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Executives

Amy Wagner – Senior Vice President Investor Relations & Global Communications

John W. Chidsey – Chairman of the Board & Chief Executive Officer

Ben K. Wells – Chief Financial Officer & Executive Vice President

Russell B. Klein – Executive Vice President & President Global Marketing Strategy and Innovation

Analysts

Greg Badishkanian – Citi Investment Research

John Glass – Morgan Stanley

Mathew DiFrisco – Oppenheimer & Co., Inc.

Jeffrey F. Omohundro – Wachovia Securities

Nicole Miller Regan – Piper Jaffray

Mitchell J. Speiser – The Buckingham Research Group

Tom Forte – Telsey Advisory Group

Jason West – Deutsche Bank Securities, Inc.

Steven T. Kron – Goldman Sachs

David Palmer – UBS Investment Research

Jeffrey Bernstein – Barclays Capital

John Ivankoe – JP Morgan

Burger King Holdings, Inc. (BKC) F2Q09 Earnings Call February 5, 2009 10:00 AM ET

Operator

Welcome to the Burger King Holdings second quarter fiscal 2009 earnings conference call. My name is Chanel and I’ll be your conference coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference Ms. Amy Wagner, Senior Vice President of Investor Relations and Global Communications.

Amy Wagner

Welcome to Burger King’s second quarter fiscal 2009 earnings conference call. We have prepared an earnings call PowerPoint presentation to assist in presenting our second quarter results. These Slides as well as the audio broadcast of this call may be accessed through our investor relations page on our website at www.BK.com. Both the audio portion and the Slide show will be archived on our website where it will be available for future reference for 30 days.

Presenting on the call today are John Chidsey, Chairman and Chief Executive Officer and Ben Wells, Chief Financial Officer. Also with us on the call today is Russ Klein, President Global Marketing Strategy & Innovation who will be available to answer any questions you may have about our marketing, advertising and products during the Q&A portion of the call. We’ll spend about 20 minutes today discussing our second quarter performance before opening the call up for questions.

Before we begin today I’d like to remind everyone that this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations based on currently available data. However, actual results may be impacted by future events and uncertainties and could differ materially from what is discussed today. More detailed information about these uncertainties is contained within the forward-looking statement section of this morning’s earnings release.

The presentation also includes non-GAAP financial measures as defined in Reg G. The reconciliations of these non-GAAP financial measures and their most directly comparable GAAP financial measures and other information required by Regulation G are included in the appendix to this presentation.

Before turning the call over to John I’d like to announce Burger King Holding’s second annual analyst and investor day on Thursday, February 26th right here at our headquarters located in sunny Miami. Most of you should have already received an invitation via email. If you have not received an invitation please call our investor relations line at 305-378-7696. If you have received the invitation and have not yet responded, please do so today.

In addition to John, Ben and Russ presenting, you will also have the opportunity to listen to our global operations executives and hear from our four region presidents. Registration for the event will close on February 13th. I look forward to seeing all of you in a couple of weeks.

With that, I’ll turn the call over to John.

John W. Chidsey

This morning we’ll discuss our worldwide second quarter fiscal 2009 results and provide our outlook for the remainder of fiscal ’09. We’ll then move to the Q&A portion of the call. I’m pleased to announce that even during this continuing uncertain worldwide economy, we posted positive comparable sales and accelerated our net restaurant growth across every region.

We stayed focused on executing our true north plan and continued to make improvements across our strategic growth pillars. Even though we’re not recession proof, we continue to provide great value for the money food offerings with consumers responding favorably and, we keep breaking records and setting the bar higher.

During the quarter the Burger King system achieved its best positive comparable sales trend in three decades obtaining the fifth consecutive year of worldwide same store sales growth. We also just completed our best development quarter in eight years opening 125 net new restaurants. I remain confident that we will meet our full fiscal year development plan opening 350 to 400 net new restaurants during this fiscal year representing a growth rate of 3% to 3.5%.

Our business fundamentals are solid and our system remains focused and well poised to weather the economic storm. Our overall consolidated results however, were significantly impacted by extremely volatile currency exchange rates created by uncertainties in both the broader and currency markets. The magnitude of these fluctuations was more than we forecasted or could have anticipated when we gave our last update in October.

The dollar’s significant strengthening in November and December against the major currencies within our currency basket impacted the quarter’s revenues by 6% or $38 million and earnings by 15% or $0.05 per share. Despite significant fluctuations in foreign currency, we’re extremely pleased with our results and the continuing strength of our core business. More than ever, the team is focused on profitably growing the brand worldwide.

Irrespective of currency headwinds, we remain focused on our cash flows and reinvestment in the brand. We are committed to increasing our global footprint, reimaging our existing restaurant portfolio to elevate our image and appeal, providing our guests with an exceptional value for the money dining experience and strengthening our market awareness as a socially relevant brand. This clear path and the teams’ execution of our plan during these past five years has dramatically improved the brand across the board.

Our marketing, products, operations and development are all significantly stronger. We believe it will be this continued focus that will drive the brand to new heights over the next five years. During this past quarter we featured many of our consumers favorites including our limited time offer Italian and American original chicken sandwiches. We also brought back the premium mushroom and swiss steakhouse burger and balanced this indulgent offering with our value price spicy chicken crisp sandwich.

