Popeyes Louisiana Kitchen's (PLKI) CEO Cheryl Bachelder on Q2 2014 Results - Earnings Call Transcript

| About: Popeyes Louisiana (PLKI)

Popeyes Louisiana Kitchen, Inc. (NASDAQ:PLKI)

Q2 2014 Results Earnings Conference Call

August 21, 2014 9:00 AM ET

Executives

Rebecca Gardy - Director, Investor Relations and Finance

Cheryl Bachelder - Chief Executive Officer

Tony Woodard - Interim Chief Financial Officer

Analysts

Mike Gallo - C.L. King

Michael Halen - Bloomberg Intelligence

Alex Slagle - Jefferies

Mark Smith - Feltl

Josh Long - Piper Jaffray

Nick Setyan - Wedbush Securities

Operator

Good day, ladies and gentlemen. And welcome to the Popeyes’ Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Rebecca Gardy, Director of Investor Relations and Finance. Ma’am, you may begin.

Rebecca Gardy

Thank you and good morning. Popeyes is pleased to host this conference call regarding results issued yesterday after the market closed for the second quarter 2014, which ended July 31, 2014. Today's audio presentation will be available on the company's website at www.plki.com. To listen to it, please follow the link to Webcasts & Presentations. A copy of our press release and all filings with the Securities and Exchange Commission are also available on the website.

Before we begin, I would like to read the following forward-looking statement. Certain statements made on this call by Popeyes Louisina Kitchen, Inc., officers and employees regarding future events and developments, and our future performance, as well as management's expectations, beliefs or projections relating to the future are forward-looking statements within the meaning of the federal securities laws.

We wish to caution investors to not place undue reliance on any forward-looking statements since those statements speak only to the date they are made. By their nature, forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements.

These risks and uncertainties have been described in the company's annual report on Form 10-K, quarterly reports on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

During this call, references maybe made to the non-GAAP terms of company-operated restaurant operating profit, operating EBITDA, free cash flow and adjusted earnings per share.

The company defines these terms as follows; company-operated restaurant operating profit is defined as sales by company-operated restaurants minus restaurant food, beverages and packaging, minus restaurant employee, occupancy and other expenses.

Operating EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization and other expense or income net. Free cash flow is defined as net income plus depreciation and amortization, plus stock compensation expense, minus maintenance capital expenses.

Adjusted EPS for these periods presented is defined as reported net income after adjusting for certain non-operating items consisting of, other income net and the tax effect of these adjustments.

The company's full definitions, computations and reconciliations to GAAP measures of the numbers referenced for these terms are contained in our earnings press release that can be found on the company's website at www.plki.com.

Presenting on today’s call will be our Chief Executive Officer, Cheryl Bachelder; and our Interim Chief Financial Officer, Tony Woodard.

I’d now like to turn the call over to our Cheryl. Cheryl?

Cheryl Bachelder

Thank you, Rebecca. Good morning and thank you for joining our call. Popeyes demonstrated again in the second quarter that our steady execution of our plan delivers consistent result. We maintained our momentum coming out of the first quarter and recorded our 17th straight quarter of positive global same-store sales.

Our performance reflects the combination of our principles, our priority, our process and certainly the passion of our team. We’re excited about the tremendous growth potential of Popeyes and we will continue to make strategic investments in our business to support our long-term growth objectives and drive value for our shareholders.

Here are a few highlights from our second quarter. Our system-wide sales increased by 9.5% for a two year second quarter growth of just over 21%. Our global same-store sales increased 3.6% for a two year second quarter growth of 8%.

Operating EBITDA through the end of the second quarter grew by approximately 14% versus last year. At 31.4% of total revenue, our operating EBITDA margin remains among the highest in the industry.

We delivered $0.39 of adjusted earning per diluted share reflecting an 11.4% increase over last year. On a two-year basis the compounded annual growth rate and adjusted earnings per diluted share is approximately 16%.

We opened 36 new restaurants, adding a net of 21 restaurants to our overall footprint. At the end of the second quarter we had 2,262 restaurants around the globe, a 5% increase over last year.

Finally, during the quarter we generated $24.2 million in free cash flow. We used that cash for company-operated restaurant development and share repurchases to return value to our shareholders.

