Wingstop Inc. (WING) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc., Fiscal Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded today, Thursday, February 22, 2018. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer; and Michael Skipworth, Chief Financial Officer. I would now like to turn the conference over to Michael. Please go ahead.

Thank you and welcome. Everyone should have access to our fiscal fourth quarter and fiscal year 2017 earnings release. A copy is posted under the Investor Relations tab on our website at wingstop.com. Our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not place undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Our recent SEC filings contain a detailed discussion of the risks that could affect our future operating results and financial condition. We will also discuss certain non-GAAP financial measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are contained in our earnings release. With that, I would like to turn the call over to Charlie.

Thank you, Michael, and good afternoon everyone. We appreciate your interest in Wingstop and for joining us today on today’s call. We overcame with some of the greatest challenges that our brand has faced in its 23-year history in 2017. We began 2017 with negative consumer sentiment coming out of the 2016 Presidential election. Our core consumers were acutely affected and that resulted in negative same-store sales in the first quarter of 2017. Then, we experienced record high wing inflation which at its peak impacted our franchises and company-owned restaurants food costs by 680 basis points. Most brands cannot overcome such challenges in any single year, but in our case, though these challenges tested the strength and resilience of Wingstop business model, we've recorded another record year. The key metrics tell the story. We achieved a 13.5% unit growth rate ending 2017 with 1,133 Wingstop restaurants worldwide. We've recorded our 14th year of positive same-store sales growth. We achieved a $1 billion milestone in system wide sales, ending 2017 with $1.1 billion in system-wide sales. And we also initiated a regular dividend just to name a few. 2017 was really strong confirmation that Wingstop has the right business model. As I mentioned we started 2017 with negative trend in domestic same-store sales, but we also launched national advertising last February and we were able to grow system-wide sales by 14%. We saw our national advertising campaign drive brand awareness throughout 2017, where domestic same-store sales growth accelerated throughout the year with 5.2% increase in the fourth quarter, resulting in same-store sales growth of 2.6% for the full year. And despite headwinds to our P&L with high wing inflation in our company-owned restaurants, we were still able to increase adjusted EBITDA and adjusted EPS in 2017 by 18.3% and 27.6% respectively over the prior year. And finally in 2017, as a result of our strong cash flow generation, confidence in our business and commitment to rewarding shareholders, our board of directors initiated a quarterly dividend targeted at 40% of free cash flow. We then followed up our regular dividend with a $3.17 per share special dividend that was paid just last week. Michael will discuss the specifics including the related recapitalization of our balance sheet, that these dividends represent a significant return to capital to shareholders. Since our IPO in June 2015, we have returned $180 million in cash to shareholders, delivering a total shareholder return of over 160%. As we look ahead, we believe we will continue to deliver best-in-class results, as we drive our business forward through four key long-term growth strategies, national advertising, digital expansion, delivery and international development. Let me briefly comment on each one of these. As we said, we launch national advertising immediately after the Super Bowl in February 2017, with 2017 is our entrance international advertising. Our ads were narrowly focused on brand building. Instead of attempting a big splash, the national advertising program was design to provide a steady presence on television, while we build brand awareness. We were on TV for 26 weeks at a cadence of two or three weeks on and two to three weeks off. We believe that our national advertising campaign delivered just what we wanted, steady improvement in same-store sales growth throughout 2017. With the 14% growth in system-wide sales in 2017, we have more advertising dollars to spend in 2018. We continue to focus on aided and unaided brand awareness and we still have room for growth as compared to other national brands. Our 2018 campaign will follow a similar cadence as 2017, which we believe will provide a multiyear benefit to top-line sales growth. Another long-term strategy is growing revenues through our online channels. In the fourth quarter, our online sales made up 22.7% of total sales, up from 21.5% in the third quarter and reflecting a 300 basis point increase from the prior year period. Approximately 67% of our domestic restaurants are generating 20% or more of their online sales -- their sales online, up from just 45% in the fourth quarter of 2016. We continue to grow the digital side of our business organically without any