Berto Acquisition Corp (TACO) 2017 Q2 法說會逐字稿

Good afternoon. Thank you for standing by, and welcome to the Fiscal Second Quarter 2017 Conference Call and Webcast for Del Taco Restaurants Incorporated. I will now 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 John Cappasola, President and Chief Executive Officer; and Steve Brake, Executive Vice President and Chief Financial Officer. After 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 and 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 conditions. 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 measures of liquidity or financial performance. We refer you to today's earnings press release, which includes the reconciliations of non-GAAP measures to the nearest GAAP measures. I would now like to turn the call over to John Cappasola, Chief Executive Officer.

Thank you. Raphael, Good afternoon, everyone, and thank you all for joining the call today. Before we get into our exciting results from Q2, I wanted to share a few thoughts on my new role as CEO of Del Taco. I couldn't be more excited about leading this iconic brand into the next phase of growth and I am thankful to be surrounded by an extremely talented group of employees and franchisees. Their dedication and efforts have enabled us to generate industry-leading results, positioning Del Taco for continued success. The performance speaks for itself. 20 consecutive quarters of positive company same-store sales with 14 of the past 17 quarters achieving positive transactions. This has been made possible by dramatically improving guest experiences at our restaurants, significantly enhancing consumer perceptions of Del Taco and successfully repositioning the brand for future growth.

We are marching towards achieving our mid-term goals of $1.5 million AUV by 2018, and mid-single-digit new system unit growth in 2017. But this is only the beginning. Our focus is on long-term growth of this brand, both AUV and system units by leveraging and embedding our unique value-oriented QSR+ position, highlighting our great-tasting fresh Mexican food and executing at the highest level.

In order to deliver and unlock our potential, we'll need a highly talented and focused leadership team. We're starting in a great place with seasoned veterans that fit our brand and culture across departments. The core of our leadership team consists of Steve Brake, our CFO, who has been a tremendous strategic and financial leader; Jeff Little, who joined us last year to lead our restaurant development efforts with deep QSR experience, building quality company and franchise pipelines; and David Pair, who will continue to lead operational improvements to further enhance our guest experiences.

In addition, we will add talent and skill to our leadership team in the coming weeks to further drive and focus our brand building efforts. First, I am excited to announce the addition of a CMO role to the business, that's Chief Marketing Officer. We have been searching for the right fit for several months and we have hired a highly talented marketing executive. Details will be announced shortly.

This individual has great brand-building experience across several company and franchise concepts in the QSR category with a proven track record of success. So we couldn't be more excited for that hire.

Additionally, we created the role of SVP of planning and strategic initiatives to further drive innovation and strategy along with holistic brand planning and execution. This new position will be held by Chad Gretzema, who has been the driving force behind the planning and execution of combined solutions over the past five years. In the coming months, I'll be working closely with our entire leadership team, our franchisees and our Board of Directors with the goal of continuing our strong momentum as we plan for 2018 and beyond. Our focus is on achieving our initial commitments of $1.5 million AUV and MSD new system restaurant growth. While also enhancing our strategy to achieve our next phase of AUV and system unit growth.

Now let's take a look at highlights from Q2. System-wide comparable restaurant sales growth at 7.1% resulting in a very strong 2-year growth rate of 10.4%. Company-operated comparable restaurant sales growth of 6.9%, which included positive traffic growth of 1.5% and menu mix of nearly 3%. Restaurant contribution margin of 20.3% and adjusted EBITDA of $17.0 million, which grew over 6% compared to last year. Additionally, during the quarter we opened 2 franchise restaurants and 1 company-operated restaurant. Subsequent to the end of Q2, we opened 2 franchise restaurants and currently have 10 restaurants under construction, including 1 franchise and 9 company. Year-to-date we have 18 units either open or under construction and we continue to expect to open 23 to 26 new system units with slightly more than half being company restaurants. This expected outcome will achieve our initial goal of mid-single-digit new system unit growth in 2017, which is only the starting point of our unit growth opportunity at Del Taco.

Remember, upon becoming a public company in mid-2015, we achieved an optimized balance sheet and the financial wherewithal to accelerate growth. Since then, we have worked hard to build our new unit pipeline and based on typical freestanding QSR development lead times and our focus on quality development, fiscal 2017 is our first opportunity for accelerated system growth.

As we look toward the future, our powerful brand momentum has greatly enhanced our unit economic model, which has generated significant interest from new and existing franchisees, eager to grow with us to expand our reach. We will execute our growth across an appropriate balance of company and franchise restaurants with a heavy focus on our infill markets in the Western Third to leverage the brand's established long-term presence. While also pursuing our robust emerging market opportunity and specifically focusing on our efforts to create regional scale in the Southeast where we continue to gain increased traction with new and existing franchisees.

