Burger King F3Q07 (Qtr End 3/31/07) Earnings Call Transcript

Apr.27.07 | About: Burger King (BKC)
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Burger King Holdings Inc. (BKC)

F3Q07 Earnings Call

April 27, 2007 10:00 am ET

Executives

John Chidsey - CEO

Ben Wells - CFO & Treasurer

Russ Klein - President, Global Marketing, Strategy and Innovation

Amy Wagner - IR

Analysts

Joe Buckley - Bear Stearns

Steve Kron - Goldman Sachs

Glen Petraglia - Citigroup

John Ivankoe - JPMorgan

Jeffrey Bernstein - Lehman Brothers

Mark Wiltamuth - Morgan Stanley

Jeff Omohundro - Wachovia Securities

Presentation

Operator

Welcome to the Burger King Holdings third quarter fiscal year 2007 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Ms. Amy Wagner, Senior Vice President of Investor Relations. Please proceed, ma'am.

Amy Wagner

Thank you and good morning, everyone. Welcome to Burger King's fiscal year 2007 third quarter earnings call. We have prepared an earnings call PowerPoint presentation to assist in presenting our third quarter results. These slides, as well as the audio broadcast of this call, may be accessed through our Investor Relations page on our website at www.bk.com. Both the audio portion and the slide show will be archived on our website, where it will be available for playback and for future reference.

Presenting on the call today are John Chidsey, Chief Executive Officer and Ben Wells, Chief Financial Officer and Treasurer. Also with us on the call is Russ Klein, President of Global Marketing, Strategy and Innovation who will be available to answer any questions you may have regarding our marketing, advertising and products during the Q&A portion of the call. We will spend about 20 minutes today discussing our third quarter results before opening the call up for questions.

Before we begin today, I would like to remind everyone that this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's current expectations based on currently available data. However, actual results may be impacted by future events and uncertainties, and could differ materially from what is discussed today. More detailed information about these uncertainties is contained within the Safe Harbor statement included in this morning's earnings release.

This presentation also includes non-GAAP financial measures as defined by Regulation G. The reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures and other information required by Reg G are included in the appendix of this presentation.

With that, I'll now turn the call over to John.

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John Chidsey

Thanks, Amy and good morning, everyone. During the call today, we will recap our strong third quarter fiscal '07 results and provide you with a brief outlook for our full year. We will then open the call up for questions.

I'm pleased with our company's third quarter performance, as we improved in all key metrics and in every geographic segment. The momentum experienced during the first half of the year continued into the third quarter, and we again posted robust quarter-over-quarter results. Page 3 of the presentation outlines several of this quarter's highlights.

Revenue increased across all segments, driven by solid comps and acceleration of new restaurant openings and strong growth in average restaurant sales. Revenue for the quarter of $539 million was up 9% over the prior year's third quarter of $495 million. We recorded our 13th straight quarter of positive worldwide comps, and again we saw positive comps in every reporting business segment, including the EMEA/APAC segment.

This region's strong comps were led by the UK, the result of our strategic initiatives implemented over the last few quarters. In the U.S. and Canada, comps for the quarter were 2.6% and marked 12th straight quarter of positive comps. Comps benefited from our featured premium burger offerings and their related advertising campaigns, including the Texas Double Whopper sandwich, the BK Stacker and the Angus Cheesy Bacon sandwich. Comps also picked up pace in the back half of the quarter as we launched our BK Breakfast Value Menu, the first to market nationally in the QSR sector and we continue to see the right mix of guest count and check.

International expansion continues to drive our net unit growth. Our system wide restaurant count increased by 92 as compared to the same period last year and interest in the brand and our new restaurant pipeline continues to build worldwide, driven by attractive cash on cash returns. Earlier this quarter, we announced plans to open restaurants in Poland and Egypt, our first entries into Eastern Europe and into Africa. We also announced plans to increase our restaurant count in Hong Kong. Our new restaurant openings for fiscal '07 continue to be on track, and we believe we will even exceed our original plan of 430. Fiscal year-to-date, we have opened over 300 new restaurants worldwide and we are forecasting at least another 170 restaurants to open before the end of our fiscal year.

The system wide average restaurant sales of $284,000 for the quarter is a 6% increase over prior year and our trailing 12 month ARS of $1.17 million is the new record high for the system. In fact, we continue to progressively improve our ARS, and in the U.S. we have increased it by over $200,000 in just three years. We believe that with our continued focus on our strategic initiatives, our $1.3 million U.S. system wide goal is clearly achievable.

