Sonic Corporation F2Q09 (Qtr End 02/28/09) Earnings Call Transcript

Sonic Corporation (SONC)

F2Q09 (Qtr End 02/28/09) Earnings Call Transcript

March 23, 2009 5:00 pm ET

Executives

Pat Watson – Corporate Communications

Cliff Hudson – Chairman and CEO

Scott McLain – President

Steve Vaughan – VP and CFO

Analysts

Matt Difrisco – Oppenheimer

Steven Kron – Goldman Sachs

Steven Rees – JP Morgan

Jeffrey Bernstein – Barclays Capital

Chris O'Cull – SunTrust

Joe Buckley – Bank of America

John Glass – Morgan Stanley

Nicole Miller – Piper Jaffray

Robert Derrington – Morgan Keegan

Thomas Forte – Telsey Advisory Group

Keith Siegner – Credit Suisse

Greg Ruedy – Stephens Incorporated

Presentation

Operator

Good day, and welcome to the Sonic’s second quarter conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Pat Watson. Please go ahead, sir.

Pat Watson

Good afternoon, everyone. This is Pat Watson with Corporate Communications. Sonic is pleased to host this conference call regarding results issued this afternoon for the second quarter of its fiscal year 2009, which ended on February 28, 2009. Today's audio and video presentation may be accessed at the Investor section of the company's website www.sonicdrivein.com.

Before we begin, I would like to remind everyone that management's comments in this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risk.

It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this afternoon and the company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that management's remarks during this conference call are based on time sensitive information, which is accurate only as of today's date, March 23, 2009. For this reason and as a matter of policy, Sonic limits the archive replay of this conference call webcast to a period of 30 days. This call is the property of Sonic Corp. Any distribution, transmission, broadcast, or rebroadcast of this call in any form without the express written consent of the company is prohibited.

With those announcements I'll turn the call over to Cliff Hudson, the company's Chairman and Chief Executive Officer. Good afternoon, Cliff.

Cliff Hudson

Good afternoon, Pat, and thank you for the introduction. Good afternoon and welcome to all of you who have joined us on the telephone here this afternoon or online. I want to spend a few minutes kind of going through an overview of some of the items that I think and our management team is focused on is some of the most important that will help you understand where Sonic is right now. And after I do that, I’ll turn it over to my senior cohorts here.

I want to spend some time talking about recent initiatives and also some future initiatives that have been designed to augment the unique and differentiated product and service that Sonic has been known for for decades and initiatives that are also meant to ensure that we are meeting and are anticipating our customers’ needs and wants. Secondly, I want to say to you that with many of the challenges that we are confronting in our business, both our employees and our franchisees are working very much in a focused way with one goal in mind, and that is for raising the success of the Sonic brand.

Some of the challenges that we have confronted in the near past, we are making good headway on them. We won’t turn them around completely overnight, but we will reach a good level of success. And I think you will see some of the things we talk about today moving in just that direction.

The third point I’d like to make is that while the last few quarters have been more challenging for us than the business has been in a long period of time, we are confident that the actions we are taking will continue to enhance long-term competitive position of the company and the position of the brand. And it will benefit our customers and our stockholders over time.

There really are a number of reasons and number of factors that we believe give good reason for optimism, particularly as we look to the latter half of this fiscal year. We’ve begun to see some pretty good progress on a number of strategic initiatives that we outlined at the beginning of the fiscal year that we are focused on improving sales and improving operations and improving the company’s earnings performance. And we will talk about these in this presentation. They include things like the Everyday Value Menu, the refranchising initiatives that we’ve outlined for you late last summer, and most recently, our repurchasing of Sonic debt. In this case, $25 million of our own debt, which we were able to buy the discount.

So I want to talk about those, but let’s kind of move to some basic elements of the release that you’ve seen come out today and specifically the same-store sales performance for the system and for our partner drive-ins. For the second quarter of our fiscal year 2009, you see now that system-wide same-store sales were off about 3.6%. And this included a decline in partner drive-in same-store sales of 6% and franchise drive-in sales of 3%.

It’s worth noting, though, that we had one last day in February this year, February 2009 versus 2008. And the effect of that one last day of operations affected comps on the quarter by full percentage point. So, one percentage point, which would leave system -- rather leaves franchise same-store sales at about a negative 2.

For the second quarter, looking to traffic and check, system-wide traffic improved for the first quarter, but decreased slightly versus prior year by just 0.2%. And if you look at it on the same 28-day comparison, so knocking out the leap year day a year before, 28 days versus 28 days, we actually saw a traffic increase in the quarter. We did see an average check decline of about 3.4%. So, a mix in terms of how we are having to look at the business now versus times of the past where we were focused on primarily sales, driving profitability, and now with a -- particularly with the value of customer. Talk about that more later, but with the value of customer, we are having to focus on, first, driving traffic and then with other initiatives driving sales and then driving profit.

The Everyday Value Menu that we rolled out at the end of December has really been a successful part of driving positive traffic across multiple day parts. And as we will discuss later, we think the Everyday Value Menu coupled with premium product promotions will drive both improved traffic and check. As a matter of fact, with the implementation of the Everyday Value Menu, we’ve seen an increase in the percentage of happy hour drink orders that include other items. In other words, a year ago they may be coming in the afternoon for a drink, but now they are including items of the Everyday Value Menu attached to the orders. So we’ve seen the afternoon grow disproportionate to most of the other day parts with the implementation of Everyday Value Menu.

In limited time offers, so in contrast to the Everyday Value Menu, the premium product offerings that we’ve done in the past are typically part of our monthly promotions and that is before the implementation of the Everyday Value Menu, and those are usually comprised about 4% of our overall sales. So our recent reduced reliance on the limited time offers of premium products, so reducing that reliance on those less of them in the past in conjunction with a little cannibalization from the Everyday Value Menu and then a small decline in combo meal sales, all of those have contributed to the decrease in the sales in average check we are experiencing. So those elements have come together in that way. And it also provides a base of how we will continue to attack that to drive traffic sales and profitability in the future.

I want to spend a few minutes talking about some key system challenges that we have had and talk about it in that context, with those two system challenges primarily being on the -- as it relates to the entire system process of driving same-store sales. But then more locally, as it relates to performance within our company, the partnership drive-in performance, partner drive-in. And so when we look at the shortfall in the performance of profitability of this quarter, you can raise the question of whether it’s a brand issues. You can raise the question of whether it’s a fundamental thing about our business system-wide and it’s appropriate to raise it. But the answer is, no, that’s not the issue.

We have a sales issue, but the bigger shortfalls that relate to income production has to do with our partner drive-ins. And therein kind of lies the more challenging effort to drive profitability prospectively. But let me deal with those in the order of their raising [ph]; the system-wide sales and then the partner drive-in. The initiatives that we have designed in the recent past to address the issues are designed to focus both on some near-term driving of sales, but also provide a foundation for long-term success.