I’ll begin the overview of our strategic roadmap with our first pillar build a distinctive brand. Domestically our second quarter same store sales were 3.8%, representing the 17th consecutive quarter in positive territory.

On a two-year basis domestic comps were 8.1% positive. We have outperformed the Chicken QSR category for 25 consecutive quarters and have outpaced the broader QSR category for the last 11 quarters.

Our same-store sales growth in the second quarter exceeded the overall QSR industry by 3.2 percentage points for the comparable period according to NPD Sales Trac Weekly data.

Popeyes strong growth in sale has built our market share of the Chicken QSR category to 23.1% in the second quarter up from 20.5% last year according to Independent Industry Research. This market share gain underscores the fact that Popeyes is a rapidly growing brand relative to its peer group.

We continue to delight our U.S. guests in the second quarter by offering a variety of limited time-only offers in addition to our famous Bonafide bone-in chicken. In May, our Popeyes Louisiana Trios offered our guest the opportunity to enjoy their choice of three pieces of Cajun Fish, three Handcrafted Tenders or a three piece wing, leg, thigh combination for $3.99, was the first time we offered this range of variety and value and our guest responded well.

In June, we brought back our delicious Chicken Waffle Tenders, a sweet and savoury combination of flavors that served with our signature Honey Maple dipping sauce for $4.99. This product once again generated an abundance of positive buzz on social media.

In July, our new Cracked Pepper Butterfly Shrimp served with our new blackened tartar dipping sauce for $4.99 reminded our guest once again that no one does seafood like Popeyes. In addition to our second quarter LTOs we also offered beverage promotions and dessert to effectively drive up our overall ticket.

Looking ahead Popeyes national marketing calendar for the remainder of 2014 will leverage our strong innovative product pipeline supported by sustained media presence.

Popeyes international restaurants achieved positive same-store sales of 2.2% in the second quarter marking the 18th consecutive quarter of growth. Our two-year same-store sales growth for international restaurants was 8%.

Sales during the last two weeks of the second quarter were depressed due to the timing of the Ramadan season in our Middle East market. We expect sales to bounce back quickly in the third quarter in these markets.

We continue to see improvement in sales in markets that have reached the critical mass to afford advertising, specifically Turkey and Peru are experiencing double-digit growth in same-store sales during the second quarter. We are actively evaluating opportunities in other markets to replicate this success.

Our second roadmap pillar is creating memorable experiences. This reflects to our intent to provide an experience that delights our guests. Popeyes’ new guest experience survey program called the Voice of the Guest was launched domestically and in every international market at the end of the first quarter.

We will be gathering baseline data throughout this year and begin reporting that data in 2015. The system-wide remodeling of our restaurants continues at a steady pace. At the end of the second quarter, 71% of the domestic system was in the new Popeyes Louisiana Kitchen image. Having started the year at 60%, we’re halfway and on track to our goal of 80% remodeled restaurants by the end of this year.

The third pillar of our roadmap, grow restaurant profits reflects our commitment to the profitability of our franchise owners. Recall that we report franchise operating profit one quarter in arrears.

For the first quarter of this year, the average operating profit before rent of a domestic freestanding franchised restaurants in the Popeyes’ system was 23.4% compared to 22.2% last year. On a dollar basis, this increase in profitability represents a gain of approximately $8,000 per restaurant on average.

As a reminder, restaurant operating profit is historically the highest in the first quarter of the year. Total food, beverage and packaging cost declined in the second quarter led by favorable chicken cost compared to last year. We expect cost in the second half of the year to be flat to last year, bringing the full year expectations to slightly favorable overall.

The compilation of second quarter P&L results will not be completed for another few weeks. However, we’re confident that the combination of top line sales growth, moderating commodity cost, supply chain savings and attention to our in-restaurant cost control will result in higher restaurant operating profits for our domestic franchisees compared to last year.

Our fourth pillar is accelerate quality restaurant openings is focused on developing new Popeyes restaurants to superior real estate selection. In the second quarter, we opened 20 domestic restaurants compared to 29 the prior year. Included in last year's second quarter domestic openings, were 8 of the 26 restaurants which were acquired in Minnesota and California and converted into the Popeyes Louisiana Kitchen image.

