Matt Revord - Chief Legal Officer Aylwin Lewis - Chairman and Chief Executive Officer Charlie Talbot - Chief Financial Officer.

David Tarantino - Robert W. Baird Joseph Buckley - Bank of America Merrill Lynch Sharon Zackfia - William Blair Joshua Long - Piper Jaffray.

Good afternoon, and welcome to Potbelly Corporation’s Fourth Quarter Earnings Fiscal 2014 Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session. Today’s call is being recorded. And I would now like to turn the call over to Matt Revord, Potbelly’s Chief Legal Officer..

Good afternoon, everyone and welcome to our fourth quarter earnings call. Before we get started, I would like to note that certain comments made in this call will contain forward-looking statements regarding future events for the future financial performance of the company.

Any such statements, including our outlook for 2015 should be considered forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management views as of any subsequent date.

Forward-looking statements involve significant risks and uncertainties and events or results could differ materially from those presented, due to a number of risks and uncertainties.

Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information that we will be giving today can be found in our most recent Annual Report on Form 10-K, under the headings, Risk Factors and MD&A in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

Our presenters today are Aylwin Lewis, our Chairman and Chief Executive Officer and Charlie Talbot, our Chief Financial Officer. Aylwin will begin with his perspective on the fourth quarter performance and discuss some recent developments, by providing a discussion of our ongoing strategic initiatives.

Charlie will then review our financial results and future outlook in more detail before we open the call up for your questions.

Aylwin?.

Thanks, Matt. Good afternoon, everyone and thank you for joining the call. We are pleased with our results in the fourth quarter. We delivered revenue growth of 13.4% driven by company operated comparable same-store sales growth of 3.7%.

For the full year, we achieved revenue growth of 9.1% with company operated comparable same-store sales growth of 0.1%.

I’d like to take the opportunity to thank our shop and support center teams for their continued hard work and commitment, which enabled us to overcome the challenging first half of 2014 to deliver better results for the second half of the year. As I already mentioned, our company operated same-store sales growth was 3.7% during the fourth quarter.

Traffic trends continued their positive momentum from the third quarter and improved as we moved throughout the fourth quarter. Despite the challenge we faced in the first half of the year, we managed to end 2014 with positive comps representing a nice comeback in the latter half of the year.

On the development front, during the fourth quarter, we opened 16 new company operated shops, including 3 more shops in Denver for a total of 5 for the year. We opened 3 franchise shops. For the year, we opened 46 new shops, including 39 new company operated shops and 7 franchise shops.

We delivered total unit growth of approximately 14% on a net basis, which surpassed our stated long-term development target of 10%. 2014 development class are performing well with sales on track and units achieving steady state in expected timeframes.

Our adjusted net income was $1.7 million or $0.06 diluted share for the quarter and $6.7 million or $0.22 for the year which was ahead of our quarter three guidance. Charlie will discuss our fourth quarter and full year 2014 financial results in greater details on this call.

I want to spend the next few minutes talking about areas of focus as we move forward. The three things at the core of creating value for our business are having a strong GM in every shop, driving sustainable same store sales growth and continuing to aggressively open new shops with a high rate of return.

Let me briefly expand on each of these three items. Our operating model is predicated on excellent operations. Consequently our general managers are the most important leaders in our company. One big key to the future of a high-growth company is finding and developing the right talent.

We have recognized the market is very competitive for operational talent while we believe our culture attracts and keeps our people, we also recognize the need to be proactive on the people front to support our growth plans.

We know that high turnover limits the ability to achieve high – excellent operations, and we work really hard to identify, train and retain our shop leaders and our hourly employees. Specific turnover rates are not something we have talked about previously.

However, in 2014 our general manager turnover was roughly 29% and our hourly turnover was just under 80%. We feel as though we operate with some of the lowest hourly turnover in the industry, given our growth aspirations we need to continue to improve upon these results.

Additionally we want the vast majority of our new general managers developed from within. So this means we need to be a very good people development machine.

We have recently initiated a series of field level incentives to reward those who are developing our talent to incent our hourly employees to pursue salary manager positions and provide meaningful upside to our existing GMs who stay with us over a number of years. This is an incremental investment to support our growth.

