CKE Restaurants, Inc. F4Q08 (Qtr End 01/28/07) Earnings Call Transcript

CKE Restaurants, Inc. (CKR)

F4Q08 Earnings Call

March 27, 2008 9:00 am ET

Executives

John Beisler – Vice President, Investor Relations

Andrew F. Puzder - President, Chief Executive Officer & Director

Theodore Abajian – Chief Financial Officer & Executive Vice President

John Dunion – Executive Vice President, Supply Chain Management

Analysts

Brian Moore – Wedbush Morgan Securities, Inc.

Anton Brenner – Roth Capital Partners

Glen Petraglia – Citigroup

Rachel Rothman – Merrill Lynch

Christopher O’Cull – Sun Trust Banks

Dean Haskell – Morgan Joseph

Unidentified Analyst - FBR Capital Markets

Keith Siegner – Credit Suisse

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the Fourth Quarter and Full Year Fiscal 2008 Earnings Conference Call. My name is Carmen and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. John Beisler, Vice President of Investor Relations. Please proceed.

John Beisler

Thank you. Good morning and thank you for joining us everyone. My name is John Beisler, Vice President of Investor Relations for CKE Restaurants. CKE Restaurants is hosting this conference call to discuss our results for the 12 weeks and fiscal year ended January 28, 2008.

Yesterday CKE issued a press release announcing its financial results for the 12 weeks and fiscal year ended January 28, 2008. The release is available on our web site, www.ckr.com. CKE has also filed its Form 10-K with the SEC. This call will reflect items discussed within the press release and Form 10-K. CKE management will make reference to them several times this morning.

Speaking on today’s call are Andy Puzder, President and Chief Executive Officer, and Ted Abajian, Executive Vice President and Chief Financial Officer. Andy will begin today’s presentation with a few comments regarding our fourth quarter and full fiscal year results, as well as our preliminary period two same-store sales results. Ted will then review our fourth quarter results with you. Andy will conclude today’s presentation with comments on the strategic direction of the company. Andy and Ted will then take questions from callers.

Before we begin I would like to remind you of our disclosure regarding forward-looking statements contained in our Form 10-K and earnings release. Our disclosure regarding forward-looking statements can be found within our Form 10-K under Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations. Matters discussed during our conference call today may include forward-looking statements relating to future plans and developments, financial roles in an operating performance, and are based on management’s current beliefs and assumptions. Such statements are subject to risk and uncertainties and actual results may differ materially from those projected in the forward-looking statements.

As a reminder, we will be participating in the JP Morgan Gaming, Lodging and Restaurant Conference today. CKE Restaurants will present at 4:15 pm ET. A live audio broadcast of our presentation will be available on our web site and an updated copy of our investor presentation will be available under the Investor’s Presentation section.

I introduce you now to Andy Puzder, President and CEO.

Andrew F. Puzder

Thank you, John, and good morning everybody.

Fiscal 2008 was a difficult year for our economy as a whole. A week dollar, high energy costs, increased commodity costs, and significant minimum wage increases impacted our business more than at any time this decade. I believe our company withstood these pressures remarkably well. In fact, the company had its second best year since our management team took over, with respect to operating income, adjusted EBITDA, and pre-tax income for diluted shares, bested only by fiscal 2007, when both Carl’s Jr. and Hardee's benefited from the combination of same-stores sales increases of nearly 5% and lower food commodity and labor costs. In particular, we were pleased with our success in growing our same-store sales and AUVs at both brands, having our first year of positive unit growth this decade.

We are franchising 136 Hardee's restaurants, remodeling 200 restaurants, significantly reducing our outstanding share count, selling La Salsa, and renewing and expanding our credit facility. Nonetheless, we were disappointed with the impact of the pressures we experienced this year on our restaurant level operating cost and our profitability.

With respect to growing same-store sales and average unit volumes, both brands experienced positive same-store sales during the fourth quarter and for fiscal 2008. During the fourth quarter same-store sales at company operated restaurants increased 1.4% at Carl's Jr. and 0.4% at Hardee's. On a two-year basis for the fourth quarter Carl’s Jr. generated a 4.2% same-store sales increase while Hardee’s generated a 5.2% increase. While not as impressive as last year’s same-store sales increases, we were pleased with this year’s fourth quarter results as we experienced unusually severe weather conditions in our markets during the fourth quarter, which negatively impacted sales at both brands.

For fiscal 2008 same-store sales at company operated restaurants increased 0.9% at Carl’s Jr. on top of a positive same-store sales of 4.9% last year, for a positive two-year total of 5.8%. Hardee’s same-store sales increased 2% on top of positive same-store sales of 4.8% last year, for a positive two-year total of 6.8%.

As of the end of fiscal 2008, Carl’s Jr.’s average unit volume was $1.493 million, a $53,000 increase over fiscal 2007. Hardee’s average unit volume was $954,000, a $38,000 increase over fiscal 2007.

During period 2, which ended Monday of this week, snow, freezing rain, tornadoes, and massive flooding in the Midwest and Southeast, as well as a period mismatched with Easter falling in period 2 this year and period 3 last year, hindered Hardee’s, resulting in negative same-store sales up approximately 2.5%. The Easter mismatch contributed approximately 1% to this decline.

At Carl’s Jr., however, where we did not experience the impact of a longer and more severe winter, same-store sales increased approximately 6%, despite the Easter period mismatch, demonstrating, I believe, the recession-resistant nature of our business.

Perhaps the most important milestone for fiscal 2008 was our positive new-unit growth. We and our franchisees opened 121 new restaurants, resulting in a net increase of 74 units during the year, taking our unit count from 3,009 restaurants at the end of fiscal 2007 to 3,083 at the end of fiscal 2008. This is the first time this decade that we’ve opened more units than we closed.

We had positive unit growth on the company side, on the franchise side, on the licensee side, and both domestically and internationally.

On the international side, which will be a company focus in fiscal year 2009 and for the foreseeable future, our licensees opened 50 new restaurants, resulting in net increase of 44 restaurants. Our international unit count grew from 238 restaurants to 282 restaurants during fiscal 2008.

We also refranchised 136 Hardee’s locations during fiscal 2008. As you would expect, existing Hardee’s franchisees purchased some of these restaurants, however, new franchisees and existing Carl’s Jr. franchisees have also acquired some of these restaurants. We believe that our ability to attract new franchisees, including those from Carl’s Jr., speaks directly to the potential for future growth at Hardee’s.

The success of our refranchising program is a tribute to the growing strength of our franchise community, as well as a leader indicator of future growth as the seven franchisees that acquired these 136 restaurants have also committed to invest in the stores they purchased thereby reducing the company’s capital requirements. And they’ve committed to develop and additional 59 restaurants over the next five years.

These sales of company-operated restaurants to franchisees are part of a longer term strategy to slowly increase the percentage franchise mix of our business and thereby maximize profitability, cash flow, and returns on capital. Although refranchising reduces our gross revenues and adjusted EBITDA, it provides us with cash for debt reduction, share repurchases, or capital plan funding; and reduces our future capital expenditures, thereby increasing our free cash flow. Refranchising is also expected to increase our company-operated restaurant and average unit volumes, as these markets generally have average unit volumes below the system average.

As such, while our total unit count went from 3,009 restaurants to 3, 083 during fiscal 2008, our company-operated restaurant count went from 1,090 restaurants, or 35.4% of the system, to 967, or 31.4% of the system. We are actively reworking to refranchise the remaining 64 Hardee’s units of our 200 unit refranchising plan during fiscal 2009.

