Executives
Pat Watson - Corporate Communications
Cliff Hudson - Chairman and Chief Executive Officer
Scott McLain - President
Steve Vaughan - Chief Financial Officer
Analysts
Joe Buckley - Bank of America
Brad Ludington - KeyBanc Capital Markets
John Glass - Morgan Stanley
Matt DiFrisco - Oppenheimer
Matt Van Vliet - Stifel Nicolaus
Larry Miller - RBC Capital
Jake Bartlett - Susquehanna
Sharon Zackfia - William Blair
Keith Siegner - Credit Suisse
Peter Saleh - Telsey Advisory Group
Nicole Miller Regan - Piper Jaffray
Chris O’Cull - SunTrust Bank
Robert Derrington - Morgan Keegan
Paul Westra - Cowen & Company
Greg Ruedy - Stephens, Inc.
Sonic Corporation (SONC) F1Q2011 Earnings Call January 4, 2011 5:00 PM ET
Operator
Please stand by. We are about to begin. Good day everyone and welcome to the Sonic first quarter conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Pat Watson. Please go ahead sir.
Pat Watson
Thank you and good afternoon everyone. This is Pat Watson with corporate communications. Sonic is pleased to host this conference call regarding results issued this afternoon for the first quarter of fiscal year 2011, which ended on November 30, 2010. Today’s audio and slide presentation is available on the Internet. If you would like to view the slides during this presentation please go to the investor section of the company’s Web site, www.sonicdrivein.com, and follow the link to events and presentations under investor info.
Before we begin I would to remind everyone that management’s comments in this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company’s future results may differ materially from those anticipated and discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences have been described in the news release issued this afternoon and 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. Lastly, I would like to point out that management’s remarks during this conference call are based on time sensitive information that is accurate only as of today’s date, January 4, 2011.
For this reason and as a matter of policy, Sonic limits the archived replay of this conference call webcast to a period of 30 days. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the express written consent of the company is prohibited. With those announcements, I’ll turn the call over to Cliff Hudson, the company’s Chairman and Chief Executive Officer. Good afternoon, Cliff.
Cliff Hudson
Good afternoon Pat and good afternoon to everyone on the line this afternoon. We thank you for joining us for this conference call. In this call we’re going to cover a number of topics including an overview of the first fiscal quarter of fiscal year 2011 moving then to a discussion of progress we’re experiencing in implementing a number of strategic initiatives that really flow out of announcements we made last spring, March I think as a matter of fact.
And then a discussion of some of the indications that those initiatives are having on our sales momentum moving to a development update and the perspective surrounding that, how we see that impact our business over time and then also an update on our financial performance and the capital structure, the financial performance of first quarter and some use of capital issues and where we are from a capital structure standpoint as well as expectations for the remainder of fiscal 2011.
For this first fiscal quarter comparing looking at the trend of the business over time, looking at the first fiscal quarter of this fiscal year versus fourth fiscal quarter of last fiscal year, we’re pleased to see the progression in the sales improvement in our company owned stores. In the first fiscal quarter we saw a shift upwards you might say, a sales decline of 1.9% versus in the summer it was a sales decline of 6.1, so trending very much in the right direction.
And as this system sales declined in first quarter of 2.4% versus 6.4% in the fourth quarter so we saw some better trending moving forward into first and for the second fiscal quarter of 2011 beginning in December we have continued to experience some system sales improvements still with company owned drive-ins outperforming franchisees in the early part of this quarter. So we’re pleased with that progression. Now looking at the historical elements that have driven our business over a number of years, we’re going to talk about some of these today from a current standpoint.
We’ll talk about a little later in the presentation how we view these historical drivers and how we’re viewing them not just today but over the next couple of years. And I think this will be helpful to you to give you a framework of the strong historical growth we’ve had and why we believe we’ll return a good part of that on a progressive basis over the next one, two and three years. As to the focus on fiscal year 2011, there really are kind of two main drivers that we’re looking to from an operational standpoint that will improve the performance.
And then the third you see there we’ll talk about today as well and will have over a period of time. But the first one is the same store sales. The system wide same store sales performance in a lot of ways, what we’ve been about in the last year and talked in some detail about today, a number of elements that are really very much about fixing the foundation of our business, focusing on food quality, customer service, some real good transitions of the business there in the last one to two years.
Prospectively near term we’re be talking more about new partnerships for media purchasing, new partnerships for media creative campaigns and then also improvement in store level systems meaning technology focused that we’ll continue to build that. But we’re seeing some benefit of that and we’ll talk more about the benefit of those elements today. As it relates to the company owned stores, seeing improved indication in customer service and in turn sales performance recently.
So these are key elements that drive the business. We’ll go into more detail on them and then also the use of capital. I’ll make that point here. We paid down 105 million in debt in fiscal year 2010. Recently we repurchased another $62-1/2 million in variable debt at a $5 million discount with the use of existing cash. And in the remainder of this fiscal year we’ll also pay off approximately another $50 million. These are scheduled principal payments on our outstanding debt and we’ll still be in a healthy cash position after having done so.
Over the longer term this sustained approach to return on investment and return on equity we’ll continue to address and that will be part of our presentation as we go further into today’s presentation. So let’s spend a couple of minutes talking about the company owned drive-ins and our focus there to what we expect to achieve near term. We have really had an added emphasis on customer service here in the recent past, a reduction of management layers between store levels and management here at the corporate headquarters both to reduce overhead as well as bring focus and sharper focus on what’s occurring at the store level.
And then in the last year we have also implemented the new compensation structure at store level management. This is the area of our business that can have the most significant impact on earnings in the near term, not just this year, one, two and three years but again, one which we are focusing keenly because of its potential impact. When you look at this level of focus and what we see, we see here that these four kind of areas of focus, the checkmarks on the couple that we believe we’ve made the biggest headway against, closing the gap between service levels indicated by customers.
The franchise drive-ins versus company owned, we’ve really made huge headway there. We have also closed the same store sales gap, the same store sales change rate and so again, the last two quarters, big performance there. Going forward we’re going to be focusing on stabilizing and improving restaurant level operating margins and then also improving average unit volumes in order to improve their outcomes with our own stores. The team that surrounds our company owned stores is led by Omar Janjua and is very much committed to sustaining these first two elements and accomplishing the next two on a progressive basis over the next few years.
