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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q2 2009 Earnings Call

August 3, 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 – Wells Fargo

Kenneth Bann - Jefferies & Company

Mitchell Speiser - Buckingham Research

Brian Elliott – Raymond James

Brian Hunt – Wells Fargo

Analyst for Greg Ruedy – Stephens Inc.

Operator

Welcome to the Carrols Restaurant Group second quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the call over to Mr. Paul Flanders, Carrols’ Chief Financial Officer for opening remarks. Please go ahead.

Paul Flanders

Thanks. Good afternoon and welcome to our second 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 our financial results.

On the call today with me is Alan Vituli, our Chairman and CEO and Dan Accordino, our President and Chief Operating Officer. Alan and Dan will provide some commentary on the business and then I will walk through the financial results for the quarter and discuss our updated 2009 guidance. We will then be happy to address any questions that you might have.

With that, I will turn the call over to Alan.

Alan Vituli

Thanks, Paul, and good afternoon, everyone. Let’s begin by reviewing some highlights from our second quarter. Overall, we saw a significant improvement in profits due to actions we have taken to reduce costs as well as easing cost pressures particularly on commodities and utilities. We also saw considerably lower interest expense.

As a consequence, we more than doubled our net income to $7.1 million from $3.3 million and EPS to $0.32 from $0.15 in the year prior for the quarter. However, while our profitability rose our revenues were off by $6.7 million compared to last year with much of that related to our Burger Kings where comp sales were down 4.7% in the second quarter. Recognize that second quarter 2008 Burger King comp sales were up 5.9% compared to 2007.

Revenues from our Hispanic brands in the aggregate were down only $400,000 as the effect from new units opened over the past year helped to offset the softness in our same store sales. However, both our Pollo Tropical and Taco Cabana brands did experience negative same store sales for the quarter.

Our ability to boost the bottom line was a consequence of a number of things. First, the actions we have taken to reduce and leverage costs are evident across our P&L both at the corporate and restaurant levels. We benefited from a moderation in commodity prices, cost of sales improved 124 basis points compared to the second quarter of last year. For all of 2009 we continue to anticipate that increases in commodity costs will be moderate.

Our restaurant operating costs declined 52 basis points year-over-year partially because of favorable utility costs but also due to other steps taken to reduce operating costs. Our G&A costs which included an $800,000 increase in bonus expense this year compared to the second quarter of last year were lowered by $1 million or 28 basis points in the second quarter of 2009.

Advertising expense which was $1.7 million lower than the year-ago period positively impacted our bottom line during the second quarter. However, this is part of a timing issue which Paul will further explain. Lastly, lower debt balances along with more favorable interest rates enabled us to lower interest expense by $2.2 million.

In the second quarter we opened one new Taco Cabana restaurant, one new Pollo Tropical restaurant and also closed two Burger King Restaurants. As we have said on prior calls, we focused on generating higher free cash flow this year in order to pay down debt and to reduce our financial leverage. We are only developing a few restaurants for the balance of 2009 and will not resume aggressive growth of our Hispanic brands until we have greater visibility with respect to the economy.

Reduced capital spending along with higher earnings enabled us to reduce our debt balance an additional $14.8 million in the second quarter. We have reduced debt by $21.2 million so far this year and $61.2 million over the past 12 months. We anticipate continued progress in this area in the second half of the year as we estimate total debt reduction for 2009 in the range of $30-35 million.

As you can see from our revised outlook we are taking a more cautious outlook regarding our top line expectations for the balance of the year given present economic conditions, the increasingly competitive environment as well as recent sales trends particularly at Burger King and Taco Cabana.

While there may be some early signs the economy may improve later this year, we are particularly concerned by the continued increase in unemployment in many of our markets which is causing us to be cautious for the balance of the year. Simply stated, we just don’t have good visibility. Our plan to grow top line at both Pollo Tropical and Taco Cabana centers on what we believe are our competitive advantages over both the conventional quick service segment and casual dining.

Unlike QSR and casual dining our Hispanic brands offer full meals that are freshly prepared and positioned for home meal replacement on premises dining as well as those customers who are time constrained. Our Hispanic brands offer food that rivals conventional full service restaurants at value and prices which are competitive with quick service restaurants.

