Ooh, that's bright!
I know. Thank you.
Those are really bright. My goodness.
It is bright.
Those lights?
Crazy.
That's what I hate about that-
Yeah
... when they get 'em right in your eyes. Yeah.
Yeah.
You feel like, it's like nothing compared to maybe, like, being on a TV set or something, but-
Oh, you're on.
Yeah, we are on.
Good morning, all. I'm Andy Barish, restaurant analyst at Jefferies, and we're pleased to have all the way from the West Coast, El Pollo Loco. Maria Hollandsworth is the interim President and CEO. Ira Fils is the CFO. This is a, for those of you that don't know, a flame-grilled chicken brand in the QSR Plus category, as we termed it a long time ago when we took it public. You know, growing and trying to move outside of its California roots, which we'll hear about as we go through the Q&A. I wanted to start out, Maria, with you. You're new, about a year to the company, a little more than a year, but November in your current role.
The board made some decisions to kind of make some changes with the previous CEO in November. Just give us a little background in terms of, you know, what you think the board was kinda looking for in making the change.
Thanks, Andy. Good morning, everyone. This was the decision of the board. We all heard last quarter's call that from our chairman when he said, he wanted to, they wanted to see changes, they wanted to see acceleration. And also for us to go back to where we used to be, the, what's special about us. And, you know, being in this position, it's my job to execute. That's really what I'm focused on right now.
Yeah, can you give us sort of the first 100 days of what you've, you know, really focused on? I mean, there was a lot of, a lot of work that had been going on in the past year plus that you were involved with, with Larry. Has that changed in your, you know, your first 100 days in the new role, or is it kind of like, let's really stay focused on these three or four things and, and, you know, and then move forward?
Sure. I'm six weeks in position right now, and so, what I've been really focused on is I've been working with my leadership team on our annual operating plan. A lot of details on that. We've also been working on culture, reinforcing the culture of recognition and accountability, which, you know, really, Larry started last year when it comes to recognition. You know, just looking at going forward with our strategic plans, do we have the right people who will help us execute our strategies? In addition to that, we've been focused on looking at our development strategy. Lots of things there. You know, thinking about embedding a culture of unit economics first to drive our development.
Things like lower cost prototype to mitigate the cost of building restaurants, that kind of stuff that we're looking at right now.
If there were, you know, a couple of things for somebody new to El Pollo Loco in terms of the brand positioning and that special differentiation, as you mentioned earlier, could you give us a few of those that, you know, kind of really stand out?
Sure. You know, what really stands out about El Pollo Loco is our chicken. So we are going to continue to sharpen our focus on our chicken, mainly on the flavor as well as what's better for you, and the Mexican flavors that are attached to that. So that's the main one that really separates us from everyone else.
Yeah, there's a lot of chicken players in the industry, but I think where we really stand apart is our flame-grill. First of all, it's fresh, freshly prepared in the restaurant. We marinate it in-house, and so it you know, there's a higher quality ingredients and it's grilled, it's not fried. And so we have that, that those are some very strong points of differentiation, and then we surround that with the Mexican flavors, so.
And for those that aren't again totally familiar, just the average unit volumes, which are quite high, and sort of historical restaurant-level margins. Obviously, there's some stuff going on right now we'll walk through, but just you know give people a little bit of a historical framework.
Yeah, you know, historically, we've been an 18%-20% store cash flow margin concept. Really as late as 2021, we were 18% store-level margins. You know, 2022, we had some COVID impacts, and, you know, some high inflation as we moved into 2022. 2023, we saw some good margin recovery from where we were in 2022. We ran a 13% level, a 13% store-level margin in 2022. You know, as we moved here into 2023, you know, we've guided 15.5%-16.5%. And our AUVs, as Andy talked about, have remained strong. We're, you know, a $2.1-$2.2 million AUV brand.
So as we continue to work on our margin recovery, which we've seen, you know, great progress this year, combined with what Maria's been talking about as we, you know, kind of as we sharpen our focus on our prototype and our build cost, that's how we plan on, you know, improving the economics.
Is the roadmap to $2.5 million AUVs still something that is on the drawing board? Obviously, there's management changes and stuff going on, but is that a viable, you know, path to be heading towards still?
Absolutely. We're always going to look at ways to grow our AUVs and, you know, also as well as our margins. And lastly, you know, with the AUVs and the margins at a healthy pace of growth, we're going to see our units grow as well.
