Berto Acquisition Corp (TACO) 2015 Q4 法說會逐字稿

Welcome to the fiscal fourth-quarter 2015 conference call and webcast for Del Taco Restaurants Inc. I would now like to turn the call over to Mr. Raphael Gross to begin.

Thank you, operator. 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 Steven Brake, Executive Vice President and Chief Financial Officer. After Paul, John and Steve deliver their prepared remarks, we'll open the lines for your questions.

Before we begin, I'd 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 Incorporated for more detailed discussion of the risks that could impact future operating results and financial condition.

Today's Earnings Release also includes non-Generally Accepted Accounting Principles or non-GAAP financial measures such as adjusted EBITDA and restaurant contribution. 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'd now like to turn the call over to Paul Murphy, Chief Executive Officer.

Thank you, Raphael. Thank you all for joining us on the call this morning. We are very pleased to report another quarter of impressive results and a strong end to a terrific year. Our ability to solidify our QSR-plus positioning and elevate the Del Taco brand can really be seen in our financial highlights for the quarter, which include system-wide same-store sales growth of 5.8%; restaurant contribution margin of 21.2%, a 90 basis point improvement over the same period last year; and adjusted EBITDA growth of 8.4%, reflecting a 30 basis point margin improvement to 15.9%.

We extended our track record to nine consecutive quarters of system-wide same-store sales growth and 14 consecutive quarters of positive same-store sales for Company-operated restaurants. We achieved 6.3% system-wide same-store sales growth in 2015 and lapped 5.2% system-wide same-store sales growth in 2014, resulting in two-year growth of 11.5%. These achievements are the result of our focus to continue to deliver the great value and speed that Del Taco has become known for as a fast food provider, while layering on opportunities to broaden occasions we serve by offering new and delicious fresh Mexican food platforms that elevate our brand promise.

Similar to the third quarter, our solid same-store sales growth in the fourth quarter was due in part to menu pricing, but even more importantly was driven by an increasing contribution from menu mix. We once again saw menu mix boost our same-store sales growth by over 2% year-over-year. Consumers have responded to our premium offerings. The launch of new fresh grilled carne asada steak in November has been a hit with our guests.

The quality and flavor improvements helped to more than double our sales mix of the steak protein. The addition of the new Epic carne asada burrito has also helped to maintain premium category sales mix, which is now in the low double-digit range for the second quarter in a row, up from zero 2.5 years ago. This launch completed a series of ingredient and platform-based menu initiatives in 2015. They were designed to grow our average check, expand occasions we serve and set the stage for future occasion expansions by building a stronger QSR-plus foundation.

We also saw a success in the fourth quarter in managing value perceptions by balancing premium tier growth and our fall menu price increase with a four-week mid-quarter Buck & Under menu focus. Our strategy was to remind guests that the Buck & Under menu starts at just $0.59 and has category leading variety. According to the NPD Group's quarterly market monitor, Del Taco's Q4 value and affordability perceptions in key markets strengthened over Q3, leading all QSR brands.

It's very encouraging to see value and affordability perception spike in a quarter where we launched a premium menu platform and a menu price increase. We'll continue to leverage the Buck & Under menu consistently in 2016. As we look ahead to 2016, we believe that we are well-positioned to take advantage of a growing segment and brand momentum that continues to build. We recently set a goal of $1.5 million average unit volumes by 2018.

Over the last three years, we increased Company annual unit volumes by $180,000, while improving restaurant contribution margin by 280 basis points. While we are rightfully proud of these achievements, we plan to drive those metrics even higher without disrupting our strong competitive positioning on value.

Within our Company-owned restaurant base, annual unit volumes for the top one-third are already $1.5 million or greater, with the top third averaging just over $1.7 million. 90% of those restaurants have restaurant contribution margins at or above 21%. This compares very favorably to our competitive set.

In a moment, John will detail some of the specific initiatives driving us toward $1.5 million annual unit volumes as part of our enhanced fresh combined solutions. But first, I'm going to comment on Q1 trends and touch on new unit growth. In January, we said we expected Q1 same-store sales to be our most challenging as we lap our strongest quarter in 2015. When the Company posted 7.9% same-store sales including significant traffic growth of 3.9%. We anticipated worse weather year on year.

In addition, significant discounting and low price promotion emerge across quick service restaurants during Q1. Despite these challenges, we expect Q1 system same-store sales to be in the low to mid 3% area. We feel good about this performance and believe achieving these results in a very tough environment speaks to how resilient our brand is due to our strong value perceptions driven by our proven barbell menu strategy.

You'll hear about our detailed plans from John in a moment, but you can expect the Buck & Under menu to be a significant component of our marketing calendar in 2016, with more menu promotion and new product news compared to 2015. In fact, we began in January by expanding the Buck & Under menu from 12 to 16 items including our new grilled chicken rollers, which resonated with guests and quickly became our best ever Buck & Under product launch.