Given the current consumer behavior and the economic circumstances in which consumers find themselves, we will be further building on our brand position. We believe we can grow sales by maintaining great value combined with new product development and enhancing the overall consumer experience at our restaurants. We hope to avoid some of the aggressive discounting which is currently prevalent in the restaurant industry by assuming this strategy.

With that I would like to turn it over to Dan Accordino, Carrols Chief Operating Officer and President to deal with the brands in greater detail. Dan?

Dan Accordino

Thanks Alan. With respect to Pollo Tropical, our comp sales fell by 3.1% in the second quarter against a tenth of a percent increase last year. Despite weak comparable sales and an $800,000 decline in overall revenues, Pollo’s EBITDA increased slightly to $6.8 million and EBITDA margin was 35 basis points higher than the second quarter of 2008.

As you are aware, the Florida economy has been difficult for some time and the unemployment rate has continued to tick up. In June unemployment was 10.6% in Florida compared to the 9.5% national average. That being said our product introductions and new media campaigns are enabling us to hold our own and although comparable sales were still negative we have continued to see sequential improvements in traffic trends from their lowest levels in the fourth quarter 2008.

Our TV advertising and promotions are focusing on specific new menu items and price points that we believe are communicating our differentiation and stabilizing sales. In the second quarter we introduced our churrasaco steak, a Latin-style skirt steak which was advertised and promoted in South Florida at $6.99 including two sides. Concurrently with our promotion focused on our [Tropi] chopped loins starting at $3.79.

Outside of South Florida we introduced churrasaco fajitas at a $5.99 price point and in all markets we distributed bounce back coupons with offers including our quarter chicken meal at $2.99 and a whole chicken with two sides at $9.99. More recently we introduced our new Grilled Tropical Wings available in either a five piece portion for $3.59 or eight piece portion with two sides for $6.59. Unlike most, if not all, competitors, our wings are grilled, not deep fried, and served with either our proprietary pineapple rum wing sauce or our spicy Amazon sauce. This new product introduction is being well received and our comparable store sales at Pollo have actually turned slightly positive so far in the third quarter.

Lastly, we continued to move forward with our Pollo International franchise development plans with the opening of a new franchise location in Freeport, Bahamas, which brings our franchise for Pollo Tropical locations up to 27.

With regard to Taco Cabana, comparable sales dropped 3.8% compared to negative six-tenths in the second quarter last year. Guest counts which have been negative overall got slightly worse in the second quarter on both a sequential and year-over-year basis as the competitive and discounting environment continued to intensify both at QSR and casual dining. Although the Texas economy has held up better than most of the country for some time, we are seeing some softening and mounting consumer pressures there as well.

Recent unemployment reports indicate conditions have worsened and although the unemployment rate at 7.5% is below the national average in June the state of Texas lost the most jobs second only to California. Despite this, we increased Taco’s EBITDA contribution by $2.2 million over the second quarter of 2008 to $8 million and expanded EBITDA margin by 347 basis points on just slightly higher revenues. This reflects the more favorable cost environment and cost reductions, along with solid performance from the restaurants that we have opened over the past 12-18 months.

Our tactics at Taco Cabana this year have been focused on the promotion of historically successful products along with product offerings at compelling price points to compete with not only QSR but also casual dining operators who have adopted very aggressive pricing such as side bar lunches and two dinners for $20 as examples.

During the second quarter our promotions included our popular chicken flautas starting at $2.99. We also rolled out our Cabana combos which are our version of value meals. More recently we launched new grilled fajita pupusa’s with either steak or chicken served with melted cheese, sautéed onions, fresh Pico de Gallo and a choice of sauces for $2.99. We maintain that Taco Cabana is differentiated with its quality food and fresh ingredients and we are aggressively addressing the competitive factors that we face with our focused promotional activities.

With respect to Burger King, we experienced difficult top line performance which in part reflected the difficult comparison from the prior year. Having said that, sales were still softer than we anticipated as we saw the negative impact from escalating unemployment in a number of regions combined with an increasingly competitive and promotional environment. Also, Burger King promotional activity during the second quarter, particularly the Transformer movie tie in and related games, did not drive adequate sales increases when compared with similar tactics employed last year.

