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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q1 2012 Earnings Call

May 8, 2012 04:30 pm ET

Executives

Dan Accordino – Chief Executive Officer, Carrols Restaurant Group

Tim Taft – Chief Executive Officer, Fiesta Restaurant Group

Paul Flanders – Chief Executive Officer

Analysts

Karen Eltrich – Goldman Sachs

Andrew Gadlin – CJS Securities

Bryan Hunt – Wells Fargo Securities

Todd Cohen – MTC Advisors

Operator

Good day, ladies and gentlemen; thank you for standing by. Welcome to the Carrols Restaurant Group Q1 2012 Earnings Conference Call. (Operator instructions.) This conference is being recorded today, Tuesday May 8, 2012. And now I’d like to turn the conference over to Paul Flanders, Carrols’ Chief Financial Officer. Please go ahead, sir.

Paul Flanders

Good afternoon, everyone. By now you’ve had access to the announcement that was released earlier which can also be found on the website at www.carrols.com under the Investor Relations Section. Before we begin our remarks I want to remind everyone that our discussion today will include forward-looking statements and comments regarding our strategies, intentions or plans. These statements are not guarantees of future performance and therefore undue reliance should not be placed on them.

We also refer you to our filings with the SEC for a more detailed discussion of the risks that could impact our business and financial results. I also want to point you to certain fillings with the SEC that have either been made today or that we intend to make over the next few days. Fiesta Restaurant Group will file a Form 8(k) today which will include the Q1 financial results on a standalone basis for Fiesta. This filing also includes certain pro forma information regarding lease accounting changes occurring upon the spinoff.

We plan to file Q1 10(q)s for both Carrols and Fiesta in the next couple of days. Carrols will also file a Form 8(k) later this week for the spinoff of Fiesta which was completed yesterday. This filing will include the pro forma Carrols financial statements recast to reflect Fiesta as a discontinued operation. Because the spinoff did not occur until the current quarter our actual Q1 financial statements for Carrols will still include the Fiesta results.

Lastly, we will discuss the Carrols’ pending acquisition of the 278 Burger King restaurants in a moment. We anticipate that we will file a Form 8(k) which will include certain financial information for the acquired restaurants and pro forma financial information that gives effect to the acquisition. We hope to file this sometime next week. I encourage you to refer to all these filings to better understand the standalone results of operations and financial conditions for each of Carrols and Fiesta, including implications with regard to their respective financial statements after giving effect to the spinoff and effect of the pending acquisition.

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

Dan Accordino

Thanks, Paul, and good afternoon everyone. Having just completed the spinoff of Fiesta yesterday I want to start by wishing our colleagues at Fiesta success as they begin life as a separate public company. I will use my time today to discuss Carrols’ future as Burger King’s largest franchisee. Tim will provide an update on the Fiesta business and Paul will cover the Q1 financial results.

Having spent most of my professional career at Carrols I can say that I’ve never been more excited about Carrols’ future, and it’s clear to me that my enthusiasm and optimism is shared throughout the organization. As a singularly-focused company we will now be directing our full attention and resources to our Burger King operations and playing our part in the transformation and revitalization of the Burger King brand, which I will speak about in greater detail momentarily.

We are excited to be moving forward with our objective of growing within the Burger King system, something that we first began discussing when we announced our intention to spin off Fiesta. We believe that our size and scale as Burger King’s largest franchisee affords us the ability to grow within the system and to create long-term value for our shareholders.

As you are likely aware, in late March we announced that we entered into a purchase agreement with Burger King Corporation to acquire 278 of their restaurants in markets generally contiguous to our own Burger King footprint. Well the absolute size of this transaction is by itself integral to our long-term growth strategy, equally important is the structure of the transaction. Burger King Corporation has reinforced its strategic relationship with Carrols by agreeing to take an approximate 29% equity stake in our company as a significant component of consideration for the acquisition. In addition, Burger King will be assigning a right of first refusal to us for franchisee-to-franchisee restaurant sales in a 20-state region. This is an important aspect of the transaction from our perspective since future acquisitions are an important component of our long-term growth strategy.

Near-term we are focused on three things: first, to close the acquisition which includes completing our financing to fund the transaction and to provide capital for the restaurant remodeling plan that we have agreed to; next, integrate these restaurants with our information and operational systems. We have already begun to focus on this and we believe there are significant opportunities to improve operational and financial performance for the acquired restaurants. While maybe a bit premature to discuss specifics I will note that restaurant (inaudible) of 278 units is about a third of that for our existing restaurants on volumes that are only about 8% to 10% lower.