offers or incentives to convert debts. In addition to providing operational efficiencies inside the restaurant, our expansion of digital sales provides the $5 higher average check. Almost half of our orders still come in over the phone today, which we believe represents a significant opportunity for conversion to digital. Technological innovation is core to fueling this digital growth. We were one of the first to launch [SPOT] technology through both Facebook and Twitter messaging and customized ordering through Amazon Alexa. More recently we joined a select group of brands in the launch of GM’s OnStar marketplace. So you can order Wingstop from your car. Our digital strategy is to meet our digital guests wherever they are and create a highly efficient guest experience from when the order is placed all the way through receiving their order. We have several innovative technology projects underway in 2018 and we are excited to share more progress with you as we continue to position Wingstop for future growth. Another long-term growth drivers, the strategic rollout of delivery, we conducted our initial delivery test in Las Vegas during the second quarter of 2017. The results of this initial test were very positive. Delivery in that market has sustained a 10% sales lift and most of the sales are incremental. Following our success in Las Vegas, in the fourth quarter, we expanded our delivery test with DoorDash to the Chicago and Austin markets. In both Chicago and Austin, we have experienced a mid-to-high single digit sales lift. And in both cases, the sales lifts have similar levels of incrementality to our last Los Vegas test. In our free delivery test markets we have seen great results and remain encouraged by what delivery can add to our brand. Our current focus is on optimizing delivery in these test markets and continuing to approach delivery in a thoughtful manner, using learnings from our test markets as a foundation for a broader, strategic delivery rollout, to ensure the best possible guest experience. At this time, we are contemplating a market-by-market approach to rolling out delivery nationally, which we expect to begin sometime in late 2018 and continued through 2019. In our free test markets, we have been pleased with our partnership with DoorDash with. With the approach that we are contemplating, we expect to leverage third-party support through DoorDash as they scale to provide coverage for our national footprint as well as leverage the growth in brand awareness from our own national advertising. As we continue to drive top-line sales with national advertising, digital expansion and delivery, our best-in-class unit level economics should further improve, creating the type of returns that should help maintain domestic unit development from existing and new franchisees. Maintaining and improving these unit level economics gives us confidence in our ability to achieve the 2,500 plus restaurant potential in the United States, but the domestic business is only part of the unit development story. The unit growth of our strong in emerging international business is our fourth long-term growth strategy. The basis of our international development strategy is centered around chicken being the most highly consumed protein around the world and the broad appeal and adaptability of our menu and flavors. The early success we are experiencing in our emerging international business provides us confidence in our international development strategy. We ended 2017 with 106 Wingstop locations in eight international markets. We have a pipeline of sold development agreements for almost 600 additional international Wingstop restaurants. International same-store sales rose 9.9% in 2017, our sixth consecutive year of growth. The momentum in same-store sales growth continues to improve, already strong sales to investment ratios in our international markets. In 2018, we anticipate further extending our international reach with restaurant openings in the UK, France, Panama, Australia, and New Zealand. We are excited about our early successes internationally and a long-term growth in front of us. We have confidence in the four key long-term growth drivers of national advertising, digital expansion, delivery and international and we will continue to focus on these priorities in 2018 and beyond, as we execute against our vision of becoming a top 10 global restaurant brand. As you will hear from Michael shortly, we are confirming our long-term guidance for 2018 as we execute against these four strategic priorities. In 2017, we clearly demonstrated the ability to achieve our long-term growth targets, even when our brand is faced with the toughest of challenges and deliver our commitment to shareholders of best-in-class returns. This is consistent with our vision of becoming the top 10 global restaurant brand. I am very proud of what our team and our franchises have accomplished in executed against these strategies, together we are truly driving best-in-class performance and a well positioned to achieve our long-term goals. We are all committed to our mission of serving the world flavor, further differentiating Wingstop from other concepts and keeping ourselves firmly in a category of one. With that I will turn it over to Michael.

