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Carrols Restaurant Group Inc. (NASDAQ:TAST)

Q4 2007 Earnings Call

March 7, 2008 8:30 am ET

Executives

Paul Flanders - CFO

Alan Vituli - Chairman and CEO

Analysts

Reza Vahabzadeh - Lehman Brothers

Bryan Hunt - Wachovia

Larry Miller - RBC Capital Markets

Jeff Omohundro - Wachovia

Ken Bane - Jeffries & Co

Steven Rees - JPMorgan

Jason West - Deutsche Bank

Josh Gross - Gross Asset Management

Greg Ruedy - Stephens Inc.

Rishabh Parikh - KBC

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Carrols Restaurant Group Fourth Quarter 2007 Earnings Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

Now, I'd like to turn the conference over to Mr. Paul Flanders, Chief Financial Officer. Please go ahead sir.

Paul Flanders

Thank you. Good morning and welcome to our fourth quarter call. By now everyone should have access to the earnings announcement released this morning, which may also be found on our website at www.carrols.com under the investor relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance, and therefore undue reliance should not be placed on them. We refer you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results.

On the call today with me is Alan Vituli, our Chairman and CEO. Alan will provide some introductory remarks, and then I'll walk through our financial results for the fourth quarter, as well as our guidance for 2008. After that, we will open up the call for questions.

With that, I'd like to turn the call over to Alan.

Alan Vituli

Thanks Paul and good morning everyone. On balance we were pretty satisfied with what we accomplished in 2007, against the backdrop of what has been a very challenging period for the restaurant industry. During 2007 we further developed our Hispanic brands as we expanded into both new and continue to penetrate existing markets. We also participated in the resurgence of the Burger King brand.

In the fourth quarter we generated positive same store sales at all three concepts, results that we were pleased to achieve in the current environment particularly when considering our strong results in the fourth quarter of the prior year. Throughout 2007, we were challenged by higher commodity cost and to a lesser extent increases in labor expenses.

While menu price increases help mitigate some of these effects of -- we still had some margin compression. The pressure on food cost is still at a lower year-over-year restaurant level operating margins, but despite this we were able to modestly exceed a high-end of our 2007 earnings guidance by achieving $0.79 per fully diluted share, which excludes $0.09 per share after-tax charge related to certain unusual items.

I'll let Paul delve into the specific financial results, but wanted to highlight some key items at all three of brands.

At Pollo Tropical, we ended 2007 with 84 company-owned units, including 81 in Florida. We added nine locations during the year. In the fourth quarter, we added Pollo Tropical restaurants in Woodbridge, New Jersey and Tampa, Florida.

As we discussed on our last call, we also closed our location in Brooklyn, New York. That was done in October of 2007. Comparable sales at Pollo Tropical increased 2% in the [quarter], which was not too bad given the brand concentration in South (inaudible) which is an economically sensitive market these days.

During the quarter, we introduced Caribbean fajitas at the brand, individual Caribbean fajitas, which is chicken fajitas meals are priced at 599 and a value meal version with 920 is also available. We believe this product provided additional menu variety.

At Taco Cabana, we added two - we ended 2007 with a total of 147 Taco Cabana restaurants having opened eight locations during the year, but also closed four older locations. During the fourth quarter, we opened one new restaurant in McAllen, Texas and closed one location. Comparable sales were marginally positive for both the fourth quarter and full year, and while weaker than we would have preferred in line with our recent guidance.

As you know, Taco Cabana is a 24 hour concept, and it was under some competitive challenges throughout '07 from increased competition from the QSR segment, especially in late night and during the breakfast day part. While our late night business continued to be affected negatively in the fourth quarter, we've seen improved sales at breakfast and same store sales in this day part have been a positive.

We are addressing guest needs for an improved value proposition through a number of products that can be used as either a full meal or an add-on to an existing meal. 2007 can certainly be characterized as yet another step in Burger King's very dynamic turnaround.

However, we are not building any new Burger King restaurants and in fact closed six locations last year, simply because the higher returns on invested capital for Pollo Tropical and Taco Cabana compel us to allocate more capital to those brands.

Our Burger King brand can best be viewed as a steady, reliable cash stream that will facilitate the growth of our Hispanic brands and provide stability and support to our capital structure.

We certainly remain confident with the long-term prospects for our Hispanic brands, but have moderated our short-term growth plans, somewhat given the environment. While the economy as a whole seems to be flirting with the recession. We have yet to see significant decreases in the commercial real estate market, but are however cleanly focused on trying to better the transaction that we're negotiating with landlords and we're starting to see an increase in the availability of sites, but still at lofty rents or selling prices.

In terms of Pollo Tropical we have six to 10 new opening planned for 2008. The wide range reflects the uncertainty in the timing of the number of openings that are schedule very late in the year, which could easily slip to 2009. We have four new units planned in the first half of the year, most of which are in the Florida or expansion markets of Tampa and Naples.

We also have several new units in the pipeline in northeast market, which should open later in 2008. And without creating too much in the way of specific site projections, we recently approved our first store in Hartford, Connecticut. Slowly but surely the number of restaurants outside of the Florida market will continue to grow from its current three New Jersey locations. As we continue to plan flags in the northeast part of the United States.

In terms of Taco Cabana, our primary objective is to continue building our Texas -- build out Texas particularly markets which are still under penetrated mainly Houston and Dallas, and we’ll continue to grow in New Mexico. Many of our 2008 planned openings will be in those markets, or probably all of those will be in those markets.

I wanted to give you an update on our expansion strategy outside of Texas and New Mexico since we previously made some passing reference to our R&D activities in terms of the Taco Cabana expansions. While we continued to make progress on our Mexican concept for expansion outside of its core markets, we have slowed these activities in order to fully focus our attention on our core brand. We plan to build eleven or twelve Taco Cabana's in 2008.