Last but not least we have committee to remodel more than 450 restaurants over the next three and a half years to the new Burger King 2020 image. We believe that this is an important part of Burger King’s overall transformation strategy and we are focused on accelerating our remodeling activities to support this.

Next, I’ll focus on some of the transformational changes and enhancements being implemented throughout the Burger King system as it repositions itself within the quick service segment. Although it’s only been a few weeks since some of these changes were announced or took effect, I can say that preliminary consumer feedback has been very positive and that the momentum experienced in Q1 in both average check and customer traffic has accelerated in Q2.

First, the menu: Burger King has taken a number of steps to modify and upgrade its products and menu structure, culminating with the introduction of more than a dozen new menu items in early April. This is Burger King’s broadest menu expansion in its 58-year history and it’s designed to evolve the brand so that it’s more relevant to today’s QSR customer while expanding the brand’s appeal to a broader demographic. The new menu items range from garden fresh salads, snack wraps and crispy chicken strips to real fruit smoothies and frappes, all made to order. These offerings are in addition to the earlier launch of the fire-grilled BK Toppers line and our new Golden Crispy Fries, a dramatically improved French fry made with thicker cut potatoes.

Second, marketing: in conjunction with its new product expansion Burger King launched a series of new advertising campaigns focused first on its food but also featuring A-list celebrities such as David Beckham, Salma Hayek, Sofia [Bragarra] and Jay Leno to name a few. This series of ads is part of a national multi-platform marketing campaign that also extends across social media and digital applications. These rebranding and promotional efforts support the brand’s focus on the quality of our food, improving the marketing image of the brand and broadening its consumer appeal.

Third, brand image: an important element of the Burger King transformation strategy involved enhancing the image of its restaurants throughout the system and to create marketing consistency between the image and the overall quality of our products. In conjunction with the pending acquisition we are accelerating the remodeling of our restaurants and plan to remodel more than 50 restaurants in 2012, and to remodel more than 450 restaurants over the next three and a half years. Once completed, nearly 80% of our store base will feature the 2020 restaurant image which showcases a fresh, sleek and eye-catching design. With capital requirements which we estimate will average around $300,000 per remodel, total capital expenditures for this initiative are expected to be approximately $135 million to $150 million.

As you can see, there are a lot of changes underway, and although we are still in the early stages of this transformational process we believe that these initiatives provide positive momentum for the brand which will create sustainable traction in our performance. And now let me quickly review Q1.

As you can see in our release we experienced strong revenue growth in our Burger King restaurants. Comparable restaurant sales increased 5.9%, making it the third consecutive quarter of positive in-store sales and our best quarterly performance in a few years. Adjusted EBITDA for the Burger King segment in Q1 2012 was $3.4 million compared to $3.8 million in Q1 2011. Excluding staff and acquisition expenses, segment EBITDA improved to $4.3 million from $3.9 million and gained about 25 basis points as a percentage of revenues. With that, I’ll turn the call over to Tim Taft, Chief Executive Officer of Fiesta Restaurant Group.

Tim Taft

Thank you, Dan. I know I speak for everybody on the Fiesta Team when I say how appreciative we are for what Carrols has done to build Pollo Tropical and Taco Cabana into the brands they are today. We’re delighted to begin our corporate life as an independent company. In terms of putting together the finishing touches on our leadership team, we should be able to make two important personnel announcements over the coming weeks and months including the new Chief Financial Officer and the Chief Development Officer.

The role of Chief Development Officer is a new position we are creating within the organization that’s a critical step toward our long-term growth plans that will be responsible for heading up development at both brands. On a related note we recently named Danny Meisenheimer to the newly created position of Chief Brand Officer of Pollo Tropical. Danny will oversee marketing, communications and R&D. Having worked with him in the past I can personally attest to his caliber and formidable skillset, and consider him a fine addition to our team and someone I trust implicitly with the Pollo Tropical brand.

Turning to our performance and business strategy, we’re certainly pleased with Fiesta’s strong start to 2012 and think our performance in Q1 sets us up nicely for the full year. We believe that our results reflect our continued focus on three key initiatives which include first, leveraging our favorable brand attributes to drive comparable restaurant sales while capitalizing on the consumer trends towards freshly prepared food, convenience and value. As many of you know, Fiesta has enjoyed strong industry-leading comps since 2010. To build on this track record we’re focused on four distinct revenue streams: on- and off-premises consumption, whole meal replacement, continued product development, and brand elevation.