Thank you, Charlie. I would like to begin by reviewing our quarterly results for the 13 week period ended December 30, 2017, before discussing guidance. Just to remind everyone, the year-ago period in 2016 includes 14 weeks, so the year-over-year comparisons are not strictly apples-to-apples unless specifically identified. As Charlie stated, we had a nice strong build of momentum in our business throughout 2017 and this was most pronounced in the fourth quarter. Total revenue increased 14.3% to $28.3 million while royalty and franchise fees increased 17.1% to $18.3 million. These top line results were driven by a 13.5% unit growth rate and by the 5.2% increase in domestic same-store sales. Also included in royalty and franchise fees is other revenue of $1 million associated with vendor contributions received to fund our franchisee convention that occurred in the fourth quarter of 2017. Our 2016 convention occurred in the second quarter of 2016. Excluding the extra operating week in the fourth quarter of 2016, total revenue grew 21.9%. Company-owned restaurant revenue grew 9.4% to $10 million on a same-store sales growth of 4.6% and approximately $1 million in sales from the two Dallas area restaurants that we acquired early in the third quarter. Excluding the 14th week in fourth quarter of 2016, company-owned restaurant revenue grew 17.8%. Cost to sales decreased as a percentage company-owned restaurant sales by nearly 160 basis points to 74.5% versus the same period in the prior year. The decrease was driven primarily by sales leverage on fixed operating costs, which was partially offset by food, beverage and packaging costs that were slightly increased as a percentage of company-owned restaurant sales. Chicken wing prices peaked in the third quarter of 2017, but have since declined rather dramatically. We believe this is due to restaurants and other concepts exiting this product as well as frozen stock inventories rising back to normal historical levels. We believe this positions 2018 for more favorable wing outlook as compared to the inflationary 2017. Selling, general and administrative expenses in the quarter increased 19.9% to $10.5 million from $8.7 million in the prior year. $1 million of this increase is associated with the cost of our franchisee convention. This cost was offset my contributions received from vendors and does not impact the profit dollars. Adjusted EBITDA on GAAP measure increased 12.9% to $11.3 million. Excluding the 14th week in the fourth quarter of 2016, adjusted EBITDA increased 18.9%. Note, the reconciliation table between adjusted EBITDA and net income is most directly comparable GAAP measure included in our earnings release. Adjusted net income increased 14.6% to $5 million, while adjusted diluted earnings per share increased 13.3% to $0.17. Excluding the extra operating week in the fourth quarter of 2016, adjusted net income increased 20.7%. Next, we wanted to provide a brief update with regard to the recently enacted tax legislation, which we refer to as the Tax Act. The Tax Act was enacted in late 2017 and impacted our 2017 financial results. We estimate a one-time net tax benefit due to the enactment of Tax Act to be $5.5 million during the fourth quarter of 2017, consisting primarily of the re-measurement of deferred tax liabilities using a 21% federal tax rate instead of the previous 35% rate. Looking ahead to 2018, based on our current interpretation of the Tax Act, we anticipate our 2018 tax rate to be approximately 23%. As we experienced in 2017, the recent accounting rule related to the treatment of excess tax benefits associated with stock option exercises could create quarter-to-quarter volatility. We have not included any benefit from stock option exercises in our forward-looking guidance. At end of December, we had cash and cash equivalents of approximately $4.1 million and $133.8 million in debt. During the fourth quarter, we paid our second quarterly dividend of $0.07 per share on December 19th and our Board just authorized our next quarterly dividend of $0.07 per share, which will be paid on March 23rd to shareholders of record as of March 9th. We call that our quarterly dividend is designed to return capital to shareholders on a regular basis, targeted at approximately 40% of free cash flow. This allows us flexibility with our capital to make necessary investments to position the Company for future growth, but we would expect the quarterly dividend to increase as our free cash flow grows. We plan to continue returning capital to shareholders and that maybe informs in addition to a quarterly dividend. Case in point has a special dividend of $3.17 per share that we paid to shareholders of record February 14th, subsequent to the closing on our new five year $250 million senior secured credit facility that we completed in late January. The facility bares an interest rate of 90 day LIBOR plus 275 basis points and consists of a $100 million senior secured term loan, with a 5% mandatory amortization and a $150 million senior secured revolving credit facility. The interest rate is subject to a grid with step down to 25 basis points as leverage decline. We borrowed approximately $230 million on the new facility including the full amount of the term loan facility and a $130 million of the revolving facility, to fund the $92 million special dividend. On a pro-forma basis, our net debt to trailing 12 month adjusted EBITDA is approximately 5.4 times. Turning to guidance, we are reiterating our long-term targets and providing an update on certain items that will impact how we report our 2018 results. For 2018, system-wide unit growth of 10% plus, domestic same-store sales growth of low single-digit, adjusted EBITDA growth between 13% and 15% and effective tax rate of approximately 23%, stock-based compensation expense of approximately $3 million, and adjusted diluted earnings per share of approximately $0.75 and fully diluted share count of approximately 29.6 million shares. There are two things I would like to highlight for modeling purposes. First, I want to speak briefly on the implementation of the new revenue recognition accounting standards. The two largest impacts of the new standard pertain to the timing of the recognition of upfront franchise fees and the advertising fund that we managed on the half of our franchisees. Under the current accounting standards, we've recognized franchise fees and we have performed all material obligations and services, which generally occur when the franchisee opens the restaurant. Under the new accounting standards, we will defer the initial and renewal franchise fees and recognize this revenue over the term of the related franchise agreement, which is typically 10 years. Under the current accounting standards, we do not reflect advertising front contributions to our national add fund or advertising fund expenditures of our national add fund in our statements of operations. Under the new accounting standards, advertising fund contributions to our national add fund or advertising fund expenditures of our national add fund will be reported on a gross basis in our statement of operations. We do not expect the new accounting for our advertising fund, to impact profit metrics. Included in the 8-K with our earnings release, our supplemental schedules that present the impact of the new revenue recognition guidance on our financials. Please note that the EPS guidance provided for 2018 reflects the new revenue recognition accounting and should be compared to the 2017 amounts in the supplemental schedules for comparability purposes. To be specific, the fiscal year 2018 estimate of approximately $0.75 adjusted diluted earnings per share included in our 2018 guidance is comparable to fiscal year 2017 adjusted diluted earnings per share of $0.69, which has been restated for the new revenue recognition accounting rules and can be found in the supplemental schedules included with our 8-K. As a reminder, the revenue recognition accounting standards do not impact cash flows and our simply a change to the timing of the revenue we recognized for upfront fees. I would like to also highlight that the fiscal year 2017 adjusted net income and adjusted diluted earnings share includes $2.5 million or an $0.08 benefit associated with the excess tax benefits from stock option exercises. Our 2018 EPS guidance does not include an estimate for the excess tax benefits from stock option exercises. Second, we estimate the impact -- the EPS impact of our recent recapitalization to be approximately $0.11 on 2018. Thank you. Thank you all for being with us this afternoon and we would now be happy to answer any questions that you may have. Operator, please open the line for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from David Tarantino from Robert W. Baird. Please go ahead.

