Executives: Melissa Heidman - General Counsel Paul Murphy - Executive Chairman David Boennighausen - Chief Executive

Officer
Analysts: Michael Gallo - CL King & Associates Andrew Barish - Jefferies LLC Fred Wightman - Citigroup Joshua Long - Piper Jeffery Ryan Royce - BMO Capital Markets Kevin Robinson - SunTrust Robinson Humphrey, Inc. Dennis Geiger -

UBS
Operator: Good afternoon and welcome to today's Noodles & Company Second Quarter 2018 Earnings Conference Call. All participants are now in a listen-only mode. After the presenters' remarks, there will be a question-and-answer session. As a reminder, this call is being recorded.

I will now introduce Noodles & Company's General Counsel, Melissa Heidman.

Melissa Heidman: Thank you, and good afternoon, everyone. Welcome to our second quarter 2018 earnings call. Here with me this afternoon are Paul Murphy, our Executive Chairman; and Dave Boennighausen, our Chief Executive Officer. Let me start by going over a few regulatory matters.

I'd like to note that during our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including our guidance about our anticipated results in 2018 and details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are only projections, and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The Safe Harbor statement in this afternoon's news release and the cautionary statement in the company's most recent Form 10-K and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company's forward-looking statements. I refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's Annual Report on Form 10-K for its 2017 fiscal year and subsequent filings we have made.

These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Now, I would like to turn it over to Paul Murphy, our Executive Chairman.

Paul Murphy: Thank you, Mel and good afternoon. I continued to be very excited and pleased with our performance as we build momentum to the implementation of our strategic roadmap. During the second quarter the company made meaningful strides evidenced in many key areas, particularly our comparable restaurant sales which had plus% system-wide were our strongest performance in six years.

Thus far in 2018, the company has made significant progress against our strategy, including the successful nationwide introduction of zucchini noodles which has exceeded our initial expectations. Continued momentum around our off premise capabilities, improved communication at the brand's positioning to our guest and continued work on the operational execution of our brand. While we are certainly pleased with the trajectory of the business and the sequential improvement in our performance, we also know that there's tremendous opportunity ahead. Noodle has every strength you'd want to build an enduring brand around that consistently performs at the top of the restaurant industry. Our transformation strategy will continue to capitalize on these strengths with important investments in people, culinary, off-premise and brand communication initiative that can drive sustainable and continued value creation, allowing the brand to reach its immense potential.

While we have seen significant improvement over the past several months, our team is forward look looking, working diligently on the areas that will benefit the company and drive results for the remainder of 2018 as well as in 2019 and beyond. I will now turn it over Dave today to discuss our Q2 results and 2018 strategy in more detail. David Boennighausen : Thank you, Paul. As Paul mentioned, Q2 comparable sales were particularly strong with system-wide comparable sales growth of 5.4 % comprised of a 5% increase accompanied on restaurants and an 8% increase of franchise locations. This marked our first positive comparable sales quarter since Q1 of 2015 and our best comparable sales performance in six years.

At company-owned restaurants, comparable sales included 2.4% of price, a negligible impact from menu make shift and traffic growth of approximately 3.1%. Like comparable sales, this was our best quarter of traffic growth in six years. Comparable sales did benefit approximately 100 basis points from holiday shifts, but we're still strong at approximately 4.4% system-wide even without those shifts. Both Easter and 4th of July fell in Q2 of 2017, but were in Q1 and Q3 of 2018 respectively. As a result, we will face a comparable sales headwind of approximately 50 basis points in the current third quarter due to the 4th of July holiday.

I am pleased to report that exclusive of the impact of the 4th of July holiday, while still very early in Q3, we continue to see nice momentum in our top-line results. Clearly, we are encouraged by recent performance which was a result of the momentum already seen from the work over the past several quarters, as well as key initiatives that were launched during Q2. I'm proud of our team for not only their efforts but also in the results we are achieving. I would like to start with zucchini noodles, which as we discussed last quarter were introduced, nationwide in early May. We've been very pleased with the performance of this offering which has resonated with loyal guests, late users and last users alike.

