Berto Acquisition Corp (TACO) 2015 Q3 法說會逐字稿

Good afternoon. Thank you for standing by, and welcome to the fiscal third-quarter 2015 conference call and webcast for Del Taco Restaurants, Inc. I would now like to turn the conference over to Ms. Alexis Tessier. Please 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; John Cappasola, Executive Vice President and Chief Brand Officer; and Steve Brake, Executive Vice President and Chief Financial Officer. After Paul, John and Steve deliver 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 statement 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 flow 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 measure included in today's press release.

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

Thank you, Alexis, and thank you all for joining us on the call today. Once again we are very pleased to report another quarter of exceptional results and strategic progress, as we continue taking the Del Taco brand to new heights. Financial highlights for the third quarter include: system-wide same-store sales growth of 5.6% with positive traffic; operating income growth of 17%; restaurant contribution margin of 19.7%, a 150-basis-point improvement over the same period last year; and adjusted EBITDA growth of nearly 10%, reflecting a 40-basis-point margin improvement to 15.5%.

The third quarter marked our 8th consecutive quarter of system-wide same-store sales and traffic growth, and our 13th consecutive quarter of positive same-store sales for Company-operated restaurants. We attribute this impressive track record to our ongoing effective execution of our combined solution strategy. Our solid top-line growth resulted, in part, from menu pricing, but even more importantly was driven by an increasing contribution from menu mix as we expanded the premium tier of our menu. In fact, we saw menu mix boost our same-store sales by over 2% in the recent third quarter compared to last year's third quarter, demonstrating consumer demand for our premium offerings.

New premium food platforms such as salads and fresh sliced avocado are critical pillars of our menu strategy to expand our customer base and broaden the occasions we serve. They enhance freshness and quality perceptions, while creating opportunities for higher check average and penny profit growth. We will continue to position ourselves as the category leader on value, even as we take advantage of the opportunity to thoughtfully narrow the average check gap versus our QSR competitors through a combination of menu mix and pricing.

On the pricing front, Company restaurants took our annual fall price increase in the second week of October after extensive analysis, including competitive pricing surveys, market testing of key items, and external analysis with an econometric modeling firm to measure store- and product-level elasticity to support our varied price tiers. We love the opportunity to enhance profits with targeted price increases, while also taking care to protect traffic trends and meet guest value expectations. This allowed us to achieve nearly 3% of real volume-based growth, consisting of menu mix and traffic growth during the third quarter.

Along with launching new fresh products and platforms, operations plays a critical role in differentiating Del Taco from our peers. Over the past quarter, our focus has been on three key areas that we define simply as fresh, friendly and fast. And our restaurant teams did an amazing job delivering on those areas this past quarter.

On the fresh front, we achieved an all-time high in product scores on our guest experience measurement survey results. As for friendly, we continue to provide a warm and inviting environment, evidenced by an all-time high in our service guest experience scores. And we achieved these results without losing sight of the importance of speed in our category, as we posted another quarter of year-over-year improvements in drive-through times during our peak lunch day part.

Rounding out our model for delivering better guest experiences is our focus on people. About two weeks ago, we held our most successful national conference to date in Palm Springs, California. The theme of this year's conference was Fresh Forward, and we believe we are making huge strides in bringing fresh forward in all aspects of our Business. We had over 700 franchise owners, store leaders, and general managers attend this annual event, which has become a springboard to further ignite our teams, and provide additional training and tools so that we can uphold our commitment to the goal that every guest leaves happy. Our Chairman, Larry Levy, also attended the conference, and had a chance to meet with many franchisees and share his vision for the brand.

We are pleased to report that the Company is now positioned to move forward on its previously announced plan to close underperforming restaurants. We have worked hard to minimize the costs associated with the closings, and expect to implement the plan and close 12 to 13 underperforming Company restaurants by year end. With the closing of these 12 restaurants, located across several DMAs in Texas, we expect to eliminate approximately $1.6 million in negative restaurant contribution.

As we noted in our proxy at the time of the merger, our real estate strategy on underperforming locations did not set us up for success. Between the time of our entry into Texas back in 2010, well before our combined solutions was implemented, and our subsequent entry into Georgia in 2012, we analyzed what did not work well and revamped our strategies for entering new markets. The changes we made were very effective. And we are enjoying success across our seven locations in Georgia, and are continuing to expand. In fact, in Georgia we currently have two new restaurants under construction, and are planning additional growth based on our strict site-selection criteria.

