Berto Acquisition Corp (TACO) 2018 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Fiscal Fourth Quarter 2018 Conference Call and Webcast for Del Taco Restaurants. I would now like to turn the call over to Mr. Raphael Gross to begin.

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

Today's earnings press release also includes non-GAAP financial measures such as adjusted net income, adjusted EBITDA and restaurant contribution. Non-GAAP financial measures should not be considered as alternatives to GAAP measures, such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance. We refer you to today's earnings press release, which includes the reconciliations of these 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. We appreciate everyone joining us for the quarterly call. Before walking through our Q4 results and plans for 2019, I wanted to briefly highlight some key financial and strategic takeaways from 2018, as I believe they will provide great context for what we hope to accomplish this year. First, we achieved our sixth consecutive year of comparable restaurant sales growth across the Del Taco system with a 2.5% increase, while our company-operated restaurants generated a 1.5% increase. Franchise comparable restaurant sales grew at even faster rate of 3.8%, which we view as indicative of our strengthening franchise system and Del Taco's brand portability across a diverse geographic footprint. In fact, franchisee AUVs have increased approximately 30% in the last 5 years across our 13-state footprint, with more than half of these restaurants located outside of California. Our franchise momentum, coupled with our noncore Western market refranchising strategy that I will discuss shortly, is expected to stimulate development interest across existing and new franchisees to help expand Del Taco's brand reach.

Second, we held our restaurant contribution margin steady at 19.7%, demonstrating our effective margin management strategy despite only modest same-store sales growth at company restaurants. Fiscal 2018 was our fourth consecutive year achieving a restaurant contribution margin of approximately 20%, and we only recently achieved a $1.5 million AUV. Margin management has become a strong competency at Del Taco and is critically important during this extended inflationary cycle. Third, we opened 25 restaurants across the Del Taco system in 2018, including 13 company operated and 12 franchise restaurants. This compares to 20 openings in 2017 and only 13 in 2016. We are encouraged by the momentum we are seeing both in terms of more openings and the expanding geographic breadth of our openings, as 10 states had openings in 2018, and we expect openings in 14 states during 2019.

Our franchise acceleration has been particularly encouraging and has been enabled by strengthening our franchise foundation through enhancements and investments in recent years to position franchising as a pillar of our growth strategy. And fourth, we successfully rolled out Elevated Combined Solutions, the latest iteration of our brand strategy to further our mission to be the leader in the value-oriented QSR+ segment. It included brand catalyst and operational improvements to elevate our brand positioning through a deeper focus on our fresh preparation, quality attributes and, of course, hospitality. We also work to further strengthen our great culture with the launch of our new advertising campaign centered on real employees, highlighting our freshly prepared ingredients and QSR+ positioning by celebrating the hardest working hands in fast food.

Regarding Q4 itself, we extended our track record of comparable restaurant sales growth to 21 consecutive quarters for the Del Taco system with a 1.9% increase and a 26 quarters for company-operated restaurants with a 1% increase. Average check growth at company-operated restaurants was 4.9%, including over 1% of menu mix growth, although transactions declined 3.9%. Franchise comparable restaurant sales grew 3.2%, again outpacing company-operated restaurants.

We also increased our restaurant contribution margin by 40 basis points to 20.3% and our adjusted EBITDA by $0.3 million to $23.6 million. Finally, we had 15 system-wide openings consisting of 7 company operated and 8 franchise restaurants. Q4 marked the return of a fan-favorite premium limited time offer protein Shredded Beef, which had not been on the menu since 2012. Shredded Beef included mid-tier and premium products to provide a great value and a quality food experience designed to elevate the brand. We paired that LTO with additional new product news around Epic Burritos, with the launch of the new Triple Meat Epic Burrito featuring freshly grilled steak, chicken and bacon. These promotions help drive over 1% of menu mix growth and a Q4 premium mix that exceeded 10%.

Turning to our 2019 plans. We're focused on driving traffic momentum profitability through a series of strategic initiatives using a phased approach. This starts with our digital transformation through our new app and expanded third-party delivery, followed by enhancements to our core value program and delivering exciting new products designed to generate incremental occasions.

