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Executives

Amy Wagner - Senior Vice President, Investor Relations and Global Communications

John W. Chidsey - Chief Executive Officer, Director

Ben K. Wells - Chief Financial Officer

Russell B. Klein - President- Global Marketing Strategy and Innovation

Analysts

John S. Glass - CIBC World Markets

Joseph T. Buckley - Bear Stearns

Glen Petraglia - Citigroup

Steven T. Kron - Goldman Sachs

John Ivankoe - JPMorgan

Jeffery A. Bernstein - Lehman Brothers

Mark Wiltamuth - Morgan Stanley

Jeffrey F. Omohundro - Wachovia Securities

David Palmer - UBS

Matt Difrisco - Thomas Weisel Partners

Burger King Holdings, Inc. (BKC) F1Q08 Earnings Call November 5, 2007 10:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the Burger King Holdings first quarter fiscal 2008 earnings conference call. My name is Bill and I will be your conference coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Amy Wagner, Senior Vice President of Investor Relations and Global Communications. Please proceed, Madam.

Amy Wagner

Thank you, Bill and good morning, everyone. Welcome to Burger King's first quarter fiscal 2008 earnings conference call. We have prepared an earnings call PowerPoint presentation to assist in presenting our first quarter performance. These slides, as well as the audio broadcast of this call, may be accessed through our investor relations page on our website at www.bk.com. Both the audio portion and the slideshow will be archived on our website where it will be available for future reference.

Presenting on the call today are John Chidsey, Chief Executive Officer, and Ben Wells, Chief Financial Officer. Also with us on the call is Russ Kline, President, Global Marketing Strategy and Innovation, who will be here and available to answer any questions you may have about our marketing, advertising and products during the Q&A portion of the call.

We’ll spend about 20 minutes today discussing our first quarter results before opening the call up for questions.

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

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

Before turning the call over to John, I want to announced that we’ll be hosting our first analyst investor day on February 27th, 2008, at our headquarters in Miami, Florida. You will have the opportunity to hear from our top executives, including our division presidents from around the world. And on the following day, we’ll take a few of you down to Mexico to tour restaurants so that you can experience the global reach of our brand.

We are excited about this first ever event and look forward to hosting you. Formal invitations will be sent out in December.

And with that, I’ll turn the call over to John.

John W. Chidsey

Thanks, Amy and thank you for joining us this morning. During today’s call, we will discuss our strong first quarter performance and comment on the outlook for the full year. After which, we will open up the call for questions.

Our worldwide momentum continued as evidenced by our strong quarterly results across all key financial metrics, and the team’s focus on the execution of our global go forward plan and our strategic growth opportunities drove strong quarter-over-quarter performance, once again demonstrating that we have the right formula to deliver best-in-class results.

All business segments contributed to top line expansion, yielding significant earnings improvement over the prior year period. Worldwide revenues increased to $602 million, up 10% compared to $546 million in the same quarter last year, and I am pleased to share that we recorded our 15th consecutive quarter of positive worldwide comps of 5.9%, the best level of comp performance in 10 quarters.

Our robust comps benefited from our barbell menu architecture strategy of offering premium and value products, from the strength of leveraging our marketing alliances worldwide and from extended hours in the U.S. And once again, our strong EMEA APAC comps were led by the U.K., which posted double-digit performance.

In the U.S. and Canada, we recorded our 14th consecutive quarter of positive comps of 6.6%. During the period, we drove incremental sales and traffic with our premium BBQ Bacon TenderCrisp Chicken Sandwich and the Spicy Chick'N Crisp sandwich, our newest addition to our p.m. Value Menu.

Our successful Simpsons movie tie-in drove sales of the Ultimate Double Whopper and our Transformers and NFL alliances drove traffic and created brand relevance. We also continued to promote our breakfast value menu and our extended late night hours in the U.S. and we realize the forecasted improvements in both of these day parts.

Restaurant growth continued on an upward trend. Our system-wide net restaurant count increased by 146 as compared to the same period last year. During the fiscal year, the U.S. is expected to post positive net restaurant growth for the first time in six years. And approximately 80% of gross openings will come from international as we continue our expansion in new and existing profitable markets around the globe.

We anticipate significant net restaurant growth in our second quarter, especially in our Latin America and EMEA segments. In October alone, we opened approximately 20 restaurants and that trend is expected to accelerate throughout the quarter.

In line with previous guidance, we are on track to open approximately 300 net restaurants this year, meaning we will have more BK restaurants operating than ever before in the brand’s history at some point during this fiscal year.

Worldwide average restaurant sales of $327,000 for the quarter are a 9% improvement over the prior year. Trailing 12-month worldwide ARS was $1.22 million and the U.S. trailing 12-month ARS was $1.21 million, both a new record high, exceeding the $1.2 million ARS mark for the first time.

Turning to page four, our strategies remain on course, effectively delivering profitable results in every reporting segment. This quarter, EBITDA was $117 million, representing a significant 13% improvement compared to EBITDA of $104 million in the same quarter last year.

