Berto Acquisition Corp (TACO) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fiscal Fourth Quarter 2017 Conference Call and Webcast for Del Taco Restaurants, Inc.

I would now like to the call over to Mr. Raphael Gross to begin. Thank you. You may go ahead.

Thank you, operator, and thank you all for joining us today. On the call with me 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 will open the line 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, Inc. for a more detailed discussion of the risks that could impact future operating results and financial condition.

Today's earnings release -- today's earnings press release also includes some non-GAAP financial measures, such as adjusted EBITDA, restaurant contribution and adjusted net income. 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 the reconciliations of the 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. Hello, everyone, and thank you all for joining the call today. We continued our momentum in 2017 as we leveraged our solid, value-oriented QSR+ positioning to deliver another year of mid-single-digit same-store sales results with 2- and 3-year comps that are among the best in our industry. These achievements reinforce the endurance of our strategy and the ongoing consumer demand opportunities that it provides.

We also extended our impressive streak to 5 consecutive years of positive annual same-store sales, which also included transaction growth, and 4 consecutive years of positive annual menu mix. We are obviously very proud of these results and thank all of our employees, franchisees and guests for making them possible.

Let's take a look at Q4 highlights. During the quarter, system-wide comparable restaurant sales grew 2.4% or 7.9% on a 2-year basis. Company-operated comparable restaurant sales grew 2.1% or 7.4% on a 2-year basis. Restaurant contribution margin was 19.9%. Adjusted EBITDA margin was 15.9%, and we opened 10 new units in Q4, our strongest quarter since becoming a public company. Overall, we ended the year strong despite a highly competitive environment.

Towards the end of the third quarter, we saw an intensified focus on value, with many QSR competitors offering compelling bundles and deeply discounted beverages. We maintained our disciplined Combined Solutions approach with key restaurant initiatives, pushing guest satisfaction scores to record highs and driving throughput with improved speed at key dayparts like lunch and dinner. We complemented these guest experience and productivity improvements with product innovation across our barbell menu strategy, highlighting our everyday value approach to drive consumer demand without discounting margins to compete.

To start Q4, we successfully leveraged our newest QSR+ ingredient, Queso Blanco, with our new $1 Queso Chicken Roller to keep our Buck & Under platform top of mind, manage value perceptions and drive core QSR user visits. This helped Queso achieve over 6% mix during Q4, while in November, we featured 2 new Epic Burritos starting at $5, designed to drive traffic and guest trade-up. The promotion was very successful and drove strong Epic Burrito mix totaling over 8%.

This combination effectively balanced traffic and menu mix trends particularly on a 2-year basis as we lapped the 2016 launch of Platos, our highest priced premium platform. Our fourth quarter approach also underscored the brand's ability to resonate in a highly promotional environment as momentum built throughout the quarter, culminating in December with strong same-store sales and positive traffic, which carried into Q1.

As a promotion-heavy environment continues in 2018, we will maintain our focus on efforts to strengthen our brand position, drive same-store sales growth and optimize restaurant level margins.

I'll start with strengthening our brand position. The Combined Solutions strategy has been the driving force behind our effective QSR+ brand repositioning by enhancing brand perceptions through marketing and menu enhancements, complemented by dramatic improvements in the guest experience through aligned and focused operational initiatives.

Combined Solutions has taken on a few refreshes over the years, with those same principles guiding our plan as we updated initiatives. The last successful refresh was in 2016 when we launched Fresh Combined Solutions. Over the past 2 years, Fresh Combined Solutions has driven continuous improvement in guest satisfaction metrics and same-store sales growth. We've also strengthened the value and affordability perceptions and differentiated ourselves on freshness and quality from larger QSR chains, which positions us well for the future.

As pleased as we are with our progress, we believe we're still in the early innings of our journey. Our focus is to further elevate our brand position by driving a deeper understanding of our quality and freshness attributes without losing our value and speed brand strengths. To achieve this, we will refresh Combined Solutions later this year with our latest iteration, Elevated Combined Solutions.

Elevated Combined Solutions will include a series of brand catalysts and operational improvements. On the brand front, we plan to launch a new advertising campaign focused on fresh prep. We'll refresh all marketing communications and menus, introduce complementary, new mid-tier and premium products throughout the back half of the year and roll out the Del Taco mobile app with enhanced marketing capabilities.

Operationally, we are already preparing for the launch of Elevated Combined Solutions with our spring leadership academies followed by a focus on restaurant leadership and culture, training enhancements with an update to our e-learning platform and a focus on greater hospitality in our restaurants. Elevated Combined Solutions will be an internal rallying point for our brand and a catalyst on better brand position externally.

Now I'll move to driving same-store sales growth in 2018. We believe we are uniquely positioned for success as the category focuses on value. Our everyday value approach over the past 4.5 years has led to some of the strongest value and affordability scores in the category.

As long as we keep our everyday value strategy fresh with new news and top of mind through marketing, we believe we can compete effectively in any environment without sacrificing margins by deep discounting. In addition, our barbell menu strategy and full complement of dayparts provides multiple sales levers we intend to activate.

We started 2018 with a strong focus on Buck & Under by repositioning our messaging to reinforce that we have the only value platform at $1 or under, featuring up to 15 items, including new news with the new $1 Salsa Chicken Taco to drive added interest. We expect to feature Buck & Under variety and new news throughout the first half of 2018.

