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Edited Transcript of TACO earnings conference call or presentation 6-May-19 8:30pm GMT

Q1 2019 Del Taco Restaurants Inc Earnings Call

LAKE FOREST May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Del Taco Restaurants Inc earnings conference call or presentation Monday, May 6, 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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* Craig Martin Bibb

CJS Securities, Inc. - Senior Research Analyst

* Jeremy Scott Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail

* Nerses 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

* Peter Mokhlis Saleh

BTIG, LLC, Research Division - MD and Senior Restaurant Analyst

* Spencer Christian Hanus

Citigroup Inc, Research Division - Associate

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the First Fiscal Year Quarter 2019 Conference Call and Webcast for Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Steven Brake, Executive Vice President and Chief Financial Officer, to begin.

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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 conditions.

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. We appreciate everyone joining us on the call today. Although our quarterly results were negatively impacted by unfavorable weather in California and throughout the West, as well as the anticipated 3-week shift of the Lenten season, we are encouraged by our recent second quarter trends, which I will cover in a moment, and we are reaffirming our full year guidance.

For the first quarter, system-wide comparable restaurant sales decreased 0.1%. Franchisees again outpaced company-operated restaurants, growing 0.4% versus a decline of 0.6% at company-operated restaurants. Average check growth at company-operated restaurants was 4.9%, including nearly 1% in menu mix growth, driven by our Mix2 promotion and the return of our seasonal seafood promotion, although transactions declined 5.5%.

We made progress on our portfolio optimization strategy, which is designed to help grow AUVs and stimulate new unit development. By shifting our portfolio mix to 55% franchise by summer 2020, our company-operated footprint will predominantly reflect strong AUVs and restaurant margins in our core Western markets, plus a strategic presence in our emerging markets. We expect this to also drive a sharpened operational focus and financial benefits, including: improved company AUVs and restaurant margins; reductions in recurring existing unit capital; and reduced exposure to cost-side inflation and California concentration.

During the first quarter in the Los Angeles area, we refranchised 13 lower-volume company-operated restaurants to strong, existing multiunit operators and acquired 3 high-volume franchise restaurants to help better position all of these restaurants for AUV growth.

We have also retained The Cypress Group, a leading restaurant and franchise investment banking firm, to manage the refranchising of company-operated restaurants in 4 non-core Western markets. The marketing process has commenced and is targeting new or existing franchise groups with proven restaurant operations capabilities and a strong, consistent track record of new unit development, who commit to continued brand growth in existing and/or other markets.

Additional development updates include opening 4 franchised restaurants and 1 company restaurant so far this year. These 5 openings span 5 total states, demonstrating the geographic breadth of our growth, and an additional 9 restaurants are currently under construction, which puts us in a good position to deliver our annual guidance of at least 25 new restaurants. We also recently signed a 3-unit development agreement for southern Brevard County in Florida.

As we enter the second quarter, our transaction-driving initiatives are gaining traction, including our digital transformation, value evolution and menu innovation. On the digital front, our new app has now exceeded 500,000 registered users since launching last November. We are excited about the long-term potential this marketing platform has to drive guest frequency as it continues to scale, and we are planning to expand its functionality to include mobile ordering for pickup or delivery this summer.

During the first quarter, delivery through Grubhub was enabled for substantially all company-operated Del Taco locations, and we plan to leverage a multiple-DSP approach to maximize consumer demand by adding Postmates and DoorDash later this year.

Our second transaction-driving initiative is enhancing our core value program. This began late in the first quarter with the launch of our $4, $5 and $6 Fresh Faves Boxes. These full meal deals include 2 or 3 entrées, French fries and a drink and help address growing consumer demand for abundant value with price points and variety that further differentiate Del Taco from the competition. Fresh Faves Boxes were met with strong demand and mixed at approximately 6% with a typical margin percentage profile. And they work in concert with Buck & Under and Buck & Change to expand our value offerings from a la carte items to bundle meal deals.

