Wingstop Inc (WING) 2016 Q4 法說會逐字稿

Good day, welcome to the Wingstop fourth quarter 2016 earnings conference call. At this time all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. Now I'd like to turn this conference over to Mr. Mike Mravle, Chief Financial Officer. Thank you. You may begin.

Thank you, operator, and good afternoon. By now everyone should have access to our fiscal fourth-quarter and FY16 earnings release. If not, it can be found at www.Wingstop.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future property results and financial condition.

Lastly during today's call we will discuss certain non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release.

With that, I would like to call over to Charlie.

Thank you, Mike. Good afternoon, everyone, and thank you for listening to our call.

I'd like to begin today with a recap of a very successful 2016 both in terms of profitability and progress on key initiatives. After that, Mike will review our fourth-quarter financial results and provide annual guidance for 2017. Finally, I will wrap up a formal remarks in a few closing comments before we open the line for questions.

2016 was a year of record financial and operational achievements for Wingstop. We opened 153 net new restaurants and grew adjusted EBITDA by 23% and adjusted net income by 24%, both to record levels. We achieved our 13th consecutive year of positive same-store sales growth, 3.2% for 2016. We also completed a recapitalization of the business in 2016 and rewarded shareholders with a special dividend that equaled 10% of our market cap.

We are very proud of the profitability that we delivered for the year and for the fourth quarter in particular despite consumer uneasiness about discretionary spending. Our focus in 2016 was executing against our three strategic priorities, the first of which is unit development. We delivered a record 153 net new openings in 2016 across 30 different states and five international markets. We believe this demonstrates the broad opportunities ahead of us.

We ended the year with a total of 998 restaurants across 40 states and six countries. We also ended the year with a pipeline of 518 domestic franchise commitments, of which 80% are from our existing franchisee base, showcasing their support to continue investment in our brand.

In January, we proudly opened our 1000th restaurant in Decatur, Georgia with one of our most successful long-term franchisees, Rick Ross. We believe that only 40 or so restaurant brands have achieved the thousand-restaurant mark and only a handful have reached it faster than Wingstop.

We also ended the year with 76 international Wingstop restaurants in five countries including Mexico, Singapore, the Philippines, Indonesia, and United Arab Emirates. And 2016 we announced International development deals that will add 100 restaurants in Saudi Arabia over the next 10 years and 30 restaurants across Colombia and Panama over the next five years.

Our total pipeline for International development commitments stood at 349 restaurants at the end of 2016. We are very pleased with our progress across all of our International markets to develop a scalable business model that can be leveraged as a growth vehicle for the brand well into the future.

Hitting the 1000th restaurant milestone and our progress in international markets demonstrates the opportunity for us to grow into what we believe is our ultimate potential to become a top 10 global restaurant brand.

Our second core strategy is growing orders through the digital channel. Online orders have a $4 higher average check than all other orders, and this variance continues to have a positive impact on sales growth as we sequentially grow the digital channel. In the fourth quarter digital sales made up 19.7% of total sales, up from 17.7% in the third quarter and a 480-basis point increase over the prior year fourth quarter. 46% of our domestic restaurants had online sales mix in excess of 20% of total sales during the fourth quarter. This is up from 32% in the third quarter, 27% in the second quarter, and 20% in the first quarter.

About half of all orders come in over the phone and with approximately 75% of our mix is takeout, we are well-positioned to continue to grow our digital ordering mix over time. We are also leading and technical logical advancement of online ordering. Wingstop was the first restaurant to successfully launch dynamic social ordering on Facebook Messenger and Twitter last June and the first to launch voice-activated ordering with menu customization on Amazon's Echo platform in January.

One of the key enablers of digital or growth is the rollout of our fully integrated point-of-sale system. At the end of 2016 I am pleased to announce that we are substantially complete with our domestic systemwide rollout of our point-of-sale system, which we accomplished in roughly two years.

Finally, I'd like to provide a brief update on our national advertising campaign. In January we launched our national digital campaign and just after the Super Bowl we launched our first National TV campaign. This transition to national advertising from locally driven co-op advertising was designed to and is already providing us with more recent frequency in existing media markets in addition to coverage for smaller and newer markets, where we did not previously leverage TV or radio.

This shift in advertising dollars does not change the total amount a franchisee spends on marketing, rather the allocation of that spend is shifted to National from local.