We expect this strategy will allow us to sustain a two-year system same-store sales trend that is consistent with 11% plus achieved in our recent two quarters. Although, we have already observed some competitors revise or abandon the deep discount tactics that prevailed in the front half of Q1, we plan to continue to position ourselves as the category leader on value. Remaining focused on our strategy with a few tactical adjustments is a clear course of action that we expect will enable us to continue to achieve our full-year system same-store sales guidance.

Now I'll wrap up my commentary with new unit growth. During the fourth quarter, we opened three Company-owned restaurants and our franchisees opened six restaurants bringing our 2015 development total to 12 restaurants system-wide. One Company-owned restaurant that was originally expected to open in late 2015 was delayed due to significant rains in Georgia and opened after the end of the year on January 6. For 2016, we expect to open 15 to 18 new restaurants system-wide including the Georgia location that slipped into 2016, for a system new unit growth rate of approximately 3% that we plan to accelerate to mid single-digit growth rate during 2017.

As we have discussed previously, our near-term priority for development is infill markets. We have identified over 300 infill trade area opportunities in the western third of the United States, where we believe that we and our franchisees can leverage our existing brand awareness, people, distribution and broker relationships for accelerated high quality growth. We are already seeing an acceleration in our development pipeline for infill trade areas and are confident in our ability to meet our targeted 2017 mid single-digit system-wide new unit growth rate.

While infill markets are a near-term top priority, we have significant emerging market opportunity and are continuing to build Company restaurants in both Georgia and Oklahoma. Recently, we announced the signing of new franchise development agreements in Brevard County, Florida, to complement our success in the Orlando market, as well as in Pennsylvania to complement previously announced development agreements in the greater New Jersey area.

We plan to continue to identify the right markets, the right sites and the right development sequence through sophisticated market modeling and consumer research as we move forward. Additionally, we expect franchise development to accelerate in 2018 and beyond as our recent growth in average unit volume and restaurant contribution margins continues to attract new potential franchisees. Our targeted range for new Company unit performance delivers a cash-on-cash return of approximately 25% to 30%. Franchisees find both our unit economics and relevant brand positioning to be very compelling.

Lastly, we have made necessary infrastructure investments to ensure staffing and resource alignment to help accelerate development. We were excited last week to announce the hiring of Jeff Little to fill the newly created position of Senior Vice President of Development. Jeff is a seasoned veteran who brings over 20 years of development experience to Del Taco, where he will lead the Company's development efforts and play a critical role in executing our near and long-term growth strategies.

In summary, we believe that all of our assets are aligned to support growth in average unit volume and new restaurants. We're excited about the opportunity to accelerate that growth in the coming years. With that, I'd like to turn the call over to John Cappasola, our Chief Brand Officer.

Thanks, Paul. Good morning, everyone. As Paul mentioned, our combined solution strategy which has been the driving force behind our successful QSR plus positioning over the past several years has been enhanced for 2016 and beyond. We're calling the latest evolution, fresh combined solutions, which aligns the brand for our drive to $1.5 million AUV by 2018. Our goal is to reinforce and strengthen our fresh paired with value positioning by improving freshness and quality perceptions without diminishing our category leading value scores or our ability to deliver speed and convenience.

As I walk you through the key initiatives supporting our fresh combined solutions, let me start with dramatically improving the guest experience at our restaurants. In the first two waves of our combined solutions model, we set the foundation for our operating culture. One of the most significant changes culturally was making guest metrics as important as financial metrics. The impact of this change can be seen in the marked improvement in our guest metrics, with overall satisfaction up 38% and likely to recommend up 34% since we launched our guest experience measurement program three years ago.

As we move forward, we will continue to focus on driving great guest experiences by providing our people with improved tools and enhanced training. We plan to continue to expand our e-learning system in 2016, including a new on-boarding program. We are also rolling out improvements to our guest experience measurement program to better understand the root cause of guest experience issues in each restaurant, narrowing the focus for improvement in order to move further faster.

In addition, to make it easier for our restaurant teams to execute, we plan to make targeted capital investments in 2016 that are designed to help us deliver our evolving QSR plus menu platform with our customary speed and convenience. The investments will help us address system-wide opportunities and target high opportunity restaurants with equipment solutions that are proven to save time, drive speed and enhance quality.

We also plan to make an investment in the brand, designed to improve freshness and quality perceptions and guest loyalty. Something we hear from consumers regarding our fresh preparation is that seeing is believing. So we intend to show them exactly what we stand for through the use of freshness coolers in our restaurants. The coolers, which are situated in plain view, right behind the front counter, house many fresh ingredients used in our kitchens. It is a great opportunity for guests to see that our fresh position is not just lip service but reality.

