Del Taco Restaurants, Inc.
Q4 2016 Earnings Call Transcript

Published: 13 Mar 2017

[Operator:]

Good afternoon. Thank you for standing by and welcome to the Fiscal Fourth Quarter 2016 Conference Call and Webcast for Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Raphael Gross to begin.

[Raphael Gross:]

Thank you, operator, and thank you all for joining us today. On the call are Paul Murphy, Chief Executive Officer; John Cappasola, President and Chief Brand Officer; and Steve Brake, Executive Vice President and Chief Financial Officer. After Paul, John and Steve deliver their prepared remarks, we’ll open the lines for your questions. Before we begin, I’d like to remind everyone that part of our discussion today will include some forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We do not undertake to update these forward-looking statements at a later date and refer you to today’s earnings press release and the SEC filings filed by Del Taco Restaurants Incorporated for more detailed discussion of the risks that could impact future operating results and financial condition. Today’s earnings press release also includes non-GAAP financial measures such as adjusted EBITDA and restaurant contribution. Non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance. We refer you to today’s earnings press release which includes the reconciliations of the non-GAAP measures to the nearest GAAP measures. I would now like to turn the call over to Paul Murphy, Chief Executive Officer.

[Paul Murphy:]

Thank you, Raphael and thank you all for joining us so early on a Monday morning. 2016 marked another impressive year at Del Taco as we exceeded or delivered our annual guidance across all financial metrics and continued our QSR-plus brand progression through the successful refresh of our combined solutions strategy. The operations and brand building initiatives associated with the refresh drove strong results in the fourth quarter, which we believe are among the best in the category. Highlights for the quarter include system-wide comparable restaurant sales growth of 5.5%. This came on top of a 5.8% year ago comparison, resulting in an enviable two-year growth rate of 11.3%; company-operated comparable restaurant sales increased 5.3% or 11.2% on a two-year basis and included 2% attractive growth; restaurant contribution margin of 21.5% a 30 basis-point improvement over the same period last year and adjusted EBITDA of $25.3 million or $24.2 million excluding the impact of a 17th week, as compared to $21.2 million in the fourth quarter last year for a 19.4% growth rate or 14.1%, excluding the extra week. Comparable restaurant sales trends were relatively consistent throughout the fiscal quarter and we extended our positive comparable restaurant sales to 13 and 18 consecutive quarters for the system and company-operated restaurants respectively. Given the continued promotional activity and widely reported industry slowdown, we are very proud of these results, which we achieved without discounting. John will cover the brand headlines from the fourth quarter and our focus areas this year, but I’d first like to comment on key 2016 accomplishments, which we think position us well continued success in 2017 and into the future. As you may recall, last year, we launched a refresh of our Combined Solutions strategy that we refer to as Fresh Combined Solutions. We believe that Del Taco has a unique value proposition in QSR-plus due to our fresh, high-quality ingredients and ultimate barbell menu strategy. Fresh Combined Solutions puts a finer point on this, holistically through brand and guest experience initiatives in order to further define and embed our positioning. We skew to the QSR side and QSR-plus and compete where the majority of restaurant transactions reside, traditional fast-food dry food. As we said before, our goal is to provide guest a better QSR value proposition with our fresh faired with value brand experience. So, we can take share from QSR and grow share among fast casual occasions with the convenience of our dry foods. In 2016, Fresh Combined Solutions felt strong brand momentum and drove progress towards our goal of $1.5 million annual unit volumes by 2018. In 2016, annual unit volumes were just over 1.4 million, an increase of 230,000 since 2012. Over that same timeframe, we have also expanded restaurant contribution margins by 340 basis points to 20.6%. Fresh Combined Solutions will remain our platform to elevate and embed our position and in 2017, you should expect a smart combination of execution improvements along with menu innovation that has become our signature. As we move through the year, a primary focus will be on consistent improvement of our execution. To that effect, in early January, we took an important step organizationally with promotion of John Cappasola to President and Chief Brand Officer, expanding his leadership role to include restaurant operations. The purpose was to strengthen our capabilities regarding execution against both the restaurant experience and brand development. In 2016, we also made progress on the development front, laying the groundwork for accelerating unit growth of 2017 and beyond. During the fourth quarter, we opened seven restaurants system wide including five company operated locations and two franchise restaurants. Additionally, during the quarter, as previously announced, we opportunistically acquired five franchise restaurants in Bakersfield, California, north of Los Angeles. We see ample opportunity to grow the brand in this market and plans are in progress to add new company operated restaurants. We also continue to attract new, high-quality franchise partners help expand our reach and accelerate development. In September, we announced a new franchise commitment to open five restaurants in the San Diego area which currently has owned 16 system restaurants. In February, we sold our two southernmost county operated restaurants in San Diego to this franchisee to help facilitate its long-term success. More recently, we announced two new franchise development agreements for Phoenix and one for West Palm Beach for a total of 14 and 10 restaurants respectively. As you can see, our flexible model allows us to be strategic by taking advantage of accretive opportunities to accelerate growth by purchasing franchise restaurants where we can also drive further company development or by selectively refranchising restaurants to help enable the long-term success of our growing franchisees. We have entered 2017 with a strong and growing pipeline. So far this year, we have opened three franchised restaurants and have six system restaurants under construction. We are on track to deliver mid single-digit system unit growth in 2017. In terms of cadence, development will again be back-end loaded, particularly on the Company operated side. Our growth focus is two-fold. First, our development priority remains lower risk in-fill sites in the western U.S. where we have identified over 300 incremental trade area opportunities in existing markets. And second, we are committed to developing our Southeast Hub together with our existing and new franchise partners to build scale and brand awareness. This dual focus provides ample side [ph] opportunity to drive discipline, high-quality unit growth for the foreseeable future. Our strengthened pipeline reinforces our plans to deliver mid single-digit growth in 2017, improve upon that growth in 2018 and we believe, an acceleration toward high-single-digit growth beyond 2018 is both realistic and achievable for Del Taco. In addition to developing a robust pipeline, we have made the necessary investments to ensure that the foundational elements are in place to deliver a high level of execution as it relates to new restaurants. The strengthening of our development capabilities around infrastructure, internal processes, systems and franchisee support coupled with our QSR-plus brand and guest experience initiatives position us well to fulfill our growth objectives in a disciplined manner and take advantage of our long runway for growth. And finally, as we enter 2017, much has been said regarding sales volatility and the impact of weather, especially in the west. Specific to Del Taco, we endured the same weather challenges in Q1 and so lapped a three-week unfavorable calendar shift, impacting win -- and our popular seasonal seafood promotion. This shift hindered our first quarter performance, but will reverse and help our second quarter. However, in a testament to the underlying strength of our business, we expect our first quarter comparable restaurant sales to be up approximately 4%. With that I’d now like to turn the call over to John Cappasola, our President and Chief Brand Officer.

