Hello, and thank you for standing by. Welcome to Portillo's Third Quarter 2025 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's, to begin.

Thank you, Operator. Good morning, everyone, and welcome to the Portillo's Third Quarter 2025 Earnings Call. With me today are Mike Miles, Chairman of the Board and Interim Chief Executive Officer, and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release, and supplemental presentation on investors.portillos.com. Any commentary made here about our future results and business conditions are forward-looking statements, which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-K identifies risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we'll be happy to take questions from our covering sell-side analysts. And with that, I will turn the call over to Mike.

Thanks, Chris, and good morning. Although I've had the opportunity to meet many of you over the years at different venues, this is my first time speaking with you as interim CEO of Portillo's. I was also in this role back in 2014 and 15 after our founder, Dick Portillo, retired, so it's not my first time. And as most of you know, I have been chairman of the board for the past 10 years. I've been back in the seat for a little over a month, and everything I have seen only reinforces my confidence that Portillo's has a long runway for growth ahead. Each time we enter a new market, our first restaurant is overrun with passionate fans who have been waiting for years for Portillo's to come to town. And the first restaurants opened outside Chicago in California and Arizona have matured well over the years. We'll do over $10 million in our Buena Park location this year. I'm also impressed with the capability of the company today compared to 10 years ago, from the talent and training we have in our restaurants to the energy and commitment at the Restaurant Support Center to the experience and perspective we have on the Board of Directors. Although I've had the privilege of seeing all that develop gradually from the board level over the past decade, it's that much more pronounced being back in the RSC in Oak Brook every day after a 10-year gap. What hasn't changed is the Portillo's experience, our unique craveable menu, outstanding value, genuine hospitality, and lines that move quickly. Those were the ingredients for the success of Portillo's a decade ago, and they are the foundation of our success today. And the reason that our 98 restaurants average $8.6 million in annual sales and contributed $163 million of restaurant-level EBITDA over the last 12 months. Although we have a leadership transition at Portillo's, our first priority remains with our customers and restaurant-level teams. Our operators have rededicated themselves to QSAC, our timeless focus on quality, service, attitude, and cleanliness. And we approach every guest visit with a commitment to make their day. As you know, in the third quarter, Portillo's announced a strategic reset, slowing development in 2025 and 2026, and refocusing our operations on delivering an outstanding guest experience. As we shared with our second quarter results and when we communicated this reset, we added too many locations too quickly and too close together over the past 24 months, particularly in Texas. This has produced a number of restaurants with initial volumes that are not sufficient to deliver healthy economics. As a result, we have slowed development to the extent we can, limiting openings in 2025 and 2026 to sites with already signed leases. Quite a few sites in the pipeline were pushed back or dropped. Michelle will speak to the associated costs we recognized in this quarter. We also have to address the low-volume restaurants we opened and are working to drive trial and get the labor equation right at these locations. Going forward, we plan to have more time and distance separating our openings in new markets. We're also deploying a smaller format restaurant that can deliver good unit economics at $4 or $5 million of sales. It's worth noting that we already profitably operate several smaller restaurants in Chicago that perform well out of similar footprint and with sales in the $4 to $5 million range, including Portillo's No. 1 in Villa Park. It took years of great customer experiences at number one and dozens of other restaurants like it in the Chicago market to build the Portillo's brand to the point where number 43, opened in 2016 in the South Loop, will do over $20 million in sales this year. So our development strategy will reflect a return to a more gradual pace, avoiding cannibalization, and letting great experiences drive more visits and ultimately more restaurants. And we will design and build new Portillo's that can succeed at today's new market initial volumes, which are industry-leading, but not yet at the level we achieve over time in established markets. At the same time, we have focused on driving more transactions. Our most important lever remains the Portillo's experience. The Italian beef sandwich, perfect crinkle-cut fries, family recipe chocolate cake, made-to-order salads, all with the speed and at price points that compete with QSR, but served with a genuine hospitality and a fun and unique atmosphere. It's a powerful customer proposition, and executing it well has always been our formula for same-store sales growth. We're also leveraging our Portillo's Perks loyalty program that we launched earlier this year. Although it's still scaling, we have already had success using it to stimulate visits. And especially in some of our new markets, we're looking to expand our reach by leveraging affiliate marketing and catering and delivery partners to help drive trial and get that first taste of Portillo's into more new mouths. In closing, I want to thank our team members, especially those and our restaurants for their continued focus on creating outstanding guest experiences during this period of transition. And I'd like to thank our partners and investors for their support and confidence in this beloved brand. I know I speak for the entire board in saying that we believe in Portillo's and our ability to create shareholder value more than ever. In a couple of weeks, we will celebrate a major milestone when we cut the ribbon for our 100th restaurant in Kennesaw, Georgia. It will be an exciting moment for all of us and a reminder that while we've accomplished a lot, we're really just getting started. I will now hand it over to Michelle to review the details of the third quarter results.

