Einstein Noah Restaurant Group's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Einstein Noah (BAGL)

Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL)

Q2 2013 Earnings Conference Call

1 August, 2013 5:00 PM ET

Executives

Emanuel Hilario - COO and CFO

Jeffrey O'Neill - President and CEO

Analysts

Nicole Miller Regan - Piper Jaffray

Alexander Slagle - Jefferies

Michael Tamas - Oppenheimer

Will Slabaugh - Stephens

Paul Westra - Stifel Nicolaus

Phan Le - Lazard

Karen Holthouse - Cowen and Company

Operator

Good day, and welcome to the Einstein Noah Restaurant Group Second Quarter 2013 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Manny Hilario, Chief Operations Officer and Chief Financial Officer. You may begin.

Emanuel Hilario

Thank you. Good afternoon everyone and thank you for your time today. Let's begin by covering a few regulatory matters. During our formal remarks and in responses to your questions, certain items may be discussed which are not based on historical facts. Such items including statements indicating our beliefs, trends, plans, expectations, assumptions, anticipation, guidance, projections, estimates, or the like should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks, which could cause our actual results to differ materially. For more details, please refer to our earnings release issued today and to the risk factors in our recent SEC filings.

And now let me turn the call over to our President and CEO, Jeff O’Neill. Jeff?

Jeffrey O'Neill

Thanks Manny. We appreciate you all joining us today. But just before I start, I want to recognize two leadership appointments at Einstein Noah, and formally welcome these individuals to their new positions. First, I want to welcome Glenn Lunde who joined us as our Chief Concept Officer back in May. Glenn is a seasoned marketing executive with over 20 years of fast, casual and quick service experience, has been tasked with leading the strategic marketing direction for the three of our brands.

And last month, our CFO, Manny Hilario was appointed Chief Operations Officer, replacing the now retired Brian Unger. We are excited that Manny has assumed these new responsibilities. In fact, over the past year, he had already taken on an expanded role, which included both license and franchise operations. I look forward to partnering with both of these individuals on behalf of our shareholders, to further strengthen the organization, and as part of this transition, we have already begun the search for a new CFO.

So with that, let's now turn to our broader quarterly discussion. Comp sales returned to positive territory in the second quarter, with plus 0.7% systemwide gain, and with the exception of the first quarter, the company has now had positive comps in eight of the last nine quarters. We are benefitting from our transition to our new 'everyday value' strategy and extended hours of operation across all our locations. These tactics have further supported our growth in catering, specialty beverages and breakfast sandwiches.

Importantly, as we rolled across the country from West to East in the second quarter, transactions were down roughly 2%, which is our strongest quarterly performance since the first quarter of 2011. We believe that a new emphasis on everyday value combos, coupled with a renewed emphasis on incenting for exceptional guest experience is resonating with customers, and this in turn, is improving traffic trends.

In addition, we are also providing more value for our bulk offering, including more options under $10 and lower pricing on our popular Cream Cheese Shmears. To complement this, we have also introduced higher checked and higher margin gourmet sandwich features, like our grilled paninis, Nova Lox, and other popular Big Eat sandwich lineup.

Growing specialty beverages is also key to driving comp sales, along with building average check, and this expanded line of blended beverages is helping us drive more beverage occasions. The category itself grew almost 9% in the second quarter, (inaudible) sales growth overall, as our frozen strawberry and lemonade, low fat smoothies, and ice vanilla hazelnut coffee, have proven to be summer favorites.

Total catering sales grew close to 18% across our company-owned stores for the quarter. Our focus this year is on using our sales force to build greater awareness of our catering capabilities, particularly at lunch, along with an expanded role in search engine marketing, and outlier marketing management.

So as you can see, we are employing a three-pronged sales strategy within our stores. Firstly, accentuating everyday value to encourage transaction to frequency. Second, offering high price and more indulgent Big Eat sandwiches to drive margin and check, while expanding our line of specialty beverages, and gaining share in catering, to also build our average check. These store level initiatives are being supported by greater brand awareness, through a combination of in-store, grass roots and mass marketing, which we call our four walls, four blocks and four mile strategy.

