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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q4 2011 Earnings Call

February 28, 2012, 8:30 a.m. ET

Executives

Paul Flanders – VP and CFO

Dan Accordino – President and COO

Tim Taft – CEO, Fiesta Restaurant Group, Inc.

Analysts

(Resava Habada) – Barclays Capital

Kevin Mcclure – Wells Fargo Securities

Karen Eldridge – Goldman Sachs

Brian Porcaro – Raymond James

Ken Bann – Jefferies & Co

Clive Rowe – Oskie Capital

Operator

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Carrols’ Restaurant Group Incorporated fourth quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question and answer session and instructions will be given at that time. (Operator instructions).

And as a reminder, this call is being recorded today, February 28, 2012.

I would now like to turn the call over to the company’s Chief Financial Officer, Paul Flanders. Please go ahead, sir.

Paul Flanders

Good morning, everyone. By now you should have access to the announcement that we released earlier this morning, which can also be found on our website at www.carrols.com under the Investor Relations section.

Before I begin our formal remarks, I want to remind everyone that our discussion today may include forward-looking statements. These forward-looking statements may include comments regarding our strategies, intentions or plans, including, without limitation, our spin-off transaction of Fiesta Restaurant Group.

These statements do not guarantee the future performance and therefore, undue reliance should not be placed on them. We also refer you to our filings with the SEC for a more detailed discussion of risks that could impact our business and financial results.

On the call with me today is Dan Accordino, CEO of Carrols Restaurant Group and Tim Taft, CEO of Fiesta Restaurant Group. I’ll now turn the call over to Dan.

Dan Accordino

Good morning. I wanted to start by making a comment regarding the Form 8-K that was filed this morning. As you are aware, Alan Vituli retired and resigned as CEO of Carrols Restaurant Group on December 31, 2011. And on January 16, 2012, retired and resigned as a Director and as Chairman of the Carrols Board of Directors.

Yesterday, February 27, the Board appointed Jack Smith to replace Alan Vituli as the Non-Executive Chairman of Fiesta Board of Directors. Jack is currently a member of the Carrols’ Board of Directors and is the Chairman of it’s audio committee and is also a member of the Fiesta Board of Directors.

Jack founded The Sports Authority, a national sporting goods chain, in 1987 and served as it’s CEO until September of 1998 and as it’s Chairman until April, 1999. Prior to that, he was Chief Operating Officer for Herman’s Sporting Goods and also held executive positions with a number of other major retailers over his career.

In addition, Jack served on the Board of Directors for Darden Restaurants and as the Chairman of the Darden Audio Committee from 1995 to 2009.

In appointing Jack Smith, the Carrols Board of Director concluded that with the spin off nearly complete, that this leadership change at the Board level was consistent with its continuing succession planning and would facilitate Tim Taft’s ability to lead Fiesta as it starts it’s journey as an independent public company.

I know want to give you an update on the pending spin off of Fiesta Restaurant Group, the parent company of Pollo Tropical and Taco Cabana. Unfortunately, from a timing perspective, we weren’t able to get the Fiesta registration effective before our third quarter financials went stale in mid-February. However, we have cleared most of the SEC comments received thus far and will proceed to refile the Fiesta Form 10 with the year-end financial statements as quickly as possible after filing our Form 10-K with the SEC next week.

In early February, we received the favorable private letter ruling from the IRS, so as soon as we can get the registration effective, we’ll proceed to set the record date for the distribution and effect the spin off. We believe that it will likely be early to mid-April when this is completed. AT this point, the spin off primarily remains subject only to final Board approval, effectiveness of the Fiesta stock registration and the SEC and final listing approval from NASDAQ.

In terms of our financial results for 2011, total revenues increased 3.3% to 822.5 million in 2011 with revenues for Fiesta increasing 8.2% to 475 million, while our Burger King revenues decreased 2.7% to 347 million.

Net income for the full year was 11.2 million in 2011, or $0.51 per diluted share compared to 11.9 million in 2010 or $0.55 per diluted share. Both years included certain charges in non-recurring items that in the aggregated reduced earnings by $0.25 per share in 2011 and $0.21 per share in 2010. These are detailed in the press release.

Turning to the fourth quarter, I’ll begin by discussing our Burger King business and then turn it over to Tim to cover the Fiesta business.

We continue to be encouraged by the revenue growth at our Burger King restaurants; albeit, still at a somewhat moderate rate. Comparable restaurant sales increased 1.5%, marking the second consecutive quarter of positive same-store sales.