Zucchini noodles taste great and also addressed the largest gap we had in our culinary offering which was for a low-carb, low-calorie option. Encouragingly, we have seen Zoodles perform even better than they did in test. Moreover, while this holds true for the signature of zucchini romesco dish which we first tested earlier this year, we have also seen a significant increase in substitutions of the Zoodles into all of our guest favorite dishes, testifying to the versatility and the broad appeal of the zucchini noodle. Additionally, while we have to choose meaningful marketing to support the launch, we did not utilize any significant discounting, giving us confidence in its ability to sustain strong performance over the coming quarters. We believe that this initial launch is just the first step in our path to create a platform of better for you flavorful dishes that meet the needs of today's consumer.

Importantly, our approach to this platform honors the heritage of the brand and affirms our authority on noodles not just pasta in the fast casual space. Just as we are in the early stages of a larger culinary strategy, we are also just starting to see real forward movement and the opportunity to be one of the premier concepts for the off-premise dining occasion, which we define is all food that is order either at our restaurant or online but eaten outside of our restaurants. Earlier this year, we installed our initial version of quick pick up shelving units in our restaurants, which coincided with additional investments in our rewards program and digital marketing strategy, resulting in sizeable off-premise sales increases during the second quarter. Total off-premise sales during the second quarter increased 370 basis points over the prior year to 50.4 % of sales. Moreover, sales derived from online ordering, which are subsequently picked up in restaurant increased 620 basis points to 14.3% of sales.

This remains a great opportunity for us to continue to educate guests on the ability to use this convenient option and drive the incremental transactions. As we've discussed in the past, our approach to the off -premise occasion remains holistic. We will continue to invest in and test potential solutions that elevate our ability to meet the need for convenience in today's marketplace. From operational procedures that enable execution of off -premise to enhancements to our interior merchandising that will improve and facilitate the guests experience to utilizing technology to remove friction for our guests. We see several areas to elevate our capabilities and capitalize on this opportunity for Noodles & Company.

Finally, I would like to discuss our approach to better communicate our brand strengths in today's competitive environment. Coinciding with the launch of zucchini noodles in May, we implemented a new look and feel to our menu boards, welcome wall, and digital ordering platforms to make the guest experience easier to navigate. Additionally, with updates to our plate-ware, colors and design elements in our communications and investment in our team members, we continue to bring energy and life back to the brand and capitalize on the friendly and engaging nature of our talented team. As excited as we are about the initial results of our initiatives, our work is not done and we know there is tremendous opportunity to increase both our sales and profitability. I would not like to shift my commentary to our financial results.

Adjusted EBITDA for the second quarter was $9.1 million, a 4.4% increase over the prior year. Adjusted EPS for the quarter was $0.01. As we discussed key items from the statement of operations, I would like to note that there were several unusual costs during the second quarter. From a restaurant level perspective, we had approximately $700,000 of non recurring investments in our COGS, labor and operating expense line items to support successful implementation of our May initiatives. First I would like to discuss our cost of goods sold which at 26.7% was 20 basis points higher than Q2 of 2017 due primarily to the successes of zucchini noodles which carry a higher cost of goods sold in the balance of our menu.

Additionally, we had one-time investment in the initial training and preparation of Zoodles to ensure a successful launch. We anticipate the COGS will return to the low to mid 26% range over the course of the balance of the year, as we realize benefit from pricing, certain supply chain initiatives and do not incur the initial investments that we had in Q2. Labor in the second quarter was 32.7% of sales and in line with the prior year. Labor was impacted by increased resources that we allocated to ensure the successful launch of our zucchini noodle offering. We expect labor to be modestly favorable versus prior year during the balance of 2018 with comparable sales momentum and last year's labor initiatives offsetting continued wage inflation between 4% and 4.5%.

Occupancy costs as a percentage of sales were 10.6%, 70 basis points better than the prior year. We expect occupancy costs to be modestly lower as a percentage of sales during the balance of 2018 versus prior year. Operating expenses of 14.5% were also in line with prior year results, reflecting investment in marketing and off-premise initiatives, offsetting leverage from higher AUVs. Marketing as a percentage of sales was 1.3%. We anticipate marketing expense of 1% to 1.5% of sales during the balance of 2018.