So let’s go to what some of the kind of the focus on the revenue opportunity–. If you look at what franchisees have accomplished, where franchisees are in the fiscal year into 2010, they’re roughly $1 million average unit volume. And this is a material gap between franchisees and our company owned stores. And the company owned stores over the next year simply close that gap and I don’t mean as franchisees grow. I’m talking about you fix it at $1 million, close the gap from the roughly 900,000 to the million.
You’re talking about for our company owned stores on our income statement and another $45 million in revenue. So a serious impact, very achievable but a huge contribution or contributor to the company’s growth in earnings and profitability. In addition to that, potential margin improvement is a very real opportunity. With improved sales volumes we should be able to have a serious contributor here because of the flow through that would occur as this gap can be closed over the one, two and three year period.
But it will be driven not just by increased sales but also by more effectively managing food packaging and labor costs. We don’t see the margins returning to the historical margins of 20% but we do see improvement of existing margins moving to kind of the 16 or 17% operating margin. We believe that is very achievable. So these things will contribute mightily to our company owned stores and their profitability but in turn to our performance as well. As we look to system strategies and the potential that is there, the value equation continues to be a huge one.
Our consumer’s perception of value is very much defined by the experience that they have when they come to our restaurants divided by the price they pay. You’ll recall that in fiscal year 2009 we focused much more on the denominator of this or the price with the introduction of our every day value menu and the new pricing strategy but we also began to work to improve our customer service and feedback tools that we had in place. In fiscal year 2010 we focused somewhat more on the numerator, a lot more heightened emphasis there with initiatives to improve customer experience such as skating car-hops and product quality initiatives, new product news that followed these quality initiatives and some new efforts at messaging what was occurring there.
Looking at this fiscal year we’re going to continue to build on the numerators, sustaining our messaging that this is a high quality, distinctive food and more fun experience that consumers and customers can have at the drive-in because we’re very much of the belief that in the long run elevating the consumers’ experience through product and service differentiation will do more to contribute to sales and earnings growth than simply offering food for a low price point. So this is the area where we think we can win and we can begin building that foundation and will continue to do so.
The sales driving initiatives that we look to on a system basis are really comprised of three components. The first is providing consistent high quality customer service at the drive-in level and we continue to see improved customer service scores both for company owned and franchise stores. With that improving customer feedback you can see pictured here that we’ve improved our overall satisfaction - OSAT as we say. But overall satisfaction, the customer feedback for company owned drive-ins if you look back to October of 2008 you see us going from 59% and now in November two years later it’s 79%.
So we not only closed the gap, we slightly surpassed franchise, that is our company owned stores have. But you can see franchisees improving over that time as well, going from 68% to 78% and we’re pleased with the progress here. We know there is room for improvement. We’ll continue to focus on improvement of the actual scores but also the consistency across the systems. Other sales building initiatives when you look at the food quality and product quality, this has been a part of our initiative in the recent past, improvement in core menu items in addition to innovative new products kind of building on those.
This includes if you look at the last year, real ice cream beginning in May, the quarter pound foot long chili cheese Coney in July, the new bigger loaded burgers in September. And since the introduction of these products we have seen incremental real ice cream and Coney sales unit sales sustained after the promotional period. Real ice cream is really kind of helping us build and drive improvements in the afternoon and evening day parts while Coney is helping particularly in the dinner day part.
But with the implementation of these different product improvements we have seen products representing about almost half of our sales at the average Sonic drive-in go through the product improvement. Then as we look into 2011 we will incorporate new products around these and product extensions and continue to get the new product news focus. The last element there about customer engagement, this third component involves customer engagement and includes everything from the messaging we have to mediums we use in the products we promote.
Last fiscal year we introduced new messaging designed to emphasize what makes Sonic so different from the typical QSR and these new commercials were utilized not only to call attention to what Sonic has and others don’t with respect to the quality food, real ice cream, foot long, quarter pound - I’ve got to slow down here - Coneys and our loaded burgers, etcetera, that can be customized for every customer but also a friendly experience served by skating car-hops and a personalized level of service you cannot get elsewhere.
We’ll continue to appeal to customers with these new products and emphasizing this distinctive difference. You’ll see that coming up in the immediate future, our red velvet cheesecake blast made with real ice cream. And we will look for new ways to continue to leverage our business in this area. In October we announced a new agency was selected to review our menu design as well as our online marketing. And the results of their work will be implemented in the fourth fiscal quarter of 2011.
As many of you know, we are also currently conducting agency review for our messaging and we anticipate a new agency will be selected in late January. Our view is that we can expect them to build on the themes of the product and service differentiation and use a diversity of formats to engage our current customers but also attract new ones. And this will arise in our third fiscal quarter, the new efforts from the agency selected in January. And on a related note, you may have noticed we recently selected a new media buying agency, Zenith, who will focus on improving the efficiency of our media expenditures.
And this will include cost efficiencies as well as refining the balance between national and local media and our expectation is that the impact of their work will also come into play in our third fiscal quarter. So the summation of these, our expectation moving into the year is we’re going to be looking at improved company owned drive-in performance this year and beyond on a progressive basis and they will be the biggest contributors up front.
And successful implementation of these various initiatives that we put in place in the recent past will have an impact across the system and then also the use of capital pay down debt and other opportunistic uses are key elements this fiscal year, some of them beyond as well. With that I’ll turn it over to Scott McLain who is going to talk a little bit about development in our systems.
Scott McLain
Thank you Cliff. Our development activity continues to be challenging as a result of the decline in sales and profits, which together with ongoing economic uncertainty have led to a more cautious approach by our franchisees. Our franchisees did open nine new drive-ins during the first quarter and completed rebuilds or relocations on another three drive-ins and we continue to be on pace for 40-50 new drive-in openings this fiscal year.
As was the case last year, we are offering some development incentives not only for our more challenged markets but also targeted against markets that are close to achieving breakthrough media levels and for a few of our franchise developers that have the financial and operational capacity for accelerated growth. These incentives were well received by our franchisees last year and we expect them to have a positive impact this year as well.
However, because the development cycle is normally 12-18 months in length we don’t expect to see a rebound in new store development until some period of time after the stabilization of sales and profits. On the positive side, first year sales for new drive-ins are still strong, particularly in new markets with average opening volumes of $1-1/2 million. As the drive-ins in newer markets enter their second and third years we are seeing sales volumes decline fairly significantly from their opening levels.
