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Sonic (NASDAQ:SONC)

Q2 2012 Earnings Call

March 21, 2012 5:00 pm ET

Executives

Claudia San Pedro - Treasurer and Vice President of Investor Relations

J. Clifford Hudson - Chairman and Chief Executive Officer

W. Scott McLain - President and President of Sonic Industries Services Inc

Stephen C. Vaughan - Chief Financial Officer and Executive Vice President

Analysts

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Phan Le - Lazard Capital Markets LLC, Research Division

Will Slabaugh - Stephens Inc., Research Division

John S. Glass - Morgan Stanley, Research Division

Operator

Hello, and good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Sonic Corp. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Ms. Claudia San Pedro, Vice President of Investor Relations. Please go ahead.

Claudia San Pedro

Good afternoon, everyone. We are pleased to host this conference call regarding results issued this afternoon for the second quarter of fiscal year 2012, which ended on February 29, 2012.

Before we begin, I would like to remind everyone that comments made during 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, in the company's annual report on Form 10-K, quarterly reports on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that remarks made during this conference call are based on time-sensitive information that is accurate only as of today's date, March 21, 2012. The archived replay of this conference call webcast will be available through March 28, 2012. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or a rebroadcast of this call in any form, without the expressed written consent of the company, is prohibited.

Finally, we have scheduled this call, which includes the Q&A portion, to last one hour. If we have not gotten to your question within that hour time slot, please contact me, area code (405) 225-4846, and we'll make the appropriate arrangements to answer your questions.

We also want to note that due to an error from Business Wire, the original release issued at 4:01 Eastern Time was incorrect. The corrected release has been posted.

With those announcements, I'll turn the call over to Cliff Hudson, the company's Chairman and Chief Executive Officer.

J. Clifford Hudson

Thank you, Claudia, and good afternoon to all of you on the line with us this afternoon. We appreciate your joining us today for this conference call, and appreciate your interest in our second quarter results and our current business performance. As you saw from the earnings release, our systemwide same-store sales for the quarter increased 3.5%. We were pleased with this improvement in sales that we experienced in the quarter and believe it reflects the changes we've implemented with respect to a variety of aspects of our business, layered pricing, improved service, improved products, and so on, in the last year and more. We think it's worth noting that we've seen positive same-store sales now for fiscal year 2011. We finished last August and we've seen positive same-store sales for the first 2 fiscal quarters of fiscal year 2012. As you might have expected, we benefited from warmer temperatures in many of our markets throughout this quarter and in February. This temperature benefit was particularly true in January and the early part of February. At the same time, it's fair to say that some of our core markets experienced more typical winter conditions during December, then also in the second half of February. So mixed weather at times throughout the quarter. Also, the additional day in the leap year in the month of February did contribute about 1% to our positive same-store sales. Notwithstanding this warmer weather and the benefits of leap year, same-store sales continue to improve on both a 1 and 2-year basis. So we're glad to see this positive trend in the business.

Another positive aspect of this second quarter was restaurant-level margins, the performance, restaurant-level margins. Despite ongoing food and packaging cost pressures, the leverage from improved sales resulted in 70-basis-point improvement in restaurant margins. This improvement should give you a sense of the potential of increased operating leverage as sales continue to improve in our business. With food and packaging cost pressures subsiding in the latter half of the fiscal year, we're optimistic we'll continue to see improvement in this area of our business. Steve will provide more detail on that later in the presentation in a few minutes.

Now looking at some other aspects of our business, in the latter part of -- so fiscal third and fourth quarters, fiscal 2012. As we move to this portion of the year, we're optimistic that our revised marketing strategies should position us to maintain positive same-store sales growth through the remainder of the year. First, and as a complement to the creative changes that you may have seen on national television this month, our switch last year from a regional to a national media buyer continued to result in improved quality of our media purchases, the quality of those purchases, as well as the increased cost effectiveness. So even with relatively constant media dollars this year, this improved efficiency has resulted in a step-up in terms of reach and impressions, and we expect this improved efficiency to continue through the remainder of the fiscal year. So nice positive impact from a media buying standpoint. As it relates to group media creative, so recent changes you would've seen, if you're watching television, was on the recent changes on television creative. So let me spend a little bit of time talking about the challenge of our previous creative campaign and why we've gone through this transition. To move our business forward from our viewpoint, we need a campaign that can promote all 5 day-parts in a relatively short period of time. The food-focused campaign that we've had in recent months really didn't present this because the length of time needed to have a commercial, single commercial, in the marketplace and allow for that one new commercial to be even recognized as a Sonic promotion, while at the same time getting the word out about that new product, it really did not have the flexibility of kind of moving across a variety of day-parts and messages. So that campaign was requiring longer promotional windows to get comparable brand recognition by customers and in turn, those longer promotional windows were unable, in a short period of time, to promote the same number of day-parts that we've been able to promote historically. So obviously, we wanted to get this in terms of the number of day-parts in a relatively period short period of time in order to keep positive same-store sales moving across a variety of day-parts. The fact is that this "Two Guys" format ends up being ideally suited to meet the needs of a greater number of short fuse promotions. Our research told us that they still have a very strong customer recognition and customer appeal. So when we had tested this format in limited market application, we were pleased with the customer reaction and with the sales results. Our view is that this "Two Guys" format will promote -- will permit us to promote different products for different day-parts in a shorter period of time with a single campaign format. We expect this strategy to achieve a higher level of awareness of promotions and ultimately then result in increased traffic in a shorter period of time than the other creative format permitted. We moved to this creative format utilizing social media in February and then at the end of February, 1st of March, began using it for television creative as well.

