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Edited Transcript of TACO earnings conference call or presentation 29-Jul-19 8:30pm GMT

Q2 2019 Del Taco Restaurants Inc Earnings Call

LAKE FOREST Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Del Taco Restaurants Inc earnings conference call or presentation Monday, July 29, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John D. Cappasola

Del Taco Restaurants, Inc. - CEO, President & Director

* Steven L. Brake

Del Taco Restaurants, Inc. - Executive VP & CFO

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Conference Call Participants

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* Alexander Russell Slagle

Jefferies LLC, Research Division - Equity Analyst

* Nick Setyan

Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Spencer Christian Hanus

Citigroup Inc, Research Division - Associate

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the fiscal second quarter 2019 conference call and webcast for Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Steve Brake, Chief Financial Officer at Del Taco, to begin. Thank you.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [2]

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Thank you, operator, and thank you all for joining us today. On the call with me is John Cappasola, President and Chief Executive Officer. After we deliver our prepared remarks, we will open the lines for your questions.

Before we begin, I would like to remind everyone that part of our discussion today will include some forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We do not undertake to update these forward-looking statements at a later date and refer you to today's earnings press release and the SEC filings filed by Del Taco Restaurants, Inc., for a more detailed discussion of the risks that could impact future operating results and financial condition.

Today's earnings press release also includes non-GAAP financial measures such as adjusted net income, adjusted EBITDA and restaurant contribution. Non-GAAP financial measures should not be considered as alternatives to GAAP measures, such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance. We refer you to today's earnings press release, which includes the reconciliations of the non-GAAP measures to the nearest GAAP measures.

I would now like to turn the call over to John Cappasola, Chief Executive Officer.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [3]

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Thank you, Steve, and thank you for joining us on the call today. We are pleased to report an acceleration in comparable restaurant sales and transaction trends at company-operated restaurants relative to the first quarter, along with sequential comparable restaurant sales improvements for franchised restaurants in The Del Taco system. Comparable restaurant sales at company-operated restaurants grew 1.7% during the second quarter, marking a 230-basis point improvement from the first quarter. This was led by a 300-basis point improvement in transactions as we began to benefit from the transaction-driving initiatives that I will cover shortly.

Average check growth at company-operated restaurants was 4.2%, including slightly favorable menu mix. This was despite lapping a very check-friendly Carnitas LTO, which helped drive approximately 1% of menu mix during the second quarter of 2018. Franchise comparable restaurant sales outpaced company-operated restaurants, increasing 2.8%, with system-wide comparable restaurant sales growing 2.2%. These metrics reflected sequential improvements of 240 and 230 basis points, respectively, from the first quarter.

From a restaurant contribution standpoint, margins declined 70 basis points compared to last year. Although excluding the impact of the new lease accounting guidelines, margins were flat.

Adjusted EBITDA of $16.7 million included a $0.7 million impact from lease accounting compared to $16.8 million during 2018. These metrics represent good outcomes enabled by our margin management strategies designed to help mitigate the impact of our operating cost inflation.

Our brand focus remains centered on further developing and embedding our transaction-driving initiatives, including our digital transformation, value evolution and menu innovation. This focus helped sequentially improve our transaction trends during the second quarter compared to the first quarter. On the digital front, our new Del App now exceeds 675,000 registered users, and we recently expanded its functionality in all company restaurants to include mobile ordering for pickup or delivery.

During the first quarter, Grubhub was enabled in substantially all company restaurants, and currently, we have over half of our franchised restaurants live or in the process of adding Grubhub. Although we have been happy with the addition of Grubhub, our long-term plan is to maximize consumer demand through a multiple delivery service provider approach. And we are particularly excited about our plan to soon add DoorDash, who has recently reported significant market share gains as well as Postmates, who is the market share leader in our core Los Angeles market. We are currently testing the POS integration for both of these DSPs and currently expect to roll out Postmates during the third quarter, followed by DoorDash in the fourth quarter.

Next, the late first quarter launch of our $4, $5 and $6 Fresh Faves Boxes is driving our value evolution, complementing our Buck & Under and Buck & Change offerings and positioning our brand to maintain strong value and affordability category leadership. During the second quarter, Fresh Faves Boxes mixed at nearly 5%, with a typical margin percentage profile and strong associated value perceptions. We plan to further embed the Fresh Faves platform in the back half of 2019 through a combination of ongoing marketing and new box news. In fact, we launched 2 new boxes at the end of June. So much like we've done with Buck & Under over the years, our plan is to continuously optimize the platform.