We are pleased with the overall strength of our development pipeline and the status of the projects underway this year. We’re confident that we’re on track to deliver our full year guidance on restaurant openings.

Our new domestic freestanding restaurants opened in 2013 are averaging first year sale of approximately $1.6 million on an annualized basis compared to the average of all of our domestic freestanding restaurants at approximately $1.3 million. This continuing trend reflects our commitment to higher quality site election and the extent to which our brand building efforts have created pent-up demand in the new and under-penetrated markets where we are opening.

Approximately 80% of our domestic restaurants opened in 2013 were freestanding restaurants compared to 75% in 2012. Of those, 98 freestanding restaurants opened in 2013. Approximately 40% were new expanding markets for the Popeyes brand.

Included in the domestic openings through the end of the second quarter, our four new company restaurants, bringing our total to 56 across our four company markets. We expect to open a total of 10 to 15 in 2014 and as in prior year, we expect the majority of these restaurants will open in the fourth quarter.

Moving to international openings, we opened 16 restaurants in the second quarter and closed 12. Through the end of the second quarter, we opened 24 international restaurants compared to 32 last year, primarily due to delays caused by the timing of Ramadan at the end of the second quarter.

We’re focused on accelerating success in current market and identifying our best next countries for franchise expansion. We’re confident in our expectation of approximately 75 new restaurants opening outside the U.S. this year. We’re committed to creating a culture of servant leadership which ultimately will be reflected in the positive experience of our employees and our guest. The measure of our success will be improved employee and guest engagement which yields improved sales and profits to the enterprise.

Our people, our franchisees, restaurant teams and corporate employees are all critical to the long-term success of our strategic roadmap. Our investment leadership competency includes the development and implementations of tools, programs and training. We’re building new metrics to measure employee engagement along side our existing guest experience metric.

Going forward, we will continue to invest in developing our talent, welcoming, inspiring, growing and celebrating our people as a path to superior sustained Popeyes’ performance.

I’ll now turn the call over to Tony to discuss the financial highlights of our second quarter. Tony?

Tony Woodard

Thanks, Cheryl and good morning, everyone. This morning I’m going to quickly step through a few key performance metrics and then Cheryl will review our guidance.

In the second quarter, our adjusted earnings increased to $9.2 million or $0.39 per diluted share compared to $8.5 million or $0.35 last year. On a two-year basis, the compounded annual growth rate and adjusted earnings per diluted share is approximately 16%. Popeyes system-wide sales increased 9.5%, driven largely by strong global same-store sales performance and the addition of new restaurants.

Total revenues in the second quarter were $53.7 million, versus $47.9 million in the prior year. Of these revenues, franchise royalties and fees were $30 million, up $900,000 over the prior year. The increase was primarily due to the 3.9% growth in same-store sales and sales of new franchise restaurants offset by decrease in franchise fees.

If you please recall at the second quarter of last year, included one time franchisee fees of $1.8 million associated with the conversion and franchising of eight restaurants acquired in Minnesota and California. Our company-operated restaurants had sales of $22.3 million in the second quarter, compared to $17.5 million in 2013. This $4.8 million increase was primarily due to nine net openings over the last four consecutive quarters and a same-store sales increase of 1.6% in the second quarter.

I want to take a moment to provide clarity on the same-store sales of our company restaurants. Restaurants in our heritage markets, New Orleans and Memphis, had same-store sales growth of 7% combined for the second quarter. As we've indicated on prior earnings calls, we expect our restaurant in Indianapolis and Charlotte, our two newest markets, to pose negative same-store sales as we build additional restaurants in those new markets. Specifically, we believe Indianapolis and Charlotte can each sustain at least 20 restaurants. And for this reason, we ask that you focus on total sales of our company restaurants as a better indication of performance.

Our rapid growth in opening new company-operated restaurants drove 31% increase in company restaurant operating profit after rent to $4.2 million from $3.2 million last year.