This balanced and discipline approach has us on a path to further accelerate system growth in 2018 and beyond. On the marketing and product front, Q2 was driven by a combination of factors. The timing of Easter, which gave us nearly 3 weeks of Lent in Q2 this year versus none last year, aided our traffic and mix performance due to the strong consumer reaction to our seasonal seafood program that was headlined by our Jumbo Shrimp LTO.

In addition, the refresh of our breakfast menu in March, which highlighted our QSR+ balance with the new Dollar breakfast Rollers and premium Epic Huevos Ranchero Burrito drove significant breakfast day part same-store sales improvement over Q1 as both new product lines resonated extremely well. We believe breakfast continues to be an important and strategic sales layer and we're well positioned to continue to drive morning sales growth in 2017.

Lastly, we continued to reinforce and drive the Del Taco and Platos in Q2, with dedicated marketing windows for both. The Del Taco continues to carry extremely high guest satisfaction with superior demand, achieving sustained double-digit sales mix including the Del Taco meal, which is our #1 combo meal. Platos, which also earned strong guest satisfaction scores played a big part in the dinner daypart ranking #1 in same-store sales in Q2 as we positioned the platform to fulfill a QSR+ dinner occasion. Platos is consistently achieving 3% plus sales mix at dinner, aiding another quarter of double-digit premium mix. We will leverage both platforms in the back half of 2017 in our marketing and innovation mix to achieve our brand and business objectives.

The second day of Q3 began our lap of the Del Taco. Our most successful product launch in company history, to successfully lap last year's accelerated performance, our plan is to drive comprehensive improvement across the brand employing a threefold strategy. First, we will continue our intense focus on operating at a higher level year-over-year, concentrating on overall satisfaction and speed. Our restaurant teams helped drive our business in Q2 and will continue to strive to deliver QSR+ experiences for our guests.

We achieved another all-time high in overall guest satisfaction, reflecting mid-single-digit top box improvement over last year. We also improved speed of service versus Q1 to create additional throughput in our drive-thru. Continuous operations improvement is an important part of our evolution and our rollover strategy. Second, we believe we have continued opportunity and try both check and transaction growth through our new incremental platforms the Del Taco and Platos as we continue to embed each through ongoing operations, marketing and innovation.

And third, we launched our Carnitas LTO in early Q3. We have not had Carnitas on the menu since 2014 and there is significant pent-up demand for this tender braised pork. The Carnitas lineup includes a compelling value offer with Carnitas Combo Burritos at 2 for $5, as well as trade up opportunities with an Epic Carnitas Burrito, Carnitas Loaded Fries and a premium Carnitas Wet Burrito Plato. Initial guest satisfaction scores are extremely strong, a testament to the culinary innovation team's ability to create craveable menu items and our operator's readiness to launch promotional products.

We believe this threefold strategy combined with an impactful marketing plan is a clear roadmap to successfully lap our strong same-store sales last year. We are happy to report that through the first 5 weeks of Q3, our same-store sales are positive double-digits on a 2-year basis and we expect to again deliver double-digit same-store sales on a 2-year basis in Q3 when we report our fiscal third quarter results. Looking ahead we are excited to announce the upcoming launch of a new QSR+ ingredient, Queso Blanco, which contains no artificial color, flavors or preservatives. Our highly disciplined process to develop a new ingredient like Queso began over a year-ago, followed by restaurant level tests that began early this year to successfully commercialize the program to make consumer expectations around quality, the pricing and packaging, while also improving efficiency through the removal of our legacy nacho cheese pumps making it easier to deliver quality and value with the speed of our drive-thru. We believe Queso is a highly relevant and elevated ingredient that will further embed our QSR+ position, reinforce our occasion expansion capability and enable exciting future product innovation across our menu. And it may be positioned to drive both traffic and check. We've had proven success with premium ingredient innovation in the past, including fresh sliced avocados and fresh-grilled Carne Asada steak. And we believe Queso can play a similar role in our fourth quarter.

Finally, I want to provide a progress update on the expansion of our mobile and online ordering test that is now available in more than 50 restaurants. We recently added a delivery option to our Las Vegas test, leveraging UberEATS network of drivers through the Olo Dispatch platform.

Additionally, we have entered into a delivery test agreement with GrubHub that will begin in Q3. Our goal is to continue our test-and-learn approach in order to both operationalize these ordering approaches across multiple delivery platforms and to further assess consumer demand dynamics to evaluate the potential timing and scope of future expansion.

