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Carrols Restaurant Group Inc. (NASDAQ:TAST)

Q1 2009 Earnings Call

May 4, 2009 4:30 pm ET

Executives

Alan Vituli - Chairman and CEO

Dan Accordino - President and COO

Paul Flanders - VP and CFO

Analysts

Reza Vahabzadeh - Barclays Capital

Jeff Omohundro - Wachovia

Kenneth Bann - Jefferies & Company

Mitchell Speiser - Buckingham Research

Joshua Long - Stephens Inc

Brian Vaccaro - Raymond James

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Carrols Restaurant Group First Quarter 2009 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Monday, May 4, 2009.

I’d now like to turn the conference over to Mr. Paul Flanders, Carrols’ CFO. Please go ahead, sir.

Paul Flanders

Thanks. Good afternoon and welcome to our first quarter 2009 conference call. By now, everyone should have access to the announcement released this afternoon, which you can also find on our website at www.carrols.com under the Investor Relations section.

Before we begin the formal remarks, I need to remind everyone that our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed on them. We also refer you to our other filings with the SEC for a more detailed discussion of the risks that could impact our business and results.

On the call today with me is Alan Vituli, our Chairman and CEO. Alan will provide some commentary on the business and then I’ll walk you through our financial results for the first quarter and update our 2009 guidance. We’ll then be happy to address any questions that you might have.

And with that, I’ll turn the call over to Alan.

Alan Vituli

Thanks, Paul, and good afternoon, everyone. I’d like to begin by reviewing some highlights of our first quarter. Overall, we were pleased with our results as they demonstrated that our action plan for managing the business in the current environment along with the benefit of using cost pressures have positively impacted our earnings.

Revenues grew by nearly 3% year-over-year to 201.3 million in line with our annual guidance while earnings per share grew considerably to $0.23 per diluted share from $0.07 last year. Comp sales were strong at Burger King in the first quarter, where we posted a 5.1% increase year-over-year; that is, first quarter of last year relative to this year.

QSR segment remains one of the few bright spots within the restaurant industry. And it’s clear that Burger King continues to demonstrate its appeal and relevance to the consumer. Hispanic Brands, which both posted – well, which both posted slightly negative comp sales in the first quarter continue to see some weakness in traffic and face specific challenges in their markets, which we’ll touch on.

Our improved earnings compared to the first quarter of last year were the results of several factors. First, the actions we have taken to reduce and to leverage costs are evident across our P&Ls, both at the corporate and restaurant level. Our G&A costs were reduced by $1.1 million or 57 basis points before the increase in performance bonus expense in 2009 of 1.4 million.

Our restaurant labor costs declined 78 basis points year-over-year as we took steps to reduce overtime hours, improve labor productivity and we’ve reduced employee turnover. The economy has helped that a little bit also. We also benefited from a moderation in commodity prices as cost of sales improved 50 basis points compared to the first quarter of last year. For all of 2009, we anticipate that the commodity cost increases will be moderate relative to 2008.

Lastly, our lower debt balances along with more favorable interest rates resulted in a reduction in interest expense of $2.3 million.

In the first quarter, we opened one new Taco Cabana restaurant and one new Burger King restaurant. The Burger King was a relocation of a unit that we had closed in 2008. We also closed a Pollo Tropical restaurant in Plant City, Florida, and we closed two Taco Cabana restaurants in the state of Texas.

As we indicated before, the key objective in 2009 is to increase free cash flow so that we can further reduce our financial leverage. This combined with our concern surrounding the current recession and consumer spending have caused us to slow new unit development in the near term as a consequence of our reduction of capital spending. Along with our increased earnings, we were in fact able to continue to reduce debt levels and our financial level – leverage in the first quarter.

While it appears that we may be seeing some early signs that the economy may improve later this year, we remain very cautious in the face of the continuing pressures on consumer spending and the increasing competitive environment that we’re in.

All things considered, we think that we are holding up pretty well. From a competitive standpoint, we continue to focus on offering new and promoted menu items at our Hispanic Brands that offer competitive value, while our Burger King business is doing well with new products and its effective barbell pricing strategy, which we’ll get into as we talk on.

Getting our financial leverage down to levels which will be more comfortable to investors is a must for us. Standing here today, I believe the long-term potential of our two Hispanic Brands is very exciting. The current environment has helped us to better understand some of the adjustments which we will be making to better position the brands going forward.

In terms of our Burger King business, while we continue to experience a net reduction in a number of units where we operate, we’re confident that the brand is a great asset for our company. The Burger King Corporation management team is very strong and appropriately focused on the long-term position of the brand. Despite the presence of a dominator in the Hamburger segment, Burger King has a great proprietary position with consumers which will enable the brand to remain strong, innovative and well positioned to grow market share.