With respect to our remodeling program in both brands, we remodeled 200 company-operated Carl’s Jr.s and Hardee’s in fiscal 2008 at a cost of approximately $39 million. As of the end of fiscal 2008 we had remodeled 236 restaurants, or about 24% of our company-owned restaurants. We intend to remodel an additional 200 restaurants in fiscal 2009, bringing the total number of units remodeled to 436, or 45% of the company-owned systems. Franchisees are also beginning to remodel their restaurants.

In addition, we and our franchisees completed 96 Carl’s Jr. Green Burrito and 41 Hardee’s Red Burrito dual-brand conversions during fiscal 2008. While we anticipate no difficulties with funding our remodels and dual-branding plan, given our strong operating cash flow and borrowing capacity, we could easily and quickly reduce the number of units we remodel or dual-brand at any time during the year should we choose to do so.

In fact, one of the most encouraging aspects of the company’s performance is a strong free cash flow, even during periods of significant cost pressures. In fiscal 2008 we demonstrated this strength not only by building 23 new units and remodeling 200 existing units, but also by our ability to return capital to our shareholders through both share repurchases and dividends.

During the fourth quarter we’ve repurchased 2,655,300 shares of our common stock at a total cost of $32.9 million. For the full fiscal year we’ve repurchased 15,854,519 shares at a total cost of $266.6 million. Since the inception of our stock repurchase plan in April 2004 we have repurchased approximately 21.3 million shares, or approximately 34%, of our fully-diluted share count, for a total investment of approximately $357 million. We expect the impact of our cumulative share repurchases to be accredited to earnings per share in fiscal 2009. We also paid dividends to our shareholders of $13.4 million during fiscal 2008.

Finally, at the corporate level, we sold La Salsa Fresh Mexican Grill and renewed and expanded our credit facility. Ted will discuss our credit facility and the amendments to that facility during the year in his portion of the presentation.

With respect to our financial results for the year, while we were aided in increases in same-store sales and average unit volumes at both Carl’s Jr. and Hardee’s, higher commodity costs, labor costs, and non-cash charges related to the interest rate swap agreements we entered into during the second half of the year more than offset the benefits of same-store sales and average unit volume gains.

To address these issues at the operations level, we continue to implement certain cost reduction initiatives and take price increases to offset rising commodity costs and the impact of increasing minimum wage rates.

In particular, we took pricing during both the third and fourth quarters of fiscal 2008. Overall these initiatives benefited our company. For the fourth quarter, on a consolidated basis, labor and employee benefit costs were essentially in line with the prior year quarter.

Carl’s Jr. fourth quarter food and packaging costs were actually 30 basis points lower as a percentage of company-operated restaurants revenue versus the prior year quarter. This decrease was primarily due to price increases and reduced food distribution costs as compared to the prior year quarter when we were in the initial stage of relocating our primary distribution center.

At Hardee’s we saw a 150 basis point increase in food and packaging costs driven by continued increases in dairy and biscuit ingredient costs, which impacts Hardee’s to a much greater degree than Carl’s Jr. due to the strength of Hardee’s breakfast day part. Occupancy and other restaurant operating costs increased by 90 basis points over the prior year quarter, on a consolidated basis due primarily to increased depreciation from our ongoing remodel program at both brands.

We continue to narrow the gap in operating expenses thanks to our costs reduction initiatives and the impact of two price increases, the first of which we implemented during the third quarter and the second of which we implemented during the fourth quarter.

Looking back to the second quarter, our restaurant operating costs were 210 basis points above the prior year quarter. In the third quarter operating costs were 190 basis points above the prior year quarter, down 20 basis points from the second quarter peak. In fourth quarter, despite further increases in certain commodities, such as wheat, dairy, potatoes, and cooking oils, we further narrowed the gap by an additional 30 basis points as operating costs as a percentage of revenue were 160 basis points higher than the prior year quarter. We intend to take additional pricing during the first quarter and to continue our costs reduction efforts so as to further narrow the gap versus prior year.

During the fourth quarter we also recorded a $9.5 million non-cash expense related to our interest rate swap agreements, reflecting a mark-to-market impact over the five year term of the facility. As we explained in our third quarter call, we incurred this charge because interest rates had continued to decline after we entered into our interest rate swap agreements in the third quarter.

The non-cash impact on fourth quarter income, before income taxes and discontinued operations, was approximately $9.5 million, or $0.11 per diluted share.

The non-cash impact on fiscal 2008 income, before income taxes and discontinued operations, was approximately $11.4 million, or $0.11 per diluted share.

Should interest rates increase in the future we would expect to record a benefits to earnings; should they decrease further, we would incur additional charges to earnings. Nonetheless, we continue to have a very favorable long-term debt financing at approximately 6.2%, a rate much more favorable than what the credit markets would offer today.

On a very positive note—with respect to costs—during the fourth quarter we reduced our

G&A expense by $1.9 million as compared to the prior year quarter. G&A spending also decreased as a percentage of total revenue by 20 basis points.

For fiscal 2008 G&A expense decreased by $2.9 million and our G&A spending, as a percentage of total of revenues, decreased by 10 basis points. We achieved these percentages of revenue reductions despite a reduction in our total revenue due to our refranchising of 136 Hardee’s restaurants, a $3 million increase in share-based compensation expense, and increased staffing in our real estate construction and training departments, to support our growth and remodel initiatives.

With respect to income, I find operating income to be a good indicator of our progress regarding overall profitability because, among other things, it excludes the impact of non-cash, mark-to-market charges related to our interest rate swap agreements and other fluctuations caused by changes in our capital structure.

In the fourth quarter we generated $15.5 million of operating income as compared to $16.5 million in the prior year quarter. The $1 million, or 5.9% drop, in fourth quarter operating income compares very favorably to the third quarter drop of $7.3 million, or 27.1%.

Fiscal 2008 operating income was $88.3 million as compared to fiscal 2007 operating income of $110.7 million. Again, our second best operating income this decade.

In summary, fiscal 2008 presented many challenges and a very difficult operating environment. In spite of these challenges we continue to grow same-store sales and average unit volumes at both brands, reduced G&A expense, opened 121 new restaurants resulting in a net increase of 74 restaurants during the year, continued to make necessary investments in our business, returned a significant amount of capital to our shareholders and further positioned ourselves for top line growth and profitability.

I will now turn the discussion over to Ted Abajian, our Chief Financial Officer, for his discussion of the financials.

Theodore Abajian

Thank you, Andy. Good morning everyone. Before I get started I need to make you aware that during this conference call we may refer to certain non-GAAP financial measures, as explained in our earnings release issued yesterday and in our annual report on Form 10-K for the fiscal year ended January 28, 2008. Also, our reported financial results have been adjusted to reflect the sale of our La Salsa Fresh Mexican Grill chain, which has been classified as a discontinued operation within our consolidated financial statements.

I will now take you through our fourth quarter results. Consolidated revenue for the fourth quarter as $338.1 million an $11.1 million, or 3.2%, decrease from the prior year quarter. The decrease in revenue reflects the impact of refranchising 136 restaurants during fiscal 2008, partially offset by our same-store sales growth and new unit development.

Fourth quarter operating income was $15.5 million, a $1 million decline from the prior year quarter operating income of $16.5 million. Our year-over-year performance in the fourth quarter represents a substantial improvement as compared with the third quarter, when our operating income decreased by $7.3 million, or 27.2%, from the prior year third quarter. The year-over-year decline in fourth quarter operating income is primarily attributable to a 60 basis point, or $1.5 million, increase in food and packaging costs, a 90 basis point, or $1.7 million, increase in occupancy and other restaurant operating costs.

I will also comment further on both of these areas when I address our performance at the brand level.

