Del Frisco's Restaurant's (DFRG) CEO Norman Abdallah on Q1 2018 Results - Earnings Call Transcript

Del Frisco's Restaurant Group (NASDAQ:DFRG) Q1 2018 Earnings Conference Call May 7, 2018 8:30 AM ET

Executives

Neil Thomson - CFO

Norman Abdallah - CEO

Jeff Carcara - CEO, Barteca Restaurant Group

Analysts

Will Slabaugh - Stephens Inc.

Brian Vaccaro - Raymond James

Operator

Good morning, ladies and gentlemen, and thank you for standing by and welcome to the Del Frisco's Restaurant Group Incorporated First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided for you at that time to queue up for a question.

I would now like to turn the conference over to Neil Thomson, Chief Financial Officer. Please go ahead, sir.

Neil Thomson

Thank you, Mindy. Good morning, everyone and thank you for your time and interest in Del Frisco's Restaurant Group. I am joined here today in our restaurant support center by Norman Abdallah, our Chief Executive Officer; and Jeff Carcara Chief Executive Officer of Barteca Restaurant Group. After Norman and I deliver our prepared remarks, all three of us will be happy to take your questions.

As you have probably already seen, we shoot two press releases this morning: the first regarding our intention to acquire Barteca Restaurant Group; and the second outstanding earnings press release. Both may be found in our newly designed corporate website, www.dfrg.com and the Investor Relations section as well as on numerous financial website. We've also uploaded a brief investor presentation on the acquisition and the rationale behind it at our Investor Relations website that will accompany our prepared remarks this morning. We therefore urge you to follow along.

But first, let me read our Safe Harbor statement. As part of our discussion today, we will include forward-looking statements, including statements regarding our Fiscal 2018 outlook. Please be advised that these statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer you to today's earnings press release and our SEC filings for more detailed discussion of the risks that could impact our future operating results and financial condition.

In addition, we will be referring to restaurant-level EBITDA and adjusted net income this morning as part of our first quarter 2018 review, which are both non-GAAP measures. We have therefore provided a reconciliation of these measures in the earnings press release tables to the most directly comparable financial measure presented in accordance with GAAP.

And now, I will turn the call over to Norman.

Norman Abdallah

Thank you, Neil, and good morning everyone. We have a lot of ground to cover today, so let's get started with the investor presentation posted to our IR website. On Slide 2, you can see our forward-looking statements relating to the Barteca acquisition, which includes statements about growth, synergies, accretion and delivering activities. I urge you to read those statements as part of your review of the presentation.

Turning to Slide 3, you may recall that we signaled on our Third Quarter 2017 Conference Call that we would be open to acquiring restaurant concepts that complement our existing restaurant portfolio. Our top process was that we would consider a smaller or emerging brand that have proven they have earned the right to grow and share our vision of celebrating life into restaurants through great food, great wine and superior hospitality. The combination of Del Frisco's and Barteca's does just that, it creates a leading portfolio of highly differentiated experiential restaurant brand.

Barteca consist of two concepts each within unique vibe, food, drinks and design. Barcelona Wine Bar is a neighborhood Spanish tacos bar featuring flavorful small plates and award-winning wine list while bartaco offers fresh upscale street food with a coastal vibe in a relaxed environment inspired by a healthy outdoor lifestyle. Together, they compromise 31 restaurants operated across 10 states in Washington DC with growth fueled by relentless focus on the guest experience.

The brands deliver on more than just high quality food and drinks, the atmosphere in each restaurant is fun, familiar and full of energy. In our view, Barteca is an ideal acquisition target, but before we delve more into our acquisition rationale, discussions of the brands themselves and why they are such a good fit for Del Frisco, I will like Neal to walk through the specifics of the transaction.

Neil Thomson

Thank you, Norman. On Slide 4, we'll provide you the summary of the transaction. The $325 million enterprise value will be paid in cash and represents 10.6x full year 2018 run rates adjusted EBITDA of $31 million.

We estimate $3 million to $5 million of annualized run rate synergies by 2020. This excludes $6 million to $8 million expected one-time integration costs. The transaction will be funded with a new debt financing commitment from JPMorgan Chase and Citizens to back DFRG and Barteca respectively for years. Comprised of a $390 million senior term loan and $50 million unfunded revolver. This results in 4.6x leverage post transaction with an intention to delever to below 3.5x within two to three years. This covenant-like arrangement provides us with significant flexibility and liquidity over the next few years.

Because of the transaction, we are suspending share repurchases to maximize free cash flow to deleveraging. The acquisition is subject to customary regulatory approvals and we anticipate it will close at the end of our second quarter June 26, 2018.

The benefits to our shareholders include the following. The transaction is expected to be accreted in full-year 2020, a disciplined acceleration of growth while leveraging DRFG's existing multi-brand strategy and best-in-class shared resources. A strong strategic fit to our family of restaurants with highly complementary brands that diversify the portfolio and finally, a significant value creation opportunity.

Now, let me turn the call back to Norman to walk through the rest of the presentation.

Norman Abdallah

Thank you, Neil. On Slide 5, we have provided a synopsis of why we strongly believe that the combination of our companies makes such great sense. First, Barcelona and bartaco share our cultural values in our experiential brands, highly complementary to our Del Frisco's Double Eagle and Del Frisco Grille brand.