In terms of the specific brands, with respect to Pollo Tropical, comp sales fell by 3% in the first quarter, which was slightly better than our performance in the fourth quarter of last year and somewhat better than anticipated. Despite weak comps and flat overall revenue, Pollo was able to generate 6.5 million in segment EBITDA, which was $500,000 or 110 basis points higher than the first quarter of last year.

As you know, the economy in Florida is substantially worse than in any other state or in most other states. March unemployment rate in Florida was 10%, which is significantly higher than the national average. We feel that our business is holding up well on a relative basis, though, and while comp sales are still negative, our trends in customer traffic were better than they were in the fourth quarter.

After being off-air for several years, we believe that our return to television advertising has played an important part in helping to communicate our differentiation and in stabilizing sales trends and we intend to remain on TV.

In the first quarter, our promotions included a quarter chicken meal – combo meal with two sides for $3.99, chicken and ribs combo for $6.99 and during the Lenten period, tilapia with two sides for $5.99.

In the second quarter, we’ve introduced our new churrasco steak, which is being advertised and promoted in South Florida, along with churrasco or beef fajitas, which we’re performing in our markets – which we’re promoting in our markets outside of South Florida.

Our Northeast stores are doing okay at this point as a Group, but are under contributing given our low penetration, higher operating cost and newness in these markets. While the economic environment certainly isn’t helping, we do expect to improve performance in these markets as we continue to build brand awareness.

Continue to move forward with our Pollo franchise development plans, currently we have 26 franchise locations including our most recent opening in the Bahamas – Freeport in the Bahamas on April 17. We also have development agreements for Trinidad & Tobago and Honduras and expect to see initial openings in some of these markets later this year.

With regard to Taco Cabana, comp sales fell 1.6% compared to a positive of 7% in the first quarter of 2008. Guest counts, which have been negative overall, got slightly worse in the first quarter as the competitive and discounting environment continued to intensify from both the Quick-Service segment and casual dining competitors.

Although the Texas economy has helped us better than most of – has held up better than most of the country, we certainly see the strains on consumer spending there as well. Despite this, we increased Taco Cabana’s segment EBITDA contribution by 1.6 million over the first quarter of 2008. So for the quarter, we had 8.2 million and our EBITDA margin expanded by 216 basis points. This reflects the more favorable cost environment already discussed along with solid performance from the restaurants that we’ve opened over the past 12 months.

Our strategy this year is focused on promoting historically successful products along with the product offerings at price points designed to be compelling values and frankly to align to compete with conventional QSR. We’re getting a fair share of competition as – from the Casual Dining segment as well and seeing in our markets a considerable offerings of $5 lunches and dinners for under $10.

During the first quarter, our promotions included enchiladas at 3.99, shrimp tampico during the Lenten period along with brand advertising focused on sizzling fajitas on breakfast.

The second quarter, we’re promoting our popular chicken flautas starting at 2.99 and we’ve been dropping some coupons which include, buy-one-get-one offers on products such as our fajita taco dinner and our personal-case – sized quesadillas. We believe that Taco Cabana is somewhat differentiated with its quality, food and fresh ingredients and we are aggressively addressing the competitive factors that we face with our focused promotional activities.

Finally with respect to Burger King, our restaurant has performed well in the quarter as the brands barbell marketing strategy of offering aggressive low-priced items at one end and full margin products at the other continues to be successful. This approach will certainly continue and is freeing many of the Hamburger – many in the Hamburger segment from deep discounting of their core menu.

Segment EBITDA for our Burger King operations was seven million in the quarter compared to 5.6 million in the first quarter of last year. EBITDA margins improved 127 basis points. Promoted products in the first quarter include the Angry WHOPPER and the new BK SHOTS, both of which were reasonably successful.

Looking ahead, there’s a significant portfolio of new products that we think will positively impact the long-term position of the Burger King brand. Many of these are designed for the new flexible batch broiler which we’ll be rolling out later this year. In the meantime, we believe that Burger King’s strong proposition will continue to resonate well with consumers in the current economic climate.

With that said, I’d like to turn it over to, Paul, who will review our first quarter financial results and update you on our guidance for the year. Paul?

Paul Flanders

Thanks, Alan. Total revenues for the first quarter increased 2.9% to 201.3 million from 195.8 million last year. Revenues from our Hispanic Brand restaurants increased 2.2% in the quarter and totaled 106.9 million compared to 104.6 million in the previous period.

Our Pollo Tropical revenues were essentially flat at 44.1 million compared to 44.3 million in the first quarter of ‘08. We opened six new restaurants since the beginning of the first quarter of ‘08 while comparable restaurant sales in the first quarter of this year decreased 3% compared to a negative 1% comparison from the prior year.

