Carrols Restaurant Group, Inc. (TAST) CEO Dan Accordino on Q2 2018 Results - Earnings Call Transcript

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About: Carrols Restaurant Group, Inc. (TAST)
by: SA Transcripts

Carrols Restaurant Group, Inc. (NASDAQ:TAST) Q2 2018 Earnings Conference Call August 7, 2018 8:30 AM ET

Executives

Paul Flanders - CFO

Dan Accordino - President & CEO

Analysts

Jeremy Hamblin - Dougherty & Company

Jake Bartlett - SunTrust Robinson Humphrey

Bryan Hunt - Wells Fargo Securities

Frederick Wightman - Citigroup Inc

Will Slabaugh - Stephens, Inc.

Brian Vaccaro - Raymond James

Operator

Hello, and welcome to the Carrols Restaurant Group Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time. I would like to remind everyone that this conference call is being recorded today, Tuesday, August 7, 2018, at 8:30 a.m. Eastern Time and will be available for replay.

I'll now turn this conference over to Paul Flanders, Chief Financial Officer. Please go ahead, sir.

Paul Flanders

Good morning. By now you should have access to our earnings announcement released earlier this morning, which is available on our Web site at www.carrols.com under the Investor Relations section.

Before we begin our remarks, I'd like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, guidance, or plans. These statements are not guarantees of future performance and therefore, undue reliance should not be placed on them. We also refer you to our filings with the SEC for more details, especially the risks that could impact our business and our results.

During today's call, we will discuss certain non-GAAP measures, which 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 Generally Accepted Accounting Principles. A reconciliation to complete GAAP measures is available with our earnings release.

With that said, I'll now turn the call over to the President and CEO of Carrols Restaurant Group, Dan Accordino.

Dan Accordino

Thanks, Paul, and good morning, everyone. We posted solid results for the second quarter and are pleased with our overall performance to the first half of the year. And on the top line we increased sales 8.4% for the quarter with strong growth in comparable restaurant sales of 5% over the 4.6% increase in the second quarter last year.

The effectiveness of Burger King's marketing and barbell menu strategy, along with the balance of both premium and value offerings continues to provide a highly attractive value proposition that is resonating with our customers. Sales increased across all day parts and again reflected favorable sales mix and higher average check due to the nature of our premium and combo promotional offerings.

In terms of profitability, we successfully leveraged the growth in restaurant sales against a number of operating costs, while also benefiting from more than a 6% decrease in ground beef costs from the prior-year quarter. These factors enabled us to generate significant growth in restaurant level EBITDA and adjusted EBITDA of 16.7% and 19.4%, respectively compared to the second quarter of 2017. Adjusted net income of $10 million or $0.22 per diluted share increased by more than 50% over the prior-year quarter.

With regards to products and promotions, the two for six Mix & Match promotion, which includes the WHOPPER Crispy Chicken Sandwich or Spicy Crispy Chicken Sandwich, remains a strong value and check driver for us. Other promotions during the second quarter included the two cheeseburger meal bundle for $3.49, the new Crispy Pretzel Chicken fries, the two sandwich $3.79, King's Meal Deal and our 10 piece chicken nuggets for $1.69.

Burger King also enhanced its beverage offerings with the new solvent Carmel shake and more recently Frozen Fanta Orange and Frozen Coke. Rounding up Burger King's barbell strategy, the brand continued to build upon the popular and well received SOURDOUGH KING platform with the new Bacon & Swiss SOURDOUGH KING and the SOURDOUGH Chicken Club.

Near the end of the second quarter, Burger King also teamed up with Budweiser, the king of beers, to advertise the launch and launch the new American Brewhouse King sandwich, which continues to be featured in the third quarter. Lastly, our breakfast offerings continue to perform well led by the 2 for 4, Mix & Match breakfast sandwich offering, the SOURDOUGH KING breakfast sandwiches, and our $0.79 sausage biscuits.