We have been able to quantify through our consumer research that the addition of a freshness cooler can move the needle significantly with regard to the believability of our freshness claims and that the coolers help to differentiate ourselves from traditional QSRs. Freshness coolers have been integrated into our prototype restaurant, so all new builds feature it. In addition, this year, we will continue retrofitting existing restaurants and expect to have just under half the system completed by year end.

Now, let's move on to key initiatives designed to elevate the brand promise and complete our fresh combined solutions model for our guests. We will be complimenting the investments we are making in our restaurants with an exciting refresh of our breakthrough advertising campaign, UnFreshing Believable, planned to kick off late in the second quarter. The focus of UnFreshing Believable 2.0 will be to tell the story about the brand's fresh prep and quality position and how we pair that with unexpected category leading value.

We intend to put a finer point on our messaging to enhance our brand positioning and drive further differentiation. The campaign will be multi-media and all our communications assets will be refreshed to make a statement.

We also plan to continue to drive sales and broaden our appeal through menu and product innovation. We plan to continue to strengthen our sub-branded premium food platforms in 2016 with new Epic Burritos and hand-crafted Ensaladas, along with further promotion of our new carne asada steak to drive a broader set of occasions and trade-up guests.

In addition, as Paul mentioned, you can expect to see us continue to leverage our unique value proposition by promoting the Buck & Under menu more in 2016, including continued innovation within it. As a reminder, the Buck & Under menu is highly differentiated within QSR for two reasons. First, it is an everyday value strategy as opposed to a limited time offer strategy.

Second, as we have shared in the past, the Buck & Under menu drives both incremental and add-on purchases in a manner that allows us to achieve a full margin outcome across our transactions, as opposed to a deep discount strategy that typically unfavorably disrupts check, margin and profit trends. We believe we have a powerful everyday value platform in Buck & Under that offers consumers the most variety with up to 16 items and flexibility with prices that range from $0.59 to $1.

New product platform news will also find its way to the breakfast menu when we launch new chorizo sausage this week. The launch of chorizo will include value news starting with the chorizo breakfast taco on the Buck & Under at breakfast menu for just $1, along with new mid-tier products and an Epic breakfast burrito featuring the new chorizo protein. Maximizing daypart utilization is an important part of our model. We continue to see growth and opportunity at breakfast.

We are also excited about our opportunity to grow our dinner daypart. We began testing plated meal options called Platos, featuring more traditional authentic Mexican fare like wet burritos and street tacos in summer 2015 and are expanding the tests to a second market in spring 2016. The Platos program addresses a Mexican night occasion, which we do not currently serve and presents an opportunity to drive a larger party size and higher checks as well as incremental visits.

The last initiative I want to touch on is technology, which we plan to leverage to build the business and enhance the guest experience and further our drive to $1.5 million AUVs. We are currently developing and actively testing several key technology initiatives, focused on franchise systems, business intelligence and mobile ordering and payment. We are particularly excited about mobile ordering and payment including our recent partnership with OLO to support our online ordering capabilities, which we think will be a great engagement tool as we move into the future.

In summary, we believe that we have the key initiatives in place to support our fresh combined solutions model in 2016 and beyond, designed to achieve our short and long-term goals. With that, I'll turn it over to Steve Brake for a detailed discussion of our fourth-quarter financial results and our 2016 guidance.

Thanks, John. Good morning. Our fiscal fourth-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. Therefore, the successor period for the 16 weeks ended December 29, 2015 is being compared to the predecessor period for the 16 weeks ended December 30, 2014.

Turning to the results. Company restaurant sales increased 6.0% year-over-year to $128.1 million from $120.9 million in the year-ago fourth quarter. The increase was driven predominantly by same-store sales growth of 5.9% at Company-operated restaurants. Fourth-quarter Company same-store sales growth represents the 14th consecutive quarter of gains and was comprised of 6.0% in check growth, including over 2% of menu mix growth and an approximately flat transaction trend at negative 0.1%.

Franchise revenue during the fourth quarter increased 11.5% year-over-year to $4.6 million from $4.2 million in the year-ago period. The increase in franchise revenue was driven by franchise same-store sales growth of 5.7%, as well as an increase in initial fees from additional new franchise restaurants during the fourth quarter of 2015.

System-wide same-store sales increased 5.8% and lapped system-wide same-store sales growth of 5.8% during the fourth quarter of 2014, resulting in a strong two-year trend of 11.6%. Total fourth-quarter revenue was $133.4 million, an increase of 6.1% over the $125.7 million in the year-ago fourth quarter.