[John Cappasola:]

Thanks, Paul, and good afternoon, everyone. We’re proud to have achieved our third consecutive year of mid-single-digit comparable store sales growth in 2016. And as a Paul mentioned, we again generated traffic growth in Q4 with day parts positive, which is no feat in our category right now. In fact, we have achieved positive company restaurant traffic in each of the past four fiscal years, including 12 of the past 15 quarters, since repositioning the brand through combined solutions. These results demonstrate the strength of our brand position, our diverse menu and marketing capabilities, and great guest experiences delivered by our focused restaurant teams. Let me sort by discussing the latter. Guest experience scores across all key product and service level metrics improved in 2016 with overall satisfaction scores or OSAT increasing on a top box basis to an all time high mark. This represents our fourth consecutive year of increasing guest experience for us. In 2016, we set out to improve overall guest satisfaction by narrowing our focus to a few key initiatives. For example, speed with service at dinner and lunch; we’re supported by initiatives designed to drive sustainable improvements and experience and throughput. We saw steady speed improvements in both day parts this year concurrent with improving guest experiences as evidenced by mid-single-digit percentage increases and OSAT at lunch and at dinner. We will continue to drive speed with service in 2017 through sustained operational focus, as well as through targeted capital deployment on kitchen equipment designed to improve throughput and provide great guest experiences. Menu development and new product and ingredient innovation continue to be key strategic drivers for the brand and our marketing efforts. We have built the team and capability to be a category leader in innovation and we are excited about future opportunities in this area. We believe our aggressive focus on menu development keeps the brand fresh and gives our guests new reasons to become back while deepening our relevance through branding of the occasions we are targeting. In the second half of 2016, as part of Fresh Combined Solutions, we launched two important product initiatives, The Del Taco and Platos. These introductions complemented by our operational improvements generated solid results in the fourth quarter. During the quarter, the Del Taco sustained strong sales momentum and earned extremely-high consumer satisfaction scores. We believe ongoing menu and marketing efforts in 2017 to keep the Del Taco top of mind will yield both, incremental frequency and additional trade up opportunities. We also plan to use new product news to expand use of the Del Taco throughout the year and we began that effort in Q1 with the launch of the Del Turkey Taco. [Ph] As I said on the last call, the Del Taco hits the bull’s eye for our core fast food occasion in an elevated yet value oriented way, whereas Platos is an occasion expansion strategy and a great step forward for the brand. Our support center designed a strong rollout plan and our restaurant teams executed Platos at a high level, driving strong top box overall satisfaction scores. Platos in particular demonstrates how we can extend our fresh ingredient based Mexican platform through innovation to deliver new occasions giving guests even more reasons to use Del Taco. Sales mix metrics were very similar to test markets. We saw a strong trial in the mid-single-digit sales mix area during the initial 10-week marketing push, led by dinner and closely followed by lunch. As expected Platos drove higher check averages and an increase in premium mix during Q4. As we shifted our marketing focus to the Del Turkey Taco and Buck & Under in January and our annual shrimp LTO in February and March, we continue to be encouraged by solid Platos sales mix during lunch and dinner with continued high guest satisfaction scores. We appreciate the building a new occasion as a journey. Beyond growing check through mix, we are looking to drive an incremental visit that guests aren’t yet accustomed to using Del Taco for. In order to do that we’ll need to keep the program top of mind and continue our marketing efforts during appropriate seasonality. Platos will be front and center again in the spring as a primary message leading into summer and you can expect continued reinforcement of Platos and dinner throughout 2017. We’ll do that by marketing and branding the base program to drive trial and awareness along with our standard playbook of new product news which we’re planning for midyear. In fact, we are planning new product news in nearly every promotional window this year, supporting all of our sub-branded food platforms like Buck & Under, Epic Burritos, Platos, breakfast and even bringing new news to sides and desserts to complement our food experience, drive credibility [ph] and provide incremental check opportunity. In February, we introduced new Jumbo Shrimp as an LTO offered in a Taco as well as mid-tier and Epic Burritos builds. These are premium products priced accordingly, and carry strong consumer demand for the months they’re available. In March, we are making additions to breakfast with the new $1 breakfast rollers. This will be added to the Buck & Under breakfast menu and comes in three great flavors, egg and cheese, bacon and chorizo. We were also adding the new Epic [Indiscernible] Burrito, a premium offering we think will be recognized as one of the best quality breakfast burritos in quick service restaurants. We will use these new products this year to reinforce and grow the Breakfast day part. Again, 2017, is set to be another year full of menu innovation and new product news to entice guests and progress our brand. One other important initiative, I want to touch on is technology. As you know in Q4, we began testing online ordering view web and the Del Taco mobile approximately, which is designed to provide guests get another convenient way to access our brand and allows for both the dine-in and drive through pick-up. We are pleased with our progress, and we’ll expand the test to the Las Vegas market in Q2. We will also be adding a delivery component to the Las Vegas test in order to further our learnings and enhance the value proposition. Our goal is to put our brand in a position to meet developing consumer needs and we are in a good position to test, learn and evolve in this year. Before, I turn the call over to Steve, I want to reiterate the key components of Fresh Combined Solutions that will drive brand progress in 2017. First, improving operational consistency and ease of execution to deliver great guest experiences; second, driving trial and awareness of the Del Taco and providing news to further expand usage; third, growing a new premium occasion through Platos and a focus on dinner; and fourth, delivering new product news supporting our sub-branded food platforms to keep the brand fresh. With that, I would like to turn the call over to Steve Brake to review our fourth quarter financial results and 2017 guidance.