Despite second quarter sales performance, we continue to believe that the underlying barbell strategy is sound. It has certainly been successful over the longer term. As we look forward, we recently began advertising around the $1.00 Whopper Jr. to highlight, promote and better focus on the value portion of the menu. There will also be a national coupon drop in late August to further stimulate consumer traffic. We believe these tactics are certainly aligned with the needs of the consumer in the current environment.

EBITDA for our Burger King operations was $9 million in the quarter compared to $8.1 million in the second quarter last year and EBITDA margins improved 153 basis points despite a $6.3 million reduction in sales at the brand. We believe that Burger King’s strong value proposition coupled with a renewed focus on value advertising can and should resonate with consumers in the current economic climate. We believe that Burger King’s sales should improve later this year driven by more successful product offerings than experienced in the second quarter and as year-over-year comparisons become less challenging.

With that I would like to turn it over to Paul who will review our second quarter financial results and update our 2009 guidance.

Paul Flanders

Thanks Dan. Total revenues for the second decreased 3.2% to $203.9 million from $210.7 million last year reflecting lower sales at our Burger Kings. Revenues for our Hispanic brand restaurants fell marginally during the quarter and totaled $108.4 million compared to $108.8 million in the previous period. Pollo Tropical revenues decreased 1.8% to $44.6 million compared to $45.4 million in the second quarter last year. We opened five net new restaurants since the beginning of the second quarter 2008 while comparable restaurant sales decreased 3.1% compared to a positive 0.1% comparison from the prior year.

Miami-Dade County where we have more than 1/3 of our restaurants continued to perform better on a relative basis than other markets with comparable sales down only 0.2%. The 15-unit Orlando market was down 6.9% in the second quarter. While not that many restaurants, our newer markets on the west coast of Florida and in the Northeast were softer than the chain as a whole given the added challenges of brand building in the present economic environment. Unemployment levels are also higher in many of the Florida west coast markets which has added additional pressure there.

Taco Cabana revenues increased 0.6% to $63.8 million from $63.4 million due primarily to the opening of 12 new Taco Cabana restaurants since the beginning of the second quarter last year. Comparable restaurant sales in the quarter were down 3.8% against a negative 0.6% comparison in 2008. San Antonio and Austin have been softer for some time, as we indicated. Dallas and Houston, both positive in 2008, have softened recently particularly in Dallas.

With regard to Burger King, we indicated in our previous call we were running negative early in the second quarter particularly in light of the very strong sales increases in the second quarter of 2008. However, sales in the quarter were still somewhat lower than anticipated. Overall, Burger King sales decreased 6.2% to $95.5 million which include net closing of eight restaurants since the beginning of the second quarter last year as well as the decrease in comparable sales of 4.7%.

While comparable sales were softer than anticipated in Burger King and Taco Cabana, our effectiveness in managing costs and increasing profitability was clearly reflected across most of the P&L. First and foremost, costs were down substantially from the year-ago period reflecting the more favorable cost environment of commodities and utilities as well as our increased focus to reduce our leverage in a number of other expenses.

The result was an increase of $3.2 million in EBITDA and $4 million in operating income over the prior year and an expansion of operating margins of 217 basis points to 7.9%. We posted strong earnings in the second quarter with net income of $7.1 million or $0.32 per share compared to net income in the second quarter of 2008 of $3.3 million or $0.15 per share. Although some of the improvement reflected a favorable shift in the advertising of Taco Cabana and included an insurance recovery of $579,000 related to Hurricane Ike, the increase in earnings was solid nonetheless.

With regards to the operating portion of our P&L, cost of sales were 29.2% or 124 basis points lower than the second quarter of 2008 with Burger King cost of sales decreasing 108 basis points, Pollo Tropical down 103 basis points and Taco Cabana down 177 basis points lower. Given the significant increase we experienced in commodity costs last year, you will recall we took pricing increases over all of our brands in 2008. While we haven’t taken additional pricing in 2009 we are continuing to benefit from those actions.

For the second quarter effective pricing was about 6.5% at Pollo Tropical, 5.8% at Taco Cabana and 3.2% at Burger King. For the full year, we will be about 2.5% for Burger King and between 3.5-4% for our Hispanic brands, all from last year’s price increases. Currently we estimate commodity inflation will run 3.5-4% for Pollo, flat to down 1% at Taco Cabana and although we have less visibility with respect to Burger King we believe that costs will increase 3-3.5% range for the year. For the full year we are estimating cost of sales will now be 80-90 basis points below 2008, a little better than we indicated on our last call.