With that, I'll turn the call over to Steve Brake to review our quarterly results in detail.

Thanks, John. Second quarter company restaurant sales increased 8.4% year-over-year to $104.0 million from $95.9 million in the year-ago period. The increase was driven by company-operated comparable restaurant sales growth of 6.9% along with contributions from additional company-operated stores as compared to the second quarter of last year. Second quarter company-operated comparable restaurant sales growth represents the 20th consecutive quarter of gains and was comprised of 5.4% in check growth, including almost 3% of menu mix growth and 1.5% growth in transactions. Franchise revenue increased 9.1% year-over-year to $3.9 million from $3.6 million last year. The increase was driven by franchise comparable restaurant sales growth of 7.5%, and increase in initial fees and additional franchise restaurants operating during the quarter as compared to the second quarter last year.

System-wide comparable restaurant sales increased 7.1% and lapped system-wide comparable restaurant sales of 3.3% during the second quarter of 2016, resulting in a strong 10.4% 2-year trend. The Del Taco system has now generated 15 consecutive quarters of positive same-store sales. Total second quarter revenue was $108.6 million, an increase of 8.6% over the $100.0 million in the year-ago second quarter. Moving to expenses. Food and paper cost as a percentage of company restaurant sales increased approximately 20 basis points year-over-year to 27.7% from 27.5%. This increase was driven by modest food inflation as well as by the impact from our new Del Taco and Platos products, which each have driven a strong margin dollar contribution but with a slightly lower than typical margin percentage partially offset by the impact of menu price increases in the mid-2% area. Food inflation was driven by increases in avocados, French fries and cheese, partially offset by reductions in beef and eggs. We previously expected annual fiscal 2017 food basket inflation of 50 basis points. However, based on expected food inflation trends during the second half of 2017, particularly during Q3 primarily driven by trends in avocados and ground beef, we are now expecting annual 2017 food basket inflation of approximately 1% to 1.5%. We also expect to carry fiscal 2017 menu pricing in the mid-2% area, reflecting the high-end of our original estimates. Labor and related expenses as a percentage of company restaurant sales increased approximately 40 basis points to 31.9% from 31.5%. This was primarily driven by the California minimum wage increase to $10.50 per hour, partially offset by the impact of menu price increases.

Our overall experience managing higher wages remains consistent with our original guidance, which includes minimum wage increases that became effective on July 1, 2017, in local jurisdictions within Los Angeles County and Pasadena impacting 27 company restaurants. Occupancy and other operating expenses as a percentage of company restaurant sales decreased by approximately 30 basis points year-over-year to 21 -- 20.1% from 20.4% last year, driven by leverage on our comparable restaurant sales increase. Based on this performance, restaurant contribution increased 6.9% to $21.1 million from $19.8 million in the prior year. Restaurant contribution margin decreased approximately 30 basis points year-over-year to 20.3% from 20.6%. General and administrative expenses were $9.1 million and as a percentage of total revenue increased by approximately 10 basis points year-over-year to 8.3%.

This increase was driven by increased stock-based compensation, management incentive compensation based on performance, and incremental public company costs to support SOX 404(b) compliance in 2018. Adjusted EBITDA increased 6.4% to $17.0 million versus $16.0 million earned last year. As a percentage of total revenues, adjusted EBITDA was 15.6%, down approximately 40 basis points from 16.0% in the prior year. Depreciation and amortization expense was $5.3 million versus $5.5 million in the prior-year second quarter, a decrease of 4.6% reflecting approximately 60 basis points in the year-over-year improvement as a percentage of total revenue. This improvement was primarily driven by assets that became fully depreciated in the prior fiscal year, partially offset by the addition of new assets. Interest expense was $1.6 million versus $1.4 million in the prior-year second quarter. The increase was due to both a higher outstanding revolver balance and an increased 1-month LIBOR rate compared to the second quarter of 2016.

At the end of the second quarter, $146 million was outstanding under our all revolver credit facility, while our applicable margin for LIBOR loans remained at 1.75%. Income tax expense was $3.3 million during the second quarter for an effective tax rate of 38.4% as compared to a $3.3 million expense during the same period last year. Net income was $5.3 million for the second quarter or $0.13 per diluted share compared to $4.9 million or $0.13 per diluted share during the prior-year period. Turning to our repurchase program covering common stock and warrants. As previously announced during the second quarter, we repurchased 400,000 warrants from PW Acquisitions, a related party, for $3.75 per warrants or $1.5 million in aggregate. At the end of the fiscal second quarter, approximately $25.3 million remained under our $50 million repurchase authorization. Finally, we are raising fiscal 2017 guidance on several key metrics. Please refer to today's earnings release for the details on our outlook and be mindful of the fact that fiscal 2017 contains 52 weeks and will compare to a 53-week period in fiscal 2016.

