American Lithium Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 13, 2021

There are 9 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to the fiscal Q3 2021 conference call and webcast with Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Rafael Gross, Managing Director at ICR to begin.

Speaker 1

Thank you. Good afternoon and welcome. On today's call are John Cappasola, President and Executive Officer and Steve Brake, Chief Financial Officer. After we deliver our prepared remarks, we will open the lines for your questions. But first, let me remind everyone that part of our discussion today will include forward looking statements.

Speaker 1

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 SEC filings for a more detailed discussion of the risks 2nd impact, Del Taco's future operating results and financial condition. Today's earnings press release also includes non GAAP financial measures such as adjusted net income, adjusted EBITDA and restaurant contribution along with reconciliations of these non GAAP measures to the nearest GAAP measures. However, non GAAP financial measures should not be considered or any other GAAP measure of liquidity or financial performance. Let me now turn the call over to John Cappasola, President and Chief Executive Officer.

Speaker 2

Sir? Thank you, Rafael, and hello, everyone. We appreciate you all joining us for today's call. I'm very proud of our teams who continue to drive strong restaurant level execution in this difficult operating environment. Our 3rd quarter performance was in line with our expectations, which I would characterize as a good outcome, particularly in light of well known cost pressures across the restaurant industry.

Speaker 2

On the top line, we drove positive comparable restaurant sales across company operated and franchised restaurants compared to last year and compared to 2019 as we lap strong performance driven by our very successful launch of Crispy Chicken and despite the emergence of the Delta variant along with well documented challenges in our category. At the same time, the inflationary headwinds impacting our industry were managed through menu pricing, totaling delivery channels. In addition, as you may have read in numerous recent press releases, we have been very active signing 4 additional new franchise development agreements from coast to coast since July, bringing our year to date total to 7 new development agreements for 53 future These new development agreements expand our pipeline and further support our ability to deliver 5% system wide new unit growth led by franchising beginning in 2023. First, I will briefly review our Q3 highlights before discussing the specifics on these new franchise development agreements. During Q3, system wide comparable restaurant sales grew 1.8% over the prior year, consisting of a 2% increase at Franchise restaurants and a 1.6% increase at company operated restaurants.

Speaker 2

During Q3, on a same store basis compared to 2019, sales grew at a low single digit rate, while franchised restaurants grew at a high single digit rate. Geographically, on a same store basis versus 2019, Our primarily franchised non California restaurants grew approximately 10%, while California grew at approximately 4.6%. Restaurant contribution margin decreased by 150 basis points to 16.5%, which primarily related to normalized advertising of 4% of restaurant sales versus 3% last year. In terms of profit, adjusted EBITDA decreased to $14,100,000 from $15,300,000 This reduction was primarily due to the dollar impact of the normalized advertising. Through our quarterly dividend and share repurchases, we returned in aggregate $5,900,000 of capital to shareholders and also reduced our outstanding revolver to $106,000,000 from $110,000,000 Finally, during Q3, we opened 1 company and 3 franchised restaurants and closed 1 company and 1 franchised restaurant to end with 603 system wide restaurants.

Speaker 2

Now let's discuss restaurant development and specifically how our new agreements with experienced restaurant operators provide momentum for our franchise led growth. So far this year, franchisees opened 8 new restaurants and the company has opened 3 company operated restaurants. Our 4th and final 2021 company opening will be our 1st new Fresh Flex prototype in our new Orlando seed market, and we expect one additional franchise opening. Following 3 development agreements for 30 units announced prior to our Q2 call, Since July, we have signed an additional 4 new development agreements for another 23 units. These newest agreements cover future restaurants in 4 states coast to coast, including the East Coast of Central Florida and Raleigh Durham, North Carolina as well as Fresno, California and nontraditional casino locations in Las Vegas.

Speaker 2

These signings demonstrate our growth potential not only in the Southeast, we know has significant room to grow the brand, but also in California and in Las Vegas, where even with our current penetration, We believe there are still strong infill growth opportunities. Importantly, our steady stream of new franchise development agreements been aided by very strong interest in QSR drive thru development and ultimately made possible by highly desirable Del Taco traits, including our unique QSR Plus positioning, ubiquitous menu that drives broad appeal, strong track record of 8 consecutive years of franchise comparable on sales growth across 15 states and attractive new Fresh Flex prototype, which expands real estate opportunities to help lower net investment and modernizes the guest experience. On a related note, we recently announced a new delivery only license agreement with Reef, a leader in the growing Dose Kitchen space. We expect to open our 1st reef outlet in the dense urban mid city area of Los Angeles later this month, which is the first of several planned outlets. We are excited about this new delivery only partnership to help expand access to the brand where there is strong delivery demand, particularly in high density urban areas.