Restaurant labor costs increased 17 basis points in the quarter to 29.1% of sales. Considering the softer comp sales and the de-leveraging which that generally causes, we are certainly pleased with this only minor uptick in costs. We have also taken some labor out of the brands and we have implemented labor productivity improvements and cut hours in tandem with sales changes. I should also note that higher unemployment has favorably impacted employee turnover and in turn further improved labor productivity and lower training and recruiting costs.

Restaurant operating expenses which exclude rent decreased 52 basis points in the second quarter to 14.4% of sales. As a percentage of sales a number of costs have positively leveraged including utilities, R&M’s and other restaurant level costs. Amortizing expense was $1.7 million lower in the second quarter compared to the year-ago period, a decline of 57 basis points. However, this was largely reflective of a timing shift in expense.

At Taco Cabana advertising was about $900,000 lower in the second quarter and in total was lower for the first half of 2009 compared to 2008. For the full year though we expect Taco Cabana advertising to increase about $1.2 million and to increase approximately $1.7 million in the second half of the year over 2008 levels. In addition to the media shift at Taco Cabana, Burger King advertising was 4.2% of Burger King sales compared to 4.7% in the second quarter last year, reflecting the timing of expenses related to movie tie in promotions last year.

General and administrative expenses were 6.2% of total revenue, down 28 basis points and $1 million lower compared to the second quarter last year after the $800,000 increase in bonus. Our reduced G&A expenditure is a consequence of the cost reductions that we implemented in late 2008.

Rent expense increased 59 basis points in the quarter to 6.1% of sales. This is a result of the 2008 reclassification of leases that had been on balance sheet as lease financing obligations to operating leases. The rent payments previously accounted for as interest and principle are now included in rent expense. The effect in the second quarter for these changes was to increase rent by about $750,000 with reductions in interest of about $900,000 and depreciation of $200,000 which in total was about $350,000 of pre-tax.

Lastly, interest expense decreased $2.2 million to $4.9 million. In addition to the lease change I just mentioned this reflected the debt reduction we made in 2008 and 2009. Interest reduction was due to the repurchase of $15 million of our 9% senior subordinated debt last year as well as lower interest rates on our LIBOR based borrowings resulting in a significant drop in short-term rates.

At the end of the second quarter our total debt was $294.9 million which reflected a $14.8 million reduction during the period and a $21.2 million reduction through the first half of 2009. Our senior credit facility required a total debt to EBITDA ratio of under 4.5 times at June 30th and as calculated for purposes of compliance we were at 3.3 times for about [inaudible] of a tenth lower than at the end of the first quarter and well below the required levels. Debt reduction remains a high priority and we now anticipate that in total we will pay down between $30-35 million of debt this year and this is a little higher than the $25-30 million previously indicated and should further reduce leverage from where we are today.

Finally, I would like to comment on our outlook for 2009. As Alan said, we are taking a more cautious outlook regarding sales expectations for the balance of the year given current economic conditions, the competitive environment and recent sales trends at Burger King and Taco Cabana which at least so far have not improved in the third quarter. On the other hand, we expect Pollo Tropical sales trends to improve from the first half of 2009. Pollo same store sales have actually been slightly positive so far in the third quarter.

With respect to our overall revenue for the full year we are now guiding to a 1-1.5% increase for the full year. Diversely, given the favorable cost trends we have experienced, we are raising our full year earnings guidance from $0.90 to $0.95 per diluted share to $0.94 to $0.99 per share. This includes the effect of the extra week in our fiscal year estimated to benefit net income in the fourth quarter of 2009 by approximately $3.5 million or $0.07 per share.

Important objectives this year include increasing free cash flow, reducing debt and lowering financial leverage. We continue to make meaningful progress in all three of those fronts. We have limited new restaurant openings, now projected between 4-6 locations for our Hispanic brands which assumes 1-2 Pollo restaurants and 3-4 new Taco Cabana restaurants. In addition, we plan to relocate 2-3 Burger King’s to new locations. We have completed one. We will close four Burger Kings and have closed two so far.