And earnings per share were up 17% to $0.35 compared to earnings per share of $0.30 in the same quarter last year, benefiting from our de-leveraging initiative. Our effective tax rate for the quarter was 38.8%, higher than last year’s first quarter tax rate of 37.5%.

Tax rates were higher this quarter due to a statutory tax rate change in Germany, partially offset by the reversal of some valuation allowances in Canada, negatively impacting EPS by $0.02. Ben will provide you with more details later in the presentation.

During the quarter, we also used our strong cash flow for a variety of purposes. We paid down an additional $25 million in debt. We declared and paid our third quarterly dividend as a public company, and we repurchased 252,000 shares for a total of $6 million through our previously announced $100 million share repurchase program.

Our cash flow generation remains strong. It affords us the opportunity to return value to our shareholders while at the same time deriving future profitability by investing in our brand, making it a win-win for all stakeholders.

On page five of the presentation, you will find key worldwide quarterly highlights. Again, total revenues were up 10% for the quarter to $602 million, led by a 16% increase in franchise revenues.

As we forecasted, worldwide company restaurant margin came in flat at 15.3%. Robust comp sales worldwide offset higher commodity costs in the U.S. and Canada, utility cost increases in Latin America and throughout EMEA, and lower margins from the underperforming restaurants acquired in the U.K.

On a positive note, even with significant commodity cost pressures in the U.S. and Canada segment, we were still able to increase margins by 50 basis points quarter over quarter through strong comp sales, savings derived from the completed rollout of the flexible batch broiler, and effective labor management.

We continue to aggressively manage our G&A. Our G&A costs are actually down 1% net of foreign exchange impact of $3 million and incremental equity compensation expense of $1 million. Even with these additional costs, G&A is up just 3% versus prior year, in line with guidance and at a significantly less growth rate than our overall revenue increases.

As we continue to drive top line growth, our highly leveraged business model, both at the restaurant and at the corporate levels, will enable us to deliver bottom line expansion at a much faster rate than revenue growth.

Now, I want to briefly mention the progress we have made in the U.K. market. Consumers continue to respond favorably to our brand revitalization efforts that we kicked off last October. Sales and traffic continue to strengthen and we now have 11 months of positive comps. We continue to rationalize our restaurant portfolio and are committed to operating only those restaurants that are or can become profitable.

On the last call, we made reference to additional U.K. restaurant closures as part of our strategy to better position that market and to strengthen our overall financial performance. This quarter, we closed an additional 35 restaurants, the majority of which were located in high rent districts and had limited earnings potential.

We do however remain confident in the market’s long-term potential and in our strategies currently in place to generate growth. We have refranchised 24 restaurants to existing franchisees in the past year and we have secured new franchisee development commitments to open new restaurants in locations that are expected to deliver higher returns.

On page six, you will find quarterly financial highlights by segment. Worldwide revenue and income from operations improved substantially as our top line momentum continued and as we leveraged our highly franchised business model and our G&A to drive profits.

U.S. and Canada revenues grew by 8% and income from operations increased by 11%, driven by very strong comps of 6.6% compared to 2.6 in the same quarter last year. A winning combination that featured products and promotions drove sales and traffic. Premium and value offerings included the BBQ Bacon TenderCrisp Chicken Sandwich, the Ultimate Double Whopper, and the BBQ Spicy Chick'N Crisp Sandwich.

Our Simpsons and Transformers movie tie-ins and NFL promotions delivered the forecasted results, creating significant brand relevance and incremental traffic. And we also continued to promote our breakfast and late night day parts, producing the expected improvements in those day parts.

Company margins improved 50 basis points to 15.3% from 14.8%. Increased food costs, primarily in beef, chicken, and cheese, negatively impacted margins by 200 basis points. However, our robust comps, benefits derived from the completed implementation of the flexible batch broiler, and cost management drove meaningful margin expansion in spite of these pressures.

EMEA APAC revenues grew by 15% and income from operations was flat. Revenues were boosted by 97 net new openings and the acquisition of 15 restaurants, predominantly in the U.K., during the 12 months ended September 30, 2007.

Revenue growth was also aided by strong comps of 4.6% versus 1.1% in the prior year, led by double-digit comps in the U.K. and strong performance in Germany, Spain, and Australia markets.

During the quarter, we featured a variety of premium products, including the limited time offer Smokey Blue Angus Burger in the U.K. and the Whopper BBQ Sandwich in Spain. We also drove traffic with the launch of the BK Fusion’s Real Dairy ice cream offerings in the U.K. and we leveraged the strength of our marketing alliances with The Simpsons in many countries within this segment.

Despite the increase in revenues, company restaurant margins decreased 80 basis points to 14.4% from 15.2% in the year-ago period. These lower margins were the result of operating under-performing restaurants that were acquired in the U.K. Company restaurant margin was also impacted by higher utility costs throughout all major EMEA markets. These decreases were partially offset by improvements from sales of higher margin products.

In Latin America, revenues grew by 8% and income from operations increased 13%. Our results were favorably impacted by 88 new restaurant openings over the past 12 months and positive comp sales of 3.8% versus 6.1% in the prior year.