This improvement was driven by favorable mix shifts, including a continuation of better balancing of our value products and promotions and to some degree, higher pricing. Although customer traffic remains slightly negative for the quarter, we have experienced sequential improvement in these trends throughout the year.

During the fourth quarter, Burger King added a 3.2 ounce fire-grilled BK Toppers line to the menu, including a Deluxe Cheeseburger, a Mushroom-Swiss burger and a Western Barbeque Cheeseburger, all priced at $1.99.

We also introduced the BK Chef’s Choice burger, a premium flame-grilled sandwich offered at a $4.99 price point. There was also an important menu enhancement with the launch of Burger King’s new Golden Crispy Fries, which are made with thicker-cut potatoes. This product is superior to the previous french fry and was promoted with a free-fry day in December.

Despite a number of positive changes emerging from the brand, the sales momentum in the fourth quarter was simply not great enough to overcome increases in commodity costs, particularly, higher ground beef prices.

Reported segment EBITDA declined from 4.1 million in the fourth quarter of 2010, to 2 million. However, non-recurring spin-off costs and related expenses accounted for about $1 million of this decrease, which was burdened entirely against the Burger King business because of how we have historically reported our corporate G&A expenses in the Carrols financial statements.

Still, even excluding these charges, the impact of commodities and the related margin pressures on our Burger King profitability is apparent.

As we discussed on the last call, Burger King is in the process of implementing a number of initiatives as it repositions itself within the quick service segment. Modifications and upgrades are being made to products and menu structure, operational changes are being implemented to enhance food quality and the overall customer experience. Changes have also been made to the brand’s advertising to better focus on our food and to improve the marketing image of the brand.

And lastly, there are longer-term initiatives focused on upgrading the facilities to further enhance brand image and to create more consistency with the overall quality of our product offerings.

There are a lot of changes under way and although we are still in the early stages of this transformational process, we believe that these initiatives have the potential to provide increasing momentum for the brand and create sustainable traction in it’s performance as we move forward.

Trends early in 2012 have continued to improve with comparable sales up about 7.5% for the first eight weeks of the year. While some of this improvement reflects better weather so far this year, we do believe that much of the improvement is reflective of the brand initiatives that I’ve touched upon.

In concluding, at Carrols, we are looking forward to completing the spinoff of Fiesta so that we can solely focus on our Burger King brand and distinct opportunities as the largest franchisee of Burger King in the U.S. We believe that we are well positioned to pursue a meaningful growth strategy within the BK system to leverage our operating infrastructure and to create long-term value for our shareholders.

And now, I’ll turn the call over to Tim Taft, Chief Executive Officer of Fiesta Restaurant Group.

Tim Taft

Thank you, Dan. With each day, we’re moving closer to the completion of Fiesta’s spinoff from Carrols. And I know that I speak for everyone on the entire team about how excited we are to be soon starting our corporate life as an independent company.

As you can imagine, there’s been a great deal of preparation to affect the spinoff and we’ve been working for about a year now to ensure a successful transition.

Much of that work has been completed, but I’m still in the process of putting together the final touches on our leadership team and would hope to make several important personnel announcements over the coming weeks and months.

While Paul Flanders is ably serving as our interim CFO, we’ve been interviewing several CFO candidates and look to name someone as soon as reasonably practical. We’re also looking to appoint a Chief Development Officer that will be responsible for heading up development of both brands. This would be a new position within the organization and one that we view as critical to our long-term growth plans.

Back in November, we announced that industry veteran Joe Brink joined Fiesta as Vice President of Supply Chain Management. Joe is now overseeing all aspects of the supply chain for Pollo Tropical and Taco Cabana, including food and ingredients sourcing, purchasing, food safety, quality assurance and distribution. And is making significant progress in managing our commodity exposure in the current environment.

In terms of our company vision, the Fiesta story will be centered on two well-positioned differentiated brands with compelling opportunities around three key initiatives. First, we intend to drive comparable store sales by leveraging our favorable brand attributes and the supporting consumer trends with respect to freshly prepared food, convenience and value.

In 2011, comp restaurant sales rose a robust 9.9% at Pollo Tropical on top of a 7.4% increase in 2010, which we believe reflects one of the best two-year comp sales track records in our industry. At Taco Cabana, comp sales rose a solid 3.7% in 2011.

The momentum at both brands has continued into 2012; we’re very encouraged by that. For the first eight weeks of the year, comp restaurant sales for Pollo Tropical are up 10% and Taco is up about 7%, including the estimate 2.5% benefit from better weather in January compared to 2011.