For greater context, last year just over half of our domestic restaurants were supported by varying levels of TV advertising in 10 DMAs across the US. This year we will be on TV for at least 22 weeks covering 100% of our domestic restaurant base. Hopefully you've already seen our first national commercial, which is focused on our key brand attributes of fresh made-to-order wings that only the way experts at Wingstop can deliver. We are very excited about the expected increase in brand awareness that will come from this campaign.

As you know the restaurant industry was soft at the end of 2016 and we were not immune from that. Our same-store sales in Q4 were below our expectations at 1% positive growth. There was a noticeable change in our growth trend immediately after the election, which continue through the end of the year and into the start of 2017. There are many factors contributed to this trend that the most material to our business are the impact of the presidential election and the delay in income tax refunds to our core customer. Our research indicates that while our guests are still passionate about the Wingstop brand, frequency has been reduced as they have been more cautious with their disposable income.

We will discuss guidance shortly but for 2017, we are still optimistic that the launch of national advertising and continued progress on our technology initiatives will allow us to deliver our 14th consecutive year of positive same-store sales growth despite the fact that we have started the year with domestic same-store sales down 2.6% to date. Our well-timed national advertising campaign launched immediately after Super Bowl and we are seeing an improvement in our trend as brand awareness grows.

In summary, 2016 was an incredibly productive year as we executed on our key strategic and financial objectives and delivered exceptionally strong results for our shareholders. We believe that our core strategies will continue to yield industry-leading growth well into the future. With that, I will turn the call over to Mike.

Thank you, Charlie. I'd like to begin by reviewing our quarterly results for the 14-week period ended December 31, 2016 before turning your attention to our annual guidance for FY17. Recall that the year ago period included 13 weeks so the year-over-year comparisons are not strictly up apples to apples unless specifically identified.

Low revenue for the fourth quarter 2016 increased 20.3% to $24.8 million from $20.6 million in the prior year. The majority of these revenues are royalties and franchise fees because our system is 98% franchised. Together the increased 24.4% to $15.6 million for the fourth quarter, compared to $12.5 million in the previous year quarter. Excluding the 53rd week in the fourth quarter 2016, total revenues grew 13.2%.

We opened a record 49 net new restaurants during the fourth quarter. We ended the quarter with 998 systemwide restaurants, which represents a unit growth rate of 18.1% compared to the year ago period. In addition to restaurant development in the incremental operating week, revenue growth was also driven by domestic same-store sales growth of 1% which included an 80-basis point benefit from an extra operating day associated with the shift of the Christmas holiday into the 53rd week. Our Q4 and full-year same-store sales calculation excludes the 53rd week.

Company-owned restaurant revenue increased to $9.1 million from $8 million in the prior year, driven by contributions from two company-operated restaurants that opened between the second and fourth quarters, 1% growth in same-store sales, and one additional operating week. Excluding the impact of the 53rd week in the fourth quarter 2016, company-owned revenue grew 6.3%. In 2017, our corporate owned restaurants same-store sales to date are trending slightly behind the overall system.

Cost of sales increased to $7 million from $5.6 million in the prior year fourth quarter. As a percentage of Company-owned restaurant sales, cost of sales increased 590 basis points to 76.1% from 70.2%. The increase was driven primarily by 13.1% inflation from bone-in chicken wings, a 4% increase in the average size of chicken wings, and continued labor investments in roster sizes and staffing.

Margins were also impacted by about 100 basis points versus the prior year, from the two new stores that were opened in the year. The stores are performing well relative to our new store targets but are operating at average unit runs below our strong Company store average.

Lastly I would like to highlight that in Q1 2017 we expect about 10% inflation on our bone-in chicken wings over the prior-year quarter.

Selling, general, and administrative expenses increased 13.4% to $8.7 million as compared to $7.7 million in the prior-year period. The increase in SG&A expense is primarily due to head count additions to support continued growth, nonrecurring cost of $0.1 million related to our second offering, and incremental costs of $0.6 million related to the 53rd week.

Adjusted EBITDA, a non-GAAP measure increased 27.1% to $10 million from $7.9 million in the fourth quarter last year. Please review the reconciliation table provided in our earnings release between adjusted EBITDA and net income, its most directly to comparable GAAP measure. We estimate that the incremental week contributed approximately $0.5 million to adjusted EBITDA, so on a comparable basis adjusted EBITDA increased approximately 23%.

