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Edited Transcript of LOCO earnings conference call or presentation 1-Aug-19 8:30pm GMT

Q2 2019 El Pollo Loco Holdings Inc Earnings Call

Costa Mesa Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of El Pollo Loco Holdings Inc earnings conference call or presentation Thursday, August 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernard Acoca

El Pollo Loco Holdings, Inc. - President, CEO & Director

* Laurance Roberts

El Pollo Loco Holdings, Inc. - CFO & Treasurer

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Conference Call Participants

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* Andrew Marc Barish

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst

* Jake Rowland Bartlett

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Matthew James DiFrisco

Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

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Presentation

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Operator [1]

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Greetings, and welcome to El Pollo Loco Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

And as a reminder, this conference is being recorded. I would now like to turn the conference over to Larry Roberts, Chief Financial Officer. Thank you. Please go ahead.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [2]

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Thank you, operator, and good afternoon. By now, everyone should have access to our second quarter 2019 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 2019 tomorrow, and we 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 reconciliation to comparable GAAP measures are available in our earnings release.

I'd now like to turn the call over to President and Chief Executive Officer, Bernard Acoca.

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [3]

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Thanks, Larry. Good afternoon, everyone, and thank you all for joining us today.

For the second quarter of 2019, we reported adjusted earnings per share of $0.23 per share as compared to adjusted EPS of $0.22 last year. While our system-wide comparable store sales increase of 0.7% was below our expectations, it does represent our fourth straight quarter of positive system-wide same-store sales growth since the launch of our transformation agenda.

In addition, our teams did a nice job of managing store-level expenses during the quarter as evidenced by our restaurant contribution margin of 19.9%.

Heading into the second half of the year, our main focus is delivering affordable value without sacrificing the quality our customers have come to expect from El Pollo Loco.

By affordable, I mean products that have value-engineered to deliver good margins at very attractive price points. An example of this is our current Overstuffed Quesadillas promotion, featuring our new Nacho Overstuffed Quesadillas at $5. We will follow up this promotion with our $5 fire-grilled combos promotion, which includes your choice of 5 of our most popular entrée items, along with our famous chips and a drink. Both of these promotions offer tremendous value to consumers at food cost designed to help maintain attractive margins.

While we are taking actions to drive near-term sales and transactions, we remain focused on our longer-term strategies. During the second quarter, we continued executing against our transformation agenda, and I'd like to provide a brief update on a few of the key initiatives that we've been working on during the past 3 months to drive and sustain future growth.

As part of our ongoing focus to build a culture centered on leadership with heart, we completed testing a food-donation program, which will be rolled out in September. Partnering with food donation connection, all company restaurants and those franchisees choosing to participate will donate food left over at the end of the day to local shelters and food banks. We believe this is particularly important as homelessness has reached epidemic proportions in Southern California, and we are committed to doing everything we can as a brand through initiatives, both big and small, to assist with the mounting crisis in the communities in which we do business.

As a system, we expect to donate over 500,000 pounds food over the course of the year to help feed people in need. We also continue to make progress with regard to our brand relaunch that we initiated in March, which, as you'll recall, included the system-wide rollout of our new logo, advertising campaign, Feed the Flame tagline, menu boards and point-of-purchase materials.

On July 8, we launched our new e-commerce website and mobile app, significantly improving our customers' ability to engage and interface with our brand. Both the website and app highlight the quality and craft associated with our food, our brand heritage and dramatically simplify ordering food from us, whether it be for delivery or takeout. Equally as important, we have increased our digital and social media mix in Q3 to 15% with plans to get to 20% next year in order to drive customers to these e-commerce platform.

For context, we spent less than 3% on digital media prior to making this change. While we still have work to do, we believe that this new website, app and greater commitment to digital media are the first steps toward creating a first-class digital experience, which is key to unlocking the full potential of our loyalty, delivery and catering platforms.

With regards to delivery, in addition to our DoorDash relationship, we are in the process of testing the expansion of our delivery partners to include Postmates and Uber Eats as options for our customers. The test also includes a new, more curated menu with a heavy emphasis on family meals and combos, which are designed to drive more profitable sales through third-party marketplaces.

Because this limited test has shown a lot of promise in terms of significantly increasing our delivery mix, we are expanding it to one entire DMA and plan to launch it system-wide in September.