Let me start with our digital transformation progress. Last November, we launched our new app as a key pillar of our CRM development strategy. Our initial focus is to provide offers to build our database, which has now eclipsed 400,000 registered users since November. We are encouraged by the early momentum of this marketing platform and the long-term opportunity it provides us to drive guest frequency as it scales. We expanded our delivery initiative as well during the first quarter by launching Grubhub delivery in substantially all company-operated Del Taco locations. We believe a multiple DSP approach will optimize driver coverage to maximize consumer demand, and we expand -- we expect to launch both DoorDash and Postmates later this year. While we continue to leverage the Buck & Change feature of Buck & Under to provide pricing flexibility, we are also enhancing our value platform with the recent launch of Fresh Faves Boxes. Fresh Faves addresses growing consumer demand for abundant value and better positions us to meet value-oriented guest needs. These are full-meal deals with 2 or 3 entrées, French fries and a drink, designed to deliver best-in-class abundant value and variety that differentiates Del Taco from the competition. That differentiation really starts with our pricing approach, by offering $4, $5 and $6 options, which provides the consumer great choice. And new Fresh Faves Boxes will work in concert with Buck & Under and Buck & Change to offer expansive value, ranging from à la carte items to bundled meal deals. Underpinning the launch of Fresh Faves Boxes is our seasonal seafood promotion, featuring our popular Jumbo Shrimp limited time offer and 2 beer-battered fish tacos for just $4, made with handcut, sustainable, wild-caught Alaska Pollock in a crispy beer batter, sounds delicious. Finally, we plan to leverage innovation to drive incremental occasions with the launch of the Beyond Taco and Beyond Avocado Taco during the second quarter. The growing guest demand for vegan and vegetarian options created an opportunity for us to partner with Beyond Meat to be the first Mexican QSR chain to develop a proprietary blend of seasoned 100% plant-based protein that tastes similar to our current ground beef. We have tested Beyond Meat in select restaurants in Greater LA, our entire San Diego market and more recently in all Oklahoma restaurants. The response on social media and the results have been impressive, increasing both check and traffic as many new or lapsed users and regular Del Taco fans visit our restaurants' easier to sample something innovative, which delivers on the better for union state. We believe this program will drive sales while further strengthening our QSR+ brand position.

Currently, our first quarter system-wide comparable restaurant sales trends today are running slightly negative and below our prior expectations as expressed in mid-January. This outcome is influenced by the anticipated shift of Lent, which began 3 weeks later this year and adversely impacts Q1 due to our very popular seasonal seafood promotion as well as the unanticipated, extremely cold and wet weather we have experienced in California and throughout the West.

Looking forward, the expected combination of normalized weather and the favorable reversal of the Lent shift in the second quarter is expected to sequentially improve same-store sales across our system, particularly as strategic initiatives kick in and transaction compares ease. Lastly, I wanted to reiterate our portfolio optimization strategy, which is designed to help grow AUVs and stimulate new unit development. By shifting our portfolio mix to 55% franchise by summer 2020, our company-operated footprint will predominately reflect strong AUVs and restaurant margins in our core Western market, plus a strategic presence in our emerging markets. We expect this to also drive a sharpened operational focus and financial benefits, including improved company AUVs and restaurant margins, reductions in returning existing unit capital and reduced exposure to cost-site inflation in California concentration.

In the first quarter, we acquired 3 high-volume franchised restaurants and sold 13 lower-volume units in the LA area to existing multiunit Del Taco franchise groups. These transactions are expected to optimize these restaurants for AUV growth, and although we will consider buying or selling other restaurants in our core LA market, nothing further is planned at this time. We also plan to refranchise our core -- our noncore Western markets to help stimulate development, as we begin to solve for the common prospective franchisee desire to buy than build. We have no additional updates at this time other than to say that the process will proceed with a focus on transacting with the buyers who are most likely to deliver on their growth commitments. We remain confident they can all be refranchised by next summer 2020. Over time, the net proceeds from such refranchising may help fund new company seed markets, enabling co-development or adjacent franchise growth opportunities and other efficiencies. In closing, there are a lot of exciting things happening at Del Taco. Our digital value and innovation strategies will serve as important catalysts for sales growth, and as always, we plan to complement our top line initiatives with effective margin management.

And now Steve will review our Q4 financials and full year guidance for 2019.

Thank you, John. Total fourth quarter revenue rose 7.3% to $157.3 million from $146.5 million in the year ago fourth quarter and included $4.1 million of franchise advertising contributions and $0.2 million of other franchise revenue related to the adoption of new revenue recognition rules in 2018. Excluding these revenue recognition impacts, total revenue grew by approximately 4.4%. System-wide comparable restaurant sales increased 1.9% and lapsed system-wide comparable restaurant sales of 2.4% during the fourth quarter of 2017, resulting in a 2-year comp of 4.3%. The Del Taco system has now generated 21 consecutive quarters of positive same-store sales. Fourth quarter company restaurant sales increased 4.4% to $146.7 million from $140.6 million in the year ago period. This increase was driven by contributions from additional company-operated stores as compared to the fourth quarter of last year, along with company-operated comparable restaurant sales growth of 1.0%. Fourth quarter company-operated comparable restaurant sales growth represents the 26th consecutive quarter of gains and was comprised of a 4.9% increase in check, including over 1% in positive menu mix, partially offset by a 3.9% decline in transactions.

Franchise revenue increased 7.0% year-over-year to $5.3 million from $5.0 million last year. The increase was driven by a franchise comparable restaurant sales growth of 3.2%, other franchise revenue related to the adoption of the new revenue recognition rules and additional franchise operated stores as compared to the fourth quarter of last year.

