LOCO
#Thank you, Operator, and good afternoon.
By now, everyone should have access to our second quarter 2016 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 expect to file our 10-Q for the second quarter of 2016 tomorrow and will 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 an 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 <UNK> <UNK>.
Thanks, <UNK>.
Good afternoon, everyone, and thank you, all, for joining us on the call today.
We are pleased to report 2016 second quarter results that included our 20th consecutive quarter of system-wide comparable store sales growth and pro forma net income of $0.19 per share.
More importantly, we believe our second quarter results displayed continued progress as a result of the value, operational, and service initiatives that we have implemented during the past year.
System-wide comparable store sales increased 2.4% including a 2.7% increase at franchise restaurants and a 2.0% increase at Company-operated restaurants.
We're particularly pleased that transactions at Company-operated restaurants increased 2.7% during the quarter and believe this is an indicator that we are making headway with our more value-focused guests and heavy users.
Restaurant contribution margin for the quarter was a healthy 22%, which was 40 basis points better than the second quarter of 2015.
The primary driver of margin performance was lower food cost driven by commodity deflation and a favorable marketing calendar which more than offset higher labor costs.
As we discussed last quarter, sales continue to run below our expectations in Houston.
While the soft Houston economy is likely a headwind, we are focused on building a deeper relationship with consumers to drive repeat purchases and build frequency.
To that end, we are enhancing our local store marketing initiatives including focusing our efforts on our core menu offerings.
On the operations side, we are adding employee training resources to improve our customer service and better educate customers about our food.
We believe that as we continue to attract new customers in our restaurants and they experience the taste and the quality of our food, we can turn them into repeat customers.
It's also important to note that the things we've learned with regard to our entry into Houston will be valuable as we enter new markets in the future.
Switching now to development.
During the second quarter, we opened two new Company-operated restaurants.
Additionally, franchisees opened three new restaurants including our twelfth El Pollo Loco in Houston.
For the full year 2016, we continue to expect to open 17 to 20 new Company-operated restaurants and expect our franchisees to open between 10 and 15 new restaurants.
We remain pleased with the progress of our development plan in Dallas where together with our franchise partner we expect to open approximately seven restaurants this year, including two that are scheduled to open this month.
With regard to franchise restaurant growth, we remained focus on accelerating development and continue to seek new franchise candidates with the resources and capability to develop in new markets.
During the second quarter, we announced the signing of a development agreement with a new franchise partner, PLM Restaurants, who will open six new restaurants in the Tucson, Arizona, area by August of 2019.
In addition to opening new restaurants, PLM Restaurants completed the acquisition of two existing El Pollo Loco restaurants in the Tucson market, one of which was a Company-operated restaurant and the other a franchised unit.
PLM Restaurants currently operates over 80 Burger King restaurants, and we're very excited to have them join the El Pollo Loco system.
Finally, I'd like to provide a quick update on our new Vision prototype, a design that we feel better reflects the quality of our food and QSR-plus positioning.
We continue to receive favorable consumer feedback from our initial remodel in Fullerton, California, and plan to complete more remodels with a new design by early next year.
In addition, all new Dallas restaurants, both Company and franchise, will open with the new design as will all new Company-operated restaurants outside of Dallas which have not already begun the permitting process.
We expect to have a total of between 8 and 12 restaurants operating with the Vision design by the end of the year including new builds and remodels.
With that, I'd like to turn the call over to <UNK> for a detailed discussion of our second quarter results and 2016 guidance.
<UNK>.
Thanks, <UNK>.
For the second quarter ended June 29, 2016, total revenue increased 9% to $97.5 million from $89.5 million in the second quarter of 2015.
The growth was largely the result of the increase in Company-operated restaurant sales which rose 8.7% in the second quarter to $90.9 million.
This increase in Company-operated restaurant sales was largely driven by the contribution from the 18 new restaurants opened during and subsequent to second quarter of 2015 combined with a 2% increase in comparable restaurant sales.
The increase in Company-operated comparable restaurant sales was comprised of a 2.7% increase in transactions offset by a 0.7% decline in average check.
