Berto Acquisition Corp (TACO) 2016 Q2 法說會逐字稿

Good afternoon and thank you for standing by. Welcome to the fiscal second quarter 2016 conference call and webcast for Del Taco Restaurants Inc.

I'd now like to turn the call over to Mr. Raphael Gross to begin.

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

On the call are 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 statements at a later date, and refer you to today's earnings press release and the SEC filings filed by Del Taco Restaurants Incorporated for a more detailed discussion of the risks that could impact future operating results and financial condition.

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

We refer you to today's earnings press release which includes a reconciliation of the non-GAAP measures to the nearest GAAP measures.

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

Thank you, Raphael, and thank you all for joining us on the call this afternoon.

Similar to Q1, we delivered solid results in Q2 that met our own expectations and we therefore remain well-positioned to achieve our annual guidance.

Highlights for the second quarter include system-wide comparable restaurant sales growth of 3.3%, cycling over the second strongest quarter of 2015 when we achieved a 6% increase, resulting in an impressive 9.3% two year growth rate.

Restaurant contribution margin of 20.6%, an 80 basis point improvement over the same period last year, and adjusted EBITDA of $16 million, up from $15.3 million in last year's second quarter, reflecting a 4.5% growth rate.

As you all know, the QSR industry is currently steeped in deep discounting and aggressive promotional activity, which in our view makes our very solid growth in comparable restaurant sales during Q2 all the more impressive without the need to discount. The Del Taco system in our own company operated restaurants have now generated 11 and 16 quarters of consecutive gains in comparable restaurant sales growth respectively.

Within our company operated restaurants, comparable restaurant sales rose 3.1%, consisting of a 4.9% increase in check, which was partially offset by a 1.8 % decrease in transactions. The year-ago traffic comparison was plus 2%, so considering the competitive environment, we were satisfied to have held our two-year traffic trend slightly positive. Moreover, our transaction trend reflected a sequential improvement of 80 basis points, and, similar to Q1, we experienced strong check growth as a result of effective menu price increases, along with menu mix growth of nearly 1%.

With respect to restaurant contribution margins, we leveraged four-wall operations despite the inflationary labor pressure, as food costs were more favorable than we had anticipated, and our higher sales volumes drove operating leverage.

I spent a fair amount of time on our last conference call discussing our approach to tackling minimum wage increases, so I will not repeat everything I discussed back in May. This issue is certainly not new to us given our footprint in California, and we have successfully managed it the over the last two years through strong sales performance on both an absolute and relative basis, while also expanding our restaurant contribution margin.

As evident within the components of our comparable restaurant sales, there is certainly an important role for menu pricing in absorbing macro events such as wage inflation. But that alone does not tell the entire story at Del Taco. Our brand repositioning through our combined solutions strategy which pairs value and convenience with fresh, and our barbell menu strategy across Buck & Under, mid-tier, and premium, has enabled us to achieve effective menu price in a targeted manner without disrupting value perceptions. In fact, this expansion of premium items designed to encourage new occasions and elevate the brand promise is helping drive favorable menu mix and aiding value perceptions.

As we reflect on sales in the front half of 2016, we attribute our momentum to three key areas of focus that we believe will continue to support our comparable sales growth. First, we plan to continue delivering what we view as category leading everyday value to our guests, across all three tiers of our menu. This will be accomplished through a new product news designed to induce trial in marketing communications that create greater awareness of the strong value that our sub-branded menu platforms offer.

Our guests know that they can count on the consistency of our value message day in and day out. We think our consistent everyday value approach fosters greater loyalty and does more to solidify our brand equity while delivering top and bottom line results.

At the same time during Q2, we launched our new chorizo lineup at breakfast, as well as a new Epic burrito for $5.49 that delivers a great value relative to the competition. These launches typified the power of our barbell approach in everyday value positioning, while enticing guests with exciting new product news. Our second key area of focus, broadening our occasion set by fully leveraging our QSR+ quality value positioning, which in turn is driving check through menu mix.

As I said a moment ago, we experienced healthy menu mix growth of nearly 1% in Q2, which was similar to Q1. The premium menu items are naturally driving this growth, as guests are finding great value in craveable products on the higher end of our menu. In fact Q2 marked our fourth consecutive quarter of double-digit premium mix.

The strength and diversity of our menu offering provides us with the flexibility to hone our messaging through our marketing promotions based upon the business need while staying on our strategic course. It should also help us reach the $1.5 million threshold for AUVs by 2018 that we have spoken about in the past, by appealing to more consumer restaurant occasions.