Strong top line revenue growth, better company restaurant margins, and improved operating income in every business segment drove this quarter's substantially improved bottom line profitability. EBITDA was $84 million this quarter, an 18% increase over $71 million in adjusted EBITDA in the same quarter last year. Aided by a decreasing tax rate and interest cost, net income of $34 million was a 70% improvement over the prior year's adjusted net income of $20 million. Earnings per share were also up 67% to $0.25 as compared to an adjusted earnings per share of $0.15 last year.

Our stronger free cash flow enabled us to pay down an additional $25 million in debt this quarter, and to declare and pay our first quarterly dividend as a public company of $0.0625 per share. Additionally, the private equity funds controlled by our sponsors executed a secondary offering, selling 22 million shares at $22 per share in February. Collectively, these funds now own approximately 58% of the shares outstanding.

I am very pleased with this quarter's performance and the momentum we are seeing in the fourth quarter. The team continues to stay focused on our go-forward plan, executing on our initiatives and delivering the expected quarterly results.

On page 5 of the presentation, we have presented key system wide quarterly financial highlights and I want to take some time to discuss these results. Total revenue was up a solid 9% for the quarter, up 10% in company restaurant revenues and 9% in franchise revenues. Premium product offerings and an increase in net new restaurants fueled revenue growth this quarter and the ongoing success of the PM Value Menu and the introduction of the Breakfast Value Menu continued to drive guest count.

Company restaurant margins increased for the fourth consecutive quarter up 110 basis points to 14% from 12.9% in the same period last year, driven by lower food costs, the sale of premium products which generate higher margins, and higher revenues at company-owned restaurants.

Our third quarter EBITDA was up 18% as compared to the prior year's adjusted EBITDA. The quarter over quarter improvement accelerated as expected, due to net new restaurants positively impacting profitability and sequential improvement in company-owned restaurant margins. However, EBITDA was affected by several unusual events this quarter. We incurred approximately $1 million in costs associated with our sponsored secondary offering, an additional $2 million primarily related to franchisee financial distress in the UK, and $1 million in cost associated with closing a number of UK restaurants. Even with this additional $4 million in costs, we were still able to grow EBITDA at twice the rate of overall revenue, clearly demonstrating the inherent leverage within BK's fixed cost structure.

This is a good time to update everyone on the progress we have made within the UK. The introduction of new premium burger products such as the Aberdeen Angus Burger and the Three Pepper Angus have greatly increased comps. Targeted marketing, fresh high quality new premium burgers and improving restaurant operations have contributed to the four months of solid comp performance. We continue to see positive guest count and sales carry into our fourth quarter. The team is focused on the task at hand, and I am confident that we have the right people executing the right strategy to turn that market around.

Our net income and earnings per share were greatly improved quarter over quarter, again driven by significant improvements in income from operations and from a very favorable tax rate of 24.4%. Ben will provide more details on the tax rate later in the presentation.

On page 6 of the presentation, we have depicted our year-to-date results, and I want to briefly point out some highlights. First, our worldwide system comps have improved by 1.1 points, our ARS has increased by 5% year-over-year, and our blended royalty rate continues to accrete as our U.S. franchisees renew their contracts and are migrated to the higher 4.5% royalty rate. Company restaurant margins have improved by 80 basis points, as we continue to enjoy decreases in food cost, which is more than offsetting increases in labor, rent, and utility cost.

On a year-to-date basis, adjusted EBITDA is up 8%. As we've pointed out previously, we realized the expected incremental EBITDA expansion this quarter by growing top line revenue, opening new restaurants and improving our company restaurant margins. Our year-over-year profitability improvements is expected to again accelerate during the fourth quarter, enabling us to deliver on the 10% to 12% adjusted EBITDA and the 20% plus adjusted net income full year growth targets we set out at the beginning of our fiscal year.

Our tax rate is down over 25 points, primarily as the by-product of our European and Asian operational realignment effected at the beginning of our fiscal year. Both net income and EPS are up significantly, 24% year-over-year.

On page 7 is our third quarter financial highlights depicted by reporting segment. Both revenue and income from operations improved across all segments, up 9% in revenue and 24% in adjusted income from operations. U.S. and Canada revenues grew 2% and adjusted operating income grew by 20%, both positively impacted by comp sales of 2.6% versus the prior year of 4.9%.