I would now like to move to G&A which also had some unusual activity in Q2. G&A increased $5.4 million to $14.8 million. During the second quarter, the company received the final assessment from the third of three payment card companies that vetoed assessments related to our 2016 data breach. The assessment of $11 million which was paid early in the third quarter was within our expected range and resulted in a $3.4 million true up charge during the second quarter. Additionally, the company recorded $300,000 in expense related to the settlement of litigation concerning gift cards in the state of Delaware, an issue which was first disclosed in prior years.

I would also like to note that our non-cash stock compensation was higher in Q2 than in a typical quarter due to the timing of vesting of certain equity grants. While we anticipate full year stock compensation expense of approximately $2.7 million, our expense during Q2 was just over a $1 million itself. Exclusive of these events G&A increased $1.2 million in Q2, 2018 versus the prior year. We expect G&A inclusive of stock compensation expense of between $44 million and $ 46 million for full year 2018. Interest expense in the second quarter was $1.2 million and additionally we incurred $626,000 of non-cash debt extinguishment fees related to our new credit facility instituted early in Q2.

We anticipate interest expense of approximately $1.2 million per quarter during the balance of 2018. Debt at the end of Q2 was $63.4 million net of unamortized debt issuance cost of $1.8 million. This debt figure does not include two items which will be paid during the third quarter. The $11 million data breach assessment which was paid earlier this month, as well as the gift card litigation settlement mentioned earlier. With these two events behind us, we will now have no large unusual outstanding liabilities related to the data breach or litigation activities.

We did not have any additional new restaurant openings during the second quarter and we closed seven company locations. Note that these closures in any additional and upcoming quarters are primarily related to normal course of business activities, where we are approaching the end of the lease and believe the trade area has shifted. The class of 2017 continues to perform better than any class in several years giving us continued confidence in the overall unit potential of the brand. While we do not anticipate any additional openings during the course of 2018, we are now working to develop a disciplined approach to more meaningful unit growth commencing in the back half of 2019. Our franchise community also continues to perform strongly, as seen in their comfortable sales performance which was at 8% during the second quarter.

Of note, during the first three quarters of 2018, we have offered 1% of franchise sales and marketing allowances for our franchise restaurants in order to allow them to invest in local marketing in support of our recent launches. This depressed franchise revenue by approximately $150,000 during each of the past two quarters with a similar expected impact in Q3. We anticipate full year franchise revenue of approximately $4 million. N now I would like to discuss our overall guidance for 2018 which has been updated reflecting the momentum and strong performance of the second quarter. We are raising our total revenue guidance from between $440 million to $450 million and now expect revenue between $450 million and $455 million for the fiscal year, inclusive of the aforementioned impact on franchise revenue.

Our revenue guidance now includes system-wide positive 2.5% to 3.5% comparable sales for the full year, up from our previous guidance of modestly positive comparable sales. As a reminder, comparable sales in Q3 will be negatively impacted approximately 50 basis points by the shift of the 4th of July holiday. Guidance also incorporates the impact of restaurants that have been or may close due to approaching lease expirations. As a whole, we expect these closures to be neutral to adjusted EBITDA and beneficial to restaurant contribution margin, but they do reduce overall revenue. As noted earlier, we do not anticipate any additional new restaurants opening system-wide and plan full year development of one new company location and no new franchise locations.

Our guidance for full-year restaurant level margin is 14.5% to 15.5% reflecting upside from our supply chain initiatives and same store sales momentum, offset by continued wage inflation in the incremental investment that we occur during the second quarter. We anticipate adjusted EBITDA between $32 million and $34 million and adjusted EPS are between flat and $0.03. Given the new credit facility that we entered into during Q2, we now anticipate overall capital expenditures of $13 million to $16 million in 2018 as we invest additional capital to support restaurant refreshes and investment in our off-premise capabilities. Before I hand it over to Paul, I would like to express my gratitude towards our talented team on the continued improvement in the brands performance. I am more confident than ever at Noodles' ability to become one of the leaders in the fast casual space, and I'm excited for the balance of 2018 and for the years to come.