With that, let me update you on our expansion activities. As indicated in this morning's press release, we exercised our right of first refusal in late July related to the acquisition of 31 Burger King restaurants in Virginia, in one transaction and two restaurants in Detroit and another. Along with two other small acquisitions totaling four restaurants, we expect to complete the acquisition of a total 35 -- 37 restaurants by the end of the third quarter.

We also opened two new restaurants in the second quarter bringing our new unit growth for the first half of the year to four restaurants. These new units along with the 11 new restaurants constructed last year are making a positive contribution to sales, adjusted EBITDA, and adjusted EBITDA margins.

Similarly, the 64 restaurants acquired in 2017 have favorably contributed to our results due to their inclusion for the entire second quarter this year and from operating improvements made since we acquired them. To conclude, our results in the second quarter and in the first half of 2018 have been solid and we’ve been actively working our acquisition pipeline.

Based on our performance in the first half of the year now and our outlook for the remainder of 2018, we are increasing both our sales and adjusted EBITDA guidance while narrowing the range of our comparable restaurant sales estimates. Our updated guidance also includes the anticipated contribution from the acquisitions that I just discussed.

Paul will go into greater detail regarding our updated guidance. And with that, I will now turn the call over to him for our financial review.

Paul Flanders

Thanks, Dan. Restaurant sales for the second quarter increased 8.4% over the prior-year period of $303 million. Comparable restaurant sales increased 5% reflecting a 4.4% increase in average check and a 0.6% increase in customer traffic. The increase in average check included 2.9% of menu pricing along with favorable sales mix shifts.

Adjusted EBITDA increased 19.4% to $32.8 million and restaurant level EBITDA increased 16.7% to $47.4 million compared to the second quarter of last year. Adjusted EBITDA margin increased 100 basis points to 10.8% of restaurant sales and restaurant level EBITDA margin improved 111 basis points to 15.6% of restaurant sales.

The improvement in margins was in part due to the leveraging of our strong sales performance and favorable changes impacting cost of sales. Cost of sales increased -- I’m sorry, decreased 114 basis points as a percentage of restaurant sales compared to the prior-year period reflecting lower commodity costs mainly ground beef, favorable mix shift, and menu pricing.

Ground beef prices averages $2.07 per pound in the quarter or approximately 6.3% lower than the second quarter of 2017. Our updated guidance, which I will get to in a moment, reflects our expectation that beef costs will remain at a comparable level for the remainder of the year.

Restaurant labor expense increased 52 basis points to 32.0% of restaurant sales compared to the prior-year quarter, primarily due to higher workers' compensation, medical and incentive costs. Our leveraging of the strong sales growth and other fixed labor costs enabled us to offset much of the impact from a 5.7% increase in our hourly wage rate.

We also favorably leveraged rent and other restaurant operating expenses by a combined 48 basis points. While general and administrative expenses increased slightly by 13 basis points due to higher incentive compensation based on our financial performance.

Net income in the second quarter of 2018 was $7.8 million or $0.17 per diluted share compared to $6 million or $0.13 per diluted share in the prior-year period. Net income included $2.9 million of impairment and other lease charges and $0.1 million of acquisition expenses. For the same period last year, net income included $0.4 million of impairment and other lease charges and $0.4 million of acquisition expenses.

Impairment and other lease charges for the second quarter of 2018 included a $1.9 million equipment write-off for defective products older units that we had to replace in approximately 300 restaurants. While the outcome and recovery is uncertain at this time, we’ve commenced legal action against the equipment supplier.

Adjusted net income was $10 million or $0.22 per diluted share compared to adjusted net income of $6.6 million or $0.14 per diluted share in the prior-year period. Reconciliation of net income under GAAP to adjusted net income, which is a non-GAAP measures provided in the supplemental tables included with today's press release.

