Matt Revord - Chief Legal Officer Aylwin Lewis - Chairman and Chief Executive Officer Andrew Raabe - Vice President of Finance.

Sharon Zackfia - William Blair David Tarantino - Robert W. Baird Karen Holthouse - Goldman Sachs Nicole Miller - Piper Jaffray Joseph Buckley - Bank of America Merrill Lynch.

Good afternoon everyone, and welcome to Potbelly Corporation’s First Quarter Fiscal 2015 Earnings Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session. Today’s call is being recorded. I would now like to turn the call over to Mr. Matt Revord, Potbelly’s Chief Legal Officer.

Thank you sir, please go ahead..

Good afternoon, everyone and welcome to our first 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 or 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 and 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 Andrew Raabe, our Vice President of Finance. Aylwin will begin with his perspective on the first quarter performance and discuss some recent Potbelly leadership developments, by providing a discussion of our ongoing strategic initiatives.

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

Aylwin?.

Thanks, Matt. Good afternoon, everyone and thank you for joining the call. We had strong results in the first quarter. We generated revenue of about $86 million or roughly an increase of 16% driven by company operated comparable sales increase of 5.4% and the opening of seven new company operated shops. Our adjusted EBITDA was $8.2 million.

Our adjusted net income was $800,000 or $0.03 per diluted share. Thanks to our sales of 5.4% was driven by traffic and check. We opened seven new company operated shops during the quarter. This included our first shop in Salt Lake City, which will be a spoke city [ph] attached to our Denver Hub.

Our 2015 pipeline is essentially complete with 70% of the leases signed. We’re on track to achieve our stated opening goal of 40 to 45 company shops and 8 to 10 franchise openings. As previously published, we signed a London franchise deal. We’re very excited about bringing Potbelly to London. The first shop should open later this year.

Andrew will discuss our first quarter financial results in greater detail later on the call. But first, I want to take a moment to talk about our culture and our recent leadership changes. The Potbelly advantage defines our culture. From the CEO and the senior leadership team, we spend a lot of time driving culture deep into the company.

Several times a year we’re in our shops reviewing our values to our frontline associates. Leadership and teamwork is very important. No one person is more important including the CEO than the team. This focus and culture should allow us to find strong candidates to replace any leader in the organization.

We have two recent examples, our CFO and COO positions. The CFO change was unplanned. But within four-week period, we had a robust slate of potential candidates from which Mike Coyne was selected. As a general manager/business runner, we expect Mike to enhance our CFO position, specifically regarding productivity, risk assessment and analytics.

Mike started yesterday and he’s in the process of working through an aggressive transition plan. The second example was planned. After 12 years of growing Potbelly Nation, John Morlock requested a reduced work schedule. His replacement Julie Younglove-Webb has been internally groomed to assume the most senior leadership job at Potbelly.

She was a senior executive before she came to Potbelly six years ago and she has learned operations from the shop level upward. John leaves a strong ops team from which Julie can build upon. John will run global franchise operations and still contribute as a senior leader.

Investors should be confident to know that our culture act as a stabilizing force that allows this company to manage through any situation positively. Again, our first quarter results were very good. So, we remain confident in all the growth drivers that we expressed on our last call. Let me recount them for you again. Strong GM in every shop.

During the quarter we implemented new incentives design to impact development, tenure and turnover. Our Q1 people results are on track relative to our internal goals. This is important work that requires continuous focus. Second, gross sales. Throughput at peak, backline, digital media, the bulk of this media started in Q2 with the rollout of avocado.

And lastly, menu innovation. Q1, our new soup Turkey Sausage Lentil sold very well and it met our expectations. Lastly, grow new units. We’re on track relative to our 2015 targets. The strong Q1 results were widely distributed across the company and across the quarter. Now, Andrew Raabe will give you the details of our numbers..

Thanks Aylwin and good afternoon everyone. I will walk down the P&L and give you some of the highlights and colors associated with our first quarter results. As Aylwin mentioned, we’re pleased with our performance in the first quarter of 2015.

Starting at the top, total revenue increased about 16% to approximately $86 million in the quarter driven by our new unit growth and our increase in company operated same-store sales of 5.4%.

Breaking down same-store sales, our average track grew approximately 4.5% driven primarily by the price increases we implemented in July 2014 and January 2015 along with a mix increase from menu and add-on growth initiatives. In addition, we continue to see positive traffic trends in the first quarter that have carried into the second quarter.

While we are bullish about our sales trend so far in 2015, we expect our comp’s cadence to be the highest in the first quarter and then become less positive as our July 2014 price increase rolls off. On the development front, we added seven new shops and as planned we closed two airport locations during the first quarter.