In other development news, we opened one Company location during the quarter in Pomona, California. After the end of the quarter, one franchise location opened in Taylorsville, Utah. For the full year, we expect to open 13 units systemwide. Our pipeline is strengthening, and we anticipate opening 14 to 18 units systemwide in FY16, with accelerating unit growth in FY17 and thereafter. This growth is expected to come in the form of both Company stores and franchise stores.

As we have discussed previously, our near-term priority for development will be infill markets where we and our franchisees can leverage our existing brand awareness along with logistics and real estate infrastructure. For example, just last month we announced development agreements for 27 new Del Taco restaurants within the central California region, including three new locations slated to open within the next six months. In addition, we are excited to announce our commitment to add Company-operated locations in the Denver, Colorado, market by early 2017. Joining forces with our franchise partners, we have operated successfully in the Denver area since 2001. We expect Company development to drive further brand awareness and move us towards local critical mass in this high-potential market.

We plan to complement our infill development strategy with expansion into select newer regions with attractive demographics. You can anticipate that we will announce development initiatives in promising territories throughout 2016. We're laying the groundwork for this growth right now, with extensive investigation of new potential territories, fine-tuning of marketing and real estate plans that are tailored to areas where the brand is not yet known, and meetings with potential franchisees who may help fuel our growth and provide local expertise.

With continued momentum driven by our strategy, coupled with a strong balance sheet, we are excited to have the opportunity and means to accelerate the rate of new store growth as we move into the near future. Growth is a top initiative for Del Taco as we go forward. And with that, I would like to turn the call over to John Cappasola, our Chief Brand Officer, who will go into more detail of some of our exciting brand initiatives.

Thanks, and good afternoon. As Paul laid out, all of our initiatives, from menu to operations to people, really support the same overarching goal: elevating the Del Taco brand promise to deliver a better guest experience. This, in turn, broadens our occasions of use, and reinforces our QSR-plus positioning, elevating Del Taco above the typical QSR.

Over the past two quarters, we made significant headway in broadening the occasions we serve with a strategic progression of menu innovations that leveraged and expanded our fresh ingredient platform, targeting new and existing guests looking for fresh, premium and delicious options with the speed and value of the QSR. In June, we introduced fresh sliced avocado, which also served as a catalyst for revamping our Fresca Bowls line at the end of July. Our fresh avocado platform has gone over extremely well with guests. Over 10% of transactions during the third quarter contained either an avocado item or add-on. And as Paul mentioned, we saw an all-time high on our guest experience survey in the product category.

Fresh sliced avocado is also a key ingredient in our new premium salad platform that launched in September. Our handcrafted Ensaladas are made to order in our kitchens using the freshest ingredients, and they taste great; all under 600 calories, including dressing, and they are truly unFreshing Believable. We're happy with the early performance of our handcrafted Ensaladas line, which launched in the last week of the quarter.

Sales mix of the platform has consistently performed over 3%, and has pushed overall premium category sales mix into the low double-digit range for the first time, which is a huge win. As well as we're doing now, right out of the gate, the key goal here is to build credibility with salad users to gain incremental visit share over time. We plan to do that by continuing to perfect our execution, pulsing in additional promotion of the platform to embed awareness, and bringing in line extensions once or twice a year to keep the platform fresh and induce new trial.

Let's recap Paul's and my key points regarding the launch of our new premium food platforms. They provide the brand growth opportunities in four key areas: growing into consumer demand territories that we are not currently serving; filling out the premium tier of our menu strategy, which commands a higher check and penny profit; helping us close the check average gap with our competitors without impacting value; and finally, embedding the plus side of our QSR-plus positioning by enhancing freshness and quality perceptions.

The expansion of our menu's premium tier is also well balanced with our strong Buck and Under and mid-tier offerings; and in fact, it is our barbell menu strategy that really sets us apart and makes our QSR-plus formula unique. Although we spent the past several months on premium platform rollouts, our barbell strategy gives us the ability to toggle back to Buck and Under to drive traditional QSR visits by providing top-notch value and variety. As a reminder, we use the Buck and Under menu to target heavy fast food users with strong value and variety, and to help manage value perceptions. And we have long held a strong market-leading position on key perceptual attributes such as value and affordability. In the most recent report from the NPD Group's Market Monitor Research of key Del Taco DMAs taken during the second quarter, we led the category in these attributes, outpacing our larger QSR competitors; and we don't plan on letting up.