As I mentioned during last quarter's call, we were going up against tough comp sales quarter over quarter. We rolled out the very successful BK PM Value Menu last February, which had and continues to have a strong impact on comps. So as expected, our current quarter comps came squarely within our 2% to 3% guided range.

This quarter's positive comps were primarily driven by the premium sandwiches I mentioned earlier, and from the introduction of the Breakfast Value Menu, which began national advertising on March 5th. . Initial results indicate that the Breakfast Value Menu will be an incremental traffic driver and it will certainly play a more substantial role in driving comps in the fourth quarter and subsequent quarters.

Company restaurant margins were up 300 basis points to 15.6% from 12.6%, reflecting sales of higher margin products, reduction in overall food costs, primarily in beef and tomatoes, reduction in utility costs, and the fixed cost margin leverage inherent in the company restaurant P&L, simply attained from increased revenues.

EMEA/APAC revenue and operating income grew by 26% and 11% respectively, primarily driven by 109 net new restaurant openings in the region, robust comp sales of 5.3% versus a negative 0.4% in the prior year, and our net acquisition of 33 restaurants from financially distressed franchisees in the UK. Strong revenue and comp performance reflects continued strength across many markets and vast improvements in the UK's third quarter performance, as mentioned earlier. Promotion and products surrounding indulgent burgers and chicken sandwiches fueled comps throughout the segment.

Despite increased company restaurant revenues, company restaurant margins decreased 180 basis points to 9.7% from 11.5% primarily due to costs related to the closure of UK restaurants and increased utility costs across all major markets within EMEA. These cost increases were partially offset by sales of higher margin products and a slight reduction in food cost.

Latin America revenues grew 9% and operating income was up 14%, driven by 89 net new restaurant openings in the region, and comps of 2.7% versus 1.5% in the prior year. During the quarter, performance was led by Mexico's Texas Double Whopper Limited Time Offer and the Big Fish Sandwich promotion, in conjunction with the Easter season. Indulgent burger products promoted throughout the rest of the region also drove comps. Company restaurant margins decreased 370 basis points or by $400,000 primarily reflecting increases in utility costs and property taxes.

Page 8 illustrates our year-to-date financial highlights reported on a segment basis. Solid revenue growth in all segments, consistently strong income from operations results in both the U.S. and Canada and Latin American segments, and an improving EMEA/APAC segment, have yielded greatly improved year-over-year profitability.

On page 9 is our company score card, keeping track of the progress we have made on our multi-faceted growth opportunities. As you can see, our third quarter fiscal '07 results outperformed prior year's results. We continue to make incremental progress in all critical areas that ultimately drive profitability.

I'll now take a few minutes to discuss each one of these metrics. On page 10, we depict our comp sales for both system wide and U.S. quarterly results. Our U.S. and Canada segment comps were 2.6%, as we discussed earlier, and the U.S. standalone comp was 2.7%. We continue to experience the best level of comp performance in over a decade in both the U.S. and on a worldwide basis.

I'm very optimistic about our fourth quarter comps. We anticipate an increase in comp sales when our new U.S. late night hours initiative goes into effect on May 10. U.S. restaurants will be required to remain open until midnight or later, seven days a week. This change affects approximately 42% of U.S. Burger King restaurants. Our fourth quarter results will also include a full quarter benefit from the BK Breakfast Value Menu and expected positive lift from our promotional tie-ins with SpongeBob, Spider-Man 3, and NASCAR BK Racing.

Turning to page 11, the entire team has been focused on our development plans in existing countries and expanding our reach through development agreements with franchisees in economically attractive regions. Fiscal year-to-date, we have opened more than 300 new restaurants and we expect to open an additional 170 to 190 restaurants within the fourth quarter, bringing the total number of new restaurants opened in the 470 to 490 range. We are confident in these projections. Most of the scheduled fourth quarter new restaurant openings are under construction and are expected to open before June 30th.

I'm very pleased with the progress our development team has made in this area. In fact, they will exceed their original fiscal '07 goal of 430 by approximately 50 new restaurant openings. During this fiscal year, we will open 35% to 40% more new restaurants than we did in '06, and over 50% more than the number of new restaurants we opened in each of the two previous fiscal years. We will however, close more restaurants than we anticipated at the beginning of the year. These unplanned closures primarily stem from the UK financial distress and from the refranchising in the Philippines, accounting for 69 of the total closed restaurants. Closing these restaurants was financially the right thing to do, and in the best long-term interest of the brand.

