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
Steven Kron - Goldman Sachs
Jeffery A. Bernstein - Lehman Brothers
Matt Difrisco - Thomas Weisel Partners
Glen Petraglia - Citigroup
John Ivankoe - JPMorgan
Joseph T. Buckley - Bear Stearns
Jeffrey F. Omohundro - Wachovia Securities
David Palmer - UBS
Mitchell Speiser - Telsey Advisory Group
Burger King Holdings, Inc. (BKC) F2Q08 Earnings Call January 31, 2008 10:00 AM ET
Operator
Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the Burger King Holdings second quarter fiscal 2008 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Amy Wagner, Senior Vice President of Investor Relations and Global Communications. Please proceed.
Amy Wagner
Thank you and good morning, everyone. Welcome to Burger King's second quarter fiscal 2008 earnings conference call. We have prepared an earnings call PowerPoint presentation to assist in presenting our second 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 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 second quarter results before opening the call for questions.
Before we begin today, I would like to remind everyone that this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations based on currently available data. However, actual results may be impacted by future events and uncertainties and could differ materially from what is discussed today. More detailed information about these uncertainties is contained within the Safe Harbor statement included in this morning’s earnings release.
The presentation also includes non-GAAP financial measures as defined by Regulation G. The reconciliations 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, as mentioned on our last call, we’ll be hosting our first ever analyst and investor day on February 27th at our world headquarters in Miami, Florida. The company’s growth strategies will be discussed by top management, including our North American, EMEA, APAC, and Latin American presidents. If you have not registered yet for this event and would like to attend, please contact us at our investor relations line at 305-378-7696. And remember, registration closes tomorrow, February 1st. We look forward to hosting you in sunny Florida.
So with that, I’ll turn it over to John.
John W. Chidsey
Thank you, Amy. I am happy to be here today to share with your our strong worldwide results, including our significant net unit growth we attained during our second quarter. After discussing our performance and our outlook for the rest of fiscal 2008, we will open up the call for questions.
Our strong worldwide business momentum continued into the second quarter, confirming our ability to deliver on our multi-faceted strategic growth opportunities. Robust performance across all our business drivers -- marketing, products, operations, and acceleration and development drove substantial year over year improved results.
All business segments reported significant top and bottom line expansion, and page three of the presentation illustrates some of this quarter’s highlights. Worldwide revenues increased 10% to $613 million compared to $559 million in the same quarter last year. We recorded our 16th consecutive quarter of positive worldwide comps of 4.5%, marking the completion of four straight years of positive comp performance. Effective menu management, global promotions, and new product launches primarily drove incremental sales and traffic.
Worldwide, our barbell menu strategy of premium and value products struck the right balance between quality and affordability. In EMEA, comps were lifted by margin boosting products such as the Angry Whopper Sandwich and BK Fusion’s real dairy ice cream. Additionally, the 50th anniversary of the iconic, flame-grilled whopper was celebrated with local events supported by advertising in many countries.
In the U.S. and Canada, we recorded our 15th consecutive quarter of positive comps of 4.2%, and on a standalone basis, U.S. comps were 4.5%. during the quarter, we attracted new guests into our restaurant with the launch of Homestyle Melts. We placed a strategic emphasis on our AM and PM value menus, attracting cost-conscious consumers, and we drove family traffic with promotions such as SpongeBob and iDog.
In December, we kicked off the Whopper’s 50th anniversary celebration with our innovative Whopper freak-out media campaign, driving significant brand relevance and incremental sales. In fact, the Whopper line posted double-digit sales increases over the prior year period in the U.S. Comps were strong throughout the quarter and remained strong, even accelerating into January.
We have not and are not seeing a slowdown.
Restaurant growth increased considerably. We opened a net 105 units worldwide during the quarter. This growth is the highest quarterly net restaurant opening in over seven years and more than double the net restaurant growth compared to the same period in 2007.
We continued our expansion in existing and new countries with an additional franchise development agreement signed in Brazil and new franchisee development agreements signed in Columbia and Romania.
Our strong quarterly restaurant growth proves that we have the capacity and the concentrated focus to grow the brand worldwide. As previously guided, we are on track to open approximately 300 net new restaurants during this fiscal year, about 80% coming from international markets. And in the U.S., we expect positive net restaurant growth for the first time in six years.
Worldwide average restaurant sales increased 8% to $322,000 compared to $297,000 in the same quarter last year, and trailing 12-month ARS was $1.25 million, another new record high.
Turning to page four, strong revenue growth and our highly fixed cost franchise business model enabled us to deliver a 23% increase in EBITDA to $118 million compared to EBITDA of $96 million in the same quarter last year.
Diluted earnings per share were also significantly higher, up 29% to $0.36 versus $0.28 in the prior year period. Our effective tax rate for the quarter was 38% compared to 34.5% in the same period last year. Last year’s second quarter tax rate was abnormally low, benefiting from the positive resolution of a state tax audit which favorably impacted earnings by $0.01.
During the quarter, we used our strong cash flow to enhance shareholder value. We paid down $25 million in debt and are very comfortable with our current debt position. Going forward, we plan to use a portion of our excess cash flow to repurchase shares under our previously announced $100 million share repurchase program, opportunistically taking advantage of current broader market conditions.
We declared and paid our fourth quarterly dividend of $0.0625 and in our efforts to better align our restaurant portfolio with our aggressive development plans, we finalized several small acquisitions and facilitated restaurant sales between franchisees.
We also continued to execute on our plan of remodeling and rebuilding restaurants in the U.S. In November, our sponsors executed a secondary offering, selling 20.7 million shares. Collectively, they now own approximately 43% of all BK shares outstanding.
On page five of the presentation, you will note key quarterly highlights -- a combination of robust comps, significant at-restaurant growth, and a 20% increase in franchise revenues primarily drove substantial top line expansion. Revenue was up 10% quarter over quarter. As guided, worldwide company restaurant margins remained unchanged at 15.9%.