Last, but certainly not least, we are using menu innovation to drive traffic in incremental Del Taco occasions with the exciting recent launch of the Beyond Taco and Beyond Avocado Taco, which are now available in all restaurants. As guest demand for vegan and vegetarian options continues to grow, 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. A key objective as we developed our Beyond Taco strategy was competitive differentiation, which we attacked on 3 fronts: flavor, variety and convenient value. The team did a great job developing a proprietary and unique flavor profile that tastes incredibly similar to our current ground beef, allowing us to broaden its appeal to not only attract vegans and vegetarians, but also those looking for better-for-you options or to reduce red meat without sacrificing flavor.

Next is variety. Our Beyond ground protein can be substituted for any other protein or added on any menu item, including burritos, nachos, bowls or salads. This provides best-in-class variety to our guests and endless future product innovation opportunities for our culinary team.

And lastly, convenient value. The Beyond Tacos have a recommended $2.49 point, representing only a $1 premium from our Del Taco. This incredible value, coupled with our convenient drive-throughs, makes our Beyond Tacos broadly accessible.

To maximize the launch of Beyond, we developed a dynamic Combined Solutions strategy that leverages marketing and operational touch points to create real impact for our brand and our guests.

Our operational efforts are paying off, with early guest experience measurement survey results showing a high level of guest satisfaction for Beyond Tacos, even higher than the very successful Del Taco, following its launch. The marketing team complemented our operational preparedness with a 360-degree plan, including very targeted public relations and social media campaigns to drive buzz and excitement leading up to the launch. These efforts generated over 728 million online and print media impressions through the first week, including placements in USA TODAY, BuzzFeed and over 70 television newscasts. The advertising highlights that the future of tacos is here and available in all of our markets.

Similar to our tests, since launching 11 days ago, we are very encouraged by increases in both check and traffic as this new product platform is bringing in many new or lapsed users and appealing to regular Del Taco guests, who are all eager to sample our Beyond Taco offerings. This has translated to a strong 6% product mix so far, supporting the unique appeal of this product. We believe the Beyond platform will drive sales while further strengthening our QSR+ brand position, and we see incredible future opportunity to expand this protein across our menu.

Looking ahead, we are encouraged by the sequential improvement in transaction trends, which have helped to restore positive comparable restaurant sales thus far in the second quarter as we cycled the Lenten calendar shift and began to benefit from our transaction-driving initiatives, including our digital transformation and core value program enhancements.

More recently, since the April 25 launch of Beyond Tacos, our check and transaction same-store sales trends have improved significantly, which reflects favorably on our outlook, particularly as prior year compares ease in the second half. We are pleased to reaffirm our full year outlook and remain excited about all that is happening at Del Taco. We remain confident that our digital, value and menu innovation strategies will drive comparable restaurant sales growth that we will pair with effective margin management strategies.

And now, Steve will review our first quarter financials and annual guidance.

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

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Thanks, John. Total first quarter revenue rose 1.5% to $114.2 million from $112.6 million in the year-ago first quarter. System-wide comparable restaurant sales decreased 0.1% and lapped system-wide comparable restaurant sales of 3.7% during the first quarter of 2018, resulting in a 2-year increase of 3.6%. First quarter company restaurant sales increased 0.8% to $105.9 million from $105.1 million in the year-ago period. This increase was driven by contributions from additional company-operated stores as compared to the first quarter of last year, partially offset by a company-operated comparable restaurant sales decline of 0.6%.

First quarter company comparable restaurant sales was comprised of a 4.9% increase in check, including nearly 1% of positive menu mix, offset by a 5.5% decline in transactions. Franchise revenue increased 7.2% year-over-year to $4.1 million from $3.8 million a year ago. The increase was driven by additional franchise-operated stores as compared to the first quarter last year, including 13 restaurants that were refranchised during the first quarter as well as by franchise comparable restaurant sales growth of 0.4%.

Turning to our expenses. Food and paper costs as a percentage of company restaurant sales decreased approximately 40 basis points year-over-year to 27.2% from 27.6%. This was driven by menu price increases, partially offset by modest food inflation of over 1%, including increased distribution cost. Looking ahead, we expect net food inflation of approximately 2.5% to 3% in each of the next 3 quarters and continue to expect annual 2019 food inflation of approximately 2% to 3%. Labor and related expenses as a percentage of company restaurant sales increased approximately 80 basis points to 33.9% from 33.1%. This was driven by wage inflation from the recent $1 California minimum wage increase to $12 an hour, partially offset by the impact of lower payroll taxes, menu price increases and slight dollar and percentage reductions in group health insurance and workers' compensation.

Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 220 basis points to 23.1% from 20.9% last year. This was driven by inflationary trends, including increased insurance expense due to adverse general liability claims development, coupled with the negative comparable restaurant sales, which created deleverage, as much of our operating expenses is fixed in nature.

In addition, the adoption of the new lease accounting rules unfavorably impacted our occupancy and other operating expense and restaurant contribution margin by approximately 90 basis points. Based on this performance, restaurant contribution was $16.8 million compared to $19.3 million in the prior year and restaurant contribution margin decreased approximately 260 basis points to 15.8% from 18.4%. General and administrative expenses of $10.5 million, up slightly from $10.4 million last year. As a percentage of total revenue, G&A decreased by approximately 10 basis points year-over-year to 9.2%. This decrease was driven by significantly reduced management incentive compensation, mostly offset by general inflationary trends and increased stock-based compensation expense.

Adjusted EBITDA of $12.1 million compared to $13.9 million last year. As a percentage of total revenues, adjusted EBITDA decreased 180 basis points to 10.6% from 12.4% last year. Note these reductions include an unfavorable $0.7 million impact from the adoption of the new lease accounting standard. Depreciation and amortization expense was consistent at approximately $5.9 million each year, reflecting a larger company-operated restaurant base, offset by the reclassification of our built-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 10 basis points to 5.2%.

Interest expense was $1.8 million compared to $1.9 million last year. The decrease was due to the reclassification of our built-to-suit leases to occupancy and other operating expense under the new lease accounting rules, mostly offset by an increased 1-month LIBOR rate and a higher average outstanding revolver balance compared to the first quarter of 2018. As of the end of the first quarter, we had $154 million outstanding under our revolver and our applicable margin for LIBOR loans remained at 1.75%.

Income tax expense was approximately $0.6 million for an effective tax rate of 28.0% as compared to $1.2 million during the first quarter of 2018 for a year-ago effective tax rate of 27.1%. Net income was $1.4 million or $0.04 per diluted share compared to $3.2 million or $0.08 per diluted share last year. In addition, we're reporting adjusting net income, which excludes restaurant closure charges, sublease income for closed restaurants and other income related to insurance proceeds. Adjusted net income in the quarter was $1.7 million or $0.04 per diluted share compared to $3.2 million or $0.08 per diluted share last year.

Turning to our repurchase program, covering common stock and warrants. During the quarter, we repurchased 270,874 shares of common stock at an average price of $10.30 per share and 840,255 warrants at an average price per warrant of $1.78, for an aggregate of $4.3 million. At fiscal quarter end, approximately $25.4 million remained under the $75 million authorization.

During the quarter, we completed 2 sale-leaseback transactions for net proceeds totaling approximately $10 million, and we refranchised 13 Los Angeles area restaurants for net proceeds totaling $2.1 million. We also acquired 3 Los Angeles area franchise restaurants for $3.1 million.

Finally, as John stated, we are very pleased with the recent sales momentum and are reaffirming our fiscal 2019 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 I just had a couple of questions. The first one was on the Beyond Meat offering. There's been a lot of press around that. Can you just talk about the different types of customers that you're attracting with that offering? And then are you happy with the supply that you currently have with that product, given the, seems like, pretty high demand for it?

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

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Yes. Sure. Yes, overall, we feel great about the launch of Beyond Tacos. The team has done a wonderful job preparing the restaurants to provide a great experience with the product and overall experience with the brand. And as expected, we are seeing some new faces as well as a lot of trial among our existing guests. So great opportunity here from a consumer standpoint. You know I think generally, this is the type of customer that is in QSR today, and QSR just has not traditionally provided them great options. And we feel like we can. We feel like we can deliver on that for them from a value and a convenience standpoint. And regards to the supply, we feel good about it. We're kind of in line with our partner at Beyond Meat, and we're monitoring it as we go, but there's nothing that our plans haven't accounted for at this point.