In early October, we kicked off a Buck and Under focus promotion to reinforce our value strength with QSR users, and maintain our market-leading position on value and affordability perceptions. Coming on the heels of our salads launch, this promotion demonstrates our balanced high-low approach, and further embeds the Buck and Under platform as a real brand advantage. The promotion was also timed to coincide with our targeted fall price increase in order to manage value perceptions.

Looking ahead to November, we plan to launch new fresh grilled carne asada steak, literally beefing up our mid- and premium-tier menu segments. This launch will complete a series of ingredient-based menu initiatives in 2015 designed to set the stage for future occasion expansion and fortify our QSR-plus positioning. After significant research and testing, we believe that we have materially improved both the overall quality and the flavor profile of our steak, and we are excited to get this launched. We're going to feature the carne asada in new products, including street tacos, an Epic Burrito, and loaded fries, as well as use it to upgrade existing products in areas like burritos and breakfast.

Great-tasting carne asada steak would get attention on its own, but at Del Taco it will also highlight our working kitchens. The new carne asada is grilled fresh in our restaurants, which is not typical in a traditional QSR setting, and it is something guests will see, they'll smell, and be excited to try and taste. We expect the carne asada offering to be met with strong consumer demand, which creates an opportunity to drive higher check average, guest satisfaction, and overall profit dollars.

So, in closing, we continue to be focused and committed to building a stronger Del Taco brand that can live up to and really define the QSR-plus space. With that, I will turn it over to Steve Brake, Chief Financial Officer.

Thanks, John. Our fiscal third-quarter 2015 results are for Del Taco Restaurants, Inc., which became a public company when it completed a business combination with Levy Acquisition Corp. on June 30, 2015, which resulted in a fiscal third-quarter financial statement presentation that includes a predecessor period for the two weeks ended June 30, 2015, followed by a successor period for the 10 weeks ended September 8, 2015. The financial results I will cover for the fiscal third quarter have been aggregated to reflect, on a pro forma basis, the combined successor and predecessor periods for the 12 weeks ended September 8, 2015, compared to the comparable 12 weeks during FY14. In addition, the business combination required us to apply purchase accounting and, therefore, the results subsequent to June 30 include impacts from our preliminary purchase price allocation.

Turning to the results themselves, Company restaurant sales increased 6.7% year over year to $94.8 million from $88.8 million in the year-ago third quarter. The increase was driven predominantly by same-store sales growth of 5.4% at Company-operated restaurants, as well as by contributions from new units not yet in the comparable base. Third-quarter Company same-store sales growth represents the 13th consecutive quarter of gains, and included a 0.6% increase in traffic, representing the 10th consecutive quarter of positive traffic for Company-operated restaurants. Franchise revenue during the third quarter increased 6.8% year over year to $3.2 million from $3.0 million in the prior-year period. The increase in franchise revenue was primarily driven by franchise same-store sales growth of 5.8%.

System-wide same-store sales increased 5.6%, and marked the eighth consecutive quarter of system gains, with all eight quarters including positive traffic. These results were achieved on top of system-wide same-store sales growth of 5.6% during the third quarter of 2014, resulting in a two-year trend of 11.2%. Third-quarter revenue was $98.6 million, an increase of 6.7% over the $92.4 million in the year-ago third quarter.

Turning to expenses, food and paper costs as a percentage of Company restaurant sales decreased by approximately 10 basis points year over year from 28.8% to 28.7%. This improvement was driven by the impact of modest menu price increases carried during the third quarter that slightly exceeded modest food basket inflation. The food inflation was primarily driven by higher beef pricing and an increased cost of eggs that began towards the end of our third quarter due to the avian flu outbreak earlier this year. As we anticipated, the year-over-year food cost improvement moderated sequentially as we lapped a favorable beverage contract renewal that occurred in mid-2014 and we faced tougher year-ago comparisons.

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 this year, we currently anticipate full-year commodity inflation of up to approximately 1.5%. Much of this inflation is expected to come during the fourth quarter, which will fully include the increased cost of eggs, and will also be influenced by our new fresh grilled carne asada steak offering, which is expected to drive a strong margin dollar contribution with a lower-than-typical margin percentage. We believe that the food inflation will be mitigated by carrying menu price increases in the mid-3% area during the fourth quarter.