My question, I guess, the first -- I have a couple questions. First, on the guidance for this year, it seems like you've anchored on your longer-term targets for all of the metrics. But, I guess, specifically on same-store sales, you exited 2017 with quite a bit of momentum. So, I was just wondering if you can talk at high level, how you think this year will play out? Does the low single digit comp guidance assume that you start the year higher than that, and then settle back in that rate as you move on? Or how should we think about the same-store sales trajectory for 2018?

David. It’s Charlie. I think the demonstration of the guidance is to confirm the long-term, I like your word of anchoring on that and I think it's indicative of the confidence we have in our brand to continue as we've demonstrated year-after-year to consistently deliver against that long-term objective then our growth strategy. As it relates specifically to this year, especially in Q1 as you noted, we did exit Q4 with solid momentum and part of that momentum was driven by a rollover from the negative performance we had last year, both in late Q4 and early end of Q1. And we would expect that momentum to carry us into the first half of the year. And then certainly, we start to rollover some of the national advertising benefit we saw in 2017 as we continue to generate awareness. Now, the beauty of Wingstop, with our 14% overall system wide revenue growth, we continue to build upon our advertising dollars and we intend to use that to increase the amount of advertising throughout this year, to continue to grow brand awareness and we believe on the long-term outlook for national advertising that it provides us slow steady climb. So hopefully that gives some perspective on what our outlook is for the rest of this year.

And then on delivery specifically, Charlie, you mentioned that you're still seeing success in the two test markets and the plan is to look at market-by-market rollout. Did I understand it correctly that you might not have hit the next market until later in this year and then maybe the lion share the rest of the country would come in 2019? I just want to make sure I understand that. And then, secondly, I was wondering if you could just maybe talk about the newer markets that you launch, you said mid-to-high single digit lift which is still very good, but not quite as strong as what you saw in Las Vegas. Just wondering if you noting any differences in execution or anything in the newer markets that we haven't discussed I guess in your initial market of Los Vegas?

So the answer to the question on the timing, your assessment is accurate. If I feel the gap in between now and the back half of 2018, a lot of work will be done that is been generated from this test to ensure that we have got all the proper training in place for our markets that we do choose to rollout first, that we also make some technology investments that we want to have minimal overlap into this rollout and a lot of that centers around the front end applications for customers to place their orders mostly through our app and web technology. So those are already in place and being put together we think that combined those together makes for the best possible rollout and an effective and seamless rollout for the system. As it relates to the two new tests and their performance, very positive results as we noted in the script in both markets, certainly not the strength of Vegas, but I don't think that should be an indication in any way shape or form that it has anything to do with service levels, quality or otherwise. All the various metrics that we have measured in Las Vegas turned out to be very consistent as it relates to the operations and the operational performance for those markets just a slightly different level of sales growth. I will say Austin has only been in place for a short period of time. We launch that in period 12, latter part of period 12, this last year. So, it's only had a couple of months of performance, but we are seeing it continue to develop same.