On a net basis, we will grow our restaurant count worldwide by 200 to 220, eight times more than fiscal '06 net restaurant openings of 25, and greatly improved over fiscal years '05 and '04, where we had net restaurant closures in excess of 100.

The fiscal '08 development pipeline is shaping up nicely, with new development agreements signed in Japan, Indonesia, Egypt, Hong Kong and Poland. New restaurants are also planned to open in existing countries throughout the U.S., Latin America, Europe, the Middle East and Asia. During our fourth quarter call, we will specifically address our '08 development targets.

Existing franchisees are building restaurants again, and we have signed many more new franchisees with developing agreements. After three years of black on black comps, ARS closing in on the $1.3 million interim goal, and improved restaurant level economics, franchisees are reinvesting in the system and opening new restaurants.

At this point, I would like to turn the call over to Ben, who will update us on the rest of our metrics.

Ben Wells

Thanks, John and good morning, everyone. As John mentioned earlier, we continue to grow our ARS. Our third quarter system wide ARS was up 6% to $284,000. Our trailing 12 month ARS was $1.17 million, a new record high. As page 12 indicates, both U.S. company ARS and restaurant margins continue to improve. Company restaurant ARS of $1.24 million is rapidly approaching our system wide goal of $1.3 million. Corresponding restaurant margins of 16% is also up 130 basis points from 14.7% at the end of fiscal year '06.

Our consistent revenue growth has enabled us to leverage our restaurants fixed cost structure, and the decline in food costs has also added to margin expansion at the restaurant level.

On a U.S. system basis, which includes both our company-owned and franchised restaurants, we now have 2,177 restaurants open for at least 12 months, or approximately 31% of the total at or above our $1.3 million ARS interim goal. The last 5 freestanding restaurants that opened in the U.S. and that have operated for at least 12 months have an ARS of $1.52 million, a 30% increase over the current U.S. system ARS.

Positive comp sales and the opening of new restaurants with a higher than average sales volume have enabled system wide ARS to increase by $207,000 in just three years. We believe our innovative marketing, great new products and focus on operational excellence have enabled us to grow ARS substantially during the past three years, and will drive future ARS even higher.

Turning to page 13, as forecasted, we realized quarter-over-quarter increases in our system wide blended royalty rate, as U.S. franchisees renewed their franchise agreements at the higher 4.5% royalty rate. As new U.S. franchisees came into the system at the 4.5% level, as of the third quarter fiscal '07, our blended system wide royalty rate was 3.77%. Over 20% of our U.S. franchisees were above a 4% royalty rate.

This quarter's effective tax rate of 24.4% was positively impacted by one-time adjustments and tax accruals due to the acceleration of the benefits derived from the operational realignment of the European and Asian businesses. The lower than anticipated tax rate contributed about $0.035 to this quarter's earnings per share. Our fourth and subsequent quarters’ effective tax rate will continue to reflect the accelerated benefit derived from our international subsidiary realignment. Our fourth quarter effective tax rate is therefore expected to be approximately 36%.

Turning to page 14, cash flow from operations remains strong, and we used $25 million of it to retire additional debt. On a year-to-date basis, we have retired $125 million in debt, and are now at historically low levels of debt. We have also triggered our last positive debt covenant, reducing our effective tax rate by 25 basis points on our term loan A. Our effective interest rate on our term debt now stands at 6.7%.

During the quarter, we also declared and paid our first ever quarterly cash dividend as a public Company of $0.0625 per share.

Our balance sheet is in great shape and we are well positioned to add flexibility to our capital structure, supporting our growth plans and increasing shareholder value. We are exploring opportunities to strengthen our restaurant portfolio, such as buying restaurants from franchisees who want to exit. We would then, in a short period of time, sell these restaurants to operators who are eager and motivated to grow the brand.

We could also use our balance sheet capacity to seed market development in cities in which we have minimal to no presence, both domestically and internationally. And of course, we would consider share repurchases if and when appropriate.

Before I turn the call back over to John, I want to mention that we have once again included additional company data and reconciliations in the appendix of this presentation.

John Chidsey

Thanks, Ben. We are pleased with our third quarter and year-to-date performance on all levels. Restaurant count is growing, comps are at their best level of consecutive black-on-black performance in well over a decade, system wide ARS is at an all time high, company restaurant margins have increased for four consecutive quarters, our operational excellence scores continue to climb, we have a healthy pipeline of exciting new products, and our advertising and promotional tie-ins continue to resonate with our guests worldwide.