For contact, airport locations typically have seven to 10 year leases which after expiration are re-bid depending on the airport’s designation. For the first airport location, we were successful on being awarded the shop again for another seven-year lease. We closed this shop for a full remodel and we expect it to reopen in the second quarter of 2015.

For the second airport location, unfortunately the space had - the space we had occupied was no longer designated as a sandwich deli, and consequently, we were not eligible to bid on this space. It was a successful shop for us and we look forward to having a successful bid sometime in the future.

Moving down P&L, shop level margin for the quarter increased 60 basis points to 18.1% driven by increased productivity and slightly lower than expected commodity inflation as well as leverage across our cost categories with the increase in sales.

Cost of goods sold as a percentage of net sandwich shop sales decreased in the first quarter to 28.5% down about 20 basis points from the prior year. As expected, we incurred inflationary headwinds primarily from dairy and certain proteins that will likely continue through 2015 which we offset as part of our January price increase.

However, the inflation was slightly lower than we initially expected during the first quarter. Our food cost basket is roughly 70% locked for 2015 and we anticipate our COGS will be on the lower end of the 29% to 30% range for 2015 with total inflation to be on the lower end of the previously communicated 2% to 3% range.

Labor, as a percent of net sandwich shop sales was 28.8% for the quarter which was a decrease of about 40 basis points from the prior year driven by sales leverage, improved labor management and slightly less new shop inefficiency as we lapped nine openings in the first quarter of 2014 with seven in the first quarter of 2015.

Less volatile weather, and subsequently less volatile sales trends helped labor management during the quarter but in general we’re seeing our shops do a better job of having the right number of staff in the restaurant at the right times.

This not only drives better execution but also helps teach future leaders best practice, operational practices within our organization.

As a reminder, there are several states, counties and cities in which we operate that already or will be implementing minimum wage increases throughout 2015 including but not limited to Chicago, Washington DC, Minnesota, Ohio and New York. Based on this current slate of increases labor inflation is expected to be back-weighted in 2015.

As we communicated previously, our labor will fluctuate by quarter based on the sales seasonality and timing of new unit openings. Based on these factors, the labor inflation outlook and the pricing currently in place, we expect labor as a percentage to trend between 28% and 29% as previously stated.

Operating expenses as a percent of net sandwich shop sales increased in the quarter to 11.3% up 20 basis points from the prior year driven primarily by cost associated with being a high growth company.

Occupancy expense as a percent of net sandwich shop sales decreased in the quarter to 13.3% down 30 basis points from the prior year, driven primarily by leverage of the fixed occupancy expenses. Our general and administrative expenses were approximately $8.8 million during the quarter.

After adjusting for one-time costs associated with shop closures and certain costs associated with our corporate office relocation later this year, our G&A was $8.7 million.

This is approximately $0.9 million higher than prior year primarily due to the 2015 bonus reset, investment in field staff to support our development plans and incremental advertising spend. For the full year, we continue to expect our general and administrative to range between $36.5 million and $37.5 million as previously communicated.

As Aylwin mentioned, our adjusted EBITDA is $8.2 million which is roughly 30% increase over prior year. Our adjusted net income for the first quarter was $800,000 which is an increase of over $600,000 and adjusted net income per diluted share was $0.03. Our effective tax rate was slightly below 40% for Q1.

Congress is yet to extend any dose regarding the WOTC Credit Program into 2015, so reiterate our guidance for 2015 which calls for an effective tax rate not expected to exceed 40% and excludes any benefit from these credit programs.

We are hopeful that WOTC program will be extended and in the event this happens, our tax expense would be reduced by approximately $150,000 to $200,000 for fiscal year 2015. Now, I would like to provide a brief update on our share repurchase program.

During the first quarter we repurchased 335,000 shares of Potbelly common stock in the open market for a total of approximately $4.4 million. As a result, we have $20.4 million available from our board authorized program for repurchases which we will continue as we move forward. The buyback activity had no impact on diluted EPS result for the quarter.

I would like to reiterate our full year outlook for fiscal 2015. We expect adjusted net income growth of at least 20%, at least 3% company operated comparable sales growth driven by a combination of traffic and check, 48 to 55 total new shops which we continue to expect to be more weighted towards the back half of the year.

We expect our effective tax rate not to exceed 40% and capital expenditures of $34 million to $38 million. Finally, we expect shares outstanding of between 29.5 million and 30.5 million shares slightly down from previous guidance reflecting the Q1 repurchases. This outlook excludes the impact of any additional share repurchases.

