El Pollo Loco Holdings Inc (LOCO) 2014 Q4 法說會逐字稿

Greetings and welcome to the El Pollo Loco fourth quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Larry Roberts, Chief Financial Officer. Thank you. You may begin.

Thank you, Operator, and good afternoon. By now, everyone should have access to our fourth quarter 2014 earnings release. If not, it can be found at www.elpolloloco.com in the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We are also filing our 10-K for the FY14 early next week and would encourage you to review that document at your earliest convenience.

During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release.

Lastly, I want to remind you that our fourth quarter of 2014 consisted of 14 weeks, compared to 13 weeks in the fourth quarter of 2013. Comparable restaurant sales are on a comparable calendar period, 14 weeks to 14 weeks for the quarter. With that, I would like to turn the call over to Steve Sather.

Thanks, Larry. Good afternoon, everyone, and thank you for joining us on the call today. We are very pleased to report our fourth quarter results, which reflect continued operating momentum, including pro forma earnings of $0.14 per share. Excluding the impact of the extra week, our pro forma earnings for the quarter increased 45% compared to last year's pro forma EPS of $0.09.

Other highlights for the 14 weeks ended December 31, 2014 include system-wide same-store sales growth of 7.6%; excluding the 14th week, adjusted EBITDA growth of 21.5%; and the opening of 11 company-owned and franchise restaurants, resulting in a total of 16 new restaurants for 2014. Our healthy 7.6% same-store sales growth in the quarter was our 14th consecutive quarter of positive same-store sales and included a balanced mix of transactions and check growth.

We believe we are uniquely positioned in the restaurant industry in what we refer to as QSR-plus. We define QSR-plus as offering the high-quality food and dining experience you would expect at a fast casual restaurant, combined with the speed, convenience and value you'd find at a traditional quick service restaurant, essentially getting the best of both worlds.

Our comp growth is evidence that our compelling value proposition alongside our fresh handcrafted Mexican-inspired cuisine continues to appeal to our guest. Our menu allows us the flexibility to create new and unique menu items that complement our signature fire-grilled chicken and provide our customers with even more choices at a great value.

Our current promotion highlights what we believe to be a key long-term opportunity for El Pollo Loco, which is to expand our menu to include additional proteins that complement our chicken and Mexican heritage. It features savory marinated Baja shrimp, which adds great flavor to both our new and existing dishes. Guests can substitute our Baja shrimp across the menu in any taco, burrito, tostada salad or other favorite, giving them the customization that they crave.

Additionally, we recently featured signature LTO dishes which highlighted our new shrimp offering. These included a shrimp mango taco, shrimp verde enchiladas, the shrimp and chicken avocado bowl, and my personal favorite, the avocado shrimp salad. Unlike in prior years, shrimp will remain on the menu until the end of May.

Additionally, healthier food is a brand equity that we continue to leverage. This quarter, we added new items to our Under 500 menu, which has resonated well with our health conscious guests. The new offerings included the chicken and shrimp grilled tostada, a double chicken wet burrito, a grilled chicken and kale salad, and the skinny chicken quesadilla. This Under 500 menu gives consumers authentic healthier options without having to sacrifice flavor.

Switching to development, our pipeline continues to be robust and positions us for 8% to 10% unit growth over the long term. We opened six Company restaurants in the fourth quarter, bringing our total Company openings for the year to 11. Four of the restaurants we opened were in existing markets and two were in newer markets. Additionally during the fourth quarter, our franchise partners opened five restaurants in existing markets.

In our newest market, Houston, we opened two locations during the fourth quarter and we've opened one additional restaurant to date in 2015. While it's still early, we are very pleased with the results at these new locations.

Given our initial success in the Houston area, we plan to open five to seven more restaurants this year in the Houston area and are currently working to secure leases in our next Texas market, Dallas, where we are targeting our first opening in 2016. We're also actively pursuing company and franchise development in a number of additional Western markets.

All of our new restaurants are opening with the new Hacienda design, and we continue to remodel our existing restaurant base with the new design, which showcases a more moderate and inviting dining experience within our restaurants and is a better representation of our elevated brand positioning. Through the end of 2014, we have completed over 200 remodels and remain on track to have the entire system completed by 2018.

With that, I'd like to now turn the call over to Larry for a detailed discussion of our fourth quarter results. Larry?

Thanks, Steve. As a reminder, please note that the fourth quarter of 2014 contained 14 weeks versus 13 weeks in the prior-year period.