Total capital expenditures excluding acquisitions were $14.5 million in the second quarter of 2018 and $32.5 million in the first half of the year. At the end of the second quarter, our cash balances were $38.2 million and total outstanding debt was $283.5 million.

With that, let me review our updated guidance for 2018. This guidance includes the acquisition of a total 37 restaurants that we anticipate will be completed by the end of the third quarter as discussed earlier, which excludes the impact from other among potential acquisitions that we might complete.

We now expect restaurant sales, total restaurant sales of 1.16 to 1.18 billion. Previously 1.15 to 1.1 7 billion including an estimated 3% to 4% growth in comparable restaurant sales which has been narrowed from 3% to 5% previously.

Commodity costs are now expected to be flat, previously a 1% to 2% increase it includes a 1% to 2% decrease in beef costs which were previously estimated to increase 2% to 3%. General administrative expenses are still expected to be $58 million to $60 million excluding stock compensation expense and any acquisition related costs.

Adjusted EBITDA is now expected to be $100 million $105 million, previously $95 million to $102 million. Our effective income tax rate is still estimate -- estimated to be zero and a 5%.

Capital expenditures before discretionary growth related expenditures are now expected to be $58 million to $62 million. Previously, $50 million to $60 million. In addition expenditures for the construction of 13 to 15 new restaurants and the remaining costs from 2017 construction late last year expected to be $20 million to $25 million. Previously, $15 million to $25 million with 10 to 15 new units.

Expenditures for the acquisition of the 37 restaurants included in our guidance are expected to be $30 million to $32 million. We still expect to complete $10 million to $15 million of sale leasebacks. And lastly, we expect to close 15 to 20 restaurants in 2018 down from our previous estimate of 20 to 25 restaurants. 5 restaurants were closed in the first half of the year.

That concludes our prepared remarks. So with that, operator, let's go ahead and open the lines for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] Our first question will come from Jerry Hamblin, Dougherty & Company.

Jeremy Hamblin

Hey, guys. Good morning. Congratulations on the very strong results. I wanted to just make sure to clarify on the total sales guidance for the year, Paul, I think you indicated, it does include the acquisitions that are announced in the press release. Does that imply that you have good visibility on this deal closing or these deals closing here in the next few weeks, or I mean, is there risk that this gets pushed to the end of the quarter?

Paul Flanders

No, these are all under contract already. We -- the 2 -- the 33 of the stores we exercised were, first, it was in late July and so those are moving along and we'd anticipate those could be close maybe by the end of August. We’ve guided that all 37 of these will be done by the end of the third quarter.

Jeremy Hamblin

Okay. In terms of the price paid on the [indiscernible] deals, how are the -- have that compared to historical valuations? 31, that's a big deal by historical standards. Did you have to pay little bit more, or little bit less, any color you could provide on that?

Paul Flanders

Yes, I would describe overall the 37 stores combined with the multiples are reasonably in line with what we’ve been paying, around 4x sellers cash flow based on the historical cash flow. So I would say it's been in line. Maybe a little bit on the higher end for the 31 store transaction.

Dan Accordino

This is Dan, Jeremy. The 31 store transaction more than half of those restaurants have been recently remodeled. So that was one of the reasons why the multiples a tick higher.

Jeremy Hamblin

That’s great color. Thank you. And then, Paul, I wanted to ask -- I think you had said that ground beef prices were down 6% year-over-year in Q2, does that imply about $2.07 a pound? And then what is the current run rate on delivered ground beef prices?

Paul Flanders

Yes, I mean, the price was $2.07, it averaged $2.07 in the quarter. As I said, 6.3% below the prior year. You recall we had elevated pricing -- prices on beef in both the second and third quarters last year, so we anticipate certainly the third quarter will be lower. And I think that generally our guidance implies that prices will be up around where we ran in the second quarter. And right now we’re running a little bit lower than that. I think this week we’re $2.01 per pound.