And third, we are driving great guest experiences at Del Taco through our combined solutions focus, which is maximizing our opportunity with every transaction. In Q2 we achieved our second-highest overall guest satisfaction score as we prepared our restaurant teams for the launch of Fresh Combined Solutions through our general manager and franchisee boot camps, and the use of our enhanced training tools.

To further fuel guest experience improvements, we also launched our next-generation guest experience measurement program in April, with our new partner InMoment. This new guest experience reporting system provides real-time scoring and analysis on the guest experience. It also uses a proprietary algorithm to provide each location with the top two areas of opportunity that will have the greatest impact on the guest experience in their specific restaurant to further our every guest leaves happy objective.

As we move into Q3, we are excited about the launch of Fresh Combined Solutions. The three key areas of focus that I've outlined are contributing to our topline success, and are a big part of our ongoing plans, which John will touch on in a moment. But first let me wrap up my comments with development.

Our expected range of 15 to 18 new restaurants system-wide in 2016 remains intact. This range reflects an approximate 3% system new unit growth rate which we plan to accelerate to mid-single digits system growth rate during 2017. We continue to focus on our infill opportunity, where we have identified over 300 trade area opportunities in the western third of the United States, as well as emerging market opportunities including Georgia and Oklahoma, where there is more company activity in the pipeline.

We also continue to expect franchise development to accelerate beginning in 2018, given ongoing growth in AUVs and restaurant contribution margins, along with our plan to further improve these metrics. This momentum is expected to spur greater interest from new and existing franchisees alike.

I'd now like to turn the call over to John Cappasola, our Chief Brand Officer.

Thanks, Paul, and good afternoon, everyone.

As Paul touched upon, our Q2 marketing program highlighted our unique barbell menu strategy and brought exciting new protein news to breakfast. The combination of targeting occasions through our sub-branded food platforms, along with our diverse daypart mix, gives us multiple levers to pull, and enabled us to continue growing comparable restaurant sales in the recent quarter.

We maintained strong Buck & Under messaging throughout Q2 to keep the platform top of mind and counter active value and deep discounting by our competitors. Although we increased our focus on Buck & Under, we continued to expand our margins, highlighting the platform's unique ability to deliver great value and healthy margins without the need for incremental discounting.

We also devoted more merchandising to Epic burritos on our menu throughout Q2, including the rollout of the new bacon ranch chicken avocado Epic burrito mid-quarter. This played a role in growing Epic burrito sales mix up from Q1, and achieving our fourth consecutive quarter of double-digit premium sales mix. Premium platforms are an important element of our strategy to embed our QSR+ positioning and grow check and margin dollars through menu mix.

One last point on Q2 is that we were pleased with the performance of both our late-night and breakfast dayparts. We put incremental merchandising efforts against late-night and saw it lead Q2 in comparable restaurant sales.

We were also pleased with the launch of chorizo in March, which helped us to maintain positive momentum in the breakfast daypart. Daypart utilization is an important part of our sales building strategy, and we will continue to drive balanced messaging between late-night and breakfast throughout the remainder of the year.

Turning to Fresh Combined Solutions. In Week 2 of the third quarter, we kicked off the consumer-facing elements of our strategy. While the fundamental thinking doesn't change from the original combined solutions approach, the specific initiatives put a finer point on our brand positioning to further differentiate Del Taco.

As I spoke about on the last call, Fresh Combined Solutions includes several brand catalysts. Our UnFreshing Believable 2.0 advertising campaign was launched and will dramatize our unique dichotomies that only Del Taco can deliver, and guest love. These include fresh preparation paired with category leading value, and tacos and burritos paired with crinkle cut fries.

In addition, we launched the UFB 2.0 in-store marketing and merchandising enhancements, including an elevated new look and feel to our menus. The launch was also paired with our new signature crunchy beef taco called the Del Taco, a product we believe is worthy of the brand's name.

Inspired by the 1964 original, the Del Taco is loaded with seasoned beef, freshly grated cheese, and includes a new, larger, crunchier shell. It really does have more of everything you love, and at $1.39 it will be a mid-tier menu catalyst for the brand. Even though it's early, we're excited about the launch of the Del Taco and expect it to be one of our most successful product rollouts. As I said before, our intent is to provide the best value for the money for a crunchy beef taco in Mexican QSR, and we believe the Del Taco will live up to that billing.