Together, by focusing on key initiatives, we have and will continue to deliver on our development and financial targets. We believe we will meet or exceed all of our annual year-over-year financial growth targets we set out in the beginning of our fiscal year: revenue of 6% to 7%, adjusted EBITDA of 10% to 12%, and adjusted net income of 20% plus for this fiscal year.

I would like to thank everyone on the call for their time and their continued interest. Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Buckley - Bear Stearns.

Joe Buckley - Bear Stearns

First, just a clarification on the tax rate. Ben, did you say the fourth quarter effective tax rate would be 36%? Because I think the presentation said the full year. I just wanted to be sure I understood that.

Ben Wells

The fourth quarter will be 36%. We actually did a true-up in this quarter to bring ourselves to that new tax rate of 36%.

Joe Buckley - Bear Stearns

Okay, very good. A question on food costs. You gave us those numbers. They played a big factor in the quarter. How long are you locked in? What's your outlook for food costs for the fourth quarter and maybe into fiscal '08?

John Chidsey

On the food costs, as you know, the only thing we lock in, which we have talked about in the previous quarters, is the chicken contract. The chicken contract, as I recall, has about three more quarters to go, I want to say, because we lock it in for about a year-and-a-half, and I think we're about halfway through that. So that's really the only hedge or protection we have, I guess you would say. Our outlook for '08 I think would be relatively flat to slightly down. Certainly, not an upward bias, at least what we see when we look into our crystal ball.

Operator

Your next question comes from Steve Kron - Goldman Sachs.

Steve Kron - Goldman Sachs

John, just this new U.S. late night initiative, it seems as though you guys are taking a little bit more aggressive approach with franchisees to mandate open past 12. Can you just talk a little bit about this and how this came about? I recall in the past that you guys weren't as forceful with this effort.

John Chidsey

I think it's a couple things. One, we have our company restaurants on that, and we have looked at the business case we have built there and as you know, we have done incentives in the past. 60% of our system is already there, and so we've slowly been increasing the number of franchisees that are there. I think for us to get where we really need to get to so we can run national advertising around late night, open until midnight or later, we have got to have the whole system there. So to continue to build that particular day part, it's sort of the chicken and the egg. You've got to have them there so you can advertise, and that's what's really going to build the system.

I think we felt comfortable with the large percentage of the system that was already there, and it was the right time to just go ahead and make the move for the rest of the system.

Steve Kron - Goldman Sachs

Is this somewhat reflective of in the past we have heard you talk about some within the franchise base having been in the system for awhile and perhaps a little bit complacent, that at this point they're starting to make more money than they have made in a long time. Is it reflective of your view that perhaps they're a little bit too complacent and maybe impeding your ability to kind of break out, if you will, as far as reinvestment in the stores, extended hours, or unit growth, or what have you?

John Chidsey

I don't think it's so much that. I think it is a couple things. I think with 60% of the system there, and the business case proving itself out, and really where the competition is going. I mean, when you look at the success McDonald's has had in terms of the number of operators that are certainly open till 2 a.m. and the high percentage of restaurants that are open 24 hours a day, we're the one playing catch up here. We have got to be competitive. It's a competitive world out there, that's really what drives it.

Steve Kron - Goldman Sachs

On the Breakfast Value Menu, it seems like you guys have pretty positive early read on it. Just wondering what we're seeing from a mix standpoint at that day part? Are we seeing maybe slightly less mix as people order something off the Value Menu? If so, is that affecting perhaps franchisees pricing on some of the other products on the menu?

John Chidsey

I'm going to let Russ give you the details on that one.

Russ Klein

We haven't really seen any kind of price management based on the introduction of the Breakfast Value Menu. What's been above expectations has been the blended gross margin, which approached almost 75%. So it's been accretive in every way, if you will, from a GP standpoint. So it has really fortified our profitability around breakfast as we continue to try to grow guest counts there. Again, we're not seeing any kind of disruption on pricing on the rest of the menu as a result of it.

Operator

Your next question comes from Joe Buckley - Bear Stearns.

Joe Buckley - Bear Stearns

Wow. What a treat here. John, could you talk about the UK, what's going on there? You mentioned business trends improving and being pretty good. On the other hand, there's more store closure expenses and expenses related to the troubled franchisees. So just give us an update where you stand, and remind us if you would, how many company operated you have there now, maybe versus a year ago.