G&A cost reductions and reduced facility action charges partially offset the increases in food and packaging and occupancy and other operating expenses. Fourth quarter G&A costs, which include a $200,000 increase in share based compensation expense, as well as increased staffing for real estate development, construction, and training declined by $1.9 million, or 20 basis points as a percent of total revenue, as compared with the prior year quarter.

Fourth quarter facility action charges of $0.9 million reflects the loss we incurred on the refranchising of 30 Hardee’s restaurants during the fourth quarter. Overall, facility action charges declined by $1.7 million during the current quarter as compared to the prior year quarter.

Interest expense was $15.6 million for the fourth quarter, an increase of $11.7 million as compared to the prior year. The increase versus the prior year quarter is due to accommodation of higher overall debt balances resulting from our share repurchase activity and a $9.5 million non-cash charge we incurred during the fourth quarter to adjust the carrying value of our interest rate swap agreements. I will cover the interest rate swap agreements in more detail when I discuss our credit facility towards the end of my presentation.

As a result of this $9.5 million non-cash charge and an unusually high income tax rate during the quarter our fourth quarter income from continuing operations was $238,000, or break even on a per diluted share basis.

Our fourth quarter tax rate was approximately 77% as a result of our relatively low pre-tax income, $1.046 million, which was heavily impacted by the interest rate swap charge and the impact of recent IRS guidance that became effective during the fourth quarter. For fiscal 2009 we expect our booked income tax rate to be approximately 41%.

In addition to significantly narrowing the year-over-year gap in operating income and restaurant operating costs we also made significant progress in reducing the year-over-year gap in adjusted EBITDA during the fourth quarter. Looking back at quarterly year-over-year comparisons for each of the quarters of fiscal 2008 adjusted EBITDA decreased by $3.3 million in the first quarter of fiscal 2008, decreased by $8.1 million in the second quarter, $3.2 million in the third quarter, and finally decreased by $1.6 million in the fourth quarter.

I will now briefly discuss the fourth quarter results at both Carl’s Jr. and Hardee’s. At Carl’s Jr. fourth quarter same-store sales increased 1.4% rolling over a 2.8% increase in the prior year quarter. Operating costs increased by 130 basis points to 78.6% of company-operated restaurant revenue. The increase in restaurant operating costs was driven by a 120 basis point increase in occupancy and other expense over the prior year quarter due primarily to a 60 basis point increase from depreciation expense arising from our increased remodel activity. Labor and employee benefit costs were 40 basis points higher from the prior year quarter. Higher direct labor expense related to minimum wage increases at the federal and state levels were offset by a reduction in restaurant level manager bonus expense. Food and packaging costs at Carl’s Jr. decreased by 30 basis points over the prior year quarter mainly due to lower food distribution costs, although the price increases we took during the third and fourth quarters also contributed to the decrease. Food distribution cost declined because we incurred costs in the prior year quarter to relocate our main distribution center and simultaneously install a new overall distribution management system and those costs did not recur this year.

Moving now to Hardee’s. Fourth quarter same-store sales at company-operated Hardee’s restaurants increased by 0.4% rolling over a 4.8% increase in the prior year quarter. Restaurant operating costs increased 280 basis points to 85.7% of company-operated restaurants revenue. The increase in restaurant operating costs at Hardee’s was primarily driven by a 150 basis point increase in food and packaging costs. A substantial portion of the increase in food and packaging costs is due to higher commodity prices for biscuit ingredients such as flour and buttermilk, as well as dairy products overall. As Andy has already mentioned, these items have a much greater impact on Hardee’s business than Carl’s Jr. as a result of Hardee’s significantly higher breakfast sales. Occupancy and other expense increased 50 basis points over the prior year quarter due primarily to higher depreciation and amortization expense, as well as increased repair and maintenance and utility costs. Labor and employee benefits costs also increased 70 basis points versus the prior year quarter, primarily as a result of higher direct labor expense related to minimum wage increases at the federal and state level and a 30 basis point increase in workers’ compensation claims expense resulting from a relatively small favorable adjustment to our workers’ compensation claims reserves in the prior year quarter coupled with a relatively small unfavorable adjustment to our worker’s compensation claim reserves in the current year quarter.

Now, a few comments on our credit facility. Over the course of fiscal 2008 we accomplished a number of important milestones with respect to our credit facility. First, in March 2007 we renewed and extended our credit facility with more favorable borrowing rates. In August, during the initial stage of the ongoing credit crunch we amended the credit facility to increase our borrowing capacity to $100 million to facilitate additional share repurchases. Fortunately, we were able to maintain our favorable loan pricing structure in spite of the rapidly deteriorating credit environment. In September we entered into interest rate swap agreements which effectively fixed the interest rate on $200 million of our term loan debt at 6.22%. Finally, in March 2008 we amended the leverage covenant within the credit facility to allow for full utilization of the facility.

The leverage covenant was set before we increased our borrowing capacity in August. We revised the covenant in order to allow us to fully utilize the increased borrowing capacity, which our banks were more than willing to do. While we have no current intention of fully utilizing our available credit, it simply made sense to adjust the leverage covenant so we could do so if we decided it was in the best interest of the company.

Now we obviously have a very supportive and diversified bank group that truly understands the drivers of our business and we certainly appreciate their support.

Regarding the interest rate swap agreements and the related non-cash charges that we have incurred, I want to make sure that investors understand a few of the specifics about these charges. First of all the mark-to-market charges represent the impact of current interest rate changes over the entire life of the agreement, which is about four years at this point. Second, while it would have been nice to foresee the precipitous drop in interest rates that has occurred since we entered into these agreements, we nonetheless have a very attractive long-term debt financing at approximately 6.2%, which is significantly more favorable than what current credit markets would afford today. Third, after each of these mark-to-market charges we began recognizing the current interest rate underlying the mark-to-market adjustments as we record interest expense from that point forward. Finally, if interest rates—or more specifically forward-looking interest rate yield curves—should increase, we would reverse a portion, all, or potentially more than all of the charge that we have taken to date.

Last week the Federal Reserve lowered interest rates by an additional 75 basis points and this decrease in rates will likely cause an additional mark-to-market adjustment during the first quarter of fiscal 2009. Based on current interest rate levels we would expect to record an additional mark-to-market charge of approximately $3.9 million pre-tax in the first quarter. As we did at the end of the fourth quarter, we will provide the actual mark-to-market charge when we release our same-store sales results for period 4, the last period of the first quarter.

Before Andy wraps up our prepared comments I would like to comment on our general expectations with respect to a few key metrics. We continue to roll over higher commodity costs from the prior year in first quarter but believe that our actions in recent quarters should continue to benefit restaurant level operating costs such that first quarter year-over-year increase in restaurant level operating costs as a percentage of sales should be lower than the year-over-year increase in the fourth quarter.

I am sure that many of you recall that we began to experience a significant increase in commodity costs last May, the last period of our first quarter. As a result, we anticipate that we will experience more favorable commodity costs comparisons beginning in the second quarter.

Our planned price increases later this quarter will also help us reduce the year-over-year increase in restaurant level operating costs as a percentage of sales during fiscal 2009.

We also expect to see additional G&A reductions during the first quarter of fiscal 2009 as compared to the comparable quarter in fiscal 2008, in part due to the success of our refranchising program. I would expect to see a decrease in total G&A costs of approximately $.5 million in the first quarter of fiscal 2009 as compared to the prior year quarter. As a reminder, our first fiscal quarter consists of 16 weeks versus 12 weeks in the other three fiscal quarters.

Finally, our estimate for weighted average diluted shares outstanding for the first quarter is 54.5 million shares, a 20% reduction from the prior year first quarter diluted weighted average share count of 68.2 million shares.

I will now turn the call over to Andy for closing remarks.

