Berto Acquisition Corp (TACO) 2015 Q2 法說會逐字稿

Good afternoon. Thank you for standing by, and welcome to the fiscal second-quarter 2015 conference call and webcast for Del Taco Holdings, Incorporated, a wholly owned subsidiary of Del Taco Restaurants, Incorporated.

I will now turn the call over to Miss Alexis Tessier of ICR to begin.

Thank you operator, and thank you all for joining us today.

On the call are Larry Levy, Chairman of the Board; Paul Murphy, President and Chief Executive Officer; Steven Brake, Executive Vice President and Chief Financial Officer; and John Cappasola, Executive Vice President and Chief Brand Officer. After their prepared remarks, we will open the line 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. We 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 release also includes non-generally accepted accounting principles, or non-GAAP financial measures such as adjusted EBITDA. Non-GAAP financial measures should not be considered as alternatives to generally accepted accounting principles in the United States of America, or 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 the reconciliations of the non-GAAP measures to the nearest GAAP measures included in today's press release.

I would now like to the call over to Larry Levy, Chairman of the Board.

Thank you Alexis, and good afternoon, everyone. We appreciate your interest in Del Taco and your participation on our call today.

As you already know, the June 30 Levy Acquisition Corp's special meeting of shareholders resulted in a vote of overwhelming support in favor of the Del Taco Holdings acquisition. Our shareholders clearly saw the same things that we did when we evaluated the Company; an important national brand filling unique -- a unique niche between QSR and fast casual with accelerating same-store sales growth, growing customer accounts, improving profitability and a brilliant and deep management team.

We have also assembled a Board of Directors of talented restaurant industry veterans who will help guide Del Taco through this next phase of national growth. The management team has successfully repositioned the brand, and the dramatically improved financial condition bodes well for accelerated expansion. We are thrilled to be a part of this exciting story and can't wait to take Del Taco as far as the Company can go.

While today's results were achieved before the closing of the merger, this earnings call is our first as a publicly traded company. In my 30-plus years in the restaurant business, I have learned the key metrics that show the health of a restaurant company. I am delighted to start things off on such a strong note by reporting improving key operating metrics across the board.

With that, I would like now to turn the call over to Paul Murphy, our Chief Executive Officer.

Thank you, Larry.

On behalf of the entire Del Taco management team, we appreciate your kind words and confidence in us as we look to realize this brand's full potential in the marketplace. With that in mind, I am pleased to report that our strong fiscal second-quarter results further position us for an exciting year Del Taco.

Highlights from the quarter include: system-wide same-store sales growth of 6%, including positive traffic growth; operating income growth of over 30%; restaurant contribution margin of 19.8%; a 150 basis point improvement over the same period last year; and two new company restaurant openings.

These results are a testament to the ongoing success of our Combined Solution strategy. Combined Solutions was implemented in the spring of 2013 to highlight our quality value positioning and to bring our latent strengths of freshness, quality and our working kitchen to the forefront of consumers' minds. Our execution of this multifaceted strategy has enabled us to deliver strong growth and consistent improvements in our key performance indicators as we elevate Del Taco beyond the typical QSR and firmly into the realm of QSR-plus.

We are focused on capturing more of the QSR-plus opportunity by delivering a better guest experience and building freshness perceptions. Elevating the guest experience is made possible through a combination of operational execution improvements and personnel development.

We build freshness perceptions by introducing new products that reinforce and expand our fresh ingredient lineup. Our Fresh Avocado platform introduced late in the second quarter differentiates Del Taco from traditional QSR brands, while allowing us to compete more effectively for fast casual locations.

We highlighted the Fresh Avocado platform with new product news, launching the Epic Grilled Chicken Avocado Burrito, which quickly became our number one selling Epic Burrito. In fact, it has exceeded the performance of all other Epic Burrito product launches during the initial promotion. If you are able to come and visit a Del Taco restaurant, try it and you will understand why.

In terms of delivering a better guest experience, we achieved an improvement in our overall guest satisfaction scores in every quarter for the past two years. And the second quarter was no exception. Our Chief Brand Officer, John Cappasola, will go into more detail on the specific initiatives driving the improvement in a moment.