Basically, we see our incremental Fiesta revenue in the future coming from four distinct streams. First, on and off premise, which requires that we deliver our value proposition with speed of service, which allows us to compete with the quick-service restaurant entities.

Second, our home-meal replacement business in which consumers seek high-quality food to be taken home for dinner.

We’re ramping up our social media efforts as well as employing the latest web-based technology to create ease in ordering and preparing the orders to coincide with the customer pick-up schedule.

Our third stream is through product development that will continue to differentiate ourselves with our customers and through the evolution and creation of a line of portable products our customers need while on the go.

And finally, through a sequence of steps, we’re elevating our standards with respect to cleanliness, hospitality and order accuracy.

Both Pollo Tropical and Taco Cabana are in varying stages of having conversation low-ordering program incorporated into our POS systems to speed the ordering process, improve order accuracy and allow us to deliver on consumer requests for customization.

The second key initiative is strategic new unit development. We plan to increase our geographic reach through strategic build out of new units, and continue to build brand familiarity by clustering stores in new markets.

From a development standpoint, our mindset with Pollo has really evolved over the last two years as a result of the considerable amount of research. We’ve refined our site selection criteria to be more general market. In the past, we targeted densely populated areas that delivered a large percent of Hispanic customers and where the average household income was around $50,000. This, by the way, was very much aligned with our South Florida model.

The research told us that we should be competing for more high-profile locations with big box realtors and other traffic-generating entities; households with incomes of $70,000 plus, and not limiting ourselves to a Hispanic-centric demographic. This has been our model for the last three new restaurants and is producing consistent volumes that are well above our system-wide AUPs and will be the model for all sites that we will open this year.

Taco Cabana has a new updated look that was born from our remodel program. It’s a clean, contemporary look and has been a hit with both customers and perspective developers alike. By year end, we expect to build 10 to 12 restaurants, which will be split pretty evenly between Pollo and Taco.

Pollo development will include a second location in Atlanta, a third in Jacksonville and the remainder in our existing Florida markets, utilizing the site selection criteria.

Taco Cabana development at this point will be exclusively in Texas across it’s major markets; Dallas-Fort Worth, Houston, Austin and San Antonio. We also plan to capitalize on international expansion opportunities through franchising with plans for our franchisees to open 10 to 12 Pollo restaurants outside the United States.

With that said, we’re not going to be able to sustain our unit development plan without also focusing on our existing facilities. Therefore, we will continue our reimaging and remodeling initiatives, operating clean, well-maintained restaurants and value engineering unit costs to improve our unit economics.

As Pollo’s remodeling projects are mostly winding down, our 2012 activity will be centered primarily on Taco Cabana including 14 remodel projects in Austin, 12 in San Antonio, 8 in Houston and a few others scattered around Texas.

Lastly, we expect to improve our margins through operating leverage, commodity contracting and supply chain initiatives. Our operating philosophy is predicated on five points of focus, which include great food, cleanliness, hospitality, consistency and accuracy as well as well-maintained facilities. I believe that if we can executive on these restaurant basics we can positively impact the guests’ experience, and gain increased frequency and loyalty from our customers.

A few minutes ago I spoke about bringing Joe Brink on board and the work that he’s doing on our supply chain. Now simply taking cost out, but adding value to our menu offering by improving the quality of our core products. And while cost engineering is always desirable and important, it’s perhaps more relevant today than ever given our ongoing commodity inflation that our needs make the most of our sales momentum, despite the cost pressures that we are facing.

Turning to the fourth quarter Pollo Tropical, comparable restaurant sales increased a solid 7.8%, marking the ninth consecutive quarter of positive comparable unit sales of the brand.

Segment EBITDA improved 8.6 million from 7.9 million last year although segment EBITDA margin decreased slightly to 16.5 from 16.7 due to higher commodity costs. Key products and promotions were focused on popular TropiChops, which is a customized bowl with a choice of protein, rice, veggies and beans. And our popular soap and salad combo means, as well as a new cheese steak wrap.

At Taco Cabana, we experience – we continued to experience positive momentum with a comparable restaurant sales increase of 2.7%. However, Taco Cabana segment EBITDA decreased 6.6 million from 7.3 million last year and segment EBITDA margin decreased by 160 basis points to 10.2% due to commodity pressures and higher labor costs.

Key products and promotions in October and November included customization of our Cabana Bowls, similar to the product I just described for Pollo and our burritos. In December, we featured Flautas with two new dipping sauces.

I know I’ve covered a lot of ground today and I’m looking forward to answering any questions you may have during our Q&A session. In the meantime, I’ll turn the call over to Paul to discuss financial results in greater detail.

