michelle. Before we open for questions, I want to thank our Portilla's team members for all of their hard work in 2022.
We persevered during a challenging year for the restaurant industry. And this is because we kept our focus on what matters. An unrivaled experience for our team members and our guests. And it's working. Our guest satisfaction scores continue to be the highest they've been in three years. Consumers are choosing portillos. Our sales and comp trajectory continue to show that. In 2023, we're focused on balancing the needs of our three core constituents. We're creating value for our guests by delivering delicious food at a great price point. We're creating value for our team members through great work experiences.
And we're creating shareholder value by improving our already healthy restaurant level margins. We'll keep delivering on those promises.
With that operator, can we open the line for questions?
With that operator, can we open the line for questions? Yes.
If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue and for participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys.
Our first question is from Sarah Sedator with Bank of America. Please proceed. Oh great. Thank you. I actually just wanted to sort of dig into the margin piece and the cost outlook. Specifically, if you can give us any kind of guidance, I know you're looking to improve that. Maybe sort of talk through how much price you expect to have on the menu. And also, more specifically, you talked about continued labor investments. My sense had been that your wage inflation has been pretty much in line with the industry and in the double digit range in 2022. So, you could talk to that. Is that maybe perhaps you got to later start to raising wages? Is it to stay ahead of the curve? Should we expect to see more broadly maybe another wage cycle in 2023? I'm just trying to understand sort of the complexion of the margin outlook and wages in particular. The things that were salooned it out and, obviously, are as much as the beginning of those pret spare orders and just
Yeah, good morning Sarah. Let me start now, I'm turning it over to Michelle. On pricing, I mean, I don't think, hopefully it's not lost to anyone, that our pricing last year lagged our competition. And when we look at the underlying metrics, when we look at our traffic trends, our sandwich count metrics, when we look at guest satisfaction scores, speed of service scores, we feel really, really, really good about the value that we're providing guests, and we think that we have, we have untapped pricing power. And so,
I'm not going to space specifically how much we're going to price this year, but we feel like we have pricing power and it's right and appropriate to catch up to the pack in terms of overall pricing. And then I'll let Michelle talk about labor. The one thing I'll tell you that the gift that keeps on giving for us on labor is we have worked very, very hard as an organization to make sure that we are providing a great experience and a great environment for our team members. And we see that our gap in hourly turnover versus the rest of our competitors is actually getting bigger. So we have anywhere from up 40 to 50 point gap on turnover versus other limited service restaurant companies. And our gap on turnover with our management teams has also increased. So and you know, right, turnover is hugely important to this industry. There's soft costs and hard costs associated with the company. And we're going to have to deal with that the hard cost is relatively easy to measure. Soft cost is a little bit harder to measure.
I think that the investments that we're making more than pay for themselves in terms of team member satisfaction, lower turnover, which in turn generates better guest experiences. Yes, sir. I would just add on to what Michael's saying in terms of the pricing and the margins with the pricing that we put out there with the 2% we took in Q1 will be at around 90% in the first quarter of 23. And then we'll be then lapping a price increase in mid-May. So if that falls off, you'd be at about 5.5% price if we took no action. But as Michael said, we're going to remain fluid and flexible in our pricing approach. We're not committing to anything beyond what we've already announced.
with the January price increase because we got to continue to see how the landscape plays out with both commodities as well as the labor environment. I mentioned on my prepared remarks, we do expect to continue to make investments in labor. I think when you look at, you mentioned it, our labor inflation in 22. We saw, you know, double-digit inflation. That started to come down a bit in the back half of the year. So we were at about 9% labor rate inflation in the fourth quarter. I expect that to come down as we start to lay up some of those numbers, but we do expect to make the continued investments in labor as well in 23. Okay, I'm sorry, just to put a finer point on it. You know, it sounds like you can take price.
And then, you know, the expectation is, and Michael mentioned this in his remarks, that transactions as well as our entry count has been positive year to date. I know it's early on, but, you know, it's to be determined the remainder of the year, but we're seeing good trends there early on. Great, thank you very much.
Michael mentioned this in his remarks that transactions as well as our Entry Count has been positive year to date. I know it's early on, but you know it's to be determined the remainder of the year but we're seeing good trends there early on. Great. Thank you very much.
Our next question is from Sharon Sexio with William Blair. Please proceed. Hi, good morning. I'm curious if you can talk about commodity inflation. I know you mentioned it's going to drop off as the year goes on and it would be lower than the fourth quarter, sequentially in the first quarter, but there's a lot of room to be lower than 14.5%. So can you give us kind of how you expect commodities to play out as the year progresses? And I don't know if I missed it, but did you talk about kind of where you are on the percent of your basket that's locked? Yeah, Sharon. Obviously the year is, you know, there's a lot of year left to play out, but...
I don't expect it to be the 14.5 percent we saw in Q4. They said, I do expect sequential improvement, but as you can imagine, I don't expect that to fall off a cliff either. And all of a sudden get us into a range that is, you know, single digits or even mid-single digits. But based on what we know today, what I would expect is that, again, that improvement quarter over quarter. We have locked in, we do have some hedge positions. We're at about 34, about a third locked for the full year and 23. As you know, most of the positions that we take is generally on those B-flats where we do forward buys on that. And so we have that pretty locked in for Q1. We've taken some positions in the remaining quarters on that particular mine item. And then we're working through, you know, some of the
if you've got something in the pipeline that might take off some of that pressure.
Thank you first because you're right. They're like eye popping numbers and the team has been fantastic. And I think we have, you know, like we've learned a lot and we have, we probably have over invested in experience, talented Portillo's management down there and our team is doing an amazing job. So we're very, very proud of that team.
We had planned for, and I think we publicly said this, another four to five restaurants in Texas. We want to be in that four to five range by the end of this year, 23 in Texas. We've announced two more, and don't be surprised if we build a few more in Texas this year. I think the colony will settle down, and I don't think we need to think about cannibalizing quite yet. I think that that's a restaurant that's going to settle down. It is an iconic flagship restaurant for us in a fantastic location.
And so my expectations is that it performs closer to like a Chicago market restaurant than a typical out of core restaurant. But it, I'll say what it does Sharon, we have a lot of people asking us questions about do you think you'll succeed in Texas? Do you think that people will eat Italian beef in Texas? And I, you know, it's only six, eight weeks in but I feel like the answer to that is a resounding yes. They seem to like our beef sandwiches a lot. No surprise, beef and bread works really well in the great state of Texas. Alright, thank you. Our next question is from David Tarotino with Baird, please proceed. Hi, good morning. Just first a question about the fourth quarter.
I don't think you mentioned the on-trade count growth. If you had the on-trade count growth number, that would be helpful. Yeah, David, it was in the quarter. It was negative for the quarter, but if we excluded the impact of the storm, we would have been flat. Okay, great. But all in, it was negative for the quarter. It would have been flat excluding the impact of the storm. Okay. Great. And then, you know, just kind of circling back on the new unit performance, especially in Texas. I guess Michael, you know, based on your observations or your data collection for that location.
a great location and we're thrilled to be partnering with the folks who've developed that area. There's an Nebraska furniture mark there. There's a shield. Those are world-class retailers and we have a fantastic location in a very, very well-designed development. So that's an undeniable truth.
It's right next to a business complex in Frisco. It's a mile away from all of the office buildings in Frisco, so it's great. Now that's it. We invested time, energy, and money in marketing, Texas. We sent the beef bus down for two tours to generate excitement, energy, and demand. We over-invested to some extent with a fantastic multi-unit manager down there.
a fantastic general manager down there, and 70% of our management team and crew chiefs have Portillo's experience. So we stack the deck to make sure that we can handle these volumes, et cetera. We are, despite all that, I am a little surprised and overwhelmed by the response that we've gotten. I think that Texas can be either hit or miss for restaurant companies. If you do well, if you really, you know, you approach it with a sense of humility and work your butt off, you can be great. If you try to mail it in and just assume you're going to be great, you might stub your toe. We are approaching our Texas expansion with a great deal of humility. We're looking for A plus locations.