Our strong revenues, continued improvements in U.K. company operations, and savings derived from the flexible batch griller in North America helped us manage commodity cost pressures, primarily in beef, chicken, and cheese, which adversely impacted margins by 110 basis points.
However, in the U.S. company restaurant margins were up 30 basis points despite these commodity pressures.
G&A expense was in line with guidance, increasing its rate of inflation and at a lower percentage rate than revenue growth net of foreign exchange impact. We opened 105 net new restaurants this quarter and held G&A virtually unchanged quarter over quarter, highlighting our ability to aggressively manage G&A even with the addition of over 100 net new restaurants within the quarter.
On a trailing 12-month basis, we now have 211 more restaurants compared to the same period last year.
Selling expense, primarily comprised of advertising contributions, decreased to $22 million as compared to $25 million in the second quarter last year. Last year’s expense included a $7 million company funded advertising investment in the U.K., which helped to reignite the brand and turn comps positive in that market.
As you know, we started our U.K. revitalization efforts over a year ago and I’m excited to share that our strategies are producing results, including operational improvements yielding higher company restaurant margins, new fresh high quality premium offerings, tailored marketing, and the rationalization of our portfolio to operate only in profitable locations.
Sales and traffic are on a solid upward trend with four consecutive quarters of positive comps. We are pleased with the U.K.’s progress and are confident in the market’s profitability potential.
On page six of the presentation, we included year-to-date financial highlights. During the first six months of fiscal 2008, we delivered top of the industry financial performance. Compared to the same period last year, revenue was up 10% to $1.2 billion compared to $1.1 billion. EBITDA is up 18% to $235 million from $200 million, and diluted earnings per share is up 25% at $0.71 versus $0.57.
Given the inherent seasonality of our business, restaurant sales are typically higher in the spring and summer months, our fourth and first fiscal quarters, than in the fall and winter months, our second and third quarters. Notwithstanding, as a result of our strong year-to-date performance and our forecasted growth in the second half of the year, we now expect to exceed our initial revenue, EBITDA, and earnings growth guidance given at the beginning of our fiscal year.
On page seven, we have presented quarterly results by business segment. Revenues and income from operations improved significantly over the prior year period. Our multiple growth strategies produce strong results, particularly comps and solid international net restaurant openings. As mentioned earlier, revenues grew 10% and income from operations grew at a much higher rate of 27%, again evidencing the profitability leverage of our highly fixed cost franchise business model.
In the U.S. and Canada, revenues grew by 6% and profitability increased by 5%. Both were positively impacted by strong comp sales of 4.2% compared to 4.4% in the prior year period.
In November, the launch of the breakfast and lunch Homestyle Melts exceeded expectations. Throughout the quarter, we strategically featured both our value and premium offerings, satisfying both cost-conscious consumers and guests seeking indulgence, and promoted family traffic with kid-friendly advertising campaigns.
Additionally, we celebrated the 50th anniversary of the world-renowned Whopper with the Whopper Freak-out media campaign, generating significant brand awareness as we captured on film our guest reaction to Whopper-less Burger King restaurants.
Company restaurant margins in the reporting segment decreased just 10 basis points to 15.2%, despite 140 basis points of commodity pressures, primarily in the cost of beef, chicken, and cheese.
These costs were partially offset by savings derived from the flexible batch broiler and labor efficiencies gained as a result of higher sales.
EMEA/APAC revenues grew by 16% and income from operations more than doubled to $27 million from $13 million earned in the same quarter last year. Revenues were favorably impacted by foreign currency exchange rates, representing 68% of the total revenue growth.
However, expenses commensurately increased by the same rate of exchange, therefore having minimal impact on overall earnings.
Top line growth also benefited from robust comps of 5.5% versus 1.7% in the same period last year, led by strong performance in key markets, including U.K., Australia, Spain, and South Korea.
Premium product promotion, such as the Angry Whopper Sandwich and the Aberdeen Angus Burger, fueled results. Net restaurant growth of 135 as compared to the same period last year also contributed to strong revenue growth. Company restaurant margins increased 40 basis points to 16.1% compared to 15.7% in the same quarter last year, primarily due to improved U.K. company restaurant margins. These operational improvements more than offset the negative impact of higher labor expenses and increased commodity costs.
In Latin America, revenues grew 12% and income from operations increased 10%. Performance was driven by the opening of 96 net new restaurants as compared to the same period last year and by comps of 2.4% versus 4.1%. Last year’s second quarter comps were influenced by strong promotions, including the Whopper Mania campaign in South America. This quarter, we featured our Spicy Chicken Crisp and BK Stackers, which drove performance throughout markets in Central and South America. Company restaurant margins decreased to 25.7% compared to 28.8% in the same quarter last year, or by $167,000.
Page eight of the presentation depicts year-to-date highlights by segment. Our strong performance in the first half of fiscal 2008 illustrates our ability to drive solid worldwide growth. The fundamental strength and momentum of our brand continues in the right direction. Year-to-date revenues are up 10%, income from operations is up 22%, and net income us up substantially to 26%.
On page nine is our company scorecard. We continue to post strong quarter-over-quarter improvements across all key financial metrics. I will now take a few minutes to discuss each one of our scorecard metrics.
Page 10 illustrates our positive comp sales trend, both on a worldwide and U.S. basis. Worldwide, we continue to augment our barbell menu strategy of value and premium products, ranging from our Spicy Chicken Crisp sandwich to the Three-Pepper Angus Indulgent Burger. Many countries celebrated the Whopper’s 50th anniversary with local events and advertising. In the U.S., Whopper mania kicked into high gear with the Whopper Freak-out media campaign. According to advertising industry researcher IAG, these commercials were twice as effective as the competitor’s on consumer recall and likeability, and our sales performance reflects the success of this campaign.