The South Florida counties of Miami-Dade, Broward and Palm Beach, where we have 63 units, performed better on a relative basis than our Central and West Coast Florida markets. Comparable sales in Miami-Dade County actually increased slightly at 0.3%. Broward County declined 2.2%, and Palm Beach County was down 5.1. The 15-unit Orlando market, which was running double digit negative in the fourth quarter of 2008, was down 8.8% in the first quarter.

Taco Cabana revenues increased 4.1% to 62.7 million from 60.3 million due primarily to the opening of 11 new Taco restaurants since the beginning of the first quarter of the prior year.

Comparable restaurant sales in the first quarter were down 1.6% against the positive 0.7% comparison from the first quarter last year. As mentioned on the last call, comparable sales weakened somewhat in the first quarter for Taco Cabana. Of our four major markets, only Houston remained positive for the first quarter with an increase of 0.8%. Dallas was down 3.4%, Austin was down 3.8% and San Antonio while improving from the fourth quarter of 2008 was negative 2% compared to the first quarter of last year.

As you’ve heard, our Burger King restaurants had another strong quarter. Overall, sales increased 3.6% to 94.5 million despite the net closing of six restaurants since the beginning of the first quarter of ‘08. Comparable sales increased 5.1% against a 4.0% positive comparison from the first quarter in 2008.

We were able to improve margins across most of the P&L as well as at all three of our brands. This reflected a more favorable overall cost environment for commodities and utilities as well as our increased focus to reduce or leverage a number of other costs. The result was a strong increase in both EBITDA and operating income over the prior year and an expansion in consolidated operating margins of 160 basis points to 6.6%.

We posted strong earnings growth in the first quarter with net income of 5 million or $0.23 per diluted share compared to net income in the first quarter of 2008 of 1.4 million or $0.07 per share.

With regards to the operating portion of our P&L, cost of sales were 29.0% of restaurant sales, which was 50 basis points lower than the first quarter of 2008 and 78 basis points lower on a sequential basis from the fourth quarter of 2008. Year-over-year Burger King cost of sales decreased eight basis points, Taco Cabana fell 198 basis points, while Pollo cost of sales increased 82 basis points.

We did take price increases at all our brands last year, given the significant increase that we experienced in commodity costs. For the first quarter of 2009, effective pricing at the Hispanic Brands was about 6.5% over the comparative period in 2008 and at Burger King, pricing was about 4.5%. At this time, it is unlikely that we will take much, if any, pricing in 2009. As it stands today, effective pricing for the full year is about 2.5% for Burger King and between 3.5 and 4% for our Hispanic Brands.

We have most of our key commodity contracts for ‘09 in place for our Hispanic Brands at this point and currently estimate commodity inflation of around four to 4.5% at Pollo Tropical, flat at Taco Cabana. And although we have less visibility and control with respect to purchasing for our Burger King restaurants, we believe that costs will increase in the three to 3.5% range for the year. Overall, we’re estimating that our cost of sales percentage for the full year will be 30 to 50 basis points below 2008.

Restaurant labor cost decreased 78 basis points in the first quarter to 29.2% of sales, the result of leverage from last year’s price increases along with other steps to reduce hours and from labor productivity improvements.

Restaurant operating expenses decreased 49 basis points in the first quarter to 14.6%, with utilities being flat on an absolute basis. As a percentage of sales, a number of costs were positively leveraged, including utilities, R&Ms and other restaurant level costs.

General and administrative expenses were 6.6% of total revenue and essentially flat in total compared to the first quarter of last year. However, as Alan said, performance bonus expense was 1.4 million higher in the first quarter of 2009 with all other G&A costs reduced by 1.1 million reflecting the cost reductions that we implemented in late 2008.

Rent expense increased 30 basis points in the first quarter to 6.2% of sales, which mostly reflects the 2008 reclassification of leases that were on balance sheet as lease financing obligations and re-classed to operating leases. The rent payments previously accounted for interest and principal are now included in rent expense. The effect in the first quarter from these changes was to increase rent by about $0.7 million with a reduction in interest of about 0.9 million and depreciation reduction of 0.2 million, which in total was approximately $400,000 accretive to pre-tax earnings.

And lastly, interest expense decreased 2.3 million to 5.2 million. In addition to the change just discussed, this reflected the debt reductions made in 2008 and 2009, interest reductions due to the repurchase of $15 million of our 9% senior subordinated notes last year, as well as lower interest rates and our LIBOR-based borrowings resulting from the significant drop in short-term interest rates.

At the end of the first quarter, our total debt was 309.7 million, which reflected a 53.1 million reduction since the first quarter of 2008, including a reduction of 6.4 million in the first quarter of this year.

Our senior credit facility required that our total debt to EBITDA ratio be under 4.5 times at March 31. And as calculated for purposes of compliance, we were at 3.57 times at the end of the first quarter or about two tenths of a turn lower than at year end, and well below the levels required by our credit facility.

