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Executives

Amy Wagner Senior Vice President, Investor Relations and Global Communications

John W. Chidsey – Chief Financial Officer

Ben K. Wells – Chief Financial Officer

Analysts

David Palmer – UBS

Jeff Omohundro – Wells Fargo Securities

David Tarantino – Robert W. Baird

Matthew DiFrisco – Oppenheimer & Company

Steve West – Stifel Nicolaus

Greg Badishkanian – Citigroup

Sara Senatore – Sanford Bernstein

Steven Kron – Goldman Sachs

Jason West – Deutsche Bank Securities

Joe Buckley – Banc of America, Merrill Lynch

Jeffrey Bernstein – Barclays Capital

Nicole Miller – Piper Jaffray

John Glass – Morgan Stanley

Mitch Speiser – Buckingham Research

Keith Siegner – Credit Suisse

Tom Forte – Telsey Advisory Group

John Ivankoe – JPMorgan

Burger King Holdings Inc. (BKC) F2Q10 (Qtr End 12/31/09) Earnings Call Transcript February 4, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you very much for your patience, and welcome to the Burger King Holdings second quarter fiscal 2010 earnings conference call. My name is Marianne and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Ms. Amy Wagner, Senior Vice President of Investor Relations and Global Communications. Please proceed.

Amy Wagner

Thank you, Marianne and good morning everyone. We have prepared an earnings call PowerPoint presentation to assist in presenting our second quarter results. These slides, as well as our audio broadcast of this call, may be accessed through our Investor Relations on our website at www.bk.com. Both the audio portion and the slideshow will be archived on our website, where it will be available for future reference for 30 days.

Presenting on the call today are John Chidsey, Chairman and Chief Executive Officer and Ben Wells, Chief Financial Officer. Also with us on the call is Mike Kappitt, Senior Vice President, Global Business Intelligence and Strategy, who will be available to answer any questions you may have about our marketing, advertising and products during the Q&A portion of the call.

We’ll spend about 20 minutes discussing our second quarter performance, before opening the call for questions. Before we begin today, I would like to remind everyone that this conference call has forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations based on currently available data.

However, actual results may be impacted by future events and uncertainties and could differ materially from what is discussed today. More detailed information about these uncertainties is contained within the forward-looking statements section of this morning's earnings release.

The presentation also includes non-GAAP financial measures as defined in regulation G. The reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and other information required by Reg G are included in the appendix to this presentation, and with that I will turn the call over to John.

John W. Chidsey

Thank you, Amy and thank you for joining us on today’s call. In our prepared remarks, we will discuss our second quarter fiscal 2010 performance and provide our outlook for the second half of the fiscal year. We’ll then answer any questions you may have.

During our fiscal second quarter, we continue to operate in a challenging, operating and consumer environment. Quick service restaurant traffic in the U.S continued to be down year-over-year and global underemployment and unemployment levels remained high. We continued to tactically respond to the current consumer need for extreme affordability with our value promotions, while remaining focused on managing the brand for the long-term and investing in our future. This quarter, our top-line remain challenged, but I am pleased with our year-over-year earnings growth of 12%.

We remain focused on providing our guests with exceptional value offerings like our national limited time offer $1 quarter pound double cheeseburger and local two for four [ph] sandwich offering.

Additional promotions including our Tony Stewart Whopper sandwich endorsement and New Moon, Twilight Saga promotion kept us top of mind with both of our male and female SuperFans. And we continued to attract parties with kids with our SpongeBob and Planet51 toys.

We made significant progress in restaurant level initiatives over the past six months, including the continued global roll out of new technology like our broilers and POS systems. The utilization in the P&L benchmarking tool enabling us and our franchisees to benchmark restaurant level performance and more importantly to help identify areas of improvement.

The use of our proprietary business analytic store designed to enhance restaurant level performance and the introduction of our four corner pricing model to our U.S. franchisees. These initiatives coupled with better variable labor controls, inventory management, and reduced operating cost in the U.S. and Canada segment, enabled us to expand company restaurant margin. Worldwide margins were up 20 basis points led by strong 160 basis point improvement in the U.S. and Canada segment.

Meanwhile, given our heavily value focused promotions, we also made significant strides in our value for the money ratings. In the U.S., we achieved a best ever value for the money rating of 60% excellent on our GuestTrac feedback, a five point improvement over December 2008 and we attained our best ever overall business satisfaction rating of 56%, meaning 56% of survey respondents indicated they had an excellent visit experience.

We continued our product innovation with the introduction of Funnel Cake Sticks that are uniquely positioned to drive both profitable dessert and breakfast sales. This product has been well received by our guest, outperforming all previous dessert launches in terms of units sold and we geared up the U.S. system for the Steakhouse XT launch with our $3.99 introductory price point offer for the regular bill.

The franchisee showed support on this introductory price promotion garnered an extremely high level of support and enthusiasm. And our development efforts kept pace as we opened 95 net new restaurants, celebrated the grand opening of our 12,000 restaurant located in Beijing’s Joy City, unveiled our new 20/20 restaurant design with the remodel of our highest grossing BK restaurant located in Amsterdam and opened our first Whopper bars in the Asia Pacific and Latin American regions.

So, we continue to tactically respond to the current consumer environment, while remaining keenly focused on managing the brand for the long-term. On page five of the presentation is our scorecard. As we focus on driving the brand forward, we continue to grow our restaurant count, while diversifying our global portfolio, compared to the same period last year, EMEA/APAC’s net restaurant count increased by a solid 7% and Latin America increased their unit count by 5%.

We also signed an agreement to acquire 35 franchise restaurants in Singapore, which will become our second company market in Asia and act as that region’s center of product innovation and development.

Worldwide comp sales were negative 2%, compared to positive 2.9 in the same period last year, albeit improving sequentially from last quarter. Even though worldwide traffic was positive, predominately led by the U.S., average ticket price was down sequentially as the result of more competitive promotions, including the dollar quarter pound double cheeseburger in the U.S.

