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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q4 2009 Earnings Call Transcript

February 25, 2010 8:00 am ET

Executives

Paul Flanders – VP, CFO and Treasurer

Dan Accordino – President and COO

Alan Vituli – Chairman and CEO

Analysts

Reza Vahabzadeh – Barclays Capital

Bryan Hunt – Wells Fargo Securities

Jeff Omohundro – Wells Fargo Securities

Greg Ruedy – Stephens

Tom Forte – Telsey Advisory Group

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Carrols Restaurant Group's fourth quarter 2009 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to turn the call over to Mr. Paul Flanders, Carrols' Chief Financial Officer, for opening remarks. Please go ahead.

Paul Flanders

Good morning, and welcome to our fourth quarter and full year 2009 conference call. By now, everyone should have access to the announcement released this morning, which you can also find at our Web site at www.carrols.com, under the Investor Relations section.

Before we begin our formal remarks, I need to everyone that our discussion 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 a more detailed discussion of the risks that could impact our business and our financial results.

On the call with me today 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 provide some commentary regarding 2010. We'll then be happy to address any questions that you might have. And with that, I turn the call over to Dan.

Dan Accordino

Thanks, Paul, and good morning, everyone. All things considered, 2009 was a pretty good year as we were able to significantly increase earnings despite the ongoing challenges to top line growth caused by the difficult consumer environment. While favorable commodity and utility costs certainly helped to improve the bottom line, we also benefited from specific actions taken across the P&L to reduce costs. Also, reductions in debt over the past two years and lower interest rates resulted in a considerable decrease in our interest expense in 2009.

Net income for 2009 was $21.8 million or $1 per diluted share, compared to $12.8 million or $0.59 per diluted share in 2008. Excluding impairment charges and non-recurring gains, diluted earnings per share were $1.06 in 2009, compared to $0.61 in 2008, a notable increase. Fourth quarter diluted earnings per share, excluding non-recurring items and impairment charges increased from $0.22 in 2008 to $0.26 in 2009. As Paul will address, the fourth quarter of 2009 included one extra week, which contributed approximately $0.07 per diluted share to both the quarter and the full year.

Fourth quarter revenues increased 4.4% on an overall basis, and were higher at all three brands due mostly to the extra week in the quarter. Comparable restaurant sales in the fourth quarter on a comparable 13-week basis were down 3% at Burger King and decreased 4.5% at Taco Cabana. However, as turns continue to improve at Pollo Tropical, same store sales for the brand turned positive 0.3% for the quarter.

This past year, an important objective was to further reduce leverage, and we made considerable progress to this end as we reduced total debt by $33.1 million. Obviously, the trade offer using free cash flow to pay down debt has been a reduction in new store development. Absent the cost benefits present in 2009, earnings in 2010 will be more reliant on improvements in top line trends. There remains continued uncertainty regarding the economic recovery and increases in consumer spending.

To build guest traffic at our Hispanic brands, we continue to focus on our pipeline of new products and compelling promotional offers supported through television, radio, and direct mail advertising. We continue down to size the attributes that most differentiate our brands within the quick casual segment, specialty made food, distinct flavor, flavor profiles, and a strong proposition for the consumer. We believe that our Hispanic brands are well-positioned and have great long term growth potential. We will, however, continue to limit new unit growth in the near term in order to maximize free cash flow to pay down debt, while we work on improving the competitive position of the two brands by elevating them further from conventional fast food. We would anticipate more aggressive expansion beyond 2010 as the economy improves.

With respect to Burger King, the brand has increasingly focused on the consumer's need for extreme affordability, with very aggressive promotional activities at the QSR industry and its conventional customers have come under increasing pressure. Our visibility is limited at the present time regarding sales expectations for our Burger King restaurants in light of recent trends and competitive activity in the face of reduced consumer spending. However, we are hopeful that as Burger King adjusts its discounting strategy and launches new products in 2010, these efforts will provide more balance to brand's barbell strategy.