Now as to the layered day-part promotional strategy, as we go forward, you'll see promotions across multiple day-parts. We're excited about our upcoming product pipeline and promotional strategy as we introduce new flavors and new news, rather, across a number of different day-parts. One of the areas of momentum that we've had going into this third quarter, that we did not have for the same period a year ago, is a momentum behind breakfast sales. Since we started promoting our new premium Breakfast Burrito line last August, mid-August, we've seen positive same-store sales for that day-part. So having this momentum in our business is a good foundation as we enter this third fiscal quarter for March, April, May. In addition, we promoted our hot dog line in the month of February to shore up this product line, which is now part of our base business. And this month, we are celebrating the return of our high-quality Jumbo Popcorn Chicken. We had allowed it on a regional actual [ph] basis when we changed our menu design last June, but based on customer feedback and recent market tests, we placed it back on our menu. While this product doesn't have the same broad appeal of a $1.99 hot dog, it's a higher quality product than similar products being promoted by our competitors right now and is priced at a premium to theirs. So we're pleased with the results of this promotion to date.

From a snack perspective, we're promoting a brand-new, limited-time product, our Sweet Potato Tots. Customers have had a very positive reaction to them. And they provide a nice add-on or a standalone snack item, add-on for a meal, snack in the afternoon, that differentiate us from our competition while also adding nicely to our check, helping same-store sales across day-parts: Lunch, afternoon, dinner and the evening. All in all, we're confident that this improved media buying; altered, modified, improved, creative strategy; differentiated promotions, hitting a shorter period of time across all 5 day-parts, that the combination of these will help us to sustain the positive same-store sales we've experienced, help us for the remaining part of our fiscal year.

In this area of our business, I'm also pleased to welcome James O'Reilly, who joined us earlier this month as Chief Marketing Officer. He comes to Sonic, brings a significant amount of industry experience in marketing and franchising, QSR business, earlier in his career, product and packaging. James has very good industry experience, broad as it relates to the various bases of our business, confident that the style he brings will blend quite well with our management team, with our franchisees. We're very pleased to have him on board.

Now looking further into 2012, overall, we continue to be focused on improving operating income with improved sustained same-store sales growth through the system and improved margins at the company drive-in level. We saw some measure of how positive the impact of these 2 areas can be with our second quarter results. With solid and predictable free cash flow, we have the flexibility to use our excess cash opportunistically and strategically to invest in our brand, pay down debt or repurchase shares. Over the next 2 or 3 years, our goal is to strengthen our balance sheet by increasing EBITDA. The goal of reducing our leverage to approximately 3x net debt-to-EBITDA.

So with that, I'm going to turn it over to Scott McLain, who's going to give you an update on franchising revenues and development. Scott?