Last year’s robust comps were the result of our very successful Whopper 15th Anniversary promotion in Mexico. However, we continue to post strong comps this quarter with our featured products and promotions, including the Angus Mushroom Swiss, BK Stacker Sandwich, and the BK Spicy Chick'N Crisp, and our worldwide Simpsons and Transformers movie promotional tie-ins.

Company restaurant margins decreased 150 basis points or $20,000 due to higher utility costs and expenses related to the rollout of new POS systems, which are expected to improve restaurant efficiency. These decreases were partially offset by sales of higher margin products, labor efficiencies, and new restaurant openings.

On page seven is our company scorecard. Our continuing momentum and maniacal focus on executing our global go-forward plan drove strong results across the board. I will now take a few minutes to discuss each one of our multi-faceted growth opportunities.

Page eight illustrates our robust worldwide comp sales trend, closing in our fourth full year of strong black-on-black results. This quarter was a very powerful comp quarter for us. Our menu management strategy, product innovation, marketing alliances, and extended operating hours drove solid results and continue to build brand relevance.

For example, we created The Simpsonizeme.com website as part of our movie tie-in with The Simpsons, allowing consumers to turn digital photos into animated yellow versions of themselves. Almost 40 million photos have been uploaded with over three-quarters of a billion hits to date, evidencing our marketing leadership in creating brand awareness using innovative and cutting-edge advertising media.

And I’m excited about our second quarter’s new product offerings and promotional lineup. In October, we featured both our A.M. and P.M. value menus and for Halloween, super fans every enjoyed being the King. We sold tens of thousands of King costumes and masks through our online store and at various retailers, creating an even higher level of brand awareness in the marketplace.

This month, we will launch homestyle melts in the U.S. and Canada, a product with both a breakfast and lunch version that has been very successful in our test markets. We also expect to drive family traffic through our SpongeBob SquarePants and Viva Piñata promotional tie-ins.

I am confident that our positive comp trend will continue this second quarter, even as we lap last year’s very successful Microsoft Xbox holiday gaming promotion.

Before turn the call over to Ben, I would like to reiterate that our development plan is on track. This quarter’s net number again was impacted by the 35 planned U.K. closures that I mentioned earlier. However, we are off to a great start this quarter with approximately 20 net new restaurants open in the month of October. Our new unit worldwide development pipeline is strong and we expect to open approximately a net 300 restaurants during this fiscal year. Expanding our brand globally is a top priority and focus of the entire BK management team.

I’ll now ask Ben to update us on the rest of our metrics.

Ben K. Wells

Thanks, John and good morning, everyone. Our momentum remains strong and we are confident in our ability to continue driving strong worldwide growth by delivering on our multi-faceted opportunities. Let me now turn your attention to page nine of the presentation.

Our sequential ARS improvement continued, making our ARS stronger than ever. Since the revitalization of our U.S. business in ’04, we have grown ARS by 25%, getting us closer to our $1.5 million new interim ARS goal. Worldwide, we exceeded the $1.2 million ARS threshold for the first time in our brand’s history, generating greater profitability given the inherent leverage of our business model.

A good example of our leverage can be seen through the chart on the left side of this slide. U.S. company restaurants with a trailing 12-month ARS of $1.9 million or above generated a best-in-class margin of 25.5%.

Potential and existing franchisees are recognizing the success of this business model and are seeking development opportunities in the U.S. and internationally. We expect the U.S. to be a net unit grower this year for the first time in six years, a meaningful milestone as we continue to ramp up development worldwide.

U.S. company restaurant margins of 15.8% improved 50 basis points compared to the same period last year. As John mentioned, due to our robust comps, we were able to leverage our fixed costs at the restaurant level and deflect commodity cost pressures. We also saw our first full quarter of expected energy savings from the completed rollout of the flexible batch broiler.

On another note, we also saw quarter-over-quarter progress in the percentage of U.S. restaurants above the 4% royalty rate. We now have about 30% of the U.S. restaurants above the 4% mark.

Turning to page 10, we actively delivered on our commitment to enhance shareholder value through a variety of initiatives. We used our strong, consistent cash flow to pay down an additional $25 million in debt, bringing our net debt to adjusted EBITDA ratio to an historical low of two times.

Our current outstanding bank debt is now at $846 million. We declared and paid the third cash dividend as public company of $0.0625. In addition, we used $6 million of our cash to repurchase 252,000 shares of our stock as part of our previously announced share repurchase program. Finally, we spent $20 million this quarter building new and refurbishing existing company-owned restaurants.

Our strong free cash flow generation gives us the flexibility to invest in the brand, driving future growth and value to our shareholders. On our last 32 remodels, we realized a rate of return of 16%. On our last 16 scrapes and rebuilds, a rate of return of 36% was earned. Our remodeling and rebuilding initiative is on track.

We have solidified our capital spending plan for 2008 fiscal year and expect to continue this initiative in the second half of the year. We are using our strong balance sheet to enhance shareholder value, investing in initiatives that align with our overall growth plan.