As Alan said, debt reduction remains a high priority for us and we anticipate that in total, we will pay down between 25 and $30 million of debt this year, which will further reduce and improve our leverage ratios.

I’ll now briefly discuss our outlook for 2009. Given our performance in the first quarter, we are increasing our full year earnings guidance to 0.90 to $0.95 per diluted share. This includes the effect of one extra week in our fiscal year, which is estimated to benefit earnings in the fourth quarter by $0.07 per share. We are projecting a total revenue increase of approximately 2.5 to 3.5%, including a comparable sales increase on a 52-week basis of 1.5 to 2.5% for our Burger King restaurants, a decrease of one to 2% for Taco cabana and a decrease of two to 3% for Pollo Tropical.

As Alan mentioned, increasing free cash flow, reducing debt and lowering our financial leverage are high priorities this year. Accordingly, we have limited new restaurant openings to between five and seven locations for our Hispanic Brands. In addition, we plan to relocate two or three Burger King restaurants, one of which has already been completed. We also plan to close another four Burger Kings this year.

Total CapEx is now estimated to be 33 million to 38 million, which is still considerably below our 2008 spending, but a little higher than our previous guidance. This reflects a modest increase in certain remodeling expenditures, mostly for our Burger Kings. Overall, we’re projecting total G&A expenses to be comparable to 2008 reflecting the increase in bonus expense in 2009, but as a percentage of sales to be down slightly. Lastly, our annual effective tax rate is estimated at 37.5%.

I’d also like to comment on what we’re seeing so far in the second quarter. As indicated earlier, Pollo Tropical seems to be getting stronger, and although still negative, is not bad as bad as we anticipated earlier this year. Trends in April were slightly better than in the first quarter with comparable sales a little over 2% negative. On the other hand, Taco Cabana has softened up a little as indicated by our first quarter results and we’ve reflected these trends in our updated guidance. In April, comp sales were actually down about 3% for Taco Cabana, although we believe that the quarter as a whole will be a little better than that.

With regards to Burger King, we increased our sales guidance slightly for the year. Having said that, in the second quarter, we’re up against some difficult comparisons, particularly in April and May, since comparable sales increased 7.5% last April and 6.8% last May. Not surprisingly, we were down about 2.5% in April. We still expect, though, to see reasonable comparable sales increases in 2009 particularly as the year progresses. And that’s top line.

In terms of bottom line, we anticipate that we will continue to benefit from the recent cost trends and the cost reduction initiatives taken in late 2008 and we expect corresponding improvements in net earnings compared to last year.

Lastly, and I’ll conclude with the following thoughts. We’ve raised our earnings guidance reflecting our first quarter performance and to reflect a modest increase for the balance of the year. While we have increased confidence in our ability to drive profitability, given cost trends, our outlook on consumer spending remains cautious. We appreciate the market positioning of our three brands and view their inherent diversity within our multi-brand operating model as a strength in this environment. While we await broader improvements in general economic conditions, we believe we are acting responsibly in managing our business effectively for the current environment.

And with that, we open up – we’d like to open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Reza Vahabzadeh from Barclays Capital. Please go ahead.

Reza Vahabzadeh - Barclays Capital

Good afternoon. It’s Reza Vahabzadeh from Barclays.

Alan Vituli

Hi, Reza. How are you?

Reza Vahabzadeh - Barclays Capital

Good. How are you? Just as far as the Taco competitive environment, in effect of the competitive environment that each one of your brands face, can you comment on that, Alan?

Alan Vituli

Well, I mean, basically, we’re seeing a very aggressive pricing. The Texas market last year had a fairly significant number of new store opening, especially in places like Austin, which was a reasonably large market for us. But what we’re seeing is really the behavior of the reduction in consumer spending and everybody competing for the fewer birds in the air. So we’re getting a significant discounting and – by the QSR segments for breakfast and for lunch. And casual dining has been doing – it’s very, very aggressive in the dinner hour. It will pass, but currently we’re just sort of fighting to keep our share of market.

Reza Vahabzadeh - Barclays Capital

Got it. And then on the Burger segment?

Alan Vituli

The Burger segment is something that you’re well aware of. I mean, it’s – they have been – Burger King with its promotional activity and its new product pipeline has done a great job. I mean, from time to time, you miss a little with a product or you have a promotion that doesn’t really do what you want it to do. But overall, I mean, what we’re seeing is down 2.5% April, except that April of last year, as Paul said, was up 7.5%, and the April before that was up 4%. So I mean to get back 2% in the month of April, and probably get back – May was similar combined to years with over 10%, probably in the 11 or 12% category for us. So we expected it to be down a little. Combine that with the fact that everyone is basically pumping the dollar menu and offering lots of bounce backs and promotions. The brand is doing remarkably well. Pollo is differentiated, but nonetheless, we are competing with quick service and casual dining, the lunch and dinner. Pollo is coming back pretty nicely, and we’ve got a great product pipeline that gives you a high sense that the year will be a better year than anticipated.

