El Pollo Loco Holdings Inc (LOCO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded today, May 14, 2015. On the call today we have Steve Sather, President and Chief Executive Officer of El Pollo Loco; Larry Roberts, Chief Financial Officer; and Ed Valle, Chief Marketing Officer. And now I would like to turn the conference over to Larry Roberts.

Thank you, Operator, and good afternoon.

By now, everyone should have access to our first-quarter 2015 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 filing for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-Q for the first quarter of 2015 tomorrow 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.

With that, I'd 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 another quarter of strong sales results, including year-over-year pro forma earnings growth of 40.1%. Our results were driven by a solid combination of comparable sales growth and new unit growth, as we continued our acceleration of new unit development in existing and new markets.

For the first quarter, we saw a 5.1% increase in system-wide comparable sales growth that consisted of a 3.5% increase for Company-operated restaurants and a 6.2% increase for franchise restaurants. The increase in comparable sales growth marked our 15th consecutive quarter of positive same-store sales and came on top of a 7.2% growth last year, for a strong two-year growth rate of 12.3%. We also added 17 units, consisting of 12 new Company-owned restaurants and 5 new franchised El Pollo Loco restaurants, opened during and subsequent to the first quarter of last year.

We believe our comp growth is continued evidence of the appeal of our brand, driven by our fresh, hand-crafted Mexican-inspired cuisine, compelling value proposition, and fast service. Our menu allows us the flexibility to create new and unique menu items to complement our signature fire-grilled chicken and provide our customers with even more choices at a great value.

During the first quarter, we featured Baja shrimp and tostadas. Both are proven winners with our customers. In line with our longer-term menu strategy, shrimp is being offered across our menu throughout the end of May and continues to perform very well. In order to further test our multi-protein strategy, we are currently promoting carne asada on top of our shrimp offering. Our carne asada is made from fresh USDA beef, seasoned with a traditional marinade of citrus, salt, and pepper to add flavor and tenderize the meat. It is then fire-grilled, hand chopped, for our 5 delicious carne asada entree items: the burrito, the tostada, a taco, quesadilla, and a wet burrito, each offering a fresh take on an El Pollo Loco menu classic.

Similar to shrimp, we currently plan to include carne asada on our menu for multiple modules. While the carne asada promotion and underlay represents an incremental food cost investment, it represents the first time we showcased three different proteins on our menu at the same time. While we are still in an extended test and assessing the overall impact on the menu and mix, we are optimistic about what we believe to be a long-term opportunity to expand our menu, including the (inaudible) to include shrimp and/or carne asada as full-time menu items.

At the end of the month, we'll be rolling out our hand-carved chicken salads. Each of our four salad options -- Southwest bacon, mango avocado, Mexican Caesar, and avocado cafe -- will be prepared with delicious ingredients, like fresh gourmet greens, hand-sliced avocados, cotija cheese, and grape tomatoes. The best part, however, will be the freshly grilled, freshly sliced, off-the-bone whole chicken breast on top. Our hand-carved salads are yet another example of the breadth and depth of our offerings.

In addition to providing our guests with food that they are craving, we strive to provide them with an enjoyable experience, whether they're dining in, taking out, or driving through. As such, we are implementing and testing a number of initiatives to enhance the customer experience and ensure optimal efficiency and speed. At the end of April, we completed the roll-out of our pagers to all Company-owned restaurants. The pagers will notify dine-in and take-out customers when their orders are ready for pickup. Not only do pagers improve our customers' experience, but they also allow us to better monitor our store operations.

In addition to pagers, we are testing several back-of-the-house initiatives to drive efficiencies, higher throughput, and faster speed of service. These include revised peak-period labor deployment, simplified product builds, and a new layout for our center line. All of these are in test now and expected to roll out in May and June. In an effort to go even further in driving efficiencies and service, we'll be testing a new back-of-the-house layout later this year. These are all exciting initiatives designed to further enable our employees to deliver great food with great service.

Switching to development. Our pipeline continues to be robust and positions us for 8% to 10% unit growth over the long term. We opened 1 new Company restaurant during the quarter and remain on track to open 16 Company-owned restaurants and 11 franchise restaurants, for a total of 27 new restaurants during 2015.

Our restaurants in the Houston area continue to perform very well and our initial success in Houston has further bolstered our confidence in our ability to drive outside our core Southern California market. In addition to the 6 to 8 additional restaurants we plan to open in the Houston area this year, we have signed 2 LOIs in our next Texas market, Dallas, for restaurants to open in 2016.