In the U.S. and Canada, we drove strong comps with the introduction of the breakfast and lunch Homestyle Melts and increased family traffic with targeted promotions. We also strategically structured our marketing initiatives to proactively respond to current macroecnomic pressures, with breakfast and lunch value menu advertising that appealed to cost-conscious consumers.
However, we remain mindful not to create a significant product mix shift towards value through in-restaurant upselling and premium product promotions that run in tandem with value advertising.
I am excited to share that our comp momentum continues into the third quarter. Our marketing calendar is properly positioned to accelerate the brand’s worldwide top line growth, geared towards attracting guests of all ages. Our NFL alliance is poised to build brand relevance among sports enthusiasts. Popular classics, such as Snoopy and Cabbage Patch Kids Minis, along with SpongeBob and Monster Jam Trucks, are expected to drive family traffic.
Our barbell menu strategy will once again be implemented, providing value menu products and margin boosting options, such as the Barbeque Bacon Tendercrisp Sandwich, to guests seeking indulgence.
Now, Ben will update you on the rest of our metrics.
Ben K. Wells
Thanks, John and good morning, everyone. Our intense focus on driving results produced substantial quarter-over-quarter progress and we are committed to carrying our momentum forward. Let me turn your attention to page 11 of the presentation. It includes average restaurant sales, company restaurant margins, and royalty rate information. Worldwide trailing 12-month system and company restaurant average restaurant sales are at an all-time high of $1.25 million and $1.34 million respectively. Sales expansion is an important part of our long-term strategy. Growing our top line generates significant incremental company restaurant and franchisee profits, as we are able to effectively leverage our restaurants fixed costs and our supporting overhead.
For example, our U.S. company restaurants, with an average restaurant sales above $1.9 million, now generate close 26% in margins. In the U.S., we are steadily advancing towards our interim goal of $1.5 million.
During the second quarter, U.S. company restaurant margins were up 30 basis points at 16.2% compared to 15.9% in the same quarter last year. As the chart depicts, company restaurant margins were 16.3% on a trailing 12-month basis, despite higher commodity costs, robust comp sales, labor efficiencies, and savings derived from the flexible batch broiler enabled margins to expand.
We also experienced strong improvement in our worldwide blended royalty rate, up 23 basis points at 3.96% quarter over quarter. The royalty rate for approximately 300 U.S. franchised restaurants increased to 4.5% effective December 31st. These restaurants were at a lower royalty rate as a part of an early remodel incentive program.
Turning to page 12, our strong cash flow generation affords us the flexibility to pursue multiple investments and initiatives to enhance shareholder value, including reinvestment in company assets, development expansion via portfolio management, payment of quarterly dividends, and opportunistic share repurchases.
As John mentioned earlier, going forward the company plans on using a larger portion of its excess cash to repurchase shares under our previously announced $100 million share repurchase program.
In the second quarter, we retired an additional $25 million in debt, bringing our bank debt to $821 million and our net debt to EBITDA ratio to 1.8 times. Year-to-date, we have retired $50 million in debt and are comfortable with our debt position, allowing us to focus our excess cash on share repurchases.
We also declared and paid our fourth quarterly dividend of $0.0625 per share, returning $17 million to shareholders year-to-date. As a part of our development expansion efforts, we also used our cash flow to execute various small restaurant acquisitions and are actively negotiating several others.
It is our plan to sell the acquired restaurants to existing or new operators committed to growing the brand profitably.
Year-to-date, we have invested $44 million in building new and remodeling existing company-owned restaurants, as compared to $26 million in the same period last year. Average restaurant sales increases in excess of 35% for scrapes and rebuilds and 15% for remodels are driving our decision.
During the second half of the year, we are on plan to significantly remodel or rebuild over 30 company restaurants in the U.S. These restaurants will have a short-term negative impact on U.S. revenue and restaurant margins due to loss of sales during renovations and accelerated depreciation from the disposal of assets.
We expect both revenues and margins to be impacted by approximately $10 million to $12 million over the next two quarters. However, we anticipate significant returns from these newly imaged restaurants beginning in fiscal 2009.
Our strong and consistent cash flow enables us to invest in our restaurants and to pursue our shareholder enhancing initiatives. Our effective tax rate this quarter was 38% compared to 34.5% in the prior year period. As John mentioned, last year’s second quarter tax rate benefited from the positive resolution of a state tax audit and favorably impacted earnings by $0.01. As previously guided, we anticipate an effective tax rate of approximately 37.5% for the full fiscal year.
Before turning the call back to John, I want to mention that we have included additional company data and reconciliations in the appendix of this presentation. Again, thank you for your continued interest and participation on our call today.
John W. Chidsey
Thanks, Ben. In closing, our second quarter performance substantiates our ability to drive top of the industry results even in this challenging macroeconomic environment. Our growth in all areas remains on a steady upward trend. In the second half of the year, we will leverage our momentum in all facets of our business -- marketing, products, development, and operations worldwide. As we capitalize on our growth opportunities, we expect to exceed our initial earnings per share year-over-year growth guidance of 12% to 15%. In fact, for the full fiscal year, we expect to deliver north of the street’s long-term EPS growth consensus of 15%.
Because of the cost associated with the remodels and rebuilds Ben mentioned earlier, we will not experience the same rate of growth in the second half of the year as we did in the first. However, with that said, we are performing stronger than planned as consumers take advantage of our value, convenience, and quality around the world, and we are raising our EPS year-over-year growth guidance to be in excess of 15%.
We remain steadfast in our efforts to create significant value for our shareholders and I am confident in our ability to produce strong results. We expect to deliver on our multi-faceted strategic growth opportunities, while building a strong foundation for accelerated future growth.