The EMEA/APAC segment continue to post positive comparable sales led by continuing strength in the U.K., Spain and our Asia-Pacific franchise markets, offset by negative comp sales in Germany and the Netherlands. Our worldwide trailing twelve-month average restaurant sales decreased $63,000 to $1.24 million, largely driven by negative currency exchange rate impact of $39,000. As previously noted, worldwide company restaurant margins improved by 20 basis points quarter-over-quarter largely benefiting from lower food and operating cost in the U.S. and Canada.

Lower company restaurant margins in EMEA/APAC and Latin America, as compared to the same period last year, partially offset the 160 basis points improvements in the U.S. and Canada. Our blended worldwide royalty rate increased two basis points to 4.07%, compared to the same period last year. And the last financial metric illustrated on the scorecard, our net debt to EBITDA ratio improved to 1.8 times as the result of paying down debt.

Our second quarter financial highlights are presented on slide six. On a worldwide basis, we posted total revenues of $645.4 million, up 2% compared to the prior year period. Revenues were aided by currency translation benefit of $22.8 million as the result of a 9% appreciation in our weighted currency basket against the U.S. dollar and by solid net restaurant growth rate of 2.7% among the highest in the industry.

As a result, we now have 321 more restaurants opened, compared to the same period last year and over 90% of the net restaurant growth came from our international segments. In fact, our international restaurants currently represent 38% of our total restaurant count compared to 36% in the same period last year and 32% at the time of our IPO. However, benefits derived from currency fluctuations in net restaurant growth were partially offset by negative comps.

And although comps were negative in the quarter, they improved sequentially, largely driven by our popular $1 quarter pound Double Cheeseburger promotion, which drove positive traffic and gross profit dollars in the U.S. compared to the same quarter last year. And the cannibalization of our higher price sandwiches like our core Whopper products due to this promotion have been in line with our expectations.

Company restaurant revenues increased 1% primarily due to $16.7 million of favorable currency translation impact. The increase was partially offset by negative comps of 1.5% and by a net decrease of 22 company restaurants during the last 12 months, primarily due to the refranchising of company restaurants as part of our ongoing portfolio management initiative. Franchise revenues increased 5% benefiting from a $5.6 million of currency translation and from the addition of 343 franchise restaurants during the last 12 months in a higher effective worldwide blended royalty rate.

Property revenues increased 3% largely driven by currency translation capability [ph]. EBITDA was $115.5 million, up 6% compared to EBITDA of a $109.4 million in the same quarter last year and up 5% compared to adjusted EBITDA of a $109.9 million, which excluded $500,000 in start up expenses for acquired restaurants.

During the quarter, EBITDA was positively impacted by currency translation, continued net restaurant expansion, a higher worldwide blended royalty rate, positive comps in the EMEA/APAC segment and a 20 basis point improvement in company restaurant margins, led by improvements in food, paper and product cost and other operating expenses in our U.S. and Canada segment.

G&A expense increased $3.3 million compared to the same period last year. Currency translation negatively impacted G&A by $4.1 million. Net of currency translation, G&A actually declined 1% compared to the same quarter last year, due to ongoing cost containment initiatives. While on the topic of G&A, please note that we reclassified net gains held in the rabbi trust from the other income and expense category to the selling, general and administrative expense category. The net gains or losses on investments held in the rabbi trust are largely offset by commensurate increase or decrease in differed compensation. This change will allow for an easier review of our core G&A.

EPS increased 12% to $0.37 compared to EPS of $0.33 in the same quarter last year. EPS benefited from lower interest expense, reflecting a decrease in debt as well as in rates paid on borrowings, a lower tax rate of 33.9% compared to 37.8 in the same period last year. The quarter's lower than expected tax rate was primarily driven by our current mix of income from multiple tax jurisdictions as we opened more restaurants in international markets that had lower effective tax rates than the U.S. and currency fluctuations.

Additionally, currency translation, which is negatively impacted earnings during the last four quarters, positively impacted EPS by $0.02 this quarter. We continue to experience weak consumer spending, as global unemployment levels remained high. However, on a sequential basis, we did improved comps by utilizing our barbell menu strategy in our international segments while focusing on satisfying our guest desire for extreme affordability in the U.S.

Slide 7 [ph] of the presentation includes our year-to-date highlights. Worldwide revenues are down 2% on a year-to-date basis largely driven by lower comp sales of negative 2.5% compared to positive comps of 3.3 in the same period last year. This negative impact was partially offset by the addition of 321 net new restaurants during the last 12 months and a currency translation benefit of $1.9 million.

Year-to-date, G&A net of currency impact is up 2.7%, in line with our previously provided guidance of 3% for the full fiscal year. As disclosed last quarter, the increase is largely related to consulting fees for the implementation of new POS technology in company restaurants. Year-to-date, EPS is up 3% at $0.71 compared to $0.69 in the same period last year and unchanged compared to adjusted EPS of $0.71. Last year’s adjusted EPS calculation excludes $3.5 million in expenses related to acquisitions.

EPS benefited from net restaurant expansion of 30 basis point improvement in worldwide company restaurant margin and lower interest and tax expenses. Even though we continue to operate in the challenging consumer environment, we’ve strengthened the business by investing in its future. We continue to generate cash to pay down debt, pay dividend, reimage our restaurants, build new locations and invest in technology, all while continuing [ph] G&A and increasing the profitability of our company restaurant portfolio.

I’ll now turn the call over to Ben, who will discuss our results by reporting segment.

Ben K. Wells

Thanks, John, and good morning everyone. Page eight of the presentation includes our quarterly highlights. In the U.S. and Canada, total revenues decreased 1%, while income from operations increased 5% or 4% on an adjusted basis. Revenues were impacted by negative system comp sales of 3.3%, compared to a positive 1.9% in the prior year period. Last year’s comps included the Whopper Virgins promotion in December, one of our most popular advertising campaigns.

