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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

F1Q10 Earnings Call

May 11, 2010 4:30 pm ET

Executives

Paul Flanders – Chief Financial Officer

Alan Vituli – Chairman and Chief Executive Officer

Daniel Accordino – President and Chief Operating Officer

Analysts

Reza Vahabzedah – Barclay’s Capital

Jeff Omohundro – Wells Fargo Securities

Greg Ruedy - Stephens Inc.

Jason West – Deutsche Bank

Bryan Hunt – Wells Fargo Securities

Jonathan Waite – Precipia Research

Mitchell Speiser - Buckingham Research

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Carrols Restaurant Group's first quarter 2010 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 afternoon and welcome to our first quarter 2010 conference call. By now, everyone should have access to the announcement released this afternoon, 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 remind 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 is Alan Vituli, our Chairman and CEO and Dan Accordino, our President and Chief Operating Officer. Dan will provide some commentary on the business and then I'll walk through the financial results for the first quarter and then we’ll be happy to answer any questions that you might have. I now turn the call over to Dan.

Daniel Accordino

Thanks, Paul, and good afternoon, everyone. As our financial results suggest, the first quarter was a challenge in certain respects with both revenues and profits negatively impacted by our Burger King business. On the other hand we were very encouraged by the top line performance of Pollo Tropical and Taco Cabana as both posted sequential quarterly improvements in comparable sales and guest traffic trends.

As I said on our last call, our earnings this year will be largely determined by momentum improvements and top line since continued cost improvements will be more difficult to achieve than last year. We note that the economy seems to be demonstrating some signs of recovery and consumer confidence is slowly improving.

However, unemployment remains high and we believe that lower levels of unemployment are key to a longer term consumer recovery. We are determined to continue to strengthen our business and improve our brand positioning. We are working on some very exciting initiatives at Pollo Tropical and Taco Cabana designed to enhance their long term positioning and to further differentiate these fast casual concepts from quick service competitors.

Beyond 2010 we would expect more aggressive expansion of our Hispanic brands as the economy recovers and the benefits from these initiatives take hold. For 2010 we continue to constrain our capital spending and to reduce outstanding debt with our free cash flow.

With that said, I’ll now discuss our three brands in greater detail. Comparable restaurant sales for Pollo increased 3.7% in the first quarter of 2010 and customer traffic which has continued to improve sequentially increased 7.4% in the period. We also modestly improved segment EBITDA for Pollo Tropical to $6.7 million and EBITDA margin by 15 basis points to 14.8%.

While the economy in Florida has not improved dramatically, it appears to have stabilized and we are particularly encouraged by the momentum that we’re experiencing at our restaurants. Customer traffic has been positive since the third quarter last year and although average check has declined somewhat with the introduction of our new sandwich line, our overall comparable sales has been strong.

Our customers are responding favorably to our new menu items, product line extensions, promotions, and our advertising. During the first quarter we featured our new handheld sandwich and wrap line including a chicken Caesar wrap, a Cuban wrap, a chicken sandwich with peppadew sauce, a chipotle chicken sandwich, and a guava pork bbq sandwich, all priced at $2.79 or a combo meal for $4.99. This handheld product line which is targeted to better serve the consumer’s need for grab and go has been very well received.

As I referenced earlier, we’ve also begun efforts to evolve the brand and to elevate our service model to better position us within the fast casual space. Specifically, to better align the dining experience with the quality of our food. We believe that these enhancements to further broaden the appeal of the brand and better position us for growth, particularly in newer markets.

We initially remodeled five Pollo Tropical locations in the Tampa Bay and Orlando areas to enhance the ambience and to get the restaurant more of a casual dining feel. We’ve upgraded the service model by adding silverware and dinner plates, add a hostess, and introduce modified table service.

We’ve also added sangria, wine, and beer along with a full service coffee bar including lattes, espresso, cappuccino, and American coffee. Preliminary results are encouraging. Our plans are to roll this out to 28 locations this year and to continue to use this elevated platform as our expansion model going forward. The average capital cost in conjunction with this upgrade is estimated to be a little over $100,000 per restaurant.