Jeremy Hamblin

Okay, great. That’s helpful. And then in terms of your rent expense. I think it is the first time in a couple of years where you’ve seen leverage on a year-over-year basis on rent and that’s despite having some monster comps over the last couple of years in certain quarters. Any color that you can provide on where that came from in terms of thinking forward as well? Is that something that's an opportunity or you kind of -- even though you’ve been running strong comps, you’ve seen a little bit of deleverage on rent generally over the last couple of years. What was different in this quarter?

Paul Flanders

I think a lot of it -- some of the reasons for deleveraging is we’ve continued to build some restaurants. We’ve done the sale-leasebacks, which caused that to go up a little bit. I think we talked about that last quarter. I just said, I mean, clearly leverage the 5% sales increase somewhat. And I think frankly, it was probably a couple hundred thousands of other adjustments that we -- to run expense that fell in the second quarter favorable adjustments, which I think helped that as well. I think as we look forward, we anticipate a little bit continued leverage in the third quarter, certainly.

Jeremy Hamblin

Great. Last question. Any color on quarter to date trends as you begin lapping some of these really challenging comps?

Paul Flanders

Yes, I mean, we’re through the first week of August at this point. July was basically up about 3.5% roughly. So trends have continued to be okay, I mean, it's -- traffic soft -- maybe soften a little bit from June to July.

Jeremy Hamblin

I think most restaurants would kill for 3.5%. So better than okay. Congratulations, guys. I will hop out of the queue.

Operator

Thank you very much. Our next question will come from Jake Bartlett, SunTrust.

Jake Bartlett

Great. Thanks for taking the questions. Just on that last point on the quarter-to-date. Looking at last year, it looks like you are kind of low to mid-single digits in July, and then accelerated really significantly from there. So is that situation here where you are doing the 3.5% now, but you’ve much more difficult compares for the rest of the quarter?

Paul Flanders

Well the rest of the quarter and the rest of the year, I mean we were up -- for the third quarter last year, our comps were 7.5% positive and we were up 8.9% in the fourth quarters. So we're up against certainly some big numbers. We’ve obviously known that since last year. And I think if you recall, you may not made out of [indiscernible] calls beginning in the year, Jake, but if you read the transcripts, you recall that we -- when we guided the 3% to 5%, we sort of steered that towards the lower to middle part of the range just because of the stiff comparisons that we have in the second half of this year.

Jake Bartlett

Got it. Got it. And then looking at the quarter and your mix between kind of value versus more premium items, have you noticed any shift in the consumer potentially or the premium items getting a little bit more mixed, or is it kind of more the same that we’ve really seen for the last couple of years?

Paul Flanders

I think that -- I mean, the volumes have been pretty balanced. Certainly we -- some -- we’ve got some additional deals on the value side of the barbell, which I think it certainly seems -- consumers gravitate to somewhat, but just as you can tell by the increase in the average check, the premium products and promotions that continue to drive the sales numbers.

Jake Bartlett

Got it. And maybe kind of on that front, your COGS were -- you leveraged your COGS pretty well. Was that in part due to less promotional activity, or just less kind of a hit to your margins from promotions?

Paul Flanders

No, it wasn’t less promotions. Promotional levels and the discounts were probably slightly higher than they were in prior year just as we continue to lap those increases throughout last year when the cost of sales decrease was largely driven by the favorable commodity costs, most significantly beef.

Jake Bartlett

Got it. Got it. And then lastly, maybe just turning to your acquisition pipeline. Typically, in '14, '15, '16, the majority of the acquisitions were done in the fourth quarter. I’m wondering if you think that will potentially be the same this year or any dynamics around that and just maybe your kind of confidence in the pipeline right now.

Dan Accordino

This is Dan, Jake. As indicated, we we're closing the 37 restaurants here in the third quarter and we have a couple of more transactions that are likely to occur in the fourth quarter.

Jake Bartlett

Great. Great. Thank you very much.