Reza Vahabzadeh - Barclays Capital

Got it. And then turning to P&L, Paul, the labor cost decrease is obviously helpful to your P&L. How much of that decline is due to hours reduction versus leverage from pricing? And how comfortable are you that service levels are still at reasonable levels?

Paul Flanders

I’ll actually let Dan answer that. Dan has joined us on the call in the last few minutes.

Reza Vahabzadeh - Barclays Capital

Okay.

Alan Vituli

Oh, great.

Daniel Accordino

Yes. There’s been very little reduction in the labor formula at any of the brands. Pollo had a few hours reduced. Taco and Burger King had no hours taken out of the formula. So – and the metrics that we use to measure the operations of the three brands, we use the same metrics for all three brands, which is real-time customer surveys, so we’re confident that we’ve got no degradation in customer service. As a matter of fact, all of our data points have improved over our 2008 period.

Reza Vahabzadeh - Barclays Capital

Okay. Wonderful.

Alan Vituli

And we’re also getting some of it out of the fact that employee turnover is down considerably, and so we’re dealing with better trained, more experienced staff.

Reza Vahabzadeh - Barclays Capital

Yeah. Sounds good. Thank you much.

Operator

Thank you, sir. And our next question comes from the line of Jeff Omohundro with Wachovia. Please go ahead.

Jeff Omohundro - Wachovia

Thanks. My question relates to the improvement seen in Pollo Tropical. I wondered if you could maybe elaborate a little bit more about your marketing support for the brand, what seems to be gaining traction there? And when thinking about the strategy in the Northeast, how much critical mass in terms of scale would you need to start supporting the brand in that market to – sort of, to help build a brand awareness? Thanks.

Alan Vituli

Yes. Let me just – we – let me take the second part of that question first. We have planted flags in New Jersey, Connecticut, and in New York State recently, and so – I mean, these markets are huge. It’s not a question of sort of building out the Connecticut area, and then moving on to New Jersey. I don’t think we – clearly we’re operating relatively inefficiently and clearly our focus is to continue to open restaurants. I’d like to think we can get to a point where we’re opening restaurants in the double-digits in the relatively near future, but we need more visibility. I can’t answer the question quantitatively because – at this point simply because I think we just need to get the volumes up higher.

We can certainly cut out costs, but we’re not prepared to lean out those costs given our view that there’s great opportunity to build there. In terms of why Pollo is getting better, its product pipeline and some of its promotional offerings are paying off. It recently launched a steak, a churrasco steak. It soon will launch a line of smaller wrap-type sandwiches, including this Cuban sandwich, and we’re very close to now launching a spicy wing which has been – done fabulously well in tests. And so, I mean, given the pipeline and given the fact that these items have done so well in test, we’re pretty optimistic about those components. And the promotional activity is basically – and the advertising, which we hadn’t done in the past, is certainly causing a fair amount of consumer attention. So we’re starting to see upticks, slower down ticks. We’re still struggling in Central Florida and we’re still struggling on the West Coast of Florida, where the consumer economies are awful. But in Dade, Broward and Palm Beach counties, we’re getting some really good positive results out of the advertising. I hope that answers the question, Jeff.

Jeff Omohundro - Wachovia

Yes. Thank you.

Operator

Thank you, sir. And our next question comes from the line of Ken Bann with Jefferies & Company.

Kenneth Bann - Jefferies & Company

Good afternoon. You’ve done a good job of reducing leverage pretty quickly. I was just wondering with your interest expense down and your capital expenditures down, if it keep on going this way, you’ll continue to reduce leverage pretty rapidly. When do you hit the point where you think, we’ll have reduced – we’ve reduced leverage enough, and now it’s time to go back and start spending money on growing the restaurant base?

Alan Vituli

And Paul – maybe I’ll take a shot, and Paul, chime in whenever you want to. I mean, we’re currently at about three and a half times EBITDA. I think, we’d more comfortable given where this sort of new world is going, and given the fact that it’s our desire and our intent to be a public company and access public markets for growth – for growth capital from time to time, if there’s not enough internally generated funds. I think, the intent is to get us to below three times. Now that’s going to be a combination of paying down debt and growing EBITDA. I don’t think we have a – I think, the world is going to define for us what’s acceptable, but clearly three times represents a targeted number for us currently. And given the consumer economy, it – we’re balancing new openings with debt pay down. But we – the 2008 recession came upon us very quickly and we slowed our pipeline and we’re talking now a little bit about increasing the size our of pipeline going forward. More quantitative I can’t be. Paul?