So the first challenge in developing and implement system marketing initiatives drive sales in this tough environment. To improve the same-store sales growth, we’ve started working on more balanced promotions than we’ve seen in the past. In other words, historically what we have done is we’ve provided differentiated product, nice product, differentiated versus our competition, periodically value promotions. But we’ve done all of this in the context of limited time offers.

And as you will see in the next few slides and you know full well anyway, the consumers are really very focused on value today first and foremost. So our recent implementation of the Everyday Value Menu has, in fact, had the effect of driving traffic. It has improved the traffic performance we’ve had previously, most recently. And as the Everyday Value Menu awareness of consumers grows, our objective, our plan is to complement it by offering premium product promotions to improve average check. You will see that development over time. Though in the recent past, you’ve primarily seen the focus on the Everyday Value Menu.

In the Fall of 2008, we also implemented a pricing strategy for all drive-ins in our system. We are using an outside third-party firm and franchisees across our system have received information that is related to their specific trade area by store, with pricing strategies designed to blunt any adverse impact. They might otherwise have on traffic or check. And this is something I’ll talk more about in a moment with our partnership drive-ins. That pricing strategy is something that has intended to help our system to avoid some of the challenges that we’ve had in the last year or more with our partnership drive-ins.

Finally, we’ve been working over the past six to nine months on implementing tools that can provide all the operators in the system, but us as a franchisor, with direct real-time customer feedback. So this is an interactive voice response or IVR tool. And we implemented it last October. And it really has succeeded in providing us with a much richer and more detailed feedback directly from our customers. And we are in turn in a position to be able to use that to improve operations and also improve products that are offered at the drive-in level.

We called it initiative fan track [ph], and you may periodically hear us refer to fan track. It is our internally branded IVR initiative, and it will help us ensure that we are in touch with what our consumers want and expect from us, and it will also help us provide insight into their priorities and decision points for eating out. So it’s a fascinating tool that our operators really across the system have embraced very rapidly and should be significantly impactful on our business for a long time.

Now, before going into the next portion of the discussion, I’d like to talk a moment about the reasoning behind implementation of the value, some of the background might be helpful, though most of it is probably not going to be surprising to you. In May of 2008, the NPD Group, which produces the CREST survey -- NPD conducted a custom survey to find out what kind of -- rather what customers were looking for in this economic environment.

And the overwhelming response, the overwhelming answer is you can see, and as you probably already know, was the value. And in retrospect, where the economy has developed as the year went along, that is not surprising to any of us. The survey was taken mid-year last year. And the nature of that response only grew as the year proceeded.

So then the question about if that’s what customers wanted or consumers wanted, where was the sales growth coming from? And according to CREST and the NPD Group, for the quarter ended November, growth in the QSR business came from value offers. And the data -- the same data reinforce what we had previously seen and confirmed the need for the value menu thus has rolling it out at year-end. And consumers were looking for it. And in fact, it has helped drive traffic in our business substantially.

So based on this initial data, we began to work on our Everyday Value Menu back in late summer of 2008. And understanding that we historically had not had a portion of our menu dedicated to providing just the value proposition, obviously it’s important to provide options to a broad range of consumers to make sure that you can drive traffic or, you might say, to avoid losing traffic to competitors, particularly if it is based on a perception of value and a perception that we were not offering value.

The value menu obviously is designed to provide options for everyday part, and it’s flexible not for building an entire meal or simply coming in to snacking in the afternoon or late evening or whatever someone might choose to do that. The result with the implementation of it is the Everyday Value Menu is driving positive traffic across multiple day parts, and it comprises right now of approximately 10% of our sales. And we’ve seen that fairly steady for several weeks now at 10%.

The other thing I’d say is that the Everyday Value Menu did not have an impact, has not had an impact on food and packaging costs when compared to the first quarter. And we continue to see very little cannibalization of other parts of the menu, and we’re very pleased with that. Customers -- general consumer awareness of the Everyday Value Menu, the Sonic Everyday Value Menu is growing. And we will continue to invest marketing dollars promoting this in the future and then evolve that marketing strategy.

So, not all the consumers are looking for value at a dollar level, and that has played well with where we have been historically. Some consumers look at value as a premium sandwich or a product at a lower price that they may get in casual dining restaurant with something more in line with what we’ve done historically. Over the next few months, we will be shifting some of our marketing dollars to promote premium quality products at a higher price, and then you would have seen on the value menu, of course, that aiming at a different customer segment in the value menu is designed to attract. And our expectation is that we will be able to achieve positive sales through this balancing of the value and then also more premium products, the Everyday Value Menu to drive product traffic and premium products to drive check size.

Right now, we are in a period where we have been investing more of our marketing expenditures or media expenditures primarily to build awareness of the Everyday Value Menu. And this has in turn limited our ability to promote our premium products that were really more well known for as a brand. So, as we move into our seasonally stronger months, spring into the summer, we are going to be able to approach a more balanced strategy with the nature of product promotions and use of media than we have in the last several months.

Now, when I referred earlier to the challenges in terms of driving sales, one of the more complex challenges clearly has to do with boosting our partner drive-in performance. And we focus in certain key areas to try to rewrite that shift, the first of which deals with the service component, the service provided by our partner drive-in. So, in referring earlier to the fan track, the IVR program, the IVR tool that we’ve implemented in the system that has been implemented in our partnership drive-ins as well, as you would expect, and it’s quickly giving us a level of data that we’ve not had historically about what’s happening with these operations with speed, with food quality, with cleanliness of the lot, the customer’s overall satisfaction, the whole series of areas, fields of analysis that allow us to measure where we were, where we are, how we are doing versus franchisees, how one partnership drive-in is doing versus another, how we are doing by day part, by day of the week. It’s a tremendous tool, and it’s helping us improve service at the store level and will do so going forward.

As it relates to pricing in our partner drive-ins, this is in the ’07 going to ’08 time frame, a challenge for us with some of the pricing strategies utilized. And as I mentioned previously, our partner drive-ins have implemented the tool provided by a third party service provider related to pricing. And we are confident that over time -- actually we’ve already seen some impact, but over time that this will ensure more consistent and stable menu pricing strategy.

So, service and then pricing; next, staffing. We have restructured substantial amounts of staffing at store and supervisory level in our partnership drive-ins. We’ve simplified and restructured their bonus, their incentive compensation to focus more simply on customer service and more narrowed questions regarding customer service. And that we’ve also implemented a tip credit wage system in our partnership drive-ins that in turn allows us to take the savings from that and put it back into additional staffing at the store level. So there are series of initiatives from that standpoint that we believe are helping us with the staffing standpoint, which in turn clearly should help from a service standpoint with the consumer, and we should be seeing the impact of that over time.

Another initiative we laid out last year, and I made reference to this earlier, has to do with the refranchising of our partnership drive-ins. So we’ve had substantial expansion over the years with operations running from parts of the Western United States. At one time, I think it’s far west to Salt Lake City and then it’s far east as Florida and Virginia and have built the operations to almost 700 units.