Yeah, let's shift gears for a few to the top line. I don't think you pre-announced, unless I missed something or pre-released, but same-store sales were modestly positive. The third quarter, October accelerated to about 3% for the system. Any commentary or thoughts around what how the year finished out?
You know, not really. I think just if you, if you just take a general step back, I think everybody's been pretty pleased, not just us, that the consumer, I think, has held up better than everybody thought. And so, you know, like I said, we didn't preannounce it, but, you know, I think the environment has been better than everybody's kind of expected a little bit. So, yeah.
Let's talk about, I guess, a little bit of the elephant in the room, AB 1228, about 75% of your restaurant base is in California. Obviously, split between company and franchise, but, a lot of the company-owned system. What, if any, decisions have you made at this point on pricing as we look out towards, you know, trying to mitigate, the impacts of that?
Yeah. So first off, we're going after it in two ways. Obviously, price is important, and we will be in the, you know, incrementally versus what we would have normally taken in the mid-single digits from a pricing standpoint. But what we're also doing, we're fortunate enough to have some various initiatives underway that we will be rolling out here early in the year to help mitigate labor. We are rolling out in-store ordering kiosks to our locations. We are simplifying our salsa making procedures, and we are installing dish machines in some of our restaurants.
I mean, we have those things that are done and are in rollout mode, and so we're using those initiatives to, to soften the impact of what we're going to have to take from a pricing standpoint, and we're looking for more. There's a handful of other labor initiatives that we're doing, that will help us take less price, I think, than maybe some of the other brands in California.
Got it.
We are also looking at our labor tables to see if there's any more efficiencies we can gather from that. Last week, we reduced our salsa count from two to one. We're now down to one salsa, and, you know, that has some savings and also, you know, improving the morale of our team members because they're having to make one instead of two types of our regular salsas.
Got it. And back to the top line on the key drivers for, you know, 2024, other than sort of the execution, operations, blocking, and tackling that you mentioned a little bit, how do you view LTOs as part of the program? You know, trying to create menu platforms instead of just complexity in the restaurants and thing. like that.
Yeah, we're going to have this menu platforms. We're going to build on the successful product line that we had through the years, and then probably we'll add some seasonal flavors to complement these, these products. We're also, you know, driving catering. You heard us talk about that last quarter, and so far we are thrilled on the progress we are seeing with our catering.
Excuse me.
Bless you.
Uh.
That, just going into that for a moment more, that was a relaunch in the fourth quarter. Is that focused on corporate or social or both? How did you kind of approach that relaunch of the catering business?
First, we took a look at what our offerings were and made sure that they were appealing to most of our of all of our customers, and then just started driving that, whether it's through our local, you know, our mobile app or even in the restaurants. Grassroots efforts, where our general managers and our area leaders of operations really going out there and introducing our brand to people who haven't been exposed to El Pollo Loco.
Yeah, and then just augmenting all those messages via social media, digital, and so forth, to help get that message out as well.
Got it. And you mentioned the fresh flame-grilled chicken, obviously the hero product, but you've had success, a lot of success, spring of 2022 with a beef launch. Birria was something you guys were ahead of the curve on in chain restaurant land, and it did very, very well. Really good product, great, great packaging and launch. How do you view beef today as a potential add-on protein, or something permanent on the menu? How are you kind of thinking about that?
Yeah, I think Birria was very successful for us. And as we move forward into 2024, we're really focused on our hero product this year. You know, really emphasizing chicken, because it is our point of differentiation. Now, we could... We're not going to have beef permanently, but we will augment it on the menu at certain times, when you might have a platform. It might help accentuate one of our platforms, for example, but it's not going to be the primary driver of what we think about from an LTO standpoint.
Got it. And I think you went through a revamp of the app and the loyalty program as well in the fourth quarter, a busy, busy period. How are the initial results or feedback from that looking?
I think we're doing... You know, what we're finding out from our app is we're able to do machine learning. So we're able to look at different segments of our customers and then personalize those messages towards the different customers and what appeals to them when it comes to our products.
What do you, do you have a digital percentage that you ended the year with, that you're willing to share?
Yeah, no, we've been around, you know, if you think about, we've been around 12%.
Yep.