Thank you for your time and continued interest. Operator, you may now open the call for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Mr. Steven Kron with Goldman Sachs. Please proceed, sir.
Steven Kron - Goldman Sachs
Thanks. Good morning. Congratulations on a very nice quarter. A couple of questions; I guess first, talking about the U.S. same-store sales and John, your reference to accelerating into January, it also seems as though you guys talked about maybe being a little bit more nimble with the promotional and marketing calendar, in light of the macro conditions. Can you first talk about whether you have seen a mix shift within the menu? And then secondly, maybe Russ, you could talk a little bit about what we should expect from a marketing and promotional schedule going forward? I know you have a lot of products in test. Maybe you could talk a little bit about that. And then I have a second question.
John W. Chidsey
I’ll start off and then Russ can correct me when I’m wrong and bat clean-up here. As we said, the quarter was very strong and if you remember the things we were lapping last year, the X-Box promotion and things like that, so we feel like from a promotional standpoint and from a menu product standpoint, we had ourselves positioned very well to lap what was a strong 4.5 again last quarter.
And there was really no shift. I mean, we talked about the fact we were very late getting in the value game, as all of you know, and while our value menu mix has been climbing, it’s been climbing slowly but steadily. So in reality, if you look year over year, there would be a very negligible, if any, shift.
Russell B. Klein
I would just add that we are really seeing multiple levers drive the business, whether it be day part growth around late night or breakfast, the contribution through both our AM and PM value menus, the premium segment of our menu, the LTO contribution to our menu. So it’s really steady as she goes in terms of the plan we’ve been pursuing, continuing to push on hours, competitive hours of operation, continuing to find pricing power and pricing headroom where we can.
So it’s been really a story of balance that’s been the contribution. No real seismic shifts that we anticipate going forward.
Steven Kron - Goldman Sachs
Okay, and then secondly, just on the cost side of things, you talked about 110 basis points I guess in the quarter from a commodity hit. Can you talk a little bit about the outlook from the remainder of the year, how visible those commodity costs are to you, how contracted you might be on things like beef and chicken?
John W. Chidsey
I think as we talked about on the last call, we would still believe over the next six to 12 months, you are probably looking at commodity cost pressure somewhere in the 5% to 7% range. Again, if you think about food costs being 30% of your P&L, so you are looking somewhere at 1.5% to 2% in terms of margin pressure and we continue to feel good that through comps and other things, we can outrun those commodity costs, which I think again we demonstrated this quarter with increased company restaurant margins we had. But that -- we don’t really see a change from what we saw three months ago from an outlook on commodities.
Steven Kron - Goldman Sachs
Great. Thanks very much.
Operator
Your next question comes from the line of Jeffery Bernstein with Lehman Brothers. Please proceed, sir.
Jeffery A. Bernstein - Lehman Brothers
Thank you. I actually have two questions myself -- the first one being on the -- I know you mentioned the portion of excess cash for share repurchase and very comfortable with debt levels with the most recent pay-down. I’m just wondering if that means you’d be comfortable leaving debt here or whether there’s a possibility for leverage either for further share repo or thoughts around when we might see another secondary offering. And I have a follow-up.
John W. Chidsey
We’re going to leave debt essentially right here and given this market, the incremental cost for leverage is prohibitive, so we are going to -- we’re basically going to run with what we’ve got.
Jeffery A. Bernstein - Lehman Brothers
And in terms of secondary, would you still expect another one perhaps in the next couple of quarters, or --
John W. Chidsey
Well, that’s obviously up to our sponsors in terms of when they choose to sell. Today they are at about 43% ownership and they have now had two secondaries after the IPO and whether they continue -- I think the last two occurred somewhere between nine months, roughly nine months spacing. So whether they continue on that path or not, who knows. I think in the end, it’s really up to them.
Jeffery A. Bernstein - Lehman Brothers
Okay, and then just a follow-up question -- I know last quarter you guys talked about company-operated stores running pricing I believe in the 1% range. It seems like that’s well below peers. I’m just wondering, as you talk about the ongoing challenging cost environment, whether we could see more aggressive company-operated menu pricing perhaps closing the gap with franchisees over the next couple of quarters?
John W. Chidsey
We did take -- I think it was another 75 or 80 basis points in November -- it was a little under 1% on company pricing and we still believe that we are certainly lower than franchisees and again, I would reiterate I don’t think we’ve been as aggressive as our competition overall in terms of taking pricing. But given the macro environment in which we are operating, I just think we want to be very careful and measured in what we do. And to me, it’s more of a market-by-market opportunity, which we continue to sharpen our focus around that and we’ll continue to look at that. But so far I think the way we’ve approached this has worked well for us and we’ll sort of continue at that same pace.
Jeffery A. Bernstein - Lehman Brothers
Okay, and then just one last thing, in terms of the unit growth -- that seems like it is definitely strong in this quarter, after a softer first quarter. I’m just wondering, you mentioned comfort with the 300 net new, whether -- do you see potential upside whether it does ramp up in the back half of the year, or perhaps what might be inhibitors to achieving more aggressive international growth? Especially, it seems like investors will want to pay up for the international exposure in the current domestic environment. Thanks.
John W. Chidsey
I think the answer we talked about as we ramped up development over the last year or two globally, it’s taken us a while to try to smooth out our pipeline. I mean, if you look a year ago and look how much of it was in the last two quarters of the year, it’s going to take us a year or two to try to get this thing really balanced out as our growth gets going here. So you are correct in that the first quarter was the weakest and we certainly delivered a good quarter from a development standpoint. I think you’ll see that trend continue in the third and fourth quarter but I still feel like the approximate net 300 number is the right place to be for the year.
Jeffery A. Bernstein - Lehman Brothers
Thank you.
Operator
Your next question comes from the line of Matt Difrisco with Thomas Weisel Partners. Please proceed, sir.