We are confident that these programs over time will be self-funding. We will reduce turnover, reduce training costs and better run and more profitable shops. Now relative to same store sales growth, our focus is on three areas throughput, backline and targeted advertising by social, digital and mobile platforms.

Throughput at peak is one of the best opportunities to drive incremental sales and we will continue to focus on this in 2015. Our line is an awesome production machine that will drive traffic over time. We were not happy constrained at all during our busy lunch day part.

In fact many of our shops average between 120 to 150 transactions during their peak half hour. The average throughput for our system is well below this level, which signifies to us a tremendous opportunity to grow our business during the busiest timeframe across our system.

We are committed to invest in technology, equipment and staffing to support higher levels of throughput as we move forward. Secondly, our backline business which includes online ordering, catering and delivery, this business continues to grow. This part of the business was roughly 14% of our shop sales in 2014.

Our average weekly volumes of the backline business grew over 6% versus 2013 for the full year. Again our belief is that we have tremendous capacity growth in this business. We have the goal of doubling this business over the next 3 years to 4 years.

We have done many things to get to this level, ever more as needed in order to achieve the size and scale of this business that we believe we can achieve. For instance we have recently hired a national backline leader to direct our strategy and tactics across the Potbelly nation.

At the local level, our six sales and catering managers are dedicated to building business relationships and securing larger catering orders, which has fueled our backline growth in their home markets. In 2015 we will add additional two new sales and marketing managers.

Lastly, outside the four walls, we have started to work on increasing our digital, social and mobile presence. We have increased our advertising budget in 2015 and the vast majority of this money will be spent on digital, mobile and social mediums in order to message the brand outside the four walls.

We introduced our mobile app in late Q4 of last year. The goal is to improve the functionality of this app this year as a way to increase our sales through this app. Lastly, we continue to focus on menu innovation and daypart expansion.

In Q4, our Turkey Bacon Cheddar Flat promotion was successful for us and we will continue to innovate around the Flat platform. As we discussed on our last call, we rolled out breakfast to 24 additional shops bringing our total to 95 or 28% of the system.

We will continue to roll breakfast out opportunistically based upon the neighborhood traits and specific site attributes. We will test different snack items in 2015 in an effort to improve our sales during the 2 to 5 PM sub-daypart.

In summary, we have intense focus on same-store sales growth through throughput, media investment, digital, social and mobile, menu innovation, smart daypart expansion and backline focus. Finally, I wanted to highlight our development efforts. We are pleased with the 2014 class of 39 company owned shops and 7 franchise shops.

We had a good balance of opening in established markets, such as Chicago, Washington DC and Houston and our newer submarkets. We are off to a good start in Denver, our latest submarket with 5 shops opened by the end of last year. Our 2015 pipeline is nearly complete and we are comfortable in achieving another year of over 10% new unit growth.

We have started this growth phase in 2011 and I just wanted to talk about the returns of the two years that we have calculated. Our 2011 returns are over 25%. Our 2012 class which is our most challenged class is in the mid-teens. This class is impacted by 4 shops.

When we remove these 4 shops, our returns approach 20% and we are working seriously to improve this class. We also believe that 2013 and 2014 classes should be at or above our long-term return target of 25%. To summarize, we feel good about the business in the fourth quarter.

We have plans in place to support the key growth drivers of value in this business. Having a great GM in every shop, driving sustainable same-store sales results and continue to build new shops that hit our return metrics. With that, I will turn it over to Charlie to give you the details of the quarter..

Thanks, Aylwin. Good afternoon, everyone. I will walk through down the P&L and give you some highlights and color associated with our fourth quarter results and full year as well. Additionally, I will provide some thoughts on our financial plans for 2015.

Starting at the top, as Aylwin mentioned, total revenue increased 13.4% in the quarter to approximately $85 million driven by new unit results and an increase in company operated comparable store sales of 3.7%.

As a reminder, weather and the government shutdown was a factor in our Q4 2013 results, but comparable store sales growth continued to show strength in each month in fourth quarter driven by an improvement in underlying traffic trends as well as easing comparisons.

The traffic trend has extended into Q1 2015 to-date and we continue to be highly focused on sustaining this positive momentum in 2015. As we think about 2015, we are in a macro environment that’s currently favorable to our customers. Unemployment rates are low.