Paul Flanders

Thanks, Tim. For the fourth quarter, total revenues increased 4.5% to 203.6 million in the prior year with revenues from Fiesta Restaurant Group increasing 7% to 116.9 million and with Burger King revenues increasing 1.2% to 86.7 million.

For the quarter, net income was $59,000 or $0.00 per diluted share compared to net income of 2.6 million or $0.12 per share in the fourth quarter of 2010.

Fourth quarter of 2011 includes certain charges totalling 2.8 million or $0.09 per diluted share after tax, mostly due to 2 million in impairments and other least charges and 1 million in spin-off costs and related expenses.

Moving to staff-related costs, total EBITDA declined approximately 1.1 million due to the commodity prices in our Burger Kings that Dan discussed. EBITDA for Fiesta brands was essentially flat as the commodity costs increases in Taco Cabana were offset by the strong sales performance for Pollo dropping down.

In terms of sales, Burger King comparable restaurants sales increased 1.5% compared to a negative 6.1% in the prior year. Customer traffic improved sequentially as Dan noted, but still decreased 1.8%. However, an average check increased 3.3% due to favorable mix shift as well as 2.8% in effective pricing.

Pollo Tropical revenues increased 9.6% to 52 million, the comparable restaurant sales up a solid 7.8% against the positive 10.7% comparison to the prior year.

Customer traffic increased 5.7% for Pollo while effective pricing was 2.7% and average check increased 1.9%.

Taco Cabana revenues increased 5.1% to 65 million with comparable restaurant sales up 2.7% against the positive 2.3% comparison from prior year. Average check increased 4.4% reflecting favorable mix shift along with 3.4% of effective pricing.

Overall, cost of sales was 31.7% of total restaurant sales, and increased 168 basis points compared to the fourth quarter of 2010 due to commodity inflation at all three brands as we’ve already said.

At Burger King, costs of sales increased 179 basis points, compared to the 2010 fourth quarter with average ground beef costs at $1.86 per pound, 19% higher year over year.

Pollo Tropical and Taco Cabana cost of sales increased 157 and 149 basis points respectively with higher chicken costs for Pollo Tropical and higher beef and cheese costs at Taco driving the majority of the commodity increases.

In terms of operating expenses, restaurant labor costs were 29.2% of total restaurant sales and decreased 28 basis points from the prior year on a combined basis. This reflected the positive leverage of sales increases at Pollo Tropical and lower store level incentive payments at Burger King.

Restaurant operating expenses, which excludes rent and advertising, was 13.8% and 43 basis points lower than last year due to lower utility costs as well as the leverage on the higher sale.

Advertising expense was 7.4 million for the quarter and $541,000 higher than last year due to the timing of our spending at both Pollo and Taco.

General and administrative expenses were 2 million higher compared to the fourth quarter of 2010 and included the 1 million of spin-off and relay costs that we discussed, an increase in Fiesta’s G&A of approximately 400,000 and a $236,000 increase in stock compensation costs.

As I said earlier, earnings were impacted by charges in the fourth quarter, which included 2 million of impairment and other lease charges.

These include a $1.3 million impairment related to a Pollo unit in Jersey where we’re unlikely to renew the lease. Approximately 500,00 was related to an increase in reserves for certain closed Pollo restaurants that have taken longer to sublease than we anticipated and the balance is related to minor impairments required for a couple of our Burger King restaurants.

Interest expense was 6.1 million for the quarter compared to 4.7 million in the prior year due to increases in both total vest and our weighted average interest rates due to refinancing completed in [inaudible].

Total outstanding debt was 278.6 million at year end including Fiesta’s 200 million (8 7/8’s) senior notes and Carrols LC’s term-loan borrowings of 63.4 million.

At the end of the quarter, there were no borrowings on the Fiesta revolver, there was $4 million outstanding under the Carrols LLC revolver.

Cash balance totaled about 24.7 million including approximately 13.7 million accumulated by Fiesta since refinancing and the 9.5 million of excess proceeds from the refinancing.

Capital expenditures in the fourth quarter 2011 were 17.8 million. Fiesta cash tax totaled 5.1 million, including 2.1 million for new units and a 2012 land purchase.

Burger King CapEx totaled 13 million, including 2.2 million for remodeling, 1.7 million for our new point of sale system roll out and approximately 6.4 million for equipment related to the new product and operational initiatives at the brand.

Under Burger King’s incentive programs, we will recruit about 6.5 [inaudible] these investments for reductions in our required advertising contributions to Burger King over the next four years.