Our next question is from John Glass from Morgan Stanley. Please go ahead.

Along the same lines on guidance, unit growth of 10% plus, I know it's a long-term but it's less than what you did this year. How much is that conservatism versus maybe a reality setting in where your labor costs or real estate availability or something like that that's impeding maybe growth to the same level you've seen in 2017?

Yes, John, I think the 10% plus as you know we have stated since we went public in 2015 has been our long-term stated guidance and that number really is becoming more and more a function of the denominator than it is about the performance of the Company in particular, and certainly does not reflect any lack of confidence in our ability to consistently exceed that number. So I don't want that to appear as a signal slowing growth associated with any macroeconomic factors whatsoever. We did note in Q4 when we first released our -- pre-released our earnings that we had a few restaurants that we felt we are going to move from Q4 into Q1, and that's what we has seen. But I think the cadence of what we expect to see in 2018 would be consistent with the natural cadence of the business has been delivering and would be expected to deliver in the future.

And just to maybe put that in plain English, do you expect to open the same number of stories roughly in 2018 to 2017, understanding that 10% plus could mean a lot of things? Or do you expect it to be lower by any…

Yes, I think we want to avoid trying to get into the specifics. I think what we've demonstrated for past couple of years is that, we like the range of percentages that we've used in the past. We decided this year, let's just stick to long-term guidance and demonstrate what are our brands continuously capable of, and then as we get later in the year, we'll provide a little more specifics into what we see because that's when we have perfect clarity into what the year will deliver.

I don't believe I saw a CapEx noted in the release, talking about 2018 guidance, you talked a little bit about some technologies. Is there anything meaningful changing in the capital spending of the business to support delivery rather technology initiatives?

Yes, I think there will be a slight uptick in our CapEx expectations this year because of the technology investment, I mentioned today a little while ago, not meaningful, probably about $1 million more than what we executed in 2017.

Our next question is from Jeff Farmer from Wells Fargo. Please go ahead.

You guys did mention momentum on the top line, but as you did last year any change you can update us on the same-store sales trends you're seeing through the first six, seven, eight weeks of the quarter?

Yes, no, at this point we're not going to give any specifics into Q1, we’re quite a way through the quarter at this point, but I think consistent with what I mentioned to David, there are a number of factors that led -- would lead us towards a nice sequential performance from the prior quarters, especially given what we're rolling over.

Okay. And I don't want to get too caught up in the change in revenue recognition and counting, but it looks like, your new tax rate would be roughly $4 million level of tax savings and just sort of looking at the revenue drivers real quickly. Is it fair to assume that benefit is almost entirely offset by what looks like a similarly sized the level of franchise fee reduction related to that change in revenue recognition accounting, so $4 million offset by $4 million?

Yes. Jeff, this is Michael. I think those numbers are directionally accurate, if you look at it that way.

Okay. And then just one more on development, I know you didn't want to get too specific, but it looks like you saw roughly 32 net international unit openings in 2017, always directionally do you think that we would see a greater number than that in 2018, considering the momentum in the business?

Yes, I think as we noted at the end of the year when we pre-released and some of the commentary we gave at the time, I would just reconfirm that we're very excited about the potential for continued growth and accelerated growth in our international business. This year, we will open as we noted a number of new countries this year. However, each new country that comes online usually gets about one or two new restaurants in their first year to get their feet wet and then the accelerated pace continues, but at the same time markets like Indonesia, Mexico and some of our maturing markets around the world have the potential to continue to increase the pace at which they've opened and we've seen that in prior years. So I think it's fair to say that yes, we expect to continue to increase momentum in the international.

Our next question is from Jeff Bernstein from Barclays. Please go ahead.

A couple of follow-up questions, one just on the unit growth for 2018, Charlie, I know you mentioned the denominator that leads you to just kind of guide to the 10% plus, but obviously in 2018 as that denominator grows by another 10% and we think about 2019 and 2020. Do you think 10% is a realistic number for the next however long your long-term guidance is maybe 3 to 5 years? Or did you get to a point where it becomes even difficult to do that? What would be the adherence to you sustaining that 10% plus growth over the next number of years?