Andrew F. Puzder

Thanks, Ted. As I have said during recent investor conferences, I firmly believe that the foundation we laid this past year is critical to both our near-term and long-term success. We continue to make adjustments to our business, a few of which I’ll discuss in a moment, not only to make up this year’s profit and adjusted EBITDA shortfall but to continue to condition our company for strength and long-term growth. As we’ve stated in the past we expect to achieve a long-term average growth rate for adjusted EBITDA of 11%-13% per year.

I will now speak for a moment about some of the adjustments we are making to our business before I provide updates on certain of our key objectives. Actually, it will be the reverse of that. First I’ll do the update on the key objectives and then I’ll do the adjustments we’re making to our business.

As I noted earlier, during fiscal 2008 our international licensees opened 50 new restaurants, an increase of more than 50% compared with 33 openings in fiscal 2007. These 50 new restaurants contributed to an 18% increase in our international operations. As of the end of fiscal 2008 our licensees operated 282 locations in 13 countries. In the eight weeks that have lapsed since the end of fiscal 2008 that number has grown to 289 restaurants. In fiscal 2009 we anticipate that our international licensees will open approximately 45 new locations.

We recognize the potential our brands have internationally and we have dedicated new resources to cultivating this incredible opportunity. We’re working to add new markets such as China, Canada, and Australia, as well as other European and South American markets to our portfolio. We are also considering a joint venture to develop restaurants with one or more of our licensees in Mexico, which is a natural extension of our domestic growth effort. Overall, we’re very excited about our international growth prospects and we’re determined to achieve our international growth objectives.

With respect to our capital plan, we have now completed the second year of our five-year $168 million capital plan. During the first two years of the plan we expended $209.2 million of our projected capital expenditures. This includes $137.3 million of non-discretionary spending, which includes remodels, repairs and maintenance expenditures and investments in IT and our distribution center. The remaining $71.9 million has been discretionary spending, which includes new unit growth and dual-branding of our restaurants.

As we previously indicated, our initial capital spending has been weighted towards non-discretionary projects as we invest in areas where capital spending has been deferred for some time and where we need to rebuild our infrastructure as required for growth. Our discretionary spending will begin to represent a larger percentage of our overall capital expenditures over time. Of course, we will monitor the performance of our discretionary spending projects and we will adjust our spending based on the results we’re achieving. Should we need to do so at any time we can slow down our remodel, dual-branding, and new unit development efforts although as I stated earlier, we do not contemplate doing so.

For fiscal 2005 to fiscal 2007 we opened 20 new company-operated Carl’s Jr. restaurants. These restaurants are located in our core California markets and in some of our growth markets such as Portland, Oregon, and Salt Lake City, Utah. In fiscal 2008 these 20 restaurants had an average unit volume of $1.531 million. These restaurants cost an average of $1.35 million to build and are generating incremental cash flow of $331,000 per restaurant. Accordingly, based on last year’s results, as impacted by commodity and labor cost increases, these stores generated a return on investment of 24.5%.

We’re on track to open 24 new company-operated Carl’s Jr. restaurants during fiscal 2009. In addition, we anticipate our domestic franchisees will open 37 units and our international licensees will open 20 locations for a gross opening total of 81 Carl’s Jr. units, up from 69 in 2008.

On the Hardee’s side. We plan to open 12 company-operated Hardee’s stores and project our domestic franchisees will open 13 locations. We anticipate our Hardee’s international licensees will open 25 stores, a slight decrease from last year’s very strong total of 30 unit openings. In all, we expect a gross total of 50 Hardee’s locations will be opened in fiscal 2009.

With respect to dual-branding, we converted 23 company-operated Carl’s Jr. restaurants into dual-branded Green Burrito locations in fiscal 2008 and our franchisees converted a record 73 restaurants. We now have a total of 194 Carl’s Jr. Green Burrito company-operated restaurants and 201 franchise units for a total of 395 dual-branded units, or 35% or the Carl’s Jr. system. We expect to dual-brand a minimum of 20 company-operated restaurants with Carl’s Jr. and Green Burrito this year. We also expect franchisees to continue their dual-branding efforts this year.

At Hardee’s we completed 41 Red Burrito conversions in fiscal 2008 and we now have a total of 69 Hardee’s Red Burrito company-operated dual-branded units and 8 franchised units for a total of 77 dual-branded units, or 4% of the Hardee’s system. We expect to dual-brand approximately 30-40 company-operated restaurants with Hardee’s and Red Burrito this year.

Over the past year we have continued to refine our selection criteria for dual-brand locations and we believe we can achieve in excess of a 30% return on investment on these conversions. In some instances we’re converting locations at the same time as we complete a remodel. Combining these projects saves roughly $20,000 in exterior signage costs and obviously improves our return.

In fiscal 2008 we also remodeled 200 company-operated restaurants at a cost of approximately $39 million. We expect to remodel an additional 200 restaurants during fiscal 2009. And our franchisees are now beginning to remodel stores as well. Our current remodel consists principally of an interior remodel, although we do replace the exterior signage and paint the restaurant. We initiated a test of a more extensive exterior remodel in four of our Indianapolis Hardee’s restaurants in late December and we’re expanding the test to include 15 additional Hardee’s and 6 Carl’s Jr. restaurants. The preliminary results have been very encouraging.

One of the adjustments to our business is a renewed focus on training and people development. Now that we’re growing our business in a meaningful way we must update and augment our training and people development efforts to support our growth strategy. With our refranchising initiative well underway we recently moved Noah Griggs, a 25-year Hardee’s operations executive, from his post as Executive Vice President of Hardee’s operations to Executive Vice President of Training for both Hardee’s and Carl’s Jr.

This reorganization has also helped us with our G&A reduction initiative as we’ve reduced our executive level staffing by one position and we have reassigned other functions within the company to other executives in order to establish better cost controls.

In his new role, Noah will be responsible for updating the content and delivery method for all management and staff training programs. As our new unit development accelerates, development of additional restaurant general manager and district manager personnel is critical to our success. Both Carl’s Jr. and Hardee’s have an enormous wealth of hard-working, dedicated employees who are anxious to move up to the next level and we’re now updating our efforts to support their growth with state-of-the-art training and management development tools.

In addition, Noah and his team are working with operations to develop tools to better train our field management to control food and labor costs at the restaurant level. For example, one of our major initiatives for this year is to further improve our drive-thru speed of service and accuracy. We intend to increase the number of cars we can get through the drive-thru in a given period and we intend to improve consumer perception with respect to our speed of service and order accuracy at both brands.

With the aid of new reporting tools we will be training our managers to better manage their labor schedule to provide adequate staffing during peak sales periods which should improve service times at the drive-thru as well as inside the restaurant.

I’m very confident that we have the right teams focused on the appropriate objectives in order to enhance our existing operations, as well as support our growth plans.

Another initiative we’re working on is the addition of new revenue sources for existing restaurants. This is an area in which we need to be careful to preserve the brand images we have worked very hard and long to create. One such option that looks promising is the installation of advertiser-supported TV monitors in our restaurants. The way these systems work is that vendors provide the equipment and video content along with non-competitive advertisements and we share the advertising revenue.

We’re now testing a few different vendors but our Hardee’s chain is in the process of rolling one such system out into 300 units. This system we’re implementing is primarily for the dine-in guest. This system also allows us to run our own commercials or special information. We will also be developing and testing a drive through system for later implementation.

Before we get to your questions, I have a few additional comments about our efforts to deal with rising commodity prices. At the end of fiscal 2008 we operated 31.4% of our total restaurant base, a significantly higher percentage mix than most of our competitors. As I explained during our third quarter earnings conference call, increases in food commodity and labor expenses have a greater impact on our profitability than our peers that operate predominantly franchise systems. We’ve taken, and will continue to take, price increases to offset these cost increases and we’re making very good progress, as Ted has already pointed out. Because we generally don’t market our products based on specific price points, we believe we can be more flexible in taking pricing on our menu without affecting our marketing strategies.