Speaker 2

As a reminder, we expect a modest step up However, we believe our growing franchise development pipeline, including 7 new agreements for 53 Del Taco Restaurants signed this year, puts us in a Regarding our test remodel program, we are currently integrating our Fresh Flex prototype into our remodel design and remain on track to complete up to 20 company operated remodels this year, including 10 extensive remodels of older facilities and 10 remodels of more modern facilities with primarily cosmetic upgrades at a lower investment level. We are excited about the transformative impact these remodels are having on the restaurant and expect to continue to invest in this important And AUV driving initiative as we move into 2022. Turning to sales and marketing. We continue on our 5 sales acceleration drivers, and those are value leadership, menu innovation, brand engagement, digital transformation and ultimate convenience. These pillars are anchored by our focus for better operations execution strategy designed to ensure that we provide guests and employees outstanding brand experiences.

Speaker 2

Let me start with operations. The entire industry is feeling the impact of labor staffing challenges, and we are no For certain restaurants with labor availability challenges, we selectively increase wages and in some cases temporarily closed dining rooms or limit our late night and early morning hours of operation. The need to reduce operating hours increased throughout Q3 and impacted the company operated comparable restaurant sales by slightly under 1% during fiscal Q3. We believe this impact has peaked at approximately 1% thus far during fiscal Q4 based on recent improvements from our efforts to combat the labor challenges. Specifically, we are executing our holistic staffing strategy focused on both recruitment and retention.

Speaker 2

On the retention side, we are showing appreciation for our teams through things like daily pay, free meals and doubling our referral bonuses, along with special events like employee appreciation month. We have also enhanced our talent acquisition through new digital recruiting efforts increase our presence on job boards and simplify the application process to reduce friction for applicants. Recently, Our actions have begun to translate into increased applicant flow that is allowing hotspot restaurants to return to more normalized operations. As we add staff to these locations, we are also investing in additional training to set the new team members up for success. Turning to sales and marketing.

Speaker 2

In August, we leveraged our menu innovation, introducing another exciting platform, stuffed quesadilla tacos, which takes our fan favorite quesadilla and adds creamy queso blanco, folded into the shape of a taco shell and stuffed with grilled chicken, Strong consumer demand, mixing it over 6% of sales thus far, which has helped us maintain our positive sales momentum as we lapped a very successful Crispy Chicken launch a year ago. Next month, we welcome the seasonal return of our authentic tamales menu, which we consider a Perfect holiday comfort food. Our tamales are made with seasoned shredded pork and a fire roasted salsa surrounded by a layer of soft stone ground corn masa and wrapped in an authentic corn husk. We will also offer a tamale Fiesta pack with 12 tamales to feed the whole family with simple trip through our convenient drive thrus or delivery channels. On the daypart front, delivery remains a Key driver of sales growth representing over 7% of sales during the Q3.

Speaker 2

Delivery is particularly well suited to capitalize guest demand for convenience and value during our late night hours of operation when delivery over indexes and it's helping to drive outsized 1 and 2 year growth in and introduced our new loyalty app called Delia rewards. Delia rewards is a point based loyalty program featuring 4 tiers named Queso, scorcho, Inferno and Epic that unlock exciting offers, rewards and experiences, which increase along with the usage of the app. Delia rewards also enables us to unlock our customer data to drive personalized and valued experiences by delivering unique messages and offers in a way that members are most apt to respond to. We are very excited by the launch of this loyalty program and look forward to sharing more on its impact to the business on future calls. Finally, reflecting our commitment to deliver shareholder returns, we paid our 3rd quarterly cash dividend of $0.04 per share in late August And today announced our 4th quarterly dividend of $0.04 per share, which will be paid on November 24th.

Speaker 2

We also repurchased Ed, although the current environment continues to present staffing challenges and inflationary pressure, our relevant QSR Plus Positioning, use of innovation and ability to deliver value across our barbell menu strategy provides us with Significant pricing power that we will utilize to manage inflation as we exit 2021 and enter 2022. This focus, Along with our strong foundation, which now includes our new Delia rewards program and an expanding group of franchisees eager to invest in our brand for the long term have set us up for continued growth and expansion. Now I'll turn the call over to Steve to review our Q3 financial results and outlook.