Look I think, yes, we're confirming the 10% plus is our long-term guidance, which would imply that we are looking out for the long-term as it relates to that. I think with the momentum that we just talked about on international coupled with the significant still remains wide space in the U.S. and our desire to be a top 10 global brand, those factors play into why we feel very confident in 10% plus for the long-term.

Got it, so the absolute number of openings kind of contained an increase to sustain that 10% plus on the larger base, just want to make sure?

Yes, I mean the math is quite simple in that regard and yes, it would suggest that number could increase overtime.

And then on the tax rate I mean the 22% and it sounds like 1,500 basis points I guess from the higher 30s in the years passed. And how much of that savings do you -- is any plan to reinvest I think you said $1 million might be going into CapEx, I don't know if you mark that from the savings, but versus flowing through to earnings? I am just wondering where there even are any opportunities to co-invest with franchisees or to invest more in technology or something along those lines or should we assume that the majority of that just gets flow through to the bottom line?

Yes, I think that something we'll evaluate as the year goes on, but the firm answer on increasing CapEx of about $1 million more as what we know based on the investments we're committed to currently. As we transition through the year, I think that concept of being able to work with our franchisees is always out there and always something we think about to help in growth or acceleration of new ideas, things like that. And so, it's always on the cards that there is nothing nice, I would say at this point as something we confirm. That being the case then the likely secondary position of that cash would be returning that to shareholders in a consistent manner that we have done before.

And just lastly, you mentioned about the Wing prices that its peak and its flown off pretty meaningfully and I know you said in 2018 you expect us to be more favorable, or whether show, whether more favorable less inflation or to what degree do you anticipate deflation based on what you know today, so you are Wing costs?

Yes, the Wing cost, the earned a berry price of Wings currently as of today stands at a $1.35 a pound now. What we delivered to the restaurants is a little different than that, but the raw commodity itself in the market is certainly much lower than it was at the peak in 2017. So during the quarter, we saw the inflation start to reverse itself quite a bit in the back half of the year, first quarter again those numbers are even better. What we like about that, is we have seen this cycle in the past 2012, 2013 was the last time we saw a pronounced spike in Wings that was followed by a subsequent drop, and what I would say is that the indications, we get from the market right now is that there is ample supply out there and growing supply. If you look into late 2018 into 2019, there is anticipated increases in capacity amongst the supply chain, which all will support longer-term outlook to be favorable on chicken wings. That translates to better profits for our franchisees, more cash to invest in our very efficient and low CapEx model. So all in all, we feel very good about where wing prices are right now.

Our next question is from Karen Holthouse from Goldman Sachs. Please go ahead.

One more question on guidance this year. Just sort of going forward, should our assumption be that annual guidance would be anchored on that longer-term guidance, unless there was something substantially deviating from that in your expectations? And I guess tied to that I’m trying to figure out why flow through next year, wouldn’t be a little bit better when you are – for given top-line outlook when you are wrapping the wing inflation in next year, you're still picking up some of the benefit and you’re still picking up some of the benefits of split menu pricing?

So I'm going to ask you another question on that last one, but let me confirm the answer on the first part of your question, Karen. Yes, you can expect that we would anchor on this long-term guidance for the long-term. So next year, we’ll probably be very similar to what we're doing in 2018 and I think that's by the way very consistent with a large multinational or if you will, world-wide franchise organization. To your next question on flow through, are you speaking specifically to store level P&Ls or flow through for the corporation itself?

Yes. At the EBITDA level, I mean, that's what we have guidance for, so…

Okay. All right, yes.

So, I’m sort of specifically asking, but feel free to explain that however make sense at the store level or otherwise?

Yes. So I think the answer to your specific question is, yes, an expected increase in flow through, given, improved commodity costs would be a very reasonable assumption. As you know from your experience with Wingstop when wing prices spike, it can have a meaningful effect on food cost and if you look across the full-year of 2017, our company restaurants alone ran about a 40% food cost during the year across the year and the spike in the peak, if you will was even higher than that. So with a substantial decline in that pricing on the wings which is also sustained that would yield in and of itself a very nice flow through.

And then one final one on the split menu pricing, the spend in place longer, are you still seeing that 150 basis points to 200 basis points sort of COGS impacted across the system, I know regionally there can be some pretty big differences and sort of the baseline level of bone-in versus bone-less restaurant wings and whatnot?