Consumer confidence is up and more recently easing gas prices certainly mean more disposable income. With that in mind, we expect our 2015 comp to be at least 3%.

However, importantly, each of our quarterly results could be above or below this annual target due to easier comparisons in the first half of the year versus latter half given the impact weather had on the results in early 2014.

Our average check growth for the quarter was approximately 3%, driven primarily by the price increases we took last February and then again in July with the remainder coming from menu mix growth. A big part of the mix increases is the continued success of our Flats program.

Flats mix remained relatively consistent with trends during the back half of the year and remains the healthy part of our menu. And as a reminder, Flats are priced at a premium to our original sandwich offerings.

We are currently promoting a skinny pair in most of our markets, but we will continue to use a Flat platform for future innovation and messaging. So, before we get too much in detail about certain areas of the P&L, I would like to remind everyone of our philosophy when it comes to pricing.

We believe we have a competitive advantage when it comes to pricing given our focus on quality and experience combined with our menu pricing in relation to our competitive set. In support, we have seen very little resistance to our recent price increases. In 2015, we are expecting to have inflationary headwinds, primarily on two fronts.

COGS or cost of goods sold as we have routinely seen in the past at varying levels and labor costs, which have been less frequent, but will be more impactful as we move forward. We expect to see more inflationary impacts related to COGS in the first half of the year and more inflationary impacts related to minimal wage in the back half of the year.

So, we have implemented our planned pricing of approximately 3% in January to cover these 2015 headwinds. Moving down to P&L, cost of goods sold as a percentage of sales increased in the fourth quarter to 29.2%, up 10 basis points from prior year.

As expected, we moved from a deflation in the first half of the year to inflation ramping up at the end of Q3 and continuing into Q4 mostly due to commodity increases for dairy and certain proteins we would expect to continue into 2015. For the year, COGS was at 28.8%, which is down 50 basis points from 2013 levels driven by pricing and menu mix.

Looking ahead, our food cost basket is around 60% locked for 2015. We expect higher levels of inflation than experienced in 2014 predominantly in the first half of the year and decelerating in the back half of the year.

We anticipate COGS in the 29% to 30% range for 2015 and full year 2015 inflation gross of rebates to trend in the 2% to 3% range, which again we expect to be more weighted towards the first half of the year. Our supply chain is working really hard to mitigate as much inflation as possible and we'll keep it up-to-date as we move forward.

Labor as a percent of sales increased in the quarter to 29.1%, an increase of 40 basis points from prior year.

The increase was driven primarily by the timing of 16 company operated shop openings in the fourth quarter, which were more back half weighted as well as the incremental training and people investments in advance for these fourth quarter openings. For the full year of fiscal 2015, we expect labor as a percentage of sales to trend between 28% and 29%.

Our guidance assumes increases related to additional training and incentive dollars for certain shop level employees in an effort to enhance our bench and shop turnover results. Regarding minimal wage increases, several major markets in which we operate will implement increases during 2015, including Illinois, Washington DC and Michigan.

Based on the current slate of increases, inflation is expected to be back weighted. However, we believe we remain positioned well given our historical practice of paying our employees above minimum wage levels. Our general and administrative expenses were approximately $8.1 million during the fourth quarter.

After adjusting for the one-time cost associated with the store closure and certain costs associated with our corporate office move later this year, our G&A was approximately $7.4 million during the fourth quarter, which was below our previous guidance.

This favorability is a result of headcount vacancies as well as timing of certain professional costs. With regards to closure costs, we took advantage of an opportunity to close one underperforming shop. And as a result, we incurred associated lease exit costs.

For 2015, we expect general and administrative costs to increase and range between $36.5 million and $37.5 million.

The increase is primarily related to increased field staff to support our development plans, higher incentive compensation as a result of resetting our bonus plans to target levels as well as a modest increase related to higher ongoing occupancy costs for our support center.

When adjusting for these items, we expect to obtain leverage of roughly 20 to 30 basis points on 2014 G&A which is in line with our expectations going forward. As Aylwin mentioned, our adjusted net income for the quarter was $1.7 million or $0.06 per diluted share, which is a decline of roughly $160,000 versus last year.

The decline in our adjusted net income was primarily due to additional G&A costs associated with becoming a public company that weren't incurred in fiscal 2013.