Turning to expenses. Food and paper costs as a percentage of Company restaurant sales were up slightly, increasing by approximately 10 basis points year-over-year to 28.7% from 28.6%. This result was primarily driven by the impact of food basket inflation and to a much lesser extent strong sales mix on our new fresh grilled carne asada steak platform, which featured a lower than typical margin percentage. These impacts were almost entirely offset by menu price increases in the mid 3% area carried during the fourth quarter. The food inflation was primarily driven by higher beef pricing and an increased cost of eggs.

Labor and related expenses as a percentage of Company restaurant sales decreased approximately 90 basis points to 29.6% from 30.5%. This improvement was driven by the impact of menu price increases and favorable menu mix, which helped leverage the fixed components of labor, as well as reduce workers' compensation expense. Occupancy and other operating expenses as a percent of restaurant sales decreased by approximately 10 basis points year-over-year to 20.5% from 20.6% in the year-ago period.

As a result of this top line and cost side performance, restaurant contribution increased 10.3% to $27.1 million from $24.6 million in the year-ago quarter. Restaurant contribution margin improved approximately 90 basis points year-over-year to 21.2% from 20.3% in the year-ago quarter. General and administrative expenses as a percent of total revenue increased by approximately 100 basis points year-over-year to 8.8%. The increase was primarily driven by increased stock-based compensation from new management equity incentive plans that were finalized during the fourth quarter and other G&A expense increases including incremental public Company costs, partially offset by the increase in total revenues.

Adjusted EBITDA in the fourth quarter was $21.2 million, an increase of 8.4% from the $19.6 million earned in the fourth quarter of 2014. As a percentage of total revenues, adjusted EBITDA margin was 15.9%, up approximately 30 basis points from 15.6% in the prior-year period. Depreciation and amortization expense in the fourth quarter was $7.0 million, an increase of 28.1% over $5.5 million in the fourth quarter of 2014 and as a percent of total revenue increased by approximately 90 basis points to 5.2%.

These increases are driven by purchase accounting adjustments to increase our property and equipment and intangible assets to their estimated fair value. This incremental run rate will continue to burden net income and earnings per share growth prospectively into the third quarter of 2016. Interest expense was $1.9 million in the fourth quarter of 2015, down $7.0 million from $8.9 million in the year-ago 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. As of the end of the fiscal fourth quarter, $154 million was outstanding under this all revolver credit facility.

Income tax expense was $3.2 million during the fourth quarter of 2015, as compared to a benefit of $0.2 million during the same period last year. This resulted in net income of $4.8 million in the fourth quarter of this year, compared to a net loss of $8.1 million in the year-ago quarter.

Looking ahead, following is our guidance for FY16, which is the 53-week period that ends on January 3, 2017. We expect: system-wide same-store sales of approximately 2.5% to 4.5%; total Company restaurant sales of approximately $422 million to $432 million; and total revenue of approximately $439 million to $449 million. Restaurant contribution margin between 19.8% and 20.3%.

In terms of food costs, we have locked a substantial portion of our 2016 food basket and although inflation well persists during the first quarter, we expect an approximately flat food basket during Q2, followed by deflation during the second half, resulting in annual food basket deflation of approximately 50 basis points. This guidance also reflects a $7.2 million estimated impact from the California minimum wage increase to $10 an hour, including preservation of appropriate wage differentials and incremental payroll taxes. Our restaurant contribution guidance also contemplates anticipated FY16 menu pricing in the low to mid 3% area.

G&A expenses between approximately 7.9% and 8.3% of total revenue. This includes incremental public Company costs and non-cash stock-based compensation. Adjusted EBITDA of approximately $67.5 million to $70.0 million. Effective tax rate of 40%, approximately, based on estimated federal and state income apportionment, net of various available tax credits. Diluted earnings per share of approximately $0.53 to $0.56. 15 to 18 new restaurants system-wide, split roughly 50/50 between Company-owned and franchised. Openings will be back-half weighted. Net capital expenditures of approximately $36.0 million to $41.0 million.

Lastly, I'd like to discuss the share repurchase program announced this morning. Our Board of Directors has authorized a $25 million program covering common stock and warrants. This represents about 6% of shares outstanding at current valuation. The authorization will expire upon completion of the repurchase program unless terminated earlier by the Board. Purchases under the program may be made in open market or privately negotiated transactions in compliance with SEC rules.

Our strong free cash flow profile allowed us to repay $10 million of revolvers since the August 2015 refinance. Going forward, this repurchase program will opportunistically use a combination of free cash flow and revolver capacity currently at $76 million, without any impact on our growth or other capital initiatives. In addition, on a pro forma basis, even a full $25 million use of the revolver would result in lease adjusted leverage that is lower than it was at our August 2015 refinance. So we remain very comfortable with any potential increase in leverage under this program.