For the fourth quarter ended December 31, 2014, revenues increased 18%, to $90 million, from $76.2 million in the fourth quarter of 2013. The increase in revenue was predominantly driven by an increase in company-owned restaurant sales, which rose 18% in the fourth quarter, to $84.1 million from $71.3 million in the same period last year. Approximately $4.6 million of the increase in company-owned restaurant sales was attributed to the extra week.

Contributing to our Company revenue growth during the fourth quarter was a 6.4% increase in comparable restaurant sales. The comparable restaurant sales growth was comprised of a 3.1% increase in traffic and a 3.3% increase in check. Franchise revenue increased 18.5% year-over-year, to $5.9 million, largely due to franchise comparable restaurant sales growth of 8.6%.

Turning to expenses, food and paper costs as a percentage of Company restaurant sales improved by 40 basis points year-over-year to 31.8%, driven by 2% in menu price increases taken in the second half of 2014, partially offset by higher commodity costs. For 2015, we expect overall food and paper inflation to run 2.5% to 3%, as higher chicken prices, which we have locked in for 2015, are offset by favorability in other commodities. To offset higher food and paper costs, we took an additional 1% menu price increase at the beginning of February and are implementing several cost saving initiatives.

Labor and related expenses as a percentage of Company restaurant sales decreased 74 basis points year-over-year, to 25.1%. The decrease in labor was driven by leveraging our strong comparable restaurant sales growth during the quarter and the reversal of an accrual for federal unemployment taxes due to a penalty waiver granted by the US Department of Labor. These were partially offset by higher minimum wages in California.

As we have mentioned previously, we do not expect to be significantly impacted by the Affordable Care Act in 2015, as our health insurance program was already fully compliant with the Act prior to its implementation. I'd like to point out that in the first quarter of 2015, we had an unusually high number of group health insurance liability claims; seven, to be exact, versus only one for all of 2014.

As a result of these claims, we are currently estimating a $500,000 to $750,000 impact split between labor and G&A during the first half of the fiscal year, although the exact timing is difficult to precisely pinpoint. While group insurance claims are always difficult to predict, at this point we do not anticipate higher than normal claims activity for the balance of the year.

Occupancy and other operating expenses as a percentage of Company restaurant sales improved by 80 basis points year-over-year, to 20.7%. Approximately 40 basis points of the improvement was due to the 53rd week. Higher sales and favorable general liability claims, partially offset by Houston advertising expenses, drove the balance of the improvement.

General and administrative expenses increased by $1.8 million year-over-year in the fourth quarter, to $8.5 million. As a percentage of total revenue, G&A expenses increased 64 basis points, to 9.5%. The increase was driven predominantly by investments supporting our growth, incremental public company costs, and a one-time bonus of certain employees at our support center in recognition of their contributions to our successful IPO.

These were partially offset by leverage on strong sales growth. On a pro forma basis and excluding the one-time bonus, G&A as a percent of total revenue increased by 10 basis points versus the fourth quarter of 2013.

Depreciation and amortization expense increased to $3.3 million from $2.6 million in the fourth quarter last year. As a percentage of total revenue, depreciation and amortization increased 16 basis points year-over-year. The increase was primarily driven by our new store development, as well as our accelerated remodeling program. For 2015, we expect depreciation and amortization expense to be between 3.7% and 3.9% of company revenue.

Interest expense decreased by $4.1 million year-over-year, $2.8 million from $6.9 million in the fourth quarter of 2014, largely due to the payoff of our second lien credit facility with the proceeds of our IPO in July and to lower interest rates associated with our previously announced November, 2014 closing on a new credit facility.

During the fourth quarter, we incurred a charge of $1.3 million relating to the present value of expected payments under our income tax receivable agreement, which calls for us to pay our pre- IPO shareholders 85% of the savings realized as a result of utilizing our pre-IPO net operating losses and other tax attributes.

We recorded an income tax benefit of $2.6 million in the fourth quarter of 2014, compared to a benefit of $600,000 last year. Our tax provision for the fourth quarter reflected additional tax benefit, primarily due to California enterprise zone tax credit claims.

We reported net income of $4.6 million, or $0.12 per diluted share, in the fourth quarter compared to a net loss of $18.1 million, or a loss of $0.63 per diluted share in the year-ago period. Weighted average diluted shares outstanding were approximately 39.7 million for the fourth quarter of 2014 and 28.7 million shares for the year-ago period.

