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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q2 2010 Earnings Call Transcript

August 9, 2010 4:30 pm ET

Executives

Paul Flanders – VP, CFO and Treasurer

Dan Accordino – President and COO

Alan Vituli – Chairman and CEO

Analysts

Bryan Hunt – Wells Fargo Securities

Reza Vahabzadeh – Barclays Capital

Jeff Omohundro – Wells Fargo Securities

Bryan Elliott – Raymond James

Greg Ruedy – Stephens Inc.

Robin Broudy – Waterfront

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Carrols Restaurant Group's second 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. By now, everyone should have access to the announcement released this afternoon, which you can also find on our Web site at www.carrols.com under the Investor Relations section.

Before we begin our formal remarks, I will remind everyone that our discussion today may include forward-looking statements that reflect our expectations for the future. 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 and I will review our operating results for the second quarter and then we’ll be happy to address any questions that you might have. With that I will turn the call over to Dan.

Dan Accordino

Thanks, Paul, and good afternoon, everyone. In many ways, our second quarter was similar to last quarter in so far as operating results and profitability were challenged primarily by our Burger King business. At the same time, we are encouraged by encouraged by trends at both Pollo Tropical and Taco Cabana, bitch experienced improvements in their comparable sales as well as positive customer traffic. We primarily attribute their performance through a combination of new menu items along with our promotional and marketing activity.

In terms of the macro environment, the consumer recovery appears to be slow as customers remain cautious in their spending, unemployment levels remain high, particularly with the 18 to 34 male demographic, which is mostly significant affecting our Burger King results. With respect to our two owned Hispanic brands, we have intently focused on driving sales growth by capitalizing on opportunities to enhance the customer experience at our restaurants and through new product introductions and effective promotions.

We are investing in both Pollo Tropical and Taco Cabana to elevate the best service models, enhancing the facilities through restaurant remodeling, and in general further differentiating these quick casual brands from conventional quick serve competitors. Our remodeling programs are progressing well, and initially yielding favorable results in terms of both customer perception and the sale trends at those restaurants.

More importantly, we see the elevation of these brands as an important step as we look to further broaden their appeal into more aggressively accelerated expansion in the future as the economic environment improves. In the meantime however, we have limited capital spending for new unit development this year so that we can continue to reduce debt.

With that said, I’ll now discuss our three brands in greater detail. Comparable restaurant sales for Pollo Tropical increased a solid 6.3% in the second quarter of 2010 and customer traffic, which has continued to improve sequentially increased 8.9% in the period, and has been positive since the third quarter of last year. We also improved segment EBITDA for Pollo Tropical to $8.1 from $6.8 million and EBITDA margin by 222 basis points to 17.4%.

Our average check, while declining 2.6% during the period, primarily reflects our own marketing emphasis and new product pricing. During the second quarter, our promotional and advertising focus was primarily directed to our new sandwich and wrap line launched earlier in the year, specifically our $4.99 combo meal. This handheld product line targeted to better serve the consumer’s need for grab and go and later meal has been very successful. Overall growth in both traffic and comparable sales more than offset the lower average check in this quarter, enabling us to improve overall profitability at the restaurant level.

As we said, we are in the midst of elevating the Pollo Tropical experience at a number of our restaurants to better align the dining experience with the quality of our food. Changes include upgrades to our restaurants, the addition of real plates and silverware and limited table service, free WiFi, and the introduction of several new menu items. We have also had the full service coffee bar, including lattes, espresso, and cappuccino, and in many locations added sangria, wine, and beer.

Through the end of the second quarter we had converted 11 locations and we anticipate the roll-out of these initiatives to 15 or 20 locations by the end of the year, including restaurants in Tampa Bay, Naples, Orlando and the north-east. (inaudible) sales lists have varied, but are averaging 8% to 10% on an overall basis compared to pre-conversion trends, and generally seem to be stronger in some of the locations that have a less Hispanic customer base. The average capital cost in conjunction with this upgrade is estimated to be a little over $100,000 per restaurant.

At Taco Cabana, we continue to see improvement in our comparable restaurant sales trends with comparable sales down just one tenth of one percent in the second quarter. Both customer traffic and average check continued to improve on a sequential basis. Customer traffic was a positive 2%, while average check declined 2.1%. Operating margins for Taco Cabana were negatively impacted by the effect of promotions, some expense deleveraging, and the shift of advertising from the first quarter.