Near term challenges notwithstanding, our long-term growth strategy has not changed. We aim to generate revenue growth as we add to our Hispanics restaurant portfolio to generate higher comp store sales at our existing locations and leverage our infrastructure across a large restaurant base.

Given some of the cost challenges present in the restaurant industry today, margin improvement at the restaurant level will be hard to come by in 2008 with steady margins probably in the best scenario. Paul will address our specific guidance for 2008, but I wanted to comment for a moment on how we view our positioning these days.

We are currently not immune from the current economic environment, but at the same time it does offer us opportunity to differentiate ourselves. The key word to remember about Carrols is that we are a pretty diversified company. We have brand diversification, we have commodity diversification and we have geographic diversification. And at least to some extent while we are somewhat hurt by shrinking disposable income, we're also benefiting from a trade down as casual dine is elect not to eat out and its dead wood or food to go from concepts like ours.

The average working American, who finds himself with less discretionary and can find great value at all three of our concepts through our menus offerings. And despite the fact that we are raising prices, we believe that our brands do provide a compelling price value proposition for our customers.

In addition, while the economic climate is challenging, Carrols has had a long history as an operating company and has effectively managed through a variety of business cycles. We believe our company is well-positioned, but we are also committed to manage through the current cycle as a (inaudible) as possible.

I will now turn the call over to Paul who will review the financial results in greater depth. Paul?

Paul Flanders

Thanks, Alan. Total revenues for the fourth quarter of 2007 increased 4.5% to $197 million. Our growth was driven by the addition of 23 new restaurants in our Hispanic brands since the beginning of the fourth quarter last year and positive comparable unit sales growth at all three brands, particularly strong results at our Burger King restaurants.

Revenues at our Hispanic restaurant brands increased 5.6% in the quarter and totaled $100.6 million. Our Pollo Tropical top-line increased 7.2% to $41.7 million for the period reflecting the opening of 13 new Pollo Tropical restaurants since the beginning of the fourth quarter last year, including two new restaurants opened during the fourth quarter of '07. Comparable restaurant sales in the fourth quarter rose 2% at Pollo Tropical including the benefit of a 3.2% cumulative menu price increase and against the 4.9% comparison from the prior year.

Taco Cabana revenues increased 4.6% to $58.9 million in the fourth quarter, due primarily to the opening of 10 new Taco Cabana restaurants since the beginning of the fourth quarter of '06, including the addition of one new restaurant during the fourth quarter and that was the only one restaurant that we closed. Comparable restaurant sales in the fourth quarter rose 0.9% at Taco Cabana, including about 3% cumulative price increase and against a negative 0.6% comparison from the prior year.

Once again, there were varied results across key markets for Taco Cabana. Comparable sales in San Antonio, a 39 store market were about 1% negative, Dallas of 32 unit market increased 3.9%, and Houston, where we had 39 restaurants was up 3% in the fourth quarter. Our smaller markets also faired well with comps up 3.2% in El Paso and over 10% in Oklahoma. However, our 20 store market in Austin continued to be under top line pressure where comparable unit sales were down about 5%.

Our Burger King restaurants had a strong fourth quarter as sales increased 3.4% to $96.7 million. This increase came despite the closing of six restaurants since the beginning of the fourth quarter last year, including three units closed in the fourth quarter of 2007. Comparable restaurant sales increased 4.6% at Burger King in the fourth quarter, compared to a 7.9% increase in the fourth quarter of 2006. Our effective menu price increase was approximately 2.7%, so you can see that our traffic remained very strong at our Burger King units.

Now in terms of cost; cost of sales as a percentage of total restaurant sales increased 130 basis points to 29.3% during the fourth quarter from 28% in the same period of '06. At Burger King, cost of sales increased about 130 basis, with a 3% in ground beef cost accounting for about 20 basis points of the increase, higher cheese price is another 30 basis points, and higher chicken prices caused about 30 basis points of the increase.

At our Hispanic Brands cost of sales rose 70 basis points at Pollo Tropical, brought on mostly by mixed shifts including our new chicken fajitas and sales of our Tropical Trio offering, while cost of sales increased 160 basis points at Taco Cabana with higher cheese prices again being the most significant driver year-over-year. Cheese prices at Taco Cabana were up about 30% in the fourth quarter over the prior year causing 125 basis points of the overall increase.

To offset some of the commodity pressures we implemented selective price increases at our Hispanic Brands in the third quarter, which alleviated but did not offset the margin pressure from these higher costs. I'll comment further on our 2008 commodity outlook in a minute.

Restaurant wages and related expenses as a percentage of sales were up about 20 basis points. This was consistent with our projections for 2007, and we would see labor costs up 20 to 30 basis points. We expect some moderation in labor in 2008 and believe that as a percentage of sales such costs should decrease 15 to 20 basis points. Restaurant rent expense as a percentage of sales increased 20 basis points to 5.8% in the fourth quarter, mostly because of the soft cap performance at our Hispanic Brands, and the effect of some sale-leasebacks over the past year.

Other restaurant operating expenses were 14.6% of sales, and decreased about 20 basis points compared to the fourth quarter last year due mostly to the sales leverage from the increase in our Burger King sales. Advertising expense decreased 400,000 from the fourth quarter of 2006 or 40 basis points as a percentage of sales to 3.3% in the fourth quarter from 3.7% in the same period in '06. The decrease was related to the timing of our advertising spend this year. For the full year our ad spending increased 3.2 million or 23 basis points as a percentage of sales.

General and administrative expenses as a percentage of revenues decreased 20 basis points to 7% in the fourth quarter, despite higher costs for stock-based compensation, which was about $400,000, and increased public company costs.

Inclusive of all charges and gains, income from operations was $13.4 million in the fourth quarter, compared to $15.1 million in the fourth quarter of prior year. Interest expense decreased $1.8 million to $7.8 million in the fourth quarter, primarily reflecting lower average debt balances from the prepayment of $68 million in term loan borrowings from the IPO proceeds received by the company in December 2006. Interest rates in our borrowings were also lowered when we refinanced our senior credit facility in March of '07.