We will also complement Buck & Under with mid-tier and premium LTO news to drive demand and trade-up opportunities during the first half of 2018. We recently launched our seasonal seafood offering, which included the return of our popular Jumbo Shrimp. We plan to follow that up with the return of our successful Carnitas LTO in Q2. Historically, both LTO programs have driven check upside through menu mix while also driving incremental traffic.

We also expect to deliver several new products in 2018, aimed at driving velocity at mid-tier price points, generally between $1 and $3. This strategy aligns with our signature Del Taco that launched in mid-2016 and helped to drive growth in same-store sales, traffic and margin dollars. We believe mid-tier products can effectively drive trade-up from the Buck & Under menu without slowing traffic, particularly as the category has expanded its emphasis on value messaging beyond $1.

Lastly, for driving sales, we are planning the nationwide launch of our new mobile app in the back half of 2018. Our initial focus is to establish our customer relationship marketing capabilities, including the use of targeted promotional offers to drive incremental guest frequency.

Over time, our platform can scale to a loyalty program that we view as a powerful marketing tool in both new and mature markets. In addition, our initial testing with third-party delivery service providers has delivered significantly higher average checks, with early returns showing incremental sales lift.

We plan to expand the test on the Grubhub platform in Q2 to refine our learnings on both the consumer and commercial model to help optimize our plans for additional expansion.

We are pleased with our Q1 performance to date as system-wide same-store sales were up 4%, with positive traffic at company restaurants. This trend includes an extra 2 weeks of Lent in the first quarter 2018, as compared to 2017.

The third focus of our plan is optimizing restaurant level margins. We utilize a comprehensive margin management plan that includes cost management and brand management strategies in order to maximize restaurant contribution performance in 2018 and beyond.

On the brand management side, our focus on promotions, pricing strategy and menu strategy across our robust barbell menu is aimed at driving incremental margin dollars with an optimized margin percentage.

On the cost management front, we are focused on supply chain strategies and restaurant level improvements, including labor scheduling enhancements and the use of targeted capital investments to drive restaurant performance. For instance, in 2018, we plan to launch new prep equipment that will reduce labor and enhance quality as well as a tortilla warmer to drive throughput and improve quality.

Let's shift gears to development. During the fourth quarter, we opened 9 company-operated restaurants and 1 franchised restaurant and also acquired a single franchise unit in Southern California. Although 3 company-operated locations and 1 franchise location that we had planned to open in the fourth quarter slid into 2018, due to significant construction delays, we still delivered elevated growth, with 20 system-wide unit openings in 2017, representing a substantial increase from 13 new system-wide restaurants opened in 2016.

Moving forward, we intend to drive growth while balancing quality over quantity in order to maximize long-term shareholder return. This includes expanding both our pipeline of company-operated restaurants in existing geographies and our franchise pipeline by leveraging brand momentum with existing franchisees who are increasingly motivated to grow, as well as new franchisees.

To that end, we are pleased to announce a new 12-unit franchise development agreement with an existing Michigan franchisee who has successfully operated the brand since 2005 and is excited to expand their footprint within the Greater Detroit market. We also expect to sign additional development agreements with new Southeastern franchisees to join the other 4 Southeastern development agreements signed during 2017.

In total, we plan to open 25 to 28 new system units during fiscal 2018, including the carryovers, split nearly evenly between company-operated and franchised restaurants. Approximately 75% of our 2018 new system-wide unit growth will be infill development in core Western markets, with approximately 25% representing emerging market growth primarily around our regional hub in the Southeast.

In closing, we're encouraged by our 2017 financial results and the foundational progress we have made to expand our system new restaurant pipeline both driven by continued brand momentum. Our barbell menu strategy is enabling same-store sales growth despite the highly competitive environment, and our intense focus on improving the guest experience has led to all-time OSAT scores.

We believe the roll-out of our Elevated Combined Solutions strategy later this year, along with its corresponding brand messaging, menu innovation and enhanced operational execution initiatives will power further momentum in 2018 and beyond.

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

Thank you, John. As a reminder, the fourth quarter of 2017 was a 16-week period as compared to the fourth quarter of 2016, which consisted of 17 weeks. Where relevant, I will normalize comparisons in order to provide a more accurate view of the quarter relative to the year-ago period.

Total fourth quarter revenue was $146.5 million, a decrease of 2.5% from the $150.2 million in the year-ago fourth quarter. Excluding the approximate $8.3 million of revenue from the 17th week last year, total revenue increased 3.2% year-over-year.

System-wide comparable restaurant sales increased 2.4% and lapped system-wide comparable restaurant sales of 5.5% during the fourth quarter of 2016, resulting in a strong 7.9% 2-year trend. The Del Taco system has now generated 17 consecutive quarters of positive same-store sales.

Fourth quarter company restaurant sales decreased 2.6% year-over-year to $140.6 million from $144.4 million in the year-ago period. Excluding the approximate $8.0 million from the 17th week last year, company restaurant sales increased 3.1% year-over-year. The increase was driven by company-operated comparable restaurant sales growth of 2.1%, along with contributions from additional company-operated stores as compared to the fourth quarter last year.