As you know, we've made a priority of simplifying operations for our employees and franchisees. A key focus of this goal has been the reduction of back-of-house complexity to free up capacity in order to deliver a better customer experience. Along these lines, our new back-of-house inventory management system has now been rolled out to approximately 120 restaurants, and we continue to expect full implementation by the end of this year.

This system will help streamline our operations and is expected to free up an additional 1 to 2 hours per day for our restaurant general managers. We've also made huge progress simplifying, eliminating and rewriting many of our standard operating procedures.

This work includes simplifying the production process for each of our menu items to 6 steps or less. We are also very close to completing what has proven to be a successful market test of simplifying how chicken is cooked in our restaurants to deliver a more consistent, higher-quality product that is much easier to teach to our aspiring grill masters.

This detail work is foundational for simplifying our operations and the enabler for our team members and franchisees to serve great food and provide exceptional customer service. Ultimately, we believe it will have the added benefit of lowering turnover and increasing retention, which is particularly important in today's tight labor environment.

Lastly, we continue to strengthen the foundation for new market expansion and continue to target 2020 for entry into 1 or 2 new markets. Included in this is the development of a new restaurant of the future prototype, which is going as planned. Included in its design features will be our new brand visual expression, and it will incorporate our parallel work to simplify our back-of-house operating platform.

By continuing to focus and make progress against our transformation agenda, I'm convinced that all our current initiatives should lead to a stronger foundation for our business, allowing us to grow our business profitably and responsibly over the long term.

We remain excited about the progress we've made to date, and I look forward to updating you on our progress on future calls as we continue to elevate the El Pollo Loco brand.

Before I turn the call over to Larry, as always, I would like to thank all of our employees and franchisee partners for making these results possible. Your passion, commitment and dedication are what make this brand and this family truly special.

I'll now hand the call over to Larry to review our second quarter results in detail.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [4]

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Thanks, Bernard.

Before we get into our second quarter results, I'd like to quickly update you on our store base. No new El Pollo Loco restaurants opened during the second quarter.

For the full year 2019, we now expect to open 2 to 3 company-operated restaurants, along with 2 to 3 franchised restaurants. The lower guidance is primarily due to restaurant openings slipping from late 2019 into 2020.

We did continue our remodel efforts, completing 2 company-owned restaurants to coincide with an additional 9 remodels completed by franchisees. As our new asset design work continues, we are reducing the number of company remodels we expect to complete this year from 10 to 15 to 7.

Rather than continuing to invest in remodels using the Vision design, we'd rather wait until early 2020 and use a new design. We still expect our franchise partners to complete 10 to 15 remodels in 2019.

Finally, we closed on the sale of 4 company-operated restaurants in the east bay area and 7 company operated-restaurants in Phoenix to 2 franchisees. We're pleased to have put these restaurants into the hands of strong-performing franchisees and both transactions include development agreements to promote continued growth in these markets. We expect that the sales will be accretive to both margins and earnings.

Now onto our financial results. For the second quarter ended June 26, 2019, total revenue increased to $113.7 million from $111.6 million in the second quarter of 2018. Company-operated restaurant revenue increased to $100.1 million compared to $99.6 million in the same period last year.

Company-operated restaurant sales growth was driven by a 0.4% increase in company-operated comparable restaurant sales as well as by the contribution from 6 new restaurants opened during and subsequent to the second quarter of 2018, partially offset by 7 restaurant closures and the sale of 11 company-operated locations to franchisees during the same period.

The increase in company-operated comparable restaurant sales was comprised of a 3.1% increase in average check, inclusive of 3.6% effective pricing, partially offset by a 2.7% decrease in transactions.

Franchise revenue increased 20.8% in the second quarter to $7.9 million compared to $6.6 million in the prior year period. The increase was driven by fees associated with the use of our point of sale system, a 0.9% increase in comparable restaurant sales, the contribution from 8 new franchise restaurants opened during and subsequent to the second quarter of 2018 and the addition of the 11 former company-operated restaurants transferred to franchisees during the quarter as noted previously. This was partially offset by 3 restaurant closures during the same period.

Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 100 basis points year-over-year to 27.8%. The improvement was predominantly due to higher menu prices and favorable sales mix. Looking ahead, we expect commodity inflation for approximately 1% in 2019. Labor and related expenses as a percentage of company restaurant sales increased 120 basis points year-over-year to 29.2%. The increase in labor expenses was due primarily to higher hourly wages in California, especially Los Angeles, and higher workers compensation expense, partially offset by increased menu prices. We expect labor inflation of about 6.5% in 2019, which is slightly higher than previously communicated, reflecting a tight labor market.