Finally, to capitalize upon the growing demand for vegan and vegetarian options, we took the opportunity to partner with Beyond Meat, an innovative leader in plant-based proteins, to be the first Mexican QSR chain to develop a proprietary blend of seasoned, 100% plant-based protein using our new Beyond Taco and Beyond Avocado Taco, which launched on April 25. The Beyond launch was an impressive brand-wide effort and demonstrates the strength of our innovation, commercialization and training process. I am proud of the high level of execution by our franchisees and company operators that has delivered a product that very much lives up to the brand promise.

We are very pleased with the guests' reception to our Beyond Tacos, which mixed at over 6% during the second quarter and garnered an incredible amount of social and traditional media impressions that helped drive incremental guest visits following the initial launch. Our early learnings indicate that although we have broadened our appeal and are benefiting from new usage or additional frequency from vegans or vegetarians, the frequency of these guests is lighter but tends to be more incremental compared to existing Del Taco guests.

We are also seeing a high rate of trial among existing guests at a higher-than-average check. Whether this existing guest trial reflects an emerging flexitarian trend or simply a desire to try something new, we are pleased to be at the forefront of Mexican limited-service restaurants by offering this unique alternative. And we believe the Beyond platform is well positioned to drive incremental sales opportunities and further strengthen our QSR+ brand positioning over the long term.

We intend to continue to leverage Beyond, and will further embed the platform through ongoing marketing and product extensions. For instance, our recent expansion into the burritos with the Beyond 8 Layer Burrito and Epic Beyond Cali Burrito increased our Beyond mix to over 7% of sales over several weeks. And we believe the sustained mid- to high single-digit Beyond sales mix in each of the first 13 weeks is indicative of a permanent demand dynamic.

Despite the progress we have made on our transaction-driving initiatives, thus far in the fiscal third quarter, our system-wide comparable restaurant sales have slowed sequentially but remain within our guidance range. Although the first 2 weeks of fiscal Q3 began with trends that were similar to Q2, we experienced an unexpected traffic-driven slowdown since week 3, which began in early July. Looking forward, we expect that our transaction-driving initiatives will help to restore more favorable trends as we move through summer and into the fall time frame. In particular, the pending addition of 2 new delivery service providers and our ongoing Fresh Faves Box innovation, coupled with a great lineup of new products to delight our guests, including the launch of a new $2 breakfast toasted wrap last week and the planned return of our premium Carnitas LTO in September, is expected to improve our recent trends.

Turning to our portfolio optimization strategy, as you may recall, it is designed to help grow AUVs, stimulate new unit development and help shift our portfolio mix to 55% franchise by next summer 2020. Upon completion of this process, we expect to have a sharpened operational focus with a company-operated footprint of predominantly strong AUVs and restaurant margin stores in core Western markets plus a strategic presence in emerging markets.

We also expect to reduce recurring unit capital, cost-side inflation exposure and California concentration. We are working with The Cypress Group to manage the re-franchising of certain company-operated restaurants across 4 noncore Western markets and are encouraged by the significant interest among new and existing franchisees. We are currently evaluating transaction economics and, most importantly, buyer qualifications, including their track record as operators and new unit developers. Although we have nothing specific to announce at this point, we look forward to doing so at the appropriate time.

During the second quarter, we opened 1 company-operated restaurant, while our franchisees opened 2 restaurants. Thus far in 2019, there have been a total of 9 restaurant openings, and we currently have another 12 restaurants under construction, with 5 more scheduled to start in August, which puts us in a position to deliver on our development guidance of at least 25 new restaurants. We also recently signed a new franchise development agreement for 7 restaurants in the Columbus, Ohio area as we look to expand our Midwest presence.

To conclude, there are a lot of great things happening at Del Taco, and we are pleased with the progression of our digital, value and menu innovation strategies. Looking forward, we are excited about the launch of our pending new products, which, coupled with our margin management strategies and the easing of our second half transaction comparisons, puts us in a position to reaffirm our outlook for the full year.