Our income tax provision for all of 2007 was derived using an estimated effective rate of about 33.2%, consistent with our recent guidance which reflected discrete adjustments to tax reserves, previously recorded in third quarter. Our fourth quarter effective tax rate was 37.6%, compared to 32% in the fourth quarter of '06. Net income was $3.5 million or $0.16 per diluted share in the fourth quarter of '07, on a share base of 21.6 million shares.

This compares to net income of $3.7 million, or $0.22 per share in the fourth quarter of last year on a share base of 16.9 million shares, including a non-recurring gain of $0.9 million after-tax or $0.06 per share related to the sales of leasehold interest.

After giving pro forma effect for the additional shares issued in the December '06 IPO, net income in the fourth quarter of 2006 would have been $0.17, and excluding the non-recurring gain of $0.04 per share EPS would have been $0.13 per share on a pro forma basis in the prior year.

The full year of '07 net income was $15.1 million, or $0.70 per diluted share, including non-recurring losses of $1.7 million after tax, or $0.09 per share, which included the write-down related to the Brooklyn closing, and a charge related to refinancing of the company's senior credit facility.

Net income for the year ended December, 31st 2006 was $13.4 million, or $0.83 per share based upon the $16.2 million weighted average shares. The 2006 results included non-recurring gains of $1.9 million, or $0.12 per share. Net income would have been $0.62 per share in 2006 after giving pro forma effect for the additional shares issued in the IPO, including the non-recurring gains of $0.09 per share on a pro forma basis.

In respect to our full year 2008 guidance, we look for total revenue increase of approximately 5% to 6% including comparable restaurant sales increases of 1% to 2% for Pollo Tropical, 1.5% to 2.5% for Taco Cabana and 2.5% to 3.5% for our Burger King restaurants. [Pulsating] these expectations is an overall price increase of 4% at Pollo Tropical based on current pricing and approximately 2% at both Taco Cabana and Burger King.

Total new unit openings of 17 to 23 Hispanic brands including 6 to 10 Pollo Tropical restaurants and 11 to 13 Taco Cabana restaurants. We will likely close one Taco Cabana restaurant and have a net closure of 4 to 5 Burger King restaurants with a net of the opening of 7 or 8 new Burger King locations, 5 or 6 of which will be relocations of existing units.

We expect capital expenditures of between $70 million and $80 million, including $35 million to $45 million for new restaurants and that’s before sale-leasebacks. $15 million to $18 million for remodeling and $6 million to $8 million for new point of sale systems at both Taco Cabana and Pollo Tropical.

We expect and estimated annual effective tax rate of between 37.5% to 38.5%, and lastly we're estimating diluted earnings per share to range from $0.70 to $0.75 per share with diluted common shares outstanding estimated at around $21.6 million.

Our 2008 outlook reflects what we believe will be a challenging period for ourselves and our industry. While we know that our commodity costs are higher, we have limited visibility as to how consumer discretionary spending trend will fair over this time horizon. While so far in Q1, Burger King and Taco Cabana sales have held up reasonably well, we have seen weakness in the Florida market with our same-store sales at Pollo running flat to slightly negative.

With respect to our commodities, other than at Burger King, we have the annual contracts in place for most key commodities including chicken at Pollo Tropical and [Tahiti Beef] at Taco Cabana. We have recently entered into a new contract for chicken at Pollo. Our previous contract was a two year deal so while we had favorable cost through most of 2007 relative to market. Our new prices increase significantly from what we were paying in 2007. The prices of chicken at Pollo was increased about 15% for 2008 and is driving a 5% to 6% overall increase in our Pollo Tropical commodity cost.

At both Burger King and Taco Cabana, we look for overall commodity cost increase 3% to 4%. Like other restaurant companies, we continue to see pressure on non-contracted food items, like cheese and wheat-based products such as buns and tortillas. On a positive note though, our cost of Taco Cabana will benefit from a lower contract for [Tahiti Beach] in 2008 as this contacted item is actually decreasing about 5%.

January, we further increased Pollo Tropical menu prices almost 3% in respect to the significant increase in chicken cost. We believe that our menu and our past discipline over price increases gives us reasonable pricing power without undermining our value proposition. We anticipate that we will take additional price increases across all brands as the year progresses, but we will evaluate and balance this in light of the consumer environment. Our current estimates anticipate that our overall cost of sales is likely to increase at least 40 basis points to 50 basis points.

Finally, I should note that about $120 million of our debt, which is the amount outstanding under our senior term loans, is tied to short-term LIBOR rates. As a consequence of the significant drop that we've recently seen in the short-term benchmark rates, this will result a corresponding decrease in our 2008 interest costs. That's where we are today with regard to our 2008 outlook. We will of course update these assumptions throughout the year as circumstances warrant.

In closing, notwithstanding the difficult cost environment and the uncertain consumer trends, our Hispanic Brands are certainly differentiated and we do believe that they have the ability to capitalize longer term and favorable demographic trends including the continued growth of the US Hispanic population, as well as our influence on American eating habits in general. While we have moderated our development somewhat in 2008, we are continuing to expand both Hispanic Brands.

Our efforts are focused on securing quality sights that meet internal hurdles, while improving returns to our share holders over the longer term. Having said that, we are also very much aware of the challenges facing our industry in the upcoming year. We've experienced operators that have been through these cycles before, and will manage the business prudently thought this one.

And now, Alan and I would be happy to answer any questions that you may have. Operator, could you please open the lines.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Reza Vahabzadeh with Lehman Brothers. Please go ahead.

Reza Vahabzadeh - Lehman Brothers

Good Morning.

Paul Flanders

Good Morning Reza.