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

So, with that, I’m going to turn it back over to Aylwin for summary remarks.

Aylwin?.

Thanks Andrew. Q1 results were very positive. The business fundamentals are good. Our culture, our execution and our daily intensity around the details of this business makes Potbelly a strong company.

We believe we are multi-dimensional company that can create value in the marketplace several ways, company growth, franchise growth, North America growth, growth outside of North America. Our company growth is self-funded. We have a strong balance sheet. To the question of whether we can grow same-store sales, we’ve had two strong quarters in a row.

We believe our same-store sales will continue to grow because of our focus on throughput, our backline, menu innovation and digital media. Over time the addition of Mike and Julie to help us get stronger. There is no one better to help us grow our franchise business than John.

Thanks again to the men and women at the Potbelly Nation for an excellent Q1. Again, thanks for your time today. I’d like to turn it over to the operator. And we’ll be open for questions..

[Operator Instructions]. Our first question comes from the line of Sharon Zackfia with William Blair. Please go ahead with your question..

Hi, good afternoon.

I just wanted to talk through the addition of avocado, can you kind of walk us through where you’re doing marketing, obviously I’m in Chicago, so I’ve been seeing the billboards and so on, I don’t know if that’s Chicago specific? Outside of Chicago is it building through word of mouth, kind of what’s the attachment like on the avocado? And then, also how should we think about avocado goes through cost of sales because I think it’s probably a lower margin add on for you?.

Well, we have - Sharon this is Aylwin, avocado started in Q2. We’re very pleased with its initial success. It’s in all of our steady state shops and markets. We’re supporting it, we are supporting the seven top markets with digital media, so those markets that are advertising have selling avocado has digital media.

And we split the avocado in fours, customers get three slices of fresh avocado and we charge $1 for it. And the margins are really strong for us. So, it has not derogated our margins and it’s been really, it’s been strongly accepted..

Okay, great. Thank you..

Thank you. Our next question comes from the line of David Tarantino with Robert W. Baird. Please go ahead with your question..

Hi, good afternoon and congratulations on a good start to the year.

Aylwin, could you talk maybe about how Q1 results compared to your internal expectations, I know you don’t give quarterly guidance but were you expecting the results to be as strong as they were?.

That’s a great question. I should say, yes, and just take that to the bank. We thought we’d have a strong quarter, we think we’re going to have a strong year. The growth plans we put in place, we tested that, a lot of that stuff in the middle of last year. And we’re very focused on execution.

But the men and women of the company really came through, we had great execution. And we’re very pleased. But we expected 2015 to be strong and the quarter definitely helps. And we’re looking forward to continuing to execute the growth drivers that we’ve talked about..

Great. And maybe I’ll try it another angle at this. You reiterated a lot of your growth targets but many of them are for at least a certain amount of growth.

So, I’m wondering how we should think about Q1 results in that context, are you more confident in delivering those targets than you were maybe when you provided them initially?.

It is really early in the year. And so, it’s one excellent quarter, things we learned last year is that you got to do this every day. And so that’s what we’re working on. Obviously, by the middle of the year, we’ll have a better view what the full year looks like. First quarter definitely helps.

We were in a hold this time last year when we reported, we’re not in a hold. So we’re feeling very good. But [indiscernible] we’re not taking big relapse and we’re very focused on executing those growth drivers. So, we feel good. And we reiterated the targets that we’ve expressed.

And we’re going to work hard to exceed those in the balance half of the year. But I’m not ready to declare that..

Fair enough.

And then, one metric that I don’t think I heard reiterated was I think last time you talked about on the call, comps at least 3% for the year, is that still a valid outlook based on where you sit today?.

Yes, sir..

Right. Okay, thank you very much..

Thank you. Our next question comes from the line of Karen Holthouse with Goldman Sachs. Please go ahead with your question..

Hi, thank you. Two questions. First looking at your avocado, it sounds like it was a success.

Are there any other opportunities you think you see to add other ingredients to sandwiches as an add-on that could be a driver of check? And second question is, if we look at some of your competitors side there has been noise about companies going through and making pretty branded claims about improving the quality of ingredients or sourcing of particular ingredient.

Do you think that there is, opportunities or needs to take to do that with any skews that are going into your products?.

We’re always - we call this thing food loving and best ingredients. We’re always looking for, they have the best ingredients. So I would say one of the things we stated last year is that reduction of sodium is something we’re going to tackle in over the next few years, our commitment in our proteins were to do that.