Occupancy and other operating expenses as a percentage of company restaurant sales was unchanged at 23% as increases in occupancy cost and delivery fees were offset by lower advertising costs and other operating expenses.

General and administrative expenses decreased by $3.1 million year-over-year to $9.3 million. Included in G&A are approximately $550,000 of expenses related to legal expenses associated with securities litigation and executive transition cost compared to approximately $3.5 million in the second quarter of 2018.

Excluding the costs associated with the securities litigation and executive transition cost, G&A expenses in the second quarter of 2019 decreased approximately $140,000 year-over-year to 7.7% of total revenue, a decrease of approximately 30 basis points versus the prior year. The dollar decrease in G&A expenses was primarily due to decreases in preopening, dead site and travel expenses, which were partially offset by higher bonus accrual.

Depreciation and amortization expense increased to $4.5 million from $4.3 million in the second quarter of last year and was flat year-over-year as a percentage of the company revenue. Additionally, we received insurance proceeds of $10 million in the second quarter related to the settlement of the securities class action lawsuit as compared to insurance reimbursement of $2.4 million in the prior period related to the reimbursement of legal costs associated with the securities class action lawsuit.

We recorded a provision for income taxes of $5.7 million in the second quarter of 2019 for an effective tax rate of 28.7%. This compares to a provision for income taxes of $855,000 and an effective tax rate of 14.6% in the prior year second quarter.

We reported GAAP net income of $14.1 million or $0.37 per diluted share in the second quarter compared to net income of $5.1 million or $0.13 per diluted share in the prior year period. Pro forma net income for the quarter was $8.7 million as compared to pro forma net income of $8.6 million in the second quarter of last year. Pro forma diluted earnings per share were $0.23 for the second quarter of 2019 compared to $0.22 in the prior year period.

For a reconciliation of pro forma net income and earnings per share to the comparable GAAP figures, please refer to our earnings release.

In terms of liquidity and balance sheet, we had $11.3 million in cash and equivalents as of June 26, 2019, and $85 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.

For 2019, we expect our capital expenditures to total $12 million to $15 million.

During the quarter, we repurchased 1,303,282 shares for approximately $14.9 million or an average price of $11.46. Effective June 26, 2019, our $20 million 2018 stock repurchase program expired. Effective June 27, 2019, our $30 million 2019 stock repurchase program commenced, which will run until March 25, 2020.

Turning to our outlook for 2019. We're updating guidance for the full year as follows. Excluding the impact of potential share repurchases, we expect pro forma diluted net income per share of $0.69 to $0.72. This compares to pro forma diluted net income per share of $0.74 in 2018. Pro forma net income per share guidance for 2019 is based in part on the following annual assumptions: We expect system-wide comparable restaurant sales growth to be approximately 1% to 2%; as I noted, we expect to open 2 to 3 new company-owned restaurants and expect our franchisees to open 2 to 3 new restaurants; we expect restaurant contribution margin of between 18.2% and 18.7%; we expect G&A expenses of between 8.2% and 8.4% of total revenue, excluding fees related to securities class action litigation and reflecting our change in accounting for franchise advertising fees; we expect adjusted EBITDA of between $61 million and $63 million; and we're using a pro forma income tax rate of 26.5%.

This concludes our prepared remarks. I'd like to thank you again for joining us on the call today, and we are now happy to answer any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first questions come from the line of Matthew DiFrisco with Guggenheim.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [2]

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Larry, just one bookkeeping question here for the question. With respect to the 11 that shifted from company to the franchise side, how much did that contribute in the quarter to the revenue -- of franchise revenues?

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [3]

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Oh, the franchise revenues, net of expenses, I think it was about $300,000.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [4]

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Okay. But just to the revenue line.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [5]

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Oh, I'm sorry. Revenue line was about $76,000.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [6]

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So it was only -- okay, it was a modest amount. Okay.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [7]

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Yes.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [8]

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Got it. And then respect -- with respect to the stores that are moving over into 2020, is that something that is purely incremental to 2020? Or is this sort of -- I guess I'm trying to figure out without you giving development or being held to a number for '20, should we expect that '20 is going to be a meaningful up year in development?