Segment EBITDA for Taco Cabana was $6.9 million compared to $8 million in the second quarter last year, and EBITDA margin of 10.7% was 190 basis points lower. In the second quarter, we launched our new advertising campaign with a tagline, Taco Cabana making great tasting Mexican food is our obsession. The campaign showcases our cooks each day in every restaurant prepare our food by hand. We are optimistic that this campaign will continue to help improve trends at Taco Cabana.

Our primary promotions during the quarter centered around a limited time offer of our newly introduced hickory-smoked, shredded brisket taco. We also added a daily happy hour, where guests can enjoy half price nachos and $1.50 select beers and margaritas. Similar to Pollo Tropical, we are investing in enhancements to our Taco Cabana restaurants initially with restaurant remodeling and upgrading of our service model in the Dallas Fort Worth market.

By the end of the second quarter, we only converted a few restaurants, so it is a bit premature to assess results, but we can say that we are experiencing some sales lift, particularly with respect to the dinner day part. We’re estimating the capital cost for the typical Dallas upgrade to be about $75,000, although there are five or six units, the cost will be much higher due to more extensive remodeling. We expect to convert about 35 restaurants or so by the end of this year.

Lastly I will address Burger King. Comparable restaurant sells for our Burger King were down 1.4%, which was on top of a comparable sales decline of 4.7% in the second quarter of 2009. These results reflect the challenges facing the brand and general economic conditions, particularly the economic pressure on its customer demographic as well as the difficult competitive environment. The combination of negative sales trends, aggressive price driven promotional activities and higher beef costs resulted in a significant reduction in our Burger King profitability.

Segment EBITDA was $5.5 million, a 39% decrease compared to the second quarter last year. Although customer traffic was positive, incremental sales were not sufficient to overcome the lower margins on discounts and promotions, or the effect of the price sensitive consumer managing their spending levels. Average checks, while improving sequentially, was down 4% compared to the second quarter of 2009. During the period, Burger King added the BK Buck Double to the value menu, enabling the brand to increase the price on the heavily discounted double cheeseburger somewhat.

The brand also expanded its breakfast offerings including the $1 breakfast muffin sandwich and the BK breakfast bowl. On the premium side, second-quarter promotions focused on the Whiplash Whopper, along with a limited time offer and promotion of the new BK Fire-Grilled Ribs. The ribs, as well as the Steakhouse XT product line launched earlier this year reflect the initial introduction of premium products made possible by the new (inaudible).

And with that I will turn it over to Paul, who will review our second-quarter financial results in more detail.

Paul Flanders

Thanks, Dan. Total revenues for the second quarter of 2010 increased 0.3% to $204.5 million from $203.9 million in the same period last year. Revenues for our Hispanic brand restaurants were $111 million, and increased 2.4% over the second quarter of 2009.

Pollo Tropical revenues increased 5% to $46.8 million with strong comparable restaurant sales of 6.3% against a negative 3.1% comparison from the prior year. This was the third consecutive quarter of positive same store sales for Pollo and as Dan said, customer traffic was very strong at positive 8.9%.

Taco Cabana revenues increased 0.6% to $64.2 million with comparable restaurant sales down slightly at 0.1% against the negative 3.8% comparison from the prior year. This was mostly reflective of softness in the Houston market, which was negative 3.8%. Excluding Houston, comparable restaurant sales were actually up about 1% for the rest of the chain. Customer traffic continued to improve at Taco Cabana, and was 2.1% positive in the second quarter, although this was largely offset by a decrease in average check.

With regards to Burger King, overall sales decreased 2.2% to $93.5 million with comparable sales down 1.4% for the quarter. We also had a net closing of 7 Burger King restaurants since the beginning of the second quarter last year.

Net income was $2.4 million in the second quarter or $0.11 per diluted share compared to $7.1 million or $0.32 per share in the second quarter of 2009. Excluding the impairment charges, which I will discuss in a moment, net income was $4.8 million or $0.22 per diluted share.

On a consolidated basis, operating margins contracted about 381 basis points year-over-year in the second quarter. Including the impairment charges, as well as the insurance gains in 2009, operating margin decreased 178 basis points, which generally reflected the lower gross margins in Burger King.

Operating margins at our Hispanic brands were in the aggregate relatively the same year-over-year. Cost of sales was 30.8% of total restaurant sales, up 169 basis points compared to the second quarter of 2009. As Burger King cost of sales increased 317 basis points, Taco Cabana increased 79 basis points, while Pollo Tropical decreased 32 basis points.

