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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q3 2009 Earnings Call

November 2, 2009 4:30 pm ET

Executives

Paul Flanders – Chief Financial Officer

Alan Vituli – Chairman, Chief Executive Officer

Daniel Accordino – President, Chief Operating Officer

Analysts

Reza Vahabzedah – Barclay’s Capital

Jason for Jeffrey Omohundro – Wells Fargo Securities

[Reed Ken – Banc of America]

Greg Ruedy - Stephens Inc.

Mitchell Speiser – Buckingham Research

Brian Hunt – Wells Fargo Securities

Kenneth Bann – Jefferies & Company

Operator

Welcome to the Carrols Restaurant Groups third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Paul Flanders, Chief Financial Officer.

Paul Flanders

Good afternoon and welcome to our third quarter conference call. By now everyone should have access to the announcement we released this afternoon which you can also find on our website at www.carrols.com under the investor relations section.

Before we begin 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 filings with the SEC for more a more detailed discussion of the risks that could impact our business and our overall financial results.

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

Daniel Accordino

Good afternoon everyone. All things considered we were pleased with our third quarter results given the obviously challenging consumer environment that we’ve been facing. While favorable commodity and utility costs certainly contributed to our earnings improvement, we also benefited from specific actions taken at all levels of our P&L to reduce costs.

Additionally, reductions in debt over the past year and lower interest rates resulted in a sizeable decrease in our interest expense. Net income in the third quarter of 2009 was $5.6 million, an increase of $1.9 million or 52% over the third quarter last year and diluted earnings per share rose to $0.26 from $0.17, both notable increases.

Our bottom line improvement came in spite of a decline in revenues in the third quarter of $7.9 million from the same period last year which while not unexpected was somewhat softer than we anticipated. Must of the decrease was related to our Burger King business which as we indicated on the last call was running negative in the third quarter.

Revenues from our Hispanic brands were down about $500,000 in total as the effect of new units opened over the past year helped to offset softness in our comparable restaurant sales, particularly at Taco Cabana. We did though; see continued improvement in our Pollo Tropical which is encouraging.

In aggregate, our profit improvement in the third quarter 2009 was the consequence of several factors. First as I said, we’ve taken actions to reduce and leverage costs across our P&L both at the corporate and restaurant level. As in prior quarters we continue to benefit from a moderation in commodity prices as cost of sales improved 174 basis points compared to the third quarter last year.

Our restaurant operating costs declined 68 basis points year over year for the quarter, partially because of favorable utility costs, but also due to steps taken to manage operating costs. And lastly, our outstanding debt balances along with more favorable interest rates enabled us to lower our interest expense by $2 million.

This year, one of our primary objectives has been to reduce financial leverage. Thus far in 2009, we’ve reduced debt by $25 million. We estimate that for the entire year that this reduction will be approximately $35 million. Obviously the trade off for using free cash flow to pay down debt has been a reduction in new unit development.

While we anticipate improvements for our Burger King’s in light of more aggressive promotional activity this quarter, we remain cautious on our overall sales expectations in light of recent trends, competitive challenges, rising unemployment and reluctant consumers spending affecting all of our brands.

The Burger King system and QSR in general is undoubtedly under more pressure these days, but we believe that the increased emphasis on value including the $1.00 Quarter Pound Double Cheeseburger will have its intended results and improve sales trends.

As we focus on improving top line trends at our Hispanic brands, our emphasis remains on the overall value equation for the consumer, more than relying on the discounting tactics that are increasing present in the industry.

Although we are certainly more focused on our value message, our TV and radio advertising generally emphasize the quality and the combination of our fresh food and distinct flavor profiles along with the overall value experience that we deliver at extremely attractive price points. We believe that this balance in combination with new products and improving consumer experience will continue to improve our long term brand positioning.