Ultimately, this authorization is reflective of our strong business, confidence in our ability to successfully execute on our growth strategy and our commitment to enhancing long-term returns for our shareholders. In summary, we couldn't be more excited about the enormous opportunity ahead to continue to elevate our brand promise, expand our store base and drive long-term shareholder results.

Thank you for your interest in Del Taco. We are happy to answer any questions you may have.

(Operator Instructions)

Nicole Miller, Piper Jaffray.

Great results. What I was wondering about on the top line for this year, what will price be? Also wondering, as you've completed a lot of the initiatives that you talked about at the beginning of the call, do you think there's an ability for maybe throughput or operations to improve, so that you'll see positive traffic as well going forward? Thanks.

Good morning, Nicole. This is Steve. So first on the pricing front, right now our guidance does contemplate the expectation for menu pricing in FY16 in the 3% to 3.5% area. Typically, summer and fall are the two windows where we may make price moves. What we'll absolutely be reading the trend, the consumer, the broader macro to help make sure we make the right move in terms of the menu pricing that we carry for the year.

So we definitely have some flexibility. That's why we have that out there as a range, but somewhere in that range is where we expect to land. We feel like that's appropriate for the business based on current trends as we look ahead.

Nicole, this is Paul. In John's section as he mentioned, we have a lot of initiatives obviously beyond the food platforms, but we're investing capital this year against targeted restaurants with both equipment in the back and in processes that we believe will enable us to significantly increase our throughput capacity and start to lower our drive-through times even from the progress we made the last two years. So, very excited about having the capital to attack some of those processes and equipment issues. We think it will produce results on the transactions as we move through time.

Great. Thank you. I appreciate that. Can you just give us also a quick update on everything off-premise. Obviously you talk about -- drive-through would I guess be considered. But also thinking more along the lines of consumer facing technology. Where are you today in terms of digital mobile ordering, et cetera?

Nicole, it's John. I'll touch on mobile. So our primary focus with the mobile development this year is going to be operations integration to create really great guest experiences. So we are in development phase. We chose ordering and payment as the first point of development in 2016, just in order to fundamentally get our operations developed and integrated so we could deliver great guest experiences and integrate value proposition.

We chose OLO as our partner, just due to their experience in ordering and payment being the largest in the space. We are in development phase as I said with them currently. That will continue through the spring, from there, we'll take it into small groups of restaurants.

It will be a very iterative approach as we move through time. We'll expand based on our learnings and our performance as those things warrant it. So we can definitely see a path to a system-wide solution at some point in 2016. But we do have a lot to learn still.

We are not planning on being on the bleeding edge of technology right now. We're looking at it as a means to further buttress in-restaurant experiences and a means to ensure that guests can access Del Taco in any way that they would like. So that's where our focus is currently.

Great. Thank you so much.

Peter Saleh, BTIG.

Congrats on the quarter. Just first, a little bit of housekeeping. What is the share count you guys are assuming in the EPS figures for 2016?

Good morning. On share count, we expect basic to be in the 39 million area. As far as dilution, there's a couple moving parts.

Naturally, the repurchase could tend to drag it one direction, whereas the warrants all struck at $11.50. Depending how the stock plays out for the balance of the year, it could obviously push it in the other direction. Particularly difficult to call, the diluted share count at this juncture, but somewhere up in they 39 million to 40 million share area would be a reasonable assumption.

Great. Then can you just comment a little bit on the daypart performance in the fourth quarter? Has anything changed so far in 1Q in terms of which dayparts are the strongest and which ones are the weakest?

Let me comment on Q4. We continue to see really all dayparts with positive same-store sales in Q4, so we're happy about that. Breakfast was the top performing daypart once again for the quarter and actually for the year for 2015, so two years in a row that it has led the pack and obviously it was a big part of our marketing plans in 2015. As we think about breakfast moving forward, we continue to drive it with new product news and value this year.

So we're excited about the launch of chorizo this week. We intend to use it to continue to grow this daypart, which we think is highly relevant and definitely on a growth trend in the category. We want to stay ahead of that.

So targeted daypart growth as we talked about in the past is definitely a key pillar of our strategy. We'll toggle back to late night over the summer months when we think seasonality is best and we feel good about that. But we'll continue to leverage these key dayparts, both breakfast and late night and move into potentially some expansion at dinner as we get late into the year.

Great. Then just on the marketing strategy for 2016, you said you're going to have a significant push in late 2Q on the marketing side. Could you just talk about how much you guys plan to spend? Is the spend going up? Is it changing at all? Or at least the cadence of the spend on the marketing side, is that changing relative to last year?

Yes, this is John again. No, we're not -- there won't be a significant investment spend at all. Obviously, as sales are driving up, we've got more in that marketing fund as part of our model.