Burger King cost of sales was most significantly impacted by sales mix changes and the discounting of the double cheeseburger compared to the prior year, as well as the relatively lower margin on the $1 Buck Double sandwich. Beef costs for Burger King, which averaged $1.71 per pound for the quarter, increased almost 20% from the prior year and was further compounded by a 16% increase in usage due to the sales mix shift.

Restaurant labor costs increased 14 basis points in the second quarter to 29.2% of restaurant sales due to some de-leveraging of labor costs in Burger King and Taco Cabana.

Restaurant operating expenses, which exclude rent and advertising, were 14.3% or 13 basis points lower than the second quarter of 2009 and included a 22 basis point reduction from lower utility costs. Advertising expense was $7.8 million compared to $7.6 million in the second quarter of 2009, reflecting an increase of about $370,000 at Taco Cabana due to a shift in the advertising calendar, partially offset by a favorable $200,000 shift in Pollo Tropical.

General and administrative expenses were down slightly compared to the second quarter of 2009, and were essentially flat in both absolute dollars and as a percentage of total revenue.

Interest expense decreased about $215,000 to $4.7 million, mostly 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 125 basis points over LIBOR to 100 basis points over LIBOR. As I indicated, we took 3.6 million in impairment charges during the second quarter, or $0.11 per share after-tax. These charges covered nine restaurants in total, including reserve adjustments to several previously impaired or closed units. They also included about 2.5 million for the impairment of the Pollo Tropical restaurant in Hartford, Connecticut, and a Taco Cabana restaurant in the town of Texas, both of which have struggled for a while. While we continue to aggressively work to improve sales and traffic at these locations, we felt that it was prudent at this time to get these write-downs behind us.

With regard to our debt balances, total debt was $278.7 million at the end of the second quarter. Total debt decreased 8.7 million in the quarter, and was 4.4 million lower than at the beginning of this year. Our financial leverage has increased somewhat this year as a consequence of the decline in earnings. The total leverage ratio or debt to EBITDA was 3.4 times as calculated for purposes of loan compliance. It was essentially unchanged from the first quarter. It continued to be well below the maximum level of 4 times permitted under the loan covenants.

As previously indicated, we are not providing specific earnings per share guidance for 2010; the following updates are previous commentary and outlook, however. We now expect comparable sales for Pollo Tropical to increase 3% to 5% for the full year, and expect Taco Cabana comparable sales to be flat for the full year.

Comparable sales for Burger King, which decreased 3.9% in the first half of 2010 could improve in the second half of the year, but we believe will likely still be negative for the full year. Commodity costs are expected to decrease 1% to 2% for Pollo Tropical and be flat to up 1% for Taco Cabana, and to increase 4% to 5% for Burger King.

Capital expenditure so still expected to be in the $40 million to $45 million range for the year. The company anticipates the opening of three or four new Hispanic brand restaurants, as well as the closing of one Pollo Tropical, one Taco Cabana, and 8 Burger King restaurants, net of one relocation.

General and administrative expense is expected to decrease 2% to 3% compared to 2009. The amount of debt reduction will depend on earnings and capital spending, which is estimated to be $5 million to $10 million.

Finally, the company’s estimated annual effective tax rate it is now expected to be 36% to 37%. I will also point out again that this fiscal year has one less week than 2009, and is estimated to negatively impact revenues by about $13.6 million and earnings by $0.07 per share on a comparative basis.

Lastly, I will provide some insight regarding sales trends early in the third quarter. In July, Burger King comparable restaurant sales were negative 2.2% against the year ago comparison of negative 5.9%. The trends worsened somewhat compared to the second quarter. Pollo Tropical continued to perform well, although in comparable restaurant sales 9.7% in July compared to an increase of 0.2% last year. Finally Taco Cabana trends continue to get a little better, with July comparable sales up 1.3% against a negative 4.9% comparison in 2009.

And with that we will now open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Bryan Hunt with Wells Fargo. Please go ahead.

Bryan Hunt – Wells Fargo Securities

Thank you. I was wondering if you could talk about competition for Taco Cabana in the most recent quarter, and in particular, do you compete against Del Taco's to any large degree? And do you anticipate some Del Taco openings? We've seen a press release that they were going to open 90 in Texas and it was in the upcoming couple of years.

Alan Vituli

Let me see if I can deal with that. Texas is enormous competition for Taco Cabana both from conventional quick service with Taco Bell, Del Taco, and Taco Bueno and other Taco brands in the market, some regional, some throughout the state, some national. We don't see Del Taco presenting any particular new challenge for us. And quite frankly we at Taco Cabana have sort of said its sight is further and further from conventional quick service, and much closer to something slightly above what we call quick casual, but not quite casual.