One of the many ways to measure this is that none of these concepts offer delivery. Guests have to sit down in the restaurant to get the full experience; second, they will benefit from the multi-brand strategy that we already have in place with dedicated management teams and resources for individual concepts with best-in-class shared services; third, they will provide more diversification and balance to our own portfolio. This includes a hedge or a market downturn with lower average checks, the opposite seasonality to our existing brands with peak seasonality in the summer months, a less-decent menu which makes our supply chain less acceptable to swings and beef commodities in the smaller footprint for individual location which provides greater flexibility to our real estate strategy; and fourth, we believe we will be able to realize significant synergy opportunities through greater scale, both at the corporate level and in the middle of the P&L.

On Slide 6, you can see how we at Del Frisco have aligned our organization in a way that is ideally suited to manage multiple brands. Our dedicated brand teams operate autonomously with their own brave [ph] president, VP of Ops, concept chefs, finance, marketing, sales and events planner and training. This provides each brand not only with a toned [ph] personality, but also helps us do a better job in building accountability. Then at the corporate level, we support our brands with best-in-class shared services including systems and process in the areas of purchasing, development and real estate, finance and accounting, information technology, human resources, legal and risk.

This balance is intended to provide each concept with the best of both worlds. The entrepreneurial feeling of a small brand with a support and structure of a disciplined larger organization. The organizational structure that we have established should enable us to effectively integrate Barteca and realized synergies while continuing our existing strategic focus to accelerate Double Eagle growth and continue to implement our consumer and financial model strategy for Del Frisco's Grille. We will rely on third party assistance to help with the integration of Barteca, we will be disciplined in this integration and plan for it to take 12-18 months. In the meantime, the Barteca team can continue to operate on a self-sufficient basis.

With that background, let me now turn your attention to Slide 7 to description of Barteca itself. Barteca founders Andy and Sasa have created a cultural excellence with a laser-focus on unparalleled service, much like the culture we have created here at Del Frisco's. The Barteca team lead by current CEO Jeff Carcara -- whom you may recall was formerly our own COO -- lives and breathes hospitality and it shows to their people-first mentality, their warm-servers, their dedication to craft of chef-focused [indiscernible] beverages and their unique restaurant spaces that encourage guests to unwind and enjoy.

Barcelona Wine Bar and bartaco display all hallmarks of leading lifestyle brand that affords competitive [indiscernible] in the marketplace including connectivity beyond the four walls of the restaurant, brands that inspire evangelism, culture and brand's trending food, all powerful halos that drive appeal in loyalty. Their relentless focus on the guest experience characterized by warm, welcoming service and a commitment to high quality food and award-winning beverage programs is well aligned with Del Frisco's approach to dining.

First opened in 1996 to Norwalk Connecticut, Barteca has since grown to include 31 restaurants across 10 states; in Washington DC consisting of 15 Barcelona locations and 16 bartaco locations. Barcelona's average check is around $35 in asset 53% food mix and beverage mix of 47%. In 2017, Barcelona generated net sales of $60.2 million, comparable restaurant sales of 1.9% in restaurant EBITDA of $14.2 million, representing an impressive 23.6% margin. Bar Taco's average check is around $22 and asset food mix of 64%, and beverage mix of 36%.

In 2017, bartaco generated net sales of $67.1 million, comparable restaurant sales of 7.3% and a restaurant-level EBITDA of $17.5 million, representing an incredible 26.1 margin. These are obviously some best-in-class metrics. On Slide 8, you can see Barteca's current footprint mostly on the Eastern seaboard, but with two restaurants in Colorado. In the near term, the brands expansion comprises 30 approved sites, 20 signed leases at 15 locations under construction or in the pre-construction phase. Most of the development will be an existing market, although the brands will enter the Midwest and Texas as well. We believe Barcelona has the potential to have 50-100 restaurants domestically while bartaco has a potential to have 200-300 restaurants domestically.

Turning to Slide 9, Barcelona Wine Bar serves up top-of-style dining, using the best seasonal pits from local markets as well as specialties inspired by the culture of Spain in the Mediterranean. Simple small plates with [indiscernible] presentation allow guests to mix and match different flavor profiles throughout their stay, creating a unique experience each time they dine. The concept currently features an award-winning wine list boasting the largest Spanish wine program in the country with over 400 labels and offers over 40 by-the-glass Spanish wines in each location. But it's not just about the food or drink, it's about the feeling of spending a night that is fun, familiar and full of energy, somewhat unpretentious that delivers amazing quality.

Each restaurant is designed to be one-of-a-kind drawing inspiration from the neighborhood in architectural details of the original building inspired by an urban modern industrial feel. The interior consists of large format artwork striking steel and marble accents, refurbished [indiscernible], warm lighting and inviting bars and patios that create a timeless sophisticated and vibrant atmosphere.

On Slide 10, we described the bartaco experience which combines fresh upscale street food with a laid back coastal vibe that is inspired by healthy outdoor lifestyle. The flavors are bold, spicy, Mediterranean-inspired and also include a healthy twist which makes the concept very on-trend to current consumer preferences. The bar offers award-winning cocktails made from the artisanal spirits, hand-pressed Agua Frescas and over 40 tequilas that match the rustic beach-sat vibe of each location. This combination of unique food and drink offerings paired with a modern inviting atmosphere provides guest with an energetic stylish experience. Each restaurant is a one-of-a-kind design, light, minimalistic décor including reclaimed wood and hand-woven basket lights, draws on the energy of the neighborhood and invites guests to enjoy the lively outdoor bars and impressive fireplaces.