Speaker 3

Thanks, John. For the Q3, total revenue increased 2.9% to 124.3 dollars from $120,800,000 in the year ago period. Company restaurant sales increased 2.2% to $112,000,000 from $109,500,000 in the year ago period, which was primarily driven by positive comparable restaurant sales and to a lesser extent new company operated restaurants. Franchise revenue increased 8.1% year over year $5,600,000 from $5,200,000 last year. The growth was primarily driven by the increase in franchise comparable restaurant sales, coupled with additional franchise operated restaurants compared to last year.

Speaker 3

As John said earlier, system wide comparable restaurant sales increased 1.8% consisting of a 1.6% increase at company operated restaurants and a 2.0% increase at franchise Turning to expenses. Food and paper costs as a percentage of company restaurant sales have decreased approximately 30 basis points year over year to 26.2% from 26.5%. This was primarily driven by a menu price increase of approximately 5% that ceded food inflation of just over 4%. As expected, inflationary pressure materialized during the second half of twenty twenty one and our projected Q4 food inflation is approximately 5%, resulting in full year inflation of approximately 2%. To help manage this inflation, we accelerated the timing and magnitude of our fall price increase and now expect menu price of 5.5% in the 4th quarter.

Speaker 3

Looking ahead, we believe our QSR Plus positioning and the attractive price points we offer across our barbell menu strategy drives a compelling value proposition and provides us with significant pricing power that we plan to utilize in the new year to help manage food inflation that will likely extend into the first half of twenty twenty two. Labor and related expenses as a percentage of company restaurant sales increased 80 basis points to 33.2% from 32.4%, driven primarily by minimum wage increases in California and Nevada as well as wage rate pressure from restaurants with labor availability challenges where we selectively increased wages. These impacts were partially offset by the impact from our positive comparable restaurant sales, including elevated menu pricing, effective management of variable labor and a reduction of workers' comp expense based on favorable underlying trends. Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 100 basis points to 24.1% from 23.1% last year. This increase was primarily due to higher advertising expense, which normalized at 4% of restaurant sales compared to 3% in the prior year quarter and higher utility expense.

Speaker 3

Restaurant contribution decreased 6.3% to $18,500,000 compared to $19,700,000 in the prior year, while restaurant contribution margin decreased approximately 150 basis points to 16.5% from 18.0%, primarily due to the aforementioned higher advertising compared to last year. General and administrative expenses were $11,200,000 up from $10,800,000 last year and as a percentage of total revenue held steady at 9.0% compared to last year. The increase was primarily driven by increased non cash stock based compensation, Travel expense and general inflationary trends, partially offset by lower management incentive compensation expense. Adjusted EBITDA decreased 8.0 percent to $14,100,000 compared to $15,300,000 last year and decreased as a percentage of total revenues to 11.3% from 12.7% last year. Depreciation and amortization was 6 $10,000 down from $6,100,000 last year due to the impact of fully depreciated assets and decreased 20 basis points to 4.8% as a percent of total revenue.

Speaker 3

Interest expense was $700,000 compared to $900,000 last year. The decrease was due to a lower average outstanding revolver balance and lower interest rate compared to 2020. During the 3rd fiscal quarter, our outstanding revolving credit facility borrowing was reduced from $110,000,000 to $106,000,000 and the remaining availability under the revolving credit facility was $130,600,000 Along with this debt reduction, we also repurchased 149,324 shares of common stock at an average price of $9.87 per share during the Q3 for a total of $4,400,000 and paid our 3rd quarterly cash dividend totaling $1,500,000 At the end of the fiscal Q3, approximately $10,600,000 remained under our $75,000,000 repurchase authorization. Net income was $3,800,000 or $0.10 per diluted share compared to $5,800,000 or $0.15 per diluted share last year. We also reported adjusted net income, which excludes items identified in our earnings release in the financial tables.