Interest expense rose to $1.5 million from $0.7 million in the fourth quarter last year, reflecting a refinancing of our credit agreement that was completed at the beginning of the third quarter. Income tax expense was $2.4 million. Our effective tax rate was 35.8% compared to 34.4% in the comparable period in the prior-year. For the full-year our tax rate for 2015 was 37.2% compared to 36.2% in 2015.

Net income increased to $4.3 million or $0.15 per diluted share compared to net income of $3.8 million, or $0.13 per diluted share in the same quarter last year. Weighted average diluted shares outstanding were approximately $29.1 million for the fourth quarter 2016 and approximately $29 million for the prior-year period.

EPS grew by 15.4% in Q4 and would have grown by 23% excluding the impact of the Q3 recap. The impact of the 53rd week on adjusted net income was $0.2 million.

In terms of our liquidity and balance sheet, as of December 31, 2016 we had cash and cash equivalents of approximately $3.8 million and $150.7 million in debt.

Our net debt to trailing 12-month adjusted EBITDA was approximately 4.1 times, which is down almost a full turn from our post-recap leverage in just two quarters. We made $5 million in debt payments against our revolving debt facility during the fourth quarter.

Annual CapEx was $2 million. Our annual guidance for 2017 is consistent with our long-term targets. Please note that 2017 is a 52-week period ending on December 30, 2017.

Our development forecast is 13% to 15% annual unit growth. We expect domestic same-store sales of low single-digits. SG&A expenses are projected between $34 million and $35 million. Our adjusted EBITDA growth is anticipated between 13% and 15% growth.

We expect net income between $18.5 and $18.8 million and fully diluted EPS growth between 8% and 10%. The impact of the 2016 recap on EPS growth is approximately 500 basis points. And finally fully diluted share count should be approximately 29.3 million shares.

I would like to highlight that we expect a favorable impact on our tax rate in 2017 to the new GAAP presentation requirements related to equity-based compensation that will begin in the first quarter of 2017. Outside of the impact of this new GAAP requirement, we expect our effective tax rate to be between 37% and 38%, which is the rate assumed in our guidance. And now I will turn the call back over to Charlie for closing remarks before we begin Q&A.

Thank you, Mike. We put another great year in the record books and wish to thank all of our key stakeholders including our world-class team and valued franchisees for their contributions to our success. Despite early headwinds, we believe that our asset-light model positions us well to continue delivering industry-leading results into the future. Thanks again for joining us this afternoon. We appreciate your interest in Wingstop and would be happy to answer any questions that you may have.

Operator, please open the line for questions.

(Operator Instructions)

John Glass, Morgan Stanley

Hi guys this is Courtney on for John. I just wanted to follow up. I appreciate you giving us the quarter to date comp, but did you -- how does that compare to how you exited fourth quarter? Did it worsen in January and February? And then have you seen any pickup as we've seen these refunds start to come back to the consumer?

Hey, Courtney. This is Mike. Good question. Yes, I think exiting the quarter, we saw a bit of a rebound in January but similar to many others, the tax refund delays impacted our February results and just referencing Charlie's notes on the call, with the advent of national advertising coming out and also the tax refund delays we have seen momentum come back to the business.

And then on unit development, I think for 2017 it was a little bit slower than we would've expected, given the openings that you had this year. So can you just give us a sense of why we should expect unit development to just take a step down a little bit? Was there a shift from the first quarter of this year into the fourth quarter of last year or was it something else?

I don't think it's necessarily a shift as much as it is just a reconnection as it relates to our long-term guidance for the brand. Certainly still well above 10% growth. And then at the same time I don't think anything that's happening in the business as it relates to this recent impact on same-store sales is going to impact our development pipeline at all. I'll reinforce that at the end of the year our development pipeline include 518 restaurants still comprised primarily of restaurants, commitments from our existing franchisees as well.

Okay, great. And then, just lastly, I think in the past you've given us revenue guidance. Can you just -- did I miss that? And secondly can you just give us a sense of how new stores are opening relative to history? They were usually around 800,000 or something.

We may have, I don't recall.

I think, as Charlie mentioned, we were sticking consistent with our long-term guidance. As we said annual guidance for the year. Obviously, we've given openings and given comps, which allow you to get there. There's no change in the expectation that we have on performance of the new stores.

Thanks.