As you can see on Slide 11, Barteca is firing on all cylinders. The restaurant count has grown at 22% care while revenues have grown at a 32% care since 2013 through the end of last year. Thanks to our sales on a system-wide basis have risen between 5% to 7% in each year since 2014. In terms of profitability, restaurant-level EBITDA has grown at a 30% care in margin has ranged between 25% and 26%. Adjusted EBITDA has grown even more dramatically at a 34% care with a corresponding margin between 14% and 16%. For a definition of adjusted EBITDA and a reconciliation to GAAP net income, please refer to Slide 18.

On Slide 12, we compare Barteca to other best-in-class high-growth restaurant concepts in the public markets. You could see here that Barteca has the second highest unit count growth over the previous four years with a 25% care than the second highest total revenues with a 32% care.

On Slide 13, we demonstrate that Barcelona and bartaco work across a variety of markets and formats in urban settings, strip centers, college town, lifestyle centers and even tertiary market. Barcelona and bartaco generate $4.7 million and $5.6 million in AUVs respectively, with one of the highest sales per square foot and restaurant-level EBITDA margins in the 25% to 29% range. The impressive cash-on-cash return of 57% and 87% respectively excluding pre-opening calls from the investment and current sales to investment ratios of 2.3x and 3x respectively support the ideal that this is a compelling business that provides a long run way of opportunity for future development.

Turning to Slide 14, we compare Barcelona and bartaco to Del Frisco's Double Eagle and Del Frisco's Grille across several different attributes. All four of these brands have exceptional beverage programs with Barcelona generating the highest of 46% of sales.

Barcelona and bartaco's average checks are far below Del Frisco's Double Eagle and Del Frisco's Grille which provides for more flexibility and frequency in dining occasions. The square footage is also much lower at approximately 4,500 to 5,000 square feet which opens up more real estate options for expansion. Across all concepts, the day part mix skews were towards dinner of the Barcelona and bartaco have late-night businesses and bartaco has a substantial lunch business at 30% mix. And of course, the guest phase across all of these brands is highly desirable phase upon their relative affluent in interest and experiencing and enjoying the best that these restaurants have to offer.

On Slide 15, we compare the unit economics of what will be our three primary growth trends: Del Frisco's Double Eagle, Barcelona and bartaco. Del Frisco's Double Eagle AUV is obviously much higher than the others, but the sales per square foot are more similar as are the restaurant level margins. For comparability, cash-on-cash returns are shown here excluding pre-opening calls which we typically treat as part of our investment. The cash-on-cash returns are all certainly compelling with Double Eagle at 55%, Barcelona at 57% and bartaco, the highest at an exceptional 87%.

Turning to Slide 16, our intention is to create tremendous value for our combined entity and we are going to do that with these considerations in mind. Our organizations are well aligned through our brand presence and structure in our cultures of excellence and we will seek to leverage shared services to realize significant G&A cost. Second, our brands offer distinct dining occasion which ensures minimal cannibalization, expensive frequency for our core consumers and makes the combined company more recession-proof.

Third, we will drive to continue minute innovation across all of these brands through our combined culinary talents while having dedicated concept chefs reporting to each brand president and Jeff Carcara, the CEO and capabilities and benefits from our robust bar program. Fourth, from a real estate standpoint, we will have significant leverage with developers and landlords because of our distinctly-positioned growth brand with an industry-leading economics and the respect to Del Frisco's name has with national developers. These are demonstrated with our six previously-announced locations for 2018 or 2019 openings for the Del Frisco's Double Eagle. In addition, we also have greater flexibility with the opportunity for synergies through shared development efforts.

And lastly, our enhanced scale creates cost-saving opportunities and purchasing across the portfolio because of combined know-how and capabilities for best-in-class supply chain. To conclude on Slide 17, this is an attractive growth opportunity in our company. We are going to maintain our goal of executing at least 10% disciplined unit growth for DFRG as a combined company supported by consistent comparable restaurant sales growth at Barteca, which will also contribute to overall positive sales trends at DFRG into the future. Second, we have best-in-class mini-economics that are proven nationally across markets and formats. This in turn supports a vast wide space growth opportunity for each brand.

Third, we have identified synergies as Neil mentioned earlier of approximately $3 million to $6 million on an annualized run rate basis. This is after one-time cost of approximately $6 million to $8 million and a strong free cash flow that will support a quick deleveraging of the balance sheet with a target below 3.5x EBITDA to that ratio within the next two to three years. We have a fantastic improvement management team, we share culture and values that are eager to begin the integration process and create a lot of value for our shareholders. So with that, let me now briefly discuss Sullivan's Steakhouse in Q1 results at a high level before turning the call over to Neil.

As we reference in our earnings press release, we are nearing an agreement to sell Sullivan's and hope to have a signed agreement as the next 60 to 90 days. We have a few interested buyers and are negotiating with them concurrently. Divestment of this concept enable us to better-allocate capital to develop the Double Eagle in both Barteca brands. This will also allow the Sullivan's team to grow new restaurants again under a new ownership group.

As we continue to see positive results from our consumer research base strategy that we've implemented at our core Del Frisco Grille restaurants, we will assess the performance of our two new builds in the second half of 2018 in Philadelphia and Fort Lauderdale. We are optimistic that by 2020, Del Frisco's Grille will have earned the right to capital and disciplined growth.