Second, increasing our geographic reach through strategic new unit development and building brand familiarity by clustering stores in new markets. We’re also improving the quality of our asset base through selective remodeling; and finally, improving margins through operating leverage, commodity contracting and supply chain initiatives. At both brands our portable product offerings have improved lunch sales during the quarter as more customers look for a fresher and healthier on-the-go meal solution.

The speed of service in our restaurants allows us to compete with quick service while delivering quality food comparable to casual dining. At Pollo our “Create Your Own Family Meal” offerings have contributed to increases in our dinner sales as our customers recognize the affordability and high quality of whole meal replacement options that we offer in our restaurants. We’re also addressing efforts to improve ordering at both brands and are in the process of incorporating conversational ordering techniques into our POS system to speed the ordering process, improve order accuracy and allow us to deliver on customer requests for customization. We’re also seeing positive feedback from our table service implementation which resonates well with the high-quality products our customers have come to expect.

Now I want to talk about development and remodeling. As you know, our development strategy with Pollo has evolved considerably over the past three years and we’ve refined our site selection and customer demographic material to be more general market and less Latin-centric. With the success of our Atlanta, two Jacksonville restaurants, and now our second restaurant in Atlanta that just opened last Friday, we’re demonstrating our ability to be successful outside of the South Florida market and are generating volumes for these new restaurants that are well above our system-wide AUBs. As we move forward, we look to identify and secure high-profile locations near big box retailers and other traffic generating entities, and households with higher incomes, for our future sites.

Pollo Tropical, as I have mentioned, is a little ahead of Taco Cabana in terms of brand evolution. However, now that we are essentially complete with our Pollo remodeling projects we’re shifting the focus of our remodeling efforts to Taco Cabana. We’re updating older units to reflect a clean, contemporary look and have received favorable response from our customers. This, coupled with the quality real estate locations our team has been identifying, makes us hopeful we will see these initiatives translate into higher AUBs for Taco Cabana.

In Q1 we made a decision to close our five Pollo restaurants in New Jersey. These legacy locations were not profitable and coupled with unfavorable supply chain logistics and a disproportionate amount of resources being devoted to them, we decided that we would be better served by concentrating on opportunities with greater promise. As a result, we took a $5.9 million impairment on lease charges in Q1 as we exited this market in late March.

Our last initiative is margin improvement. To achieve our goal here we are executing our five points of focus: great food, cleanliness, hospitality, consistency, accuracy and well-maintained facilities. These restaurant basics are at the core of our operating DNA and can greatly impact our guest experience and help gain increased frequency and loyalty from our customers. In addition, we are also realizing efficiencies through purchase and supply chain initiatives, managing our commodity exposure and adding value to our many offerings by improving the quality of core products which are also critical to margin improvement.

Before Paul reviews the financials, let me offer a brief review of Fiesta’s Q1 results. At Pollo Tropical comparable restaurant sales increased a solid 9.4%, marking the tenth consecutive quarter of comparable unit sales at the brand. Key products and promotions were focused on the popular [Tropic Chop] which is a customized bowl with a choice of protein, veggies, rice and beans along with wraps and salads.

At Taco Cabana we continued to experience positive momentum with a comparable restaurant sales increase of 6.1%. Key products and promotions during the quarter included the [Value] meals for under $5, hickory smoked brisket, and we reintroduced the shrimp Tampico during the Lenten season.

Fiesta adjusted EBITDA as reported for Q1 was $15.1 million compared to $15.9 million in Q1 2011. Excluding allocated expenses related to the spinoff, Fiesta adjusted EBITDA was $15.8 million in Q1 2012 compared to $14.1 million in the prior-year Q1. With that, I’m going to turn the call back over to Paul.

Paul Flanders

Thanks, Tim. For Q1 2012, total revenues increased 7.3% to $211.6 million. Burger King segment revenues increased 4.7% to $85.5 million, while revenues for Fiesta grew 9.1% to $126.1 million compared to Q1 2011. Overall cost of sales was 31.7% of restaurant sales and increased 107 basis points from Q1 2011, as all three brands contended with higher commodity costs partially offset by favorable sales mix changes and the effect of menu price increases.

Restaurant labor costs were 29.2% of restaurant sales and decreased 51 basis points from the prior year as we leveraged this line item on higher sales volumes. Restaurant operating expenses which exclude rent and advertising were 14% of total restaurant sales, and 22 basis points lower than last year. Advertising expense was $7 million for Q1 2012 and $512,000 lower than last year. This decrease mostly reflected the effect of advertising credits that we’re receiving from Burger King over the next four years to offset the new [coupon] investments made in late 2011 and early 2012 for new product introductions. This advertising credit is approximately $1.6 million per year.