Certain of our competitors have reverted to a discounting strategy in an attempt to drive sales. Rather than joining in with this approach, we will maintain our premium quality strategy with an emphasis on a value proposition that extends beyond just the price point. As Carl’s Jr.’s positive period 2 preliminary same-store sales results, in excess of 6%, demonstrate. We believe that this will be a very successful approach and will distinguish us from the competition. However, we will continue to make sure that our pricing actions do not materially increase the gap between our pricing and that of our competitors.

In the past week some commodities, such as wheat and soybean oil, have come down from their record highs. Fortunately, we had coverage in place on many of these commodities before they hit their recent highs so perhaps we’ve avoided the peak pricing in some cases. I certainly don’t know if the recent drop in commodities is the beginning of a new trend or just a pause in the prior trend. For now, we’ll continue to run this business as if we expect commodity prices to continue to increase.

I’m confident that our management team can continue to respond to the challenge that the current economic environment presents.

In conclusion, we continue to address the short-term issues facing our business, while preparing our brands for long-term growth. We’re very optimistic that we have the right strategy and we’re committed to delivering improved results this year and in the future.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Brian Moore from Wedbush Morgan. Please proceed.

Brian Moore - Wedbush Morgan Securities, Inc.

Good morning. This first question for Andy relates to Carl’s Jr. in California—two parts. First, great period 2 costs here. Wonder if you would maybe talk to any benefit you had in period 2 from what I think has been abnormally warm weather here in California. And/or the number of remodeled stores. And then secondly, I guess in light of all the focus on the economy here--high gas prices, sub-prime—if you could speak to what’s been your thoughts on the good or bad economic factors year-to-date affecting costs; have you seen any movement around day parts or products? For example, the Angus Burger versus a less premium hamburger, or even beverage sales, as it relates to the Carl’s Jr. menu.

Andrew F. Puzder

I would be happy to. We, in California--out West-- we are certainly glad to be out of what seemed to be the bad winter weather this year, which is continuing in the Midwest and Southeast, but really cleared up here in period 2. Our period 2 numbers were not a whole lot different than our period 1 numbers on days when the weather was good. In a lot of days in California in period 1 there was a lot of rain and people just don’t go out when it rains. As you know, Brian, it’s kind of like when there’s a blizzard in the Midwest or Southeast, when it rains here in California. But now that that’s cleared up I think we’ve seen the real impact that our brand positioning and our not going with the pack can have on our business.

Yes, we saw the Chili Burger, which is the burger we’ve been promoting in period 1 and period 2—and we promote it—we have a single, which is the normal ¼ pound burger, a double, and the $6 version. And you really see all of them selling well. The $6 Black Angus Burger sells real well. We’ve got an add-on here now where we’re promoting the fact that we’re using all Black Angus Burger in our $6 burgers and I think that’s helping our premium quality statement.

I think people realize that you can come to Carl’s and get a burger that is as good or better than you can get in the sort of mid-tier restaurants and you can get it at fast-food price, you can get it at fast-food speed; there is something for your wife to eat, there is something for your kids to eat. You know, a family can come. And if you’re a young, hungry guy you realize you don’t need to go to a higher priced place to get a really delicious, big, thick Black Angus Beef Burger.

So, I think all of those things are having a positive impact on us and I think you see the—what I’m hopeful that you see is the recession-resistant nature of the business we have both at Hardee’s and Carl’s and fast food generally, which is that when we have a recession people eat at us more rather than less. So, hopefully we are beginning to see that. We’ll know more in third period. Hopefully things will clear up in the Midwest and Southeast—the tornadoes will stop in Atlanta, the flooding will stop in Missouri and the freezing rain and snow will stop in the Southeast.

But we think that when we do see the weather improve we’ll see the same kind of improvement at Hardee’s. We’ll just have to wait and see.

Brian Moore - Wedbush Morgan Securities, Inc.

Great. Thanks. That was very helpful. I guess, Andy, as well, on the refranchising, it seems like you intimated the goal longer term to move below the 31.8%. I guess company [inaudible] beyond the remaining refranchising of Hardee’s stores that you’ve already talked about. I wonder if maybe you would talk to—is there an absolute number? Is it less than 20% company ownership and how many years it might take you to get there? And then if it includes any Carl’s Jr. refranchising, why continue new store development for that brand?

Andrew F. Puzder

Even if we were refranchising at Carl’s, we would continue to build out the markets that we’re in. You need to build; if you don’t build, you’re dead. You know, people perceive you as dying. We, for a number of years, we were unable to build, and we’re really starting to see some of the benefits from increased penetration, increased marketing dollars, increased excitement in the markets we’re in with new units, for Carl’s Jr. and Hardee's.

We have no plans at this time to refranchise any of our Carl’s restaurants. Nor do we have any plans to further refranchise any Hardee’s restaurants. That could change at any point but we don’t have plans to do that currently. We do intend—even though we’re building we always like to see our franchisees build more units than we do and generally speaking—I can’t recall the year where they didn’t.

So over time, particularly as unit growth in both brands ramps up I think you will see that percentage of company-owned stores come down as a percentage of the entire system, particularly as we grow overseas, which is a very dynamic area for us to grow. We’re currently discussing, as I said, some joint venture opportunities in Mexico with a couple of our very good Mexican franchisees. But generally the overseas development is all franchise development. So, again, that will increase the percentage of franchise ownership in the system and take our ownership down, although our number of units may not come down.

Brian Moore - Wedbush Morgan Securities, Inc.

Very helpful. Thanks. And then I guess a question for Ted on the 2008 costs that I’m looking out. I know that Andy and you both talked about further narrowing the gap on a sequential basis. I think last quarter, if I’m not mistaken—Q4—up 150 basis points at the restaurant level in terms of cost—is there a way to quantify that for Q1 fiscal year 2009? Is it sequential proven of 30, 50, 75 basis points—I’ll let you pick the number? And then as we look to the full year, do you think you might be able to maintain, or actually improve restaurant level margins?

Theodore Abajian

Well, Brian, I guess it’s premature for us to try to predict what the level of additional improvement might be for Q1. It would be my expectation that we would continue to provide the kind of updated guidance we’ve been providing over the last couple of quarters as we get closer to the end of the quarter here. But we certainly do expect to see sequential improvement. It’s a little hard at this point to predict what that magnitude might be.

And certainly as we get into the second quarter where we’re really rolling over a more kind of apple-to-apple comparison while commodities have continued to increase since second quarter of last year, at least a substantial portion of the increase is already baked into the prior year. So certainly at some point—you know, obviously our goal, longer term, is to increase our operating margins or decrease our costs such that we get back to our highs that we achieved in the prior year. And unfortunately I think everybody’s crystal ball has been a little less effective over the past year but that is certainly what we’re working towards.

As Andy mentioned, the addition price increases that we’ll be taking, we expect to see further benefits from, and perhaps these recent declines in commodities might, in fact, be the beginning of a new trend but I don’t know for sure at this point.

Brian Moore - Wedbush Morgan Securities, Inc.

Okay, great. Just a final question, for Andy, I guess, on the product innovation update. You told us the cheeseburger is very successful but I’m wondering as a reintroduced product—might we see an entirely new product—hamburger product—this year. Will it be in the first or second half? And then, in terms of beverage platform, it seems like some of your peers have had success there and they have the milkshakes. But what are your thoughts there regarding beverages this year?