But first, I'd like to touch on new store development. We opened two new company restaurants in the quarter, one in Irvine, California, and one in Marietta, Georgia. While it is still early, we are very pleased with the results from these new locations. We remain on track to open 13 to 17 units system-wide this year.

As we look to 2016 and 2017, we are executing our near-term strategy of targeting lower risk infill markets, which lever Del Taco's brand awareness, scale and existing real estate relationships. The strong performance of our new Fresh Forward prototype in establish markets, coupled with the number of potential infiltrated areas, makes it an important element in our growth strategy for the foreseeable future.

As we continue to execute our infill strategy for longer-term growth, we are also targeting growth areas such as Georgia, New Jersey and our newest franchise market, a 10-store development agreement in Tennessee. While we already generate strong cash flow, the debt reduction that Steve will discuss shortly will free up even more capital to enable the acceleration of store growth in the coming years.

We also believe that the added exposure of being a publicly traded company shines a spotlight on the great results we are achieving. And will help us attract additional high-quality franchise operators who are excited to become part of a successful growing chain of restaurants. Our association with a restaurateur like Larry Levy, our Chairman, and the deeply talented Board of Directors he has assembled, will only help increase our potential for strong growth and franchise restaurants over time.

I would now like to turn the call over to John who will speak in more detail about some of the brand and operations initiatives driving our strong second-quarter results. John?

Thank you.

As Paul laid out, we are relentlessly focused on delivering a better guest experience and building freshness perceptions. We will achieve these goals by continuing to align restaurant operations with our quality value positioning.

Our success to date, as evidenced by continually improving operating metrics and guest satisfaction scores. We are particularly proud of our restaurant teams and the progress they continue to make against our Every Guest Leaves Happy goal. We earned an all-time high on overall satisfaction in Q2 and saw key guest loyalty ratings, such as likely-to-return and likely-to-recommend also achieve record performance.

During Q2, our experienced operators and franchisees remain focused on improving the guest experience through key initiatives designed to develop our people and improve operational execution. On the people development front, one of the primary drivers of this quarter's guest experience improvement was our all-time high score in the service category. We were able to put a spotlight on the differentiated level of service we expect through implementation of a recognition program that enabled our GMs to reward top service-oriented team members. This initiative supports our ongoing push to develop a strong guest-centric culture at Del Taco.

In addition, as I shared on our last call, we are deploying a new learning management system to set a higher standard for our training and team member development. The system delivers high-impact bilingual training through the use of videos and interactive exercises on a wireless tablet in the restaurants. It allows us to electronically validate the completion and effectiveness of training across all of our team members and restaurants. At the end of the quarter we had completed approximately half of our Company restaurants, and we anticipate completing the rollout to all Company restaurants in early Q4 and to franchise restaurants by year end.

In terms of operational execution initiatives, our restaurant teams are aligned on driving throughput during our peak periods. In Q2, we continued to improve our operational efficiency through more effective deployment of people during our peak periods. Overall, our speed of service times improved in both our Company and franchise operations. This allowed us the opportunity to serve more guests during peak periods and improve guess perceptions of our speed of service, which is critical as a QSR-plus brand.

Another important operational execution initiative that drove results this quarter is effectively rolling out new and limited-time menu items. Every restaurant follows a hands-on training calendar to ensure that each new product makes a great first impression with our guest. In the second quarter, we leveraged this highly detailed training and execution process to successfully launch two new Buck & Under products and our Fresh Avocado platform. The Fresh Avocado platform in particular drove a significant improvement in guest product satisfaction scores late in the second quarter.

Our ability to successfully launch new products is also a major driving force behind the brand side of our Combined Solution strategy. In the second quarter, we continued to effectively reinforce our brand strengths, as well as further our efforts towards building freshness and quality perceptions through the use of new menu offerings.

New product and promotion news in the quarter also supported our Buck & Under menu and Epic Burrito platforms. As I've spoken about before, we have developed these and other targeted food platforms into differentiated sub-brands to both stay relevant and drive frequency among core QSR users while broadening our occasion opportunity within the limited service restaurant universe.