Matt Difrisco - Thomas Weisel Partners
Thank you. Could you update us -- I have a couple of questions, but can you update us on the broiler rollout with the franchisees? What’s the progress of that and milestones that you expect at the end of this fiscal year or the next?
John W. Chidsey
Well, as you know, we were completely rolled our across our company restaurants by the end of the year and I believe today the number is about 1,500 restaurants -- I’m sorry, restaurants -- well, yeah, 1,500 restaurants have the new broiler and that continues to pick up speed as we move along. I think you know we have a mandate by the year 2010, all franchisees must be on one of these two new broilers, the new NICO or the new DUKE, so the adoption rate has picked up and is running very nicely.
Matt Difrisco - Thomas Weisel Partners
So you have 1,500 franchises currently?
John W. Chidsey
No, in total.
Matt Difrisco - Thomas Weisel Partners
In total? Okay, I can back out then. Do you have a milestone on how we are going to get from now until 2010 or just -- is it going to be evenly paced? It seems like -- I mean, Carroll’s hasn’t mentioned yet that they’ve rolled it out, so is it going to be a little bit more back-end weighted or is it on pace as you had planned?
John W. Chidsey
I think it will actually accelerate as opposed to a smooth linear line, if you will. And I think the reason for that is just this is the first time we’ve had a new manufacturer in the system in decades and I think you have the normal healthy skepticism on the part of franchisees and they wanted to see how these broilers really operated in our company restaurants. And as you get some large, influential franchisees who have now taken them into their restaurants who have also seen great results, I think it will be the usual thing. They’ll be out converting the rest of the masses, so to speak and we’ll see that curve accelerate. That would be my guess.
Matt Difrisco - Thomas Weisel Partners
Okay, and can you give us a little bit of greater color or granularity on the pricing and the average check behind this comp you’ve reported and what you are running right now? Are you experiencing a positive direction in the average check mix?
John W. Chidsey
We’re very pleased with the balance between tickets and average check growth in terms of the makeup of our comp sales growth. And as we’ve said historically, we’ve moved from what was a pricing, an average check driven turnaround to a much more balanced performance between traffic and check and we like the mix and we plan on sustaining that mix.
Matt Difrisco - Thomas Weisel Partners
Okay, and then lastly, given that you are getting back into a little bit more modest but still expansion, is there any implied margin pressure in the restaurant or on the G&A line in your current guidance? Or is that too small of a pick-up in the overall base to really have an impact on the margins?
John W. Chidsey
No, we’re comfortable with our current guidance. You’re not going to see any growth in the G&A based off of that activity.
As we keep saying, we’re running a fixed cost model and we’re leveraging off of it. I would refer you again that we will take an accelerated depreciation charge and we’ll have some down time but as far as building infrastructure around this growth, you probably are not going to see very much at all.
Matt Difrisco - Thomas Weisel Partners
Okay. Thank you.
Operator
Your next question comes from the line of Mr. Glen Petraglia with Citigroup. Please proceed, sir.
Glen Petraglia - Citigroup
Thanks and good morning. I guess John, if you could maybe speak to the franchisees’ access to capital, given the credit markets. I think they want to grow but we haven’t necessarily seen it yet. When do you think -- it sounds like back-half of this fiscal year you are expecting to see it. I’m presuming that you have some visibility into the pipeline. If you could maybe comment on that, and then I’ve got one or two follow-ups. Thanks.
John W. Chidsey
I’ll let Ben specifically address the capital availability out there, but I would disagree on one part, Glen. I would say we remain on track, as we said in our prepared remarks, that the U.S. will be a net grower for the first time in six years, and I think while we did not give you the breakdown this year on region by region, I think we did say that the U.S. will build triple the number of restaurants this year that it did two years ago and that that curve has accelerated dramatically and we still believe we will hit our growth number in the U.S. not just on a net basis but on a gross basis, so I think that’s our way of saying people are able to get capital. But Ben can probably add a little more color.
Ben K. Wells
On the micro level, we have actually gone out and checked with the franchisees that are most likely to be developing and ask them if they are having any trouble with access to capital, and it’s actually just the opposite -- that capital is readily available. In fact, I know it is going to sound a little bit incongruent, but we are actually seeing a number of them reduce their cost of borrowing as they refinance.
Secondly, we’ve gone out and we continue to dialog with those institutions that lend into the system and what you find, even though the financial press is all about telling us about what is happening some place about the sub-prime, the reality here is that much of our organization inside the U.S., as well as inside Europe, used regional banks which have largely been unaffected by the sub-prime mess that’s floated through the market.
We’re not seeing that pressure at all.
Glen Petraglia - Citigroup
Okay. I wish I could say the same about large, multi-national banks but in terms of the economy, specifically in Europe, we’ve heard some concerns that Europe may be slowing. I’m curious if you’ve seen any indications of that or have any concerns about that. And then, just lastly in terms of labor scheduling in the U.S., I know it was something that you were testing. I’m wondering if you could maybe update us on that.
John W. Chidsey
As to your Europe question, we have not seen a slowdown just as I would say in the U.S. You know, January is off to a good start. If you look at the quarterly comps we had in EMEA this quarter, they were obviously very strong in January. I would make the same statement for EMEA that I made for the U.S., so haven’t seen any indications yet of any slowdown or change in business trends there for us.
Labor scheduling system is still in the hands of a select group of franchisees who are testing it. I don’t think we have any change in terms of the timeframe we had in mind for rolling that out.
Glen Petraglia - Citigroup
Thanks.
Operator
Your next question comes from the line of John Ivankoe with JPMorgan. Please proceed, sir.
John Ivankoe - JPMorgan
Thank you. A couple of questions, if I may; first, Ben, can you remind us of the CapEx budget for ’08 and if you’ve given it for ’09 and how that’s split between new unit and non-new unit?