At Taco Cabana we are seeing improvements in our comparable restaurant sales trends and while still modestly negative at 2%, have shown improvement from sequential trends over the last half of 2009. Traffic turned slightly positive in the fourth quarter last year at 0.2% and further improved to plus 0.2% in the first quarter. Although the average check is a little lower, we are pleased to see improving customer counts which we can build upon.

Our primary promotions during the quarter were focused on Shrimp Tampico quesadillas and our Cabana bowls. Taco Cabana’s segment EBITDA was $6.8 million in the first quarter, about $1.4 million lower than the comparable period in 2009. Similar to the theme I just discussed regarding Pollo Tropical, we are also investing in similar enhancements to our Taco Cabana restaurants, initially with restaurant remodeling and upgrading our service model in the Dallas – Ft. Worth markets.

We have just begun this initiative with the recent update of three restaurants and we intend to make similar improvements throughout the Dallas market this year or in almost 40 restaurants. Our goal is to provide guests with high quality, freshly made, attractively priced, Mexican food in a more contemporary and quick casual restaurant setting. For Taco Cabana, we’re estimating the capital cost for the typical Dallas upgrade to be about $75,000 but we have five or six units where the costs will be much higher due to more expensive remodeling.

We also just launched new advertising in all markets. The new advertising campaign features our new tag line “Taco Cabana - making great tasting Mexican food is our obsession.” The campaign is about showcasing our cooks in the kitchen who with great effort and care prepare our food by hand every day. They are the heart and soul of Taco Cabana and we are proud to tell the story of their obsession.

In the last two weeks we have also introduced a hickory smoked shredded brisket taco and have added a daily happy hour where guests can enjoy half priced nachos and $1.50 select beers and margaritas. We are all optimistic that this campaign will continue to improve current trends of Taco Cabana.

Lastly, I will address Burger King. As I’ve said, comparable restaurant sales throughout Burger King were down 6.12%. Average debt decreased 7.8% from the first quarter of 2009 due to the appeal of our dollar double cheeseburger offering. However, our customer traffic increased 1.8%. EBITDA was $3.8 million, a 46% decrease as compared to the first quarter last year. I am sure that many of you have already listened to Burger King Corporation’s earnings call on April 29 and therefore have some perspective on recent product and promotional tactics for the brand.

During the period, we featured the dollar double cheeseburger, which giving a substantial discount at this price contributed to significant erosion in margins. This promotional tactic clearly drove customer traffic and improved the significantly negative trend that we were experiencing prior to its launch in late October. However, while we sold a significant number of double cheeseburgers, we didn’t see an adequate attachment rate for drinks and fry add-ons.

On the [inaudible] end we promoted the newest steakhouse XT burger line in the beginning of February. This is the first of several new products that we utilized the new batch-broiler system. In the second quarter, the brand is in the midst of a series of product initiatives and had begun scaling back somewhat on the very aggressive promotional activities employed over the past six months.

We believe that these changes should provide better balance to the brand’s [barbell] strategy and have a positive effect on margins and sales traction; however, we note that ground beef prices have continued to rise at all-time highs and are offsetting these margin improvements to some degree.

In the second quarter, Burger King added the BK Buck Double from the value menu, enabling the brand to increase the price on the double cheeseburger to either $1.19 or $1.29 depending on the market. It also added new breakfast offerings including the $1 BK breakfast muffin sandwich and the BK breakfast bowl and continues to feature the Steakhouse XT burger. We are cautiously optimistic with regards to these tactics and driving traffic and improvements in average check.

With that I will turn it over to Paul who will review our first quarter financial results.

Paul Flanders

Thanks Dan. Total revenues for the first quarter decreased 3.1% to $195.1 million from $201.3 million for the same period last year. Revenues for our Hispanic brand restaurants were $107.5 million, increased 0.6% over the first quarter of 2009.