[Steve Brake:]

Thanks, John. As a reminder, the fourth quarter of 2016 was a 17-week period as compared to the fourth quarter of 2015, which consisted of 16 weeks. Therefore, where relevant, I will normalize comparison, so as to provide a more accurate view of the quarter relative to the year ago period. Company restaurant sales increased 12.8% year-over-year to $144.4 million from $128.1 million in the year ago fourth quarter. On a 16-week basis, which excludes approximately $8.0 million from the 17th week, Company restaurant sales increased 6.5% year-over-year. The increase was predominantly driven by Company operated comparable restaurant sales growth of 5.3% as well as contributions from additional Company operated stores opened as compared to the fourth quarter of last year. Comparable restaurant sales growth for the 17th week was calculated by comparing it to the like week in the prior year. Fourth quarter Company-operated restaurant sales growth represents the 18th consecutive quarter of gains and was comprised of 3.3% in check growth, including nearly 1% of menu mix growth and 2% growth in transactions. Franchise revenues during the fourth quarter increased 9.7% year-over-year to $5.1 million from $4.6 million last year. On a 16-week basis, which excludes approximately $0.3 million in revenue from the 17th week, franchise revenue increased approximately 3.3% year-over-year. This increase was driven by franchise comparable restaurant sales growth of 5.8%, partially offset by fewer franchise restaurants opened as compared to the fourth quarter of the prior year and a reduction in initial fees. System-wide comparable restaurant sales increased 5.5% and left system-wide comparable restaurant sales growth of 5.8% during the fourth quarter of 2015, resulting in a strong two-year trend of 11.3%. Total fourth quarter revenue was $150.2 million, an increase of 12.6% over the $133.4 million in the year ago fourth quarter. On a 16-week basis, which excludes approximately 8$.3 million in revenue from the 17th week, total revenue increased 6.4% year-over-year. Moving onto expenses. Food and paper costs as a percentage of Company restaurant sales improved approximately 90 basis points year-over-year to 27.7% from 28.7%. This improvement was due to the impact of menu price increases in the mid 2% area during the fourth quarter along with food deflation led by reductions in beef and eggs, partially offset by increases in french fries and avocados as well as an impact from our new Del Taco and Platos products which have driven strong margin dollar contributions but with a slightly lower than typical margin percentage. Labor and related as a percentage of Company restaurant sales increased approximately 150 basis points to 31.1% from 29.6%. This was primarily driven by the California minimum wage increase to $10 an hour as well as increased workers’ compensation expense, partially offset by the impact of menu price increases and operating leverage from our transaction gains. This deleverage increased from a 90 basis points of deleverage in the third quarter primarily due to lower menu pricing in the fourth quarter. Occupancy and other operating expenses as a percentage of Company restaurant sales decreased by approximately 90 basis points year-over-year to 19.6% from 20.5% last year. The improvement was primarily driven by leverage on our comparable restaurant sales increases. Based on this performance, restaurant contribution increased 14.6% to $31.1 million from $27.1 million in the prior year fourth quarter. Excluding the estimated $1.4 million generated during the 17th week, restaurant contribution increased 9.4% year-over-year. Restaurant contribution margin improved approximately 30 basis points year-over-year to 21.5% from 21.2%. General and administrative expenses were $12.1 million and as a percentage of total revenue, declined by approximately 70 basis points year-over-year to 8.1%. This decrease was driven by reduced management incentive compensation and legal related expenses and additional leverage from the 53rd week. Adjusted EBITDA in the fourth quarter increased 19.4% to $25.3 million versus $21.2 million earned in the fourth quarter of 2015. Excluding the estimated $1.1 million contribution from the 17th week, adjusted EBITDA increased 14.1% year-over-year. As a percentage of total revenues, adjusted EBITDA was 16.9%, up approximately 100 basis points from 15.9% in the prior year. Depreciation and amortization expense was $7.0 million in both fourth quarters, but as a percentage of total revenue, it