We're going to continue to over invest in management team and training of our team members. We'll open the restaurant when it's beautiful and ready to go and the folks are ready to go. And so I think we did just a lot of things right. And as we continue to evolve and develop, we'll continue to get a lot of things right. And so my hope is that it is a precursor of what we can expect for Texas. But you know, look, Florida's doing really well. Our newest restaurant in Tucson, Arizona is just fantastic.
We feel like we've got the flywheel working for us in the sunbelt. Yeah, that's helpful. Then one more quick one on Texas is Texas. I guess my impression is it's a lower cost market to operate in, but I guess how would you characterize?
whether it's construction costs or labor costs relative to your typical financial model. Is it, is it, is it, you know, am I right that that's a lower cost market?
I mean, there are certain elements that make it easier, I would say, to work in Texas, but we're, you know, our first restaurant there is in a relatively high-priced location. We're paying really well. You know, we're not, we're paying for great labor. We're expecting greatness out of our team. So I would tell you that don't think of it as coming out of the gate with Chicago-like margins. How much this is expensive is scary. demands romance,
I mean there are certain elements that make it easier, I would say, to work in Texas, but we're, you know, our first restaurant there is in a relatively high-priced location. We're paying really well. You know, we're not, we're not, we're paying for great labor. We're expecting greatness out of our team. So I would tell you that don't think of it as coming out of the gate with Chicago like Got it. All right. Thank you very much.
Our next question is from Brian Harbor with Morgan Stanley . Good morning. To that point, you just made Michael maybe comment on the margin performance of some of the other new locations, not just Texas, but are they coming in better than you expected or perhaps not? And how do we think directionally about the impact of those new units as we think about margins for the first quarter and then also kind of the second half of the year where you will have quite a few openings as well? Yeah, let me give you sort of the philosophical part of the question, the answer and I'm going to let Michelle give you a little bit more. But keep in mind, when we open a new restaurant, I would really be hesitant to draw any conclusions about margin in the first couple of quarters because we have a new restaurant opening team helping out. We over invest in management. When you're running at the volumes that we have right now, you need all hands on deck to help. And it's very important to provide guests a fantastic experience. When you're first in market, you're at a new restaurant, it's really important to provide a great experience or you're going to chase people away for a long time.
So we over invest and I frankly don't even care about the margin coming out of the gate for the first couple quarters. It will stabilize over the course of the year and then it will improve what we think works really well is get the restaurant on the right footing, get it going right away from a guest satisfaction standpoint from enticing crew members to stick around and then the margin comes fast. And for us, you know, Michelle's talked about this in the past that when we reach six to eight restaurants, there's like an inflection point on our operating margins. And so once we've decided that a market is going to work for us, it is important to us to get the scale relatively quickly to start seeing that material margin improvement. Yeah, and I think just to add on to that, Brian , Michael is absolutely right. As we talked about the profile for a class of restaurants, right.
by the opening.
Okay, thank you. Separately, maybe just talk about food delivery and what you are still seeing there on a year over your basis, maybe on a quarter over quarter basis, if you still continue to see that, be quite strong. And then also, maybe on a new unit, how do those do, just on third party delivery.
Yeah, great question. So we're, you know, like God bless the people doing third party delivery because it just keeps on growing. And so it's performing well for us. The channel continues to grow. It's probably continuing to do a little bit of mixed shift for us. So we're seeing continued growth in third party delivery even through the course of 22 and into the fourth quarter. So that is definitely happening.
Your latter question, the last part of your question about new units is a very good question because we're very thoughtful about metering the channel so that we don't overwhelm a new restaurant. And let me tell you what I mean by that. Our Orlando restaurant came out of the gate blazing. And can we tell how much? We're very thoughtful about metering the channel so that we don't overwhelm a new restaurant.
No, okay, so but it had a fantastic first year. We did not want to overwhelm that team, so we did not have third party delivery pickup or catering turned on on purpose. And we only recently after a little bit over a year added a channel added another channel. So now it's got the whole, you know, the whole whole mix. The colony does not have third party turned on, does not have digital ordering turned on, does not have catering. Right now it is exclusively dine in pickup and drive through. And that's on purpose because we, you know, it's doing such crazy volumes. We don't want to create excess pressure and create more channel stress right now. So.
For new restaurants, that's a very, that is sort of a new normal for us, which is expand the channel outreach over time once the restaurant stabilizes and can handle the volumes. Thank you. Our next question is from Dennis Geiger with UBS. Please proceed.
Thank you and good morning guys and congrats on the colony and some of the other strengths and the other recent openings. I wanted to ask first sort of on supply chain, permitting and then any other delays as it relates to targeted openings for this year and how you're thinking about this year. Is there any update there? And I guess maybe Michael, if you could just kind of touch on build costs, how that's true.
processes with governments, et cetera. And so we built in significantly more time for permitting for all this stuff.
The things that are under our control.
You know, we feel pretty good about where we're getting better. We're getting smarter. We're getting faster We you know, we built three of the restaurants that we built were worth first time National scale general contractors. That's what we've got to do. We've got to we've got to become a scale construction company and so I feel good that we have
I feel good that we have learned a lot and that we are more pragmatic and planful in when we think things are going to open. It is honestly done, it's why the 23 is so back half loaded. You know, I would never want it to be back half loaded in a perfect setting. And so my expectation is 24 is much closer to bright and then 25 should be perfect. You know, we should have...
And perfect for us I think is 60, 70% of the restaurants are open in the front half and the remainder open in the third quarter, maybe one in the fourth quarter. That's what great looks like. So we're not great in 23. We're back half loaded, far more than I would prefer, but that is neither here nor there. And then in terms of construction costs, it has, I would describe it as it has tapered a bit.
It hasn't come back to Earth and I don't know how much of it will, I don't know how much of it won't. We've talked about this before. What that means for us is because we're still very committed to hitting the financial targets that we have set. So it means Michelle and I are only approving restaurants that we think are going to far exceed.
some of the numbers that we would have looked at in the past because the build cost is higher. We're also being very thoughtful about how much money we're spending to build our restaurants. We've talked about the restaurant of the future. I think in the class of 24, we'll start building restaurants that are smaller, more versatile, and have the ability to generate the plus-size volumes that we want.
And so I think we've got to skin this cat in those two ways. We've got to be more thoughtful and frugal in how we're building. Still want a great experience for guests, but build a lower cost building. I don't like to worry cheaper. So it's got to be lower cost for still a gorgeous inviting, engaging building. And we have to be thoughtful that the restaurants that we're signing up for, that the revenue will still greatly achieve all of our aspirations for returns. Michelle, I think. Very, yeah. Okay. Yes. No, you said it all. We're committed to the...
cash on cash returns we've laid out there and that's what we look at when we approve new restaurants. Yeah. Very, very helpful color there. Just about one other one. A helpful commentary on the delivery strength there. I'm curious though if there's anything else to touch on as far as what you're seeing from customers recently, changing behaviors across, you know, any metrics, channel utilization, etc. Thank you.
You know, if it's, there is a structural shift that is undeniable. Like if you go back to 2019, 53% of our sales were inside the restaurant and 22, 42% was inside. 2019, all the delivery channels were like 6%, now they're 14%.
