El Pollo Loco Holdings, Inc. (LOCO) Earnings Call Transcript & Summary

Good day and welcome to the El Pollo Loco Holdings, Inc. Annual Meeting of Stockholders. I would now like to turn the conference over to Michael Maselli. Please go ahead.

Good afternoon, and welcome to the 2020 Annual Meeting of Shareholders for El Pollo Loco Holdings, Inc. My name is Michael Maselli, and I am Chairman of the Board of the company as well as Chairman of the meeting. El Pollo Loco's Corporate Secretary, Jason Weintraub, has indicated to me that notice of this meeting was properly given to shareholders beginning on April 21, 2020, based on a record date of April 9, 2020, and it's also my understanding that we have a quorum of shareholders either present or represented by proxy. Accordingly, I now call the meeting to order. As Chairman, under our bylaws, I have set both the agenda and the rules of conduct for this meeting. You should see these or links to them on your computer screen. As permitted by the state of Delaware, our state of incorporation, we are holding this meeting as a virtual meeting, something we've all become too familiar with during the COVID-19 pandemic and required distancing. I hope all of you have remained safe and healthy as we have navigated the many challenging circumstances of the pandemic. I'm joined by members of our Board and members of management, including directors: Doug Babb; Samuel Borgese; Mark Buller; Bill Floyd; Dean Kehler; Lili Lynton; and John Roth; Director, President and Chief Executive Officer, Bernard Acoca; Chief Financial Officer, Larry Roberts; Chief Operating Officer, Miguel Lozano; and Senior Vice President, Chief Legal Officer and Corporate Secretary, Jason Weintraub. Also joining us today is Carrie Shagat, a partner at BDO USA, our auditor; and Jon Commers, our inspector of elections. Jon, as inspector of elections, can you please confirm for the record that a quorum exists?

Yes, Mike. This meeting has a quorum, meaning majority of the stock outstanding as of the record date is present in person, including electronically, or is represented by proxy.

Thank you, Jon. Now I'd like to take a moment to review our agenda for this afternoon. I've already called the meeting to order. After taking care of some housekeeping matters, my colleagues and I will present the proposals for your consideration. Shareholders can vote on proposals during those presentations at any time until we close the polls. At that time, we'll announce preliminary voting results. After this announcement, we'll conclude and adjourn the formal meeting. When we have finished the formal portion of our session, senior management will make a few remarks about the company's -- about the state of the company, after which, there will be a question-and-answer session. Let me make some initial procedural points. We are recording this meeting. You'll be able to access a recording of it for 1 year via the virtual shareholder meeting website. Please wait a day or so to allow for the recording to be uploaded. [Operator Instructions] We've also selected in advance some commonly asked questions that we will make sure to address. We cannot guarantee that we will answer all questions. If we don't get to your question, you're welcome to ask it by using the Contact the Board link in the Investor Relations section of our website, elpolloloco.com. Additionally, as I briefly mentioned earlier, please note that you may vote during this meeting at any time from the beginning of the meeting through the presentation of proposals and until we close the polls. If you have already voted in advance of today's meeting by using an online ballot or physical proxy card, you do not need to vote again. However, if you choose to vote again in this meeting, your vote today will supersede your earlier vote. In the event of any technical difficulties before the formal adjournment of the meeting, we may adjourn temporarily and reconvene in accordance with our bylaws. A final note, some of our discussion today may relate to forward-looking statements. Forward-looking statements are statements about, among other things, financial projections, managerial plans or objectives or future economic performance. The company's actual results may differ materially from those projected by any forward-looking statements in our annual report on Form 10-K for 2019, filed on March 6, 2020, as amended by our first quarter 10-Q filed on May 1, 2020. We included sections on forward-looking statements and on risk factors that could materially adversely affect our business. For additional information, we refer you to both filings, which are available on our website and on the Securities and Exchange Commission website. Shareholders have 4 matters on the table today for their consideration. The first is to vote to fill 3 seats on our Board of Directors, for which Samuel N. Borgese, Mark Buller and John M. Roth are all running for election as Class III directors, with terms expiring in 2023. The second is to ratify our Audit Committee's choice of BDO as our independent registered public accounting firm for 2020. The third matter is an advisory vote to approve the compensation of our named executive officers: Bernard Acoca, Larry Roberts and Miguel Lozano. The fourth and final matter is also an advisory vote on the frequency of future advisory votes to approve the compensation of our named executive officers. Under our bylaws, there are certain requirements particularly relating to advanced notice for director nominees and for proposals to be submitted for consideration at an annual meeting of our shareholders, so that shareholders can have adequate time to deliberate on them. That being the case, I am said (sic) [ I can say ] that no additional director candidates or shareholder proposals have been, or at this point, can be properly brought before today's meeting. Many shareholders have voted on the 4 proposals I mentioned in advance, including via their stockbrokers, either by completing an online form or by signing and returning our form of proxy card. By using their proxy card, a shareholder appoints either Larry Roberts or Jason Weintraub to vote on his or her behalf in the manner that the shareholders indicated on the proxy card or if the shareholders left the proposal blank in accordance with the Board's recommendations. A shareholder who has voted in advance does not need to be present at or vote at the meeting to have his or vote counted. Instead, Larry and Jason are here on behalf of such shareholders. Larry and Jason have indicated to me that they are voting their proxies in accordance with the terms that I've just described. We are now ready to move on to our first proposal, director elections. Normally, at this point, I would give the floor to Sam Borgese, the Chairman of our Nominating and Corporate Governance Committee. However, since Sam is one of the directors up for election today, I will give the floor to our Chief Legal Officer and Corporate Secretary, Jason Weintraub.

