Executives: David Boennighausen - Chief Financial Officer Kevin Reddy - Chairman & Chief Executive Officer Mark Mears - Executive Vice President and Chief Marketing

Officer
Analysts: Keith Siegner - UBS Securities Jeffrey Bernstein - Barclays Capital Jake Bartlett - SunTrust Robinson Humphrey Joseph Buckley - Bank of America Merrill Lynch Andrew Barish - Jefferies John Glass - Morgan Stanley & Co David Tarantino - Robert W. Baird & Co. Jason West - Credit Suisse Nicole Regan - Piper Jaffray Eric Gonzalez - RBC Capital

Markets
Operator: Good morning and welcome to today's Noodles & Company Third Quarter 2015 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 Chief Financial Officer, Dave Boennighausen. Mr. Boennighausen, you may begin.

David Boennighausen: Thank you, Heather and good morning everyone and welcome to our third quarter 2015 earnings call.

Here with me this morning is Kevin Reddy, our Chairman, Chief Executive Officer and Mark Mears, our Executive Vice President and Chief Marketing Officer. Let me start by going over a few regulatory matters. I'd like to note that during our opening remarks 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 targeted results for 2015 and details related 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 morning's news release and the cautionary statement in the company's most recent Form 10-K are considered a part of this conference call. 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 2014 fiscal year. This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections of forward-looking statements. Now, I'd like to turn it over to Kevin.

Kevin Reddy: Thanks, Dave, and good morning.

We appreciate that you have joined us this morning to review the Q3 2015 results. As you saw on our earnings release, the third quarter was challenging as comparable restaurant sales decreased 0.9% system-wide, adjusted EBITDA for the third quarter was $8.7 million and our adjusted diluted earnings per share was slightly positive. Dave will discuss our financial results in more depth later in the call. We are actively taking steps to address the challenges we have seen during the past few quarters. Although our investments in building the business have come at short-term financial costs, we believe strongly that we are allocating resources on the right initiatives, and actions to move the brand forward.

The first step that I would like to discuss is our action to close select restaurants, and reduce the associated resource and financial burden of these units, as we announced in the press release earlier this morning. It's important to note that during the 20-year history of Noodles & Company, we have only closed a handful of restaurants. However, at this time, we believe it is a better use of resources to allow our teams to focus support on culinary operations and marketing initiatives. We believe in the incredible potential of the brand and the uniqueness of the concept and we plan on continuing to expand in those areas where we expect the strongest return on invested capital. Again, Dave, will discuss more later on.

As our development strategy has become more focused on the infill of existing restaurants; we are also sharpening our focus on how to bring the brand to life, both inside and outside our four walls. Before I discuss our efforts in brand positioning, I would like to give a brief update on our initiatives to increase off premise sales from our restaurants. Today roughly 40% of our sales are eaten off-premise, a number which has steadily grown over the years. We believe we have tremendous potential in better meeting the needs of off-premise dining occasions and are actively working on three avenues to drive

this opportunity: online ordering, catering and delivery. First, is increased promotion of our online ordering platform.

Our online ordering system currently counts for 5% of total sales and 12% of off-premise sales. This number has grown organically over the past few years and brings with it added convenience for the guests as well as more seamless experiences at the restaurant level. We will be more actively promoting online ordering in upcoming quarters, which includes the opportunity for the guests to make smaller catering orders online. And this smaller catering platform is primarily focused on groups of 10 to 20 guests and was introduced earlier this year. It complements the larger catering offering we introduced just over a year ago.

This offering is also available through digital ordering, and has helped overall catering reach 1.5% of sales a 50% increase over the same time last year. As we enter the holiday season, we expect to capitalize on the catering opportunity, and will support it through a variety of communications inside and outside of our restaurants. Finally, we have expanded our test of delivery to roughly 40 restaurants through various third-party partners primarily in college and urban trade areas. We are still very much in the early stages of this program, and are actively working on incorporating it into our overall online and mobile ordering systems but believe there exists solid opportunity to meet this growing need of our guests. Last month, Noodles & Company celebrated our 20th anniversary, a National Noodle Day with new menu updates and the launch of our Made.Different.

brand positioning. Noodles & Company's culinary platform and appeal to Millennial parents is a significant strength, which we have not fully capitalized on over the years. This new positioning are differentiated made-to-order fast casual dining experience, as well as our continued commitment to food quality and transparency. Over the past few quarters, we've shared with you the work we've done from the rigorous review of the brand to the selection of the Made.Different. brand positioning.

During the third quarter, we began to bring this to life through an integrated media campaign focused in a few markets. While many of these messages have been more brand driven in nature, I am very pleased that our early read has shown improvements in traffic terms, especially given the improvements have come at a time of a slowdown in the broader industry. We have accelerated those efforts going into the fourth quarter with additional PR and supporting promotional marketing efforts. As part of our brand positioning launch, we also announced the removal of all artificial colors, flavors, preservatives, and sweeteners from our core menu as well as our commitment to pursue an entire selection of meat and poultry never given antibiotics or hormones by 2017. Finally, we are taking action to better capitalize on our strength of Millennial parents.

Our kids' meal introduction, which Mark will discuss in a little more depth, is an example of our actions to increase our share with this segment. While the industry backdrop has been challenging and the results aren't yet where they need to be, we have seen important progress from these initiatives, which is also carrying into the fourth quarter. Comparable restaurant sales quarter-to-date through November 3 stood at a negative 1.5%, which implies traffic improvement of roughly 120 basis points from Q3 trends as we have overlapped nearly 200 basis points of price, an important metric we indicated last quarter we intended to drive and needed to proceed other initiatives and other metrics. On a two-year cumulative basis, comparable sales increased 0.9% during the first quarter, 140 basis point improvement from the two-year growth during the second quarter. During the third quarter, we outperformed the Black Box Fast Casual Index in Colorado in comparable sales for the first time since 2013 as our media and operational initiatives began to take hold.

