Del Taco Restaurants, Inc. (TACO) CEO John Cappasola on Q3 2020 Results – Earnings Call Transcript


Del Taco Restaurants, Inc. (NASDAQ:TACO) Q3 2020 Earnings Conference Call October 15, 2020 4:30 PM ET

Company Participants

Raphael Gross – Managing Director at ICR

John Cappasola – President and Chief Executive Officer

Steve Brake – Chief Financial Officer

Conference Call Participants

Todd Brooks – C.L. King & Associates

Nicole Miller – Piper Sandler

Nick Setyan – Wedbush Securities

Operator

Thank you for standing by, and welcome to the Fiscal Third Quarter 2020 Conference Call and Webcast for Del Taco Restaurants Incorporated.

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

Raphael Gross

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 questions.

But first, let me 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 SEC filings for a more detailed discussion of the risks that could 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 as alternatives to GAAP measures, such as net income or loss, operating income or loss, net cash flows provided by operating activities 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.

John Cappasola

Thank you, Raphael, and we appreciate everyone joining us today. I would like to begin by expressing my deep appreciation for the entire Del Taco team at the restaurants and our support center and of course, our franchise partners across the country for their perseverance and exceptional work during these unusual times.

They have more than risen to the occasion in serving our guests and strengthening our brand by demonstrating their ability to innovate, execute rapid change and embed new best practices. It is really their work that guided Del Taco through our recovery and it set up our longer term brand acceleration as I will explain shortly.

As a reminder, since the onset of COVID-19, we maintained operations through our drive-thru, takeout and rapidly expanding delivery channels. We have not yet reopen any company-operated dining rooms, which has helped us stand out as a trusted brand for safety and sanitation, while driving significant operational efficiencies.

This is validated by improving guest satisfaction scores, labor efficiencies that were also aided by our new workforce management system, increasing guest engagement in our digital channels and of course, our business results themselves.

Let me briefly review Q3 before covering our plans for Q4 and 2021. During Q3, system-wide same-store sales rose 4.1% including a 6.5% increase at franchise restaurants and a 2% increase at company-operated restaurants. Our franchise base exhibited strength across a diverse 14 state footprint while company restaurants turned positive despite a 90% plus concentration in California and Las Vegas with heightened COVID trends and restrictions.

Restaurant contribution margin increased 120 basis points reflecting a significantly lower food percentage and modest labor and related leverage despite absorbing a $1 increase to California Minimum Wage. These improvements were partially offset by slightly higher occupancy and other operating expense that benefited from a 1.1% reduction in advertising expense as a percentage of sales, compared to last year.

This helped our Q3 restaurant contribution margin, but advertising expense will return to a normalized level in Q4. In terms of profit, adjusted EBITDA increased to $15.3 million from $14.5 million, while adjusted net income per diluted share increased to $0.16 from $0.10 last year.

Finally, we reduced our drawn revolver by $21 million to $124 million which helped to lower our net debt-to-adjusted EBITDA leverage ratio to approximately 2.1 times. I am proud of our actions to stabilize our business and we are now focused on longer-term brand acceleration through five drivers including value leadership, innovation, brand engagement, digital transformation and ultimate convenience.

So let me start by covering each and I’ll start with value. Our unique ability to deliver speed, convenience and affordability with freshly prepared quality ingredients establishes our broadly appealing brand positioning, which along with our powerful barbell menu strategy provides multiple levers for sales and profit growth across dayparts and allows us to compete against a wide spectrum of occasions.

We believe our focus on value is enduring and will increasingly play an important role in restaurant purchase decisions given the economic uncertainty facing today’s consumer. The foundation of our menu strategy is Del’s Dollar Deals because of its ability to do a few key things. It supports our category-leading value and affordability perception.

It also attracts the interest and frequency of heavy QSR users and it’s margin-friendly due to its primary use as an add-on to a purchase and its ability to drive incremental transactions. It is not a loss leader. We also plan to continue leveraging innovation to keep Del’s Dollar Deals fresh with new product news and marketing reinforcement while also maintaining a steady stream of innovative, mid-tier and quality value products at the middle and upper-end of our barbell menu strategy.