The launch also contained a number of operational enhancement initiatives to ensure we deliver quality and speed without standing service. As Paul reported, our efforts leading up to the launch yielded excellent results as we focused on improving our operational systems and training.

I'm also pleased to report that we continue to make solid progress on the deployment of targeted capital investments to complement Fresh Combined Solutions by enhancing our operational and brand capabilities.

At the time of launch, all company restaurants had installed new wireless noise canceling drive-through headset systems, and upgraded to new electric [bean] mixers to improve product consistency and save time. We've also deployed additional freshness coolers this year to drive fresh and quality perceptions, bringing our system-wide total to 193 at the end of Q2.

Looking to the future, we're excited to announce our decision to launch the Platos program in Q4 as another brand catalyst of Fresh Combined Solutions. This is our first occasion-based expansion strategy that we have been developing for the better part of two years. It is designed to grow our occasions of use, primarily through the dinner daypart with plated meals including chips and salsa, rice and beans, and an entree, that can be conveniently picked up through the drive-through at a great relative value.

We are very pleased with the consumer, financial, and operational results in our testing, including incremental sales and margin dollars, driven by check and transactions, as well as strong brand perceptions that align with our QSR+ positioning.

Finally, our mobile initiative is progressing nicely, as we begin testing our mobile ordering and payment platform in restaurants in Q3. Based upon our learnings, we will expand the test in the coming quarters with the intention to roll it out system-wide over time.

Now I would like to turn the call over to Steve Brake to go over our second-quarter financial results.

Thanks, John.

Our fiscal second quarter 2016 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 12 weeks ended June 14, 2016 is being compared to the predecessor period for the 12 weeks ended June 14, 2015.

Company restaurant sales increased 2.1% year over year to $95.9 million, from $93.9 million in the year ago second quarter. The increase was predominantly driven by same-store sales growth of 3.1% at company operated restaurants, partially offset by fewer company operated restaurants.

Second quarter company operated same-store sales growth represents the sixteenth consecutive quarter of gains, and was comprised of 4.9% in check growth, including nearly 1% of menu mix growth, partially offset by a 1.8% decrease in transactions. This transaction trend features 80 basis points as sequential improvement from our first quarter.

Franchise revenue during the second quarter increased 13.6% year over year to $3.6 million, from $3.1 million last year. This increase was driven by franchise same-store sales growth of 3.6% in additional franchise restaurants, compared to the second quarter of the prior year, as well as an increase in initial fees.

System-wide same-store sales increased 3.3%, and lapped system-wide same-store sales growth of 6% during the second quarter of 2015, resulting in a strong two-year trend of 9.3%. This was our second toughest comparison of the year, in comparison [to ease] in the back half of 2016.

Total second quarter revenue was $100 million, an increase of 2.5% over the $97.6 million in the year ago second quarter. During the quarter we opened one company operated restaurant, and one franchise restaurant closed.

Now moving on to expenses. Food and paper costs as a percentage of company restaurant sales improved approximately 110 basis points year over year to 27.5%, from 28.6%. This improvement was due to the impact of the menu price increases of approximately 4% carried during the second quarter, along with modest deflation on our food basket.

We previously expected a leveling in the food basket during Q2. However, we began to benefit from deflation earlier than expected primarily due to favorable trends in cheddar cheese and beef. Looking ahead, we expect continued modest deflation during the second half of 2016.

Labor and related expenses as a percent of company restaurant sales increased approximately 120 basis points to 31.5%, from 30.3%. This was primarily driven by the California minimum wage increase to $10 an hour, as well as increased workers compensation expense, partially offset by the impact of menu price increases. This outcome was similar to the 110 basis points of deleverage in Q1, and overall our experience managing this higher wage is consistent with the guidance we furnished earlier this year.

Occupancy and other operating expenses as a percentage of company restaurant sales decreased by approximately 80 basis points year over year to 20.4%, from 21.2% last year. The improvement was primarily driven by leverage from our comparable restaurant sales increase.

Based on this performance, restaurant contribution increased 6.2% to $19.8 million, from $18.6 million in the prior year second quarter, while restaurant contribution margin improved approximately 80 basis points year over year to 20.6%, from 19.8%. This outcome reflects favorably on future expected performance and our ability to achieve our full-year guidance.

General and administrative expenses as a percentage of total revenue increased by approximately 150 basis points year over year to 8.2%. This increase was primarily driven by additional resources to support brand development and incremental public company costs, as well as increased stock-based compensation from new management equity incentive plans that were finalized during the fourth quarter of 2015.