Given that the spinoff of Fiesta is nearing completion, we provided limited guidance for each Carrols Burger King operations and Fiesta Restaurant Group in the press release issued this morning.

I also want to point you to our SEC filings, including the Fiesta Form 10, which is still subject to amendment, for further insight including our historical fully-allocated G&A costs and some forward-looking guidance for this business on a stand-alone basis.

The following is a recap of the guidance from this morning’s release. For Carrols Burger King restaurants, we expect comparable restaurant sales to increase approximately 3 to 5% and commodity costing to rise 3 to 4%. Capital expenditures are expected to be in the 20 to $25 million range, which includes 10 to 12 million for remodeling 25 to 30 restaurants and 6 to 7 million to complete our new point of sale system rollout.

At Fiesta, we expect comparable restaurant sales to increase approximately 4 to 6% for each brand, with commodity costs expected to increase 1 to 2% for Pollo and 2.5 to 3.5% for Taco. We also expect to open 10 to 12 new restaurants in 2012 and close 2 to 4 existing units.

Fiesta capital expenditures are expected to be 40 to 45 million, including 20 to 25 million for new unit development and approximately 10 to 11 million for the remodeling projects that Tim spoke about earlier.

With that, we will now open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions). And our first question does come from the line of (Resava Habada) with Barclays Capital.

(Resava Habada) – Barclays Capital

Hey, good morning.

Dan Accordino

Good morning, (Resava).

(Resava Habada) – Barclays Capital

On the same-store sales, I’m not sure if I made out what was the contribution to whether both in the fourth quarter, if any, as well as the first eight weeks of this year?

Paul Flanders

Well, what I reported was that the favorable increases was for, for both brands, about 2.5% of the total which is 10 so far for Taco, and around 7 for – I’m sorry, 10 for Pollo, and 7 for Taco, and about 2.5% of that, was, we believe, is because of favorable weather.

(Resava Habada) – Barclays Capital

And this is for the first eight weeks of this year, but what about the fourth quarter if any?

Paul Flanders

The fourth quarter, it really didn’t impact Taco Cabana or Pollo last year, that was more in January. Obviously, the Burger King results were impacted somewhat in the fourth quarter last year because certainly we had more snow in December in our markets then in 2011. Having said that, I think we think that in total, the weather probably has been 2.5%, probably less – at least in January, probably less than that behind the fourth quarter of last year.

(Resava Habada) – Barclays Capital

Okay, and then as far as traffic on the Pollo and Taco side, did you throw that number out for the fourth quarter?

Tim Taft

Traffic was 5.7% for Pollo, Taco that is actually down 1.5%.

(Resava Habada) – Barclays Capital

Okay, and then on the food costs, whether it is on BK or Taco and Pollo, are you basically contracted on beef and chicken and other ingredients, or are you somewhat on the market?

Tim Taft

We are contracting in advance for our proteins and most of our major food basket items.

Dan Accordino

In terms of Burger King, everything is contracted except for ground beef, there is some hedging on ground beef, but most of it is purchased on a stock market basis.

(Resava Habada) – Barclays Capital

Okay, got it, and then can you talk about the competitive environment facing each of the key concepts that you face in 4Q ’11, and so far in 2012?

Tim Taft

Dan?

Dan Accordino

It’s a competitive environment in the FSHR category, (Resava), hasn’t really changed significantly from what we saw in the fourth quarter or in recent times. You still see – there’re people still – concepts are still investing against price, there’s still a significant retail component around everybody’s messaging. So I think all of the brands are looking to improve the quality of their foods.

Everyone is dealing with what would be referred to as a barbell strategy, where you have a value menu and you’re also introducing some full-margin products. But in addition to that, the level of asset size or couponing, and that sort of thing, it’s continuing at about the same rate that we’ve experienced or seen over the past year.

Tim Taft

I’d echo what Dan said for fourth quarter and for this far in Q1. Our competitive set really has not changed. There are a lot of people that are dealing – talking price with Pollo; our drum beat is 499 and has been for quite a while. And for Taco, we’re really moving away – have been moving away for the last year-and-a-half from a price message more to a quality – an upgraded value proposition that coincides with our remodeling efforts.

(Resava Habada) – Barclays Capital

All right, thank you much.

Operator

And our next question does come from the line of Bryan Hunt with Wells Fargo Securities.