During the pandemic, we didn’t pause our menu innovation efforts at all. Instead, during Q3, we launched our new handcrafted fresh from scratch guacamole, along with a new Epic Burrito lineup. Our fresh guac is handcrafted in each restaurant daily with just four simple ingredients and further separates us from our QSR peers. It is available across our barbell menu as a side or product modification, as well as within new products designed to highlight this signature ingredient.

We then followed up to successful launch as the first national Mexican QSR to offer a new Crispy Chicken menu that features unique products and flavors spanning our menu barbell. This highly relevant protein is available in a Dollar Crispy Chicken Taco, which was our first new addition to the Del’s Dollar Deals menu, a $4 Crispy Chicken and Fries Box and a $5 Epic Burrito with fresh guac.

The new Crispy Chicken contributed to our Q3 same-store sales improvements and drove strong overall guest satisfaction and high-single-digit menu mix. Last week, we added a new flavor to the Crispy Chicken menu through our partnership with Cholula and we plan to add other new flavors in the future.

The next driver of acceleration is enhancing our brand engagement through a new creative and advertising approach to layer in more reverent and humorous branded content to bring new products and brand messages to life in memorable ways for consumers. Our CMO, Tim Hackbardt is collaborating with our new advertising agency to reimagine our strategy to ensure Del Taco stands out across traditional and digital channels through fun and buzz worthy content that our fans want to talk about and share.

We are already seeing significant improvements in our consumer engagement across social and digital channels as a result of their early work. In fact, our new approach to deliver must watch, brand creative has increased social engagement and buzz by up to four times.

Turning to our digital transformation, we continue to increase our one-to-one digital engagement with fans through our Del Taco mobile app and delivery channels which enable enhanced guest engagement and expanded convenience. The Del App has grown to more than 1.2 million registered users, up 38% from the end of 2019.

Importantly, we have seen an increase in active app users, which is impart due to regular disruptive offers only available on the Del App. We are aggressively promoting Del delivery as a contactless ordering option with Postmates, DoorDash, Grubhub and Uber Eats across all company restaurants and today more than 90% of franchise restaurants provide delivery through one or more DSPs.

We believe partnering with all four leading delivery platforms to maximize consumer convenience channels and leverage the trend toward at home delivery provides us with a clear advantage. During Q3, delivery represented over 6% of system-wide sales and our company-operated delivery check average continues at approximately 1.85 times our at restaurant check average including a company delivery premium of 20% that began at the start of fiscal Q3.

More broadly, the consumer adoption curve related to accessing and interacting with brands through technology has accelerated since the pandemic and this trend will likely strengthen. We therefore plan to leverage our solid foundation to position us for the future with further investment and focus on technology in two key areas.

First, in 2021, we plan to develop a holistic CRM platform to further digitize Del Taco by incentivizing and rewarding our guest. To further develop and execute this strategy, we added a new position of Vice President of Marketing Technology to our team with the appointment of Erin Levzow. Erin brings strong expertise along with a background of building successful CRM platforms in the hotel and restaurant sectors.

The second area of focus enabled by technology is to address increased consumer demand in off-premise occasions through our ultimate convenience initiative. This includes expanding the access and convenience of our drive-thru lands and adding outside order takers to improve throughput in high volume restaurants.

In addition, we plan to leverage our delivery channels and the order ahead feature in our Del App to expand our limited contact service occasions and modes. This will include developing additional smart bundles similar to our fiesta packs to grow our share of larger party size occasions and testing curbside pickup.

Turning now to development. In Q3, we opened one company-operated and four franchise restaurants and we expect to open two additional franchise restaurants during fiscal Q4 including our entry into Ohio. Looking ahead, we believe our unique brand position and ubiquitous menu offerings drive broad national appeal that supports long-term system growth.

Although the pandemic appropriately caused us and our franchisees to pause growth plans, strong recent results have instilled confidence in our growth-minded franchisees to revisit and in many cases resume their growth plans.