We also closed nearly the entire gap to the Black Box Index in the Mid-Atlantic region, another market that had previously been under significant pressure. Moreover, catering and online ordering continues to grow and represents significant long-term potential. And finally, our newest markets Orlando, Phoenix and Toronto continue to perform at volumes above company average. I'd now like to turn the call over to Mark Mears our Chief Marketing Officer to discuss at more length our new Made.Different. brand positioning and our ongoing marketing strategy.

Mark has established a proven record of achieving outstanding results at a variety of fast casual and casual dining brands and his impact on Noodles & Company is already being felt in the few short months he has been with us. Mark?

Mark Mears: Thank you, Kevin, and good morning everyone. I am thrilled to be part of the talented and dedicated team at Noodles & Company and I look forward to helping shape a powerful and enduring future for this great brand. In my first 100 days, I have become fully immersed in my role as chief marketing officer for Noodles & Company, working to understand our brand's DNA and mission along with its relevancy within today's fast casual environment and related guest dining habits. Our mission is clear and powerful, to always nourish and inspire every team member, guest, and community we serve.

To that end, we are embarking upon an integrated multifaceted strategic approach to bring this purpose-based mission to life in our quest to become the fast casual restaurant of choice for our millennial family target. Now, the three strategic pillars of this plan are, first, build top of mind brand awareness in concert with our agency we've developed a new strategic positioning to harness our key brand assets and equities in a way that creatively communicates the essence of our broader brand story, featuring the positioning line Made.Different. And this is focused on real food, real cooking, and real flavors. Now to grow awareness for our new Made.Different. campaign, our strategy is to employ an integrated mix of both mass reach and micro-targeted communications, including publicity, radio, out of home, online video, search engine optimization, digital and social media, as well as in restaurant merchandising, email, and local restaurant marketing.

Now this is to clearly highlight the fresh, high-quality, clean ingredients and complex sauce differentiators of each handcrafted dish we serve while creating an emotional connection with our millennial family target. We are bringing the family back together. The second pillar of our plan is to encourage a deeper level of brand engagement to fulfill our brands' pan to table promise among all constituents. From the millions of guests we serve in our restaurants every day to our 10,000 strong noodle ambassadors who serve them. Now this emotional connection that will forge externally to our increased advertising in key markets, expansion of our social media footprint, and system-wide local marketing efforts will be paired with engaging our team members internally through more focused training and an emphasis on improved operations execution.

The third, and clearly the most important pillar of our plan is growing profitable sales. To accomplish this objective, we are executing a variety of integrated menu and marketing initiatives that will generate incremental guest visits and profitable sales in ways that will also reinforce our value proposition, and elevate the brand experience. Now, just one example is our recently launched Kids Meal program to appeal to millennial parents and their families. We feel strongly and very encouraged by the early sales results, as well as the positive feedback we've received from both guests and our operations team. And more than just offering great tasting food, we have partnered with Share Our Strength's No Kid Hungry program to help connect hungry kids with 1 million meals.

While the aforementioned marketing activities are designed to grow comp sales in Q4, our team is already hard at work in developing a comprehensive Noodles & Company brand plan for 2016. This strategic plan will integrate both our marketing in menu focused brand and sales building initiatives, along with our operational excellence focused initiatives, designed to improve the stickiness of our marketing efforts by improving the key drivers of guest satisfaction. Now I'd like to turn it over to Dave to give an update on our development strategy and discuss financial results.

David Boennighausen: Thanks, Mark. As Kevin mentioned and as we announced earlier today, we anticipate closing 16 restaurants during the balance of 2015, which we expect to have a positive impact on future earnings, average unit volumes, restaurant level margins, cash flow and return on capital.

This decision was the process of a thorough evaluation of the performance of our real estate portfolio from a site characteristic, operational and guest perspective. As of last night, we have closed all of our six restaurants in the Austin, Texas area as well as one in Lubbock. As we've discussed in the past, we'd had difficulty overcoming initial operational setbacks in the Austin area, despite considerable investment and resources. While we have been successful in our entry further south in Houston, we ultimately believe that the resource distraction to improve Austin is not where our focus should lie. Of the remaining nine restaurants, several will be in the D.C.

Metro area. As Kevin mentioned, the market as a whole has improved, and we still have many great performing restaurants in this area. But similar to Austin, we believe our resources are better focused on supporting our initiatives versus focusing on these underperformers. In the third quarter, we incurred a non-cash impairment charge of $16.2 million associated with the impairment of 25 restaurants which included 10 restaurants that are slated for closure as well as 15 additional restaurants that will remain open what we impair based on our current assessment of future cash flows relative to net book value. During the fourth quarter and potentially early into 2016, we estimate that we will incur pre-tax charges of approximately $5 million related to cash lease obligations, brokerage commissions and other direct costs associated with the closures such as employee severance costs.

We will update the estimated pre-tax charges related to the restaurant closures when we report our fourth-quarter operating results early next year. As for the benefits that we anticipate from this closure and impairment activity, based on our results thus far this year, the estimated pro forma impact would be 120 basis points increase in margins and EBITDA would increase approximately $2.5 million on an annualized basis. Operating income would be increased by approximately $4 million to $4.5 million. The 16 restaurants we have closed or in process of closing generated less than 3% of total sales during the third quarter. Their impact on comparable sales was negligible.

Looking forward, we do not anticipate additional closures in the near-term with the potential exception of those that during the normal course of business would be relocated or closed at the end of their lease term. New markets of Orlando, Phoenix, and Toronto are exceeding sales expectations and our best comparable sales performance continues to be in markets where we are developing more restaurants and building organic brand awareness. Where we have seen a common thread though in terms of underperforming real estate is in urban neighborhoods that are fewer of our core family demographic. Consequently, our ongoing development focus will be on the infill of existing markets with particular focus on family presence when securing new locations. Our unit growth will be measured in 2016, and we expect between 50 and 60 openings system-wide compared with up to 66 during the fiscal year 2015.