John Chidsey

While I'm quickly calculating the percentage of restaurants with the additional company ones there. The numbers that you saw in terms of the expenses, if you recall in the last quarter, we talked about that we had worked out a lot of the franchisees through a mini FFRP program, if you will and there were a couple more to go. So what you saw was just two or three more that came through this quarter. I think there's either one or two left. So you could see one last expense in the fourth quarter. Ben is holding up two fingers, so I guess there's two left to go, and that will be the tail end of it. So the expenses have come down very nicely as we morph our way through that.

In terms of the number of restaurants we picked up, we have gone from owning 70 restaurants to 108 in the UK. So, out of a total of roughly 700 or high 600s it's gone up a couple percentage points, but nothing overly dramatic.

Joe Buckley - Bear Stearns

If the national minimum wage increase shakes out of Congress, what kind of impact are you expecting maybe initially, and then maybe looking out to the second and third tranche of increases?

John Chidsey

I stick with the answer I think we gave last quarter, which is in 26 states already at or above it as you know, the vast majority of our jobs, like 90% plus, are already above where they're proposing to take minimum wage. So the impact will be the ratchet-on effect. So if you used to make $8.50 and you were happy, now do you want to make $9, do you want to make $9.25? I'm sure we will see some flow through impact there.

But again, with our labor scheduling system that we're in the process of rolling out, our new batch broiler, kitchen minder, lots of other things, I think we will more than make up for that both for ourselves and most importantly, for our 90% franchise restaurants.

Operator

Your next question comes from Glen Petraglia - Citigroup.

Glen Petraglia - Citigroup

Could you talk about how you're thinking about the pricing environment and how you go to market, thinking about price increases to maybe offset any cost inflation that you have been facing?

Russ Klein

From our standpoint, pricing is a very complex factor and opportunity for us. As we have said many times, we're still at a large perceptual disadvantage on value for the money versus certainly our number one competitor. So we're going to continue to drive aggressively behind our AM and PM Value Menu to improve that. Because of our margin construct, we don't have to worry about any dilution. Our restaurant level economics from a franchisee point of view are very attractive.

I think that will keep the lid a little bit on the overall mentality about pricing. Where we do want to keep driving behind in parallel is to generate pricing power through innovation and quality, which we have been able to do very successfully the last four years. Certainly, our pipeline going forward, is filled with products that are differentiated, are elevations in quality that will give our franchisees pricing power on that front.

Nominal pricing increases on our existing mix, if you will, are ones that we give guidance to our franchisees twice a year. Of course, it's their right to price as they choose. But generally, we're careful about that area, because our value for the money perception is in a delicate area.

Glen Petraglia - Citigroup

You mentioned the product pipeline. It sounds like you have a really good promotional calendar lined up here for the fourth quarter. If you could give us an update on the Hold'ems product, which I think is scheduled to roll out sometime in August, I believe, which would be your fiscal first quarter. Have you gone back and maybe retooled that product, or gotten over some of the operational challenges that you were facing before?

Russ Klein

Well, we're still in test market right now on Hold'ems. Our plan is to make a roll out call in the summertime around the results. We're learning a lot in the test markets. Our guidance in terms of an introductory window has been October, November now for the last six to nine months, I think, as we have been talking to the investor community. It looks like we're still on track for that.

Again, it is a complex product. It is a step change in terms of quality and innovation. So we're really being careful about working our way through these test markets on the learning. But, our view is that still that October/ November window is a probable introductory window.

Glen Petraglia - Citigroup

Lastly, in terms of the Breakfast Value Menu and the PM Value Menu, I'm curious to know if you have seen any trade down, particularly in the breakfast day part, in terms of the average check reductions, and while the margins may be good on that product, maybe you're getting a decline in the revenue.

Russ Klein

No, we're not seeing that.

Operator

Your next question comes from John Ivankoe – JP Morgan.

John Ivankoe - JP Morgan

Could you quantify what the store closure expense was that affected the EMEA reported company store margins?

John Chidsey

It was $1 million of closure costs in this quarter, John.

John Ivankoe - JP Morgan

The second question is on the batch broiler, could you give us an update in terms of how many company stores it's in, the cost savings that you anticipate, and if it's working as you expected from an operational perspective?

John Chidsey

Yes, we have 300 rolled out now. We are rolling out literally 10 to 20 a day so the clip has been at a very nice pace. We have three teams that do three restaurants a day. So I guess that would be nine, to be exact. We have had no issues whatsoever. They have been performing exactly as we had hoped or anticipated. We will meet our goal of having all the 850 restaurants in the U.S. and Canada rolled out by the end of June. We have our convention next week, so obviously we will be showing that new batch broiler, as well as the new eco broiler at the convention, and we assume franchisees will start to pull those in starting in the fiscal year, July 1.