Marketing promotions were a key component of this past quarter’s performance in driving traffic and creating overall brand awareness. We targeted our super families with iDog and a Nintendo giveaway promotional tie in with our BK Crown Card aimed at driving holiday sales. Our prior year’s successful whopper freak out campaign was met head on with its sequel, Whopper virgins the world’s purest taste test. And, we wrapped up the quarter with the promotion the flame, a men’s body spray which showcased the brand’s creativity and ability to drive pop culture. Originally available at Ricky’s in New York City and online for $3.99, it sold out in just three days.

Our operations team continued to improve the guest experience and expand our competitive hours. In our US and Canada company restaurant portfolio we are busy converting operations to 24 hours and forecast approximately 20% or 200 company restaurants to be open 24 hours, seven days a week by the end of our fiscal year. Our mantra has been that we will serve great tasting food to our guests where they want it and when they want it so extending our competitive hours initiative will remain a critical part of our plan to increase sales. And, we continue to manage our overhead prudently and have again improved our G&A as a percentage of revenue quarter-over-quarter by 130 basis points.

Our momentum continues despite this difficult economy and challenging consumer environment. On page three of the presentation is our score card. We continue to post strong results in most of our key operating metrics. Our net restaurant count increased markedly up 3.2%. We have 362 more restaurants opened today than we did a year ago. We recorded our 20th quarter marketing our fifth straight year of worldwide positive comps of 2.9% compared to a strong prior year comp of 4.5%.

In the US and Canada we obtained our 19th consecutive quarter of positive comps of 1.9%. Comps in all regions across the global were positive led by strong performance in key markets such as the UK, Spain, Canada and throughout many countries in Central and South America. Worldwide trailing 12 month average restaurant sales increased to $1.31 million compared to $1.25 million in the same period last year.

During the quarter company restaurant margins continued to be impacted by high commodity costs. However, within the quarter we saw meaningful sequential improvements in our commodity costs, gross profit margins and therefore overall company restaurant margins. On a net basis, food inflation impacted margins by 90 basis points as compared to the same period last year substantially better than last quarter where food inflation pressured year-over-year margins on a net basis by 160 basis points.

Our US and Canada reimaging program as expected has a substantial net neutral impact on the P&L this quarter. Remodeled and rebuilt restaurants continued to generate on average a 12% to 30% lift in sales respectively. Since the beginning of the program, we have no fully reimaged 60 restaurants in our US and Canada company portfolio. Given our forecasted sales uplift we expect the program to contribute net margin increases on a go forward basis.

Increased labor expense also added 130 basis points of worldwide company restaurant margin pressure. Regulatory and contractual increases in hourly wages in our German company owned restaurants which began to impact last quarter and continued in to the second quarter contributed to the year-over-year increase. Also, additional labor expense in our US company restaurants required, as we launched our 24 hours initiative and staffed up at our newly acquired restaurants to protect the guest experience during the integration process increased costs.

We believe that company restaurant margins will continue to improve during the remainder of our fiscal year as we benefit from declines in commodity costs, as we maintain our strategic pricing levels and as we begin realizing a net positive benefit from our reimaged restaurants. Our royalty rate continued to accrete as new restaurants opened and restaurants renewed at the higher royalty rate in the US.

Our net debt to EBITDA ratio was two times, a very healthy and comfortable debt level for the organization. Before discussing specifics of the quarter, I want to reiterate that despite the volatile currency markets impact on earnings this quarter, our core business remains strong and our plan is intact. The team continues to stay focused on doing the right things for the long term driving profitable growth and significant returns for our shareholders.

Our quarter’s highlights are depicted on page four of the presentation. The company posted revenues of $634 million this quarter, up 3% from the same period last year. Company restaurant revenues increased 6% primarily driven by the net addition of 141 restaurants during the last 12 months. Franchise revenue remained unchanged year-over-year. Although the net number of franchise restaurants increased by 221 during the last 12 months and comps grew at 3%, these benefits were offset by the unfavorable impact of currency exchange rates.

Total property revenue decreased by 13% again, driven primarily by the unfavorable impact of currency exchange rates. Quarter-over-quarter EBITDA was $109 million compared to $118 million. EBITDA adjusted for $1 million in one-time expenses related to the acquisition of company restaurants was $110 million down 7% versus the prior year period. EBITDA was adversely impacted by $7 million due to movements in currency exchange rates.

Additionally, EBITDA was negatively affected by lower company restaurant margins as a result of higher, albeit improving, commodity costs and increased labor costs in our German and US and Canada company restaurants. Also of note is $6 million of expenses incurred within our other income and expense category as compared to $1 million in income last year. $4 million of the $6 million in OI&E is related to net losses on investments held in a rabbi trust for executive deferred compensation.

This amount however, is fully offset by a decrease in deferred compensation within G&A. The remaining $2 million represents the net expense related to the remeasurement of foreign denominated assets and the use of foreign currency contracts to hedge the currency exchange impact on such assets. This expenses was in line with our forecast from last quarter. We still anticipate OI&E to be a quarterly expense of approximately $2 million excluding the accounting for the rabbi trust which again are fully offset within G&A. But, ultimately the markets will determine what the actual impact will be in any given quarter.