Our manufacturing business is a great story; as we continue to grow revenue to third parties from our Whittier, California production facility, and due to the successful restructuring last year, this segment is now generating phenomenal margins. Manufacturing revenues accounted for about 7% of total revenues in the second quarter, but nearly 11% of gross profit, as it's margin rose more than 600 basis points over the prior year.

We realize that driving operational efficiencies is critical to our long term success, and over the course of 2013, we will continue to build on our accomplishments. Our focus right now is on packaging, supply contracts, and distribution center rationalization, and we expect to save between $2.5 million to $5 million on top of what we achieved over the last two years. In other words, our manufacturing arm is benefitting from both sales leverage, as well as a concerted effort to drive efficiencies.

Overall, we are on track with the development plan within existing territories, while building our footprint in some new territories. Manny will review the details on our growth plan shortly, which is largely centered on attracting qualified and experienced franchise and license operators to partner with us, and build a flagship Einstein Brothers brand.

With that, I now like to turn the call back over to Manny, our Chief Operations Officer, and for the time being, our CFO.

Emanuel Hilario

Thanks Jeff for your kind words earlier. I am now going to review our financial results for the second quarter 2013 and then discuss our outlook for the remainder of 2013.

Total revenues increased $18 million or 1.7% to $107.8 million from $106 million. System-wide comparable restaurant sales increased 0.7% and consisted of a 2.9% increase in average check, that was offset by a 2.2% decrease in transaction. As Jeff mentioned, the rate of our declined transaction was our lowest in more than two years, and in our estimation, a direct result of the Everyday Value initiatives that we had implemented.

Company-owned restaurant sales increased $0.7 million or 0.7% to $97.1 million compared to the year ago period. Comparable restaurant sales increased 0.4% and consisted of a 3% increase in average check, that was offset by a 2.6% decrease in transaction. Franchise and license revenues increased 14.7% to $2.7 million reflecting both comparable sales, growth of 1.5%, as well as higher unit counts for both franchise and licenses over the trailing 12 month period.

Our planned costs, cost of goods sold and labor costs were relatively flat for the combined total of 57.4% of restaurant sales, compared to 57.2% in the prior year, and reflects a tight control of the two biggest costs in our P&L.

Rent and related expenses increased 50 basis points to 11.3% from 10.8%, primarily due to the 60 new restaurants that we have added over the last four quarters. Our investment in marketing initiatives decreased $0.6 million from the same period in 2012, or 70 basis points as a percentage of restaurant sales. Overall, gross margin in our company stores was slightly down by 20 basis points to 17.6%.

Manufacturing revenues from our Whittier facility increased by 10% or $0.7 million due to the strength of orders from third parties. Gross margin as a percentage of manufacturing revenues increased to 29.2% from 22.9%, our highest marginal record, as we benefit from the leverage on the sales gain, combined with cost savings from the efficiency initiatives.

General and administrative expenses increased just slightly to $10.2 million in the second quarter of 2013 from $10 million in the second quarter of 2012. Preopening expenses were $0.3 million, compared to 90,000 in the prior year second quarter, and were related to two company openings in the second quarter, as well as expenses for several openings that are planned for the third quarter.

Income from operations increased 22.1% to $6.8 million from $5.6 million, reflecting a positive impact of our cost initiatives, and the efficiencies in our supply chain, and our continued focus on franchising and license. Adjusted EBITDA was $11.6 million in the second quarter of 2013, compared to $11 million in the second quarter of 2012, and I'd refer you to the reconciliation table in the earnings release for a detailed presentation on how we arrived at those numbers.

Interest expenses rose to $1.6 million in the second quarter of 2013, compared to $0.8 million in the second quarter of 2012, reflecting a higher level of indebtedness related to our recapitalization and the special dividend paid in December 2012. This increase alone in interest expense impacted our after-tax diluted EPS by $0.03 per share. Despite a revenue increase of less than 2%, net income in the second quarter of 2013 was $3.3 million or $0.19 per diluted share to net income in the second quarter of 2012 of $3 million or $0.17 per diluted share. This reflects an EPS growth rate of 12%.