Labor and related expenses as a percent of Company restaurant sales decreased approximately 100 basis points from 30.8% to 29.8%. This improvement was driven by the impact of modest menu price increases, the same-store sales increase in traffic and menu mix, which leverages the fixed components of labor, and reduced workers' compensation expense. Labor leverage improved sequentially when compared to the first half of 2015, as we have lapped the impact of the July 1, 2014, California minimum wage increase.

Occupancy and other operating expenses as a percentage of Company restaurant sales decreased by approximately 40 basis points year over year to 21.8% from 22.2% in the same period last year. The decrease was driven by the strong same-store sales performance that created leverage across the fixed elements within our cost structure, as well as a reduction in advertising expense as a percent of restaurant sales, partially offset by an approximate $0.1 million increase due to a preliminary non-cash purchase accounting adjustment to reset prospective straight-line rent expense. This impact is entirely non-cash, as the underlying lease economics remain unchanged.

As a result of this top-line and [comp]-side performance, restaurant contribution increased 15.6% year over year to $18.7 million from $16.2 million in the prior-year third quarter. Restaurant contribution margin improved approximately 150 basis points year over year to 19.7% from 18.2% in the fiscal third quarter of 2014.

General and administrative expenses as a percentage of total revenue increased by approximately 40 basis points year over year to 6.9%. The increase was driven primarily by increased incentive compensation and other G&A expense increases, including the impact from incremental public company costs. New management equity incentive plans are expected to be finalized during the fourth quarter and are, therefore, not yet accounted for during the third quarter.

Adjusted EBITDA in the third quarter of 2015 was $15.3 million, an increase of 9.6% from the $13.9 million in the third quarter of 2014. As a percentage of total revenues, adjusted EBITDA margin was 15.5%, up approximately 40 basis points from 15.1% in the prior-year period. Depreciation and amortization expenses as a percent of total revenue increased by approximately 20 basis points from the prior year to 4.9%, and include the impact following a preliminary purchase price adjustment to adjust our property and equipment, and intangible assets, to their estimated fair value.

Income from operations was $10.2 million in the third quarter of 2015, up 17% from the $8.7 million earned in the prior year. Interest expense was $2.4 million in the third quarter, down $4.4 million from $6.8 million in the prior-year third quarter. The interest reduction stems from the elimination of all of our subordinated notes in March 2015, the repayment of $68.6 million in senior debt upon the June 30 closing of our merger, and our August 4, 2015, refinance transaction that resulted in a new five-year $250 million senior credit facility. This new all-revolver credit facility bears an initial interest rate of LIBOR plus 200 basis points, and following the refinance, debt issue costs totaling $1.9 million will be amortized to interest expense over the term of the agreement. As of the end of the fiscal third quarter, $161 million was outstanding.

Benefit for income taxes was $1.4 million during the two-week predecessor period, and a benefit of $3.1 million during the 10-week successor period. This resulted in a net income of $2.4 million in the two-week predecessor period, and net loss of $2.2 million in the 10-week successor period, which includes $12.0 million of transaction-related costs.

In terms of our annual outlook, we are issuing the following guidance for FY15, which is the 52-week period that ends on December 29, 2015. We expect total Company restaurant sales between $404 million and $407 million, and total revenue between $420 million and $423 million; system-wide sales comps of approximately 5.5% to 6%; restaurant contribution margin between 19.5% and 19.7%; G&A expenses between $29.9 million and $30.4 million prior to accounting for the management equity incentive plan that we expect will be finalized in the fourth quarter; and adjusted EBITDA between $64.2 million and $64.8 million, and 13 new system-wide restaurants, including 7 Company-operated restaurants.

One Company restaurant closed during the third quarter upon lease expiration; and as previously disclosed in our proxy, we now expect to close 12 of the 13 underperforming Company restaurants by year end. Over the past 12 months, these 12 restaurants generated a negative restaurant contribution of approximately $1.6 million, which we believe will immediately drive an accretive outcome by improving our run rate restaurant contribution, adjusted EBITDA and related margin percentages. Upon closure of these restaurants in the fourth quarter, we expect to record restaurant closure charges totaling approximately $4.2 million to $5.0 million. This range represents the present value of the future lease obligations, net of estimated sub-lease income, as well as brokerage commissions and other direct costs associated with the closures.