I also want to mention that Fitch upgraded our debt ratings during the quarter. Our long-term issuer default rating was upgraded to Double B Minus from B Plus, and unsecured credit facility was upgraded to Double B Plus from Double B. The agency noted our significant profile improvement, including our comp sales momentum, increased ARS, and improved margins.

Turning to this quarter’s effective tax rate, our tax rate was 38.8%. This is higher than we had originally forecasted and higher than last year’s first quarter effective tax rate at 37.5%. As most of you are aware, and as John noted, many countries are in the process of revising their statutory rates, which in turn impacts our effective tax rate each quarter as these changes become law and we make the appropriate adjustments.

Even though we do anticipate our full fiscal year effective tax rate to be 37.5%, based on what we know today, we will continue to see variability in our effective tax rate quarter to quarter.

Before turning the call back to John, I want to mention that we have included additional company data and reconciliation in the appendix of this presentation, and again, thank you for your interest and participation on our call.

John W. Chidsey

Thanks, Ben. In summary, I am confident in our business momentum. We have the right resources, strategies, and multi-faceted growth opportunities to carry the brand forward. We are executing on our global go-forward plan, delivering best-in-class results as demonstrated by our strong first quarter performance.

We remain on course, building profitable restaurants in domestic and international markets, improving operations excellence, continuing our best-in-class innovative marketing and advertising campaigns, and continuing product development and menu management. We believe that our intense focus in these areas will yield incremental growth and in turn create value for our shareholders.

We are thriving in a challenging economic environment as consumers take advantage of our value and convenience. I am confident in our ability to execute on our strategic growth opportunities and deliver solid results.

On a separate note, subsequent to our earnings announcement this morning, we issued a press release regarding our sponsors, Goldman, TPG, and Bain’s intent to sell 23 million shares of BKC stock. We anticipate filing an S3 within 24 hours that will outline the specifics of the deal. Until that document is filed, I am not at liberty to discuss any details of the proposed transaction.

We will now open the call for questions as they pertain to our earnings. Again, I am unable to answer any questions surrounding our sponsors’ intention to sell shares, so please limit your questions to our earnings release. Thank you for your time and continued interest. Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of John Glass with CIBC World Markets. Please proceed, sir.

John S. Glass - CIBC World Markets

Thanks very much. John, at one time you talked about an operating hour deficit with McDonald’s of about 30 hours a week. With the updated or extended operating hours this summer, what do you think that deficit is today?

John W. Chidsey

It actually, John, it was 20 is what it was previously, and then we talked about the fact on the last call that we mandated that you must be open until midnight or later starting on May 17th, so the deficit now is somewhere between 13 to 14 hours. If you’ll recall, we said about every five hours is worth a comp point.

John S. Glass - CIBC World Markets

Okay, and that in fact was the case this quarter then? You believe you got that incremental -- the amount of incremental comp that you thought you should?

John W. Chidsey

Yes.

John S. Glass - CIBC World Markets

Great, okay. And then, you didn’t talk about the food cost outlook for the United States. Do you have any update from last quarter, given where commodities are today?

Ben K. Wells

We basically, along with everyone else in the industry, is watching it very, very closely. I’ll tell you, we think that if beef continues to moderate as it currently is, all things being equal, and we get the comps that we anticipate, we are going to be able to continue to deflect the commodity pressures inside our P&L.

John S. Glass - CIBC World Markets

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Joe Buckley of Bear Stearns. Please proceed.

Joseph T. Buckley - Bear Stearns

Thank you. Give us an update, a little bit more of an update on the U.K. You mentioned you closed 35 restaurants this quarter. Are the store closures behind you at this point? And maybe just talk about some of the things you’ve done as you’ve taken over some of those under-performing franchise stores, the kind of operating changes you’ve implemented.

John W. Chidsey

I think as we said, Joe, on the call the previous quarter, we had this last batch to go of what I would consider traditional restaurants. I think we are basically done. I’m not saying you’re not going to have a few stragglers here and there but nothing in this size range.

In terms of the restaurants that we’ve taken over, I think it is very similar to what we’ve done in the U.S., which is put money back in them because they were traditionally under-invested in from an image standpoint. They were not run incredibly well with the right amount of labor, things of that nature.

Obviously the overall work that the marketing and the new product teams have done over there, that’s been a benefit not just for the company restaurants we took over but for the system as a whole, whether it was ice cream, whether it was the Angus Burger and a lot of the great work we’ve done on that front. So it was really no different than what we would have done in this market.

Joseph T. Buckley - Bear Stearns

Okay, and the margin pressure there, is that likely to continue for a while longer? Obviously the comps sound like they are doing very well. At what point do those two lines cross, do you think?

John W. Chidsey

Until we lap taking over these company restaurants, which we’re going to have the impact of that in our numbers for another two quarters, until you lap that, you are going to have some pressure there. I think you will certainly expect to see it next quarter. I can’t remember exactly at which point we then start to comp over comparable numbers, so to speak, from a margin basis.