Total debt as of July 2 was $125.5 million and consisted of $97.5 million under the term loan A and $28 million under the revolver. Our cash balance at quarter end was $11.6 million. We ended the quarter with 821 restaurants. During the second quarter of 2013, we opened 7 restaurants, consisting of two company-owned restaurants, three franchise restaurants and two license restaurants. We saw five company-owned restaurants to a franchise in the second quarter of 2013. At the end of the quarter, our portfolio consisted of 453 company owned and operated restaurants, 107 franchise restaurants, and 261 license restaurants.

In terms of our 2013 outlook, our expectations are as follows; specifically, we look for 60 to 80 system-wide openings, including 15 to 20 company-owned restaurants, 15-20 franchise restaurants, and 30 to 40 licensed restaurants. Capital expenditures are estimated at $20 million to $22 million; cost of goods inflation is projected at approximately 2% to 3%, which we plan to offset through efficiency initiatives. Pre-opening expenses of 65,000 to 75,000 per new company-owned restaurant; interest expense of $5.8 million to $6.2 million.

We are very pleased with the fact that we amended our senior credit facility on June 27, 2013, with a reduction in the applicable interest rate of approximately 75 basis points, which is expected to save over $1 million in expense over the next 12 months. We also extended the maturity by six months, and we expect a reduction in interest expense of approximately $0.5 million from previously disclosed fiscal 2013 guidelines, reflecting six months of lower interest expense, and lower average balance outstanding; and an annual effect of tax rate not to exceed 39%, however we will continue to only pay minimal cash taxes for the next several years.

And now, I would like to turn the call back over to Jeff.

Jeffrey O'Neill

Thanks Manny. Our approach to growing sales and traffic, through a combination of Everyday Value and Premium sandwiches and specialty beverages is beginning to take hold, and should provide us with the momentum we need to address the top line opportunity, within our company results.

Our right-sized manufacturing arm is emerging as an effective profit tender, as it benefits from increased penetration within some key accounts, and leverages those incremental orders on extreme line operations. We are also keen on continuing to optimize our business model towards Asset Light, with an emphasis on franchise and license development, while of course also adding and relocating our company stores in select markets.

We intend to make more headway this year, growing non-company owned units with 45 to 60 new franchise and license openings as part of our long term plan to grow the entire system base, by roughly 10% annually. The bottom line is that we are focused on doing everything we can to continue to generate strong free cash flow and optimize returns for shareholders.

And with that, I'd now like to open up to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Nicole Miller with Piper Jaffray.

Nicole Miller Regan - Piper Jaffray

Thanks. Good afternoon. Could you talk just a little bit more about the stores you sold to the franchise, what territory were they in and will he be picking up coverage and growing in that area?

Jeffrey O'Neill

Okay. So Nicole, it's a part of the strategy we have for sort of -- opportunistic looking at refranchising opportunity. We had five restaurants in the Pittsburgh market. It wasn't on our sort of tier-1 expand list, and we sold it to our largest franchisees. So it's a perfect opportunity. He then has -- as part of that development agreement, to expand there. He is a great operator, when you look at sort of the operations within Pittsburgh. So we are really pleased, not only from the focus and attention that we will get in Pittsburgh, but also the future potential from a development agreement. And we will continue to look at opportunities like that, in selective other cities as well.

Nicole Miller Regan - Piper Jaffray

Just given those that have reported earnings so far, what would you be willing to tell us about July, just to help us understand broader industry trends and then anything you could say about yourselves?

Jeffrey O'Neill

When we -- I will talk about the second quarter first of all, and I would say that we had stronger kind of March and April, than we did June, if we sort of break it down in search, and the first couple of weeks in July were similar to that in June. But we really see it starting to pick up, and we don't like to give a lot of guidance on the quarter going forward, but I'd say that whatever that pick up we had in June, seems to have passed, and we are back to more normalized trend lines that we were expecting.

Nicole Miller Regan - Piper Jaffray

Okay. I will hop back in the queue. Thank you.

Operator

We will take our next question from Alex Slagle with Jefferies.

Alexander Slagle - Jefferies

Thanks. Hey guys.