On the whole, our volumes in new markets continue to exceed the system average. Retention of sales in new markets will be a major focus for our new media agency and we are employing new messaging targeted at the trade area level designed to build brand awareness and usage for these drive-ins. We ended the quarter with 3,558 total drive-ins and we’re now operating in 43 states making continued progress on our way to becoming truly a national brand by adding 14 new states in just the last four years.
23 drive-ins closed in the first quarter. Roughly half of these were in Florida and related to a larger restructuring effort of one of our franchisees, which when completed placed him in a much stronger overall financial position. We also continue to actively evaluate our lower volume drive-ins and we do expect that additional closings will occur. However, at this point we expect the magnitude of those closings to be consistent with what we have seen over the last couple of years.
Although our rate of closings has increased somewhat, we believe it still remains relatively modest given that we’re a 57-year-old brand with more than 3500 stores and especially given the current environment. While some of our franchisees are experiencing challenging financial times, the overall fiscal health of our franchisees remains sound with some of our longer term franchisees expanding their base. Despite the near term challenges, our franchisees remain as passionate as ever about the Sonic brand and the strategic initiatives we have implemented.
And we are gratified by their continued commitment and investment in what we together believe is a bright future. Now I’ll turn the call over to Steve Vaughan, our Chief Financial Officer.
Steve Vaughan
Thank you Scott. For the first fiscal quarter of 2011 our reported earnings were 12 cents per share. Excluding the one time benefit from the favorable settlement of a certain tax obligation, our earnings would have been 10 cents per share. We are pleased with the progress we have made on improving same store sales trends while also stabilizing restaurant operating margins.
During the first quarter our franchising revenues declined by approximately $1 billion. This decrease was primarily caused by the decline in franchisee same store sales as well as the decline in franchise fee revenue related to fewer openings. The effective royalty rate was relatively flat at 3.74% for the quarter with the decline in same store sales largely off set by higher sales and rates at new drive-ins. As we have discussed previously, almost all manager and supervisor compensation is now included in payroll and employee benefits.
Under the old compensation program the majority of management compensation was included in non-controlling interest. In order to compare overall restaurant operating margins on an apples to apples basis we have combined the non-controlling interest line with company owned drive-in cost of sales. Despite the impact of sales deleveraging, the implementation of a new store level compensation program designed to improve manager tenure and investments in improving product quality, our restaurant level margins continue to stabilize.
Looking at each individual line item, food and packaging costs remained relatively flat versus the same quarter last year despite significant investments in quality. These investments were offset by less discounting relative to the first quarter of fiscal 2010 and better controls over food costs. We were also helped by benign commodity costs during the quarter, which increased between 1-2%. Looking forward, we would expect a similar level of commodity cost inflation over the remainder of our fiscal year.
The combination of increased costs related to our product quality improvements as well as the increase in commodity costs will likely place upward pressure on our food and packaging costs particularly over the next two quarters. Most of our commodities are either locked in or are far enough along in contract negotiation process to provide decent visibility into costs for the remainder of the fiscal year. The notable exception is beef, which we continue to buy on a short-term basis.
Due to the competitive industry environment we made several pricing changes with the new menu but the net result was virtually flat. Therefore our cumulative price increase for the second and third quarters will be less than 1/2 of 1% at company owned drive-ins. I would also like to point out that Omar and his team continue to make significant progress in implementing a comprehensive ideal food cost program, which has minimized waste at company owned drive-ins. We expect to continue to see benefit from this program over the next two quarters.
While lower discounting and improved controls will partially offset the investments in product quality initiatives and higher commodity costs, we believe we will see increased food and packaging costs in the second and third quarters of fiscal 2011 in the range of 25-75 basis points year over year. Payroll and employee benefits inclusive of non-controlling interest reflect the shift in expenses from non-controlling interest to labor and benefits under the new partner compensation program implemented in April.
During the quarter there was an 80 basis point deterioration in overall labor cost resulting primarily from incremental costs associated with the new compensation program. We believe more efficient labor practices combined with no federal minimum wage increase will result in slightly favorable labor costs as a percentage of sales during fiscal 2011. However, since a greater portion of our managers’ compensation is now fixed, we experienced an unfavorable labor cost in the first quarter and expect that our lowest volume quarter, which is our second fiscal quarter, will also experience unfavorable labor costs.
However, as we move to higher volume months in Q3 and Q4, we expect favorable labor costs, the extent of which will depend upon continued improvement in our same store sales trends. Other operating expenses were favorable by 50 basis points, a marked improvement from the 140 basis point deterioration experienced in fiscal year 2010. As same store sales improve we expect to see continued improvement in this line item. During the first quarter SG&A expenses increased by approximately $150,000.
While we continue to invest in resources to drive our business we have also attempted to rationalize our overhead costs to align better with revenue growth. Looking forward we expect SG&A to be approximately $16.5-17 million per quarter. For the quarter depreciation and amortization declined by 3%. Looking forward we continue to expect depreciation and amortization expense in the range of $10 to 10-1/2 million per quarter in fiscal 2011. We reached a favorable settlement on an uncertain tax position during the quarter, which resulted in us reducing our tax liability by approximately $1.1 million.
This reduction had a favorable impact on earnings of approximately 2 cents per share. We continue to be pleased with our decision to move to a more franchised business model. This model allows us to maintain our capital expenditures at a reasonable level while also servicing our debt requirements penetrably. As Cliff mentioned earlier, we continue to make significant progress in utilizing our excess cash by purchasing $62.5 million of our variable funding notes at a $5 million discount.
This transaction occurred in mid-December so it will be reflected in our second quarter financial statements. Including the approximately $390 million in outstanding debt under our fixed rate notes combined with 125 million outstanding under our variable rate notes, our total debt including capital leases now stands at approximately $550 million. With $50 million in additional principal payments scheduled for the remainder of 2011, we would expect to end the fiscal year with our debt to EBITDA in the range of four times.
Subsequent to the variable funding note we purchased transaction, we have over $30 million unrestricted cash. This cash combined with our operating cash flow is expected to be more than sufficient to meet our 2011 planned capital expenditures and scheduled $50 million in principal payments on our fixed rate notes. We continue to have a solid balance sheet and exceed our debt compliance covenants. We anticipate this compliance will continue into the foreseeable future.