Drive-throughs remain roughly the same. And so it's just a question of that inside the restaurant, how much of that keeps coming back, and where does it come from? So delivery continues to grow, and I think everyone's aware that the price points on a third party delivery are materially different. And if you go through the drive-through or you pick it up in the restaurant, there's, you know...
fees, et cetera, and tip, and all those things add up. But that consumer sort of defies any price elasticity and continues to be very robust and continues to order from us. So I think I would be guessing that I'm still surprised that Dine-in hasn't picked up more, but it could just be that that's been a structural change that is here to stay. Appreciate it, Michael. Thank you.
and tip and all those things add up, but that consumer sort of defies any price elasticity and continues to be very robust and continues to order from us. So I think I would be guessing that I'm still surprised that Dine-in hasn't picked up more, but it could just be that that's been a structural change that is here to stay. Appreciate it Michael. Thank you. You bet.
Our next question is from Andy Barish with Jeffries. Just wanted to dig into a little bit more on the margin discussion, just from an operational improvement efficiency perspective. I know you guys have. I'm going to give you a little bit more on the margin discussion. Just from an operational improvement efficiency perspective, I know you guys have.
done some good work around that over the last, you know, year and a half, two years. If this is something we should think about as kind of annually an opportunity to drive more productivity, you know, in your, in your business. And then secondly, just, I know you're working on a new kitchen, 2023 design. How does that roll into the restaurants, you know, for for this year's builds?
Yeah. Good morning, Andy. Good to hear from you. So here's what I'd say. You know, we aspire to be a great company and be a great operator. And that means that you're always trying to get better and improve. We're, you know, while we're a 60 plus year old brand with a great legacy.
There's a lot of things that we can get better at operationally. So I think operational improvement is a thing that's going to be around the porttillos for quite a while. We had fantastic efficiencies last year. I think did a really good job of becoming more dynamic and efficient. We're doing things that I think will continue to enable that. One of the investments that Michelle alluded to with labor is what we call the step-up program.
If Andy is my rock star beef maker, but that's all he's done and he's getting to a certain hourly wage, you can go and cross train. You can learn how to make hot dogs at the station we call Table, you can turn around and work broiler. And every new station that you learn, we pay you more. And every new station that you learn, you're creating flexibility for the company in terms of staffing and utilization. So that's a gift that's going to give and that we're...
figuring all the details of that item our goal is to deploy the step-up program in the second half of the year. You referenced Kitchen 23 which we saw a significant savings where we tested it. It requires a little bit of CapEx and a little bit of a pain to redo the restaurant. But we think we've got a really good idea on how to do that and we're retrofitting. You know we're going to target 15 to 20 restaurants in the Chicago area to retrofit towards Kitchen 23.
for this year. That will generate savings. And then on an ongoing basis, we carefully look at our items for labor hours, a productivity metric. We look at the spread between the top quartile and the bottom quartile. We look at productivity by day, by day part. And there's a lot of there there. There's a lot of opportunity for, you know, we have some restaurants that perform at ridiculously high productivity levels. And there's some learnings there that we can and should be applying to restaurants that are a little less.
On the other operating expense, you mentioned NROs in the 4Q. What specifically is that? Was there anything else that moved it up to 12 percent? I imagine utilities were probably pretty high in paper and packaging as well with catering and things like that. I think just kind of wondering.
is what I called out in the restaurant. The only other thing that I think I would call out to you that would be an outlier again would be some catch-up that we did on the repairs of maintenance expense in Q4. But in terms of a run rate again, I'm not going to get into future numbers, but that's what I call for Q4. Okay, thanks. Yep. Okay.
I called out in the restaurant. The only other thing that I think I would call out to you that would be an outlier again would be some catch-up that we did on the repairs of maintenance expense in Q4. But in terms of a run rate again, you know, I'm not going to get into future numbers, but you know, that's what I call for Q4. Thanks. Yep. Thanks, Eddie. Thanks.
Our next question is from Chris O'Cole with Steve O'Lease for seed. Good morning and congrats on the recent store opening. It's very impressive. We shall give the comp trajectory in the first quarter. How should we be thinking about traffic or entry count growth as comparisons start to normalize? I think Chris, Michael called out that we've seen positive transaction growth year to date, so that's through the first two periods. The thing that we continue to see is, and I've even talked to you and others about this book.
Yeah, pricing is definitely a lever, Chris, that we're going to be looking to pull as the primary lever. And again, I mentioned we put in the 2% in January . There is nothing else that Michael and I have aligned on moving forward. We're going to again continue to see how the environment looks.
But then I would just point to exactly what Michael just said when he was talking to Andy about the improvements that we're looking at in terms of Kitchen 23, our step-up program. And then as we look at our items per labor hour, which is our efficiency metric that we measure in our restaurant, so we're going to be looking, can we make some improvements there? So those are the two things, but pricing would be the primary letter.
And just as a follow-up to that labor question, I think you said there's some labor investments planned for this year. Can you remind us what the magnitude and timing of those investments are expected to be relative to when you start to lap the investments you made in 22? Yeah, we don't, as Michael mentioned, Chris, we haven't determined exactly when we're going to put in place the step-up program, for example, and the labor decisions haven't been made fully. We put in place last year.
in Q3, the beginning of Q3, around of increases into our restaurants. And so that's when you'll start to lay up some of those increases this year. But at TVD, and what we're going to do in 23, we haven't made all those decisions. Okay, thanks. Yep. Our next question is from Gregory Frankfort with Google Hi and Please Proceed.
Okay thanks's for the question can you talked just a little bit about the recent sales trends you're seeing to start one Q I mean the particular January numnumber is really strong and I think the whole industry' had a little bit of a pickup but the industry may have easier comparisons and I think you guys have top comparisons So if you maybe talk about that dynamic and is there anything regionally that you're seeing or.
Just thoughts on the consumer strength as a whole. Thanks. Yeah, I think so. Greg, here's, I would just, I think January was honestly a little bit of a bounce back, some pent up demand from that last week at December that we missed out on, so that there's a chart in the supplemental that kind of I think clearly identifies that. Now, even if you neutralize that, we are seeing, you know, we're seeing a little bit more momentum in our business. I would tell you it's broad base. It's not any individual market. It's broad base momentum in our business. We feel really good about both the
traffic trends as well as the sandwich count trends. And by the way, as our channel mix begins to stabilize, and I think traffic is probably more straightforward to describe it. But we feel really good about that. I know I saw like a broken record, but for the last nine months, guest satisfaction scores, speed of service scores, value perception scores. So I attribute our step up in performance for the first two months that our price laggard strategy is working. We're providing great value to our guests.
They're telling us that they find great value, they're satisfied with us, our guest satisfaction scores are now at three year highs. And I think that our strategy is working. We've lagged a little bit on pricing. We've said this. We invested in our guests in 22 and that is generating a little bit of, I guess, beta when it comes to revenue performance at the beginning of 23. Thanks for that. And then just a follow up question on the step up program. I mean, I kind of hadn't heard of any restaurant doing anything like this before of paying you a little bit more as you kind of add different capabilities as a worker. What what's road to design of that? I mean, is.
Are workers today in your restaurants just less cross-functionally were the past and you're trying to get back to a certain level, is this going to put you at a new level of cross-functionality of workers? Any thoughts on that and kind of where did the genesis of the idea came from? I think it's, honestly, it's rooted in a concept of pay for performance, pay for play. So the first thing is, when we ask our team members, we want to keep people. You know, we want to keep people. You want to keep great people. You want them motivated. You want them happy. And it's undeniable that when people are learning new things that they're actually happier, they actually like being able to do different things. So the genesis of this truthfully was that we want to keep our team members happy. We want them cross-
trained, we want them to be able to work multiple stations, multiple shifts. It's probably more important to us than some other restaurant companies because we do have so many different stations within our restaurant. And it's a great way of rewarding that so we can create a win-win dynamic. We can create really happy, engaged, excited team members because they're learning and growing. We actually can make our investors very happy because we can staff more efficiently and get labor productivity. And our guests are happy because they're getting high-quality team members who are super excited to be there. So it's kind of like a hat trick of wins for us.
them to be able to work multiple stations, multiple shifts. It's probably more important to us than some other restaurant companies because we do have so many different stations within our restaurant. And it's a great way of rewarding that so we can create a win-win dynamic. We can create really happy, engaged, excited team members because they're learning and growing. We actually can make our investors very happy because we can staff more efficiently and get labor productivity. And our guests are happy because they're getting high quality team members who are super excited to be there. So it's kind of like a hat trick of wins for us. Awesome. Thanks for the thoughts.