Joseph T. Buckley - Bear Stearns

Okay. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Glen Petraglia of Citigroup. Please proceed.

Glen Petraglia - Citigroup

Thanks. Good morning. John, the comment was made in your prepared comments about labor management in the U.S. Obviously you’ve gotten some benefits from the batch broiler. I’m wondering if you can give us an update on kitchen minder and the labor schedule and where you are in terms of the rollout of that to the company owned restaurants in the U.S.?

John W. Chidsey

Well, kitchen minder comes really as a package with the new batch broiler, so if you order this new batch broiler, you must order a kitchen minder. And so I would say that we have gotten a fair amount of the benefit, if you will, that we are seeing on the broiler from not just an energy efficiency standpoint, as Ben mentioned, but also from a waste and a consumer perception from kitchen minder.

From the labor management scheduling, while we rolled it out in some of the company restaurants, we’ve got a ways to go there, so I would say we’ve barely begun to feel the benefit of labor management. Most of that improvement would have come from the broiler and kitchen minder.

And on the franchise side, it would be even more skewed in terms of the labor management being rolled out.

Glen Petraglia - Citigroup

Okay, and then Ben, if you could -- I didn’t see it anywhere and perhaps I just missed it -- impact from currency in the quarter.

Ben K. Wells

Currency was negligible during the quarter. It was less than $1 million on the bottom line.

Glen Petraglia - Citigroup

Okay. Thanks.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Steven Kron of Goldman Sachs. Please proceed.

Steven T. Kron - Goldman Sachs

Good morning. A couple of questions; I guess first just on a capital structure, I mean, you guys are now at the somewhat targeted two times debt, net debt to EBITDA range that you guys talked about a while back. You continue to generate great free cash flow. I’m just wondering how you are thinking about the capital structure going forward since you’ve been able to pay down debt so effectively.

John W. Chidsey

I think, as we said on our last call, Steve, our number one desire is to reinvest back into the brand, whether that’s building new company restaurants, whether that’s being more aggressive, as long as we continue to see the results we expect to see on scrapes and rebuilds and remodels, I think the second way to reinvest back in the brand is some of these negotiations that we’ve mentioned that we have underway to potentially acquire franchisees, again to either fold into our company portfolio or to break up and spin them back out, and we have those discussions going on both in the U.S. and outside the U.S. You can obviously only play the cards you are dealt on that front but I think that would be a great use of our capital.

And then, after those initiatives, which again I view as really helping to grow the brand long term, then whatever cash flow you have left, your ability is in either to buy shares back in the open market or at some point, depending on how the debt markets, in what shape they are in, levering up and buying shares back directly from the sponsors.

And the last use would just be your ordinary quarterly dividend.

Steven T. Kron - Goldman Sachs

Okay, that’s helpful, thanks. And then, just on the margin front, clearly it seems as though on the company margins, you’ve gotten the benefit of having the batch broiler rolled out for the full quarter now and offsetting the commodity cost headwind to a large extent.

Can you maybe just talk about what margin realization you are actually getting from the batch broiler? Can you quantify that a little bit for us?

And then secondly, certainly the next step is for franchisees to start to order these products, batch broiler and kitchen minder. Can you talk about the adoption rate here going forward?

John W. Chidsey

I can’t take it down because in my head I’m not fast enough on the margin standpoint, but the $500 to $600 that we talked about a month in anticipated savings is absolutely what we are seeing. And as Ben said, the first batch has been there for well over a year now that we started out with, so we have enough data to know. So I feel good about the $500 to $600 a month in savings.

In terms of franchisee adoption, I’m looking around the room here. I’m going to say we are somewhere between 750 to probably 850 broilers that have been ordered by franchisees and that continues to go well, in terms of them being [inaudible] -- we’re more up to like 1,000 now, so we’ll go with 1,000.

Steven T. Kron - Goldman Sachs

Okay, great. I’ll leave it at that. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of John Ivankoe of JPMorgan. Please proceed.

John Ivankoe - JPMorgan

Thanks. Actually, just a quick follow-up on the batch broiler; has the company begun to take it abroad in some of the European stores or the EMEA stores?

John W. Chidsey

A little bit in very selected markets. I think we were first of all sticking closer to home in terms of Latin America, Puerto Rico, places that are really in this general vicinity. But w have done a few company markets over there. Germany, as an example, but again we want to get the U.S. done first and then really go after Europe.

John Ivankoe - JPMorgan

Okay, so that might be a couple years out still?

John W. Chidsey

I think over the next 12 to 24 months is probably a reasonable guess.

John Ivankoe - JPMorgan

Could you comment on the pricing environment, just kind of -- I mean, we’re beginning to hear specific numbers from a number of different quick service companies in terms of the pricing that they are running. If you could help us think about straight pricing and then whether you are seeing the average ticket go up or down relative to that pricing?

Russell B. Klein

We continue to see the very healthy blend in terms of traffic and check, in terms of our contribution to sales growth and then inside of check, we’ve had a real nice balance of both pricing power with product innovation and mix management, and then also nominal price increases that our operators we’ve seen out in the system.