In terms of our Q1 results, demonstrate the impact of severe winter weather in January and March at some of our highest volume locations in the northeast along with one-off event such as lapping the presidential inauguration of Washington DC and the Superbowl moving from Houston where we have three restaurants to Minneapolis where we don't operate any restaurants. These factors resulted in approximately $3 million in lost revenues within an associated costly leveraging that we estimate negatively impacted adjusted net income by approximately $0.08 per diluted share. Without this impact and timing differences in our marketing spend in the first quarter of 2018, compare to first quarter of 2017, which reduced adjusted EPS by another $0.03 compared to prior year, our adjusted EPS would have been $0.21.

Most of our restaurant level cost rose as percent of revenues although our labor line benefited significantly from our Hot Scheduled flavor model and we continue to see more traction in Q2 from increased production in lower labor in our restaurants. Since the start of Q2, sales trends have improved in all three brands and we believe that this momentum coupled with a timing of the marketing spend that lay down the first quarter positioned us within our annual guidance range for adjusted net -- notwithstanding the divesture of Sullivan's and acquisition of Barteca.

Now, I would like to turn the call back to Neil. Neil?

Neil Thomson

Thank you, Norman. Now, let me turn your attention to the 13-week first quarter ended March 27, 2018. For comparison purposes, I will use the recast first quarter 2017 for the 13-week period ending on March 28, 2017, which is contained in the back of our earnings press release this morning, as well as on the 2017 financial restatements on our investor relations website. Note that earnings press release also contain the shorter 12-week quarter as we have reported it last year.

Consolidated revenues for Q1 decreased 1.3% to $89.3 million from the $90.5 million in the year ago 13-week period as we cast. The top line decline reflects the blended 3.6% decrease in comparable restaurant sales and three Sullivan's closures in Seattle, Houston and Austin, partially offset by openings in Plano Texas, the Double Eagle and in New York City and Westwood Massachusetts, the Del Frisco's Grille.

The 3.6% decrease in comparable restaurant sales consisted of a 9.3% decline in custom accounts, partially offset by 5.7% increase in average check. Comparable restaurant sales were negatively impacted by approximately $3 million by three severe winter storms in the Northeast and lapping one-time events from the prior year quarter, such as the presidential inauguration in DC and Superbowl in Houston. Double Eagle and Grilles essential sales with both being slightly positive and would have contributed approximately $0.08 in diluted EPS without these impacts.

Turning to our cost line items, total cost of sales as a percentage of revenues rose by 100 basis points to 29.3% to 28.3% in the year-ago period. This was due to increased commodity cost and a mixed shift to higher percentage cost of sales for menu items. The year-over-year commodity cost increase was most notable at the start of Q1, but improved throughout the quarter. As we enter Q2, we are locked in a more favorable pricing for our highest volume beef products as far as we are able to given our fresh beef sourcing, and combined with a number of supply chain initiatives, we expect to see a continued fall in cost of sales as a percentage of revenues through Q2.

Restaurant operating expenses as a percentage of revenues increased by 80 basis points to 49.5% from 48.7% in the year-ago period, primarily due to a one-time $0.5 million [ph] or 60 basis point rent accounting adjustment in Q1 2017, related to the closure of our Seattle Sullivan's restaurant, sales deleverage and wage inflation of about 6% to 7%. Recall that we had anticipated between 100 to 150 basis point improvement in labor cost this year as we have implemented our Hot Schedules tool to best schedule our labor alongside other initiatives to optimize our management labor cost. We improved by 110 basis points in Q1 despite the negative comp and the unfortunate weather both in early January and the middle parts of March. Our operators are clearly becoming worked at deflecting labor up and down, based up on expectations the guest counts.

Marketing and advertising expenses rose by 80 basis points as the percentage of revenues to 2.3% as we invested in our brand new campaigns and menu launches. Note the Q1 2017 was an abnormally low quarter at the marketing spend at 1.5% of revenues with full-year 2017 marketing and on advertising expenses coming in at 2.3% of revenues, the same percentage spend at Q1 2018. We have forecasted similar levels of spends to full-year 2018 as in 2017 in that guidance. We'll spend more evenly phased across quarters and are on-track to achieve that. The variability between Q1 2018 and Q1 2017 is a timing difference driven by a different marketing calendar.

For all the reasons just stated, restaurant-level EBITDA fell by $2.5 million to $16.9 million in Q1 from $19.4 million in the year-ago period, while the margin decreased 250 basis points to 18.9% versus 21.4% in the prior year. Pre-opening expenses rose to $1.1 million to $0.4 million in the year-ago period, reflecting greater development and the timing of restaurants under construction. Note that pre-opening cash include non-cash straight line rents which is incurred during construction and can precede the restaurant opening by four to six months.

General and administrative expenses rose to $8.3 million from $6.8 million in the year-ago period, as the percentage of revenues increase 180 basis points to 9.3% versus 7.5% in the year-ago period. We continue to make investments to strengthen our restaurant supports entity and regional management level personnel to support recent and anticipated growth. Note this total of $8.3 million includes $0.2 million of non-recurring legal expenses, which are added back in our adjusted net income. After this adjustment, we mess our internal company G&A plan for Q1 and are on-track to meet our full-year G&A guidance of $30 million to $33 million. We incurred $0.2 million in consulting project costs related to our ERP projects, whereas we had consulting project cost of $2 million in the year-ago period related to our research project.