David Tarantino, from Robert W. Baird

Hi, good afternoon. Just wanted to understand a bit more about the recent comp trends. I think Charlie said that you saw a slowdown after the election, and that might have started earlier than what we started seeing in the industry. But can you talk about sort of the stepdown you saw after the election, whether you think a lot of them could carry over here as we move into the rest of this year. Really, because of the political environment hasn't really settled down. And if you could give us a little bit more color on how you're thinking about the impact on your consumer and how that might play out here in the next quarter or two.

Sure. I think we noted that we saw a noticeable change in the comp momentum that we had immediately following election and you can clearly see the change that happened from one week to the next. I will say that up to that point we were tracking nicely against our targeted and guided results for the quarter, but the impact it had was noticed then.

As it relates to where we stand today, Mike and commented on and I also did in my notes -- where we are year-to-date, I will say that in the last week prior and then this week to date, we have returned to positive, which is indicative of what Mike noted earlier, which is with the return of the refunds, and then our third effective week of national advertising on TV, starting to take effect, we believe that that impact was relatively short-term if you think about it that way and expect that these levers that we have put in place, national advertising and the like, will help us get back to our guided low single-digit comp for the year.

Great. That's very helpful, and then just one clarification on the quarter to date. I think, Mike, you mentioned that January was better and then February was soft. Was January positive and February just dragged down the number to the negative territory?

I don't think we want to get into the monthly numbers, David. I think that's the general trend. Obviously there was a noticeable slowdown in February, and I know as you noted in some of your notes relative to the timing of the tax refund delays, so that's all about all we have to say.

Great. Thank you very much.

You're welcome

Jake Bartlett, SunTrust

Thanks for taking the question. You know, in terms of the national TV advertising, have you noticed much larger impact in stores that never had any TV advertising. What's your experience been so far? Maybe a little color on the results early reads of the National advertising.

Hi, Jake. It's in excellent question. It's early in the game, but we do have data that would support that statement, that in the recent weeks when we finally did start our national advertising, those markets that did not have the support previously have seen a stronger performance. Not a lot, but it is stronger than the other markets, and that's during that short period I mentioned earlier where we've returned to positive.

Got it. And then I'm trying to pick apart the impact of the election. Do you think it as anything to do with your large Hispanic customer base and concern over immigration? You know, is that a concern if that is true, could it that be more prolonged? Is at a concern for you?

I don't think it should be prolonged, I think it probably was indicative of just the nature of the change, if you will, overnight in people's minds. But I think our recent momentum is indicative that A, there still plans of our brand. All of our core customers are. Their frequency had slowed during this time frame, but we believe that frequency is returning to us and it's showcasing itself. I think the other big piece that Mike talked about is the delay in the refunds, because our consumer base is generally a lower middle income consumer and that does have a more meaningful effect on that consumer. So that did help contribute to some of the negative performance in the quarter.

Okay, and lastly, on the impact of the commodity inflation you're seeing. One, do you expect wing prices to be continue this trend to be up maturely year-over-year for the whole of 2017?

And then in that context would you expect -- in the past you've had more of a systemwide pricing increase, so is that something that you'd be pushing on your side or just kind of letting it up to the franchisees to do what they are going to do there?

Hey, Jake. No, we don't have an anticipation that wings for the balance of the year are going to be significantly higher than the prior-year. There was some built-in inflation headed into the year based on where prices peaked in December versus last year, but at this point in time we are running -- wings have come down pretty significantly over the past couple of weeks, and we anticipate -- and you're right about in line with last year at this point in time. And there's no reason for us to think that's going to be a significant inflation

Great. Thank you very much.

Karen Holthouse, Goldman Sachs. Go ahead.

Hi. Thank you for taking the question. The store's slower absolute unit growth than we've seen in the last couple of years going back to that. Is there anything you would call out in terms of your regions or types of markets that's driving that? So specifically core versus emerging. And I have a follow-up

Can you hi Karen can you clarify your comment on slower unit growth?

So if I do 13% to 15% growth in 2017, I get to like 130 to 150 net units versus 153 in 2016.

I think we always -- when we start the year, we did this as well last year and in prior years tried to establish what we think is the appropriate range of outcomes for the year as it relates to the development pipeline. So I would guide you towards the 13% to 15% range as being consistent with what our pace and pattern have been.

On a percentage basis that might be lower, but then the base of restaurants has grown by 18% last year. And as we noted we've eclipsed 1000 restaurants, so the pace of development remains consistent and that's both US and International currently. But as we've also noted the pipeline is strong, with pretty much the same number of restaurants in the pipeline at the end of the year that we started the year with. So we are replenishing it well and replenishing it more so with existing franchisees than with net new franchisees.