You know, dinner is a very important component of our business. In-store dinner is a very important focus of our strategy, and neither of those are particularly important to the conventional quick service restaurants like Del Taco.

Bryan Hunt – Wells Fargo Securities

Did you tell us how alcohol is blending in the stores, particularly the ones remodeled?

Alan Vituli

Well, we recognize that these businesses have significant off premise, and also the Taco Cabana is a 24-hour restaurant. We don’t disperse alcohol through the drive-through. We have no alcohol sales associated with our breakfast business generally. A very, very slight alcohol associated with our dinner business – with our lunch business. Yet alcohol sales are about a little under 2% of sales, but they relate almost entirely to the happy hour, and to the in-store dinner business, which in terms of a percentage of the in-store dinner business, it is a reasonably meaningful percentage of the in-store dinner business.

Bryan Hunt – Wells Fargo Securities

And then, lastly, I caught the amount of remodels on Taco Cabana, but could you talk about how many remodels you plan before the end of the year on Pollo Tropical?

Alan Vituli

Dan you want to deal with it?

Dan Accordino

Yes, Alan. We have already done 11. By the end of the year, we certainly would have 15 to 20. So we will do another 5 to 10 by the end of the year.

Alan Vituli

The remodels for Pollo Tropical are to really reposition the brand as Dan has said to get it to be a more pleasant place to have dinner. And it is certainly showing pretty good results.

Bryan Hunt – Wells Fargo Securities

Thank you very much. I'll get back in the queue.

Operator

Thank you. Our next question comes from the line of Reza Vahabzadeh with Barclays Capital. Please go ahead.

Reza Vahabzadeh – Barclays Capital

Thanks, on the cost guidance, Paul, what is that cost guidance that you provided for the year imply for the second half of the year for BK, Taco and Pollo?

Paul Flanders

Well, Taco should be flat to maybe up 1%. It is pretty consistent with where we have been because we have for Pollo and Taco most of our costs are contracted for the year. So it doesn’t really vary a whole lot between the two halves, but would Pollo continued to be down, obviously, the variable here in (inaudible) to Burger King – we averaged $1.71 as I said in the second quarter. It has come down now. In July, I think we are about $1.60. So, they have come down a little bit from those highs.

Alan Vituli

Just to put into perspective Pollo uses between 300,000 to 350,000 pounds of beef a week.

Reza Vahabzadeh – Barclays Capital

Got it. And then as far as same-store sales is concerned, do you feel like you have the right balance of many items to level out sales on the Taco side, going into second half, despite the competition?

Alan Vituli

I believe the answer is yes. But I mean our product pipeline is filled with lots of new products, and you know in – but clearly we have the intent of introducing a fair number of new products going forward.

Reza Vahabzadeh – Barclays Capital

Got it. And then, lastly, as far as total remodels for this year, Paul, I missed how many remodels you have in total – Taco, Pollo and otherwise.

Paul Flanders

As Dan said, Pollo will be 15 to 20 units, Taco Cabana probably will be 35 or so, and then on top of that, of course, we have got typical Burger King remodeling, and I think this year we are doing somewhere 14 or 15 units I think.

Reza Vahabzadeh – Barclays Capital

Got it. Thank you.

Paul Flanders

Thanks.

Operator

Thank you. Our next question comes from the line of Jeff Omohundro with Wells Fargo Securities. Please go ahead.

Jeff Omohundro – Wells Fargo Securities

Thank you. First question is on Pollo Tropical, just wondering how you're thinking about now that you have a few quarters of momentum building here and you're looking out into 2011 – your site pipeline and what kind of expectation we should have about a pickup in the pace of development in that timeframe?

Alan Vituli

Jeff, it is clear that our Hispanic brands we have a sense of calling. In Pollo’s case the pipeline calls for 10 to 15 new units in 2011. Where those units are, they’re going to be essentially along the eastern seaboard outside of Florida. We’re talking about the Georgia market, Washington area and the Connecticut area. And mostly, those units will not be in areas that are necessarily densely Hispanic. We are looking at this as being a general market brand.

Jeff Omohundro – Wells Fargo Securities

And then my second question is, as we move into the fall with Burger King, we're expecting to see a pretty significant step-up across the system, in terms of the breakfast focus, in terms of products and marketing. Just wondering how you're positioning for that and what your thoughts are about opportunities at the breakfast day part?

Alan Vituli

Dan.