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [9]

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Well, I think, right now, we're still working through 2020. It's a little early to make that call, Matt. I guess the one thing I would say which we consistently said is, we certainly expect 2020 to be higher than this year, which, given the low bar, we should be able to achieve. But it's way too early to give actual numbers on 2020.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [10]

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Okay. And then Bernard, with respect to I guess the positioning now. A couple of quarters into it, repositioning of the brand, the comp you did mention was somewhat on the lower end of what you had been expecting. Is that more the context of California and some of the pressures we've heard out there? Or have you had -- I don't want to use weather or disruptions from regional issues, but are you -- is that still a strong number though on the context of what you've seen as far as in industry and the region in California what your peers are doing?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [11]

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Yes, Matt. If I could take a step back for a minute, I think the way -- what we attribute our results to, quite frankly, is where we are in our journey with the transformation agenda. And we really started this journey 4 quarters ago. It really took hold in the third quarter of 2018. And while we're happy with the progress we've made certainly during that time, we're -- again, we communicated that we've experienced 4 quarters of consecutive same-store sales growth.

There are going to be some bumps in the road in terms of where we are in that journey. And so what I would attribute the comps to in this quarter, while positive, was more to a product introduction, which we have been able to count on to do very, very well for us in the past, not delivering fully up to our expectations. So we know that we've got to do more work with our innovation pipeline to deliver more compelling and true new news to our customers, and we're well underway to doing that.

And I'd say the second thing that I think impacted us in the quarter was the delay of the launch of our e-commerce website, which we've now realized July 8 in this quarter and the accompanying digital plans that we originally intended to launch in Q2, which have now launched in Q3, which as I said in my opening remarks, have increased our digital mix -- or I should say, our overall media mix to 15% digital, with the intention of only growing that number over time.

So I'm not looking at the macroeconomic climate as the rationale for why we are where we are. I think it has more to do with where we are in our journey, and we feel like we're pretty -- we're in control of what we can deliver on a go-forward basis.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [12]

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Okay. So that helps me I guess better understand the guidance implies a meaningful step-up in the 2-year trend. But it sounds like you had some headwinds given the delays that you just outlined in 2Q that you're counting on more so for the third quarter or are already seeing the benefits of those.

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [13]

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Well, what I can say in terms of what we're seeing right now is that we saw a nice uptick in sales comp in June. But in July, we did experience a slowdown. And so it was a softer than expected month, but we're looking to bounce back from that for the balance of the quarter.

Matt, the only other thing that I want to mention that I failed to mention that I think is also upside on a go-forward basis, certainly, with the arrival of our new Chief Operating Officer, Miguel Lozano, is we see a lot of the plans that he's starting to put into effect being -- enabling us to deliver a vastly superior customer experience than the one we've been able to deliver historically.

And so I mentioned the pipeline, I mentioned digital and e-commerce. You heard me talk about delivery in my opening remarks. The thing that I probably underplayed was the benefit that we think improved operations can have for us on a go-forward basis as well.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [14]

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Excellent. Can you -- while I still have you, can you give us the cadence of the comp from a year ago? Was the 2.6% pretty much even throughout all 3 months? Or was the July ahead of your compare?

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [15]

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You're talking about Q3 last year?

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [16]

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Yes, Q3 '18. So I'm trying to figure out July, August and September year ago comparisons?

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [17]

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Okay. We have that. Give me a second. Yes, relatively, I'll call it, consistent during the quarter, Matt, maybe a little bit higher in September versus August and September, but fairly consistent.

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Operator [18]

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Our next questions are from the line of Jake Bartlett of SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [19]

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Bernard, I'm wondering about -- it sounds like you're going to -- one of the strategies going forward to get the sales going and traffic going is to focus more on value. My perception just from the rest of the industry and where they've gone on kind of on the QSR side has been to move away from the kind of deep value orientation that we've had over the last few years. And so more premium products seem to be doing better, but I'm curious to hear what you're seeing out there. Why you think that value is what you need to focus on to kind of reignite traffic here?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [20]

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Well, I mean for us, I think it's always a balance. We have a high-end business, which is our family business, so you always see us on air with a $20 price point. But then we have a lower-end business, which we like to counterbalance our high-end business with. As a matter of fact, it's one of the biggest strength in our business is that we've got that evergreen barbell, if you will. And in regards to the promotions that I've referenced, those quite honestly aren't additional discounts as they pertain to our business. The $5 fire-grill combos menu, for instance, comprises a lot of the items that already exist at that price point on our menu board today. So it's not what I would technically describe as incremental discounting. It's simply highlighting what is on our menu today and promoting it aggressively in a way that, perhaps, we don't throughout the course of the year.