Given the current status of the pipeline we expect our openings in 2016 to be weighted towards the first half of the year, before we normalize to a much lower unit growth rate during the back half of 2016. As we reallocate resources, we will also be investing in the remodel of some of our older restaurants. As we've discussed in the past, while our research shows that our current design resonates well with guests, some of our more established markets have restaurants that need to be refreshed. We will begin remodeling some restaurants here in Colorado later this quarter which will inform a larger program we will discuss at more length in upcoming calls. Moving back to the third quarter, with new openings revenue in the third quarter increased 10.5% to $117.3 million.

We reported adjusted net income of $98,000 and adjusted EBITDA decrease from $12.1 million to $8.7 million, due primarily to the impact of underperforming restaurants and investments in our marketing and operational initiatives. In the third quarter, comparable restaurant sales decreased 0.7% at company restaurants, 1.9% of franchise restaurants and 0.9% at system-wide. For company restaurants, comparable sales included approximately 2% of price offset by negative traffic. From a cadence perspective for Q3, comparable sales were slightly positive in July and modestly negative during both August and September. As Kevin mentioned, during the fourth quarter we overlapped our prior price increase and are currently running an effective price of only 10 basis points, 190 basis points less than what we've been running year-to-today.

Fourth quarter to-date, company comparable restaurant sales through November 3 are running at negative 1.5%, reflecting an implied improvement in traffic of 120 basis points from the third quarter and the quarter to-date Q4. While we are seeing noticeable improvement in traffic trends, giving negligible price we anticipate comparable sales to be modestly negative during the fourth quarter of 2015. As discussed, the underperforming restaurants that we are closing had a roughly 120 basis point pro forma drag on overall restaurant level margin and our restaurant level margin of 15.2% in the third quarter was 320 basis points below the prior year. Looking at the line items of the P&L, the primary cause of our overall decline in restaurant level margin can be found in our labor costs, which increased 210 basis points from prior year to 32.4% during the third quarter. Structural impacts from wage inflation and the implementation of the Affordable Care Act caused roughly half of the increase.

The other half was caused by a combination of de-leverage on lower average unit volumes, as well as the intentional investment and training in labor that we discussed during the most recent call, including those non-recurring investments to support our Made.Different. launch. We anticipate similar overall increases in the labor line year-over-year during the fourth quarter. Our cost of goods sold of 26.6% was a 40 basis point improvement from the prior year. We anticipate some added cost from the investments we are making in our real food and promotional initiatives, and we expect COGS to be between 27% and 27.5% during the fourth quarter.

During the third quarter, occupancy cost increased as a percentage of sales by 60 basis points, a similar increase to what we saw during the second quarter of this year. This is the result of deleverage on lower average unit volumes as well as the pure number of openings that we've had. Operating cost increased as a percentage of sales by 80 basis points during the third quarter. While much of this is tied to deleverage on lower unit volumes, we are also making smart investments in technology and marketing initiatives that we believe strongly will help us meet our strategic goals. Our marketing spend for the third quarter was 1.5% of sales, a 20 basis point increase over Q3 of last year.

We anticipate an increase in marketing spend to approximately 1.7% to 2% of sales during the fourth quarter, compared to 0.9% during Q4 of 2014. General and administrative expenses of 8% of revenue was a 90 basis point increase over Q3 of 2014. 50 basis points of this increase is due to the timing of a bonus accrual reversal during 2014 with the remainder coming from support of new markets and marketing initiatives. We expect G&A expense to be approximately 8% in the fourth quarter of 2015. Our tax rate for the third quarter on a GAAP basis was 37.4% and our estimated annual tax rate for 2015 is between 38% and 39%.

During the third quarter, we completed our $35 million share repurchase program and through the entire program purchased approximately 2.4 million shares. As of the end of the third quarter, the company had $60.4 million in debt outstanding on our credit facility and cash on hand was just over $2 million. Given our third-quarter results, we now anticipate adjusted diluted earnings per share of between $0.13 and $0.15 for the full year 2015 and adjusted EBITDA of between $37 million and $40 million. This guidance incorporates slightly negative full year comparable sales and revenue of approximately $455 million. We now anticipate full year contribution margin between 15.5% and 16%.

Looking forward to 2016, while we are seeing momentum in traffic from our initiatives, we do expect earnings will remain under pressure, particularly during the first half of the year. Given we have just recently entered the activation phase of many of our investments, and are still finalizing our annual budget, we do not believe it is prudent at this time providing more guidance on the 2016s expectations at our Q4 earnings call early next year. I would now like to turn it over to Kevin for final remarks before we go to Q&A.

Kevin Reddy: Thank you. In closing, I'd like to reiterate the confidence we have in the plan and actions that we are taking in the future growth of Noodles & Company.

At 20 years, and nearly 500 restaurants, we have reached milestones, few concepts have been able to achieve. Yet we know we have much to do to maximize our potential. Our actions towards underperforming restaurants will allow us to better support our growth initiatives in our existing restaurants. Our measurement and focus on the functional component of operations combined with the leadership development programs will accelerate our in-store hospitality experience for our guests. Our focus on initiatives surrounding off premise sales will meet the challenging needs and desires of today's consumer.

Our new Made.Different. brand positioning captures the essence of what makes Noodles & Company such a powerful brand for our millions of guests, and along with our newly introduced Kids Meal program, better connects the brand to millennial parents as we strive to build awareness, deepen our level of engagement and drive profitable sales into our restaurants. Our continued investment in our ingredients furthers the promise to our guests of real food, real cooking, and real flavors. Results aren't where they need to be. But we have the right plan in place, and we are seeing the progress as we activate this plan.

Thank you for your time, and if we can now please open the lines for Q&A. [Operator Instructions]

Operator: Your first question comes from line of Keith Siegner with UBS. Your line is open.

Keith Siegner: Thanks, folks. Kevin, with Mark in place now, with the Made.Different.

program here, with all these other things you are considering, I'm sure you've taken a step back and looked at the menu and thought like, is there anything we need to do here? Have you been testing recipe changes? Are you thinking about any changes to the pricing architecture? What about menu simplification? Can you talk about these things? Maybe what you are testing? How we can think about those into next year? Thanks.