Fourth quarter company-operated comparable restaurant sales growth represents the 22nd consecutive quarter of gains. Comparable restaurant sales growth was comprised of 2.5% in check growth, resulting primarily from menu price increases, offset by a 0.4% decline in transactions as we lapped a strong 2.0% traffic comparison that was achieved last year.

Franchise revenue decreased 2.3% year-over-year to $5.0 million from $5.1 million last year. Excluding the approximate $0.3 million in revenue from the 17th week last year, franchise revenue increased 3.9% year-over-year. The increase was driven by franchise comparable restaurant sales growth of 2.8% and additional franchised restaurants operating during the quarter as compared to the fourth quarter of last year.

Moving on to expenses. Food and paper cost as a percentage of company restaurant sales increased approximately 10 basis points year-over-year to 27.8% from 27.7%. This increase was driven by food inflation mostly offset by the impact of menu price increases in the mid-2% area. Food inflation was primarily driven by increases in french fries.

Labor and related expenses as a percentage of company restaurant sales increased approximately 90 basis points to 32.0% from 31.1%. This increase as a percentage of company restaurant sales was primarily driven by the California minimum wage increase to $10.50 an hour, and the Los Angeles County and Pasadena escalations to $12 an hour on July 1, 2017, which impacted 27 company restaurants. These increases were partially offset by the impact of menu price increases and reductions in workers' compensation and bonus expense.

Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 70 basis points year-over-year to 20.3% from 19.6% last year. This increase was mostly driven by higher advertising expense as a percent of restaurant sales based on the timing of advertising as well as increased repair, maintenance, supplies, insurance and credit card fee expenses as a percent of restaurant sales, partially offset by a slight leverage in utilities.

Based on this performance, restaurant contribution decreased 9.9% to $28.0 million from $31.1 million in the prior year. Excluding the estimated $1.4 million generated during the 17th week last year, restaurant contribution decreased 5.7% year-over-year. Restaurant contribution margin decreased approximately 160 basis points year-over-year to 19.9% from 21.5%.

General and administrative expenses were $11.0 million and, as a percentage of total revenue, declined by approximately 60 basis points year-over-year to 7.5%. This decrease was primarily due to lower performance-based management incentive compensation.

Adjusted EBITDA decreased 7.9% to $23.3 million from $25.3 million earned last year. Excluding the estimated $1.1 million contribution from the 17th week last year, adjusted EBITDA decreased 3.8% year-over-year. As a percentage of total revenues, adjusted EBITDA was 15.9%, down approximately 100 basis points from 16.9% in the prior year.

Depreciation and amortization expense in the fourth quarter was $7.5 million, an increase of 7.3% compared to $7.0 million last year and, as a percentage of total revenues, was up to 5.1% compared to 4.6% last year.

Interest expense was $2.4 million compared to $2.0 million in the prior year fourth quarter. The increase was due to an increased 1-month LIBOR rate partially offset by a lower average outstanding revolver balance compared to the fourth quarter of 2016, and we expect an increased year-over-year trend to continue in the year ahead due to the rising interest rate environment. As of the end of the fourth quarter, $153 million was outstanding under our all-revolver credit facility, while our applicable margin for LIBOR loans remained at 1.75%.

Income tax was a benefit of $24.8 million during the fiscal fourth quarter as compared to a $5.8 million expense during the same period last year. This fiscal fourth quarter 2017 result includes a $29.1 million onetime income tax benefit from the revaluation of our deferred tax balances as a result of the recent tax reform. Excluding this onetime benefit, the fiscal fourth quarter effective tax rate would have been 41.6%.

Net income was $35.2 million, representing $0.89 per diluted share compared to $8.0 million in the fiscal fourth quarter of 2016, representing $0.20 per diluted share. Excluding the aforementioned $29.1 million onetime income tax benefit, fiscal fourth quarter adjusted net income and adjusted earnings per diluted share totaled $6.1 million and $0.15, respectively. Fiscal fourth quarter 2016 results included an estimated $0.01 benefit to diluted earnings per share for the additional operating week.

Turning to our repurchase program, covering common stock and warrants. During the fiscal fourth quarter, we repurchased 249,210 shares of common stock at an average price of $12.27 and 23,000 warrants at an average price of $3.22 per warrant for an aggregate of $3.1 million. This brings our 2017 repurchase activity to a total of approximately 1.0 million shares at an average price per share of $12.41 and 424,000 warrants at an average price per warrant of $3.72 for a total of $13.8 million. At the end of the 2017, approximately $20.9 million remained under our $50 million repurchase authorization.

Lastly, I'd like to review our guidance for the 52-week period ending January 1, 2019. Based on our current outlook, we expect system-wide comparable restaurant sales growth of approximately 2% to 4%; total company restaurant sales of approximately $473 million to $483 million, including the impact from 2 temporary yet extended company restaurant closures and the fact that one of the planned 2018 company openings is a relocation.

Total revenue of approximately $506 million to $516 million, including impacts from the new revenue recognition rules, whereby franchise advertising contributions and other franchise revenue will be reported on a gross basis starting in 2018. These items totaled $12.7 million and $0.8 million in fiscal 2017, respectively.