We have also resumed company development with a focus on attractive infill opportunities in core western markets and the strategic seeding of emerging markets to help stimulate longer-term franchise growth including our plans for the company to enter Orlando in 2021.

We also anticipate favorable dynamics may occur as a result of the pandemic such as additional new franchise interest and drive-thru concepts, and increased real estate availability. To help capitalize on these opportunities, as well as shifting consumer behavior, we are in the final stages of developing our new restaurant prototype and a menu of venues initiative.

These efforts are expected to help enhance our targeted new unit return profile and expand our real estate access. This will allow us to be opportunistic in regards to real estate and conversion opportunities as it includes a smaller footprint drive-thru -only model to accommodate smaller sites. The new prototype will include a modernized design, improved functionality, and other operational enhancements that will refresh the brand and position us well for growth in the future.

In addition, we are continuing to refine our test remodel program that is already driving encouraging sales lifts and returns. This is a great opportunity to promote both a positive brand image and generate a compelling financial ROI through the new design and functionality we can apply across the age fleet over time.

We believe the combination of expanded real estate and prototype opportunities, alongside a comprehensive future remodel program will benefit future company and franchise development including attracting new franchisees.

So to conclude, our brand positioning is exactly where what the consumer is looking for these days, fresh, flavorful food, great value and of course convenience. And we can provide these relevant attributes through limited and no contact channels. Our business has recovered and is now stable. Our franchisees are healthy and our balance sheet is in great shape.

This allows us to invest in our future and we intend to reach the other side of the COVID crisis better position to capitalize on new opportunities.

This includes accelerating our brand by bringing our new menu products and messages to life in memorable ways that create buzz, strengthening our guest engagement through investments in technology to improve our ability to providing greater convenience and evaluating how we can realize the emerging real estate opportunities to grow our brand’s expanded prototype capabilities.

We look forward to providing further updates on these topics and our progress. Now, I’ll turn the call over to Steve to review our third quarter financials.

Steve Brake

Thank you, John. Total revenue increased 0.5% to $120.8 million from $120.2 million in the year ago third quarter. System-wide comparable restaurant sales increased 4.1% consisting of a 2.0% increase at company-operated restaurants, and a 6.5% increase at franchise restaurants.

Third quarter, company restaurant sales decreased to 1.4% to $109.5 million from $111.1 million in the year ago period. The decrease was driven by fewer company-operated comparable restaurants compared to last year, primarily due to our refranchising activity, partially offset by the increase in company-operated comparable restaurant sales.

Franchise revenue increased 15.1% year-over-year to $5.2 million from $4.5 million last year. The growth was driven by the increase in franchise comparable restaurant sales, coupled with additional franchise-operated restaurants, compared to last year, primarily from our refranchising activity.

Turning now to expenses; food and paper cost as a percentage of company restaurant sales decreased approximately 120 basis points year-over-year to 26.5% from 27.7%. This was driven by a menu price increase of just over 4%, which exceeded food inflation of approximately 1%.

Regarding the fourth quarter, a sequential step-up in food inflation to over 2% driven by a very elevated cheese market, coupled with slightly less Q4 menu pricing in the high 3% area is expected to result in a modest year-over-year reduction in our food percentage compared to the more robust reduction during Q3.

We now expect an effective fiscal 2020 menu price increase of approximately 4% and annual fiscal 2020 food inflation of approximately 3%.

Labor and related expenses as a percentage of company restaurant sales decreased 30 basis points to 32.4% from 32.7%. We view this as a strong outcome, particularly with a $1 increase in California Minimum Wage to $13 an hour that was more than offset by effective management of variable labor, a narrowed focus on drive-thru operations as dining rooms remain closed and reduced workers’ compensation expense based on favorable underlying trends.

Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 20 basis points to 23.1% from 22.9% last year. This increase was primarily due to higher third-party delivery fees as our delivery channel grew by a factor of over eight times to 6.5% of company sales from 0.8% last year, as well as the incremental direct cost related to COVID-19.