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

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Okay. Great. And then on the refranchising, you guys mentioned in the release that you guys made -- you've made some progress on that. Can you talk about the interest that you're getting from that, from like owner-operator buyers and then financial buyers, how does that mix split?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [5]

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Yes. So it's early days. We just really commenced and announced last week with Cypress through a press release. Of course, we have been getting some initial inquiries over the last couple of months since we talked about it, at ICR and on our earnings call, from both internal and external. So we've been capturing those, and we'll follow up. I mean the main purpose of this, obviously, is growth and part of this process, why we wanted to use The Cypress Group, was to make sure that we approached it in a robust fashion, so that we could find the right cultural fit for this brand that has great operational capabilities as well as the proven track record of growth. And that is really the driver, that kind of latter part, is really the driver of what we believe will be the final kind of outcome here with this process. So we're not in any hurry, as we said, we're looking to get this done by the summer of 2020, and we'll move through the process with the mindset of quality over quantity and kind of see where we're at here over the next few months.

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Operator [6]

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Our next question comes from the line of Peter Saleh with BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [7]

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I was just wondering if you guys would elaborate a little bit on the quarter-to-date trends? How should we be thinking about traffic? I know you said it sequentially improved, just any sort of guidance there would be helpful.

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

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Yes. Sure, Peter. So we've seen sequential improvements during Q2 in traffic and same-store sales. Obviously, starting with the launch of Fresh Faves Boxes, which also, by the way, coincided with the favorable Lent rollover. So we had the unfavorable rollover in Q1 and then favorable as we moved into the back end of Q1 and into early Q2. But nevertheless, Fresh Faves Boxes, we saw some momentum coming out of that program and then we've seen further acceleration recently with the launch of Beyond Tacos. So we think overall, these 2 initiatives, as designed, puts us just in a great position to compete more effectively for transactions immediately, while we work to scale our digital platform via mobile app and delivery.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [9]

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And then on the Beyond Tacos, how much of this do you think is trial versus a more sustainable trend in terms of same-store sales? And where do you -- all right, go ahead.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [10]

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Yes. I mean I think there's definitely excitement around the launch. I mean we're 11 days in right now. So there's a lot of excitement. The media has kicked off, the PR plan was great. And the things that I can say about it thus far are that it's behaving very similar to what we saw in our test market. So the sales mix is in a similar ballpark. I think we said on the last call that we were seeing incremental check and traffic from the program in our test markets. We're seeing that in the early days of the launch thus far. So I think all signs are pointing towards a very similar outcome that we saw in our test markets. But clearly, on a system program like this, with a lot of buzz around Beyond Meat in particular, we want to just continue to execute really well. And we'll see where it shakes out here over the next several weeks. But early days, we're pretty excited about the program.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [11]

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And then just on the margin profile of the Beyond Tacos, are they in line with the rest of the menu? Are they margin accretive, margin dilutive? How should we be thinking about that as well?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [12]

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Yes. Peter, the margin percentage after food is slightly lower than our overall normalized margin profile. That said, with the extra $1 per Taco plus an upcharge if they added into any other item, the margin dollars flowing through from that transaction, we're going to be very, very happy with. So we see it as definitely margin dollar driver without a doubt, very modest percentage contraction perhaps, depending on where the mix settles. But as John said, very happy with it and it's going to be a nice driver for us as we move forward.

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Operator [13]

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Our next question comes from the line of Craig Bibb with CJS Securities.

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Craig Martin Bibb, CJS Securities, Inc. - Senior Research Analyst [14]

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I guess I'll ask the same question in a different way. You guys are very data-driven in your management of the company, admirably. So can you give us -- I bet you know the percentage of Beyond orderers that are new to your concept.

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

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Yes. So it's early to be able to tell that, Craig. If I got your question right, you're looking for the new users related to the Beyond Taco launch?

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Craig Martin Bibb, CJS Securities, Inc. - Senior Research Analyst [16]

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Yes.

