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Einstein Noah Restaurant Group Inc (NASDAQ:BAGL)

Q4 2008 Earnings Call Transcript

March 02, 2009 at 5:00 pm ET

Executives

Jeffrey O'Neill - Chief Executive Officer

Richard P. Dutkiewicz - Chief Financial Officer

Analyst

Matthew Difrisco - Oppenheimer & Co.

Michael Pohorzer - Sidoti & Company

Paul Westra - Cowen & Company

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the BAGL fourth quarter 2008 earnings conference call. During today’s Presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, March 2, 2009.

I would now like to turn the conference over to Mr. Rick Dutkiewicz, Chief Financial Officer; please go ahead sir.

Richard P. Dutkiewicz

Good afternoon, and welcome to the Einstein Noah Restaurant Group fourth quarter and full year 2008 conference call. I am Rick Dutkiewicz, Chief Financial Officer and with me today is Jeffrey O'Neill, our President and Chief Executive Officer.

Let me start by covering a few regulatory matters. I would like to note during our former remarks and in our responses to your questions, certain items may be discussed which are not based on historical fact. Such items, including statements indicating our belief, trends, plans, expectations, assumptions, anticipation, guidance, projections, estimates and the like should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. For more details please refer to our news release issued today and to the risk factors in our SEC filings.

With that out of the way, I want to acknowledge that this is just an inaugural conference call and as a result, we thought we would do things a little differently. Unlike prior quarters, we thought we have Jeff talk about the opportunities he sees at Einstein Noah and I will align his plan for 2009 and beyond. I will then review our financial highlights for the full year 2008 and talk in depth about the fourth quarter. Afterwards, we would be happy to answer any questions that you might have. With that, I will turn over to Jeff.

Jeffrey O'Neill

Thanks Rick and thank you all for joining us today. I know I have had the pleasure meeting many of you at two investor conferences back in January but for those who do not attend or listen to the web cast, let me introduce myself and more importantly discuss our plan for continued group at Einstein Noah.

Before joining the Company in early December, I was most recently the CEO of a publicly traded company in Canada, which is one of the largest KFC franchisees in the world. Prior to that, I was the president of Pepsi-Cola Canada, and actually was one of the first Pepsi-Cola employees to move to Chicago to work directly on the integration with the Quaker Oats Company after the division. My past experience has taught me to focus the organization; first and foremost, on revenue generating opportunities because all good things come from growing the top line. I believe that the role of the CEO and that of the leadership team is to ignite that focus and ensure that all key decisions are made from the top line point of view. Not that we will not maintain our focus and discipline and cost management because we will but it is amazing how quickly things fall in place once the top line has the necessary momentum.

I have also learned the value of discipline, operational focus that begins with measurement, consistency and accountability at the store level and that is another area of emphasis that placed on the organization as we realized our mission of building a best-in-class restaurant Company. My primary objective in leading this organization is to out-perform our peer group of companies in the five casual category and deliver consistent, reliable growth, and revenue and EBITDA for our shareholders and for our costumer standpoint, my objective is to ensure that our fresh baked products, friendly service, and neighborhood atmosphere remained second to none.

A brief review of some historical metrics proved my point of a growing annual unit volume and its corresponding effect on restaurant level contribution margin. In 2004, the average company operated restaurant generated 757,000 in sale and delivered $134,000 in restaurant level contribution margin yielding a 17.5% return. Since then, the Company has more than doubled the number of restaurants in January in excess of a million dollars in annual volumes while the number of locations that operate below the $600,000 level has been reduced by 80%. Across the entire system, 2008 average unit volumes were just north of $900,000 with restaurant level contribution margins of 183,000 dollars for a 20.2% margin return. This level of performance already places us among the top tier of our restaurant companies from a unit economic perspective. It also point to a real opportunity we have in upgrading units in higher performance level.

Most importantly the data shows that when we can move a restaurant above the million dollar level, the resulting margins exceed 20%. I firmly believe that we can rate our average unit volumes to a million dollar over the next three years and generate overall margins that could reach the 21% to 22% range by 2012. To get there, we are going to raise the bar on our promotional, merchandising and product innovation efforts to increase both trial and frequency of our brands.