You bet. As a reminder, it is star one on your telephone keypad. And our next question is from Brian Mullen with Duet Shipank. Please proceed. Okay. Thank you. Question on the balance sheet. Congrats to the team on getting the refinancing done. You know, Michelle, with that and the rearview mirror, can you just touch on the priorities after you've found the cat-bex requirement for you for the growth of the business? Just philosophically, I'm wondering if you'd be inclined to want to pay down debt and leverage a bit over time or whether you'd be more inclined to start to look at capital return over time. And then is there a target?
net leverage ratio or a range we should keep in mind that you think is optimal. Yeah, Brian , great questions and yeah, we're definitely excited to free up a bit more cash from the refinancing and have that in a room, room, room. As I think you all saw during our investor day, we laid out where the cat backs was going to go. And so, you know, the vast majority of our cash is going to be to fund the new restaurants that we're going to build, put investments into existing restaurants, and then continue to make investments in other things like technology, et cetera. You know, we talked about digital menu boards, those type of things.
Outside of that, to the extent that we have excess cash, I mentioned on the call, you know, we started to already pay down that revolver. So we have 15 million outstanding on the revolver. I'd like to get that paid down. We paid 5 million off of that a couple days ago, and so we're at 10 million outstanding on the revolver. Outside of all that, I am open to whatever makes sense, and is in the best interest of our shareholders, whether that's paying down debt or other avenues. If Michael and I are in the rest of the...
Leadership team are comfortable with dialing up growth. Then we will do that because obviously that's the best investment. It has a fantastic return. And so that would be the primary avenues we would deploy our capital. Thank you. Yeah, and just sorry, Brandon, I didn't ask you your question. And do we have a targeted leverage ratio? I do not have a targeted ratio in my head. But I feel very comfortable that we can service the dot invest.
and everything I just mentioned and I continue to grow. Thank you. We have reached the end of our question and answer session. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
That.
good
The.
I.
Greetings. Welcome to Portillo 4th Quetter and fiscal year 2022 earnings conference call. At this time, all participants are no listen only mode. A brief question and answer session will follow the formal presentation.
If any of you need 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 Noverini, Portello's Director of Invest Relations. Please go ahead. Thank you operator. Good morning everyone and welcome to our fiscal fourth quarter 2022 earnings call. With me on the call today is Michael Osan-Lew, President and Chief Executive Officer and Michelle Hook, the Company's Chief Financial Officer.
Let me also remind everyone that part of today's discussion will include forward-looking statements. These statements are not guarantees a 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 risk-secure impact portal's future operating results and financial condition. Our remarks also include non- GAAP financial measures, such as a Dusted Ibadah and restaurant level adjusted Ibadah. We direct you to our earnings release issues 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 gap measure of our 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 Osamlou, President and Chief Executive Officer.
Thank you, Barb, and good morning, everyone. We appreciate you joining us for our year and earnings call. Portillo's had a great first full year as a publicly traded company. Our brand is synonymous with quality and value, and true to form, we closed 2022 with solid financial results. And we're off to a great start for 23. I'm excited to share more about what's on the horizon for us, give you a preview of this year. But before I do, let me recap our fourth quarter financial results. In the fourth quarter of 2022, total sales increased 8.6% to 150.9 million. Same restaurant sales grew 6%. For the fiscal year of 2022, total sales increased 9.7% to 587.1 million. Same restaurant sales grew 5.4%.
We ended the year with an average unit volume of 8.5 million per restaurant. Restaurant level adjusted EBITDA margin was 21.2% for the quarter and 22.6% for the fiscal year. Now Michelle will go over financial results in more detail, but let me discuss the underlying drivers of our performance as we closed out the year. People love portillos. Many fans bring us into their homes for holiday gatherings and celebrations, and we certainly lost a little bit of momentum during winter storm Elliott that week of December 23rd. But whether never keeps portillos fans away for very long. As you'll see in a graph provided in our earning supplement, sales bounce right back to following week and we've maintained strong sales since. Our entrees sold and transaction metrics are both
The colony has been the number one restaurant across the entire system. This means it's been matching the volumes of restaurants in Chicago that have been open for decades. Specifically, the colony has averaged $48,000 in sales. The colony has been open for decades.
per day since the grand opening. Now that annualizes to 17 million per year and that's a crazy number, so please don't model that. It's definitely coming down. But we feel really good that this restaurant will significantly exceed our underwriting expectations and set this up for further success in Texas as we continue to expand.
We took the time we needed to make sure that this restaurant opened well, with everything and everyone in place to be successful. In its first 30 days, guest satisfaction scores at the colony have outperformed the 30-day average of all the restaurants we've opened since 2021. This early outcome validates what we've learned along the way, that disciplined openings set up our new restaurants for success. We're also getting a really good read on our other restaurants in the class of 22. Our Portillo's pickup location in Joliet, Illinois, has just over a year of operating history now. St. Pete is about to reach its first anniversary, and Sherable Indiana has been operating for over a quarter. All these restaurants are performing well, and all are exceeding our underwriting expectations. We expect that to continue for the first time in the world. We're going to be able to make a full class of 22.
Looking ahead, we're committed to opening nine new restaurants in 2023 with a heavy emphasis on the Sun Belt. We're already out of the gate in Texas. We recently announced our next locations in Allen and Arlington and we've started work on both sites. As we continue to navigate the new normal in the restaurant development life cycle, our 23 openings will still be back half-loaded. However, we're already planning to better balance our 24 restaurant openings across the four quarters. As we continue to bring Portillo's to both new and long-time fans across the nation, we remain focused on creating value for our three core constituents. We're taking care of our guests by delivering delicious food at an unbeatable value. We're providing unrivaled work and personal growth experiences for our team members. And for our shareholders, we're committed to improving our already healthy restaurant level margins, despite the flurry of restaurant openings in 23. With that, let me hand it over to Michelle. Great. Thank you, Michael, and good morning, everyone. Before we discuss our fourth quarter financial results, let me address our November 2022 secondary offering.
We completed the sale of approximately 8 million shares of Class A common stack at an offering price of $22.69 per share. We used the proceeds to purchase shares primarily from the private equity firm that acquired Portillo's in 2014 and subsequently sponsored our IPO in 2021. The transaction allowed them to monetize another portion of their holdings in Portillo's. This is a common and expected course of action. In private equity backed IPOs, sponsors will reduce their ownership over time for the simple purpose of returning capital to their limited partners. No one from Portillo's management team sold shares in the offering. We completed two secondary offerings in 2022, which have collectively increased the liquidity of our Class A common stack and diversified our shareholder base. At the end of Q2 2022, we've increased the amount of publicly traded Class A shares from 50.4% of total shares outstanding.
to 67% of total shares outstanding. Note that these transactions only cause the ratio between our publicly traded class A and privately held class B shares to shift, but total share count remains the same. These transactions have not been diluted to existing PTOO shareholders. Now turning to the results of our fourth quarter 2022, where we saw strong cap line growth. During the fourth quarter, revenues were up 150.9 million, reflecting an increase of 12 million or 8.6% compared to last year. Driven by 6% increase in same restaurant sales, combined with the opening of five new restaurants since the beginning of the fourth quarter of 2021. The same restaurant sales increase of 6% was primarily driven by an increase in the average check of 6% and a 2.3% impact. From the change in recording third party delivery pricing, this was offset by 2.3% decrease in transaction.