improved by 60 basis points year-over-year. Interest expense was $2.0 million in the fourth quarter, slightly above the $1.9 million in the prior year fourth quarter. As of the end of the fourth quarter, $159 million was outstanding under our all revolver credit facility while our applicable margin for LIBOR loans remained at 1.75%. Income tax expense was $5.8 million during the fourth quarter for an effective tax rate of 41.9% as compared to a $3.2 million expenses during the same period last year. This resulted in net income for the fourth quarter of $8.0 million or $0.20 per diluted share, compared to $4.8 million or $0.12 per diluted share during the prior year period. Fiscal fourth quarter 2016 results included an estimated $0.01 benefit to diluted earnings per share from the additional operating week. Turning to our repurchase program covering common stock and warrants. During the fiscal fourth quarter, we repurchased approximately 213,000 shares of common stock at an average price per share of $11.16 and approximately 222,000 warrants at an average price per warrant of $3.45 for an aggregate of $3.1 million. This brings our 2016 repurchase activity to a total of approximately 1.35 million shares at an average price per share of exactly $10 and 699,000 warrants at an average price per warrant of $2.54 for an aggregate of $15.2 million. At the end of 2016, approximately $34.8 million remains under our $50 million authorization. Lastly, I’d like to review our guidance for the 52-week period ending January 2nd 2018. And please, be mindful of the fact fiscal 2017 will optically compare to a 53 week fiscal 2016. Based on our current outlook, we expect system-wide comparable restaurant sales of approximately 2% to 4%; and in terms of cadence, we expect more relative strength in the first half of the year, compared to the second half of the year due to lapping easier compares in the first half; total Company restaurant sales of approximately $448 million to $458 million and total revenue of approximately $466 million to $476 million; restaurant contribution margin between 19.8% and 20.3%. In terms of food costs, we have lots of substantial portion of our 2017 food basket. And although we will have slight deflation during the first quarter, we expect very modest basket inflation during the following three quarters, resulting in annual basket inflation of approximately 50 basis points. We anticipate approximately 5% inflation on our labor and related expense line, primarily driven by the California minimum wage increase from $10 to $10.50 an hour as well as other state or local minimum wage increases. We anticipate fiscal 2017 menu pricing in the low to mid 2% area. This more modest menu pricing is cognizant of our elevated pricing over the past 2.5 years, particularly in light of the continued inflation disparity between food away from home versus at home, the intense competitive environments and continued reported softening across the restaurant industry. We believe this level is appropriate to help achieve a healthy balance across all our same-store sales drivers including our focus on transaction growth. G&A expenses of approximately 8.1% to 8.5% of total revenue, and this include incremental public company costs to support compliance with the Sarbanes-Oxley Section 404(b) requirement, which will apply to us in fiscal 2018. Adjusted EBITDA of approximately $71 million to $73.5 million, effective tax rate of approximately 40% and diluted earnings per share of approximately $0.52 million to $0.55. We expect to open 23 to 26 new restaurants system wide that will skew slightly towards Company operated with openings being back-half weighted, particularly for Company restaurants and net capital expenditures of approximately $43 million to $46 million. In summary, we are very pleased with our fourth quarter and full year results, which we believe are among the strongest in the category. We believe our Fresh Combined Solutions strategy will continue to drive our brand forward elevating the guest experience through execution improvements and menu innovation and solidifying our brand position. We will remain focused on driving shareholder returns including returning capital to shareholders through additional share repurchases, pursuant to our remaining authorization or through other avenues. We look forward to sharing our progress with you in the year ahead. Thank you for your continued interest in Del Taco and we are now happy to answer any questions you may have.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.