The decrease in revenues was partially offset by an increase of 29 net new restaurants over the past 12 months and by $4.9 million of favorable currency translation resulting from a 13% appreciation in the Canadian dollar, against the U.S. dollar. The FX impact on operating income wasn’t significant. In the U.S., traffic was positive and increased quarter-over-quarter and all day parts except breakfast, which continue to be negatively impacted by record high unemployment and underemployment. The improvement was largely driven by our popular Double Cheeseburger promotion.

According to NPD Group, QSR traffic in the U.S. declined 3% versus a year ago in the quarter ended November 2009, thus differentiating our positive results from the overall industry. The promotions performance was in line with expectations, positively impacting traffic and generating gross profit dollars. Similar to results generated in the testing period, the promotion negatively impacted food, paper and product costs by about a 130 basis points and lowered our overall average ticket price.

During the quarter, we also continued to build brand relevance with marketing initiatives such as the U.S. campaign with NASCAR driver Tony Stewart, and a multifaceted promotion with The Twilight Saga New Moon aimed at broadening the brand's appeal with female SuperFans, and SuperFamily promotions such as SpongeBob and Planet51 were leveraged across many international markets. Similar to last quarter, company-owned restaurant comps performed better on a relative basis compared to franchisee comps of negative 3.6%. We believe the primary difference is driven by our four corner-pricing model, which enabled us to implement location-based pricing decisions in our company restaurants.

Segment income from operations significantly benefited from a 160 basis point increase in company restaurant margin, making three consecutive sequential quarters of margin improvement in the segments. Company restaurant margins of 14.4% benefited from 100 basis point improvement in other operating expenses, including lower utility costs, largely related to our natural gas fixed price contracts, a favorable insurance adjustment in the non-recurrence of startup expenses related to acquisitions in the same quarter last year. Lower food, paper and product costs also aided the U.S. and Canada margins by 70 basis points.

Our U.S. weighted food cost index decreased 4% compared to the same quarter of last year, largely driven by 11% decrease in beef costs. These benefits in conjunction with company restaurant initiatives including variable labor efficiencies more than offset the comp driven sales deleverage on a fixed cost, lower gross margin due to value promotion and higher operating expenses.

The higher operating expenses are related to minimum wage increases in certain U.S. and Canadian markets along with the forecasted additional depreciation expense related to our POS system and U.S. and Canadian reimaging program. As it relates to our second half, we now anticipate our U.S. food basket costs to have a fairly benign impact on the P&L, with expected increases in beef offset by a new favorable chicken contract and forecasted favorable grain prices. Specifically, we should see a slight year-over-year benefit in the fiscal third quarter and a modest increase in the fourth quarter. EMEA/APAC revenue increased 9% to $187.9 million and income from operations decreased 2%. Movement in weighted currencies largely driven by a 12% increase in the euro and a 4% increase in the sterling against the U.S. dollar positively impacted revenues by $17.3 million, and income from operations by $1.9 million. In addition to the benefit of currency translation, revenues benefited from positive system comp sales of 0.9% compared to a robust 5% comp in the same period last year.

The segment’s positive comp performance was due to a 1.2% increase in franchisee comps led by the U.K., Spain and major APAC markets. However, the increase was partially offset by negative company restaurant comps of 1.3% largely related to a negative comp sales in Germany, which accounts for roughly half of our company-owned restaurant portfolio within the segment. Comps in the region continue to be negatively impacted by a challenging consumer environment, including double-digit unemployment in some of our major markets. The segment focus on promoting the company's barbell menu strategy with a combination of value and premium offerings, such as value-oriented King Deals, Stunner Deals and the indulgent products such as the various angus burger builds and the Whopper sandwich LTOs.

Quarterly revenues also benefited from an additional 235 net new restaurants over the last 12 months. Company restaurant margins decreased 280 basis points to 11.4%. Most of the margin decrease was related to other operating expenses, which included higher repair and maintenance costs and startup expenses for new restaurants. Margins were also negatively impacted by the effects of sales deleverage on our fixed costs from lower comps.

Although EMEA/APAC Company restaurant margins remained at relatively low levels, they increased sequentially over the last three quarters. In Latin America, revenues increased 4% and income from operations increased 14% or $1.3 million. The top line increase was driven by an additional 57 net new restaurants opened during the last 12 months and a $600,000 positive impact from currency translations. The impact of FX on income from operations was not significant. These benefits were partially offset by negative comps of 2.6% compared to a solid comp of 4.1% in the prior year period. Comps were negatively impacted by continued adverse socio-economic conditions specifically in our largest market Mexico, which continue to see a slowdown in tourism and remittances.

During the quarter, the segment continued to leverage the barbell menu strategy with focus on everyday value platforms such as the Come Como Rey, and the BK King Deals, brand campaigns for our differentiated Made To Order Whopper, along with the affordable, indulgent LTO offerings including Mega Angus XT Furioso and the Club Whopper Jr. combos in the key markets.

Company restaurant margins of 21% were down 300 basis points, compared to the same quarter last year. The majority of the decrease of 270 basis points resulted from higher occupancy and other operating costs driven by a one-time rent adjusted recorded in the prior year.

Margins were also negatively impacted by the effect of sales deleverage on our fixed costs as a result of negative comps. The segment however delivered Company restaurant margins in excess of 20% for the first time since the third quarter of fiscal 2009, as the effects of the H1N1 virus subsided and as our teams focused on new initiatives deliver profitable sales.

Turning to page nine, I won’t spend too much time walking through the year-to-date business results, but I would like to point out that even though revenues are down 2%, our net income is up 3%. The team continues to work hard at identifying opportunities to improve profitability, not only through sales increases and new restaurant openings, but also through process improvement initiatives and cost containment programs, basically just finding better, more efficient and cost effective ways of doing business. So, we’re all focused on building this brand for the future, we continue to build upon a strong foundation and we remain on course, executing our strategic initiatives that we believe will position us well for when the operating environment improves.

Moving to page 10, we continue to deploy our cash in high return initiatives, including our successful reimaging program. The opening of new company restaurants and in technology like our POS systems, which are now installed in 88% of our worldwide company restaurants. The Phase 1 benefits of our new POS are already at work and include better loss prevention, labor efficiencies and inventory control. Phase 2 will be fully leveraged following the development of our data warehousing system over the next few years.