Adjusted EBITDA in the second quarter increased 4.5% to $16 million, versus $15.3 million earned in the second quarter of 2015. As a percentage of total revenues, adjusted EBITDA margin was 16%, up approximately 40 basis points from 15.6% in the prior year period.

Depreciation and amortization expense in the second quarter was $5.5 million, an increase of 45.7% over $3.8 million last year, and as a percentage of total revenue increased by approximately 160 basis points to 5.5%. This increase is primarily driven by purchase accounting adjustments to increase our property and equipment and intangible assets to their estimated fair value, and the addition of new assets. As a reminder, this incremental run rate will burden net income and earnings per share until we lap purchase accounting in the third quarter of 2016.

Interest expense was $1.4 million in the second quarter, down $2.6 million from $4 million in the prior year second quarter. The interest reduction stems from the repayment of $68.6 million in senior debt upon the June 30, 2015 closing of our merger, and our August 4, 2015 refinance transaction. As of the end of the second quarter, $154 million was outstanding under this all-revolver credit facility, while our applicable margin for LIBOR loans remained at 1.75%, based on our lease-adjusted leverage ratio based pricing grid.

Income tax expense was $3.3 million during the second quarter, for an effective tax rate of 40.5%, as compared to $1.7 million in expense during the same period last year. This resulted in net income for the second quarter of $4.9 million, or $0.13 per diluted share, compared to $4.6 million in the prior year period. As a reminder, we incurred $0.9 million of transaction related costs last year that consisted of direct costs incurred in connection with our two-step business combination transaction.

Turning to our $25 million repurchase program covering common stock and warrants, we actively demonstrated our commitment to enhance long-term shareholder returns during the second quarter. Specifically, we repurchased 542,303 shares of common stock at an average price of $9.92 per share, and also repurchased 241,806 warrants at an average price of $2.36 per warrant, for an aggregate cost of approximately $6 million during the second quarter. Subsequent to the second quarter, we repurchased an additional 361,573 shares of common stock at an average price per share of $8.79, and an additional 235,000 of warrants at a cost of $1.85 per warrant.

In aggregate, since the inception of the program in March 2016 through the current date, we have repurchased 990,555 shares of common stock at a average price per share of $9.58, as well as 476,806 warrants at an average price of $2.11 per warrant, for an aggregate cost of $10.5 million. We currently have approximately $14.5 million remaining for future repurchases of common stock and warrants under this authorization.

In addition, on July 11, we commenced an offer to exchange 0.278 shares of common stock for each outstanding company warrant, exercisable for shares at an exercise price of $11.50 per share, up to a maximum of 6.75 million warrants. The offer to exchange will expire unless extended on August 5.

All of our directors and executive officers who beneficially owned warrants have agreed to participate in the offer, and in aggregate have agreed to tender at least 1.5 million of their warrants, and such details can be found in our recent SEC filings. The purpose of the exchange offer is to reduce the number of shares that would become outstanding upon the exercise of warrants, thus providing investors and potential investors with greater certainty as to the company's capital structure.

We believe this will make the company more attractive to holders with a long-term investment horizon. If all 6.75 million warrants were tendered, the company would issue 1,876,500 shares in exchange for such tendered warrants. As mentioned earlier, we have repurchased 998,555 shares of common stock in the open market, which is 52.8% of the potential dilution from the 1,876,500 shares.

Lastly, based on our performance to date and expectations for the remainder of the year, we are pleased to again reiterate our 2016 guidance. For details on this outlook, please refer to our earnings release from this afternoon.

In summary, we are executing according to our plan, and our entire organization is energized by the launch of Fresh Combined Solutions, the next phase of our multi-year brand strategy intended to help deliver strong performance during the second half of 2016 and beyond.

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

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

(Operator Instructions)

Andy Barish, Jefferies.

Hello, guys. I was wondering if you can give us sort of any sense with the California market continuing to be strong, have you seen any changes in the consumer tone out here? Or just more competitive? And then anything on the start with Fresh Combined Solutions would be great as well.

Andy, this is Paul, to kind of answer that question I'll just speak a little bit to the cadence through Q2 and into Q3.

In Q2 Period 4, that was our slowest period which certainly mirrored the industry, yet it still was positive but in a very low single-digit range. However, kind of differing from reported industry trends out there, both Period 5 and Period 6 strengthened as we moved through the second quarter.