Paul Flanders

I think, Alan has touched on – I mean, as he said, there’s two ways of de-levering. One is to improve earnings, and one way is to pay down debt. Fortunately we’ve done both and I think where we feel better today is that – than we did, let’s say, six months ago is that we are seeing earnings improvements and stability in our margins or improvement in margins actually. So I think we feel better with our ability to de-lever more quickly, certainly today.

Kenneth Bann - Jefferies & Company

Okay. And second, do you expect any other further benefits from say utilities coming down at all this year versus last year or do you expect them to pretty much be flat?

Paul Flanders

I think, in an absolute sense, we – I think, we see – and this is with the fact that we have increased our number of units, I think in an absolute sense we see utilities are being flat in total. However, I think, when we look at that on an average restaurant basis or the like, we should – we’re actually should – expecting to see decreases as we renew some of the contracts that we have for various utilities right now.

Kenneth Bann - Jefferies & Company

And -

Alan Vituli

We have some higher priced contracts that we signed up last year that are running off during the course of this year.

Kenneth Bann - Jefferies & Company

And finally a number of other companies have been mentioning that they’ve been going back to landlords to try to get some either rent relief or changes in some of their leases especially on restaurants that may not be performing as well as some of the others. Have -

Alan Vituli

Dan, do you want -

Kenneth Bann - Jefferies & Company

– you been doing that or had any success with that?

Alan Vituli

Dan, do you want to address that?

Daniel Accordino

Yes. We have been on a fairly regular basis going back to landlords and we’ve had some success. I mean, obviously, the most success you have is if you have an option that’s coming to term and an opportunity to extend the renewal period and things of that nature, but we’ve actually been quite successful over the past six to eight weeks.

Kenneth Bann - Jefferies & Company

Okay. And soy you’re saying you’ve seen a – is it safe to say, you’ve seen an increase in your ability to negotiate over the last few months?

Daniel Accordino

Yes.

Kenneth Bann - Jefferies & Company

Okay. Great. Thank you very much.

Daniel Accordino

Particularly as it relates to renewals.

Kenneth Bann - Jefferies & Company

Okay. Great. Thank you.

Operator

Thank you, sir. And our next question comes from the line of Mitch Speiser with Buckingham Research. Please go ahead.

Mitchell Speiser - Buckingham Research

Great. Thanks very much. Just a couple questions on the Burger King business. First, can you let us know how much beef was up in the quarter versus a year ago?

Alan Vituli

Dan?

Daniel Accordino

About a nickel.

Mitchell Speiser - Buckingham Research

Got it. And can you quantify that like on a percentage basis year-over-year?

Paul Flanders

I mean, our beef cost the first quarter was about $1.39. This year the average price, as Dan said, was up about a nickel or $0.06, which is 4.5% over last year. And that’s probably 30. Sequentially from the fourth quarter, I think, it’s down about 35 basis points, sort of the benchmark.

Mitchell Speiser - Buckingham Research

Got it.

Daniel Accordino

The real pick up in beef in 2008 didn’t occur until the May/June period of 2008, and then it got progressively higher throughout the summer period where we use most, the majority of our product.

Alan Vituli

We would be delighted if the beef prices held right here.

Mitchell Speiser - Buckingham Research

Sure. And if you were just to extrapolate what you’re seeing now on the second quarter, what type of percent year-over-year decline should we see in this calendar second quarter?

Alan Vituli

I think, we’re looking at five to 6% lower beef cost in the second quarter. I think, the increase – that decrease should be larger by the time we get to the third quarter because that’s really where we hit the very high levels that Dan referred to.

Mitchell Speiser - Buckingham Research

Great. And if I can ask you some questions on comps. Just in the year ago period, was there anything that drove such strong comps like movies or promotional tie-insurance, or was it just good momentum?

Daniel Accordino

At Burger King?

Mitchell Speiser - Buckingham Research

Yes.

Daniel Accordino

No. Not really. The promotional tie-ins will occur in the 2009 timeframe at the same time that they occurred in 2008. So in the first quarter of 2009, the marketing calendar was pretty similar to 2008. We had an ADVO and we had – this year, we had the Burger SHOTS, and we had the Angry WHOPPER this year, and the prior year, we had – I believe, it was a TENDERCRISP promotion.

Mitchell Speiser - Buckingham Research

Got it. And just to try to understand the March decline in comps, and that was versus a real tough comparison.

Daniel Accordino

No. In April.

Mitchell Speiser - Buckingham Research

I’m sorry, April. On an average weekly sales basis, was there any slowdown from March or was it purely just the year-over-year comparison that drove the comp down?