Paul mentioned the strong positive response to the new Epic Grilled Chicken Avocado Burrito, the showcase product of our new Fresh Avocado platform. Not only did this product exceed the launch performance of all other Epic Burritos to date, it also increased total unit sales for the Epic Burrito line by over 60%. This launch demonstrates yet another instance of consumer acceptance of the brand in the QSR-plus space, as well as consumer acceptance of higher price points, made possible due to our ability to seamlessly execute fresh ingredients with great speed and service.

We will continue to expand use of the Fresh Avocado platform across the our menu by promoting the option to add fresh slices of avocado to any Del Taco menu item. We believe the strategy will help to further freshness and quality perceptions, improve product experiences and provide future check and margin upside. Overall, we are very pleased with the launch and our operations teams are doing an excellent job executing the program for our guests.

Looking ahead, we're excited to launch new premium salads late in the third quarter. These salads should drive improvement in our freshness perceptions and build on the success of our Eat Well With Del platform that currently includes grilled chicken and avocado bowls and lean seasoned ground turkey. The introduction of salads also furthers our goal of broadening our occasion set; and in this instance, addresses an occasion that we do not currently serve.

The premium salads will leverage many of our existing fresh ingredients, including our Fresh Avocado platform, and enable us to capitalize on growing consumer interest in salads within the limited service restaurant space. In addition to elevating our brand promise, the salad platform will be market competitive to drive trial and falls into the premium category of our barbell menu strategy, providing solid check and menu mix upside.

As you can see, our operations and brand initiatives play key roles as part of our strategy to enhance the guest experience, build our freshness perceptions and embed our QSR-plus positioning.

Now I'd like to turn the call over to our Chief Financial Officer, Steve Brake, who will review the fiscal second-quarter financial results in more detail.

Thanks, John.

Before I get started I want to remind you that the financial results that we will discuss today are for Del Taco Holdings, Inc, which is now a wholly owned subsidiary of Del Taco Restaurants, Inc.

The 12-week fiscal second quarter ended on June 16, prior to the closing of the business combination. We have also posted to the investor relations portion of our corporate website at deltaco.com a table that includes financials and other relevant metrics for Del Taco Holdings, Inc by quarter for the FY14. We believe this information will be helpful to investors in evaluating our performance.

Turning to the results themselves. Company restaurant sales increased 7.1% year over year to $93.9 million from $87.7 million in the year-ago second quarter. The increase was driven predominantly by same-store sales growth of 5.9% at Company-operated restaurants, as well as by contributions from new units not yet in the comparable base. Second-quarter Company same-store sales growth represents the 12th consecutive quarter of gains, and included a 2% increase in traffic, representing the 9th consecutive quarter of positive traffic for Company-operated restaurants.

Franchise revenue during the second quarter increased 4.4% year over year to $3.1 million from $3 million in the prior-year period. The increase in franchise revenue was primarily driven by franchise same-store sales growth of 6.2%, partially offset by reduction in franchise initial and renewal fees.

System-wide same-store sales increased 6% and marked the 7th consecutive quarter of system gains, with all seven recent quarters including positive traffic. These results lapped system-wide same-store sales of 4.8% during the second quarter of 2014, resulting in a two-year trend of 10.8%. Total second-quarter revenue was $97.6 million, an increase of 7% over the $91.2 million in the year-ago second quarter.

Turning now to expenses. Food and paper cost as a percentage of Company restaurant sales decreased by approximately 90 basis points year over year from 29.5% to 28.6%. This improvement was driven by the impact of modest menu price increases and only slight food basket inflation compared to the year-ago period, primarily due to elevated beef pricing, including the impact from a very favorable taco meat contract which lapsed in April 2015, and resulted in a sequentially higher taco meat price.

The beef inflation was mostly offset by the impact of a favorable beverage contract renewal that occurred in mid-2014. As we had anticipated, the favorable year-over-year food percentage reduction moderated slightly relative to the first quarter.

Looking ahead, we have a majority of our food basket locked for 2015. And after experiencing an approximately flat food basket in the first half of the year, we currently anticipate full-year commodity inflation between 1% and 2% as a result of anticipated beef inflation and an estimated increase to our cost of eggs. As I mentioned on the first quarter call, a very favorable taco meat contract lapsed in April and we will lap our favorable beverage contract renewal by mid 2015.