From an external margin perspective, we are working to increase brand awareness and trial through initiatives such as direct mail coupons and limited time offers. As an example, we recently dropped the coupon targeting last our nonusers of the brand with value added coupons focused on free coffee s and free bagel Fridays. These initiatives are aimed at driving trial and increasing transactions while addressing the tough economic realities that category consumers are facing.

In addition, we are contemplating local radio and outdoor advertising in selected BMAs as a means to extend the reach in frequency of our marketing efforts. Within our stores we are examining merchandising promotions that will drive interest and traffic through loyalty programs and limited time offers and had begun to build a pipeline of exciting new products with plans to launch a number of this throughout the balance of the calendar year.

I personally tried all of these new products including our new 400 calorie menu that can attach to the great taste and appeal, but more importantly, we are in the process of consumer testing each of these opportunities to determine the consumer appeal and interest and are getting some great feedback.

To run about the customer experience, we will continue to invest capital in effort to enhance throughput, decrease wait times and improve order accuracy. Based on the data we have received, this investment is paying dividends.

We also remain committed to remodeling at least 45 of our current restaurants in 2009 because the economics are so compelling. At a capital cost of approximately $80,000, we are able to keep our locations fresh and relevant, while also generating an average sales list of approximately 2.2% as well as an approximate 50 basis point reduction in our cost of sales driven largely by investment in new technology to enhance our customer’s experience while delivering a cash and cash return in excess of 30%.

Other revenue building opportunities we are working on in 2009 include off premise sales. Our catering business grew substantially in 2008 and with our continued efforts to expand into other markets as well as our commitment to new technology and ordering processes; we believe we can double this business over the next three years.

As I said earlier, the Company is focused on growth mode and we plan to continue to expand our company-owned stores although more modestly in 2009. To that point, this year we expect to open 68 company locations and as importantly, we have a solid pipeline of opportunities in front of us which we can realize as circumstances allow.

We also plan to open 30 to 35 license stores and continue on a high margin path we have been on over the last couple of years. License stores will be added in venues like college campuses, airports, and hospitals. With regards to franchising, we have a substantial ongoing opportunity in terms of capturing a steady and growing royalty stream while creating greater awareness for our brands. In addition to Manhattan Bagel, which is our franchise brand in Northeast we also had begun expanding our opportunities for the Einstein Brother’s group.

Our franchise partners plan to open 68 new stores this year and it is our goal to have 50% of our stores franchised or licensed by 2012, up from around 34% currently. With a little more help from the credit markets we think take our agenda even further, encouraging current franchisees to execute on the stated growth plans more rapidly while also bringing new franchisees into the system. Our business model is certainly enticing the potential franchisees and we believe they are able to recoup their initial investment after three solid years of operation.

Before I turn the call over to Rick, I want to leave you with the following thoughts.

First of all, we are well positioned within the breakfast day part, which is perhaps a hottest segment within a restaurant industry, with an asset like business model that lends itself to solid returns in our capital investments.

Second, we have emplaced accelerated marketing merchandising and new product activities all designed to encourage new users and repeat business.

Third, we have opportunities for expansion from a Company operated franchise and license perspective; and fourth, we will continue on a prudent cost management course that has been a key part of the business over the last couple of years focused on controlling our controllable at store level as well as making investments in our stores when and only when the returns justify it.

I am thankful to be surrounded by a very dedicated senior management team with a proven track record of success both at Einstein and within the industry. We bring the sum total of these experiences to the table and further improving the financial performance of this Company.

Lastly, I would like also to say that I am interested in maintaining an open dialogue with all our stakeholders and will be available to answer any questions that you might have at the conclusion of our formal remarks.

And now, I would like to turn things over to Rick to talk more specifically about our Q4 and year end results.

Richard P. Dutkiewics

Thanks Jeff, and now I will briefly review our financial results.

