Del Taco Restaurants, Inc. (NASDAQ:TACO) Q3 2019 Earnings Conference Call - Final Transcript

Thank you for standing by, and welcome to the Fiscal Third Quarter 2019 Conference Call and Webcast for Del Taco Restaurants, Inc.

I would now like to turn the call over to Mr. Raphael Gross Managing Director at ICR to begin.

Thank you, operator, and thank you all for joining us today. On the call with me is John Cappasola, President and Chief Executive Officer and Steve Brake, Chief Financial Officer. After we deliver our prepared remarks, we will open the lines for your question.

Before we begin, I would 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 our filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions.

Today's earnings press release also includes non-GAAP financial measures such as adjusted net income, adjusted EBITDA and restaurant contribution along with reconciliations of these non-GAAP measures to the nearest GAAP measures. However, 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.

I would now like to turn the call over to John Cappasola, Chief Executive Officer.

Thank you, Raphael, and thank you for joining us on the call today. Let me first summarize Q3 before focusing on Q4 where we have since experience an improvement in company-operated sales and transaction trends due to furthering our transaction-driving initiatives as well as made progress on our portfolio optimization strategy and refranchising efforts to help stimulate long-term growth. During Q3, slightly positive comparable restaurant sales at company-operated restaurants, coupled with inflationary pressures resulted in a loss of leverage across the P&L. Specifically, comparable restaurant sales and company-operated restaurants grew 0.4%, consisting of average check growth of 4.1% including approximately 3.5% of menu price and a transaction decline of 3.7%.

You may recall on our Q2 conference call, we foreshadowed transaction softness that began in July, and then sustained through August, until the launch of key transaction-driving initiatives helped to restore transaction trends that were similar to our second quarter trends. Franchise comparable restaurant sales outpaced company-operated restaurants during Q3, increasing 1.8% while system-wide comparable restaurant sales grew 1.0%.

Turning to restaurant contribution, excluding an approximate 70 basis point impact from the new lease accounting rules and approximately 40 basis points of pressure from the timing of advertising expense, restaurant contribution margins declined approximately 200 basis points from last year. This reflects cost inflation across food, labor and operating expenses, coupled with slightly positive comparable restaurant sales which yielded lower restaurant contribution margins and dollars.

Adjusted EBITDA of $14.5 million declined $3.2 million from last year, including an approximate $0.7 million impact