W. Scott McLain

Thank you, Cliff. Our core franchise business remains solid, as evidenced by the increase in royalty revenues we saw during the second quarter and for the first 6 months. While overall royalty revenues increased, our average royalty rate declined slightly as a result of some of the development incentives we've offered over the past 2 years, as well as our efforts to assist some of our more challenged markets. While these incentives have somewhat constrained our average royalty rate, they've also helped us sustain development and stabilize our franchisee base, particularly in developing markets. We're also quite pleased to see much improved same-store sales performance in both new and developing markets, which we believe is the result of our emphasis on service and product improvements, combined with improved media efficiency, including more balanced spending between national and local media. The impact of the incentive programs will continue to be at play during the coming year, and they will serve to keep the average royalty rate relatively flat depending upon the degree to which our same-store sales are positive. However, over the longer term, we expect these franchisee incentives to yield long-term rewards, with increased brand penetration and improved sales, ultimately resulting in an ascending royalty rate as volumes continue to grow. Our franchisees opened 10 new drive-ins during the second quarter. And as of the end of February, we had 3,550 total drive-ins operating in 43 states. Looking forward, we continue to expect to open 30 to 40 new drive-ins this fiscal year. Year-to-date, we closed 23 drive-ins, 8 fewer than were closed during the first 6 months of the last fiscal year. We continue to actively evaluate our lower volume drive-ins. And looking ahead, we expect our number of closings to be on par with, or slightly less, than the prior year. We're pleased that our sales and profit momentum has improved, which has helped to continue to increase our franchisees' overall confidence in the business. That confidence, together with return on investment, is the single biggest factor in their willingness to continue investing capital. We've also been working on efforts to improve new store ROI through a new small building prototype that reduces the cost of the building by about 15% to 20%. We're beginning to use this in several new stores and we expect that this effort, in concert with rising sales and profits, will significantly improve our development pace over the longer term. However, as we've noted before, given the 12 to 18-month development cycle, it will likely be several quarters before we begin seeing a marked increase in new drive-in openings for the development portion to become a major factor in our earnings growth.

With that, I'll turn the call over to Steve Vaughan, our Chief Financial Officer, for some more detail on the financial results.

Stephen C. Vaughan

Thank you, Scott. For the second quarter of fiscal 2012, we reported earnings per share of $0.03 compared to $0.07 for the second quarter of 2011. Excluding a $3.3 million after-tax gain from the early extinguishment of debt in the second quarter of 2011, adjusted earnings per share were $0.02. As Cliff mentioned earlier, we are pleased with our overall business trends. We believe the change in our creative campaign and refinement of our promotional strategies will yield improved and more predictable sales results going forward, particularly with respect to traffic. During the quarter, we re-franchised 34 lower volume company drive-ins. 31 of these drive-ins were located in a single market in South Texas and were re-franchised to an experienced operator at the end of January. As part of that transaction, the franchisee signed a commitment to build an additional 10 drive-ins in the market. Collectively, we recorded a small gain on these re-franchising transactions, which is reflected in other operating income on our income statement. Overall, restaurant-level margins improved 70 basis points to 10.4%, reflecting leverage from improved same-store sales growth. This improvement in restaurant margins was a major factor in an overall operating income margin improvement of 70 basis points. These improvements reflect the potential to improve margins as we sustain positive same-store sales going forward.

Looking at each individual line item, food and packaging costs were favorable by 10 basis points for the second quarter. This was a significant improvement over our expectations and was driven by a combination of product mix shift in January and February and improved inventory management at the store level. Accumulative pricing at company drive-ins remains at approximately 2%. As we noted on the last call, we have locked in our beef costs through calendar year 2012. As a result of our beef contract and other commodity contracts, we expect commodity inflation to subside in the third and fourth quarters to approximately 2% on a year-over-year basis. We also plan to take additional pricing later this quarter with the expectation that we will have at least 2% of pricing as we lap over last summer's increase. Accordingly, we are projecting slightly favorable food and packaging costs for the third and fourth quarters of fiscal 2012.

Payroll and employee benefits, inclusive of noncontrolling interests, improved 30 basis points in the second quarter as a result of leverage from higher same-store sales. Our sales leverage allowed us to more than offset the higher cost in workers' compensation and unemployment taxes. Other operating expenses also improved by 30 basis points, primarily attributable to leverage from higher sales. While credit card fees remain a challenge, we implemented a new utility contract in Texas on January 1 that will resulted in savings. Looking forward, we expect to continue to see improvement in our restaurant operating margins dependent upon the degree to which same-store sales are positive.

For the second quarter, SG&A expenses increased versus the prior year, reflecting increased variable compensation costs, as well as higher recruiting and severance costs. We continue to add resources carefully over the past year, which should position us to show operating leverage as sales trends improve. Our business model is first and foremost focused on franchising. This is a distinct advantage from a return on capital perspective. As a result, our cash flow is more predictable and stable while our capital expenditures are lower, with an estimated $25 million to $30 million in annual capital expenditure requirements, depending upon the status of various sales-driving initiatives. Our first priority remains to reinvest in our business with a filter that these investments must meet our return on investment criteria. We will continue to evaluate investment options and may adjust our CapEx levels as justified by the ROI of revenue generating or margin accretive projects.

During the quarter, we completed an RFP process in the selection of a new point-of-sales system provider. Over the next several months, the selected vendor will be modifying their system to accommodate our unique needs. We currently expect to begin rolling out this system in our company drive-ins during fiscal year 2013. This implementation will likely result in slightly higher capital expenditures during the rollout, but we anticipate achieving a strong return on this investment. The rollout though our franchise system will take more time, but we expect it will provide significant benefit to their store level profits as well. As with many of our major initiatives, our franchisees were involved in the selection process, support the new system and financing is not expected to be an issue as a result of the strong ROI.