For the full year 2008, we generated $413.5 million in total revenue which was 2.6% above the prior year. On a net basis, we added a total of 10 company-operated locations while our licensees added an additional 28. We also closed three non-core brand franchise locations and opened two Einstein Brother locations. We ended the 12-month period with a total additional 37 stores in the system, up 6% from 2007.

For the full year, system wide comparable store sales which include company-owned franchise and license locations for positive 1.4% on top of 4% growth in 2007. Net income for the year was $21.1 million in 2008 compared to $12.6 million in 2007. Overall, we were pleased with our performance and we feel our results underscore our ability to execute our plans successful in an otherwise very tough consumer and economic environment.

Specific to the fourth quarter, total revenue was down 1.3% to $103.9 million from $105.2 million in the prior period. We operated 37 more locations across the Company compared to a year ago, although the unit volume of products sold adversely affected the top line.

Company owned restaurant sales fell marginally by 2.5% to $94.3 million from $96.7 million, while comparable store sales were down 3.3% versus 3.2% growth in the prior year.

Fourth quarter system wide comparable store sales were down 1%. Franchise and license comparable store sales increased 8.5% while company-owned comparable store sales decreased 3.3%.

The company-owned reduction was comprised of a 7.6% reduction in traffic partially offset by a 4.6% increase in average check. The reduction in company-owned comparable store sales volume was due to several factors. First, it was a result of our conscious decision to reduce hours of operations. As you all know, these changes made in the second and third quarters of 2008 and we will begin to [lap] in the next several weeks. As we have discussed before, this was an efficiency move and had no adverse impact on operating profits of the restaurants themselves.

Second, this all occurred against the backdrop of the current economic downturn of which we are all aware. Year 2008, AUV was $909,000, based on total store weeks of 21,701, and the weekly per store sales average for all of our company-owned restaurants in the fourth quarter was $17,212, while the average check was $7.46.

Please recall that we have a significant presence in states that have been most impacted by the recession, namely Southern California, Arizona, Florida, and Nevada. Company-owned restaurant gross profit was $18.9 million in the fourth quarter of 2008 compared to $20.7 million in the same period last year. Costs of goods sold were essentially even as a percentage of restaurant sales at 29.8% and we are managing our exposure well in the current environment as I will now explain.

We have now locked in the costs for over 90% of major agricultural commodities at prices that are virtually flat to 2008 which is above the 60% we spoke about on our last conference call. These include the majority of our wheat, coffee and cheese needs as well as butter which is a proxy for cream cheese. But what is important, we will continue to participate on any downside on wheat and other commodities through our supplier relationships.

Labor cost fell 60 basis points to 29.2% of restaurant sales due to our heavy focus on maximizing efficiencies and appropriately staffing our locations during peak hours. Other operating costs were up 130 basis points to 10.3% of restaurant sales due to higher utility cost as well as higher credit card service charges. Rent and marketing cost rose by 60 basis points to 10.7% as a percentage of restaurant sales mostly due to the fact that we had several new stores in our system.

Manufacturing and commissary revenues increased 12.6% to $7.7 million in the fourth quarter of 2008 compared to $6.8 million in the same period last year. We believe our commissary business should continue to grow in tandem with the expansion of our franchise and license business as well. Manufacturing and commissary growth profit experienced a $1.6 million swing to $700,000 compared to $900,000 loss in the same period last year so we clearly executed well here.

Franchise and license revenues grew 11.1% to $1.9 million from $1.7 million in the fourth quarter last year reflecting the additional 27 locations year-over-year as well as an 8.5% increase in franchise and license comparable sales. Our general and administrative expenses fell $900,000 to $8.4 million compared to the same period in 2007. The overall decrease was primarily due to a reduction in corporate compensation and benefit cost, lower spending on travel, reduce sales and use tax and reduction in non-cash stock-based compensation expense.