What we saw was sequential transaction improvement from Period 4 to Period 5, and then from Period 5 to Period 6. And kind of so far through the first five weeks of the third quarter, transactions are positive with the transaction momentum much more pronounced in the most recent three weeks, following the launch of the Fresh Combined Solutions and the Del Taco.

And I think this speaks honestly to our strategy and the execution of that strategy, but it also says that I think what we're doing is really resonating with the consumer out there, not only in California, but in all the marketplaces where we're doing business.

Thanks. That's great --

I could have John give a little bit more color in terms of the Del Taco which is a product catalyst with the Fresh Combined Solutions.

Yes, obviously the new ad campaign and the Del Taco, we're real pleased with the early results. As Paul said, it is early on the Del Taco but we're very happy with the launch. I'd say, I'd characterize it as it's living up to our goal of leveraging the product as a brand catalyst of Fresh Combined Solutions, and as I said, we really do expect it to be one of the most successful product rollouts to date.

So based on our testing and early results, we believe the product, the Del Taco has potential to drive both mix and transactions, and in fact we think the product has played a role in the positive traffic that Paul just referenced in Q3, and we also like it because of the $1.39 price point, and we think that's going to be helpful for us in sustaining a favorable menu mix trend.

So where we're focused now with the restaurant teams is on execution, as you can imagine. We know the demand and repurchase intent is there, and we just need to execute it well and continue to embed that muscle memory among our restaurant teams, and so we built in a detailed and redundant checks and balances system from internal restaurant audits to guest experience and perception ratings after purchasing the Del Taco, and we're doing a great job thus far and just need to keep that up.

So we're very pleased thus far. It's only been three weeks since the launch of Fresh Combined Solutions, but certainly like the momentum that we're seeing, and we're certainly liking the performance of the Del Taco to date.

That's great to hear. And then just one quick one again, get Steve involved, were there any -- I'm sure it was in your plan, but any noticeable costs just on getting the teams ready and such in 2Q for Fresh Combined Solutions?

No, really nothing that's worth calling out. There's obviously a lot of training focus within the four walls. That said, most quarters especially the last few years, we've been very busy in the four walls bringing a lot of great stuff to market, so nothing worth calling out in that regard.

Peter Saleh, BTIG.

Great, thanks. I appreciate the color on the traffic in the same store sales trends throughout the quarter. Can you just remind us, if you don't take any more price going forward, how much price will you have in your comp for the balance of this year?

Sure. So in terms of pricing, as you know, we've now carried about 4% each of the last two quarters of menu price. That said, late in the second quarter we lapped a little over 1% of price a year ago. We did replace that with similar timing with a little less than 1% price this year.

So as you think about Q3, kind of more in that mid to high 3% area is the menu price that we would be carrying, then the final primary move will lap is this fall, kind of middle part of -- early to mid part of Q4, we will be lapping a more substantial price increase from a year ago, that was more of that mid 2% area.

The work has begun again, so what we might do this year, it's still very early to call the exact timing or magnitude of the price increase that we'll take this year. All of that said, I would probably just refer you back to our annual guidance of low to mid 3% menu pricing for the full-year. That's still very much intact and we expect the full-year to kind of land in that area.

Great. I think I heard it correct, you guys said late-night was the strongest, if that's correct, was breakfast the second strongest and how did the rest of their dayparts hold up throughout the quarter?

Yes, graveyard had the number one same store sales ranking this quarter, and breakfast was right there in the middle of the pack. We again had a lot of balance across our six dayparts, with all driving same-store sales in that 2% plus area.

So I think relative to breakfast, we continue to be well-positioned to drive value and variety at breakfast with that chorizo launch that we talked about on the last call. It will be a big part of how we leverage breakfast the remainder of the year through our marketing efforts. It's proven to be relevant. The chorizo is selling four times more than the previous sausage protein that we had in the business, and it's representing a meaningful portion of our breakfast sales mix launch to date.

So we'll continue to toggle between breakfast and late-night in 2016 to bring to life and achieve our daypart utilization strategy.

Got it, and then on the Platos, how many products or how many different items will you guys be launching, and what is the anticipated price point that you guys will have when you launch this nationally?

Yes, so the plated meals will be right around, we'll probably launch with three plated meals, and that'll be a wet burrito that we've been testing for some time, as well as a couple of core products that are already on the menu that will not new to operations, and those are a couple street taco versions that we have on the menu, both fish and chicken and we've got carne asada.