Speaker 3

Adjusted net income was $4,200,000 or approximately $0.11 per diluted share compared to 6,000,000 or $0.16 per diluted share of last year. In today's earnings press release, we formally announced our 4th Quarterly dividend of $0.04 per share of common stock that will be paid on November 24, 2021 to shareholders of record at the close of business on November 3, 2021. Finally, through the 1st 5 weeks of our 16 week fiscal Q4, Our company operated comparable restaurant sales are up approximately 3% and franchise comparable restaurant sales are up over 4% despite the impact from reduced operating hours that John referenced. Please refer to today's earnings press release for our fiscal 2021 That concludes our formal remarks. As always, thank you for your interest in Del Taco, and we are happy to answer any questions.

Operator

And at this time, we will be conducting a question and answer session.

Speaker 4

Inc.

Operator

Our first question is from Alex Slagle with Jefferies. Please proceed with your question.

Speaker 4

Great. Thank you. On same store sales, just wanted

Operator

to walk through some of

Speaker 4

the drivers, trying to think through some of the biggest Tailwinds and headwinds and it sounds like the trends improved pretty good here Quarter to date. But maybe first just on the intro of the CRM platform and loyalty program and Just how we should think about that in terms of directly impacting the comps in the early stages, if at all? Or how should we think about that piece?

Speaker 2

Yeah. It's early, Alex. I mean, we're seeing some really good directional trends, but we're only 4 weeks in. So as a reminder, We launched on September 9th and then we did the hard launch, which was point of purchase materials at the restaurant, Starting to do some of the marketing on September 16th, so just a few weeks ago. And then really our second wave campaign, which was really a Focus on marketing and acquisition and getting folks to transition, not only get new members, but get folks to transition from the old app to the new app Kicked off here on October 4th with some tags on television and radio and promoting it through our direct mail and FSI drops and we've also got some digital media Acquisition going.

Speaker 2

So it's early days, but what I would say is that directionally, It's what's happening is kind of what we wanted to have happen, which was you look at the motivation that occurs with both current and new members Related to the point based system and that structure designed to motivate and reward behavior. So we've seen there's unique Active users already in the 1st 4 weeks performed at a similar level that we had with our old app. And that's before we've even completed The migration, right? You still got guests that are moving into the new app from the old app. The other kind of piece that we thought was really telling And interesting was that nearly 40% of the new members coming into DeliaRewards Are actually new members.

Speaker 2

So these are folks that were not in the old app. So again, just kind of speaks to the motivation around That app not just being an offer engine, there's reasons to be involved with the brand and engage with the brand in that and certainly being able to earn points And move up into loyalty tiers is a big part of that. So we feel great about the 1st 4 weeks. Execution has been good and a lot more marketing To come in regards to that app as we move to the back end here of Q4 and into obviously 2022. Okay.

Speaker 4

And how many members are you up to now?

Speaker 2

So we have nearly 250,000 members in the 1st 4 weeks. So again, that's a combination of those new folks I referenced nearly 40% and then folks migrating over from the old app Into the new app. So again, just to underscore, when you see the unique active users performing at a similar level in the 1st 4 weeks, In aggregate, in totality of that on that $250,000 number compared to the $1,500,000 that we had in the old That's pretty impressive and I think it speaks to the frequency and usage that's happening within that within the new loyalty program. Okay.

Speaker 4

And then thinking about some of the other drivers, staffing, obviously that you talked about that being a 100 basis point sort of impact and I guess working that down and then just in terms of menu innovation and promotional lacks, I mean, kind of what would you call out as the biggest driver for us to think about in terms of changing the trajectory and accelerating the

Speaker 2

Yes. I think it's important to remember that Q3 was positive going over positive for both And Q4 thus far, as we noted, is also positive going over positive for company and franchise. Inc. It's important to remember that we were able to achieve same store sales growth in Q3 and Q4 2020 despite the pandemic. And We just happened to roll over in Q3, one of our the more successful product launches in the history

Speaker 5

of the company, which was the

Speaker 2

Crispy Chicken Taco You know, or the crispy chicken menu in 2020. I think overall, what I'd say on this front is the product Launches with stuffed quesadilla tacos and double cheese breakfast tacos along with Deli Eye rewards, which will continue to build momentum, are driving improved year on year same store sales Trends, as we look at the 1st 5 weeks of Q4 compared to Q3, and that's really despite those operating The operating in a more challenging environment year on year due to some of those staffing challenges that we referenced in those hotspot stores. So overall, we expect to finish 2021 with 6 consecutive quarters of same store sales growth in both the company and franchise.