For the full year, we came in at $36.4 million in G&A and as a percentage of total sales were below 10% versus above 10% in prior years. I think the key for us frankly is how we took our long hard look at the activities within our organization and adjusted them to reflect today's economic environment. Depreciation and amortization expense increased to $3.9 million in the fourth quarter of 2008 from $3.3 million in the same period last year to an additional cost related to our new stores and upgrades.

Overall, we are pleased with our income from operations to quarter of $7.5 million and net income of $5.8 million considering the current economic climate as well as the $1.3 million we incurred during the quarter for senior management transition cost. Net income was $5.8 million and diluted EPS was $0.36 for the fourth quarter of 2008. The senior management transition cost on a diluted per share basis was approximately $0.08.

In our last call, we discussed the prospects for releasing our valuation allowance in the fourth quarter which currently reserves 100% of our deferred tax assets. As the recession deepened for the US economy in the fourth quarter, we decided not to release our valuation allowance of approximately $66 million because of the economic uncertainty surrounding 2009.

For the full year, our streamlined operating activities resulted in a 73% year-over-year increase in net cash provided by operations to $43.1 million. At the end of the fourth quarter, this enabled us to build an unrestricted cash and cash equivalent balance of $24.2 million. We continue to be focused on generating free cash flow and building our balance from now until June 30, 2009 which is the day our $57 million Series Z preferred stock matures.

Over the last several months, we had had a lot of questions regarding our plans with respect to the Series Z preferred stock redemption. Over the past year, we have focused on generating free cash flow and accumulating unrestricted cash. Our goal was and still remains to pay down a significant portion of the redemption on June 30, 2009. To the extent that the Series Z preferred stock is not redeemed in full on June 30, 2009, the unredeemed portion requires additional redemption in an amount that is 250 basis points higher than the highest rate of our funded debt.

As of today, the highest rate in effect is 5.52%. With these features in place, we plan to make the significant payment on June 30, 2009 as well as additional redemptions until the Series Z preferred stock has been redeemed in full. It is important to understand that this is redeemable preferred stock, not debt, within our credit facility. As such, we have considerable flexibility for redeeming the preferred stock. Please note that on February 27, 2009, we made a mandatory prepayment of $7.2 million on our senior notes. This payment will reduce our unrestricted cash as well as our leverage ratio on the dollar per dollar basis.

In essence, we now have approximately $80 million of senior debt outstanding. If we recall from our debt agreement as filed with the SEC, the ratio of debt to EBITDA must be below 2.75 times. At the end of the fourth quarter, we were less than 2.2 times. Therefore, with our unrestricted cash balance as of today plus the added cash in the next two quarters that I have just described along with the $13 million in excess borrowing capacity under our revolver, I am confident that we have a solid action plan in place.

Finally, we were locked in a fixed interest rate on $60 million of our first million term loan at 3.52% plus inapplicable margin. We also benefit from being able to choose between the lower of LIBOR plus 200 basis points and prime plus 100 basis points which is a significant benefit in a volatile environment for the remaining balance of the debt.

That is the summary of our financial results. Both Jeff and I are now ready to answer any questions you might have during the Q&A session. David, please open the lines for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Matt Difrisco - Oppenheimer & Co.

Matthew Difrisco - Oppenheimer & Co.

I guess just looking ahead on a little bit of guidance to kind of figure out how 2009 might look, was there anything you need to meet, commissary sales or manufacturing sales in the fourth quarter that might come back into the first quarter or with respect to that 91% cost of good sold, it looks like it was a little stronger than I guess you had in the past.

Richard P. Dutkiewicz

Yes, Matt this is Rick. Frankly, the commissary operations couple of things happened in the course of the year. We made some product changes at some of the commissary and actually got out of some business that we had done on a third-party basis and the store standpoint and in addition, we believe we have a really good team that is now managing both our manufacturing and commissary operations. They are very focused. They are focused on profitability and I think the final pieces that we are able to take some pricing in 2008 that also restored us to a profit standpoint.

Matthew Difrisco - Oppenheimer & Co.

Okay so that will be a profit centered then going forward and something that grows with the growth of the franchise network?