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

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Right. Okay. It's early days. I mean anecdotally, what we would tell you, having a lot of -- the leadership team has been out in restaurants and we've been talking to franchisees and talking to operators on regular calls, and we continue to see and also get reports back that we, as I said, we're seeing new faces in the restaurants. I mean we've had stories, even on social media, of folks talking about having never been to Del Taco before and this giving them a reason to check out the brand. So that was why we wanted to be really focused on the operational element walking into this program, because we felt like we would see new faces and maybe some lapsed users. And so it created an opportunity for our operations to do what they have done well with Combined Solutions and really keep those guests and get those guests coming back again tomorrow. So that's our utter focus as we speak today, is just continuing to maintain a high level of experience for those new guests coming in. So probably have a bit more color on that as we move through time here, but anecdotally, it does feel like there are some new faces coming in.

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Craig Martin Bibb, CJS Securities, Inc. - Senior Research Analyst [18]

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Okay. And then on the refranchising efforts in the quarter, I know there were high-volume units and low-volume units, but you sold -- you bought 3 for $3.1 million and you sold 13 for $2.1 million? Like I must be missing something.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [19]

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Well, certainly, the 3 we bought, we feel very happy with that transaction. We don't disclose transaction multiples, but we feel good about that acquisition being certainly earnings accretive in a nice baked-in return investment from day 1. On selling the 13, we'd said before that they were low-volume, $1.1 million AUV or even inside that, and we don't have a lot of low-volume units, but those were and they have a much lower restaurant contribution margin, think definitely single-digit, not dramatically above the 5% royalty that we're going to receive going forward. So not a lot of net EBITDA was sold. By the way, we're now 1 area manager or area director lower than we would have been, which is a significant G&A save. So the effective EBITDA we sold just wasn't a big number. And I'll just tell you that the $2.1 million in net proceeds, we feel good about that, and we also believe set these buyers up with stores that definitely have upside, and we're looking forward to working with them to untap that upside.

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Craig Martin Bibb, CJS Securities, Inc. - Senior Research Analyst [20]

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Okay. On labor, on a per operating week basis, you actually -- you did spectacular given the $1 increase in minimum wage. How material was the offset from workers' comp and lower payroll tax? (inaudible)

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [21]

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In the first quarter, workers' comp and health insurance were -- they were both down on dollars and percent, not down a lot. Probably more notable for the first quarter was we went over that FUTA, F-U-T-A, Federal Unemployment Tax, kind of surcharge that we talked about in the fourth quarter. That was retroactively eliminated last year. So we were paying and accruing -- rather accruing that tax first quarter a year ago. As you know, in the fourth quarter, that ended up being reversed and was not paid because it went away. So I'd say the favorability of lapping that in this recent quarter, definitely more significant than workers' comp and health insurance. We probably lapped about half of the dollar impact of that payroll tax going away. The next couple of quarters, there'll be a lower amount that is favorable as we lap them in Q2 and Q3. And then Q4, we go over the reversal a year ago. So there's a little bit of a cadence there that as we go forward, we'll do a good job trying to illustrate how that's playing out.

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Operator [22]

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Our next question comes from the line of Nick Setyan with Wedbush Securities.

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

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It's great to hear that sequentially, the trends have improved. Steve, would you mind reminding us when your next pricing action might be? And if the sort of upwards of 4% pricing is still the plan or potentially we can see a little bit more pricing as the year progresses?

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

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Sure. So we have been in a cadence of making 3 pricing moves per year. That would be very early spring, summer and fall. So this, so far this year, early spring, we did take some price that resulted in us carrying just a hair over 4% during the first quarter. There is also an early summer increase that has now been authorized. So that will kick in. As we approach summer, that's going to result in us carrying just again a hair over 4% during the second quarter. Then the timing and what we're lapping will result in us carrying right about mid 3% during our third fiscal quarter as we get into fall. Naturally, our fall price increase that has not yet been determined, will give us the opportunity to hold that 3.5%, potentially boost it back up. As you know, we take a very scientific approach as well as take a look at the marketplace and competitor actions and the trends within our business. So that's what we can talk about, basically Q1 is 4%, Q2 is 4%, Q3 will be about 3.5% and then fourth quarter to be determined, but we -- I'd expect it to be at least in that 3.5% to 4% area, in line with our guidance.