John Ivankoe - JP Morgan

So in other words, you are going to have two different broilers available for franchisees?

John Chidsey

Yes, and they both allow all the innovative cooking that we would like to do in the future. So franchisees will now have a choice of which broiler they would like.

John Ivankoe - JP Morgan

When would some of that innovative cooking be available? When might you be able to take the batch broiler and begin to actually market products off of that? Is that like a two-year process from today?

John Chidsey

In an ideal world, you could do it in probably 18 months, but let's be safe and say over the next two years.

Operator

Your next question comes from Jeffrey Bernstein - Lehman Brothers.

Jeffrey Bernstein - Lehman Brothers

First just more on the finance side of the secondary offering. I was just wondering if we can get any feedback or learnings from that versus thoughts of future offerings? Ben, you had mentioned you obviously would consider repurchase. I am just wondering your thoughts as it pertains to the current float on the shares, as it relates to repurchase.

John Chidsey

Well, obviously we are very pleased with our offering. It went extremely well, it was oversubscribed. It did pretty much what we designed it to do, which was to increase the float. We have seen roughly a 50% increase in the number of shares traded on a day-to-day basis. So that was great news for us, and I think for our shareholders at large.

Jeffrey Bernstein - Lehman Brothers

You had mentioned the potential for share repurchase, if the opportunity presented itself.

Ben Wells

Right. We continue to evaluate that. We look at the use of capital inside the company. Obviously, our first objective is to grow the brand with expansions that we have outlined before. Obviously, we're rolling out the broiler, et cetera, et cetera, et cetera. So then after we run through those, we will evaluate the share repurchase. But at this time, we're going to stick with our plan as we are seeing it now.

John Chidsey

Obviously, if and when the sponsors choose to do another secondary, that's sort of out of our control. So we don't know if that's two months from now or ten months from now.

Jeffrey Bernstein - Lehman Brothers

A question on foreign exchange. I was just wondering if you could talk about the benefits from the dollar weakness in terms of hedging, contributions to earnings and how much flow through you can expect.

Ben Wells

Well, one of the beautiful things about the Burger King P&L is that it's largely balanced. As you're probably well aware, since the beginning of our fiscal year, the euro has accreted 10%, sterling has accreted 13%. Euro is at an all time high right now, all things being equal. So we see certain numbers come through. $13 million on the upside on revenue, but then it's a give back on the bottom half of the P&L, and you net/net come down plus or minus zero.

Operator

Your next question comes from Mark Wiltamuth - Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

I just want to dig in a little bit on the net unit openings. It sounds like that number has gone down a little bit. Was that just mainly the closures in the UK? And then if you could talk about the gross openings where you feel like you're coming in better than expected, what regions are really seeing the stronger than expected openings?

John Chidsey

Well, the openings are really coming from Europe, coming from Latin America. Those would be the two big ones that have outperformed. You're right, I think we said at the beginning of the year, we said we would be somewhere in the 250 range. And so now we're saying this 200 to 220. So you're correct in that it has come down somewhat. But again, due to the UK, which I think it was the right thing to do in the long-term, re-franchising the Philippines, definitely the right thing to do. Those are one-time things that we'll get behind us. So I'm just much more pleased and excited about the fact we beat our openings goal by a good 40 to 60 restaurants for the year, and that bodes well for the future.

Mark Wiltamuth - Morgan Stanley

As you look going into extended hours, for the stores that have moved to extended hours, what kind of a lift can you get out of that? Just to clarify, you said you were at 16% extended hours right now, and you're going to go to 42% when this program is fully in place?

John Chidsey

No, no. We said 60% of the system roughly is already on extended hours, 60%. So it's another 40% roughly of the system that has got to get us there, so we're completely unified around the country.

Mark Wiltamuth - Morgan Stanley

That's going to be the whole system mandated through midnight in May?

John Chidsey

Correct. In terms of your question about an increase in sales, as we have always said, about a five hour increase represents about a 1% lift in sales. This would probably represent a little bit less than five hours. So it would be somewhere three-quarters to a quarter of a point, let's call it, in comp sales.

Operator

Your next question comes from Jeff Omohundro - Wachovia.