Ben K. Wells
We on our last call gave guidance of approximately $140 million as the CapEx guidance, and what was your second question?
John Ivankoe - JPMorgan
It was between new unit and non-new unit, and if you’ve given an indication on ’09 as well?
Ben K. Wells
On new units, we’re going to be spending approximately $30 million to $40 million inside that space and then we’re going to continue to focus on existing restaurants in which we are going to remodel another 40 to 50 units at this juncture and rebuilding yet 15 to 20.
So basically, new restaurants, $49 million, existing is $76 million, and then the balance is going to go to other general corporate purposes.
John Ivankoe - JPMorgan
Okay, and was that just the ’09 number that you gave? That was the ’08 number.
Ben K. Wells
That was ’08.
John Ivankoe - JPMorgan
So the 49 on new units, 76 on existing, and then you have some corporate to take us to 140. Have you given an ’09 indication? I mean, should we assume that it goes up normally or just stay at the current level?
John W. Chidsey
I wouldn’t say that it would go up. What we said, if you’ll recall, is we were going to go attack these 30 scrapes and these 30 remodels and assuming we continued to see the great sales uplifts we saw, we would probably continue to spend capital at the same level.
So I would say it would be flat -- I would consider at worst case it would come down, and when I say worst case because that would mean we didn’t get the sales lift we wanted. So I would jut model flat until we tell you something different for ’09 if you are looking out that far, but we haven’t really given any per se guidance as to ’09.
John Ivankoe - JPMorgan
Well, actually the next follow-up was directly on that. You know, Ben, I just couldn’t write fast enough, you’re doing I think 30 remodels or rebuilds I think in the second half of ’08, is that what you said in your prepared remarks?
Ben K. Wells
Yes.
John Ivankoe - JPMorgan
Okay, and the cost of those, which we are actually going to see on the income statement flowing through is $10 million to $12 million?
Ben K. Wells
That’s correct.
John Ivankoe - JPMorgan
Okay, so that’s worth about $0.06 through earnings, I guess, is what your point is in your --
Ben K. Wells
More or less about five.
John Ivankoe - JPMorgan
Okay, now going forward to 2009, should we assume that that’s also going to be the cast the first half of ’09 on an incremental basis, or was there some of those expenses in the first half of ’08 that I wasn’t sensitive to?
Ben K. Wells
Well, anytime you take a restaurant out and rebuild it, you are going to have accelerated depreciation. But since we haven’t given any guidance on ’09, we’ll bring you up to speed as our plans come out for ’09, but good question, John. But obviously anytime you take a restaurant offline, you are going to take a charge and then, keep back of mind as we begin to model this out, you’re start seeing uplift from the ones that we did this year, so net net, it’s unclear. We’ve not given any guidance, rather, so it’s a bit unclear, I acknowledge, but we’ve not given any ’09 guidance at this point.
John Ivankoe - JPMorgan
Assuming this current program works and that you are getting the 35% type of sales lift on the rebuilds, how many units would you like to do? I mean, out of Europe, let’s see -- ending the quarter at 914 units, how many do you think need that level of a significant rebuild?
Ben K. Wells
Well, I think two things -- one, if you keep driving to ’09, I would just again assume, because we really haven’t gotten that granular yet, if we do the same number because it works again next year, to your point you are going to have that same $10 million to $12 million, but it will be spread over four quarters because this year we go going so late, it all ended up being in quarters three and four. If we do the same number next year, it will be more spread evenly throughout the year and you are going to have the benefit of the remodels you did in the previous year.
So if it works, we might ramp it up some. My guess is over the next five years, like we said, we probably need to hit anywhere from 50% to 75% of the portfolio, so at least 10% a year, which is what we are doing this year. And if it continues to show, we think we might ramp it up to as much as 12% to 15% of the portfolio, but again, we need a few more data points before we jump to that conclusion.
John Ivankoe - JPMorgan
That’s very helpful. John, just a follow-up on something that you said, and I want to make sure that I got this right -- you referenced a consensus growth rate of 15% I think in terms of what your earnings growth is in your prepared remarks, and --
John W. Chidsey
If you look at, yeah, where most of the street has us, I’d say the vast majority of you have as 15%.
John Ivankoe - JPMorgan
Including me, but is that -- I mean, are you -- is that your new growth rate going forward or in your mind, are you still at 20?
John W. Chidsey
Since you guys have us at 15, I say in reality, have we changed our mind? No, but to me, I just always say now we are very comfortable we can beat the street at 15 because we keep saying over and over the 20. Nobody seems to be buying into the 20, so we’ll just -- we’ll keep saying we’re comfortable beating your long-term growth rates.
John Ivankoe - JPMorgan
Totally fair. I know I’m going to get the question, so I’ll ask you. And then finally, that one piece, the difference between the 15 and the 20 is that tax rate, and I think I ask about it every quarter, so I’ll ask about it again -- is that something that we are still confident in moving forward, that that’s going to come down 100 basis points a year?
Ben K. Wells
Yes, we are still planning on that and I will just point out that the 38% this quarter was adversely affected by a couple of discrete items. You are always going to have that floating through but the operational rate continues to perform exactly how we had anticipated. We’ll just have to play it out but yes, that’s our guidance.
John Ivankoe - JPMorgan
Okay. Thank you very much.
Operator
Your next question comes from the line of Joseph Buckley with Bear Stearns. Please proceed, sir.
Joseph T. Buckley - Bear Stearns
Thank you. Ben, in your comments, you talked about a certain number of U.S. restaurants, franchise restaurants that went up to a 4.5% royalty as of December 31st and I missed that number. Could you repeat it.
Ben K. Wells
It was 300.
Joseph T. Buckley - Bear Stearns
Are there other big tranches of restaurants that will be going up to the 4.5% rate over the next year or so?