[Alex Slagle:]

Hey, thanks. Congrats, guys. Question, I just want to clarify your comment on the first quarter same-store sales. You say up 4% in the first quarter?

[Steve Brake:]

That’s correct.

[Alex Slagle:]

Okay. And how much was the weather and the calendar shift from what you can -- from what you think?

[Steve Brake:]

There is not a reliable metric I’ll give you; there is a lot of moving parts in Q1. Certainly weather, a lot of rain and cold temperatures had an impact. As I mentioned for us was a very strong seasonable seafood promotion, the three-week delay [ph] this year versus a year ago had an impact. And we think perhaps the delayed tax refunds may have also played a role in some of the Q1 dynamics. So, a lot of moving parts, hard to put a figure on it, but there definitely was some impact from all the above.

[Alex Slagle:]

Okay. And then, from a marketing standpoint, is there anything you’re seeing with the current competitive environment in consumer spending, and is there anything that will make you reevaluate the balance of your marketing focus between premium and Buck & Under, or do you feel comfortable with that balance and it’s more about just keeping the innovation pipeline going?

[John Cappasola:]

Yes, Alex. I think we feel pretty comfortable right now, just given the flexibility that we have with our marketing promotions with that barbell approach that we use frequently and just really toggling back and forth from Buck & Under all the way through mid-tier with the Del Taco and having flexibility to scale up as appropriate and throughout the year with things like Platos and Epic Burritos. So, I think we’re in pretty good shape there and our cadence feels right. As far the market goes, I would just say that the first half so far feels like still there is a lot of value in the market right now, probably not quite as much as we saw last year, but still very prevalent in our category, specifically around price value and deals. And I think that that will likely continue maybe weighing a little bit, I think the prevalence is some sort of value oriented messaging is going to be out there in the quick service restaurant space indefinitely and I think the consumer dynamics and just the market dynamics will dictate that. But I think we’re well-positioned to handle that as we move through 2017.

[Operator:]

Thank you. Our next question comes from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your question.

[Jeremy Hamblin:]

Good morning, guys. Add my congratulations. I want to come to the restaurant level margins and just see if we can get an apples-to-apples. So, Steve, I think I might have missed this, but if you were to back out that extra week, full year restaurant level margins were about 20.4%. Is that correct?

[Steve Brake:]

I think it would be at least 20.5 that last week -- it’s a lower volume week, thus the margin for that week runs a little bit lower. But on a 53-week basis, it may be a 10th or thereabout. There is not a lot of waggle there. So, probably 20.5 would be a good estimate for how we would look without that last lower volume week of the year.

[Jeremy Hamblin:]

Okay. And then, just thinking of getting from the 20.5% that you delivered last year down to your guidance range of 19.8% to 20.3%, is that all just labor and the expected drag that you would have on labor, given what you saw in Q4? Are there other line items where you think you might see some deleverages here?

[Steve Brake:]

Yes. Based on what we’ve furnished, that 5% fully loaded line item inflation for labor and related, coupled with environment where our menu price is stated 2 to 2.5 area, that’s more than a point lower than what we took last year. We are right about mid 3s on pricing a year ago. So, really that formula sets up that line to again be certainly delevering. That said, the other key line item is food with 50 bps of very modest inflation against that low to mid 2% of menu price. That does set up some very modest improvements year-over-year. And then OpEx, as you know, when we comp well, we generally see some improvements there. Last year, we had an 80-bp reduction, but the two years before that, both 2014 and 2015, we had 20 bps of improvement. So, OpEx also has that levering capability as long as the same-store sales where we want them to be. So that’s how those three line items shake up, couple be very modest good guys; they’re certainly going the other way, not fully offset by the two good guys. So that’s kind of the directional guidance there.

[Jeremy Hamblin:]

So, total labor drag could be close to 100 basis points this year, I guess is the implication.

[Steve Brake:]

Yes. Depending how you model moving parts and how much traffic or mix you assume, that does have a levering capability as well. I would say that up to 100 bps area is a fair approximation, depending on what the assumptions you will throw in a fiscal model.

[Jeremy Hamblin:]

Okay, great. And then, I just wanted to come to potential share repurchase activity. So, as the stocks come in a little bit, have you done any share repurchase activity quarter-to-date? And what would be the potential to do that, given that you guys are going to see -- you’re seeing accelerating unit growth moving forward? Thanks.

[Steve Brake:]

Sure. So, definitely, returning capital to shareholders has been a key focus. As everyone knows, last year, we deployed over $15 million between common and warrant buybacks. We expect to very much remain active on that program in the New Year through activity and also windows and/or 10b5-1 plans when appropriate. So, definitely, I think that should be an ongoing seen that we will report on and bring forward in the coming quarters. And then more holistically, certainly, most of that is going to coming out of free cash flow. When we think about cash flow deployment, at the very top of the lists is all of those investments we’re making to drive the brand forward; much of that now at an accelerated rate being unit growth which we’re excited about. And then, right behind that, certainly returning capital to shareholders is another high priority, probably more so than paying down debt. We’ll of course be mindful of leverage as well. I’ve always talked about long-term target leverage in that two to three area; we’re right in the middle of that on a balance sheet basis. So that’s how we think about it; that all revolver facility, $159 million drawn at year-end; it is a $0.25 billion facility, plenty of headroom there. So, we have the right flexibility, and I think approach to kind of have that balance part of our total return model.