With that said, I'll now discuss our three brands in greater detail. Revenues for Pollo Tropical increased 7.4% in the fourth quarter of 2009, including the extra week, while comparable restaurant sales on comparable 13-week basis increased 0.3%. Customer traffic has continued to sequentially improve since the fourth quarter of 2008, and was 3.8% positive for the fourth quarter of 2009. We also improved segment EBITDA for Pollo by $1.4 million to $6.7 million, and EBITDA margin by 33 basis points to 14.9%.

With our concentration of restaurants in Florida where the unemployment rate is almost 12%, economic difficulties have weighed in on our performance for some time. Throughout 2009, we've employed TV advertising in Dade Broward and Palm Beach Counties as well as Orlando focusing on our new products, promotional price points, and our favorable brand attributes. We believe this messaging is that effective in improving both sales and customer traffic.

Our Grilled Tropical Wings introduced in the third quarter continued to perform well. These are attractively priced at $3.59 for a five-piece portion or $6.59 for eight pieces. In the fourth quarter, we also added the wings as a choice with our popular Tropical trios, which now includes any combination of three wings, a quarter rack of ribs, a quarter grilled chicken, or half a Churrasco Steak, plus two sides for $7.99. This was our primary promotion during the fourth quarter.

We also launched the handheld sandwich and wrap line during the fourth quarter, initially in the West Palm Beach market. This new line includes a Chicken Caesar Wrap, a Cuban Wrap, a chicken sandwich with peppadew sauce, a chipotle chicken sandwich, and a guava pork barbecue sandwich, all priced at $2.79. Combos are priced at $4.99 and include a 20-ounce fountain drink and a choice of Caribbean chicken soup, Caesar salad, curly fries, fried Yuca or sweet plantains. This product line was rolled out chain-wide in January 2010, and is targeted to better serve the consumer's lunch and on-the-go needs. It has been very well received, and is averaging almost 90 sandwiches and wraps per day per store. While in its lowered average check somewhat, it has resulted in a comp sale increase in most of our markets.

With regard to Taco Cabana, I said in our previous call that we've been mounting – that we've seen mounting consumer and economic pressures in the Texas market starting 2009. This continued in the fourth quarter as Taco Cabana's comparable restaurant sales were down 4.5%. Our primary promotion during the quarter was focused on the launch of our Fajita bowls, which come with same grilled chicken or steak for $4, and our Cabana bowl for $3. These price points, combined with our lapping of 2008 price increases and some couponing during the quarter were reflected in the 4.9% decrease on our average checks, compared to last year. However, customer counts continue to improve sequentially and were slightly positive for the quarter.

During the period, we opened one new Taco Cabana restaurant in the Dallas market, which brought new unit openings to four in 2009. Taco segment EBITDA was $8.1 million in the fourth quarter and about $1.2 million lower than the comparable period in 2008, due largely to a $900,000 shift in advertising this year.

With respect to Burger King, I'm sure many of you already listened to Burger King Corporation's earnings call and have some perspective on product and promotional tactics for the brand, most of which centered around the $1 double cheeseburger in the fourth quarter. This promotion, which continues, is certainly an aggressive discounting tactic intended to drive both top line and customer traffic. Although we are still selling a lot of double cheeseburgers, we have a gradual tapering off from the initial levels.

Relative to the trends that we were experiencing at early October prior to the start of this promotion, we did see improvements in both sales and traffic. However, these have (inaudible) the expense of some margin degradation given the inherent discount. In addition, while we're selling a lot of sandwiches, our incidence of drink and fry add-ons is not that high, making the gross profit contribution less appealing that we had hoped.

Comparable sales for our Burger Kings in the fourth quarter were down 3%. Our average check decreased 5.8%, while customer traffic increased 2.1% for the quarter. Segment EBITDA for our Burger King operations were $7.9 million for the quarter, and decreased 7.7% from the fourth quarter of 2008. EBITDA margins declined 92 basis points due to an increase of 40 basis points in spoon and paper costs, along with some de-leveraging and labor.

Looking to 2010, Burger King will be adding the BK Double to the value menu, and increasing the price on the double cheeseburger. We will also be refocusing on the breakfast day part, with the addition of a breakfast muffin sandwich and the BK Breakfast Bowl. Lastly, with the new broilers rolled out system-wide, the brand will be introducing more elevating products, including the XT Burger, ribs, and others. While we are cautiously optimistic with regard to these tactics, it is difficult to estimate these net results given the backdrop of the current consumer environment.