Pollo Tropical revenues increased 3.1% to $45.5 million compared to $44.1 million in the first quarter last year. Comparable restaurant sales increased 3.7% against a negative 3% comparison from the prior year. This was the second consecutive quarter of positive same store sales for Pollo and as Dan said, customer traffic was very strong at 7.4%.

Taco Cabana revenues decreased 1.1% to $62 million with comparable restaurant sales down 2% in part due to the severe weather early in the quarter. The comparable restaurant sales decline was partially offset by the four new unit openings from last year.

Net of closings, we were offering two more units than at the beginning of 2009. Customer traffic continued to improve and was 1.2% positive in the first quarter. Although the average check was down 2.9% year-over-year for the quarter, we experienced about a 4.5% sequential improvement from the fourth quarter.

With regards to Burger King, overall sales decreased 7.3% to $87.6 million with comparable sales down 6.4% for the quarter against a difficult 5.1% comparison. After running 8.5% negative in January and February, we experienced some improvement in March when comps were down 1.6%. We also had a net closing of 4 Burger King restaurants since the beginning of the first quarter last year.

Net income was $2.3 million in the quarter or $0.11 per diluted share compared to $5 million or $0.23 per share in the first quarter of 2009. I will point out the results for both years include increases in existing impairment or closed restaurant reserves of approximately $0.3 million or $0.01 per share.

Operating margins contracted about 220 basis points year-over-year in the first quarter due to the effect of promoting the Burger King $1 double cheeseburger, the mix shifts at Taco Cabana and from higher labor costs or the percentage of sales at all three brands.

Overall cost of sales was 30.4% of restaurant sales, up 142 basis points compared to the first quarter of 2009. As Burger King cost of sales increased 287 basis points, Taco Cabana increased 64 basis points, while Pollo Tropical decreased 80 basis points.

As indicated cost of sales was most significantly impacted by the Burger King $1 double cheeseburger promotion as the group grew to over 10% of the brand’s sales mix. Additionally beef costs for Burger King, which averaged $1.56 per pound for the quarter, increased 12% in the prior year and was further compounded by more than a 20% increase in usage due to the promotional mix.

Tomato shortages also affected all three brands as higher prices increased cost of sales by about 35 basis points compared to the prior year. Restaurant labor costs increased 120 basis points in the quarter to 30.4% 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. Increases in worker’s comp claims and higher medical expenses further affected our Hispanic brands.

Restaurant operating expenses, which exclude advertising, were 14.5% of sales and 13 basis points lower than the first quarter of 2009 and included a 46 basis point reduction from lower utility costs. Advertising expense was $6.8 million for 47 basis points lower in the first quarter compared to the prior year reflecting a decrease of about $650,000 for Taco Cabana due to a shift in the advertising calendar and a $500,000 decrease in Burger King advertising contributions due to lower sales as well as reduced promotional expenditures.

General and administrative expenses were about $700,000 and lower in absolute dollars as compared to the first quarter of 2009. As a percentage of total revenue was 16 basis points lower. This decrease reflected a $1.1 million reduction in bonus expense compared to the first quarter last year.

Lastly, interest expense decreased $400,000 to $4.7 million reflecting the debt reduction for last year and to a lesser degree the drop in our borrowing rate under our senior credit facility last year from 1.25% over LIBOR to 1% over LIBOR. At the end of the first quarter, total debt was $287.4 million, an increase of $4.3 million from the end of 2009, mostly from the timing of the semi-annual interest payment under subordinated debt.

Our financial leverage did increase somewhat in the quarter as a consequence from the decline in earnings. Our financial leverage ratio or debt to EBITDA was 3.39 times as calculated for purposes of loan compliance compared to the 3.18 times we reported in the fourth quarter. We continue to be well below the maximum level of the 4 times required under our loan covenant. As previously indicated, we are not providing earnings per share guidance for 2010. With regards to the 2010 commentary provided in our last press release, we are making the following updates.