So it's really about repurposing the assets, refreshing the assets. The fresh combined solutions that we'll be kicking off, which will include both operations as well as marketing initiatives, there will be a catalyst to that from a consumer-facing standpoint which will be the UnFreshing Believable 2.0 campaign that we look to kick off very late in Q2. We'll be out there talking about Del Taco and the way that we start with fresh and serve with value.

So we plan to really bring that home to market and have that hit hard, showing consumers how we combine fresh prep and great value. So unlike other restaurants who make you choose, with Del Taco, we'll show the guest how you can choose not to choose and you can get both. So we're really excited about that.

It's done well in our testing with consumers. That's the basis of the 2.0 launch. So that's -- to the extent of the commentary we can give you now, but needless to say, we're real excited about mid-year and what we're planning.

Great. Thank you very much.

Craig Bibb, CJS Securities.

Great quarter but similar to what you pre-announced. Could you talk about -- you guys have made a number of franchise announcements recently. Could you give us a little more insight into the type of franchise you're attracting now? What the pipeline looks like?

Craig, this is Paul. We're really -- frankly, we're excited about what we're seeing in terms of the conversations that we're having and the type of franchisee that we're seeing coming to the discovery days that we're having. What we're seeing now are people that have -- either have another brand or have been with another brand. They have some infrastructure in place. They have good capital.

The majority, we're now looking at doing a 5 to 10 store deals. We think that what's really driving that is, I think, we mentioned in the script is that certainly as our results are improving, we've driven the top line over the last few years by 180,000 restaurant contribution by 250 bps.

The model just continues to get better. We have a lot of brand momentum. The brand is positioned well. What it is doing is attracting a different type of person.

I also think that the exposure with the Company going public and obviously the involvement of Larry Levy and his team is just helping to get this brand out there in the marketplace. The results speak for themselves. It's a compelling return. We think we're on a really nice upward trajectory there.

Okay. It looks like unit growth is going from 3% next year to kind of 5% plus in 2017. Can you get it closer to 10% in 2018? Or what are you thinking further out?

As we look at 2017, we certainly believe we'll be in the mid single-digit area, close to that 5%. But as we're thinking about quantity and we think about 2018 and 2019, we certainly look to see acceleration but we're also going to be as concerned about quality as we are the quantity of the sites that we take. Remember, we're doing free-standing out-parcels, so that takes a little bit longer to get that going than you do on the in-law just to find that.

So it's a game that we think in 2018, we do believe we will accelerate. But I can't sit here and commit to 10% because one thing that I'll say that I think we're doing right now is being very disciplined about what comes to the real estate committees. If we don't believe that it's going to push towards that $1.5 million or beyond number that we talked about as our goal, it gets kicked out of the process.

So we're affirming 2017. I think you'll see growth in 2018. We're going to be happy to continue to grow from there.

Okay. Then Atlanta's actually a very key market for your growth prospects in terms of introducing the brand to new markets. Could you give us a little deeper dive on your performance there in 2015 and recently?

Craig, this is Steve. We're very excited about what we've been achieving in Atlanta. I think we're in our fourth year in that market, Oklahoma City as well.

Ultimately, I think the proof point there is that we continue to build in both of those markets. We've already opened one this year in Atlanta, the second opening in Atlanta this year happens later this month. So we feel great about the prospects to continue growing really both of those markets. So we're happy with what we've seen to date and just continuing to drive performance through good operations and a great menu.

Okay. Last housekeeping type question. Are all the merger public Company charges, purchase accounting, are all those charges behind us at this point?

Good question. So certainly in the fourth quarter the P&L and of course the resulting earnings per share was burdened by restaurant closure charges, which is principally made up of the 12 closures that happened late in the fourth quarter, as well as about $1 million of transaction cost. So about $3 million between those two pretax, about a $0.045 EPS implication.

Yes, that should principally be behind us. A couple transaction related things may lag slightly into the new year, so not to say the transaction costs will be zero going forward. But they will be fairly tame and minimal compared to the multi-million dollar run rate during 2015, which was obviously a very choppy year for our P&L in terms of a lot of unusual activity that was required to put together this great transaction and great outcome for the brand.

Thanks a lot.

You bet.

Jeremy Hamblin, Dougherty & Company.

I wanted to ask a question about the Q1 comp trends that you're seeing. I know there was some pretty difficult weather I think early in January and just wanted to see -- are you seeing more normalized results? In terms of the kind of cadence of comps throughout the quarter, was it kind of rougher earlier in January and you've seen kind of an improvement since then? Or any additional granularity you might be able to provide on those trends?

Hey, Jeremy, this is Steve. So certainly January was -- there were elements of El Nino, a very cold month. February very much normalized. We're barely in March, so obviously we feel good about the range we talked about for the quarter.