With that said, I’ll now discuss the three brands in greater detail. With respect to Pollo Tropical overall restaurant sales increased 1.4% in the third quarter of 2009 as we were operating three more locations compared to 2008. Comparable sales fell marginally by a tenth of a percent in the third quarter against a 1.9% decrease in the same period last year.

However, this was our best comparable sales performance in over a year. Since the fourth quarter of 2008 we’ve continued to see sequential improvement in customer traffic and in the third quarter this was actually positive at 2.7%.

More importantly, we improved segment EBITDA for Pollo by $1.1 million to $6.3 million and EBITDA margin by 226 basis points to 14.3%. Our concentration in Florida and the economic difficulties across that state continue to weigh on our performance. Throughout 2009 we’ve employed TV advertising and Dade Broward and Palm Beach County as well as in Orlando focusing on specific products including our new products, promotional price points and other favorable brand attributes.

We believe this messaging has been effective in stabilizing sales and improving customer traffic. In the third quarter we introduced and promoted our Grilled Tropical Wings with our proprietary pineapple rum wing sauce or our Spicy Amazon sauce which were available in either a five piece portion for $3.59 or an eight piece portion with two sides for $6.59.

We also promoted our Tropical Trio’s which include any combination of three wings, a quarter rack of ribs, a quarter grilled chicken or half a steak plus two sides for $7.99.

With regards to Taco Cabana, I said on the last call that we’ve seen mounting consumer and economic pressures in the Texas markets. Taco Cabana comparable sales were down 4.3% in the third quarter and although they were slightly lower than in the second quarter we experienced a meaningful improvement in customer counts sequentially from last quarter.

In the third quarter we launched with either steak of chicken served with melted cheese, sautéed onions, fresh pico de gallo and a choice of sauces for $2.99. \We’ll also continue to promote our Cabana combo meals introduced in the second quarter and have more recently launched our fajita bowls which come with flame broiled chicken or steak for $4.00 and our Cabana bowl for $3.00.

These very attractive price points give you a sense of how we are aggressively addressing the brands’ challenges. Along with couponing and our lack in price increases, we experienced a lower check average in the quarter but we did see customer counts improved from 5.8% negative in the second quarter to 1.4% negative in the third quarter.

During the period we opened one new location. Subsequently in October, we opened another new restaurant, bringing the total new Taco units in 2009 to four and completing our development plans for this year.

Taco segment EBITDA was $6.7 million in the third quarter and about $650,000 lower than the comparable period in 2008 due to a shift in advertising this year.

With respect to Burger King, I’m sure many of you probably listened to BK’s earnings call last week and already have some perspective on product and promotional tactics for the brand. On last quarter’s call we indicated that our Burger King restaurants were experiencing greater top line weakness as rising unemployment coupled with a limited value message during the quarter were creating headwinds for sales performance.

Third quarter comp sales were down 6.1% against a positive 3.5% comparison from the prior year. During the quarter the promotional focus was on the Angry Whopper and Tender Crisp Sandwiches, the Dollar Whopper Jr. along with a national coupon drop in late August.

Looking forward, the brand is moving further toward the value end of the bar bell with a key advertising and promotional activity now focused on the $1.00 Quarter Pound Double Cheeseburger which just started a couple of weeks ago.

Initially there has been a meaningful improvement in both top line and customer traffic albeit at the expense of some margin degradation given the level of discounting inherent in this offering. Segment EBITDA for our Burger King restaurants was $8.8 million for the quarter in both years; however EBITDA margins improved 69 basis points even with a $7.4 million decline in sales at the brand.

Our ability to improve margin was primarily related to more favorable commodity costs particularly beef which was down about 20% year over year. And with that, I’ll turn it over to Paul who will review our third quarter financial results.

Paul Flanders

Total revenues for the third quarter decreased 3.8% to $201.2 million from $209.1 million in the same period last year mostly due to lower sales at our Burger King and to a lesser degree at Taco Cabana.