So we are very pleased and proud of that, and I think there's nothing other than making sure that we reinforce our long-term guidance that at the pace of growth that we are experiencing today, we'll be able to achieve the profit levels that we've guided to the long-term as well?

And then you also mentioned that AUVs for new units are really pretty steady with the targets. Is there any update to the build cost piece of it? I know a number of rates did a broader economics. A number of other restaurant companies have talked about pretty meaningful build cost inflation and particularly in some geographies.

And then also competition for rent and real estate becoming a bit -- competition for real estate and rents becoming bigger challenges

Neither of those have been areas that have been of any concern to us. Our restaurant cost has been fairly consistent since for a number of years now and we don't expect that to change much at all.

The access to real estate remains quite strong. We don't have a challenge because we are not always looking in the same markets that a lot of the other companies that you may speak with are accessing. So we're in the urban core markets, looking for those as we talked about before, kind of B and C sites in the centers. And we're not fighting for the same real estate so it still is plentiful for us.

Thank you

You're welcome

Matt DiFrisco, Guggenheim Securities.

Thank you. Gentlemen, I know you've been asked this question a couple times before about delivery and you really haven't really gone down that path. But just in the last 24 hours, a lot of us came back from McDonald's, which is testing or talking about testing delivery, and talked about that as an opportunity. I wondered, is there something that also is far as your view that your demographic in your locations might not be that consumer that over indexes necessarily toward delivery?

Or if that were the case or if that were to change, would that be something that you would consider? I guess the pack seems to be moving towards delivery, yet you guys of been somewhat reluctant. I wonder what it would take to change that philosophy, or what's been the impediment in the past?

Yes, I think the only thing that holds us back at the end of the day has been the idea of product quality and making sure that our guests who have been historically very comfortable taking the product with them, and certainly that drives great unit economics and great value, is maintained.

I did see the article about the tests. We hand-cut our potatoes in our restaurants every single day to make our fresh-cut seasoned fries, and so we want to be very diligent about who controls that product. And not every delivery company -- third-party delivery company allows for such control. So that's been, if you will, our stubbornness.

We do know that in certain markets our guests look for that. We know that as we move into the upper Midwest and the Northeast it's going to be a stronger demand. And so we understand the market, but I think step one for us is let's make sure we can stand behind the product, ensure the same kind of experience that the Wingstop consumer is used to, and then from there make our decisions about how we would if we would and how we would implement that into the business.

Okay. And then it's pretty impressive, the 80% of the existing franchisees supporting or 80% of your future commitments being supported by existing franchisees. I wonder, are you at a point where now with 1000 stores, and you just mentioned a couple of the regions, like the Midwest, building out into or filling them and in the Northeast as well. Would you look towards expanding maybe at a faster pace the bench of new franchisees to bring in?

Yes, I think the pace is relative. We have just under 300 franchisees in our system. I think what's most important is to partner with the right group of franchisees and markets where we are developing new restaurants, which we do every day.

I don't know that it will materially accelerate the number of new franchisees but it certainly will make -- we will make sure to bring on high-quality franchisees that are well-capitalized, that are experienced developers, that can develop the brand very quickly.

So I just want to call that little nuance, but certainly that's our goal and objective is to do that.

Excellent. And just a follow-up question. I just want to make sure I heard it correctly. I appreciate all the granularity you gave on the quarter to date same-store sales. It was down 2.6 year-to-date yet you are back to being positive in the last week or couple of weeks you said, was the term you used?

Yes, last week, if you consider full weeks for us, was positive. This week to date is also positive so far.

There was nothing you'd call out as a year ago comparison that's an anomaly or something like that, that would be, that would cause an impact to make it on a two-year basis not as much of a change but that is just -- that is momentum-improving in your eyes?

That is momentum and improving, and we align it with two key factors, the tax refunds coming through and our third week of national advertising. As awareness builds, which we expected it to do very quickly, that awareness is translated into much-improved performance.

Excellent. Thank you so much

You're welcome.

Will Slabaugh, Stephens.

Thank you, guys. Just had a couple quick follow-ups. Regarding the performance you saw in 4Q, and then, if it also applies to the quarter to date period, was there anything geographically that changed for you? Or was it fairly consistent across the board?