Turning to our expense items, food and paper costs as a percentage of company restaurant sales decreased approximately 40 basis points year-over-year to 27.4% from 27.8%. This was driven by menu price increases, partially offset by modest food inflation, including increased distribution costs. We also experienced slight margin pressure from our Shredded Beef and Epic Triple Meat promotions, which feature a slightly lower-than-typical margin percentage. Labor and related expenses as a percentage of company restaurant sales decreased approximately 40 basis points to 31.6% from 32.0%. This was driven by lower payroll taxes due to the elimination of a federal unemployment payroll tax surcharge on California wages that was retroactively eliminated in November of 2018 for the entire 2018 tax year. The favorable impact from this payroll tax elimination was 26 basis points for fiscal 2018, which was entirely realized during the fiscal fourth quarter. We expect to retain this permanent lower rate prospectively. Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 30 basis points to 20.6% from 20.3% last year. The 30 basis points of deleverage was due to inflationary pressure within this category that outpaced our modest same-store sales gain of 1%. Based on this performance, restaurant contribution was $29.8 million compared to $28.0 million in the prior year, an increase of 6.5%. Restaurant contribution margin increased approximately 40 basis points to 20.3% from 19.9%. General and administrative expenses were $13.4 million, and as a percentage of total revenue increased by approximately 100 basis points year-over-year to 8.5%. This increase was driven by increased legal and related expenses, performance-based management incentive compensation, stock-based compensation expense, incremental SOX 404(b) compliance costs and the expense side of the other franchise revenue that is now reported on a gross basis as well as lower-than-expected revenues, which magnified the percentage. Adjusted EBITDA increased 1.2% to $23.6 million from $23.3 million last year. As a percentage of total revenues, adjusted EBITDA decreased 90 basis points to 15.0% from 15.9% last year. Depreciation and amortization expense increased 9.6% to $8.2 million compared to $7.5 million last year, with the increase driven by the addition of new assets. As a percentage of total revenue, depreciation and amortization rose 10 basis points to 5.2%.

Interest expense was $3.1 million compared to $2.4 million last year. The increase was due to an increased 1-month LIBOR rate and a higher average outstanding revolver balance compared to the fourth quarter of 2017. As of the end of the fourth quarter, we have $159 million outstanding under our revolver and our applicable margin for LIBOR loans remained at 1.75%.

Income tax expense was $2.1 million during the fourth quarter for an effective tax rate of 27.1% as compared to a $24.8 million benefit during 2017, which included a one-time income tax benefit as a result of the recent tax reform. Excluding this one-time benefit, the prior year rate would have been 41.6% and the lower effective tax rate is due to the impact of the recent tax reform. Net income for the fourth quarter was $5.6 million or $0.15 per diluted share compared to $35.2 million or $0.89 per diluted share last year.

In addition, we are reporting adjusted net income, which excludes impairment of long-lived assets, restaurant closure charges and other income related to insurance proceeds. Adjusted net income in the quarter was $7.0 million or $0.18 per diluted share, compared to $6.2 million or $0.16 per diluted share last year.

Turning now to our repurchase program covering common stock and warrants, during the quarter we repurchased 765,209 shares of common stock at an average price of $11.05 per share and 20,596 warrants at an average price per warrant of $1.93 for an aggregate of $8.5 million. At fiscal year-end, approximately $29.6 million remained under the $75 million authorization. I should add that during the fiscal first quarter of 2019 we have remained active and repurchased approximately 200,000 shares and over 830,000 warrants so far this year.

One balance sheet point is the presentation of a held-for-sale caption in current assets to reflect the carrying value of property and equipment sold in connection with the 13 unit refranchised transaction during the first quarter as well as owned property for 3 new restaurants opened in 2018 that we expect to sale leaseback in 2019. 2 such sale leaseback transactions were finalized in the first quarter. The sale leaseback proceeds help to net down our capital expenditures to align with our capital guidance that is provided on a net basis whereas our GAAP presentation uses a gross basis.

Before covering our fiscal year 2019 annual guidance, I want to discuss the new lease accounting standard that is effective at the start of fiscal 2019 and how it is expected to impact our balance sheet and P&L. Upon adoption, all existing build-to-suit leases will become operating leases and we will derecognize all the existing build-to-suit assets and deem landlord financing liabilities.

Going forward, substantially all restaurants will be operating leases to be accounted for on the balance sheet. We expect to recognize operating lease liabilities of approximately $220 million to $240 million and right of use assets of approximately $210 million to $230 million. From a P&L perspective, there's no material change to our accounting for existing operating leases. However, the accounting for our prior build-to-suit leases will impact several key expense lines, primarily occupancy and other operating expenses where build-to-suit leases will now be reported. The expenses for these leases were previously reported in depreciation and interest expense. This reclassification is expected to have an unfavorable impact of approximately 70 basis points on our restaurant contribution margin and adjusted EBITDA and has been incorporated into our annual guidance. It is important to note that this change is noncash, expected to be net income neutral and does not reflect any underlying economic changes in performance. In terms of guidance, we are reiterating what we issued in January, revised for the new lease accounting standard where appropriate and are furnishing several additional key metrics.