And with that, I'll turn it over to Paul who will review our fourth quarter financial results.

Paul Flanders

Thanks, Dan. Total revenues for the fourth quarter increased 4.4% to $209.7 million from $200.8 million the same period least year and reflected the benefit of one extra week this year, which generated about $13.6 million in sales. 2009 was a 53-week year compared to the 52-week year in 2008, with the extra week falling in the fourth quarter.

Revenues for our Hispanic brand restaurants were $109.8 million and increased 5.8% over the fourth quarter of 2008 due to the extra week, which added approximately $7.2 million in sales. Including about $2.9 million from the extra week, Pollo Tropical revenues increased 7.4% to $45.1 million, compared to $42 million in the fourth quarter last year.

We opened a net of two new restaurants since the beginning of the fourth quarter of 2008, and comparable restaurant sales increased 0.3% on a comparable 13-week basis, compared to a negative 3.6% comparison from the prior year. This was the first quarter of positive same store sales for Pollo since the second quarter of 2008. And as Dan said, customer traffic continued to – its sequential improvement and was 3.8%.

In terms of Pollo's specific markets, fourth quarter same store sales in Miami Dade County were down slightly at negative 0.4%. However, we experienced sequential and year-over-year improvements in many of our markets, including Broward County, which is up 4%; in the Northeast and in the West Coast, to Florida. Orlando, while down 2.5%, seems to have stabilized as it compares to the double-digit decrease from last year.

Including about $4.3 million from the extra week, Taco Cabana's revenues increased 4.7% to $64.7 million. Comparable restaurant sales on a comparable 13-week basis were down 4.5% in the quarter against the positive 0.5% comparison in 2008. The comparable restaurant sales decrease was partially offset by New Year's openings at Taco Cabana. Since the beginning of the fourth quarter last year, we opened seven new Taco Cabana restaurants, and closed four existing restaurants.

With regard to Burger King, overall sales increased 2.9% to $99.9 million, including approximately $6.4 million from the extra week, while comparable sales on a comparable 13-week basis decreased 3%. We also had a net closing of five Burger King restaurants since the beginning of the fourth quarter of last year. After running 8% to 10% negative early in the fourth quarter, we experienced a dramatic improvement in November traffic after the launch of the $1 double cheeseburger in late October, with comparable sales in November up about 2.8%. This trend slowed in December, however, and it continued to be weak in the first quarter as I'll get to in a moment.

Net income was $4.1 million in the fourth quarter or $0.19 per diluted share, compared to $4.4 million or $0.20 per share in the fourth quarter of 2008. Both years included impairment charges as well as non-recurring gains or losses, including an insurance gain in 2008 and a $4.2 million gain from the repurchase of our senior subordinated debt in 2008. These items in the net reduced EPS by $0.07 per diluted share in 2009, compared to $0.02 per diluted share in 2008. Excluding the non-recurring items, earnings were $0.26 per share in the fourth quarter, compared to $0.22 in the fourth quarter of 2008.

Excluding the impairment charges and the other non-recurring gains and losses, operating margins expanded about 89 basis points year-over-year for all of 2009 due to the favorable cost trends. In the fourth quarter, however, on a similar basis, operating margins were down about 65 basis points from 2008 as some of the favorability in operating costs were offset by higher advertising, about 42 basis points; the margin impact from the Burger King $1 double cheeseburger promotion; and, from some de-leveraging at our labor costs.

Similar to the third quarter, the nature and pricing of our promotions, along with related mix shifts, resulted in lower average check at all three branches year-over-year. Average check was 3.4% lower at Pollo, 4.9% lower at Taco Cabana, and 5.8% lower at Burger King. (inaudible) are more positive at all three branches, positive 3.8% of Pollo Tropical, up 0.2% at Taco Cabana, and positive 2.1% at Burger King.