In terms of additional guidance we have not yet touched on, CapEx is estimated to be $35-40 million, considerably below our 2008 spending. General and administrative expenses should be comparable to 2008. Lastly, our annual effective tax rate is now estimated to be slightly lower at 37.3%.

Concluding, we positively view the positioning of our three brands in enabling us to weather the current macro conditions. The actions we are taking to improve our capital structure during this period have certainly been important near-term priorities and we believe they will better position us to accelerate expansion as economic conditions improve.

With that we will now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Reza Vahabzadeh - Barclays Capital.

Reza Vahabzadeh - Barclays Capital

On the cost of sales, obviously it has been a nice tailwind for you so far this year. How much visibility do you have on the two Hispanic brands that this level of improvement will continue? Maybe if you can comment on the Burger King cost of sales visibility as well?

Alan Vituli

Dan maybe you should take that question dealing with potentially how much we have in terms of the forward contracts.

Dan Accordino

With the Hispanic brands we have good visibility because all of our primary commodities are contracted for the balance of 2009. As it relates to Burger King we have reasonably good visibility given the information that we have received from the buying cooperative for the balance of this year. We know what our packaging costs are and what our French fry costs are and what some of the proteins are. The only variable would be the ground beef costs which changes weekly. Certainly it will be infinitely more positive than it was a year ago.

Reza Vahabzadeh - Barclays Capital

Ground beef has been declining obviously on a year-over-year basis in the last 3-4 months. Is that something that in your guidance you are incorporating as if it is going to be down on a go-forward basis or what kind of assumption are you making on that front?

Dan Accordino

It is going to be down relative to last year certainly. On a sequential basis it actually tends to go up a little bit during this time of year.

Alan Vituli

In terms of guidance, a general statement our inclination with respect to the world that we are looking at was to be as relatively conservative with respect to our guidance. Certainly the historical beef prices that we have experienced at Burger King, we are using prices that are lower than those historical prices.

Reza Vahabzadeh - Barclays Capital

On the operating expense side, obviously a significant improvement there. How much of that is sort of sustainable in the next couple of quarters? You talked about advertising being timing driven. Utility expense, how much was that down and is it likely to be down going forward?

Paul Flanders

Utility costs year-over-year was a big part of the favorability. I think we will continue to see some of that as we go forward in the third and fourth quarters. I would say in general as you can see in the numbers we have improved operating margins pretty considerably in the quarter. I think as we go forward I wouldn’t necessarily think in terms of margin expansion at those rates but that is more dependent on what sales end up doing in the back half of the year than anything.

Reza Vahabzadeh - Barclays Capital

Do you recall how much was your utility expense lower?

Paul Flanders

Utilities year-over-year were down I think about $1.2 million.

Reza Vahabzadeh - Barclays Capital

The competitive environment seems pretty intense, especially in QSR and the burger segment. Can you comment on your thoughts regarding the promotions we are seeing and your outlook on that going forward?

Alan Vituli

The current recession makes every company assess their strengths. With respect to QSR price points tend to be the mechanism that is available to them. As long as we are in this recession and an environment which is best characterized as contracted consumer spending and is over-stored and it is going to take an awfully long time for quick service to be free of the perception that deep discounting dollars off and expanding the value menu is their strategy.

For us, I think that assessing our own strengths we find it is our food. That is a fabulous strength to have now. I think that prospectively we are going to build much more on the customers’ affinity for our brands rather than sort of running with the masses on discounts as a strategy. We are going to enhance service. We are going to try to enhance the consumer’s experience and we are certainly going to continue aggressively with product development. Nonetheless, value is very much of a component of why consumers love our food. It is our food at that price. Bottom line is you are going to see significant discounting continuing in QSR and in casual also. I think if we had sort of a reassessment and emphasis it steers us a little bit away from conventional discounting and more towards value perception built around the consumer’s experience with our food.

Operator

The next question comes from the line of Jeff Omohundro – Wells Fargo.

Jeff Omohundro – Wells Fargo

My question is in a way along the same lines of the QSR environment. Specifically in the case of Burger King and the content renewed focus on value, I am just curious has the advertising supporting the $1 Whopper Jr. begun to at least shift the trajectory of sales in July? Do you think the upcoming coupon drop will help? What is your sense of that?