We continue to actively pursue Company and franchise development in a number of other Western markets. As many of you may have seen, during the first quarter we signed a new franchise development deal for the Salt Lake City area. The development deal was made with three existing franchisees and one new franchise partner to open five restaurants by 2018, which will bring our Utah footprint to seven restaurants. Further, we continue to hold active dialogue with a number of existing and prospective franchisees regarding additional new unit development agreements. In fact, we reached an agreement in principle earlier this week with a prospective franchisee to develop with us in the Dallas market.

All of our new restaurants are opening with our hacienda design, and we continue to remodel our existing restaurant base with the new design, which showcases a more modern and inviting dining experience within our restaurant and is a better representation of our elevated brand positioning. Through the end of the first quarter, we've completed 227 remodels system-wide, or roughly 55% of our restaurant base. We 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 first-quarter results and our 2015 guidance. Larry?

Thanks, Steve.

For the first quarter ended April 1, 2015, total revenue increased 11.1% to $90.4 million, from $81.4 million in the first quarter of 2014. The increase in revenue was largely a result of an increase in Company-owned restaurant sales, which rose 11.2% in the first quarter, to $84.7 million. Our Company-owned sales growth in the first quarter resulted from the contribution of 12 new Company-owned restaurants opened during and subsequent to the first quarter of 2014, combined with a 3.5% increase in comparable restaurant sales. The comparable restaurant sales growth was comprised of a 3.4% increase in average check and a 0.1% increase in traffic.

Note that the comparable restaurant sales growth was negatively impacted by the timing of the New Year's holiday, which reduced same-store transactions and sales by approximately 60 basis points for the quarter. Franchise revenue increased 9.2% year over year, to $5.7 million, largely due to an increase in franchise comparable restaurant sales growth of 6.2%.

Turning to expenses. Food and paper costs as a percentage of Company restaurant sales increased by 50 basis points year over year, to 32%. The increase was driven by higher commodity costs, partially offset by the price increase taken in the second half of 2014 and the first quarter of 2015. For 2015, we still expect overall food and paper inflation to run 2.5% to 3%, as higher chicken prices, which we have locked in for 2015, are partially offset by favorability in other commodities.

Labor and related expense as a percentage of Company restaurant sales increased 20 basis points year-over-year, to 25.5%. The increase in labor expenses was driven by higher workers' compensation and health insurance claims activity, partially offset by leverage on management labor costs. As we mentioned on the last call, we had an unusually high number of group health insurance liability claims during the first quarter. As a result of these claims, we saw a $240,000 impact to the quarter in labor and related expenses, and $110,000 to G&A. We anticipate the remaining $300,000 impact in the second quarter, again split between labor and G&A.

Occupancy and other operating expenses as a percentage of Company restaurant sales improved by 90 basis points year over year to 20.2%. The improvement was driven by leverage on higher revenue partially offset by Houston advertising expenses, increased rent on new stores, and higher credit card fees due to higher credit card receipts. General and administrative expenses increased by $900,000 year over year in the first quarter to $7.5 million. As a percentage of total revenue, G&A expenses increased 20 basis points, to 8.3%. The increase was driven by higher medical costs due to the aforementioned higher medical claims activity, as well as by incremental public company costs, partially offset by leverage on strong sales growth.

Depreciation and amortization expense increased to $3.1 million from $2.6 million in the first quarter last year. As a percentage of total revenue, depreciation and amortization increased 30 basis points year over year. The increase was primarily driven by our new store development, as well as by our accelerated remodeling program. For the full year, we continue to expect depreciation and amortization expense to be between 3.7% and 3.9% of Company revenue.

Interest expense decreased by $4.4 million year over year to $1.2 million from $5.6 million in the first quarter of 2015. The decrease is largely due to the payoff of our second lien credit facility with the proceeds of our IPO in July of 2014, lower interest rates associated with our December, 2014, refinancing of our credit facility, and the $15 million of payments on the revolver in the first quarter.

During the first quarter, we incurred a charge of $300,000 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 tax savings realized as a result of utilizing our pre-IPO net operating losses and other tax attributes. We recorded a provision for income taxes of $4.7 million in the first quarter of 2015, reflecting an estimated effective tax rate of 41%. This compares to a provision of $400,000 in the prior year first quarter.

We reported net income of $6.8 million, or $0.17 per diluted share in the first quarter, compared to a net income of $5.5 million, or $0.18 per diluted share in the year-ago period. Weighted average diluted shares outstanding were approximately 38.9 million for the first quarter of 2015 and 30.2 million for the year-ago period.