We have come to the conclusion that we are going to have to go about that differently and perhaps came to that conclusion a little late. But nonetheless, focusing first on those stores that are more underperforming and quickly reason to believe that if we can put those in a local operator’s hands, they will have key ownership on the ground in those markets and will attack the core performance that the brand will be better represented, and so this is why we are focusing on those markets first.

In earlier quarters we announced the completion of 21 drive-ins we had refranchised since September 2008. And so as of today, I think I made reference earlier that we have refranchised another 90 drive-ins to be -- those transactions to be closed. Probably one already has and the other two will in the next 30 days to close during our third fiscal quarter. This will bring the total number of stores that we’ve refranchised to 111. These are being done with both new and existing franchisees. And I think this shows -- should show, one, the earlier concerns about liquidity and the sale of these has not been an issue. Two, the interest by our existing franchisees and folks new to the system. The interest in the brand is high. And so we have not had difficulty structuring transactions to move these along.

We are also engaged in ongoing negotiations for the refranchising of additional stores in additional markets and believe that we will have some other transactions that will ultimately lead our partnership drive-in group, our owned group with a narrow group of stores that are currently operating more successfully and that our ownership group -- I mean, our partnership group would be able to move to another level rather than having to focus on the broad nature of problems that they have had recently.

As we complete those transactions, we will evaluate the best use of the franchising, the refranchising proceeds that we receive. Obviously today we’ve announced the pay-down of some of our debt and whether we -- I should say, they are repurchase of debt and also the reduction. So whether we do use it for simply paying down debt, repurchasing debt, or other shareholder initiatives, we will do it in a way that helps to build the value of the company. And given our strong cash flows, we believe we will be in a position to pursue those, and we will do so on an opportunistic basis.

I would also like to say to you, since the performance of our partnership drive-ins began to decline, our management team has explored a variety of strategies to pursue both the sales and operations performance for the benefit of our customers, our operators, and for you, our shareholders. And I believe these initiatives we’ve outlined today should give you some confidence that we are attacking that in a way in some areas we will have near-term positive consequence, but we will also have ongoing, more long-term positive consequence.

So going forward, we’re going to remain focused on working through these challenges, tailoring various product offerings that resonate with consumer tastes and preferences. We’re going to be implementing initiatives that not only position us to adapt to today’s business operating environment, but also work to successfully transition us from a regional national brand over the near to mid-term.

With that, I’d like to turn it over to the President of our company, Scott McLain.

Scott McLain

Thank you, Cliff. Our overall franchise development activity remains relatively solid, especially in line with general economic conditions and the turmoil in the credit markets. Our franchisees opened 24 new drive-ins during the second quarter and relocated or rebuilt 12 drive-ins, slightly fewer on both fronts than in the second quarter a year ago. During the first six months, 58 franchise drive-ins opened and 31 relocations and rebuilds were completed. So, overall development activity was basically flat with two fewer new drive-in openings offset by two more relocations and rebuilds than the same period last year.

Our franchisees also completed 112 retrofits in the second quarter and 240 for the first six months, which puts us at roughly two-thirds of the system with a new look. We continue to have a strong pipeline for future development with almost 1,000 drive-ins scheduled to open over the next several years, almost 50% greater than where we stood just three years ago.

However, as was the case in the second quarter, our near-term development is clearly going to be challenged by the effects of the difficult credit market. We’ve yet to lose a project because of financing, and a vast majority of franchise development that’s planned for this fiscal year and next is being financed by local and regional banks and not national lenders. However, the slowdown in the credit markets has resulted in significant delays in almost every current project and will continue to affect the pace of our openings in coming months.

Projects are requiring a great deal more equity and significantly more time and effort to get through the system. This is particularly true for new franchisees who do not have a significant history of Sonic drive-in performance. We are working with franchisees to navigate these challenges and the increased credit standards we’ve put in place for new franchisees in 2006 have been a major benefit for the process. But the current environment continues to cause some near-term delays.

On the positive side, we are seeing real estate prices fall in most areas and in some places, including some of our new markets in the upper Midwest and northeast, by as much as 30%. Overall competition for sites has also diminished, and we are getting access to much better sites. More property is also becoming available for sale as opposed to lease, which greatly helps the financing process since it’s very difficult to finance a ground lease today.

In addition, construction costs are also decreasing as many contractors are hungry for work. These factors, together with lower interest rates, will be very good for us over the longer term, as they will only serve to increase our franchisees return on investment. And nothing is more important to our long-term development than return on investment. However, in such an environment, franchisees will often take more time than usual to make sure they have negotiated the best deal, which may further constrain our near-term openings.

Given all the uncertainty, it’s somewhat difficult to project openings over the next few quarters. However, we currently anticipate opening roughly 140 franchise drive-ins this year, equaling our performance of the previous fiscal year. Another positive factor is the continued strong performance of new drive-ins, with overall opening volumes averaging over $1.3 million, roughly 30% greater than what we were seeing three to four years ago.

We also continue to see even higher volumes in newer markets, including the first drive-in opened in the State of Wisconsin, which opened in the second quarter. We ended the quarter with 3,511 total drive-ins, and we are now operating in 38 states making continued progress on our way to becoming truly a national brand.

With that, I’ll turn it over to our Chief Financial Officer, Steve Vaughan.

Steve Vaughan

Thank you, Scott. For the second quarter, two components comprised our earnings per share of $0.14, which was down $0.01 from the same period last year. First, we earned $0.08 per share from the operating portion of our business, which reflected the decline in same-store sales compounded by deleveraging impact on restaurant-level margins. Second, we recorded a gain of $0.06 per share from the purchase of approximately $25 million in debt at a discount.

On a year-to-date basis, earnings per share totaled $0.26, including the gain on early extinguishment of debt. On an operating basis, our first half earnings per share declined 44%, excluding the gain. Soft sales at partner drive-ins were compounded by restaurant-level cost pressures and were a primary contributing factor in our disappointing first half performance.

Same-store sales at our partner drive-ins declined by 6% during the second quarter, while average unit volumes declined by 4.9%. The one less day of sales in February of 2009 adversely impacted second quarter same-store sales by approximately one percentage point, as Cliff mentioned earlier. We are pleased that excluding the impact of leap year, our same-store sales trend did show some improvement versus the first quarter. On a year-to-date basis, same-store sales declined 6.3%.

As Cliff discussed earlier, we have implemented a number of steps to address sales performance, including a stepped-up focus on improving customer service to revise management incentive programs implemented last summer; a new ongoing customer satisfaction survey, which was implemented system-wide in October; the full implementation of the new pricing initiative, which was completed in our partner drive-ins during November and is made available to all franchise drive-ins beginning this spring; the implementation of the Sonic Everyday Value Menu effective the beginning of this calendar year; as well as significant progress in shoring up our partner operations as demonstrated by the recent momentum in our refranchising initiative.