The higher average check was driven by an approximate 7.9% increase in certain menu prices, partially offset by lower item sold transaction. We experienced positive trends through the quarter until winter storm alleots significantly disrupted sales during the last week of our fiscal quarter. We estimate that the storm had a negative impact of at least 70 basis points on our same restaurant sales growth in the fourth quarter of 2022. Subsequent to the fourth quarter of 2022, we have seen improvements in our sales trends as same restaurant sales grew 12.3% in our first fiscal period of 2023 and we estimate same restaurant sales to grow 7.9% in our second fiscal period of 2023. We currently anticipate our same restaurant sales growth to be in the range of 8 to 10% and total revenue growth to be in the range of 16 to 18%.
for the first quarter of 2023. We expect to open nine new restaurants in the class of 2023 in the back half of this year with three to four targeted openings in the third quarter and the remainder in the fourth quarter. Now let's look at our costs. Cost of goods sold, excluding depreciation and amortization, as a percentage of revenues increased to 35% in the fourth quarter of 2022, from 32.6% in the fourth quarter of 2021. This increase was largely driven by 14.5% average increase across most commodities, especially in beef and chicken. Additionally, cost of goods sold was negatively impacted by 1.4% resulting from the change in recording third-party delivery pricing.
These increases were partially offset by the increase in our average check. In 2023, we expect our overall commodity inflation will ease and are currently estimated mid-single-digit commodity inflation for the full year. As you would expect, it will start high and taper down over the course of the year. For reference, Q3 of 2022 was up 15.4% and Q4 of 2022 was up 14.5%. Q1 of 2023 will be a sequential improvement from these past quarters. Now let's look at labor. Labor as a percentage of revenues increased to 26.5% in the fourth quarter of 2022 from 26.2% in the fourth quarter of 2021. The increase was primarily driven by incremental investments to support our team members, including hourly rate increases made in Q3 2022 in higher variable-based compensation expense.
These increases were largely offset by an increase in our average check and operational efficiencies. We anticipate making continued wage investments in 2023 and remain committed to providing a competitive total rewards package for our team members. Other operating expenses increased $3 million or 20% in the fourth quarter of 2022, which was primarily driven by new restaurant openings in 2021 and 2022 as well as increases in repairs and maintenance expenses. I can see expenses were flat as a percent of sales.
As a result of the above, restaurant level adjusted even at a decreased 8.5% to 32 million in the fourth quarter of 2022. Restaurant level adjusted even at margins were 21.2% in the fourth quarter of 2022 versus 25.2% in the fourth quarter of 2021. The 400 basis point decrease in restaurant level margins was primarily driven by the continued impact of increased commodity costs and to a lesser extent labor investments. We partially offset higher expenses through menu price increases and operational efficiencies. We raised menu prices 1.5% in the first quarter of 2022, 3.5% during the second quarter of 2022.
and 3.4% during the fourth quarter of 2022. These actions resulted in an effective price increase of approximately 7.9% in the fourth quarter of 2022 and 7.5% year-to-date. During mid-January of 2023, we did increase menu pricing to reflect a net 2% price increase as we continue to combat inflationary cost pressures and restore our margins. Our GNA expenses decreased 33.6 million to 11.7% in Q4 2022 from 37% in Q4 2021.
The absence of IPO-related expenses in Q4 2022 contributed to the overall decreases in equity-based compensation of $25.5 million, option holder payments of $6.6 million, and transaction-related fees and expenses of $2.3 million. Variable-based compensation also decreased by $1.7 million in the quarter. These decreases will partially offset by increases in our people and business. We will continue to make investments in GNA in 2023 and estimate that full-year spend will be in the range of $72 to $77 million.
Pre-opening expenses increased 1.7 million to 2% in the fourth quarter of 2022 from 0.9% in the fourth quarter of 2021. This increase was due to the timing and geographic location of activities related to our plan restaurant openings at the end of fiscal 22 and early fiscal 2023. We expect pre-opening expenses to be between 7.5 million to 8 million in 2023 which covers four class of 22 restaurants.
and the nine additional restaurants we expect to open during the second half of the year. All this slides are adjusted evadav 18.1 million in the fourth quarter of 22 versus 23.2 million in the fourth quarter of 2021, a decrease of 22.1%. Below the evadalign, interest expense was 8.4 million in the fourth quarter of 2022, an increase of 0.8 million from the fourth quarter of 2021. This increase was primarily driven by 2 million of additional interest expense and our first lean term loan due to an increased interest rate.
partially offset by lower outstanding borrowings under a first lean term loan and by the payoff of our second lean term loan. As of the end of the fourth quarter, the effective interest rate on the first lean term loan was 10.4%. On February 2nd, we announced that we entered into a new $500 million term loan and $100 million new revolver facility.
The proceeds under the term loan and revolver facility, along with cash on hand, were used to repay outstanding debt under a previous first-leam term loan and transaction related expenses. At prevailing rates, the all-in interest rate on the term debt has been reduced by approximately 270 basis points. At these rates, we expect that our annual interest expense in 2023 will be approximately 8.5 million lower as compared with our previous debt facilities. This new credit agreement provides additional financial flexibility to pursue our growth strategy and other strategic initiatives. Income Tax Benefit
was 1.7 million in the fourth quarter of 2022 and an income tax expense of 1.8 million for the year. Our effective tax rate for the year was 9.6% versus 20.9% in 2021. Our future effective tax rate will fluctuate
as class-a equity ownership increases and as equity-based awards are exercised and vast. We ended the quarter with 44.4 million in cash. Subsequent to the quarter, we deployed approximately 9.7 million of cash on hand in connection with the refinancing to pay off the existing term loan and transaction-related fees and repaid 5 million about standing by our new revolver facility.
Going forward, we will be using our cash balance plus operating cash flow to support our continued growth. In 2023, we are estimating our capital expenditures to be between 70 million to 75 million.
We remain committed to delivering healthy top line and bottom line growth in 2023 and beyond. More importantly, we're confident in our long-term outlook that was provided in our earnings release this morning.
Thank you for your time and with that I'll turn it back to Michael. Thank you Michelle. Before we open for questions I want to thank our Portillo's team members for all of their hard work in 2022. We persevered during a challenging year for the restaurant industry. Thank you for the time and with that I'll turn it back to you.
And this is because we kept our focus on what matters. An unrivaled experience for our team members and our guests. And it's working. Our guest satisfaction scores continue to be the highest they've been in three years. Consumers are choosing Portillo's. Our sales and comp trajectory continue to show that.
In 2023, we're focused on balancing the needs of our three core constituents. We're creating value for our guests by delivering delicious food at a great price point. We're creating value for our team members through great work experiences.
And we're creating shareholder value by improving our already healthy restaurant level margins. We'll keep delivering on those promises. Thank you. With that operator, can we open the line for questions?
Yes, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue, and for participants using speaker equipment and maybe necessary to pick up your hands that before pressing the star keys. Our first question is from Sarah Senator.
with Bank of America, please proceed. Oh great, thank you. I actually just wanted to sort of dig into the margin piece and the cost outlook. Specifically, if you can give us any kind of guidance, I know you're looking to improve that. Maybe sort of talk through how much price you expect to have on the menu. And also, more specifically, you talked about continued labor investments. My sense had been that your wage inflation has been pretty much in line with community our standards are included.
Yeah, good morning Sarah. Let me let me start now turn it over to Michelle on pricing. I mean, I don't think I hopefully it's not lost to anyone that are you know our pricing last year lagged our competition. And when we look you know when we look at the underlying metrics when we look at our traffic trends, our sandwich count metrics, when we look at guests.
and appropriate to catch up to the pack in terms of overall pricing.