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

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Very helpful. John, any updates on the Grubhub partnership, how that's going? I don't know if you guys would be willing to share any percent of sales type of information and also, what the timing of the Postmates and Door Dash rollout. Is that Q3, is that Q4?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [26]

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Yes. Sure. So we are feel like we are on track with our rollout, with, as I said, nearly all of the company restaurants are on Grubhub with POS integration. And incidentally, the franchisees are right behind. So we've got a lot of franchisees who are opting into the program now as well. And I think roughly, the numbers as of today were about 50% of the franchise restaurants in the process are in some stage of rollout. So we feel good about that as well, with momentum building on that side of the house.

And you can plan that DoorDash and Postmates will also be added with some POS integration later this year. Can't give you an exact timeframe right now, it's just the nature of technology and in getting technology up and running in our restaurants, as we want to make sure we do it right. So my hope is that as we get through the summer months and into the early fall, that, that will be happening in a lot of restaurants with both of those providers. And that's certainly the aim, but we also want to hedge for things that just come about as you're implementing new technology.

So overall, feel good about where we're at. In regards to the performance, as I said I think on the Q4 call, the overall average volume, if you look at it on a per-day, per-store basis, is relatively low and part of that is that we just haven't implemented the full strategy just yet. So we need to get all 3 of these DSPs kicked in, and we believe that the restaurants that are experiencing smaller demand are going to do nothing but improve as that really kicks in. That said, Nick, we are seeing some locations that are significantly outperforming. And our multi-DSPs test also shows greater demand than the single DSP. So the performance should continue to grow as we build awareness through marketing and add these additional DSPs to optimize demand.

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

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That make sense, especially with the market share Postmates and DoorDash have in some of your markets forward, so. And just kind of last question on the margins as we kind of think about the back half, Steve, you got a little bit more inflation in food costs. Potentially, you got other OpEx hit from the third-party delivery rollouts. Labor, we have another minimum wage increase. So how are we thinking about getting to maybe the low and/or the mid-point of the low margin guidance? Is it just a function of where comps end up being for the rest of the year? Or are there other things in terms of operations that you guys are focused on to be able to get to those types of margins for the year?

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

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It's a little bit of all the above. I would say that kind of comp momentum certainly would be high on that list of what can put us in ideally, a better position to have margin performance. I shared the level of pricing, that certainly what I shared means we're going to be in that up to 4% area, certainly, which is elevated, it goes a long way to protecting margins and enhancing margins. And as you know, if we can couple that with continued menu mix, which we had a nice long track record of doing, and the nice sequential improvement, especially of late in traffic, that's very exciting.

So I'd say that comp equation is going to play the heaviest role, along with that, we talked about the food prep equipment that is now well in place in all our restaurants. Several months ago, working with the operators to really do the best they can to streamline labor, scheduling enhancements has also been an ongoing work in process. A lot of things going on in the food basket in terms of strategies, looking at portion optimization, packaging, freight strategies, a lot going on there. Probably to some degree, that's baked into guidance, but just really that ongoing margin management focus is something that we remain very focused on.

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Operator [29]

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Our next question comes from the line of Jeremy Hamblin with Dougherty & Company.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [30]

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Congrats, guys, on the improved results. I wanted to just come back to the commentary around Beyond Taco here and traffic trends. I just want to make sure I had this clear. So prior to the launch of the Beyond Taco, it sounded like you had seen comps go back to positive quarter-to-date in Q2, prior to the launch of BT. Is that correct?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [31]

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Correct.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [32]

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Okay. And then in terms of what you said further from that, on the traffic trend, did you say traffic had returned to positive territory post BT launch?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [33]

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Yes. So we didn't say. We said that we'd seen sequential momentum and then acceleration with Beyond Tacos trend. We want to be careful with it, but I will say that we have definitely seen some days of positive traffic here since the launch of Beyond Tacos. But like I said earlier, it is a early days of the program, lots of excitement and PR. I'm sure you've all been watching some of the social media and the presence that it's had out in the marketplace. So we want to be careful with that, because there's a lot of momentum associated with it, but we feel good that it's absolutely doing what it was supposed to do, which is to bring in an incremental occasion and bring some new users to the business and drive some traffic. So early days, feel good about it.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [34]

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And then just one more on that product launch. In terms of having a higher price point with slightly lower food margins, in terms of you guys do big business on, let's say, Taco Tuesdays and in terms of usage by your customers, a little bit to a prior question of the type of customers coming in, in terms of units moved, when somebody's coming in, are they buying the Beyond Tacos with the regular taco? Or just in terms of pattern, are you seeing people just come for the Beyond Taco? And then if so, are they, because of the higher price point, buying fewer units of that product than somebody who might come in and just say, "I'm looking for 5 tacos."