Jeffrey O'Neill

Hey Alex.

Alexander Slagle - Jefferies

I was wondering if you could talk further about what you saw during the Everyday Value rollout, specifically the dynamics, the lag between the initial investment, and sort of when you saw the traffic start to increase?

Jeffrey O'Neill

Yeah. So the best way to describe that Alex would be to go back to the extensive testing we did last year, and what we saw there is similar to what we are seeing now, and that is the whole idea of the everyday value is to drive frequency with our guests, our current users, who look and see that both at lunch and breakfast, as an example of breakfast, we have a great combination of a bagel cream cheese and coffee for $3.99, that's a great everyday value price. You can get out at one of our restaurants on a regular basis, with the three in front of it.

So what we saw was, it took a while for that to take hold. We are doing advertising outside of our four walls, as you know. So it's really building that frequency with guests, and the trendlines that we see, is we picked up about a couple of points of traffic improvement in the first kind of full quarter as we have rolled this out. The other thing to keep in mind, is that we sort of rolled west to east, so if you take a look at the east, there is a west -- central and west, it's a little bit ahead of the curve, and we had about a three point improvement in our traffic in the markets where we got out there a little bit earlier, and the east coast is a little bit behind that, but is gaining as we establish our everyday value.

There is two things to keep in mind. One is everyday value, and the other is that we are driving a -- with the exception of guest experience. So we are incenting our store experience on this exceptional guest experience, and that is a big part of it, that's not something that happens over night, but really there is Everyday Value, extended hours, and there is exceptional guest experience are the three levels that we have been looking at to drive traffic. Sorry for the long answer, but it's obviously a key part of what we are doing, and really important to our success going forward.

Alexander Slagle - Jefferies

That's great. Thank you.

Operator

We will take our next question from Brian Bittner with Oppenheimer and Company.

Michael Tamas - Oppenheimer

Thanks. This is Mike Tamas on for Brian. Can you just tell us what the pricing and mix components were in the average check for the quarter? Then I have a follow-up.

Emanuel Hilario

I will give you the pricing piece. Pricing has about 1.8% pricing in the quarter.

Michael Tamas - Oppenheimer

Great, thank you. Then the follow-up is, can you just talk about the impact on average check that the value push is having and then maybe the balance with catering? I assume it's going into the mix as well? Then maybe how you balance the average check versus traffic, as we look forward over the next couple of quarters? Thanks.

Emanuel Hilario

I will start the answer and I am sure Jeff will add some color to it, but going forward, we continue to see catering being a big building to the check, as we plan to continue our push in [doing] that part of the business, double digits. I think also from a check perspective, I think Jeff mentioned, we are offering $3.99 and $5.99, we are also balancing that with higher premium sandwiches, the feature in our LTO promotions and that actually helps elevate the check, to offset and even create incremental check over this kind of (inaudible) $3.99, $5.99. And the third thing to keep in mind is, we are also doing value in the college campuses, and interesting enough, although it's promoted to the value message, we are actually treating people up into a full combo, so that's actually helping the check and the campus level as well.

So as you look at this going forward, I think you should see our check to continue to expand, not on pricing, but mostly from product mix.

Jeffrey O'Neill

It's good to know that our college age kids out there are actually looking at value when they are in the college campuses. So it warms my heart. The only other piece that I'd add to what Manny said, and I think he answered very well, so remember that our average catering order is about $120, and so when it's growing at 18%, that certainly drives that check number nicely.

Michael Tamas - Oppenheimer

Great. Thank you.

Operator

We will take our next question from Will Slabaugh with Stephens.

Will Slabaugh - Stephens

Yeah, thanks guys. Wondered if you could talk a little more about the three initiatives that you mentioned earlier, just from a higher level between everyday value, premium, and the expanded specialty beverages and catering. Where you feel like you are in the evolution of those initiatives, and where you feel like really the most opportunity lies between them?