Kevin Mcclure – Wells Fargo Securities

Hi, this is Kevin Mcclure standing in for Bryan, thanks for taking our question. A couple for Dan related to Burger King, and then I swish to Fiesta and Tim. Dan, have you seen much success with Burger King since the premiumized menu? And how has the Chef’s Choice Burger performed relative to your expectations with both the sales and a profitability stand point?

Dan Accordino

I think the Chef’s Choice is – we’ve only had – we’ve only talked about the Chef’s Choice briefly for a two to three week period, so, it will be a main message in March. And I think we will get a much better read in terms of what the long-term opportunity is with that product. I think the platform certainly is consistent with where Burger King wants to go in terms of premium products, but it is going to take a while to continue to message against that specific product, and we will have a much better read of that by the end of March.

Kevin Mcclure – Wells Fargo Securities

Okay.

Dan Accordino

In terms of Toppers, which we referenced earlier, the Toppers have done quite well, and we’re continuing to sell between 40 and 50 units per restaurant per day.

Kevin Mcclure – Wells Fargo Securities

Great, and you mentioned that ground beef costs were up 19% in Q4, I know those are difficult to hedge, or to plan for, but baked into your guidance for inflation at Burger King, is that a reasonable number to incorporate into our analogy?

Dan Accordino

No, it’s not going to continue to run at a 19% increase over the prior year, no. But we’re still looking for ground beef to continue to be at elevated rates over the absolute number that we saw in the fourth quarter. We forecasted $2.12 a pound in the first quarter, and we’re going to be around $2.06 a pound based upon current experience.

Kevin Mcclure – Wells Fargo Securities

Got you, and last for Burger King, it sounds like based on your CapEx intentions, I may have heard this wrong, do you plan to actively participate in the corporate remodel program?

Dan Accordino

Yes.

Kevin Mcclure – Wells Fargo Securities

Okay, great, and switching to Hispanic brands. Tim, I don’t think I caught this, I’m not sure if you said it but how much pricing is built into your same-store sales guidance for 2012 at both concepts?

Tim Taft

Kevin, in – for Taco, it’s about a 3 – well, we took about a 3.5% increase mid-year last year, and we’ll take what is probably a 1% in the second quarter of this year. And with Pollo, it’s about a – for 2012, will be a 2.2% blended rate. And if we have to, then we’ll add some costs in the latter half of the year.

Kevin Mcclure – Wells Fargo Securities

And with your unit development plans, how many of those do you intend to sale lease back, or how many sale leasebacks do you expect in 2012?

Tim Taft

In 2012, and Paul can correct me if I’m wrong, but we don’t plan doing any sale lease backs of the ones that we’re opening in 2012.

Paul Flanders

Yes, that’s correct, we’ve been – because I’ve said earlier, Fiesta has actually built some cash here since the refinancing, and our – based on our projections we don’t see the need to do any sale/lease backs in 2012 at this point. So, we are basically – we’ll be building inventory of property.

Kevin Mcclure – Wells Fargo Securities

Okay, and last question for us; with your impairment charge, should we read into that that you are gradually shifting your resources and your focus away from New Jersey and may one day tend exit that as the demographics have changed, or do you still plan to have Jersey operations?

Tim Taft

I think it’s safe to say that I’ve been on the company – on the ground now for about six months, and when you take a look at the restaurants that we’ve opened, the last three that take into consideration the new demographic profile, new site selection criteria, that what we want to do is really focus our time and energy and resources on those new markets.

So as time goes on, we need to take a look at New Jersey and figure out exactly how we’re going to grow that market if we are. That’s really a long-term proposition, it’s going to be a challenge if we’re going to be successful there. But we are reviewing possible strategies as how to best address that market and challenges. We’re focusing as I mentioned on the newer markets, and the new site collection criteria and the existing markets and we hope to have some clarity on the New Jersey in the coming months.

Kevin Mcclure – Wells Fargo Securities

Great. Thank you for your time.

Operator

Our next question comes from the line of Karen Eldridge with Goldman Sachs.

Karen Eldridge – Goldman Sachs

Great, thank you. As you look at some of the promotions you’ve been doing, I guess, or that are kind of being done at Burger King right now, you have the buy-one-get-one-free chicken sandwich, you’ve had some giveaways, do you think this has been effective and has that been one of the drivers for comp store sales improvement?

Dan Accordino

Yes, it’s certainly been effective. Again, if you look at where Burger King is attempting to go in terms of it’s repositioning of menu products and repositioning of the platform in the restaurant and adding dessert items and adding treats and so forth, the intent is to have less discounting, but as I said earlier, everyone still has a retail component to their messaging and the retail giveaways and the discounts that Burger King has done has been very successful.