Alan Vituli

With respect to April, there was some – the brand is pretty spread out over the United States. Most of our restaurants are in the Northeast, the mid-Atlantic and Midwest. March was not a bad month. It was an acceptable month for us. April, we had expected comps to be down, because as I said earlier, I mean, cumulative comps for the last two years are in the double digits. So did it – I think, it occurred throughout the month of April. In addition, it was a little bit of an anomaly with respect to where the holidays fell out.

Mitchell Speiser - Buckingham Research

The question follows the AUV in April compared to the AUV in March, the weekly, the weekly comp, the weekly AUV number?

Paul Flanders

No. It’s actually – April is actually a higher AUV month.

Alan Vituli

That’s right.

Paul Flanders

So we’re coming out of the winter, so our AUVs tend to trend up as we get towards the summer.

Alan Vituli

Yes.

Paul Flanders

I mean, I think the only other anecdotal take away in April I think that we had was that we saw sales getting a little softer in the Southeast.

Mitchell Speiser - Buckingham Research

Got it. Okay. And just on the comp that you reported in the first quarter up 5.1, can you tell us what the menu mix component was?

Alan Vituli

We were up – hang on just one second.

Daniel Accordino

We’ve generally been up. I don’t have it in front of me. We’ve generally been up across all day parts except breakfast. And breakfast has been consistently soft, and I think, you would find breakfast has been soft for all brands. There is a pretty direct relationship between breakfast sales and unemployment. And certainly we’ve seen that.

Alan Vituli

Yes.

Mitchell Speiser - Buckingham Research

I guess, as I look at my model, I see I do have the mix component. I think you gave it to us the last couple quarters, so I figured I’d ask for it this quarter.

Alan Vituli

Trend in the mix or -

Daniel Accordino

No. The day part sales comparison, I assume is what you’re looking for?

Mitchell Speiser - Buckingham Research

Just of the comp of 5.1%, you mentioned a price of 4.5, was there a change in mix in the – or did the average check change at 4.5% year-over-year, or was it any different?

Daniel Accordino

The average check actually has gone up higher than the price increase by virtue of the cup sizes that Burger King changed. They changed what used to be the small, medium and large. They changed the nomenclature. So what used to be the old medium is now a small. And consequently we have had customers trade up to the middle size, which is $0.40 higher than the small version, and we’ve seen actually a check increase by virtue of that.

Mitchell Speiser - Buckingham Research

I see. Great. That’s all I need to know. Thank you.

Operator

Thank you, sir. And our next question comes from the line of Greg Ruedy with Stephens Inc. Please go ahead.

Joshua Long - Stephens Inc

Good afternoon. This is Joshua Long. I’m on the call for Greg. Paul, I just wanted to see if you could break down what portion of the new guidance is interest driven?

Paul Flanders

Well, not a lot of it, frankly. We anticipated having debt reductions in the original guidance.

Joshua Long - Stephens Inc

Okay.

Paul Flanders

I think if there – I think perhaps where we’re seeing a little benefit is the fact that we’re probably more conservative on our interest rate assumptions in terms of how quickly the short-term rates would move up. I think, our view now is they’re probably going to stay down lower than – for longer than what we anticipated originally.

Joshua Long - Stephens Inc

Okay.

Paul Flanders

I wouldn’t say it. Go ahead.

Alan Vituli

There’s not much of a change, if I may, between the – our original guidance adjusted for our first quarter increased only a few pennies. For the most part, I would say, it’s really in the cost of sales.

Joshua Long - Stephens Inc

All right. That’s helpful. Any additional opportunities for sale lease back transactions going forward? Is that something that you’re looking at?

Alan Vituli

Paul, you want to deal with that?

Paul Flanders

Yes. We have – we continue to market properties in anticipation of doing sale lease backs this year. I think, earlier in the year, our view was – and I think what I said on the first call, was that we planned to do about $15 million of sale lease backs. At this point that number is a little bit lower. I think, we’re thinking more like 10 to 12 million, which has been a consequence of I think rates have moved up just a little bit on us. And whereas we could get more done, I think, given the improved performance and the debt reduction that we’ve already seen, I think our sense is that we would prefer not to pay up to get sale lease backs done, so we’ve lowered I think our view of how much we will get done this year.

Alan Vituli

Essentially the bid price for sale lease back capital has moved up pretty high.

Joshua Long - Stephens Inc

Yes.

Alan Vituli

And so the sense is that we might as well wait and let the banks restore some credit – liquidity in the credit markets, and the lease back market should roll back.

Joshua Long - Stephens Inc

Okay. That makes sense. And then last one, how long of a process is it or either in time or units to roll out the BK broiler system to all your BK units?

Alan Vituli

Dan.

Daniel Accordino

They will all be done by the end of 2009.

Joshua Long - Stephens Inc

Okay. That’s it. Thank you.

Alan Vituli

You’re welcome.

Operator

Thank you, sir. And our next question comes from the line of Bryan Elliott with Raymond James. Please go ahead.