This was mostly offset by a historically low deployment of advertising in traditional media at approximately 3% of restaurant sales representing a 110 basis point reduction compared to the prior year. However, we expect to reinstate a normalized level of advertising spend of approximately 4% of restaurant sales during Q4 which will lap approximately 3.5% in Q4 last year.

This is expected to sequentially increase our Q4 advertising expense by approximately 100 basis points compared to Q3 and result in a year-over-year increase during Q4 compared to a reduction during Q3. Restaurant contribution was $19.7 million, compared to $18.6 million in the prior year, while restaurant contribution margin increased approximately 120 basis points to 18.0% from 16.8%.

However, due to the aforementioned sequential increases in food and advertising expenses as a percent of restaurant sales, we are expecting fourth quarter restaurant contribution margin contraction compared to the significant third quarter expansion that was aided by the timing and level of advertising expenses compared to last year.

Timing aside, we expect our overall restaurant contribution performance during the second half of 2020 will demonstrate our business has stabilized and we are now currently focused our margin management strategies for 2021.

General and administrative expenses were $10.8 million, up from $10.4 million last year, and as a percentage of total revenue increased 30 basis points to 9.0%. The increase in dollars was primarily driven by increased performance-based management incentive compensation, compared to an insignificant amount in the prior year, partially offset by lower stock-based compensation expense and other G&A reductions.

Note that in Q4, we lap our lowest G&A quarter from 2019 on a dollar runrate and percent basis, which was due to recording a negative bonus expense last year based on 2019 performance. Based on this dynamic, we expect increased fourth quarter G&A on a dollar and percent basis.

Adjusted EBITDA was $15.3 million, up from $14.5 million last year and increased as a percentage of total revenues to 12.7% from 12.0% last year.

Depreciation and amortization was $6.1 million, up from $5.9 million last year. The increase primarily reflects the addition of new assets, partially offset by the impact of refranchising. As a percentage of total revenue, depreciation and amortization increased 10 basis points to 5.0%.

Interest expense was $0.9 million, compared to $1.7 million last year. The decrease was due to a lower average outstanding revolver balance and lower one month LIBOR rate compared to 2019.

During the third fiscal quarter, we reduced our outstanding revolving credit facility borrowing to $124 million compared to $145 million at the end of fiscal year 2019 and our remaining availability under the revolving credit facility is currently $108.7 million.

In addition, at the end of the third fiscal quarter, our balance sheet debt, net of cash to adjusted EBITDA leverage ratio declined to approximately 2.1 times, compared to approximately 2.25 times at the end of fiscal 2019.

Net income was $5.8 million or $0.15 per diluted share, compared to net loss of $7.7 million or $0.21 per diluted share last year. We also reported adjusted net income which excludes sublease income for closed restaurants, restaurant closure charges, impairment of long lived assets, loss on disposal of assets and adjustments to assets held-for-sale and executive transition cost. Adjusted net income was $6.0 million or approximately $0.16 per diluted share, compared to adjusted net income of $3.7 million or $0.10 per diluted share last year.

As a reminder, we have withdrawn our guidance for the 52 week fiscal year ending December 29, 2020. However, here are few final thoughts with respect to our fourth quarter. Through the first five weeks of our 16 week fiscal Q4, our system-wide comparable restaurant sales are up low-single-digits. This consists of significant franchise outperformance with company operated restaurants trending slightly negative inclusive of the previously noted sequential step-down in menu pricing.

Also, as discussed a sequential step-up in food cost and advertising expenses will impact our fourth quarter restaurant contribution margin performance on an absolute and year-over-year basis, and our fourth quarter G&A cost will lap an artificially low level of G&A due to the negative bonus expense recorded during 2019.

That concludes our formal remarks. As always, thank you for your interest in Del Taco and we are happy to answer any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Todd Brooks with C.L. King & Associates. Todd, go ahead with your question.

Todd Brooks

Thanks for taking my question. Congratulations on the quarter guys. I’ve got couple questions on the – you are welcome – couple questions to lead off. One, can you just walk through or is there a step forward path to reopening corporate dining rooms?