Cost related to acquisition and dispositions was $0.7 million. We did not incur any search cost in the year-ago period. Leave termination and closing cost totaled $0.4 million and are related to the closure of the Austin Texas Sullivan's restaurant. GAAP net income was $0.4 million or $0.02 per diluted share. This compared to the prior year GAAP net income of $3.7 million or $0.16 per diluted share.

Excluding one-time items, adjusted net income was $2 million or $0.10 per diluted share compared to prior year adjusted net income of $4.9 million or $0.21 per diluted share. Please see the reconciliation table in our earnings release for this specific set.

Turning to our liquidity and balance sheets. We ended the quarter with cash and cash equivalents of approximately $3 million and $29.7 million of outstanding debt under our credit facility. This represents less than 0.8x trailing 12 months of EBITDA.

Now, let's discuss our individual brand performances. At Del Frisco Double Eagle Steakhouse, revenues increased 2.5% to $44 million from $42.9 million in the year ago period. Top line growth was mainly a function of sales contributions around new threats around in Plano offset by a decline in comparable sales. In aggregates, we had 13 incremental operating weeks during Q1. Comparable restaurant sales fell 2.8% and consisted of a 6.7% decline in traffic, partially offset by a 3.9% increase in average check. Excluding the weather factor and event rollovers previously mentioned, we believe comparable restaurant sales would have been slightly positive.

Del Frisco's Double Eagle restaurant-level EBITDA margin decreased 180 basis points to 25.1% with sales deleveraged and higher restaurant level cost across the board to the exclusion of labor cost. Notably, we gained traction on labor cost efficiency as a result of the Hot Schedules implementation with labor cost improving by 80 basis point to 23.6% despite negative comps and the challenges of scheduling labor around adverse weather.

At Del Frisco's Grille, revenues increased 3.2% to $29.4 million in Q1, from $28.5 million in the year-ago period. This top line improvement was due to an additional operating weeks provided by the openings in New York City in 2017 and Westwood Massachusetts towards the end of Q1 2018, offset by its decreasing comparable restaurant sales. Comparable restaurant sales are 1.4% comprised with a 5.7% increase in average check and a 7.1% decrease in traffic. There were 20 restaurants in the Grille comparable based during Q1 after the total of 25 restaurants.

Similar to the Double Eagle, we believe the comparable restaurant sales would have been slightly positive without the weather and event rollover impacts. Del Frisco Grilles, restaurant-level EBITDA margin decrease 300 basis points to 11.3% due to sales deleverage and higher restaurant-level cost across the board to the exclusion of labor cost. Labor cost improved by 80 basis points to 33.4%.

At Sullivan's Steakhouse, revenues decrease 16.5% to $16 million in Q1 from $19.1 million in the year ago period. Relative to the prior year, we had 29 fewer operating weeks because of restaurant closings in Seattle, Houston and Austin. Comparable restaurant sales decreased 10.3%, consisting of a 20.7% decrease in traffic and 10.4% increase in average check, in part due to the elimination of lunch at seven select Sullivan's locations beginning in the second quarter last year. All 15 open Sullivan Steakhouses were included in a comp-based during Q1.

In Q2-to-date, these trends have significantly changed to mid-single digits negative with continued positive momentum. Sullivan Steakhouse restaurant-level EBITDA margin decreased 380 basis points to 15.9%, primarily due to one-time rent accounting adjustments in Q1 2017, related to the closure of Sullivan's in Seattle which had a benefit impact of 280 basis point in 2017 on sales deleverage and higher restaurant level cost to the exclusion of labor costs. We made the most progress on labor productivity on any of our three brands at Sullivan's with labor cost reducing by 220 basis points to 28.2%.

Turning to our fiscal year 2018 outlook, we are reiterating prior guidance except as otherwise highlighted, but we'll update these upon the pending closing of the Sullivan sale and Barteca acquisition. With those considerations in mind, we are projecting the following: total comparable restaurant sales growth of 0% to 2%; six, up from five, to seven restaurant openings consisting of three to four Del Frisco's Double Eagle Steakhouses and three Del Frisco's Grilles; all Del Frisco's Grilles and two Sullivan's Steakhouse restaurant closures; restaurant-level EBITDA of 20% to 21% of consolidated revenues; general and administrative cost of approximately $30 million to $33 million; a reduction of effective tax rate guidance to approximately 0% to 5% from 10% to 15%; gross capital expenditures before tenant allowances of $55 million to $60 million and this range also includes two Double Eagle remodeling projects; pre-opening cost for seven 2018 openings and some 2019 openings at $7.5 million to $8.5 million; and finally, annual adjusted net income per diluted share of $0.66 to $0.76.

Excluding significant year-over-year changes such as the reduced tax rates the lower depreciation and impaired restaurants and the increased pre-opening costs, the guidance midpoint represented 15% annual growth in adjusted net income.

As Norman mentioned, we have seen a nice uptake in sales trends at all three brands so far in Q2, now that the weather issues are behind us. We think that the combination of this momentum coupled with our sales, marketing and cost initiatives put us well within range on our guidance.

Now I'd like to hand back over to Norman for some closing comments.

Norman Abdallah

Thank you, Neil. Allow me to briefly review development of Del Frisco's Double Eagle and Del Frisco's Grille before taking your questions. We are working on 70 restaurant openings for this year, consisting of four Double Eagles and three Grilles. So far, we have opened a Grille in Westwood Massachusetts on march 14. We have no openings slated for Q2, but we expect to have a busy Q3 with openings for the Double Eagle in Boston at the Prudential Center and Back Bay and our first Double Eagle in Atlanta.