Improvement in the restaurant operating profit margin of our company-operated restaurants to 18.8% from 18.3% last year was primarily driven by lower commodity cost. Our second quarter G&A expenses were $17.4 million, compared to $16.8 million last year. This increase primarily reflects an increase in company-operated restaurant management expenses and continued strategic investment in franchise restaurant support services, offset by the timing of performance-based incentive accruals.

The company’s G&A expenses as a percentage of system-wide sales remains among the most efficient performance metrics in the restaurant industry. Depreciation and amortization increased to $2 million in the second quarter from $1.5 million last year, primarily due to depreciation associated with the acquired restaurants converted and leased to franchisees in Minnesota and California and to new company restaurant openings.

Other expense for the second quarter was $1.4 million, compared to zero last year, reflecting transition expenses associated with the departure of the company’s CFO. Through the end of the second quarter, we’ve generated free cash flow of $24.2 million, compared to $22 million in the prior year and 19.5% of total revenue to the company's free cash flow generation serves to fuel strategic investment and shareholder value creation.

We invested $12.9 million in various capital projects through the end of the second quarter, including $7.7 million for the construction of new company restaurants. Through the end of the second quarter, the company also repurchased approximately 462,000 shares from this common stock for approximately $20 million.

During the quarter, we opened 36 new restaurants and permanently closed 15 resulting in the net openings of 21 restaurants. We permanently closed three restaurants domestically, and 12 internationally. I’d like to pause a moment and review the transaction we announced in June with Diversified Food and Seasonings.

The company purchased new recipes and formulas we used in the preparation of mainly of our core menu items from Diversified for $43 million. We recorded an intangible asset of $41.8 million, net of $1.2 million royalty payments paid in 2014 under the prior royalty and supply agreement. The $3.1 million royalty that would otherwise have been paid to Diversified had the prior agreement remained in effect will now be reinvested annually, net of incremental interest expense into the company’s people initiatives that Cheryl touched on a few months ago.

In 2014, the amount reinvested was approximately $1.4 million net of royalties paid prior to the date of transactions.

I’m now going to turn the call back to the Cheryl for discussion of our 2014 guidance.

Cheryl Bachelder

Thank you, Tony. Let me wrap up our call with a look ahead. Popeyes’ performance in the first half of 2014 and our pipeline of menu promotions and restaurant developments give us great confidence in our full year guidance.

We are thus reiterating the following expectations, global same-store sales growth of 3% to 4%, full year adjusted earning per diluted share in the range of $1.58 to $1.63, new restaurant openings of 180 to 200, and net restaurant openings of 100 to 130 for system growth rate of approximately 5%. General and administrative expenses of approximately 3% of system wide sales, capital expenditures of $30 million to $35million, which includes the development of 10 to 15 company-operated restaurants, and share repurchases of $20 million to $30 million.

Before, I turn over the call to questions from our listeners, I want to address the recent transition on leadership team of Popeyes. As you know, we recently announced the departure of Ralph Bower. We’ve commenced a thoughtful search process to identify the right leader for Popeyes’ operations and development team. I’m confident that Popeyes will attract top talent to this position.

And now, as you read in our release at 8 o’clock this morning, I’m excited to announce the newest member of the Popeyes leadership team, Will Matt. Will joins us as Chief Financial Officer bringing a powerful combination of retail and QSR experience having held leadership positions at L Brands and KFC. His depth of knowledge in finance and in retail operations, make him a strong addition to our organization. We look forward to introducing him to you on October 9th at our Analyst Day in Atlanta, if not sooner.

So with that, I’ll wrap up today’s conference call and I’ll turn the call back over to our operator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) Our first question comes from Mike Gallo of C.L. King. Your line is now open.

Mike Gallo - C.L. King

Hi, good morning and congratulations…

Cheryl Bachelder

Good morning Mike.

Mike Gallo - C.L. King

…on a continued strong results. I want to dig a little bit on the investment of the some of the benefits you’ll get obviously from not having to pay the royalty anymore to Al Copeland. Can you give anymore specificity on exactly where these investments are being made and how you think that will drive an incremental return over time?

Cheryl Bachelder

Yes. I’m happy to respond to that. I would describe them to you as infrastructure investments. We’re building a people resources capability. For example, leadership training, for our system in addition to the great product trading, that we have on our food. We’re building a process around how we hire in our restaurants and then our home office team to get the best qualified candidates into our restaurants and in our organization. So I would call them building the HR capabilities that you would find in a company that’s distinguished for its people experience. That has not been our history but it will be our future.