EPS decreased 8% to $0.33 quarter-over-quarter compared to $0.36 in the same quarter last year. This quarter’s EPS includes a negative impact to earnings of $0.05 per share due to currency exchange rate fluctuations. This quarter’s EPS did however benefit from G&A leverage and lower interest expense driven by lower interest rates. The quarter’s effective tax rate was 38%, unchanged from the same quarter last year. This quarter’s tax rate was above our normalized tax rate due to currency fluctuations. For the year, we still anticipate an overall normalized consolidated tax rate of approximately 36.5%.

During the quarter we opportunistically repurchased approximately 100,000 shares for $2 million bringing the fiscal year-to-date repurchase to 835,000 shares or $20 million. Therefore, our diluted shares outstanding decreased year-over-year by a net 1.4 million to 136.5 million including the net effect of executive stock options on the share count calculation.

Page five of the presentation depicts our year-to-date highlights for your review. I won’t spend much time on this page but will note that our year-to-date revenues are up 8% due to continued positive comp sales in all segments, strong net new restaurant openings and an accreting blended worldwide royalty rate of 4.05%. Adjusted earnings per share of $0.71 unchanged from prior year includes a negative impact to earnings of $0.04 per share due to currency exchange rate fluctuations and $0.04 due to expenses related to the remeasurement of foreign denominated assets.

For the year, we expect earnings to follow our historical trend, improving by a wider margin year-over-year in the second of our fiscal year. I’ll now turn the call over to Ben who will discuss our results by reporting segment.

Ben K. Wells

Let’s turn to page six of the presentation. In the US and Canada, total revenues grew by 13%. Income from operations decreased 6% and adjusted income from operations decreased 5%. The unfavorable P&L impact of the 19% decline in the Canadian dollar was $8 million in revenue and on a net basis had no impact on segment income.

Revenues benefited from the net increase of 151 company restaurants over the past 12 months. Positive systems comp of 1.9% and company restaurant comps of 2.4% also aided revenue expansion. Company restaurant margin decreased 240 basis points to 12.8% from 15.2% in the same period last year. Margins this quarter however, sequentially improved from the first quarter which was down 320 basis points year-over-year.

Our total food, product and paper costs net of pricing was up 90 basis points year-over-year driven by an increase in beef costs of 13%. Even though beef prices were up year-over-year, they were down 14% from our first quarter. Labor costs were also up 80 basis points year-over-year due to the ramp up of our 24 hour initiative and incremental costs associated with assimilating the acquisitions in to the company portfolio. As john mentioned previously, our reimaging program was P&L neutral as a higher margin generated at the reimaged restaurants offset the incremental costs incurred within the program.

EMEA APAC revenues decreased 14% and income from operations declined 15% over the same period last year. These declines were primarily driven by the unfavorable impact from the movement of currency exchange rates within the quarter as compared to the prior year. The Euro declined 9%, the British Pound and the Turkish Lira both declined 23%, the Australian and New Zealand Dollars 25% and the Korean Won was down 32%.

The rapid declines in currency more than offset the strong comparable sales of 5% and the opening of 232 net new restaurants over the last 12 months. Currency exchange rates negatively affected revenues by $26 million and the segment income by $6 million. Company restaurant margins were down 190 basis points primarily due to increased commodity costs and to increased labor costs as the result of government mandated and contractual increases in hourly wages in Germany.

Our successful product promotions such as Whopper sandwich limited time offers throughout the region, other limited offers such as millionaires Shortbread and flavored BK fusion, real ice cream in the UK and the long chicken sandwich in Spain and the promotion of our four chicken sandwiches in Australia contributed to strong sales.

In Latin America revenues declined by 7% and income from operations decreased 9%. Again, these declines were primarily driven by the unfavorable impact from the movement of currency exchange rates within the quarter mainly the Mexican Peso which declined 17% year-over-year. Currency exchange rates negatively impacted revenues by $4 million and segment income by $1 million. Currency movements offset the region’s solid comps of 4.1% and the opening of 93 net new restaurants during the last 12 months.

Solid comp performance is reflective of the continued strength in most markets in the region. Comps were driven by our barbell menu strategy featuring everyday value platforms and our new steakhouse burger and angry Whopper sandwiches. Successful extensions of the US super family promotions also drove sales across the region. As John indicated, our fundamentals remained strong. Our business model generally mitigates the impact of currency exchange rates on our operating results.

We stayed focused on driving the business forward and completed five consecutive years of positive comparable sales, the best consecutive sales trend in three decades. We opened more net new restaurants and completed our best development quarter in eight years and we are on track to meaningfully grow the brand on a unit count basis. We realized continued leverage in our G&A and we are very pleased to see, as anticipated, commodity costs come down dramatically from the highs of last quarter.

We are still forecasting year-over-year commodity cost increases of 5% to 7%. With the momentum we have in the brand and with our improving cost structure, we expect to realize earnings improvement in the second half of this fiscal year. The largest unknown factor in the equation will remain currency exchange rates. Because of the unusual volatility witnesses in November and December it is difficult to predict with any accuracy the potential impact it may have on our results during the second half of the year.

Moving on to page eight, this page depicts our capital structure and uses of cash. In the first half of our fiscal year, we effective utilized our balance sheet to pay quarterly dividend, repurchase shares, build new company restaurants and reimage existing ones. We also acquired 72 restaurants from one of our largest franchisees in the US during our first quarter as part of our ongoing portfolio management.