Yes, and you answered it, yes, in markets where we did put the split menu in, and especially in markets where we have low boneless mix to begin with. Some of the higher boneless mix markets I think as we noted before, didn't take quite as much price differentiation, but the ones that really wanted to drive boneless mix did, and I think we are seeing the effects of that and the improvement in food cost and those 150 to 200 basis point improvement in that.

Our next question is from Jake Bartlett from SunTrust Robinson Humphrey. Please go ahead.

I guess not to labor the guidance question, but I'm looking at the 13% to 15% EBITDA growth it's less than you have had in the past. So if I just -- if Wing prices normalize, it looks like that could add 3% growth to EBITDA that alone. So, is there anything else that we're missing, that is G&A supposed to kind of there is some sort of spike in G&A costs, or something else that makes this 13% to 15% guidance reasonable?

Yes, well it certainly reasonable and certainly we are confirmed on the fact that it's part of our long-term guidance and so I think what we are trying to make sure that there is clarity on is that in any given year, like 2017 where we experienced even the most difficult of situations with high prices, with negative comps coming out of the gate translating into positive performance for the year, in any given year, we feel that Wingstop that we can consistently demonstrate low single-digit same-store sales growth, 10% plus unit growth worldwide as well as which both lead to 13% to 15% EBITDA growth and certainly higher EPS growth or net income growth. So at the end of the day those are our long-term figures, but if you look into some of the metrics that you just discussed, meaning improved Wing costs, flow through associated with that all of those plus continued expansion digital, continued expansion in national advertising, continued international expansion, all of those become opportunities for us to continue to exceed that performance long-term.

Got it, got it, and then in terms of the same-store sales drivers, the digital become shift towards digital has been going well but its slowed a little bit, is there some sort of kind of boundary you are hitting right now, but it's going to start to slow as the driver as becomes incremental mix that goes towards the digital channel?

Yes, I don't think there is a specific barrier whatsoever in fact if you look at quarter four, 2017, versus quarter four, 2016. In quarter 4, 2017, 67% of our restaurants had a digital mix of greater than 20% of their sales in quarter four 2016 that same number was 46%. So we continuously see each and every restaurant rise and grow. If we ever felt like we were reaching some sort of wall, A, we talk about it, B, we would probably enact another plan to continue to grow digital mix. That said, there is another -- there are couple of the data points I want to complement that with, one, our incremental check average continues to grow with the mix of digital which is great so as of Q4 and or last year, this year, that number is approaching $5 on average of incremental ticket less. So what we are seeing is without discounting ,without providing incentives, we are continuously seen this number rise naturally and organically, which is great for the P&L, great for offsetting labor costs, incrementally and great for long-term. So last piece I'd add, when we start to incorporate delivery, than we start to see it incremental top, so we think that's the next right method to use to really drive digital mix, because most if not all those order, most likely will become require digital orders for the business. So, and so I want to give you that context around it, I don't think there is anything that would we would say as a road block.

And then quick question on the accounting -- really too much into accounting, but for the advertising fund revenue and expenses, we had a company earlier who is backing the differential out of -- adding it back to your adjusted EBITDA. It doesn't look like you're doing that I'm just be able to -- the kind of the recast numbers you gave us. So were those -- the loss potentially in 2017, it looks like you had more expenses than you did revenue. So, was that already kind of flowing through your G&A or something like that that we wouldn't tend to consider that more a one-time thing?

No. Jake, I think, there's some puts and takes within G&A and in the advertising expense line. But that should net to zero on the bottom-line. So it should not have an impact on EBITDA.

Okay. However, we can talk about that offline. And then just lastly real quick, you mentioned the refranchising the transaction cost $0.11, was that it, am I seeing because of the guidance that there's a $0.05 kind of ad back from one-time stuff, but you're saying that $0.06 maybe higher in interest costs or something?

The additional debt load that we took on in January 30th of this year, translates to about an $0.11 EPS hit.

Our next question is from Andrew Charles from Cowen & Company. Please go ahead.

You’re recognizing obviously you guys have 4Q rated opening schedule like many others in the industry. Would you expect 2018 development to be back half way, given, some of the challenges you called out from 2017, just to the high wing cost perhaps the way on development decisions?