As Cliff stated earlier, we are pleased with the sales improvements we have seen recently. These improvements are consistent with the expectations we outlined in September. To reiterate, in 2011 we expect improving sales throughout the fiscal year with each 1% change in same store sales based on 2010 volumes having a 3-cent impact on earnings per share, 40-50 new franchise drive-in openings, roughly flat restaurant level margins reflecting improving sales trends and some efficiencies from labor costs offset by investments in product quality initiatives;
SG&A expenses in the range of $67-68 million, depreciation and amortization expense of $41-42 million, net interest expense of $33-34 million and capital expenditures of $20-25 million. I’d now like to turn the call back over to Cliff for a discussion of our business outlook over the longer term.
Cliff Hudson
So one of the questions that rises from the status of the business today is a an appropriate question - when will these initiatives translate into improved performance? What I’d like to do is return to a framework that we have used historically and that was also used earlier in the presentation. So in the earlier part of the presentation when I made reference to historical growth drivers, you can see these five elements listed here.
Before the recession, before the turn down in our business, we used to refer to these regularly as our multi-layered growth strategy. And we had all of these elements in place in any given year based on positive performance, same store sales and our company owned restaurants, their operations. With the excess cash then the question became what do we do to drive not just the continued building the business but the improvement in earnings per share year by year for our stockholders.
So looking at these same five elements as we have historically and kind of using this as a lens of sorts for how you may have looked at our business historically and then ask the question is it possible to get back to seeing these five levers that we could pull, our multi-layered growth strategy? And our belief is that the answer is yes and it’s a progressive process. It will occur over time. So if you look at this fiscal year our belief is that we are seeing improvement as we have the last couple of quarters and SRI disproportionate to system but improvement in same store sales.
And we are beginning to see some operating leverage at our own company owned drive-ins. So in this fiscal year we see the confidence in use of capital in a way that can help build earnings per share beyond what we would have had otherwise had we not used the capital in that manner. As Scott pointed out earlier in his presentation, as long as the store low profitability has been compromised as it has, it has a negative impact on development. And as we begin growing same store sales we will achieve both a return to the ascending royalty rate that we have had historically as provided in our license agreements.
And as we keep those sales growing more aggressively we will also have growth in store level profitability, which will aid development. So as we look beyond 2011 and 2012 as we see the same store sales beginning to return, the initiatives that we have described in our business having positive impact will not only get improved profitability just from the same store sales and the operating leverage at our own drive-ins. We’ll have that capital accessible to utilize for higher returns on capital for our stockholders and we’ll be getting the double benefit of our ascending royalty rate in our license agreements.
It’s our belief that as these things continue to occur and the unit profitability returns to more positive levels that we can look to the years out to 2013 and beyond and see the return of the development as a factor contributing to the growth in our brand, the growth in the system but the growth in corporate profitability and in turn, the improvement in earnings per share growth and building value for our stockholders. So we offer this lens as a way we have looked at the business historically.
In the last 12-24 months it’s been difficult to talk about it through this lens because we have not had the levers that we could pull in the way we have historically. But we believe now we are on a path to return to having each of those levels, that the progressive process will build over time. With that, we can open it up for questions and we’re happy to answer any questions that you might have.
Question and Answer Session
Operator
Yes sir. To ask a question on today’s call please signal by pressing your star or asterisk key followed by the digit 1 on your touchtone telephone. If you are using a speakerphone please make sure your mute function is disengaged to ensure our equipment receives your signal. In order to allow everyone to ask their questions we would like to ask everyone to limit themselves to one question initially and please re-queue for any follow ups. Again, that is star, 1 to signal with your question. And we’ll take our first question today from Joe Buckley with Bank of America-Merrill Lynch.
Joe Buckley - Bank of America
Thank you. Cliff, just to ask a question on your final comments before we went to Q&A about kind of getting back to the old multi-layered growth strategy, the Sonic experience the last couple of years has been a lot more serious than most of QSR through the recession. And I wonder how you view that to whether you think it’s realistic to get back to that multi-layered growth strategy just given the changes in the brand? What do you think in hindsight drove the changes in the brand so dramatically, more seriously than for most of QSR?
Cliff Hudson
Well, part of this Joe, there are a number of things historically that would have driven the same store sales so dramatically in a way to outstrip what we were seeing with our competitors. And there are a number of kind of you might say fundamentals about the business that I think it’s fair to say we hadn’t taken care of that we are now in the process of taking care of. So we drove the business disproportionate to our competitors over time because of opportunities that were in our business.
Day part expansion that many of our competitors didn’t seem to have the opportunity - I don’t know if they did or not. But we pursued it. A product mix that was more profitable than the average for the industry given the ice cream and drink mix, the national media that we pursued earlier this decade that many of our competitors were already utilizing - so we got the benefit of that in ’04, ’05, ’06 and so that’s something that kind of began tapping out about that time.
Our payment systems with the drive-in stalls, the use of the pace program, something that set us apart from our competition - so we had a whole series of things like this that we utilized that we kind of - I don’t know if I’d say maximizing but significant benefit by the time just about the time the recession came along. But to be frank I mean as you can see, these things we’re focusing on more in the last year.
And we really didn’t focus as much on how do we make sure that it’s a hugely franchise driven system, how do we make sure that our operations are on par or better than the competition? How do we ensure that as our competition was moving to improve its food quality that we’re stepping ours up and refreshing to differentiate ourselves further versus them? And so in some of these things, operating quality and food quality we got caught flat footed.
And we had done a number of things from a marketing standpoint and a payment and price standpoint that was very helpful to our business until this recession came along. We got hit hard and hit harder versus much of our competition. And so we have had to go back and kind of rebuild those fundamentals, which is what we’re doing. But when you go back to those layers so can we get same store sales moving? I think we’re showing now that we’re getting it moving the right direction.
And you’ll see in the coming quarters the manner in which that comes together with initiatives we have underway. So can we get the same store sales? We believe the answer is yes. Can we have company stores operating better? We believe the answer is yes. As those things occur are we going to have excess cash beyond what we have right now? Our view is the answer is yes. I mean that becomes somewhat mathematical.
Then when you move to the other issues it becomes how we manage our system, our relationship with franchisees, the return to profitability, where do we get new stores developed and I’m doing this from memory here - I’m forgetting the fifth element of the - here we go - the ascending royalty rate, which happens mathematically as well because as you get new same store sales you get the ascending royalty rates.