Even amiss the current economic slowdown, we continue to have strong and predictable cash flow and our hedging activities largely mitigated the impact of exchange rate fluctuations on our net cash flows emanating from Europe. Our debt to earnings ratio is healthy and our debt turns are extremely favorable. Our strong cash flow and balance sheet enables us to continue to profitably invest in our brand and company restaurant portfolio. Investments aimed at generating significant returns on capital over the long term.

Year-to-date we have spent $83 million in capital expenditures including $56 million on our existing company restaurant portfolio worldwide, reimaging and providing regular repairs and maintenance on existing restaurants as well as constructing new sites. Since the inception of our US and Canadian reimaging program, we have completed, as we committed the reimaging of 60 company restaurants are and realizing the expect sales lift.

We have also built 17 new company restaurants year-to-date and the softening commercial real estate market represents a good opportunity globally for the Burger King system development plans. Additionally, in January we paid down $40 million on our revolver as we continue to solidify our balance sheet position. Currently, we have $84 million in unused capacity on our revolver.

I’ll now turn the call back to John and he can give us an update on each of our growth drivers.

John W. Chidsey

Global development continues to be a main driver of our future growth. Because of the brand’s momentum around the global, we are opening on a net basis more restaurants than we have in recent history. Burger King restaurants are now open in 74 countries and we are focused on growing in under penetrated markets such as Asia, Eastern Europe and Brazil.

During this quarter we announced a business venture with our Taiwan franchisee as part of our development strategy of seeding international growth and opened our first restaurant in the Czech Republic and began development of our first company owned restaurant in Singapore. Our franchisees continue to have access to capital and are reinvesting in their existing restaurants and opening new ones. We have opened 17 company restaurants in key markets around the world using cash generated from operations.

Our reimaging program is also paying off. Remodeled and rebuilt company restaurants are generating on average a 12% to 30% lift in sales respectively making this an attractive investment in the brand. We should begin realizing net positive financial benefits of the program in this current quarter. Another significant driver of performance is our commitment to operational initiatives aimed at driving profitability. Competitive hours will continue to be a focus for us and company restaurants are leading the way through our 24 hour conversion plan.

Our four corner pricing tool takes in to consideration key trade area dynamics and enables operators to make real time pricing decisions based on market analytics. We are also focusing on the middle of the P&L providing performance benchmarking tools, educating our franchisees on managing their financing needs in this difficult environment and developing programs which have helped improve employee turnover and raise guest satisfaction scores.

We’ve now rolled our batch broiler to 62% of our US and Canada system restaurants with 40% of DMAs or designated market areas fully installed. As a result of this concentration of batch broilers we will begin our regional rollout of our steakhouse XT which will be fully cooked out in the restaurant at the end of this month. We will also begin testing ribs in select markets along with many other products designed with the batch broiler in mind. Of course, the broiler continues to save on electric and gas bills.

Another huge win for the system has been the completion of our fifth year of worldwide positive comp sales through innovative marketing alliances, creative advertising and great tasting products. On page 11 of the presentation, we provide you with a preview to our fiscal 2009 second half marketing and products calendar. In the third and fourth quarter the promotional and product calendar is designed to drive traffic and our advertising campaigns will focus strongly on our value platform to resonate with our consumers who are, now more than ever, seeking value for the money food options including an all family value initiative to be launched during our fiscal fourth quarter.

We are off to a good start with January’s comp benefitting from these promotions. We will continue to focus on attracting super families with promotional tie ins with the Nickelodeon Kids Choice Award, the Pink Panther 2 super family sweepstakes, Star Trek and Transformers 2 and we will maintain our barbell menu strategy satisfying guests seeking indulgent well priced sandwiches such as the limited time offer of the angry Whopper sandwich and the regional rollout of the steakhouse XT and those seeking value price alternatives with the introduction of a mini burger platform called Burger Shots with both an AM and PM build. We will also roll out products that will drive traffic in the breakfast and late night day parts as well as those aimed at strengthening our snacking and dessert portfolio.

In closing, our business fundamentals remain strong and we are positioning the company for long term success and profitable growth. Our focus on providing our guests with exceptional value for the money dining experience has not changed and will serve us well through these challenging economic times. Going forward, we expect earnings to continue to benefit from easing food and energy costs, expected sales lifts from new and recently reimaged restaurants, net new restaurant openings, product launches and industry leading marketing promotions.

However, uncertainties in the currency markets may continue to adversely impact earnings. Therefore, it is prudent to update guidance to account for these potential currency headwinds. We are now forecasting fiscal 2009 full year earnings per share to be in a range of $1.44 to $1.49 which includes a $0.10 per share estimate for negative impact due to movements in currency exchange markets based on December 31st exchange rates.

We have a proven business model, one that will serve us well during today’s uncertain environment and one that will enable us to be stronger and better when the cycle changes. We will continue to build upon our multiyear track record of positive comp sales, global restaurant expansion, operations excellence, product innovation, day part expansion and socially relevant marketing campaigns and we will focus on creating value for all of our stakeholders, consumers, vendors, employees and for you our shareholders.

I’d like to thank everyone on the call for their time and continued interest. Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Greg Badishkanian – Citi Investment Research.