But we like to look at the calendar. If you see the first half of the year, we didn't really resort on television or on our media, I should say, with any kind of aggressive discounting. This time of year, certainly, in the third quarter, during that kind of back-to-school time period, usually you want to be a little bit more front-footed with your discounting. So I think it's just more of a balance overall. I wouldn't qualify it as doing incrementally more than what we've historically done.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [21]

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Okay. And then in regards to your labor cost and the tick-up in wage inflation, I think in the last quarter, you mentioned some pretty impressive improvements on turnover. Are you seeing the improvements in turnover increase? Or have you maintained those improvements? How much do you think that, that can offset some of the increased wage inflation that you're seeing?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [22]

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I think as a brand, we've been historically blessed with lower than industry average turnover rates. And so we saw the second quarter, for instance, crew turnover about 115%, which is substantially lower than the 136%, 140% you see industry-wide. So this focus on culture that we've been doubling down on, I think, it's manifesting itself in the employee retention numbers that we're seeing. That coupled with the fact that we're really maniacally focused on trying to figure out how to simplify the back of the house to make our employees' job easier because we do have a little bit more of a complicated operating platform that -- those 2 things taken in tandem, we believe, has continued. Our strong retention numbers are lower than industry average retention numbers.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [23]

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Okay. And then lastly, any insight on the new markets that -- you mentioned entering 1 or 2 new markets as soon as 2020. Does that mean that you have new franchise partners already kind of lined up and signed up for that? Or is that still in process?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [24]

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Those things are all still kind of in the throes of discussion here internally, and we haven't finalized our plans yet. So we're not in a position to share them, but -- so more to come on that.

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Operator [25]

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Our next questions are from the line of Andrew Barish with Jefferies.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [26]

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Wondering on sort of the next steps you referred to on operational improvements. I mean you did the menu simplification and kind of quickly pivoted to being a little bit more sales oriented with your teams. I guess what are the next steps? And what are you seeing on guest satisfaction scores that are either good or need some areas of improvement that are the near-term focus?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [27]

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Yes. So again, I think the trend -- what we mentioned to you with the transformation agenda is over the last several quarters, we've seen a slow but steady uptick in our overall blended index, which is our measure of customer satisfaction. It is not where we still want it to be, but we do expect in the back half of the year to accelerate our improvement there, certainly, with the arrival of our new Chief Operating Officer and our focus on customer satisfaction as a metric. So we've seen slow but steady improvement. We want to see far greater improvement to hit our aspirational internal target.

We've seen improvement in speed of service in the drive-through. I would say, again, steady improvement, but we are really focused, have food ready at the window right now to drive down that window time even further. So we can -- we believe that we can do far better than what we've managed to achieve over the last several quarters.

So that in addition to some other initiatives that are really driving back-of-house simplicity. One, we talked about the inventory management system. It's in 120 restaurants now, will be fully implemented by the end of the year. We are rewriting the vast majority of our standard operating procedures to make them simpler. I can't overemphasize enough what a coup it is to have all our recipes -- all our product recipes, we're now able to make in 6 steps or less.

And then something that we are testing and very close to launching, which is a major paradigm shift in our business, is chicken-cooking simplification. And we have managed to come up with a methodology and a process to cook our chicken, which makes it so much easier for our employees, while simultaneously improving the quality of our product.

And that will be in full implementation in company restaurants in Q4, and then we'll look to roll it out to the rest of the system from there. So all these things taken in conjunction with one another we think are going to lead to greater front-of-house experience, given how much capacity we're starting to free up back of house.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [28]

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Yes. Andy, the only thing I'd add is Miguel has also come in and realigned his team. And the other thing is he's starting to get really, really focused, work with HR around the area leader level. And when you're talking about operations, that's the level you have to go after first because they are the ones who impact all the restaurants, so it's really getting into the area of your routine, what are they doing in the restaurant, how do they plan their days. A lot of blocking, tackling work that Miguel is really getting after. And those things are also going to pay dividends over the near and long term.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [29]

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And then, Larry, on pricing and mix, does the back half look similar as far as you can tell in terms of about 3.5% menu price but somewhat offset by negative menu mix with more of the $5 items seemingly becoming part of your product strategy?