Reza Vahabzadeh - Lehman Brothers

I know you talked about some moderation in new store activity and some potential timing into 2009, but when I look at your press release on page 5 on the same exact page you talk about lack of visibility and turbulence, or limited visibility in a turbulent environment and yet your CapEx and new store activity is extraordinarily healthy, and it's just hard for me to reconcile why in this low-visibility, turbulent, challenging environment, CapEx is as high as is been discussed.

Alan Vituli

Needless to say, you've got the two components of CapEx that is spending on our existing restaurants and new store growth is the most dynamic components. There is significant spending in our capital expenditure budget on existing restaurants on both Hispanic Brands and our Burger King brand.

In terms of new store growth, the cost of new construction, the cost of land is huge relative to historical levels, and when we talk of cutting back, I think, we're talking about cutting back one or two stores specifically Pollo Tropical, where we clearly sense a decline in property cost and we'd like to get the benefit of some of those declines in property cost.

So it's a very complex situation in which what we try to get across is in fact that we are just sort of being a little bit less aggressive in new store openings and we're certainly not going to neglect the competitive position of any of our existing stores, which are in the sort of cycle for having money spent on remodeling.

Reza Vahabzadeh - Lehman Brothers

Got it. I see. I didn’t get it. But will follow up on that.

Alan Vituli

No. I mean it's clearly under components of our capital Reza. It's the components of wht capital spending is. How much of it is - we've got some significant capital expenditures to be made on our Burger King restaurants which are remodels that are simply not discretionary. And we've also got what Paul described as offsets which are in the language used in the Burger King system or in our Burger King system to mean that we are buying a new store on a new piece of property, we are building a new store on a new piece of property. So while we can say that we are not really building Burger King, as a practical matter, these offsets meet our hurdle rates, they should be, have very attractive returns, they are consuming capital, and that we are closing the store and opening a new one. So you are getting that effect. But I am sure Paul can help you with the specifics of each of the category.

Reza Vahabzadeh - Lehman Brothers

Got it. Let me also just follow up on a different point. For the year, Paul, what do you think your cost of sales will be as a percentage of revenues, excluding mix changes? Excluding changes in one concept rolling across than the other one? Do you think that will be flat, up, down?

Paul Flanders

No. it's going to be up. I mean it's, I think taking that into consideration, I said, we expect overall cost of sales to be up 40 to 50 basis points.

Reza Vahabzadeh - Lehman Brothers

Okay. I missed that. Sorry.

Paul Flanders

I think and that's with whatever mix changes exists between the brands, I don't think that will be overly significant to us.

Alan Vituli

In [net items], the price increases.

Reza Vahabzadeh - Lehman Brothers

And the full price increase for the year, it sounds like you're going to carry what 4% pricing?

Paul Flanders

Now that's for Pollo, we've got [4%]. With what price we've already taken, which we just, they said we took about 3% in the beginning of '08; we're working with about 4% for the full year at Pollo.

Reza Vahabzadeh - Lehman Brothers

Got it.

Paul Flanders

The other brands I think we see the price increase as being lower obviously for those brands as we're not dealing with the same commodity increase.

Reza Vahabzadeh - Lehman Brothers

Right. And the focus seems to be still on the Taco front. Is that because of competition or is that because of weakening demand there?

Alan Vituli

I think most of the softness that we've seen in Taco in terms of broad brushes is the late night hours as the quick conventional, quick service sort to expand to 24 hours in Texas and we're sharing the market with them. We've seeing some softness in the breakfast as of both McDonalds and Burger King and local brands have increased their marketing to the breakfast daypart, and that’s part of where our Burger King business is getting growth. So on one hand its competitive pressure which we believe is sort of passed, not that competitive pressure passes but new thrust created by competitive pressure passes.

The other is that we've had significant softness as Paul said in the Austin market, much more so than any other market.

Reza Vahabzadeh - Lehman Brothers

Got it, thank you

Operator

Thank you. Our next question is from the line of Bryan Hunt with Wachovia. Please go ahead.

Bryan Hunt - Wachovia

Just a few questions, one; could you tell us what your cash balance is at the end of the year Paul, and whether everything drawn on your revolver?

Paul Flanders

The cash balance I think was around $7 million and there was nothing outstanding on the revolver. So I think in terms, I mean just to sort of follow that up, we pretty consistently said during '07 that we'd be funding the growth through internally generated funds, and that's essentially what we did in 2007.

Bryan Hunt - Wachovia

And giving us more meat on 2008 with regards to funding growth, how much of your 2008 CapEx is going to end up off balance sheet through sale-leasebacks? Could you give us an idea of that, because if you don't use that methodology you have potential to be pretty deep with your revolver.

Paul Flanders

Yeah, I think, obviously we end up in terms of borrowings will be a function of how much we can actually spend on CapEx till we get order fairly wide range there. But, yes you're right we are increasing the amount of sale-leasebacks that we will do. We’ve been obviously building some units this year and have some inventory [comp] from the year before, so the intention would be an increase of sale-leasebacks probably to $15 million in 2008. So, depending on where our CapEx plus we're in the lower end I think we could probably be pretty close to funding that internal and maybe be borrowing a little bit in the higher end. We might be in the revolver at maybe 10 million.

Bryan Hunt - Wachovia

Okay. And then speaking of the units you build in '07 and the once that are in the inventory, could you give us the number of units that you owned coming out of the year? I know it's not a significant number, but.

Paul Flanders

I don’t have that right handy. I mean, typically we've got 5% of the properties that we own, we've got like I say, the sale-leasebacks as a [requisition] 21-0.14 to everyone sale-leasebacks that we have planned for '08 are existing units that have already been opened.

Bryan Hunt - Wachovia

Right.

Paul Flanders

So, we obviously are adding to that inventory as we continue to open new units but those probably won't be sale-leaseback until the following year.