Mike Gallo - C.L. King

Great. And then, I have a question on the remodel, I mean, your 71%, I think, on the new image now 80% by the end of the year. It looks like you will be pretty much have the whole system on the Louisiana Kitchen image more or less by the end of next year. I was wondering if we started to think about a 2.0 or we start to think about whether there might be some opportunities in kitchen equipment or in other areas, how you kind of think about refining that going forward? Thank you.

Cheryl Bachelder

Yeah. Mike, you identify a truth that you were always thinking about what comes next, a remodel of the system typically happens every five to seven years and so as we bring this one to closure, we will certainly be looking at what the next round of remodel will be.

We also always are looking at the back of our house to figure out how to make it more effective to serve our team members and our guests, and that is true as well. We have an ongoing team of people looking at the effectiveness and productivity of our back of house and how we can make it easier to give delightful service to our guests, so very much an ongoing process.

Mike Gallo - C.L. King

Thanks very much.

Operator

Thank you. Our next question comes from Michael Halen of Bloomberg Intelligence. Your line is now open.

Michael Halen - Bloomberg Intelligence

Good morning. My first question is regarding the international segment, we’ve heard a little bit about softened Korean consumer from some restaurant chains. Have you seen a significant impact on your business there or is the consumer weakness maybe being mitigated by a trade down effect from some higher priced restaurants?

Cheryl Bachelder

No. I would tell you we are seeing the effect of the retail slowdown in Korea as well. Korea has been in a very soft retail environment since the ferry incident earlier this year. We hope to see that market strengthening in the back end. What we are doing to response to it is to make sure that our marketing efforts are attracting guests to our restaurants during this time of down retail sales.

Michael Halen - Bloomberg Intelligence

Great. Thank you. And my last question, with the purchase of the recipes and formulas and another $10 million in share repurchases in the quarter, your leverage ratio has obviously ticked up a bit. Can we interpret this as a willingness to maybe increase financial leverage over time?

Cheryl Bachelder

Well, as I have said in the past, we have access to leverage. We have very favorable terms in our financial agreements and when we have the right organic growth investment to make that has a good return for you, we are willing to do that. So I think that’s what the diversified transaction represents is, a willingness to use leverage when it’s right for the business returns.

Michael Halen - Bloomberg Intelligence

Great. Thanks, Cheryl.

Operator

Thank you. Our next question comes from Alex Slagle of Jefferies. Your line is now opened.

Alex Slagle - Jefferies

Hey. Thanks.

Cheryl Bachelder

Good morning, Alex.

Alex Slagle - Jefferies

Good morning. I had a question, actually clarification just on your comments on the cost of goods or the commodity inflation? Is that expected to be similar to the second quarter as a percentage of revenue or is that similar year-over-year in the back half?

Cheryl Bachelder

What I said is we have been favorable year-to-date and we will be flat; we expect to be flat in the second half of this year on the total food basket.

Tony Woodard

And that’s versus last year, Alex.

Alex Slagle - Jefferies

Okay. Got it. And then, maybe on your non-core product platforms, if you could give an update on your strategy to grow those platforms, I know you added Cajun Catfish, the permanent menu a few months ago and if you could talk to that strategic decision and some we are going to see more in the future?

Cheryl Bachelder

Yes. We recently with the launch of our digital menu boards across our system, we freshened our menu with the same strategic intent that we had for the last few years of building our boneless chicken and seafood products. That platform has been an important driver of our growth and we expect it will continue to be.

We are the only brand with we believe the credibility to sell fabulous seafood in addition to our well-known famous advantage for chicken. So that as you saw in both the menu with Cajun fish and then in our promotion plan with Cracked Pepper Shrimp is a segment of our business that’s adding customers, adding variety to our menu choices. So that has been our strategy and will continue to be to grow the boneless and seafood segments.

Alex Slagle - Jefferies

Okay. Thank you.

Operator

Thank you. Our next question comes from Mark Smith of ELTL (sic) [Feltl]. Your line is now open.