So we'll be plating those things together with our already great slow cooked beans, as well as our rice that we have on the menu today, and chips and salsa.

So most of what we've been executing over the last, when you think about the last kind of year or so on the premium front, we've been on a progression to really prepare ourselves to execute Platos well, and that progression has put carne asada in the business, so operations is used to that. And that progression has put the street tacos in the business.

So really what we're bringing to the table is a way to plate that and combine that in a new and interesting way for consumers to drive kind of that incremental behavior that we're looking for.

On the price point front, we're going to be in that $6 to $8 dollar range on each of the plated meals, which relative to the competitive set, I think we're going to be value oriented and we'll be in a good position. Again, our strategy across all tiers of our menu is always to have a great everyday value position. We don't want that to be any different with the Platos program.

Great. Thank you very much.

Jeremy Hamblin, Dougherty & Company.

Hi guys, congratulations on really strong results in a tough environment. I wanted to just follow up a little bit on Platos and just get a sense for the markets where you had that in terms of the comp trends that you're seeing, presumably you are getting a little bit better results in those markets than you are in the rest of your chain?

Yes, as I said in my comments, we really liked what we saw and actually continue to see in the test markets regarding all three of the commercialization territories. So you think about consumer, financial, and operations.

The second test certainly helped us to round out our thinking and really validate the results we saw in the first test market. And both tests achieved the incremental sales and margin dollars driven by both check and transactions that I referenced in my comments.

So just as a reminder, we don't view Platos as a promotional play. It's our first occasion-based expansion strategy, and we view it as a long term driver for us that really can provide the business, the brand, a step up potential in both sales as well as our evolving positioning in our QSR Plus in the marketplace.

So we'll need to execute it well. We're set up to do that and we'll build our credibility as we launch it with guests and over time. And this is something that should lead to solid results for us in the short term, but also provide an opportunity for future and more elevated occasions that we're interested in exploring as sales builders over time.

So first things first and that's let's get Platos to market and progress from there based on the performance and the learnings, but we're excited to get it to market. Obviously we've been talking to all of you about it for some time now, so it will be a good move for the brand in Q4.

Understood. Also wanted to ask about your unit growth and just thinking ahead at this point you probably have a fair bit of your locations for next year, [signed] and hopefully in the pipeline. Are we going to see a bunch of new geographies? I know what you have said historically is that the unit growth is probably going to be mostly backfill and existing markets, but any kind of hints at what we should be looking at for 2017?

This is Paul. For 2017 it will still be more kind of backfill, infill, and then certainly build out of Atlanta, Oklahoma City, and us entering into Denver market.

As we look at new geographies, that's really a year or two out after that because we certainly have a lot of white space kind of close in to us, but also just getting that pipeline filled.

The one thing that is important to us as we look at both 2017 and 2018, you start to get more of a cadence of the stores being built throughout the year.

It's no secret, both certainly last year and this year were a little bit heavy on the back half. And so a lot of, strategically what we're trying to do is to get that flow with the openings more across the full year, and then as we get that in the pipeline in place, we'll talk about new geographies.

Okay. Great. One last question, just on the warrants and thinking about potential next steps with that. I think the tender closes on August 5. Is there potentially a second step along the same lines? What kind of inspired doing it this way? Was it to get a quicker resolution on this potential overhang I think it's probably had on the stock? Can you just give us a little more insight into the thinking going forward on the remaining ones?

Jeremy, at this point I would just have to say it is absolutely premature to make any comment around what, if anything, will transpire after this current process is completed.

Okay. Fair enough. Congrats on the great results and best of luck in Q3 and beyond.

Craig Bibb, CJS Securities.

I would like to extend my congratulations on positive traffic, that is fantastic news. To that point, with the Del Taco, was the Del Taco the key driver to (inaudible) and the easier comparison to the return to positive comps? (Inaudible) [your stock traffic would be up to.]

At this point, the Fresh Combined Solutions remember launched three weeks ago. So to Paul's comment, where we started to really see some of that strengthening during that period of time, the energizing of the field and our franchisees as we really prepared for the launch.

We got the restaurants ready, the teams ready to really accelerate, and obviously the catalyst that has been the new campaign, kind of the new spin from a dichotomy point of view on the brand that we're bringing to life, and then of course the Del Taco which has done well as we've stated.

So I think it's a good testament to the overall strategy of Fresh Combined Solutions. We're seeing some good things from our operating metrics and it's all working together nicely to drive the business right now.