Speaker 5

And that's basically going back to, obviously, the last negative quarter

Speaker 2

was Q2 of Going back to obviously the last negative quarter was Q2 of 2020, which was the Q1 of the pandemic. So I think overall, we feel good about the trend and the programs that we've launched recently, and we think that that's they're going a long way in helping us continue to drive same sales

Speaker 4

growth. Just last question. I just wanted to see on delivery, if you're seeing any Changes in demand or anything now that we're kind of moving past the potential some of the benefits of the stimulus and Extended unemployment benefit to be seen, anything there?

Speaker 3

We continue to see delivery for the system, both company and Jai continued to grow modestly both company and franchise were north of 7% during fiscal Q3, which we view as a good sign, especially since we did implement another slight uptick to our menu price premium for delivery On the company side, company restaurants at about 22.5%, franchisees also in that low to mid 20% area. So we feel good about the model and the trend.

Speaker 4

Great. Thank you.

Operator

And our next question is from Nick Setyan with Wedbush Securities. Please proceed with your question.

Speaker 6

Thank you. What was the overall average check-in the quarter, Steve?

Speaker 3

It was in the mid to high nines.

Speaker 6

Got it. And 5.5% pricing in Q4, Inc. Assuming it kind of stays in that 5% range like in first half of in the first half of twenty twenty You guys kind of gave us 5% food cost inflation in Q4. I mean, does that imply like we should see COGS as a percentage of sales come down in Q4 versus Q4 of last year? Or is there some mix shift that we should think about?

Speaker 3

Well, the commentary is looking at both food inflation and menu price both being in that 5 plus percent area, which would imply flattish for Q4 on a year over year basis, which is I think directly correct. As you know, your waste and efficiencies This implication for Q4 year over year.

Speaker 6

And I guess the same question on labor. Q3, you said about 5%, I'm assuming 6% inflation. We saw about 80 bps of labor deleverage. Just given the level of pricing, perhaps I would have thought it would have been a little less. Is there like overtime pay?

Speaker 6

Is there just Maybe go through the puts and takes on labor that we should think about in terms of how to think about the overall maybe hourly Growth versus just inflation, how should we think about that as we kind of think about how to model the labor line?

Speaker 3

Yes. On labor, as typical with our California heavy and Nevada heavy footprint, The main driver of inflation is California and Nevada minimum wages. That is working against us. I would The operational efficiency has been very good at the restaurant level. So that's been a positive.

Speaker 3

Operators are Executing that very well. But again, back to the minimum wage. That's the main driver. And then John touched on it. It's certainly it's more On a limited basis, but there are kind of hotspot restaurants, if you will, which are minority, but those are situations where we are Paying a higher prevailing wage as appropriate.

Speaker 3

And then in addition, some of the labor availability challenges that John touched upon, That, of course, does play into not just some curtailment of operating hours, but also indeed you hit the nail on the head, an increased uptick in overtime. So all that serves to boost up average effective wage, which includes the impact of overtime. Any given year, average wage will continue to tick up during the course of the year. This year, that additional rate of growth has been higher intra year than we've seen before. That's on a long term basis, as you know, average wage You know, with the California footprint, we are on a path towards $15 an hour where minimum wage culminates in California starting January 1, just Few months from now, and in fact, that $15 level will then maintain through 2023.

Speaker 3

So it's certainly possible that some of this India Your uptick in wage we're experiencing may be more of a timing issue when you think about the long term. That said, it was pressuring us a bit in Q3. It played into that 80 bps of deleverage that you saw. And given the trend that will continue into Q4, we'll again expect deleverage on that line And again, with the low single digit, call it, same store sales trajectory, that's what leads to the deleverage overall.

Speaker 6

Understood. And then just last question. You kind of commented that more recently you've seen some of the labor pressure come down. First, is that a correct interpretation? And second, I understand that you don't really have a crystal ball.

Speaker 6

But I guess what's your internal estimate or expectation or how you're Strategizing for what when the timeframe for when that I mean, normalize. Is it by then the Q4, is it more like in the middle of 'twenty two in terms of the staffing issue?

Speaker 2

So Nick, it remains very fluid. It's hard to predict exactly what's going to happen, but I'll say we've got a very holistic strategy that we about on a couple of calls now in regards to how we're thinking about both acquiring quality talent as well as keeping quality talent and making sure we're training and developing them. And overall, I think our operators and our franchisees are just doing an outstanding job leading in this environment our people first focus and navigating kind of a very challenging time. That said, the hotspot restaurants where we've reduced Operating hours by an hour or more or so, that roughly represented somewhere in the kind of mid The high teens as a percent of restaurants. Kind of as you look at it week to week, it changes a little bit week to week depending on the situation with the restaurants.