Kevin Reddy: Sure. We are doing many of those things actually. From a menu standpoint, we clearly have some items that we have had in test in the ideation to continue to improve our labels and cooking procedures so that we can cook faster and cleaner ingredients. We've - definitely have some innovation going on in our salad lines.

We have excellent salads. We think we can have some great salads. We've looked at improving some noodle dishes. We've had in test the items that we will have in the first quarter for our LTOs. So we're excited with both some of the more adventurous flavors and spices that we are bringing in that are unique.

We have a variety of things through both, noodles and pasta, salads, as well as some improvement in our sandwich lines that we've been testing from ideation in the kitchen to a few restaurants. Price has been interesting. We have a couple of different price structures that we have experimented with in some small markets. Pretty pleased with what we're seeing there. We think it conveys greater value and will increase our protein incidence.

That is - and actually some of the big improvement we are seeing in traffic is being driven by some of those tests. We are pleased with that momentum. So, we do have quite a bit going in that area. And then next year we plan to both take some slow-moving items off the menu and replace them with what we think stronger, more powerful menu dishes that will be part of that summertime focus on menu and pricing.

Keith Siegner: Dave, a quick one for you.

We've heard a lot across the industry about commodity costs and easing pressures there. How is inflation running for you now? And how is next year shaping up, at least at this point? Thanks.

David Boennighausen: Yeah. I think we're seeing the same things, Keith. In terms of commodity inflation for this year, it's pretty negligible.

As we look to next year, it is a pretty favorable environment. At the same time, we do need to invest in certain aspects of our food evolution, in particular on the protein side looking potentially at hormone-free dairy as well. So while we expect COGS will still be pretty favorable, there will be some investments there.

Keith Siegner: And one last one from me. Kevin, you talked about normalizing to a slower growth rate in units in the back half of next year.

If you're willing to talk about it, what level does that mean? Any details would be helpful, thanks.

Kevin Reddy: I think that's a necessary question that we have been facing, and an important one to ask. When you're trailing your expectations by a little bit and although that number has remained about the same at 10 to 12 guests a day, what we expect is we will probably drop to that lower end of what we originally had is our long-term guidance, so we'll be off our current run rate by potentially 3 percentage points to 4 percentage points potentially. I think more importantly than the number we'll hit is to really convey. We are chasing a number.

We have a guidance range that we think is realistic. All of our actions have been to raise the screens in the markets where they need to be appropriately raised through real estate decisions. To make sure that we build in existing markets, so we aren't adding the first store to new market, we're not stretching the teams in that regard. To continue to fill in existing markets which should provide both brand awareness and economies of scale - and the slower growth rate that we are moving to actually will be spread across a much larger productive asset base. So it will be easier for our teams to actually open just a couple restaurants in the markets that we are in.

So we think we have a strong asset base that we need to make the right real estate decisions and that that will get us back to the profitable growth and success that we need.

Keith Siegner: Thank you.

Operator: Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.

Jeffrey Bernstein: Great.

Thank you. First, just a follow-up on the unit topic. I think you said 50 to 60 units in 2016, which is again somewhat similar to 2015. I was wondering whether those are units, it sounds like, if they are opening in the first half, perhaps those are units that are already committed to, so just wondering if that is the case. And then just to clarify what you said earlier.

I was under the impression your long-term guidance was for unit growth of 12% to 13% annually and I just want to make sure. I thought you said you'd lower that now by 3 percentage points to 4 percentage points. Was that meant to say that now we should expect once you get past the first half of 2016 that your longer-term annual unit growth would be more in the high single-digit percentage growth range. And then I had a follow-up.

David Boennighausen: Great questions, Jeff.

I think in terms of 2016 guidance for units, you're looking at 50 units to 60 units versus 66 units that we had this current year that are committed to for the vast majority for those for the first half of next year. So that is one reason why you don't see the unit growth dropping too much for the overall year of 2016. As we look beyond that, I can tell you that we don't have a very specific target in terms of what that number has to be. We don't chase the number, as Kevin mentioned. What I can tell you is that we'll absolutely be lower and it will be making sure that we are infilling markets and getting the right restaurants that will get us a stronger return on invested capital as we can.

That number could be 3% to 4% off of that 12% to 13% guidance. It could still be in that low double-digits, it could be lower than that, but I think time will tell, we'll tell more in the next earnings call.

Kevin Reddy: And just to clarify my comments. That drop I was referencing was to the run rate we have been at versus the guidance range we originally had out there.

Jeffrey Bernstein: Okay.

And then my second question was just on the media campaign. I think you mentioned it was just in certain key markets. So I was wondering if you can share what market you are looking at and maybe, Mark, I don't know if you could shed some light on how you then measure the return you get on those investments? I think you actually mentioned in the press release that you're seeing measurable improvement in the trend line. I didn't know if that's at all quantifiable?

Mark Mears: Yeah. Great question.

A portion of our spend is system-wide and so in the four markets that we've chosen for really a test, it's Colorado Springs and Madison, Wisconsin, Washington, D.C. and right here in Denver. And the point was to get a good range of our system, our heritage market, a market on the Atlantic coast as well as some smaller markets to obtain the learnings that we are going to apply for 2016. And Dave can give you an update on the results we've seen so far.

David Boennighausen: Yeah, absolutely.

We are very excited what we are seeing on that front, Jeff. It's very early, so I think it would be difficult to assign a specific same-store sales lift that we are expecting or the necessary ROI. What I can tell you is that in particular all four of those markets, they are moving in the right direction. And as Kevin mentioned, we outperformed Colorado in the Black Box Index for the first since 2013. Almost did the same thing in D.C., which is very encouraging.

Particularly when you look at those markets where - those two markets, we have been running 200 basis points to 400 basis points behind the industry prior to the media launch. And so we are seeing some good movement in that direction. But it's a little bit early to talk about what the overall ROI would be and expected sales lift.