At that point, we will have access to real time transactional level data system wide, which we believe will enhance our market research and analytics. During the quarter, we also utilized cash to pay a quarterly dividend, as well as the $15.6 million scheduled repayment of our term loan A. And this month, we strategically reallocated our uses of cash and agreed to purchase 35 restaurants in Singapore, making it our second company market in Asia-Pacific. The transaction will cost approximately $11 million. As a result of this use of cash and the lower than expected sales, we have lowered our fiscal year CapEx budget to a range of 150 to $175 million.

I'll now turn the call back to John, to wrap up.

John W. Chidsey

Thanks Ben. We along with our peers continue to operate in one of the most challenging global consumer environments, and unemployment conditions are not likely to improve during the next 12 months, therefore we will continue to satisfy our guest needs for extreme affordability with promotions such as the $1 quarter pound Double Cheeseburger and other value priced products, we will be rolling out shortly. And we will balance those offerings with a strong, indulgent product pipeline that includes the Steakhouse XT, ribs, stuffed burgers, chicken LTOs and others.

Given our year-to-date performance and our expectations for the second half of the fiscal year, we changed some of our previously provided guidance. We expect continued top line softness in our third fiscal quarter as January sales were additionally challenged by adverse weather conditions. And as Ben mentioned, we expect our full-year CapEx now to be in the range of a 150 to $175 million, due to softer sales and cash required for the pending Singapore acquisition.

And primarily due to our current income mix, our full-year tax rate is now forecasted to be 35%. To reiterate what Ben said, we will continue to focus on strengthening this brand for the future, doing what’s right for the system as a whole. Specifically, we continue to increase our value for the money rating amongst our consumers with our value menu featuring the Whopper Jr. for $1 and the $1 quarter pound Double Cheeseburger LTO, while satisfying other guest needs for indulgent great value products. We continue to broaden our consumer appeal with family promotions like this quarter’s SpongeBob, and the upcoming Iron Man II and Marmaduke tie-ins.

And we’ve targeted our female SuperFans of all ages with promotional tie-ins with the Twilight series movies continuing with the clips this summer. And with our positive steps 350 meal combos for 650 calories or less promo featured in various women’s magazines. The SuperFan is merely a term coined by BK to describe the fast-food hamburger restaurant industry’s most frequent user, who accounts for more than half of the category’s visits. To clarify, it's not just 18 to 34 year old males, its all ages and all household demographics with over half of them having children. And interestingly, over 29% are 50 years of age or older. What defines a SuperFan is simply the fact, they visit our category nine or more times a month. Our development plans remain on-track. We are building new restaurants and improving the image of the existing portfolio.

We are strategically entering new markets like Russia and diversifying our global portfolio by expanding in existing markets. And the system has invested a new restaurant level technology according to schedule aimed at enhancing sales and improving restaurant profitability including efficient boilers and POS systems. And most importantly, we are committed to working with our franchisees. Their success is our success. With the system comprising over 1,200 unique franchisees, we know that not every decision will resonate with every franchisee, but as the franchiser and largest Burger King restaurant operator of over a 1,400 restaurants globally, we are committed to making the right, sometimes difficult decisions that benefit the brand as a whole and propel this business forward. Through our various franchisee task forces, councils, and one-on-one meetings, we are committed more than ever to identify new opportunities and to develop mutually beneficial solutions to problems facing the brand and the overall industry. I’d like to thank everyone on the call for their time today and continued interest.

Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Palmer of UBS.

David Palmer – UBS

Hi, thanks, quick one here. Do you think the company stores are - it took more pricing in this last quarter than the system overall than the franchisees lately, and therefore perhaps had better gross margin trends than the franchisees and separately how did the adjustment to that self insurance reserve that was in the release, how much did that add to earnings in the quarter? Thanks.

John W. Chidsey

David, no, I don’t think franchisees, I think we’re pretty even in terms of the pricing we took. So, I don’t think that had any impact and as for the insurance adjustment, I will let Ben answer that one.

Ben K. Wells

It’s approximately half a penny, more or less.

John W. Chidsey

Next question, Operator?

Operator

Our next question is from Jeff Omohundro of Wells Fargo Securities.

Jeff Omohundro – Wells Fargo Securities

Thanks. My question relates to theSuperFan, I appreciate your elaboration on the characteristics of the SuperFan. But I'm wondering how important is it in this environment for Burger King to broaden reach, particularly given the younger SuperFan and the employment characteristics of that customer? Thanks.

Mike Kappitt

Yeah, this is my Mike Kappitt. As John said, the SuperFan is more than 18 to 34 year old man, it really is pretty comprehensive more than half of them have children in their households. And so, we focus on the SuperFan and their entirety [ph] not just that 18 to 34 year old male and if some of the properties were highlighted, I think that that’s apparent.

John W. Chidsey

I mean, when we bought [ph] media, obviously we bought [ph] media 18 to 49.

Mike Kappitt

Our products are developed against the 18 to 49 year old that are kids products, it really is more broaden than what I think the impression out there is.

Operator

Our next question is from David Tarantino of Robert W. Baird.

David Tarantino – Robert W. Baird

Hi, good morning. Just a question on your comments related to Q3 sales and in particular, could you give us some sense on the magnitude of the same-store sales that you might have seen in January or what you might be expecting for the quarter? Is it on a global basis were somewhat you reported for Q2 or better or how should we think about that?

John W. Chidsey

Tough [ph] question. What I would tell you is, like our competitors from what I’ve seen in reports, January was very much of a bifurcated month. I mean, the first two weeks were ugly given the weather for sure which till the month as a whole, but the last two weeks our traffic bounced back to positive again in our system in the U.S., albeit sales were somewhat weaker than what we saw in the fourth quarter, but I mean it was a complete reversal of the first two weeks. February there is obviously only a couple of days. So, you can’t really judge from that. So given that you have two weeks of really not pretty and two weeks of considerable improvement, it’s kind of hard to judge what the quarter is. So, if I had to guess and it’s purely a guess, you know I would say that I don't think there would be, were we sit today considerably worse than, or is there going to be any better, I think where we sit today is probably a good a guess as anything. But, it’s a total guess.