Greg Badishkanian – Citi Investment Research

Currency was a little bit more than I was modeling. Is there any way to maybe better model this as the quarter progresses and as currency changes? And, maybe in terms of your current guidance, what are you assuming for the major currencies? Basically, are you assuming that they stay at the current levels that they are at today?

Ben K. Wells

Great question. The volatility that we experienced in the market is something that we haven’t frankly observed in many, many years. You had a 30 big figure move inside the space. Furthermore, always remember we have to recognize revenue at the rate that prevails on the date the revenue is actually incurred, in other words at the average rate that prevails during the course of the quarter. So, not only do you have to predict the direction but you have to predict the duration both of which are extremely difficult to predict.

So frankly, what we do is we continue to rely on the rate that prevailed at the end of the quarter. Again, always remember that the accounting does not equate to cash. The cash that is coming in has been largely hedged. As we said on our last call we had extremely minor affect inside the cash numbers that you saw right now due to our hedging activities. Forecasting the exchange rates is going to be very, very difficult and are going to be subject to headlines and geopolitical events.

Greg Badishkanian – Citi Investment Research

So you’re using kind of the data at the end of the quarter to model out going forward?

Ben K. Wells

That is right.

Operator

Your next question comes from John Glass – Morgan Stanley.

John Glass – Morgan Stanley

On the US CRM, I just wondered if you could be more specific about the second half? It would seem to me that it would need to improve substantially on the order of 300 basis points year-on-year. While I understand food has gotten better, first of all if that is correct or not in your view, what second half US CRM should be. But, it would seem that labor is getting a little bit worse even as food gets better. Maybe the staffing at the new stores or the acquired stores has something to do with that so can you just talk about what are some of the pushes and pulls beyond food that will influence the second half CRM?

John W. Chidsey

John, in terms of the pushes and pulls, you’re right we’ll definitely as we’ve been saying the past couple of quarters continue to benefit from the fall that we’ve seen in commodity costs certainly from a comparison year-over-year standpoint because as we said we suffered most of the pain in the first half of the year so as we move in the back half from a comparison standpoint life will be better.

I think how much benefit we continue to see from commodity costs on a go forward basis, I’m not sure because we’ve certainly gotten a lot of benefit now, if we get a little bit more that will obviously be even better in addition to just the comparability piece you pick up. From a labor standpoint, as we said, we staffed up for the 140 restaurants that we acquired and obviously that, now that we’ve got that integrated we can certainly start to back off on that.

Then, from the 24 hour standpoint, as we march to the 20% of our company restaurants, that like our reimaging program should be more on a comparable comparison if you will because we’re sort of doing x number per quarter so I would think that would be flat from a comparison standpoint. So really, all those things should start to move in our favor as we move in to the back half of the year. I don’t know if there’s anything you want to add Ben?

Ben K. Wells

The only other thing with regard to the total CRM obviously, we are benefitting as natural gas and other fuel surcharges that are coming through our utility bill have fallen off significantly. We would expect to see benefit in that as we go forward.

John Glass – Morgan Stanley

I guess if you bottom line it what do you think US CRM is roughly in the back half of the year?

John W. Chidsey

Well, obviously I think the margins are going to continue to improve. I don’t actually know, your 300 basis points, I would say probably close to what they were in the previous year if you look at what margins were in the back half of last year, I would think they would look more similar to that.

John Glass – Morgan Stanley

They were 12% to 13% in the back half of last year, so they would have to get worse from here I guess. All I’m suggesting is does it go back to sort of 15% to 16% in the back half of this year or do you think it’s somewhere between where it is today and that level?

John W. Chidsey

I think if I had to guess today I’d be more in the 12.5% to 14% range. I don’t think 15% and 16% unless we really see a dramatic drop in commodity costs – are probably in the realist expectation level.

Operator

Your next question comes from Mathew DiFrisco – Oppenheimer & Co., Inc.

Mathew DiFrisco – Oppenheimer & Co., Inc.

Ben, just a clarification and then I have a question, regarding the foreign exchange, can you just help us out I guess the Euro for instance was 1.4 as of 12/31 and it’s significantly lower now at 1.29. The average of a year ago for the third quarter that we’re about to enter or are in was 1.5 so that’s a significant difference. Can you give us a gage of if we were just to assume, be more conservative than the model and assume a 1.29 Euro to the dollar or double the effect of year-over-year change, how much that would have as an earnings impact to this current quarter? Just clarity to use today’s rates rather than 12/31 so we can be more conservative with the numbers.

Then the question that I have is I think this is one of the first quarters in a while that you had a significant differentiation between the company comp and the franchise comp and give your Florida exposure I’m curious if you can give us some color on that? With the company comp was that the extended hours, the greater skew towards remodels? What was the difference between the company comp surpassing the franchise comp or is it a basis that finally may be hopefully Florida is turning?

Ben K. Wells

I’ll take the currency question. Keep in mind that we operate in 70 some odd countries and there’s a basket that we have to work against. Relying on one currency can be a bit nerve racking and give you a false positive or false negative. Nothing the spread that we had the Australian dollar was 25%, Sterling was 23% and the Euro was 9%. So basically the best thing we can say is that if you built a basket out of argumentatively those three or four that we operate in and then assume the current spot rate at 12/31 it may or not be the average rate. If you want to take the average rate down then you would do that.