Revenues for our Hispanic brand restaurants fell marginally in the quarter and totaled $107.0 million compared to $107.5 million in previous period. Pollo Tropical revenues increased 1.5% to $44 million compared to $43.4 million in the third quarter last year.

We opened three net new restaurants since the beginning of the third quarter of 2008. While comparable restaurant sales for Pollo decreased 0.1% compared to a negative 1.9% comparison from the prior year. As Dan said, customer traffic showed continued improvement in the quarter.

Same store sales at our southernmost markets were positive. Almost 60% of our units are located in Miami Dade and Broward counties where comp sales were 0.3% and 2.6% positive respectively. Orlando and Palm Beach counties about 25% of our restaurants also improved sequentially and each market was about 2.6% negative. Our newer markets on the west coast of Florida and the northeast were just a little softer than that.

Taco Cabana revenues decreased 1.7% to $63 million from $64.1 million with comparable restaurant sales down 4.3% in the quarter against a negative 0.9% comparison in 2008. Comparable restaurant sales decrease was partially offset by new unit openings. Since the beginning of the third quarter last year, we opened nine new Taco Cabana restaurants and closed four existing units.

With regards to Burger King, overall sales decreased 7.3% to $94.1 million which included the net closing of five restaurants since the beginning of the third quarter last year as well as a decrease in the comparable sales of 6.1% already mentioned.

Overall, we posted solid earnings for the third quarter with net income of $5.6 million or $0.26 per diluted share compared to net income in the third quarter of 2008 of $3.7 million or $0.17 per diluted share.

Our sales results certainly made it more challenging. We did improve overall profitability as net income grew approximately $1.9 million and operating margins expanded 66 basis points compared to the prior year.

Although we haven’t taken any price increases in 2009, we have the remaining effect of pricing last year at all three brands. Having said that however, the nature and pricing of our promotions along with related mix shifts actually resulted in a reduction in average check in all three brands year over year for the quarter.

The average check was 2.8% lower at Pollo, 3% lower at Taco Cabana and 0.9% lower at Burger King. Conversely, our customer traffic trends were better than our comparable unit sales would otherwise imply.

Overall cost of sales was 28.7% of restaurant sales and 174 basis points lower than the third quarter of 2009 as Burger King cost of sales decreased 237 basis points. Pollo Tropical was down 32 basis points and Taco Cabana was lower by 196 basis points.

These improvements mostly reflected more commodity costs. For the full year we’re estimating cost of sales to be about 90 basis points below 2008.

Restaurant labor costs increased 79 basis points in the third quarter to 29.4% of restaurant sales due to the de-leverage of fixed labor costs and the lower comparable units sales at Burger King and Taco Cabana. Pollo’s labor improved approximately 29 basis points.

Restaurant operating expenses which exclude the advertising fell $2.6 million in the third quarter to 14.9% of sales from 15.5% in the third quarter of 2008 reflecting lower cost and positive leveraging of several items including utilities and R&M’s.

Advertising expense was $150,000 or 22 basis points higher in the quarter compared to the prior year reflecting an increase of about $575,000 at Taco Cabana due to a shift in the advertising calendar, offset by lower payment to the Burger King ad firm because of lower sales.

Rent expense increased 55 basis points in the quarter to 6.4% of restaurant sales. This was largely due to the 2008 reclassification of leases that had been on balance sheet as lease financing obligation to operating leases. The effect in the third quarter from these changes was an increase in expense of about $600,000 with offsetting reductions in interest of $870,000 and depreciation of $145,000.

General and administrative expenses were about $125,000 lower in absolute dollars and 18 basis points higher as a percentage of revenue. The G&A cost reductions implemented in last 2008 were offset in part by an increase in incentive accruals during the quarter compared to the prior year.

We also had $220,000 of other income in the quarter which represented a gain from the sale of excess Taco Cabana property in Oklahoma. After tax, this gain was about $0.01 per share for the quarter.