Great. Thank you, Mike, and good morning. During the third quarter, revenues were $181.4 million, reflecting an increase of $3.2 million, or 1.8 percent compared to last year. Our revenue growth in the quarter was driven by non-comp restaurants. Restaurants not in our comp base contributed $5.6 million of the total year-over-year increase in revenue during the quarter. Same-restaurant sales declined to 0.8 percent, which decreased revenues approximately 1.2 million in the quarter. The same restaurant sales decline was attributable to a 2.2 percent decrease in transactions, partially offset by an increase in average check of 1.4 percent. The higher average check was driven by an approximate 3.2 percent increase in certain menu prices, partially offset by a 1.8 percent decrease in product mix. We do not foresee taking any additional pricing actions the remainder of this year. As such, our effective price increase for the fourth quarter is estimated to be in the range of 2.5% to 3% pending the impact of our fourth quarter Portillo's Perks offers. Moving on to our costs. Food, beverage, and packaging costs as a percentage of revenues increased to 34.5% in the quarter from 33.7% in the prior year. This increase was primarily the result of a 6.3% increase in our commodity prices, partially offset by an increase in our average check. In the quarter, we experienced increases in several categories, including our primary proteins of beef, chicken, and pork. We continue to forecast commodity inflation of 3% to 5% in 2025, with the most significant pressures coming from beef. Labor, as a percentage of revenues, increased to 26.6% in the quarter from 25.8% in the prior year. The increase was primarily due to lower transactions, incremental wage increases, higher benefit costs, and de-leverage from our newer restaurant openings. This was partially offset by an increase in our average check and labor efficiencies. hourly labor rates were up 3.3% in the third quarter of 2025. We continue to estimate labor inflation of 3 to 4% for the full year. Other operating expenses increased 2.3 million or 10.8% in the quarter compared to the prior year, which was primarily driven by the opening of new restaurants and an increase in repair and maintenance, utilities, and advertising expense. As a percentage of revenues, other operating expenses increased to 12.9% from 11.8% in the prior year. Occupancy expenses increased 1.4 million or 14.7% in the quarter compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.7% compared to the prior year. restaurant level adjusted EBITDA decreased 5.3 million to 36.7 million in the quarter from 41.9 million in the prior year restaurant level adjusted EBITDA margins decreased 330 basis points to 20.2 percent in the third quarter versus 23.5 percent in the prior year we continue to experience more significant pressures on our margins from our non-comp restaurants. We currently estimate our restaurant level adjusted EBITDA margins to be in the range of 21% to 21.5% in 2025. Our general and administrative expenses increased by 1.7 million to 20 million or 11% of revenue in the quarter from 18.3 million or 10.3% of revenue in the prior year. This increase was primarily driven by $3.3 million in dead site costs. This increase was partially offset by $1.1 million net benefit resulting from the CEO transition. This benefit was due to forfeiture of equity awards offset by other transition costs. Following CEO transition costs in the third quarter and projected board-approved retention payments, we have adjusted our G&A target for 2025 our updated estimate for fiscal year 2025 gna is now 76 to 79 million pre-opening expenses increased by 1.5 million to 3.3 million in the third quarter of 2025 compared to 1.7 million in the prior year primarily due to the number and timing of activities related to our planned restaurant openings. During the quarter, we recorded a non-cash impairment charge of $2.2 million related to our legacy Barnelli's trade name, primarily due to an increase in the discount rate. This pasta concept is available at nine co-branded restaurants in our Chicagoland market. Neither the Portillo's trade name nor Goodwill was impaired. This impairment charge has been adjusted out of our reported adjusted EBITDA. Please refer to adjusted EBITDA table in the earnings release and 10Q for additional adjustments recorded this quarter. Adjusted EBITDA was 21.4 million in the quarter versus 27.9 million in the prior year, a decrease of 23.4%. Due to the change in our estimated G&A expenses this year, we now expect adjusted EBITDA of 90 to 94 million for fiscal year 2025. Below the EBITDA line, interest expense was $5.7 million in the quarter, a decrease of $0.8 million from the prior year. This decrease was driven by a lower effective interest rate of 6.9% versus 8.3% for 2024. At the end of the quarter, we have $77 million drawn on our revolving credit facility. Our total net debt at the end of the quarter was $323 million. We have approximately $69 million of available capacity on the revolver. Income tax benefit was $1.2 million in the quarter compared to expense of $2.5 million in the prior year. Our effective tax rate for the third quarter was impacted by a decrease in our valuation allowance. Our effective tax rate year-to-date was 20.4%. We expect the full-year tax rate to be approximately 21% to 23%. Cash from operations decreased by 32.3% year-over-year to $48.7 million year-to-date. We ended the quarter with $17.2 million in cash.