General and administrative expenses were $17.4 million for the quarter compared to $13.9 million in Q1 2011. In Q1 2012 we incurred fees and expenses of $1.5 million or $0.05 per diluted share related to the spinoff of Fiesta and for the Burger King acquisition. Also included were $1.4 million of expenses, or $0.05 per diluted share of expenses – primarily stock-based compensation – related to the conversion of employee stock options to restrict stock in connection with the spinoff, and for the accelerated investing of the restrictive stock held by Fiesta’s former Chairman of the Board.

Impairment and other lease charges totaled $6.9 million including $5.9 million for the five New Jersey Pollo Tropical restaurants that were closed in March, and $1 million for the impairment of two Taco Cabana restaurants. As a result of the $9.8 million in charges during Q1, income from operations fell to $1.3 million from $7.9 million in the year-ago period. Interest expense was $6.3 million for the quarter compared to $4.6 million in the prior year due to increases in both total debt and our weighted average interest rate due to refinancing in August, 2011 in anticipation of the spinoff.

We had net loss for Q1 of $3.5 million or $0.16 per diluted share compared to net income of $2.2 million or $0.10 per share in Q1 2011. On an after-tax basis, the charges which I discussed amounted to $0.32 per diluted share. In Q1 2011 we had $1.1 million impairment and other lease charges of $0.03 per share and expenses related to the spinoff of $300,000, or $0.01 per share after tax. Total outstanding debt was $274 million at the end of the quarter including Fiesta’s $200 million senior notes and borrowings under the Carrols LLC term loan facility of $61.8 million.

I’ll now give you some brief color of both Carrols’ and Fiesta’s financials for the quarter. Our Burger King business revenue increased 4.7% to $85.5 million with strong comparable (inaudible) drive sales increasing at 5.9%, which included a 4.3% increase in traffic along with a 1.7% increase in average check. Effective pricing for the quarter was 3%.

Cost of sales as a percentage of sales increased approximately 120 basis points for the quarter due to higher beef costs, other commodity increases and due to higher promotional activity. Beef costs at $2.05 per pound were up about 11.4% from Q1 2011. However, overall restaurant level margins for the quarter improved approximately 70 basis points compared to the prior year due to our leveraging restaurant labor costs and other restaurant operating expenses, as well as the advertising credits I mentioned earlier. Burger King’s capital expenditures for the quarter totaled $7 million including $2 million for remodeling initiatives and $3.9 million for the rollout of new point of sale systems.

Turning to Fiesta, Pollo Tropical revenues increased 10.7% to $57.8 million with comparable restaurant sales up a solid 9.4% against a positive 13.5% comparison from the prior year. Customer traffic increased 6.7%; effective pricing was 3.8%; and average check increased 2.4%. For Taco Cabana, revenues increased 7.8% to $68.3 million with comparable restaurant sales of 6.1% against a positive 2% comparison from the prior year. Customer traffic increased 2.4% while effective pricing was 3.6%, and average check was up 3.9%.

Cost of sales for Fiesta in the quarter increased approximately 95 basis points due to the higher commodity costs, particularly chicken and beef. However, overall restaurant level margins for the quarter improved approximately 43 basis points compared to the prior year, again due to leveraging of labor costs, advertising and other operating expenses. Fiesta’s capital expenditures for the quarter total $8.5 million including $5.4 million for new units and $1.3 million for remodeling. Fiesta also purchased one of its operating restaurants for $2.1 million which will be marketed as a future sale leaseback.

During the quarter we closed five Pollo Tropical restaurants and one Taco Cabana restaurant, bringing our current restaurant total to 86 Pollo Tropical restaurants and 15 Taco Cabana restaurants. I’d now like to provide you with a full-year outlook on both brands.

For Carrols’ Burger King brand we expect the following: comparable restaurant sales are expected to increase 3% to 5%, commodity costs are expected to increase 3% to 4%. Two restaurants are expected to close in 2012; we’ve closed one of those in Q1. The annualized run rate for general and administrative expenses excluding stock compensation is expected to be approximately $20 million to $22 million following the spinoff of Fiesta.

With regards to income taxes we currently expect to record a tax benefit for all of 2012 ranging from $700,000 to $1.3 million due in part to the deductibility of stock compensation costs related to the conversion of stock options in Q1. Capital expenditures are expected to be approximately $30 million to $35 million including $19 million to $24 million for remodeling more than 50 restaurants. This guidance excludes any effect from the acquisition of the Burger King restaurants except the capital expenditures which have been adjusted to reflect the company’s accelerated remodeling plans in anticipation of the acquisition. We will update our guidance at some time in the future for the acquisition.