But we'll kind of let March play out, literally any minute here we're going to have another fierce storm today, some more weather on the 10-day. So, Q1 tends to have some choppiness with weather, certainly with that El Nino pattern out there, it's played a bit of a role. As far as broader cadence on our full first-quarter call, about the first quarter, we'll certainly give more color on how the full quarter played out in terms of cadence, but your observation is correct, there has been some weather chop that we've contended with.

Okay. Great. Then it sounds like, Platos, you're pleased with the initial test market going to a second market in the spring. In terms of thinking about that, which sounds like a very big opportunity longer term, is that something where that could potentially have a national rollout in 2016? Or is that something that on a kind of full system-wide rollout is a 2017 and beyond type of event?

Jeremy, this is John. We've been in a small market test, roughly around 15 stores since last summer. The plan as I said will be to expand it in the spring to another market. That will be with an optimized program on our -- based on our vast learnings that we've gotten from the first test, both operations and marketing.

I'll just tell you, we do see a path to launch this program at some point in 2016. The caveat there would be pending the outcome of the second round test.

So the opportunity with Platos is significant in our minds. But we must ensure that both the execution from a marketing and operations standpoint are solid so that we can launch this and get the full opportunity from it. That's where we're focused right now.

Is the bigger challenge on that operational? It's a little more complex than your typical product launch, I would think.

Correct. It's a plated meal where you've got rice and beans along with more authentic Mexican items like wet burritos and street tacos. So it's not a risk to speed based on what we're seeing in Sacramento as we work through the process and some of the improvements around efficiency that we've had to make on that execution. So now it's about going to a second market and replicating that.

As long as we can get comfortable with that and we feel like it's not going to degrade speed and that we've got the right solutions in place operationally, it will be one of those programs that we'll look to move forward. But there's still a little bit to learn here in the spring. We'll keep you guys updated as those learnings come through.

Great. Steve, I just had two quick housekeeping questions. I might have missed this, but what was your D&A guidance for the year?

That was not itemized explicitly. I would point out certainly for the 16 weeks in the fourth quarter, you'll see that there is an elevated run rate. The 10-K will also clarify that back half of 2015 following purchase accounting, $2.2 million of depreciation and amortization expense was sort of the stepped-up outcome resulting from the purchase accounting adjustment. So you could probably take the fourth-quarter 16 weeks and annualize that out over 52 or 53 weeks to imply a run rate there, which will likely put you in that $23 million area.

Okay. Great. Then on your food basket, so we've continued to see beef costs in particular fall early in 2016. You mentioned that you are locked in on a large percentage of your food basket for the year. I know you're constantly rolling that forward when you can.

Is it something where we get to mid-2016 and you see prices down at lower levels? Is that something where you see maybe even a bigger benefit in 2017?

The cadence that I shared on food is certainly first quarter, does remain inflationary, principally due to eggs and beef, the taco meat ingredient in particular. Then Q2 we begin to level and fall by deflation back half. So if you sort of project out what that trend probably implies for 2017, it would certainly be suggestive that some deflationary trend will continue to front half of 2017 certainly, just kind of based on the math if you will. Obviously, the 2017 basket is out there quite a ways.

Overall, we've seen tremendous improvement in beef driven by expansion in supply. We're encouraged by that. We believe that could be a longer term favorable dynamic that plays out for the category.

Other items are just much harder to call out late this year, let alone 2017. As you know, every annual crop cycle can certainly influence commodities for the good or for the bad. So overall, we're generally happy with the trend in food.

The 50 bps of deflation that we now see full year, we feel pretty good about. That's something like produce that you typically can't lock.

We've got to get through and see how much drought does or doesn't persist after our typical rain season in the west subsides here in the next month or two. But overall, we're pretty encouraged with the trajectory and how it's going to play out in 2016 and cautiously optimistic for 2017 as well.

Just a final question on labor. Two months into the higher minimum wage, is there any meaningful difference you're seeing versus your kind of modeling that you had done in January? Is it playing out pretty much as expected? Are there things that you think you might be able to do to address and make the impact lesser?

Overall, it is playing out as we anticipated, certainly from a wage rate standpoint as well as deployment of labor. Our operations team is doing a fantastic job so far this year putting the right feet on the floor to give the right guest experience.

A lot of what we've done to reinvest in the business, some of the back of the house investment principally aimed at speed, secondarily over time could that allow for some streamline of labor, that's possible. But certainly our number one focus is providing great guest experiences in our restaurant. Overall to date there's nothing I've seen that would challenge me to reassess the guidance we put out there on labor.

Great. Thanks for taking my questions. Best of luck, guys.

Thanks.

Thank you.

(Operator Instructions)

Andy Barish, Jefferies.

I guess wondering -- it sounds like a little bit more emphasis on Buck & Under given the competitive environment, is that a fair assessment? How does that sort of play into your margin thought process in terms of your guidance?