Lastly, interest expense decreased $2 million to $4.8 million. In addition to the lease change I mentioned, this reflected the debt reductions made in 2008 and 2009, interest reductions due to repurchase of 15 million of our 9% senior subordinated notes last year as well as lower interest rates on our LIBOR based borrowing due to significantly lower short term interest rates.

At the end of the third quarter our total debt was $291.2 million and as Dan said, we reduced our debt by $25 million during the first nine months this year. We also continued to improve our financial leverage ratios. As calculated for purposes of loan compliance we were at 3.24 time debit to EBITDA, well below the maximum permitted level of 4.5 times.

We anticipate for the full year that in total we will reduce debt by $34 million to $36 million. As we’ve said right along, an important objectives year included increasing free cash flow, reducing debt and lowering financial leverage. We continue to meaningful progress on all three of those fronts.

Finally I’d like to update our outlook for 2009. In terms of recent sales trends, Pollo Tropical is a little under 1% positive in October; Taco Cabana was down about 3.5% while Burger King was about 5% negative. It’s now been about two weeks since the Burger King Dollar Quarter Pound Double Cheeseburger was launched and while it’s still pretty early, we believe the improvements in sales trends so far indicate that Burger King same store sales should be positive for the balance of the quarter.

We remain cautious regarding consumer spending. Our overall revenue expectations for the full year are for sales to be somewhere between flat and up 0.5%. Given our year to date performance, and an expectation the current earnings and cost trends will continue, we expect to exceed our previous earnings guidance of $0.94 to $0.99 per diluted share.

We now believe that earnings will be in the range of $1.02 to $1.06 per share. Keep in mind though that our 2009 results will reflect one extra week in our fiscal year estimated to benefit net income in the fourth quarter by approximately $3.5 million or $0.07 per diluted share.

In terms of other guidance not yet touched upon, CapEx has been narrowed to $37 million to $39 million from $35 million to $40 million and still considered below our 2008 spending. In the third quarter our total CapEx was $12.6 million bringing the total for the nine months to about $29.9 million.

Our annual effective tax rate is estimated to be 37%. Lastly in terms of new unit growth, we’ve opened one new Pollo unit year and four new Taco Cabana’s including the fourth quarter opening that Dan mentioned.

This completes our new Hispanic brand openings this year of five units. We also plan to close one additional Burger King this year bringing our net reduction of Burger King restaurants to two. We also closed two Taco Cabana’s and one Pollo restaurant earlier in the year.

We reserve giving 2010 guidance at this time; however we are prepared to offer some initial thoughts on 2010 new unit development. We tend to be deliberate in accelerating new unit growth as we monitor how the economic and consumer environment progresses. At this time our initial plan for 2010 would be to build five to eight new Hispanic brand restaurants.

Implicitly, this means that we will continue to balance the use of our free cash flow to reduce debt and continue improving our capital structure in this interim economic period. With that, we’ll now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Reza Vahabzedah – Barclay’s Capital.

Reza Vahabzedah – Barclay’s Capital

Paul you went over the October same store sales and I missed the Pollo part of it.

Paul Flanders

What I said was that Burger King in October was running about 5% and obviously that does not include Double Cheeseburger. Pollo Tropical was running slightly positive, a little bit under 1% and Taco Cabana is running about 3.5% negative in October.

Reza Vahabzedah – Barclay’s Capital

Speaking of the Double Cheeseburger promotion, obviously designed to help traffic. Can you make reasonable margins on that as a franchisee and do you think that that is going to be EBITDA accretive product or is that just an initiative to help traffic and rebuild some share and then you go from there?

Daniel Accordino

Because of the leverage in the P&L from the sales that we expect from this Double Cheeseburger, we absolutely think it’s going to be EBITDA accretive.

Reza Vahabzedah – Barclay’s Capital

What type of sales?

Daniel Accordino

You might find some pressure on margin, a little bit of pressure on margin but it’s clearly we’re pretty optimistic with respect to its effect on the bottom line.