Speaker 2

We are managing it. Our operators and our franchisees are managing it daily and weekly. But the commentary around it peaking so far in Q4

Speaker 5

at about 1%, that's

Speaker 2

due to a really nice improvement in Yes. That's due to a really nice improvement in applicant flow coming into the system in the last few weeks. And that is related to a digital recruitment campaign that we are investing into that we have the ability to kind of really target on a zip code basis and include extra dollars in the stores that need more help and take some dollars away from stores that don't need quite as much help. And that's actually improved the applicant pool for us by 4x over the last few weeks. So that those Quality applicants coming into the system, that's step 1 for these hotspot restaurants, then getting those folks trained properly and develop properly to create great guest That's step 2, but certainly we've seen some of these hotspot restaurants start to return back More normalized operating hours, I should say, in recent weeks.

Speaker 6

Understood. Thank you.

Operator

And our next question is from Todd Brooks with CL King and Associates. Please proceed with your question.

Speaker 7

Good job navigating a tough environment here. I want to lead off with Just kind of same store sales progression for the comparison. Obviously, Krispy Chicken, a massive platform for you guys, Good success with new products during Q3 allowing you to still comp positively even with the headwinds from labor. How does the kind of comparison look across the back half of the 4th quarter relative to what you Talked about comparing against in that 3% to 4% range so far in the quarter. Does it ease at all as you move farther into The crispy chicken launch?

Speaker 3

For the system, Todd, both the company and franchise, We had a 16 week Q4. The second the later 8 weeks did perform better a year ago than the 1st 8 weeks. So Yes. The compare, if you will, will get a little bit more difficult as we round out the back half of the quarter.

Speaker 5

But I

Speaker 2

think at the same At the same time, just note that the burn off from Crispy Chicken started to occur. We were maintaining higher sales mix, but that initial excitement around Crispy Chicken Really was burning off in September and now obviously having some of these new platforms that we've launched and hope to continue to see Gaining momentum along with our tamales LTO that happens kind of in November. We think we're in a pretty good position to obviously have a positive same sales on the company and the franchise business in Q4 and put up a nice result.

Speaker 7

Great. And you do have the benefit of Del Yeah now, which you did not have last year as a driver. So

Speaker 3

Okay,

Speaker 7

great. Secondly, can you give us some details behind the Reef partnership? How does that work? Is that a royalty arrangement? And I guess if you look at The markets that you're operating, I know you're about to open the first later this month, but what's the potential of kind of densely urban markets that you could see if this works dropping A brief dose kitchen into?

Speaker 3

Yes. We're excited about it. The first outlet will open later this month, a very dense Urban or dense urban area of LA. Really the purpose here is expand access to the brand, particularly in dense areas where there's A lot of guestifications that we're just not servicing today. So we're excited about that.

Speaker 3

As we mentioned, there are several more planned. Overall, to your question, it really is very akin to franchising. It's a licensed deal, very similar to Franchise arrangements, although it does feature a reduced marketing contribution, which is appropriate based on the nature of this delivery only channel. So really Focus right now is having a good successful launch here, you know, moving forward with the additional, you know, planned openings down the road And really learn from it and then decide from there, you know, in partnership with REIT, you know, what the future looks like. So we're excited.

Speaker 3

A lot more to come, including, you know, performance out of the 1st of several outlets.

Speaker 7

Okay, great. And then final one for me. Real acceleration in your franchising Activity here in the Q3 with larger scale partners too, which is great to see. I guess Two questions on this front. How does kind of the pipeline look behind it?

Speaker 7

Are there people that are conditioning their decision to go on seeing kind of the first Fresh Flex Come out of the ground at Florida this quarter. And secondly, with the types of partners that you're signing with, My sense is the bandwidth is there that a signed deal, if it works, could grow pretty dramatically. Could you talk about maybe Other brand nameplates that these partners are running and a 10 unit deal and the potential for it to grow into something if it really works for them? Thanks.

Speaker 2

Yes, sure, Todd. We so first off, from a pipeline perspective, we've been building obviously building pipeline with

Speaker 5

a great group of existing franchisees for some time now.