In Q4 if all goes as planned, we will have Double Eagle openings in downtown San Diego in Century City California as we begin to establish a foothold for our flagship brand on the west coast. Note that all our Double Eagle projects target 35% cash-on-cash returns after pre-opening in 55% cash-on-cash returns before pre-opening. For Del Frisco's Grille, we will be opening in downtown Philadelphia and downtown Fort Lauderdale. Last week, we are pleased to announce two lease signings for Double Eagle opening in Pittsburgh in Santa Clara. Recall that we have been advised by a third-party special analytics company based upon extensive modeling that there is potential domestically for 40 to 50 Double Eagles and 50-75 Grilles.

In the near-term growth, we will be concentrated on our high returning Double eagle model. We'll be more cautious on road growth and immediate future and expect to open no Grilles in 2019 and 2020 while we assess the performance of our two newest openings in Philadelphia and Fort Lauderdale which incorporate learning from our 2017 consulting project.

Optimizing our portfolio is an important element of our produced responsibilities and we are constantly evaluating our asset-base to determine what adjustments might be needed to deliver best-in-class value to our shareholders. As previously reported, we will therefore close for under-performing Grilles and two Sullivan's this year, including the Austin Sullivan which ceased operation in January. We are making good progress on the remaining five exit negotiation. All five restaurants are cash flow negative and there will be particular gains for our Del Frisco's brand whose restaurant-level EBITDA would have been 190 basis points higher in full year of 2017 without under-performing relocations. I realized that we had a difficult Q1, but that does not diminish our optimism for 2018, both as it relates to our Bartaca acquisition, the Sullivan's sale as well as our Double Eagle and Grille brands.

We have three overreaching initiatives for our company in 2018: number one, it's to solidify our foundation based upon a continued implementation of processes and technology. Most of that will be completed this year and will support our integration of Barteca. Second is to continue to innovate within our Double Eagle or Grille brands, taken results of the consulting group and what they have provided for the Grille, establishing brand pillars and brand [indiscernible] through R&D, marketing messages and service.

Third is activating growth. You will certainly see this in 2018 as well as our pipeline going into 2019 and 2020 for the Double Eagle and the Barteca restaurants. Lastly on Barteca, I believe that we have already communicated how very impressed we are with a company culture, the high regard we have for their concept in how they have demonstrated strong financial performance, improving growth model across the variety of market.

Together, with a phenomenal management team, we intend to do great things as a public company and create value for our shareholders to top line growth. Best-in-class unit economics and significant synergies all led by an experienced energized leadership team. Thank you very much for your time today. For our Q&A session, we are pleased to be joined by Barteca CEO, Jeff Carcara to answer any questions about the Barteca brand that we have not already covered.

Operator, if you would please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll go first with Will Slabaugh with Stephens Inc.

Will Slabaugh

Thanks, guys. Can you talk about the decision process involved, Del Frisco's two more brands at this point. Obviously, very strong metrics on both. But when you go through the process of re-ramping growth of the Double Eagle, slowing the Grille, the sale process of Sullivan's, it seems like there's a decent amount going on there. So first, do this take away some of the focus from the core business in the near term? Could this be a near-term distraction? And then second, assuming you're correct about the Grille, getting back on track, do you have the people and the cost structure in place to be able to aggressively grow off more concepts? Once that were to happen, I guess that would be maybe 2020 or beyond?

Norman Abdallah

Yes, thank you. Jeff, as we look at the acquisition, something that was very important to us is being able to find a company that could stand alone for the next 12-18 months, so we could be very disciplined and cautious with the integration. We've hired third party consultants to help us with the integration to make sure that we are disciplined through that integration. As you look at the Del Frisco's Double Eagle and Del Frisco's Grille, the Double Eagle and the Grille have again dedicated teams 100% focus on their brand with everything that goes from growth and touches the consumer. When we set the company out, that was the main reason to do that, so the brands continue to have immediate focus by the presidents and the brand team.

With bringing in Barteco, one of the great things about it is Jeff was the Chief Operating Officer for Del Frisco for three years, so he understand what has been built in Del Frisco over time with the systems and processes and the focus on the guest. It does seem like a lot, but with bringing in outside consultants to handle the divestiture of Sullivan, the integration of Barteca and then the growth of the Double Eagle, we feel very good -- and I wanted to make one comment, is we don't see the growth of the Double Eagle at three to four year as an aggressive growth because of the way that we're timing out. On the Grille, again it has to prove out that we can grow it and it will be even grown at a moderate development rate into the future and will be something very cautious on through the next five years. That's how we look at the overall integration and again, if the concepts didn't fit into our ambition [indiscernible] restaurants, it wouldn't even pass a test to be able to look at it.

Will Slabaugh

Got it. And I want to follow up on a comment that you made, I think, Neil as well on trends. You mentioned improvement quarter-to-date at all three brand a couple of different times. I was wondering if you could be more specific there considering all the noise that we saw last quarter, what the magnitude of that improvement might be?

Norman Abdallah

Yes. As we move forward, the Grille is positive in low-single digits. The Double Eagle has regained about 200 basis points of same-store sales and with the lap that we just went through, it was also positive and we have conventions that are coming in this week that will bring it back to that as well. We've seen about 400-600 basis points of reduction and negative comp store sales out of Sullivan's. That's why we're very encouraged about the long-term outlook of our two existing brands. And as Neil said, we'll be riding on our projections of 0% to 2%.