Not a lot. I don't think I'd cite any one specific geography that was substantially different than the others. If anything, maybe the upper Midwest was an area where we saw some impact, but aside from that, I think the rest of the markets were fairly consistent.

One market might be Texas, did come below the system average during that time frame, but again I think I'd reinforce that all markets are working their way back over the last -- in the momentum we just talked about over the last couple of weeks.

Got you. And then, also I was curious given we heard a lot about wage inflation. You talked about double-digit inflation. So as it relates to franchisee profitability, can you talk about what that looks like now versus maybe the way it looked a year ago? And then what you're hearing from franchisees in terms of sort of their happiness from a profitability standpoint.

I think we had two things impacting the wings. One the chicken itself was rather large during this time frame in the fourth quarter in particular, and I think you may have heard that from other brands. I believe one other brand noted desiring to reduce the size of even chicken breasts.

So chickens got bigger and also the price was high. As Mike noted, since the peak on pricing on wings over the past few weeks wings have come down as much as 18 since a pound. So that has a significant impact on the P&L.

And then from a wage inflation perspective, I think a lot of those are factored into some of the price discussion that we have talked about in the past, where we've tried to get ahead of those. And I think is coming into play now for our franchisees in certain markets where they are seeing the wage inflate. But then there's more obviously coming in the future.

So I think we hope to see the wings relax a little bit more. That would be a benefit to the business. At least follow what is a more normal seasonal pattern, which we did not see in the third and fourth quarter of last year, and then that would help stabilize the P&L if there's any stress there.

Great. Thank you.

David Carlson, KeyBanc Capital Markets.

Hey, thanks. A couple questions. Mike, what sales lift do need in the first year of the advertising to determine whether the national media's on track to provide a sufficient return?

Yes, I don't think it's a question of the return, because we're just shifting dollars from franchisees and co-ops to the national fund. And so it's not like there's a significant incremental spend. We would still spend the same amount of money it's just being spend more wisely from our standpoint.

So I really don't look at it from that standpoint. I think it's growing brand awareness, particularly in these newer markets where branded awareness is relatively low while sustaining momentum in our core markets. That's the way we would look at success.

That's fair. And just real quick, since you were just talking about wing prices in stores and some of the costs the Company on source. Given some of the new store inefficiencies you guys have from, I think it was, two openings in the last three quarters so, does the guidance imply that restaurant margin improves at the Company-owned store base in 2017?

I don't think we would show an improvement in the Company store margin particularly since we are starting up the year with wings, which is the main driver of movement, outside of the two new stores you mentioned. The main driver of moving in the market is going to be really what happens with the size and the price per pound of wings.

And so as you guys know there's a bit of volatility on food cost for us that comes from year to year and quarter to quarter. And that's going to be the main driver what happens with margins at Company stores and franchise stores.

How about this, would you expect labor to -- labor to stabilize? I mean, that was one of the big items that really kind of moved the needle here over the last couple quarters outside of chicken wings.

I think obviously made the investments in the back half of the year that we talked about. And those investments have continued so we'll have a little headwind at the first part of the year, but we are at a steady run right now

Thanks for your time

Yes.

(Operator Instructions)

Nick Setyan, Wedbush

Thank you. You guys didn't call out weather in California at all. You guys do have a lot of stores in California. Was there any impact at all that you would call out, at least in the quarter to date period?

No, Nick, I don't think that's a major driver of what's going on with comps. We looked at it. We've got a lot of stores in LA and that was one of the areas that got the least amount of impact actually as we looked at the rainfall. So that's not something that we would call out specifically as a driver.

So there were no visible differences in trance and comp trends

Nothing that's material.

Do you plan to open any company-owned stores in 2017?

At this point in time we don't have any in the pipeline.

Okay. Is there any change to the international unit growth rate expected in 2017?

I think we brought the new countries on board. Each of those countries should produce at least a restaurant in the first year. That's pretty typical of a new deal. But then the rest would be just run rate from our existing markets and continuing to grow those at a similar pace to what we've seen before. As these new markets come on board and start to ramp up, then they'll gain momentum in usually their second and third year of operation overall.

The cadence of the TV advertising, does it end at some point and restart? Or is it going to be continuous?

Is typically a three-week on, two-week off cadence, something like that throughout the year. It's been scheduled that way, so there's not a big heavy push for eight weeks and then off for four or five, so it's fairly consistent throughout the year.