More recently, market egg prices have spiked due to the Avian Flu outbreak. And although this is a temporary dynamic that has already begun to moderate, it will significantly increase our cost of eggs starting during our third quarter. The impact of eggs, which are just over 1% of our total food basket, is expected to pressure food and paper costs by up to 50 basis points in our fourth quarter, with an impact of approximately half of that amount in the third quarter based on the timing of our egg cost increase. A Significant mitigating factor that would help to manage our food costs percentage is the magnitude of our planned fall 2015 menu price increase, which has yet to be finalized.

Labor and related expenses as a percentage of Company restaurant sales decreased approximately 30 basis points from 30.6% to 30.3%. Similar to the first quarter, the improvement was driven by the impact of modest menu price increases, the same-store sales increase in traffic, which leverages the fixed components of labor, and reduced workers compensation expense. These benefits were partially offset by the impact of an increased California minimum wage that became effective July 1, 2014, a headwind that will disappear in the back half of 2015 as we lap its introduction, allowing for a more meaningful year-over-year reduction in labor and related expenses in the back half of 2015.

Occupancy and other operating expenses as a percentage of Company restaurant sales decreased by approximately 30 basis point year over year to 21.2% from 21.5% in the same period last year. This decrease was driven by strong same-store sales performance that created leverage across the fixed elements within our cost structure.

As a result of this top-line and cost side performance, restaurant contribution increased 15.9% year over year to $18.6 million from $16.1 million in the prior year's second quarter. Restaurant contribution margin improved approximately 150 basis points year over year to 19.8% from 18.3% in the second quarter of 2014.

General and administrative expenses as a percent of total revenue improved by approximately 20 basis points year over year to 6.7%. The improvement was primarily driven by the absence of stock-based compensation year over year, as all previously existing management equity incentive arrangements fully vested during the first quarter and new management equity incentive plans will be finalized following the completion of the public merger.

Adjusted EBITDA in the second quarter of 2015 was $15.3 million, an increase of 12.2% from the $13.6 million earned in the second quarter of 2014. As a percentage of total revenues, adjusted EBITDA margin was 15.6%, up approximately 70 basis points from 14.9% in the prior year period.

Depreciation and amortization expenses as a percentage of total revenue improved by approximately 80 basis points year over year to 3.9%. This reduction was driven by assets that became fully depreciated during the past year.

Preopening costs were relatively consistent at $0.1 million during both the second quarter of 2015 and 2014 based on the comparable level of preopening activity each year. Income from operations was $11.3 million in the second quarter of 2015, up 30.2% from the $8.6 million earned in the prior year.

Interest expense was $4 million in the second quarter of 2015, down $3.2 million from $7.2million in the prior year. The interest reduction primarily stems from the elimination of all our subordinated notes in connection with step one of our transaction, which closed late in the first quarter on March 20, 2015. This $111.2 million subordinated note redemption will continue to drive a significant reduction in our interest expense your over year as we move forward throughout the balance of 2015.

Subsequent to the end of the second quarter, as expected with the June 30 closing of our merger, additional liquidity came into the Company and was used for a $68.6 million senior debt repayment. This repayment, along with other voluntary debt repayments since the step one closing, reduced funded senior debt to $162.5 million, which will further reduce our interest expense as we move forward. In addition, during the second quarter, we incurred $0.9 million in transaction-related costs that consisted of direct costs incurred in connection with our two-step transaction.

Provision for income taxes was $1.7 million during the second quarter of 2015, as compared to $0.4 million during the second quarter of 2014. This resulted in net income in the quarter of $4.6 million compared to a net loss of $0.1 million in the second quarter of 2014.

My commentary the fiscal second quarter included some forward-looking comments on various cost inputs. However, we are not in the position to provide definitive earnings guidance at this time because our merger with Levy Acquisition Corp is a change-in-control transaction that will require the application to purchase accounting.