Neil Thomson

I'll just add, we'll -- we started to lap the removal of lunch at Sullivan's at the start of Q2, so that's helped us significantly but there is also improvement in the brand even above the benefits of that lap analysis. So that's the brand of significance -- the biggest sequential improvement from Q1.

Operator

We'll go next to Brian Vaccaro with Raymond James.

Brian Vaccaro

Just a question on Barcelona and Barteco; could you provide a little more color on the historical comp performance at each brand? And also just any color on any initiatives that are currently in place at each brand?

Norman Abdallah

Brian, I can talk to you a little bit about that. Our comps -- we've been positive -- as of this call, we're still private by the way. We've been comp positive though for the last several years, last year was a heck of a year for us and this year so far we're still positive. As far as initiatives go, can you repeat that question on what specific initiatives you might be interested in hearing about?

Brian Vaccaro

Just in terms of -- I appreciate that color Jeff and positive comp trend over the last several years is impressive given the industry backdrop we've been facing but also the upset and Bartako [ph] caught my eye as well. So anything specific to that that's driving that would be helpful.

Neil Thomson

It's not a lot of the answers that maybe you want to hear as far as specific initiatives, technology expense, stuff like that but it's high food high comp, great service. Norman said a couple of times in his descriptive about our relentless focus on our guest and for those of you that have been on rest; I think you've probably had seen that. That is what we folks are on, we don't do a whole lot of advertising and marketing; we really put our dollars into our restaurants and we put our dollars into our people so that they can -- that we clear the -- we clear all the obstacles to the guess for our people. So we spend a lot of time making sure our managers are on the floor and not in front of a computer screen or writing a schedule or they are out there with the guests.

Now, from trends I will say that our lunch train on the Bertako side; we are seeing lunch trends as we open new restaurants. Lunch is a large growing day part for us but we're also seeing midday lunch growing for us, significantly too. We feel like we're the margaritas in ex-coffee and we're seeing quite a few people in the afternoon with a margarita on a couple of tacos on her laptop using our bars and our restaurants similar to know they use a Starbucks. Now that's an interesting trend for us right now.

And one other comment to that Brian; is with the integration over the next 12 to 18 months and this will be coming at pretty quickly with our renewal. Delfirso's is at 97 percentile in benefits for the same. We had the same philosophy that Barteca does is view investment of the team, and as we go forward, team members of Bertako [ph] will remain some things that we do at DFRG and provide better benefits that they have today and as you've seen this year, we've seen about last year about 1,900 basis point decrease in turnover and management and GM, and we expect that to go into the Barteca concepts, you're on their growth to make sure that we retain the managers for growth, the new training process is that Jeff has put in; I view them as best-in-class with making sure that the managers are seasoned as well. So the benefitees will surely make sure that we attract the top talent in all four of our concepts.

Brian Vaccaro

And then just on the core Del's business, can you clarify the quarter to date comment of legal? Sounds like you're still maybe down slightly in the first five weeks? But did I hear that correctly? Was there some -- another calendar shift or something that you were alluding to?

Norman Abdallah

We started off Q2 I think after 3 weeks of Q2, we were positive and then we've seen some shifts in some of the double legal is highly susceptible to conferences and timings; so there has been a couple of them that have shifted timing, we're expecting some benefit coming back to assume in that period, so we're slightly negative at this point in time. So I don't want to give out a number because the number is moving around a lot even within the quarter but as of now we're slightly negative but we've had line of sight with some favorability coming that way in the next few weeks.

Again, something to -- and this is where we have a lot of comfort around the double legal with the new website reservation system that we have we've seen a 50% increase through our website in reservations made and visited by the new technology that we have. So that gives us a lot of confidence in the brand as you continue to see the guests of technology that we've rolled out as well for the front end and for the guests to make it easy for the guests.

Brian Vaccaro

And then just one more if I could; on the commodity front Neil, what was inflation on the overall basket in Q1? And then as you think about '18, what do you expect, what's your latest thinking on beef and overall inflation? Thank you.

Neil Thomson

We were about 4% inflation number in Q1. And as I mentioned earlier, we were higher than that in the first few weeks of the quarter and the trend has really improved through the backend of Q1 and into the start of Q2. We're actually in a major beef lines at the moment, we're in a deflation; we're locked in on [indiscernible] now till the end of June and we're locked in on that revise till the end of May at a favorable year-over-year pricing. And that's really driven by the market suppliers up in terms of the number of capital, as well as the percentage of capital that's grading as prime at the moment is around about 8% which is very high level, it's normally 4%; so that's helping in terms of the supply to reduce the costs.

What we are seeing at the moment is that trend is starting to move a little bit back in the other direction, so we're anticipating a good Q2 in terms of commodity inflation. And then, as we get into the back half of the year, we're still projecting at this point in time an inflation re-environment; we do have a few supply chain initiatives as well, the biggest one of which is going to benefit our grill brand when we do -- new menus are rolled out around about the middle of the year. So we're hoping that will help us in the back end of the year. So overall, I'm expecting Q1 to be the highest inflation quarter for us, a decent Q2 and then, slightly inflationary Q3 and Q4.

Operator

We'll go next to [indiscernible].

Unidentified Analyst

I was wondering if you could talk about kind of the longer term vision of how you see the Company managing really a portfolio brand? Sure, you're de-emphasizing or divesting [indiscernible], you're adding two new brands -- what do you think the ultimate capacity is for the business to manage this from a portfolio standpoint? And how do you see these different brands interacting with each other and completing with each other? Thank you.