As John mentioned, Q3 is off to a strong start with same-store sales up double-digits on a 2-year basis through the first 5 weeks. Despite our fiscal third quarter lapping, the Del Taco, our #1 product launch in brand history, which will be followed by our lap of Platos in the middle of the fourth quarter. Together those launches help drive company's same-store sales above 6%, with transactions above 2% during the second half of last year. Given these comparisons, we believe our same-store sales strength with moderate in the second half of this year relative to the first, which is reflected in our increase same-store sales guidance. Our company restaurant sales and total revenue guidance has been updated to reflect our increased same-store sales estimates, net of an estimated reduction in store weeks based on the timing of new company restaurant openings that will occur later in the year than originally expected. To conclude, we had a solid second quarter and look forward to delivering strong results during the second half, including mid single-digit, new system unit growth during fiscal 2017.

We appreciate your interest in Del Taco and are happy to answer any questions. Operator, you may open the lines.

(Operator Instructions) Our first question is from Craig Bibb from CJS Securities.

The 3% pickup and -- the almost 3% pickup in mix, was that primarily people adding on Del Taco's or trading up the Platos or Epic Burritos?

Yes, we are really excited to drive nearly 3% of mix during the quarter. Q1 we drove about mid-1s percent about 1.5% area of mix, so nice lift from Q1. Next, as John touched on, there really a variety of factors that drove that strong outcome. Certainly, in the Lent shift, we picked up nearly 3 weeks of Lent in Q2 versus none last year, really helped propel that very popular seafood promotion, which tends to drive a much higher check average so we got a lot of mix out of that. Ongoing benefits from Del Taco and Platos, which are both performing very well. That's also benefited the mix, both of those as John said had dedicated marketing windows during the second quarter, so we really got some nice momentum out of those product lines. And then the new breakfast refresh that included the premium Epic Huevos Ranchero Burrito was also a contributor.

One point to make also in The Del Taco is it's our now a #1 combo meal including the drink. So the Del Taco is really helped bump up our meal -- combo meal incidents, which is helping mix. And then also, as you recall, the Del Taco at $1.39 in most restaurants, it replaced the dollar classic taco that was a Buck & Under item. So we've been able to move some velocity off of Buck & Under up to that mid-tier $1 plus area. So all of that in aggregate just played a nice role in driving great mix for the quarter.

Okay. And then did you say when you're going to introduce Queso with that -- it's probably stand-alone product, but is it also an add-on for topping or et cetera?

Yes, we'll be Craig. We're remaining flexible with the launch date, just due to the strong demand we're seeing right now for Carnitas. And really our desire to smoothly transition from Carnitas to Queso. So that -- as we said our expectation is that queso is going to positively impact our Q4 results. For a menu strategy standpoint, we like the flexibility the Queso provides to drive sales and we think we can use it across multiple menu platforms to drive check and platforms like Epic Burritos or Platos or even to pivot to drive traffic through the development of mid-tier, Buck & Under items. So it will feed our new product development pipeline for years to come and at launch, an example of that would be, we plan to add Queso to the Del Taco. So our #1 selling mid-tier product by wrapping it with a soft tortilla layered with our hot Queso Blanco. So we'll call it The Queso Crunch Taco and it's just a great example, of how Queso is highly leverageable for us across our menu strategy. And in addition, we think about it beyond just chips and dips and nachos. Those will certainly be part of the mix as well, but a lot of great innovation opportunities. We're excited about the ingredient.

Okay. And last one for me, obviously the delivery test in Vegas must be going well or you wouldn't be expanding it. Can you give us any kind of numbers on incremental revenues or any numbers around that?

Not just yet. I mean we're still in test-and-learn mode and right now I would still characterize it is fairly early in regards to our marketing and our awareness of the program. So step one was to be able to do delivery within our app environment, which is happening -- it has been happening for a couple of months now in Las Vegas and there's still lots to learn there. And the usage is fairly low on that just now because it's in the app environment, but now as we extend beyond the app environment, which is move two that we talked about on the last call, with our partnership with GrubHub. We'll start to see restaurants in Orange County, Los Angeles and even in Las Vegas on that platform, which will be outside of the app environment in that third-party environment. So we'll get some great learnings off of that over the next few months and see where we're out with the consumer demand dynamics, which still focused on really trying to drive the appropriate demand dynamics for our business to really justify the move and we think that we will be able to get there shortly.