Karen Eldridge – Goldman Sachs

And what kind of lift have you seen since you’ve – in terms of – sorry, sales of french fries since you’ve reformulated it?

Dan Accordino

The incidence of french fries is up about 7, 8%.

Karen Eldridge – Goldman Sachs

And as we look at the comp store sales improvement in this first eight weeks, is there any particular day part or any particular product that’s driving that or does it really feel like you’re gaining momentum across the board?

Dan Accordino

We’re gaining momentum across the board, even including breakfast. We introduced new cooking platforms for breakfast and some new products and breakfast is actually up slightly higher than the other day parts, which is really motivational for us because that’s a day part that we’ve been struggling with.

And the snack part of our business really hasn’t kicked in yet. We expect to see that post April when we finally have all of the smoothies, frappas and the expanded line of fundies introduced. But we’re seeing a movement across all day parts.

Karen Eldridge – Goldman Sachs

Great. And you said you’ll be participating in the remodel program, so with all the incentives that Burger King’s offering, all in, what kind of average cost are you anticipating for your remodel?

Dan Accordino

About 275,000 per location.

Karen Eldridge – Goldman Sachs

Great. And Paul, I do have to admit, we finally did try the Snackers and you’re right, those are actually very innovative and very good product. So I’ll concede you on that one.

Paul Flanders

My favorite product. Thank you very much.

Karen Eldridge – Goldman Sachs

Thanks.

Operator

(Operator instructions). And our next question does come from the line of Brian Porcaro with Raymond James Financial.

Brian Porcaro – Raymond James

Good morning. This is Brian Porcaro in for Bryan Elliott. Just a couple of quick questions. I was hoping you could give – over the last couple of quarters you’ve given an update on some of the new units, Pollo Tropical units in Jacksonville, some very impressive sales results there. I was hoping you could give an update on that Jacksonville unit and also what you’re seeing in Atlanta and any kind of difference, compare, contrast what you’re seeing how the consumer’s responding to the brand in some of the – in Atlanta versus Jacksonville?

Tim Taft

Sure. We – [inaudible] is our first restaurant in Jacksonville and it’s continuing on very well. It ended the first year with $3.5 million sales. It currently is averaging unit volume of 65, around 65, $66,000 a week. Our first one in Atlanta is around $69,000 a week and the second one in Jacksonville is around 55.7. That one was not really the same mane and name target that we had. We – that one is performing very well for us. We’re excited about it’s performance.

Brian Porcaro – Raymond James

Okay. Thank you for that. A couple more. On the Taco Cabana remodels, I was hoping you could remind us how many have been completed or how many have been kind of that new reimaged décor package, et cetera to date. And then what type of sales that you’re seeing there and what kind of incremental investment is necessary for that and any kind of ROIC kind of metrics you could give would be also helpful.

Tim Taft

Brian, first of all, we started off with what we thought was going to be the remodel, then the new look. We did – we’ve now done all of Dallas. We have been working on Austin and are almost complete with Austin. And then the remaining restaurants are going to be in remodeling San Antonio and Houston and some points in between.

In Dallas, the average investment was around 100,000. We did – we spent around $200,000 in Austin, somewhat short of that and the results thus far in Austin had been anywhere as they continue to grow after you open the restaurants. But you know, rule of thumb is we’ve been seeing anywhere between 10 to 15% same-store sales increase, which barely more than pays for the amount of money that we’re spending on the remodel.

As we get into San Antonio, which is our original market, the hometown is, those restaurants are going to have a little bit more capital needs, maybe those are going to be somewhere around 250 to 275 and then we go into Houston and that will be someplace between San Antonio and Austin. But as I mentioned, from that remodel look was born the new prototype that we’re going to be building for Taco Cabana in all of our new restaurants.

Brian Porcaro – Raymond James

Okay, thank you for that. And two more real quick. On the labor side, I was going back to Q4, I was looking at the labor costs per week and just wondering if you could give an update on what you’re seeing in terms of underlying wage inflation across the brands and also any updates on turnover, are you seeing that pick up as maybe some of the macro conditions improve a little bit sequentially?

Tim Taft

Dan?

Dan Accordino

Wage inflation has been, you know, reasonably benign this year. We do have some markets in 2012 where we have some minimum, state minimum increases that we need to deal with. And, no, turnover has been pretty consistent for at least on the Burger King side.

Brian Porcaro – Raymond James

Okay, and then one more. On the Pollo Tropical International franchising, can you give us just some more color on – are those new agreements that have been signed, and just kind of the pipeline there, as you see it over the next few years?

