Good morning, everyone. I'm Andy Barish with Jefferies. We're very pleased to have El Pollo Loco as our next presenter or fireside chatters. We're going to go through things. Liz Williams is to my right, the CEO. Ira Fils, to her right, CFO. El Pollo Loco is a Southern California-based company, and it would be kind of callous and remiss to not mention what's going on in Southern California, as we all know, and how we're thinking about everybody and sending our best thoughts and prayers and with that, Liz, I think, wanted to make a comment on that, but also then kind of jump into almost your one-year anniversary. So why don't we start out with that and kind of some feelings on where you are after a year at El Pollo Loco?
Yeah, thank you. And thank you for hosting us. And just echoing the comments, we're a California-based company, born and raised in LA. And we're all devastated. I'm pleased to report that all of our team members are safe, and we had very minimal impact to our team members. Our restaurants, also, believe it or not, we did not have any total destruction of any of our restaurants. We've had a couple here and there closed because of electricity over the last couple of days. I'm just proud of the way our teams come together. We've fed, I think, at last count last night, over 700 meals to emergency responders and growing every day and will continue to support. Our thoughts and prayers. Turning to the business, yeah, coming up on one year, time really does fly.
And as I came in, I had always loved the brand from afar. And I knew coming in, I was coming into a bit of a turnaround. And what surprised me in a pleasant way was the elements of the turnaround were a little different than what I originally thought. And what kind of turnaround this is, is a brand turnaround. But I was really excited because it is not a food turnaround. So many times people come into restaurant businesses and say, I've got to go fix the food or make the food better. And that is not the case. El Pollo Loco has some of the most delicious, revered food by our fans. People love our grilled chicken, our fire-grilled chicken. And really, I came in and learned, don't mess it up. Don't mess it up. Our food is delicious. So that was great.
And then from a business standpoint, I learned very quickly, we are a profitable business. We're throwing off a lot of cash. Now, were there some enhancements we could make? Absolutely. And was there some areas where we needed some attention? And we'll talk about today in the middle of the P&L, those areas we really jumped into in year one? Absolutely. And really, when I think about the margin improvement, that was the focus of year one. It was, hey, let's go and find the quick wins that we can get back to a business model that really works, and a business model that takes us back into those high teens in terms of margins, and a business model that franchise partners want to invest in to grow again. So that was the focus of year one of this turnaround.
And when I think about the turnaround, I say it's a three-year turnaround. Year one was, let's go get that profitability. Year two is all about the brand. And this is the heart of the turnaround. It is a brand turnaround. And so when I say brand, what I mean is, how do we make this brand more modern, relevant, youthful? And then how do we take innovation and value and really get sales and transactions humming again? Because that is the essence. Everyone wants to see the growth. And to get the new unit development, we need the business model and the profitability. We need the sales, transactions, and growth. And the development flywheel starts to go.
Perfect, and just one final overview, kind of you oversaw your first franchisee convention a few months ago. If you're willing to share kind of some of the themes and thoughts that came out of that as it flows into now 2025.
Yeah, one word, growth. That was the theme. And it was growth, both from getting sales and transactions going again, but also this new unit development. And we have some of the best franchise partners in the industry. They are hardworking, great operators, really loyal. They love this brand. And so many of them, as I came in, said, I want to grow. I want to open new restaurants. But Liz, you got to help me. You got to get the unit economics back where they need to be. And you have to reduce the build cost. It's crazy what we had been asking our franchise partners to pay for build cost. And so that's what we did when we announced a couple of months ago a new prototype aiming for $1.8 million, a new look and feel that, again, is more modern, more contemporary.
We reduced the size of the footprint as we realized a lot of business going through the drive-through, much more business going through delivery these days. You don't need to have as big of a dining room, and the franchise convention, everyone left with just this renewed spirit of, we're back and we're ready to grow.
Yeah, fun. You mentioned transaction growth. It's been a challenge for you guys. It's been a challenge for a lot of the industry in 2024. The big players in this industry are back doing value and discounting, kind of like we saw in the old days. And as a brand, obviously, you don't have the same marketing power, very dense in California. But how have you responded? And I know it's kind of come through a bit of a continuum. There were some attempts at discounting, some more focus on the premium products. And where are we kind of on that spectrum?