The next question is from Alex Slagle with Jefferies.

Had a question on Carnitas. If you could just provide some more color on the response you saw, preference and sort of how that launch played out relative to your expectations? I know its pretty early, but what you've seen.

Sure, Alex. This is Steve. Very, very happy with the performance of Carnitas. It's another item that scales real well come across the menu. Epic Burritos featured in Platos; the craveable, topped Carnitas fries; and then the traffic driving all in to the 2 for $5 Carnitas combo burrito. You could also get an à la carte Street Taco. So definitely, a lot pent-up demand was out there, as we expected. It's been 3 years since we had it on the menu. Very happy with how it's performing. It tends to skew to mid-tier to premium in terms of price points, so it's certainly something that's helpful on the check line. And as I said, that pent-up demand and ability to drive new trial, recapture some lapsed users and drive frequency off our core guest, we like how that's playing out. So very good product. It's mixing much stronger than it did 3 years ago as well, which is a nice tell. I mean, of course, the brand's a lot different than it was 3 years ago, as we continue to embed that QSR+ perceptions and get more and more credit for the fresh prep we do in the back of the house. So real excited about the performance to date.

Great. And then how should we think about the third quarter mix component lapping the Del Taco? And what you've seen so far? I mean, is it sort of a flattish mix? Is it going to start flattening out now?

With Carnitas, as I touched on, given the price point skewing mid-tier to premium, in general we see it as conducive to mix. That doesn't at all mean we're going to hold near 3% area. As you know, we're in our fourth year of putting up meaningful mix quarter after quarter, year after year. But overall, we definitely see it being a good guy for the quarter. We're only 5 weeks in, so premature to quantify elements of the comp. But obviously, we feel like we're off to a nice start with a good outlook on the quarter.

The next question is from Jeremy Hamblin of Dougherty & Company.

I wanted to ask a little bit about your store opening plans for the year. You reiterated 23 to 26 units for this year. I noted that you did close 2 locations during the quarter. I wanted to see if you could provide a little detail on that. But probably more importantly, I wanted to see if I could get some color on the timing of the openings, now that we're into July. In terms of thinking, specifically company-operated, it sounds like you're guiding to maybe 12 or even 13 additional openings through the remainder of this year. Can you give me a sense of timing splits between Q3 and Q4 openings on those?

Sure. I'll start with the second question. Definitely, we do have a fairly pronounced back-half cadence on openings this year, especially on the company side. So there are a good number left to come. You will see some openings that further occur during our third fiscal quarter, which ends on September 12. But definitely the lion's share of what's left to come, will happen in the fourth quarter and some of them being fairly backloaded in the fourth quarter. So that's where we are. Definitely on track to deliver the original range, focused on making that happen. But it will, indeed have a back-half cadence. As far as the 2-s closure that did happen in the second quarter, both company restaurants, one was just an unfortunate redevelopment dynamic. Lost a great restaurant near Disneyland. That whole broader area's being redeveloped. Unfortunately, it had been month to month for many years, and we ultimately lost that. Down the road, we hope to find an offset. We're not there yet. The other was end of a lease on one our lower-volume units that, frankly, is surrounded by other company restaurants. So we saw an opportunity to close it and be in a position to transfer as much sales and associated profits that financially we're as well off, if not better. So it was just a strategic way to close out a lease.

So just to clarify, if I were to assume there's 12 company-operated locations remaining to be opened in Q3 and Q4. Should I be thinking like 9 in Q4, and 3 in Q3 or like 8 in Q4? Is that the type of split that you're looking at, rather than something, let's say, like 7 in Q4 and 5 in Q3?

Yes, probably more like your first idea, 9 in 3. It'll be that pronounced towards the fourth quarter versus third.

Understood. That's helpful. And then I wanted to come back for to the occupancy and other operating expenses. You had tremendous leverage in the first quarter on that, about 100 basis points. And I recall that there was, I think, some expenses that were kind of pulled out of Q1, and you indicated would be, I think, spread across the remaining 3 quarters. But I am a little surprised, given how strong the comp was in Q2, that you didn't get more than 25 basis points of leverage on that particular line item. Can you just give me a little more color on that?