As a reminder, as we move into the third and fourth quarters, our same-store sales comparison is that partner drive-ins will become increasingly easier. Our franchising income, including franchisees and royalties, increased over $500,000 during the quarter. The net increase in franchising income was comprised of increased royalty revenue from new drive-in development, which offset the decline in franchise same-store sales.

The royalty rate for the quarter was essentially flat versus the same period in the prior year at 3.74%. A number of factors impacted our operating margins during the quarter. First, higher prices for several commodity items as well as a year-over-year increase in our hourly wage costs were exacerbated by a decline in same-store sales and resulted in a decline in drive-in level margins at 470 basis points during the second quarter.

Looking forward, we expect that the year-over-year increase in commodity costs will be 4% to 5% during the third quarter and then moderate further perhaps slightly higher to flat as we move into the fourth quarter based upon current trends. We are currently 100% locked in on our beef purchases through June and 77% locked in for July and August. All other major categories are largely locked in with the exception of ice cream mix, which we have not locked due to the high premium in the futures market versus the current cash price.

Overall, we feel confident that we will see only slightly higher year-over-year food and packaging cost in the third quarter and should see these costs to be flat or even swing positive in the fourth quarter. No major price increases were implemented at partner drive-ins during the second quarter. So our cumulative price increase continues to be in the 2.0% to 2.5% range. As previously discussed into our new pricing strategy, this represents an average. And our actual price increase in individual drive-ins will vary. This is in line with our new pricing strategy to customize price increases by trade area and fix smaller targeted increases throughout the year.

During the second quarter, SG&A grew 5% while depreciation and amortization declined modestly by 1.3%, reflecting the disposition of 17 stores in the first half of the fiscal year and moderated partner drive-in development. Our other income line item declined by approximately $700,000 during the second quarter. This decline was driven primarily by the unfavorable settlement of insurance claims related to Hurricane Ike during the quarter. We do not anticipate this type of other expense recurring in the second half of the year. Refranchising of partner drive-ins during the quarter did not result in a significant gain.

As previously mentioned, we have completed agreements for refranchising an additional 90 partner drive-ins in the third quarter, which will bring the total expected number of drive-ins refranchised for the fiscal year-to-date to 111. The gain information regarding these penny transactions will be reported in the third quarter. As Cliff stated, we were extremely pleased to purchase approximately $25 million of our fixed rate debt at a discount. The gain from this transaction is noted under interest expense. We also anticipate lower interest expense of approximately $1.3 million to $1.4 million on an annual basis as a result of this transaction.

As cash from refranchising proceed is available, we will continue to evaluate the most effective and best use of that cash for our company and shareholders, which include but or not limited to paying down debt, purchasing debt, increasing cash reserves, or other shareholder value initiatives on an opportunistic basis. One of the great features of our franchising business model is our strong operating cash flows. This feature allows us to maintain our capital expenditures at a reasonable level while also servicing our debt requirements comfortably.

As of the end of the second quarter, we had fully drawn the available amount of $187 million under our variable funding notes, with interest expense on these notes currently averaging approximately 1.8%. Interest expense for fiscal 2009 for this portion of our debt will depend on the changes in LIBOR and commercial paper rates. We are carrying approximately $45 million to $50 million in cash investments over and above our normal operating needs. We do not anticipate needing to utilize any of our cash investment, as our free cash flow after playing capital expenditures of approximately $55 million to $60 million and $38 million in mandatory principal payment is expected to be positive. We continue to exceed our debt compliance covenants, and we will anticipate that this compliance will continue into the foreseeable future.

Our tax rate was a little over 38% compared to over 36% in the second quarter of fiscal 2008. We continue to expect our tax rate to be in the range of 38% through the remainder of the year, although new developments could impact that rate in any given quarter. It is also important to note that we will be able to defer the taxable gain from the purchase of our debt for five years and then amortize that gain over another five years under provision in the economic stimulus package. While this provision does not show up in our income statement, it does have a positive impact on our cash flow.

This concludes our prepared remarks, and we will be happy to accept your questions.

Question-and-Answer Session

Operator

(Operator instructions) We’ll go first to Matt Difrisco with Oppenheimer.

Matt Difrisco – Oppenheimer

Thank you. I’m just trying to go through some of the comments and also the text in the release here. You mentioned that the day parts seem to be positive and that you hope in the future that the barbell strategy of pricing premium products and the value traffic driver are going to result in positive. Are you then saying that you are seeing right now positive traffic and positive comps overall?

Cliff Hudson

No, the comment was related to positive traffic, Matt, not positive sales.

Matt Difrisco – Oppenheimer

Okay. So, the tax refers to currently positive traffic, but not with the further momentum behind premium prices, you’re hoping to add that to the mix and monetize that traffic then in term positive sometime in ’09?

Cliff Hudson

We would hope to do that. That is correct. That is exactly what the strategy is intended to do.

Matt Difrisco – Oppenheimer

Okay. Would that also include then the margins? Are you looking for better gross margin of those premium products as well or is it gross profit dollars where you are just going to get a better leverage, or are they marked up higher?

Cliff Hudson

Well, they would have better operating margins in the Everyday Value Menu items, Matt. And I think if you were to see our sales turn positive, obviously that would have a major impact on our margins.

Matt Difrisco – Oppenheimer

Okay. And then last question, was this quarter a full event quarter as far as the rollout of some of the new labor initiatives that you were trying to do with the ability to lower some of the hourly wage rate by including tips? Did you have that full benefit then for all of the second quarter?

Cliff Hudson

Yes, we implemented that program last July. We did not lower any wage rate. I want to make that clear. That was a program that was implemented for new hires going forward. And so there was no lowering of existing carhop wage rate. So that program continues to phase in in terms of the expected benefits.

Matt Difrisco – Oppenheimer

Okay. Thank you.

Operator

We’ll go next to Steven Kron with Goldman Sachs.

Steven Kron – Goldman Sachs

Hi, thanks. Couple of questions. First a follow-up to Matt’s question on the balanced promotional approach going forward. Can you just talk a little bit about how this is going to play out from an advertising perspective? It doesn’t sound as if you are going to increase your marketing spend beyond what you guys have already talked about. So, where do you expect the dollars to be spent on a relative basis between premium versus value? And maybe if you could show a little bit whether you’ve done this already on a regional basis and show any takeaways of whether you saw the results at this point.

Cliff Hudson

Well, what we have done in the last several months is utilize almost exclusively all of our dollars -- use all of our dollars almost exclusively towards the Everyday Value Menu. In looking at the structure of our media expenditures, primarily -- I mean, the largest amount of dollars will be television, whether it’s national cable or local market television. In both cases, depending upon the level of dollars committed toward that segment, the national cable or local, we will have either one or two messages, one or two products in each area.

So, on a national basis in any given time, we may have two messages running anyway, whether they are both supporting a value message as they have been more recently or six months ago supporting an evening message as well as a breakfast message simultaneously on national television. We have the same flexibility depending upon the size of the market and the dollars that are available in the market to do primary promotion and a secondary promotion locally. So, looking forward, we have the flexibility to do -- have more than one message, whether national or local -- this would not be -- we've done that for years as a matter of fact. And so it’s not a new or different strategy for us.