The decline in average check was the result of a 1.4% increase in pricing offset by 2.1% in unfavorable mix, which was largely anticipated as we [left] last year's higher priced Carne Asada promotion and remain focused on delivering great value to our customers.
Franchise revenue increased 12.2% in the quarter to $6.6 million from $5.9 million in the second quarter of 2015.
This increase was driven largely by the contribution from nine new restaurants open during and subsequent to the second quarter of 2015, comparable restaurant sales growth of 2.7%, and higher revenue related to our point of sale system.
Turning to expenses.
Food and paper costs as a percentage of company restaurant sales decreased 270 basis points year over year to 29.7%.
The improvement was predominantly due to lower commodity costs, particularly lower contracted chicken prices and favorability in our promotional calendar.
As a reminder, for the remainder of the year prices for all of our chicken needs are locked in, and we expect commodity deflation of around 4% for the year.
Labor and related expenses as a percentage of Company restaurant sales increased 160 basis points year over year to 26.8%.
The increase in labor expenses was primarily driven by increases in California minimum wage and incremental labor required [for] 11 restaurants opened in the fourth quarter of 2015 and 5 restaurants opened during the first half of 2016.
Occupancy and other operating expenses as a percentage of Company restaurant sales increased 70 basis points compared to the prior year second quarter to 21.5%.
The increase was primarily due to rent expense on new and renewed restaurant leases and the incremental cost related to opening new restaurants in the fourth quarter of 2015 and the first quarter of 2016.
General and administrative expenses increased by approximately $1.9 million year over year in the second quarter to $8.3 million.
As a percentage of total revenue, G&A expenses increased 130 basis points to 8.5%.
The increase included $340,000 of legal costs related to the securities class action litigation.
Excluding costs associated with the securities litigation, G&A expenses in the second quarter of 2016 would've increased approximately $1.5 million or 100 basis points as a percentage of total revenue.
This increase resulted primarily from increases in headcount, a higher accrual for the Company's annual bonus program, restaurant pre-opening expenses, travel expenses, a dead site cost associated with new restaurant location the Company chose not to continue pursuing.
Depreciation and amortization expense increased to $4 million from $3.2 million in the second quarter of last year.
As a percentage of total revenue, depreciation and amortization increased 50 basis points year over year.
The increase was primarily driven by our new store development, as well as by our remodeling program.
Prior to our IPO, we entered into a tax receivable agreement that 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 attributes.
We recorded a provision for income taxes of $5.3 million in the second quarter of 2016 reflecting an estimated effective tax rate of 42.4%.
This compares to a provision for income taxes of $5.1 million in the prior year second quarter.
We reported GAAP net income of $7.3 million or $0.19 per diluted share in the second quarter compared to a net income of $7.2 million or $0.18 per diluted share in the year ago period.
In addition to our GAAP net income, we have calculated pro forma results adjusting for one-time or unusual items.
To arrive at pro forma net income, we have made adjustments for expenses and gains on the recovery of insurance proceeds related to a fire in one of our restaurants in 2015, expenses associated with the tax receivable agreement, gains or losses on disposable assets, asset impairments, closed store costs, gain on disposition of restaurants, professional fees incurred as a result of the block trade of 5.96 million common shares in the second quarter of 2015, and legal expenses associated with a securities class action lawsuit.
We've added back a provision for income taxes and (inaudible) a 40% 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 cost structure.
Accordingly, pro forma net income from the quarter was $7.6 million as compared to $7.4 million in the second quarter of last year.
Pro forma diluted earnings per share were $0.19 for the second quarter of 2016 compared to $0.19 in the prior year period.
In terms of our liquidity and balance sheet, we had $9.5 million in cash and equivalents as of June 29, 2016 and $117.1 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 continue to expect our capital expenditures to total $35 million to $39 million for the full year of 2016.
Turning to our 2016 guidance, based on current information, we are updating our guidance for fiscal 2016.
We now expect pro forma diluted net income per share of $0.68 to $0.72.
This compares to pro forma diluted net income per share of $0.71 in 2015.