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [35]

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Yes. It's a good question. Jeremy, it's really early on the system launch of this. So I'd say it's definitely a mixture of both and you can imagine one of the reasons we wanted to make sure that the ingredient tasted very similar to our ground beef product, which is in our tacos, is because we do see a broader general market opportunity here beyond just vegans and vegetarians, where folks are just simply looking to reduce red meat consumption. And a lot of those folks are actually in QSR today. So we want to make sure that we are serving them well. I think that could be a larger opportunity in the long run, obviously. But so a mixture of behavior. When you look at a new user that's coming in for Beyond Tacos exclusively, of course, they're buying Beyond Tacos and maybe trying a few other things, versus somebody that maybe comes in and has their Del Taco go-tos, whether it be a chicken taco or a Del Taco or a burrito. They're likely just mixing Beyond Taco in and trying the Beyond Taco and probably finding that it tastes really similar to our existing Del Taco.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [36]

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Got you. And then last one here, coming back to delivery for a second. So first, what kind of contribution did delivery have to your total comp in Q1? Part one of the question. And the second thing is what type of impact did it have, I assume on the negative side, to occupancy and other operating expenses in Q1?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [37]

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Yes. Jeremy, I think as you guys know, our goal is to get to a multiple DSP platform, as soon as possible, namely this year. So really, until we get the second and third DSP up and running, it's really maximize driver coverage and maximize consumer demand. It would be premature to give any granular details about sales, contribution and or margin and cost side dynamics, because we're still early days with 1 DSP. It's certainly not a number on either front that would be material for me to want to call out, but encouragingly, as we get to that second and third DSP, when volume ramps up, as we've seen in our limited testing to date, down the road, I think we'd be in a position to give more color along the lines of what you asked about.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [38]

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Okay. So on that 200 -- almost 220 basis points of deleverage on -- on that line item, there wasn't anything that was material from delivery?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [39]

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No. And remember, we are taking -- and we're taking the 10% premium pricing to help manage that potential. So that kind of goes into my assessment there as well.

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Operator [40]

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(Operator Instructions) 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 [41]

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A couple quick questions. On the Beyond Meat, it's a very interesting discussion. It sounds like everybody is coming in the door. So I'm curious, is this happening -- are these orders happening online? And for delivery specifically as well? And just thinking about the derivative impact, if a lot of these orders are coming in the store, there's got to be a halo on your freshness queues. And maybe it's too early, but is that something you see push up guest satisfaction scores, which tend to be a leading indicator for same-store sales?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [42]

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Yes, Nicole. So on the online versus in-store, I mean as you can imagine, it's majority transacting in the restaurants at this point, because it's the biggest part of our business versus delivery. And I haven't -- clearly, I haven't looked granularly down at what percent of Beyond Tacos are happening via delivery at this point, but I imagine it's probably commensurate from the standpoint of the overall pie of what you would see breaking down in the restaurants. I think the opportunity that we have here with this program is definitely to bring some -- put a spotlight on the Del Taco brand and then make sure that folks know that we're a brand that can deliver a value-oriented QSR+ position. And that said, a big part of this was making sure that when these guests are coming in, they're going -- they're walking away with high overall satisfaction. And so far, we're seeing some of that. We are definitely seeing OSAT on the overall Beyond Tacos program outperform. I mentioned in my prepared remarks that they're actually -- both of the Tacos are outperforming the launch of the Del Taco from an overall satisfaction standpoint. So good signs there that we're delivering and executing the product well to guests. And that's what it takes in the early days of a new incremental program like this. We need to be able to prove that we can deliver it and deliver it well and then consumer will come back again.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [43]

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And on that point of the -- if it's selling well and the 6%, I believe you said, mix. Just on the math alone, that could be low single-digit positive impact to sales. So 2 things. I guess you're asking us to use prudence in terms of modeling that out because you don't know what's trial and awareness or permanent, albeit the Del Taco was a permanent driver for quite some time of same-store sales. And then again, just not to overlook or overshadow that before this, you saw a positive momentum, more of an increase in momentum on the core business, correct?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [44]