Operator

Our next question is from Matthew DiFrisco of Oppenheimer & Company.

Matthew DiFrisco – Oppenheimer & Company

Hi there. I guess just to clarify, you mentioned your – the competitor McDonald’s mentioned 3% weather impact. Is that something that I guess you would have experienced as well? And then, I missed in the calls if you mentioned anything about the re-imaging and what you're seeing as far as sort of the outlook for that in this current environment, the rate of investment by the franchisees? Are you still seeing that pipeline fulfilled and is that any bit at risk of slowing given the credit environment or the current comp trends?

John W. Chidsey

In terms of the weather, I think we would say we are roughly, you know I would roughly say we're inline with what McDonald’s mentioned in terms of the impact that it had the first couple of weeks of the month. And so as I said, you know the back half of the month would be heck of a lot better than in the first part.

In terms of re-imaging or remodeling, we’ve now done a 143 scrapes in remodels, since we started our program about seven or eight quarters ago. So we are pretty much on track to do that 60, 70 a year that we committed to. So, we continue to deliver and obviously we are all moving forward. From a franchisee perspective, there maybe some let up, but I would consider it minor, I think most people that have committed and have their permit and their plans in place, we continue to share data with them that shows the 10 to 15% sales were from the scrapes and - I’m sorry on the remodels and 25 to 30% on the scrapes. And so, given that it’s a compelling economic story, lack of capital has not been a – an issue. Construction cost continue to come down, so it maybe on the margin a little bit less, but the most part I think we are moving ahead nicely.

Operator

Our next question is from Steve West of Stifel Nicolaus.

Steve West – Stifel Nicolaus

Hey, John, real quick. Can you talk about as you look at the double cheeseburger, and at some point probably pulling that off, you’ve been talking about of being LTO, have you thought about or tested what consumer reactions are to sales on that after you pull it? So, I guess the concern that I would have is, you train the consumer to only want to come in for the $1 double cheeseburger, and we’ve seen that in various industries, even in the restaurant industry in the past and kind of what are you thoughts on that? And how do you wean the consumer off of that $1 double cheeseburger once you finally do pull it?

John W. Chidsey

The answer is yes. We’ve been, I think as we talked about it in our last call, we’ve been testing many different things and, I don’t want to go into – surprising to say, we do have a transition strategy and we’ve been testing numerous different products, different price points et cetera and I think we will have some news for you sometime in the next month or so.

Operator

Our next question is from Greg Badishkanian of Citigroup

Greg Badishkanian – Citigroup

Great, thanks. Just a question, with respect to, you know the overall competitive landscape and - since you came out with your dollar double cheeseburger, have you noticed even with more local competition, have you noticed a pickup over the last few months in terms of what they are doing?

John W. Chidsey

Not really. I think, you know, I was looking at chart the other day from NTD [ph] Press Data for traffic for October, November, December and you know – I’d say, we held our own very nicely and on a relative basis, McDonald’s and Burger King, I think you know were the definite out performers from traffic. As we said, our traffic was positive in the U.S. and it certainly bounced back that way since the back half of January and into February. So, I think we continue to perform as we did in that earlier part of the quarter. So, I know there is a lot of thought out there is the thing loosing the dollar double cheeseburger loosing its effectiveness in terms of driving traffic, my answer would be no. And in terms of how we’re performing against most of the rest of the fast food hamburger industry, I'd say we are performing very well. But from a overall competitive landscape, I haven’t seen a whole lot of change in terms of what people are doing out there, I don’t know Mike if you --.

Mike Kappitt

No, I would say it’s fierce out there, but it was fierce out there before we got into the quarter pound dollar double cheeseburger and so – and so, that’s kind of equalize it a little bit.

Operator

Our next question is from Sara Senatore of Sanford Bernstein

Sara Senatore – Sanford Bernstein

Hi. Thank you. I wanted to jump to more of a global perspective and ask about Singapore, which is that are you talking about owning that market and I wanted to get a sense of, again, how you determine that that's the place to invest money rather than, say, which requires you to pull back on CapEx, and owning versus franchising, you set that decision process with respect to the different geographic markets? Thanks.

John W. Chidsey

Yeah, Singapore is where we have our Asia-Pacific team headquartered first and foremost and so, in terms of having a market that you can showcase, you know whether it’s training new products, you know best in class operating platforms techniques et cetera. Having that right there from a travel perspective where most of our franchisees come into meet with our Asia-Pacific team, makes a lot of sense. Secondly, I'd say we have a great development opportunity in Singapore when you look at where we are vis-à-vis the competition. So it’s very under penetrated, we think there is a considerable amount of growth left there. So, we think economically it makes a lot of sense. In Asia, we were way below our sort of 90:10 ratio that you see everywhere else in the systems. So I don’t expect to see us buying into any other markets, if that’s your question. So it’s really just I think it will be a good opportunity for us to build up that market.

Operator

Our next question is from Steven Kron of Goldman Sachs. Steven, your line is open.

Steven Kron – Goldman Sachs

Hello, can you hear me?

John W. Chidsey

Yeah.

Operator

Hear you now.

Steven Kron – Goldman Sachs

Okay, sorry about that. Follow up first, I guess on the third quarter soft same-store sales numbers, it seems like your comments are very U.S. specific, so where your comments regarding worldwide soft numbers for 3Q, is it also in your EMEA/APAC and Latin America business or just the U.S.? And then secondly, on the $1 Double Cheese, can you talk about what percentage of sales that represents, say in the month of January versus when you first launched it, is it becoming a smaller percentage of the total sales pie?

And then lastly, if you could just comment about what your plans are around breakfast on new product introductions and how you – how you look to market breakfast going forward?