So I understand. If I were to rephrase your question the question might be will we get it on the same order of magnitude as we had in ’06, ’07? I don’t know the answer to that. The development piece we had with our ascending profitability as it was for so many years, the development piece was a serious contributor to all of that at a 5-6% growth rate. It will take us beyond two years to get back to that kind of growth rate.
So in a couple of years can we start opening more stores than we are right now? I think the answer is yes. Will we be back to a 5-6% growth rate? The answer is no. I think we’ll get the multi-layer growth strategy. It’s a question of magnitude by element.
Joe Buckley - Bank of America
Okay. And if I could just ask one of Scott as well, Scott, tell me about the northern markets and the new store volumes in the northern markets, how they’re doing in years two and three and if those sales volumes are strong enough to keep the newer franchisees growing.
Scott McLain
Yeah Joe. We continue to see good volumes in a lot of drive-ins. I think I mentioned on the last call that the store we have in the Boston area hit $4 million its first year. We opened a store in Connecticut in July and I think it’s done a couple million dollars already. But then they do fall off after that but they don’t fall off to 900,000. I mean they fall off to levels that are still significantly above the system average.
But the northeast is not unlike any other place. We still have to do a good job operationally every day taking care of customers. And when we do that and execute our brand well then we perform well any place in the country. When we don’t do that no matter where we are, it’s more challenging.
Joe Buckley - Bank of America
Fair enough. Thank you.
Operator
And we’ll take our next question from Brad Ludington with KeyBanc Capital Markets.
Brad Ludington - KeyBanc Capital Markets
Thank you. I just kind of have a housekeeping and then one about the new purchasing - on the housekeeping end on the operating income there was I think 277,000. Is that just related to the sale of the two units in the quarter?
Steve Vaughan
Yes. That’s primarily - there may be a couple of other miscellaneous items in there. But it’s primarily the sale of two units.
Brad Ludington - KeyBanc Capital Markets
Okay. Thank you. And then on the new advertising purchasing you were talking about, you were saying I think starting in the third quarter you’ll start seeing some benefits from that. Is that going to be benefits in absolute savings or spending the same amount and getting more for your money, more exposure and more buy?
Cliff Hudson
We anticipate the latter. We’ll get greater efficiencies out of the same dollars.
Brad Ludington - KeyBanc Capital Markets
Okay. Thank you.
Operator
And as a reminder, please limit yourself to one question initially. And we’ll take our next question from John Glass with Morgan Stanley.
John Glass - Morgan Stanley
Thanks. Could you talk about the franchise royalty delinquencies right now, maybe if you have a number or percentage of franchisees that are delinquent or how much that’s currently costing you? And if you could broaden it to just talking about how you’re able to monitor their financial health right now?
Steve Vaughan
Yeah John. We get monthly P&Ls from our franchisees so we have a very good understanding of where they’re at from a sales and profitability standpoint. As Scott mentioned in his commentary, it is a more challenging time right now. So we do see some slower payments from franchisees. We do go through and look at that on a monthly regular basis and make allowances if we believe that there is going to be a collectability issue.
But I can tell you that from an overall materiality when you look at $125 roughly of franchise royalties it is not a significant amount that is uncollectable.
John Glass - Morgan Stanley
Okay. And just on your capital spending of 20-25 million this year and I think last year was a reduced amount as well, are you deferring maintenance in your stores do you think at that level? Or is there going to be a catch up period when we see revival in sales you have to reinvest in the drive-ins? Maybe it’s technology, maybe it’s just basic maintenance. Or do you think you cover all the necessary maintenance out of that $20-25 million budget?
Steve Vaughan
Yeah John. I would say that there has not been a deferral of maintenance. We did wrap up at our company owned drive-ins. The retrofit program, that really was pretty heavily underway from late 2006 through 2008. And so there has been a decline in that area but we continue to reinvest in our business both from an equipment standpoint and then also from a technology standpoint.
And we actually have some pretty significant investments that are planned in that $20-25 million. So I think from an overall health of the existing units we feel very good that we’re taking care of those units in that $20-25 million budget.
John Glass - Morgan Stanley
And could I just clarify that the stabilization of the restaurant margins you’re talking about, you’re adding back the minority interest back to last year. In other words, when you think about flat restaurant margins, that’s not on a reported basis the way it looks in your P&L. But you’re making that adjustment from the year ago period.
Steve Vaughan
Yes. I’m actually making that adjustment for this year and last year. So it is an apples to apples. If you look at in our earnings release we have a table where we show pro forma what that looks like. So it is we are adding that back to last year’s and also to this year’s.
John Glass - Morgan Stanley
Got you. Okay. Thank you.
Steve Vaughan
You’re welcome.
Operator
And we’ll take our next question from Matt DiFrisco with Oppenheimer.
Matt DiFrisco - Oppenheimer
Thank you. I guess just with respect to the growth if I look at your target again, last quarter I think you clarified that your initial 40-50 franchise drive-in development was going to be a net number. Looking at the closings I’m curious was 1Q a surprise to you to see the 22 closings compounded with nine openings from the franchisees? As far as I have covered you for over a decade now, it looks like that’s the least amount of openings you’ve ever had in a quarter. So I’m just wondering are these certain locked in numbers to be opened contractually? Are the bricks and mortar being put up now as we speak? And do you feel pretty confident about that?
Cliff Hudson
Yeah. So let me just clarify first it wasn’t 40-50 net openings. We talked about opening 40-50 stores and having closings that are fairly consistent with what we have had over the past couple of years. I think as I pointed out Matt, in the first quarter roughly half of those closings related to one particular franchisee that closed a number of stores in Florida as part of a larger restructure, which actually put him in a much stronger position and in turn the brand.
So we still based on the stores that we have in the process, land is purchased. In some cases some bricks and mortar are going up. Others are further along than some that we will open. 40-50 drive-ins this year but we’ll probably have some additional closings but those closings won’t be of a magnitude that is drastically different than what we have seen over the past couple of years.
Matt DiFrisco - Oppenheimer
Over the past couple of years. Okay. So I am sorry. I stand corrected. That 40-50 was gross then I guess. Looking at your guidance when you refer to sequentially improving comparable sales throughout the year, is that sort of adding back the impact from weather or can you give us some color on how much we should expect of a bounce back? I remember you clarified that you thought it was nearly 8-9% I thought the weather impact from a year ago from the storms in fiscal 2Q. How much of that can be recouped and is that included in your guidance when you say sequential improvement in comps as the year progresses?