Overall, cost of sales were 29.7% of restaurant sales, down six basis points, compared to the fourth quarter of 2008 as Burger King cost of sales increased 40 basis points. Pollo Tropical decreased 39 basis points, and Taco Cabana was lower by 63 basis points. We had the benefit of more favorable commodity costs at all three branches, offset by the effect of the Burger King $1 double cheeseburger promotion. Sequentially, cost of sales increased 99 basis points from the third quarter to 190-basis point increase at Burger King.

Restaurant labor costs increased 145 basis points in the fourth quarter to 29.9% of restaurant sales, due mostly to the de-leveraging of fixed labor costs and the lower comparable unit sales at Burger King and Taco Cabana. Restaurant operating expenses, which exclude rent and advertising, were 14% of sales or 97 basis points lower than the fourth quarter of 2008, reflecting lower costs and positive leveraging of several items, including utilities, which accounted for about 74 basis points of the decline.

The advertising expense was $1.2 million or 42 basis points higher in the fourth quarter, compared to the prior year, reflecting an increase of about $900,000 at Taco Cabana due to a shift in the advertising calendar, and a $300,000 increase at Pollo Tropical due to higher ad spending in 2009. Federal and administrative expenses were about $110,000 higher in absolute dollars, compared to the fourth quarter of 2008, including approximately $450,000 from the extra week. G&A as a percentage of total revenue, however, was 22 basis points lower.

Last week, interest expense decreased $1.9 million to $4.7 million, reflecting the debt reductions made throughout 2008 and 2009, interest reductions from the repurchase of $15 million of our 9% senior subordinated notes in 2008 as well as lower interest rate on our LIBOR-based borrowings. In addition, because of our reduction and leverage ratios, our borrowing margin under our senior credit facility dropped during 2009 from 1.25% over LIBOR to 1% over LIBOR. The end of 2009 total debt was $283.1 million, and as Dan said, we reduced our debt by $33.1 million during the year. We also continue to improve our financial leverage ratios. And if calculated for purposes of loan compliance, we were at 3.18 times total debt to EBITDA, which was well below the permitted maximum level of four times.

As we said throughout this year, increasing free cash flow, reducing debt and lowering our financial leverage were important objectives in 2009. We made meaningful progress on all three fronts.

Finally, I'd like to provide some commentary regarding 2010. As indicated in our press release, we’re not providing specific earnings guidance for 2010. There remains too much uncertainty regarding the timing of sustainable improvements and consumer discretionary spending. This is exacerbated by our lack of visibility with respect to the key sales drivers for our Burger King restaurants given the uncertainty regarding the impact of new product introductions in the current environment, along with continuing changes to Burger King’s aggressive, promotional, and discounting tactics. These factors and the negative headwinds facing the QSR industry in general make it difficult to provide meaningful earnings guidance at this time. On the other hand, we continue to have increasing confidence in our Hispanic brands and are seeing continued improvements in their trends early in 2010.

In terms of sales trends early in the first quarter, as you would expect, we've certainly experienced negative effect from the severe weather affecting much of the country. Our Burger King business has remained soft thus far, in part due to difficult comparison from the first quarter of 2009 when comp sales were up more than 5%. Comparable restaurant sales at our Burger King restaurants were down more than 8% to the middle of February. Our Hispanic brands have improved, at least early in the quarter, with Pollo Tropical comp sales running about 3% positive thus far; while Taco Cabana comps, which have been more dramatically affected by weather, are about 1.5 % negative.

We also provided some comments here in the press release regarding 2010 as follows. As we pointed out, the 2010 fiscal year will have one last week in 2009. This is estimated to negatively impact revenues by about $13.6 million and earnings by $0.07 per share, compared to 2009. Comparable sales at Pollo Tropical are expected the increase 0% to 3%. Taco Cabana comparable sales are expected to be somewhat soft early in the year improving as the year progresses, and we believe to be flat or slightly positive for the full year.

Commodity costs are expected to decrease 1% to 2% for Pollo, to be flat to down 1% for Taco Cabana, and to increase 3% to 4% for Burger King. Amortization of honor and purchase discounts recognized as reduction of cost of sales will decrease $2.2 million at Burger King in 2010 since the funds received from the Coca-Cola company and Dr. Pepper/Seven-Up in 2000 become fully amortized at the end of 2009. This will negatively impact earnings by approximately $0.06 per share in 2010.