Yeah, you're exactly right. You have to be careful that it's not a race to the bottom, and although we did get out there with our $5 Pollo Loco, which in our advertising, we say it's food that you actually want to eat for $5, not just food we're throwing at you for $5, and it's a great spot. It showcases the beauty of our food, and consumers have responded to that. We also did the Taco Tuesday, two for $5. We realized, though, that value has to be throughout the menu, and our salads, we're running our Pollo Fit Bowl salads right now, and those are $10-$12, which is a great value compared to fast casual and casual dining, which are $15 plus, so it's putting those out there. It's also getting to innovation.
I'm a big believer in value and innovation have to go together when you want to drive transactions. And we're working on a calendar that has new products that we can bring out in that $7-$9 price point that are new news for the consumer, but also a good value. So I think you have to play value so many different ways. You can't just be, I guess, a one-trick pony.
To do that $7-$9 price point, is that kind of a gap in the menu that you've sort of focused on? Or are there existing products as well as the innovation that kind of fills that area of the price range?
I would say as we've taken pricing over the last year and a half, I think it's become an opportunity for us, and it's one of those where we have our burritos at $9.99, but if we can a quesadilla, as an example, just a delicious quesadilla using some of our salsas that we're known for, and with our homemade fresh guacamole, imagine if we can get that for a consumer in that price point in a combo. I think that would be a winner.
Ira, just weaving you in on pricing, obviously, California was in a unique situation last year, quickly raising the minimum wage to $20. Just how did El Pollo Loco respond on the pricing side? And then as that laps in April of 2025 coming up, how do you envision the 2025 menu pricing looking?
Yeah, so as we entered 2024, we realized everybody was going to have to take some price to compensate for the $20 minimum wage. So our thought process was, we will do the same so we keep our profitability neutral from minimum wage. And we did a great job of that. Our pricing for the year was about $7.75. And so as we think about that, though, as Liz has mentioned here, it has impacted transactions a little bit. And as we think about next year, as we're carrying forth a lot of price that we've taken this year into next year, we are looking at keeping our pricing very our price increase very moderate next year.
Got it. And anything you want to just circling back on the marketing and innovation calendar, again, the brand's been through some changes over a number of years now. Where are we sort of coming out in terms of number of windows? How are you supporting that from an advertising perspective, just kind of on a high-level basis?
Right. You know, I think it's the number of windows, but also the quality, and so as we came into 2024, our marketing windows were pretty much re-hits of products that consumers had seen before. We had walked away from some of our innovation. This last year, we brought in a new culinary leader, and as I look at our calendar for 2025, we have five marketing windows, and every single one of those is a new product that hasn't been seen or loved by consumers, so we'll start the year with Mango Habanero Chicken. So our bone-in chicken, we have not brought new news to our delicious Fire-Grilled bone-in chicken in years, so we all know how popular different flavor profiles are. That'll be fun. We have Fresca Wraps with a citrus marinade dressing later this year. We're testing a chicken sandwich, which will be interesting.
So there's a lot. You'll see a lot of innovation from us. And then your point of how do you get that communicated to the consumer? We're placing a lot of emphasis this year on that brand positioning. And at the end of last year, we went out and did an agency review. And we're pleased to announce that we'll be working with a new agency. By mid-year, we'll start to see some of their work, which I think will really help in repositioning the brand.
Good to hear. You got through or getting through kiosk rollout, which certainly has been quite popular in the industry over the last number of years for obvious reasons. What are you seeing in terms of that rollout? What's expected in 2025, whether it's on the sales side or the labor side? Or how should we kind of think about that?
Yeah, as we rolled kiosks out through this year, and we'll complete the rollout to our company restaurants in Q1. We have some of our franchise partners also rolling out through 2025. And we'll get about half of our system will have kiosks at some point this year. And so the benefits we've been seeing have been we wanted to make sure that the guests had time to absorb and understand how to use the kiosks. So we haven't pushed hard on the labor savings at this point in time. As we move forward into next year, we think we have a big opportunity to capitalize that from a productivity standpoint in the restaurants.