Cliff Hudson
That is included in our guidance. I will tell you we did have a major impact from weather last year as you have likely experienced. We have had some weather this year as well. It hasn’t been as wide spread as it was last year but certainly our stores in the eastern half of the US have had a difficult winter period. So I think over time the volatility of weather will play out. But we believe the weather impact is built into that projection, that expectation.
Matt DiFrisco - Oppenheimer
Okay. Thank you.
Cliff Hudson
You’re welcome.
Operator
And we’ll go next to Steve West with Stifel Nicolaus.
Matt Van Vliet - Stifel Nicolaus
Yes. I’m Matt Van Vliet on for Steve. As a first question on the advertising that you have been doing lately, has there been any impact in the interim while you’re finding a new agency? And I guess if so, could you just clarify what that entails and maybe what impact you’ve seen from it?
Cliff Hudson
Well, the process of moving from the agency we’ve had in place for a long time to a new group has to be handled delicately. We have worked diligently I think to ensure that the creative that needs to be produced for a timeline which in this case is through March, the creative is consistent with our strategies, the media is placed consistent with our expectation, our strategies. The point of purchase materials are out at store level.
I mean you do run the risk as you make that kind of transition. We have been doing business with Barclay I think for 17 years. We’ll keep doing business with them in certain select areas but it’s not going to be media purchasing and it’s not going to be creative. So I don’t have feedback for you to say here is a concrete area of impact. With a maybe the possible exception is we have gone out and on the positive side as we’ve gone out and done this, we’ve gotten confident that we’ll see some efficiencies from a purchasing side with the transition just because of the scale of business of the folks that we’re bringing in to handle that aspect of our business.
Scott McLain
The other clarifying point I would make is that to date our commercials are not being produced by the new agency. We’re not buying media through the new agency. We have not seen - we haven’t actually made that transition at this point. That will occur over the next…
Cliff Hudson
Well, it’ll be the third - it’ll be April, May June. It’ll be the spring before purchasing or creative is impacted by them.
Matt Van Vliet - Stifel Nicolaus
Okay. And then on the ground beef side of your food costs, have you locked in any more? I know you said you’re mostly on short term here. But as we saw the prices come down a little bit for a brief period, does that give you a window to try to lock in any additional contracts? Or I guess maybe what your thought is from here - maybe from the standpoint of not locking it in if there was in fact an opportunity there?
Steve Vaughan
Yes. We are locked in through the end of January on our ground beef. We continue to look at the market and look for opportunities to lock in further but at this point in time we don’t see really based on the prices that have been offered a reason to do that. So we’ll continue to look for opportunities to lock that in but it has to make sense economically.
Matt Van Vliet - Stifel Nicolaus
All right. Thank you.
Operator
We’ll take our next question from Larry Miller with RBC Capital.
Larry Miller - RBC Capital
Hey guys. I want to get back to that chart you were showing where you margins as you defined them were at 20% in fiscal ’07. And I think you said hey, you can’t get back to that level. You might get back to the 16 or so, 15 or 16 or 17 level. Can you talk about is there something structural or why is it that you can’t get back to that level, especially with the higher percentage of franchising that you have in the business? Presumably in franchise you sold some of the stores that are more challenging and a little less profitable.
Steve Vaughan
Yeah. One thing to be clear on Larry is that was the restaurant operating margins. So it wasn’t our overall corporate operating margins.
Larry Miller - RBC Capital
Right.
Steve Vaughan
So I just want to make that clear. But the couple of changes that have taken place since 2007 that we see kind of having a permanent impact on our margins are the federal minimum wage hikes that have occurred that have driven up our wage rates kind of disproportionately to the pricing we have been able to take. And then we have also made some pretty significant investments in product quality that we have not passed those costs through in most cases.
We have in a couple of cases but so we do believe that we have had potentially a longer term shift in our food and packaging costs as a percentage of sales. And so if you look at the impact between those two items, we don’t believe that even if we got back to those 2007 sales levels we’d be at the same margins as we were at in 2007. But we believe we can be somewhere in that 16-17% range.
Larry Miller - RBC Capital
Hey Steven, just is there another way to think about that? What level volumes would you need to be to be back at 20% then? Have you kind of worked through the math on that?
Steve Vaughan
No, we haven’t really. It’s I think that with the food and packaging costs you don’t really get leverage out of that area of the business. And we have probably added between 150 and 200 basis points versus where we were at in 2007 to that actual line item. So I think you would have to be above the $1 million, Larry. I’m not sure how far above it we’d need to be.
Larry Miller - RBC Capital
Okay. That’s helpful. Thank you.
Operator
And we’ll take our next question from Rachel Rothman with Susquehanna.
Jake Bartlett - Susquehanna
Hello. This is Jake Bartlett in for Rachel. I just had a question just clarifying the earlier comment on the sequential improvement in same store sales. Are you saying that 2Q same store sales will be lower than the 3Q same store sales? Is that just a literal interpretation of sequential?
Scott McLain
You know, I think that’s probably overly specific at this point in time, Jake. We just believe that based on the initiatives we have in place that Cliff outlined that we will see our sales trend improve throughout the year. But I wouldn’t get too literal about interpreting that.
Jake Bartlett - Susquehanna
Okay. So the 8% weather impact, that’s going to be offset by maybe weather impact that you’re kind of seeing so far? Or is that how we should think about it?
Scott McLain
No. I don’t think so. I think we will most likely see a benefit from weather in the second quarter. But again, we’ve got some initiatives that are both media related, creative related and some of our operating and product initiatives.
Cliff Hudson
Operating and product initiatives, each of which when they come together will play well as we move into the spring and the summer. So these should have positive impact and certainly versus same quarters prior year.
Jake Bartlett - Susquehanna
Got it. Great. And I had a question on your franchise. Of the 40-50 stores that are opening in 2011 and maybe for the pipeline ahead what you’re signing up now, how many of those are utilizing the incentives?
Scott McLain
I don’t have that number off the top of my head. There are some that are using the incentives but there are a fair amount that aren’t. So we still have a lot of development that’s going on even in our core markets today. So we’re still opening up drive-ins in places like Dallas. So we’ll have a handful that will have the incentives.
Cliff Hudson
And the reason you’re saying that about Dallas is because Dallas does not have that incentive.
Scott McLain
That’s right.
Jake Bartlett - Susquehanna
Okay. Thank you very much.