We believe our efforts towards simplicity, a revised approach to new market entry, and a restaurant model with healthy unit economics will support our growth potential and drive long-term shareholder returns. thank you for your time operator please open the line for questions thank you we will now be conducting a question and answer session if you would like to ask a question please press star 1 on your telephone keypad a confirmation tone will indicate that your line is in the question queue you may press star 2 if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. We ask that analysts limit themselves to one question and follow-up so that others have an opportunity to do so as well. One moment please while we poll for questions. Our first question comes from Sarah Senator with Bank of America. Please proceed with your question.

Hey, good morning. Thank you for the question. Isaiah on for Sarah. Just seeing that other restaurant OPEX saw pressure just due to advertising expense, but the traffic decline seem to have accelerated quarter-on-quarter. Could you guys speak to marketing efficacy in the quarter and just how you think about marketing strategy going forward, especially in the light of Denise joining back in September? Thank you.

Yeah, Isaiah, keep in mind that our marketing, it's in two spots. One, as you mentioned, is in Apex, but then in G&A as well, we do have marketing spend in there, just more geography for you on the P&L. Yeah, absolutely. We continue to believe that we need to drive trial and awareness, specifically in our newer markets. And so as we look at campaigns we have ongoing in Dallas, we're making investments in Houston as well, where we have five restaurants today. And we continue to believe that that's a good investment to make as we drive that trial and awareness. Now, having said that, here in our core market of Chicagoland, that still is extremely important to us. We need to make sure that we continue to message the brand and look at our value proposition here. And so we make investments here as well. We have a campaign going on in Chicagoland as we speak right now to continue to message the brand here in our core market. So we continue to believe in that investment and that that's a good payback for us now and as we look into the future.

Thank you. I appreciate the clarification. And just as a follow-up, appreciating that you guys aren't taking price or planning to in 4Q, pricing does seem to be running towards the high end of the industry range. How do you guys view your value perception among guests and just your broader value proposition? Thank you.

Yeah, in terms of pricing, so when we look at where we were at this quarter, and then when you look at where the September inflation data was, you know, food away from home was at 3.7%. So we're definitely indexing under that. As I mentioned, we're not planning to take price this quarter. As we go into next year, we'll look at that in relation to our inflationary cost pressures. But as Mike mentioned, we continue to believe that we need to drive traffic into our restaurants. And so we have to be mindful of when and where we take price.

Our next question comes from Brian Mullen with Piper Sandler. Please proceed with your question.