Paul Flanders

The ones that you’re going to be seeing are really a mix, 70/30 existing to new franchisees. Again, all international – our plan going forward is we really want to make sure that our franchisees are building restaurants that are going to maximize, obviously, their return. There’s a, it’s a completely different environment than what we have in the United States, that in those markets, there’s a lot of food courts. They want to do a lot of kiosks.

Our desire really is that our franchisees go to the bigger high-profile, more seats, type of layout. But, Mr. (Mushkin) has been beating the bushes, and I think that as time goes by and as the brand Pollo Tropical in the United States becomes bigger and bigger, then our opportunity for franchising will increase.

Brian Porcaro – Raymond James

Okay, that’s helpful. And one quick, or two quick bookkeeping questions: Paul, did you happen to have what the cash flow from Ops was in Q4, and also the sale-leaseback proceeds in the quarter?

Paul Flanders

I didn’t say that but, in terms of sale-leasebacks, we did about $10.6 million for the full year. $2.8 million of that was in the fourth quarter. We had, we did have a couple of properties oe Pollo and one Taco that we were marketing and put those on hold because as I said, we’ve been building cash here since the financing, obviously. You know, my comments on Fiesta’s cash balance is, they generated cash flow in the fourth quarter. As I said, Burger King was in the revolver about $4 million. But we also had made a principal payment for a quarter, as well. But Burger Kind was net borrowing was probably about 2.5 million.

Brian Porcaro – Raymond James

All right, that’s all I have. Thanks very much.

Operator

And our next question does come from the line of Ken Bann with Jeffries & Co.

Ken Bann – Jefferies & Co

Good morning. I was just wondering, in some of your markets, because you’re increasing your capital expenditures, are you seeing your competitors begin to open more stores, or do more remodeling activity in Florida and Texas?

Dan Accordino

I don’t. I really don’t know how to answer that question, only because I’ve been, we’ve been focusing really on ourselves. I think that as time gets better, what, some of the feedback that we’ve been getting from our general managers is that you are seeing some re-investment in the properties. But it’s not something we’re really focusing on right now.

Ken Bann – Jefferies & Co

Okay, and then, in terms of your chicken costs for Pollo Tropical, could you talk about how much inflation you’ve seen in chicken, and specifically, what kind of inflation you expect in chicken over this next year?

Tim Taft

Well, chicken is the, is going to be, it’s locked in for through the middle part of this year, as is beef with Taco Cabana. And then the chicken contract is the next one that we’re focusing on for the remainder of the year. We anticipate a slight increase in chicken costs because everybody, you know, pork is going down; pork is going up, sorry. Beef is going up. As for chicken now, the retailers or producers are starting to cut back from the number of chickens that they’re growing in order to drive price. But we feel relatively comfortable with the position that we’re currently in.

Ken Bann – Jefferies & Co

You know what the increase in price was, say, during the fourth quarter?

Paul Flanders

There was not a price increase in fourth quarter that I’m aware of.

Tim Taft

We were locked for most of last year, so I think the increase year over year for 2011 has been put in perspective of about 10%.

Ken Bann – Jefferies & Co

Okay, you say 10%?

Tim Taft

10% for the whole year.

Ken Bann – Jefferies & Co

Okay. All right, great. Thank you.

Operator

(Operator instructions). And our next question does come from the line of Clive Rowe with Oskie Capital

Clive Rowe – Oskie Capital

Hi. Thanks for taking my question. Can you just remind us why you closed the two Pollo Tropicals that you did?

Tim Taft

Well, I can have Paul speak as to specifics, but usually, we’re closing restaurants because the leases are coming up, and we’re choosing not to renew the leases; or because they’re not producing to the level that we would need them to. And that is, and it was out of that that we’ve learned of really that our site selection criteria really changed, and that we’re more now of the general market concept, rather than, as I mentioned in my comments, a Latin-centric, Hispanic target. So sales are not well or leases are coming up, so we’re choosing not to renew.

Clive Rowe – Oskie Capital

Thank you.

Operator

Ladies and gentlemen, if there are no more questions in the queue, I would like to turn the call back over to management for any closing comments.

Paul Flanders

Okay, great. Well, we thank you for your time today. Presumably this is our last combined call, and we’ll get the spinoff done here as soon as we get our, you know, financial statements updated and filed and hopefully complete that in early to mid-April, and we’ll talk to you next quarter. Thanks.

Operator

Thank you. Ladies and gentlemen, that will conclude our conference for today. We do thank you for your participation.

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