John W. Chidsey

Yeah, you’re right, Steve. My comments were specific to the U.S. If you want to talk about globally in January, Europe had – they had some weather. But I don’t think it was anything like what we experienced in the U.S. having been over there part of it. So I would say, globally, we haven’t really seen any change when you look at sort of the major markets Asia, Europe and Latin America from what we saw in the – in our second quarter.

So there is no, I wouldn’t say there is any improvement, I wouldn’t say there is much deterioration either. So I would say outside the U.S., it’s pretty much the same result, same environment that we’ve been experiencing over the last couple of months. Your second question, I believe was around $1 Double Cheeseburger, how many we sold and has it decreased (inaudible) Mike to answer.

Mike Kappitt

Yeah, the mix of $1 Double Cheeseburgers remains about the same from the last time we spoke, which is about five to 10% of our sales.

John W. Chidsey

And the other question Mike was around the breakfast.

Mike Kappitt

Yeah, we – we obviously have a lot of activity happening in our pipeline against breakfast. We do have upcoming in April, some breakfast value news that we will be advertising in the market.

Operator

Our next question is from Jason West of Deutsche Bank Securities.

Jason West – Deutsche Bank Securities

Yeah, thanks. Just a question kind of on the margin outlook. As we see the sales still pretty soft into the March quarter, but you got a little bit less of a commodity tailwind, which we expect to see margins continue to improve year-over-year in the U.S. business or U.S. and Canada business and do you expect to be others [ph] maintaining and grow your profits in the back half even if sales are a little slower. Thanks.

Ben K. Wells

From a margin standpoint, I think you will see margin compression from this quarter. You’ll continue to see year-over-year improvement. Well, I think the last three quarters, you’ve seen year-over-year improvement, but I think sequentially you could go backwards from the U.S. – I think North America there was 14.4 simply because it’s our weakest quarter from a seasonality standpoint. Obviously, January was not a great month as we’ve already discussed for weather reasons. So I still think you’ll show improvement year-over-year, but not sequentially.

And in terms of, while we post EPS growth in the back half of year versus the first half, that obviously is totally dependent on what happens to the sales which is why we haven’t given an EPS guidance and so – your, whatever you want to put into your crystal ball for same store sales, we determine that.

Operator

Our next question is from Joe Buckley of Banc of America, Merrill Lynch.

Joe Buckley – Banc of America, Merrill Lynch

Thank you. Couple of questions as well. On the pricing front, you mentioned the four corner pricing. What kind of pricing are you running year-over-year in the company U.S. Canadian restaurants? And then on the marketing front, with all due respect to Mike, what are your plans in terms of the Chief Marketing Officer role and the release mentioned the national ad fund contribution from the company stores being a little bit lower, because its based on sales, as well as a lot have talked about the sole through re-date money not coming in, is the national advertising plan changed much looking forward versus what you were thinking in the beginning of the fiscal year?

Mike Kappitt

(inaudible) Joe. As to price, we took – I think we’re 3.7% if you – current run rate over the last year, is in two different buckets for total 37. The CMO I think was your second question and we are in the middle of the search and are interviewing candidate, so I'd think that we will have that certainly decided some time in the next couple of months here. And then as to ROF money, no, we have not - ad fund which I know ties into your question, no we have not scaled back or changed our advertising plans, we shifted a few things around but overall we haven’t had like cut any flights out or dramatically reduce GRPs or anything like that. And in terms of, we did say to the franchisees that we would not take the ROF money in February because we knew it was a tough economic environment and we were trying to find a solution, and we actually met with a group of franchisees earlier in the week and I'm hopeful and actually more than hopeful, I’m confident that we have come up with a solution that will allow us to get more money into the National ad fund and that will be able to share some good news with you in the next week or two on that front, that would impact - that would I should quantify, that would not impact us until the next fiscal year starting July 1.

Operator

Our next question comes from Jeffrey Bernstein of Barclays Capital.

Jeffrey Bernstein – Barclays Capital

Great. Thank you. Couple of questions, one just a clarification. I think you mentioned sequential traffic improved through the quarter, obviously $1 Double Cheeseburger got a lot of attention. My understanding was it initially kicks off with huge volumes and then as you would expect would presumably decelerate over time. Just wondering whether you can provide a little bit more color in terms of the trends of the $1 Double Cheeseburger, I think you said it was still 5% to 10%, which would be impressive if it didn't move out of that range, but just a little bit more color on the sequential trend throughout the quarter and perhaps what it did to the average check? If it was still driving positive traffic. And then secondly, just on the franchisee relations, obviously, that's pretty encouraging news about essential boost to the ad fund, but the combination of the beverage rebate and the lawsuits on the pricing and what not, just wondering whether you could talk about the ten years relationship? How does it impact the operations? How would it potentially impact the long-term unit growth and what kind of negative impact is it having in the near term? Any kind of broader color would be great. Thank you.

John W. Chidsey

Okay. Jeff, I'm going to let Mike to answer the – I didn’t actually talk about sequential – within the months within the quarter, I just said that we had positive traffic for the month and that positive traffic had returned posted the bad two weeks of weather that in the back half of January and into February, we continue to see positive traffic. I didn’t talk about whether December was better than November, better than the last half of October and I don't know think, I know, we don’t want to get into that level of detail. So I don't know Mike, if you want to…

Mike Kappitt

Yeah. No, I mean I would say, it’s fair to say that keeping in line with what we experienced in past, we did get off to a great start and as we know things kind of settle in, people go back to their to habits to some extent and again, it’s performed very similar to what we experienced in that.