Sure. First quarter, 50 basis point of the 100 bps improvement was absolutely timing due to the advertising that we discussed at length last quarter. So the real improvement was more like 50 basis points Q1. This quarter, even at that 30 basis points rounded area -- not as much leverage as we saw Q1. As you point out, the comp was stronger. As you point out, there's just a lot of things that run through that line item from utilities, repairs, supplies, the credit card fees and consumer consumption there. It can vary a little bit quarter-to-quarter. So there's no single cause exactly what drove that. But, I mean, generally to have that modest amount of leverage is a good thing when we put up good comps. Also, there are some pure fixed things in OpEx, but there's also purely variable items. And some of that are semi-fixed, semi-variable. So I think you can tend to have better and not as good quarters from time to time, as far those various run rates go. And the dynamics played out as they played out. So no further specific thoughts to add on that.

Okay, a couple other items. In terms of the food cost, just to clarify a little bit more. It sounds like you're expecting a little more -- well, one you had 20 basis point of drag in Q2, which I think may have surprised some people. But in terms of looking at the back half of the year, it sounds like that drag could actually be even little bit more specifically in Q3 due to the short-term spike in beef prices. Am I reading that right? And then would you assume that maybe labor -- you guys did a really nice job in Q2 on labor. Should -- are we kind of thinking splitting the difference here between what you saw in Q1, Q2 on labor? Or was that callout on Los Angeles impact suggesting, hey, we're not going to get the same kind of result on labor in the back half of the year because of that?

Sure. During Q2, we certainly drove a very good outcome on labor relative to what the cost headwinds look like, coupled with have -- modest price in that mid-2% area, allowed us to drive really nice traffic and mix. So overall, good outcome on labor in Q2 as you look ahead. Obviously, the strength of the comp, because a big portion of labor does have that fixed element. So the strength of the comp will inform how that trend's moving forward. The callout on the L.A. stores only about 10% of our stores, but they did they have a move on July 1, which, just on a pure run-rate basis, would create a small amount of margin pressure there. That is what it is. So that should help you kind of think about how Q2 progresses as we move here forward, with both Q2 and Q1 being relevant points in time to think about to help frame that out or model that out. In terms of food costs, overall, as I mentioned, the full year guidance on the inflation is now 1% to 1.5%, up from 50 bps. The main 2 drivers of that was ongoing elevated avocado pricings and also costing on ground beef, 50s as well as 90s, elevated certainly versus our original expectations. So as we look ahead, the 20 bps of deleverage on the food line, those were the big drivers of it during the second quarter versus what we had expected. From here forward, some good news. There'll be a little bit more price in the fall. We traditionally take price in the summer and the fall, so we'll be finalizing plans to do that here soon, which will help from a run-rate basis. As I mentioned, the inflation that does lie ahead of us in both quarters, a bit more pronounced in Q3, not as pronounced in Q4. But overall, we'll have good controls on that line in light of us continuing to carry price in that mid-2% area.

The next question is from Joshua Long of Piper Jaffray.

Congratulations, John, on the new position. And then also, a very interesting update on the addition of a -- the forthcoming announcement around the CMO and then maybe some of the other upper management positions you're adding. I was just curious if we should expect additional additions there? Or if you feel like you got the team in the right spot going forward to kind of be able to hit all those strategic guidance across digital marketing, et cetera, that you want to do as we go forward into the back half of this year and maybe 2018?

Yes, I know. I think we are well positioned with the team now. I think we filled some of the gaps that I felt like needed to be filled, as we looked across the leadership. And that leadership team is going to be critical for us as we think about our goals moving forward and really putting a strong focus on people, just in general, at Del Taco and wanting to build really a wealth of talent at the brand. And that's going to be big part of our strategy to ensure we deliver on quality growth and take our QSR+ position to the next level of success. So I think with the addition of the CMO, which I'm very excited about, bringing another brand-oriented leader into the business to really lead that marketing team and our agencies through the next phase of brand development as we continue that journey; and the move with Chad Gretzema, getting him into a more strategic role that's looking forward and thinking about things like the experience at Del Taco moving forward and what that needs to look like in the next couple of 3 years and not just what's immediately in front of us, I think those are going to be very impactful moves for this business and really help to kind of codify the leadership group and the things that need to happen as we think about moving forward and the key pillars of growing this brand. So I couldn't be more excited about where we stand as these few moves happen here over the next few weeks.

Great. On -- as we think about last year's -- or rather, Q3 of '16, you had the performance from a lot of the initiatives you were rolling out. And it sounds even during the first 5 weeks this year in 3Q, you're obviously putting up some pretty strong numbers. I was curious, if we think back to the back half of 3Q '16, how did the performance kind of compare? Did it continue to accelerate? Did it get maybe a little bit easier? Just trying to think about what kind of performance hurdles are ahead of you to lap over for this quarter?