Basically, the basket that we’ve got right now moved 15% year-over-year and 9% during the existing quarter. So, the volatility inside that unfortunately makes it extremely difficult to predict and again, I need to stress that the accounting impact on the face of the P&L does not equate to the cash that the organization is generating because that again is hedged.

John W. Chidsey

In terms of your question about the comp differential, I think it was a piece of reimaging, you’re correct on that front. The other piece was weather in terms of what the Midwest was hit with where we don’t have any company restaurants. Again, if you look for like markets basically comps were the same so you didn’t see that spread where we matched up with franchisees.

Operator

Your next question comes from Jeffrey F. Omohundro – Wachovia Securities.

Jeffrey F. Omohundro – Wachovia Securities

Given the results from the reimaging, maybe you can share with us your thinking about possible acceleration in that program later this year?

John W. Chidsey

Well, I think two things, one obviously we’ve been very pleased with the results that we’ve seen not just with the remodels but with the scraps as well. But, I think the governor that we are working with is under our current credit agreement we’re limited to $200 million in cap ex spending which we’re pushing on. I think our guidance to the street this year was $180 to $190 million so we’re pretty much at our limit.

Obviously, at some point we’ll be able to redo our debt deal but again as we’ve said in the last couple of calls, redoing that now would not be in our best interest. But, I think we do have a decision to make next year whether we want to slow down new builds potentially and pour more money in to the remodels and scraps and that’s something as we put our budget together for the year starting July 1 we will certainly look at what’s the right balance to strike between those two.

Jeffrey F. Omohundro – Wachovia Securities

If I could follow up, the Shots rollout that’s currently occurring, can you talk a little bit about that product roll out, the mix of breakfast versus burger and how you think you might promote that next month?

Ben K. Wells

Well, we’re in restaurants now and we’re rolled out with both the Shots PM as well as the breakfast product. It’s very early, we don’t have advertising support on the air until next week. The non-advertised unit volumes are looking very promising and match up very favorably against the test experience which was the business case to roll them out in the first place. We think it’s going to be a great play both on premium and novelty and innovation as well as value for the money. So, the consumer metrics and the reads look excellent on this product. More to come on that but we’re already working on an innovation pipeline for other variations off of that platform.

Operator

Your next question comes from Nicole Miller Regan – Piper Jaffray.

Nicole Miller Regan – Piper Jaffray

I just wanted to make sure to clarify the store level margin conversation, if you still get back to flat for this fiscal year? Then the one question I just wanted to lob in is in the press release today for the first time you make mention of how many stores could be at extended hours and I think it was actually 24 hours, I just want to confirm that 20% of the company base by this fiscal year end but, what would be the total? How high could that number be for the company and system wide?

John W. Chidsey

Nicole again, on the margins what I said was I think you could look at where we were for the back half of last year, we’d be flat with the margins for the back half of last year not necessarily flat for the whole year. So, I stick with what I said earlier about somewhere in that 12.5% to 14% range for the full year is probably an accurate statement.

In terms of the remodels, I think if I understood your question, that we committed that we wanted to do 60 a year and that over a five year period that would get the 300 to 350 basically done that was 40% of our portfolio in the US that was 30 plus years old. The previous question was a good one meaning given what we’ve seen do we want to speed that up and maybe try to do 80 plus next year and cut cap ex from somewhere else until we can get the debt deal redone and that’s again something we’ll look at.

Outside the company restaurant portfolio if I understood your questions, franchisees continue to step up the pace and as we said we’re on track for the number that we gave you which I think was 150 to 200 franchisee remodels for the year as well. So, access to capital has still been good for that, they continue to be pleased with the results they’ve seen so I think we’re encouraged that we’re slowly but surely improving our portfolio overall.

Operator

Your next question comes from Mitchell J. Speiser – The Buckingham Research Group.

Mitchell J. Speiser – The Buckingham Research Group

My first question is on the average restaurant sales. I believe if you exclude the foreign exchange impact the ARS was up 2.8%, global comps were up 2.9% so the ARS growth did slip a little bit or was about in line with the comps growth. It has been running above comps growth materially for several quarters so I guess my question is has the new unit productivity slipped a little bit or did the previous ARS numbers include foreign exchange as well. I don’t think that was maybe disclosed in previous quarters. That’s my first question.

John W. Chidsey

I’m looking at Ben but I believe it was included, maybe we didn’t make that abundantly clear. So, obviously given what the dollar has done over the past couple of years before our crisis we’re encountering, that probably magnified the affect to some extent because obviously we didn’t change our methodology so it would have been done the same way since we’ve been public.

Mitchell J. Speiser – The Buckingham Research Group

I think it was down 3.1 including foreign exchange so I’m excluding foreign exchange in the numbers you reported this morning, it was up 2.8% and it was just below the comps growth. I’m just wondering in terms of the new stores, I think on previous calls you mentioned how the new store sales are doing, was there any slippage in the new store sales numbers because the ARS growth has typically been above comps growth and it did slip a little bit below comps growth this quarter.

John W. Chidsey

Yes, I think it’s too things, I think one it is a little bit of mix shift meaning when you look at where the restaurants come up around the global. We have always said restaurants in Latin America which may do more like $1 million on average, $1.1 million, are very profitable in that part of the world and if you build a lot more in one quarter in Latin America versus previously what you did in the US, your average is going to come down to some extent there.