And now Steve will review our second quarter financials.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [4]

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Thanks, John. Beginning with the top line, total second quarter revenue rose 3.1% to $121.5 million from $117.8 million in the year-ago second quarter. System-wide comparable restaurant sales increased 2.2% and lapped system-wide comparable restaurant sales of 3.3% during the second quarter of 2018, resulting in a 2-year increase of 5.5%. Compared to the first quarter, system-wide comparable restaurant sales improved 230 basis points.

Second quarter company restaurant sales increased 2.2% to $112.2 million from $109.8 million in the year-ago period. This was primarily driven by a company-operated comparable restaurant sales increase of 1.7%. Second quarter company-operated comparable restaurant sales were comprised of a 4.2% increase in check, including a slight increase in menu mix, partially offset by a 2.5% decline in transactions. Compared to the first quarter, our comparable restaurant sales improved 230 basis points led by a 300-basis point improvement in transaction trends.

Franchise revenue increased 11.8% year-over-year to $4.6 million from $4.1 million last year. The increase was driven by additional franchise-operated stores as compared to the second quarter last year, including 13 restaurants that were re-franchised during the first quarter as well as by franchise comparable restaurant sales growth of 2.8%.

Turning to our expenses, food and paper costs as a percentage of company restaurant sales increased approximately 10 basis points year-over-year to 27.5% from 27.4%. This was driven by menu price increases that were mostly offset by food inflation of nearly 3% as well as impact from Beyond Tacos, which drive a strong margin dollar contribution but with a slightly lower-than-typical margin percentage.

Labor and related expenses as a percentage of company restaurant sales increased approximately 10 basis points to 32.4% from 32.3%. This was driven by wage inflation from the recent $1 California minimum wage increase to $12 an hour that was mostly offset by the impact of menu price increases and reductions in workers' compensation, group health insurance and payroll taxes.

Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 50 basis points to 21.1% from 20.6% last year. This was primarily driven by the adoption of the new lease accounting rules, which unfavorably impacted our occupancy and other operating expense and restaurant contribution margin by approximately 70 basis points, partially offset by 30 basis points of favorability due to the timing of advertising expenditures. Excluding these factors, we experienced only 10 basis points of operating expense deleverage as other categories were relatively consistent as a percent of company restaurant sales.

Based on this performance, restaurant contribution was $21.3 million compared to $21.7 million in the prior year. And restaurant contribution margin decreased approximately 70 basis points to 19.0% from 19.7% primarily due to the impact of the new lease accounting rules. On a sequential basis, this marked a favorable progression from the first quarter, when our restaurant contribution margin contracted 260 basis points.

General and administrative expenses were $10.8 million, up from $10.3 million last year. As a percentage of total revenue, general and administrative expenses increased by approximately 10 basis points year-over-year to 8.9%. This increase was primarily driven by higher stock-based compensation expense.

Adjusted EBITDA was $16.7 million, down slightly from last year and decreased as a percentage of total revenues to 13.8% from 14.3% last year. Note these reductions included an unfavorable approximate $0.7 million impact from the adoption of the new lease accounting standard.

Depreciation and amortization expense was consistent at approximately $5.8 million each year, reflecting a larger company-operated restaurant base, offset by the reclassification of our build-to-suit leases to occupancy and other operating expense under the new lease accounting rules. As a percentage of total revenue, depreciation and amortization declined 20 basis points to 4.8%.

Interest expense was $1.7 million compared to $2.0 million last year. The decrease was due to the reclassification of our build-to-suit leases to occupancy and other operating expense under the new lease accounting rules, partially offset by an increased 1-month LIBOR rate and a slightly higher average outstanding revolver balance compared to the second quarter of 2018. As of the end of the second quarter, we had $146 million outstanding under our revolver, and our applicable margin for LIBOR loans remained at 1.75%.

Income tax expense was approximately $0.8 million for an effective tax rate of 27.7% as compared to $1.6 million during the second quarter of 2018 for an effective tax rate of 27.3%. Net income was $2.1 million or $0.06 per diluted share compared to $4.2 million or $0.11 per diluted share last year.

In addition, we are reporting adjusted net income, which excludes restaurant closure charges, sublease income for closed restaurants, impairment of long-lived assets and other income from insurance proceeds. Adjusted net income in the quarter was $4.9 million or $0.13 per diluted share compared to $5.4 million or $0.14 per diluted share last year.

Turning now to our repurchase program covering common stock and warrants. During the quarter, we repurchased 303,607 shares of common stock at an average price per share of $10.05 and repurchased 6,186 warrants at an average price per warrant of $1.30 for an aggregate of $3.1 million. At the fiscal quarter-end, approximately $22.3 million remained under our $75 million repurchase authorization.