As you know, this accounting dynamic will require us to revalue our tangible and intangible assets. And this will impact our prospective depreciation and amortization expense. And it also drives other adjustments under generally accepted accounting principles that may impact our reported financial results. Until this purchase accounting work is completed at the end of this year, and until management stock incentive compensation is finalized and the resulting stock-based compensation charges are measured, we are not in a position to responsibly provide earnings guidance.

Paul already reaffirmed our development plans of 13 to 17 system unit openings for 2015. One franchise restaurant closed during the second quarter, and, as disclosed in our proxy, we still expect to close the 13 underperforming restaurants during the second half of the year.

I would now like to turn the call back over to Paul for closing remarks.

Thanks, Steve.

Our Combined Solutions strategy is propelling our brand forward, providing us with the roadmap to deliver sales momentum along with strong and sustainable operating results. More and more customers are enjoying our fresh ingredients and made-to-order menu items with increased enthusiasm, while appreciating the value, speed and convenience our restaurants provide.

These attributes, complemented by our focus on improved guest experience, are elevating our brand promise and ensuring that we deliver on our QSR-plus positioning. With our exciting new partnership in place, along with our materially stronger balance sheet, we are ready to begin this next phase of growth for Del Taco.

Thank you for your interest in our Company. And we're happy to answer any question you may have.

(Operator Instructions)

Craig Bibb, CJS Securities.

I believe you lapped the increase in Taco Bell's breakfast marketing increased spend this quarter. Can you bracket what impact that might have had on your same store sales?

In regards -- this is John. In regards to breakfast, yes. We've been, obviously, doing breakfast for decades now as a brand, and we've been actually competing with Taco Bell and their breakfast platform on the West Coast, where many of our restaurants are for a couple of years now. So we have more than lapped that proposition. And I think as I have said before, we definitely do not view Taco Bell's entry into the daypart or their advertising of Mexican-inspired products in the morning as a negative. We appreciate the spotlight it provides for our category in regards to breakfast and that daypart specifically.

We continue to be very pleased with our performance at breakfast. We will continue to use strong value and product innovation with a complementary focus on operations to drive performance at breakfast over the next several quarters. And it was a daypart where we saw positive sales performance, as well as traffic performance year on year in Q2.

Craig, I would add -- this is Steve, that really for the quarter from a comp standpoint, we run six dayparts across the 24-hour clock. All six dayparts were in that comfortable mid-single digit range, plus breakfast was among the top two, I will say. Very happy with the entire daypart mix, including breakfast, despite that lapping dynamic that you brought up.

With avocado, I know the sales impact in the second quarter was probably minimal. But you've got a couple weeks of experience with it. Can you give us any guess on how that might impact your comps in the second half?

This is John again. I would say that we're very optimistic in regards to the fresh-sliced avocado platform. As we've said, it came out with record performance. We think we have got plenty of headroom as we think about adding avocados to any Del Taco menu item in the future, which we are promoting and our salesforce, our sales and restaurant teams are actively letting guests know about it.

We're currently, about 5% of our transactions are being added at this point -- are adding avocado. So we feel good about that. And considering where only a couple of months into the launch we believe the added focus that we're putting on it at the restaurants and promotionally will get additional guests to try it. And we believe they are going to really enjoy it and like what they are having. Yes, we do believe it is going to provide upside from that perspective.

We also have new product innovation that is leveraging the Fresh Avocado platform that we have announced, as well. Last week we started a new program with our Fresca Bowls and we've revamped that particular program in line to have fresh avocados in it. And our upcoming premium salads that I talked about, as well, on launches in September. Plenty of avocados in our mix as we move through the back end of the year.

Last one then I'll get back in the queue. What is the price point on the premium salads?

We will be competitively priced. There will be a release, Craig, that comes out here in the coming weeks where we're going to give details on the overall program. But it is obviously to be on the premium side of our menu strategy for Del Taco. Very competitively priced to gain trial in the marketplace. I think guests are really going to be wowed by the overall value proposition that we are offering with such a fresh product.

Nick Setyan, Wedbush Securities.

Quick question on the average check. I didn't get the breakdown of menu price versus mix.

Nick, this is Steve.