Now I will turn it back to Paul for final remarks.

Paul Murphy: Thanks Dave. I'm very proud of the accomplishments of the team to date. The company continues to execute the ongoing hard work necessary to strengthen the foundation to deliver on initiatives such as Zoodles, which amplified the relevance of the brand. We also continue to work to build upon our momentum to drive sustained, predictable growth for years to come.

The brand is now on the offensive in terms of executing on a strategy to deliver both top and bottom line growth. And we believe we are still in the early innings of that strategy. In short, I remain confident in our strategy and excited for the balance of 2018 and the years to come. James, please open the lines for Q&A.

Operator: [Operator Instructions] Our first question comes from Michael Gallo of CL King.

Your line is now open.

Michael Gallo: Hi, good afternoon. And congratulations on the strong momentum. My question just on the margins, obviously, it was good to see the growth in margins. I was wondering if you could dimensionalize at all.

What the overall margin impact will be from the close --the stores that are closed? I think you mentioned they'll be-- it'll be margin accretive. And also if you can speak to what kind of benefits you expect to see from the new labor management tool that will be going in, as well as the new food cost system as we head into 2019. Thanks. David Boennighausen : Sure, Mike. I'll start with the impact of the close restaurants on margin; will be pretty negligible probably about 10 to 20 basis points on the high side in terms of margin benefit.

These tend to be restaurants they weren't necessarily losing money, but just that we felt at the end of the lease the trade area had shifted from us. So there will be a modest benefit but nothing extraordinary. From the labor and food management perspective, it's just a bit too early. We certainly feel there's opportunity there not just from an efficiency perspective, but also from a guest experience perspective to ensure we have proper deployment and as fresh of food as possible, but it really just is now entering test phase. And will be launched nationwide in 2019.

So just a bit too early to comment on any expected benefits there.

Michael Gallo: And then just as a follow on. In terms of Zoodles, obviously, off to a really strong start. I was wondering how we should think about that line being expanded as you --as we go through the rest the year? And obviously you started off with a few dishes and you've added on to that, but should we think of that as a platform that will see meaningful expansion off of? Or how should we think about that going forward? Thanks. Paul Murphy : This is Paul.

I would think about it as a platform. It's something that obviously we're excited about, certainly excited about the results that we're seeing that it's generating, especially as people are substituting it into the already existing dishes, but you will see that as we move into the fall we will reinforce the platform with new dishes that certainly feature the zucchini noodles. And so we'll expand upon the offering there and continue to drive the awareness of Zoodles so to speak, and in the offerings that we have behind it. So we see the ability to start with the zucchini romesco and the substitutions and then expand upon the platform as we go through the balance of 2018 and into 2019. David Boennighausen : Yes and we do believe that the opportunity for the platform extends beyond zucchini into just total better-for-you opportunities to use Noodles & Company and noodles certainly doesn't limit itself just to zucchini noodles.

There could be several other items vegetables and even fruit that can fall into that line and taste great, and I think that's one of the main reasons zucchini has been so successful is you're not sacrificing taste in order to have something healthier. And I think we're --it's very excited with where that platform can go.

Operator: Our next question comes from Andrew Barish with Jefferies. Your line is now open.

Andrew Barish: Hey, guys.

First one on the mix in the quarter. I would have expected with Zoodles and also the increase in online ordering that you would have gotten some mix. Can you dimensionalize what else may be going on and in terms of the mixed component of that strong same store sales number?
David Boennighausen : Certainly. I think from a mix perspective, one thing that's important Andy to know is that when we look at traffic we're looking at total entrée account. So while online ordering does have a higher per transaction track average if you will than a typical order going to a different channel.

When you look at a per entrée per person perspective, it's actually quite similar. For the zucchini itself, one reason that it had a really modest impact that was just very little offset by others was we priced it relatively low. We priced it at $0.75. We knew that it was going to be a bit of a higher cost of goods sold item, but we didn't want to have such an up charge that it might limit the amount of trial on that we that we couldn't -- that we would have on the dish. And as mentioned earlier, we did no deep discounting on it.