Now, turning to development, we are pleased with the fact that we opened 16 new company operated shops and three domestic franchise shops for a total net unit growth of 13.8%, puts us at 46 total openings for the year which is at the higher end of our previously provided guidance of 40 to 48 new shop openings.

Also our capital expenditures came in at approximately $29.2 million, which is at the lower end of the $30 million to $35 million range those previously disclosed. As a result of lower average costs per unit, in addition more than half of the new company operated shops open today are in legacy markets.

In 2015, we expect to open 48 to 55 total new shops with slightly more than half expected to open in the back half of the year. We have a few planned closures in 2015 that have been factored into our EPS guidance.

The legacy to new market opening mix will vary year-to-year as we move forward, but we will target our new unit opening – development to be split evenly between new and legacy markets over time. We expect to spend between $34 million and $38 million on capital expenditures next year, for this year which includes CapEx for our new corporate office.

Regarding our effective tax rate of approximately 38.7% for full year fiscal 2014, the government came through and retroactively renewed the WOTC programs for 2014 as well as continuing to allow accelerated depreciation which both contributed to lowering our tax rate.

However, Congress did not pass any bills to extend these benefits into 2015 and pending any resolution our guidance for 2015 excludes any benefit from these credit programs. Consequently our effective tax rate for fiscal 2015 is not expected to exceed 40%.

We are hopeful the WOTC program will be extended and in the event if this happens, our tax expense would be reduced by approximately $100,000 to $150,000 for 2015. So we cross into a New Year, we believe the underlying traffic trends and more positive macroeconomic environment will be favorable to our business.

As a result, we are confident we will return to our stated growth targets with 2015 full year adjusted net income growth of at least 20%. Included in our expectations is the financial pressure associated with the plant closure of certain profitable shops, higher incentive based compensation reflecting the impact of below target performance in 2014.

Our guidance will provide for comparable adjustments to the current year which includes the add backs of certain one-time for non-cash costs such as impairment, closures and one-time costs associated with move of our corporate office.

Pursuant to previously announced share repurchase programs we have repurchased 356,000 shares of Potbelly common stock in the open market for a total of $4.4 million during the fourth quarter. As a result we have $24.8 million available from our Board authorized program for repurchase which will continue.

The buyback activity had really had no impact on our diluted EPS for the quarter. For 2015, we expect shares outstanding between 30 million and 31 million shares. This excludes any impact of additional share repurchases.

So to summarize, we remain very committed to our stated long-term growth targets for 2015, which include total new unit shop growth of at least 10%, low single-digit comparable store sales growth, shop level profit margin of 20% or better, annual adjusted net income growth of at least 20%, return on capital investments of 25% or more.

So with that, I am going to turn it back over to Aylwin for summary results – remarks..

Thanks Charlie. We continue to focus on ensuring the business is setup to sustain a long run of growth which is predicated upon three important principles having a great GM in every shop, to have a consistent comparable same store sales and our ability to sign, open and run new shops at a high level of return.

Under those guiding principles, we will continue to make the necessary investments in the business to ensure our growth is sustainable. 2014 was a challenging year, but we feel good about the rebound in the business in the back half of the year and the positive momentum we have so far in 2015. We are committed to our long-term goals.

We are very confident in the long-term fundamentals of the business. Again, thank you for your time today. I turn it over to the operator and we will open it up for questions..

Thank you. [Operator Instructions] And our first question comes from the line of David Tarantino with Robert W. Baird. Please proceed with your question..

Hi, good afternoon. I have a couple of questions on the same-store sales trends we are seeing. And first, I was going to ask a question about the quarter, you mentioned that the trends strengthened as the quarter went on.

And I was just wondering if you could parse out the impact from perhaps cycling some unfavorable weather or maybe the easier comparison related to that versus maybe what you are seeing on an underlying basis? Do you think that the underlying trend is also improving?.

Hi, David, this is Charlie. A couple of things. One is as we mentioned last year, the weather in P12 was roughly 120 basis points for the quarter. The government shutdown in P10 was roughly 30. And so we kind of discount those out as we look at trends in the business.

And so as we look at Q4, excluding those situations last year, we felt pretty good about where the trends were headed as we got through the quarter..

Great, that’s helpful.