In fiscal 2012, we project we will generate between $50 million and $55 million in free cash flow, which we define as net income plus depreciation, amortization and stock compensation expense less capital expenditures. As Cliff stated, our goal over the next 2 to 3 years is to enhance shareholder value by increasing operating income with improved same-store sales and reducing our net debt-to-EBITDA level to achieve leverage in the 3x range. With solid free cash flow, we have the flexibility to use this cash to enhance shareholder value by investing in our brand with initiatives such as the replacement of our legacy POS system, paying down debt or repurchasing shares. As you know, we purchased $10.5 million of shares in the first quarter. We evaluate the opportunity for share repurchases on a quarter-by-quarter basis and currently have $19.5 million in existing share repurchase authorization available through August 31, 2012. Due to the seasonality of our business, during the second quarter, we opted to pause our share repurchase program to conserve cash. As we go forward with a solid cash balance and positive momentum in our business, we believe we will have ample flexibility to purchase shares through the remainder of the fiscal year. We will continue to evaluate repurchases on an opportunistic basis. We have a solid balance sheet and continue to exceed our debt compliance covenants by a wide margin. While it is still possible that we could see some volatility in our sales due to external challenges, we believe the improvements we have made to our business will help us sustain positive same-store sales going forward.

Along those lines, we remain focused on stabilizing and improving profits and improving average unit volumes at our company-owned units. When you consider the disproportionate opportunity from getting back to a $1 million average unit volume for our company drive-ins, it presents approximately $30 million in revenue potential, which combined with improving drive-in margins, can create significant shareholder value over the next couple of years. Looking to fiscal year 2012, we expect positive same-store sales. And as a reminder, each percentage point change in same-store sales has an estimated $0.03 impact on annualized earnings per share. 30 to 40 franchise new drive-in openings, flat to slightly favorable annual restaurant level margins, despite commodity increases and higher operating expenses during the first half of the year, moderating commodity cost increases in the second half of the year, are expected to result in slightly favorable margins depending on the degree of same-store sales growth. SG&A expenses in the range of $67 million to $68 million. As we have done historically, we will manage the addition of resources in this area in line with the performance of our business, depreciation and amortization expense of $42 million to $43 million, net interest expense of approximately $32 million, a tax rate between 38% and 39% depending upon the reinstatement of employment tax credit programs and capital expenditures of $25 million to $30 million.

Now I'd like to turn the call back over to Cliff for some closing comments.

J. Clifford Hudson

Thank you, Steve. In summary, we're pleased with the momentum of our business as we enter into the back half of the fiscal year. We're glad to have our new creative up and running. It gives us a consistent and familiar platform to be able to promote products across all 5 day-parts more efficiently and with greater awareness as we talked about earlier, combined with a improved purchasing of our media, a differentiated menu with made-to-order products and service initiatives we put in place during the last few years, we're optimistic that we're in a much better position to drive consistent sales and profitability going forward. In fiscal year 2012, the positive same-store sales from our viewpoint will continue to fuel other aspects of our multilayered growth strategy, including operating leverage, improved operating leverage, and return on capital, improved return on capital. Beyond that, improved sales and profitability should also help in ascending royalty rate and, over time, with increased new store development. With the solid and consistent free cash flow this will help generate, we'll also have the flexibility to use our excess cash to reinvest in our brand, opportunistically pay down debt or repurchase shares to enhance the shareholder value.

So this gives us our continued optimism looking forward and it concludes our prepared remarks. We would also be happy to accept your questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jake Bartlett with Susquehanna.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

I have a question on your free cash flow guidance of $50 million to $55 million, up from $35 million to $40 million. Wondering what's driving that. Were there any proceeds from the re-franchising in that?

Stephen C. Vaughan

This is Steve. No, actually that $35 million to $40 million was after principal payments on debt, which we believe, or a lot of people, have typically used the formula of free cash flow being before principal payments on debt, so we changed that. But it's really, it's consistent with that previous $35 million to $40 million. It's now just before principal payment as opposed to being after.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Okay, so the definition was just changed a little bit?

Stephen C. Vaughan

That's correct.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Okay, and then regarding the re-franchising, these were underperforming stores, I guess low-volume stores, do they have any effect on your margin guidance or your margin performance at the restaurant level in the quarter?

Stephen C. Vaughan

No, they did would not have -- it was such a small number of stores that were re-franchised as a percentage of the base. I really wouldn't expect it to have much of an impact.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Okay, so that really wasn't driving any of the guidance change on the margin front?