Reza Vahabzedah – Barclay’s Capital

Alan, you’ve been around this space for awhile. Where are we as far as price promotion in the fast food burger segment? It seems like price competition has escalated dramatically in the last three or four months. Are we going to much more intense levels or have we reached the peak level of competition?

Alan Vituli

I think what you’re going to see is a bit of shift. You’ve now got value menu initiatives with dollar Double Cheeseburger and dollar Whopper Jr. and corresponding products at Mac Donald’s and those items are every day value so you will see that in place and you’ll see less coupon discounting and promotional discounting.

Reza Vahabzedah – Barclay’s Capital

The Double Cheeseburger as mentioned is dilutive and you wonder what the cannibalization impact will be on the rest of the business, right?

Alan Vituli

Again, we’ve only had it for two weeks, but we know that not all of the cannibalization is negative. It seems to be cannibalizing hamburgers and cheeseburgers and that’s not necessarily a bad thing. There’s been a trade off on the Whopper Jr. which one would expect.

The question is going to be going forward what will be the impact on the ancillary items in terms of fries and drinks. We just don’t know that yet after only two weeks.

Until the economy essentially can provide us with some confirmation of the fact that the recovery, I think what you’re going to find is that you’ve got huge constraints and that’s driving certainly in the quick service segment, driving customers in off of price promotions, is going to be the dominant attack.

We’ve seen it before, and then as things sort of pick up, those prices disappear. So I don’t think it’s the way of the world long term, but certainly you could expect it at least in the short term.

Reza Vahabzedah – Barclay’s Capital

As far as input costs, do you anticipate input costs continuing to help your margins in the fourth quarter but offset like they were in this quarter by the sales de-leveraging?

Paul Flanders

We’ll continue to see certainly some improvement in overall margins in spite of the effect of the Double Cheeseburger in the fourth quarter. Beef costs, that’s probably the most significant commodity that we would not have contracted at this point, but beef costs should be lower in the fourth quarter compared to where we were last year, probably 12% or 13% is my estimate.

Reza Vahabzedah – Barclay’s Capital

Do you have an initial view of 2010 input costs, any forward purchasing?

Paul Flanders

Yes. Again, we don’t do the purchasing for Burger King, but we’ve had some visibility regarding where we think their contracts are coming in at. We expect Burger King to somewhere in the 1% to 2% higher commodity exposure in 2010 compared to 2009, most of that in the beef area.

For the Hispanic brands where we do all of the purchasing, we’ve already taken positions on our primary protein commodities. We see Taco Cabana as being zero to plus .5% in commodity increase and Pollo will be favorable commodity by about a point and a half.

Operator

Your next question comes from Jason for Jeffrey Omohundro – Wells Fargo Securities.

Jason for Jeffrey Omohundro – Wells Fargo Securities

Just wanted to ask if you’d give a little more color around the mix of this Double Cheeseburger particularly as it relates to the offering being sold or bundled with either value meal or being sold with other items. I know it’s early, but any context you could give us around that would be helpful. And if you could run through again, I think you gave some detail around the sequential traffic improvement for some of the brands. I didn’t get all that down.

Alan Vituli

In terms of the Double Cheeseburger, again we’ve only got two weeks of exposure so in terms of how many of these are being bundled with a fry and a drink; I just don’t have that information.

In terms of the total number of Double Cheeseburgers which is individual units as well as units being bundled, we’re north of 10% of sales for the first two weeks in terms of the Double Cheeseburger mix.

Daniel Accordino

In terms of traffic, Burger King was about 7.5% negative in the second quarter. That improved to about 5.3% negative in the third quarter. Pollo had a meaningful improvement. Traffic was about 2.9% negative in the second quarter and turned 2.7% positive in the third quarter and Taco Cabana went from about 6.4% negative to 1.4% negative between second and third quarters.

Jason for Jeffrey Omohundro – Wells Fargo Securities

One more follow up on the Double Cheeseburger. How does that 10% mix with the promotion compare with the more historical mix that you saw?