We anticipate that we will open four to six new Hispanic restaurants, plus close seven Burger King restaurants net of one or two units that we anticipate relocating, and close to Taco Cabana units.

Total capital expenditures are expected to be $40 to $45 million, increasing from 2009 due to some additional rebottling plant for our Hispanic friends. Appreciation expenses expected to increase approximately 5%, reflecting 2009 capital equipment additions, 2010 new units, and increases in re-imaging expenditures. G&A is expected to increase to increase to approximately 2% to 3%. And lastly, the company's estimated annual effective tax rate is expected to be 37% to 37.5%.

And with that, we’ll now open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) The first question comes from Reza Vahabzadeh from Barclays Capital. Please go ahead.

Reza Vahabzadeh – Barclays Capital

Good morning.

Paul Flanders

Good morning.

Dan Accordino

Good morning, Reza.

Reza Vahabzadeh – Barclays Capital

The Pollo, it seems, sales in the fourth quarter as well as the first quarter trends are impressive. Do you feel like you’ve gained share of the pie? Is it the new products? Is it the economy? Any color on that would be appreciated.

Alan Vituli

Let me take that. It’s obviously a combination of things, Reza. Clearly, our new product introduction is broadening the appeal of the brand, our wings, (inaudible), which is really targeted to the luncheon customer. I think we're building both on frequency and reach. And we do feel that there’s pretty good sustainability in terms of what we’ve done. We think that we’ve essentially turned the corner with Pollo.

Reza Vahabzadeh – Barclays Capital

Got it. And then, you seem to suggest that Taco, it seems their sales have also improved in the first quarter from the fourth quarter. What do you attribute that to?

Alan Vituli

It's in part its product, in part it’s the marketing of those products. I think we’re getting closer to being responsive to what the Taco consumers are looking for. It’s noteworthy that the two Hispanic brands, as Dan said, are basically moving further from quick service. Contrary to the direction that quick – that some of the QSR segments have gone, we’re basically moving up on the ladder. I do believe that that’s showing itself in our numbers.

Reza Vahabzadeh – Barclays Capital

Got it. Paul, you talked about the commodity costs outlook. How much visibility do you have on that?

Paul Flanders

Well I think relative to Pollo and Taco, we’re – well, most of our contracts or many of the contracts are in place certainly at this point. So we have a lot of visibility on that. We have less visibility, of course, on Burger King because we purchased through the Burger King cooperative. And as a matter of course, they don’t do a lot of hedging, and so we don’t really have good visibility on the prices there. Having said that, you know Pollo and Taco value are projected to be favorable this year. On the other hand, Burger King is expected to be up somewhat. A fair amount of that's being driven by beef costs, which are – already have climbed early this year and expect it to be higher year-over-year.

Reza Vahabzadeh – Barclays Capital

Right. But are the – is the Pollo and Taco commodity costs outlook, is that based on prior contracts or is that based on a new contract?

Alan Vituli

Dan, you want to deal with that?

Dan Accordino

Yes. Those are new contracts, Reza. All of our – most of our contracts, including all over the primary protein contracts, were entered into at the end of 2009 for all of 2010.

Reza Vahabzadeh – Barclays Capital

Got it. My last question is, Paul, on the CapEx number, will there be any sale effect?

Paul Flanders

Yes. To tell you where we ended up in 2009, total sale we expect for about $8.7 million. We also bought a couple of properties back, which netted that down to about $3 million. We’re a little under $6 million this year. The sale that we expect for 2010 should be in the $5 million to $10 million range.

Reza Vahabzadeh – Barclays Capital

Got it. Thank you.

Operator

Thank you. The next question is from Bryan Hunt from Wells Fargo Securities. Please go ahead.

Bryan Hunt – Wells Fargo Securities

Paul, thank you for taking our questions, but to continue on the CapEx discussion, could you carve up the $40 million or so of CapEx projected for 2010 in the different buckets for us? As well as, could you give us an idea of how much you’re going to spend up on the remodeling of certain of the Pollo Tropical stores, either per unit or give us an idea of the range of cost there? Thanks.