Our top line expectations aren't changed, including low single-digit system-wide comparable restaurant sales growth, with total revenue between $517 million and $527 million. In company restaurant, sales between $481 million and $491 million. We continue to expect menu pricing of up to 4% to help mitigate the impact of food inflation of approximately 2% to 3%, including higher distribution and transportation costs and labor inflation of approximately 6%, primarily driven by a $1 increase in California minimum wage.

General and administrative expenses between approximately 8.7% and 9.0% of total revenue. This range reflects a plateau compared to 2018 in light of our first quarter refranchising activity, which created an estimate of 15 basis point increase as the G&A savings from this transaction cannot be offset on a percentage basis given the reduction in restaurant sales.

To the aforementioned new lease accounting rules, we've revised restaurant contribution margin expectation by 70 basis points to between 18.1% and 18.6%. We also revised our adjusted EBITDA estimate by the same 70 basis points from the new lease accounting rules, and we now expect between $66.5 million and $69.0 million. Interest expense is now expected between $7.2 million and $7.6 million, which represents the lease in fourth quarter annualized run rate less approximately $2.6 million due to the new lease accounting rules, which will now be recorded in operating and other expenses.

Effective tax rate of approximately 26.5% to 27.5%. Diluted earnings per share of approximately $0.47 to $0.52. At least 25 system-wide new unit openings on a gross basis, skewing towards franchised restaurants, and an estimated 1% system-wide closure rate.

And finally, net capital expenditures of approximately $42 million to $47 million, including approximately $18 million to $20 million for new unit construction, approximately $14 million to $15 million to maintain or enhance existing restaurants and approximately $10 million to $12 million for discretionary investment, including the remodel program test and technology investments such as mobile ordering and delivery, drive-through enhancements to improve throughput and learning management and workforce management upgrades to drive operational efficiencies.

With that, we thank you for your interest in Del Taco, and we are happy to answer any questions?

(Operator Instructions) Our first question comes from the line of Alex Slagle with Jefferies.

Just wonder if you can provide additional perspective on the planned refranchising strategy and frame up what the range of outcomes might look like in terms of timing and potential impact on operating results in 2019.

Hey, Alex, it's John. Let me start with the strategy here and how we're thinking about that and I'll let Steve kind of weigh in a bit on the end year impact. So clearly on the refranchising piece there's 2 components. One, which is really kind of falling under our portfolio optimization umbrella, is what we did most recently that were -- the deals that were completed here in Q1 of 2019. And that was the 13 units that we refranchised to 3 local franchisees in the LA market that we feel really good about giving them the opportunity to turn these restaurants into a big win and they have a proven capability of doing that and some other acquisitions that they have done within our systems. So we're excited for them and excited about what they can do with these units. And obviously we saw the opportunity to also acquire 3 franchised restaurants to company because these were in territories where the company operations was very strong. So as I've said, we don't have any plans to do anything further in that area. But we're going to be very opportunistic in regards to portfolio optimization and where it makes sense. We'll look at other opportunities as we go down the road. The other big component that we talked about obviously was the refranchising of noncore Western markets, and a little bit different part of the strategy one that as we said has not been fully activated yet and there's no set time line on that other than we'd like to get all the markets done by the summer of 2020. So we're in process of evaluating right now and trying to make the best decisions there with the ultimate focus being let's partner with either existing or new franchisees that can deliver on growth. And that's really kind of the thrust of that part of the strategy. Let me just throw it over to Steve to see if he has any color on the impact of the 13 divestitures.

Yes, that has definitely been factored into our Q1 guidance that is the purchase of 13 stores, sale of 3 stores. As we've said a couple of months ago that we'll have an accretive impact to earnings, has been fully reflected inside of our guidance. However, the noncore markets in the West has not yet been factored into our guidance. For now there's no specific update on timing other than to say there will be a process moving forward with the big focus on making sure we transact with the buyer or buyers, most likely buyers, who will most likely deliver on the growth commitments that will be part and parcel with those expected transactions.

Got it. And to what extent have you identified future new markets that you want to seed, where we might hear about that?

Yes, we're in process. So we've been evaluating several markets, and we're not ready to announce anything just yet. But I would say that we're getting close in realizing that what we're doing down in the Southeast is actually a very viable strategy to move forward with in another territory or 2. So we'll make that decision here in the near future, and we'll make sure that we update everyone as appropriate.

Then just the last follow-up, if you had an estimate on the magnitude of the weather impact you saw in the first quarter and maybe any other views on the underlying momentum you see in the business with the recent value efforts with the mix, too, and recently the Fresh Fave Boxes.

Yes, John touched on certainly adverse impact Q1 in the West, very wet, very cold. As John said, both company and system right now are slightly negative. It's not a perfect calculation but had we experienced normalized weather, we believe it would probably lead to slightly positive for the company and system as well, so maybe that percentage area of swing due to the weather.

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

Just maybe I'll just quickly follow up on that. It sounds like including the impact of weather, quarter-to-date, which is I think like a weak loss in the quarter, you're running like a minus 5% almost in traffic. Is that 3% or 4% price to...