[Operator:]

Thank you. Our next question comes from the line of Craig Bibb with CJS Securities. Please proceed with your question.

[Craig Bibb:]

Just to follow on that a little bit. You guys have plenty of liquidity to accelerate your Company-owned rollout, if you wanted to do that. Have you built up your real estate and other functions to support that or…

[Paul Murphy:]

Yes. We’ve done some investment in that. And as you know, last year, we brought on a new Head of Development in Jeff Little and so both on the real estate side and on the construction side. And then on the operational side getting the processes is in place and the systems in place. So, we feel like that we’re at a good spot organizationally. Now, as we hit this inflection point and go into mid single digit growth in 2017. So, we feel like that the organization we have [indiscernible] be able to support that and do a great job on executing that.

[Craig Bibb:]

Okay. And then, the guidance on the franchise openings for 2017 was a little modestly wide versus what I was expecting. Is there a franchisee that got moved or is there anything that’s kind of holding that back a little bit this year?

[Paul Murphy:]

No, I won’t say anything that’s holding it back. As we’ve announced, we are bringing people into the fold. And it takes a while to get them trained and then to get their sites selected and built out. So that’s why, as you heard on the call, you’ll see that as we do mid single-digit growth in 2017, that will start to grow and accelerate in 2018 and beyond. So, we think that franchise starts to kick-in as we move into 2018 and 2019.

[Craig Bibb:]

Okay. Could you guys provide some color in the markets outside of the California, Atlanta, Denver, Salt Lake…

[Paul Murphy:]

Well, as I said on the call, we are very committed to the Atlanta market. We’ve kind of named it the Southeast Hub. So, along side of our franchise partners, we’re going to be aggressively growing down there. As we previously announced, we are entering into Denver with one of our larger franchisees there. So Denver, I’m not sure if it’s in 2017, I think it’s actually 2018, our first one will come out of the ground. But in 2017, you’ll see us still expanding strongly down in the Southeast Hub or which is really grounded by Atlanta.

[Craig Bibb:]

Okay. And then last one, maybe, John, could you give us a little more color or timeline on what’s the technology rollout during 2017?

[John Cappasola:]

Yes, sure. The first test market, as I said is -- we are pleased with what we saw there. It comprised of around 18 restaurants, but it was designed to help us operationalize the ordering program for further rollout. And it had limited features to the app; it didn’t have the delivery fees or royalty for engagement or marketing. That said, as you would expect overall, we even at the test, we saw lower usage. And as we move into the second test market where the numbers are going to get a little bit bigger and a larger market rollout in Las Vegas, we’re deploying more ways to really engage the guests. So, you will see the delivery piece, you’ll see some new marketing elements to really get folks involved in the app and we’ll look at broader ways to engage as well outside the app to get folks interested. So, as we’ve said, we want to be nimble in this area. We are in test and learn mode this year. And the key is to develop the right solutions for our consumers and for Del Taco. And I think we are on the right track and working on the right things that would complement our business model at this point. So, it’s just a matter of time as we really look to kind of get the right formula and think about where the appropriate investment may need to be.

[Craig Bibb:]

Okay. And so, full rollout would be next -- would be 2018?

[John Cappasola:]

We haven’t committed to full rollout just yet on the mobile app. I mean, our hope would be that as we continue to test and feel good about the program, we would be able to expand it, but right now, we haven’t set a rollout timeline.

[Operator:]

Thank you. Our next question comes from the line of Peter Saleh with BTIG. Please proceed with your question.

[Peter Saleh:]

Yes, great and congrats on the year, guys. I just wanted to come back to the first quarter commentary so far. Anything else you guys can talk about the cadence during the first quarter now, given that we’re into the middle of March here? Because I think you are running well above that, so coming out of the fourth quarter. So, just wondering if you can just give us some color on where January was and was it mostly confined to February kind of the weakness around the weather?

[John Cappasola:]

Sure, Peter. January, it was a good month for us despite having a lot of rain in January. February did slow considerably due to continued rains, that three-week shift I referenced and perhaps some impact from the delayed tax refunds. However, February did remain comfortably positive; now, in March the business is definitely strengthened aided by much better weather and at start of Lent which happened on March 1st being Ash Wednesday.

[Peter Saleh:]

Excellent, all right. And in terms of the pricing, I know you guys have set mid -- low to mid 2% pricing for the year. Can you give us a sense on the cadence? Is that going to be -- the full year is going to be around that? Do you think it will take more price in the back end of the year or how should we be thinking about the cadence and price throughout the year?