Steven Kron – Goldman Sachs

Okay. And then just switching gears to the sale of company stores to franchisees, it seems as though you guys are shifting a bit to selling more of the underperformers on a go-forward basis. I assume that’s part of the 90 stores that you have kind of locked in in some sort of an agreement here. We do assume that there is not [ph] to be any gains associated with that. And if you can maybe give us a little bit of a hint as to how much worse the same-store sales from those stores are versus the core store base.

Cliff Hudson

Well, as to your first part of your question about -- as to the first part of your question about has our primary focus been initially on the poorest performing partnership drive-in, the answer is yes. And so the lion’s share of what we are moving here would include the poorest performing stores. As to gains on those, Steve mentioned earlier that those will be reported as they close, which we anticipate these transactions being in the third quarter. And so we will give you that data with the reporting of the third quarter. As it relates to the comp store sales issue, you asked for a hint, I think. And so I’m trying to figure out an effective hint. But it’s --

Steven Kron – Goldman Sachs

The number would be fine.

Cliff Hudson

That would be the best hint I can give you. But at the same time, I think we have not made an effort to go through a breakout and say, these stores we’re selling out, these negative or positive comps, et cetera. Let me -- I'm going to defer to see because I don’t know what -- we're really -- I think it’s just fair to say that these markets that we have under agreement are performing below the average. But we don’t have anything to quantify for you.

Steven Kron – Goldman Sachs

Okay. I’ll pass it on. Thanks.

Cliff Hudson

All right.

Operator

We’ll go next to Steven Rees with JP Morgan.

Steven Rees – JP Morgan

Hi, thank you. Since driving the average check is an important part of the story now in the second half. Maybe you could just talk about the premium products you do have in the pipeline, what you’re planning to promote on the new products, new platforms, et cetera.

Scott McLain

One of the things that we are doing in April is we are introducing a new product, a new premium chicken product, a chicken-bacon club sandwich on whole wheat bread, which is a premium product, which will be featured very prominently on lot as well as on television in many markets and our national cable as well. So that -- next month will really be the first month where we’ve got more balance in our message.

Cliff Hudson

So you will see the hybrid approach where we are promoting the higher-end chicken sandwich on a wheat bun and at the same time, still promoting value.

Steven Rees – JP Morgan

Okay. And then are you tweaking at all the current value menu to perhaps drive to help increase the check through value at all?

Cliff Hudson

We did well. There is no doubt we will have that opportunity over time with the value menu. I think at this point it’s 75 days old. And so we will have the opportunity to do that over time, but we have not felt the urgency to -- in this period of time where we are simply building awareness and building sales at the unit level.

Steven Rees – JP Morgan

Okay. And then just finally on labor, I guess it’s a little bit of surprise of Q3, this quarter is worse than last quarter despite slightly better partner store comps. I mean, how should we think about potential labor or less labor degradation in the second half? I mean, how are you balancing investments in labor versus cost controls given where sales are coming in?

Steve Vaughan

I think the labor performance was really more a function of deleveraging sales in the second quarter is our lowest seasonal quarter. So it tends to have negative same-store sales, kind of have a compounding effect in that quarter. And so I think looking forward, we would -- number one, I think we are looking to have more positive sales and then also you wouldn’t see the same deleveraging effect as you get into your more seasonal time of the year.

Steven Rees – JP Morgan

Okay, great. Thanks very much.

Operator

We’ll go next to Jeffrey Bernstein with Barclays Capital.

Jeffrey Bernstein – Barclays Capital

Great, thank you. A couple questions. One, if you could talk about the gap between the partner and the franchise. I know you walked through a lot of initiative to help close that gap. Is it fit to assume that that gap closed throughout the quarter if we were looking on a month-to-month basis? And any reason why we wouldn’t expect to see those two once again equate in coming quarters, or are there some inherent differences that you would think the company would concede perform even once these initiatives are laid out?

Cliff Hudson

Well, in terms of some of the performance transition, we have started seeing some of the things that we measure, such as response time when a customer places an order, service time that is the period of time to get the order to the customer. We have seen on a progressive basis over the last six to 12 months. We have seen those gaps narrow between the two, and in some months we have seen our partnership drive-ins kind of align with some of those key quantitative characteristics we’d be looking to. That speaks first in the near-term to losing -- not losing customers rather than gaining them, because if you had poor customer service for a while and you lose customers, it takes quite a bit to get them back with the options that they have.

There are other measures we will be looking at when (inaudible) what we would we be looking to in the more recent initiatives we’ve put in place that are more indicative of current challenges you may have and opportunities to really retain customers and avoid the decline in the first place with issues related to speed of service from a consumer’s viewpoint, not from an absolute tightening standpoint. But speed of service, the cleanliness of the operation, overall satisfaction, there is a whole series of these things, but some drive the behavior more than others.

So we will be using this new tool that we’ve put in place in October, the fan track to help us set how we are doing by drive-in, by two providers or by regional director, et cetera. And it is a pretty rich tool that allows you to go in, dealing with the supervisor or manager and talking about challenges by store or by day or by day part, even isolating one assistant manager versus another, and their varying performance based on when one assistant managers was staffing the store versus another.

Jeffrey Bernstein – Barclays Capital

Okay. And then a question on the competitive environment and with things like sales across the industry have slowed over the past number of quarters. I’m just wondering whether you guys are seeing a little bit more of it from your own research just, as you mentioned, I guess products you’ve been known for for decades in terms of higher margin beverage and snack day parts, just whether you’re seeing more of a convergence with your QSR peers now targeting those same products, whether you’ve seen that in particular markets is going to be your response or something like that.

Cliff Hudson

Well, we’ve seen -- let's see what it has been, 15 months, 16 months since we implemented national happy hour program. And we’ve seen continued growth and that -- so happy hour, two to four each day, seven days a week, and we’ve seen growth in that day part versus other day parts. And then with the implementation of the value menu, disproportionate positive impact there, the drink piece continues to grow nicely.

And even as we’ve seen some sluggishness in the industry on weekend consumer activity, we continue to see our afternoon do better than the other day parts, which would again go to the drink piece. And so these initiatives, the happy hour, the value menu, other initiatives we will be putting in place in the near future, they are intended to go to show up that aspect of our business and limit the attack from competitors, but also continue to grow it for us.

Jeffrey Bernstein – Barclays Capital

Okay. And then just lastly, can you just update us on the system-wide rollout of the retrofit? I know you’re saying everything is taking a little bit longer to get done. But you’re still seeing -- can you remind us the sales lift you are getting in terms of -- sales lift in returns kind of versus your average cost for these retrofits now that you are two-thirds of the way?

Scott McLain

We haven’t talked specifically about those today. I don’t think we’re prepared to do so. But the biggest thing I can tell you is that our franchisees are continuing to invest in our brands. And they are investing using their dollars to invest in our brand in a number of ways and the retrofit is one. They did 111 retrofits in the second quarter and 248 for the first six months.