Richard P. Dutkiewicz

It absolutely grows with the franchise network and we think we got that shifts studied in. It has been generating nice profits.

Matthew Difrisco - Oppenheimer & Co.

Okay. I always thought about of something maybe close to running to zero given you are making a royalty rate as well but I guess it is okay to take a little price there.

Richard P. Dutkiewicz

Yes, it is.

Matthew Difrisco - Oppenheimer & Co.

Okay and then you said 2.75 is the debt ratio and you are at 2.2 right now.

Richard P. Dutkiewicz

That is correct.

Matthew Difrisco - Oppenheimer & Co.

The $7.3 million that you had to pay that is already taken out of the $24 million?

Richard P. Dutkiewicz

No, that is not. That was subsequent to yearend, Matt.

Matthew Difrisco - Oppenheimer & Co.

Okay, so you have $17 million in cash and $13 million in the credit facility level?

Richard P. Dutkiewicz

Well, adjusted for that date and time, that is correct. That is what the numbers were.

Matthew Difrisco - Oppenheimer & Co.

Okay, so in theory, if you were to carry incremental like $20 million or so on the preferred, let us say you left the balance to $20 million to $25 million, you have anywhere from $1.5 million to $2 million worth of interest over a 12-month period.

Richard P. Dutkiewicz

Yes, additional redemption is what that is referred but that is correct. That is you take the 8% times remaining balance. As you are well aware, we are also able to continue to make redemptions against that as we go through the year with the excess cash flow that we generate.

Matthew Difrisco - Oppenheimer & Co.

Right great and then can you just talk a little bit about what you are seeing in your volumes and your new stores. I guess in the fourth quarter, you start between average weekly sales and stores sale implies that the new stores probably opened up a little softer. Were they market specific or were you designed to make them a little smaller market? Are they development markets for the brand is not known as well in each center? Can you explain maybe the cause for those volumes to be a little lighter in the fourth quarter from most new stores?

Richard P. Dutkiewicz

Sure, frankly a lot of them opened pretty late in the quarter, Matt, so I think that was more of phenomenon just to that holiday shopping season so we have very few of them. We even opened more than four to six weeks. We also consciously decided not to have what I call the broader grand openings at that time because we thought it would got lost in the noise around the holidays. So we are now going back end with our teams and doing a lot more of those grand openings.

Jeffrey O'Neill

Yes, just to build on that Matt, this is obviously Jeff O'Neill. What we have gone back to do now is we got sort of the operations team are working on kind of a launch team. We are now going back into those stores and really building as Rick said, a launch schedule to get in the market place with a little more bang. We all know that certainly December was softer than any of us had anticipated in the restaurant business and so we had a little bit of impact on that and then also regionally, we opened a number in the Midwest, in and around Chicago and of course there was some weather that happened in there as well that had does an impact.

But overall, we remain optimistic and we know that they will certainly get on track as 2009 kicks off.

Matthew Difrisco - Oppenheimer & Co.

And then can you just follow on how are current trends? Have they picked up on that sluggish December?

Jeffrey O'Neill

Yes, we continue week on week to build from there and overall when we take a look at our trends, we are just more recently, we have dropped a mail coupon and we have been quite happy with the response that we received from that. We build transactions quite nicely over the last couple of weeks and continue to sort of build momentum as the quarter goes on.

Matthew Difrisco - Oppenheimer & Co.

Okay. So, I guess just to sum up your marketing initiatives going forward and lapping now, the hours being reduced, would it be then fair to say that success from these or your goal is to be positive comps throughout 2009?

Richard P. Dutkiewicz

I think it is a little premature to call the comps for 2009, Matt. I think from our standpoint, really the focus that we have got is going against this more from a transactional standpoint. Jeff spoke about the direct mail coupons. We sought some really nice momentum with those but this is a very tough and very choppy economic environment.

Matthew Difrisco - Oppenheimer & Co.