Dan Accordino

The Whopper Jr. advertising is maybe two weeks old. The early returns for the last couple of weeks the sales have continued to struggle. Our expectation is that yes the ad and the coupon drop has consistent strong offers and we are expecting that will generate a positive consumer response.

Alan Vituli

There is a point where these value propositions, the price point proposition $1 items are so loudly shouted by so many brands or the equivalent that the sound gets muted. I think you are starting to see that a little bit. With respect to Burger King we really don’t control the marketing strategy but we have pretty good confidence in their marketing team. With respect to our Hispanic brands I think we have made the decision to basically emphasize the best parts of our brand and to try to stay away from the barrage of nuttiness that is going on with respect to discounting.

Operator

The next question comes from the line of Kenneth Bann - Jefferies & Company.

Kenneth Bann - Jefferies & Company

I was just wondering, on Pollo Tropical you indicated lately sales have improved. Do you think it is due to the new products and the marketing you have been doing or is it because you are going up against somewhat easier comparisons? Do you think the market in Florida has bottomed and maybe turning?

Alan Vituli

I do think the market in Florida got hit very early with the recession. Early and very hard. As to whether it is bottoming, it is an awful place for it to be bottoming but unemployment doesn’t seem to be getting very much worse but it is certainly not improving. With respect to the progress we have made at Pollo Tropical it has more to do with our marketing and our new product development than the Florida economy.

Kenneth Bann - Jefferies & Company

I get the cost reductions you made there and profit improving you have made there with any improvement in sales we should expect an improvement in EBITDA year-over-year as the sales continue to improve there?

Alan Vituli

Sure.

Kenneth Bann - Jefferies & Company

At Taco Cabana I would guess you are probably going to do more advertising in the second half the kind of profit improvement we saw in the second quarter, we shouldn’t expect that kind of probability at Taco Cabana?

Alan Vituli

Product development, new products and marketing are going to drive Taco’s business top line and ultimately the bottom line. The Texas economy and competitive activity is sort of forcing us to speak a little louder and do a little more but it is going to be product development and new products in the market with those new products and some permanent price points.

Kenneth Bann - Jefferies & Company

It sounds like you are going to remain fairly conservative on new store development going into at least the early part of 2010 and maybe all of 2010 which I would guess would mean you are going to generate again a fair amount of free cash flow. Is that true in 2010? What I was wondering is what are you thinking at this point? Would you continue to use that free cash flow to pay down debt or would you use it for some other purpose?

Alan Vituli

We are still pretty levered from a financial standpoint. Certainly from our historical perspective we are pretty comfortable with a level of leverage. I think because the world is redefined acceptable levels of leverage we are going to have to continue to basically improve our debt to EBITDA. If EBITDA moves up because of what we are doing then my sense is our debt to EBITDA gets improved faster and we return to building restaurants faster. In terms of 2010, based on what we are looking at we are probably looking at maintaining maybe slightly increasing but certainly not aggressively building and that will leave us with free cash flow. Needless to say the banks would like that free cash flow to end up in their coffers. Your assessment is correct. We are pretty fluid.

Operator

The next question comes from the line of Mitchell Speiser - Buckingham Research.

Mitchell Speiser - Buckingham Research

On the same store sales at Burger King, you gave us the April comps last quarter. I believe it was down 2.5. Would you be willing to give us the May/June comps on that monthly basis?

Paul Flanders

We fell off after April obviously. May and June were about the same at about 5.5%.

Mitchell Speiser - Buckingham Research

You did say July kind of is continuing at a similar trend?

Paul Flanders

That is true.

Mitchell Speiser - Buckingham Research

For 2009, you didn’t give us specific comp guidance for the brands, Burger King in particular. Do you have a 2009 comps target for Burger King?

Paul Flanders

We gave overall revenue guidance at this point. I think our sense is we have to be a little cautious here because we are having problems with visibility. Burger King is a little bit negative. We think it is going to get a little better later this year. Taco Cabana has been a little worse which is really what has driven the overall guidance down. Pollo as we said probably is about a percentage point higher.

Mitchell Speiser - Buckingham Research

Just to drill down a little deeper into the Burger King comp and the second quarter can you give us a sense of breakfast, lunch and dinner. Was there one day part that was particularly weak? Was it widespread?