Scott McLain
Yeah.
Operator
We’ll take our next question from Sharon Zackfia with William Blair.
Sharon Zackfia - William Blair
Hi. Good afternoon. Actually most of my questions have been answered but just a quick one I guess. On the composition of comps in the quarter, I’m not sure that I heard you break out between average ticket and traffic. And then going forward as you’re talking about the sequential improvement in sales the rest of the year, I’m presuming you expect that to be primarily traffic driven but if you could just clarify that.
Steve Vaughan
Yes. I believe Sharon the first quarter comps were primarily traffic. So check was down but just slightly. And what was the second part?
Scott McLain
Going forward it’s mostly from traffic.
Steve Vaughan
Yes. We would expect traffic to be the primary variable.
Sharon Zackfia - William Blair
Okay. And then I remember I think it was two years ago you kind of revamped the pricing on the menu. So do you feel relative to your peers that the pricing on the menu is holding up well at this point? Or do you think there is more optimization that needs to be done there?
Steve Vaughan
We do think that on just kind of a product for product basis that our pricing is very comparable competitive with our peers. We do still see some opportunities as we look at our menu. And in fact one of the new partners that we brought on board with our online [ph], looking at the menus and online kind of point of purchase materials is helping us work through that. But in particular different items at different price points to make sure that we offer a full range of products for what a consumer is looking for. So there is probably still some opportunity there. But in terms of just the pricing of the items that are on our current menu, we feel pretty good about it.
Sharon Zackfia - William Blair
Okay. Thank you.
Steve Vaughan
You’re welcome.
Operator
And we’ll take our next question from Keith Siegner with Credit Suisse.
Keith Siegner - Credit Suisse
Thank you. My question is in relation to SG&A. We talked about the unit growth outlook before and with the closures this year that we saw in first quarter and maybe a kind of traditional run rate going forward for closures, you’re at very little net unit growth if any possibly this year. Next year the development doesn’t quite pick up yet. It’s really more of 2013. In an environment where we have little unit growth but we do have a return to comps, is that going to be sufficient to leverage SG&A? How should we think about that over say the next two years before the unit growth comes back? Can we leverage SG&A and if we can, how much?
Steve Vaughan
I think we can. Really the two leverage points will be returning to positive same store sales, which we should be able to get nice leverage from that and then the operating leverage on our partner drive-in or company owned drive-ins. Historically we were able to see nice leverage when we would get positive same store sales out of company owned drive-ins. And so I think between the combination of those two we should be able to see our operating income margin expand over the next couple of years even without this development growth engine.
Keith Siegner - Credit Suisse
Okay. Thank you.
Steve Vaughan
You’re welcome.
Operator
And we’ll take our next question from Peter Saleh with Telsey Advisory Group.
Peter Saleh - Telsey Advisory Group
Great. Thanks. Just wonder if we can go back to the incentives to franchisees. If you guys could just remind us again what are the incentives to franchisees and how long you guys expect to have those ongoing?
Scott McLain
Well, we offer an incentive depending on the type of market that either provides them some period of time where they don’t have to pay royalties or that the royalties are paid and then sent back to them and used for advertising to their local advertising cooperative. So this is a program which we had in place last year and we have in place this year. But we really haven’t talked about what we’ll do kind of going forward.
Peter Saleh - Telsey Advisory Group
Has anything changed in this program from last year to this year?
Scott McLain
Yeah. I think what we’re doing this year is being a little more targeted towards markets that are perhaps closer to achieving a certain level of median which would allow them to get significant benefit. So those are markets where we’re going and saying if you can open a store then we’ll take the royalties from that store and put it back into your advertising cooperative and that will benefit not only that store but the entire market.
Peter Saleh - Telsey Advisory Group
Great. And then just a last question on the beef inflation - how much beef up in the quarter?
Steve Vaughan
It was in the mid single digits. It was not a huge amount but we will in the third quarter is really when we saw a significant spike last year, our third fiscal quarter. So we would expect to see kind of a comparable absent some aberration in these (thoughts) we would expect to see kind of a comparable year over year increase and maybe even flattening out in the third quarter.
Peter Saleh - Telsey Advisory Group
Great. Thank you.
Steve Vaughan
You’re welcome.
Operator
And we’ll take our next question from Nicole Miller with Piper Jaffray.
Nicole Miller Regan - Piper Jaffray
Good afternoon.
Steve Vaughan
Hi Nicole.
Nicole Miller Regan - Piper Jaffray
A comp question - the two-year trend has been holding pretty steady at a negative 13-15% and albeit a shocking number it is improving as you have said. So my question is even holding that steady in the second quarter would get you towards like flat to even positive territory. Is there any reason you would caution us against that?
Cliff Hudson
Why don’t you repeat that for us if you would to make sure we understand your question?
Nicole Miller Regan - Piper Jaffray
Sure. If I just take the comp on a two-year basis and add it together so this what you were down, the 3% or so this quarter and this same time last quarter gets it down 12 and over the past four quarters it’s been in that kind of down 12-15% range. So when I look at the second quarter that you’re in right now, last year you were down 15 on the company side, down 13 for the system.
So if you were to hold that trend steady because it was a whole lot of weather issues in that quarter you really should in the second quarter track pretty close to flat then this year. Is there any reason you would caution us against that two-year trend not staying steady or improving, getting you to flat territory?
Cliff Hudson
No. I think one thing I would point out is in the first quarter our two-year trend is actually down about 9% for the system. So it improved versus the third and fourth fiscal quarters of last year. So I don’t think there is any reason that we would expect to see the second quarter deteriorate from that.
Scott McLain
I mean the second quarter, we do have easier comps. But as you know Nicole, it’s always very volatile every year.
Nicole Miller Regan - Piper Jaffray
Okay. And I know the weather last year wasn’t in December. I think it was in January and February.
Scott McLain
Yes. It was January and February. You’re right.
Nicole Miller Regan - Piper Jaffray
Okay. And to that point I guess the value message from your competitors was very strong in the month of December. Can you tell us how you fared? One thing I did notice particularly was Subway as an example doing a 1.99 six-inch foot-long on two of their sandwiches through the end of the year. And I often saw it in a few markets that I was in back to back either before or after your 3.99 hotdog Coney dog message. So how was the competition and how did you fare in December because of that?