To account for the IPO and changes to our capital structure, we have calculated pro forma results, including net income and basic and diluted share counts as if the IPO had occurred at the beginning of FY13. To arrive at pro forma net income, we have made adjustments for the elimination of management fees from our sponsor, credit facility interest expense, IPO and secondary offering-related expenses that were not capitalized, costs incurred to refinance our debt, estimated ongoing public company costs, expenses associated with the tax receivable agreement, losses on disposal of assets, asset impairments and closed store costs. We have added back provision for income taxes and applied a 40.5% income tax rate.

Included in our earnings release is a reconciliation of our GAAP results to our pro forma results. We believe that the pro forma results provide a useful view of our business and our post-IPO capital and cost structures. Accordingly, pro forma net income for the quarter was $5.5 million, as compared to $3.4 million in the fourth quarter of last year. Pro forma diluted earnings per share were $0.14 for the fourth quarter this year, compared to $0.09 in the prior-year period. Fourth quarter 2014 results included an estimated $0.01 per share positive impact, due to the extra week in the quarter.

We've used a diluted weighted average share count of 39.7 million shares for the fourth quarter 2014 and 38.4 million shares for the year-ago period, which reflects our shares post-IPO. In terms of our liquidity and balance sheet, we had $11.5 million in cash and equivalents as of December 31, 2014 and $165.8 million in debt outstanding.

For the foreseeable future, we expect to finance our operations, including new restaurant development and maintenance capital, through cash from operations and borrowing under our credit facility. We expect our capital expenditures to total $34 million to $37 million for FY15.

Turning to our 2015 guidance, the Company expects 2015 pro forma diluted net income per share ranging from $0.67 to $0.71. This compared to pro forma diluted net income per share of $0.55 in 2014. As I noted, FY14 pro forma diluted net income included an estimated $0.01 per share positive impact, due to the extra week.

Pro forma net income guidance for 2015 is based in part on the following annual assumptions. We expect system-wide comparable restaurant sales growth of 3% to 5%. We expect to open 16 new company-owned restaurants and expect our franchisees to open 11 new restaurants.

For the company-owned restaurants, development this year will be back half weighted. We are very pleased with the sites we have lined up for 2015, with most new units expected to open in the third and fourth quarters. As of today, we have opened one new unit in 2015, with one under construction and 15 in permitting and six under letters of intent.

We expect restaurant contribution margin of between 21.7% and 22%. We expect G&A expenses of between 8.2% and 8.4% of total revenue, and we expect adjusted EBITDA of between $66.5 million and $69.2 million. With that, I'll turn the call back to Steve for closing remarks.

Thanks, Larry. As we move into 2015, we're excited about the continued operating momentum and the long-term opportunities to bring freshly prepared, crazy you can taste entrees to an even wider audience. Our success to date is due to our focus on our four pillars of our brand. These are high-quality food, compelling value, excellent service, and a warm, inviting atmosphere.

Our ongoing focus on these four pillars positions the brand well for the future and will support our continued growth through increasing comparable restaurant sales, expanding the restaurant base, and enhancing the restaurant operations. Thank you for joining us today. We appreciate your interest in El Pollo Loco. And now, we'd be happy to answer any questions that you might have. Operator?

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

John Glass, Morgan Stanley.

Thanks very much. If I could just start, maybe just a couple of clarification questions on the details, Larry. On the G&A, can you quantify what that bonus was, so we can understand what would be a run rate going forward? I know you gave some color, but if you could quantify that. And then on the labor line, I think you talked about also some -- the medical claims. So whatever it was, if you could also clarify that so I can understand what the underlying G&A -- the labor was.

Thanks, John. On the bonus, (inaudible) we haven't really announced the amount to our employees. It's a one-time, it is not going to be recurring. So it's only in this year's numbers. It's not going to be in next year's numbers. It's really a recognition for all their hard work around the IPO that people put into it.

It's in the 2014 numbers.

Yes, in the 2014 numbers. So I'd rather not actually say the amount at this point in time. We're still working through the final details and we haven't announced it yet formally. We've told people it's coming, but not the amount. But again, it's not recurring.

On the medical claims, this is one that's really difficult to predict, because these are -- basically, they are the result of the employees, they could be spouses, going in, usually it's hospitalization because of the magnitude of the claims. As you know, we're self-insured, which actually saves us a lot of money, but it does lead then to some volatility around the timing of claims. And so we've just now had seven claims this year versus last year, I think we only had one.

And when I say seven claims, I mean seven claims that are going to push up against our stop loss, which is about a $125,000 stop loss. And so what we're saying is we're going to have somewhere, $500,000, $750,000 impact, Q1, Q2, probably more weighting Q1. You'll probably see $450,000 to $500,000 in Q1, the balance in Q2. I just worked through -- just before I got in here -- about where that will be allocated. The majority of that will actually be allocated to G&A, not labor. There will be some in labor. But the majority will actually be in G&A.