With regards to FY16, we plan to open approximately 14 to 18 restaurants, with the majority of locations opening late in the year. Most of the openings are expected to be Company restaurants, with the majority expected to be in-filled locations. Beyond next year, we expect system-wide unit growth of a mid-single-digit percentage in FY17, followed by acceleration towards high single-digit percentage system-wide growth thereafter. I would now like to turn the call back over to Paul for some final thoughts.

Thanks, Steve. It has been just over three months since we became a public company, and we believe we have already achieved so much. Many of you may have seen us ring the opening bell at the NASDAQ last week. While this celebrated a great milestone in the life of our Company, it also illustrates the great benefits of an enhanced public profile. There is palpable energy felt by our employees and franchisees, and many of our loyal customers have expressed their excitement to see us in the news announcing new stores or great earnings. We are hearing long-time franchisees talk about expanding their store base. And we are meeting with some of the country's most successful restaurant operators about taking a prominent role in the future story of Del Taco.

Larry Levy and I talk frequently about how we can bring Del Taco to new places, and we couldn't be more excited about the enormous opportunity ahead to continue elevating our brand promise, expand our store base, and drive long-term shareholder results. Thank you for your interest in our Company. And we're happy to answer any questions you may have.

Thank you at this time we will be conducting a question-and-answer session.

(Operator Instructions)

Craig Bibb, CJS Securities.

Hi, great quarter. Good start to being public.

Thank you.

Could you provide maybe a little more color on the Ensaladas? I heard 3% of sales. How much is that is incremental, or you attracting new customers, and how are you promoting it?

Craig, this is John. Remember, it was really the last week of Q3 that we launched this program. So it didn't have a --

You could talk about October, too. (laughter)

It didn't have a big impact yet. (laughter) I'd love to. But let me just tell you we are very pleased. As we said in the release, 3% of sales is pretty much where it's been since launch. We are happy with that.

As you may be aware, we've got three salads that we used to initially launched the platform. So we think we have some nice diverse variety there. We think the price point is right. But the key goal here is to really build that credibility over time with that user. So we know we have the platform. It's high quality, it's great tasting, it's low calorie. But we need to build those brand perceptions as we move in the direction of our enhanced QSR-plus positioning.

And as I said, that credibility is happening over time. We feel good about it, that it will bring in an incremental user. We think right now it's a little risk because what it's doing for us is it's boosting our incremental check and profit.

The double digit mix that I referenced is certainly a big part of our short-term story, but the long term should be growing incremental transactions. We feel good about it. It's going to continue to build.

Okay. Denver is an interesting market to pick for your expansion of your Company-owned units. I think there's another Mexican chain that's based there. Could you talk about why that was attractive? And maybe how your franchisee who's in the market is doing relative to the system?

This is Paul, Craig. We chose it for a couple of reasons. We think it is a dynamic market. We have some very strong performing stores there.

We think it is under-served. We can help it get to critical mass quickly. And just kind of be honest about it, I came here from Denver. I am very familiar with it, and there are a lot of trade areas that either we are not in or are under-served.

We think that it's a market that certainly can perform and perform well. And we think that our coming in there will give it the boost it needs to really drive to a higher AUV and a higher store count. So the critical mass that we bring to it certainly can help from a brand awareness, and also the ability to do more advertising in the marketplace.

Great. All right. Well, thanks for making us all look smart. (laughter)

Jeremy Hamblin, Doherty and Company.

Hi, guys. Congratulations. Wanted to ask actually some questions about commodity costs that you're seeing, and obviously you talked about the impact of eggs both in Q3. But in terms of looking forward I wanted to get a sense, I think you had previously indicated that you could see up to a 50 basis point impact in Q4, that some of that might be offset by price increases. But even looking beyond that with the new carne asada, it looks like a lot of commodity costs have really come in, especially beef prices, over the last several months, cheese prices, et cetera. How locked in are you for 2016? And do you think that is something where your basket could actually be down next year?

Hey, Jeremy. This is Steve Brake. I will take those some in order. Certainly eggs, as we talked about on last call, due to the avian flu outbreak over this year, as we anticipated we did have a step-up in our cost of eggs. That did hit us about two-thirds of the way through the third quarter.

That will certainly be with us through the balance of fourth quarter, and certainly into at least some or all of the first half of next year. Certainly absent the return of the flu we feel like that will eventually revert back towards normalized levels. Certainly a temporary dynamic, but fourth quarter in particular that will be an inflationary item for us.