Stephen C. Vaughan

No, it did not.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Okay, and then just a question on inflation in the quarter. So you got some leverage on the COGS line. You have 2% pricing. Just if you could give us the actual inflation that you saw in the quarter.

Stephen C. Vaughan

The inflation was between 7% and 8% on a system basis, that is, for our company drive-ins, it might be slightly different due to mix shift. We typically just look at that on a systemwide basis. But we did have -- a couple of areas that I mentioned that helped offset that other than pricing, were a significant improvement in our ideal food cost management and then in January, February, our promotions were geared toward lower-cost items. So we had a favorable mix shift. The combination of those items did result in a more favorable restaurant cost than we had anticipated at the outset of the quarter.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

And do you anticipate some of those savings, did that effect, I mean, it seems like a pretty large effect. Do you expect that to continue in the back half of the year?

Stephen C. Vaughan

Well, we do think that we'll continue to have some favorable mix shift as we are doing less discounting than we had done last year. So I do think we'll see some favorable mix shift but in addition to that, the lower commodity cost increases should help us achieve lower food and packaging costs in the third and fourth quarters.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Okay, and then lastly, the language in the press release and your comments, Cliff's comments, it does sound like you're expecting consistent positive same-store sales in the back half of the year. And I guess the real question is whether that implies on a quarterly basis, you expect positive same-store sales for each quarter, the third and fourth quarter remaining.

J. Clifford Hudson

Well, what it -- this is Cliff, what it does suggest is that we have in place methods to drive our business, improved media, improved creative, a day-part strategy, promotional activity focused across a variety of day-parts. And so it is the elements of that strategy working to the extent already implemented and having utilized it in the past and at various times. It gives us the optimism that we'll continue to have good positive momentum in our business. So the purpose of that isn't to say, here's what it will be third quarter, here's what it will be fourth quarter. The purpose of it is to say the momentum that we have in our business is occurring, in our view, because of specific strategies to a considerable degree and we'll have those in place going forward.

Operator

Our next question comes from Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

A couple of questions, first just kind of a follow on from the kind of sequential comp discussion you just had. I think, Cliff, you mentioned that ex the weather and the 1-point leap year benefit, that the kind of more of the underlying numbers improved on a 1 and 2-year basis in the second quarter versus, I guess, prior quarters. But I think, importantly, there's been a lot of volatility of late. I was just wondering if you can give, within the quarter, I don't know if you can offer some monthly color from December through, even if you can take it through March since we're moving through that month here, and perhaps the comparison that you lapped in the year ago, so we can kind of gauge the December through March and if it's possible to quantify the weather component, that would be great as well.

J. Clifford Hudson

Well, quantifying the weather is always a challenging thing. It's fair to say that when the weather is more challenging, it is, by definition, negatively impactful for sales. The progression throughout the winter, the better the weather was and as the winter progressed, I kind of made reference to this earlier, January was stronger than December. We also had a more widespread, harsher winter-type weather in December. January was better than December and February to the extent that weather was positive. February also improved further, to the extent that February, we had some more winter-like weather and then it pulled back from a sales standpoint. It's kind of the progression of the strength of the sales through the winter and you are correct, in that winter quarter in particular, weather is a bigger variable than it is than other times of the year.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Okay, and in terms of the commentary on the March trends, is that kind of momentum continuing? It sounds like you're feeling good about it as we enter the fiscal third quarter.

J. Clifford Hudson

Well, our pretty standard response to the question about what have you done for us this week sort of thing, is that as we move into this quarter, we'll give you an update when the quarter ends as to how the business is going. The initiatives that we've described are more prevalent in this quarter than they were last quarter. We only implemented the "Two Guys" creative on February 27. So you're now getting the benefit of that in March, and the creative campaign will help us end of this quarter. So the elements from our -- I mean, this isn't just a quantitative issue, what's the number? It is rather, what are the strategies we have for driving the business and the strategies that we've described come in place more firmly as this quarter progresses than they did in the first and second quarter.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Understood. I was just trying to gauge it because it looks like the comparison becomes 300-plus basis points more difficult in the third quarter. So was just trying to figure out that momentum, but understood. And then separately, just on the restaurant margin side, as we think longer term, I mean, you clearly got leverage this quarter, which was a very pleasant surprise. Just wondering where we are kind of on that spectrum of -- I think you've talked about the opportunity to return to 16% to 17% versus perhaps the 13% in fiscal '11. I know you often talk about 2 and 3-year plans. Is that realistic? I mean, where do you see timeframe to get back to that and perhaps the greatest challenge, whether it's getting the AUVs back to $1 million or more of the inflation side of things hurting the margin?