John W. Chidsey

And as to your question about franchisee relations, I do think it would be a positive, if we come to what I think it’s an acceptable solution around, how to get more money into the ad fund, which I think even franchisees would agree is a, it’s a big one for the brand. It's really more how we got there. But the last two shows of support that we voted for around the $3.99 introductory price point on the XT because that’s a nationally advertised price point that passed, we’ve got a gain that they voted for around Iron Man in the summer - Eclipse, sorry that passed, so I know there is a lot of mythology out there that somehow we’re not able to get things done. But I would hope those two shows more what we proved it. When you lay out the right business case, and people see what’s in it for them, they vote, yes. Obviously, it’s a tough time, so I read the research reports from other brands out there and any time sales aren’t positive, you’re going to have discontent, but I don’t think it is really stopping us. I think this will be the third year in a row that we will have net unit growth from a restaurant standpoint. So franchisees continue to build restaurants. We were at 90 plus percent in terms of POS being installed and we’re very close now to getting up to a 100%., So I think, yes, there is noise, but I think in the end, we really are doing what we need to do to drive the brand forward for the long-term.

Operator

Our next question is from Nicole Miller of Piper Jaffray.

Nicole Miller – Piper Jaffray

Good morning. I just wanted to clarify on the comps when you did give globally not talking about US, no change - is that a quarter-to-quarter like sequential from the second quarter or is that like a two-year trend unchanged comment?

John W. Chidsey

No, what I was saying, Nicole is the U.S -- well, first of all, like I said, I don’t really know where our comps are going to go because I don’t have the crystal ball and that’s one of the main reasons we didn’t give the EPS guidance this year. And I certainly feel, like we made the right call there because it's a confusing environment today as it was two quarters ago. What I said was the U.S. - the traffic bounced back, sales like I said were not great in January given the weather and they’ve – as I have said they have softened somewhat, but again how much is weather again hard to say. Globally we haven’t seen any change over or outside the U.S., haven’t seen any change over the last quarter or so. And so when you are looking forward into this quarter, I don’t think you’d see a whole lot outside the U.S. that looks that different.

Nicole Miller – Piper Jaffray

And just to piggyback on Joe's question about the marketing, I think before you had a pipeline, let's call it maybe 18 months, is the pipeline still that strong and what is going to be the balance between value and premium products?

John W. Chidsey

Absolutely, the pipeline is very robust and we are actually very shortly here are going to start to balance out our messaging in terms of our value and our premium products when we go on air with Steakhouse XT towards the end of this month.

Operator

Our next question that is from John Glass with Morgan Stanley

John Glass – Morgan Stanley

Hi, thanks. Couple, one is on pricing. I just want to confirm the 3.7%. That's a gross amount, not the net amount that would be in the comp? And more broadly, you’ve been talking about four-quarter pricing for a while, so at what point does that lap? That seems like a lot of pricing you will be taking in this environment? So, are we at the tail end of that or do you think there's an ongoing significant opportunity even in this environment? And just on January, are you talking about company same-store sales or do you have visibility on franchise as well given that the report is on a lag?

Mike Kappitt

I’ll answer the back question there. Most of that what I’m giving you is complicated – I mean we have some, actually the franchise data is just literally coming in. We basically get it about a week lag to your point from the month. But I think, directionally, it will be accurate for what I’ve said for franchisees as well. I don’t have it in the same detail as the company, but I know, there was again some, obviously the same impact by weather. I think traffic, you know, bounced back for them and for the system, and again I think from an overall sales standpoint, there would be some weakening over the previous quarter, but not a huge amount.

Ben K. Wells

Yeah, in the version of the four corner pricing model that we rolled out to franchisees, we did that in the fall, and so they still have you know an opportunity ahead of them. One of the great things about the four corner pricing model without getting too specific into how it works is, it should continue to generate opportunities for us to be smarter about our pricing at the trade area level.

John W. Chidsey

And then your question on the, on the overall pricing, that was gross. Next question operator.

Operator

Our next question is from Mitch Speiser of Buckingham Research.

Mitch Speiser – Buckingham Research

Great, thanks very much. And, John, just within the context of, I know last quarter you did give us a wide global comps range of down two to up two for fiscal ’10. Do you still think that range is good? It does seem like it might be at the lower end, but if you can just put that into context? And on margins in the U.S. for the March period, I believe you are lapping some pricing that you took in the March period last year, so I guess net-net should there be – should that 3.7% gross number decelerate in the March period? Thank you.

John W. Chidsey

I'm trying to remember which month we took the pricing. and as I said, margins overall, yes you will see – you will see compression again sequentially, because from a seasonality standpoint it's always the lowest quarter. Again, we told you January wasn't a great month. Year-over-year I do expect you to see improvement. So, I think that's all we're really going to say about margins at that point. And the pricing is obviously going to depend on whether we take, which we never announce in the future, but as we look at over this quarter we are not taking any more pricing this quarter now. I think your second question was…

Mike Kappitt

Range of the comps.

John W. Chidsey

The range of the comps. Thank you. Yeah, I didn’t actually – I don’t think I said it last quarter. I think at the beginning of the year, I said, I could see us being down anywhere from sort of down two or three to up two or three. You were correct that if you look at the first half of the year, we were certainly at the lower end of that range, I think we were down 2.5 on a worldwide basis through the first six months of the year. So, obviously, I told you, you know, at least that we now expect the back half of the year to be softer than we had initially forecasted. So yes, I think it would be safe to assume that we will be somewhere more in the lower end of that range for the full-year as opposed to some dramatic turnaround that I don’t think any of us in the industry see over the next three to six months.

Operator

Our next question is from Keith Siegner of Credit Suisse.

Keith Siegner – Credit Suisse

Thanks. Just a quick question on slowing of the CapEx. I understand that some of the funds will go towards the acquisition, but in an environment where you have the remodel opportunity, the sales lifts are there, the construction costs are down, those stores are outcomping their local market DMAs post remodel. Could this be an opportunity to spend right up to the limit, remodel as much as you can? It seems like that would help from a competitive standpoint. Why not take the CapEx right up to the limit?