Finally, as John covered, the progress and outlook for our transaction-driving initiatives, including a strong new product lineup for the second half, puts us in a position to reaffirm our annual guidance for the 52-week period ending December 31, 2019. Please refer to today's earnings release for the details on our outlook.

Thank you for your interest in Del Taco, and we are now happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Greg Badishkanian with Citi.

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Spencer Christian Hanus, Citigroup Inc, Research Division - Associate [2]

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This is actually Spencer Hanus on for Greg. So you mentioned that Beyond Taco is mixed at over 6% since late April. I was just wondering if you could talk about how demand for the product is trending quarter-to-date and then any data you have on trial versus repeat orders by customers of this product.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [3]

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Yes, sure. So I think what we referenced was the 6% that we ran in the quarter reported. And then since we launched the Beyond burritos, we had seen mix as high as kind of in the 7% range. So actually, we saw more mix as we layered on the Beyond burritos.

As far as the customer goes, there are really 2 big buckets of users here. And one is that we talked about, the vegan and vegetarian users, and these guests are pleased with the product. And they're pleased that Del Taco is relevant here. But we're also finding, as I mentioned in the prepared remarks, those guests are just lighter users compared to the average Del Taco user. So we need to just continue to work to educate those consumers on our QSR+ positioning and really build their frequency over time. So still a very relevant group for us as we move forward and certainly part of the incrementality in Q2.

The second big bucket is obviously the existing user base. They're folks that are looking to reduce meat or maybe this flexitarian group that's been talked about quite a bit. And obviously, when you look at these folks, many of them are already Del Taco users or Del Taco guests before Beyond Tacos. And now they're just simply trading into the product and trying and liking it, which, although they're not creating as much incremental traffic for us, they're certainly -- we believe it's going to help their frequency over time. And it's definitely driving a higher check average with those guests.

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Spencer Christian Hanus, Citigroup Inc, Research Division - Associate [4]

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Great. And then can you just quantify any impact you guys saw from weather or calendar shifts on the comp during the quarter?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [5]

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No. The early part of fiscal Q2, there was a very slight good guide in terms of the less seasonality with a little bit of a headwind in Q1, a slight benefit in the early days, first couple of few weeks of the second quarter, but that wasn't that dramatic. Beyond that, no other fiscal Q2 seasonality nor weather impacts to note.

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Operator [6]

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Our next question comes from the line of Alex Slagle with Jefferies.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [7]

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What's your best guess as to what's driving the sales slowdown in July? Is it like a regional slowdown? Or is this more of a broad-based competitive issue? Or what are your thoughts?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [8]

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Yes. Alex, I think the slowdown in traffic trend is somewhat unexpected over the last just recent weeks, I would say. So we said it's about 3 weeks ago, since about the 4th of July holiday. We've seen some of that expected slowdown, and we've really seen that in some key markets. California is one of those markets, but I'll say it's not the only market. So I wouldn't go as far as say it's a broad-based slowdown, but it's certainly, in an upmarket sorts, kind of affecting the trend.

There's a couple of things we've looked at really closely. To some extent, you've always got to look at the rollover and try to understand what the effect is on same-store sales year-on-year. If you remember last year, this exact same time frame, it lines up almost exactly with the $1 chicken snacker rollout, which was rolled out, heavily promoted. And as you recall, it was a pretty powerful demand driver, if you will. It created an adverse impact on check mix due to the high menu mix percent at the time. Although that demand, if you recall, wasn't enough to offset the drag on check mix.

So clearly, there was some underlying demand with the product. That was likely driven by a discount value user. So as we think about the kind of year-on-year, we're rolling over that launch with mid-tier value program in Fresh Faves, which we think is the future of our value platform and one that we're going to continue to optimize and improve upon, like we just did with the 2 new boxes.

And then we're also rolling over with the Beyond burritos, which is more of a premium platform. So you could argue that we might be toggling a bit of traffic for check right now. That could be happening, so we'll keep a close eye on that dynamic.

The other one that we're keeping an eye on, although not necessarily beginning just 3 weeks ago, but when we look at this, we kind of look at timing. And there's not really any major competitive disruptions, but obviously, the year-on-year growth of delivery in the category is definitely a factor that we could point to. That might make sense with summer seasonality, just consumers looking for more convenience. During summer, the days are longer, et cetera. And obviously, that particular service mode could be poised for additional growth during a time frame like this one. Kind of the summer has heated up, if you will.