And then I'll let Michelle talk about labor. The one thing I'll tell you that the gift that keeps on giving for us on labor is we have worked very, very hard as an organization to make sure that we are providing a great experience and a great environment for our team members.
And we see that our gap in hourly turnover versus the rest of our competitors is actually getting bigger. So we have anywhere from up 40 to 50 point gap on turnover versus other limited service restaurant companies. And our gap on turnover with our management teams has also increased. So and you know right.
Turnover is hugely important to this industry. There's soft costs and hard costs associated with it. The hard cost is relatively easy to measure, soft cost is a little bit harder to measure. I think that the investments that we're making more than pay for themselves in terms of team member satisfaction, lower turnover, which in turn generates better guest experiences. Yes, Sarah, I would just add on to what Michael's saying. In terms of the pricing and the margins, with the pricing that we put out there, with the 2% we took in Q1, we'll be at around 9-ish percent in the first quarter of 23.
And then we'll be then lapping a price increase in mid-May. So if that falls off, you'd be at about 5.5% price. If we took no action. But as Michael said, we're going to remain fluid and flexible in our pricing approach. We're not committing to anything beyond what we've already announced with the January price increase because we've got to continue to see how the landscape plays out with both commodities as well as the labor environment. I mentioned on my prepared remarks, we do expect to continue to make investments in labor. I think when you book it at...
You mentioned it, our labor inflation in 22. We saw double digit inflation. That started to come down a bit in the back half of the year. So we were at about 9% labor rate inflation in the fourth quarter. I expect that to come down as we start to lay up some of those numbers. But we do expect to make the continued investments in labor as well in 23. Okay, answer just to put a finer point on it. It sounds like you can take price, you think to cover, broadly cover inflation. So as we think about margin expansion, should we be thinking about leverage on positive transactions? Or is there something else that is...
Entrez count has been positive year to date. I know it's early on but you know it's to be determined the remainder of the year, but we're seeing good trends there early on. Great, thank you very much.
has been positive year to date. I know it's early on, but it's to be determined the remainder of the year, but we're seeing good trends there early on. Great, thank you very much.
Our next question is from Sharon's sexio with William Blair. Please proceed. Hi, good morning. I'm curious if you can talk about commodity inflation. I know you mentioned it's going to drop off as the year goes on and it would be lower than the fourth quarter, sequentially in the first quarter, but there's a lot of room to be lower than 14.5%. So can you give us kind of how you expect commodities to play out?
as the year progresses. And I don't know if I missed it, but did you talk about kind of where you are on the percent of your basket that's locked? Yeah, Sharon. Obviously the year is, you know, there's a lot of year left to play out, but I don't expect it to be the 14.5%. We saw in Q4, they said, I do expect sequential improvement, but as you can imagine, I don't expect that to fall off a cliff either.
and all of a sudden get us into a range that is, you know, single digits or even mid single digits. But based on what we know today, what I would expect is that again, that improvement quarter over quarter, we have locked in, we do have some hedge positions. We're at about 34, about a third locked for the full year in 23. As you know, most of the positions that we take is generally on those B flats where we do forward buys on that. And so we have that pretty locked in for Q1.
We've taken some positions in the remaining quarters on that particular line item, and then we're working through You know some other items on our basket today But I do expect the easing in those chicken and pork proteins As most have said over the course of the year, but beef again I expect that to be more of a pressure in the back half of the year
as we continue to see that trend. So that's what we know today, but again, a lot of years off to play out and we'll update you as we continue to get more information. Thanks for that. And then a quick question on the colony. I mean, those are pretty jaw dropping volumes. I can't even imagine what it's like to be a team member at that location. I guess just given those volumes in under senators, some honey moon, but still, I mean, does that kind of accelerate any idea of opening a location that might cannibalize some of that. I'm not familiar.
if you've got something in the pipeline that might take off some of that pressure. Thank you first because you're right. They're like eye popping numbers and the team has been fantastic. And I think we have...
You know, like we've learned a lot and we have, we probably have over invested in experience, talented, portillo's management down there and our team's doing an amazing job. So we're very, very proud of that team.
We had planned for, and I think we publicly said this, another four to five restaurants in Texas. We want to be in that four to five range by the end of this year, 23 in Texas. We've announced two more, and don't be surprised if we build a few more in Texas this year.
I think the colony will settle down and I don't think we need to think about cannibalizing it quite yet. I think that that's a restaurant that's going to settle down. It is an iconic flagship restaurant for us in a fantastic location. And so my expectations is that it performs closer to like a Chicago market restaurant than a typical out of court restaurant. But I'll tell you what it does Sharon, we have
A lot of people ask us questions about, do you think you'll succeed in Texas? Do you think that people will eat Italian beef in Texas? It's only six, eight weeks in, but I feel like the answer to that is a resounding yes. They seem to like our beef sandwiches a lot. No surprise, beef and bread works really well in the great state of Texas. All right, thank you. Our next question is from David Tarotino with Baird, please proceed.
Hi, good morning. Just first a question about the fourth quarter. I don't think you mentioned the on-trade count growth. If you had the on-trade count growth number, that would be helpful. Yeah, David, it was in the quarter. It was negative for the quarter, but if we excluded...
the impact of the storm, we would have been flat. But all in, it was negative for the quarter. Would have been flat excluding the impact of the storm. Great. And then just kind of circling back on the new unit performance, especially.
I guess Michael, based on your observations or your data collection for that location, I was wondering if you could just elaborate on why you think it was so strong in the early days. Do you think it's more related to the site you picked, or do you think it's more related to the consumer demand for your type of...
product. I know you mentioned the beef sandwiches are popular, but I guess what's your thought on this being a leading indicator for the rest of the market as you go forward?
Great question, David. You know, I'm going to give you a cop-out answer because it's a little bit of everything you just said. It is undeniably a great location and we're thrilled to be partnering with the folks who've developed that area. There's an Nebraska furniture mark there. There's a shield. Those are world-class retailers and we have a fantastic location in a very, very well-designed development. So that's an undeniable truth.
You know, it's right next to a business complex in Frisco. It's a mile away from all of the office buildings in Frisco. So it's great. Now that said, we invested time, energy, and money in marketing, Texas. We sent the beef bus down for two tours to generate excitement, energy, and demand. We over invested to some extent with a fantastic multi-unit manager down there, a fantastic general manager down there.
and 70% of our management team and crew chiefs have Portillo's experience. So we stack the deck to make sure that we can handle these volumes, et cetera. We are, despite all that, I am a little surprised and overwhelmed by the response that we've gotten. I think that Texas can be either hit or miss for restaurant companies. If you do well, if you really, you approach it with a sense of humility and work your butt off, you can be great. If you try to mail it in and just assume you're going to be great, you might stub your tail.
We are approaching our Texas expansion with a great deal of humility. We're looking for A-plus locations. We're going to continue to over invest in management team and training of our team members. We'll open the restaurant when it's beautiful and ready to go and the folks are ready to go. I think we did just a lot of things right.
And as we continue to evolve and develop, we'll continue to get a lot of things right. And so my hope is that it is a precursor of what we can expect for Texas. But you know, look, Florida's doing really well. Our newest restaurant in Tucson, Arizona is just fantastic. We feel like we've got the flywheel working for us in the Sun Belt.
Yeah, that's helpful. Then one more quick one on Texas is Texas. I guess my impression is it's a lower cost market to operate in, but I guess how would you characterize whether it's construction costs or labor costs relative to your typical financial model? Is it, is it, you know, am I right that that's a lower cost market? I mean, there are certain elements that make it easier, I would say.