Paul Flanders

Yes. Maintenance CapEx is – that should be in the $7 million to $8 million range, which is far historical levels, so there’s no dramatic increase or decrease there. As I said, the overall increase over 2009 allowed – that's being driven by some additional remodeling that we have planned this year. The remodeling is probably going to $15 million to $17 million right now as our projection. And then of course, we've got a few more – a couple more new units. So the new unit CapEx will be – is anticipated to be higher in 2010 as well.

In terms of the remodeling, as you know, we, year-in and year-out, have Burger King remodeled into the franchises we knew. I think this year we’ve got about 16 remodels planned for Burger King. Those are close to $0.5 million a piece. So that’s probably $7 million or so if we – based on that plan. Pollo and Taco, we’ve increased the spending there as we spend at the $5 million neighborhood at each brand, coordinated at least by our plans at this point. So we planned to – depending on each brand remodeling, 25 or 35 restaurants. These are not major remodels, not so much the Burger King, but we anticipate by spending $125,000, $130,000 a store. And then in addition to that, we’ve got four or five more significant remodels planned at Pollo.

Bryan Hunt – Wells Fargo Securities

What you've done is remodel from the past in the Hispanic brands. What kind of sales lifts are you experiencing?

Alan Vituli

Obviously, in part it varies with the magnitude that they remodel. Clearly, the capital expenditures that Paul was referring to with respect to the two Hispanic brands as part of our – if we can call it our repositioning project, basically, it’s a project to provide a more elevated experience to the consumer. And it’s very early for us to be giving you a sense of what we’re getting out of it. But I will tell you it’s been very positive, but not enough yet to give you a statistic. The little bit of experiences that we've had thus far, if the program held through, we’re going to be dancing this time of the year next year.

But the Burger King uplift, it varies enormously. The issue is the sustainability of the uplift. We are seeing 10%, 15% in some cases. And in other cases, it’s just sustaining the competitive position of the brand. But I’m not sure you can put a consistent number to that? Dan, you want to try to add to that, on Burger King

Dan Accordino

I think on the Burger King side, it's a function of, to some degree, the age of the asset that’s being remodeled, the magnitude of the remodel. But Alan’s right, we've seen somewhere between 5% to 8% on a pretty consistent basis if we’re remodeling an existing facility. If it’s a scrape and rebuild, the sales increases are greater than that.

Bryan Hunt – Wells Fargo Securities

Alan, I was wondering if you can address maybe menu complexity at Pollo Tropical and Taco Cabana. It seems like year-in and year-out, you had a lot of products and you all do a good job of managing the margin in the sales as you go through that process. Just to give us an idea of some of the recent menu adds, are you pulling – consistently pulling things off? And how is the menu adds or how is that complexity accepted in terms of in a drive-thru times and register times? And I only have one more question.

Alan Vituli

I’d like to reshape that if I may. There is no question in order to be quick, you've got to limit the number of menu offerings. And there’s no question that we do have limited time offers and we do have products that were not intended to be limited time offers. But once they are no longer supported by marketing, we look at them as to whether we want to make them a permanent part of that.

Service times have – as far is a very sensitive issue for us. And if anything, our service times had been – our service scores have been pretty good and getting better. But some of the menu items really as we’re looking at the growing relevances the consumers expect as healthy and differentiated tastes, fresh food, the continuing growth of home meal replacement, the quest for a pleasant experience at an attractive price point. We focus on Pollo, and potentially Taco. Believe that modest changes with respect to the interior of the restaurant and the menu offerings can have a – can create a much broader consumer appeal well beyond their current markets.

So that essentially in 2010, we've concluded that we’ll be focusing our efforts on addressing a broader opportunity with both – from capital expenditures in the store. But menu items that have a more general market appeal, even though they meet the criteria of differentiated taste, fresh food, and they travel well, and health is a very important factor for us at Pollo Tropical. I don't know if that answers your question.