We are about two-thirds of the way through our retrofit and gotten another third to go, which may take a little bit longer. But from our standpoint, the fact that our franchisees are continuing to retrofit, they are continuing to relocate drive-ins, they are continuing to rebuild drive-ins, and they are continuing to build new drive-ins. All of that is a good indication that they feel like we feel that our business is fundamentally healthy and a great place to invest your money for the long-term.

Jeffrey Bernstein – Barclays Capital

Great. Thank you.

Scott McLain

Thank you.

Operator

We’ll go next to Chris O'Cull with SunTrust.

Chris O'Cull – SunTrust

Hi, guys.

Cliff Hudson

Hi, Chris.

Chris O'Cull – SunTrust

Steve, my question relates to the sequential increase that we saw on labor costs and other operating costs, I think it was asked a little earlier, from the first fiscal quarter to the second. I mean, given that the profit dollar contribution is slightly lower as a result of the value menu, shouldn’t we expect sales deleverage to be greater on those two lines because of that?

Steve Vaughan

Well, I think it really will depend on if we are able to drive either less negative sales or positive same-store sales, Chris. We did design the items on Everyday Value Menu so that they wouldn’t have a significant impact on the food and packaging costs. So we really didn’t see that in the first quarter -- in the first quarter to the second quarter. So I think looking forward, I wouldn’t expect that to have a significant impact going into the third or fourth quarters.

Chris O'Cull – SunTrust

If you think about the traffic increase though that’s needed to kind of mitigate the labor and the other operating line, do you have an essence for what kind of traffic gains you will need to generate to make that value menu have a profitable impact to those other two lines?

Scott McLain

I mean, I don’t know that we’ve gone to that much detail. One point I do want to make about labor in the second quarter, I mean, we could squeeze labor and we could have had a better percentage. But one of the things that we really want to make sure that we did was to get ready for spring, make sure we had our drive-ins properly staffed and that we were able to give customers a good experience and good service as we head into the busier times of the year. And I think that as we continue to drive our volumes in our seasonally higher times of the year really from now through August, having that staffing in place while it might hurt our percentage a little bit in the second quarter, it should serve us well this quarter and in the fourth quarter.

Chris O'Cull – SunTrust

Okay. And then my last question relates to just the minority interest line. It’s my understanding that’s the kind of the -- that's the payout to the partners as part of the compensation structure. What percentage do you think that becomes more of a required payment to maintain a certain competitive level of compensation to those people? I mean, does it fall below 2%, I guess, is I’m asking.

Steve Vaughan

You know, I don’t know -- we don’t really look at it as a percentage of sales. It’s more on a “what is the compensation per partner” basis. Clearly, we don’t like to see that number go down. So we have done some things to try to shore that up. Some of that has probably come with the expense of more of a manager salary, which goes into the labor line as opposed to going into the minority interest line. But I don’t know that I have a specific percentage for you, Chris. It’s really focus on more at looking at each partner and their individual circumstance.

Chris O'Cull – SunTrust

Okay. Great. Thanks, guys.

Operator

We’ll go next to Joe Buckley with Bank of America.

Joe Buckley – Bank of America

Thank you. Couple of questions. Steve, you mentioned you locked beef in I think you said 100% through June and then 70% for July and August. At what kind of rate were you able to lock that in versus a year ago?

Steve Vaughan

It is actually down I think in the ballpark of 20% for the -- that's in the fourth quarter. The fourth quarter is really where it kind of peaked last year, Joe, fourth quarter of 2008. It’s down a little bit in the third quarter. I don’t have the specific. I think it is low-single digits, but it’s down significantly in the fourth quarter.

Joe Buckley – Bank of America

Okay. And then on the 90 stores that are going to be sold, I think maybe Cliff referred to that being retransactions. And it sounds like one for four units may have closed already. Can you give us a little color on the other two -- how does that break down in terms of size? And what kind of profit impact, net income impact are you expecting second half of this year or maybe on a full year basis?

Steve Vaughan

Joe, let me clarify, the four store transaction that has already closed, that’s in addition to the three that are pending for 90 drive-ins. I don’t think we -- at this point, we’re not comfortable going into the specifics of those since they have not closed. We do have signed agreement, but we would feel more comfortable giving you those details once they have actually closed.

Joe Buckley – Bank of America

Okay. Do you have any sense, though, as you trade company sales and operating income for royalties and the operating income that that creates, what that trade-off might look like?

Steve Vaughan

Well, we have definitely modeled that out. And there will be some trade-off. I think part of it will be the predictability that we will get from the franchising model. We may trade off some upside that you have with the partner drive-in model, but there is also -- as we have experienced in the last 12 months, there is some downside with that as well. Again, I don’t have specifics for you. I think we would really like to see these transactions kind of play out and then we will give you some more specific guidance.

Joe Buckley – Bank of America

Okay. And then one last one, are you seeing any change in how customers are paying their bill, either credit cards, debit cards, or cash? Is anything shifting as -- given the weak economy?

Steve Vaughan

Not really. It’s kind of stayed at about one-third of our transactions are now made by credit, two-thirds by cash. And that has stayed fairly constant. It continues to inch up a little bit, but nothing significant over the last few months.

Joe Buckley – Bank of America

Okay. Okay, thank you.

Steve Vaughan

Thank you.

Operator

We’ll go next to John Glass with Morgan Stanley.

John Glass – Morgan Stanley

Thanks. On the company and the partner drive-in, I just want to make sure I understand what the comp trends are there underneath the 6%? Are you talking about traffic trending positive there as well? And can you clarify about where check is if -- I think you said pricing was up 2% or 2.5%. So what’s actually happening [ph] in check then at the -- you know, how much worse is that for check if you’re going to get down 6% comp?

Steve Vaughan

Well, we started out in the month of December significantly negative both -- I think our traffic was down, our check was down a little more. In the months of January and February, we did see positive traffic in both our partner drive-ins and for the system as a whole. And that’s if you exclude the effect of leap year in February. But we are continuing to see our check at our partner drive-ins is declining at a higher rate than it is at our franchise drive-ins. And I think, John, to a certain extent, we are trying to get our pricing back in line maybe with where we’ve gotten it out of line a year ago. And so that 2.0% to 2.5% is probably a little bit lower increase in pricing than our franchisees are averaging right now.

John Glass – Morgan Stanley

Steve, just to clarify, would your check at partner drive-ins this quarter be down high-single digits then if your pricing is up 2%, 2.5%, and your traffic is flat, let’s say, minimum?

Steve Vaughan

Actually our average check is probably down mid-single digits.

John Glass – Morgan Stanley

Okay. And when do you start lapping the negative into the down 3.5 or 3.9 from last year? Is that starting in March or does it happen later this quarter?

Steve Vaughan

Well, we had -- in the third quarter last year, I think our comps were down about 3%, 3.5%. So we will begin lapping the easier comps starting this quarter.