Jeff Omohundro - Wachovia Securities

Another question on the unit openings and the back end loaded calendar. It seems like a lot of the stores are opening in Q4. Maybe you can talk a little bit about your depth on store opening teams and your confidence that those stores will be open well, and whether we would expect in '08 another back end loaded year or a little more balance in the opening timing? Thanks.

John Chidsey

I think the reason that it's back end loaded is just we really put a big push on getting going on development again after the three years of really working to get the brand turned around and getting it back on solid track so that franchisees had enough money to start thinking about those things. So you can imagine, as you get the train going back in the right direction from a development standpoint, it has been more back end loaded.

If you look at places like Latin America, where we have consistently, for the last three or four years, been building 85 to 100 restaurants a year, it is very evenly spread throughout the year. What you will see over the next year or two is the U.S. and Europe will become much more balanced throughout the year as well, as that pipeline builds and as we put more development people out there to help franchisees, and also to increase our own company restaurant builds, as well.

Operator

Your next question comes from Steve Kron - Goldman Sachs.

Steve Kron - Goldman Sachs

A follow-up on the new product development, Russ, can you just give us a little bit of framework around how you guys are thinking about the direction of new products, whether it remains kind of in that more indulgent or is there something down the pipe a little bit more with a health and wellness bent, or premium versus value?

I guess what I'm getting at, are we firmly staying, as you look out within that super fan target or are there opportunities maybe to expand beyond the super fan a little bit?

Russ Klein

Yes, well, the super fan is still our core customer. What we're beginning to develop now for the future is the thesis that the super fan not only eats at a fast food hamburger restaurant 192 times a year, but they also eat several hundred times more at other out-of-home food concepts. This is their life style, whether it be the occasional other QSRs or fast casuals or even casual dining.

So with the overall QSR market commanding an all time high of the out-of-home meal dollar, 76% now, our view is that we need to continue to deliver our scale advantages in terms of convenience, portability, price, value for the money, speed of service, and push up further now around quality and innovation. So you will see products like Hold'ems, you will see a spectrum of products that may include things that are lighter fare that we're certainly looking at, as well.

The key for us we believe is to continue to push up quality and innovation, but also the value for the money component is critical. It's a critical part of the out-of-home meal market. We will be driving on both fronts there.

Steve Kron - Goldman Sachs

John, on the Latin America business, certainly a business that has been very good for Burger King. I am just curious to get some reaction from you, given McDonald's announcement in that market, and whether you see anything changing from the competitive landscape as you guys continue to build, and perhaps maybe see greater expansion from the McDonald's system? Just your initial thoughts from the competitive landscape.

John Chidsey

Obviously our Latin American team is our most seasoned team. They have been together for 15 to 20 years, and our franchisees have been down there for a long time, really building out those markets very nicely. So that's certainly not going to cause us to do anything different than what we have been doing year after year after year. As you know, this will be our 12th year of positive comp sales in Mexico and that part of the world.

My guess is it will take them a while, McDonald's and the new purchaser, to get organized and get moving in the right direction. They're a good competitor down there and I guess only time will tell what impact it has in terms of their business. But I feel really great about the number of openings and opportunities we have in that part of the world, what our infrastructure looks like and what our marketing programs and products look like. So only time will tell.

Operator

Your next question comes from Glen Petraglia - Citigroup.

Glen Petraglia - Citigroup

Ben, just a follow-up on the tax rate. 36% in the fourth quarter here is the guidance. I'm curious as we look out over the course of the next couple years, I think about a year or so ago, the expectation was that it would maybe drop 100 basis points a year. Any reason to think that might change?

Ben Wells

No, not really. We're still holding to our internal forecast. What we did realize, if you think about it, FAS 109 makes you have to true-up when you collect new facts. We gave guidance about 1% a year, and frankly, we realized it in the third quarter versus the fourth quarter. So we're still pretty much on track with that 1% a year.

Glen Petraglia - Citigroup

You mentioned and you made the point that you're now at a historically low debt level. Could you maybe comment on your willingness to maybe add some debt to the balance sheet, and add a couple turns from where you are today?

Ben Wells

Well, we continue to evaluate all alternatives, as we look at what our internal needs are and the ability to return value to our shareholders. So we have not ruled out anything, but we will continue to evaluate it as we go forward.

Operator

Thank you very much, sir. That concludes our Q&A session for today. I would like to turn the call back over to Mr. John Chidsey, Chief Executive Officer, for any closing remarks he may have.

John Chidsey

We would just like to say thank you again for joining us. Thanks for your interest in the story and we look forward to speaking to you next quarter. Thanks a lot.

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