Speaker 2

And I think our existing group, for some time now. And I think our existing group that really is the foundation of our pipeline has done a nice job and is really excited about Fresh Flex and continues to build opportunities. And especially now as you look at having With our menu venue strategy, more and more assets to grow with than we had before. It's not the old kind of cookie cutter model anymore. Now We've expanded the asset group to be drive thru only, which is a smaller footprint.

Speaker 2

Perhaps gives you the opportunity to access trade areas you couldn't have accessed before, All the way up to more of a standard prototype with a dining room. So that existing group is has been and will continue to build pipeline and be a good part of Our growth story. And then what you referenced is the 7 new deals for 53 units that we signed this year. Obviously, those will start to come to fruition here Over the next 18 to 24 months, so these initial stores are opening. And to your point, we are absolutely Taking a quality over quantity type of an approach with these groups, we certainly see some operators that we've signed that have Some big brand nameplates to your point and have capability and current store counts in the multi dozen range and more.

Speaker 2

And We know that with success begins excitement and more success and that's what we're intent on delivering and supporting our lead partners To do so, to your point, there's definitely some upside, but we need to execute. We need to deliver the brand and we need to give our new partners the support For them to be able to kind of get to that next level of growth, if you will.

Speaker 7

Okay, great. Thanks, John. Got

Operator

And our next question is from Nicole Miller with Piper Sandler. Please proceed with your question.

Speaker 8

Thank you so much and good afternoon. Just a couple of quick ones. On the 4th quarter price 5.5%, did that start day 1 before Q or is that coming now?

Speaker 3

It will evolve slightly throughout the quarter, but throughout the quarter we will be maintaining somewhere between 56 Based on the timing of what we're rolling over. So essentially day 1, we're in the 5 plus area.

Speaker 8

Okay. I was just trying to true it up To the commentary of the quarter to date comp. So I appreciate that to see how much more prices on a comp Against difficult compares given the earlier question. And then second on comp, And this is probably maybe just nuanced, but company owned improvement could reflect easing compares, But franchise comp gets more challenging and they're doing much better. We know price Could be a factor.

Speaker 8

Is there anything else you would point to? Any other channel, daypart, regional trend that we should be aware of?

Speaker 3

Yes, we still have a very fairly pronounced theme of geographic differences. So company is heavily California, Southern California specifically in Las Vegas, whereas franchisees are operating across the 15 state footprint. So we continue to see on a 1 year and 2 year basis, really outsized, very strong Performance particularly outside of California, which is largely in favor of our franchise community, where we share markets with franchisees and so the California performance is much more aligned with much more modest franchise Outperformance. So really that geographic theme continues to be fairly pronounced in favor of franchise. Okay.

Speaker 8

Thanks. And then just the last one. I mean, I was just kind of listening to the presentation and thinking at a very high level. This is really about swapping and refranchising some stores for a high flow through EBITDA stream, right? And so I know there's Like 2% revenue growth, but I'm looking at what was like 5% total system Sales growth and up almost or more than 10% versus 2019.

Speaker 8

So have I characterized that Properly and the system is probably growing faster than just looking at that total revenue line, right?

Speaker 3

Yes. Something a metric like system wide sales, which capture more of all sales of the 600 unit system, it certainly would reflect Inc. The more robust growth you're describing, whereas on the company P and L, the revenue line is so I believe influenced by company restaurant sales that are certainly comping positive and growing, but at a lower rate compared to franchise, Whereas franchise revenue does show that robust growth that you alluded to.

Speaker 8

Yeah. And you've fluffed out some stores, right? And that's the plan. So again, in favor of a recurring royalty stream. So I guess I just want to make sure like we're Making that comparison as well.

Speaker 8

So, just taking in time and I think that's it for me. Thank you for taking my questions tonight. Appreciate it.

Operator

Welcome. Thanks, Nicole.

Speaker 4

And we have reached the end

Operator

of the question and answer session. And I'll now I'll turn the call back over to management for closing remarks.

Speaker 2

Okay. Thank you, operator, and we certainly appreciate everyone taking the time today with us, and We thank you for your interest in Del Taco. It's exciting to accelerate growth and we feel great about our prospects on that front. So we look forward to sharing our progress on future calls. Have a great day.

Speaker 5

Thank you for joining

Operator

us today. You may disconnect your lines at this time. Thank you and have a good day.

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Earnings Conference Call
American Lithium Q3 2021
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