And then I guess a question related to that, can you give us any perspective on how you are thinking the first quarter or the first half of the year might play out given how the comparison is so much softer than what you have been cycling? Is it expected to kind of hold the multi-year trend that you saw in Q4 or how should we think about that? And then I have a follow-up question about the overall guidance for the year..

Yes, I think just as you think about the year, obviously the first half of 2015 will have some easier comparisons based on what we talked about all of 2014. So, that’s to be expected. And then as we get into end of 2014, those trends will be a little bit more difficult to roll, but – and then beyond that, we have all the factors related to pricing.

So, we just rolled pricing in January. So, we will have some benefit on a relative basis in the first half versus the second half. And so when we talk about our guidance for comps for the year, the at least 3% is really contemplating. We will probably – our plan suggests we will have higher comps in the first half relative to the second half.

And that’s just based on how we plan the business today..

And then last question on this front, the comps outlook for the year at least 3%, I guess at the bottom end, the actual 3% would not include a lot of traffic improvement. It sounds like you are going to have at least 3% of pricing.

So, I guess is that just conservatism on your part or you are seeing something in the business that suggests you wouldn’t be able to grow traffic against what you are facing or what you are cycling versus last year?.

I will start and Aylwin can finish. Certainly, we expect to grow traffic. I mean, really what we are seeing as a baseline is we are throwing out the expected impact related to pricing. Our expectations internally are to exceed 3%, hence at least part of that comment, but it’s February.

And so we have got a lot of year to go and we will obviously keep everyone impressed as we move throughout the year and as results come in, but that’s our expectation is at least and pricing will be a big chunk of that baseline..

Great. That’s very helpful. Thank you..

Thank you. And our next question comes from the line of Joseph Buckley with Bank of America Merrill Lynch. Please proceed with your question..

Hi, thank you. I have a few questions as well.

Just the fourth quarter the comp you reported last year was kind of confusing there was an adjusted comp, an [early] [ph] adjusted comp what do you guys think the 3.7% is up versus in the year ago quarter?.

Last year we reported 0.7% for Q4. And I guess I am – we had some adjustments in 2012 related to a 53rd week but that was kind of the adjusted version if you will. So that’s really what we are comparing ourselves to on a year-over-year basis..

Okay.

And then Charlie did you say you took 3% pricing in January and if so where does that lead you year-over-year during the first quarter from a pricing standpoint?.

Yes. So let me walk through it. We took some marginal pricing in Q2 of last year – I am sorry P2 of last year in February. And so we have that, we have – we took some more pricing in July to cover the incremental inflation that we have realized in the back half of 2014. And then this year we took roughly 2% pricing in January.

So when you look at the full year obviously we will have a little bit more pricing in the first half until we roll that July pricing from 2014. But the net pricing impact to 2015 should be roughly 3% is the way we have got it modeled..

Okay.

And then just a question on the labor, can you talk a little bit about wage rate inflation and I think you referenced adjustment to compensation plans to try to keep people to groom to be GMs and then keep the GMs you want if you roll wage rate maybe hourly and at a managerial level they are going to be up I guess if so how much?.

So a couple of things one is on the wage rate. We have gotten all that modeled in terms of the markets that are going to have increases in 2015. Some that have had increases in back half of 2014.

The pricing that we took in January of this year was predominantly geared towards covering both labor inflation related to minimum wage increases as well as cost of goods sold inflation. And so from a dollar perspective we have that covered in our plan.

And so those will roll out as we know throughout the year and some have happened in January this year and some will happen later this year..

Our pricing philosophy is that we price to cover inflation and that’s what we try to do and we did it last year with anticipating inflation primarily around the food and this year we have taken it in anticipation around the labor.

The incentives I have mentioned earlier are incentives, so they are not in the base, they are only earned if you do something positive for the business. So the new incentive is not part of the base, as people earn through their actions then they will get a payout..

Got it, okay. Thank you..

Thanks Joe..

Thank you. And our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question..

Hi, good afternoon.

A couple of questions, I think first on marketing, you mentioned that you are going to increase that further into 2015, could you kind of update us on where marketing was as a percent of sales in 2014 and when you say increase in ‘15 is that in dollars or as a percent of sales or both?.