Jeffrey Bernstein: Understood. And then just lastly on the pricing outlook, it would seem to be a positive message you're sending in terms of letting the pricing fall from, I think it was 200 basis points in the third quarter.

Now we're talking about 10 basis points in the fourth quarter. I am just wondering whether that's just timing wise or what's your outlook in terms of - at least initial thoughts on pricing into 2016 and things like you said commodities could be somewhat favorable next year, but labor obviously sounds like more of headwind. So how do you at least think about pricing relative to the 10 basis points you're running now?

David Boennighausen: Yeah. So, I mean, just to level set kind of on our approach on why we didn't have more price going into Q4. First of all, we think when traffic is under pressure, we don't think it's a time to be too aggressive on the pricing side.

We think that more importantly we needed to seed the Made.Different. positioning, get more credit for the quality of our ingredients, and raise that side of the equation. We absolutely still think there's opportunity in price. We do think there's flexibility there. As we look towards 2016, it is a little bit early, we will give more texture.

But we do think that you will see us go back to the pricing board to offset those labor pressures in particular. So we could be as soon as, as we launch the next LTO in February, might be in smaller chunks, we might do it multiple times versus one time a year. But we think we - we will have some price into 2016 for sure.

Jeffrey Bernstein: Great. Thank you.

Operator: Your next question comes from the line of Jake Bartlett with SunTrust. Your line is open.

Jake Bartlett: Thanks for taking the question. Dave, could you clarify, for the Colorado, are you talking about it in October? Or was that for the third quarter that you exceeded Black Box in Colorado?

David Boennighausen: That's for the full third quarter.

Jake Bartlett: Okay.

And would you be able to share direction of what your results were like in Colorado? Were they positive or were they - because I know it's been running negative, were they still negative in the third quarter?

David Boennighausen: Yeah, absolutely. We're comfortable with that. We are still running - in the third quarter, we are still running slightly negative comparable restaurant sales in Colorado. Some similar results to what we had actually seen during the first half. What we did see a big change in was that Black Box Index where, again, it had about 200 basis point drop for the category from Q2 to Q3 for the industry.

So our performance stayed pretty steady, outperform the Black Box Index at a time when the Black Box Index was softening.

Jake Bartlett: Got it. And by category, do you mean all restaurants in general or fast casual?

David Boennighausen: Fast casual.

Jake Bartlett: Okay. And then - sorry.

David Boennighausen: No, go ahead, Jake.

Jake Bartlett: Okay. Just clarifying what changed in Colorado in the third quarter? Because the Made.Different. marketing plan really launched in the very end of the quarter. So what did you do during the quarter that would've caused that inflection in Colorado?

David Boennighausen: So Colorado was one of our initial markets with the launch of media, so the Made.Different.

platform was launched nationwide in early October. However, we were seeing some media efforts beginning kind of in the middle of the third quarter in markets like Colorado, so we did start seeing some of the benefit there. So it's just very steady improvement through the quarter. Some of its operational and some of the initiatives we're working on that and - but the media did have a little bit of an impact in Colorado.

Mark Mears: Okay.

And again, the early work was branding. We got some billboards up sooner. But it wasn't a significant weight, which is why I think that we didn't decelerate, like the agency - the rest of the industry was encouraging.

Jake Bartlett: Got it. And then in October, have you gone - is this all gaining more traction in terms maybe moving positive in a place like Colorado?

David Boennighausen: It's still a little early and you see the volatility from week-to-week.

Colorado I think is still under pressure, actually I've seen it degrading more from the industry perspective. So getting positive there might be difficult. We are seeing the D.C. Metro area move much closer in that direction, which is a very positive data point for us.

Jake Bartlett: Great.

And then the last question. Maybe just - so I understand the marketing is in test, but do you expect it to be - how can we expect the rollout in 2016, like kind of ratably across the quarters or is it going to maybe still get learnings and then maybe go more forcefully towards the backend? How should we think about the kind of rollout in 2016? And will we have - do you think we will have in all markets by the end of the year?

Kevin Reddy: This is Kevin. I don't think we will have it in all markets across the year. We will have a national system spend, but not at the same level. One of the things that we are gaining from learnings is the various channels, what is most effective in what size markets.

And that's why we picked the original four that we did. We expect that we will sustain a certain amount of spend in the markets that we launched Made.Different. in and we will have a voice there, and then we will add additional markets probably with the most effective bang for our buck in specific channels. So it's working, it's creating some brand awareness, it's connecting the messages that we think are important. So you will see us incrementally spend in a few more markets and continue I think at this level and add to it slightly quarter-to-quarter with a keen eye on making sure that we are getting the results that we are seeing in traffic trends.

Jake Bartlett: Great. Thank you very much.

Operator: Your next question comes from the line of Joseph Buckley with Bank of America. Your line is open.

Joseph Buckley: Thank you.

Hey, Dave, can I just kind of verify on the restaurant level margin guidance that it implies a fourth quarter restaurant level margin of 14% or less. Is that kind of how the math works?

David Boennighausen: Yeah. We are definitely being appropriately prudent when you look at the Q4 guidance on margin. And the reasons for that Joe, I would say, first of all, we are somewhat naked on price, so you're having the overall impact to the inflation that you're seeing, particularly in that labor line. We are absolutely having some investments in the marketing side, in the labor side in terms of the preparation in the launch of the Made.Different.

platform, also those underperforming restaurants which had really been a significant drag for us. Those are really - you will have a half of the quarter roughly where those restaurants are still in play and hurting the overall P&L. So it's going to be some softness until we get a little bit more sales momentum to overlap some of those investments we've made.

Joseph Buckley: And can you remind us where are the marketing expense? You indicated that would be up year-over-year, where is that in the income statement?

David Boennighausen: That's in operating costs. So just in the other operating expense line.

Joseph Buckley: Okay. And then the stores, the 15 stores that you impaired that are not closing, is there geographic concentration of those stores?