With regards to Fiesta’s outlook we expect the following: comparable restaurant sales are expected to increase approximately 6% to 7% for Pollo Tropical and 4% to 5% for Taco Cabana. Commodity costs are expected to increase 1% to 2% for Pollo and 2.5% to 3.5% for Taco Cabana. Approximately 10 to 12 new restaurants are expected to be open and six restaurants are expected to be closed for the entire year; as I said earlier, we’ve closed all six of these in Q1.

The annualized run rate for general and administrative expenses is expected to be approximately $38 million to $40 million following the spinoff from Carrols. We expect the effective tax rate to be 41% to 43% and capital expenditures are estimated to be approximately $42 million to $46 million. And with that we’d now be happy to open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir; we’ll now begin the question-and-answer session. (Operator instructions.) Our first question comes from the line of Karen Eltrich with Goldman Sachs. Please go ahead.

Karen Eltrich – Goldman Sachs

Thank you. As you look at the Burger King acquisition what kind of infrastructure investments are you going to have to make and how long do you think it’ll have to be to digest it so to speak before you’re ready to make additional acquisitions?

Dan Accordino

In terms of the IT infrastructure investments, those have already been made. We have a platform in Syracuse that was built to appeal to acquire restaurants and the technology that’s in the existing core restaurants is going to conform to what we already have. So from that standpoint I think we’re off ahead of the curve. From a personnel standpoint we’re acquiring many of the people who come with the acquisition including one of their regional directors. In terms of timeframe our expectation is that for the balance of 2012 we’ll be able to improve cost of sales from between 0.5% and 1% and have a 1% to 1.5% improvement over the subsequent twelve to eighteen months beyond that.

In terms of acquiring restaurants, I think we’re going to have our hands full in terms of absorbing these restaurants and doing the remodeling program over the next two years. We’ll be able to do acquisitions that are of a smaller scale, in the six to twelve kind of numbers, but I don’t think we’ll be engaging in any of the larger acquisitions over the next 24 months.

Karen Eltrich – Goldman Sachs

And in the group of stores, how many are cash flow negative?

Dan Accordino

There were a handful that were cash flow negative but some of those were a function of leases which we are in the process of renegotiating. Some of them were Burger King owned fee properties which we’re also negotiating shorter-term leases on so that they will only have those restaurants for 24 to 36 months.

Karen Eltrich – Goldman Sachs

Great. And with regards to the new menu, what percentage of sales are these new items reaching and do you think this is kind of causing a halo effect on your comps or is it people actually are coming in to sample the new items?

Dan Accordino

These are platforms so I think the salad platform and the dessert platform are going to be here to stay. Certainly we’re getting a fair amount of trial for people who are coming in and trying them, but the products within those platforms may change. But we see those platforms being an integral part of the Burger King menu going forward. As we said in our remarks, Burger King clearly needs to and has expanded its demographic base to be more user friendly to women and kids and people who want snack items and so forth, so I think if you look at the aggregate of everything they’ve done coupled with the marketing, certainly there has been a lot of trial over the past couple months. But we think this repositioning is sustainable going forward.

Karen Eltrich – Goldman Sachs

Great. And moving on to Fiesta, what was the average unit volume of the New Jersey stores that were being closed in the system? Were they cash flow negative?

Dan Accordino

Paul, do you want to answer that?

Paul Flanders

Yeah, it was really all over the board but I would say on average they were probably averaging $1.3 million – there were some that were a little bit above that and a couple that were below.

Karen Eltrich – Goldman Sachs

And were they cash flow negative?

Paul Flanders

They didn’t cover the rent.

Karen Eltrich – Goldman Sachs

Got it. And if you look at Fiesta, how big a focus is international expansion going to be and again, what kind of investments do you need to make to really accelerate that?

Tim Taft

Well international franchising, we’ve got somebody who’s dedicated to that along with a support team at Pollo Tropical. I think on a go-forward basis we don’t anticipate adding any G&A for this coming year.

Karen Eltrich – Goldman Sachs

So how big of a pipeline do you think you can build?

Tim Taft

Well this year we anticipate opening up around 10 to 12 new restaurants, but I think it’s just a matter of how many different markets we want to open it up to and how big an emphasis we’re going to place on international. We’d at least like to do a little bit of support internationally but really focus our attention domestically.

Karen Eltrich – Goldman Sachs

Great, thank you very much.

Operator

Thank you. Our next question comes from the line of Andrew Gadlin with CJS Securities. Please go ahead.