Okay and then just last two questions. The freights, I know I think I might have missed that within the average check that you have running through the first quarter of 2009 and what you have had in the fourth quarter embedded in that average check and…

Richard P. Dutkiewicz

Yes, a little north to 5% was embedded in the fourth quarter. If you recall, we rolled over the pricing that we took last year at the beginning of February which is our period two and that number was almost 6% of pricing. So, we have now rolled over that. We have not yet taken pricing this year on Einstein. We are being patient with the respect to that with a lot of focus around building transaction growth. We took a modest price increase at Noah's. So, it is a more of a wait-and-see right now Matt.

Matthew Difrisco - Oppenheimer & Co.

Okay and then last question, just to get to that 50/50 goal of franchising company, do you have a plan or a strategy or are you marketing some company market, company stores potentially to move to that market a little faster and also raise some cash?

Jeffrey O'Neill

When you really take a look at what we have done in the last couple of years both from a franchising and licensing point of view and the number of stores that we have opened up, quite frankly just by continuing on in that trend with about 30 to 35 license building on the franchise that we quite comfortable that getting to that 50 is not anything that we have to do more than what we have been doing.

Obviously you need a little bit of break from that from an economic point of view and then in the capital market if you will and we got a break there and we are well within kind of reasonable as to getting that 50/50.

Richard P. Dutkiewicz

Yes, Matt and aside to that, we now have seven development agreements for Einstein Brothers. We recently signed an additional one for five units kind of in that area above deep southern California, just above San Diego and those development agreements for Einstein alone have an additional 47 stores to be open over the next few years.

Operator

Your next question comes from the line of Michael Pohorzer - Sidoti & Company.

Michael Pohorzer - Sidoti & Company

I am just wondering what is driving the much better same store sales performance at the franchise and license locations versus the company-owned.

Jeffrey O'Neill

Well there is a couple of things that as we look at that. One is as Rick mentioned, the store hours decreased in our company-owned stores so that is something that we are lapping from a company-owned point of view than we are not from a franchise licensing point of view. The second one is when you look at licensing historically it has been a little bit of a slower billed so that year one lap is generally stronger than obviously against our base stores. We have been working really hard in both our franchise and licensing team in top trade training to help to build on that but those are really kind of if you look at the early laps and things are some of the differences between the two. So nothing sort of inherently in the base more in kind of the upfront billed from the licensing stores.

That said, we are really pleased with the locations and both in the college campuses and in the airports and we are very pleased and we are quite bullish specifically about licensing than obviously about our how we touch on the franchising development.

Michael Pohorzer - Sidoti & Company

If those franchise and licensed locations are still performing very well without the reduced hours, do you think that maybe that means that the company-owned that get back the hours that they use to be at.

Jeffrey O'Neill

It is more of an impact that they have opened on hours that are similar to what we reduced to. So we got the learning from our company-owned stores. We got to lock that company to company but as we open the franchise, as we talk to the franchises and we open the license stores, we are able to build those hours in upfront so they do not have the overlap. It is more I guess to the point.

Operator

(Operator's instruction) Your next question comes from the line of Paul Westra - Cowen & Company.

Paul Westra - Cowen & Company

A follow up question first on the menu pricing, does that mean you have zero pricing on the Einstein brand as of this week and at this point, do not plan on any going forward?

Richard P. Dutkiewicz

We had no pricing on Einstein starting the beginning of period two call which is the beginning of February. Like I said earlier is that it is our intent right now to continue focus on transactions and we will keep an eye to what is going on both internally with our own stores as well as what is going with Noah and competitors. We want to be a little more opportunistic because of the work we did on commodities. We were not forced to have to take pricing this year.

Paul Westra - Cowen & Company

Okay and then a follow up question because I know, a lot of times on the wheat portion of your commodities, I know you mentioned all of your commodity back in slight year-over-year. On the wheat piece, can you explain as we look at to 2010 assuming the market sort of flattish where it is now, what type of perspective impact or benefit 2010 would look like and also long way out.