Dan Accordino

We are excited about the fact that Burger King is focusing on breakfast Jeff. We haven’t really – that has not been a marketing priority for a period of time now, than there are a lot of exciting products that are coming out in September, October, including the relaunch of a coffee brand. So we’re hopefully optimistic about the fact that breakfast will gain some market share in breakfast.

Jeff Omohundro – Wells Fargo Securities

And you briefly alluded to some of the more premium products that are prepared on the broiler. I just wonder if you could maybe elaborate a little more on the Ribs and the Steakhouse XT, and their performance. Thanks.

Alan Vituli

The Ribs were an LTO. So, we had them for a period of time, roughly 8 weeks and we sold 35 to 40 units a day, and now they may be reintroduced at a later time in the calendar. The Steakhouse burger has continued to be on the calendar. During the advertised period, we averaged 34, 35 units a day. During the non-advertised period, it fell off to 17 to 20, which one would expect as soon as we modified the advertising focus. And it is currently being advertised again. So I see these premium products being inflated periodically throughout the calendar.

Jeff Omohundro – Wells Fargo Securities

There's been much focus on the discounting efforts. Are these sorts of initiatives enough? Or would you like to see more done with these premium products?

Alan Vituli

Dan, let me take that. You know, we have had some lengthy discussions with Burger King, and it is clear that given the power and the momentum of McDonald’s and the fact that the US economy is in a pretty significant recession, you can understand that the BK marketing will strongly focus its tactics on ticket counts and market share.

BKC has just brought on a pretty bright and accomplished individual as its head of marketing. The feeling I got, and Dan shares that with me is that we are pretty confident she understands the issue. She has taken the position not as a tactician, but as a long-term strategist. Our sense is if the BK shareholders and the franchisees give her a little bit of time, I am sure she will get the brand back on track, and that means especially more for margin, more run off of the – our new broilers. So, I do see that this business sort of shifting back to Burger King re-establishing its identity in the large sandwich and premium product market, but it is going to take time.

Jeff Omohundro – Wells Fargo Securities

Thanks, Alan. That's helpful.

Operator

Thank you. (Operator instructions) The next question comes from the line of Bryan Elliott with Raymond James. Please go ahead.

Bryan Elliott – Raymond James

Hi, good afternoon. I’m on the road, can you her me okay.

Dan Accordino

Yes, Bryan.

Alan Vituli

Yes, Bryan.

Bryan Elliott – Raymond James

Okay. I actually missed a few things during calls speed-reading lesson there very good. Did you give – I know you gave ending debt, and I missed it, and I wanted the ending cash as well.

Paul Flanders

Ending cash was about $279 million. We probably have $3 million or $4 million of cash as distributable.

Bryan Elliott – Raymond James

Okay. And did you give a CapEx range for the year, given the remodels, et cetera?

Paul Flanders

CapEx hasn’t really changed a lot. It is still in the $40 million to $45 million.

Bryan Elliott – Raymond James

Okay. All right. And did I get the remodels right? Oh, and do you have year-to-date CapEx?

Paul Flanders

Yes, I do. Year-to-date we’re at about 16.5 million.

Bryan Elliott – Raymond James

Okay. And did I get this right, that we're going to end the year with about 15 to 20 Pollo remodels, but did I hear 35 Tacos? And yet I think in the prepared remarks, we just have done a few so far, that really helped dinner, but it's a very small sample?

Paul Flanders

We started Pollo much earlier in the year, so we have got 11 of those done, a total of 15 to 20 for the whole year. Then, Taco Cabana, we really just did a few in the second quarter. So we got ways to go with those –

Bryan Elliott – Raymond James

But did I hear right, that the target is 35 by the end of this year? Or did I mishear that?

Paul Flanders

Yes. You heard that correctly.

Bryan Elliott – Raymond James

Okay, alright. And then, I guess – what kind of per poundage range are you assuming in the beef cost projections for Burger King? Within, say, 10% of the $1.60 you're currently paying? Or just trying to get a sense of what's underlying the guidance.

Paul Flanders

I mean, I think our sense is that the second quarter, which was $1.71 hopefully is the high point this year. Our anticipation was that beef costs will come down in the back half, and they have certainly at least done so in the first month. We did $1.60 as I said. I would hope that we could sort of stay in that range for the second half.

Bryan Elliott – Raymond James

Okay, great. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Greg Ruedy with Stephens. Please go ahead.

Greg Ruedy – Stephens Inc.