As well as we move into next year, we believe we have an opportunity to really work them from a sales standpoint and really upsell and sell the items that we'd like the guests to be purchasing.
Got it. So not really much of a labor save, just a kind of a reallocation of?
Yeah, no, yes and no. It's savings because we can then focus some of those to more sales-focused ideas and throughput.
And as the year goes on, you'll start to see more of that labor savings. And then the consumer benefit of order accuracy. And as we dial in the check increase, we're optimistic we'll see all three of those.
Got it. And as we were talking just on the way up, operations were something that you quickly saw some wins in. Do you want to give us one or two examples of kind of how retraining, restandardizing, all those kind of things have flown through the business?
Yeah, we have great operations. We have some of the lowest turnover in the industry. I learned when I came in that one of the things that we had walked away from over the years was some of our just standardization and just our attitude around standards as a franchise business. So we've reinvigorated that. We've relaunched that with our company and our franchise restaurants. We've put in a new auditing system for standards that we're just rolling out. And then we've done a lot of work around labor deployment. And I think we all share a strong belief in the industry. If you have aces in their places at the right time, speed magically happens and you get a better customer experience. And we're starting to see that as well. So I'm excited to see what that brings throughout the year.
Yeah, and I think you introduced a terminology that I didn't hear or haven't heard much of in the restaurant business, but total cost to serve, which I imagine includes a lot on the back end with procurement and things like that. So how has that holistically started to show up or will show up in 2025?
Absolutely.
I think that's what we'll see. That's what our upside is for us in 2025. We started a project mid-year. We brought in a third party to give us a little help to do exactly what you said, just look through our supply chain and really get a good understanding of what we're buying, who we're buying it from, and how we're using it in the restaurants to really make sure that we are optimizing the things we're buying versus the amount of work we're doing in the restaurants from a prep standpoint with the overarching concept that we're not deteriorating our quality or our standards or what the guests are actually going to see.
We have many projects that are in focus this year that we should see some gains next year that'll help us get to those margin goals that we've put out there of in that 18%-20% over time, but approaching 18% next year.
And we know if we invest in capital in the right places, we can also help make the team members' time more efficient so that they can be doing the customer service tasks. So as an example, we've invested in better salsa machines that help the team members make our handmade salsa that much faster in the restaurants, holding cabinets, which deliver a better flavor profile for our chicken, but also help the team member. So we're looking for those productivity enhancements that really get after the total cost to serve.
Yeah, you delivered really good margins about 20 in 2024, even with the California wage increase. 2025, you pointed to some growth approaching 2018, as you just mentioned. What do you need to or what range of traffic or comp do you need? Or are you implying sort of underlies that assumption?
Just in every like every year, you think about you want to be in that 2%-3% consistent growth rate over time. And so if we can achieve that, that'll give us the ability to meet our margin expectations.
Okay, helpful. On the growth side, I think there's first some opportunities on the existing fleet. You've talked about a full model, a remodel, and a refresh. Where are we in that? And how many units do you expect to get touched over the next year or two?
Yeah, so our remodel, we rolled out a new version of the remodel the end of last year. We got them built. You can see a couple of them in Southern California. And then this year, we'll touch about 40 of our corporate restaurants and about that number with our franchise partners. Over the next couple of years, we should touch about half of our restaurants just because there was so much deferred with COVID. And then this last year, we said, everyone pause while we get the remodel to a state that we really love. And so I'm excited that this is going to be a good refresh of our system. And then with new builds, we'll start to see elements of that new prototype. We are actually the last that just opened in the last couple of weeks. We started to see some of those elements.
A full new unit with those elements we'll see later this year.
On the bigger remodels, is there an implicit sales lift that'll come from that to kind of justify some of the capital spend on those?
Yeah, historically, what we've seen and we're expecting to see with this remodel is a mid-single-digit sales lift, which on about a $400,000 investment should give us into the teens return on cash-on-cash, one-year cash-on-cash return.