3Q last year, really top to bottom, had very strong performance. So we really faced very strong compares throughout this entire quarter. So very happy to have a strong start to the first 5 weeks. And we feel good that the quarter will also yield that double-digit tier stack same-store sales outcome, which we'll feel really good about. But there's not any pronounced up or down on the compares. It was just a very strong quarter that we're going to continue marching over.

Understood. And then, John, I think during your comments, you'd mentioned about the ability to get some additional throughput through the system -- or at the store level, particularly in the drive-through. I was just curious if you might be able to talk about some of the things you're doing there. If it's more process-oriented, that there's maybe some new technology, maybe a little bit of everything? Just how are you thinking about the ability to continue driving that throughput piece, particularly at the drive-through with some of these new platforms?

Yes, there's a few key pieces that we've been focused on really all year. And that's, one, narrowing the gap between the best- and the worst-performing locations. There's been a big focus on making sure that we have identified the outliers and that we are working actively to help them, and train them, and make sure that they're enacting the systems that we need to enact and have the people that we need to be able to drive that performance. We've seen really great momentum from our operations and our franchise group in that regard. Also, we've done some things in regards to just fortifying our systems, like at dinner, I would say is a great example. As we thought about Platos and we thought about really diving that elevated dinner occasion at Del Taco, part of what we knew we would need to do is deliver a combined solution to market. And part of that combined solution was making sure that we really fortified the operations and that we could deliver Platos with the same speed and throughput that we were executing and delivering before it came into the business. And so there's been a real focus on just improving the experience at dinner, and we're seeing that in our overall satisfaction scores during that daypart as well as seeing some nice speed improvements. So that's absolutely aiding our plight. And then when you think about what we've been doing, some of the moves we made in 2016 from a targeted capital standpoint, deploying things like noise-canceling headsets to the system and have outside order takers at high-volume restaurants, we're continuing to do a lot of that work this year. So we'll keep making moves to invest in our kitchens in order to drive quality and speed. And we'll continue to target those higher-volume restaurants. So those high-return restaurants that get those new fryers, that's part of the puzzle. Deploying more of those outside order takers in areas where we have opportunity to drive some throughput, driving that speed during peak hours. And we're doing a targeted taco bar retrofits as well to double our makeline capacity in restaurants that only have single taco bars or single makelines. So a lot of great things happening across the brand relative to improving that guest experience and that -- really, that 4-wall execution that is delivering the speed and the overall satisfaction improvements.

And then last one from me. In terms of thinking about the upwardly revised same-store sales, which is exciting, and then understanding that there's some incremental cost pressures in the business, was curious how you might balance that out in terms of what's kind of eating up some of those extra sales. Is it relatively balanced between food and labor inflation and then maybe some extra G&A? Or just how would you kind of stack or rack order the incremental pressures that you have in the back half of the year?

For the most part, the very nice, upward, favorable revisions on the low end, the high end of same-store sales, the flow though you would expect from that -- for the most part, we have the food dynamics where there is more inflation than originally anticipated. The extra 50 to 100 bps in terms of our expectation today, that on a dollar basis, for the most part, offsets the flow through we would otherwise enjoy. The nice thing is on the low end, there is a $0.5 million raise on the low end of EBITDA. So there is some upward revision there, which is positive. But that's the main cause. There are some food pressures that are materializing here as we wrap up the back half of the year. But very pleased that the same-store sales and AUV momentum, which is that enduring foundation we need to obviously perform well this year, but we're already planning against 2018 and beyond. So we feel great about the AUV. Happy to be raising the EBITDA guidance, and we just got to execute back half.

(Operator Instructions) And the next question is from Nick Setyan of Wedbush Securities.

And congratulations, John, on the new position. In terms of the double-digit comp commentary for the 2-year stack, let me get back to that mix question there in terms of Q3. Because if the mix is low enough, the transactions are going to be positive. So is there actually a chance that we might see positive transactions in Q3?

Well, we're only 5 weeks in, so carrying mid-2s price, the implication is that the aggregation of mix and trans will be positive. We feel good about that. How those will split out, 5 weeks in, it's really hard to call that at this juncture. But overall, we love both. They're both a very healthy form of growth. Traffic is naturally the health of a business. But mix, the power there is that's us 4 years now into, frankly, training our consumer to think about these much differently, spend a little bit more, the embedding of fresh, the innovation, especially on the premium end, has lead to that. It's been a nice, long journey. So where those net out, we'll know in 7 more weeks and talk about in October. But in aggregate, those are both powerful throughput drivers that are helping us.

Sure. And in terms of kind of the unit growth, the 5 openings for the franchises in the first half, that's -- I think that's the biggest number in a long time for the first half. How's the pipeline looking out to 2018 and 2019? Are we seeing the franchisee pipeline catch up to the company-owned pipeline?