The company took price increase in July of about 1%, so we continue to see the ability to thoughtfully take price and in fact, one of the key focuses of the company is to refine our pricing model so that we can really wring out those opportunities on a restaurant-by-restaurant basis.

So there absolutely has been the ability to try to outrun some of the cost pressures on F&P with pricing.

John Ivankoe - JPMorgan

Let me follow up on that; so you took a price of 1% in July, so is that your cumulative price increase? Do you know what I’m saying? Was there any more taken before July that is currently in the numbers?

Russell B. Klein

No, just anything that would have occurred from mix management, improvements in value meal incidents and that sort of thing.

John Ivankoe - JPMorgan

Okay, and secondly, it sounds like you are actually going to be doing location-based pricing. How far along are you in that initiative and when might we see that at the store level?

Russell B. Klein

We, we are pretty far along. We have a cascading strategy that we are in the midst of rolling out. I would say by the time we are full to [bright], it will be 12 to 18 months and we do see this as a important opportunity for us.

John Ivankoe - JPMorgan

Okay, absolutely. And finally, Ben, if I may, and if I missed this, I apologize; could you update us on the fiscal ’08 CapEx and tax rate guidance?

Ben K. Wells

On the CapEx, we are going to, as we said before, we are going to spend approximately 140 to 150, perhaps 120 to 150, but inside that broad range. The actual tax rate for the full year, as I noted in the script, was 37.5%. That’s with the discrete items that we included. Obviously it will be less if you started stripping out all the statutory changes that are taking place.

John Ivankoe - JPMorgan

And going forward, fiscal ’09, should we still be thinking that tax rate dropping a point or so a year or something --

Ben K. Wells

Absolutely. In point of fact, the noise you are seeing here is people are lowering their tax rates, which requires us to make the appropriate accounting. So in the outer years, we feel very comfortable that our rate will continue to drop by about a point a year.

John Ivankoe - JPMorgan

Okay, perfect. Thanks.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jeffery Bernstein of Lehman Brothers. Please proceed.

Jeffery A. Bernstein - Lehman Brothers

Great, thanks. Good morning. First, a follow-up question on the U.K.; I think last quarter you were able to strip out what your acquired units did to margins. I think you said it was 140 basis point impact. I’m just wondering what you view the impact was to this quarter’s company-operated margins in terms of the European market.

John W. Chidsey

It’s about 80 basis points.

Jeffery A. Bernstein - Lehman Brothers

And then going forward, you’d expect that to continue to lessen over the next quarter or two until you are net neutral?

John W. Chidsey

Correct.

Jeffery A. Bernstein - Lehman Brothers

And then specific to the U.S., you had mentioned breakfast and late night were producing the expected improvement in day part sales. Is there any way to quantify where you are in terms of either the breakfast menu or the value menu or the late night in terms of as a percentage of comp or percentage of the system?

John W. Chidsey

I think that Russ can jump in after I’m through here, Jeff, but I think what we meant is we talked about it a lot on the previous calls that we’ve been able to grow those day parts at a faster rate than we had our overall business, somewhere between 1.5 to 2 times our normal growth rate.

Russ can give you some more highlight in terms of how we’ve been able to move breakfast or value in terms of what percentage of our menu it was a year or two ago versus where it is today.

Russell B. Klein

Just to John’s point, even overall on multi-faceted levers for growth, I mean, we’ve seen a real nice balance and certainly contribution from a day part standpoint is equally balanced. We see some expected disproportionate growth in A.M. and P.M. parts of our business. The value menu, which is an A.M./P.M. offering for us, has continued to grow as a percentage of sales, particularly with the kick we got from Spicy Chick'N Crisp. Yet we still see opportunities there.

Obviously our breakfast represents a big part of the gap versus our key competitor and when you look at the value menu as a percentage of sales mix, we remain underdeveloped versus our two key competitors and still possess a superior blended margin, so we’ll continue to use that as a strategic advantage.

Jeffery A. Bernstein - Lehman Brothers

But no specifics in terms of where you are on an actual percentage basis of the total menu?

Russell B. Klein

It’s around 13%, the value menu is.

John W. Chidsey

With both of our competitors being well over 20%, so again to Russ’ point, we think we have a lot of room to run there.

Jeffery A. Bernstein - Lehman Brothers

And then just lastly, there’s been talk on the U.S. company operated margin, obviously up nicely despite the commodity pressures. I’m just wondering, as you look at the comp needed to maintain the margin in the current environment, do you have a sense as what do we keep going forward? I know you mentioned that you thought momentum was continuing into this quarter. I’m just wondering what it really takes to maintain that margin.

John W. Chidsey

You’re talking about the U.S. specifically? Because in the call, we obviously said we felt good about, as Ben said, even if we see some continued pressure, given the flow-throughs from increased comps and what we are seeing with the batch broiler, which mostly that’s in the U.S., that we remain confident that our margins would stay flat again on an overall basis.

Jeffery A. Bernstein - Lehman Brothers

I didn’t know if there was anything specific to the U.S.