Alan Vituli

Okay. And then, just to sort of drill down on, there is probably 15 or 16 properties that represented inventory if you will, that we went into 2008 with. So, one could think about in terms of what might be as much as $15 million or $20 million.

Bryan Hunt - Wachovia

Okay. Thank you. And then Paul, looking while we are hearing this extremely low interest rate environment. Is there any thought about swapping out, the rates on your term loan and trying to lock in a fixed rate as opposed to what you can float, have you got that exercise as well as do you have any LIBOR floors on your term loan?

Paul Flanders

We have no LIBOR floors, its something that we look at periodically. I think in this environment we elected to float down and in hindsight which is always 20/20 that has turned out to be a pretty good decision. We will continue to look at that in the future.

Bryan Hunt - Wachovia

Alright and then lastly, from a competitive standpoint there is significant growth from both Chipotle and other like [Chitobo] concepts all over the southeast as well as southwest markets. Could you talk about what the impact is to one of your stores, when one of these locations opens up nearby and who you think the best competitor is in that space?

Alan Vituli

It's very much store specific. Chipotle tends to been relative to both Pollo and Taco much more Americanized burrito lunch proposition. Where as if Moses sort of intimately were inclined to compete with us in dinner. I would say to you neither of those represent concepts that we think would talk a lot about and neither of those really create this time any vulnerability.

I think that the biggest competitors we have in both Florida and Texas markets tend to be local operators whose names you are less familiar with. And they not necessarily even change your dealing within the core markets authentic food and it's easy to be more authentic among the ethnic groups that comprise our customer base. But there isn’t really competitors that cause us to say, oh my gosh. We are going to lose significant sales because someone has opened nearby there is an initial thrust and then we seem to get it back and that’s true both for us.

Bryan Hunt - Wachovia

Thank you. I'll get back in the queue Alan. Thank you.

Operator

Thank you. Our next question comes from the line of Larry Miller with RBC Capital Markets. Please go ahead.

Larry Miller - RBC Capital Markets

Hey guys. Paul can you help me understand something, because you said that at Pollo obviously had great contracts in to '07 because the '06 contracts was two years on chicken and now your are going up 15%, but inflation only 5% of that brand and that would imply that something is actually coming down or is that net of pricing? I am just not sure how I should think about that?

Paul Flanders

Well, it's two things. First of all, chicken is obviously not the only commodity, so the question is about 50/50, the effect of the 15% on a weighted basis. So that everything is obviously not up 15% and we have gotten that also reflects pricing.

Larry Miller - RBC Capital Markets

Okay, so on the rest of commodities, you were either flattish or slightly up. Is that what we should think about?

Paul Flanders

We are up in a more normal, 2% to 3% range on and most items.

Larry Miller - RBC Capital Markets

Okay, fair enough. I get that. And then I might have missed that Alan, but did you talk about some of the major new products that you are launching in '08, some of these brand? And I know you had been testing with [holdums] and some equipment at Burger King. Can you kind of give us an update or what your thoughts are on those?

Alan Vituli

Larry, there are initiatives going on in all three brands in terms of products. The Burger King had many reengineering of chicken and hamburger products. The big issue of course at Burger King is the value menu and whether things like a double cheese burger finds its way onto the value menu and the issuance of products that will be created by the new multi-speed, multi-temperature broiler working its way into our system.

In terms of top we know we’ve got to continue to offer a lunch, portable lunch and late night type products and we know we need to give more thrust to our breakfast with product offerings that are compelling values. Those compelling value propositions leave us with offerings like a dozen tacos for $10, breakfast tacos. It leaves us with products like the pupusa, which is a hand-held product that we introduced earlier that we are continuing to basically push and create some differentiation and a value proposition.

At Pollo we introduced chicken fajita and we’ll be launching a beef fajita. Now, what’s dynamic about that for us is that the fajitas using a tortilla is a whole new dimension for Carrols and is probably more appealing to the out of market customers potentially. But we were surprised to find that our Latin and Caribbean customers find using a tortilla very good way to eat their food even though it's not native to their culture.

So we are going to be building around the fajita line, using a tortilla. In addition, we are beginning to put in Clamshell grills at Pollo, which should give us more affordable product like a Cuban sandwich and Cuban [Raspberry] and a Kids Casadia. We are starting to work those pieces of equipment into the stores which is essentially a Clamshell grill which can handle Kids Casadia and Cuban Raspberry very well.

Larry Miller - RBC Capital Markets

Thanks a lot. And then just one question Paul, the effective interest rate, we should think about, in fact I would say spread over LIBOR rates for you guys, can you use --?

Paul Flanders

I don’t have these. (inaudible). Larry kind of the cap, if you look at the [debt] you've got $180 million which is a senior sub debt is suffixed at 9%. The senior facility, which as I said is basically $120 million outstanding on the or on the term loans now. Nothing really on the revolver, that’s LIBOR plus 1.25. So think we're in the 6% range, roughly weighted.

Larry Miller - RBC Capital Markets

Okay, thanks. And then just lastly, I mean you have outlined your pricing so that you are taking now and you said you alluded to taking more price during the year. What is your thought on that, have you got down that road where it might lead to sort of up side the inflation, you are going to take?

Alan Vituli

Well, we're working with some price increases all three brands now. I think the issue is we are not going to lap the Burger King price increase till somewhat early in the second quarter. I think our thought is at all our three brands frankly is to make sure we understand the consumer and sort of make the decision as what we are going to do in terms of price in light of what those factors look like at the time. So I think the plan at this point would be that we are going to come back and take some modest price increases in Burger King and Taco Cabana when we get around lapping their prior increases. And in the case of Pollo, given the increase in chicken we are going to come back and revisit that, but it's unclear right now whether we would be able to take anymore given the backdrop in Florida with that.

Larry Miller - RBC Capital Markets

Okay. So in other way, you are just trying to replace the price that you are going to roll off, and is that right or maybe that’s a little less?