But we already think we have really great ingredients, we spend a lot of time on it and take a lot of care with our supply chains. So we’re going to be opportunistic on that. We think our customers now can eat healthy based on the customizable part that you can do once you come into the Potbelly.

So, it’s a longwinded but I would say that sodium is the one we’re really trying to take off. But we work on great ingredients every day. I’m sorry, what was your first question..

Avocado, you bring that on to the menu, a potential add-on to sandwiches.

Are there other products that you would look at as another opportunity to maybe have things people could add-on to sandwiches for $1 that could become a driver of check?.

Yes, I think menu innovation is something we work on. And avocado hit a real, it was a real gap that we had. And I think that’s the key to success of this stuff, is really finding gaps in your menu where items that customers find appealing and then provide them at a great price and that’s what we will continue to do..

All right. Thank you..

Thank you. Our next question comes from the line of Nicole Miller with Piper Jaffray. Please go ahead with your question..

Thank you, good afternoon and congratulations on the good start to the year.

I wanted to check a couple of numbers, I think there were seven company openings in 1Q, were there any company closures?.

Yes, this is Andy. Yes, we did have two closures this quarter as we stated, they were both airports. And one closed by mid quarter, one was towards the end..

Thank you. And looking at the cadence of the franchise openings and having, raising to the low-end, I think eight is the low-end.

Can you talk a little bit about with not one opening in 1Q, will they be equally split for the rest of the three quarters or backend loaded, what’s the best way to think about that please?.

I’d say backend loaded..

Okay. And then just a last question if I may, great to hear the culture update.

How are you going to transfer that overseas, are you transplanting people or will you send opening teams, how will that work?.

Yes, we want all our franchise partners come into Chicago to be trained. And they go through the culture classes. They’re expected to take the Potbelly Advantage back to their business. And then we send what we call kind of All-Star teams to go over and help with the openings.

In the case of London, we’ll have someone over there for almost a year, the first year to help them manage their business. We picked a very high talented person to do that. So they’ll stay longer than when the All-Stars come home. And again, the culture and trajection, whatever we do on the company side we expect the franchisee to participate.

The culture is non-negotiable..

Thank you..

Thank you. [Operator Instructions]. Our next question comes from the line of Joseph Buckley with Bank of America Merrill Lynch. Please go ahead with your question..

Thank you. I have few more questions on the sales increase.

Can you talk about day parts, was there any further extension into breakfast and maybe use to the backline, what that sales mix look like versus a year ago if that was part of the increase, maybe if you could help with that?.

Well, yes, that is widely distributed across all day parts. We extended breakfast to about 100 shops. We added about 21 shops in the middle of last year. We’ll continue to look for that but it has to make sense for us. And those shops have grown their breakfast and it seems like that was the right decision. The focus on the backline has continued.

So we saw, when I mentioned the growth we saw was uniformly across all geographics, all type of shops, and across the quarter from a timeframe perspective, that was a true statement. So, we saw all parts of the business kind of contribute to the growth..

Okay.

On a regional basis, can I ask about the DC market which I know was highly competitive and have been issue from time to time for you guys and for other brands, do you see, was that market as strong as for system in the first quarter?.

No, because well, while they’re on the East Coast was just as bad in 2015 as it was in 2014. We were fortunate as a company to get about six weeks in to the quarter with good weather but after that their February, March, early April was just as bad as last year.

So, where they had good days they had growth, where they had days where we had to close down shops and hit a huge amount of snow, absolutely not. So, we didn’t talk about the weather, but the weather on East Coast was definitely an impact and a drag on our overall sales for the quarter..

Okay.

And then, last question, you mentioned lapping some July pricing, could you remind us how much price that was last July?.

1.5 to 2..

Okay. Thank you..

Thank you. Our next question is a follow-up from the line of Nicole Miller from Piper Jaffray. Please go ahead with your follow-up..

Thank you very much. I just want to kind of piggyback on Joe’s question. I think I heard 4.5% of the comp was check in mix.

Could you please isolate the check component? The price component I guess is what I mean to say, I apologize, the price component for the quarter?.

Yes, so, yes you’re right. It was about 4.5% total check it’s predominantly price..

Okay.

And then, just can we get the cash at quarter end while we have you?.

$61.7 million..

Thanks again..

Thank you. [Operator Instructions]. Thank you everyone. We have no further questions at this time. I would like to turn the floor back over to Aylwin Lewis for closing remarks..

Thanks for your interest today. Thanks for your questions. It was a good quarter, good start to the year. I again want to thank the men and women at Potbelly Nation for their execution and their focus on the things that are very important to us. We look forward to talking to you at the end of next quarter. So, thank you..

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day..