Ben K. Wells
No, that was the termination of an incentive program that we had a number of years ago. This concludes the final tranche. As a result, the rate will now be a very steady increase over time and as a successor, they’ll ratchet up to that 4.5.
Joseph T. Buckley - Bear Stearns
Okay, and these 300, what is the rate that they were at versus the 4.5?
Ben K. Wells
Well, originally they were at 2.5 and then it migrated them up to 3.5, and then finally they go back up to 4.5, so they are now at the 4.5 rate.
Joseph T. Buckley - Bear Stearns
And then another question on the remodels, rebuilds -- how much of that $10 million to $12 million is accelerated depreciation and how much is because you are closed for a period of time?
Ben K. Wells
It’s about I’d say $6 million would be the accelerated depreciation. We’ll have some down time. Keep in mind we’ve also got some activity refurbishment going on inside Europe as well, which is another say three. So we’re going to -- we’ll work off of that.
Joseph T. Buckley - Bear Stearns
Okay and then the acquisitions you are making, are you cleaning up the system? Talk about the motivation behind that and what types of stores you are buying, whether they are good volume, low volume, and if there is any permanency to it or do you think your company mix will stay about where it is?
Ben K. Wells
It’s a little bit of everything, Joe. It could be somebody who we think is not doing a good job in their market and for whatever reason, there’s not a franchisee to step up and do it, so we’ll do it and then find somebody and flip it. It could be something that fits in very nicely where they are company DMAs that we basically control. It could be where there’s something where we know we could put it together with something else and flip it out, so it’s lots of different reasons.
But I still stick to our statement that three to five years from now, with all these ins and outs, we’ll end up within a percent or two of where we are five years from now. We don’t expect to go from whatever we’re at today, 10%, 11%, and end up at 18% or anything like that.
Joseph T. Buckley - Bear Stearns
Very good. Okay. Thank you.
Operator
Your next question comes from the line of Jeffrey Omohundro with Wachovia. Please proceed, sir.
Jeffrey F. Omohundro - Wachovia Securities
Thanks. Good morning. I just wonder if you could give us an update on the Asia targets, China in particular, over the next say three to five years? Thanks.
John W. Chidsey
Well, we haven’t given any specific targets around that. We talked about obviously the fact that we have a new franchisee and new franchise agreement in Indonesia and we refranchised the Philippines. The new franchisee is out building there and we’ve got the new franchisee in Hong Kong and Macau and they’ve started to build and open restaurants. We have a new franchisee in Japan. We’ve got our first franchisee signed up in China.
So as I keep saying, I think all the pieces are being laid in place. Our development number in Asia this year, again we’re not giving them out, but is about double as I recall what is was last year, and I still stick to my projection that three to five years from now, Asia will certainly equal if not outstrip Europe and the Middle East as our largest piece of our growth.
Jeffrey F. Omohundro - Wachovia Securities
That was the element that I was interested in. So there is no change in that target then? Thanks.
Operator
Your next question comes from the line of David Palmer with UBS. Please proceed, sir.
David Palmer - UBS
Thanks. Congratulations on that quarter. Ben, just a model keeping question -- could you remind me, wasn’t there a three-year step-up in stock option expense for a few years? Was that ending in fiscal ’08?
Ben K. Wells
The answer to the question is yes, there was and then it moderates in fiscal ’10.
David Palmer - UBS
So fiscal ’10 is the first year of moderation?
Ben K. Wells
You hit steady state then. I mean --
David Palmer - UBS
Right, right.
Ben K. Wells
-- we had the expense and so we’ve got two more years and then it will just lap itself and we won’t see anymore negative impact.
David Palmer - UBS
Right. I was kind of hoping it was going to be fiscal ’09, but thanks. The second question on pricing, I have to say, I find your hesitation to raise prices more on your company stores a bit of a mindblower. I guess I’m just wondering maybe the thinking there. Your franchisees didn’t seem to hold back much in calendar ’07. Is part of your thinking that A, you didn’t really need it in your company stores because of the new broilers and less labor pressure because of the type of markets you are in? Or is it maybe a little bit of that that you may not have as much of that double-cheese on the dollar menu effect that essentially screams value to give you that offset in the value perception? What’s your thinking there?
John W. Chidsey
Well, I’m going to ask you to try to clarify the second part of the question but our restraint on pricing is essentially one of where we are always carefully managing our value for the money ratings. This is a value for the money category, along with being a convenience category, along with being a food quality category, and so management of those issues, particularly given the large disadvantage that we faced when we came into place here versus McDonald’s on value for the rating, value for the money rating.
So we’ve been able to claw back and narrow that gap but we still have a long, long way to go and we still have in our quiver the arrow of the value menu, which has got that superior blended margin and it is still relatively under-developed as a percentage of our overall sales.
So we really want to continue to keep some coherence to our menu architecture on overall pricing given the importance of us driving that value menu as well.
David Palmer - UBS
Basically all I was talking about in the second part of that question is that some of the competition, what they like to do is raise price maybe more on some of the premium sandwiches, or even more particularly on the extra value meals. They have the dollar menu that essentially gives them the value ratings while they push on less price elastic parts of the menu, and I’m wondering if that -- while you may not have the double-cheese on your dollar menu, or the $0.99 menu, if you feel like maybe you have to be a little bit more careful. That’s what I meant.
John W. Chidsey
Well, we monitor very closely what all of our competitors are doing literally by location on pricing so -- and it’s again, it’s important to manage the coherence around your pricing architecture even if you have a value menu in terms of what the rest of your products, your popularly priced products and your premium priced products are, and so we -- we’re very careful to make sure that that makes sense for our consumers to be able to navigate our menu in a way that feels appropriate for the overall value for the money.
And we are also careful not to get too much into thin air as it relates to casual dining and fast casual, which is one of the places where we continue to encroach, we believe, as we take quality up.