Yes, you're in the ballpark. The traffic for the first quarter will be sequentially lower than the 3.9% that we experienced in the fourth quarter. So in that 5% plus area is a good estimate, although there is 9 days left to go.

Okay. In your -- you're pushing 4% price, which is aggressive and needed, but you're confident that you're not seeing pushback there?

Yes, I mean -- Craig, this is John. So far all of our internal analysis and then the work that we've done with our econometric modeling firm just continues to indicate that these pricing actions have been accretive. And that said, you can impact traffic to some degree when you take some level of pricing. But the answer right now for us is, I think, overall it's been accretive for us. And the focus now is let's really execute well our transaction momentum strategy, which we believe, as we assess the business coming out of Elevated Combined Solutions mid last year, we understood there was some -- we came to a conclusion there were some gaps that we needed to address on the digital front as well as some enhancements we can make to our value platform and then some exciting new news we needed to bring to the table. And we have that in Beyond Meat that will be coming soon. So I think all in, we're okay with our pricing strategy. We're going to continue to watch it and watch the market very closely and see what the competition is doing and measure it. But we don't think that it's having a adverse impact, a massively adverse impact to the traffic at this point.

And 2 other things we do there, Craig, we consistently and regularly measure or monitor our value and affordability perception ratings performed by NPD Group. We continue to be very strong on both of those attributes. So that's an important part of our thought process. Then also reading the competitive landscape, it's certainly a level playing field in our view when it comes to wage, and we definitely observe a lot of accelerated price happening out there in the marketplace in most of our markets certainly in California by our peers as well.

Okay. And lastly, the 400,000 app downloads sounds like a lot relative to your size of your store base. Do you know how it compares to your peers? And do you have a goal for where you want to be? And are they buying more or less than your average customer?

Yes. I'd say our strategy going into this year was obviously use offers to build the database so that we could pivot coming out of 2019 to either a deeper loyalty program or really start to leverage scale of this platform. So when we came into the year, our focus was really around building the database and getting registered users up. That was our #1 goal. And what we have put out there internally was that we wanted to -- we believe we could achieve somewhere in the high 6 figure range. I'd love to see us achieve somewhere just right over 7 figures if we can, and that's certainty what the team's doing. Of course, we're ramping up quickly. We're at about 700 registered users per store right now. And as you know, as you move through time, it probably will become a little bit more difficult to register folks. But I could see us in the high 6 figure range, maybe low 7 figure range this year. And what's important with that is obviously we are giving these folks reasons to come back to Del Taco on a weekly basis. We're looking at their activity, we're sending them targeted offers. And over time as the database becomes bigger, it will be easier for us to be more certain in regards to how we can move the needle on the same-store sales side of the business. So over time, it's a CRM platform, but right now it's about building that database.

Our next question comes from the line of Jeremy Hamblin with Dougherty & Company.

I want to start by coming back to the labor comments and the payroll taxes. For Q4, I think you -- if I caught this right, 26 basis points for fiscal '18 in total. Does that imply there was roughly 100 basis points for the year -- I'm sorry 100 basis point impact for Q4? What was the impact, Steve, for Q4 on that particular item, the benefit?

The 26 basis points for the year, it could drive just over $1.2 million, which would be about 83 basis points for the fiscal fourth quarter. So looking at that line item, the leverage of 40 basis points absent that positive news from California probably would have been deleverage of 40 to 50 basis points. In the full year, we'll delever probably 40 basis points rather than the 10 basis points that we reported. So a bit of a onetime good guy in some respects, but very positively, it is a permanent relief, if you will, that rate has currently gone away. So it is a benefit that we will carry forward into the future years.

Understood. And as I think about your guidance for 6% wage inflation this year and how that compared to 2018, what are the factors as we think about that labor line item that's been a hurdle for a while? How we should be thinking about that this year, do you expect maybe slightly higher impact to that line item in total in '19?

We think the 6% estimate is solid. So we have $1 of wage increase this year, last year that was $0.50. So last year the original guide was 4% to 5%, and we landed that and placed rate somewhere in that mid 4% area. So we do feel good about the 6% this year. Every extra dollar becomes a little bit less proportionately and unfortunately things that are more fixed in nature, be it GM salaries, health insurance as well as workers' compensation, have all trended in a much less inflationary manner. So it allows us to kind of net that all down to more of that MSD type rate that right now we see at 6% for 2019.

Got it. And then wanted to ask a question on G&A, moving forward. So after we get through the refranchising effort and you see some normalization, you've continued to see your G&A line item grow as a percent of sales over the last several years. You mentioned it plateauing this year. How can we be thinking about that now as you go from 55% to 45% company-owned locations? As we look forward, is that something where G&A, it's popping out, and potentially could even be lower on an absolute basis with 10% fewer location? In 2020?