Thank you, Mike. As mentioned, our first proposal is to elect Samuel N. Borgese, Mark Buller and John M. Roth to the Board. They would continue to be Class III directors, meaning that, barring unforeseen circumstances, their terms would run until the company's Annual Meeting of Shareholders 3 years from now in 2023. As you know, our Board and its Nominating and Governance Committee reviewed Sam, Mark and John's background, qualification and suitability for continued board service. And following this review, the Board resolved to advance those nominations for shareholder vote. That vote is now before the shareholders. And let me offer my thanks to the 3 of you for your continued engagement.

This is John Roth. It's our pleasure, Jason, and we appreciate the Board's and the committee's confidence.

Thank you, John. It's now time for shareholders to vote on the proposal. Please note that the polls for this and all of our proposals will remain open until the fourth and final proposal has been discussed. Mike, I turn things back over to you.

Thanks, Jason. While the shareholders are voting, let's move on to the next 3 proposals. The second order of business before the shareholders is to ratify the decision of our Board's Audit Committee to appoint BDO as our independent registered public accounting firm for the current fiscal year of 2020. The Audit Committee has already made the appointment and no further action is necessary by the Board at this meeting. Accordingly, shareholders may now vote regarding BDO's appointment. As I mentioned earlier, Carrie Shagat from BDO is with us today and is available to answer any shareholder questions during the question-and-answer session, if necessary. She also has the opportunity now to make a statement if she wishes and to field any questions from the Board. Carrie, would you like to say anything?

No, thank you, Mike.

Okay. Are there any questions to Carrie from the Board? Hearing none, let's move on. As a reminder, you can vote on this proposal and all of our proposals until the close of discussion on our fourth and final proposal. Our third item of business is an advisory vote by the shareholders to approve the fiscal 2019 compensation of the company's named executive officers, which is commonly referred to as a say-on-pay vote. The Board of Directors recommended that shareholders vote for this proposal. Our proxy statement provided detailed information regarding the company's compensation philosophy, including our commitment to performance-based compensation, the specific elements of compensation provided to our named executive officers as well as compensation benchmarking conducted by the company and our Board. The fourth and final proposal before our shareholders today is an advisory vote on the frequency of future advisory votes to approve the compensation of our named executive officers. We are required to present executive compensation to shareholders for an advisory vote, either every year, every other year or every 3 years. We are also required to ask shareholders periodically how often they prefer to hold such a vote. For today's proposal, our Board has recommended a vote for holding these votes every year. While we wait for the votes to be cast, let me remind you of your voting options and the policies governing votes on each of our proposals. Regarding the first proposal, directors are elected by a plurality of votes cast at the annual meeting. In other words, the 3 open seats go to the 3 candidates with the highest vote totals, ignoring votes withheld and broker nonvotes. Auditor ratification is approved if supported by the affirmative vote of the majority of the shares represented at the meeting. With respect to the advisory vote concerning our named executive officer compensation, shareholders may vote for, against or abstain. And finally, for proposal 4, shareholders may vote 1-year, 2-year, 3-year or abstain. [Voting]

All right. Please close the polls now. Mr. Commers, can you comment on the preliminary results?