Paul Flanders

I think when we get time we should be working with that 2% to 3% at Burger King and Taco Cabana alone and probably about 4% Pollo.

Larry Miller - RBC Capital Markets

Okay. Perfect. Thanks, guys.

Operator

Thank you. Our next question is from the line of Jeff Omohundro with Wachovia. Please go ahead.

Jeff Omohundro - Wachovia

Yeah, thanks. First as a follow up; what is your view about the dollar double-cheese burgers currently in test at some BK units in the system as a potential value meal addition?

Alan Vituli

Jeff, it's a pretty controversial issue. I mean from the consumer's perspective, it’s a compelling offer, and there is no question that it will cause a fair attraction and put us into a pretty good, competitive position with McDonalds who has a comparable offering. I think the issue becomes one of the fact that, while we may be trading a gross or upgrading our gross, the question is what the impact of it is on that.

But in a consumer squeezed economy, we're going to convert people who would have paid for margin or for better penny profit sandwiches that we're replacing with some thing that has an astronomical food cost for us. And needless to say our own reaction is that, it won't do very much for us as a business proposition, and we'd like to see products that leave us with some better potential bottom line results than taking what is a product that should sell for much more, and getting it down to the dollar menu. So it’s a bottom line expense like we'd say to you is, we'd rather - it didn’t happen.

Jeff Omohundro - Wachovia

Right. Got it. And then maybe a little bit more elaboration is my other question on Pollo Tropical in the North East. In terms of what kind of performance you're seeing at the inline units versus say then you drive through, and then finally a little maybe elaboration on the coming Connecticut opening, what type of location you're looking at, the timing, and what the demographics might be there? Thanks.

Alan Vituli

You know just to broaden that question; we're looking to come back into New York, and are clearly looking at the boroughs very hard, and do have at least one unit planned to be opened in the boroughs of New York City for '08 incidentally. So Connecticut would be in the Hartford area, would be a freestanding site in a area that these demographics contain a fair Hispanic counts and we believe that's (inaudible) do very well and quite frankly we're looking in New Havens, we're looking in the Boston market, and believe sites will start to pop through soon. And we got a long pipeline of stuffs that's being negotiated now.

In terms of the three stores that we have in the New Jersey market, two in lines and one free-stander. The expectations or that those in lines will do about $1.8 million and make some pretty good money at $1.8 million with respect to the new restaurant that we opened in Metuchen, we think when it all settles in it will be a $2 million location. I believe that general trading area in Metuchen is not as good as the trading areas that we have to support the Kennedy Boulevard store and the Clifton Restaurant. So, you are seeing $1.8 out of the in lines, 2 million out of free-stander that isn't in a particularly Hispanic area.

Jeff Omohundro - Wachovia

And will the Connecticut unit have a [addresser].

Alan Vituli

Yes, it will.

Jeff Omohundro - Wachovia

Okay, thanks a lot.

Operator

Thank you. Our next question is from the line of [Ken Bane with Jeffries & Co.] Please go ahead.

Ken Bane - Jeffries & Co

Good morning. On the restaurants you are opening in the Northeast, are the rent cost the same or higher than what you are experiencing down in the Florida area?

Alan Vituli

It varies enormously. The rent had gone through the roof in the Florida market, so I would have said to you that the rents in the Northeast are higher than the Florida market. But what we started to experience is that rents in the Florida market were about the same. We suspect that what we're going to see going forward is, Florida rents especially the West Coast and as we work our way up through the north, that those rents will be lower than what we've been experiencing and thus rents in the northeast, specially in the dense areas that we are looking should continue to be around where they are. So the short answer is, that rents in the northeast prospectively will be higher than rents in the Florida market on a per square foot basis.

Ken Bane - Jeffries & Co

And the restaurants that you have in the Northeast now outside of the one you've closed in New York, are they a drag on earnings at this point, or have any of them reached a point where they are at least breakeven or contributing to earnings of Pollo Tropical?

Alan Vituli

That's a good question. The entrance into the New York market for us or the northeast market was one in which we certainly wanted to make a name for ourselves with very little in the way of penetration. So, we've spend significantly on advertising and local store activities to each of the three restaurants when we first opened them up. In addition we were pretty inefficient in our operations from both the labor standpoint and the food-cost standpoint.

The two restaurants that are in line should be reasonably profitable in 2008. Those are the two, one that opened in '06 and the other that opened in '07, the Clifton Restaurant having opened in March in '07. So clearly 12 months would make them very profitable. We would hope that Metuchen is going to be pretty profitable, pretty quickly its volume is higher and our infrastructure was already there and we are much more efficient.

What happens when we open Hartford or something that is reasonably far away, I expect it will not be particularly profitable for 12 months, where as anything opened in the New York, New Jersey area should be profitable in the first year of operations, marginally profitable.

Ken Bane - Jeffries & Co

Okay. And that's I guess improvement is of course not only just higher volumes but getting the cost under control of the labor cost.

Alan Vituli

Yeah, and supply side is a problem. We pay more for product because shipping costs of our products are just not efficient. But everything both our labor and our supply side and our operating cost. In terms of our food costs are getting better and better as we continue to be more seasoned operators in that market and our people tend to be a little more familiar with our processes and we were able to put more product on the truck. So, it's getting better.

Ken Bane - Jeffries & Co

Okay. And finally could you tell us what rent expense was for the year.

Alan Vituli

Paul do you have that.

Paul Flanders

I do Alan. Rent expense was $44.1 million for the full year.

Ken Bane - Jeffries & Co

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Steven Rees with JPMorgan. Please go ahead.

Steven Rees - JPMorgan

Hi, thank you. You talked in the past about your Burger King business, with the same-store sales really being driven by growth in breakfast, the value menu, late night and we've seen bit of a slowdown here in domestic quick-service hamburgers. Just wanted to hear from you if you've seen sort of those day-parts and the value menu holding out here in the first quarter today relative to the fourth quarter, if you've seen any sort of slowdown at Burger King?