Bryan Hunt – Wells Fargo Securities

It’s your conference call, and it did in a round-about way.

Alan Vituli

Yes.

Bryan Hunt – Wells Fargo Securities

And then lastly, you mentioned dancing because of maybe some of the efforts you’re putting forward. Does that imply maybe this year or next year at this time that you may switch gears from debt reduction to growth CapEx again, or focusing on growth, or maybe just give us some idea of what the trigger is in your mind from shifting those gears from balance sheet conservation to a growth and load it once again?

Alan Vituli

We’re pretty close to more acceptable leverage levels. I believe in terms of the new normal, clearly, we’ll still be leveraged. But that we do need 2010 to bring debt levels down a little bit. And we are using 2010 to position the brand, both Pollo and Taco, for the coinage – the phrase, extreme growth vis-à-vis it’s historical growth. So the answer is yes. Is it likely for us to look like a growth company in the year from now? The answer is clearly yes.

Bryan Hunt – Wells Fargo Securities

Thank you.

Operator

Thank you. The next question is from Jeff Omohundro from Wells Fargo Securities again. Please go ahead.

Jeff Omohundro – Wells Fargo Securities

Thank you. My question relates to the Burger King calendar, and in particular the evolution of the $1 double cheese burger. Can you just maybe give us your thoughts about the transition strategy, raising the price of the $1 double cheese burger and introducing the new double product with one less slice of cheese at a $1? Thanks.

Alan Vituli

Dan, won’t you take a shot at that one?

Dan Accordino

Well I think, Jeff, you’ve seen this strategy before.

Alan Vituli

On a different one.

Dan Accordino

It’s what the brand – it’s been determined that’s what the brand needs to do in order to be competitive given the significant promotional activity that’s going on in the marketplace. Our double cheeseburger number of units are still – we’re still selling a fair amount. So the question is when we put this double burger on, will that – will the number of units be accretive or will we simply sell fewer double cheese burgers? I don't know yet. But I think it’s certainly a competitive strategy.

Alan Vituli

Jeff, just the elimination of it – from our $1 menu and moving it up to $1.19 brings its food costs down to below 50%. But what’s happening and – BKC is coining the phrase "extreme affordability". Unfortunately, the unforeseen consequences to the restaurants are that the – what we’re experiencing is that extreme affordability is converting too many of our core customers to extreme bargain seekers with no interest in looking beyond the extreme market, and we got to break that chain. So we have to change its food costs as Dan has said. We’re still selling the Burger King – you heard as much as 10% of revenues are attributed to the double cheese burger. If you relate to just entrees and take-outs, the ancillary items, it's simply too significant to push in the business, and it undermines the proprietary qualities of the brand.

Jeff Omohundro – Wells Fargo Securities

And when you look at some of the – I think Dan mentioned some of the more balanced barbell strategy, do you think the pipeline of products there with a little bit more premium in a cache, how's your confidence about mix going forward on that and success of that strategy?

Paul Flanders

The Steak House was launched last week on a soft sale basis. And we sold 24 units a day without any advertising. And we just started the advertising two days ago, so I don't have any real crisp numbers so far this week. I think it’s a good offering relative to the percent of sales that we’re realizing off the value menu. I’m not certain that the units are going to be terribly significant.

Alan Vituli

But it does in part – I mean moving the cheeseburger up and putting some more stuff at the other end of barbell, moving the double cheese up, it should give a little bit more balance. If it’s terribly imbalanced in terms of in favor of the extreme affordability, and that should improve it. But as Paul has indicated and as Burger King Corporation has indicated, it's – there' just so little visibility.

Jeff Omohundro – Wells Fargo Securities

That’s helpful. Thank you.

Operator

The next question is from Greg Ruedy from Stephens. Please go ahead.

Greg Ruedy – Stephens

Hi. How are you doing?

Alan Vituli

Good.

Greg Ruedy – Stephens

(inaudible) Greg. Why don't you – maybe transition into Taco quickly, and talk about the regional trends you were seeing there?