John Glass – Morgan Stanley

I’m just wondering when during the quarter. Is it really happening now or did that happen sort of toward the end of last quarter, was there a deceleration?

Steve Vaughan

No, it really started in the month of March. As we came out of the winter -- and that’s back to Chris O'Cull’s earlier question about labor, I think we were probably under-staffed in the second quarter last year. And so coming out of that winter quarter, we saw our sales kind of fall flat when the business picked back up. So, yes, we do begin lapping over those easier comps this month.

John Glass – Morgan Stanley

Exactly. And then lastly, to your use of the proceeds in the refranchising, how much debt is available? I mean, can you buy as much as you want or is that a difficult thing to do in terms of buying that debt at below face value?

Steve Vaughan

That’s a great question. It’s not publicly traded debt. And so it’s not something that I can tell you that we have an answer. But we were very pleased with the debt that we were able to buy in the second quarter and we will opportunistically look at that in the future. But I can’t really give you a good answer on that question.

John Glass – Morgan Stanley

How does it work? Do you negotiate with the specific bond holder for it and negotiated price, or is there a third-party intermediary involved somehow or --?

Steve Vaughan

You know, I think I’d just prefer not to answer that.

John Glass – Morgan Stanley

Got you. Okay. Thank you.

Operator

We’ll go next to Nicole Miller with Piper Jaffray.

Nicole Miller – Piper Jaffray

Good afternoon. Just back on the value menu, I think understood 10% of sales. Is there a difference of that mix of day parts, lunch versus breakfast versus dinner?

Steve Vaughan

Yes, there is a difference by day part. I think –

Cliff Hudson

You want to know what that is?

Nicole Miller – Piper Jaffray

Please.

Steve Vaughan

Well, we don’t have exact percentages, but I can tell you that the impact at the lunch day part has been the most significant. And then the second most benefited day part is the afternoon --

Cliff Hudson

Lunch and afternoon are -- really seems to work particularly well.

Steve Vaughan

And we also -- I think we had a slide briefly that the perception of value at our lunch day part climb significantly following the introduction of the new value menu. So that appears to be a day part where people are significantly sensitive to the value piece.

Nicole Miller – Piper Jaffray

And then when you think about the premium side, I don’t know how you would segment those products, but what percentage of sales is that, and is that up or down?

Cliff Hudson

Well, historically that’s -- in some way you can say that’s then our business. We are going to push the envelope a little bit in terms of nature of product and potential pricing. But we have long -- you know, with the made to order food and slightly different products, we have long had often a more expensive product than many of our competitors. So the premium in some ways is accounted for the lion’s share of our business compared to QSR on average. But we’ve also periodically had the higher end sandwich as well. What we’ve not had is this balance higher end and lower end that I think some of our competition has had in place for a while and able to deal in this environment more effectively than we were during ’08.

Nicole Miller – Piper Jaffray

So, as you execute on the barbell strategy, for example, the new, I believe, is a chicken sandwich that was mentioned, that would be even higher price point?

Cliff Hudson

Yes.

Nicole Miller – Piper Jaffray

Okay. Do you have an example of price point --?

Cliff Hudson

Not a grossly higher price point, Nicole, but it is a higher priced sandwich because it does have bacon, ranch.

Nicole Miller – Piper Jaffray

Okay. And then, I think -- I don’t have in front of me, but debt-to-EBITDA is the relevant covenant. Can you just let us know where that stands at quarter-end?

Steve Vaughan

I’m sorry, what is that question?

Nicole Miller – Piper Jaffray

Debt-to-EBITDA, is that your relevant covenant?

Steve Vaughan

Yes. Our debt-to-EBITDA is a little over four times at the end of the quarter on a trailing 12-month basis.

Nicole Miller – Piper Jaffray

And what is the hurdle rate or what is the max leverage ratio?

Steve Vaughan

The maximum is five times.

Nicole Miller – Piper Jaffray

Okay, thank you very much.

Steve Vaughan

You’re welcome.

Operator

We’ll go next to Robert Derrington with Morgan Keegan.

Robert Derrington – Morgan Keegan

Thank you. Cliff, this past summer you debuted your angus -- I guess you’d call it a premium product. And it didn’t go as well as I think you had expected or many had expected. What have you learned from that process that might help keep the plan going forward looking at other premium products? How will you make those successful?

Cliff Hudson

Yes. Well, I think the difference at this point in retrospect as you look to what occurred through the year, about this time last year, consumer perspective really started shifting. The slide that we showed you earlier where 64% of the customers said they go to restaurants more often if they had value menu. 64% -- that was in May. Our own proprietary surveys showed our customers by December that that same type of question but focused on -- Sonic had grown to about three quarters -- 74%, 75%.

So I think in a context where value is the primary thing that would drive traffic and in turn sales, focusing only on a premium product without addressing the value piece was not going to advance the business. And so looking at the premium promotion in that context, you could say the same thing about December because we had a premium promotion. And December was the worst month of the quarter we just finished, the quarter ended February.

So it’s in a different context where you’re first addressing the number one issue the customer has, value. And once you’re able to knock down that barrier to entry by implementing it, you can then open up the opportunity for other and additional products. And so from our standpoint, whether it’s a meal occasion or snack occasion or whatever, that’s kind of the next step.

In addition to that, there is also an opportunity to do these things not just as a primary promotion, i.e., major television support, but also do this through on lot promotional activities and the use of one initiative to get people on lot and in fact follow through with that habit on lot, but also have other promotions on lot that you hope they shift to once they are on lot. And in fact, we’ve seen folks using our value menu and buying even the smaller sandwiches, the chicken or the beef sandwich, the hamburger. They are spending more when they buy one of those little sandwiches. They are spending more than our average check.

Robert Derrington – Morgan Keegan

Cliff, do you have sufficient advertising dollars to be able to split the message between both the premium product as well as the value menu?

Cliff Hudson

Well, we’ve been splitting it by day part and by a variety of products for several years. And so I think the answer is yes, but you sit tight and we’ll both find out here in the coming month.

Robert Derrington – Morgan Keegan

One more, if I may, follow-up. Steve, when we look at the G&A run rate, this past quarter it certainly appeared relatively frugal. How should we think about G&A as we go forward through the second half of the fiscal year?

Steve Vaughan

Well, I think as we look to move forward with this refranchising program, we will be very cognizant of managing our SG&A because it does take more resources to run a partner drive-in than it does a franchise drive-in. So you should expect to see that continue to be the case. As we go into the third and fourth quarters, we’ll be very careful with managing those dollars.

Robert Derrington – Morgan Keegan

Got it. Okay. Thank you very much.

Steve Vaughan

You’re welcome.

Operator

We’ll go next to Thomas Forte with Telsey Advisory Group.