The one thing I would say is, if we take a look at beverages. Beverages is a key strategic plank, and it's important because, when you think about driving traffic and frequency, when you have a strong specialty beverage platform, and a strong coffee platform, that becomes a destination at breakfast, and that's what really drives traffic. Hey, we love when people come in for the best bagel and cream cheese in the country. We are the leaders in bagels. But we also feel it's critical and it's a goal of ours to move coffee and specialty beverages from a mix of about 10% to a mix of 15% and beyond. So coffee is a key player, because when you think of it, we are still going after breakfast in a big way. We have a strength in breakfast, and we believe we can build on that strength with our focus on that combination of fresh baked and fresh brewed, if you will.

So that's a really big piece of it. Obviously, it's the early stages with the new Chief Concept Officer. We want to build on our strength in breakfast and bagels. We are focused on growth in hot beverages and specialty. We are doing some testing in media. It's early, we like the results we are seeing from kind of directional outdoor advertising and radio. Obviously it's still too early to determine what impact on our investment strategy going forward. But so at breakfast, it's about beverage and it's about breakfast sandwiches, which continue to grow nicely; then carrying is also a big -- plays a big element in that as well.

Will Slabaugh - Stephens

Got it, and then just a quick follow-up if I could, on marketing costs. Looks like those are up sequentially, and you noted that earlier about $1 million or so. Can you help us with how would you think about those costs in the back half of the year, and if considering how you did improve, from a [travel] perspective this quarter, if maybe that's a run rate we should consider for the next year to two years?

Jeffrey O'Neill

I will jump in and then I will let Manny sort of fill in the blanks on this. The one thing that you saw this quarter was, if you look back a year ago, we had some specific cuts associated with our testing and the consultant that we brought in, to help us evaluate our whole plan to win, if you will, and the key elements to that. So that was the blip that you saw, and then Manny why don't you talk about it?

Emanuel Hilario

I think from an expectation perspective, we still expect the annual number to be around that 3% of revenue. So if you are trying to adjust your model, that's kind of where we see the whole year finishing it.

Will Slabaugh - Stephens

Got it. Thanks guys.

Operator

We will take our next question from Paul Westra with Stifel.

Paul Westra - Stifel Nicolaus

Good afternoon gentlemen.

Jeffrey O'Neill

Hey Paul, welcome back.

Paul Westra - Stifel Nicolaus

Good, thank you. Good to be back. Just a couple of questions. First, maybe on the cost of goods sold lines, which you haven't really touched too much in maybe your cost outlook for the remainder of the year, maybe remind us what is lost and what is not, and maybe your first peek at 2014 where (inaudible).

Jeffrey O'Neill

Okay. So obviously we have been really happy, and you know Paul, that we put a lot of emphasis on our whole supply chain line, over the last couple of years, and we continue to do so. We have a number of key initiatives that have helped to sort of offset inflation to-date, and we are expecting that further somewhere between kind of $3 million to $5 million in savings, kind of full year, between the rollover of initiatives from a year ago, and then our focus on a couple of key initiatives that we have, the supply chain contracts, and some distribution savings.

The one thing to keep in mind that A, it's important as you think about this is, last year we picked up 180 basis points in savings initiatives, and despite that, we are -- so far this year, we have held costs equal to prior year, and that's always, when you look at the rollover, that really to me is a testament to the commitment that the team has to continuing to build year-on-year, and we are seeing some numbers here, as I said, that they come to at $3 million to $5 million as we look at the strong rollover that we had a year ago.

As far as commodities next year, Manny, why don't you touch on that?

Emanuel Hilario

Starting with the -- just for this year, we are totally locked-in in weeks in coffee for the remainder this year, we are almost done with butter, and we have the majority of our [class-III] which is our four key commodities. From a next year perspective, we have already filled the books with about 75% week to next year, there were some buying opportunities in coffee, we are mostly done with coffee for next year.

If you follow the coffee markets, we have been back to the historical more normal number, so we took that opportunity and we bought coffee for 2015.

Jeffrey O'Neill

The other piece of our -- Paul, the other piece of our cost base I think deserves talking a little bit, that Manny touched on in the upfront pieces, the manufacturing and our profit is up 40%, we have got 29.2% margin and I am really happy about that, and so we are adding some capital into our plan to take advantage of some customer opportunities, to expand our third party business. So we feel really good about that, where we are now, and how things look in the future as well.