Andy, this is Paul. Yes, you're right. There's a little -- be a little bit more focus on Buck & Under, but I think what's great about the Buck & Under as John mentioned is that as we use Buck & Under, it really allows us to maintain the margins that we run. It's not a deep discount.

It's actually half the people use it as add-ons, the other half it helps I think to drive the traffic line of the business to a degree. We do that without sacrificing margins. So in terms of its impact on the overall margin basket, it's right there with the rest of the menu.

I would just add another data point. Both in 2014 and 2015, the Buck & Under sales mix was approximately 22% each year. So in a certain promotional window when we decide to kind of dial up, if you will, Buck & Under, which we certainly did to open the first promotion of the year this year, it nudges that upwards but we still think about it up 2% but inside 25% is what we've typically experienced.

It's not like a full focus on Buck & Under pushes us into the upper 20%s or the 30% plus range. So just to give a little bit of texture there. It's an important move when we make it.

As you may recall, we often do it when we take price like in the fall to help kind of give us air cover to achieve the menu pricing that we're after by enforcing that great everyday value proposition. To start this year, we you saw that new chicken roller line become our number one Buck & Under item ever. So we had tremendous success there.

It did nudge that percentage up somewhat. But it doesn't change it dramatically, which leads you down the path of -- although the Buck & Under items in a vacuum do mix a bit lower on margin, that type of step-up in take rate really is unlikely to have any noticeable impact on our overall food cost.

I think the thing to always note is that Buck & Under is a permanent part of our menu. It's that as Steve mentioned, it is that everyday value piece that's always there for our consumer. I think in a way it actually helps to protect our margins.

Got you. Thanks. Just on another important daypart on breakfast, it seems like the brand has -- the postmortem is that everything's solid and surviving in spite of a large Mexican QSR and obviously the largest QSR launching breakfast and then launching all day breakfast, any commentary around that?

Andy, it's John. We're staying focused on just driving breakfast with great value and food innovation in 2016. So it will start in March, actually this week with the launch of chorizo. We're going to start that on the Buck & Under menu at breakfast, where you can get a chorizo breakfast taco for $1 and that will go up to mid-tier as well as Epic Burrito.

So I think that's the best play for Del Taco. It's a good formula and a good playbook for us over the last couple of years, pairing value with new product news. There will be more of that in 2016 than we even had in 2015. So we look for it to continue to accelerate.

As far as commentary on things like all day breakfast, et cetera, not at this point. We sell breakfast 11 PM to 11 AM. We have for a long time. During that same time frame, we do full menu.

If you just look at our Q4 trends, I commented on daypart. Breakfast was a top performer in Q4 and lunch was quite strong as well. So kind of in that window where you would expect impact, it was tough for Steve and I to really look at it and see any.

But we'll keep a close eye on what they're doing. They're a big brand, it's important to understand it. But we're going to keep focused on value and product innovation in 2016.

Thanks, guys.

Thank you.

Colin Radke, Wedbush Securities.

I was just wondering if you could update us on your new unit performance? Maybe how that's tracking relative to your expectations? Particularly as you enter some of these new geographies?

Sure. Good morning. This is Steve. We don't formally itemize about new units, but looking at recent classes or annual years of performance, we're seeing very good results. As Paul teased earlier, when we approve a new site, we really are challenging ourselves to have conviction that store can do $1.5 million or beyond. Certainly with any group of stores, you're going to have a bit of dispersion in performance. But we feel really, really good about the results we're seeing in our new units in recent years.

Also feel great about the pipeline we've built, that is kind of bigger than it's ever been. We believe those stores will also do very well. That really cuts across geographies.

So we certainly have a lot of infill opportunities that we're bringing to life on the Company and franchise side. We also see some great performance coming out of newer stores in emerging markets. As we've said, we're still very bullish about Atlanta and Oklahoma City in particular, continue to build there and have several sites in process for this year or later this year.

Got it. Then just on the comp trends that you've seen by geography, is there any region that stood out as particularly strong or particularly weak. Maybe do you think you're seeing any kind of benefit on the demand side from that minimum wage increases in California?

Yes. By geography, all of our key territories, really no significant outlier for the good or the bad. For the most part, most markets are really in that kind of mid single-digit plus area that we've been humming along for a while now. So we feel pretty good about the consistency if you will you across geographies, as well as the consistency between Company and franchise, the same-store sales performance has been fairly consistent there.

All right. Thank you very much.

You're welcome.

Thank you. Mr. Murphy, there are no further questions at this time. I'd like to turn the floor back to you for any final remarks.

Okay. Well, great. Thanks everybody for joining. We're certainly excited about the strong results for the fourth quarter and for 2015, but even more excited about the opportunity that we have to grow our annual unit volumes, our store base and to create value for all the shareholders. So, thank you for your time this morning.

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