[John Cappasola:]

Sure. At this point, it will be a pretty stable cadence. Right now, we would expect every quarter to probably within those bookings. We opened the year at about exactly 2% at a very modest increase in eight [ph] quarters. So we’ll be carrying in that very low 2% area for the first quarter. The two moves we lap -- the two primary moves from a year ago is -- nearly a point of price was taken in June last year and then a little over a point of price was taken last fall. So, as we lap those, generally in the zip code of replacing those price moves, such that we price say within that 2% to 2.5% collar is how I would think about it today.

[Peter Saleh:]

All right. And then, just coming back to the mobile order and pay and the test, can you just give us a little bit more of color on what you saw in the test that gives you I guess confidence or to kind of move forward and expand the test? What is that you’re looking for and what is that you’re seeing?

[John Cappasola:]

Yes. I think the main thing as I said was really making sure that we could operationalize the program and through to our combined solutions model, which is to be able to execute the things that we say we want to do and if we’re going to get out there and make a brand promise, we are able to do it through that speed of the drive-through and really make sure was that our feet under us from an operational standpoint. There were a number of key metrics related to operations that we’re looking at as well as just key procedural pieces. We did do a little bit of marketing and we did some basic things that we were hoping would move the adoption curve on it. But realistically right now, I think we’re moving in a good direction from that test. We know that it’s a little slower relative to adoption and fast food drive-through than you’re seeing in fast casual because you’ve already got the ability to get a really speedy transaction accomplished as a consumer. So we’re not really solving for anything from a consumer paying point standpoint in fast food drive-through. So, now as we move into Vegas, we think we’re adding some components that could absolutely help us to extend the service fees, [ph] so, the delivery piece along with some marketing elements. We’re excited about it. We believe that it is an inevitable adoption curve especially as you look at the younger end of the millennials and how they’re behaving with technology. So, we know we need to be there. We just want to be pragmatic and realistic in regards to how we move forward. And like I said I think we’re in a good place to be able to kind of get that done this year and really think about how to move forward.

[Peter Saleh:]

Great. And then, just my last question. It sounds like Platos was a success and is performing as you guys expected. Is that a platform we should expect you guys to expand on sometime later this year?

[John Cappasola:]

Yes. I would say the thing to think about what Platos is that the real outcome that we’re looking for here and it’s great that it’s been accretive to check and it’s been a margin dollar driver, because any trade-out on the menu is essentially a positive shift for us in regards to the financial metrics. But that real outcome we’re looking for is to achieve that extra visit that we wouldn’t have already received because we just didn’t have the platform and we didn’t offer that occasion or that experience before. So, as we think about that journey and trying to build the occasion and getting confidence with the consumer around our brand, we’re going to need to continue to market this year and we will be doing that in the spring, will be marketing the base platform and we’re also going to need to bring new news to it, which we are planning to do this year. So, specific to Platos, innovation on the product side, you should expect to see probably starting around mid-year and as we move through the back-end of the year as well.

[Operator:]

Thank you. Our next question comes from the line of Joshua Long with Piper Jaffray. Please proceed with your question.

[Joshua Long:]

Great. Thank you for taking my question. I was curious on the test on the digital test of app [ph] ordering, things of that nature. It sounds like you’re starting up a little bit slower and building it over the course of the year? I was curious if you maybe have it, maybe have your penetration usage in some units you could really test that operational aspect? I think you mentioned, John, being able to run it through the combined solutions. But I was just curious if that was something that you’ve experienced yet or we should expect that as you ramp it up, that’s when we can really start to see how it might touch the systems and kind of how those learnings should evolve going forward?

[John Cappasola:]

Yes. I mean, the first test market kicked off in Q4, end of November, beginning December timeframe. So, we were absolutely able to, both through consumer use, as well as some simulated use that we were able to do in the market, get enough throughput on it to really make sure that we understood the operational aspects and the different components that were a little different related to the ordering ahead piece versus what we do today where guests just show up at the restaurant, either they come into the dining room or they come through the drive-through. So, I think, we got a sufficient amount of learning through that process with the first test market. And now, we will really try to amp up usage a little bit in the second market through some additional components that I mentioned.

[Joshua Long:]

Great. Thank you. And then, as we -- I think you made the comment that you’ll have new product news in every marketing window this year. I wanted to see how different that was versus prior years and how you’re thinking about that ability to drive mix, the mix components in same-store sales for this year? Is that materially different year-over-year or do you see the new products you’re bringing in, largely just building on maybe platform you had in 2016?