Mark Smith - Feltl

Hi. Good morning guys. First just want to dig in a little bit on franchise royalty and fee revenue. Tony walked through the fee income last year. Was there anything else kind of impacting the number this year that brought it little lower?

Tony Woodard

No, nothing, nothing to call out notable, Mark. One thing to keep in mind, we mentioned is that we did have higher fees last year. So some of the fees that we’ve seen are running a little higher than we are this year because we -- those are not recurring. We didn’t experience those this year currently. But other than that I think the royalty and fees are tracking where we thought they would.

Cheryl Bachelder

Probably the big difference is the eight restaurants that we…

Tony Woodard

Right.

Cheryl Bachelder

…bought in last second quarter compared to this year which had both fees and rent attached to them.

Mark Smith - Feltl

Can you remind in Q3 of last year, any additional fee income or rent to income from conversions?

Tony Woodard

There were other -- yes, there were other restaurants that were converted and opened and the fees recognized in Q3. I do not have that number in front of me. We can get it for you but you should expect to see a similar issue in third quarter. We had fees last year that are non recurring this year.

Mark Smith - Feltl

Great. And then Tony, you’d walked through a little bit about [inaudible] company operated restaurants in [inaudible] Charlotte running a little lower. Is that cannibalization as you open some new restaurants in the market? Is some of that coming out of honeymoon? Can you just talk a little bit about what’s driving the comps in those markets?

Tony Woodard

Yeah, we’re seeing cannibalization as we build more stores in the market so as the number of stores in the market place increase we’ve seen a little bit of spreading of the sale. So what you’re seeing of the current store, current units being impacted as we grow out those markets and we expect that will continue until those markets kind of mature.

Mark Smith - Feltl

And the last question, you guys had hit a little bit on commodities, mainly chicken. Have you seen any pressure in any of your seafood items or any other commodities we should be keeping an eye on?

Cheryl Bachelder

There was some pressure on trends earlier in the year but we contracted well ahead of that and that’s why I think you see the favorable position reflected in our cost structure for the second quarter. But we’re contracted on our limited time offers to the balance of this year and feel solid with our forecast that our total food cost will be flattish.

Mark Smith - Feltl

Excellent. Thank you.

Cheryl Bachelder

Thank you.

Operator

Thank you. Our next question comes from Nicole Miller Regan of Piper Jaffray. Your line is now open.

Josh Long - Piper Jaffray

Great. Thank you. Good morning. This is Josh on for Nicole. Wanted to circle back to the investments in the improving engagement employee and on the guest side, specifically on the employee side? Was curious if there were some other tool sets that were in place of any or it may be, that was speaking more towards one of the first responsive about building out the HR function and using some of that royalty money into a leadership center and was trying to get. Give a sense for what has already been put in place and what the opportunity is going forward?

Cheryl Bachelder

Well, I think the simple way to say it is we’re building first time HR capability. We’ve always measured the guest experience as you know. But we’ve never measured the employee experience. We’ve always been known by our food and therefore always had huge capability around training our restaurant teams and support teams around food but not about leadership.

And so these are fresh capabilities and frankly the $1.4 million, we’re reinvesting this year as you think about it if you were moving kind of from zero to four HR capabilities is the pretty modest investment in training, tools and programs and measurement to advance our capability.

Someone earlier asked me about return on these investments and what I would point you toward is -- and I think the most straight forward way to think about it is the famous service profit chain that’s talked about all the time that how the business will arrive, which says that highly engaged employees lead the highly engaged guest which lead to increased sales and profit in the restaurants, that is our thesis, that’s what we believe to be true and we’re building towards that capability.

But I will tell you, we will be measured about building HR capability just as we have been with every other strategy in our plan and we’ll be looking to see improvement over the years ahead in those metrics of employee and guest engagement.

Josh Long - Piper Jaffray

That’s a helpful clarification. Thank you. I wanted to just go back to the real estate here, your comments around the higher-quality site collection? Specifically, maybe inferring the focus on freestanding units, but I also wanted to revisit what opportunity relocation presents as an opportunity going forward, particularly in those markets where maybe the trade area has moved? Could you talk about what you’ve been able to learn from that process and then kind of what contribution that has going forward on the relocation side?