To account for our 2014 IPO and changes to our capital structure, we have calculated pro forma results, including net income and basic and diluted share count as if the IPO had occurred at the beginning of 2013. To arrive at pro forma net income, we have made adjustments for the elimination of management fees from our sponsor, credit facility interest expense, 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 have 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 $7.1 million, as compared to $5 million in the first quarter of last year. Pro forma diluted earnings per share were $0.18 for the first quarter this year, compared to $0.13 in the prior year period. We have used a diluted weighted average share count of 38.9 million shares for the first quarter of 2015, and 38.4 million shares for the year-ago period, which reflect our shares post-IPO.

In terms of our liquidity and balance sheet, we had $8.6 million in cash and equivalents as of April 1, 2015, and $150.8 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 borrowings under our credit facility. We expect our capital expenditures to total $34 million to $37 million for the full year 2015.

Turning to our 2015 guidance. We are reiterating our 2015 pro forma diluted net income per share expectation of $0.67 to $0.71. This compares to pro forma diluted net income per share of $0.55 in 2014. Pro forma net income guidance for 2015 is based in part on the following annual assumptions: we continue to expect full-year system-wide comparable restaurant sales growth of 3% to 5%. That said, we do not expect our comparable restaurant sales increases to be evenly split among the remaining three quarters of 2015. During the second quarter, we will be lapping a record high average unit volume quarter as a result of two of our most successful promotions, while simultaneously conducting extended tests of alternative proteins. As a result, we will expect our second quarter comparable sales to be closer to the low end of the range.

We expect to open 16 new Company-owned restaurants and expect our franchisees to open 11 new restaurants. 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. We expect adjusted EBITDA of between $66.5 million and $69.2 million. And we are using pro forma income tax rate of 40.5%.

With that, I'll turn the call back over to Steve for closing remarks.

Thanks, Larry.

We're excited about our 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 the four pillars of our brand: high quality food, compelling value, excellent service, and a warm and inviting atmosphere. Our steadfast focus on these four pillars positions the brand well for the future, supporting our continued growth through increasing comparable restaurant sales, expanding the restaurant base, and enhancing restaurants' operations.

Thank you for joining us today. We appreciate your interest in El Pollo Loco, and we'd be happy to answer any questions that you might have.

Operator, you can now open it up for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session.

(Operator Instructions)

Our first question is coming from the line of David Tarantino with Robert W. Baird and Company. Your line is now open. You may proceed with your question.

Hello. Good afternoon.

My question is on the comp trend that you saw in Q1 and that you're pointing to in Q2. And while I realize it's still within the boundaries of your plan for the year, it is slower than what we've been used to seeing from you, and was just wondering if you could comment on why you think the trend line slowed versus what you saw in the prior quarters into Q1 and now in Q2?

Well, as Steve mentioned -- or as Larry mentioned, actually -- Q1 2015 overall, our sales were strong. We had in Q1 our highest AUP, which is kind of impressive, given that we have January seasonality involved in that. The drivers within the quarter, David, were really shrimp and tostadas. We saw those come in in period 2 and period 3 and we began to see momentum build through the quarter with those.

Some of the things that weighed on the fourth quarter -- excuse me, on the first quarter -- was, as Larry had mentioned, the New Year's Eve timing, New Year's timing, where the gain fell into prior year and the pain fell into this year. He mentioned there was a 60 basis point hit on comps for that.

But also the Under 500 line, we focused on our shrimp and moved away a little bit from the Under 500 line and that was a little bit of a drag, as well. We happen to be restaging that line in June, and we believe we'll get back up to the strength that it had in the quarter of last year.

Remember, again, how successful that line was in Q1 of 2014.

One clarification question on Q2. When you are saying that you expect comps towards the lower end of your full-year plan, does that apply to system comps, or is that Company comps, or both? Could you help us understand that?

That is a system comp range.

And would you expect Company comps then to be below that level?

(Multiple Speakers) -- below that. And the one thing, David, as we moved into -- as Ed highlighted, we actually had growing momentum through Q1 with shrimp and tostadas. In Q2, things have started out, they were looking pretty good and then we moved -- we decided to test the alternative proteins. So we added shrimp in. And we really wanted to get a feel for carne asada as we brought it in. So we actually brought carne asada in a bit earlier and it will remain as an underlay through the next module.