At the same time this year since that spring renewal we talked about on our taco meat, beef overall, mainly taco meat as well as steak and hamburger patties, have been elevated for us. The good news on beef is going back nearly a year ago, the market was very, very elevated. Kind of futures topped out late last year, early this year. We've certainly seen from a futures standpoint beef begin to dial back meaningfully. We are hearing more and more good news about the herd beginning to expand meaningfully.

So right now we do have some buys into part of next year across our three beef proteins. Certainly from our standpoint, from where we are currently looking out at least getting into next year, we feel like we've certainly plateaued. To what extent we may see reductions, be that next year or thereafter, still a bit of a TBD but we're certainly encouraged about where we are and where we are headed compared to where we were maybe six, eight, nine months ago in terms of more uncertainty earlier this year. So we feel good about the trajectory on beef.

Overall food, we are not formally guiding on food yet, but in general for our 2016 basket, I talked earlier about the fact that full-year inflation this year will be up to 1.5%. We're not guiding 2016 yet. I think there will be some level of inflation, but certainly not to the degree that we saw this year, if that's somewhat helpful. And we are definitely working on a lot strategic buys going into some or all of next year as we speak, so when we guide 2016 we should by then have very good color on 2016 food.

As a form of practice, though, for locking in contracts for next year, when you get to the beginning of 2016 and you provide some more formalized guidance, what percentage of your food costs would you have expected to have locked in by early 2016?

We typically target having two-thirds of our basket locked at any given moment. In recent years where there has been more of an inflationary environment we have been beyond that, more on the three-fourths or even higher point. So as we get into early next year I think we'll minimally be at that two-thirds area, perhaps a bit higher.

Cheese is one, I will tell you, that we're about to go floating. We like that right now. We think there will be a buy opportunity on that, not in the very -- in the relative near future, and that's something we'll likely have locked up by the time we enter 2016. Then a lot of other key ingredients are more on a calendar renewal that are either in process or complete. So as we enter the new year once we are able to fully guide on that food line.

Okay, great. In terms of the composition of your same-store sales, wanted to make sure I went through those numbers again. It sounded like traffic was up 60 bps and check change Company-owned 4.8%. The composition of that, was it roughly kind of like [2.6%] -- 260 basis points price and 220 mix, or how was the composition broken down?

Yes, that's a good summary. We had over 2% of menu mix, and then mid- to high 2% area on price. So your estimates were certainly in the ballpark there as to how we ladder up to that 4.8% check comp. We love that healthy balance of not just menu price, but that menu mix. That is the menu strategy, and really the brand positioning working for us vis-a-vis the consumer.

Okay. In terms of thinking about that moving forward, I think you said mid-3%s for Q4 on your menu prices. Is that right?

Yes, we did take a recent typical fall price increase. That will allow us to carry mid-3% area in terms of menu pricing for the fourth quarter.

Are you still assuming that you're going to have positive -- I mean, you've had, I think, now 10 consecutive quarters of positive traffic trends as well. Are you thinking that you're expecting to have positive traffic again in Q4?

This is Paul. Honestly we are pleased that we have had eight consecutive quarters system-wide and 10 in terms of the Company-owned restaurants, but we look at it both by the quarter and by the two-year. And if you look at both Q2 and Q3, both were over 3% traffic growth. When we look at the category, as we look at MPD sales track, traffic was negative in Q3 and we are still positive. So overall we believe that the traffic story here at Del Taco is a good one.

I think one thing that we also focus on, as John mentioned, we spent the majority of Q3 focused on our premium food platforms. The purpose of that is to broaden the occasions that we serve at Del Taco and really to reinforce the QSR-plus positioning that we're moving the brand to. So we are on bit of a journey here, and some of the new menu initiatives really aren't as expected from our brand of value are. So we don't really necessarily expect to get the immediate impact on traffic. What we are focused on is driving trial and awareness of these platforms against new users out there. And it's going to take some time to gain credibility with that.

An example would be the Ensaladas, but we are confident that the products are great and that we have the ability to deliver them in a very effective fashion. So as John mentioned, in the short run the parts are low risk for the brand and that's why we're focused on the real growth, which is that combination of menu mix that Steve talked about and traffic. And while we know the existing users will certainly trade up to the new products, which is a win on both menu mix driving both check and profit, we know over the long run that the work that we are doing will drive incremental visits and guests will come in and try these new platforms.