And as I said in my comments, I think it's important for us to further ramp up on our strategy there and close the gap with our multi-DSP approach. And that's going to happen over the next couple of quarters.

So I think just to kind of wrap it all up obviously it's an unexpected slowdown. We're only a few weeks in at this point. But despite this, we think we're really well positioned to get that momentum back. And as we think about moving through summer into the fall time frame, between what we talked about with our digital and delivery expansion and the powerful barbell menu, which will include ongoing focus on Fresh Faves and Beyond, as we move into the late summer and fall as well as new news of breakfast -- and we said we're going to bring back the Carnitas LTO in the fall as well. So I think we've got a lot of good levers to pull on the demand side, and we look forward to kind of moving in that fall time frame.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [9]

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Got it. Sounds good. And I guess on the value end you're -- it sounds like you're still seeing the consumers incrementally gravitating towards that bundling -- bundled offer versus the à la carte items on the Buck & Under. So I guess that's the case. Nothing's really changed there. You're still pretty happy with Fresh Faves.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [10]

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Yes. As we've said, near 5% Fresh Fave mix after -- during the second quarter. That's actually bumped up a little bit so far in the third quarter. So a lot of traction and good reception we see on the Fresh Faves thus far.

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Operator [11]

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Our next question comes from the line of Nicole Miller with Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [12]

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Two things on the plant-based alternative proteins. First, you talked about the incrementality of it. And I'm just wondering how you measure that, how scientific that can be. And what -- how much would you say was the comp contribution?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [13]

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At this juncture, we have what we call the more scientific methods working with our econometric modeling firm. That's more so currently in process. We felt it appropriate to do some of the real in-depth data capture after it matured a bit more, i.e., the first wave with tacos in Q2. Now in Q3, we've added the burrito line. So we now have a fairly mature Beyond offering out there. So I would say the more scientific analytics are underway. We'll share more on that down the road.

So in the meantime, we don't have a very scientific method to quantify what the impact on the comp was. Some of the feedback, we shared today. It's a little bit more anecdotal. Certainly, you're looking at social media, talking to our operators at length. There absolutely are some new faces and a lot of neat energy out there in social media, a lot of that coming from vegans and vegetarians. But we certainly are also observing and concluding early days that those are lighter users. So it's a positive, but we think it's still early days for plant-based proteins as a whole.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [14]

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It does make a lot of sense. I agree. The incrementality of it makes perfect sense. So the more scientific that becomes, I think everyone will be interested in that.

Maybe the other equally difficult question, as you talked about it being a permanent demand dynamic, now that part, I'm not so sure about. So do you think, to your point that you've said, that they come but less often? Or do you think they ultimately come like as a user that you have today? And how do you know -- when will we know it's permanent? How will we know?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [15]

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Well, I think, Nicole, what we're trying to do is we're -- if you think about it just fundamentally, we're attacking a need-state here, right? And there's a need-state that's out there that is among -- one of them -- one of those need-states is a lifestyle choice, the vegans and vegetarians. And the other need-state is more a better-for-you type of a need-state that is just kind of among us and within the category and has been within the category for years. So folks just looking to maybe, perhaps, feel a little bit better about what they're eating each and every day, mixing in things, lighter calorie options or having options like that on a menu, which, by the way, we've had a lot of success with over the years with our QSR+ positioning when we launched ground turkey or when we brought a platform like freshly sliced avocados to bear.

So we think there are some deeply rooted, longer-term fundamental characteristics here in regards to those better-for-you need-states that we do not think will go away. Now will the platform have to be continuously optimized and improved upon over time depending on how those need-states shift or move? Yes, of course, just like anything else that we do. But that's probably where you're seeing that demand being driven by the existing users and the existing QSR universe.

Now as far as the vegans and vegetarians go, definitely, as I stated, a lot more incremental. We know now -- we've seen that through our consumer research both in tests and now some of the early consumer research we've done since we've launched. But we're -- like Steve said, we're also seeing that they're just very -- they're not as heavy as a core QSR user, as a core Del Taco user.