It’s both I mean our marketing spend as we have talked about in the past was under 2% of revenues. And so what we are doing is we are stepping into an increased spend. So from a dollars perspective, we will gain dollars because we have more revenues to spend against meaning new store count.

And then also we are slightly increasing the percentage on top of that. So and we will talk about the impact as we get throughout the year, it’s still in our minds a fairly low-level of spending on the P&L. But we think it’s something we want to start stepping in to do in terms of the platforms we're going into..

And when you are talking about the increase in marketing is it more what I would call traditional marketing like billboards or bus stops or is it more kind of the bounce back offers that you have done sporadically?.

No, it’s – majority of the spend is against digital, social, and mobile..

Okay..

And so we have developed an array of programs to use those mediums. We've partnered with folks outside the company that have the expertise and the data to help us decide how we do it, but very little of this will be spent on traditional mediums.

We think we still believe in the word of mouth and the shop has experienced the neighborhood piece, but we said all along we could find a way to message outside the four walls it would just really help us. And so big year to test some things and we think it will work out for us..

Okay. And then lastly on the backline, I think when you said the goal to kind of double that over the next 3 to 4 years, I had in my notes that the backline was like 15% of sales, so obviously doubling that would be a really big number over the next 3 or 4 years.

First, is that correct, is it 15% of sales? And then secondarily, what are the real touch points to doing that, because it seems like a really big steppingstone if you can actually achieve that?.

Yes. We think it’s a really big opportunity to market for off-premise sales is growing. It’s a market – we are at 14%, 15% of our sales with the backline and the first step of that is we have done a lot of things internally. We have hired an expert on the outside that brings experience. He is going to be our national leader.

And he is charged with helping us organize at the national level, at the market level, and the shop level. We are going to look at technology advances we should do. We are going to look at managing our sales managers a little bit more aggressively.

And so it’s a lot of things to do, but the reason we didn’t say double it in 2 years, because you probably wouldn’t believe me, but it’s a bold goal that we think we can achieve in 3 to 4 years. And obviously if we do that, that’s a tremendous boom for the business.

And so when we think about driving sustainable sales, throughput through peak is a big part in the backline in trying to grow that aggressively and thinking outside the box and bringing the new person in to challenge how we do things and improve it is big. And then we have our sales managers that are out there and we are adding two this year.

We believe we have put programs in place that can really help us sustain the same-store sales that we need to have a great business here..

Great, thank you..

Thank you. [Operator Instructions] And our next question comes from the line of Joshua Long with Piper Jaffray. Please proceed with your question..

Great, thank you. As I think we discussed previously, the pricing plans for this year were going to be centered around your core sandwich items, which as I remember correctly was not something that had really seen a lot of pricing taken over time.

So, I was just curious on how those plans worked out versus your expectations? And if you learned anything that might either adjust or kind of work its way into future pricing plans around those core items?.

We have pricing stores that we understand what our elasticity is. So, out in the marketplace, we have a number of shops that we push the limits. So, when we put a pricing action in, at least we have response from the marketplace. We continue to get asked, do you have pricing in your model and we believe we have pricing.

We like our price value and we are going to fight hard, not to go up against that imaginary number that we think folks should pay for our product at lunch, but the actions we have taken will cover inflation and will allow us to maintain the profitability in the shop and our pricing philosophy is the price to cover inflation and that’s what we have done.

But we don’t – we take it and we kind of know what’s going to happen, because we have these test shops. And so we are very confident that when we take pricing, it will stick and we have some advisory groups that we meet with quarterly that before we do something like this we would run it by them to get customers’ opinion about it.

So, we do try it in an informed way. And so when we do – when it happens, we think it will be positive impact on the business than not negatively impact the business..

Thank you for that perspective. And then Aylwin, switching over to your commentary around the incentives and the investments around driving results at the store level. It sounded as though you might have said there was maybe some initial investment upfront that would pay dividends later.

And so I just wanted to clarify that was more of a – maybe more of a figurative investment as it sounded like in some of your other commentary that those were maybe sales-based or results-based incentives that were hit that you weren’t actually increasing necessarily a base, but realigning the targets that there were some new targets to be achieved and at which point, there would be a payout? So, just wanted to make sure I understood that correctly..