Yes, Mike. Based on the proxies granted in advance of the meeting, it appears that all 3 director nominees have been elected, and accountant ratification has been approved. Proposal 3 has been approved concerning the compensation of named executive officers. And for proposal 4, approval has been provided for holding the advisory vote on named executive officer compensation every year. My colleagues and I will be checking and updating the vote and finalizing the tabulation in the next day or so.

That schedule sounds good. We will publish the final voting results in the next few days on Form 8-K. I want to thank the shareholders for their support of our directors and auditor. That was our last formal item of business. I'll adjourn the meeting -- the formal meeting now. However, for the benefit of shareholders, we'll continue informally with a brief management presentation and a question-and-answer session. We stand adjourned. Thanks again to everyone who's participated or listened in today, especially our shareholders, for their time. Now let me turn things over to CEO, Bernard Acoca, for the management presentation.

Thank you, Mike, and thank you for joining us today. I hope that everyone is staying safe and healthy as we navigate this unprecedented time together. While my focus here would typically be centered around the success of our business during the past year, the impact of COVID-19 on our operations, and in fact, collectively on all our lives, obviously, cannot be ignored. I'm very pleased to say that the guiding principles of our transformation agenda, which provided the foundation of our success in 2019 and propelled our momentum entering 2020, have been beneficial in navigating the challenges over the last few months. As you may recall, our transformation agenda consists of 4 key strategies: one, developing a people-first culture by investing in and growing our talent; two, differentiating the brand by accentuating our strengths and building upon them; three, simplifying operations, thereby making it easier to be an employee and franchisee; and four, growing the business responsibly and profitably for the long term. These strategies continue to provide the framework for everything we do, even as we adapt to the new realities of the COVID-19 world. The success of these strategies was evidenced by our system same-store sales growth in 2019, including growth of 3.9% in the fourth quarter. This positive momentum continued into 2020 through mid-March, before the initial impact of the COVID-19 pandemic. As the reality of the pandemic set in, we responded quickly and decisively. First and foremost, our highest priority was and always will be the well-being of our team members, franchisees and customers, and we implemented a number of actions to ensure their health and safety. These included providing masks and gloves to all employees, enhanced cleaning processes, installing plexiglass shields at cashier stations, implementing contactless payment procedures, and we are now requiring all employees to undergo temperature checks before working their shifts. On the marketing side, we quickly pivoted from our standard limited time offering calendar to a program focused on 4 key themes: delivery, family meals, digital e-commerce and value. As an example, we became the first company to offer free delivery for however long people were sheltered at home. As a result, our delivery business nearly tripled in growth. These initiatives, along with an intensified focus on our drive-through operations, have enabled us to drive continued sales improvement since late March and have put us in a very good competitive position as the economy recovers from the crisis. For context, we went from driving 45% of our business via the drive-through pre-COVID to generating over 70% of our sales from this channel today. The last thing I'd like to say is that I have never been more proud of the team than I am of my El Pollo Loco family during these last 3 months. I'm incredibly fortunate to lead a phenomenal group of people who are working tirelessly to drive the business while making sure we protect our fellow employees, franchisees and customers. I'm especially grateful to our restaurant teams who are on the front lines every day, working to provide an essential service to our customers. If anything, the COVID-19 crisis has made our organization even stronger, and I remain as optimistic as ever about the future of El Pollo Loco.