Alan Vituli

Do you want to take that?

Paul Flanders

Yeah. I mean, Burger King has been pretty strong so far in the first quarter. We're probably in February and January running 4% or 4.5%. I think what we have seen is as breakfast has settled in, while its still performing well as all the day parts are, I think the level of increase is net day-part that we saw obviously come down. Late night has continued to be pretty strong on a relative basis. Again, it's a pretty small piece of the day. We have also seen some pick-up in late afternoon from some of the snack items that have been added to the menu.

Steven Rees - JPMorgan

Okay. And then, Alan mentioned the new flexible batch broiler, which I understand is supposed to have some pretty nice operating cost savings. Can you just talk about where you are in that process and when do you expect to realize your savings?

Alan Vituli

We have a couple or so installed now, that was more for testing and determining which one we are going to select. As we do, some of these remodels or open new stores we'll put the new broiler in obviously, but in terms of a full system rollout, we are looking out in past '08 to do that probably as an '09 initiative.

Steven Rees - JPMorgan

Okay, and can you talk about the sort of savings you have seen from that?

Paul Flanders

On that, they clearly are labor and utility savings, I’m not sure we have a big enough sample, at this point to make a qualitative statement on that.

Steven Rees - JPMorgan

Okay, and then…

Alan Vituli

I think the most dramatic effect that you are going to get out of the Flex broiler is the ability to deal with product and the ability to basically expand certain menu products that we could do one in the [old] broiler.

Steven Rees - JPMorgan

Okay, and then just finally it sounds like Pollo is the brand where you have seen kind of the greatest traffic softness, given the Florida market and you mentioned steak fajitas, but I just wanted to know if you are planning on doing anything there to address the traffic declines in terms of more value product introductions or more advertising or radio advertising.

Alan Vituli

Yeah, we have stepped up our advertising; we appreciate the impact of having the substantial portion of your business in South and Central Florida., we had very significant softness in the Orlando market, most of than any other place. What is the effect of US travelers being replaced by foreign travelers is what we are experiencing in Orlando and our value proposition is very, very, very good among our consumers. I think what we are working on are affordable items for lunch, which we think will get us more squarely into the off premises lunch, consumer and just much more awareness about value and the health qualities of the menu relatively to other alternatives and to continue to build the family meal or meal replacement business by making the consumer more aware.

So, we just see it as we've done things pretty right. The consumers we have love us, they are spending a little less money in our restaurants, when we try to expand the consumer base a little bit by playing up of health and spending a little more money on where you advertise it.

Steven Rees - JPMorgan

Okay. Great, thank you very much.

Operator

Thank you. Our next question is from the line Jason West with Deutsche Bank. Please go ahead.

Jason West - Deutsche Bank

Yes, thanks guys. I think you mentioned during the script that Burger King is the only brand we don’t have contracts in place for commodities. I was wondering if you could talk a little bit about how that's handled?

Alan Vituli

We basically buy through a buying cooperative and for the most part that buying cooperative doesn’t go and dupe contracts license by market. And so is the possibility that commodity prices will go up. Yes, but we are already reflecting some pretty hefty commodity prices, right now in our cost of sales numbers. So, I mean it works like any other cooperative that doesn’t do hedging.

Jason West - Deutsche Bank

Okay. And now can you give us any help in terms of how the commodities breakdown within the comps of goods sold, just some of the big ones like beef, chicken, cheese and then wheat based products?

Alan Vituli

Paul.

Paul Flanders

Let me sort of address that by brand, I think that's probably the better way to do it. But in terms of Burger King beef is obviously a fairly significant commodity and that's about 25% of the overall mix, chicken's probably 13%, 14%, cheese is not as significant as you would think. Its about 5% at Burger King, so doesn't have as much of an impact. So what we are seeing, in fact Burger King costs the most are obviously chicken and beef, but we think beef is pretty stable coming into '08, given were…

Alan Vituli

With bun prices being a vulnerability, because of wheat cost.

Jason West - Deutsche Bank

Correct.

Paul Flanders

Buns are probably, they are not 10%, I would say they are 8% of our cost, but not in consequence. In terms of Pollo, chicken by far is the largest commodity. It probably accounts for 35% to 40% of their cost. So that has a big effect and that's the price of the most significant item there that we see price pressures on. Taco Cabana, beef is about 15% or 16% and as I said, the beef contracts at Taco are actually down, it would be down 5% for '08, Cheese is a big commodity, it's about 15% of the cost at Taco Cabana.

We've had significant increases in cheese 30% or more throughout '07. So while we see some continued increases in cheese in '08, we think that given the levels that we're working on that those increases are going to be little bit more moderate than that than what we've obviously seen in the past, I'll call it 6% to 10%. And those are probably the most significant items for Taco given sort of the environment. Tortillas, that’s the other one at Taco Cabana, that’s a wheat based product that really had the mix but we probably we go through a lot of perkiness.

Jason West - Deutsche Bank

Okay now that helps and just another big picture question on the overall QSR environment and more focus on the Burger King side. Though we've seen, I don’t know, a lot of more focus on value menus and value meals and obviously the Yum! system, KFC and Taco Bell are pushing a lot more advertising this year than they were last year and obviously Taco Bell had a rough year last year. I was just wondering if you sense any overall shift in the competitive environment within any of the brands and do you think still a little more price promotional than they have in the last few years.

Alan Vituli

Its no question that the value menu offerings and value propositions and the increased levels of advertising, creating new awareness of price point has an impact on the business. I do think we understand what we've got to do if that is the specific pain of attack but right now our sense is that we've done -- other than the many dials that we can adjust, there is not a real reason for us to change the Hispanic Brand positioning to try to offset Taco Bell or Pizza Huts kinds of things, they are just too permanent in effect on the long-term brand positioning. The value menu in Burger King is clearly intended to respond to quick service competitive pressures and quick service competitive strategies, and we're clearly riding that just like every other quick service brands.