Brian Vaccaro - Raymond James

Good afternoon, gentlemen. This is Brian Vaccaro filling in for Bryan Elliott. I just wanted to quickly touch on – go back to your pricing commentary. I think you said Q1, your Hispanic brands were up 6.5, and I was hoping you could give us a sense if there was much difference between the two brands? And then if you could also remind us when you begin to lap some of that pricing as we go throughout ‘09?

Paul Flanders

No. There was not a substantial difference between the two brands. I think, one was at 6.5, and the other one was between 6.4 and 6.5. In terms of when we start lapping those pricing, we took price increases at Pollo last year basically in the second half is what you’re concerned with is July 1 and the early October, so we’re going to start lapping those and then in the case of Taco we were – we took three price increases, one in late May, one in the middle of August, and one in middle of October.

Brian Vaccaro - Raymond James

Okay. That’s very helpful. And just moving over to margins by brand. I was just hoping you might be able to give us a sense. I appreciate the commentary on the year-over-year change in your COGS at each brand, but I was hoping you might be able to give us a better sense in particular like at Pollo Tropical where some of that 110 basis points might have come from given that the cost of goods sold was up 82 at Pollo?

Daniel Accordino

Generally yucca and plantains which are two products that we – they are unique products, and Pollo Tropical is a big user of both of those products. And from a quality standpoint, we have found that the Costa Rica source is far and away the best place to source those products. We had contracts on both of those products, but unfortunately due to supply dislocation, the vendors in order to be able to supply us with the quantity they need – that we needed had to outsource that to some other sub-vendors in Costa Rica, and we had to pay a slightly higher price.

Paul Flanders

Okay. I think, Brian, when we look – when I look at Pollo, we leverage labor across all three brands, so we have leveraged Pollo’s labor about 80 or 90 basis points. It was a big piece of that difference in the advertising because although we were on TV in the first quarter, on a percentage basis, we were actually a little bit lower this year in terms of advertising. And then I think other than that, as I said, there was a – we’ve leveraged a number of items in the P&L whether it be R&Ms, utilities, and so forth. And it’s just really been scattered around as we focus then on cost management in general.

Alan Vituli

The other component that – is the fact that we have taken price increases and as a consequence cost percentage have seem to come down on a relative basis. But we’ve taken our consumers’ temperature on a very regular basis with respect to the Hispanic brands. We find ourselves still getting very great – good value scores despite the price increases.

Brian Vaccaro - Raymond James

Okay. That’s very helpful. And last quick question. Do you happen to have CapEx, and what the – if any, proceeds from sale lease back in Q1?

Paul Flanders

Yes. I mean, in the first quarter, we did close the sale lease back. I think, it was – we did about 1.9 million in the first quarter and total CapEx was about 8 million.

Brian Vaccaro - Raymond James

Perfect. All right. Thanks a lot.

Operator

Thank you, sir. (Operator Instructions). And our next question is a follow-up from the line of Reza Vahabzadeh with Barclays Capital. Please go ahead.

Reza Vahabzadeh - Barclays Capital

Actually my questions were asked and answered. Thank you.

Operator

Thank you, sir. And we have another follow-up from the line of Mitch Speiser with Buckingham Research. Please go ahead.

Mitchell Speiser - Buckingham Research

Thanks very much. As it relates to Burger King on the ‘09 food cost outlook, I believe you said up 3 to 3.5%. I assume that includes beef. Can you discuss what you think might be up above that 3, 3.5% rate given that beef is looking like it will probably be below that rate?

Paul Flanders

Primarily french fries. I mean that contract was negotiated by RSI back in October/November of 2008, and they were coming off a three-year contract with a fixed cost. And consequently the new price that they entered into was significantly higher than the price that we were coming off of.

Mitchell Speiser - Buckingham Research

I see. So that’s a system wide --

Paul Flanders

Yes.

Mitchell Speiser - Buckingham Research

-- French fry contract? Got it.

Paul Flanders

Yes.

Mitchell Speiser - Buckingham Research

Understood. Thanks. And on the cup size change that you mentioned, was that a system wide change as well?

Paul Flanders

Yes.

Mitchell Speiser - Buckingham Research

Great. Thank you.

Operator

Thank you, sir. (Operator Instructions). All right. I’m now showing no further questions in the queue. I’d like to turn the call back over to management for any closing remarks.

Alan Vituli

We have no closing remarks other than we appreciate you joining us today and your attention and we will certainly talk to you next quarter. Thank you.

Operator

And ladies and gentlemen, this concludes Carrols Restaurant Group first quarter 2009 earnings conference call. You may now disconnect and we thank you for using AT&T Conferencing.

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Source: Carrols Restaurant Group Inc. Q1 2009 Earnings Call Transcript

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