Alan Vituli

Significantly higher.

Operator

Your next question comes from [Reed Ken – Banc of America]

[Reed Ken – Banc of America]

I wanted to follow up on to Pollo Tropical comp in the quarter. Was any of that boosted by favorable weather, perhaps a milder hurricane experience?

Alan Vituli

Last year was not a particularly difficult year from a weather standpoint. Although this year was really better than most, but I would say the bottom line is that the weather did not have a material effect on the business.

[Reed Ken – Banc of America]

For the traffic increase which was pretty normal in the environment we’re going through, do you really attribute most of that to the new products you rolled out or is there anything else to expand on there?

Alan Vituli

The advertising. It’s a combination of not only the message but the media. We spent advertising dollars this year to a higher level on television than we did in 2008.

[Reed Ken – Banc of America]

And where across the chain does the average check sit at?

Alan Vituli

It’s come down a little bit as a percentage but the actual number right now is probably around $7.58 last week.

[Reed Ken – Banc of America]

Were the five to eight restaurants you’re initially thinking of for next year, are those all going to be up in the Northeast and what the second question would be what is your cash balance at the end of the quarter?

Alan Vituli

The restaurants are not Pollo’s. Some of those were Pollo’s that will be in the Northeast and the balance are Taco’s that will be in various markets in Texas.

Paul Flanders

In terms of cash we were $3.3 million at the end of the quarter.

Operator

Your next question comes from Greg Ruedy - Stephens Inc.

Greg Ruedy - Stephens Inc.

How are trends at Taco Cabana in the different Texas markets?

Daniel Accordino

Historically we talked about the fact that Dallas and Houston as an example had held up better for longer in comparison to some of the other markets. And I think as we indicated on the last call, we have seen more softness in those markets and that’s predominantly why we’ve seen Taco become negative here.

That trend I would say continued in the third quarter. Dallas clearly was softer than most of the other markets. I would say all of the major markets were negative to some degree.

Greg Ruedy - Stephens Inc.

And as you look into the next year, is there an opportunity to pare back a couple of your units in your BK portfolio. How do you look at doing that in the market for asset sales and any opportunity to use that cash to pay down debt?

Paul Flanders

Are you asking in terms of sale lease backs or closed restaurants?

Greg Ruedy - Stephens Inc.

Sale lease backs.

Paul Flanders

In terms of sale lease backs, first I’ll say in the third quarter we completed no sale lease backs. We do anticipate to get a few or a small amount done in the fourth quarter. I think we’ve got $7 million to $8 million being marketed actively right now and we’ll probably close by my guess $3 million to $4 million of that.

What we’ve done, we don’t really have the pressure to do sale lease backs with any Cap costs so the time to market these has been a little bit longer. The market is holding up but we’re seeing some push back on rate and we’ve elected to just take longer to market the properties frankly than to pay up on the rates.

We’ll get a little bit more done this year and we’ll continue certainly into early next year.

Greg Ruedy - Stephens Inc.

Then as we look at CapEx for next year, given that you have a couple of more units on there, can we expect it to pick up from the guidance you gave for this year?

Paul Flanders

No, I wouldn’t think about it that way. If you recall we had some discretionary CapEx to replace point of sale systems at Pollo and Taco in the last year or so. We also in 2009 are installing new broilers in the Burger King. So between those two items alone, there’s $6 million to $7 million of CapEx that won’t reoccur next year.

So I think the better way to think of it is we can probably build a few more units and CapEx shouldn’t be any higher. It may even be a little bit lower.

Operator

Your next question comes from Mitchell Speiser – Buckingham Research.

Mitchell Speiser – Buckingham Research

The comps guidance that you gave for the fourth quarter are flat to up .5%. I guess just backing in that probably implies about 3% positive comps in November and December. As we look at November/December, are your assumptions positive traffic, somewhat offset by a lower check or is it possible through add ons that you might actually get an increased average check?