It’s real dollars, but it’s based on actions that you have to hit to get the dollars. We didn’t add it to the base. So, it’s real dollars that we have to plan for, but it’s not added to the base. And if folks do training well, if they hit certain 10-year marks, then they will get the payout..

Understood.

And Charlie on the 60% locked for this year, is that – should we consider that kind of fully locked for your model or your basket or is there an opportunity to maybe lock some of that in and maybe edge up towards 70% or greater early in the part of this year, so we have some more visibility or just curious on how you are thinking about managing that line?.

No, we will – by the time we talk next, we will have much more visibility and we will continue to plan that out. If we can get 100% locked and it was at prices we like we would be there today, I think one of the things that we are mindful of is the evolution of inflation in 2015.

And so we want to make sure that we balanced the need for price certainty with the opportunistic buying that we do and being able to spread that out as long as possible. So, yes, that number will continue to grow and – but we are pretty comfortable with where we are at right now..

Thank you for that.

That 2% to 3% that you mentioned on a gross basis what are the larger pieces that are moving that target around?.

Beef and pork are the two main drivers of inflation as we look at 2015 at least as we sit here today. And again, I think that we will continue to watch that closely to see if we can take advantage of some opportunities later in the year to bring that number down..

Thank you so much..

Thank you. And our next question comes from the line of Karen Holthouse with Goldman Sachs. Please proceed with your question..

Hi, good afternoon. This is Greg on for Karen today..

Hi, Greg..

I am just going to try to get to some of these wage investment and pricing questions in a different way with our new positions and incentives, also a higher level of pricing model, how should we think about the level of traffic needed to lever labor in the model in 2015?.

Well, in terms of leveraging labor, I mean, we do that. That’s what we kind of spend a lot of time worried about. So, when we take pricing, there is couple of things balancing out. When we take pricing, obviously we are going to be able to leverage labor of that.

The other thing is as we continue to build bench to support our growth that’s going to be countering that leverage. In other words, as we have increased our shop count, we increased the ramp of our development activities. We have to continue to build a deeper and deeper bench of management talent to support the development.

And so you saw that a little bit in Q4 as we opened up 16 new company shops. We spent a fair amount of money training and getting folks ready for those shops. So, I think those two things slightly offset if that answers your question..

Yes, thank you..

Thank you. The next question comes from the line of David Tarantino. Please proceed with your question..

Hi, I just had a follow-up question on the margin outlook. Charlie, I think the earnings guidance for 20% plus growth implies some margin expansion and I guess based on the components that you gave us it’s not obvious at least to me or that margin expansion that’s coming from.

So, could you kind of parse out what you expect maybe at the restaurant level in terms of year-over-year profitability there? And then maybe a comment on some other lines that might see some leverage to offset maybe the G&A investment you are making?.

Sure. I think the first comment I will make is that keep in mind that when we talk about those targets, those are long-term targets in nature. And so you are going to have years whereas in 2014, where we did not achieve the 20% margin, for example, and we can go through the reasons for that, but a lot of it had to do with leverage around the business.

So, again, it depends on ultimately our same-store sales in our ability to leverage that. And then the other big piece is our ability to ramp up new unit profitability in the expected timeframes. So, again, 20% is our target. We spent a lot of time talking about that.

And as we go through the year, we will keep you updated as to how we are progressing against that number, but again, the focus is that’s a long-term goal that we have around here that we will keep our eye on..

And does the guidance for this year assume that you get back towards that level? I am just – I guess the guidance for G&A as it basically calls for some de-leverage.

So, I am trying to figure out where the offsets are in the P&L to get to overall margin improvement?.

Yes. Well, I think on the overall operating margin improvement, it’s going to come down to our ability to drive comps of course. And that’s a big part of that offset if you will..

Great, okay. Thank you very much..

Okay. Thanks, David..

Thank you. [Operator Instructions] Thank you. We have no other questions in the queue at this time. I would now like to turn the call over to Aylwin for any closing remarks..

Yes. I just want to thank everybody for your interest. We feel like we have always believed in the fundamentals of this business. I think the last quarter was a demonstration that the operating model here is the right one and we will continue to drive performance.

I want to thank our folks in the shops and the folks at support center for their hard work and we will continue to work hard and we will keep you apprised of our progress. So, thank you very much..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and we thank you all for your participation..