Secondly, the average in the US has come down a little bit recently, not by a lot and I think the third thing is just down time as well. I think it’s a combination of all those factors but offline we can dig in to that a little more deeply if you’d like.

Mitchell J. Speiser – The Buckingham Research Group

Just a second question, I guess just on the margin question I guess for the global store level margin, I just want to understand, I believe the target was flat year-over-year at the beginning of the fiscal year and it looks like if it is going to be in the back half, 12.5% to 14%, I guess that would imply I think the global store level margin CRM down about 150 basis points. So, is that now the new guidance for fiscal year ’09 for CRM globally?

John W. Chidsey

If you’re looking at the existing quarter, again I hate to keep point to the foreign exchange but we did have an asymmetrical movement inside the program and there was some margin impact of currency inside that. So basically, $4 million worth of currency flowed through the margin line. That was then offset by G&A costs in various countries inside that space.

So, I think what we’re going to do is we’re going to stick with our previous guidance. Again, if you want to adjust it for currency risk that would clearly something you might want to do but we’re hanging in there with our original guidance in the 13% to 14% range.

Operator

Your next question comes from Tom Forte – Telsey Advisory Group.

Tom Forte – Telsey Advisory Group

I wanted to know if you could talk a little about any competitive environment? If you’re seeing a change in promotional activity, discounting, or an increase in focus on value menu at your peers? And, what impact that is having?

Ben K. Wells

Well, we’re absolutely continuing to see everyone in the out of home restaurant space put their value for the money messages out there whether it be accentuating their value menus, whether it be introducing value menus in the case of some concepts. The discounting is certainly very aggressive out there and we too have been focusing on our value for the money messages. We did again in this recent January and as I said earlier, even the burger Shots platform is a value for the money play and you’ll continue to see that thread run through calendar 2009. We’re seeing the same thing going on globally. This is a global theme.

Operator

Your next question comes from Jason West – Deutsche Bank Securities, Inc.

Jason West – Deutsche Bank Securities, Inc.

I just want to clarify on the guidance, if you guys changed your underlying assumptions, excluding currency there up or down? If you did, can you talk about maybe what’s changed outside of currency as you look at the back half versus where you were three months ago?

John W. Chidsey

If you add back the currency which we said our guess is $0.10, that gets you right back to the range we were. So, no we still think had we not suffered this currency impact we would be very comfortably be in the $1.54 to $1.59 range which is what we put out back in the summer when our year began. I guess again, just to reiterate, the underlying fundamentals of the business we’re very happy with the net restaurant growth, we’re very happy with the comps, we’re very happy with how things are playing out for the year.

Operator

Your next question comes from Steven T. Kron – Goldman Sachs.

Steven T. Kron – Goldman Sachs

A couple of questions, first, on the remodel program it looks like the AUV lifts that you site in your press release at least on the remodel side, like the 12% seems to be a little bit lighter than what the numbers were that you had previously communicated. So, can you maybe just address whether more recent remodels are coming in kind of below that 12%. That’s the first question.

The second one, Ben, we talk about easing commodity costs, early in this fiscal year you talked about I guess in the first quarter the basket being up in the order of high teens, maybe 20% or something. What was the basket up in the second quarter and is your expectation for easing still inclusive of further spot cost reductions, or spot price reductions here on the commodity landscape?

John W. Chidsey

I’ll answer your first question Steve, I don’t think we really changed our commentary. We said remodels as far as I can recall, calls were 12% to 15% and the scrapes were 25% to 30%. Yes, you see some blips within the quarter where a quarter may come in looking like 12% to 13% and depending on what happens you can have other quarters that come in like 15% to 16% but the average across the 40 we have done so far I say we still feel very comfortable in the 12% to 15% which still gives you the 20% cash-on-cash returns that we talked about. I consider that a blip as opposed to really a fundamental move in what we’re seeing. I’ll let Ben answer your second question.

Ben K. Wells

I think I’ll work it backwards, as you are probably well aware, the spot corn price or the near contract on corn is running about $3.59 and wheat is at $5.52 and we’ve got live cattle at $85.85 so clearly we’ve come off significantly. Whether or not that goes down further or not I’m not really sure, I wouldn’t bet the farm on that one so to speak. But, the real reality is that the cone of uncertainties that we were dealing with last year at this time, it was significant and [inaudible] coming down in to that 5% to 7% for the balance of the year and as I look out as we begin to fix different contracts and certain commodities inside our portfolio, I’m thinking we’re going to see ourselves as relatively stable as far as I can see out beyond the current environment.

Operator

Your next question comes from David Palmer – UBS Investment Research.

David Palmer – UBS Investment Research

The question I guess, maybe this is for Russ, it seems like the biggest players out there in fast food are really growing uniquely. They have the national media scale, they have often times the new value oriented news, the $5 foot longs, the dollar menu, the THREEconomics and it’s almost like the bigger are just trouncing almost everybody else because they can drive the traffic to the value and they’re very competitive with at home eating.

Burger King so far really hasn’t had, I mean you have the Whopper Junior and you’ll have the Burger Shots which is $1.49 and it’s not quite the same I would say as some of these other guys, do you think that Burger King is really seating some advantage to some of the others including the Taco Bells or whatever that have really compelling new value tier?