Thank you. Just a question on development. I guess one, is there anything you can say around the openings you'd expect in 26 as you sit here today? Presumably what will open next year is already underway in some form or fashion. It's been planned. And then just related to that, if you were going to make any kind of pivot on development beyond next year, I would think it wouldn't be until 2027. So maybe just talk about what scenarios you're contemplating, is there a world in which you don't build for a while and you focus on the existing assets? Are there a lot of things just open-ended on next year?

Yeah, Brian, as we said, we're going to plan to open eight restaurants next year, and you're spot on that a number of those were already in flight. And so you'll see some additional restaurants in Dallas and Houston, which if we could do it all over again and wave a magic wand, we might not open in 2026. We've probably pushed them out. But we've got some other great sites in the pipeline, and as we look ahead to 2027, it's our intention to continue to grow and to grow gradually, as I discussed. So you won't see us open a bunch of more restaurants in 27 in either the Dallas or the Houston market, but you'll see us expanding in other markets that are growth opportunities for us. We'll probably have our second opening in the Atlanta market in 2027 and look to other locations for growth beyond that.

Okay, thank you.

Our next question comes from Gregory Frank-Fork with Guggenheim. Please proceed with your question.

Good morning. This is Ari and Rezae on for Greg. I wanted to ask about the beef costs. And I know it's early, but can you help frame the early thoughts in commodity into the next year? And also maybe like touch on labor inflation guidance. It seems like a lot of companies, like I've seen like below 3% wage like year over year, but I'm seeing you guys are still like above that. I don't know if it's regional or any outlook on that or any commentary would be super helpful.

Yeah, so in terms of beef costs, obviously we've seen pressures on beef all this year. As we go into next year, we don't see any easing on beef costs. We're still putting together plans. I think you've seen other companies who have a more concentrated basket on beef, signaled more mid-single digits. We're, again, putting together that plan. And we'll have more information on what we think 26 is going to look like in January for you all. But I imagine what you're hearing today, we're not in any different boat than those folks are. But just for context, about 30% of our basket is beef. So that is more heavily weighted for us. But there's still, you know, a broader basket for us and with some offsets as we look into next year as well that we think can help mitigate some of those pressures. On the labor front, year to date, we're at about 3%. We came into the year forecasting 3% to 4%, so we're at the lower end of the range. I wouldn't say that there's necessarily more geographical concentration for us. We continue to give increases to our team members within each year. We don't pay minimum wage anywhere. When you look at our average hourly rate, we're above $17 an hour, so we feel really good about where we sit today, but we still need to make investments in markets and existing team members, but nothing I'd call out in terms of concentration of where those increases are.

Got it. Thank you so much.

Our next question comes from Chris Ocull with Stiefel. Please proceed with your question.

Hi, thanks for the question. This is Ella. I'm for Chris. Mike, I appreciate your prepared remarks on the quarter, but can you elaborate on what enabled the company to deliver a bit better comp performance than what you guided to in the business update?

The comp performance in the third quarter was helped out some by our PERCS program, which we're beginning to scale and are beginning to learn more about how to use. It's great that we have such an engaged customer base, and so when we use the PERCS program to stimulate visits, we get an immediate response to it. And we did a little bit of that in the third quarter, and it's helpful both with respect to lapsed guest activation, also getting folks to try new things that are on the menu. And then we've also sent a couple offers to the entire base that have had a really nice response. And that was a bit of an upside for us in the third quarter.

Great. Just to follow up on the fourth quarter comp, so the full-year comp guidance of down 1% to down 1.5 imply a pretty big decrease in the fourth quarter, both on a one-year and two-year basis. Curious, how's the quarter-to-date comp look like and any color on that?

Yeah, we're not going to comment. on any Q4 comp information other than what you just said, Ella. I will say, though, when you look at what we're lapping in Q4 of last year, we did have a positive comp, so we have a little bit tougher lap coming into Q4, and there's still a lot of unknowns. I mean, you all see what's going on in the industry, so it's very fluid right now. We do have a large seasonal catering business here in our core as well. So, that can be impactful to us in Q4. So, still some unknowns for us, but we feel comfortable about the guide that we put out there.