But what we saw was the higher price point of carne asada and shrimp together, we think may have had a bit of an impact on customers. So we're really still reevaluating this. We think long-term, both shrimp and carne asada are players. Shrimp was very, very strong. Carne asada is mixing very well. But it's trying to figure out from a value pricing standpoint the interplay of carne asada, shrimp and the rest of the menu.

David, based on the success of shrimp, we decided that we would move carne asada up. So they literally overlapped four or five week period of time, which means our menu skews a little bit more to check than it does to transactions. So we're assessing the impact of that. We're still in that second quarter.

But I will tell you this. They both mix very, very well. You will see shrimp back again in our module six, which starts in July, and we'll also look to bring steak back in 2016. It's really about when we look at this, this is really about sequencing and pacing these proteins as we bring them in over time.

David, this is Steve.

We also want to get a look, like we did with shrimp, throughout the whole menu. We're going to do that with the carne asada in a couple of weeks. It will go from an LTO to being offered on all the menu items, and we need to see how that's going to play out, as well. We're excited about that in just a couple of weeks, as well as our, as I mentioned in my opening, the hand carved chicken salads, which start in a couple weeks, as well.

Great. Thank you very much.

Thank you, David.

Thank you. Our next question is coming from the line of John Glass with Morgan Stanley. Your line is now open. You may proceed with your question.

Thanks.

Could I follow up on that and understand, is there a dynamic you're seeing that there's some price resistance in the higher price points? Remind us where the price points of the shrimp and the carne are versus the core chicken products. And is that the issue, or is it more that people were just confused about the messages you were getting, a couple different LTOs at once, and maybe that wasn't generating as much incrementality?

It's more of the second one, John. We would normally, as we would phase these in, we would sequence them over time. We would seed the shrimp. We would grow the shrimp. And then either 9 months to 12 months later, we would then bring the steak in after that.

So I think it was a little bit more of they both converged together. As a result, the visibility of value on our menu is not as strong as it used to be, at least for that five-week period of time. Our value scores, though, are still high.

Value scores remain still one of our best attributes.

You might see a phasing more like this, John, more like this would come back in in module six, in the July period. And you might see a steak come back here somewhere maybe mid-year of 2015, mid-year, second to third quarter of 2016.

The thing, as Ed highlighted, the shrimp promotion performed extremely well, even as it ran under the menu, as we call it. We had a 7% shrimp mix, which was really our highest in -- last year, it was 6.6%, then 6.4% the prior year. So we're very pleased with that. And then really wanted to understand how we lay the steak in on top of it and then coming up under the line, we call it.

It's really like the marketing communication thing. There's success with the steak. There's success with the shrimp. And how are we going to express that and balance that within our menu, as we move into the back end of this year and into 2016.

And then just thinking about the back half, comps were very strong in the back half. When you talked about high volumes this quarter and last quarter, you're going to face even tougher year-over-year challenges. Are you changing the way you're thinking about how you're going to promote products to deal with those tougher laps, or do you think this kind of resolves itself when you stop having multiple messages?

I think we move to more focused message as we come out of this, the middle of this second quarter, as we get more focused. The reason why I'm excited about the back end is our hand carved salads, which will come out in another week, as Steve said. Our signature salads, if you remember, did extremely well last year. These are actually better salads in and around the neighborhood of the same price points. The hand carved salad, we carve off the bone and we slice it, we put it on the salad.

This is a whole new platform for us. So we're going to watch how that works. And you know how we test live, right, John? We test live. We understand how it performs in a five-week window. And then we bring it back in and we understand its role, either in the back half of this calendar or into the 2016 calendar. But the way that we do this chicken, this is a whole new platform for us and could literally extend to a bunch of different spots on the menu, like bowls, for example.

And if I could just sneak one in. Larry, the labor line, I appreciate there was those costs, one-time costs. But without even backing that out, it was flat year-over-year, labor. Is this just the way it is now, in that you've got minimum wage increases, not only, I guess, in California but some other states came in around the first or the year, or is there anything else you'd point to this quarter around labor that made it less leverageable than it had been in the past?

In terms of core, the labor, really if you look year-on-year and if you stripped out the group insurance, it was flat year-on-year. So we did a nice job managing labor. It came in right where we expected, absent the insurance. We think balance of the year, we don't expect to see any surprises on labor, so we expect to come in just as planned. And again, we've given the overall margin range of 21.7% to 22%, and we feel confident we're going to be in that range. So feel good on labor.