Sure. Good question. So yes, near term for 2019, as I mentioned, kind of pro forma for that first quarter refranchising activity, that itself causes about 15 bps of pressure. So 2018, probably would have otherwise been reported around 8.8%. So the guide for the year ahead of 8.7% to 9.0% more or less colors that outcome. So we are, in essence, plateauing this year. And the midpoint reflects about 5.5% dollar inflation year-on-year, which is more reflective of the very low unemployment inflation environment that we're in. So that's what we're expecting for the year ahead. As far as getting into our refranchising of the noncore markets, that will happen over time. As those happen, we'll be very careful to give very good updates and guidance on what will happen, restaurant-level royalties as well as the G&A impact. So without a doubt, as you refranchise larger numbers of restaurants, there certainly is some, I'll call it, variable G&A. The above store leader usually runs 8 to 12 stores, as a great example. Those cuts will be made and essentially transferred to the franchisees when they happened. But naturally there's a large drop in restaurant sales as well as revenues. So over time, as those happen, we'll try to bring more color into what the percent of revenue will do. They're -- and they actually tick up somewhat. But as or maybe more important is what is the dollar inflation year-over-year in light of what we need to manage the business, actually we need to sell a lot of restaurants. A lot of those needs do go down, so we'll be very focused on taking those variable G&A costs off our P&L as those restaurant refranchise transactions happen and giving good color on what that then translate to on a percent of revenue basis as we move forward.

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

Guys I just want to ask about the refranchising and how franchisees are thinking about their capital, I guess, not just this year but going forward. As the franchisees absorb some of these company units over the course of the next year, 18 months, do we think about that any sort of acceleration in new unit development as a system that get pushed out to 2021 and beyond, maybe as franchisees are absorbing some of these units, is this going to limit the amount of capital they have to put into new unit growth openings going forward?

Yes, Peter, I wouldn't say that would be the case. I mean, how we're thinking about this is it's a combination of new and existing franchisees. And so we're definitely looking to bring some new blood into the system that can leverage a base of company operations to get really competent on the brand very quickly and then pivot obviously into growth. And that's going to be the real catalyst of us selling these markets. Whether it's a new franchisee or existing franchisee, their ability to move and deliver on a growth agreement, that's material for us. So the idea there is to spur new unit growth, specifically, franchise growth.

So all the refranchise units or all the deals you guys are planning to put together over the course of the next year or so, they come with required sort of new unit builds going forward in those markets for the franchisees?

Yes, yes, absolutely growth will be a big part of the sale process. And that'll be really one of the driving pieces for us in regards to divesting these units. But it won't necessarily be just in the markets, growth in the markets that they currently resided. There may also be adjacent growth or new territories attached to that. So again, these are folks that are likely going to be sophisticated franchisees, some of them may have multi-state operations, some of they may not. But either way, we would expect to be able to attach some level of agreement to it that would be either within the existing market or outside of the market. TBD, dependent on the groups and the attractiveness of the groups that we take a look at here over the next couple of quarters.

Great. And then just my last question, I think you guys mentioned the addition of a couple more third-party aggregators, DoorDash and Postmates later this year. Can you just talk about that decision, why you decided to move forward with more partners and what exactly is entailed to add these partners? Is it more tech investment? Are they making the tech investment? What needs to be done to further integrate these other delivery partners?

Yes. So I mean what we talked about is in the past is our really our strategy on delivery as we believe a multi-delivery service provider approach is the best way for us to kind of breakthrough and optimize consumer demand. Once we got our heads around the economic model associated with delivery, which for us -- we've talked about the kind of the big pillars for us for check average, what we're seeing so far with our launch is nearly 2x. The store level check average, that gives us a lot of leeway as far as room to play with on the margin dollar side. And also, we wanted to be able to do premium pricing. And we are doing now, we tested that. We found that adding reasonable level, it was -- the consumer was willing to pay it because of that convenience, additional convenience to you being able to get Del Taco delivered to your doorstep. So we've activated that. So that's helped us. So the economic model, we feel really good about. So now it's about let's get as much demand as we can, and what we saw in our tests is that as we layered on the multi-delivery service providers, we actually saw step-ups in the -- at some units in the actual delivery rate that we were seeing at these restaurants. So we like that approach. We think every trader is a little bit different, every market is a little bit different. And the breadth of having the 3 DSPs, and that's Grubhub, Postmates and DoorDash, activated together is important to us. The other component I would only mention is we absolutely want to have POS integration. We found, through our test, that the tablet approach and having tablets laying around the restaurant wasn't very conducive to an efficient and seamless transaction for our operators and it was actually hurting overall satisfaction from a perspective of order accuracy. So what POS integration has done for us is actually we've seen the overall satisfaction scores, in some cases, surpass what we see through our drive-through and dine-in experience. So we've removed that order accuracy issue because you know with the standalone tablet, that employee is actually having to key in the order manually to the POS. And we don't want that to have to happen. So POS integration is really important, and we're leveraging existing technology that we have in our restaurants today along with some new technology features that come along with platforms, like what Olo brings to the table, to make sure that we have integration.

Our next question comes from the line of Joshua Long with Piper Jaffray.