Stephen C. Vaughan

This is Steve. It's a combination of getting the AUVs back to $1 million at our company drive-ins and also putting into place some tools that we believe will help us manage to those margins. And I've talked about the new point-of-sale system. We're very excited about that. That will be ready to begin rolling out next fiscal year. We have also been working on supply-chain management, believe there's some significant cost savings opportunity there. So I think it will be a combination of driving sales, the company-owned drive-ins and also some of these margin opportunities with tools that we plan to put into place. So I would look at that as probably a 2 to 3-year opportunity, depending upon how successful we are in getting these tools in place.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

That's helpful. It seems like the advertising was a big driver. I'm just wondering, lastly, is it still 60% local, 40% national, or is that deemed the best balance or is there a chance to raise the amount of spend? It seems like it's working for you, so I'm just trying to get a gauge for that.

Stephen C. Vaughan

Roughly at about 50-50 national, local at this point in time and we feel like that, that's a pretty good balance for us.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

No chance -- there's no thought process to raising the actual dollars spent in total?

Stephen C. Vaughan

Not from a material standpoint that's going to affect your analysis of impact near term.

Operator

Our next question comes from Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

I wanted to just kind of follow up on the marketing part of it. I just wanted to make sure I heard this right. On the move back to the Pete and P.J. guys, is that going to be the bulk of the national TV ads now or will it still be a mix of some of the new type that we've seen and some of the more recognizable ones?

J. Clifford Hudson

The primary creative you will be seeing prospectively will be Pete and P.J., "Two Guys".

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Great. And then Steve, when you were talking about the POS system, I missed out on part of that. I fell behind on my notes a little bit. I just wanted to make sure I've got that right. You're looking at starting the rollout in company stores fiscal '13 and it'll lag a little bit with franchisees?

Stephen C. Vaughan

That's correct, yes. We have actually completed the RFP process, made a selection of a vendor. They're in the process of modifying their system to fit our kind of unique needs and we anticipate beginning the rollout in FY 2013. It will proceed more rapidly at company drive-ins. It will also begin rolling out in franchise drive-ins, but we expect it will proceed -- take a longer period of time to achieve the rollout there.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Okay, and then finally, I know that part of the strain on gross margin has been improvement in the quality of your product and even size, sometimes. Do you think when you have some easing in commodity costs over the next few years and you have this POS system out there that's getting back down towards that 26% or lower cost of sales percentage, if you're doing it on company stores, is achievable?

Stephen C. Vaughan

I don't know that we've set a specific target. We do feel like there's significant opportunity between some, maybe some relief of pressure on commodity costs. These tools that we plan on putting into place. I don't have a specific number for you. But I definitely feel like there is quite a bit of opportunity there.

Operator

We'll take the next question from Chris O'Cull with SunTrust Bank.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Cliff or Steve, how should we think about the same-store sales components in the back half of the year as you lap the hot dog promotion? Do you expect the promotions to drive menu mix more than traffic?

J. Clifford Hudson

The objective going forward is to affect, I think, it will be -- the answer is going to be mix more than it's going to be traffic. I don't know if you're -- so I mean, in other words, as we look at how we would expect how we're driving the business now and how we expect driving in the coming months, it is with this 5 day-part strategy. And so over a 3 or 4-month period, you'll see more variables in terms of promotional activity than we saw last March, a year ago this month. I mean, a large part of the traffic in the incremental business a year ago was hot dogs. And while we will work to continue to grow that business, and view it as very much a part of our base now, sustaining same-store sales over time will be about day-part mix, which in turn inevitably means product mix as well.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Okay, that's very helpful. And then, you guys are clearly benefiting from the theoretical food cost system. How are you capturing the waste? Is it from changes to the menu, prep procedures, forecasting? What's the key here?

W. Scott McLain

Chris, it's Scott. I think that we're doing a number of different things. Basically everything that we can think of, from taking inventories on a very rigorous schedule, portion control, everything that we can do to make the food costs as efficient as possible. So it's really no one particular thing. It really is just constant vigilance on the part of our partners at the store level to make sure that they do what they can to manage food costs.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

How big is the waste cap now, Scott?

W. Scott McLain

I mean, we've tried to lower that. I can't give you an exact percentage off the top of my head, but that's one area where Omar and his team have made significant improvements over time.

Stephen C. Vaughan

In terms of the waste, Chris, there's not a significant opportunity left to cut additional waste at least -- with our current tools that we have.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Okay, and then just lastly, what are the benefits you guys expect from the new point-of-sale system and do you expect -- is it -- are you incorporating your labor scheduling system into this new point-of-sale system?