And I think I misspoke when I asked that question. In the fourth quarter, there was an accrual reversal in labor. What was that worth?

Oh, I'm sorry. Yes, that accrual was about $400,000. And again, what that relates to is we accrued all -- basically during the year, we accrued for the federal unemployment tax penalty that the State of California is incurring from the federal government. And the governor of California, along with other states, applied for a waiver. That waiver was approved in November, so that allows us to reverse the accrual in Q4.

That's great. And then, Steve, if I just could sneak one more in about Dallas, your thought process around entering that market. Do you approach it in the same way you approached Houston? Do you think about it differently? Is there a different competitive dynamic? Is there a different marketing dynamic that you can't use or can use, same to the similar techniques you've used in Houston successfully? Maybe you could just give high level thoughts about how that may be the same or different.

Thanks, John. Good question. As you know, we're very pleased with the Houston performance and have been really looking at Dallas and other Texas markets for the last year. We've all gone to Dallas. Our real estate people have been very active there. We think there's tremendous opportunity in Dallas, that would be equal that we see in Houston. We would enter it in a similar fashion, still working through how we did in Houston on an operations side.

As you know, for the first three stores, we put in seasoned El Pollo Loco restaurant teams to make sure our operations hit the ground running. We had a lot of research on the marketing and a lot of blogger events and things to really introduce that brand there, which was very successful. And we plan to use the successful parts of that, certainly as we enter Dallas. But we're very excited about that.

And those units would -- although we have sites now that we're looking at, we'll soon sign leases on, they won't -- scheduled to open first part of 2016.

Great. Thank you.

David Tarantino, Baird.

Hello. Good afternoon. And congratulations on a nice finish to the year. I had a question about the Houston market, Larry. I know you said you're very pleased with the results so far. But is there any context you can give us around how the sales volumes have started? I know the new store model that you'd given us assumes new markets open around $1.5 million. So perhaps you could talk about whether Houston is meeting or exceeding that level, at least early days, on the run rate.

Thanks, David. And it's still -- Houston, we've got three restaurants, a couple of them are still just really coming out of the honeymoon period. So they're starting to settle out. The one thing I'll say is that they're exceeding expectations.

Okay. Good. They're all worth a shot, I guess.

(Multiple speakers) how you put it.

And then the next question is on comps. The comps have been very strong and impressive, especially against the comparison you're facing in the fourth quarter. Could you talk about what some of the key drivers were in the fourth quarter and what the momentum looked like exiting the quarter, and if you care to comment on what you're seeing so far in Q1? And then maybe separately, do you think the macro environment is helping at all with lower gas prices?

David, Ed Valle, our Chief Marketing Officer, is here with us today. So that's right in his spot.

Hello, David. So you know that our calendar is built around these tastes (inaudible) this group called Main Street Foodies. And really a couple of the (inaudible) healthier food and variety. So we always keep that in mind as we -- and customization, by the way -- as we build our calendar.

So some of the things that performed strongly for us in the fourth quarter were our stuffed quesadillas, which crept into the first three weeks of the fourth quarter. But the create-your-own bowl performed -- it hit our sales metrics and it also hit and exceeded our consumer metrics on high level of satisfaction and repurchase intent. So that's something we were very happy about and you will see that back again in the future.

Carnitas also came in and did well for us. And then on the family side, really the three-course family meal, the family chicken, really picked up in the quarter, as well, more so than the rest of the year, with the create-your-own three-course meal. And then we also offered a three-course meal out with instead of salads, cheese enchiladas, and that did exceptionally well for us, as well.

So it was steady through the quarter. But a couple of those things really kicked it in. Underneath that, we talk about below-the-line items, David. We also had our ultimate double menu that was up there, and that performed exceptionally well for us. And then at the very beginning of the year, we did the Under 500, which plays to that healthier need space. That's a product line that we put in and we left in, because we felt it was important. And every time we target that healthy needs space, we get a very positive response, from a sales perspective.

Moving into -- I think your next question was moving into the first quarter. I think we really liked what we see, without getting too much into specifics. You may have seen the Baja shrimp on our menu. That performed exceptionally well for us. In fact, it's stronger this year than it was last year. It went in as what we call a seasonal LTO, which means it's in for about 12 or 13 weeks, or three modules.