Andrew Gadlin – CJS Securities

Thank you, good afternoon. To clarify, for the 450 stores that Carrols has committed to upgrade, is there anything to read into that to the number of stores that have already been upgraded?

Dan Accordino

We’ll have 575 restaurants by the time that we’re all done so there are some that aren’t going to be remodeled and there are a fair number that have already been remodeled, yes.

Andrew Gadlin – CJS Securities

So you kind of mentioned before that there are a handful of stores that you might not renew and their leases come up in 24 to 36 months. Can you kind of give us a broad sense of the size of that?

Dan Accordino

Paul, do you have the numbers right in front of you? I don’t. I don’t have those numbers, and I think there’s a number of restaurants. I think we see the brand coming out of the trough if you will and turning around if you will. So there’s a number of restaurants that we think while they’re underperforming based on our standards today, as the brand gets better we suspect that the results of these restaurants, either because we improve our operations or because the business gets better, we believe a fair number of these restaurants should improve.

So what we’ve done is we’ve pushed this decision out a couple years more to kind of give time to see how these stores are really going to perform and we’ll make a determination at that point in time. But in the near term we’re not planning on closing a whole bunch of stores.

Paul Flanders

I think over the next two years the only thing that we’ve committed to right now that we know we’re going to close are eight restaurants.

Andrew Gadlin – CJS Securities

That’s helpful. On the operational improvements that you’ve targeted for the new restaurants, just so I understand, if they’ve done a third of the EBITDA on essentially 90% of the revenue, but the SG&A after you add those on should be minimal, right? There should be significant leverage.

Paul Flanders

That is correct. This is P&L. The improvements that will be made are all within the P&L. We’re not adding very much overhead at all and there’s a 253 basis point to 300 basis point delta in the cost of sales between the acquired restaurants and our restaurants. The throughput costs are exactly the same; the menu prices, their menu prices are actually a bit higher than ours so consequently the only delta in that cost of sales is all in operating efficiencies, and a big part of that we’re going to be able to solve through the technology that we’re bringing to being able to manage the food costs.

Andrew Gadlin – CJS Securities

What percentage of that delta comes from the costs, from the 250 basis point difference in cost of goods sold?

Paul Flanders

Most of that is going to come out of the food costs improvement. The costs will flow through at the same level they flow through ours once we improve the cost of sales.

Andrew Gadlin – CJS Securities

And then just one more question if I may on the right of first refusal? Can you talk a little bit more about your options there and how you think about new store openings versus acquisition?

Paul Flanders

The right of first refusal as it’s written in the agreement, first of all the right of first refusal currently exists in every franchisee’s franchise agreement. So if Franchisee A wants to sell to Franchisee B they would negotiate the entire terms of the transaction, and if Burger King decides that they would like to take that deal on the terms and conditions that were negotiated they have the right to step in and take the deal. That right has been assigned to Carrols in (inaudible) and we now have the opportunity to do that.

In terms of new construction, we’re going to continue to look for opportunities as they present themselves. Our footprint is now larger than it was previously and we think that there’s going to be opportunities within these markets to build new restaurants. And in some cases, to a previous question about cash flow negative restaurants, the trade area is a good trade area – I just don’t like that particular site. So to the extent that we can exit a lease in two years we will offset that location with a new build.

Andrew Gadlin – CJS Securities

But will that count towards your 1000 store…

Paul Flanders

Yeah, that will count.

Andrew Gadlin – CJS Securities

Alright, thank you very much.

Operator

Thank you. Our next question comes from the line of Bryan Hunt with Wells Fargo Securities. Please go ahead.

Bryan Hunt – Wells Fargo Securities

Good afternoon. Paul, can you just remind me what you said those 50 remodels are going to cost this year?

Paul Flanders

Yeah, the remodels, we won’t do more than 50 this year and those are about in the $20 million range. The average cost is about $400,000.

Bryan Hunt – Wells Fargo Securities

Okay, the average cost is about $400,000 – yeah, that’s what I was trying to get to. And can you talk about the stores you’ve remodeled so far within the Burger King portfolio, what’s the kind of sales lifts you’re seeing in the 2020’s?

Paul Flanders

We’ve seen between a 5% and 7% lift from our remodel and we’ve modeled going forward that we’re going to get 5%. So we think we’ve been conservative. Burger King thinks that we should be getting 8% to 10% but we’ve been conservative in terms of our assumptions.

Dan Accordino

Yeah, I think what we’ve mainly seen, Bryan, is you get one set of results if you’re remodeling a restaurant. The question is what happens when we start transforming entire markets. One would assume that we should be getting a little bit higher lift as we progress with this remodel program.