Scott McLain
Well, our December same store sales performance, the improved trending that we saw coming fourth quarter last fiscal year into first quarter this year, the improved trending continued in December. So we were pleased with that improved trending.
So to the extent that I’m sure anybody on the line would hope that we would give you specific numbers about December negative versus positive and how much of either, we’re not going to give that.
Nicole Miller Regan - Piper Jaffray
That was actually very helpful though just trend wise so thank you.
Scott McLain
Yeah. It’s a positive trend has continued. The trends fourth to first and the positive nature have continued into this quarter.
Nicole Miller Regan - Piper Jaffray
Thank you.
Operator
And we’ll take our next question from Chris O’Cull with SunTrust Bank.
Chris O’Cull - SunTrust Bank
Thanks. Good afternoon. I just had a follow up on the pricing question earlier. Cliff, it looks like the company stores took less pricing than what was originally targeted. I think you guys had on the last call 1% and it was more like a half a percent. Was that decision based on some menu testing or was the commodity inflation or inflation overall less than you had expected? Or what was the reason for less pricing?
Cliff Hudson
Really what happened was we actually had one of our products that we determined we had promoted at a limited time price and decided to keep that pricing permanent at our company owned drive-ins, which was our foot-long quarter pound chili cheese Coney. So we by virtue of rolling back the price on that item it ended up being relatively flat. So there was a little bit of a shift from what we had originally anticipated based on analyzing the data and some testing that we had done.
Chris O’Cull - SunTrust Bank
Okay. Fair. And Steve, how onerous would it be for the company to refinance its securitized debt today? Is there a fairly significant MACO premium right now?
Steve Vaughan
There would be a fairly significant MACO premium. The markets are very solid as you have seen from some of the other refinancings that have taken place. So it certainly would be very doable should we choose or chose to do that. But I would say that the MACO premium is significant and would definitely be somewhat of a deterrent.
Chris O’Cull - SunTrust Bank
What’s the cash rate today on the notes and what’s the gap rate if you would on the notes?
Steve Vaughan
Let’s see. The cash rate on our fixed rate notes is 6.2% and on our variable funding notes is about 1.9%. So you can kind of take those two and weight it out to our weighted I think it’s just under 5%.
Chris O’Cull - SunTrust Bank
Does that include the amortizing and deferred financing fees?
Steve Vaughan
No it does not.
Chris O’Cull - SunTrust Bank
Okay.
Steve Vaughan
So that would probably increase that another 50 basis points or so - 40 or 50.
Chris O’Cull - SunTrust Bank
Okay. Great. Thanks.
Steve Vaughan
You’re welcome.
Operator
And we’ll take our next question from Robert Derrington with Morgan Keegan.
Robert Derrington - Morgan Keegan
Yes thank you. My questions have been answered.
Steve Vaughan
All right. Thank you.
Cliff Hudson
Thank you Robert.
Operator
And we’ll go next to Paul Westra with Cowen & Company.
Paul Westra - Cowen & Company
Hi guys. I’m just one more quick question if you wouldn’t mind. Would you clarify a little bit on your expectation of the payroll on employee, the one with the non-controlling interest? Do you expect further deleverage here in the second quarter? And then you talked about the third and fourth quarter, getting some leverage on that line item to offset the first half of the fiscal year. Is that leverage called normal?
You’re obviously expecting leverage here in the second half given I know you had mentioned a slightly improving sales environment. But it seems pretty - I mean are you lapping any one-time items in last year’s second half that I don’t recall? Or is that just the fact that in an improving environment you’re going to see some leverage on that line?
Steve Vaughan
Well, I think a couple of things. One, we did essentially change that compensation program. We have a greater fixed component versus before our partners would basically share the profits. There is still that component to their compensation but it’s not as great a percentage. And so as we see improvement in profits we will retain more of those improvements. So I guess that’s one item to take into consideration.
The second is Omar Janjua has been with the company now for about 15 or 16 months and we are seeing the programs that he implemented really taking effect and I think seeing very good controls over our labor costs. And so our confidence level has increased that as we see our sales trend improve we will continue to see some improvement in our labor costs going forward.
Paul Westra - Cowen & Company
So in the sales environment you see past April where you start lapping implementation of the program that you’re going to start to leverage because of the controls you have in place and the improved sales environment?
Steve Vaughan
Yes, that’s right Paul.
Paul Westra - Cowen & Company
Great. Thanks.
Steve Vaughan
Thank you.
Operator
And we’ll go next to Greg Ruedy with Stephens, Inc..
Greg Ruedy - Stephens, Inc.
Thanks. I believe your corn syrup contract was expiring in January. Do you have an update there? Do you have something new in place and what sort of rate of inflation are we looking at if so?
Steve Vaughan
Yes. We’re under a long-term contract with our cola suppliers and so we did have I think a low single digit increase in that. So that will go into effect January 1st.
Greg Ruedy - Stephens, Inc.
Okay. And the follow on there, Cliff, you mentioned some things that really helped drive your business a few years back, the (paper stall), new day parts. But how much impact do you think you’ve had over the last few years of competitors coming after your drink business? And given your comments there, what is your opportunity to recapture some share on mainly the drinks, not so much the desserts? Thank you.
Cliff Hudson
I think the opportunity for us to build our businesses across multiple day parts, your point about us building historically with drinks, ice cream and the growth in the afternoon and the evening business, that was a big part of our growth over a sustained period of time and not just the last few years, the late ‘90s well into this decade.
And with the nature of the cost of those products, great contributor to average store profit. So we do have competitors going after those. We do see the day parts where those are a bigger part of our business continuing to grow. So it’s not as though as an example afternoon, happy hour - it’s not as though those have turned negative for us because they haven’t. So that’s one answer to your question.
But we also with our improved hamburgers, hot dogs, line extensions you’ll be seeing in coming months, our belief is that we have the opportunity to grow lunch and dinner as well and we’ll be focusing on that. So moderator, is that the end of the line there?
Operator
That’s all the questions we have for today. I’d like to turn the call back to you Mr. Hudson for closing remarks.
Cliff Hudson
Well, we appreciate your engagement today. We appreciate your lively and sustained questions and your interest in the company. And as we move forward we’ll look forward to continuing to share information about the performance of the company and appreciate your engagement. So happy holidays, happy new year and our Steve and Claudia will talk to you along the way but we’ll look forward to visiting with you either on the road or next quarter. Take care.
Operator
And that does conclude today’s conference. Thank you for your participation.
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