Commodity costs from Burger King are now expected to increase 4% or 5% given our current outlook regarding beef costs. We don’t expect to open more than 5 new Hispanic brand restaurants this year. Our range of new units is now 4 to 5 compared to our previous range of 4 to 6 new units. General and administrative expense is now expected to be flat compared to 2009. While the amount of debt reduction will vary based on earnings and capital spending, we currently estimate it to be $5 million to $15 million this year.

Lastly, I will provide some insight regarding sales trends early in the second quarter. In April, Burger King comparable restaurant sales were 0.9% negative, so these trends continue to improve a little bit. I point out the comparisons from last year starting to get easier beginning in May. Last year we were running 5% to 6% negative in May and June as sales started to slow at Burger King.

EBITDA continued to perform well. Comparable restaurant sales increased 4.3% in April. While still slightly negative, Taco Cabana trends also got a little better with April comps down just 0.6%.

With that we will now open the line for questions.

Question-and-Answer Session

Operator

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

Reza Vahabzedah – Barclay’s Capital

On the gross margin front is the uncertainty the Burger King marketing strategy or is it the increase in meat costs?

Alan Vituli

The two are related. The effect of the increase in ground beef is infinitely more on our Burger King business. Dan, do you want to add to that?

Daniel Accordino

I think that we only know the Burger King marketing calendar to July of this year, but there is certainly the elevation in beef costs. It is far greater than anything that we were led to believe would take place. Again, because we don’t have any visibility around that and have no involvement in the purchasing, yes there is a high-level of uncertainty around that Reza. We have the highest beef price this week that we’ve seen in years.

Reza Vahabzedah – Barclay’s Capital

Right. Also on the increase in your cost of goods sold as a percentage of sales, how much of that was the mix impact of the double cheeseburger versus the rest of the input costs?

Paul Flanders

It is all related because what’s happened is… Obviously we are selling a lot more double cheeseburgers, so the mix shift has gone to double cheeseburgers in the first quarter. The volume, as I’ve said, the usage of beef is up 20%. That is obviously being driven by the promotion. Obviously sales are up that much. At the same time, the cost has increased. In the quarter it was up 12% on beef costs.

So you have the promotional effect; we are using more beef that is costing more. Then the nature of the promotions is that we had a $1 double cheeseburger, so the sandwich is being discounted relative to what we were selling this double cheeseburger at before it was priced at $1 on top of that.

Alan Vituli

The essence of this is that we are promoting the wrong product.

Reza Vahabzedah – Barclay’s Capital

Right, but aren’t you… Isn’t Burger King discontinuing the $1 double cheeseburger?

Daniel Accordino

Yes, it’s either $1.19 or $1.29 as I said. About 40% of our restaurants are at $1.29 and 60% are at $1.19. The Buck Double was introduced, which is the same product with only one slice of cheese. When you look at the decrease in the double cheese units and the increase in the Buck Double units, you are still selling a heck of a lot more ground beef than you sold a year ago.

Reza Vahabzedah – Barclay’s Capital

I see. Okay. Then on the Taco side, do you anticipate as you use your comparisons to see some improvement in your yearly sales?

Paul Flanders

We certainly hope so. If we look at the last couple of quarters of 2009, Taco Cabana was running between 4% and 5% negative. You can see by our trends in the first quarter that we were still a little bit negative, but sales have improved, traffic is positive. We would anticipate certainly as we come against those softer numbers in the back half that we should be doing better. In fact our guidance with regards to sales for the year was where it should be flat to slightly positive.

Reza Vahabzedah – Barclay’s Capital

Then I guess on the other side, the Pollo brand has had strong momentum and it seems to be actually strengthening. Is that likely to sustain itself in the next couple of quarters?

Paul Flanders

We believe so.

Operator

Your next question comes from Jeff Omohundro – Wells Fargo Securities.

Jeff Omohundro – Wells Fargo Securities

First, in the press release, there is a comment about the 2011 development outlook and in fact the company’s efforts to begin securing real estate. Maybe you can expand a little bit on your thinking about the pipeline and development into 2011.