Our pro forma net income guidance for 2016 is based in part on the following annual assumptions: We expect system-wide comparable restaurant sales growth to be in the low single digits.
We expect to open 17 to 20 new Company-owned restaurants and expect our franchisees to open 10 to 15 new restaurants.
We expect restaurant contribution margin of between 20.8% and 21.2%.
We expect G&A expenses of between 8% and 8.2% of total revenue excluding legal expenses related to securities class action litigation.
We expect adjusted EBITDA of between $67 million and $69 million, and we are using a pro forma income tax rate of 40%.
With that, I'll turn the call back over to <UNK> for closing remarks.
Thank you, <UNK>.
Let me close by saying that we continue to focus on delivering against our four brand pillars: great food, excellent service, a warm and inviting atmosphere, and a good price.
We believe this will strengthen the foundation of our business and drive results over the long term.
Along these lines, despite a challenging external environment, we continue to see improvement in our core business driven by the value, service, and operations initiatives that we have put in place during the last year.
In Houston, we are very focused on driving trial and continuing to educate consumers about our great food as we look to steadily grow our user base and increase frequency.
Lastly, our development remains on track, and we continue to make progress attracting new franchisees with the skill, resources, and capability to partner with us in our future development.
Thank you for joining us today.
We appreciate your continued interest in El Pollo Loco, and we'd be happy to answer any questions that you might have.
Operator.
Yes, <UNK>.
So, versus last time, like I said, we had a pretty solid second quarter but as I look out the balance of the year, we still expect that we will be making greater incremental investment in Houston and Dallas.
They're probably the biggest drivers of why we dropped both the margin and the EPS estimates.
As we look out ---+ I mean, as we've highlighted the Houston restaurants, sales are still below our target but we've made a decision here that the one thing we're not going to do is cut back on labor and some of the other expense items, so we're going to continue investing and make investments in labor and even on the food cost line.
As we look to bring customers into our restaurants in Houston, we decided we're going to be a little more aggressive in how we do that, so that's an investment on the food cost line.
So when we look at that and then the idea that we'll probably translate that and do some of that also in Dallas, as we enter Dallas, those are really the biggest drivers of why we dropped our full year EPS and margin percentages.
From the Q1 forecast, not really, no.
Yes, sure, <UNK>.
Glad to.
Recently, we've implemented a number of actions really to drive trial and have deeper relationships with the consumer: driving repeat purchases and build awareness.
To that end, we focused on kind of switching our direct mail.
We've increased the circulation to help build awareness.
We're sending it out to a larger area around the restaurants, and also it's focused on the menu comprehension and inducing trial.
We shifted our media spend to a highly-targeted social media advertising, and we think that's the future.
We've also added upgrading of field marketing position as well as our calendar as now we're focusing on the core menu items in Houston versus focusing on the LTOs.
So those are just a few, <UNK>, of the things we've done, but as <UNK> mentioned, we're continuing to give Houston that support on labor to ---+ when people come in and the trial is there we're doing sampling programs.
So, they have a great experience.
[We'll continue using] that support a little bit longer out after the store is open from their initial increase labor for training.
So, we see that as a positive, and we'll also include that into Dallas where we feel very good about the Dallas, which we think the economy there is stronger.
Probably open, as we mentioned at the beginning of the call, seven units this year along with our franchise partner, the Harper Group, so we think that will be stronger there.
Yes, <UNK>, obviously as you've said, it's early.
But certainly we are feeling pretty good about the situation.
I mean, I think corn actually hit a ---+ certainly year over last ---+ a lower last year and I think it was even low over the last two years, so with corn prices at a very low point at this point, and certainly we see chicken supply looks to be pretty good.
I think we feel good about entering into 2017 that we'll see ---+ I mean, I'm cautiously optimistic that we'll be flat on the chicken front plus or minus 1%, but you'll certainly feel pretty good about where we are right now on chicken costs heading into next year.
This is <UNK>, <UNK>.
We're ---+ as you know, we use Market Force and monitor that very closely.
We're seeing continued strong scores both Q1 and through Q2.
Also our NPD metrics for Q1.