It's pretty been level for a while, which is, you know, the two big things, about 8% delivery and about 4%, you know, ordering ahead through the app.
The family meal business is a really important part of your business, from best of my recollection, about 25% of the business or so. You made some pricing changes in that. It seems to be still a great value product. How are you thinking about that and value overall in the, you know, in the current consumer environment?
So I think what we've done and we're gonna continue to do is we'll have that one anchor price point right now with the $24 family meal. And then what we do is throughout the year to help keep it fresh, we'll like right now, we're offering an additional side with that, or the other thing that we had some success with is, like, you buy the eight-piece meal, and you can add on another eight-piece meal for $12. And so trying to keep a lot of value through the family meals is definitely an important platform for us.
Got it. You mentioned briefly some marketing changes, you know, broadening out to, you know, obviously, more of the social and digital. How does that progress as we move through, you know, 2024 and beyond?
Yeah, we continue to focus on targeting the younger groups, and so we're leveraging TikTok and YouTube
To help us keep that top of mind. And then also, we have some new products, like lately that we just rolled out a new menu board, so there are some add-ons there. We have this Shredded Chicken Crunchy Tacos that is appealing, and if you try it, it can be addicting. So, yeah, it's appealing to the younger generation because it's, you know, easy to eat as well as craveable.
Chicken Avocado Quesadilla.
And the menu board rollout, was that something system-wide, or is it at the beginnings, or where are you kind of on it? And is it a digital menu board, I assume, or?
It is system-wide.
Okay.
It's not digital on the exterior, but it is in interior.
Okay.
You know, we just rolled it out last week.
Yeah, last week.
Gotcha. And how much of the business is drive-through business these days?
About 55%.
Okay. Good. Getting back on the, just on the margin side, you know, putting the pricing into context, I mean, it sounds like, just from thinking through the numbers in my head, you're, you're trying to offset the dollar impact of, of 1228, but the percentage impact is, is harder to do. So, you're coming off at 16% or so at least, you know, the way it seems 2023 is finishing up. Again, I know you're not giving guidance, but how are you thinking about either is it protecting dollars or percentages at this point?
Well, we're trying to protect the dollars, but we're also doing, I think that what's important, we're doing a lot of other things beyond pricing-
Yeah
To help drive the margins this year, and that will enable us to not take a step back when we think about margins in 2024, and give us a great place to build off of as we continue to move into 2025.
You, you mentioned a couple of those, and I'm glad we're, we're circling back. On kiosks, I know it's early on, but is there a timetable as to how that progresses moving through 2024 in terms of the rollout to company-owned stores, franchise stores?
Yeah, I mean, we're getting ready to roll this out real soon, and we intend to complete the company rollout within this year.
By mid, we should be.
Yeah
By mid-year-ish, we should have the rollout complete.
Okay
... from a kiosk standpoint.
Okay. I know some of the early testing, you still have a fairly large cash component. That was an element that was kind of being debated. Where, where did things come out on, you know, on having a cash part of kiosk?
You know, for us, it was important. We do have a big segment of our consumer base that does still like to use cash, so we found usage much higher, and adoption, consumer adoption, much higher in the restaurants. We tested both without cash machines and with, and it was pretty clear that putting cash machines in was the right answer for us, and so that's what we're doing.
Okay.
Yeah, and we also tested the freestanding and counter, and the-
Sure
One on the counter works better for us, so that's what you're gonna see in our restaurants as well.
Okay. Okay. And then, do you think at this point, just given some of your, you know, cultural changes and operational changes, is that savings, let's say, one person who is at cash, you know, POS? Is that person gonna be reallocated, or do you start to get some labor saves off of that?
No, no, our plan is to really leverage those labor savings-
Okay.
to help drive the profitability of the restaurant, given, quite frankly, the pressure we're seeing in wage rates in California.
Yeah, and I think, I think you guys have, you know, publicly said, each labor hour per store per year is about $1 million of EBITDA across the enterprise. Are there some projections you're willing to share about sort of how you can get hours of labor saves across the system over the next couple of years?
Yeah, I think it's, you know, it, it's fairly significant, you know, when you think about what we're going to get from labor savings on a per store per day for the initiatives that we're rolling out from a kiosk perspective, and from simplifying the salsa production, from going from two to one and using a an easier-to-clean equipment. It. You know, it'll help offset anywhere from, you know, between that and some of the other things Maria was talking about, you know, a third to a half of some of the impact that we're going to see from minimum wage.