Alan Vituli

Positive traffic offset by negative check.

Mitchell Speiser – Buckingham Research

In August you mentioned that you did a national coupon drop. Was that for the Double Cheeseburger and can you give us a sense of how those trends were during that coupon drop?

Alan Vituli

The Double Cheeseburger was one of many items that was included in that coupon. I will tell you that we’re running probably the worst month of the quarter was August and between August and September as a consequence of having that in the market, our comp trends probably improved about 2% or so.

Mitchell Speiser – Buckingham Research

If you were to take a look back, for folks that have been in the industry for awhile, when it comes to this $1.00 Double Cheeseburger, the initial marketing push I’m sure gives it a lot of awareness. Do you expect it to continue at this rate that you’re seeing now in terms of the acceptance or do you expect it to wane as it comes less new news?

Alan Vituli

Let me say this. It’s not a new product. It is a very inducing price point and while it’s being supported with a fair amount of marketing, you should have a reasonably high expectation that it’s sustainable simply because you’re not really dealing with come in and try something that you’ve not eaten before. It’s a price point.

Mitchell Speiser – Buckingham Research

So even if the advertising doesn’t stay at these levels, as you said it’s a good value. People know it and baked into your fourth quarter comp estimate is sustainability at this sales mix at about 10% or so?

Alan Vituli

Yes. And obviously Burger King was hard pressed to come up with that and it is reflective of the environment we’re in, but it’s a pretty strong offer and a pretty wise choice for the brand to be doing this in this kind of an environment.

Operator

Your next question comes from Brian Hunt – Wells Fargo Securities.

Brian Hunt – Wells Fargo Securities

Just to continue on Burger King, these new broilers that are supposed to give Burger King the opportunity to introduce a large portfolio potentially of new products, when do you anticipate maybe getting the other side of the bar bell now that they’ve got the $1.00 Double Cheeseburger in place. When do you think you’re going to get some higher price point items?

Daniel Accordino

Right now the marketing calendar calls for a national launch of the XT Burger in February of 2010. The brand is certainly well positioned. It’s the rest of the world that’s out of position for us right now so essentially new product introduction that is at the other end of the bar bell can only come after you’ve stabilized your counts.

Brian Hunt – Wells Fargo Securities

And it sounds like the Double Cheeseburger is taking you down that path at least, the first part of the path.

Daniel Accordino

Between now and the first part of 2010 that’s the primary marketing initiative, but as I said, the XT burger will be nationally promoted in February of 2010.

Brian Hunt – Wells Fargo Securities

Looking at labor costs, I imagine with unemployment rates in the markets in which you participate, double digits in Florida and I imagine weakening in Texas, are you seeing your labor rates improve and/or stabilize on an hourly basis relative to a year ago? Do you think there’s opportunities to reduce your turnover rates on a go forward basis on the labor front?

Alan Vituli

Turn over has been significantly reduced which to a large degree is a function of the economy. Our team member turnovers for all three brands are as low as we’ve ever seen them. Here in Pollo our team member turnover is in the 80% range. Yes the rates have moderated. Actually what’s burdening the rates is you’ve got an artificially high minimum wage given where the economy is at, and we’ve certainly taken this opportunity to improve the quality of not only our team members, but our management personnel as well.

So our turnover is reduced at the salaried level and at the team member level. The rates are moderating and we’ve improved the quality of the personnel.

Brian Hunt – Wells Fargo Securities

I don’t want to pin you in the quarter on labor forecasts for 2010 but it sounds like or is it your expectation that you turnover is going to be low into 2010?

Alan Vituli

Yes.

Brian Hunt – Wells Fargo Securities

Looking at your sites for next year, are these sites that have been secured for some time and/or are these sites you recently secured and do you feel like the new sites you’re looking at for development, is there greater availability of A sites versus maybe the historical availability looking back a year or two.