Andrew F. Puzder

Okay, we’ll take your burger question first. You will see a new product in both brands very soon. And obviously I’m not going to say what it is because we don’t want the competition jumping all over it, but it will be a new and innovative product. And it really is nice to come back to a product like the Chili Burger—a popular product that comes back where you’ve got some equity built up and you can see the kind of success you can have with it. But we will have some new products this year and we will have a burger product, soon, at both brands.

As to your second question, we’re constantly testing beverage initiatives. I think some test better than others and we’re working with Coke with respect to innovation in our equipment that’s being installed in our restaurants which will give us greater flexibility on how we distribute beverages. Beverages are an important part of our business; they’re a very good margin product if you sell the right beverages. We’re looking at sport energy drinks, we’re looking at all kinds of opportunities and I don’t think we’ve gotten to the point in anything where we’re ready to roll it out. Although we are going to be increasing the variety of soda beverages available in our restaurants as we install this new Coke equipment. But it also gives us flexibility to do other things.

We put in a premium quality coffee product at Carl’s a few years ago and quite honestly--

I think I told everybody people weren’t coming to us for salads and applesauce, we were going to stick with monster big burgers. I can pretty much tell you people aren’t coming to us for lattes and cappuccinos either. But if we tested them and it sold, I would put them in in a second but I think there’s a lot more excitement around some of that than maybe would be justified—in our brand, anyway. Other brands that have more advertising dollars and can promote just about anything, they have better success with it. I’m not criticizing anybody else’s plan, I’m not changing ours.

Brian Moore - Wedbush Morgan Securities, Inc.

Great. Thank you very much.

Operator

The next question comes from the line of Tony Brenner from Roth Capital Partners. Please proceed.

Anton Brenner - Roth Capital Partners

Good morning. Andy you made the point that you’re operating on the assumption that commodity costs will continue to rise--which I presume that you’re forward-buying when possible. Commodity prices have declined most recently. I’m wondering if that means that any benefit from that decline will be lagging for CKE, one that you won’t quickly the benefit of some of these drops in prices.

Andrew F. Puzder

On most of the stuff where we did do forward--and by the way, forward-buying really wasn’t what I was referring to. I’ll come back to that. But on most of the things where we were forward, we really actually are still below the current price. So we managed to keep ourselves away from the peak. For example, wheat would be a good example, where we are now is still below where wheat is today. So what I was referring to was really that we will continue to take prices increases, we’ll continue to look at changing the way products are shipped or adjusting the builds to products or promoting products that we believe—you know, pork right now is very low. You might look to see a product to promote something with more pork in it.

So I really was not referring to forward buying. But since you asked about that, I happen to have John Dunion here with me today. If John wants to add anything to what I said, I’m going to give him the opportunity.

John Dunion

Thank you, Andy. Tony, yes, to your point, with the recent dip in many of those futures, we do take the opportunity to add coverage whether it be full or partial.

Anton Brenner - Roth Capital Partners

Thank you. One other point. Ted, could you explain a little more fully the reason for the 80% tax rate in the fourth quarter?

Theodore Abajian

Sure, Tony. There was some new IRS guidance that came out, literally two days before the end of our fiscal year, that required us to treat items that were previously deductible for tax purposes as no longer being deductible. And so that ultimately gave rise to the increase in the tax rate.

Anton Brenner - Roth Capital Partners

So that was a full-year adjustment all in the quarter?

Theodore Abajian

Correct. And then—I don’t want to be critical of the IRS or anybody, but with the infinite wisdom of everybody involved, the IRS then reversed course after the end of our quarter and went back to the old method of handling these expenses and decided that they would be deductible in the future and grandfathered in those that had had these expenses in the past and so now, in fact, during the first quarter we will get a small benefit back to tax expense as we’re able to reverse this charge during the first quarter. Although given the length of the quarter, it won’t have a material impact on our tax rate for the first quarter.

Anton Brenner - Roth Capital Partners

That’s wonderful.

Andrew F. Puzder

And for further clarification you can go to our Certified Public Accountants or the IRS. It didn’t make sense to us, either.

Anton Brenner - Roth Capital Partners

Those must be the same folks that make you mark-to-market interest.

Andrew F. Puzder

Exactly. And people wonder why nobody looks to EPS anymore.

Anton Brenner - Roth Capital Partners

Thank you.

Operator

The next question comes from the line of Glen Petraglia from Citigroup. Please proceed.

Glen Petraglia - Citigroup

Thanks. Good morning everyone. I realize it’s early but I was hoping maybe you could share some insight in terms of the cost [inaudible] between your interior remodel and the more extensive remodel that you’re testing. And then along those same lines, I think,
Andy, you made a comment fairly early on in the conference call about potentially postponing remodels at any time if you so choose. And I think one of the things that has been my understanding is that you have to make these investments regardless so why would you potentially postpone them?

Andrew F. Puzder

Let me start with your second question. Some people have asked out there, and really this was just in response to investor inquiries and suggestions from my investors that I address the issues. Some of them said, “Look, if you really have a problem, if something comes up, if the whole world falls apart,”—I mean everybody in New York is so scared to death I’m surprised they go out of their condos anymore—but everybody was saying what if the world falls apart, what do you do? And the response is rather than remodeling 200 restaurants, if we had some issue with cash, we could remodel 150 restaurants, or 100 restaurants. So it’s not like we don’t have means to deal with this and some investors said, “Well, you ought to say that.” So now I’ve said it and we’ll move on. I don’t think it impacts a lot but I think that it does show that we have flexibility with respect to cash.

And as I tried to point out in my presentation—you know, one of the really great things about this company is its free cash flow. If you look to last year where we bought back $266 million worth of stock, we paid over $13 million in dividends, we’ve remodeled 200 restaurants and we’ve built 23 restaurants and we’ve borrowed a whole lot less money than it took to do all those things, so we aren’t nervous about it, we aren’t concerned about it, but we wanted to make people aware that we have the flexibility so that people could sleep at night.

On the cost of the interior versus the exterior, I don’t have a good number. I think the exterior is probably like $90,000 more. Don’t write that down or factor that into anything because we’ve only done four of them and it’s really hard when you only do four because you do get price savings when you do a large number of these, manufacturers like that and you get a better deal.

But the real question to me isn’t how much it costs; it’s what kind of a return we get on it. And so we’re looking to—let me take that back; I’m very concerned about how much it costs and I’m on my guys every day about that, but the big question here is whether or not we get the right return. And that’s what we’re testing with these additional units.

So those first four were very encouraging. But I will say they were in Indianapolis. Those of you who are from Indianapolis or have ever been to Indianapolis know that in the winter it’s not particularly a friendly place and we did these in December and January so there was some difficulty with reading their performance. But really, it looked good. So we’re going to do some more in some more Southern markets and some [inaudible] markets and see if we get the same kind of bulk and the same kind of return as we got in these initial units before we make any decision to do any more.

I also should point out it might be hard to do these in California because it’s hard to do everything in California. And you have to get permits for the smallest things. So it may be more difficult in California markets so we’re actually looking for a kind of—I don’t want to say a “dumbed-down” version, but a less impressive version that might work in California as well. So it’s an ongoing process and I wanted to mention it.

If you’re in Indianapolis let me know and I’ll give you the address because you really should look at these restaurants. They’re very impressive.

Glen Petraglia - Citigroup

Sure. And just for my own clarification, what sort of return were you seeing—can you refresh my memory?

Andrew F. Puzder

Well, at Carl’s we were seeing returns in the high single digits and at Hardee’s in the mid-teens to high-teens, percentages.

Glen Petraglia - Citigroup

I think you said you were going to be raising prices again here. I’m presuming it’s towards the back end of the first quarter, but if you could maybe help me think about how you think about elasticity of demand—how much pricing can consumers handle, particularly given that supermarket inflation has been somewhere between 5% and 5% for the last several months here—gas prices are presumably going to be trending higher as we get into the summer months, etc.