Dan Accordino

It is across all day parts with breakfast being the most negative.

Mitchell Speiser - Buckingham Research

It does seem like Burger King is under performing at the breakfast day part. Would you characterize it as your target market might be more unemployed, kind of that young male user?

Alan Vituli

You have to appreciate the fact we are franchisees in the Burger King business. Some of those questions are probably best put to Burger King. What we give you is historical perspectives much better. It is too speculative for us to be dealing firmly with some of these prospective issues on Burger King. It is pure guess.

Mitchell Speiser - Buckingham Research

On beef, I think you gave us a dollar amount. What was beef down in the second quarter? Is there any sense of the third quarter percentage difference versus a year ago?

Paul Flanders

The whole quarter averaged about $1.43 per pound which was down roughly 7% from second quarter of last year. Third quarter is where we sort of peaked last year at about $1.72 and we are seeing beef costs sort of staying in the same range we are in currently or maybe even ticking down a bit.

Mitchell Speiser - Buckingham Research

On utilities I think you did give us a dollar amount. Can you give us what that percentage change was year-over-year in utilities?

Paul Flanders

I think it was 51 basis points on utilities.

Mitchell Speiser - Buckingham Research

Can that be translated to a percentage basis or year-over-year percent what utility costs were down?

Paul Flanders

We have more stores this year so I’m not sure that number would be meaningful.

Operator

The next question comes from the line of Brian Elliott – Raymond James.

Brian Elliott – Raymond James

We have talked about Burger King. We have talked about Pollo here in July. I guess we can’t leave Taco out. Can you give us a sense of Taco Cabana how it progressed through the quarter and what we might be seeing so far this quarter?

Dan Accordino

I think on the last call Taco was running about 3% negative when we had the call. It got a little bit worse than that, not a lot, but maybe low 4% range. It is a little worse than that in July.

Brian Elliott – Raymond James

I know earlier you talked about Taco seeing some weakness in breakfast and late night if I recall correctly which are aggressive focus points of QSR. Is that trend continuing as well? That is where the weakest day parts are.

Alan Vituli

I think it is across the board at this time. We are seeing it in lunch and dinner also.

Dan Accordino

I think the bigger issue is markets that had been very good up until now, like Dallas particularly, have gotten much softer.

Brian Elliott – Raymond James

Which is reflective of the economy and job loss, etc.

Dan Accordino

Correct.

Alan Vituli

That combined with the enormous increase in discounting which sort of leaves us with reaffirming the logic of our position which is to create permanent value and turn toward new products. All of our tests suggest our consumers like our food and don’t consider us anything but a decent value but we have stopped some of the comps facing the QSR segment and start to basically position ourselves where the consumer wants us to be. That is a quick casual restaurant.

Operator

The next question comes from the line of Brian Hunt – Wells Fargo.

Brian Hunt – Wells Fargo

Can you comment on how many stores you have in your franchise pipeline with Pollo Tropical and Cabana. What is the financial scale of the firms that have these franchise agreements? The ability to get franchise financing in the current environment is fairly difficult.

Alan Vituli

We don’t franchise domestically other than the fact that we have three opened institutional situations with Aramark at Universities. We are continuing to pursue that very aggressively to get into the student feeding just because Pollo is tremendously well received, is pretty healthy, gets high marks and Aramark is doing very well with that brand.

We have a restaurant, as Dan indicated, in Freeport that will be opening this year with restaurants in Trinidad and Honduras. We are in the process of signing franchise agreements with some significantly larger places. Basically we are sort of building our franchising business but that is abroad. That is probably the best way I can answer it. Those capital markets tend to be distinguishable but almost always it is with seasoned restaurateurs who have a fair amount of equity in their business. In one case it is with a pretty prominent family. So far we haven’t heard as financing as the impediment.

Brian Hunt – Wells Fargo

Getting back to the question someone else asked, can you talk about what your target leverage is? If you get to that target leverage point still in this difficult economy I would imagine opening new stores might be relatively unattractive. What might your plans be for cash be at that point if that kind of plays out?