The Del Taco, are people using that as an add-on, or are they ordering multiples of them, or -- (inaudible)

Craig, this is Steve. It's a little early to get a full read that we can share on the exact usage of it. I mean, we're certainly seeing nice early traction across dayparts. It is part of a number combo meal which certainly has great traction, but we also see a large amount of a la carte.

So, we're really just three weeks and change into it. It's going to take a bit more time to see, to enjoy watching it reach its full potential, and when it gets there we'll be happy to report next quarter about the ins and outs of what it's doing for the business.

Okay. In the two Platos markets, Platos is available lunch and dinner? Is that correct?

Yes, it's not just a dinner platform. It's obviously akin to dinner, the way that it's been positioned with the plated meal, but it is being purchased across dayparts. So we're seeing activity at lunch as well as dinner and other dayparts.

So it's something that gets you in the mindset of dinner of course, and it's something that's going to be well positioned for dinner, but the good news is, is it's being used through the drive-through, it's being used in the dining room, and it's being used across dayparts, which we feel really good about.

Is it having its biggest impact on dinner?

Space impact, or -- it's skewing dinner a bit right now, but we're seeing some nice movement during the other key dayparts as well, lunch especially, so it's not exclusively dinner.

And are people coming and ordering family style or one-offs?

We can give a bit more color on it on the next call as we finalize our test results and really get the timing of the launch for Q4 ready to go. We can dive into some of those types of metrics, but as you can imagine it is a higher check average that we're seeing. It's definitely positioned for larger party size because it is more of a dinner skewing platform. So we're seeing some nice things on the check and on the margin side of that platform.

(Inaudible)

(Multiple speakers)

Yes, we're finalizing the details right now. It will not be any later than mid Q4 at this point.

(Operator Instructions)

Nick Setyan, Wedbush Securities.

Thank you and congrats on a great quarter, guys. Just a quick one. (Inaudible) -- EPS guidance, is that taking into account the potential dilution in the second half of the shares?

Can you repeat that question? You were breaking out a little.

In terms of the guidance on the EPS, did that take into account the dilution from the warrants?

Well, as you know the guidance was done much earlier this year. Since then obviously we've been very productive in the market, buying back essentially around 1,000,000 shares.

That said, if fully subscribed I think we would deploy nearly 1.9 million shares, so kind of a little more than half of that dilution, so to speak, is already been acquired in the open market.

The guidance range of $0.53 to $0.56 has not changed. I think anyone with a pocket of warrants out there kind of calling the dilutive share base is always a bit of a challenge, so I would just tell you at this point, we still feel very good about that diluted EPS guidance that we're affirming today.

Got it. And I'm just concerned about the competitive environment, obviously we've kind of seen the cadence eased a little bit from a dollar price point to it seems like it wants to gravitate towards [a $5 price] point, and one of your bigger regional competitors caused (inaudible) about four weeks, five weeks ago, and maybe that also helped with the acceleration in transaction trends.

I guess what are your thoughts around the competitive environment today, and then going forward do you think there's a chance that we get back to the tone and that type of an aggressive stance again, going out of this year and into 2017?

Into 2017? Okay. Nick, this is Paul. From my standpoint it's a little hard to tell. I think it's two issues.

It's going to be how are these other brands performing? We like the course that we're on. We like the strategy that we have, and certainly the results that we are seeing in our business. But with our strategy kind of vis-a-vis what's going on in macro, a couple things to always consider is that in early 2017, some of these other brands that haven't had more of a heavier discount have to lap what they did in 2016.

So at that point, internally for them, it comes down to they have some real decision-making. Do they toggle back more towards check than trying to drive transactions?

And then also some of them were a little more -- have a heavier franchise presence. It's also part of the franchise community's going to be excited to keep on discounting, or are they going to feel like that they're leaving money on the table?

And as the commodity environment starts to be a little bit less deflationary, it makes it tougher for some of these brands to do what they're doing.

As you know about our strategy with Buck & Under, it's full margin so it's not discounting. So our view is that we're going to always monitor them, look at what's going on in the macro, but as we've said a few times this year, we're sticking with our strategy.

We like the results that it's doing with the launch of the Fresh Combined Solutions, and the everyday value that we're able to present we think is going to enable us to move through this in a very strong fashion, and come at the other end as one of the top brands.

Thank you, that was very helpful. And then just final question. Steve, the incremental food deflation you commented on, is that relative to Q2? So is that a sequential deflation again, or were you just talking about it on an annual year-over-year basis?