We really wanted to have just a nice low introductory offer that our introductory price that would get people to try it and I think that's worked well for us.

Andrew Barish: Great and then can you give us the update on the delivery role as they head towards half the system I think what's --what kind of timeframe are we looking at there?
David Boennighausen : Well, I'm still on track for that to be done in the next few months. We are in test now with some other providers aside from the ones that we currently use. We've gone just north of 15% but when we get these tests there we expect that we'll be able to accelerate to get to 50% in relatively short order. They aren't --these -- rest of these areas that we're testing those are live tests that are in restaurant right now.

Operator: Thank you. Our next question comes from Greg Badishkanian from Citi. Your line is now open.

Fred Wightman: Hey, guys. It's actually Fred Wight on for Greg.

If we just look at the comp performance in the quarter. Can you sort of help us size the relative impact of some of those major initiatives that you guys have talked about? I mean is Zoodles really driving most of that improvement and how should we think about the relative contribution of off-premise and just broader improvements and operations?
David Boennighausen : Yes. I think it's a great question, Fred. I think one of the reasons we've been so successful is the approach we've used has been pretty comprehensive. And while zucchini certainly gets a lot of the press and a lot of play we're incredibly excited about it.

Keep in mind; we've already seen nice momentum over the past two or three quarters. So we're already moving positive prior to the zucchini launch. We introduced quick pickup units. We continue to -- we do expanded delivery modestly. We've seen more in terms of online presence.

The call center that we started to use for off-premise occasions has also helped. We have seen quite a bit of traction just from the overall collective power of as people come back to the brand and zucchini certainly been one of the major draws for that. I think the brand itself is executing much better certainly operationally as well. So tough to dimensionalize any individual component and what the impact has been. We think much more so it's been just a collective power of all those items together with zucchini just adding an extra inflection point to that.

Fred Wightman: Makes sense. Then if we just look at the Delta between franchised and co-owned comps in the quarter. Anything you want to call out the sort of drove the relative performance. David Boennighausen : Well, sure. We talked about how in the first three quarters so inclusive of this current quarter.

We allowed the franchise community to have 1% of sales to dedicate specifically towards marketing events, very pleased with how they put those to use. We're certainly learning some things that we can translate to the company side on it as well. So that has been one major factor is effective use of marketing supporting the initiatives. And additionally, I think the franchise community just as a whole is executing at a very high level to somewhat small sample size in terms of the population, so same store sales can be a little bit volatile or dependent on two or three groups, but as a group the franchise community is just performing very strongly.

Operator: Our next question comes from Joshua Long with Piper Jeffery.

Your line is now open.

Joshua Long: Great, thank you for taking my question. I was curious what you'd learned as you dug into some of that data? It look like great traffic results during the quarter, curious if that is primarily new customers coming in, last customers, if you're getting incremental visits out of your core customers. And how you think about that in terms of just the new products you've been rolling out? And then in the bigger scope of zucchini noodles, one of the bigger opportunities was to remove that veto vote and so curious if there's other areas in the menu where you still maybe have some of that latent opportunity to remove the veto vote or if it's really about innovating now as you go forward off of some of these platforms that you're working with. David Boennighausen : Sure.

So I'll start with the question in terms of what the dynamics have been for our guests in terms of the frequency and increase in traffic. Then let Paul weigh in on some of the gaps in the menu. We are just in the early stages of the rewards program really being able to glean incredible data to support the analysis of what exactly the changes have been from different guest profiles. What we see in the early stages is that in particular in the last couple months, we have seen increase in frequency from loyal guests, a lot of lapsed users that have come back to the brand. You certainly see that when you look at our Instagram feed or Twitter.

A lot of people that have not used the brand in a while. We're seeing that veto vote has been lifted. And I'm also seeing light users that are come that are coming more often that feel they don't have to worry about potentially too heavy of a carb load if you will. So that's one encouraging aspect about our recent successes. It has really run the gamut of all of the different-- all the different groups that we attract.