Our next question is from Brian Harbor with Morgan Stanley . Please proceed.
Good morning. Yeah, thank you. To that point, you just made Michael maybe comment on the margin performance of some of the other new locations, not just Texas, but are they coming in better than you expected or perhaps not? And how do we think directionally about the impact of those new units? Yeah.
as we think about margins for the first quarter and then also kind of the second half of the year where you will have quite a few openings as well. Yeah, let me give you sort of the philosophical part of the question, the answer, and then I'm gonna let Michelle give you a little bit more. But keep in mind, when we open a new restaurant, it's, I would really be hesitant to draw any conclusions about margin in the first couple of quarters because we have a new restaurant opening team helping out. We over invest in management where you're running at the
it will improve. What we think works really well is get the restaurant on the right footing, get it going right away from a guest satisfaction standpoint, from enticing crew members to stick around, and then the margin comes fast. And for us, you know, Michelle's talked about this in the past that when we reach six to eight restaurants there's like an inflection point on our operating margins.
And so once we've decided that a market is going to work for us, it is important us to get the scale relatively quickly to start seeing that material margin improvement. Yeah, and I think just to add on to that, Brian , Michael is absolutely right. As we talked about the profile for a class of restaurants, right? And that's sort of how we're bucketing these when we talk about the class of 22, or even the class of 23, the typical profile for that class is, you know, high teens margins in year one flight.
improvement to flattish in year two, and then it starts to grow in year three. Scale does matter, as Michael pointed out, so that's gonna be important as we continue to get to scale. But I think that when you think about the overall margin profile of Portillo's, as Michael mentioned in his prepared remarks, we're committed to improving that despite the restaurant openings in 23.
because we know and we've talked about that we purposefully had marriage and degradation in 22 because of our price-lagged approach. And so that is what we're looking to do in 23 despite the opening. Okay, thank you. Separately maybe just talk about food delivery and what you are still seeing there on a year over your basis, maybe on a quarter over quarter basis, if you still continue to see that be quite strong and then also...
Maybe on new units, how do those do just on third-party delivery? Yeah, great question. So we're, you know, like, God bless the people doing third-party delivery because it just keeps on growing. And so it's performing well for us, the channel continues to grow, it's probably continuing to do a little bit of mixed shift for us. So we're seeing continued growth in third-party delivery, even through the course of 22 and into the fourth quarter. So that is definitely happening.
Your latter question, the last part of your question about new units is a very good question because we're very thoughtful about metering the channel so that we don't overwhelm a new restaurant. And let me tell you what I mean by that. Our Orlando restaurant came out of the gate blazing. Had a fantastic first year. And can we tell him this? No. Okay. So, but it had a fantastic first year. We did not want to overwhelm that team so we did not have.
third-party delivery, pickup, or catering turned on, on purpose. And we've only recently, after a little bit over a year, added a channel, added another channel. So now it's got the whole mix. The colony does not have third-party turned on, does not have digital ordering turned on, does not have catering. Right now it is exclusively dine-in, pickup, and drive-thru.
And that's on purpose because it's doing such crazy volumes. We don't want to create excess pressure and create more channel stress right now. So for new restaurants, that's a very, that is sort of a new normal for us, which is expand the channel outreach over time once the restaurant stabilizes and can handle the volumes. Thank you. Our next question is.
Michael, if you could just kind of touch on build costs, how that's trending and any kind of expectation for this year relative to what you saw in 2022.
how that's trending and any kind of expectation for this year relative to what you saw in 22.
On timing, look I think I'm sure you've heard this from every other restaurant company but there seems to be a new normal in how long it takes to get through certain administrative processes with governments etc and so we've built in significantly more time for permitting for you know all this stuff. The things that are under our control you know we feel pretty good about where we're getting better, we're getting smarter, we're getting faster.
half loaded.
I would never want it to be back half loaded in a perfect setting. So my expectation is 24 is much closer to bright and then 25 should be perfect. We should have, and perfect for us I think is 60-70% of the restaurants are open in the front half and the remainder open in the third quarter, maybe one in the fourth quarter. That's what great looks like.
So we're not great in 23 we're back half loaded far more than I would prefer But that's you know that is neither here nor there and then when in terms of construction costs It's it has I would describe it as it has tapered a bit It hasn't it hasn't come back to earth and I don't know if I don't know how much of it will I don't know how much of it
won't. We've talked about this before. What that means for us is because we're still very committed to hitting the financial targets that we have set. So it means Michelle and I are only approving restaurants that we think are going to far exceed some of the numbers that we would have looked at in the past because the build cost is higher.
We're also being very thoughtful about how much money we're spending to build our restaurants. We've talked about the restaurant of the future. I think in the class of 24, we'll start building restaurants that are
smaller, more versatile, and have the ability to generate the plus size volumes that we want. And so, I think we've got to skin this cat in those two ways. We've got to be more thoughtful and frugal in how we're building. Still want a great experience for guests, but build a lower cost building. I don't like the word cheaper, so it's got to be lower cost for still a gorgeous, inviting, engaging building.
And we have to be thoughtful that the restaurants that we're signing up for, that the revenue will still greatly achieve all of our aspirations for returns.
Michelle, anything? No, he said it all. We're committed to the cash on cash returns. We've laid out there. And that's what we look at when we approve new restaurants. Yeah.
Very helpful color. Just one other one. Helpful commentary on the delivery strength there. I'm curious, so if there's anything else to touch on as far as what you're seeing from customers recently, changing behaviors across any metrics, channel utilization, et cetera. Thank you. You know, um.
Very helpful color. Just one other one. Help commentary on the delivery strength there. I'm curious. So if there's anything else to touch on as far as what you're seeing from customers recently, changing behaviors across any metrics, channel utilization, et cetera. Thank you. You know, you know, if it's it's.
There is a structural shift that is undeniable. Like if you go back to 2019, 53% of our sales were inside the restaurant and 22, 42% was inside. 2019, all the delivery channels were like 6%, now they're 14%. Drive-throughs remain roughly the same. And so it's just a question of that inside the restaurant, how much of that keeps coming back and where does it come from? So delivery continues to grow and I think everyone's aware that the price points on a third party delivery are materially different than if you go through the drive-through or you pick it up in the restaurant. There's fees, et cetera, and tip and all those things add up. But that consumer sort of defies any price elasticity and continues to be very robust and continues to...
you know, year and a half, two years, is this something we should think about as kind of
annually an opportunity to drive more productivity in your business. And then secondly, I know you're working on a new kitchen 2023 design. How does that roll into the restaurants for this year's builds?
Yeah, good morning Andy, good to hear from you. So here's what I'd say, you know, we aspire to be a great company and be a great operator. And that means that you're always trying to get better and improve. We're, you know, while we're a 60 plus year old brand with a great legacy, there's a lot of things that we can get better at operationally. And so I think operational improvement is a
Because the thing that's going to be around at Portillo's for quite a while. And you know, we had fantastic efficiencies. We had fantastic efficiencies last year. I think did a really good job of becoming more dynamic and efficient. We're doing things that I think will continue to enable that. So, you know, one of the investments that...
Michelle alluded to with labor is what we call the step-up program. So, you know, if Andy is my rock star beef maker, but that's all he's done and he's getting to a certain hourly wage, you can go and cross train. You can learn how to make hot dogs at the station we call table. You can turn around and work broiler. And every new station that you learn, we pay you more. And every new station that you learn, you're creating flexibility for the company in terms of staffing and utilization.