Bernard, thank you for that presentation. I'd like to take a moment to thank you, your leadership team and the whole El Pollo Loco family for the great effort and work in responding to and navigating the COVID crisis and for keeping our restaurants open to safely serve our customers throughout these most challenging times. On behalf of my fellow Board members, thank you. Now the last item on our agenda is the question-and-answer session. It is important to note that we are unable to answer any question today about our second quarter performance. We do have time for a few questions and provided that they are relevant and not related to privileged or material nonpublic information. Given our limited time, we will focus on the most frequently asked questions. Jason, are there any questions?

There are, Mike. Our first question is, what impact do you think the COVID-19 crisis will have on the restaurant business over the longer term? And what changes would you make in your strategy?

This is Bernard Acoca. I'll take that question. Well, it's always challenging to predict how consumer behaviors will change over the longer term. However, I expect that a significant number of customers will choose not to dine in the restaurants in the short term and will look to access food through takeout, delivery, curbside service and the drive-through. Customers will also want assurances that restaurants are taking every reasonable action to ensure that they are not exposing their customers to harmful illnesses. Fortunately, these trends will play to our strengths, and will require an acceleration rather than a change in our strategies. Prior to COVID-19 crisis, 75% of our business was off-premise. During the crisis, we successfully accelerated strategic initiatives to enhance our delivery and e-commerce platforms and improve our drive-through operations. As a result, we tripled our delivery business and significantly improved our drive-through speed. We will continue to drive these and develop additional means for customers to access our food such as curbside service. While we continue implementing technology to drive accessibility, we will continue to broaden our reach by offering fresh, healthier food at prices that offer tremendous value. We believe that the success of this strategy is evidenced by our results in Q4 of 2019 and early 2020.

Thank you, Bernard. Our next question is, are you having any issues sourcing chicken or other commodities?

Larry, you might be on mute. If you want to take that question.

Yes. Yes. Sorry about that. Yes, thanks, Jason. I'll take that one. We have not experienced any issues with our supply chain. Chicken prices are locked in for the year, and we have not had any significant supply disruptions. This is also true for our other commodities, including avocados. So as for now, we don't foresee any major commodity issues this year.

Thanks, Larry. Next question. What is your longer-term development strategy? And has it changed with the recent crisis?

Hey, Jason, I'll also take that one. Yes, the recent crisis has delayed, but it hasn't changed our long-term development strategy. We'll have fewer company and franchise builds in 2020 as new unit development has been pushed back to 2021. However, we expect to be back on track in 2021 and are continuing to work towards these ends. Work on our new asset design continues, and we expect to test it in the second half of the year with several remodels. The new design, which we've highlighted before, includes redesigning the building to better communicate our brand, redesign the back of house to simplify operations and reducing the building costs through value engineering. Now if successful, we'll start utilizing the new design starting in 2021. And in addition, I'd just like to highlight that our development strategy includes entering new markets with either new or existing franchise partners within the next 1 to 2 years.

Thanks, again, Larry. Another question. What is the long-term opportunity for this company? Why should I continue owning the stock?

I'll take that one, Jason. This is Bernard Acoca. When I decided to become CEO of El Pollo Loco, I believed that there was tremendous untapped potential for the brand. I feel more strongly about that today than I did 2.5 years ago when I joined. What our restaurants do is truly unique. Nobody does what we do. We marinate and then flame-grill fresh chicken for 60 minutes. We cut tomatoes and avocados and make our salsas and sauces from scratch every day. In short, we serve fresh, healthier delicious food at prices almost anyone can afford. The transformation agenda we've been executing against is designed to leverage these brand attributes that no one else can match while also building a great company culture using technology to make us more relevant to more people and developing an operating platform that can be replicated consistently outside of our core markets. The results we've seen in 2019, especially in the fourth quarter and early 2020, demonstrate that these strategies are working. I remain confident that this is a brand that hits on many of the things people are looking for and will resonate strongly outside of our current markets, especially once the new asset design, what we're terming our restaurant of the future, is completed, and our operations are more structured.

Okay. Thank you, Bernard, Larry, Jason. That concludes our question-and-answer session. And that was the last item and the end of the informal portion of the meeting today. Again, I want to thank everyone, especially our shareholders, for their time and participation. It's our privilege -- and it's a pleasure and privilege to work with El Pollo Loco, and I hope you share my enthusiasm for the great work Bernard and his team are doing and for our road map for the company. Until next time, goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.