Thomas Forte – Telsey Advisory Group

Great, thank you very much. I had a couple of various questions. The first one was, on advertising rates, can you talk at all about your ability to lock in lower rates given the pullback you’ve seen in advertising and with the economy? And then the second is, what are your thoughts long-term on your percentage of mix from the value menu? You talked about how it’s 10% now and it’s trended that way for a couple of weeks, but I was curious what your thoughts were on longer term? And then last, can you give an update on where you stand on chicken costs and your thoughts for the rest of fiscal ’09 on chicken?

Scott McLain

Yes. We’ll start with the last one. On chicken cost, we are locked in through December of 2009, but we’ve had a very favorable contract on chicken for a couple of years now, and I think it expires in December of 2009.

Cliff Hudson

As it relates to the menu mix, and our comment that it’s around 10%, 10 and a fraction, most recently, sort of -- the move to that -- the implementation of it at the end of December, it moved to that relatively rapidly. And it’s clear to us that we are getting an incremental customer that in many cases we would not -- or driving an incremental transaction, we would not have been driving otherwise.

So where could that go? Well, we had -- before implementing it, we had looked at our major competition with their value menus and estimated based on their information, looked like it was kind of a 12% to 15% sort of play. I think even as McDonald’s has grown as it has over the last five years, it would appear as though theirs has stayed somewhere around 13% or so. So there would appear to be some potential to build that, but given the fact that it has been in place 75 days or so, we are pleased to be driving the transactions we are with 10 and a fraction percent attributable to that.

Steve Vaughan

And Tom, as it relates to your first question, as Cliff mentioned earlier, we are with some of the softness in sales in the first half of the year expecting our media expenditures to be relatively flat versus last fiscal year. However, our marketing group has been working closely with our advertising agency. And we are seeing a couple of things, particularly in some of the local markets that we buy TV is number one. We are seeing better rates. Some of those rates have been coming down. But I think the second piece is we are able to get more prime spots.

So in some cases, for example, we were able to get some local spots with the Super Bowl. And also I think with the Academy Awards some spots came available with some of the more prime shows that previously we hadn’t been able to get access to. So I think in terms of -- you know, the dollars may not be increasing, but we do believe they are going further in terms of their reach, but also the quality of the buys that we are getting.

Thomas Forte – Telsey Advisory Group

And then as a quick follow-up, is it too early to think about what chicken cost might be like after the contract expires?

Steve Vaughan

Yes.

Thomas Forte – Telsey Advisory Group

All right, thank you.

Steve Vaughan

You’re welcome.

Operator

We’ll go next to Keith Siegner with Credit Suisse.

Keith Siegner – Credit Suisse

Thanks, guys. Just one question since we’ve already been on here for a while. I was noticing the franchise closures kicked up a little bit to 16, one of the highest quarters you had in a really long time. And it’s not alarming, but given the decline in the openings as well -- the gross openings, I should say -- the net openings with the smallest number we’ve seen in a really long time. So I was just wondering if you could just talk a little bit more about the franchise unit closure outlook, maybe what was driving this quarter and what we should think of it as kind of a run rate for the second half?

Cliff Hudson

Well, I think a couple things. Number one, 16 closures on a 3,500 base is extremely, extremely small percentage. So we are certainly not alarmed by that. Our brand is 55 years old, and we have been actively going about trying to relocate and rebuild a number of drive-ins, which we are doing that. But there probably are some drive-ins that probably do need to close because the area may have moved away or changed over time.

But I think that we are pleased, as I said earlier. I mean, we are pleased that our franchisees keep investing in the brand in a number of different ways. And they haven’t slowed down on that at all. We might see -- typically what happens is when we go through a retrofit process, sometimes that sort of causes franchisees to take a harder look at some of their assets and closings might change just a little bit. But I think over time our closings have been incredibly small as a percentage of our overall drive-ins, and I wouldn’t expect that to change.

Keith Siegner – Credit Suisse

Would you ever consider buying in any of these units under appropriate circumstances?

Cliff Hudson

That would not be our first choice. That would just depend on the circumstances, where they are located, why they are closing, age of the store, what the opportunity is, opportunity to refranchise. We’d just have to look at that totally on a case-by-case basis.

Keith Siegner – Credit Suisse

Okay, thanks.

Cliff Hudson

I think we have one more question lined up. So let’s take that one, and if there is anyone after that, we will take it and then we will close it with one or two more questions here.

Operator

And we’ll go next to Greg Ruedy with Stephens Incorporated.

Greg Ruedy – Stephens Incorporated

Thanks. I know that you said that 67% of the system has been retrofitted. Can you break out what percentage of the franchisees are now done with the retrofit? And just regarding the deal closure environment, is there an opportunity for the pace of openings to actually pick up?

Steve Vaughan

I don’t have that number, Greg, off of top of my head on what percentage of the (inaudible).

Cliff Hudson

It will have to be over 50.

Steve Vaughan

Yes, it’s got to be greater than 50%. But I don’t have that specific number for you. And then I think in terms of the pace of openings, the good thing is that, as I mentioned earlier, the return on investment is getting better for -- because real estate is getting cheaper, construction costs are getting cheaper, we are getting access to better sites. The ROI environment is very good. And so I think if the credit markets free up, interest rates are also very low. And our franchisees can get good access to capital, and we continue to see strong sales as we have been seeing from new stores. Hopefully, over time our openings will pick up. But we do -- our franchisees are like anybody else. They have to navigate through the credit challenges, and it is challenging right now.

Greg Ruedy – Stephens Incorporated

Couple more if I may. I know that you said 10% of sales was coming from the Everyday Value Menu, but what percentage of the transactions have a product from that menu on the check?

Steve Vaughan

I don’t have that number offhand.

Greg Ruedy – Stephens Incorporated

Okay. And then last one, on a total average check basis, how much of that is comprised of modifications like an add cheese or an add bacon?

Cliff Hudson

Well, I’ll say it’s -- the interesting thing in our business, all the food is made to order. And so the percentage of customers who modify and add in, add on, as we say, get an attitude, I mean, it’s pretty good -- it's got to be a pretty good size number one way or another; add jalapeño, add vanilla to my Dr. Pepper, whatever.

Greg Ruedy – Stephens Incorporated

That’s all I had. Thanks.

Cliff Hudson

And maybe we’ve got one more and if -- is there any other question? Okay. I’m told that was the last one there. So we appreciate all of you all participating today and not to be redundant, but I think our business is, we as a company and our business is in a period of strategy transition from the product and service differentiation of the past to Everyday Value Menu now balanced with this premium piece. And I think that the first stage of that, we feel good about and we’ve got things lined up to move into here in the spring and summer. Winter quarter, in part, really proved out the early implementation of the Everyday Value Menu, January, February being much better than December was once that was rolled out.

We will continue focusing on the turnaround of our partnership drive-ins and the phases of that. And we are pleased to see the interest in the brands that so many folks have had new franchisees, existing franchisees, wanting to be a part of our system. And we think that bodes well for the growth of the brand going forward. So, appreciate your engagement with us and enjoyed visiting with you today, and we look forward to visiting along the way. Take care.

Operator

And that does conclude today’s call. We do appreciate everyone’s participation. You may disconnect at this time.

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