Paul Murphy: Josh, this is Paul. And the second part of the question, I think it really is an on expanding it. One thing that we are certainly, one of the goals of the brand is that noodles does not have to mean pasta that the ability to do the zucchini noodles; to look at different vegetables; look at different fruits. Mow what can we do to really speak to people who maybe just look at this as a pasta company and so we didn't really play into their needs state or their occasions of youth. So for us it's really expanding upon that now certainly continuing to drive that home, drive the awareness behind that.

I think it's really beginning. We're just as I said in our earnings, opening doors to people to really kind of re-ID the company and what Noodle stands for and very exciting and zucchini while Zoodles have been very obviously very effective and we love the results. We think it's just the beginning of the ability to have a brand that has a better for you but also tastes great at the same time. And we think there are kind of infinite possibilities in the R&D against that. David Boennighausen : Yes.

And I also had one other aspect of the brand that I think is underappreciated is the opportunity we have in terms of revisiting the menu structure and pricing, which from a GAAP perspective it's not necessarily a menu item but when you have the tiger and curry and the buttered noodles at the same retail price, certainly you recognize that's probably not optimized for neither the company nor the consumer. We're in the process right now of research, Josh, on pricing. We absolutely want to ensure that it's tested correctly and we're disciplined about it. But I think you will see one of the gaps that are closed in the menu or in the brand I should say, is that ability to hit a lot of different occasions from an affordability and value perception perspective. So that could be family meals, it could be bundles; it could be the core menu prices itself.

We think there's a lot of opportunity there that we'll be able to capitalize on particularly in 2019.

Joshua Long: Thanks for that, Dave. And maybe that's the answer right there. And that last piece I was curious kind of how long that study or revisiting of the menu pricing structure you need to kind of get your hands around it? Is that more of a 2019 opportunity?
David Boennighausen : Well, it's more of a 2019 opportunity, absolutely and probably spring of 2019, Josh, we will be in test here just in the next couple months. That said, pricing is something that as anybody as you certainly know you have to make sure you get a right and you test it correctly.

So we want to make sure that we get the right work done before it goes nationwide.

Joshua Long: That makes sense. When we think about the incremental CapEx going towards some of the restaurant refreshes and then the off-premise capabilities, anything there that's worth calling out. Should we think about this as kind of leaning into the work that's already been done and really just allowing that to roll out and getting the benefit from it? Or there's maybe some inflection points built in there too for new things that are coming down the pipeline that we'll be talking about in the coming quarters? And then shifting to bigger picture as you start you mentioned during the call about maybe revisiting growth in 2019 and beyond, curious if you are also looking at what the noodles of the future store footprint might look like given that you're really leveraging this off-premise business and if there's an opportunity to optimize the square footage that you guys need. David Boennighausen : Yes.

Certainly, I think the way you worded I think is really well in terms of it is leaning into the initiatives that we have. And I'm talking about existing restaurant CapEx right now. When you look at the off-premise occasion in particular, we know that there's ability as we look at some of our restaurants that were built 10-15 years ago, when the business was much different and the off-premise occasion has evolved and changed quite a bit over those years. So ensuring that it's optimized for rather its quick pickup or future innovation around pickup windows or something along those lines. We think there's a lot to lean into in our existing restaurants, as well as what the team has done from a new menu look and feel, really getting great response on the menu boards itself and the welcome wall, the interior some of those restaurants are a bit dated.

I think there's opportunity to better communicate the brand there. From growth of the future, what I can say is absolutely we don't --we --it is a different footprint. It's a smaller footprint, should be a less expensive footprint. It will be one that is much more catered towards convenience of our guests than the footprint of five to ten years ago.

Operator: Our next question comes from Andrew Barish with BMO Capital Markets.

Your line is now open.

Ryan Royce: Hi. This is actually Ryan Royce on for Andrew. Congrats, first of all congrats on the good quarter. I just wanted to dig in a little bit on the marketing spend.