Thanks, I wanted to go back to commodities. Do you have anything locked for fiscal year '11 yet? And at Pollo, if the traffic continues at the momentum, how much confidence do you have that some pricing is in order?

Alan Vituli

Dan, take the commodity part for us if you would.

Dan Accordino

We have – the chicken part at Pollo is contracted subject to a corn escalator, and the breast meat at Pollo, which is a significant component, the price is already fixed at the same level as 2010. The packaging goods for the most part have been locked in for the first part of 2011.

Greg Ruedy – Stephens Inc.

Okay.

Alan Vituli

In terms of pricing, we have got some reasonably good room in pricing. We have not taken any increases this year. We made consider it to increase towards the end of the year.

Greg Ruedy – Stephens Inc.

Okay. And then back on Taco, can you kind of give us an idea of what gross margin at the dinner day part is versus the rest of the business?

Alan Vituli

It is pretty consistent throughout.

Greg Ruedy – Stephens Inc.

Okay. The G&A guidance looks like it ticked down a little bit from the first quarter?

Paul Flanders

It is true.

Greg Ruedy – Stephens Inc.

What's going on there?

Paul Flanders

Frankly, a fair amount of that is lower bonus accruals this year given the earnings numbers that we have been achieving.

Greg Ruedy – Stephens Inc.

Okay. And then any color you can provide on Hartford and your thoughts on penetrating that market going forward?

Alan Vituli

The Hartford is an interesting phenomenon for us because it has opened in an area with fairly good Hispanic counts, but very low socioeconomic indexes. You know, the people who have been hit hardest by the recession and high unemployment and so on and so we’re just going to sort of buckle down and continue operating hard for it, though we see it as a slow build.

We have approved additional stores in the Connecticut market, specifically in the Milford area, which is not all that far from Hartford. And continue to look in the Connecticut market for sites, and believe we have a great number of opportunities in that market. But the demos we are using are a lot different than the Hartford restaurant, which was our demo almost three years ago. We are looking for higher – we’re no longer committed to a high Hispanic safety net. We’re getting terrific responses out of the non-Hispanic communities, which free us up to look at a lot more real estate.

Greg Ruedy – Stephens Inc.

Appreciate that color. Thanks.

Operator

Thank you. Our next question comes from the line of Robin Broudy with Waterfront. Please go ahead.

Robin Broudy – Waterfront

Hi, I'm just curious if you could help us understand what's going on at Burger King a little bit more. I would have thought by now that the comps would have turned positive or shown more of an improvement, and then especially when we see the stuff from McDonald's, can you help us understand which new programs are working versus not? And what you guys think you're really missing in order to close the gap?

Alan Vituli

We don’t control their marketing. I think the fact that they brought in a pretty senior, pretty competent executive in the marketing area, who understands the economics of this business, it is apparent that they are planning long-term, and long-term we know you can’t live off of the low margins on these discounted products. Beyond that, it is clear that most of the discussions we have had with them is related to bringing them more balance to this barbell strategy of tying down the extreme affordability at one end, but the premium customer who is discerning with respect to his hamburger and a large sandwich at the other – I mean it is basically getting the right products at the premium end, which we are able to do because of the flexibility in the broiler, because of flame grilling. And staying with them, and I think Burger King sees it that way. It is not going to be a straight road up for us. That is clear.

Robin Broudy – Waterfront

Do you think that you could see positive – I mean, because July, I would have expected some improvement, given the much weaker compares last year and it kind of took a step backwards. Do you think we would begin to see positive comps towards the end of the year?

Alan Vituli

You have got to go to a source higher than us for that one.

Robin Broudy – Waterfront

Thank you very much. I appreciate the help.

Operator

(Operator instructions) And at this time, I’m not showing any further questions. I would now like to turn the call back to Mr. Paul Flanders. Please go ahead sir.

Paul Flanders

We don’t really have any concluding remarks to make today, but we certainly appreciate your attention today, the look forward to talking to you again next quarter. Thanks.

Alan Vituli

Let me see if I can just add to Paul’s comment given the fact that we have a little more time than we usually have. Basically we have taken this intermezzo in the economy as an opportunity to achieve three things for Carrols Restaurant Group going forward. One was to lower our debt, and we have said that and we have done that, and it is still kind of high and we are going to be able to address that. The other is to simplify our business model. We see investors seeing us as a pretty confusing, complex kind of a company with three brands, one of which is a franchised business.

And the third is that we have to confirm to the investment public that we are a growth company, and that is where we are steering it. With that, we will talk to you on the next quarter.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

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