[John Cappasola:]

Yes. So, we’ve certainly got still opportunity ahead of us with the Del Taco, as well as Platos. So, that’s part of our marketing mix in 2017. And we think we’ll continue to have upside with both of those programs as we further get folks into those programs and build the frequency. Clearly, there is mix benefit there as we move forward both of those. Yes, the sub branded food platforms, the reason why we’ve been really trying to optimize those and really building into those over time is because those stand for niches that we really think we can do a great job in owning within quick service restaurants. And so, you’ll see some innovation against Buck & Under this year to continue to keep that top of mind and help with the traffic piece and value perceptions. You will see some innovation against Epic Burritos this year, I mentioned the breakfast. So, I think we’ve got plenty of innovation coming that will keep the consumer feeling like Del Taco’s fresh and relevant and giving them new reasons to come in to try the brand. Relative to mix, we’ll see, I think we’ve got a good opportunity as we think about premium and mid-tier over the long run. And we absolutely believe that innovating in both of those areas as a menu are going to be relevant to that mix over time. And as we can build those more premium occasions to actually be more embedded, that’s going to continue to create upside for the brand.

[Joshua Long:]

Great. Thank you. Switching over to new unit development on those 23 to 26 system-wide stores, you mentioned that they are skewed towards the Company side. I was curious what closures look like for those units, trying to get a sense of net unit growth?

[Steve Brake:]

Yes. I would see the outcome we posted in 2016 with six system closures is probably a free representative number of what closures might look like going forward, a handful or so, inevitably closures can happen, leases come due, in some cases we actually choose not to renew as we can transfer sales down the road for instance. So, I think that six area or call it roughly 1% of your prior year base is a good working estimate for you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed with your question.

[Nick Setyan:]

Hey, gentlemen. Thanks for taking the question and congrats on another solid quarter. In terms of G&A guidance, what is the Sarbanes-Oxley impact for 2017?

[Steve Brake:]

Sure. So, in fiscal 2018, we’ll have to require, what’s called section 404(b) where the auditors audit our internal control environment. So that’s kind of last leg of SOX compliance. It’s a pretty significant and important under taking, and there will be use of consultants as well as some internal hiring just to make sure we’re properly compliant. A simple example, segregation of duty is very important and there will be some adds across accounting as well as information technology just to make sure we are very buttoned up and ready to comply with that requirement and have a passing audit two years from now.

[Nick Setyan:]

In terms of the actual G&A spending, given the backend nature of the unit openings, obviously there is a big step up. This quarter, you guys opened up five, seems like those five units opening went very smoothly. And is there anything bulky around the second half and those opening that we should watch out for G&A and maybe even strong execution, if you could just talk about maybe new unit opening execution and then how you feel about all that?

[Steve Brake:]

As far as G&A, there is no spikes or peaks or valleys that I would note at this juncture along with Sarbanes-Oxley costs. There is some expansion of resource within development in a modest, smart fashion that helps support those opening, even on the franchise support side, there will be a head or two over time to support us from that standpoint as well. So, no spikes. I would just note that certainly pre-opening, you see what we posted last year and with company opening stepping up dramatically, obviously that line item would step up as well.

[Paul Murphy:]

I think on the development side, obviously as we move to a frankly, just a higher number of openings, I think we’re ready for it. But we will as we move through time, we’ll bring the right people along. and it’s our hope as we move into 2018 and 2019 that that’s spread out little bit more evenly over the year but from a G&A perspective, I don’t see that with any the pressure.

[Nick Setyan:]

What’s the share count you’re using for EPS, like guidance assumption, Steve?

[Steve Brake:]

Up to $40 million.

[Nick Setyan:]

Up to $40 million? Okay. And I guess taking a step back and beyond 2017, what’s the right level of EBITDA growth we should be thinking about in terms of that annual algorithm?

[Steve Brake:]

Sure. Looking down the road, as everyone knows, California will have a continued step-up in the minimum wage. Really, we look at overcoming that through a few levers. Certainly, menu price is going to play a role; I’ll come back to that but also as the levers of driving mix as well as driving traffic. We’ve now posted four consecutive years with positive traffic and then, 12 of the last 15 quarters have positive traffic. So that’s something that we’re very focused on. At some point, there is always inherent tension between menu price and traffic. So, in terms of the price, we’re taking obviously a more conservative view this year. We’re being much more judicious in that kind of low 2% area versus mid-3s a year ago. And we think that’s the right level to make sure we have a good balance across all those same store sales drivers. We want to protect that traffic line. We want to grow our customer counts because over time as we do take added price, frankly be more transactions to monetize, couple that all with the widening gap of inflation at home versus away from home, just real tough category trends, what seems to be still a bit of a tough consumer. We feel like we’re pricing the right levels. So, based on all those ingredients, it does lend itself towards more modest EBITDA growth as we get out on the horizon, certainly the ability to step price back up down the road, despite the profitability we can do that. So, every year that rate of EBITDA growth is going to depend on both of your cost side dynamics what that inflation looks like and then how you want to combat it in terms of not just menu price but also the ability to drive transactions and mix. We think we’re very well-positioned over the long run here to have a continued really strong story on traffic and mix. But, we’re not going to get carried away on price and put us in a position to lose that momentum. So really, it comes down to find the right balance.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’d like to turn the floor back to management for any final remarks.

[Paul Murphy:]

I just want to thank everybody for joining us so early on a Monday morning. And Del Taco had a great year in 2016, off to a nice start in 2017, and excited to talk to you next quarter. Everybody take care. Bye.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.