In addition, our guidance includes an estimated $0.5 million unfavorable impact from the timing of initial franchise fees and renewal fees, which must now be deferred and recognized over the term of the related franchise agreement; restaurant contribution margin between 19.3% and 19.8%.

We expect fiscal 2018 food basket inflation of approximately 1%, with over 2% inflation in Q1 followed by moderated inflation as the year progresses. We anticipate 4% to 5% labor and related inflation, primarily driven by the California minimum wage increase to $11 an hour from $10.50 an hour, as well as other state or local minimum wage increases and the impact of the tight labor market. We expect 2018 menu pricing initially below 3%, followed by menu price above 3% during the second half for full year expected menu price in the 3% area.

G&A expenses of approximately 8.2% to 8.5% of total revenue. This includes the expense side of the other franchise revenue that will be reported on a gross basis as well as SOX 404(b) compliance costs, including the use of consultants, new or enhanced systems, additional personnel and incremental fees to audit the internal controls. These increases and normalized performance-based management incentive compensation compared to a partial payout for 2017 will result in what we expect to become our peak year on G&A percentage followed by a plateau and then modest long-term leverage.

Adjusted EBITDA of approximately $71.5 million to $74.0 million; an effective tax rate of approximately 26.5% to 27.5%; diluted earnings per share of approximately $0.59 to $0.63; net capital expenditures of approximately $35 million to $38 million, including approximately $14 million to $15 million for new unit construction, approximately $13 million to $14 million to maintain our enhanced existing restaurants, and approximately $8 million to $9 million for discretionary investment in equipment, technology and remodels; and 25 to 28 new restaurant openings system-wide, including carryover from 2017, split nearly evenly between company and franchised restaurants with a back-half weighting.

In summary, we are pleased to extend our long track record of positive same-store sales to 22 quarters for company-operated restaurants and 17 quarters system-wide. Looking ahead, we believe the Elevated Combined Solutions refresh with its corresponding menu innovation, updated marketing and enhanced operational focus, along with technology initiatives, including the launch of our mobile app and expansion of our delivery platform, will drive continued growth in 2018.

Thank you for your interest in Del Taco, and we're happy to answer any questions. Operator, please open the lines.

(Operator Instructions) Our first question comes from the line over Jeremy Hamblin from Dougherty & Co.

I wanted to start with just getting some clarification on the franchisee add contributions. How is that going to be reported? Is that going to be rolled up into that franchise revenue line item? Or is this going to be added into your total revenues as a new but separate reporting line item?

Jeremy, there will be 2 components: the first, more significant component, which, as we said, totaled $12.7 million of activity during 2017. That's the franchise advertising contributions. We expect that that will have its own caption up in the top of the P&L that will foot into total revenues. The second smaller component, which ran $0.8 million in 2017, which we're calling other franchise revenues, that will likely be embedded within the line currently called franchise revenue.

But the net is that both of those items will foot into total revenues, and both of those items will have an offset on the cost side of the P&L that we expect will be very similar, if not identical, in terms of value; so no impact from those 2 items on net income, operating income, EBITDA.

Okay. But is that going to be reported then in G&A on the expense side?

We expect that the larger item, the franchise advertising contributions would have an expense side. Again, it's probably broken out on its own as its own income statement caption on the expense side. The $0.8 million that occurred in 2017, that item would be included within G&A.

Okay. And I want to just -- you went through a lot of details there. And I just want to explore that because the G&A guidance, 8.2% to 8.5%, an uptick from where we've been running, just go over again, if you would, that increase in cost.

Sure. So looking ahead to 2018, due to the revenue recognition rules, the new item that will hit G&A, which ran about $0.8 million in 2017, I would expect a similar run rate in 2018. So there'll be $0.8 million of new G&A cost created through the revenue recognition rules.

In addition, as we've said on the last couple of calls now, 2017 is the year that performance-based management incentive compensation had a partial payout, and that was earned during 2017. Looking forward, we plan for a more normalized level of incentive compensation based on what we expect to be a much stronger year ahead.

And then the third component impacting G&A in 2018 is that 2018 is the year we become fully 404(b) SOX-compliant, including the audit of the internal controls. So there is some additional cost there in terms of use of consultants perhaps next year, 1 head or 2 or 3, as well as the fees to audit the controls. So the combination of those 3 things is what leads to the revenue or to the G&A percentage guidance we furnished today.

Okay. One last one here. So Taco Bell had this launch of nacho fries, I think their -- it's now been reported their most successful launch, product launch in history. I wanted to ask -- sometimes, there's a halo effect on that kind of thing considering that you guys do serve fries, delicious ones at that. Have you had any positive or negative impact as a result of that product launch that you would call out?

Jeremy, this is John. I would say that right now, there is nothing that we are tracking that would suggest it going in either direction. I'd say coming out of -- we've made public that in December, we saw positive transactions and we've carried that momentum now into Q1. And we are seeing positive transactions again in Q1. So kind of pre the launch of the nacho fries, post the launch of the nacho fries, we seem to be on a similar trajectory. So I can't really say that it has hurt or helped us at this point.

Great, okay. So the strong comps in Q1 really driven by kind of Buck & Under success and the shrimp tacos, et cetera?

Correct.

Our next question comes from the line of Alex Slagle from Jefferies.