Cheryl Bachelder

Sure, Josh. Yes. I did emphasize the fact that freestanding building domestically has been our top priority and building new sites and then right behind that the remodeling of all of our existing sites. And frankly, those two things have been our focus and priority in the last few years.

What you bring up is very accurate that there is also one opportunity selectively for relocation. Existing restaurants where the trade area has moved or where there might just be a better high grade sites in the trade area.

We are not far along in that process. So it remains an upside opportunity going forward as our franchisees see proof of the return. Today we have a handful of those proof points that we share with our franchisees and obviously, that transaction can only occur when a lease expires and there is an opportunity to shift in the market. But it’s a good go-forward opportunity for Popeyes. We’re 40-ish year old system which does have trade areas that have shifted and overtime we’ll address that.

Josh Long - Piper Jaffray

Great. That’s helpful. Thank you. And then shifting over to your newer markets, understand and appreciate the commentary around the cannibalization from when you -- from the process of building that market out. Just curious on just high level thoughts on how the progress in those markets has been planned out. It’s a bit more or less following the scripts that you would have expected? Is the brand being adopted at a quicker pace than you would have expected? Just any sort of qualitative comments on the brand adoption and just consumer engagements in those new area, if you have any comment that you could share?

Cheryl Bachelder

Sure. I think the consumer response to our brand in those new markets is outstanding as evidence by the average unit volumes we've seen in those markets and also with the conversion market of Minneapolis where we basically build out 13 restaurants in a year at very high volume.

So, I think, we’ve clearly demonstrated the power of the brand. Now that we are in national advertiser well known for superior innovative new product, I think there is real pent-up demand for this brand in markets where we previously have not been deep.

And I get bombarded in our social media where questions of when we going to build in my neighborhood kind of thing from our customers. So I think a very strong proof point on the consumer.

The second part of your question around real estate, we told you when we were going to expand our presence in company markets that we were going to use it to prove, continue to drive proof points around superior real estate and that have proved true.

We have visited Indianapolis and Charlotte, you will see some beautiful towering top-quality real estate sites right in the list of other major competitors that are known for choosing good real estate and we are pleased with the returns we’re seeing in these markets.

Josh Long - Piper Jaffray

Great. Thank you. And then last one for me. You had mentioned that you’re fully contracted on the LTOs for the rest of the year, which is very nice to hear. Just curious on how that reflects to the larger basket and if, you could share sort of commentary on what contracting there is on the overall basket?

Cheryl Bachelder

Yes. We were contracted on the items I mentioned a then as we’ve discussed before our chicken contracting, Tony, about a 120 days out……

Tony Woodard

Yeah. Typically, they’ll look that 90 to 120 days out. The thing about our bone-in chickens will cost lots, so many of the cost components are locked in and negotiating locked in for the years. We don’t expect a lot of change in that this year and our bone-in, I think, is contracted for the year as well.

Josh Long - Piper Jaffray

Great. Thank you so much.

Cheryl Bachelder

Thank you, Josh.

Operator

Thank you. Our next question comes from Nick Setyan of Wedbush Securities. Your line is now opened.

Nick Setyan - Wedbush Securities

Thank you. On your market again, you guys have talked about the cannibalization from your openings. But at what levels are you seeing those sales? You guys talked about the greater sort of system of $1.6 million? What are the opening volumes looking like in this newer markets, because at least, in my model, when I back into it, sound -- at least to me it seems like these newer units are opening stronger than I have ever seen it in terms of quarterly basis, at least in Q2 this quarter, is that kind of a correct observation, maybe you guys can give some color around that?

Cheryl Bachelder

Yes. We don’t, Nick, we don’t report out the average unit volumes in those new markets, but I can tell you that we are, they are strong, they are meeting expectations and therefore delivering the returns we intended.

The color I’d give you is, we are trying to show our franchises there, what A++ real estate looks like. So we have invested in some strong real estate, probably, above and beyond, what most of our franchises would be willing to do and that has led to above average art.