Gotcha. And you mentioned new prototype, trying to get to 1.8. For those that haven't seen a picture of it, or a quick description just of how different it is than what has been built.
Yeah, so for the elements that the consumer can't see, so that would be the footprint as an example. I guess they can see the fact that the dining room's getting a little bit smaller. But how do you optimize the kitchen more efficiently? There's a lot of cost savings that can come from that just because then you also take down a smaller, not to mention a smaller lease as well. So there's those elements. We also then went through the design and said, in some cases, we were just over-designing. And so how do you pull back? And actually, sometimes a simpler design looks better. So we had some savings there. And then again, with our equipment, we went through and went and rebid all of the equipment.
So it really was, I would say, a long list of many things that have come to deliver that savings, which we're excited about.
I think there've been a couple of new franchise signings over the last year or two. How are you approaching that process to start to bring new franchisees or existing franchisees taking more territory into the fold?
Right. So our existing franchise partners are not only in Southern California, but also in Texas. We have got some that might have restaurants in California and, say, Salt Lake City. Many of those have come forward and said, like I mentioned, I want to grow again, and I want to go to another state. We're excited about that. They're great partners. We've also had interest from new franchise partners that we've got someone up in the Seattle area, someone in the El Paso, Albuquerque area that are just coming into the brand. So it's a nice combination. And as we're getting those inbound calls and also looking to target some franchise partners across the country, this is a brand that's in seven states today. We feel it should be in all 50 states.
It's going to take a mix of existing and new partners to get across the country and across the world eventually, so we're talking to all.
We've done a couple of refranchising transactions. Is that the start of something new, given the system is kind of balanced, company franchise, or were those more opportunistic?
Those were really opportunistic, and I think we'll always continue to think about that from an opportunistic standpoint to help supplement and add to our growth from a new store perspective.
Okay. And then even stepping kind of further back, just operationally, the business historically was. We've talked about some of the progress. Was pretty complex for new franchisees. Are there some things in addition to what we've talked about this morning to highlight to kind of give us a sense of, hey, this is something that can be a little bit easier to ramp and run than maybe historically with the grill and all those kind of things?
Yeah, absolutely. We've found ways with our operating system, as you just mentioned, to simplify, and we're not done in terms of whether it's how we marinate our chicken. We'll always grill our chicken. Can we supplement the grill with other cooking technology to make it even easier, and then a lot comes down to just training and the standards I mentioned. If you have the right training and standards upfront, the onboarding of franchise partners and just the performance you're going to see long term is going to be that much better. We see it even in existing company restaurants and partners, the sales volumes you get from that, just training and standards.
So all of that together, just seeing the last couple of openings go so much more smoothly is reassurance to me that some of those, I think, areas we stubbed our toe in years past, we've learned from, and we're operating better.
Good to hear. I think Liz may have mentioned, but in Ira's world, the business does generate ongoing free cash flow, not a lot of growth, CapEx right now, other than kind of putting back into the system in terms of remodels and things like that. What are priorities for free cash as we go into 2025?
So for 2025, the biggest priority next year is we are accelerating our remodel program. We're planning on doing about 40 company restaurants, which is a great use of cash for us. So we'll be doing a combination of that. We still have a little bit left on our share repurchase plan that we put in place last year. And given that, we'll evaluate more share repurchases or paying down debt.
Got it.
We are getting the development engine going. It just takes a little bit of time. As we get that going, using cash to also do company development is something that we're excited about.
You mentioned that first new prototype. I assume that's a company-owned building coming out of the ground sometime later this year.
I wish it was company, but only because we have a great site that I love, but it's in a really hard-to-permit area. It's going to take a long time, and so we've got a franchise partner that's already further along in a state that is just going to be easier, faster to build in, so it'll likely be a franchise partner.
Got it.
Which shows their commitment.
Yeah, look forward to seeing it, and with that, we're bumping up against time here. So I want to thank Liz and Ira, and they'll be around today. Appreciate it.
Thank you.
Thank you.