One thing to recognize, Ensaladas, the brand has never had salads on the menu before. So it's going to take some time to [try] that credibility. But we know that we can deliver it at an unbelievable price and have the convenience of the drive-through. So it's kind of our long-term strategy in the journey that we're on. So we think that the traffic story so far is a positive one, and we are excited about where it continues to go.

If I could, just a follow-up then on the salads. You mentioned kind of 3% of transactions so far. What is the goal over time? What is the number you need to get to? I don't know how much operational complexity it adds within your stores. But in terms of thinking about where it needs to be to be a permanent menu item, I know it elevates the brand and the perception of quality, but where does that need to go to over time? Is it 5%, or is it more like high single digits?

Hey, this is John. When you look at a platform like salads where the occasion is completely incremental, it really is a new needs state that we're delivering with the brand. The sales mix on the individual platform doesn't need to be as high to make it worthwhile for us to put up on the menu if it's driving incremental behavior over time. That's why in combination right now in the short run as you think about us just building the premium platforms out that we have to really fulfill the premium side of that tiered menu strategy that we have, kind of the combination of the Ensaladas, the Fresca Bowls, as well as the launch of avocados in the spring, these things together, we are definitely -- we had a target of double-digit premium menu mix. So we had been running with Epic Burritos and other -- the other platforms like Fresca Bowls last year in that kind of mid-single digit range.

So our immediate target for 2015 was through the expansion of that premium tier to get to double digits, which we are proud to say that we are able to achieve in Q3. And it's a big part of that menu mix improvement and growth that you have heard about on the call today. We will continue to look at it very situationally in regards to the platforms that we launch. And those that are more incremental like salads won't require as much sales mix as perhaps some others. But it is a real balance that we're trying to achieve to get folks to elevate beyond just the value that they've expected over time with Del Taco.

Thanks for taking my question, guys, and best of luck.

Thank you.

(Operator Instructions)

Nick Setyan, Wedbush Securities.

Good afternoon and congrats on a great quarter, guys.

Thank you.

Can you guys maybe talk about the composition of the comp geographics? I know there's been a lot of focus around Texas and a potential slowdown there, while California seems to be all speed ahead. Maybe just some color around the geographic composition would be very helpful.

Hey, Nick. Steve here. Not a lot of variation to speak of. Certainly across all of our key Company or franchise markets we are really enjoying that healthy mid-single digit-plus trajectory on the Company and franchise side across major markets. So not really anything to note from a geographic standpoint.

Got it. In the past when you competitors tended to focus on breakfast a little bit, you have actually talked about it as being maybe a tailwind for your own breakfast offerings. So with McDonald's doing what they're doing, What's your take on kind of how Del Taco is positioned?

Nick, this is John. We think we are positioned very well in regards to breakfast. It continues to be a top priority for us in regards to our daypart utilization strategy to continue to drive awareness and trial of this platform. We think we have a great compelling value proposition, as we've spoken about before. The quality is great.

Relative to the all-day offering at McDonald's, again, don't think that it can be a bad thing. Just like what happened with Taco Bell we think shining the spotlight on QSR breakfast could be a great think for a brand like ours, especially as we're coming in and talking breakfast at the same time. Our offering of breakfast, as a reminder, is 11 PM to 11 AM. So basically in our 24-hour locations, half the day is covered with breakfast. We also offer full menu during that same period of time.

So we have a pretty compelling value proposition coupled with a nice variety available throughout the entire menu during those hours. And when you pair that with our continued use of product innovation and our operational improvement strategies and consistent marketing and messaging, we think that we will continue to grow that daypart.

Incidentally, it was again our top performing daypart in Q3. So we were happy to see it bounce back after Q2. So it's definitely one that we can continue to use and drive.

Perfect. Just kind of a modeling question as my final question. I think you guys said there was one Company-owned opening and one closure. Is that correct?

That is correct.

And can you tell us what the franchise openings and closures were?

During the quarter there was no activity. There was one opening shortly after the quarter in Taylorsville, Utah.

Got it. Perfect. Thanks so much, guys.

Thank you.

Thank you. At this time we have no further questions. I will turn the call over to Paul Murphy for closing comments.

Thank you everybody for listening to the call. And as we said a little bit earlier, we were really happy with the results in quarter three, and feel like the brand is making fantastic progress under the combined solution strategy, and we're focused on growth. So thank you for your time, and look forward to speaking with you in the future.

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