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [30]

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Yes. So we expect back half of the year pricing is probably going to actually a little north of where it's been. It'll probably run at about 3.8% or so back half of the year on pricing. And then mix, in total, you're right. I think mix will be roughly flat. I think it will be a little negative in Q3 as we're driving the $5 promotion but then come back, hoping to be slightly positive in the fourth quarter as we turn stores to holidays and really emphasize family meals centered around tamales. So yes.

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Operator [31]

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Our next questions are from the line of Sharon Zackfia with William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [32]

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I just wanted to make sure I understood the delivery conversation from your prepared text. So did I understand correctly that you're testing Uber and Postmates in addition to DoorDash? And that's what's really not in September? Or was it the curated menu or both? I kind of got lost a little bit there.

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [33]

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Yes. It's both, Sharon. So we launched right now with DoorDash our bifurcated menu. So if you order from our loyalty program or order online from us, from delivery and we generate the order, you get our full menu at our regular menu price. If you order from a third-party marketplace, whether it be DoorDash and eventually, Postmates and Uber Eats, which will launch with us in September system-wide, you will get a menu that's more curated, focused on -- primarily on family meals and combos at elevated pricing -- slightly elevated pricing and also actually some unique family meals and combos you can't get elsewhere that take into account the need to kind of preserve our margins to the best of our ability. So that is what is launching system-wide come early September.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [34]

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And I guess I don't recall you having said previously how much delivery is as a percent of your sales mix at this point. So it might be helpful to update us on that.

And then is the delivery launch in September, the revamped delivery paradigm? Is that why you're optimistic that comps will improve in the September quarter? Because I feel like you -- I think the math is that you need a 0.5 comp in the back half to hit the low end of your guidance. And if comps have weakened a little bit in July, it doesn't like you're sitting there right now.

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [35]

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So there's a few things that gives us confidence: One, I think we have a lot of confidence around our $5 fire-grill combos promotion, which we think will do quite well for us: two, you are right. Our expanded delivery platform, we're expecting to do more for us. We haven't aggressively promoted delivery to date for one primary reason. And I can't state this point enough because it is a huge part of how we are transforming our business. To be clear, we have not historically been a digital player. I mean our go-to-market model has been very heavily dependent on television and print media. I know that's hard to believe, but we jumped in a single quarter, this quarter that we're in right now, from doing less than 3% in digital media to 15% and that number is only going to grow northward as we move forward. We redesigned our website which launched in the beginning of July. That website, quite frankly, hadn't been touched since 2012.

Now we have a beautiful, dynamic website, a beautiful, new, dynamic mobile app. It's been the UX on that, the user experience of that has been improved. It's been reskinned to reflect our new brand aesthetic.

And the only reason why I bring that up is that was what was first required for us to then really want to drive people to our e-commerce platforms, which then get us to growth in delivery. So now that we've put that behind us, we are ready to turn on the delivery spigot, and we're going to do that with 2 new additional partners, we're going to do that by promoting free delivery in our marketing communications far more aggressively and take delivery, which to answer your early question, represents less than 2% of our business now and really turn up the dial on that.

So yes, all those things combined we believe will help us throughout the quarter and on a go-forward basis.

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Operator [36]

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Our next questions are from the line of David Tarantino with Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [37]

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First, could you please clarify what you meant by the softness in July just so that everyone on the call is level set on what you're running so far this quarter?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [38]

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Well, I mean, I'm not going to get into the specific number, but what I will say is that we were encouraged by the way we exited the last quarter in Q2. And that momentum seemed to have slowed a little bit in July in terms of the sales comp that we experienced.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [39]

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Dave, we're, basically, slightly negative in July.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [40]

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Got it. Okay. And I guess, Bernard, as you step back and look at the last I guess 5 or 6 quarters since you've been at the company and you saw a fairly nice acceleration in the back half of last year. And then now we're seeing a little bit of a slowdown sequentially for the last couple of quarters and end of July. So I guess, what do you think you did well on the back half of last year that may not have continued in the first half of this year? And -- or is there some new issue in the first half of this year that is underneath the surface? I know you mentioned promotions not going well in Q2. But I guess just as a high level, why the strength last year and then the slowdown this year in your mind as you diagnose the business?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [41]