John W. Chidsey

Well, I think if we can -- Keith, the answer is we will. I mean remember we were at a 175 to 200, so now we’re at a 150 to 175. So, I mean if you hit the high-end of this new range, you're still within the initial range. I think what we’re saying is, given that we don’t know what the sales environment is going to look like for the next five months, we just want to flag it and say we'll watch. Obviously, we have to continue to make the debt paydowns on the term loan A, so that’s $15.7 million a quarter. So we have to make those two payments in those quarters, and obviously you know we’ll continue to pay our dividend. But other than that, yes, I mean we continue to think that is a great opportunity, because to your point, not only do you get the initial sales lift, and I know Chuck has talked to a lot of you guys when he is out presenting, you continue to get that benefit for the next year as well. You outperformed the DMA as well. So, trust me, we will spend as much as we possibly can up to the limit, as long as we are, you know, good stewards of getting sort of – stewards of the brand and manage the cash as best as possible.

Operator

Our next question is from Tom Forte of Telsey Advisory Group

Tom Forte – Telsey Advisory Group

Great. Thank you very much. I was hoping that you could give some thoughts on foreign exchange for the second half of the year and you can just use, you know, where we stand today on exchange rates. And then, second, you’ve mentioned I think a new chicken contract, can you give us a sense of the duration and what kind of benefit it is on a year-over-year basis on food costs?

Ben K. Wells

Yeah, the chicken contract is good for another year and it was a significant improvement over our prior contracts with them. The currency is – is a huge crystal ball. I think what’s safe to say is that since the beginning of our fiscal year, we’re pretty much at the same levels that we were back in July. There is a downward bias in the current market. That’s driven by geopolitical events, primarily right now as to what Mr. Trushay [ph] does with the Greece and Portugal. So perhaps the question is more directed at him than me, but there is definitely a bias in favor of the dollar right now, but that ebbs and flows. So, but as we speak, we’ve got a nominal impact on the – from the beginning of the year.

Operator

Our next question comes from John Ivankoe of JPMorgan.

John Ivankoe – JPMorgan

Hi, great. Thanks. I mean just a couple of comments, just trying to look forward a little bit. One, comps are often times a leading indicator of development, and I certainly understand that fiscal 2010 at 250 to 300 was a little bit below where you would typically like that to be, including at the franchise level. So do you have a good sense in terms of where fiscal 2011 might go? It’s the first question. And secondly perhaps a little bit related to that in some earlier comments on CapEx, it was my understanding this year that there would be some efforts made to refinance your debt to remove that restricted CapEx covenant that you have in your debt. Is that something that you are still thinking about, and in other words, should we expect meaningful increase in CapEx in fiscal 2011 relative to fiscal 2010?

John W. Chidsey

Yeah, I think this year at 250 to 300 was the goal and again half way through the first half of the year, clearly, driving home [ph] the fact that we opened 95 this quarter on top of a strong first quarter hopefully gives investors confidence that we should come in actually closer to the high-end of that range where we sit today for the year. And I think when you look at the pipeline in F ‘11, again as we talked about land is cheaper, landlords are certainly willing to throw more into deals now today in terms of helping finance things, construction costs are down, not just from the building material standpoint, but actually the labor itself.

And so I think the franchisees that understand all those benefits, I mean they’re clearly in it for the longer–term. They view this as, if you want to be countercyclical this is the time to be expanding. And as I also said, there hasn’t been an big issue around capital. So, I would expect that the F ‘011 pipeline would certainly either be as good as this year or bounce back pack up closer to what we were doing in the past. I think a lot of that again is dependant on what larger projects i.e. malls, Wal-Marts, Targets, things out in Asia, the Middle East, et cetera, if that picks back up. I think that will be the big determinant of whether we can step back up from the 250, 300 range up to, back to the 350 range that we were at earlier. I would also point out I think even where we are 250 to 300, we still have certainly if not the highest, one of the highest growth rates out there in the industry.

From a refinancing standpoint, yes, you are correct that we continue to look at the markets, on a regular basis and as Ben as I said before, it's really a trade off between rates and sort of covenants and whatever other restraints you have on your financing and, when you think those two lines cross and you say, all right, I am willing to pay a little more for the debt but I am going to get much less covenants than I would have if I’d refinanced six months ago, we'll jump in there. So I think just it’s safe to say we continue to monitor that and hopefully we’ll have some news for you in the next couple of quarters here when we have a little more clarity around that.

Operator

Our next question comes from Matthew DiFrisco of Oppenheimer & Company.

Matthew DiFrisco – Oppenheimer & Company

Thank you, just two points of clarity. The call is going on quick. I don't want to hold you guys up here. But the half a penny, I think you made a reference to as far as the leverage benefit in the U.S. margin on the other operating and occupancy line, half a penny. I guess doing the math, that's about 30 basis points of the 100 basis point spend. If you could just clarify that if we're doing that correct from somewhat of the reinsurance come – or the insurance coming back. And then also just as far as the commentary on the ad spend and the fund and the commentary in the press release where you say, it was down correlated to sales. If we were to – is that relationship, should that continue as sort of the sales are equal to or slightly less than what they were just reported? Would that then mean the ad fund as well should follow directionally or is there an accrual benefit where maybe you held out to try and maybe ramp up spending in the back half with some of these new launches to come?

John W. Chidsey

Those – I mean the ad fund will definitely follow sales, I mean it’s just a strict mathematical correlation. Now, how we know at the beginning of the year to your point that we have certain product launches and so we decide, we want to save X amount of money in the ad fund to support a launch of Burn XP [ph] a new product. So I'm not saying the money gets spread evenly. That definitely doesn't happen, because you pick and choose where you want to place your bets. So, yes, if sales continue to fall, you would see a slight decrease and conversely if it went up, you would see the 4% going through on that basis. I think, Ben, can answer your question, but actually the insurance adjustment we talked about doesn't flow through our line either. That was in the margin line, Ben.

Ben K. Wells

Yeah. That was actually in the margin line, as it was resulting to cash payment so approximately about 35 basis points, when you do the mental math.

Operator

I would now like to turn the call back to Mr. John Chidsey for closing remarks.

John W. Chidsey

Okay. Well, thank you very much for joining us this quarter on our call and we're happy to follow-up with any other questions you have in the next couple of days. Thanks a lot.

Operator

Thank you very much, sir. And thank you ladies and gentlemen for your participation on today's conference call. This concludes your presentation. You may now disconnect. Have a good day.

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