David Palmer - UBS
One last question, just on the franchise fee, there’s already some folks talking about this. You talked about there was a step up in a certain amount of your stores as of the end of calendar ’07. You’ve been doing this is like the third quarter of a 20 basis point type increase year over year in your franchise fee rate. I’m wondering, is that the sort of increase that we could expect, step up year over year, through calendar ’08 now that you had that last kind of tranche step up? How should we think about that?
Ben K. Wells
You should think about five to six basis points a year. I mean, if you think about it, we had a 3.5% royalty rate in the U.S. and in ’99, Diageio increased it to 4.5%, so if you just strictly take that 100 basis point step up, we have 20-year franchise agreements, they roughly come up 5% a year, so it’s really 5 bps a year. The only thing that changes that obviously is you had some of these special incentive programs that occurred. And then if you look at the worldwide blended royalty rate, obviously the international royalty rate is at 5% and if 80% of your growth is coming from international, adding a larger percentage at 5% versus 4.5%, so that’s why I say it’s somewhere between call it five to seven basis points on average between now and whatever 1999 plus 20 is, so year 2018 or ’19 is when you will get the last impact.
David Palmer - UBS
By the way, the reason I’m asking that question is because this is the third quarter and logically things happen oftentimes in step functions for four quarters, so this next quarter might be the last of an unusual step but that’s why I’m -- you know, you can see it in the numbers. You’ve had a nice run here for -- third quarter was this quarter. That’s why I asked.
Ben K. Wells
Right, but I’m telling you there’s unfortunately there’s no big chunks of goodies left to give you --
David Palmer - UBS
Thanks very much.
Operator
Your next question comes from the line of Mitchell Speiser from Telsey Advisory Group. Please proceed, sir.
Mitchell Speiser - Telsey Advisory Group
Thanks very much. My first question is on G&A and you’ve done a great job of leveraging the SG&A line as a percentage of revenues. I guess your fiscal ’07, around 21.2%, should be lower than that in fiscal ’08. As we look three to five years out, do you have any guidance on that line?
And then secondly, just on the extended hours, if you can give us a sense of what that added to comps, and do you feel that the franchisees are accelerating their extended hours system in the U.S.? Thank you.
Ben K. Wells
I’ll take the G&A question. Basically for modeling purposes, you should assume we are going to grow more or less slightly under inflation, so say 2% to 3% if that’s your forecast, an that’s how we currently model it out now.
And then your second question was?
Mitchell Speiser - Telsey Advisory Group
On the extended hours, how much that had helped out comps this quarter, and do you see extended hours accelerating going forward?
John W. Chidsey
I don’t know the exact breakout on extended hours. I would say it was certainly a piece but as Russ said, we have so many things in our arsenal, I guess, whether you want to look at products, advertising, promotions, extended hours, imaging, value menu. We didn’t really break that down, so I’d guess -- but it would be a pure guess -- I’d say 10 to 20 basis points, something like that. I don’t think it was a huge piece of that.
In terms of acceleration, yes, I think we are starting to see that. We’ll have some results in the next month or two. We do a fairly extensive survey of all of our Burger Kings -- I’m trying to think how many times a year we do it. I think it’s twice a year and we should have that in March.
But just anecdotally from talking to franchisees in the U.S., we see more and more people who are going to 24 hours and they are slowly spreading the good word, if you will, and convincing others of the benefits of that model.
So again, like the new broiler, they are far better salesmen themselves than we often are.
Operator
Your next question comes from the line of Matt Difrisco with Thomas Weisel Partners. Please proceed, sir.
Matt Difrisco - Thomas Weisel Partners
My question is with respect to the November announcement or acknowledgement that you were testing in free markets a $1 double cheeseburger. I just wanted to see what your experience has been with that and how many stores, if you can give us greater color on how many stores that is in right now. Do you have plans of expanding that and what the margin experience is there? Do you still continue to have your relatively high superior margins on the -- from the aggregate mix of the value menu?
John W. Chidsey
Well, at the risk of frustrating you, the test markets are undisclosed and the test markets are in motion right now. We don’t have any analysis that we can share, but we are testing that proposition.
Matt Difrisco - Thomas Weisel Partners
Can you quantify how many stores?
John W. Chidsey
No.
Matt Difrisco - Thomas Weisel Partners
Can you tell us if it is a correct assumption that it is a lower margin business than the aggregate historical higher margin value meal that you’ve had than McDonald’s has had?
John W. Chidsey
Well, I think it’s axiomatic that that product would be a lower margin product in and of itself. Of course, what your -- the thesis around testing the proposition is that you can drive overall sales to the extent that the overhead absorption makes it a positive proposition because of the volumes.
So again, we are underway with that test and it’s too soon for us to make any comments on it, or certainly any decisions.
Matt Difrisco - Thomas Weisel Partners
Right, that was my -- I was trying to figure out do you see the aggregate margin, not -- obviously the gross margin is obvious that it is going to be lower. I meant the overall margin improvement or incremental sales to the store.
Could you also just give us color on the difference right now, what you are running at between the company-owned comp and your franchise comp?
John W. Chidsey
No, we can’t give that out.
Matt Difrisco - Thomas Weisel Partners
I guess you’ll have it in your Q, though?
John W. Chidsey
Yes, it will be in the Q.
Matt Difrisco - Thomas Weisel Partners
Okay, but you don’t have it now. Okay. Thank you.
John W. Chidsey
Just don’t have it off the top of my head.
Matt Difrisco - Thomas Weisel Partners
Understand. Thanks.
Operator
Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the call over to Mr. John Chidsey for the closing remarks.
John W. Chidsey
Thank you very much for your time. Thanks for your interest and as always, feel free to follow up with Amy if you have any follow-up questions. Thanks a lot.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.
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