And then we're also -- to give you a little bit more of a preview -- on the alternative proteins, we're also looking at carne asada, bringing that into that module four, also as a seasonal LTO. And the reason why that's important, these alternative proteins, is because they increase frequency among our core users. So we're pretty excited about the 2015 calendar. And as you know, we do a lot of very thorough testing to build these calendars.

Did I get them all, David?

I think you got most of them. I guess the question also was on the macro environment and maybe what your views are on whether lower gas prices or anything else you're seeing in the economy is starting to have a positive impact on the business?

My comment on that is even when gas prices were high, our comps were pretty consistent through all the quarters. I look at our business really based on this macro trend of this growing group of Main Street Foodies, who just want better food at more reasonable prices. And I think that's what gives us the stability in our comps from quarter to quarter to quarter. Lower gas prices will put more money into the pockets of consumers, and I think it's certainly helped other restaurant chains out.

Great. Thank you very much.

(Operator Instructions)

Sharon Zackfia, William Blair.

Hello. Good afternoon. A follow-up on the discussion on alternative proteins. Can you update us on what non-chicken is now as a percent of your revenue mix? And in addition to improving the frequency of your core customers, do you have any evidence that it's bringing new customers in the doors?

Yes, we do, actually. So we've seen an increase, through 2014, of 9%, in terms of new customers coming in to the brand. And in terms of its percentage of business in 2014, those tend to run, as a percentage of mix, at about anywhere from 8% to 10%, when we put the alternative proteins in. And remember, Sharon, we only put those in for five weeks in 2014, because we want to test them over the five-week period. We want to understand. We want to go do consumer intercepts. And then we want to understand if it plays a role in the 2015 calendar. And they certainly will play a solid role in the 2015 calendar.

So how do we think about this over time, if they grow disproportionately in coming years, how that relates to the cost structure of the Company? Are they gross margin neutral or are they a little dilutive? Larry, maybe if you could help us out on that?

Yes. Overall on these products, right now, the way they're run, they're probably slightly detrimental to margins, as you can imagine, especially where costs are today. Shrimp actually was not an increase year-on-year. Obviously, beef, everybody's highlighting, those prices are still very, very high. So as of now, they are a slight negative to margins. Or course, they are driving sales. So that's a big positive. And then longer term, hopefully we would see both shrimp and especially beef come down in price and make them potentially margin neutral.

Okay. Great. Thank you.

Paul Westra, Stifel.

Good afternoon, guys. This is Michael Scoon on for Paul. Just had a few questions here. I was wondering if I can ask about the clarification about the Hacienda remodels? It sounds like the system, it will be rolled out to the entire system by 2018. I was just curious, is that decision made on a case-by-case basis? Are we assuming that each one of these would be accretive?

In our franchise agreement, it calls for remodeling every seven years. And as we've mentioned before, we had delayed some of that going into this. So it is called out for contractually every seven years. We felt it was necessary just to keep the units relevant. Initially, as we've reported, it's about a 3% incremental sales on top of what they're already getting. But the customer satisfaction is putting the brand where it needs to be today in this QSR-plus now with our facilities. And we started with the oldest ones first, obviously. We'll do about 20 to 25 this year, 2015, Company, and about 40 to 50 on the franchise side.

Okay. Great. And I just wanted to touch on to see if you guys had any opinion on some recent news about the avian flu, specifically in the Sun Belt, and if there are any disruptions that could be on your new markets in Texas, if they're affecting customer perception or prices in the supply chain?

On the avian flu? No, we have, thus far, not seen -- I don't believe the avian flu's actually impacting chickens at all. I understand it's on some turkey farms. Obviously, our suppliers will do everything they can to make sure that that flu does not get into their facilities. So so far, we are not seeing any disruption in chicken supply, no impact on prices. We've locked in prices for the year. But again, we're not seeing any supply disruptions as a result of the avian flu.

And is this pretty common, I would imagine, does this recur often?

Avian flu?

Yes.

I think if you look historically, you'll see strains pop up every so often. Some are clearly more lethal than others. And obviously, we're watching this strain to see how it progresses. I know our supply partners are also, obviously, watching it very, very closely. But these things do pop up. But like I said, right now, we are not seeing any impact at all on our chicken supply.

Okay. I appreciate the clarification, guys. Thank you, and congrats again on your results.

Thanks, Michael.

Thank you. I'd now like to turn the floor back over to Management for closing remarks.

We want to thank everybody for their continued interest in El Pollo Loco and we look forward to giving you our results for next quarter. Thanks, everybody. Good-bye.

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