Paul Westra - Stifel Nicolaus

Great. Can you quantify at all, directionally, where the wheat and coffee prices are on a year-over-year basis, that you already locked in for 2014?

Jeffrey O'Neill

I think coffee is -- I mean, we are in the $1.40, $1.50 range for 2014 and for wheat, we are in the $7.80 to $7.90 range, versus $8 for this year in wheat, and about $1.80 for coffee this year.

Paul Westra - Stifel Nicolaus

Progression there. My second question is also -- may be just a little bit more on the breakfast, obviously your competitors have already discussed about -- some of the strong competition, and maybe the shrinkage in the space and more recent market share losses going around. I mean, you talked about sandwiches, I guess trending up and that was just special in that segment. But if you looked at the overall comp and clearly caring is helping a lot in the specialty drink, it's helping a lot. So I guess your core breakfast business seems to be the lowest performing and -- maybe just discuss what is going on there, where do you think you are in this sort of brunch with the new entrants into the space, and I guess the forward outlook on how to contain or hold on to much market share as you can?

Jeffrey O'Neill

Right. So if you take a look at our business overall, our biggest challenge continues to be -- traffic declines at lunch. We have been strong with our breakfast business, and continue to be and we are happy with that. I think part of it is, the gains that we are getting from a coffee and a specialty coffee point of view, but also, you know, the Everyday Value, that's bumping up breakfast quite nicely.

On the lunch front, I think it really reflects the strong QSR competitors, and how pricing -- how aggressively they have been pricing over the last little while, and we are in the midst of sort of redefining our whole lunch strategy. That's obviously care and focus as we go forward, and I know certainly something that Glenn Lunde has been talking about and looking at. But we still believe that by building around our strength in -- we call it best of bagel, and our focus on specialty beverage. We feel quite good about our breakfast, and obviously the catering element to that, and feel that, as we tighten things up, we can get a foothold on lunch as well.

The other thing I'd like to add is, the extended hours has worked quite nicely, and the reason it has is because, as we go to specialty beverages, as you know Paul, both on cold specialty, like our smoothies are doing extremely well this year, and then also, even hot beverage, where -- our headline is, more people are drinking their snack, and as they do, we feel that that was why extended hours was so important to us, and it is helping our traffic growth as well.

Paul Westra - Stifel Nicolaus

Is (inaudible) helping your breakfast comp more or your lunch comp more?

Jeffrey O'Neill

It's helping our breakfast comp more, but we -- people are really -- a great part about our business is, I mean, they know that we have a strong kind of fresh baked bagel, and that's a great set of products for -- sort of quick simple, everybody loves it, lots of variety, and that's what plays out so well on the breakfast side. But what we know, and what we are finding, as we develop our catering business is, as we get that loyalty on breakfast, we are converting more of these people to lunch. So we see that certainly as an opportunity, that the catering folks are talking, and some of the growth that we are getting this year, is really building on our loyalty at breakfast, to the offering of a great lunch -- catering offer as well.

Paul Westra - Stifel Nicolaus

Great. Then one last one if I can, just maybe a more intermediate type question, maybe follow-up to the cold question on the franchise sales, and probably about Asset Light strategy. What's holding back on these and more accelerated company sales efforts to franchisees, to accelerate the Asset Light approach, or is it more just a function of letting the natural growth in the franchise licensing system over -- eventually approaching overtake the company side of the business?

Emanuel Hilario

This is Manny, I will give a little color on that. Right now we have about 30 development agreements on file, almost 200 stores to be developed under those agreements. In reality, what we are doing is, 15 to 20 is going to be our biggest year in terms of franchise store openings, so we are looking at a good year, and really here is making sure that we have our franchise well grounded with strong operations. So it's more about the quality, and if you do the math on the available inventory, will have the life of the -- four or five years of these agreements. So essentially we will be doing much more than 15 to 20. But right now, that's our taste. We feel very comfortable with that this year. A lot of our franchisees are coming to their second and third stores now, and that's really the right time to make sure that we are taking the right care with their operational level.