I believe it came in a little lower than your previous expectation and the effort --look for the rest of the year is slightly lower. Has anything changed there? Obviously, you got the sales lifts without having to increase the marketing which is great but do you think you're going to continue at this lower level or are you just kind of waiting for maybe some of your other initiatives to keep progressing before you turn back on the marketing?
David Boennighausen : Well, I think what's been so --what's so exciting Ryan is that the amount of momentum that we've seen from a PR perspective especially social media. So Twitter, Instagram, Facebook organic unpaid-for just excitement around the zucchini noodle offering in particular, we have received quite a bit of boost as a brand in terms of elevating the resonance with the zucchini just from that. So that's been one enormous amount that we expect will maintain when there was actually in the early stages for. I think the amount of marketing that you'll see us spend over the course of the balanced this year will be primarily still digital.

It will be continued to capitalize on our rewards program, as well as all the new offerings that we instituted in May and then future ones down the year. From a traditional media perspective, we think there's still so much more power in the digital and social for this current platform of initiatives but we don't expect there to be a significant increase there over the next several months.

Ryan Royce: Great, very helpful, thank you. And then just maybe thinking about the brand longer term, obviously, starting to get some of the top on benefits of your initiatives, but you have some investments going into that. Maybe you can help me frame like the longer-term margin, restaurant margin profile for the brands going forward?
David Boennighausen : We certainly think there's tremendous opportunity to increase our margins versus where they are today.

The approach we're taking it's very elastic. It looks at top-line, certainly there's opportunity there and to gain leverage which we saw some of in Q2 but we also think they're significant opportunity and costs of goods sold in labor and operating expenses as well. So we're looking at pretty much every avenue you can imagine including the pricing structure that we talked about a little bit earlier, and there's a lot of runway there. I think it's a bit too difficult to peg what that ultimate target could be, but we know it's significantly higher than where we are today.

Operator: Our next question comes from Jake Bartlett with SunTrust Robinson.

Your line is now open.

Kevin Robinson: Hello, this is Kevin Robinson on for Jake. Thanks for taking my question. The first question I have is could you please talk a little bit about the cadence of same store --the monthly cadence of same store sales like in June and early July?
David Boennighausen : Well, you certainly had a shift in the holiday which had some impact there. We did seek a nice momentum entering the earnings call which was in May and then we saw a nice little uptick from that point forward as we launched the zucchini noodles and the balance of the initiatives.

I can just say we're pleased with how the momentum and cadence progressed through the quarter.

Kevin Robinson: Okay, thank you. Another question, what level of unit volumes do you think you need in order to materially reaccelerate the pace of development? Is it 10 % higher in the current AUV of a $1.1 million or 20% higher? And in terms of the strong performance of recent openings is that a function of keeping only the very strongest sites as you shrink your pipeline or do you believe that can be achieved --similar performance can be achieved with as you rebuild the pipeline?
David Boennighausen : I'll address some of the recent openings and then would love Paul to weigh in on how we're approaching future development. When we made some changes to our strategy roughly two years ago, we had a pretty large pipeline in place for 2017. We actually brought every single site back up for review and ultimately winnowed it down and what I mean by that is we ensured that we had the right site characteristics, the right trade area characteristics and the right economic characteristics combined with a team and a bench that we feel could support those openings.

I think that's one of the strongest --one of the reasons they've been so strong, combined with that the concept is much easier to execute than it was a few years ago. So we think the training for our teams has been significantly stronger as well. So we certainly know that at that type of growth rate of 14-15 restaurants, we can execute at a very high level and get a nice return. Paul Murphy : And this is Paul. I would echo what Dave saying, it's being disciplined and really three factors.

One, obviously the site; number two is the people pipeline to really not only have the right people to open the new store, but to backfill the store in the core store. So you don't impact performance and then the really the discipline to adhere to the financial model especially an occupancy cost. So, frankly met the volumes that we're at today. I think that we're able to build it to grow the concept as we get into the back half of 2019. It's just once again making sure that we stay very disciplined against those three key areas.