Stephen C. Vaughan

Yes, so we have a number of benefits we expect to achieve. We will have labor scheduling, much more robust ability to plan based on sales, forecasted sales, sales per hour, things like that, much more robust sales auditing capabilities, so we can go in and look at different factors there. Also, it will be much more integrated with an ideal food cost program. Our current program works well but it's pretty manual. This program is going to be completely integrated. So I think we expect that there will be more widespread adoption of this tool than we've been able to achieve with our current tool. And then these additional tools, in terms of labor scheduling, should be very beneficial.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Is there an effort now to start looking at a new labor scheduling process to try to see if there's any inefficiencies in the back of the house right now?

Stephen C. Vaughan

Well, we have looked at some kitchen design things that we are testing . I don't know if that's where you're headed on [indiscernible]. That's an opportunity that may be a little further out. But I do believe with the implementation of this labor scheduling tool, we should see some efficiency and some improvement in service by having people -- staffing be more aligned with sales levels.

Operator

The next question comes from Keith Siegner with Credit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

My question is for Cliff. I just wanted to ask a little bit bigger picture kind of about the change in creative strategy again. So going back to the "Two Guys" format. It sounds very, very similar to what you were doing up until 2 years ago before you made the change to say focus on unique aspects like skating carhops and quality of food, et cetera. So in the shift back, are you kind of going back to what worked so well or is the new creative use of the "Two Guys", in your opinion, very different than what it was before? So I guess what I'm asking, are you going back to what used to work so well or is this kind of a -- or how does this differ from the "Two Guys" approach in the past?

J. Clifford Hudson

Well, that's a good question. Honestly, the issue is about what works about it. I tend to think about it less whether it's back or forward. And think about it more instead whether it's appropriate for our business or whether it will drive it. One of the things as we moved into the recession and have met challenges with our business, the challenges were undoubtedly on a variety of fronts, some of which we had to make changes along the way that we believe were the appropriate focus and yet, you only find out terms of impact once you made those changes. We've gone through concerted changes in terms of understanding customer feedback on service quality, food quality, value perception, so on and so forth, progression over time. These things have moved nicely and positively. At the early part of the recession, what we had difficulty also ascertaining is whether the creative promotional activity, the creative aspects of the promotional activity, was stale and not breaking through for our customers. As we attempted to move to other formats from a creative standpoint, one of the challenges that we found, and I'm being a little redundant from what I've said earlier, but I think I'm being responsive to your question, one of the limitations that we found was that the creative format, in order to promote a given product in the period of time, the amount of time, the length of time, the amount of time placed against this new creative in order to show the customer this is Sonic and this is what we're about, became much more elongated. The effect of it which was it was not allowing us to promote a variety of day-parts in a relatively short period of time. So you can look at it and ask the question are you going back or are you going forward? The answer -- the question we're attempting to answer is what's the best format for being able to drive a variety of day-parts in a relatively short period of time? The conclusion we came to was that this was one of the more positive aspects of these "Two Guys". The other conclusion we came to was that they probably also will enable us to use more forms of new social media and other forms of digital media beyond what other campaigns would, were we to utilize them going forward. So as we have worked and now moved forward using this campaign, we've also begun using them with social media. We'll find other ways to do that prospectively in other forms in the digital world in a way we were not doing 5 years ago. So I don't know if that gives you the answer you're looking for. I don't look at it as an issue of going back. It is rather how do you find the platform that works for multi day-part promotional strategy and multiple promotions at a relatively short period of time and yet with the consumer knowing that all of these creative implementations are all Sonic rather than having some disjointed lack of recognition with a variety of commercials in a short period of time.

Keith Siegner - Crédit Suisse AG, Research Division

Yes, I wasn't implying that there was an issue using them again. I was trying to understand the shift away from them, shift back to them and the thought process you guys went through and that did help clarify.

Operator

[Operator Instructions] And we'll go next to Matthew DiFrisco with Lazard.

Phan Le - Lazard Capital Markets LLC, Research Division

This is Phan Le sitting in for Matthew DiFrisco. And I just wanted to go back to the point-of-sale system that you plan to roll out in fiscal '13. I was wondering if you had an idea or would be able to tell us what you might expect that to contribute to the CapEx spend during the year?

Stephen C. Vaughan

We will give that guidance and outlook as we get closer to 2013. So at this point in time, I think it'd be premature to provide that.

Phan Le - Lazard Capital Markets LLC, Research Division

Okay, that's understandable. One more if I may, just wanted to step back and ask a higher-level [indiscernible] question. I'm wondering if you had noticed any changes to the behavior of -- the recent rise in gas prices?

J. Clifford Hudson

Not really.