And then just on food costs, obviously, there's the three elements. We had inflation. The pricing benefit was comparable to inflation. And then we also did have on the calendar with shrimp and the mix on shrimp, that drove some of the food costs up. So as we're doing alternative proteins, you'll see those cost of goods sold bounce up a little bit.

But again, we always plan our calendar on the full-year basis, and so back half of the year, we expect those food costs to come back in line. And so for the full year, we'll be in good shape, and again, within that margin range.

Thanks very much.

Thank you, John.

Thank you.

(Operator Instructions)

Our next question is coming from the line of Andy Barish with Jefferies. Your line is now open. You may proceed with your question.

Hello. Couple more comp questions. Just calendar wise, did the earlier Lenten season by a couple weeks impact the 1Q to any discernable degree? And then what was the realized price in your check average lift in the 1Q, as well, please?

2.7%. And we took about a 1% increase in period two, in February, and that was on top of the (Multiple Speakers) balances up.

Lenten, we didn't have any impact with Lent different than what we've seen in previous years.

Okay. And then just looking out to 2016 on pipeline real estate build, how comfortable are you there on continuing to see this accelerating unit growth that you've been putting in place?

Andy, we feel very good about our 2016 pipeline, especially confident on the Company side. It's filled very nicely, especially in the Texas market, both in Houston, where, as you know, we'll open this year another 6 to 8 units beyond the 3 that are opened. Again, Dallas, we've got 2 LOIs already signed. We think we'll have 5 to 6 openings in Dallas in the first half of next year. And also, as I mentioned in my comments, we've reached an agreement in principle with a franchise partner for a portion of Dallas, as well.

So we feel very good on the Company side. And the franchise side is building nicely, with both new franchisees, like I just mentioned, and existing franchisees. In fact, in Salt Lake, we've added an existing group that's going to take North Salt Lake and an existing group is looking at South Salt Lake, as well. So we feel confident on the pipeline, especially on the Company pipeline.

Thank you.

Thank you. Our next question is coming from the line of Sharon Zackfia with William Blair. Your line is now open. You may proceed with your question.

Hello. Good afternoon. A follow-up question on the dynamics in the second quarter. Did you, prior to rolling this out system-wide, did you test shrimp and carne asada concurrently prior to this?

No, we had not tested it. We tested it last year, but not -- we didn't test them concurrently. We ran them last year as LTOs, LTO tests. This year, we ran them as extended tests, which are going to last 8 to 12 weeks. Again, based on the success of the shrimp, we decided that we would move that steak up and get a look at, for a five-week period, get a look at that steak over shrimp to see what the impacts would be.

Okay. Trying to think through that, because this is kind of a first in 15 years of following restaurants hearing about two proteins together impacting sales. And I mean, I don't want to beat a dead horse, but the presentation, I mean, is there -- if you move forward and you're moving to a multi-protein platform permanently over time, is there some way to present this to emphasize the value without alarming the customer base?

Yes, I definitely think there is. Again, a lot of this is, when we put it out there, we see acceptance via mix. This is going to be a marketing communication story, not a product story. And it's going to be a sequencing story. So when you put shrimp out, you're going to put out a higher price point. You're going to want your consumers to get used to that over a period of time.

And really, the expression of shrimp this year even on our menu versus what it will look like next year will be a little bit different. So we will have more balancing in here. We'll have a different look on the menu. We'll have more balancing in here for entry level price points which, I think, got squeezed a little bit when both of the proteins came on.

Okay. And then on the -- I guess shifting topics -- unit productivity did look really healthy in the quarter. Steve, anything you want to talk about in terms of the new units and what's going on there?

On the productivity, did you say?

Yes.

-- labor, et cetera.

No, I meant sales productivity. So if you impute new unit productivity from a sales per unit basis, it looked like it was better than any of us were modeling. So anything you can talk about with the newer stores that are opening.

If you look at the 2014 unit builds, Sharon, those are -- they're all performing -- the vast majority are performing very, very well, actually. And those that may be slightly below are actually still performing well. So those are doing well, very happy with 2014 builds overall. Like Steve highlighted, Houston, again, we continue to be very pleased with performance. And then from a productivity standpoint on those 2014 builds, we're pleased with, again, the sales and the margins being generated overall across those units.

What I call the class of 2014 was very good, both on top line and how it's flowing. We feel good on that and we feel good on the line up that we have for 2015.

Great. Thank you.

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back over to our management team for any closing remarks.

Thank you, Operator. Thank you, everybody, for joining us today and we look forward to speaking with many of you in the coming months. Have a good evening.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.