John W. Chidsey

No, not really. I think as long as our comps continue in that 2% to 3% range which we forecast for the year, we feel pretty good that we can continue to maintain the margins that we see today.

Jeffery A. Bernstein - Lehman Brothers

That’s great. And just one last question; I know a couple of competitors have spoken about a slowdown mid-September through the present, tougher, perhaps more elevated consumer environment pressures. I’m just wondering if you guys have seen any directional trends in terms of things getting better or seeing some pressure the past 30, 45 days.

John W. Chidsey

Well, obviously as we said, that was our best quarter for us in 10 quarters, and we said we’d -- in the script, which I’ll reiterate, we feel really good about October. We got off to a great start and I think the words in there specifically were we feel confident about positive comps in the second quarter, so we haven’t really noticed any particular slowdown per se in terms of consumers.

And as we said on the last call, we still run, if you look at our comps, we are probably two-thirds traffic driven, one-third check, maybe even slightly above that a little bit, so that’s not something we really notice to date.

Jeffery A. Bernstein - Lehman Brothers

Great. Thank you very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mark Wiltamuth of Morgan Stanley. Please proceed.

Mark Wiltamuth - Morgan Stanley

Good morning. Just to check in on how the franchisees are doing. I’m curious if you think their restaurant margins are also up. And if you could give us an indication on the rate at which the franchisees are signing up to build new units.

John W. Chidsey

Okay, I’ll go in reverse order. In terms of -- you’re talking about U.S. franchisees building?

Mark Wiltamuth - Morgan Stanley

Yes.

John W. Chidsey

Well, obviously we didn’t break down this year for our guidance, we didn’t break down specifically by market, but suffice it to say that again, if the U.S. is going to be a net grower for the first time in six years, we did talk about the fact that they are building more certainly than the previous year, so we feel good about -- it’s probably double to triple -- no, it’s more than double. It’s probably triple what they built two years ago and we continue to see more and more momentum. They continue to come in -- I don’t think we put it in the script this time, but they are still coming in at a 1.5 million basically when they’ve been open for 13 months, so that momentum really continues to fuel itself, so to speak.

In terms of your first question, I would say franchisees may be doing even slightly better, simply because they’ve been more aggressive on price actually than we have. If you think about commodity costs and all the other issues they face, they’d be the same as what we face in our company restaurants, but again I’d say they are slightly more aggressive on taking price so they should be not that dissimilar but slightly better than us.

Mark Wiltamuth - Morgan Stanley

And they should still have more to go with the batch broiler as they get more of those out there.

John W. Chidsey

Exactly.

Mark Wiltamuth - Morgan Stanley

Okay, thank you very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jeffrey Omohundro of Wachovia. Please proceed.

Jeffrey F. Omohundro - Wachovia Securities

Thanks and good morning. Just a question about brand positioning and thinking about the broader menu strategy, how you might be balancing that effort with your success appealing to the core heavy user?

John W. Chidsey

Well, we definitely embarked on an act two to our growth strategies this last May when we kicked off into our new fiscal year and began to introduce what we call white space strategies, which is simply the idea that our ability to democratize what our limited markets in food to go with quality and innovation that you see in fast casual and to deliver it at a value for the money and convenience and speed of service that we can do within our business model.

So products like the Angus, products like the wrap products, our Hold’ems products that are in test market, are two examples where we can continue to push into what we consider to be white space and we’ve recast our concept of our super fan to actually be a little more complete around the concept of a super family, which obviously the parties with kids segment is a large contributor to our business and so products that have somewhat more female appeal and also kid friendly or family friendly appeal with some of the themes that are in the marketplace, maybe best demonstrated by a product we have in test market now called Apple Fries, which is a fresh cut apple in the shape of a french fry that’s in test market and we’re very excited about.

So we are continuing to balance those white space strategies against what also works for us, which is focus on our core customer, new LTOs around our Whopper product and our TenderCrisp product and our value menu.

Jeffrey F. Omohundro - Wachovia Securities

Thanks.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of David Palmer of UBS Investments. Please proceed.

David Palmer - UBS

Thanks. Congrats on your quarter, especially the U.S. My question is on your international. I think you had something like $1 million of incremental profit growth from non-U.S. markets out of the $14 million or so that you had this quarter, and obviously this stands in contrast to some of your big cat peers and restaurants, which have been doing big numbers in terms of incremental international non-U.S. profitability.

I’m wondering what you are thinking is the big picture here in terms of inflection points from -- that those profit growth in terms of dollars really picking up and in answering this, perhaps you can comment on anything that might be masking your progress this quarter. This could include above average reinvestment you made and perhaps if you feel like putting dollars on the U.K. closures, what that might have done to your profit? Thanks.

John W. Chidsey

I think it’s a couple of things, David. I think one thing that you had last year is you had -- I don’t remember which quarter it’s in, I apologize, but I think it was this quarter, we had a $5 million gain as we got out of a joint venture in New Zealand and Australia, and so that you’re lapping, so that obviously was a one-timer, so that is certainly masking it.