I wanted to circle back to some of the comments you mentioned about moving into more states year-over-year. I'm just curious on how you're thinking about driving brand awareness or maybe leveraging some of the new platforms and tools that you have this year versus 2018 to make sure you're really getting the most leverage out of everything in driving awareness as a brand.

Yes, a great question, Josh. Our playbook, that we've developed over the last several years, which has really helped us to perform across our diverse geographic footprint within our franchise base, certainly is a very local, market-driven approach to trying to own the four walls in that trade area. We call it being best on block. And it starts with Combined Solutions. Obviously, that's our overarching strategy, that is to make sure that we are absolutely focused on guest metrics, operating metrics and people metrics at the restaurant level, to drive our performance. So when the marketing comes in, we're able to deliver on that promise. So having really solid operations underneath us, being best on block is an absolute driver of our performance. The other piece is obviously getting ourselves into good real estate. So we want to make sure, especially as we get into a market that may be considered more emerging market or stay where we don't quite have the level of brand awareness picking the right sites and getting into the right trade areas are critical. And that kind of 2 things working together, we've talked about this over time, we really see success like what we've seen over the years in a market like Michigan. And what we're starting to see down in the Southeast is pick the right real estate with the right operating model and mindset and you can win. And then obviously we do a lot on the local marketing side. We don't have national advertising to fall back on. So typical to kind of who we are as a brand, we're very scrappy, and that's what Combined Solutions is all about. So we do a lot of local marketing, digital advertising. We try to get involved in the trade area and the communities around the trade area, and we want franchisees that have that belief and willingness to do that as well. So that's been some of the key things that we've seen -- that we set ourselves up for that have helped the brand in some of these newer markets over the last few years.

Very helpful color, I appreciate that. When thinking about some of your commentary about how trends should improve sequentially, you mentioned that comparison has eased and obviously we can see that as well. Just curious if that was more of a back half to the year comment, knowing that comparisons do materially ease in the 3Q, 4Q period, or if you felt confident enough in the initiatives and some of the new menu platforms you have for them to start being more of a contributor here into 2Q in the first half of the year as well.

Yes, I mean I think the way to think about it is as these big transitory headwinds start to subside, weather and lent offset, which we've been very transparent about and talked about on this call today, I think we're poised for same-store sales improvement in Q2. And I think you should expect some further acceleration as the year goes on and we implement both the transaction momentum strategy but also those compares start to ease specifically in Q3 and Q4 so. And then when you look at the transaction momentum strategy, we've gotten the second phase out the door now in the last couple of weeks with Fresh Faves boxes. Beyond Meat is about to come towards the back end of April, so right within Q2. And we feel really good about those platforms being transaction momentum drivers for the brand.

Perfect, that's exactly what I was looking for. I appreciate that context. And then last one for me, in terms of some of the discretionary spend that you highlighted in the CapEx bucket, curious if there's anything you could talk about in terms of the remodel test that you outlined or maybe some of the other upgrades around operations and operational efficiency. I'm sure it's still early and you're testing a lot of things that it's probably too early to get into the specific details, but just curious if you can give us a sense of where some of those dollars or what some of the projects you're thinking about could be down the road.

Sure, a good question, Josh. So certainly we did touch on our plans to have a remodel test program during 2019. We're really looking to make sure we understand what the right design and look and feel to that next-generation remodel looks like during this year, goal there being to optimize that program, look at the return profile. And then beyond 2019, we'd be in a position to talk about more of a likely acceleration of that on a longer-term basis. Other exciting things, kind of discretionary uses of capital, certainly, technology investments ranging from investments to further operationalize and roll out things like mobile ordering as well as expanding delivery, some drive-through technology enhancements to help improve throughput at the drive through and other investments in both learning managements and workforce management systems to help drive operational efficiencies long term. So a number of items going on there that we're pretty optimistic about.

Yes. One other thing I wanted to just add because I think it's a good point of color and context in regards to setting ourselves up for success within the four walls of the Combined Solutions is we've got nearly 450 restaurants to date that have rolled out the new tortilla warming devices, which we're excited about. Some of you guys may have seen those in our restaurants, we've talked about them a bit. So that innovation is going to provide a real quality and consistency within our operations. We have 250 million products sold annually in a tortilla at Del Taco, and we want them to be hot. So this device really improves throughput for us because it's been a bottleneck for us in the past while also improving quality for our guests. So that's another piece that we're excited about, and our operators and franchisees are really getting on board with and excited about as well.

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

My question's on the third-party delivery. I mean, so far have you guys been happy relative to your expectations around the economics, where you've seen the attach rates in terms of the higher-margin items like sodas, kind of, in line with your original expectations, aside from obviously the top line impact in our -- what do you [feel about] the margin impact? Any -- just kind of any color around the early learnings would be helpful. Is there any kind of way to think about to what extent it's benefiting mix but it's impacting transactions? Is it shifting individual people into maybe bigger groups?