Yes, it was on a year-over-year basis. So previously we did expect kind of a leveling in that food basket year over year. We did achieve a modest deflationary outcome year over year with the basket deflating primarily due to very favorable cheese pricing that prevailed through the spring as well as some wins out of the beef category.

Got it, thank you.

Joshua Long, Piper Jaffray.

Great, thank you for taking my question. Wanted to see if we might be able to go back to 3Q of 2015 and remind us what the cadence was through that quarter, if I remember correctly you were promoting salads and maybe avocados at that time, or avocado add-ons. I'm just curious on what the cadence looked like through 3Q of 2015. Obviously understanding that generally the trends get easier as you go through the course of this year, but just wanted to kind of balance those two if we could.

Sure. This is Steve. So Q3 a year ago, the fresh sliced avocado originally debuted very early June which was back part of Q2, so avocado was still in play during Q3, still relatively new.

I believe we were sustaining a new Epic burrito that featured that fresh sliced avocado, and then right as we went into Q3 we had just launched the new ensalada platform; so that definitely played a pretty key role at the end of Q3

So I guess really the front half would be characterized by the fresh avocado launch and that new Epic that featured the fresh avocado, and then the back half, very tail end of Q3 had the launch of ensalada.

The salads were really September for the most part so it would have been more a Q4 impact.

And then August, I believe, had a bit of a Buck & Under focus as well. So it was a good quarter as you know a year ago. A good mix of some premium, rehitting Buck & Under as we often do, and certainly this year we're being nimble and leaning in on Buck & Under a bit more, and then it did close out that quarter with the exciting launch ensaladas. Is that helpful?

Yes that is, thank you, I appreciate that color. Then as we shift over to the food cost environments, with deflation coming in a little bit earlier than you expected and being, some of those key items being favorable overall, does that change how you think about contracting some of those items? I think as of the last quarter, you were about 30% to 50% contracted for each of the following quarters. Just curious on where you're contracting at now and if your philosophy for the remainder of the year has changed.

We feel pretty good about where we are. As we look ahead, the back half, we're still expecting continued modest deflation across the food basket on a year-over-year basis.

Right now we have about three fourths of our basket contracted for the back half. Third quarter a bit higher than that. Fourth quarter a bit lower than that. So we have pretty good coverage across the baskets. We feel pretty good.

That said, the one area of main focus right now is block cheddar cheese. We do have partial coverage the balance of this year, but that has been fairly volatile. It was very, very favorable through the spring. It went as low as the high dollar-twenties, it really held in the dollar-thirties for May. That said, the last two days it's now at $1.68, so cheese often is very volatile. That's how it's behaving currently.

The heat of summer is driving some of that, so we're certainly doing the work trying to decide the right balance of coverage and/or floating to kind of make sure that rounds out appropriately for us as we wrap up the year.

So that and a few other renewals in areas that will take down some coverage are in process. So I'd say by next quarter we'll have a very, very good read on how the year will wrap up, but right now we're focused and overall pleased.

That's helpful, thank you, and two questions on the unit development. One, wanted to just confirm the gross openings and net closings for company and franchise in the quarter? And then a longer-term question, as you start thinking about both your growing into larger percentage development over time and then also franchisees growing out into 2018 as you mentioned on the call, any sort of investments that need to be made there, or have those already been made and it's really just growing into the scale that you already have as an organization?

Josh, this is Paul. In terms of the investment centers, in the major investment was bringing on Jeff Little as a Senior VP of Development, and he certainly has made a couple changes in his department but we feel like we're set up.

We have the organization set to deliver 2017 and 2018, so I don't see that we're going to need much more investment certainly on the personnel to make that happen.

In terms of the guidance that we've given for the balance of 2016, we've reiterated that, feel good about the number, and our focus right now is really more on 2017 and 2018, and as I mentioned earlier, trying to get to more of a cadence across all four quarters instead of being backend loaded, which is just tougher to execute that. So we know that to get into the higher percentage of growth you need to have growth in all four quarters.

And as far as there was growth, there was one opening company, one closing franchise for the quarter.

Got it. Great. Thank you so much.

Thank you. I'd like to turn the floor back over to management for any closing remarks.

I just want to thank everybody for your time today. Certainly second quarter met our expectations and love the start that we're off on to the third quarter, and just look forward to speaking again at the end of the third quarter. Thank you for your time.

Thank you. This concludes today's teleconference. You may disconnect your lines. Have a nice evening.