Alan Vituli

Both Pollo and Taco are differentiated. In the consumer’s eyes from quick service, we’re putting infinitely more into this casual subcasual what we all it fast casual or convenient casual. We’re really perfecting on ourselves in a number of our restaurants. Concurrently we know that our debt balances were higher than the street would have wanted that to be, certainly in the context of a recession.

So now going to the question you asked, we do believe that in 2011 we’ll be ready with both our capital structure and the understanding much more fully benefits of the initiatives we’re taking but what we’re looking at really is filling the pipeline during this period for units that will come out in 2011 with this elevated offering.

Jeff Omohundro – Wells Fargo Securities

Are you purchasing real estate? Is there a significant capital deployment anticipated this year in that effort?

Alan Vituli

We will be purchasing real estate, yes. But again, recognizing, this is a long pipeline. Some of this real estate will be leased and will be secured by a leasing. Some of the real estate we may in fact create deferred closing transactions where possible, but the permitting process is so long in some states that we find ourselves securing real estate but not necessarily laying out capital in 2010. We will have some significant capital outlays in 2011. There’s no question.

Jeff Omohundro – Wells Fargo Securities

What order of magnitude, if you’re looking at a max of five units this year, what kind of ballpark are you thinking about for 2011?

Alan Vituli

It’s kind of early. We’ve always used the sale leaseback market to lessen the burden of the capital outflow. We’ve always tried to own our site and then control them and put them into the sale leaseback market. But I can tell you know how many of them will essentially be the leaseholds and how much of it will be owned real estate. I mean it is our desire to be building the double digits in 2011.

Jeff Omohundro – Wells Fargo Securities

Moving on to Burger King, they’ve certainly increased their focus and effort around the breakfast day part. Maybe you can share with us how that mix is performing for you and what your thoughts might be about some of the new items such as the muffins and bowls.

Alan Vituli

The breakfast had certainly been negative in the first quarter and since the focus on breakfast and the introduction of the muffin and the breakfast bowl, breakfast sales have turned positive. So it seems to be working n that respect. Breakfast as a percent of sales at Carrols is somewhere between 12% and 14%.

Jeff Omohundro – Wells Fargo Securities

On the premium items, takeout, XT, and in particular the upcoming rib launch, the items geared toward the new broilers. How satisfied are you with them?

Alan Vituli

The only thing we’ve had so far Jeff is the XT as you well know and the forecast was that we’d sell somewhere between 35 and 40 of these units when it was advertised and we sold 37. So it met the expectation that Burger King had forecasted. The ribs will launch in the next couple of weeks and we’ll see how they work. At this point I don’t know. I think the price points are good price points relative to the quality of the product. We’re optimistic.

Operator

Your next question comes from Greg Ruedy - Stephens Inc.

Greg Ruedy - Stephens Inc.

It looks like the gap between Pollo Tropical’s average weekly sales and same store sales is improving versus the last couple quarters. How much of that is being driven by the northeast market versus newer units in your Florida market, and then to follow on Jeff’s question, when we think about 2011 development, how much of the Hispanic brands will be outside of core markets or in the northeast?

Alan Vituli

The expansion markets for us is a whisper in terms of the magnitude for Pollo, of its core business, it’s in Dade, Broward, and Palm Beach in Central Florida. We are seeing [inaudible] same store in certain of our units where we’ve been basically experimenting with this elevated concept. There’s no question.

For Pollo, most of its expansion is going to be outside of the South Florida and Central Florida markets. Pollo will be planting flags in a number of new states and with respect to Taco, it will continue to fill in both the Texas markets with significant opportunities still remaining for us in Dallas and Houston.

Greg Ruedy - Stephens Inc.

I appreciate the granularity on the roll out of the upgrades that are coming for this year at Pollo and Taco. Can you speak to the timing across the last three quarters and as those get finished, is the guest reception immediate or is there… What sort of ramp to sales have you been experiencing in the Tampa market with Pollo?