Thank you very much.

Very welcome.

Jeffrey Bernstein, Barclays

Great. Thank you.

Two questions, just one following up on the unit growth question for 2017. I think as you address the percentage of the growth is slow from the 18% to maybe 13% to 15% no doubt about that from pressure by the lower large numbers, and perhaps a little conservatism in there. But for the absolute number of openings to perhaps start the year expected to be lower than where they were in 2016, just wondering, as you talk to franchisees, and again sounds like the pipeline is pretty similar.

But I would think that as a franchisees look at the system, the comps have gone from 10% growth plus over the past three years and now we're running in the 1% range. Just wondering to get a sense of any change in tone or any reason to believe, I think you mentioned that you really don't think the comps are having any impact, but -- that would just seem like going from a 10% to 1% you'd get some franchisees that might show some hesitancy. I was wondering if you got that sense in talking to franchisees lately.

I think it's a great question. And the answer is I don't think it has any impact at this point whatsoever.

If you think about going from 10% to 1%, keep in mind that over the last five years, our aggregate comp growth during that time is almost 45%. So what's fueled our growth and will continue to fuel our growth is our exceptional unit economic model. It still has a three to one sales investment ratio and second year cash on cash returns between 35% and 40%.

And our franchisees value that. That's why they continue to help replenish the pipeline and continue to grow. So even in choppy waters temporarily, that's not going to cause them to change their overall perspective on the business as well. So I really don't see that being a driver of change.

And I think the 13% to 15%, I think you said it well. Look, we're at the beginning of the year. We established that pipeline. We have great momentum. We carried excellent momentum into Q4. Q4 did not pull any new restaurants forward out of the pipeline.

It was part of our normal cadence of openings and so we've always expected that the percentage might drop as we get bigger, and opening 153 net new restaurants is the size of some small chains in one year. So we are very proud of that in think that that's really the key driver of our growth in the long-term.

Got it. And in the press release, I know you talk about the national advertising and the growth and the online channels of positioning you well. So we talked about the national advertising. I'm just wondering, the online channels, I know you said 20 percent of the sales mix -- I think in the past you had a handful stores that are sitting at north of 40%. So I'm wondering. That just seems like a huge opportunity especially with the average check being I think you said, $4 higher.

So what are some of the incentives are using to accelerate that? I'm assuming that's taglines within your national advertising but are there other ways to kind of accelerate that acceptance of online to really drive what is a big comp driver?

Yes, we continuously increase our rate by about a point a quarter sequentially, and we've done that for three consecutive years. This natural evolution is nice in that we don't have to provide an incentive to continue to see the kind of growth that were getting.

The risk of putting incentives in place is that you start to erode the value proposition a little bit, and that might take some margin away, to give something away to get it to grow. So we like the approach we're taking. You do see that our International advertising and you'll see it more in our national advertising. And our hope is that through national advertising, bringing awareness to that channel, and continuing to drive it is going to be the benefit to the Company.

We did say previously that before we had our point-of-sale system rolled out we were a little more hesitant to advertise aggressively, so you can expect that our ads in the future will be much more pointed towards online advertising as a way to drive the business.

Got it. And just lastly, Mike, I'm not a tax expert, but you did mention at the end of your prepared remarks that the effective tax rate is 37% to 38%, but that you feel that with the new GAAP ruling and whatnot that you are going to get a tax benefit. But that's not in your guidance. So does that we should all be assuming 37% to 38%, or is it very realistic that we are talking about rate that could be significantly below that as we look through 2017

I think there's a reasonable chance it's going to be below that in 2017. The factors that go into forecasting that are unpredictable, which is why we didn't build it in. It basically has to predict when people exercise stock options and what prices they exercise at. And that GAAP particularly since we do have a lot of options and money, a gap between the strike and the exercise price will create a tax reduction.

We currently get that on our tax returns, so this is not really an economic benefit. It's just a presentation. It used to go through equity on the balance sheet, and now it's just going to run through the tax expense on the P&L. So it's not really going to provide economic benefit to the Company, so we thought it best to just start with our normalized rate and report back when we report our quarters on what the difference is.

Makes sense. Thanks very much.

You're welcome.

Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to Management for any closing comments.

No closing comments. I think we are fine. I know we have a number people that we will chat with this evening, so we appreciate everybody's time for joining the call today thank you.

This concludes today's teleconference. Thank you for your participation.

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