Got it. Helpful. And franchise growth has been a strategy. Can you step back? There's actually been some. And you mentioned some of the operational improvements and simplification to make the brand a little bit more, I'll say, accessible to new franchisees. Because historically, the brand obviously had great unit economics in California, but also a little complex in terms of the cooking of the chicken and the experience that a grill master needed and things like that. So, just talk us through some of the changes that if I were a new franchisee looking at the brand to franchise, I would see versus five years ago, maybe.
Yeah, so all the work we've been doing this past year on the initiatives, whether they're the kiosks or the salsa machine and even the dishwashers, I mean, they're all to improve both company and franchise operations. And, you know, while we talk a lot about the California restaurants, this will also be beneficial to franchisees outside of California because they will incur those savings that we are talking about.
Yeah, that's really key. I think that's a key point, because the labor pressures are much greater in California than they are outside of California. And as we're making the box more efficient and getting up and simplifying, when you translate that to the restaurants outside, and that's quite frankly where the bulk of our growth is, the economics are getting better outside of California. We might be keeping even inside California, but we're getting them better outside of California, which is going to help our growth.
Yeah, you know, and in addition, when we do these tests, our franchisees are included.
Sure.
So their feedback is always part of how we decide on what initiative to go forward with.
It's not like you're, you know, starting from just standing still. I mean, there have been a handful of new franchise agreements signed over the last 18-24 months in various Western markets, some with new franchisees, some with existing franchisees taking new territory. The company's talked about getting up to, you know, back up to 5%, I should say, unit growth, and doing that mostly asset light, I presume.
Yeah.
How many additional kind of franchise groups starting to open restaurants do you need to see over the coming years to kind of get to that, that 5% target?
Yeah, you know, 5% will always be a great goal for us. You know, I can't really talk about the timing of that. This year, in terms of our recruitment, we're going to see. You know, we got five in a couple of years, like you said, but more than likely, we'll be closer to five this year alone.
On new agreements.
Yeah.
Yeah.
Yeah.
Good. Good to hear. Have there been changes, you know, kind of made to sort of, you know, look at new franchise sales, communicating these operational, you know, simplification measures, smaller prototype, things that have sort of really, you know, started to hit home with new franchisees?
We actually have some, you know, really good communication materials, we were looking at as we're building our development strategy. We have some really good materials in place. Our goal is accelerate profitable development. That's where our initiatives will be behind in terms of how we're going to stay profitable when we develop our markets. That would include things like, you know, a lower-cost prototype and really responsibly investing in resources, whether it's people to help us drive this or tools that we need to put in place.
On the third quarter earnings announcement, you actually announced refranchising some restaurants. Can you kind of give us a background on that transaction? Is that you guys are sort of a bit of a hybrid in the ownership model, as you know, roughly split, you know, between company and franchise. Is that something you're looking at more closely, or is this sort of a one-off couple of situations?
Yeah, this was a very opportunistic opportunity. We had, especially for Houston, we had an existing franchisee who runs the San Antonio market for us, runs a couple stores in Louisiana, as well as stores in Arizona, and some in California. And they've had some history of improving performance in various markets, and they came to us and said: "Hey, we'd like to take Houston." And we thought that was. We thought it was a win-win for both them and us, as we're really expecting them to drive performance in Houston. And in regards to the California stores we refranchised, it was very opportunistic for us on our part to be able to sell some restaurants to some great franchisees of ours to continue to drive performance.
So we'll always look at that, what makes sense, be opportunistic as we think about refranchising. But the bigger point is, yes, as we think about our growth going forward, it will be franchise-led.
Gotcha. And then just finally in wrapping, company, partly because of the franchise system, partly because of strong AUVs and margins in the company-owned system, you know, generates $25-$30 million of free cash flow a year, depending on kind of where things shake out. What's been the primary use of that free cash flow, and are you comfortable with the balance sheet, you know, leverage at this point?
Yeah. Today, you know, we have $84 million in debt, you know, about 1.5, roughly, times. So very comfortable level of debt for us. And so our free cash flow, we've been, you know, we used it a lot during 2023, and I think in 2024, to repurchase shares.
Got it. With that, we have hit our time allotment. I want to thank Maria and Ira. Good conversation. Thank you.