The development outlook was a bit more balanced between company and franchise than we were expecting. And just wondering what changed there. I think the most recent commentary suggested more heavily on the company side for '18 and then maybe not balancing out until '19 or beyond then. If you could provide any color on that.

Yes, sure. We're pretty excited about the momentum we're seeing in our franchise pipeline as of recent. It's really -- and I guess it would be starting to show up here in our commentary on 2018 with that unit mix really approaching roughly 50-50 company and franchise.

So what we have happening now, Alex, is most of our existing multiunit developers that have restaurants are -- that are in our system today, legacy franchisees have restaurants that are in the pipeline or are working to identify potential sites. So that's definitely creating some momentum within the pipeline similar to what we mentioned happening in the Detroit market.

And then as far as new signings go in the Southeast, we will start to see some units coming out of those 2017 signings over the next 18 months or so, and we expect to see some more deals in the Southeast in 2018. So we're seeing nice momentum in that franchise pipeline driven both by existing franchisees that are eager to start growing again or increase their growth rate and by these new franchisees that are coming in that are just starting to build out their pipelines.

That's great. And then just a follow-up on the first quarter trend. Do you have any thoughts on the magnitude of the Lent calendar shift, what that impact might have been? And are you continuing to run sort of flattish mix into the first quarter? Is that sort of where you see it heading near term?

Yes, this is Steve. So overall, it is a 2-week Lent shift we think worthy of noting. It's very difficult to quantify that type of dynamic, which should -- does drive a little more foot traffic and some extra spend through the relevance and really long-term success of that seasonal seafood promotion, so hard to put a number on that.

Obviously, any tailwind there will reverse quickly as we get into the second quarter. Then overall mix, I think we'll have a number that's flat to positive as we move into Q1 off of the flat outcome in Q4.

Our next question comes from the line of Nick Setyan from Wedbush Securities.

Steve, it was actually great to see the mix stay flat even with the promotional environment in Q4. Can you kind of maybe comment about the acceleration you saw in the Buck & Under versus maybe last year? And now you're talking about flat to positive along with positive transactions. So in terms of the menu parts that we're seeing accelerate, can you maybe kind of comment about different dollar price points and then where you're seeing the transactions come in at?

Sure, Nick. So Q4 was definitely an interesting quarter. We talked about last call how we had observed a bit of a reintensification of that value environment, deep discounting, a $1 beverage offer hit the market. A brand like Carl's Jr., who rarely discounts, came into the fray. So it was really a quarter where we had to use our unique, strong barbell strategy.

And we -- in our view, we used it quite effectively. So, as you know, we started the quarter with a strong focus on Buck & Under, including the way we leveraged Queso across our menu. So we had it in premium items, mid-tier, but we also had a big Queso focus within Buck & Under, which -- so that was the right decision to help protect and propel traffic. And --indeed, by the time we got to the end of the quarter, traffic had turned back positive in December.

Mid-quarter, we then -- we ended a bit on the other side of the barbell with that Epic Burrito promotion starting at $5 with a couple of new Epics. So that was the other part of our approach, bringing some premium news. And that was also trying to help hedge against Platos.

As you know, the Platos debut in Q4 of 2016 was very successful, by far our highest check average item on the menu, and it was very incremental when we rolled it out. So we view that as a very tough compare particularly in terms of mix.

And we're pleased that the combination of a good, relentless focus on value as well as the strong use of that on the upper end of our barbell really helped us overcome that Platos lap. And end of the day, the 0.4% of traffic, recall, was lapping plus 2.0% traffic a year ago. So traffic up 1.6% on a 2-year basis is definitely an outcome that we're proud of.

Right. So I mean, great near-term trend. It sounds like the margin guidance was certainly above what I was expecting. Kind of talking about medium term, what's the new AUV target to think about?

Yes, Nick. So really, AUV at this point isn't something that we are going to put a target out in the near term on. We're still having conversations internally with the senior team. And by the way, in the near term, we've still got to get to that $1.5 million. So we're really close to that, I'm happy to say.

I mean, actually, that should be happening here well before Elevated Combined Solutions even rolls out. So that 13-period run rate is darn near close to that $1.5 million right now, and we're certainly about to surpass that. So as that happens and we move beyond our focus on getting Elevated Combined Solutions launched successfully this year, we'll continue to have some conversation internally on what the next target is.

We certainly believe that there is additional AUV for this brand to get out in the marketplace. And I think if you look at the peer set as well as think about the levers that we have to pull across the QSR+ spectrum, we're very well positioned to continue to have solid same-store sales growth year-after-year for several years to come.

Got it. And again, just medium term, are we thinking about the company-owned side of the business in terms of unit growth in 2019, relatively stable in terms of the unit growth rate? Or are we actually going to see a step up towards the high-single digits in 2019?

Yes. I think right now, our growth rate, the elevated growth rate that you've seen in 2017 from 2016, really where we had been historically the last several years, is really maintaining that elevated growth rate in 2018. And really, in the near term to mid-term, probably, that's where we'll be as we just continue to build strength in our pipeline.

And our #1 goal with growth is that -- you guys have heard us say this many times. We take a very balanced approach to elevate our growth rates over time. So we're building both company and franchise units to do that.

We're choosing sites that have the capability of achieving those solid unit economics and the returns that we're looking for, and we're making sure that we execute well through solid systems training and marketing to achieve the full market and unit potential. And that's the discipline that we like to talk about that we believe is the best path for accelerating growth at Del Taco.