Bryan Hunt – Wells Fargo Securities

And is that the plan – to transform entire markets at a pop? So with the 50 store remodel is this an entire market?

Dan Accordino

The 50 stores this year are not. The 57 restaurants, actually, these are all Carrols’ restaurants which were coming to the end of the term of their existing franchise agreement anyway. So we were obligated to remodel these over the next two years through 2013, so all I did was accelerate those so we could remodel them all in 2012 under the terms of the franchise agreement. Beginning in 2013 when we begin to remodel the acquired restaurants, we will be doing concentrations in markets.

Bryan Hunt – Wells Fargo Securities

Okay. And I guess if I look at the cost of funding to remodel all these stores, can you talk about the plan to fund the cash flow system with these remodels? Because it looks like you’re going to be cash flow negative associated at least with this amount of CAPEX.

Paul Flanders

Our intention is to do a senior note issue. We’ve raised already approximately $140 million or $150 million which we’ll use in conjunction with operating cash flow for the next three years which will be sufficient to fund this program.

Bryan Hunt – Wells Fargo Securities

Gotcha. Alright, and you all mentioned that (inaudible) sales were accelerating from the new product launches. Can you tell me about what the (inaudible) sales experience was for April overall at Burger King?

Paul Flanders

We were up almost 9.5%.

Bryan Hunt – Wells Fargo Securities

And because of all the new product introductions, [snack day parts] in particular, has there been a significant growth in different [day parts] given the new menu rollout and these new platforms?

Dan Accordino

I wouldn’t say it’s significant. The major increase has been in the [snack day] part which you would expect, but all of the day parts, as Paul said we were up 9.5% and all the day parts are showing improvement because we also added some breakfast products, and locally they’re doing some breakfast advertising as well. So probably snack day parts would be a tad higher than the other day parts.

Bryan Hunt – Wells Fargo Securities

And I haven’t run the math since you gave us a little bit more insight but can you give us an idea of what you bought those 278 stores for on an EBITDA multiple basis?

Paul Flanders

If that’s what you value they’re 29%.

Bryan Hunt – Wells Fargo Securities

Using today’s stock price? (laughing)

Paul Flanders

The multiple went up.

Bryan Hunt – Wells Fargo Securities

Okay, I appreciate the time. I’ll get back in the queue.

Operator

Thank you. (Operator instructions.) Our next question comes from the line of Todd Cohen with MTC Advisors. Please go ahead.

Todd Cohen – MTC Advisors

Good afternoon. A couple questions: as it relates to the cost of the remodels, you indicated that the 50 you’re doing this year would be about $400,000 per unit; and then in your remarks earlier you indicated that it would be about $300,000 per store. Now maybe that’s beginning in 2013 so I was wondering what the difference was in those two pictures.

Dan Accordino

The difference this year is 57 remodels that we’ve referenced at $400,000, they’re all Carrols’ restaurants which are approaching the end of their franchise term and therefore they haven’t been remodeled in 15 to 20 years. As we look at the acquired restaurants into 2013, many of those restaurants have had some work done on them in the last five to ten years – consequently, the amount of dollars that we have to spend on bringing them up to the 2020 image is less than what we’re spending this year on the Carrols’ restaurants.

Todd Cohen – MTC Advisors

Okay, great. And then another question: you referenced adjusted EBITDA that was in the press release at $3.4 million and then you said excluding certain items it would have been $4.3 million. What were those items that you referenced?

Paul Flanders

Those items were the expenses that we incurred in conjunction with either the spinoff or doing this Burger King transaction – about $900,000 of costs to get the Burger King.

Todd Cohen – MTC Advisors

Okay, and then just to make sure we’re comparing apples and apples, because I know you’ve included costs historically for some admin expenses and technology expenses that you were providing for Fiesta?

Dan Accordino

Yeah, what we’ve done with this press release is there’s a table in the back of the release where we recast the historical EBITDA numbers. So the numbers we’re talking here properly allocate the G&A across the three businesses.

Todd Cohen – MTC Advisors

Okay, so the $4.3 million excluding those items would be as if you were not incurring any expenses for Fiesta.

Dan Accordino

Well, the data assumes we incurred those expenses and then allocated them to Fiesta.

Todd Cohen – MTC Advisors

Okay. So is that $4.3 million, is that exclusive to Burger King?

Dan Accordino

Yes.

Todd Cohen – MTC Advisors

Okay, that’s a pure number – okay, great. And then you gave us some improvement figures on cost of goods and for store level profitability. I was wondering if you could give us those, if you break out those numbers on what was the cost of goods percentage in the quarter.