David Boennighausen: There really isn't much of a geographic concentration there. And there actually isn't too much of a concentration from an age perspective as well. What you see is a combination of restaurants that are nearing the end of their lease term, which we expect maybe closed at the end of their lease term or relocated. That's one element that you're seeing significant of.

And there are some of those urban neighborhoods that - they've got enough earnings power that we are covering our rents. The return on investment of closing those doesn't make sense. But we think at this time it's prudent just looking at the recent track record to look at the future cash flows and impair those.

Joseph Buckley: Okay. And then just one more on the expansion rate.

If you scale it back some, it sounds like you're still fairly committed to a pretty aggressive expansion rate. Is there any thought of cutting that back more dramatically until you kind of get your arms around the existing store sales?

Kevin Reddy: We have looked at that hard. We believe that for the reasons that I expressed earlier that the growth going forward will be less strain on the system than it has been in the past. And we think the important thing to focus on is making sure that we learn from the restaurants that did not perform to our expectations, that we've appropriately adjusted those screens and those trading areas. We believe that we are in the right zip code for that, and we will continue to closely monitor.

We still see the benefit and positive impact of growing brand awareness in those smaller markets.

David Boennighausen: Yeah, I'd add to that. When you look at the, we've opened four to five new markets this year and that's a significant strain on the team. As you look at the strategy ongoing, it's very important to know that we are not looking at newer markets. We are looking at the infill of markets where we have seen historically, over many, many years, up to the present day, that's where you'd see the best return from an investment perspective and efficiencies.

Our best performing comp markets, they tend to be the Portlands, the Raleighs of the world where we are growing that organic brand awareness. In Q4 thus far, Sacramento, San Francisco have been two of our best comping markets. Those are the areas we're going to be growing in and they are going to, I think absolutely have a nice return on investment. Absolutely, as Kevin mentioned, we are monitoring it very closely, but we think that the track record even up to today tells us that this is the right approach for the next few quarters.

Joseph Buckley: Okay.

Thank you.

Operator: Your next question comes from line of Andy Barish with Jefferies. Your line is open.

Andrew Barish: Hey, guys. Just a question on the sort of early remodel look and maybe it's too early.

But, any parameters around kind of what you are thinking cost wise there? And how much - I mean a lot of your system is new. But how many stores do you think kind of need refreshes given the competitive environment et cetera?

David Boennighausen: Yeah. We will absolutely give a much - more further update on that during the next earnings call, Andy. It's absolutely a big opportunity for us. I mean the research we've done shows that the new design resonates well, we need to refresh some of those older restaurants.

What we are doing as a tiered programs looking at different levels of spend and what the associated return on those investments are, that program is going, that test is going in the form that the larger program looks like. So I don't think we can give too much guidance in terms of what the CapEx spend is until we get to the next earnings call. What I can tell you is, as you said, relatively young footprint, so the amount of restaurants we would be hitting, it might be up to that 75 restaurant type range. It's not going to be the majority of the system. Timing wise, probably we would be looking for something over the next 12 to 18 months.

Andrew Barish: Okay. And then just on the incremental marketing spend and actually on food costs as well, I just want to understand, the 100 basis points incremental you are spending in the fourth quarter, you don't anticipate that continuing throughout 2016. And then should we balance, food costs, it sounds like some investment back into some of the newer ingredients are antibiotic-free. Is that kind of the way to think about as an offset to potential lower commodity basket?

David Boennighausen: Yeah, I believe that's absolutely appropriate. The marketing spend just to clarify what we had discussed earlier on the call, for the fourth quarter we're expecting 1.7% to 2% of sales to go towards marketing.

That's compared to what - we had 0.9% in the fourth quarter of last year. As we look forward into 2016, it's pretty early. We're still finalizing the budget, and ultimately if we continue to see the momentum we're seeing, you can see the number go up on the high side. If we are not seeing, it will of course adjust accordingly. I would expect it, though, to be in that 1.5% to 2% range just as a preliminary thought.

I don't think that you're going to see that necessarily drop. What will happen though is you start overlapping from a year-over-year perspective as you get further on. On the costs side with cost of goods sold, we do have some more investment that we will be doing, which you'll absolutely see it can be offset mostly by the just overall favorable environment.

Kevin Reddy: Andy, this is Kevin. One other comment on the remodels.

Even in the least expensive tiers, we're going to have some visible changes on the exterior of the restaurant, which will help create some new news as people drive through the trading areas. Clearly, our signage today is brighter and it incorporates World Kitchen. We flushed some of the buildings with lights. I think that's important to know because you can't just do the inside of a restaurant and you've really got to influence what people see and where their eyes goes as they are driving through the trading area, they pull into a center. So our least expensive tiers are going to have significant improvements in signage and visibility.

David Boennighausen: Yeah. And those could touch some of the newer restaurants as well. I mean, as an example, in some like - Southern California is an area where we are looking at doing some of those changes.

Andrew Barish: Well, thank you.

Operator: Your next question comes from the line of John Glass with Morgan Stanley.

Your line is open.

John Glass: Thanks. Good morning. Just maybe two follow-ups. One is on the marketing spend.

How much are you spending in the market themselves, maybe as a percentage of sales? The question, I guess, gets at if you're spending - I don't know what you said this quarter, 1.5% in aggregate, you must be spending a lot more if it's concentrated markets. How do you get confidence you're not getting a read that maybe doesn't end up being sustainable if you have to spend that amount over a larger number of stores?

David Boennighausen: Yeah, certainly. John, in those particular markets, you're probably in the 3%ish range. So as a reminder, you still have a lot of spend that's been national in nature, particularly on the digital side. So, it was 1.5% to 2%.

It's not completely concentrated in those areas. There's a lot of that expense that's actually system-wide. What we did look at is what was the right level of spend to be sustainable in a long-term basis. I mean a market like Colorado, we would have a heavy left in Q3 and Q4 in terms of the amount of spend and then go down to a sustaining level, potentially then shifting resources over to a different market. So, we don't think you need to go at this level of expense on an ongoing basis.