Jason West - Deutsche Bank

Okay, thanks guys.

Operator

Thank you. Our next question is from the line of [Josh Gross with Gross Asset Management]. Please go ahead.

Josh Gross - Gross Asset Management

Hey guys, my question is, I understand Burger King’s role in the company is a diversifier both product wise and geography wise. However, I was wondering whether you guys contemplate as cost increase and the returns on Burger King kind of come down, was it due to the cost of capital whether you consider selling a certain geographic segment of your Burger King portfolio to pay down some debt?

Alan Vituli

It’s a possibility. Certainly it's not off the table. I think the issue is a matter of what we see for those Burger Kings, and you know there was a period two years ago where there were no folks to who were particularly interested in buying Burger King restaurants other than those predatory purchases. Today it's an environment where there are significant buyers, and prices are reaching levels that we would consider selling that.

Josh Gross - Gross Asset Management

Okay, good. Thanks.

Operator

Thank you. Our next question is from the line of Greg Ruedy with Stephens Inc. Please go ahead.

Greg Ruedy - Stephens Inc.

Good morning. Paul I was wondering what kind of assumption you are making in the other restaurant expense line with respect to inflation?

Paul Flanders

That's a line we should see leverage on next year.

Greg Ruedy - Stephens Inc

Surprising [answer], but in terms of what you are seeing from our janitorial utilities, what are you assumptions for inflation on some of those components with in that line.

Paul Flanders

Yeah I think it's more normal inflationary assumptions 1%, 2% the most and that the price increases which are running higher than that should keep it flat, and it's just sort of the worse case and more likely that we should leverage in all that.

Alan Vituli

Yeah, and we are seeing some significant increases in utility cost, there's no question about it. But as Paul said, it's sort of offset by other items like insurance cost, which tend to be more moderating and affected less by inflation and more by experiences. So Paul what assumptions have we used for the entirety of the operating cost line, which is if you [marginize] that?

Paul Flanders

I think what I described is probably blending it together, on the utilities we are obviously seeing those or expect those to be somewhat higher, and then there is a number of other item which tend to be more fixed in nature that we should get some leverage on.

Greg Ruedy - Stephens Inc

I don't see it going up, and I see it being sort of flat to down issue.

Alan Vituli

As a percentage of sale.

Paul Flanders

As a percentage of sales? And then also don't forget it includes some new units. We've got some of the pre-opening may be in there and those kinds of things.

Greg Ruedy - Stephens Inc

Sure. With respect to the point of sale roll out at Taco, you've been, you've got some units already in place since late '07. Can you just describe what you're seeing in terms or early results and be mainly causing assumptions and your guidance from that roll out?

Paul Flanders

We had initially installed a couple of units. We are in the process of now rolling out sort of a mini roll-out to sort of test our roll-out methodology. So we are in the process of rolling on another 10 stores. So it's going to be probably another 30-45 days before we really start the roll-out for Taco Cabana which is where we are starting. But we've seen, mean these systems are much more intuitive, and the ones we've currently got in place the key-stroking is much simpler and therefore the ability to train cashiers is much simpler. So we think the training cost to be positively effected by that, customer accuracy or order accuracy should be improved, and that's all baked into the assumptions that we have. The fact is in '08 there's actually incremental cost as a consequence of this rollout, because we have the cost to train the employees. We have increased cost in a corporate level to manage and to handle this whole project, so it's actually incremental expense in '08.

Alan Vituli

Installations and things like that but as Paul said we are very optimistic about its improving cost and making training much more efficient and having a real impact on order accuracy, but you're not going to see the effect of those numbers at Taco until 2009. And you'll see them in Pollo probably within six months or so after the rollout occurs.

Greg Ruedy - Stephens Inc

That’s great color, thank you.

Operator

Thank you. Our next question comes from the line of [Rishabh Parikh with KBC]. Please go ahead.

Rishabh Parikh - KBC

Hi, gentlemen. In your comments I think you said that you expected labor cost as a percentage of sales to moderate and I just wanted and was hoping you could elaborate on your thinking of it?

Paul Flanders

Labor cost, We've obviously had labor cost increasing as for sometime but given the economic backdrop as we see some of the pressures on labor moderating and in tandem with the price increases, you should see labor as a percentage of sales should decrease in '08 by some degree?

Rishabh Parikh - KBC

Though it shows that you expect price increases to outpace labor increases?

Paul Flanders

That's exactly what's driving it and the pressure on wage rates has moderated somewhat as the economic conditions have got a little bit worse.

Rishabh Parikh - KBC

Thanks very much. Good job.

Operator

Thank you. And at this time, there are no additional questions. I'll turn it back to management for any closing remarks.

Alan Vituli

As we've said throughout, and it's certainly no revelation to you, these are strange times. I think as a company we're probably better positioned than most by virtue of our business model and by virtue of this seasoned, nature of the management team. We're cautious but frankly our sense is that it will give rise to some strange opportunities, certainly with respect to property cost of property availability, labor availability, those positives could be significant for us in terms of the long term growth of our Hispanic brands certainly.

We're happy with our Hispanic brands, we're not surprised by their behavior, I think we know what tactics we need to employ in order to make ourselves strong and fulfill what shareholders expect of us. Our guidance is we believe realistic. We can find ourselves surprised by virtue of either an economy that gets worse than we anticipated or the economy that gets a little better than we anticipated. But again, from a stability standpoint, we're pretty well positioned to weather more storms.

With that, thank you. Well thanks for your support and your interest in the company.

Operator

Thank you. Ladies and gentlemen, this concludes the Carrols Restaurant Group fourth quarter 2007 earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1800-405-2236 or 303-590-3000 using the access code of 11109632 followed by the "#" key. ACT, would like to thank you for your participation. You may now disconnect.

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