Andrew F. Puzder

I think a lot of how much pricing we can take depends on two things. One is, are people expecting it; and will it be a shock to them. And I think in the current environment nobody is being shocked by increased prices and in fact, John Dunion prepared a chart—and actually we ought to put this in our presentation or at least put it online somewhere—but it compares the food producer price index to the CPI food at home index and you can see that as of January there was still a pretty big gap between the food producer price index being higher than the CPI food at home index.

And so, even at the supermarket level, not all of the pricing has been taken yet. It certainly—this gap generally runs—kind of gravitates back and forth but it’s pretty clear right now that the food producer price index is much higher than the CPI food at home index. So I think there is a lot of room for pricing at the moment.

Now the second aspect of it, beyond consumer expectations, we have to keep an eye on what our competitors do because there is a gap between us and the competition already and we don’t want that gap to extend to the point where we’re actually pricing as high as the mid-tier restaurants—the Chili’s, the Applebee’s, the Friday’s. You know, we don’t want to get up to their pricing because I think it’s a big advantage to us that you can get a burger as good as you can get in any of those place and you can pay a much lower price.

So, we watch it very carefully. I think we will be taking pricing sooner than the end of first quarter, but it may be towards the latter half.

Glen Petraglia - Citigroup

Okay. On the wheat, and I think you mentioned soybean oil towards the end of your prepared comments, you said that you had projections in place. Maybe you could help me, John, be specific about how long or how far out you’re protected and when those protections may roll off.

John Dunion

Yes, on wheat I think it’s through the summer.

Theodore Abajian

Yes, wheat, we’ve got 100% coverage—very favorable coverage—through July.

John Dunion

And then oil, we along with our competitors have really run the course of having very favorable positions now. Our positions are less favorable as they’re shorter. Oil positions, we’ve got partial position into the summer.

Glen Petraglia - Citigroup

And then I think your potato contract runs through the fall, is that right?

Theodore Abajian

That’s correct. They’re fall contracts within the industry, typically.

Andrew F. Puzder

Pray for a stronger dollar.

Glen Petraglia - Citigroup

Is that what’s been driving up the potato prices?

Andrew F. Puzder

Yes. We compete internationally. I’ve said this—a lot of the guys on the call are probably tired of hearing me say it, but if you compete with China for potatoes, or Europe, they’re buying with a much stronger currency than we are and if you’re spending a $0.75 dollar versus their currency being at a dollar, you’re going to pay more. So it is an international issue but it’s something we deal with with pricing and I do believe commodity prices will come down again as we find a way to strengthen the dollar. Although that doesn’t seem to be such a complicated process; it seems that at that level they consider it a complicated process. So we’ll have to wait and see what happens.

Glen Petraglia - Citigroup

Okay. And then my last question is Leap Year—was that in period 1 or period 2?

Andrew F. Puzder

You know, it doesn’t matter for us because all of our periods are 30 days and then every—was it every five years, Ted, we adjust?

Theodore Abajian

Right. Actually, all our periods are 28 days.

Andrew F. Puzder

They’re all the same number of days every year. So Leap Year won’t affect us at all. The only thing that will affect us is sometimes, like for example, Easter this year falling in period 2 is bad for us because nobody buys any fast food on Easter. And last year it was in period 3 so in period 3 we’ll get a benefit from it. So, on a yearly consolidated basis it’s irrelevant, but period to period people take a look at it.

Glen Petraglia - Citigroup

Okay. Thanks.

Operator

The next question comes from the line of Rachel Rothman from Merrill Lynch. Please proceed.

Rachel Rothman - Merrill Lynch

Just a quick question. I guess it’s kind of a follow up on the amount of price and the pricing power that you guys think is still available. In the release says that it’s kind of difficult to take price and yet in your comments it seems like there’s an opportunity to take price. What we’re hearing from some of the other chains is they’ve taken so much price already that it’s becoming more difficult to pass through and therefore comps are becoming more traffic dependent.

Andrew F. Puzder

The difficulty in taking price last year—it wasn’t difficult to take price, it was difficult to take enough pricing to offset not only the cost pressures imposed by the minimum wage increase, which normally we could have done as a matter of course. What becomes difficult is when you pile on top of that some of the highest commodity costs increases in the history of the country. And so it was difficult in one year to take them all.

The second thing that made it difficult was we have to wait for the other guys to take pricing pricing, generally. We can take some and we take some all the time, but to take a meaningful price increase, we like the other guys to take it first because we don’t like that gap between them and us to increase too precipitously. So we were a little slower than the other guys on taking it, and I think most of them have taken it. Particularly given there’s a more limited portion of their menu where they can take pricing because they generally base a portion of their price, of their marketing strategy, on a price point. Which makes it hard for them to take a whole lot of pricing on the rest of the menu, that it’s less proportional. We don’t do that so we can spread our pricing more generally across the menu. So we have that advantage. But we have to be a little slower when we take it so we probably have a little more flexibility, if not a lot more flexibility, on pricing than our competitors do just because we haven’t taken as much as they’ve taken.

Rachel Rothman - Merrill Lynch

Okay, and in terms of initiatives that you guys have this year focused purely on the top line but to drive traffic, can you talk a little bit about it? Is that going to be new product news or is it going to be a shift in advertising? What strategies do you have in place to support traffic growth in fiscal 2009 or calendar 2008?

Andrew F. Puzder

We’re always interested in getting our customer counts up. Traffic is, as we’ve discussed, not a measure of customers; it’s not a customer count mechanism, it just tells you how many transactions you had during the day or the year, so if you and I go into lunch together and I say I’ll buy, that’s one transaction although it’s two customers. And with our menu, the way our menu trends, we would tend to have more of the income level people who would buy for a family or you may get people saying, “I’ll buy,” for a group of people, which is much more common than what you have with $0.99 cent menu items where you’ve got high school kids coming in. You know, you’ve got four guys, they’ve each got a buck in their pocket; they’re going to get four transactions and you’re going to get $4 worth of revenue, whereas you sell a $6 burger, you might have one transaction but you get $4 worth of revenue. And if you have four guys come in to get $6 burgers and one guy buys, you have $16 worth of revenue in one transaction. It would be easy for us to drive transactions, they just have to come out with a bunch of $.99 products so they get a bunch of the kids to come in to make it look like you’re doing more business when you’re not.

We’re more focused on driving sales and sometimes because people buy together that will increase your check; sometimes because you have a higher priced product, that will increase your check. But having said all of that, our marketing people, all being from the fast food industry, all have this transaction thing burned into their minds as well, and we do do things, like for example, at Carl’s right now we’re selling Chili Cheese Fries, which we find people buying as kind of it’s a snack item almost and as an additional item which drives transactions.

We’re also doing a $0.99 taco at our Carl’s Jr. Green Burrito right now and that will drive transactions. It’s not going to be a huge—it will also drive sales but it’s not going to be a huge sales and profit driver because you’re again dealing with that bottom-feeder $0.99 product person, which isn’t our bailiwick. But what we do find is, for us, that people are buying that taco as a side item. Like they’ll get a burger and fries and they’ll also get a taco. Now that won’t increase your transactions but will materially increase your sales.

I mean, our marketing people are very focused on transactions but I think transactions are really not all that relevant and I’m more concerned with how many people we have in the restaurants than how many transactions we ring up on the register.

Rachel Rothman - Merrill Lynch

In terms of the refranchising, are you guys still targeting the total of 200 units at Hardee’s and have you seen any change in franchisees willing to acquire the units or the multiples that they are willing to play?