Alan Vituli

It’s not consistent. The fact is where the trade area is for the middle class and below, we’ve had very minor pick up. Where the trade area is middle class to rough middle class. I use that term a little bit stronger in terms of disposable income and a little bit stronger with respect to propensity to have food, be food consumed, prepared outside the home.

The pickup has been really significant, 20% plus. But we’ve only been experimenting as Paul indicated, we had it in five stores, five units. Three of those five units had remarkable increases, and two of them have had really very modest increases. But it’s clearly that they sort of align themselves with whether they were skewed more towards lunch versus dinner. Most of the pickup is in the in store dinner business.

Greg Ruedy - Stephens Inc.

Then in terms of testing an alcoholic beverage platform, is there a target to that sales mix that you’re after that would make sense for a fast casual concept?

Alan Vituli

It’s more of an add on. It’s really more of part of the brand elevation. For example, if it were 3%, we would consider that very successful because it would be 3% of the total business of which most all of it would be presumably go along with our dinner business. So it might be as much as 15% of the in-store dinner business. 3% would be a pretty good number for us.

Operator

Your next question comes from Jason West – Deutsche Bank.

Jason West – Deutsche Bank

I was wondering if you could talk a bit about you mentioned ground beef continues to rise and you said it was up 12% in the first quarter. What kind of inflation in that product do you expect in the second quarter and maybe the third if it stays where it is now?

Alan Vituli

It’s either Dan, Paul, myself or God who’s going to be able to answer that question.

Paul Flanders

The beef cost as a point of reference in the first quarter was $1.56. The price we just got this week was $1.82. I’m not suggesting that we’re averaging $1.82 in the second quarter but it gives you I think some perspective on the magnitude of the increase. It’s been sort of gradually working up to that level so it’s going to average obviously above where we were, something above the first quarter. Typically we do see some seasonality in terms of beef cost in the summer months where it does tend to go up, so we would hope that in the fourth quarter the co-op that buys the beef for Burger King, their projections are that beef should come down in the latter part of the year. We hope they’re right, obviously.

Jason West – Deutsche Bank

What are you thinking on menu pricing? I know it’s tough to do these days but is the mix with the Buck Double now and the Dollar Double Cheeseburger mixing out at obviously a little bit of a higher price than just $1 and some of the other more premium items in the breakfast improvement, are all those things enough to offset some of this in terms of margins or do you think you need to look at raising some prices?

Paul Flanders

We’re going to see some margin improvement as you said just by virtue of the fact that there will be some moderation and mix but it really is driven by where does this beef sort itself out? We’re at 300,000 plus pounds of beef a week so with beef $0.26 per pound higher than it was in the first quarter, obviously that’s troublesome irrespective of the mix. So our expectation, our hope, is that this beef price that we’re currently experiencing will start to moderate in the near term.

Daniel Accordino

The other thing I wanted to sort of point out though is that when you say cost of sales coming down, the question is compared to what? Sequentially I think we see cost of sales should improve as a consequence of the mix changes, obviously the beef is offsetting some of that. But when we look at this on a year-over-year basis, don’t lose track of the fact that the Dollar Double Cheeseburger at $1.19 or $1.29, whatever the higher price is in the market, is still substantially below where we were selling them a year ago.

Jason West – Deutsche Bank

The last thing, on the POS system, Burger King has talked a lot about some improvements they’ve seen rolling out the new COS and a lot of savings around labor scheduling and waste. Have you guys rolled that out? Is there some optimism around that?

Paul Flanders

We have not rolled out new point of sale systems at our Burger Kings yet. We’re in the process of evaluating the approved vendors that Burger King has selected so we’ll be in a position probably next year to do the roll out. We have rolled new point of sale systems into both Hispanic brands over the last couple of years.

Daniel Accordino

I’ve heard some talk about they’ve achieved labor savings and cost savings and such and I don’t think Point of Sales is by itself is going to generate large labor and food savings for us. We have labor management and inventory systems already in place.