For the quarter on the Company side we had 2%, 2.0% positive on traffic, which we are real proud of, 8th consecutive quarter of traffic gains. Overall comp, 5.9%. So that leaves you with 3.9% on the check average. Menu price that we carried for the quarter was just over 3%. So that still leaves us with, again, not quite 100 bps, but nearly 100 bps of favorable menu mix working for us in terms of also driving check average.

Got it. So you said there's an opportunity to take a little bit more price, given the little bit of a headwind on the egg side, kind of potentially get above that 3% to maybe the mid 3%s or so, to offset that 50 bps?

Yes, pricing is definitely an important area for us. We typical will take price twice a year, summer and fall. We did recently in early June take a menu price increase. We're always looking at the amount of price that we're going to roll over when we -- to help contemplate what we need to take so that we are carrying the right amount year over year to manage cost and drive profit.

Certainly our next price increase at this point is going to be in fall of 2015. A little bit of time left to really optimize that increase. So, certainly what we have in hand with what we did in June, we are lapping a summer increase from early July a year ago. We expect that we're going to carry menu price right around the mid-high 2% range area for Q3. Then Q4, certainly that fall increase is going to give us a chance to move that where we think is optimal for the brand.

All that said, we do expect to carry at least 3% of price in Q4. That could move sequentially higher, but that still has yet to be perfected. Eggs are certainly a fluid ongoing situation that will have some role in that. And again, we're looking at optimizing and getting very effective flow-through off the increases that we do take.

Could you give us some color on the cadence of the comp as a core progress? And maybe even into Q3, how sales have been trending so far in Q3?

Yes. During Q2, really no meaningful ebb and flow at all to report on an intra-quarter basis. So Q2 overall, we had that again healthy combination of traffic, favorable menu mix and modest price flowing through. So we were very happy with that, And then Q3, we're not really guiding on or sharing anything directive, but overall we've just continue to feel good about the brand, our positioning and overall performance.

We shouldn't expect guidance until Q4? Until you guys release the Q4 numbers, and maybe talk about 2016? Is that how I should interpret the purchase accounting commentary?

Yes. The two big rocks there, this was an M&A transaction. Unlike most IPOs, we do have purchase accounting to apply, which is, A, a big undertaking and, B, does have a lot of change that will happen with respect to the P&L coming out of that. That is an ongoing process that we're focused on.

The other big area is, at the moment there is not management stock compensation plans that have been issued or out there. That is something that is in process that will happen post-merger. As you know, once that happens we'll be able to measure the associated stock comp charges that will then be recorded prospectively as the arrangements vest over time.

Those are two big things that really frankly prevent us from responsibly giving any guidance with respect to the cost side of the P&L in the near term. So we're going to defer that initiative until later this year.

Got it. The stock comp, there will be some stock comp in Q3 though, right?

Yes. From the moment the vesting begins there will be stock comp. So we have not finalized what those plans look like exactly, but I do suspect that some amortization of it will begin during Q3, and of course continue thereafter.

In terms of the purchase accounting, the big items that we should be thinking about on our end is depreciation and maybe some impact on occupancy?

Yes, depreciation and amortization. Obviously our tangible assets get fair valued, as well as intangibles, too, that are amortizable, would be the franchise rights associated with our underlying franchise contracts. Also leasehold interest, favorable or unfavorable leases. Then outside of those D&A items, also straight-line rent accruals get reset. So for straightlining fixed to terminal rents over a horizon, at purchase accounting you have to reset that, which has some upward function of bumping up reported lease expense. There is a lot of moving parts there. Those are some of the big ones to think about. And obviously that work is ongoing.

Last housekeeping item. Were there any closures on the Company-owned side in Q2? And on the franchisee side, if there were any openings or closures?

No closures on the Company side. Just one closure on the franchise side.

Any openings on the franchise side?

Not in the quarter, no.

(Operator Instructions)

Craig Bibb, CJS Securities.

What was franchise revenue in the quarter?

Dollars?

In dollars, yes.

$3,147 million.

No, no. I meant their revenues.

You mean their AUV?

Right. Their gross revenue.