So I think we're on a good trajectory right now relative to pipeline growth, relative to what I stated on the franchise side of the business. And overall, we can maintain our focus on company restaurants in the existing geographies to build the pipeline there. We should be in good shape to continue to elevate our growth trajectory.

Our next question comes from the line of Craig Bibb from CJS Securities.

The 4% comp in Q1, did you -- I mean, the quarter is basically over at this point. Did you break out traffic there? And I think somebody asked before, but if you could break out the Lent impact.

No, we didn't break it out other than to say that we definitely are experiencing positive traffic. And this is obviously 10 weeks into the 12-week quarter. So those details will come out in early May.

Okay. I was just trying to get like what the -- if you take out the seasonal impact and the calendar shift, what the kind of underlying would be.

Well, I guess one angle would be looking at a 2-year trend. As what some folks know a year ago, there was some wet weather. So if you think about -- we are lapping a 4% plus Q1 a year ago. So obviously, we feel like our 2-year trend is poised here to be a nice, strong MSD-type, HSD-type outcome once we post our ultimate comp in Q1 once the quarter wraps up. So that, again, is a nice, healthy 2-year trend kind of in line with what we did in Q4, which was 7.9%, a strong trend overall on a 1 and 2 year.

Okay. And then -- so the huge number of new units you guided in Q4, could you talk about new unit performance and distinguish between the infill units and the emerging markets?

Sure. It's too early to comment on our 2017 class as most opened in Q4 and most of those opened very late in the fourth quarter. That said, our 2015 and 2016 classes are performing very well, overall average company AUVs that are at the high end of our $1.35 million to $1.5 million range that we've talked about. So we're certainly feeling good about those classes.

And 2017, a lot a great work to win into -- opening them but also setting them up to open -- operate very successfully. So teams are excited. They're off to a good start overall. Operators are very thrilled. And we'll definitely bring more color to bear there once they get a bit more maturity.

Okay. Well, just opening that many units in a single quarter is a big change for you guys. A few slipped into Q1, which is no big deal. But were there any surprises or key learnings from -- in that shift?

No, I think that the great news for us -- and we felt really good about it -- was the team just did a phenomenal job getting 10 units open. And we felt really good about that, that the systems that had been developed to accelerate growth came through in a big way from the way we thought about training and operating and getting the stores up and running and off to a good start. So that was a great learning for us.

I mean, when you consider -- you run rate those 10 units across the entire year, that's a pretty big number. So it was definitely an elevated growth rate in Q4 and we delivered them well. We certainly learned some things along the way, some nuances along the way with the construction process and some things that we could tighten up, nothing that is going to be in our way for growth moving forward.

But certainly, as we have had our teams do debriefs on the quarter and all of the units that we've opened, we have certainly seen some things that we could do even better. So I would kind of characterize what happened in Q4 for us as a great moment of progress for the brand that put us in a great position to, one, show how capable we are of growing at an accelerated rate; and two, also tighten up our processes and our procedures to make sure that we do it even better as we move into '18.

Okay. And the last is -- last question is related. So with the change in the U.S. tax code, the new units you can write off in all of the -- maybe it's a first year write-off on new equipment for new units. And are you able to write off 100% on the maintenance CapEx that you're making on existing units?

Yes, a good question. There's definitely some technical rules about the qualified restaurant property additions where you can take advantage of that immediate deduction. Certainly on new build it stops some of the spend, certainly not all of it. Some of the ongoing capitalized enhancements, repairs, things of that nature, it has a higher likelihood in any ongoing equipment initiatives, freshness coolers, probably things of those nature are more likely to qualify.

So overall in our kind of mix of capital we deploy in a given year, a nice portion of it absolutely will enjoy that immediate deduction, which is definitely a positive for us.

So I mean, could you ballpark it? Is it like a 60% of your unit level of CapEx is something you can write off in the first year? Or what would you ballpark the percentage there to be?

I don't have a safe ballpark that I'd want to share at this point, but it's a good question. I'll take that away.

Our next question comes from the line of Peter Saleh from BTIG.

So I just wanted to understand how you guys are thinking about the comps and especially the mix for this year. So it looks like your mix has kind of flattened out on the fourth quarter and into the first quarter so far this year. So do you expect that mix to pick up steam again and be positive for the full year? Or do you expect you to give some of that mix back that you've had over the past couple of years?

Peter, it's Steve. So for this year, if you just work off of our same-store sales guidance, obviously, the midpoint, knowing our plans, will carry around 3% of price. The midpoint would imply that the combination of traffic and mix could be in that neutral zone, which would compare favorably to recent trends within the category.

But really, especially with the pending launch of Elevated Combined Solutions, we strongly believe we're very well positioned to drive favorable traffic and mix trends certainly in aggregate that we think puts us in a position to push beyond the midpoint of that same-store sales guidance.

So as we move forward, as we always do, we're going to watch the category very closely as well the consumer, and that's going to help inform really which lever we want to lean in on and pull the most, be it traffic or mix. The good news is we absolutely have both levers available to us. And in some situations, at Del Taco, it's really both. Other situations, kind of like in Q4, sometimes, you've got to pull the one for the sake of the other.