As we look at this year, as we've said, it'll tilt slightly towards company. And for the next couple of years, that'll continue to be the case. We're going to continue to accelerate our overall system growth rate as we move forward. And the next couple of years, it'll still tilt, we believe, a little bit company. But both sides of the house, frankly growing in terms of absolute numbers. Longer term, we absolutely think we're on a path to have franchise begin to, down the road, outpace company. We certainly are very motivated to grow corporately. We like the returns, but that asset life form of growth is also a great thing that we're focused on. So that's our thinking as we look at the near term and then longer term.

Got it. On the G&A, obviously, we have the annual guidance that implies something like 8% in the second half. How does that break out between Q3 and Q4, Steve?

Well, the full year, I mean, you have the color on the full year. Let me just look at how it broke out last year, which may be directionally informative. Last year, Q3 was 8.2%, Q4 was 8.1%. So there doesn't tend to be a lot of chop in our G&A dollars. Q1 is that seasonally low AUV quarter due to January being lower-volume sales. So that's the one quarter on a percent basis, it does tend to spike. And the other file dynamic is the management incentive comp is very much a variable. If we do well and we earn it, it's a strong number. If we don't and fall short, we'll start reversing bonus. So that's the main variable play that could swing something from quarter-to-quarter. But overall we're fairly stable on a run-rate basis, at least what we saw last year.

Got it. And finally, on the use of cash, great to see you guys buy some more warrants there. What about shares? I was kind of surprised we didn't see more share buybacks.

Yes, first quarter we spent $8 million acquiring shares, about 641,000 shares. We were very happy with that outcome. Fiscal Q2, there was not any share acquisition. That said, I'll tell you very recently through use of the 10b5 program, that we typically have in place during closed windows, we did have some activity already in Q3. So we view that as a nice, ongoing opportunity. We want to balance it against other uses of cash, with high focus on growth, deploying smart capital against the base business. But in the day -- this is an ongoing lever that we view through an opportunistic lens. We're not going to buy it at any price for the sake of buying, but with an opportunistic skew. We think it'll be ongoing opportunity, as we saw recently here.

The next question is from Steve Anderson of Maxim Group.

A couple of different questions. First on the queso testing that you've done, can you comment at all about the percentage of mix, that is a percentage of order incidences that you saw of customers who ordered queso. And I have a follow-up question regarding development.

Sure. In terms of the test, given the test was very important part of our process, it's a little premature to talk about mix. What we often see is that upon launch with the full scale of all our complement media, we can tend to have a lot different, more favorable outcomes postlaunch. But what I will tell you about the testing process, certainly, we're very happy from an op standpoint, first of all. What we found is that queso, because it replaces the legacy nacho cheese pumps, very much simplifies things for operations. So instead of reaching down the line to that pump, it's right there on the makeline, much more convenient for operators. So definitely a simplicity win there. Also, the qualitative feedback from our guests, both in our early on research down in the test kitchen as well as during our test, was very, very strong, so a very positive guest reaction in terms of feedback, ratings, intent to return, et cetera. So we're happy about that. And then, during the test itself, we did observe some very favorable trends versus control group in terms of driving overall sales and traffic in particular. So in aggregate, we think the great quality of the feedback from the guest as well as the directional improvement in sales and traffic in the test, we think it's a nice tell that we have a winner here, especially if it's when you go the system watch, which allows you to deploy that full complement of media and merchandising. So we're very excited about it as well as its broad appeal, as John touched on. It can really, over time, find its way into -- be it Buck & Under, mid-tier or premium products. So that'll lead to a lot of innovation that we're excited about.

Okay. The other question I had was regarding development. And just want to see if you've -- there have been any changes in your cost outlook to develop on new stores. Would it be in the established markets or the -- in emerging markets in the Southeast?

No. No update. We've talked about the $950,000 net, which is net of landlord incentive that we typically receive. And in some cases, we'll acquire the land, build up the project and then do a sale leaseback to greatly minimize our net investment. So the $0.95 million that we last talked about 6 months ago, no update to that. We always keep an eye on trends and costs. We're also always working hard to see where we can, without changing the look and feel or the experience for the guest, where we can be a little bit pragmatic and shave some cost here and there. So net-net, we think we're still in good shape at that $0.95 million.

I will now turn the conference back over to Mr. Cappasola for closing remarks.

Well, thank you all for your interest in Del Taco. We appreciate it. We couldn't be more excited about the continued opportunities that really lie ahead of us here. So we look forward to talking to you in the future, and have a great day.

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