So that's a gift that's going to give and that we're figuring all the details of that out and our goal is to deploy the Step Up program in the second half of the year. You referenced Kitchen 23, which we saw a significant savings where we tested it. It requires a little bit of capex and a little bit of a pain to redo the restaurant, but we think we've got a really good idea on how to do that and we're retrofitting. We're going to target 15 to 20 restaurants in the Chicago area to retrofit towards Kitchen 23 for this year. That will generate savings. And then on an ongoing basis, you know, we...
we carefully look at our items per labor hour, it's a productivity metric. We look at the spread between the top quartile and the bottom quartile. We look at productivity by day, by day part. There's a lot of there there. There's a lot of opportunity for, you know, we have some restaurants that perform at ridiculously high productivity levels and there's some learnings there that we can and should be applying to restaurants that are a little less productive. So I think that we have a lot of room to improve and it's a multi-year journey, but it's also predicated on taking great care of your team members, right? You want happy, productive team members who are cross-trained, eager to work and that's when everything works really well.
Yeah, really good color. Very helpful, Michael. And Michelle, just real quick on the other operating expense.
You mentioned, you know, NROs in the 4Q. What specifically is that? And was there anything else that moved it up to 12 percent? I imagine utilities were probably...
pretty high in paper and packaging as well with, you know, with catering and things like that. But just kind of wondering if this is a new run rate at about 12% of sales or so. Yeah, Andy, we have some catch up on repairs and maintenance that I called out in my remarks. Outside of that, you know, obviously year over year when you layer in new restaurants, right, you're going to have some of that in there, which is what I called out on the new restaurants. The only other thing that I think I would call out to you that
would be an outlier, again would be some catch up that we did on the Repairs and Maintenance Expense in Q4. But in terms of a run rate, again, I'm not going to get into future numbers, but that's what I call it for Q4. Okay, thanks. Yep. Thanks, Annie. Our next question is from Chris O'Call with CFO . Please proceed.
Good morning and congrats on the recent store opening. Very impressive. We shall give the comp trajectory in the first quarter. How should we be thinking about traffic or entry count growth as comparisons start to normalize? I think Chris, Michael called out that we've seen positive transactions.
growth year to date, so that's through the first two periods. The thing that we continue to see is, and I've even talked to you and others about this before, is as we looked throughout 22, particularly in the back half of the year, we continue to see a negative impact from next, right, which was that attachment or that item's per transaction. My expectation is, is I don't expect that to immediately turn around as we continue to live through this recessionary like environment, so we're still seeing that as well as we come into 23.
Okay. And then it sounds like you expect to expand margin this year despite more new store drag I guess this year than last year. This is in pricing. What do you think you're going to be the primary drivers of that improvement? Yeah. Pricings definitely definitely a lever, Chris, that we're going to be looking to pull as the primary lever. And again, I mentioned we put in the 2% in January . There's nothing else.
that Michael and I have aligned on moving forward. We're going to again continue to see how the environment looks. But then I would just point to exactly what Michael just said when he was talking to Andy about the improvements that we're looking at in terms of Kitchen 23, our step-up program. And then as we look at our items per labor hour, which is our efficiency metric that we measure in our restaurant. So we're going to be looking, can we make some improvements there? So those are the two things, but pricing would be the primary lever.
And just as a follow up to that labor question, I think you said there's some labor investments planned for this year. Can you remind us what the magnitude and timing of those investments are expected to be relative to when you start to lap the investments you made in 22? Yeah, we don't, as Michael mentioned, Chris, we haven't determined exactly when we're going to put in place.
the step up program for example, and the labor decisions haven't been made fully. We put in place last year in Q3, the beginning of Q3, a round of increases into our restaurants. And so that's when you'll start to lap some of those increases this year. But TBD on what we're gonna do in 23, we haven't made all those decisions. Okay, thanks. Yep. Yep. Our next question is from Gregory Frankfort with Guggenheim, please proceed.
Hey, thanks for the question. Can you talk just a little bit about the recent sales trends you're seeing to start one queue? I mean, the particularly January number is really strong. And I think a whole industry has had a little bit of a pickup, but the industry may have And I think you guys have proper comparisons. So can you maybe talk about that dynamic? And is there any legionally that you're seeing or just thoughts on the consumer strength that you think is a whole? Yeah, I think so. Greg, here I would just I think January was honestly a little bit of a bounce back some pent up demand from that.
But like we feel really good about that.
I know I saw like a broken record, but for the last nine months we've seen consistently improving guest satisfaction scores, speed of service scores, value perception scores. So I attribute our step up in performance for the first two months that our price laggard strategy is working. We're providing great value to our guests. They're telling us that they find great value, they're satisfied with us. So we're providing great value to our guests.
our guest satisfaction scores are now at three year highs. And I think that our strategy is working. We've lagged a little bit on pricing. We've said this. We invested in our guests in 22. And that is generating a little bit of, I guess, beta when it comes to revenue performance at the beginning of 23. 23.
Thanks for that. And then just a follow up question on the step up program. I mean, I kind of hadn't heard of any restaurant doing anything like this before of paying you a little bit more as you kind of add different capabilities as a worker. What drove the design of that? I mean, is our workers today in your restaurants just less cross-functionally were the task and you're trying to get back to a certain level? Is this going to put you at it?
kind of a new level of cross functionality of workers. I'm just at any thoughts on that and kind of what were you the genesis of the idea came from. Thanks. I think it's honestly it's rooted in a concept of pay for performance, pay for play. So the first thing is when we ask our team members what we want to keep people, you want to keep great people, you want them motivated, you want them happy.
And it's undeniable that when people are learning new things that they're actually happier. They actually like being able to do different things. So the genesis of this truthfully was that we want to keep our team members happy. We want them cross-trained. We want them to be able to work multiple stations, multiple shifts. It's probably more important to us than some other restaurant companies because we do have so many different stations within our restaurant. And it's a great way of rewarding that so we can create a win-win dynamic. We can create really happy, engaged, excited team members because they're learning and growth.
Next question is from Brian Mullin with Duy Shabank. Thank you. Question on the balance sheet. Congrats to the team on getting the refinancing done. Michelle, with that in the rearview mirror, could you just touch on the priorities after you fund the cat-backed requirement for the growth of the business? Just philosophically, I'm wondering if you'd be inclined to want to pay down debt and deliver it a bit over time, or whether you'd be more inclined to start to look at.
and then is there a target net leverage ratio or a range we should keep in mind that you think is optimal? Yeah, Brian , great questions and yeah, we're definitely excited to free up a bit more cash from the refinancing and have that in a room, room, room, room. As I think you all saw during our investor day, we laid out where the cat backs is going to go. And so, you know, the vast majority of our cash is going to be to fund the new restaurants that we're going to build, put investments into existing restaurants, and then continue to make investments in other things like technology, etc. You know, we talked about digital manual words, those type of things. Outside of that to the extent that we have excess cash, I mentioned on the call.
You know, we started to already pay down that revolver. So we had 15 million outstanding on the revolver. I'd like to get that paid down. We paid 5 million off of that a couple days ago. And so we're at 10 million outstanding on the revolver. Outside of all that, I am open to whatever makes sense. And is in the best interest of our shareholders, whether that's paying down debt or other avenues if Michael and I and the rest of the leadership team are comfortable with dialing up growth. Then we will do that because...
Obviously that's the best investment, it has a fantastic return, and so that would be the primary avenues we would deploy our capital. Thank you. Yeah, and just, sorry Brian , I didn't ask you your question on do we have a targeted leverage ratio. I do not have a targeted ratio in my head, but I feel very comfortable that we can service the debt, invest in everything I just mentioned, and continue to grow.
Obviously that's the best investment. It has a fantastic return. And so that would be the primary avenues we would deploy our capital. Thank you. Yeah, and just, sorry Brian , I didn't ask you a question on do we have a targeted leverage ratio. I do not have a targeted ratio in my head, but I feel very comfortable that we can service the debt, invest in everything I just mentioned, and continue to grow. Thank you.
We have reached the end of our question and answer session. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.