Operator

Your next question comes from Bryan Hunt – Wells Fargo Securities

Bryan Hunt – Wells Fargo Securities

I was wondering if you could just explore the direction in which you’re taking Pollo Tropical in terms of its casual atmosphere just to give us a perspective. Is there a competitor out there that you would compare your atmosphere to and also does the change in the format allow you to maintain a drive through at the concept?

Alan Vituli

That’s a terrific question. We are creating something that we believe is responsive to consumer trends and we are creating it in a way where we believe it holds itself together pretty consistently. I mean it’s clear that our business because of our food quality, because of the nature of our food, our business is oriented towards whole meal replacement as a dinner phenomenon. That is the biggest single segment of our business. We are clearly in the lunch segment, but our food was a little bit too heavy for some, so we introduced the sandwich line at the same time we are offering our platter business to the luncheon customer. The grab-and-go customer who wants a sandwich for lunch now can be accommodated. We are seeing great growth from that.

Where our greatest void was, was that we were still using what was conventional quick-service approaches. We were not fulfilling in-store dinner expectations beyond our food quality. So what we have done is simply put the food on plates, use real plates, real knives, and real crockery. We are simplifying the ordering process. We are enabling a family to basically address their kids more effectively. We are clearly after the young families who are price sensitive, time sensitive, and yet still want a dinner experience.

They know that they can get something that perhaps has a greater ambience but they can’t really do it with the two kids. We are fulfilling the expectations of the folks who are on a budget, but are anxious to dine out. We are filling the expectations of the couples that are trying to get to the movie, but want to have a beer or glass of wine before the movie and with their dinner.

So we don’t see it as a disconnect at all. But we don’t have… I can’t point to something and say we are like this. I mean if anything you have the PF Chang’s pay-way Bistro for our kind of in-store model, except that we have gone a little further than that. We have made it easy for them to take home food through the drive-thru or coming in through the restaurant. I can’t give you something that says it’s just like this. It’s convenient, casual and we believe we are bringing both of these brands into a whole new segment.

Bryan Hunt – Wells Fargo Securities

Alan, some of the stores I have been in, I mean seating. I don’t know if it was 100 utilized, but it sounds like if you are trying to drive people into the store, are you changing the overall size and the seating capacity in the new stores to absorb this increased traffic in the dinner-day part?

Alan Vituli

Essentially 30 to 100 square feet. We are not really changing the footprint of the store. We are not putting ourselves in the position where we are squarely relying on in-store dinner because we look like a casual dining restaurant. We would indeed look like a convenient, casual restaurant experience. The box will be smaller and people will come in knowing that time is controllable in that environment. We will get much more turn out of our seating than conventional casual.

Bryan Hunt – Wells Fargo Securities

Okay and my last question, looking at this remodel schedule that you have outlined for DC and ET, does that change the CapEx plan for this year? Can you just give us some guidance on where your CapEx plans are for 2010?

Alan Vituli

It doesn’t really, but Paul why don’t you take that.

Paul Flanders

It is consistent with the CapEx guidance that we previously gave in that we had, although we sort of mentioned this on the earlier call this year. We didn’t go into it. We obviously have gone in to greater length today, but the remodeling CapEx was in the numbers.

If you do the math, I think we plan on spending about $3 million or so in Pollo and $4.5 million to $5 million in Taco. Our remodeling guidance in total, I think, is $16 million to $17 million; the difference obviously being for the Burger Kings.

Alan Vituli

We are spending an awful lot more on research. We sort of want to be absolutely sure when we start rolling these out. We have done our experiments. We have confirmed what we have to adjust in the menu as we move and attempt to address the broader, general public market moving from where we infinitely were, Hispanic focus markets. Yes we are in the phase of spending for the future, but it’s not material relative to what we set.

Operator

Your next question comes from Jonathan Waite – Precipia Research.