John Glass: Okay. And then just a couple of questions on the restaurant closures. One is, how much of these expenses are going to be cash versus non-cash charges?

David Boennighausen: So we disclosed in Q3 we had almost all of the non-cash charges. There will potentially will be a little bit still to come, but our $16.2 million which included some of the impairments, on the closure costs that are cash that would be roughly $5 million, most of those will be in Q4.

John Glass: Okay.

And two other questions. One is, you mentioned that the places where you found the brand did not work have been those urban neighborhoods less families. When you look at your state of your portfolio, what percentage, after these closures, what percentage would be in those type of markets?

David Boennighausen: 1% to 2%.

Kevin Reddy: Yeah, that would be small.

John Glass: Okay.

So that's not really the relevant issue here. And then finally, just when were the store - I know Austin was somewhat of a recent market. When where those stores - is there a commonality you open them over short period of time and you were making real estate decisions then that you wouldn't make now or is there any - what's the timing of the openings of the stores that you are closing now?

David Boennighausen: It's a pretty broad mix to be honest, John. There's some that are more recent but it is a pretty good mix overall.

Mark Mears: I think they may span over a decade or more in the deviation of opening.

John Glass: Got it. Got it, okay. Thank you. [Operator Instructions]

Operator: Your next question comes from line of David Tarantino with Robert W. Baird.

Your line is open.

David Tarantino: Hi, good morning. My question is on the store rationalization strategy you have. And I guess one question is have you considered re-franchising any of your units so that you can perhaps concentrate more of your company, resources and in fewer markets and allow franchisees to operate some of the markets that are more far reaching?

Kevin Reddy: Dave, yes, this is Kevin. Yes we have.

We've had some discussions going on in place. We have some very strong franchisees. We think we have a strong internal franchise team, a great leader of that part of the business. And where it makes sense, you may see us refranchise a few markets. Any way we are actually looking at some of the markets that we know there is opportunity to grow in.

So it's not just re-franchising but does it make sense to open a couple of markets that we may have considered this company as franchise going forward.

David Tarantino: Okay. And, Kevin, how quickly might you do some of those steps? Is that something we should expect to see over the next year or so? Or is this more of a long-term thinking?

Kevin Reddy: I think it is probably more the normal course of business now. I don't know that I want to put a time on it, because negotiations, as you guys are well aware, ebb and flow. I can tell you that the answer to your question is, yes, we're thinking about it and it's become a more important component of our growth strategy.

David Tarantino: Great. And then one question on the marketing. It sounds like you are pretty pleased that the marketing is starting to move the needle and stabilizing the traffic trend. Yet the comps are coming in for the year less than what you anticipated. So, I guess, the question is, is the marketing working as well as you hoped it would heading into the program? And if there was any shortfall, where would that have been?

Kevin Reddy: Yeah.

I definitely believe it is. I think there's signs that we are making material and measurable progress in the markets that we are running in is a good data point to validate that. The macro industry still is volatile and is seeing some deceleration. We are stabilizing and gaining in the markets that we're running media in. I think I wouldn't call it a shortfall from an early timing standpoint some of the assets that we needed in channels of video, we did a little bit later in the program, because we were tweaking them and wanted to make sure they were right.

But I will tell you both the internal ops teams are excited about it. The message is resonating back from guests the way we need to. We are seeing what we believe was the most important first step was to focus on transactions. We didn't think it was appropriate to raise prices in an environment we still believe the consumer is under pressure until we got back closer to flat transactions. That is what we believe was the most important thing that we had signaled, and we're moving in that direction.

So, I am pleased with that. The other area that we're continuing to work with is to make sure that we have a strong strategic plan around promotional activity and events to complement what we are doing on brand positioning, and that's coming together I think nicely as well. So I feel actually incredibly confident in what we're doing from a marketing or marketing calendar standpoint and brand standpoint.

David Tarantino: Great. And last question, Dave, I don't know if you mentioned it, I might have missed it.

But what was the amount of cash you used for the buyback this quarter?

David Boennighausen: It will be in the Q. I don't have the exact number right with me. I believe we used roughly in the neighborhood of $5 million during Q2. So it would have been $30 million this quarter. It will be in the Q, which I believe should be filed shortly.

David Tarantino: Great. All right. Thank you very much.

Operator: Your next question comes from line of Jason West with Credit Suisse. Your line is open.

Jason West: Yeah. Thanks, guys. Just a few follow-ups. So the marketing, I know, you said you're not quite decided what you're going to do continuing the spend from 4Q into next year but can you remind us what the marketing spend was in the first half of this year?

David Boennighausen: Yeah. It was a 0.8% during the first half of 2015.

Jason West: Okay, got it. And then on the labor side can you just - you may have said this but what is sort of underlying wage inflation that you're seeing there?

David Boennighausen: Yeah. It's in the neighborhood of 3% to 5% and it fluctuates by market. But that's in the neighborhood, Jason.

Jason West: Okay.

And then you mentioned on the Colorado market that you're seeing a step down in the third quarter in terms of the Black Box numbers. Is that something you are seeing across a lot of markets or most of the markets nationally or was Colorado unique on that for some reason?

David Boennighausen: I think we did see nationwide a drop and then obviously the reports go into a little more depth than what we probably can. I do think you see a nationwide drop. Colorado definitely had more of a drop than what you saw in some of the markets for the industry.

Jason West: Okay.

Got it and then last thing, I guess, for Kevin. I guess, just big picture with the earnings issues we are having year and the thoughts around slowing down the growth rate may be re-franchising some stores. How are you thinking about the overall corporate overhead and G&A? Is there some restructuring and cost opportunities there that we should be thinking about for next year or is it too early to be making those types of changes?

Kevin Reddy: I think it's too early to make some of those changes. We are shifting resources to where we think we can get the biggest bang for the buck. And we are in some cases still adding some exceptionally strong talent to the team where we think that investment is necessary.