Paul Flanders

Yeah, that was in our remarks and it’s in the release as well.

Todd Cohen – MTC Advisors

Okay. How about store level profitability?

Dan Accordino

You’ll see that in our segment data once we file our 10(q)s.

Todd Cohen – MTC Advisors

Okay, and you’re saying the cost of goods was broken out in the release?

Dan Accordino

In total it’s in here, yeah.

Todd Cohen – MTC Advisors

In total for both concepts together or individually?

Dan Accordino

As I’ve said earlier, we’ve also filed the Fiesta financial statements in an 8(k) so those results are also available.

Todd Cohen – MTC Advisors

Okay. So you’ve not broken that out individually here.

Dan Accordino

“Here” being Carrols’ release? No.

Todd Cohen – MTC Advisors

Okay. Alright, and then I guess the last question would be for Fiesta. In your bringing on a new CFO, is it safe to assume that you’ll be bringing onboard a CFO with public company experience?

Tim Taft

Yes.

Todd Cohen – MTC Advisors

Okay, thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Karen Eltrich with Goldman Sachs. Please go ahead.

Karen Eltrich – Goldman Sachs

Thank you. Is it safe to assume that you’ll have digital ordering boards in all of your restaurants at this point?

Dan Accordino

For Burger King?

Karen Eltrich – Goldman Sachs

Yes, sorry.

Dan Accordino

Yes, that is 100% correct.

Karen Eltrich – Goldman Sachs

And how are you finding that in terms of like what kind of sales potential and customer reaction, and ease of use so to speak?

Dan Accordino

You know, Karen, it’s difficult for me to say what the sales response to that is. I will tell you that the customers love it, and our merchandising, whatever it is that we feature on that translate we better make sure that we increase our orders significantly because we sell a great deal of whatever it is that we market. The digital boards were brought in as part of an overall merchandising of the entire Burger King dining rooms, so it’s not just a digital board – it’s all of the signage, and all of the [POP] materials were also significantly upgraded prior to April 2nd. So the customer response has been very favorable and I think that in conjunction with the marketing and the new products is the reason that Burger King has had a reasonably good Q1, a very good April and so far, May.

Karen Eltrich – Goldman Sachs

Great. And you mentioned snacking. Is it safe to say that beverages is a large part of that group? And one thing, this is just from our channel check – it did look like there was some speed of service issues for beverages. Is there some work that needs to be done in that area?

Dan Accordino

Absolutely. If you get someone who comes through the drive through and orders three or four smoothies, we had to adjust our scheduling to make sure that we had somebody manning that beverage station all the time now. Generally it was manned during the lunch period and the dinner period but now we have to make sure that we adequately staff to the afternoon to make sure that we can handle the increased traffic for frozen beverages.

Karen Eltrich – Goldman Sachs

And is it just an investment in labor or do you think the equipment also may need some upgrading?

Dan Accordino

Well, each restaurant’s got brand new equipment. The only issue would be whether you need two [VitaMixes] instead of one and that’s a pretty easy fix. Primarily it’s staffing. If in the afternoon you have the cashier go over to the beverage station and make the smoothie that’s going to slow them down pretty substantially and that’s just not something that’s acceptable.

Karen Eltrich – Goldman Sachs

Great. And final question: McDonald’s obviously added a higher layer to their value menu. Wendy’s today kind of indicated that they’re willing to do the same. Do you think that’s where [quick service] is going in terms of rationality and do you see something like that for Burger King in the pipeline?

Dan Accordino

Burger King already has the extra value menu. So they’ve got the value menu and an extra value menu which has got some products on there that are over $1.50. So yeah, I think the whole industry is trying to reduce or lessen its dependence on a $1.00 menu. I mean there will still be $1.00 items but everyone is at the point now where they would like to be able to reduce the amount of traffic that’s coming in on the $1.00 menu.

Karen Eltrich – Goldman Sachs

Right, thank you very much.

Operator

Thank you. Our next question is a follow-up question from the line of Andrew Gadlin with CJS Securities. Please go ahead.

Andrew Gadlin – CJS Securities

Thanks for taking my follow-up. You’ve disclosed April’s comparable stores sales. Can you talk about that for Pollo and Taco Cabana?

Tim Taft

Sure. Pollo comp sales were in April 6.1% and Taco’s comp sales were 4%.

Andrew Gadlin – CJS Securities

Alright, thanks very much.

Operator

Thank you, and there are no further questions at this time. Ladies and gentlemen, that does conclude the Carrols Restaurant Group Q1 2012 earnings conference call. We thank you for your participation. You may now disconnect.

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