Neil Thomson

So over the next 24 months we're going to be focused on our four key brands with our tech acquisition to completely do the integration correctly using outside consultants having the cultures between the two which is already very closed merged. Jeff Decaro [ph] will be moving to Dallas and leading a team as well; so it's really making sure that happens -- you know, I've had conversations with investors and the way I described it is, basically it's almost like we're a public PE company that invest into brands and each brand and has its own dedicated team to make sure that we really protect the brands the right way. And then, how do we look at them?

We look at very experiential brands, we don't look at any functional brands for the future and again, we're going to be probably about 24 months out before we're start looking for something and that's the vision of celebrating lots in restaurants, it has to deliver the same cash-on-cash returns with the double legal to us. We look at this acquisition as a hedge bet as I talk about with the seasonality and the check as to have a stronger unit level economics as the double legal does; it has to have a proven growth model, no turnarounds, it has to be a proven growth concept. And then it can be self-sufficient during the integration pipeline and making sure that it really can do that where we don't have to do the integration immediately after we own it.

So that's how we'll be able to go with the brands and how we look at this as well. And we also have to make sure that we're producing the capital, deleveraging the business in a very quick way to allocate the proper capital with a disciplined growth of each brand.

Operator

[Operator Instructions] We'll go next to Freddie [ph] with Northern Right Capital.

Unidentified Analyst

I just wanted to ask a few oriented questions about the EBITDA and debt for the company's pro forma for the deal. It looks like the run rate EBITDA exiting 2018 is $31 million; does that include the full G&A burden?

Norman Abdallah

Yes, it does.

Unidentified Analyst

It does? Okay. So on a trailing basis, it's clearly a little more expensive, but with as you exit 2018, you expect it to be about 10.6 multiple. I guess my other question is pro forma for the deal closing today, you'll be 5x levered. Will you need additional capital to debt or equity to fund the Double Eagle and bartaco expansion?

Norman Abdallah

That's a good question, Freddie. At that close, we'll be at a 4.6x and the reason of that is the amount of capital that we're funding in development for the Double Eagle and the Barteca brand and we deleveraged very quickly through 2019. So again, our target is to be less than 3.5x on debt. We've carried a very strong balance sheet for a long time. We will continue to do that and we evaluate in a lot of different options for funding this transaction and working with JPMorgan Chase and Citizens. It really gives a lot of flexibility in the board, decided this was the best route for us to go at this time. We'll continue to actively monitor the capital market and seek ways to optimize our capital structure, as well as deleveraging even quicker as well. That's how we're looking at this transaction in making sure that we have the right debt leverage as we go forward and that's very important for us and has been that way for a long, long time.

Unidentified Analyst

Great. Thank you.

Norman Abdallah

You bet. We have time to take one more question. We have a whole team waiting in the training room for us to go speak to. We have a lot of calls coming up. If anybody have some individual questions, feel free to go through ICR to set up a call with Neil and I and then we'll be out in the investment community at doing quite a bit of non-deal road shows over the next 30 days. If you want to attend one of those, we can connect you with the analyst that are doing those road shows with us. One more question and then we'll move on.

Operator

We'll go for a follow up question with Will Slabaugh with Stephens Inc.

Norman Abdallah

Hey, Will. How are you?

Operator

Will, your line is open. Please check your mute function.

Will Slabaugh

There we go. I had a question for Jeff. By the way, Jeff, welcome back. It's good to speak to you again. I wanted to ask on the impressive AUVs and returns at bartaco because it's some of the biggest that I'm assuming most of us have seen domestically and I was wondering if you could talk about what the bill curve looks like there, if there's a decent gap between a lower unit volume locations in the higher ones and then also I know we talked about bartaco working well across various types of footprint. Is there any rule of thumb or way for us to think about this from a high level in terms of 'here is what we typically do to invest' or is it you seen pretty similar results wherever you've gone?

Jeff Carcara

There has been some learning's along the way for sure. We've had a couple restaurants that under-performed a little bit here in the last couple of years of openings, but we see consistent growth in them. They may not come out of the gate as fast as we would like, but we do see consistent growth. Similar to the question before by Brian around comp sales, is we really start to see launch kick in year-2, which has been obviously great to continue on the road of comp sales. As far as the bell curve on our returns, no, not really to answer that succinctly. Our newer restaurants and our older restaurants. Now, of course some of the much higher cash-on-cash returns come from some of our legacy restaurants in Connecticut, but even our newer restaurants and plus 50 and bartaco are even into the 60s on our newer restaurants, too. Not a huge bilker when it comes to that and we have had some learning's and recent openings. But overall, we're still moving along as well as we were four or five years ago.

Neil Thomson

Yes. Will, just one more comment on that. Part of our due diligence was to have the company that we used for the outside resource for the Double Eagle, we had every single site that was open in every single site that leads us either were signed or getting ready to be signed and it's a very, very impressive real estate portfolio and then we did diligence as well. There's no cash flow negative restaurants in the system. That speaks to really the health of the brand and the comps as well.

Will Slabaugh

Great. Thank you.

Norman Abdallah

So thank you, everybody, for the time this morning. I'm sorry about the long script. That's the longest I've talked, I think, in my life time, but we wanted to give you a lot of color on the acquisition, in our confidence, in our core brands going forward with everything that we're seeing today. Look forward to talking individually and now we'll go talk to our team. Thank you very much.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.