Thank you so much. Our next question comes from Dennis Geiger with EBS. Please proceed with your question.

Hi, this is Paul Howe on with Dennis. Thank you so much for the question. I guess my first question is more clarification. I understand you don't want to talk about anything about 4Q trends, but just curious if you could provide some color on the current cadence through third quarter and how does sales and traffic trend exiting like towards the end of the quarter. And then just to follow up, I'm wondering if you could elaborate a little bit more on what you have seen in terms of consumer behavior and if there's any notable shifts that you'd like to highlight by either age or income cohorts. Thank you.

Yeah, when you look at intra-quarter trends, Mike mentioned we pulled some Portillo's perks levers. So when you look at in July, we ran a dollar hot dog week offer. On September, we ran a 50% cheeseburger week offer. And so those were more impactful versus, say, a August comp performance. But that was obviously driven by levers that we pulled with the Portillo's perks program. And so, you know, that's just a little bit of intra-quarter color. There's always, In September, you have more pressures, but I think we did a nice job of pulling some of those levers with the PERCS program to help mitigate some of those pressures, which is why our comp performance came in a little bit better than what we were projecting. In terms of the consumer, I think you all see what we see. It continues to be a very fluid situation. It continues to be pressured, but it's something that we've been facing all year, and we continue like the rest of the industry to do what we can to mitigate some of those headwinds.

Our next question comes from Jim Solera with Stevens Inc. Please proceed with your question.

Good morning, this is Tyler Prowse on for Jim. Thanks for taking our questions. Just kind of a follow up to the last question to get started. You know, several of your QSR competitors have called out an outsized impact from the Hispanic and younger consumer cohorts. Just curious if you saw any noticeable step change during those cohorts during the quarter?

Yeah, Tyler, we did not see anything that I would call out as noticeable. You know, we've continued to call out just some pressures that we've had specifically in our drive-through channel. I'd say that was a little bit more pronounced in Q3 versus some of the other channels, but nothing specifically with like a Hispanic or other consumer cohort that I would call out.

Great, that's helpful. And just kind of shifting gears here, you previously called out more of a focused marketing effort in Texas. Can you talk a little bit how that's going? And additionally, you know, with Portillo is now in several unique markets, such as Arizona, Texas, Florida, and, you know, soon-to-be Georgia, which are effectively at different stages of awareness building, how are you developing a cohesive marketing message to communicate to these different markets effectively?

Yeah, that's a great question, Tyler, and I think at a couple of levels. First, tactically, we're pulling just about every lever that we know how in Texas to try and get people to try more portillos. It's really the kind of thing where we build our brand by people experiencing it. So everything that we can do to get folks to give us a try, from sampling events to offers that we make through the PERCS program to some market-wide offers that we're trying in Dallas and will be shortly employing in Houston, all those things help to get us our first visit, and I think that's important to get the ball rolling. And that's really the way that Portillo's has built the brand in every market going back to Chicago for the last 40 or 50 or 60 now years. I do think there's the germ of a big idea that you also referenced in your question about how we have a cohesive program for new markets. We really have not ever sort of cracked the code on communicating what Portillo's is all about to people who have never heard of us before. We really rely on the Chicago expatriate community to drive our sales in new markets, and they do a great job. The first couple of restaurants we open in a market just, you know, we can't keep up with all the demand. People drive for hours to get to those restaurants. But we need to have a clearer way to communicate to folks who have never heard of Portillo's before and don't know somebody from Chicago what's so great about it. And you heard somebody mention Denise, who's our new CMO. She's working on that, and, you know, it's not the kind of thing that's going to happen overnight, but it is something that we'll be developing over the course of 2026 so that as we go to new markets like Atlanta and beyond we've got another way to get people to try Portillo's and experience it very helpful that's all from us for now we've reached the end of our question and answer session which concludes today's teleconference you may disconnect your lines at this time thank you for your participation