Yes. Nick, those are all great questions. I can't answer every single one of them right now sitting here today as we're in the middle of -- we just kind of finished up our full rollout here with Grubhub and we're learning each and every day. So far what I'd say about the volume is kind of, as we kind of expected, was on an overall average, it's relatively low right now. But we are seeing some locations that are significantly outperforming. And we think that as we move forward, we believe the performance is going to continue to get better and there's going to be further demand driven. A couple of things that are going to help out, one is, really just this quarter we started the marketing around it. In each promotion, you're going to see more marketing related to Grubhub delivery in the markets that we are offering it. And as DoorDash and Postmates come on, you'll see marketing around that. So driving brand awareness is going to be a key piece for us as we move forward. And then obviously the other piece that's going to help create some more demand on the delivery front is going to be adding the additional 2 providers. So right now it is a single provider that we're using really with Grubhub outside of some tests that we're doing with DoorDash. And once DoorDash comes on and Postmates come on in full system now, you've got the full suite, if you will, really helping us to drive demand. And we would expect performance to improve. So I'd say as we move forward on the transactional front or the demand front, that should get better and get stronger as we move through time for the reasons that we outlined. And then just in regards to the overall mix, I would -- and check -- listen, the check average, like I said, is about 2x right now that -- what we're experiencing in our restaurants compared to what we're seeing on the delivery front. We kind of anticipated that, that would happen, so it's nice to see it. And what we saw in test markets is fairly similar, and we feel good about that and we feel good that we're not getting a lot of pushback on the incremental pricing that we've put out, thus far. Like I said, the overall satisfaction associated with delivery transactions actually rivals that of our drive-through and our dining room right now. So Steve, any color you want to add on the margin front?

Yes, the 2x check helps create some margin efficiencies, if you will, things like the credit card fees swipes are on the DSP, not us. And the premium pricing, that's not the whole commission but a very good chunk of it. Those all kind of go a long way to neutralize any potential adverse margin percentage impact. So we feel good about that. So at this point, it's about scaling the first 2 and 3. And later this year we'll have a better feel for overall velocity and what -- how it kind of ramps up as it becomes more material as the year progresses.

Got it. And a similar question on the app. We've gotten a lot of reports from others that maybe it's not necessarily driving promote transactions and it is putting the pressure on mix. What's been the early experience so far with the app?

Yes, I mean the -- like I said, we're at 400,000 registered users, there are almost 700 registered users per restaurant. The way to think about probably margin management on this, Nick, is in the long term, as CRM kicks in, we believe this can become very accretive obviously. In the long term, you're thinking about you can start to target to an individual user to spur behavior that you wouldn't have otherwise received, right. So it becomes incremental transactions that you're driving. Right now, we're in build the database mode. And let's do that through offers so that we can get to the point that we can use CRM. So in the short term, as we think about 2019, what we're really doing is we're managing the discount rate across the business, right. So we have other discounts that are happening in our business, whether it be email marketing or print marketing that we do out in some of our markets, where coupons are offered, local store marketing efforts that field marketing uses. So what we've asked marketing to do is really rationalize some of that existing discount that is in our margin line already or baked in to pivot that over to or transition that over to the mobile app as we know that we're going to have to invest a bit to get this thing up and running, right. So what you saw in our guidance that Steve provided was that we have modeled that fully out within our guidance range, and that's kind of horse trading that's occurring between the different marketing avenues right now. And obviously if we play our cards right, we're able to manage the margin in the short run while we build the database, which provides a bigger opportunity down the road.

Our next question comes from the line of Stephen Anderson with Maxim Group.

I just wanted to ask about some of the menu news that you have forthcoming. I know you've addressed value most recently, mostly in the middle of the menu barbell. Late last year you did the lower end of that barbell but I just want to see if you're having any news coming toward the higher end, I know you have the Platos come out -- coming up against the 2 and 3-year anniversary of that. I just want to see if you have any news forthcoming on that later this year.

Yes, so I'd say Beyond Meat is definitely and what we're thinking about with Beyond Tacos that's definitely more in that kind of mid-tier to premium range of our menu strategy, Stephen. So we feel really excited about what the opportunity is with Beyond. And obviously one of the things we wanted to do here was tap into that better for [unit state] to really help to further differentiate Del Taco as a QSR+ brand. But we also believe it's going to drive incremental sales via tracking a user that may be a new user or a lapse user. And we've seen, through our tests, that it's also applicable to existing users. So the consumer opportunity is immense and it's exciting. And we think that activating that platform, we're in that mid-tier and premium range, is absolutely appropriate. It will literally be -- when you think about the accessibility to a product like this that Del Taco is going to create, there is no one else doing it in our category at the price point that we're about to offer. So our ability to do that and create accessibility at a lower price point than what you're seeing from others in Mexican QSR, particularly, but across the category is we're pretty excited about.

Just to reiterate, in the test that you have seen for Beyond Meat, you are seeing increased traffic as well as ticket.

Traffic and check growth, yes.

We have reached all the time we have for questions, and I would like to turn the call back to John Cappasola for closing remarks.

All right, everyone. Well, thank you for joining us today and spending time with us on the brand. We appreciate your interest in Del Taco, and we look forward to sharing our progress on future calls. Have a great rest to your week.

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