Operator

Thank you. Our next question will come from Bryan Hunt, Wells Fargo.

Bryan Hunt

Thank you for your time. I was wondering, just to dissect the same-store sales number a little bit more in the period. Can you talk about your average check increase, how much was from mix and price as well as traffic?

Paul Flanders

Yes, I mean, as I said traffic was up .6% for the quarter. Average check in total was up 4.4% and that included 2.9% of pricing. So implicitly there's about 1.5% of favorable mix shifts.

Bryan Hunt

Very good. And then looking at acquisitions, is there any insight you could provide us on those AUVs relative to the company average?

Paul Flanders

Yes, I mean, if you take the 37 stores that we’ve included in the guidance as a group, there's -- they’re a little bit below the company average. The average on these is about $1.350 million. I think we’re little over $1.4 million right now for the system.

Bryan Hunt

Great. And then looking at same-store sales guidance, you guys brought down the top into the range. Can you talk about maybe the catalyst behind narrowing that range and taking down the 5%, the 4%?

Paul Flanders

Yes, as I just said, I think that the 5% were always due to be a little bit of a stretch target given the back half performance last year. And as I said on the call early in the year, we expect it perhaps more likely to be in the lower to middle part of that range. Maybe 1.5 years half over, so obviously we’ve got visibility of the first half and therefore I think we felt that it was appropriate to narrow that range somewhat. I think that if you look at the 2-year trends, maybe it's another ways to sort of dissect this, second quarter, we were up 5% against the 4.6% comparison in 2017 or 2-year trend was 9.6%. And I think if you look at the implied guidance for the second half of the year relative and compared to the prior year, I think that the -- at the midpoint, the guidance is probably consistent with where that second quarter 2-year trend was running. So I think it's just a matter of fact that it's 1.5 years over and we’ve got visibility. Obviously, we’re running out of quarters, I guess, is another way to put. So we felt appropriate to at least narrow that range somewhat.

Bryan Hunt

Okay. Great way to look at it. One last question. Dan, you talked about a lot of product, whether it was the Pretzel Chicken Fries or the new shakes. Can you talk about the overall size of the menu today versus where it was coming into the year? And whether things are being dropped as things are being added, just to make sure that the complexity of operating a Burger King hasn’t become more complex over time?

Dan Accordino

Yes, sure. Most of the products that we reference weren't in for the entire period. So there are a lot of LPOs, and you have one version of product for a month and then that will go out, have another replacement product. And most of the products are modifications of the existing platform. So it's a different bread carrier or a different topping or something of that nature. So the complexity of the menu is about the same as it was going into the year. The kitchens -- with the new product holding units and the new SICOM Chef product management system, actually I’d say the kitchen's are a little easier to operate now than they were a year-ago.

Bryan Hunt

Okay. And I have -- here is my last question. It seems though M&A activity is picking up, I mean, is that -- how you would characterize it? And if indeed that is the case, does that cause you to maybe evaluate where your capital structure is today, given where your bonds are callable?

Paul Flanders

I think our acquisition activity is consistent with where it's been as we -- I think try to articulate during the years. It's just the timing of the transactions obviously were -- its been a little bit later this year. And I think that's -- we were sitting on, what, $38.5 million of cash in the second quarter. So we’ve obviously got adequate funds to the balance of the year. We’ve got revolver that we don't anticipate to be drawn even at the end of the year, after we close all these acquisitions. So there's still plenty of room in the current capital structure to do a reasonable amount of acquisition, should they come along.

Bryan Hunt

Very good. I will hand it off. Best of luck in Q3.

Paul Flanders

Thanks.

Operator

Thank you very much. Our next question will come from Greg Badishkanian, Citi.

Frederick Wightman

Hey, guys. It's actually Fred Wightman on for Greg. So traffic improved a bit sequentially this quarter, but it sounds like that's take down a bit to start 3Q. So can you sort of talk about how you’re thinking about traffic going forward?