And what has to happen for that to occur? And when it does, I know you talked about some of the labor efficiency in this quarter being related to running just the off-premise channels, what would the impact on labor look like if and when you do reopen the dining rooms?

John Cappasola

Yes. Let me – I’ll go ahead and take that and just kind of – let me just give you a bit of background here in regard to the dining rooms. Obviously, we stated the company dining rooms are not open as of yet and we feel comfortable right now given the circumstances with what we are seeing from the drive-thru takeout and delivery channels obviously and off-premise channels through demand there and we’ve been able to make up for the lost dine-in sales for the most part through these channels due to the consumer behavior changes.

So, the key to reopening dining rooms is going to be making sure guests and employees are safe and secondly making sure there is adequate consumer demand to be profitable which kind of gets at your second question there, Todd. So, you may be able to pick up some sales, but if it drags down profitability, it may not be worth that when you add in the risk associated with reopening.

So on the safety front, we are confident we can make that work and we are making that work in a small minority of franchise markets that have not had the same level of risk as we have seen on west and therefore able to open dining rooms with appropriate precautions. Most company and franchise markets are still under restrictions however that significantly limit dining room capacity, which is generally tied to obviously market exposure and risks.

So we are watching that very carefully. The second piece and really important point is that, there are incremental cost that will be going into reopening dining rooms in the order to be safe and comply with county and state guidelines. So this is where the consumer demand part is really important and in general, we are seeing tepid demand for dining rooms and there is minority of franchise markets that have them open.

So, our next step here is, we are going to do some further testing and optimizing of our dining room reopening plan in Q4. We’ll do that in a couple of handful of company restaurants to make sure we are fully wedding the ongoing cost of reopening. You mentioned labor, Todd, that’s one we are going to really want to understand and see we can streamline and optimize that.

So that that makes sense, because there is clearly it could be a sales opportunity here down the road we just want to make sure that it’s profitable.

Todd Brooks

Okay. Great. And just a follow-up – if I can slide one in. The labor performance that you saw in the quarter, you talked about the new workforce management system that you’ve put in place, can we maybe quantify savings seen from the implementation of that system? And is that tool an iterative process where it will drive further savings the longer that you’re using it? Thank you

Steve Brake

Yes. Good question. The tool has been very powerful and you have it – the timing was incredibly appropriate given what we’ve been managing this year and it’s really put our operators in conjunction with some teaming with finance in a great position to just make sure they are putting the right feet and hours on the floor to provide a good guest experience.

Naturally, in a unique environment that is almost solely focused behind the counter, in the kitchen, and at that drive-thru window with an occasional takeout and delivery driver coming in. So it’s really unique here that we are very fortunate that that system is in place. It’s literally by store, by hour, by day or week, I mean, everything you could think of we are looking at it that way. And it’s been a great benefit this year.

Longer-term, I really see two steps. As John touched on, we are in the midst of starting to figure out how labor will eventually step up to service dining rooms in a safe and appropriate and guest-friendly manner, that system will be very powerful as we test and learn and perfect that.

And then, longer-term, once we are fully back in normal full dining room mode absolutely, it’s a very robust system that will always allow us to get better week-after-week, quarter-after-quarter.

So, you have to be having it in place. It’s hard to financially quantify it. I think if you look at both Q2 and Q3 performance, what labor did in light of the comps and knowing that we have that $1 of incremental wage hitting us in California this year, I think that labor line has looked very well financially and a lot of that is a credit to the new system we installed.

Todd Brooks

That’s great. Thanks, Steve. Appreciate it.

Steve Brake

You bet.

Operator

Our next question comes from Nicole Miller of Piper Sandler. Nicole, please proceed with your question.

Nicole Miller

Thank you. Thank you, so much and good afternoon. Just one on comp and then one other follow-up. Could you talk about the company versus franchise performance? So, I was going to ask the question is it due to the dining room performance, but it sounds like you said you had tepid demand. So that’s probably not it.