Jonathan Waite – Precipia Research

I wanted to kind of explore these new products of Burger King a little bit. XT, you said 37 a day. Is that at the beginning? Is that where you are tracking now? How has that changed over time?

Alan Vituli

That tailed off since the advertising stopped. We probably hit a high of 39 or 40 and we are down to the low 30’s.

Jonathan Waite – Precipia Research

Low 30’s? Okay. Then on the Buck Double, what is the sales mix there versus… I mean the Buck Double, the sales versus the double cheeseburger.

Dan Accordino

The $1 double cheeseburger just before we raised the price, we were at about 300 units a day. That is now down to 125. The Buck Double is about 130.

Jonathan Waite – Precipia Research

Okay, so once the $1 double cheeseburger started to tail off, you transitioned over to the Buck Double. That’s kind of remained about the same?

Dan Accordino

The Buck Double has only been in place for 3 or 4 weeks, so that pretty much is constant at 125 to 135 units.

Jonathan Waite – Precipia Research

Gross margin impact there, is that kind of that 10% improvement?

Dan Accordino

That is such credence to have the Buck Double to the $1 double cheeseburger. Yes, that’s correct.

Jonathan Waite – Precipia Research

Then the April ’09 comp on Burger King? What was that?

Dan Accordino

That was negative 25 I believe.

Jonathan Waite – Precipia Research

Negative 25 and you are now negative 0.9. Then the next couple of weeks you go against the down 5 to 6 in May and June. Is that correct?

Dan Accordino

April was negative 0.9.

Jonathan Waite – Precipia Research

Yes, this year right?

Dan Accordino

This year. Last year it was negative 2.5.

Jonathan Waite – Precipia Research

Yes, so the next couple in May and June, you are going up against the down 5 to 6 in ’09 right?

Dan Accordino

That’s right.

Operator

Your next questions is from Mitchell Speiser – Buckingham Research

Mitchell Speiser – Buckingham Research

The April comp did improve nicely at Burger King, albeit an easier comparison. Would you attribute that primarily to breakfast or was it the XT; just anything to comment on as to the improvement in trend?

Paul Flanders

I think primarily it is a function of the check. It was less negatively than it was previously, which is the function of the XT. The traffic increase I think to a large degree came from breakfast.

Alan Vituli

Don’t lose sight of the fact that we are talking about a number as compared to the prior year. The first quarter was better than what happened post-first quarter for our Burger King restaurants and for the system in general.

Mitchell Speiser – Buckingham Research

Right, the comparison was easier in April.

Alan Vituli

Right, it was progressively easier.

Mitchell Speiser – Buckingham Research

In terms of marketing funds, in the beginning of July, the beverage rebate funds, do they get moved into advertising? Can you comment on the advertising budget starting in July?

Alan Vituli

I think that is a question that is better asked of Burger King Corporation. No, the soft drink funds continue to go to the franchisee in the same fashion that they always have.

Mitchell Speiser – Buckingham Research

I was under the impression that that does change over at some point, but it hasn’t and it’s not planning to be?

Alan Vituli

No. You will have to get clarity out of the Burger King Corporation on that one.

Mitchell Speiser – Buckingham Research

My last question just on the Iron Man movie, which I believe that you are tying in with, had a big box office over the weekend. Is there a direct correlation between the success of the move and any sales improvement?

Alan Vituli

No.

Mitchell Speiser – Buckingham Research

No?

Alan Vituli

No.

Mitchell Speiser – Buckingham Research

That’s all I need to know. Thank you.

Operator

Thank you. I show no further questions in the queue at this time. I would like to turn the call back to management for closing comments.

Alan Vituli

We certainly appreciate your interest and time this afternoon. We look forward to speaking with you next quarter. Thank you.

Operator

And ladies and gentlemen, this concludes Carrols Restaurant Group first quarter 2010 earnings conference call. You may now disconnect.

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Source: Carrols Restaurant Group, Inc. F1Q10 (Qtr End 04/04/10) Earnings Call Transcript
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