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Yes. That's correct, we think certainly, the Fresh Faves Boxes as well as the Lent bounce back, it will help propel the sequential improvement that started as we got into the second quarter, but without a doubt, a nice acceleration in the last 11 days.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [45]

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And just on the math, I mean if 6% mix, and it's all incremental, this is a big impact, right? But just use prudence, is that kind of the idea?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [46]

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Yes. I wouldn't call it a 100% incremental at this point, because we know existing users are trading into the product, right? Because that's the bigger general market opportunity I referenced. Certainly, could it provide incremental frequency among an existing user? Absolutely, it could. Now clearly, when it's bringing in a new or a lapsed user, that's an incremental transaction. And we just have -- we don't have the depth with it just yet, because it's 11 days in, to be able to quantify the percentage that are completely new user incremental. But either -- on either side of the fence, it's really something that can provide some traffic boost.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [47]

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That's great. And then just on the refranchising efforts, you bought in 3 stores. Was that packaged in with the stores you refranchised, and a few that, that buyer did not want? Or were these separate? And are you working as the intermediary and then you'll refranchise those? Or are these part of your permanent collection?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [48]

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So the 13 we sold were to 3 different existing franchisees who've had a nice track record of performance. And all those groups had bought other stores off of other franchisees. So we felt great about those 3 separate transactions that laddered up to the 13 restaurants we sold. The 3 we brought in was frankly, a long-term franchisee who was ready to retire and move on to other things in life. So that was a totally separate transaction. So we bought those 3 in, in the very mature, well-run part of Southern California. So we feel great about that being a permanent part of our portfolio moving forward. And both those transactions are really separate from the non-core market refranchising effort that is certainly live in the market with Cypress Group. And as John said, that's really all about getting new or existing folks to have interest in the brand that will stimulate growth into the future.

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Operator [49]

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Our next question comes from the line of Steve Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [50]

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A couple of housekeeping questions. First, with regards to your other food commodity, I've noticed that looking at ground beef prices, and actually, beef in general has been going up. And how confident do you feel about maintaining your guidance even as beef prices are starting to go up? And I have a follow-up.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [51]

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Yes. Knowing what we know right now, the 2% to 3% for the full year, we feel good about. As I've said, we're at a little over 1% in Q1. So Q1 wasn't a terrible level of inflation. I did say the next 3 quarters, we're looking at 2.5% to 3%. So certainly, some of the pressure you alluded to we are seeing in the marketplace, not to mention that avocados are not in a great spot currently. Lettuce has had some challenges, the proteins, we remain focused on. We do have some buys out on the calendar to give us some protection there, across certainly, chicken, but also a number of our beef items. We're also watching the Asian swine fever quite closely as well. So as we see sit here today, I think the guide is good, but obviously, we're going to keep our eye on it.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [52]

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Got it. And the follow-up, too, you mentioned higher insurance cost. I saw a couple of your peers, late last year, that was an impact that lasted for a couple of quarters in some cases. And how confident do you feel that the higher insurance cost you saw in Q1 won't be repeated in future quarters, in terms of claims up?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [53]

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Yes. So in the first quarter, the challenge we had insurance within occupancy and other was our general liability insurance, a portion which is self-insured. So we had some customer claims situations develop adversely on us in the first quarter. I believe that was fairly transitory. As we get beyond the first quarter, I think that should normalize back to a typical run rate. The other insurance items we talked about from time to time, workers' comp has continued to be a good guy for us with year-over-year reductions. I see that kind of normalizing as we go forward. I don't see it as an opportunity or a threat. And then health insurance, we had a nice renewal this year, and we should have a pretty good stable, if not slightly favorable run rate on that insurance line this year as well. So I think that should round out the insurance topics.

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Operator [54]

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Since there are no further questions left in the queue, I will like to turn the call over back to Mr. Cappasola for closing remarks.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [55]

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Okay, everyone. Thank you for your interest in Del Taco today, and we look forward to sharing our progress on future calls. Have a great day.

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Operator [56]

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