Alan Vituli

Our target leverage in some ways is dictated to us by the capital markets. Between our advisors and ourselves we have basically concluded that before we enter any refinancing it probably should be based on a capital ratio of 2.5 to 2.75 times EBITDA. So the math is easy. We are about $300 million, presumably $250-275 million with EBITDA in the $100 million range will get us there. That will leave us with a fair amount of free cash flow. We do have three brands and plenty of uses for capital. Pollo has substantially expanded its footprint to the Northeast. I guess we have got plenty of places to go with our cash and we are reasonably close to where we need to be from a leverage standpoint. We have a little ways to go. We have plenty of places to spend dollars. The issue is just magnitude. We are going to be building restaurants. As to whether it is five restaurants or twenty restaurants is a function of our confidence in the economy.

Brian Hunt – Wells Fargo

What is your RP basket under your bottom covenants at this time?

Paul Flanders

I don’t have an exact number here but it is well north of $75 million because if you recall equity proceeds when we paid down debt went to increase the basket at that point.

Operator

The next question comes from the line of Reza Vahabzadeh - Barclays Capital.

Reza Vahabzadeh - Barclays Capital

A question on the labor expense ratio in the first quarter the labor expense ratio fell year-over-year. In the second quarter it was essentially unchanged to up a bit. Is that just sales leveraging because of same store sales or is there more to that?

Paul Flanders

That is a big part of it. I think particularly if you look at it sequentially we did reduce labor from the first quarter this year. I think that is another relevant data point.

Reza Vahabzadeh - Barclays Capital

A couple of housekeeping items. Cash on balance sheet at quarter end? CapEx for the quarter?

Paul Flanders

Cash was about $3 million on the balance sheet. CapEx for the quarter was $8.9 million. Year-to-date we have spent about $17 million, about half of what we suggested the guidance was.

Reza Vahabzadeh - Barclays Capital

How much of your on balance sheet lease obligations are reclassified to off balance sheet?

Paul Flanders

The net change in the quarter was about $3.2 million. That included we have taken off I think 3-4 leases and then we had a new sale lease back that went on balance sheet. It will only be there for a short period of time but is a consequence of that particular deal. The net number is about $3 million.

Operator

The next question comes from the line of Greg Ruedy – Stephens Inc.

Analyst for Greg Ruedy – Stephens Inc.

I had a question on Hispanic brands. Are there any incremental equipment roll outs that are going on with the new promotions right now?

Paul Flanders

No.

Analyst for Greg Ruedy – Stephens Inc.

The products, the new churrasaco steak that is being promoted are supported by TV in Florida. I think previously we had talked about Pollo not having quite enough scale yet to do television advertising.

Dan Accordino

We have been advertising in 2009 was the first year of probably the last 4-5 that we actually advertised on television in Dade County, Broward County, Palm Beach County and actually in Orlando. So that was our plan in 2009. We have more scheduled for the balance of this year. That will be our plan on a go-forward basis in those markets. We can’t television advertise on the west coast or the northeast.

Analyst for Greg Ruedy – Stephens Inc.

Have you seen any differences in usage of the new promotions between your Florida markets and your Northeast markets given we just talked about the advertising and the differences in the economy?

Dan Accordino

Some of the Northeast markets don’t always have the same products we have in the Florida markets because we roll them out in our core markets first. Generally, the wraps are very well received in the Northeast, as an example. They were rolled out a little bit later and have done very well. In the South Florida market, the wings which have been in place now for the past 3-4 weeks have done extraordinarily well.

Alan Vituli

Ethnicity tends to be relevant with respect to the popularity of our new products. Geography a little less.

Analyst for Greg Ruedy – Stephens Inc.

Are you seeing any substantial variances in the bounce back redemptions that are being offered right now given where the consumer is or is it pretty much in line with historical trends?

Alan Vituli

Historical trends.

Operator

At this time I am showing no further questions. I will turn it back to Mr. Vituli for any closing remarks.

Alan Vituli

We thank you. It is not a revelation to say we are in a period where visibility is not good. Commodities have been very helpful. Our cost reductions have been very effective and frankly now the burden and focus is to build top line. Again, over the course of the next six months we would like to give you a report that has the same direction but still with good sales numbers. Thank you for listening in.

Operator

Ladies and gentlemen this concludes the Carrols Restaurant Group second quarter 2009 earnings conference call. We thank you for your participation. You may now disconnect.

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