Paul Flanders

Well, I think generally -- I think that as you look at where we’ve been running relative to what’s driving sales in terms of traffic and check, it's primarily been check. Now I'd argue that some of the increase in the check is really traffic because of the nature of these promotions were big sandwiches, there are -- its a Mix & Match platform of two sandwiches, the meals -- two meals and there's been an increase in the number of guests that are on each check. And so that's really traffic when it shows up in price given the way we measure our average check, but we don’t really know, we don’t count the number of guests. So traffic has, I think been stronger than what’s the numbers actually indicate, first of all. But having said that, I think just given that the -- just the map of the traffic is probably flat to slightly negative going forward here for the next -- against these comparisons.

Frederick Wightman

I think that’s a great point. And then can you just remind us sort of your pricing outlook for 3Q and 4Q?

Paul Flanders

Yes, first of all, we had as I said about 2.9% of menu pricing in the third -- our second quarter. So we’ve taken -- only taken one small price increase, now that’s back in April. So we got about 2% going into the third quarter.

Frederick Wightman

Great. Thanks.

Operator

Thank you. [Operator Instructions] Our next question will come from Will Slabaugh, Stephens, Inc.

Will Slabaugh

Hi. Thanks, guys. Just two quick ones. On the acquisitions that you're saying, are these containing more deals that sort of that contain more remodeled stores than what you’ve historically. I know that’s been a driver for franchisees to sell over the years, but with us getting further along on the remodel cycle within the Burger King system, I was curious if you expect that to impact the upfront multiple paid in the coming years?

Dan Accordino

It depends on the deal. Just so happens that this deal that we’re doing, the operator had a remodeling commitment with Burger King, so consequently more than half of the restaurants had been remodeled. But in terms of other opportunities that we’re looking at, I don’t think that the remodel mix is really any different than what we've seen in the past.

Will Slabaugh

Got it. And just a quick follow-up on the guidance change on the store closures. Any reason why you’re closing a few -- fewer stores than what you’ve previously thought?

Paul Flanders

That’s going to primarily be timing. I think some of those closings we’re going to -- will fall into the first quarter next year. Maybe it's just -- that’s always [indiscernible].

Will Slabaugh

Got it. Thanks, guys. Congrats.

Operator

Thank you. Our next question will come from Brian Vaccaro, Raymond James.

Brian Vaccaro

Thanks and good morning. Paul, I appreciate the 2-year comp commentary from earlier in the Q&A, but could you disclose what the 2-year comp was in the month of July?

Paul Flanders

Can I or have we? We haven't. The [indiscernible] …

Brian Vaccaro

Or just maybe qualitatively how comps -- going back to Q3 last year, the 7.5%, was that fairly stable through the quarter or did you see a sort of sharp improvement August, September, just sort of any color on that?

Paul Flanders

I'd say what we saw was that the cap built and got stronger as we went into the third quarter and in the fourth quarter was a continuation of that.

Brian Vaccaro

Okay. And on the pricing comment you just made, so 2% -- there was 2% effective pricing during the month of July, did I hear that correctly?

Paul Flanders

Yes. Yes, that’s true.

Brian Vaccaro

Okay. And are you planning to take additional price increases in the second half or just any color on your expectations on effective pricing that will be in place in the second half?

Dan Accordino

Yes. This is Dan. I’d expect to take another small price increase in September.

Brian Vaccaro

Okay. All right. And in terms of the second quarter comps, I notice the GAAP to BK system widened again sequentially, but it's been north of 3% in the back half of last year as well. But I guess, just your thoughts, what do you attribute GAAP versus the BK system to?

Dan Accordino

Again, this is Dan. My sense is that it may be twofold. We have a larger percentage of our restaurants that are -- have been remodeled in the system in general. And I think that there's certainly a lift in terms of that. And also there's probably a geographic delta to the balance of the system. I think that the Northeast has been a bit stronger than the Central area and the West Coast.