Nick Setyan - Wedbush Securities

Got it. In terms of, now that we are in August, in terms of 10 to 15 company-owned unit guidance, is there a little maybe more visibility in terms of where you are in the construction process to give us a little bit more guidance maybe towards the high end or towards the low end? What are some of the variables that might drive us towards the high end or keep us towards the low end of that guidance range?

Cheryl Bachelder

Yes. We have very detailed spreadsheets on every single unit, where it stands in its construction. And at this time in the year, you pretty much know the approximate opening date of each unit. I will tell you the reason we always range it is, we are not in charge of a lot of things in this world and some of them effect opening date, like local regulatory agencies, inspections, et cetera.

So I have to leave you with the range. We think we are right on it and we are confident being able to deliver it. But they will be backend loaded and there is always the unexpected event that the plumber doesn’t show up or something that can affect that number, but good visibility to answer your question.

Nick Setyan - Wedbush Securities

Okay. And then in the press release around the new CFO and congrats on hiring. Well, there was a line that said that the long-term acceleration in our growth rate? I was just curious, you actually give some color on what you meant, I mean, obviously, the company owns sales which had a 40% of your revenue. You are accelerating that to over 20%? How are you kind of looking at, perhaps, maybe accelerating your longer term EPS growth guidance that historically has been sort of low to mid-teens? I mean, can we potentially see that accelerating going forward?

Cheryl Bachelder

I am pleased to know how carefully you read my words, Nick, that’s good. So long-term growth potential, I didn’t intend doing communicate anything new, because I think I have been very forth right about where we see the growth opportunity in the company. Certainly, we have talked about the doubling of domestic franchise units in the Popeyes system and accepting that by continuing to sustain the growth -- unit growth rates that we are currently hitting in the U.S.

Then our second strategy was to expand our company units which as you point out nicely accelerate to our EBITDA and therefore, earnings over the next several years. And then the third thing, we have talked about is our almost untapped opportunity internationally to access over the next several years. So, that’s what, I mean, look we want to continue to unpack and unlock each of those growth opportunities for the benefit of our shareholders and continue to delight you.

I will tell you we are pretty proud of double-digit sustained earnings performance. I think we are in the leagues of one of the best performers in our sector and I’d be really proud to keep doing that for you for years to come.

Nick Setyan - Wedbush Securities

Okay. And just kind of last clarification question, again, the COG, when you guys said flat year-over-year in the second half? Are we talking about 33.9% last year in Q3, so 33.9% in Q3 this year? Is that what you might flat or is it like inflation is flat, so we could potentially see a little bit of leverage though?

Cheryl Bachelder

You are talking about company operations food and paper.

Nick Setyan - Wedbush Securities

Yeah.

Cheryl Bachelder

We were reporting on the whole food basket for our whole system and expecting that it will be flat in the second half, meaning flat. Anything you’d add, Tony?

Tony Woodard

Yes. And really speaking to the inflation in the overall market, basket commodities and food cost in that comment, not specifically to any other factors that can affect the food cost on your restaurant’s P&L.

Nick Setyan - Wedbush Securities

Got it. So you are not actually talking about like food costs as a percentage of company …?

Tony Woodard

No, there is lot of -- there is a lot of factors that affect the number mix waste. How productive you are in the restaurant in addition to the food and market basket that we were more specifically referring to.

Nick Setyan - Wedbush Securities

Perfect. Thanks so much guys.

Cheryl Bachelder

Thank you, Nick.

Operator

Thank you. And at this time, I’d like to turn the call back to Ms. Bachelder for any further remarks.

Cheryl Bachelder

Thank you. As always, we thank you for joining us on the call this morning and for all your good questions. We appreciate your continued support for this growing brand. On September 9th, we’ll be presenting at the C.L. King conference in New York. We’ll post our conference materials on our website after that presentation.

Until then I want you to get out and taste Popeyes’ current promotions, Tear'n Tenderloin, Two all white meat chicken tenderloins, half split for tear apart dipping and served with Cajun Creamy Garlic dipping sauce. You won’t want to meet them, hurry out there. As I mentioned, our next Analyst Day will be in Atlanta on October 9th. We always have a lot of fun, please come. Our next earnings call will be mid November when we announce our third quarter results. We’ll look forward to speaking with you then if not before. Thank you and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

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