So I think when it comes out in the wash it's probably still too early to make any material changes for us to say anything about that.

Jason West: Okay. Thank you.

David Boennighausen: Yeah. I think structurally I can give a little bit of texture in terms of a benefit you'll have is that by not going into new markets, looking at our development strategy at being more infield you'll be able to get more leverage than we've had in the past.

At the same time just structurally, as you can imagine, given some softness we have in that as much bonuses you would typically have, so that could be a potential headwind on the overall just pure number.

Jason West: Got it, thanks a lot.

Operator: Your next question comes from the line of Nicole Miller with Piper Jaffray. Your line is open.

Nicole Regan: Thanks.

Good morning. In trying to better understand the comparisons in the quarter you're in, I seem to recall, I had written down that looking at October, November, December of last year that comp was strongest in December. Can you remind us if that was the case? And what that strength came from and then how - what we should expect as you lap that?

David Boennighausen: Yeah, absolutely. No, a good question. So the fourth quarter comp from a company perspective was 1.3% last year during Q4, Nicole.

December was the strongest quarter, partially driven by some good promotional activities that we had that had some significant strength. The one that we've gone through as you look at quarter-to-date numbers actually was similar to that overall 1.3%, the softest spot was kind of in the middle of November, so we're about to hit that spot right now. We do have pretty similar and I think actually improved promotional activities that we are looking at for December. So while you could see some softening from a two-year perspective, I feel pretty good that we've got a good plan in place. Also, the marketing is really starting to kick in more and more.

Nicole Regan: That's very helpful. Thank you. And then, just the last one for me, kind of big picture, I kind of thought about this model as you know 12% to 13% or whatever it had been unit growth driving 25% or better earnings growth. And I'm just trying to better understand a long-term earnings algorithm. So is the culinary operations marketing is the enabler for earnings or how would you best describe the long-term earnings algorithm? Thanks.

Kevin Reddy: Well, I definitely agree that the three items that you mentioned we believe are the strongest assets to drive long-term top-line growth. We have great kitchen capacity, good culinary innovation, the marketing and brand positioning. We have now entered that stage of our lifecycle and our growth, where we will sustain what we're spending and incrementally invest where it makes sense. I also think Nicole that from a pure operations initiatives, we have several things in that area that as we improve and tighten some of our consistency of execution that we have lived there. But as I kind of recap the prepared remarks, I think we have the right initiatives, we have the right plan to get back to the numbers that we have to drive comparable restaurant sales.

Nicole Regan: Thank you.

Kevin Reddy: Those should flow through to the bottom line.

Nicole Regan: Thanks.

Kevin Reddy: Thank you, Nicole.

Operator: Your next question comes from the line of David Palmer with RBC Capital Markets.

Your line is open.

Eric Gonzalez: Hi, it's Eric Gonzalez in for Dave Palmer. I wanted to ask about the performance of Kids Meal, it seems like something you guys seem to be excited about. If you could talk about how that mix - what the mix is of overall sales and how you are marketing that initiative. And then maybe if you could discuss from an industry perspective, is family occasions growing part of the industry or is it just that your brand tends to resonate more with that type of - that party?

David Boennighausen: You have a few questions in there, Eric so if we miss something please let us know.

In terms of the Kids Meal, I will tackle some of the mix perspective we are seeing and let Mark discuss how we are marketing it. From the overall family occasions, I haven't seen a ton of data that says how it overall is changing. I do know that the Millennial parents are becoming more and more important. And for us, we absolutely have a larger strength there just across the board, as you see it. We just resonate very well with that particular guest.

In terms of that mix, not comfortable, not generally one of our practices to disclose overall mix of it. I can tell you the take up rate has been phenomenal in terms of the amount of kids that we have that are taking it on from the mix shift. You think we didn't have a Kids Meal before. What we saw in the test and it's proven so far as we've launched nationwide is roughly half of the Kids Meal guests are those that used to have two small dishes and they are just going to Kids Meals and then you also had folks that were going from one large and splitting it between the two kids. So you are seeing a nice overall kind of mix where it's overall probably neutral to PPA.

Kevin Reddy: I'll add one comment on just from a personal perspective on size of that opportunity. Clearly, the Millennial group is going to exceed the size of the opportunity of the baby boomers. The other thing you know even within that pool of people, you look at the amount of families that still go to QSRs that want us to offer their children and themselves better food, better ingredients, real cooking. Our Kids Meal priced at $5. The offers that they have, the variety of the taste, the nutritional content is far superior than most anything else there that's out in the marketplace.

And I believe it's a chance for that trade-up to the family. We have a very strong to average check with the transaction level detail we see with the purchase of Kids Meals. And I think that allows us to take more market share going forward. From a sector that doesn't participate as much today in fast casual, but would like to. And now, Mark you can talk about [indiscernible].

Mark Mears: Yeah, great question. We are really pulling out all the stops and we are starting kind of from an inside-out perspective, so looking at the restaurant, you can't help, but miss it, literally from a cling on the door to the ordering process, as well as at the table with our eClub, which now is over 1.3 million members to our digital efforts with the video that we've just put forth, that really highlights that kind of emotional connection with the family interacting. And we know that life happens over a bowl of noodles. And the idea of bringing the family back together is really what our message is versus we too have a Kids Meal. I think that's really to Kevin's point a strategic foundation of why this is so important against our very clearly targeted Millennial parents.

And we also have family nights coming up in November that will help to drive trial and kind of create a habit that this is where they want to go for family dining.

David Boennighausen: Yeah. [indiscernible] I would also add to that is something we haven't done in the past is have that partnership with a non-profit and Share Our Strength and No Kid Hungry program we think is a phenomenal one and for $0.05 of every Kids Meal that's purchased goes towards that which we think is a great link for us.

Eric Gonzalez: Great. Thank you.

Kevin Reddy: Thank you, everyone.

Operator: Ladies and gentlemen, this concludes the third quarter 2015 earnings conference call. Thank you for your participation and have a wonderful day. You may all disconnect.