So that's the beauty of the barbell menu strategy. Long term, as we think about menu mix, there are many compelling opportunities to drive further check growth through menu mix, in particular expanding what we call the mid-tier section of our menu as well as additional innovation in the dinner daypart. We think some of that will come to light this year and even more so on a longer-term basis.

Great. And then just trying to reconcile some items in the model here. Steve, can you give us a sense of where you think interest expense will shake out for 2018?

I think if you take the 16 weeks in Q4, you would annualize that fairly close to $8 million. And as everyone knows, interest rates are on the rise. We align with the 1-month LIBOR, which today is at $1.71 versus $0.93 a year ago, so 78 bps of pressure in the last year. So I would start with Q4, annualize it and then just think about rate curves.

Okay. This is my last question. Can you give us a little bit more color on the test with Grubhub and what you're seeing and how quickly it will roll out going forward?

Yes. I think as we said, we're expecting to significantly expand the number of units that offer delivery this year as we really continue that test-and-learn approach with various third-party delivery service providers as well as through our mobile app test.

So listen, based on what we're seeing today in our third-party delivery test units, we believe that select restaurants can be highly profitable. This is really despite the fees associated with delivery.

And what -- how -- why we say that, in select restaurants, we're seeing check averages that are nearly double the restaurant average. We believe in select restaurants we can achieve high incremental usage that takes us well beyond a breakeven point. And overall, we're seeing, in the test restaurant level, incremental sales beyond the control store.

So remember also in some of these -- in these trade areas, the price sensitivity is not there. There's not a lot of price sensitivity, which gives us more flexibility on taking some price to help build margin as well. And we're really learning with this transaction, and so it triggers -- it's kind of associated with [meat steaks] that are much less price-sensitive.

So you'll definitely see ongoing expansion. Right now, our test has narrowed to the Grubhub platform as well as what we're doing through the Olo dispatch model, which is being delivered through DoorDash now. So we have about 50 units as of the end of the quarter that are on some sort of a delivery platform, and we'd expect that number to grow as the year goes on. I would not say this is going to be a system-wide roll-out in the near term, certainly not in 2018, but we definitely see pockets of stores that this could make a lot of sense in.

And just -- if we're talking about pockets of stores where this would make a lot of sense, are we talking more in terms of franchise stores or more company stores? I know you have a different geographic mix. So any thoughts on that would be helpful.

Yes. I think anything that we do on the company locations, we will make available to our franchisees and we'll present the business case and also help them make good decisions based on what we see as trade area growth profiles and they make sense. But frankly, we're still in that test-and-learn mode. And so as we learn more and continue to improve the model, I would expect more stores to come on.

So no set target right now because we don't want to box ourselves into a corner on that, but we do believe that this thing can expand significantly in 2018 and then we'll see where we're at for further expansion moving beyond this year.

Our next question comes from the line of Nicole Miller from Piper Jaffray.

My first question is you talked about kind of expanding Buck & Under in some different price point or at least some different price point options. I'm trying to understand, are you really bridging the gap between the barbell pricing so there's something in the middle?

It sounds like it sort of starts to confine with the industry standard or the framework of moving along this $1, $2, $3 price point. And are you going to do that with new items, bringing them higher price or lower -- or existing, I mean? Or are you going to put -- do this with new items?

Yes. Nicole, it's a great question. Let me just step back a moment on my commentary regarding mid-tier and any opportunity we see there. So we still believe the Buck & Under menu is an important part of our strategy and it's highly relevant. So that's kind of point one.

My comments around mid-tier trade-ups being relevant was in addition to Buck & Under, not instead of at this juncture. So we typically take the tact that we'll give the consumers the option to sell select versus forcing their hand, and that's why we believe we can preserve transactions.

So where we see the opportunity in mid-tier is really around new innovation and bringing new innovation to the table, similar to what we did on The Del Taco. And there will be some mid-tier expansion that will happen this year that will work side-by-side with Buck & Under, similar to what we did with the Del Taco roll-out. And I'll just let you know some of the things that we're working on right now that could likely hit a Del Taco menu near you at some point in 2018.

We've got a signature, new mid-tier taco that we are very close to finalizing test on for roll-out, and we think that that will do very well for us. We also have some enhancements to a few platforms, like our nachos where we have a mid-tier nacho lineup that is ready to roll out. And it's just about finding the right timing and sequence of events for that with Elevated Combined Solutions. And that fills the gap on our menu that we do not have today. It's either [Buck our menu] or premium today.

So being able to fill that gap we think can drive more demand especially now that we've got that great Queso ingredient out there. And we have a fresh new way to think about the tostada as well that's in that mid-tier category. So -- and I'm just scratching the surface at this point.

Product news across the barbell is not something we're going to fall short on. It's a key strategic pillar for us and our marketing strategy, and we've really set our teams up to constantly innovate. We just feel like right now, if you look at our menu strategy, in totality, where we have the biggest opportunity to grow is in that mid-tier area of the menu.

Great. And then I know transactions were flat in this most current quarter but have otherwise been growing. Where do you think that share comes from? Does that come from home, from convenience stores, regional or national QSR players or other places?

We certainly think it's a combination of those things. And in particular, I would look more closely at fast food drive-through occasion as where you're going to get the bulk of your share shift.