Stephen C. Vaughan

If anything, the consumer appears to be in a little better shape. We've seen rising employment, declining unemployment, consumer confidence has improved somewhat. But at this point, I wouldn't say that we've seen a negative impact from gas prices that we can discern.

Operator

We'll hear next from Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

Wanted to hit back on same-store sales. You mentioned sort of a positive lead to trends there with a caveat of some volatility to continue, if I heard you right. Just wondering, if you think a more aggressive LTO strategy or menu innovation there is needed to get you there, to a more sustainably positive number. And then similar, just to the back [ph] you might rollout, of maybe the Popcorn Chicken and Sweet Potato Tots you have going on now, and if that's something we should expect to continue in a more aggressive way?

J. Clifford Hudson

Will, do you mind just repeating that question?

Will Slabaugh - Stephens Inc., Research Division

Yes, sure, sorry about that. So just wondering from an LTO standpoint and menu innovation, if we should expect a more aggressive, more frequent LTO rollout to occur if that's something you think that you need to do in order to really put a more sustainably positive same-store sales or just anything else there on the horizon that you think you need to get you there?

J. Clifford Hudson

I think I got your question. If I've not, let me know and I'll come at it in a different way. I think what I hear you asking is given that we have Popcorn Chicken and Sweet Potato Tots being promoted simultaneously right now, is that a model that you should expect to see more from us prospectively. So, I'd answer the question affirmatively, but I'd answer it this way, and that is that, if within, as we stated, if within a shorter period of time, let's say 3 to 4 months, it is our objective to be able to -- it is our objective to promote 5 different day-parts in the 3 and 4-month period. It will require, creative execution aside, just on the product piece, it will require more activity than you would've seen 6 and 9 months ago. It will require more activity across more day-parts in a relatively shorter period of time, i.e. 3 or 4 months, than you would've seen last fall and last summer. I think I'm answering your question. If I'm not, let me know.

Will Slabaugh - Stephens Inc., Research Division

Yes, definitely helpful there. And just lastly for me, curious on geographies, is there any geography that you would point to that would be meaningfully underperforming or anything that you're worried about or likewise, is there any that you would consider meaningful outperformers?

W. Scott McLain

No, I think one of the more encouraging parts of our business is that our new and developing markets have been -- have continued to perform increasingly well over the last 12 months and our core markets continue to perform well also. So we're really seeing good balance across all of our market types and across all the geographies. So that's encouraging from our point of view.

Operator

We'll take a follow-up question from Brad Ludington.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Just a couple of questions on the last quarter. Steve, what was CapEx during the quarter?

Stephen C. Vaughan

I do not have that number in front of me, Brad. We typically publish that with the Q, but I don't have it off the top of my head.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Okay, and the other one would be, do you have what the debt balance is, including the current portion? Just a long-term...

Stephen C. Vaughan

I don't believe we got that in the release. Let's see. We've got -- I don't know if you've got the release handy, Brad, it's on Page 7, it looks like we do actually show the debt balance.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

I thought that was excluding the current portion.

Stephen C. Vaughan

Well, we've got the current portion and then there's -- it's broken out separately to noncurrent portion.

Operator

We'll take the next question from John Glass, Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First, you mentioned that the breakfast business was strong and you talked about not being able to support all day-parts through the advertising. So are all day-parts positive right now in comp store sales or if not, which ones are lagging the most?

J. Clifford Hudson

I think, John, it will be fair to say, we don't ordinarily break out the performance by day-part. We've talked about over time the fact that as we begin, in other words our ability to move that needle, that as we begin promoting breakfast last August and moving forward, we've had a positive impact there. So we'll kind of leave it at that. I think the optimism that it gives us is that by reallocating or allocating dollars differently in different times of the year but focusing on different day-parts. It does put us in the position to strengthen our business [indiscernible] I think that answers your question, Brad.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Okay, if I can just sneak one more in. Just the mix shift that positively impacted cost of goods this quarter. Did you mean that it was less discounting and that was favorable or was there some sort of weather-induced mix shift that was positive for margin? Trying to understand if that's an ongoing or just a one-time event.

Stephen C. Vaughan

It was actually both of those items. We did have less discounting. We had some mix shift more towards our fountain business, that was favorable. And then we did promote -- a couple of our promotions were higher margin promotions. So we had several areas going there that benefited us.

Operator

And we have no more questions remaining. I'll turn the call back over to management for any additional or closing comments.

J. Clifford Hudson

Well, we appreciate your participation in our conference call today. As you can see, we are feeling better about the path that our business is on, the changes that we've made in the last several years, the impact it's had on the business, the impact on the perception of our customer. We look forward to visiting with you further as the spring continues and bring you updates on our business over time. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

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