Andrew F. Puzder

No. As a matter of fact we have letters of intent or better on all the units that are remaining to be sold.

Theodore Abajian

I think we actually have contracts for some of those.

Andrew F. Puzder

They’re all in the process of being sold, at least as of yesterday. I don’t think any of them are on the market; I mean, all these deals are going forward so we continue to get the kinds of multiples that we expect to get for these Hardee’s units and we’re getting the development agreements that we expected to get and the CAPEX expense relief that we expected to get. So, I think we’ll get those other 64 closed, certainly this fiscal year, and then we’ll re-evaluate. But I don’t see us doing another 200 units in the near future.

Rachel Rothman - Merrill Lynch

And then finally, of the unit growth that you guys are targeting for this year, kind of on a go-forward basis, how much of that is company-operated versus franchise?

Andrew F. Puzder

I think we made that public. We’re projecting 32 new units at the company level this year—Carl’s and Hardee’s—and Ted, you’re in Las Vegas getting ready to make this presentation, you’ve probably got this right in front of you.

Theodore Abajian

Yes. It’s 36 company-operated stores this year—and Rachael, this is on page 34 of our Investor Presentation on our web site. And then on page 35 is the domestic franchise development, all of 50 restaurants.

Rachel Rothman - Merrill Lynch

Great. I’ll take a look in there.

Andrew F. Puzder

And it’s also got the international total, too, Rachael

Rachel Rothman - Merrill Lynch

Okay, perfect. Thank you.

Operator

The next question comes from the line of Chris O’Cull from Sun Trust.

Christopher O'Cull - Sun Trust Banks

Good morning, guys. John, my first question is for you. Last year we saw boneless beef prices spike in April and stay relatively high most of the summer. Assuming we don’t have any weather anomalies this spring, would you guys benefit from these comparisons?

John Dunion

Yes. We saw a dramatic spike, to Ted’s point, in Q2 last year on the fat trimming costs. We don’t expect to see that again this year.

Christopher O'Cull - Sun Trust Banks

Ted, can you help us quantify the impact that those 50s cost you last year in the second and third quarter?

Theodore Abajian

You know, I don’t have any data at my fingertips on that. John, I don’t know if happen to have anything.

John Dunion

No, I don’t have the specifics although I can tell you that we do foresee it as being a favorable event.

Christopher O'Cull - Sun Trust Banks

Let me ask you this. Is boneless beef 40% of your food costs?

Theodore Abajian

It’s between 20% to 25% roughly of our cost of goods.

Christopher O'Cull - Sun Trust Banks

Okay. That’s helpful. And then, Ted, just one last question. Why doesn’t the swap transaction qualify for hedge accounting treatment?

Theodore Abajian

We didn’t designate it as hedge accounting. It’s simply as simple as that. It’s not that you can’t do it, but from the time that initiated it we didn’t designate it as a hedge treatment.

Christopher O'Cull - Sun Trust Banks

Okay. Thanks, guys.

Operator

And the next question comes from Dean Haskell of Morgan Joseph. Please proceed.

Dean Haskell - Morgan Joseph

Thank you. Good quarter, gentlemen. My question is on pricing. You took pricing in the third quarter and fourth quarter last year?

Andrew F. Puzder

Yes.

Dean Haskell - Morgan Joseph

And how much was the extent of those pricings?

Andrew F. Puzder

We haven’t made public the extent of our price increases, for competitive reasons. Isn’t that right, Ted, just competitive reasons?

Theodore Abajian

Yes it is. It’s probably the only piece of data that we don’t make available.

Dean Haskell - Morgan Joseph

Okay, what would be the impact, would you say, for the whole year of 2008 then?

Theodore Abajian

Well, I think that’s the same question.

Dean Haskell - Morgan Joseph

You’re very clever; you got around it. Question on the Green Burrito/Red Burrito dual-branding units, I missed the data point on how many companies were done in the fourth quarter, on the Green Burrito.

Andrew F. Puzder

I don’t think we gave for fourth quarter, I think we just gave the year number. Ted, do you know how many were done in fourth quarter? Did you break that out?

Theodore Abajian

I have it. I don’t have it with me but, Dean, if you want to call my office tomorrow I can probably get it for you. We did 96 for the year, company and franchised combined, on Green Burrito and Red Burrito, I don’t remember the number.

Dean Haskell - Morgan Joseph

41. You gave the Red Burrito but not the Green Burrito for the fourth quarter.

Theodore Abajian

I would be happy to give it to you, though. I just don’t have it with me. Actually, the 41 conversions was for 2008. But we didn’t give the fourth quarter number for either one.

Andrew F. Puzder

You can get them both from Ted. It’s not a secret how many we did.

Dean Haskell - Morgan Joseph

No problem. Last question. How many franchise Green Burrito conversions in 2009 are expected.

Andrew F. Puzder

I don’t believe as many as we did last year and I don’t have a prediction on that. I could give you a guess but it wouldn’t be based on anything other than my guess so I probably shouldn’t do it.

Theodore Abajian

We had an incentive for them to do a Green Burrito conversion, a financial incentive, last year. We are continuing with a lesser financial incentive this year so we expect them to continue to do it. One of the notable things about the quarter that I didn’t mention is that for the first time we have—at the end of this year—we have more franchised Green Burritos than we have company Green Burritos. So the franchisees have really bought into this now. And we expect to see a good amount but I don’t have the number in front of me or a prediction.

Dean Haskell - Morgan Joseph

Okay. Thank you very much.

Operator

The next question comes from [unidentified analyst] of FBR Capital Markets.

FBR Capital Markets

Thanks very much for entertaining my question. I’m looking at your capital spending plans. Do you generate a better return on the capital for the non-discretionary or discretionary investments.

Andrew F. Puzder

From the non-discretionary. In new units and dual-branding would be the discretionary items and they are a higher return than remodels or maintenance.

FBR Capital Markets

So the discretionary items have better returns than the remodels.

Andrew F. Puzder

Yes.

Theodore Abajian

I think Green Burrito returns are very high in new units. The new units at Carl’s are doing almost 25% in the calendar year.

FBR Capital Markets

Okay. Thanks very much.

Operator

And the next question comes from the line of Keith Siegner with Credit Suisse.

Keith Siegner – Credit Suisse

Thanks. Just one last question. I’m just a little bit curious about the franchise unit same-store sales at Carl’s Jr. Having been below the company for the last three quarters. If you could help me understand a little bit about what’s going on there. Are they pricing less or is there some other thing that might explain the difference in the same-store sales between the franchise and company-owned for Carl’s?

Andrew F. Puzder

There’s a number of things. One, you know, the franchisees are, generally speaking, in the outer markets. So you’ve got franchisees in Arizona and New Mexico, Nevada, Oregon, Utah, Seattle, Alaska, Hawaii. So they’re not in our core of heavy marketing areas like Los Angeles and Orange County and San Diego County where the company has an advantage with very heavy advertising. So that may be part of it.

Secondly, generally the franchisees take more pricing than we do. I don’t have any statistics on that in front of me but it seems to me like I’m always trying to catch up to the franchisee on pricing. So their sales may be negatively impacted by taking more pricing. There are those considerations.

And also, I think over the past couple of quarters, at least, where we’ve gotten hit hard in Southern California on weather, I think these outer markets have gotten hit even harder. Particularly ones in the North, Northwestern United States. So there could be a number of factors at play.

Keith Siegner – Credit Suisse

Okay. Thank you.

Operator

(Operator Instructions) And there’s no further questions at this time.

Andrew F. Puzder

Thanks very much everybody. I look forward to speaking to you in June and have a great spring and pray for better weather and stronger dollar. Thank you.

Operator

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.

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