Alan Vituli

If you will recall from prior calls, last year, certainly Houston, Dallas markets were holding up stronger in 2008. We’ve seen those soften while we're still in the other markets. We were negative in most of the markets, obviously, in the fourth quarter. Interesting, the worst market was Houston. We’re about negative 9% in that market on a comp basis. But Houston, we also – we had the benefit in 2008 post-Hurricane Ike. We saw some sales uplift last year as a consequence of the hurricane. So I think some of that's an anomaly, certainly because of that.

Greg Ruedy – Stephens

Paul, you touched on weather in the Texas market, just – as you've said a few times, but just touch on some of the extreme results that we've had from week-to-week as a consequence of weather.

Paul Flanders

As you know, there's been bad weather throughout the country. We have snow in Dallas as an example. And when we talk about some of the extremes, early in the year, we've gone from being negative the first couple of weeks of January as an example to positive the next couple of weeks. So this weather has probably been a – could be a 3% swing week-to-week depending on weather is good or bad.

Greg Ruedy – Stephens

Okay. That’s helpful. As we look into 2010, how shall we think about the closures or the timing of the closures on the BK and Taco side?

Alan Vituli

Dan you want to deal with that?

Dan Accordino

I think Paul’s got the schedule there.

Alan Vituli

Okay.

Paul Flanders

Yes. I don't have that exact timing here. I would just in general say they’re pretty well spread out, about seven Burger Kings we’re closing, and there’re four Taco Cabanas there slated to close.

Greg Ruedy – Stephens

Okay. Next then, is there – with the rollout of the new broiler to BK and the new product you were able to offer to the guests, is there any – on the premium end of it, is there really any change, or should there be any change on the deliverability time or in the experience the guests should realize on like a drive-thru time?

Paul Flanders

No.

Greg Ruedy – Stephens

Got it. Thank you.

Dan Accordino

Our initial response on the XT Burger is service time defined.

Greg Ruedy – Stephens

Okay. Thank you.

Operator

(Operator instructions) The next question is from Tom Forte from Telsey Advisory Group. Please go ahead.

Tom Forte – Telsey Advisory Group

Great. Good morning. Thanks for taking my question. For the commentary on Burger King, the down 8% fourth quarter to date, is the 3% impact on weather also an appropriate figure there? And then this year, I believe you’re launching the different coffee line at Burger King. Can you give us a sense of what the mix of coffee is right now, and what kind of lift you might see to the mix as a result?

Paul Flanders

In terms of the fact as to weather – I’m not sure we've been able to hard quantify that for Burger King, and with 3%, it’s a guess. But I would tell you that the Burger King trends have not been jumping around as much as the Taco to the other ones that I just referred to with the weather. So we’re in general seeing softer Burger King sales irrespective of weather in the first quarter. Some of that is due to fact that we were positive 5% last year. Then to address the question of the mix of coffee, I guess I don't have that.

Dan Accordino

I don't have it in front of me either, and nor do I really know what the timing of the rollout would be for the Carrols Restaurant. That has not yet been confirmed. And I haven't seen any test results yet to indicate what kind of a lift we should experience from the new program.

Alan Vituli

But in general, the best assumption is – should be not a particularly material number.

Dan Accordino

Well, the good thing about the coffee program is at least it’s being done in conjunction with the total refocus on the breakfast day part , which I think is a very good strategy. It’s a part of the business that Burger King, frankly, we haven't addressed in a good long time. So I think that the focus on breakfast, there’s a few new breakfast products and coffee as a part of that breakfast strategy, I think is very helpful.

Alan Vituli

Demand into the coffee area, as you will know, has moved up clearly and become more relevant in terms of the consumer’s demands.

Paul Flanders

Hi, Tom. Just to put in perspective, the coffee as a percentage of total sales is about 1.5%.

Tom Forte – Telsey Advisory Group

Great. Thank you very much.

Operator

Thank you. (Operator instructions) There appear to be no further questions, please continue with any other points you wish to raise.

Paul Flanders

I think that concludes our remarks for today. We certainly appreciate your time this morning. We look forward to talking to you next quarter. Thanks.

Alan Vituli

Thank you all.

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Source: Carrols Restaurant Group, Inc. Q4 2009 Earnings Call Transcript
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