Jeffrey O'Neill

The other thing I'd say just building on that, 60 to 80 with the size of our store base is a good number for us. We know that we have got strong controls, we can support the franchisees and licensees with good business building opportunities at that level right now, and we expect that to grow over time, as Manny said, but we feel pretty good with that 10% growth on our base business, year-on-year.

Paul Westra - Stifel Nicolaus

Great. Thank you.

Operator

We will take our next question from Matthew DiFrisco with Lazard.

Phan Le - Lazard

Thanks. This is Phan sitting here for Matt. Manny, congrats on your new role there.

Emanuel Hilario

Thank you.

Phan Le - Lazard

Sure, no problem. So I guess my first question is, just going back to menu pricing. I think you guys had mentioned its trending at 1.8 in the second quarter. Wondering if any price rolls off going forward and if you intend to replacing that price. Just how we should think about that, for the next couple of quarters?

Emanuel Hilario

We have nine-tenths that is ruling out on the next quarter. So next quarter we will basically be -- we will have nine-tenths in there. So -- and the answer is right now, we are being very careful with pricing. So we don't have any pre-planned scheduled pricing, we are obviously focusing on Everyday Value and making sure that that's the message all around. But once again, that's always subject to evaluation, but right now, our plan is to not have any additional pricing in the near future.

Phan Le - Lazard

Great. Then in terms of the catering, I think you mentioned its growing at 80% or so. Looks like that's an acceleration from 1Q. I think in 1Q, you had mentioned maybe 11%, although double digits. Wondering, what's driving that momentum and reacceleration, could you guys maybe shift a few marketing dollars towards that imitative, or maybe it's just beginning to hit [a stride]?

Jeffrey O'Neill

We built up the team, so when you think about what we have -- the anomaly really was Q1; because if you take a look at back, at the last kind of four to six quarters, we have been growing at 18 to 20, so that would be my headline there. But we also know that -- there is couple of real strong initiatives. We've got a new team in there, that's continuing to look at kind of store level or a city by city level with a salesforce. We are looking at an outsourced call center, that's going to help with the smaller centers with sales from a catering point of view.

Search engine marketing is a great tool for us, and we continue to explore that and realize the strength that we are getting there. So it's kind of an evolution of our strategies, and I think there is lots of runway for us on catering, I really do.

Operator

At this time, we have one question remaining in the queue. (Operator Instructions). We will take our next question from Karen Holthouse with Cowen and Company.

Karen Holthouse - Cowen and Company

Hi, a quick question. Going back to your comment about exiting manufacturing capacity to add -- take advantage of new customer opportunities. Can you just give us a sense, is that -- it's (inaudible) sort of the traditional bagels going into warehouses, or is it going in to more of grocery channels or other products? Just kind of more color on that.

Jeffrey O'Neill

It's really focused on kind of third party. So not as much into our own warehouses, is when you think about some of the retail outlets and we got a business -- a growing business overseas in Asia, and the Costco business that we support. So those are the areas that we are looking to expand as that side of the business also extends.

Karen Holthouse - Cowen and Company

Okay. Thanks.

Operator

That concludes today's question-and-answer session. At this time, I turn the conference back to our speakers for any additional or closing remarks.

Jeffrey O'Neill

Thanks operator. I just want to close by saying that I am really pleased that the progress and the strong flowthrough that we had in the second quarter, especially in the face of some of the headwinds that we saw from an overall economic or category point of view, through June. So I am really pleased with the strong finances that we delivered and the strong cash flow that we have, and continue to deliver. And I am really optimistic about the balanced approach on the business. We do have a strong pipeline and a growing pipeline of new units. We have initiated a plan for traffic. We are building that plan out, it has started to take hold, and I think as we take a look at the balance of 2013, and into 2014, we are really going to see some real strong progress from a traffic point of view, and I am excited about that.

We obviously, as always, continue to manage and control our cost base well, and this is part of the reason why we continue to generate such a solid flow through, and led by our supply chain and our manufacturing results.

So with that, I'd say onward to Q3, and we will all be talking to you very soon.

Operator

That concludes today's conference. We thank you for your participation.

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