We haven't gotten our Q2 metrics yet, but we're very strong as well.
So we continue to focus on all of those, including last visit excellence.
We monitor some of the initiatives that we did last year to improve speed of service on the inside.
Those seem to be resonating with consumers ---+ monitoring drive-thru speed, which are improving our LVE, last visit excellence.
Well, mix is basically flat right now given our promotional calendar.
Now, our transactions, as we mentioned, are positive and continue positive into the first part of the third quarter, and then, of course, the pricing that we took.
Hey, <UNK>, in terms of mix, what really drove the mix differential year on year was the fact that last year remember we were promoting steak with an underlay of shrimp, both of which were at significantly higher prices, and so when we last [add] that was a mix impact of this year.
As I look out at the next couple quarters, I expect mix to be flat to slightly negative, so you're not going to see another Q2 in terms of mix in Q3 and Q4 because, again, our promotional items are pretty ---+ are much more similar versus this year when we had what we promoted versus steak and shrimp last year which, of course, were very high check items.
And as <UNK> just highlighted, one of the things we wanted to bring out was we talk about transactions and the fact that we feel great about the 2.7% transaction growth, and what we're seeing so far in Q3 is we are again positive to date on transactions and expect to be positive for the quarter in transactions.
Yes, just to add to that on price, <UNK>, we're currently at 1.5%.
We took 70 basis points in April, and that was on top of an eight-tenths of a percent increase last November, and we'll look at that again this November and determine what's proper.
No, we're very happy with the initial hacienda program that we started years ago.
In fact, 70% plus of the system is now either new in the hacienda or the hacienda remodel.
We did what we call our Vision design prototype in our Fullerton store here in California, and that was really the next phase of the design development.
It's really ---+ more reflects a QSR-plus.
Our positioning is really the inside matches what Ed and I talk about as the food now matches the quality of the food, and we're getting ---+ and we've done some research on it and we're getting very good customer feedback from the research that we've done.
We are going to have between 8 and 12 of those done either in new stores this year or remodel into the Vision design, and we're kind of, actually, at a lull in our ---+ we were kind of at a lull in our hacienda, the timing of our hacienda remodel, so this is really a perfect time for that.
All of the Dallas stores will be ---+ both Company and franchise ---+ will be in the Vision design as well as in any new Company store right now that is beyond ---+ that's not in permitting right now.
So, we look forward to that for the balance of this year and getting your input on that, but the initial feedback from the consumers is it's resonating very well.
Yes.
That is correct, and the biggest driver of that is a basically lower bonus.
Hi, <UNK>.
This is <UNK>.
You know, we think the California market seems to be holding well for us.
We've heard some talk that you're referring to, but if you look at the burger chains, you've got a lot of discounting going on in the burger chains and very competitive there, but we think we're ---+ our current strategy is right on and we believe that that's really what's delivering our results now and we believe over the long term because we think it really differentiates us, and a lot of the initiatives that we put in place last year focusing on speed of service, through-put, improvements in service aspect.
We've always had our food quality there, but really also being very cautious on price increases.
We think with kind of the hard work we did last year is resonating and holding very well for us this year.
So, we think the strategy's right and we think we're fortunate and, <UNK>, I'll let you add anything on top of that about the California consumer.
No.
I mean, we're not seeing it as we highlighted good Q2 on transactions.
Q3 continues at this point to be positive, expect to be positive, so maybe there's a headwind there, but I can't say as we can point to it as seeing it having a big impact on our transactions or sales.
So, I guess we're a little different than some of the concepts.
Yes, so as <UNK> highlighted, I mean one of the things we're really focused on in Houston is a driving trial, and so we are doing some I'll call it more aggressive discounting and things to get people in the restaurant to try our food.
Obviously when they try our food we believe they'll become permanent customers.
So, if I look at Houston in terms of magnitude of what we expect to run on food costs, I'm going to say it's going to be probably a 5 percentage point difference versus, say, our base business.
That kind of magnitude.
Thank you, Operator, and thank you, everybody, for joining us today.
We appreciate your following El Pollo Loco, and have a good evening.