I don't have that figure handy. With the 240-some restaurants, that may be in our 8K. That is not a figure I have handy. But embedded in their revenues is the comp reported, which was 6.2% on the franchise side. So they're still rounded at $1.2 million AUV. Again, making nice progress on same-store sales, as is the Company.

Can you give us any guidance on the closings that are planned for the second half of the Company units?

Yes. As we have discussed in recent proxy filings, we did earlier in the year identified 13 underperforming restaurants. Still plan to close these restaurants. That will have a nice accretive impact on our cash flows, restaurant contributions, EBITDA dollars and margins.

We do plan to exit those restaurants through subleases to third parties. We're making good progress with the local real estate brokers in those relevant geographies. And do expect a very meaningful recovery of the ongoing rent obligation through the subleases.

At this point we do expect to close them during our fourth fiscal quarter. At that time we would incur restaurant closure charges for the future rent obligations less the anticipated sublease income, as well as any direct costs associated with the closure and sublease of those properties.

As I've said, that puts going pretty well. We do anticipate very strong overall recovery through the subleasing. That will help mitigate the restaurant closure charges that would happen when they close. And then prospectively any cash shortfalls as we service the leases over time would run through that closed store reserve, and really allow us to really from an overall standpoint benefit from that accretive impact that it will have. Really, this will be a positive for the brand. We do expect those closures to happen fourth quarter this year.

The Tennessee and New Jersey new markets, that is a 2017 event?

Yes. This is Paul. The Tennessee is definitely a 2017. New Jersey may make late 2016, but more likely is early 2017.

Edward Stoltenberg, Phoenix Financial.

My question is -- go both to strategic and tactical concept. I would like to preference my remark with the statement. I think this concept and the QSR is the strongest QSR concept in North America that I have ever run across. I've been intimately involved with this concept for over 40 years.

Having said that, I happen to be in Saint Louis several months ago, and I happen to see one of our old stores in Saint Louis. Or I saw the sign and I drove by it and the store is shut down. Now, when I was involved with this Company, that store was doing $60,000 a week.

$60,000 a week, and that store now is shut down. How can that happen? And that market was just a super market for us.

Thanks for the nice comments and opening there. I appreciate that. This is Steve. In Saint Louis, the history there is that was during the era you referenced, that was a Company market, Company operations. And you are right, we had a lot of success in several stores in and around the Saint Louis area. It was around 2008 or thereabouts, I believe, we did re-franchise those stores to a franchise group. We always believed strongly that you need to have the right franchise partner.

For a variety of circumstances over time, that group ended up not being the right fit for the brand. They had other lines of business. As you know in that era the Great Recession hit. That group unfortunately had other holdings that suffered some very severe financial challenges. And that led into Del Taco operations sadly. We unfortunately saw AUVs erode over a painful period, and ultimately those units were closed, I believe 2010 or 2011 timeframe.

Definitely an unfortunate circumstance. It is market that at some point we feel probably as strongly as you do that the brand can and will have legs in that market down the road, as well as many other markets that we are excited about.

All I'm saying is we put in about 15 stores in the greater Saint Louis area. We were averaging very significant -- in the one store I'm talking about, it was one on McCause, which was doing $60,000. Now the store's sitting there vacant. Doesn't this lend itself to going back in there and trying to take over some of these old sites and redevelop -- because the brand obviously works in Saint Louis. And this is the reason this brand is so strong nationwide.

This is Paul. As we -- frankly now that we have, certainly a materially stronger balance sheet, we're going to have the opportunity to get back into a growth mode. I think as we've said both in the proxy and then in some previous calls, our initial strategy is going to be infill because we can move faster there. But over time you will see us in new markets, whether it is Company or franchise growth. And we will certainly take a hard look at Saint Louis because we do have a history there as a brand. And certainly try to make the appropriate decision at the right time.

And the chairman of the Company grew up in Saint Louis.

We opened that store in Saint Louis in 1979.

I think we should take the next question.

I'm sorry. I'm beating a dead horse.

We should do this offline.

At this time, I would like to turn the conference back over to management for any additional remarks.

This is Paul. I want to thank everybody for attending the call and for the questions. And we look forward to the next call at the end of Q3. Thank you for your time.

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.