Yes, we do have a back half weighted typical cadence to our development, although, I don't think the mix of restaurants from one quarter to another in 2018 would be meaningfully different than the mix in prior years. But I think, you can expect what we've done before which is a fourth quarter strong performance against the same kind of cadence and mix that we've seen over prior quarters.

And then my other question is just Super Bowl obviously had two teams that were outside of your more core regions I would say, is that some of that impacts you, obviously in terms of just the originality of obviously where the home teams are?

Actually, you would think that might be the case, but we actually had a record Super Bowl performance this year, and sold just over 14 million wings for the single day, which was up from where we were in prior years. So, very happy, very pleased with our Super Bowl performance this year.

And not to get too much underlying issue, but 14% increase. Is that similar to the same-store -- the unit growth obviously you sold this time last year?

Actually, let me clarify that we sold 14 million wings. It was not 14% growth. All I noted on growth was we were very happy with record performance. So when we look at it internally and will comment after Q1, we look at the same-store sales impact, not absolute growth. But both in case, we had a very strong performance, so the answer to your question, they originally need -- the two things that were involved had no impact, if anything, it had a great impact on the Super Bowl for us.

Our next question is from Brett Levy from Deutsche Bank. Please go ahead.

Following up on the growth -- on the unit growth targets. Is there anything in the health of the franchisees that really is slowing the stock in the potential growth, given that your highly franchised mix, it really should be, the honest on them? Is there anything that you are seeing in terms of your infrastructure, any concerns there? And then just, have you started to thinking about potentially testing any delivery outside of DoorDash, given that you are only three markets in, doesn't it make sense to possibly examine another avenue?

Sure, let me first start with the franchisees. There is no doubt and we've talked about it before, but I'll reiterate that the spike and Wing costs in 2017 certainly impacted the P&L and any brand that deals with a nearly 700 basis points increase in food cost year-over-year can expect to see franchisees start to pull back a little bit. I think what we demonstrated this year is that we were able to still meet development targets and if this had been more pronounced or longer lived in terms of the spike and Wing costs I think certainly any rationale business person would probably say okay maybe this is a means by which to slow down, because we have seen such a pronounced drop and have expectations for Wing prices to maintain at least at their current levels today for some period of time, with natural spikes perhaps in seasonality but nothing like what we saw in 2017. And I think you got to rely back on our great unit economic model, with a low investment of 370,000 and great second year cash-on-cash returns between 35% and 40% unlevered as a key driver of franchisees both current as well as newer perspective franchisees wanting to continue to invest in that great business model. So I don't see anything that and I can confirm there is nothing in our business model that I would say should concern anyone it's just we know quite well that from time to time, we have to whether this Wing commodity storm and we have done it before and it may or may not hit us again. So that's that one -- can you repeat your second question for me.

Sure the second question was you only three markets in with the DoorDash. Does it make sense to attempt another partnering somewhere else and then I just have one more question on marketing, like that?

Sure, so the answer is we already did test other providers in the Las Vegas test originally and that's what costs us to arrive at DoorDash as the best logistical partner for Wingstop. There are other partners that offer either logistics services. And what I mean by that is, most of our customers come to us through our own website, through our own channels, more so than they do at the marketplaces of the other providers. DoorDash has done a great job of demonstrating an end to end solution for us that ensures that its fully integrated with our operation and delivers a high quality experience for the guests. We did look at other players, very prominent ones at that, but we felt like they are either too much focused on the marketplace as the key driver for their business or they were utilizing drivers that we're not as reliable in delivering the kind of quality that we expect for our business and so hence why we arrived at DoorDash as our test partner. Currently on a go forward basis we still like what we see there, we are working as we noted before on the long-term outlook for delivery and if anything changes between now and then we'll let you know.

And finally on marketing, without giving out the treat you could, can you give us a little bit of insight into how you're thinking about it, you talked about two to three weeks on, two to three weeks off, with more money in the coffers. How should we think about your investments in traditional as well as digital? Thank you.

I think the mix of traditional to digital marketing will be about the same, I have noted before and I'll reiterate that we -- over index in our digital buy compared to most brands, we’re a social at the core brand and digital is our game. And so we see great returns, especially for driving online business through our digital advertising and it's very efficient in that regard and that's also an area where our core customer who is predominantly millennial lives. So we’ve very much over indexed there, but I would say the rate of investment will be proportional to where we were in 2017.

Great, thank you. This doe conclude today’s question-and-answer session as well as the teleconference. Thank you again for your participation. You may disconnect your lines at this time.