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Well, I mean, I -- honestly, I think it has to do with the fact that, as you're well aware, the industry is just getting -- everyone is getting better faster, and we need to accelerate our development on certain fronts. I talked about the innovation pipeline certainly as a place that we're looking to get better and digital and delivery being another. But I would attribute it to just simply a tougher marketplace and the fact that this marketplace is demanding every brand to get better faster. And so we never promised this was going to be 1-year transformation agenda. We're making progress. We're very proud and confident of the progress that we're making. But as I mentioned, there's going to be some speed bumps along the way. We think we're going to successfully get past those and that our best days lie ahead. But that's the best way I could characterize it.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [42]

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Got it. And then I think you referenced in the past plans to start to enter new markets next year with new unit growth. And I'm wondering, is that still on the books in the sense that it sounds like you got a lot of heavy lifting on the operations side to get to where you want. Does it make sense to maybe push that out a year so you get your operations right before you start growing? Or do you not think you need to do that?

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [43]

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Yes. No, I don't want to misrepresent where our operations are. I mean don't get me wrong. We have a solid operating platform. We just see a lot of upside opportunity for it going forward. So we're making tremendous headway and progress and we have certainly over the past year. We just see it as being a real bigger -- a bigger differentiator for our business relative to what it's been historically. And so we're tracking with our time line on everything and incorporating all the great initiatives we have underway and building them into that prototype store of the future. And that store of the future, as a matter of fact, is driving some new thinking as to things that we might want to incorporate into our existing restaurants. So it's parallel work, and we're tracking right along with other time line.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [44]

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Got it. And then the last question I had is on delivery, Larry, can you explain what the margin structure of that looks like relative to an in-restaurant or takeout transaction -- normal takeout transaction? And then, if you have any insight on what you've seen so far in terms of the sales, whether you think those are incremental or replacing in-restaurant transactions, that'd be helpful.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [45]

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Well, the economics are -- obviously, there's 2 avenues. One is the dispatch, which basically is economic or similar to somebody going in the restaurant or through the drive-through. There might be a small fee that you're paying for the process and transaction. But the margins are similar to somebody buying the price directly from the restaurant. It's the marketplace where, as you know, you're paying a fee to the marketplace provider. As Bernard highlighted with the bifurcated menu, the incrementality task has been reduced significantly, meaning the margins are better. They're not all the way to bright where the consumer is paying the full delivery price. But it is a lot better and that will continue to evolve as we work on the margin on delivery. So again, dispatch is basically the same margins. Marketplace, we are paying a fee but at the same time is we're probably covering -- I'm trying to think, what -- a pretty significant percentage of that fee is being covered by higher prices on the marketplace menu.

In terms of incrementality, I think at this stage, David, it's hard to measure incrementality. We -- as Bernard highlighted, we really haven't pushed delivery aggressively the way we're going to get ready to. So we believe it's going to be incremental. We structured it in a way that incrementality lift is less needed. It's probably more around the 20% incrementality or so that you need to breakeven on those delivery transactions. So I think we're doing the right work there. But in terms of incrementality today, we just haven't pushed it aggressively enough and so it's very hard to determine whether these are incrementality -- or incremental today. But going forward, we certainly expect them to do it and really push it.

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Operator [46]

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Our next questions are from line of Jake Bartlett with SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [47]

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I just had a clarification and then just a bookkeeping question. And the clarification was what drove the negative mix in this quarter? Was there some sort of promotion that drove that? Or was it just kind of maybe pushback from the kind of the increase in pricing?

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [48]

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No. I think overall, we -- when we reviewed that, our discounting did go up a little bit in the second quarter. It wasn't significant, but if I look year-over-year on that discount line, it's a little bit higher. So I believe that drove some of the mix shortfall year-over-year.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [49]

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Okay. And then, Larry, if you could provide us with the system-wide sales number, that'd be helpful.

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Laurance Roberts, El Pollo Loco Holdings, Inc. - CFO & Treasurer [50]

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Yes. $227.8 million.

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Operator [51]

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Thank you. We've reached the end of our question-and-answer session. I would now like to turn the floor back to Bernard Acoca for closing comments.

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Bernard Acoca, El Pollo Loco Holdings, Inc. - President, CEO & Director [52]

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Yes. I just want to thank everyone for joining the call today. We look very much forward to sharing our future results with you, and we look forward to talking to you soon. Be well.

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Operator [53]

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