So if it’s geography, I guess, it could still be mobilization to some degree. But I think I might be missing something. So could you give us a couple of reasons for that – that disconnect in the comp performance?

John Cappasola

Sure. Yes, Nicole. So franchise, obviously continues to have positive same-store sales and as a reminder it’s over a broader geographic footprint. So it’s not as concentrated in one area and generally many of those franchise markets just aren’t experiencing the level of COVID exposure and disruption that we’ve seen in our California market and the Las Vegas market, which is those two markets, really Southern California and Las Vegas make up about 90% of the company footprint.

So, overall, obviously, we are happy to see franchise continue to outperform and it’s not entirely unexpected. I mean, we put a tremendous amount of effort into establishing strong franchise support and infrastructure over the past several years and their results speak to the relevance of obviously the brand nationally and our ability to support that. So that’s a really important piece.

So let me just address the company comp for a moment and just kind of the – the recent trend. There is really kind of two drivers if you look at the company comp trends post Labor Day. The first is, the check comp issue related to burning off a 1.5 of pricing year-on-year at the beginning of September as we delayed our fall price increase to November in order to further read the consumer and just to determine the appropriate strategy for 2021 with the key there as to maximize flowthrough.

We want to make sure that we’re maximizing flowthrough and we are considering all the factors as we move into 2021. In addition, we cycled the launch of our premium Carnitas LTO in September 2019, which is a high-check program going over the $1 and $5 value Crispy Chicken program, which was designed to drive transactions.

The second recent trend that we are experiencing is in the breakfast daypart. We talked about breakfast having an outsized adverse impact in company restaurants during COVID, during the disruption that’s occurred in Southern – due to the disruption that’s occurred in Southern California and Las Vegas and in Q3, company breakfast comps, as an example were negative mid-single-digits and the company performed at a positive 2% comp.

As we moved into typically high breakfast seasonality post Labor Day in these markets while schools and offices are still highly virtual, the Q3 trend has declined further at breakfast, quarter-to-date, particularly as we lap our 2019 launch of the Breakfast Toasted Wrap last year that was launched during high breakfast seasonality and normal consumer behavior in these key markets.

So it caused the daypart comp to slight decline further in Q4 and it’s causing an overall drag on the Q4 comps, because of that daypart compared to Q3, whereas all the other dayparts are remaining flattish to positive in Q4 so far for the company including our highest mixing dayparts of lunch and dinner that each remain up approximately 2% for company restaurants.

And then, my last comment on the comp – sorry to be long-winded, I know, there is just kind of a lot in your question, I want to make sure I got to the details is the transaction volumes and the transaction comps have improved since the launch of Crispy Chicken and we are holding the majority of those increases.

So it’s truly a transaction-driving program and we think the combination of Crispy Chicken new news with returning to a more normalized advertising spend as a percent of sales in Q4 really should help to continue that transaction trajectory in our early November fall price increase, obviously, followed by – we are doing a seasonal Tamale LTO, which is more of a premium LTO for us should be complementary and help check as well, as we move deeper into the quarter. So, lot there, but there was a lot in your question, I wanted to get to the details for you.

Nicole Miller

I think that’s very, very important and appreciate it. More of a curiosity, but then it makes me really ask the question. I can imagine where your core customer, especially in California is also used to dining in with you. I understand they can use the drive-thru and the mandates don’t limit that, but franchise diverse geographies have relearned and leaned on that drive-thru. Is that potentially an issue as well?

John Cappasola

No, I mean, I think if you look at the sales the sales being built back. Clearly, we’re making up some of that from higher drive-thru mix. We’re making up some of that obviously from much higher delivery mix year-on-year. So, we’re getting a lot of that back. Your point is valid, maybe breakfast daypart, you’re going to have you could have some of that pressure. But, overall, I don’t think that it’s material compared to – in regard to that dining room piece, compared to what we are seeing outside of California. I think it’s probably a fairly neutral concept.

Nicole Miller

Well, thanks, again. A lot, like you said, going on and I appreciate it. Best of luck. Thank you.