And yes, you’ve got those U.K. restaurants, which have had some effect, so I think those would be the two biggest anomalies, if you will, so I think you will see -- I think you will definitely see acceleration in the next quarter. Because again, if you look at Latin America and use that as a proxy, last year we opened 96, 97 restaurants, we closed three. As you continue to see things like that, you are obviously driving incremental revenues because you are not having to add heads. Most of those restaurants, whether it’s Latin America or EMEA, are franchise, so -- someone just scribbled me a note that said at the end of the year, you could expect to see 33% increase --

Ben K. Wells

That’s if you adjusted it for the JV.

David Palmer - UBS

Is there anything else you would add to give a longer term feel? I know that you’ve said that you want to have most of your growth on a longer term basis come from international. Is there anything that can kind of -- I mean, in terms of perhaps the fact that you are going to be building more and having more net new unit growth within existing markets, is there any sort of timing around this, even to the quarter or to the half of the year that we can think about in terms of modeling international?

John W. Chidsey

Well, as I just said and Ben jumped in, again, if you back out the TPF gain and you are at a 26% increase in terms of operating income, so I would say the international segment is growing much faster than the U.S. segment, which you would expect to see. If you took out, which I can’t do the math right here on the fly, if you took out again those U.K. restaurants, it would be more than 26% growth, so I think it’s absolutely playing out as you would expect. That if 80% of our growth is coming from outside the U.S. and if we don’t need to add costs, you should continue to see this sort of 30%-plus growth outside the U.S.

David Palmer - UBS

Okay. All right, thanks very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Matt Difrisco of Thomas Weisel Partners. Please proceed.

Matt Difrisco - Thomas Weisel Partners

I just have a couple of questions; with respect to the campaign that we are seeing now in the U.S. market, I guess the homestyle campaign, what’s the schedule for this running? Is this going to run through Christmas as well and through the holiday season?

John W. Chidsey

No, the homestyle campaign will take us into December and then early December, we’ll be switching over to basically a Whopper campaign.

Matt Difrisco - Thomas Weisel Partners

It seems like you’ve invested a little bit more, or at least the image is building with have the moms on the advertising and everything. I guess you are going to lose that image or are you going to try and carry that into the Whopper campaign?

John W. Chidsey

I wouldn’t say that the homestyle advertising is some inflection point in terms of how we are going to market. The advertising you are seeing is aimed at positioning this particular product as one that is as good or better than mom could make and we are having some fun with that. But you’ll continue to see us draw from a play book over our calendar, targeting our core customer and managing all of the segments, whether it be parents, parties with kids, the white space strategies I spoke of earlier. So certainly the homestyle advertising isn’t some new era of work for us.

Matt Difrisco - Thomas Weisel Partners

Secondly, just following up a little bit on the international margin question, if you could just simplify it and look at it in terms of is it the -- are the margins something that would improve quicker if it was -- is it a source of you need more sales through those stores or are there some out-of-control costs that with better practices, now that some of these stores will be company-owned stores, that will improve the margins and see it through cost controls or whether it’s something cyclical, like you mentioned utilities in I believe Latin America. Or is it just a pure you need more sales volume through these stores?

John W. Chidsey

I don’t know -- they’re not out of control, that’s for sure. What you are seeing going through the international margins is currency, and you have to take a look at the revenue is way up because of currency, then the costs that are going to go through the P&L are going to be way up, or visa versa.

The same metrics that we operated inside the U.S. apply there and obviously when you have a highly fixed cost or leverage model, anything that goes through the top is going to come back down to the bottom, so obviously higher comps always helps.

But I want to stress that currency inside this model is one that comes down to the bottom with essentially a non-starter, it’s less than $1 million, it’s de minimis, but if you picked out each line, you are going to see currency flowing through and having its obvious effect, depending on what it is.

Matt Difrisco - Thomas Weisel Partners

I understand, okay. And then last question, can you give us an update if there’s any change to the investment cost of the kitchen minder and the batch broiler as it rolled out now associated with the $500 to $600 monthly savings?

John W. Chidsey

No change. That’s absolutely as advertised.

Matt Difrisco - Thomas Weisel Partners

So the investment cost is still around $16,000 for a franchisee?

John W. Chidsey

No, it’s about $5,600 to $6,000 depending on where you in freight, et cetera. So it’s still about a one-year payback.

Matt Difrisco - Thomas Weisel Partners

On the broiler and the kitchen minder?

John W. Chidsey

No, for the broiler. With kitchen minder, it’s slightly more, it’s like another $1,000, I want to say, so call it $7,000. So still, when you are comparing $500 to $600 a month, maybe a 15-month payback for both.

Matt Difrisco - Thomas Weisel Partners

Perfect. Thank you.

John W. Chidsey

I believe that was our last question, so again, we want to thank you very much for your participation today. Thanks for your interest in our story and we look forward to speaking to you next quarter. Thanks a lot.

Operator

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today’s conference call. This concludes your presentation for today and you may now disconnect. Have a good day.

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Source: Burger King F1Q08 (Qtr End 9/30/07) Earnings Call Transcript
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