So frequency pickups that come from -- just taking market share, some lapsed users becoming reactivated, maybe some folks that haven't come in quite as often. And the new product innovation or the platform innovation that we've done combined with the marketing and the operational elements cause them to come in and try and see that we're much better than they thought that we were. We're much better than maybe we were 5, 6, 7 years ago, the last time they tried.

So that's really how we're sourcing. It's really from fast food, other fast food drive-through competitors, and it's both additional frequency and reactivation is kind of where the bulk of it is.

And then just one final question. How are your guest satisfaction scores? And what's moving the needle?

Really strong. I mean, we finished 2017 with another year of elevated overall satisfaction scores in our restaurants. And I would say the main drivers of moving the needle are our commitment to where we're at with our people and our focus on training and development.

And how we've thought about the systems that we deploy in making sure that we don't overwhelm our operations or our restaurants to be able to deliver great guest experiences, which has caused us at times to slow things down a bit and further work on commercialization.

And at times we've had to bring in tools to be able to execute well, like we did with Platos, where we launched a more complicated dinner platform but we were able to actually improve speed in 2017. So our main focus is providing great guest experiences and giving our franchisees and operators the tools to do that, and we're maniacal about it. It's a big part of the Combined Solutions strategy.

So as long as we stay focused in that area and we don't get too far ahead of ourselves in regards to innovation that we can't deliver in a very positive way to our guests, then I think we'll be okay and we'll continue to move the needle.

(Operator Instructions) Our next question comes from the line of Stephen Anderson from Maxim Group.

Just doing some preliminary work on the model and it looks like, based on the guidance you gave, the food or to restaurant level operating margin, looks like it's going to run maybe slightly below or roughly in line with where you closed out for 2017. But it looks like so far, the -- even with the lower tax rate, it looks like the savings are going to go somewhere. Do you see that going mostly toward an increase in depreciation as you look toward enhanced solutions?

Are you referring to the kind of, like, cash tax savings that we will benefit from going forward?

Yes.

Yes. Certainly, the fed rate reduction in particular as well as the accelerated deductibility of qualified addition puts us in a good position to have expanded free cash flow. Over time, we really view that as giving us a lot more flexibility, first, in terms of how and where we deploy capital.

New restaurants being a high-priority item, of course, that doesn't happen overnight. There's long lead times there, but also the ability to make appropriate investments to enhance performance within existing stores, including investing in technology where and when appropriate.

Beyond that, it will enhance our ability to remain active under our remaining authorization for share and warrant repurchase. And then finally, on the margin, it puts us in a better position to control our leverage.

So it looks like at least in terms of the operating side, it's going to be very much in line, just like we will probably see more on the investment side of the equation in terms of new -- in terms of depreciation as well as on the new store side of business?

Yes. It definitely allows us to continue pursuit of those accretive investments that we're after as well as the return of capital strategy that we think is appropriate and helpful to shareholder returns on a long-term basis.

What -- do you have -- do you provide any guidance in terms of what your preopening cost may be for 2018?

No overt guidance on that other than it should track generally commensurate with openings. 2017, although 12 technically opened, the 3 company stores that carried over into the new year had substantial amounts of preopening incurred last year. So you can probably, in substance, view the run rate or the amount last year is reflective of opening 15 rather than 12 stores.

Our next question is a follow-up from the line of Craig Bibb from CJS Securities.

I just wanted to veer back to Elevated Combined Solutions. It sounds like it's going to launch in Q2 or Q3. So kind of the tangible changes, we're going to see emphasis on fresh prep and your advertising. There's going to be a mid-tier nacho. There's going to be emphasis on hospitality at the unit level. What are the other tangible changes that we'll see after that -- you roll that out?

Yes. You definitely just nailed a few of them there, Craig. The new ad campaign, complete refresh of all marketing communications, look and feel, tone to elevate the brand, similar to what we did with Fresh Combined Solutions and in the advertising enhancements and marketing investments in 2016.

We talked about marketing or product catalyst. Obviously, the mid-tier nacho is part of that as well as other products that will have a progression against as we think about the back half of the year. Then the other thing we noted that's tangible is the national launch of the Del Taco mobile app that will give us some -- the CRM, customer relationship marketing capability, as well as give us the opportunity to start to really build our database from a one-to-one marketing standpoint.

On the operations side, we've got some great things happening starting in our leadership academies right now that are active and out in the market to start to prepare our field for that.

And some of that, our modules and training that we're doing against the general manager's leadership effectiveness, which we found is a key driver of restaurant performance, as well as how to put strategies in place around retention of core, high-performing crew members, which is really important to us as well because top-performing stores have longevity in their teams. And we think we can affect that.

The other piece that we have is an enhanced training system that we'll be launching, that will give us the ability to deliver multimedia curriculum to the restaurants as well as providing enhanced, real-time reporting so we can really understand who is being trained, when they're being trained.

And then we've got a couple of new models for leadership and shift management as well as general management that this roll-out of our new e-learning platform will facilitate. So those are some of the things that I would point to as really important components of the model as we kick it off, you're right, somewhere around midyear.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Okay. Thank you for joining us today, folks, and spending time on our brand. We truly appreciate it, and we look forward to speaking to you all again soon. Thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.