John Cappasola

Thanks, Nicole.

Operator

Our next question comes from Nick Setyan from Wedbush Securities. Nick, proceed with your question.

Nick Setyan

Thank you. I appreciate the clarification. [Indiscernible]

Steve Brake

Nick, we are having a hard time hearing you, Nick.

John Cappasola

And Nick, you are breaking up.

Nick Setyan

Okay. Can you guys hear me now?

Steve Brake

Not very well.

John Cappasola

Maybe the operator can try to clear that up and help. Operator?

Operator

Yes. One moment.

Nick Setyan

How about now?

John Cappasola

You can give it a shot. But it’s tough to understand.

Nick Setyan

Okay. Let me give it a shot. And thanks for the clarification. Quarter-to-date bigger picture question, the remodel, the new prototype, when can we actually see those be implemented in a systematic way across the system, particularly on the remodel timing? And maybe just a bigger picture, talk about the unit growth you anticipate how should we think about that build over the next few years not necessarily in the near-term or even in the 2021, but maybe over the next three to five years to actually think about the unit growth potential?

John Cappasola

Yes, I think I got the gist of it, Nick. First off, the new prototype design is that we are at the finish line on that. We are excited about it and the additional functionality we’ve added now, given the pandemic and COVID and some of the things that we see moving forward like, the ability to improve throughput, as well as pick up at the restaurant level, those things have been integrated along with some smart strategies around the kitchen, that makes that kitchen more scalable to multiple menu of venues ideas that we have like drive-thru-only type of venues that lean into drive-thru and mobile pickup.

So, we’re right at the finish line on that. And now we are back casting a lot of that back into one, our remodel program, and then two, into menu of venues. So, as we enter into 2021, we are going to have a real concept there that will be considered as we are hunting real estate, both company and franchise, as well as thinking about opening new restaurants in the next three to five years.

So, will it be beneficial? We believe it will be, because the menu of venues initiatives, as I said it’s designed for us to be able to get into real estate like conversions and other opportunities, maybe smaller parcels of land and infill scenarios that we couldn’t necessarily penetrate with a standard drive-thru prototype that we’ve typically built.

So we are going to have more opportunities there that we believe will lead to additional access for us on the real estate front and for our franchisees that should lead to more growth obviously.

The remodel, we continue to believe that that remodel strategy is very promising and it could be – it should be a really good use of capital to drive sustainable revenue growth and returns among the fleet, not to mention just improving the guest experience with the brand. So, we are continuing to refine and test remodel as we speak.

We completed four remodels at the end of 2019 beginning of 2020 with a focus on really trying to understand the impact of various consumer-facing elements. And we saw strong top-line results in those restaurants. And so, then obviously we paused because of the pandemic for a few months. But we are back on track here and we are going to be doing four additional remodels here in Q4 with a focus on now the learnings from that first phase, streamlining cost, minimizing downtime and really optimizing consumer-facing elements.

And in general, we view success as AUV growth in the double-digit area. So that’s what we are targeting. And then in 2021, we’ll take these learnings. We’ll do more remodels in 2021 and you’re probably looking at a goal of, assuming everything goes well, having more of a system-level program entering 2022. And that would certainly be our goal as we think about the success we could have from some of these remodels – these additional remodel tests in 2021.

Nick Setyan

Thanks. And on labor, given the fact that, particularly a lot of the municipalities in California are already ahead of the state mandates are we in the eighth or ninth inning of the minimum wage headwind with your California footprint?

Steve Brake

Yes. We are getting past to middle innings. That said, it is still a minority of municipalities that have already hit 15. It’s definitely a minority of our California footprint. So there is $2 to go the next two years in most of our California restaurants. So, that’s our current reality.

Nick Setyan

Thank you.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

John Cappasola

Okay. Thank you, operator. Well, we wish you all the best. Thank you for your interest in Del Taco and taking time with us today about the brand and we look forward to sharing our progress on future calls. Have a great day.

Operator

That concludes today’s program. You may disconnect your lines. Thank you for your participation and have a great day.

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