Brian Vaccaro

All right. Thank you. That’s helpful. And then shifting gears to the guidance, the increased EBITDA guidance, can you be more specific on what you've embedded for the 37 units in terms of the sales and just EBITDA contribution within that guidance?

Paul Flanders

I don’t have that broken out at this point. As I -- the assumption, first of all, was those units will close late in the third quarter. So there would be no meaningful contribution in the third quarter, but would be -- we get a full quarter benefit in the fourth quarter. As I said, the volumes are averaged about $1.350 million and the group of stores, to give you some sense of what -- from there I think you can model a reasonable contribution might be.

Brian Vaccaro

Okay. And, Paul, was there any land acquired in these 37?

Paul Flanders

No.

Dan Accordino

No.

Brian Vaccaro

Okay. And then just last one for me, a margin question. Looking at the second quarter on the labor line, I think you called out higher workers' comp, medical and incentive costs. Could you quantify those impacts and do you expect them -- those factors to sustain in the second half of '18?

Paul Flanders

Well, in total, labor was delevered about 50 basis points. And that was all driven by those three items, workers' comp, incentives and medical. Some of them -- our sense is after going -- after we to sort of digested the workers' comp a little bit as we had some new people at the insurance company assigned to our account in the second quarter. So our sense is that the reserving practices may have been a little more conservative, and there's some claims that may actually be over reserved. Time will tell. So that maybe better than anomaly. The incentives obviously will -- these are a function of our continued performance.

Brian Vaccaro

Yes. And second half wage inflation expectation, I think you’ve been running about 6% in the first half. Any difference in your second half expectations on wage inflations?

Paul Flanders

We were about 5.7 in the second quarter. And I think we’re optimistic at the beginning of the year that maybe that would come down a little bit. We continue to work through the components of that, particularly we are trying to reduce the overtime we are paying. But I think, generally, we are going to see at least 5% for the balance of the year.

Brian Vaccaro

Okay. Great. Thank you.

Operator

Thank you. Our last question will come from Jake Bartlett, SunTrust.

Jake Bartlett

Hi. Thanks for taking the -- a little more -- a few more questions here. Just kind of building off that last question, I guess the dynamic here for EBITDA guidance is that labor is higher than you expected before, COGS is lower, but then -- and then you have the contribution from the acquired stores. Is that the right way to think about it?

Paul Flanders

Yes, sir.

Jake Bartlett

Okay. And then I had a question about your unit growth in the kind of the 13% to 15% that you are doing this year. How would you -- how do you think about unit growth going forward? I mean, is that the right pace, or is that really kind of including kind of getting ahead of your ability to acquire stores, given your -- the kind of 10% growth requirement? Do you view the unit growth in '19 as -- or in '18 as kind of an anomaly, or is this the right kind of rate going forward?

Dan Accordino

Jake, this is Dan. No, our organic growth actually will probably pick up a bit in 2019, and I would expect that we will be building more restaurants in 2019 than we built in '17 and '18.

Jake Bartlett

Okay. And what is the kind of the reason for that acceleration? There was -- was that just that your -- there's more capital available as your remodels have slowed down, but what is the driver to that, because it does seem like a shift from years past?

Dan Accordino

There is more capital available, given that we don’t -- that our -- most of our remodeling obligation is behind us and/or we’re very aggressive in looking at opportunities particularly in areas where we have recently acquired restaurants.

Jake Bartlett

Got it. Thank you very much.

Operator

Thank you very much. Speakers, at this time, we have no further questions in the queue. So I would like turn this conference back over to Paul Flanders.

Paul Flanders

Thank you. We appreciate everybody's attention this morning and time and we look forward to updating you after the third quarter. Have a good day. Bye.

Operator

Thank you very much. Ladies and gentlemen, at this time this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.