Richard P. Dutkiewicz

No, Paul, frankly that is a great question. We continue to look at that. I mean fundamentally you are seeing close to in round numbers from an average standpoint amongst the $1.75 to $2 just on that per bushel cost of wheat so as we look at 2010, that for us is going to be an enormous opportunity. I think the second piece when we talk about the flattish is that there is still some opportunity within basis and if you recall, that had been holding itself at levels frankly that we thought were a little unwarranted recognizing what the stocks to use where at.

We are now starting to see some cost come out of that so that will provide opportunity for 2009 as well as a little bit of the fourth quarter. We have not taken all of our coverage out in the fourth quarter of 2009 but you will spot on here and remember if reach dollar drop that you get in a bushel of wheat, for us it equates to about $1.5 million in annualize spending. So, 2010 looks like a real big opportunity here.

Paul Westra - Cowen & Company

Great and then just light hand question, for the fourth quarter, the operating cost number was running high with utilities that seems to be extra high. Are you going to see any new line item as we head..?

Richard P. Dutkiewicz

Yes, 2009 especially has been going on in energy. We think there might an opportunity for us so kind of stay tuned on that.

Paul Westra - Cowen & Company

Any specific market coming down for you that you can point to and then could you give on the credit card services, were there any increase in the usage of credit cards that might be playing a number?

Richard P. Dutkiewicz

Yes, right now Paul we are running about 50%, 50/50 transactions cash to credit card. That certainly is going up to my historically 40%. We just see in freight run are different. A lot of gases are just opting for either that debit card or that credit card even on small ticket purchases around the $7 range where we were at.

Paul Westra - Cowen & Company

And on the utility side, have you seen any explicit benefit for..?

Jeffrey O'Neill

Not, as much yet Paul. We did do some out purchases on our utilities at lower prices but not enough quite yet. We still think there is more opportunity there.

Paul Westra - Cowen & Company

Okay and the last question I think for Jeff, your offline initiatives, you mentioned the doubling of the [credit] that you are currently running at. I know your predecessor had some initiative with some centralized efforts in marketing. Could you just get on what you think the opportunity there?

Jeffrey O'Neill

Well, we still had from catering point of view, it really is to a large degree still in its infancy in many markets but we have really placed a couple of key initiatives. First of all, we have added four people into sort of the catering management side of things which looking specifically at building sales. We rolled out into five markets, Albuquerque, Indianapolis, DC, Tampa, and Las Vegas which we have not been in. So, those are all incremental builds for us for this year. We have invested in some technology around the internet driven ordering which we really believe it is a real opportunity throughout there. Actually, we are testing that now. We will test that kind of the first half of the year before we rolled it out and we have also placed a real focus around national accounts and we have had some good progress in the markets that we have been in to look at not only just store-by-store or city-by-city but we will look at some of these big national accounts and try to get into there, catering business on a national basis.

We are also evaluating some new areas in around hot food products and offerings both at breakfast and lunch and we think that is an opportunity as we go forward, maybe that the end of this year to do some testing, but also in the out years and that is how we feel we can get to that doubling at a business.

Paul Westra - Cowen & Company

And what is the current percentage now?

Richard Dutkiewicz

We are just shy of 5% that can get around 4% or 5%, yes.

Operator

I have shown there are no further questions in the queue. I would like to turn the call back over to management for any closing remarks.

Jeffrey O’Neill

No. I think just the key comment from my point of view, just appreciate the questions and as we go forward, as I mentioned from our marketing point of view we really focus on building those transactions, as Rick said. We have got a good pipeline and new products, and have a new product that is eminent. I would love to be able to talk a little bit more about it today but that is something that we will talk about on our next call on Q2, and I really believe that sort of building those transactions and attracting new users is going to be a real opportunity for us going forward. So, look forward to talking to all of you as we progress during the year.

Operator

Ladies and gentlemen, this concludes the Bagel fourth quarter 2008 earnings conference call. This conference will be available for replay after 6:00 eastern standard time today, through March 16th at midnight. You may access the replay system at any time by dialing 303-590-3030 or toll free 800-405-7325, and answering the code number of 3989731. We thank you for your participation. You may now disconnect.

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