So I don't think we necessarily have to grow to 13 or 14 to begin growth. Now certainly that makes it easier but even at the bottoms we are out today or -- this weekend, we can get back into a growth mode.

Kevin Robinson: Excellent. My final question is I noticed that you are widening your restaurant margin guidance for the year with only two quarters left. Could you talk a little bit about what are the pieces there -- getting you there?
David Boennighausen : Yes.

So [Indiscernible] from 14 to 15 up to 14.5 to 15.5. It purely reflects that we see the higher top-line momentum as we enter the second half of the year. Q2 did have some unusual events again about $700,000 worth of restaurant level expense. They hit margin during Q2 but we think there's more upside on the sales and margin for the back half of the year than we had in our prior guidance.

Operator: Our next question comes from Dennis Geiger with UBS.

Your line is now open.

Dennis Geiger: Hey, guys, thanks for the questions. So just first just wanted to get what the latest is on the guest satisfaction scores? I am not sure how often you guys conduct your customer surveys but if scores continue to trend higher in the last several months or the last couple of quarters, I guess to that point do you see a correlation between those scores and the sales results. Is there a pretty decent correlation there? So I guess that's some-- that's the first question. And the last piece that I guess really would just be is there anything that's kind of been identified as sort of the biggest opportunities for you going forward for that satisfaction work? Thanks.

David Boennighausen : Yes. I think the guest satisfaction scores continue to rise in this modest slow steady growth in terms of those metrics. We see it pretty regularly, Dennis, because of the surveys we use actually occur every single day, they come through in real-time. We just see nice steady increases there. If I'd say there's an opportunity it's really in that what we're tackling with the menu pricing research and testing that will go into that in terms of there are certain areas where we feel we could better present the brand from a pricing perspective to increase our value perception.

Dennis Geiger: Great. Then just touching on the margins and in the investment. Can you talk a little bit about what kind of comp level you feel like you need in a normal inflation year if such a thing exists to leverage restaurant margin? I'm sure there's probably lots of moving pieces here but any loose framework for how you're thinking about the comp that leverages restaurant level margins?
David Boennighausen : Yes. We see so many opportunities throughout the P&L that we think with the right discipline and the right approach that we don't need much in terms of the same store sales number in order to expand margins a night. I'd actually point to both Q4 of last year and Q1 of this year which were modestly negative in same store sales but we were actually able to expand margins at our core restaurants.

So as we look at supply chain initiatives in particular some of the operating expenses as well, we don't believe there needs to be much more than just very modest same store sales growth to be able to maintain margins. So that's one thing I think we're excited about is the potential to layer on several different levers to move that line.

Dennis Geiger: That's great. And just last one if I could just on the off -premise and the delivery opportunity. Any additional learning there that you can share I guess specific to delivery? I know super early but any data that you've got and how folks are using it? How incremental the demand is perhaps anything at this early juncture that you could share? Thanks.

David Boennighausen : Yes. I think we're seeing similar to what other concepts are seeing in terms of delivery is not the most margin accretive item, but it does bring incremental sales and ultimately incremental profit to the bottom line. The key learning for us and one reason why we're ensuring that we test these other partners and back them correctly is that we want to make sure that it's absolutely seamless for our team members. We want to make sure that the execution of that delivery occasion is as strong as possible. And so we're ensuring that they especially how it interacts with our POS and technology systems then it seamless.

And as we get those boxes checked, I think you'll see us accelerate that pretty quickly.

Operator: Our next question comes from Steven Greene with Jefferies. Your line is now open. All right. It looks like Mr.

Greene's line is not responsive. And in that case I would just like to go ahead and turn the conference back over to Mr. Boennighausen for closing remarks. David Boennighausen : Sure, well, thank you everybody for your time today. We're extremely excited with the performance that we've been seeing, but I think even more excited with what we see coming down the pipe because this is a phenomenal brand.

And I think that the work that the team has done is starting to see the results in our performance. And just extremely excited to see what 2018 and beyond hold for the brand. Thank you very much.

Operator: Thank you, ladies and gentlemen. That does conclude today's conference.

Thank you very much for your participation. You may all disconnect. Have a wonderful day.