Alan Vituli

We certainly slowed down our ambitions with respect to what we’re going into the pipeline and even aborted some of what was planned. Right now when we do our planning with respect to new development, we’re talking into 2011.

There’s great availability. As soon as we get our confidence levels and our capital structure in a place where we’re more comfortable with, the anticipation is that we’re going to be very aggressive. We’re looking at sites right now, but don’t believe that those sites will come out of the pipeline until late 2010.

By 2011 assuming that the economy finds itself on a more predictable plane, we should be able to step up construction considerably and should have a fair number of available sites.

Brian Hunt – Wells Fargo Securities

With the environment the way we’ve seen it for all even construction materials, not just food costs, are you seeing build out rates lower on your new locations for Taco and Pollo and could you give us an idea of what your costs per site are today or what they would be today versus a year ago?

Daniel Accordino

We have not built a whole lot of stores in 2009 but we have not seen construction costs to be materially lower than they were in 2008. The cost of labor associated with construction has come down a bit, but the actual material costs really have not changed very much from 2008 level.

Operator

Your next question comes from Kenneth Bann – Jefferies & Company.

Kenneth Bann – Jefferies & Company

On the operating costs, could you give us an idea how much utility costs have come down and are there other cost buckets that you’ve been able to reduce and if we see sales begin to improve can you keep those costs at some of these lower levels going forward?

Paul Flanders

Utilities has been a pretty sizeable decrease. In the third quarter for example as a percentage of sales it’s probably 65 basis points or so lower than it was a year ago and that’s been the case all year.

I think beyond that we reduced a number of operating costs. I think when we see some sales increases to the extent that we have taken those costs out, we should see pretty good flow through when sales do turn and improve a little bit.

Alan Vituli

There’s enormous operating leverage in our business in a normal case. If you look at our labor lines, we’ve not had as dramatic an effect in labor as we’ve had in reducing costs in some of the other areas.

The flow through profitability as Paul said with respect to incremental sales, it should be really very significant and there’s no reason to believe that some of these costs would go up. The fixed cost component of operating our restaurants, specifically our management labor, a little pick up should go a long way for our company.

Kenneth Bann – Jefferies & Company

On the ad spending, are you able to get a lot more exposure with the same dollars these days and is that one of the things that’s helping you be somewhat more effective with the ad spending?

Alan Vituli

Yes.

Kenneth Bann – Jefferies & Company

Is that primarily TV and radio or is that across the board?

Alan Vituli

We’re seeing it in television and radio, but most of our advertising is on television and we have been able to certainly see more GRP’s for the same dollar than we’ve been able to purchase historically.

Kenneth Bann – Jefferies & Company

Could you comment on how the Pollo Tropical’s in the Northeast are doing at this point? Are they meeting your goals in terms of sales for how long they’ve been open?

Alan Vituli

We’ve opened for the most part six restaurants. Four of those are clearly leading expectations. Two that have been a little disappointing strangely are in communities that are predominantly Hispanic and what we’re learning and now essentially focusing on more is the fact that in the Northeast as opposed to the south, the Hispanic communities tend to be denser.

They tend to be much more sensitive with respect to disposable income. They start as being slightly poorer than the communities that we have here in the state of Florida. So going forward with respect to Pollo, we believe we have huge opportunities in the non Hispanic communities even though our Hispanic frequency is high.

So four of the six stores are doing acceptably well. We’ve had better in a better economy. The two that are in the most Hispanic areas have been a little disappointing and we’re looking at why and the reason we come up with is simply the fact that disposable income has affected those communities more than the conventional communities.

Kenneth Bann – Jefferies & Company

Is there more competition from local independent restaurants?

Alan Vituli

No, that’s not really the problem.

Operator

There are no further questions at this time.

Paul Flanders

I guess we’ll conclude the call for today. We appreciate everybody’s attention and look forward to doing this again for the fourth quarter. Thank you.

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Source: Carrols Restaurant Group, Inc. Q3 2009 Earnings Call Transcript
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