Ben K. Wells

Actually, on flex pricing on value menus this is not a new concept. McDonalds, and Wendys and other scaled up operations as you described them also run anger products at the lowest price that they can construct and then they have flex pricing on other value for the money offers coming from there. Our Whopper Junior continues to be the anchor of our menu and if you look at McDonalds as an example, their contribution to sales from their value menu isn’t changing materially from the kind of sort of year-over-year growth that we see. We see it creeping up a bit, a point or two.

We continue to like our blended margin which is superior to that of both McDonalds and Wendys on our value menus. I’m not sure that Wendy’s current strategy is necessarily knocking it out of the park. I haven’t seen any numbers there. I don’t know what Subway’s same store sales numbers look like, they don’t report them so it’s a little hard for me to answer that question but I would say that if you look at the run rates, the calendar ’08 comps between BK and McDonalds including on a two year basis, they’re pretty much moving in tandem.

We feel very good about our value for the money construct. We’re going to continue to innovate around it and we think innovation is as important as price and that’s why products like Burger Shots and others are going to be part of our strategy.

Operator

Your next question comes from Jeffrey Bernstein – Barclays Capital.

Jeffrey Bernstein – Barclays Capital

Just one clarification and then a question, a clarification on the foreign exchange, I think there was a question about has guidance otherwise changed excluding the foreign exchange and you mentioned I guess it’s been reduced $0.10 due to foreign exchange. I’m just wondering whether – I’m assuming there was some foreign exchange negative impact in the guidance as of last quarter so I’m just wondering how much of the guidance reduction is due to incremental foreign exchange?

Then in terms of my question, I think with the comfort you have in the $350 to $400 net units in fiscal ’08 I’m just wondering, I know you guys talk about an 18 month pipeline, should we expect and increase in that target for fiscal ’09? I know you mentioned there hasn’t been any major credit concerns, I’m just wondering whether the international franchisees are signing up for accelerating that number or if you think you might pull back in the near term due to the broader macro pressures.

Ben K. Wells

With regards to our guidance, we have been pretty consistent. We used the rate that prevails at the end of each quarter to predicate our forecast on and there is the presupposition there that that will become the average rate and of course, if it deviates from that then we will have moment either up or down. As we look at it, we had $0.01 positive in the fourth quarter and a $0.05 minus in the second quarter for a total year-to-date of $0.04.

With regards to the availability of credit, the broader markets are still seeing monies go to those franchisees albeit at wider spreads. We’ve had some significant loans made to our system in the last 90 days, they continue to make and as we know we look out right now in the investment grade, the credit markets are beginning to unthaw and we think that is a positive event. I think there will be a perpetuation of that globally. You probably are well aware that the Bank of England today lowered their base interest rate by another 50 basis points and that will be viewed I think positively in that environment.

We are going to continue to see, I think, the availability of capital for the foreseeable future given the number of governments that are fixated on the availability of credit. Right now, I would say availability of credit is just one variable in the development program and that was one that I’m not worrying about as much as I was say six months ago.

John W. Chidsey

To answer your second question, yes I think it’s a save assumption that 350 to 400 – obviously, we’ll put our budget together for the year starting July 1 in the next couple of months but again, given the availability of the credit that we see for franchisees out there today, I don’t see any reason at this point why we would come to you with some markedly different number for what we expect for net restaurant growth but we’ll give you more update in the next call or two. But, I think that’s a good assumption for now.

Operator

Your next question comes from John Ivankoe – JP Morgan.

John Ivankoe – JP Morgan

A couple of clarifications and a question if I may, Ben, you mentioned commodities being stable in the second half of the year. I assume that’s exclusive of pricing and that’s flat commodity costs year-on-year? If you could say what the company store pricing would be for the second half of ’09 for the US that would be great.

Then finally, I just went back and checked the work from last year, store remodel costs were actually a significant negative in the back half of ’08, I mean over 100 basis points according to my notes. John, I mean you made a mention that that may be neutral in the second half of ’09 and I just wanted to make sure that was what you meant to say or at least I heard you correctly I should say and why that wouldn’t necessarily be a positive in the second half of ’09 which is at least what I originally thought it would be.

John W. Chidsey

What I said John and Ben can answer the other part, what I was saying is yes, our year-over-year comparability will dramatically improve in the back half of the year. I was talking about margins overall. In terms of commodity costs, I think you’re absolutely correct in terms of what we’re expecting in the back half of the year. The other questions just in terms of pricing, obviously we’re going to wait and see what the second half – what does happen with commodity costs, what happens sort of from the overall consumer environment before we come to any conclusions about how much pricing or when in the back half of the year we would take pricing.

I think as always I think we just sort of watch it month-by-month and decide collectively when we think the right time to move will be.

Ben K. Wells

Then, as far as commodities, yes I was looking at the raw material or the base commodity price as we look out. As we begin to get out in to the second half on a year-over-year I would guess that perhaps a 1% to 3% range on a run rate would be a good guesstimate as we begin to look out. But again, as we begin looking out in to the term, our ability to fix different contracts will play in to what we actually realize.

Operator

That concludes the Q&A session. I would now like to turn the call back over to Mr. John Chidsey.

John W. Chidsey

Well again, thank you very much for being on the call. Thank you for your interest and we look forward to speaking to you next quarter.

Operator

Thank you ladies and gentlemen for your participation in today’s conference call. This concludes the presentation. You may now disconnect.

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Source: Burger King Holdings, Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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