So it's going to continue to evolve. I think the demand dynamic associated with sales mix right now is part of what we were talking about in the script. And the idea of launching the 2 new burritos and seeing sales mix spike up over 7%, I mean I think is pretty powerful. So that's what we know. Thus far, we're still very excited about the platform, and we intend on continuing to market it and innovate against it.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [16]

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That's actually helpful, to think about it as a broader need-state. Last question for me. You're talking a lot about switching to delivery. You're talking a lot about your marketplace partners. What's the opportunity for you to go directly to the consumer, which is vast? So maybe the real question, I apologize, is how are you going to balance that opportunity with anything you can do to have the customer come directly to you for anything, digital, delivery, off-premise, et cetera?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [17]

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Yes, I know. It's a great question. So we now have kind of the ability in the platform to do that through the Del App. So the added functionality that's just kind of been added to the app recently, which will give the consumer the ability to kind of go through our app and order directly through delivery or order ahead for pickup, is going to give us that more direct-to-consumer capability, where we'll own some of that -- we'll own that data obviously. And we'll be able to look at that behavior within our CRM database. And I'm assuming you're not talking about direct delivery from Del Taco and by Del Taco, right?

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [18]

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No. The way that you've described exactly.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [19]

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And you got it. Thanks.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Nick Setyan with Wedbush Securities.

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Nick Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [21]

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Steve, what's the pricing about around second half of '19? Are we going to stay around 4% in the second half?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [22]

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First half, we carried just over 4%, both Q1 and Q2. Q3, we'll be carrying right about 3.5%. As we get into the fourth quarter, we'll lap about 1.5% that we took last fall, likely with a view to at least replace that level. So I expect to continue the 3.5%, possibly a bit higher to end the year, which will bring us in, in that high 3% area for the full year, in line with our guidance.

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Nick Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [23]

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Got it. In terms of the commodities, obviously we had some mix with the Beyond, a little bit of a headwind there. What's the underlying inflation in the second half? And then what do you think happens with COGS with the mix of Beyond where it is?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [24]

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Yes. Second half, we are looking at a little bit more inflation than the front half. Q1, we were up just over 1% of food inflation. Q2, right near 3%. I think Q3 will be our peak, meaningfully above 3%. Q4 should come back down to that 3% area. So we'll bring the year-end pretty close to 3% on a full year blend. That's at the high end of our prior guidance. Some of the pressures lately were lettuce and avocados that had some transitional and weather-driven issues that we're working through, those -- in particular how, in the case of lettuce or will, here, soon rectify as we get towards fall timing frame in terms of avocados.

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Nick Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [25]

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And then on the protein side, as we kind of look to contract out into 2020, what are we hearing around pork costs and maybe some of the substitution impact on taco meat and chicken?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [26]

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Yes. Overall, the African swine fever -- definitely, China imports are up. In general, the view is that that's been kind of supportive broadly of protein prices across the board, nowhere near worst-case scenarios or significant levels of cost pressure, fortunately. Certainly something we're going to keep an eye on. But what we kind of see right now near the midterm is most proteins are a bit elevated, call it at the higher end of what expectations may have been or what norms might look like, but fortunately, not a dramatic impact at this point. But we will continue to monitor that.

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Nick Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [27]

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And on the labor side, obviously 10 bps of deleverage was pretty impressive in the context of what we've seen in the recent past. It sounds like maybe there was a little bit of some onetime or transient benefit around medical and workers' comp. How should we think about that going forward?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [28]

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Yes. Overall, I would say the cost of four-wall labor has done a very nice job managing their hours and trends in light of where sales are. Certainly, the strength of same-store sales moving forward, in general, always can help inform what that percentage looks like. Workers' comp is a benefit we've been enjoying for a while now. We continue to see good trends in development on that line. So I'm cautiously optimistic that that will continue. We're also in the midst of a favorable health care renewal, which is a lower magnitude of save. And then on the payroll tax front, you may recall Q4 last year that FUTA, F-U-T-A, tax went away, which gave us a nice kind of onetime benefit in the fourth quarter, so we will have to lap that kind of optically in the fourth quarter. But up until then, through Q3, I see that being a favorable compare as well.

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Operator [29]

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Since there are no further questions left in the queue, I would like to turn the call back over to management for any closing remarks.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [30]

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Okay. Thank you for the -- for your interest in Del Taco today. We appreciate you taking the time on our brand, and we certainly look forward to sharing our progress on future calls. Have a great day.

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Operator [31]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.